It’s easy to be friends during the good times, but when the economy recedes, not every bank maintains the relationship. Learn how community banks provide essential services, and why they remain committed.
Only a few years ago, it was easy to obtain business capital. Marketplaces everywhere were expanding, and banks were eager to lend money. With capital so cheap and business so strong, the risk inherent to banking became a distant thought.
But what goes up must come down. When the storm hit, banks became more cautious. Larger banks abandoned customers and chased after more profitable industries. Entire industry sectors were left for dead.
Bryan Bransky, co-owner of Barrington Motor Sales, 1201 W. Lake St., U.S. 20, Bartlett, was abandoned by his big bank as the economy collapsed. Never mind that Bransky’s family had banked at this location since his late father, Ron, started the business in 1966. Loyalty didn’t matter to the Very Big Bank in 2008.
“The bank told me RV sales weren’t profitable anymore and that they weren’t going to cover me,” he says. “They packed me up and gave me the boot.”
Bransky and his brother, Sean, moved their business account to Barrington Bank & Trust, 201 S. Hough St., Barrington. Right away, the commercial banking team helped the brothers to retool their business strategy. Today, the brothers still meet weekly with their bankers. It’s a commitment Bryan could only dream of sharing with his previous bank.
“All a big bank wants is your money,” Bransky says. “The relationship factor is out the window. When times are good, anyone will give you money. When things go bad and you need help, they just shrug their shoulders. I’ll never go back.”
The Branskys weren’t alone. During the recession, overall commercial and industrial (C&I) loans dropped 16.5 percent between 2008 and 2009, according to data from the U.S. Federal Reserve. In the first quarter of 2010, C&I loans dropped nearly 20 percent. In the midst of financial crisis, some loans became too risky. Fewer were repayed, as the default rate rose from 1.15 percent in 2007, to as high as 5 percent in 2009. In the first quarter of 2011, the C&I default rate was nearly double pre-recession levels.
A volatile business climate truly tests the business-banking relationship. In the natural ebb and flow of the business cycle, community bankers continue to invest in their local customers, providing not only capital management, but also critical services for business growth.
“The commercial relationship is just that,” says David Ward, president, Algonquin Bank & Trust, 4049 W. Algonquin Road, Algonquin. “You know these folks; you know their businesses. It’s not uncommon for us to know what they want to do today, what they want to do tomorrow, what they want to do five years from now.”
As a small community bank, Algonquin Bank serves a variety of locally-owned businesses, from retail and manufacturing to transportation, recycling and home repair. The community banker’s first step is to understand a business. That means researching the particular organization and knowing about relevant business models, revenue sources, competition and the overall health of an industry.
“You have to be aware of who your clients are and find a way to tailor your services to their needs,” Ward says. “A small-business owner, like an eye doctor or a retailer, has different needs than a manufacturer, who does more with a higher payroll, a larger staff and seasonal needs. You have to understand who the business is, before you can understand the relationship.”
From there, the relationship requires constant communication. Bankers and their customers meet routinely to strategize. They analyze the business in the present and consider future goals. Take, for example, Ward’s flooring-installation customer, who started out needing a line of credit for supply and inventory. As the business grew, so did Ward’s relationship with the owner.
“It turned out he needed some equipment and inventory financing,” Ward says. “We set up our lines on an annual basis, so I have an opportunity not just to extend his credit, but to say, ‘Hey, what’s going on?’”
Steve Slack, president of Home State Bank, 40 Grant St., Crystal Lake, takes a similar approach with his customers. He finds that all banks provide the same basic products – cash management, lines of credit, letters of credit – but it’s the local connection that makes the difference. At most community banks, decisions are made in-house, rather than at the discretion of a corporate office. Most staff members, Slack included, have spent a lifetime in the community. Their connections naturally run deep.
“We know the businesses, and we’ve known these businesses for a long time,” Slack says. “We’re very familiar with McHenry County. We’ve been customers for a long time with some of these businesses and we know the people who run them.”
In some cases, it’s about more than personal connections. For example, although Home State serves a wide variety of industries, it also provides product bundles geared toward farmers and commercial leasers. Through these programs, customers obtain special financing options for expensive equipment and large down payments.
Barrington Bank, too, has areas of specialization. The commercial banking staff has unique expertise in capital management and business practices for condo associations, homeowners groups and property management companies.
“The products and services we offer are no different from the larger menu, but we have bankers that understand the unique needs of that niche,” says Jon Stickney, president and commercial lending chief. “If I walk into a homeowners association meeting for some high-rise project, I’ll know that my bankers have a specialty in that group. They know the features and benefits of what that group needs for its specific business.”
No matter a customer’s needs, Stickney and his staff remain flexible. Because Barrington Bank is locally-owned and operated, it doesn’t pigeonhole its customers into neat bundles.
“We’re a little more entrepreneurial, in that we can customize them to your needs,” Stickney says. “If you sell widgets and you want to sell them all over the country, we can figure out a way for you to remit those payments.”
Tyler Barth and his team sell industrial fans worldwide, and he is sometimes amazed at his bank’s flexibility with international banking. His company, Illinois Blower, Inc., 750 Industrial Dr., Cary, manufactures large industrial fans for clients who have lots of dirty air, especially in the power generation, refining, petrochemical and pollution control industries. There are 50 employees at his Cary facility and another 30 at a Chinese factory.
“[Home State Bank has] been extremely responsive as we’ve played more internationally,” Barth says. “We have a mortgage, equipment loans, operating lines and letters of credit. They support what we’re doing in China.”
Barth appreciates that his bank supports international commerce. While he also works with a bank in Hong Kong, he enjoys the local bank’s flexibility when it comes to global growth.
“They’re always willing to re-evaluate loan caps and amounts, based on business opportunities,” he says. “We have yet to have a time when we didn’t have the capital we needed.”
Focus on Growth
The objective of any business is to grow. When a company expands, cash is an important part of the equation.
“As it grows, a business needs to buy more inventory, you need to carry more in your accounts receivable and purchase equipment,” says Scott Reining, market president for THE National Bank, 3151 U.S. Hwy 20, Elgin.
“That’s truly the role of the banking relationship, to fund that growth. We can do that through a variety of customized loan products that are tailored for each business. At some point, many businesses need to also manage their excess cash. That’s when our Treasury Management specialists can help a client to oversee their cash position.”
Many of Reining’s customers are manufacturers, who rely heavily upon importing and exporting. These require ample capital for expensive equipment and commodities. When times are good, Reining recommends that customers build a cushion of equity, to create a backup of cash reserves and strengthen their balance sheet. Sooner or later, he says, business conditions will change. Equity provides protection and growth.
“A well-managed business is always positioning itself to take advantage of changing market conditions, whether that’s capitalizing on new opportunities or sustaining itself through challenging economic times,” says Reining. “A good business will build its capital base so it can help to fund a portion of that growth, and it does that by retaining earnings and cycling that cash back into the business.”
Chris Woelffer, president of STC Capital Bank, 460 S. 1st St., St. Charles, likens a responsible cash management strategy to that of a homeowner.
“You save your capital to buy your first house, and you get a mortgage that you can afford,” he says. “Same with a business. When you use that line of credit, you use it for working capital, because you’re going to sell your product on July 1 and you don’t get paid until Aug. 1. But you have to pay your bills in between that. So you borrow on your receivables, you get the money in August, and you pay it back. You do that over and over again.”
STC Capital encourages customers to manage capital wisely. As cash management chief for STC Capital, Jodi Ariss constantly monitors how her customers manage their deposits and withdrawals. She advises them on making the most of their cash, through federally-insured accounts, interest-earning sweep accounts or debt paydown, to reduce future expenses.
“When a company is growing, we want to look for steady, profitable growth, and we can help owners plan and budget for that growth,” says Ariss. “We want to plan and assist with that growth, but we want to educate them so that they don’t grow too quickly and allow it to get out of control.”
As the manufacturing business is picking up, Mark Wesa’s company, MKD Electric, 1515 Commerce Dr., Elgin, grows, too. As an industrial electrical contractor, Wesa focuses almost solely on manufacturing clients, something his big bank didn’t always understand. Since the company started working with STC Capital, new check-depositing services and sweep accounts have helped Wesa to manage his cash flow and streamline his finances.
The bank provides advice and financial guidance, especially as MKD Electric expands its operations. Looking for a bigger facility, Wesa sought advice on whether to rent new property, buy a new office or expand its current space.
“They gave us a lot of feedback to make a decision, and it wasn’t even a banking decision,” says Wesa. “I just wanted to know the pulse of the market, and STC had its thumb on it.”
The View From Here
It’s not unusual for community bankers to know the latest buzz. They’re in daily contact with a variety of local businesses.
As they see it, the economic seas still are choppy. Some industries are experiencing the best year in a long time, while others are still struggling for survival. Business is improving, slowly but steadily.
“We’re past the worst,” says Reining. “It’s been a trying time, and it’s still cloudy. But the clouds are moving east, as they might say. We’re getting there, but we’re not out of it yet. From a small-business standpoint, we’re head and shoulders above where we were before.”
For Reining’s customers, 2009 was filled with bad news. The past two years have brought slow yet steady growth. During this recession, weaker competitors were weeded out while companies cut costs and redesigned their business strategies. Today, those financial adjustments and a rising export market are paying off.
“Even compared to before this recession, they appear to be doing better,” Reining says. “At first, I thought maybe companies were just trying to build inventory, because in a recession, typically businesses work down their costs and their inventories. It seems like they continue to do well. They’ve pared down their cost structures, so that when business did come back, they became more profitable.”
While manufacturers are coming back strong, Slack is noticing a resurgence in auto sales, as well. Part of this recent growth, he speculates, is related to pent-up demand.
“Anything associated with the automotive industry has done better,” says Slack. “That’s a wide range of customers that provide services. That segment has done very well, relative to 2008-09. The other area that’s doing well is small companies that are exporting overseas, because there’s more growth over in Asia and other foreign countries.”
Ward notices that automotive and trucking-related firms are growing. He hears from his customers that harder-hit segments – namely real estate and construction – may soon resume growth, as well.
“Different businesses are different indicators for us,” he says. “The construction industry seems to be in a standstill – there aren’t many houses being built. But we have clients who are surveyors. [They’re] the first ones in before anything happens. They’re the ones planning things, or staking a site, and they’re giving us an indication that even though they don’t have a lot more work, they’re bidding for a lot more work.”
Ward and his colleagues suggest that real estate won’t grow until foreclosed properties are sold and demand returns for new homes and business spaces.
As some companies resume growth, and others anticipate it, Ward finds that his customers, in general, are becoming smarter and better focused. Owners are spending longer days on the job, sewing up loose ends and scrutinizing their finances.
“When things are well and running on autopilot, that’s a nice feeling, but you tend to take things for granted,” he says. “When business isn’t great, you have to stop and think about what’s happening. Is it the pay cycle, the client list or the industry that isn’t right? The tougher times make everyone think more.”
Bransky of Barrington Motor Sales has re-focused his business. Before the recession, he primarily sold high-end motor homes. When sales dried up, he reconsidered his business model. As Bransky worked with his new bank, he learned to scrutinize everything. He often mulled over his discussions at the bank.
“They asked me about all parts of the business,” says Bransky. “They wanted to look at my parts, my service, the mechanics, sales and productivity at every level. We looked at ways we could trim the fat.”
Today, sales are improving. Branksy still sells high-end RVs, but he also offers simpler models that are easier to finance. He still sees his bankers every week.
“We meet with our clients at least quarterly or semi-annually,” says Stickney, who’s known Bransky since working with his father at the big bank years ago. “We go through their financial results with them. We talk about what’s happening in their industry, what’s happening at their company, and if there are any positive or negative trends. We have to understand their business as well as they do.”
When a customer’s business shrinks, Stickney has a number of tools at his disposal. He navigates customers through tough decisions, such as reducing workforce, selling extra inventory and protracting important purchases. As a certified lender for the U.S. Small Business Administration, Stickney also connects customers with government-backed loans.
During a recession, weaker competitors are weeded out. In a sort of survival-of-the-fittest, the stronger businesses adapt to changing conditions. Brian Monson, vice president of commercial lending at STC Capital, pays close attention to cash reserves when a customer downsizes. Properly investing one’s cash helps a business to survive a downturn and resume growth.
“A lot of times, coming out of a recession, it’s not the fall that will kill you,” says Monson. “During a downturn in the economy, you’re flush with cash because you’re collecting your receivables, decreasing inventory and laying people off. All this cash can provide you with a false sense of security, and if you don’t invest it wisely, you won’t have anything to fund your growth when the economy improves.”
Old Dogs Can Learn New Tricks
It’s been nearly two years since the recession officially ended, but this time around, growth is slow. Monson blames widespread volatility in the economy; fluctuations in commodity prices and fuel costs are just the start. When future patterns are uncertain, businesses are lukewarm to large capital investments.
“There’s uncertainty in the tax code, uncertainty in the political market and uncertainty in the economy overall,” he says. “In June, for example, we saw a slight down tick in manufacturing productivity, and it was obvious in the last ISM [manufacturing] report that inconsistent material costs and buyer uncertainty played a large role in the decline. Once we finally get some certainty in the marketplace, I think companies will make those investments.”
When the recession bottomed out in June 2009, it ended the longest recession since the Great Depression, according to the National Bureau of Economic Research. At 18 months, this recession was the longest in most bankers’ careers – perhaps even in their lives.
Today’s economy is a totally different game. Long familiar with easy credit, rising real estate and quick downturns, bankers today are forced to develop innovative solutions for their customers. Sometimes, though, they play an uncomfortable role as the big, bad wolf.
“It’s been very trying – it’s been difficult,” says Slack, who’s been at Home State for most of his career. “I was always George Bailey, from ‘It’s a Wonderful Life.’ But now, I have to be more like Mr. Potter. That’s difficult – customers don’t always understand it. They say, ‘Steve, you’ve helped me for 17 years, what’s going on?’ It’s been that much more difficult to help them as this economic downturn lingers.”
Reining finds himself in the same situation. In 34 years of banking, mostly in the Elgin area, this is the most challenging business climate he’s seen. He, too, is finding creative solutions to help customers, but growth is slow; government regulations and high unemployment remain nagging dilemmas. One way or another, this will be a slow recovery, he says. However, there is a bright spot: Bankers have become more skilled at helping clients to succeed.
“I think any banker will tell you that this recession has been as challenging as any of us can remember,” says Reining. “I was having breakfast with someone today, and I mentioned that I am a much better banker than I was five years ago, because of this downturn. We’ve all learned lessons. Businesses have learned lessons, households have learned lessons, and frankly, even bankers have learned lessons.”
In general, bankers say they’re playing it safer now, and they believe real estate isn’t always a rising prospect. They still take risks, but those risks are more calculated than before.
They’re sticking with the basics of good business. But then again, community banks always have stood by their values and their customers.
“If I’m a big company and my strategy changes, I close this location and move to another part of the country,” says Ward. “I’m not moving this bank. You don’t just pick up a bank and move it. The only way a community bank works is with the client’s trust in you, the client’s trust in your longevity, and your ability to be professional over a long period of time.”
When larger banks drop customers such as Bransky, community banks save the day – and their local communities. These banks still have money to lend, and they’re ready to invest it close to home.
“At the end of the day, it’s what makes us successful,” says Reining. “If we’re not invested in them, they’re not going to stay invested in us for very long. Memories are long in the business world, and people will remember when their banks stood by them in the tough times. I think that’s still the case today. I really think that if we can stick with our customers, we can keep them for life.”
Bransky is standing by Barrington Bank. He routinely connects customers to financing deals through the bank. Stickney returns the favor, firing business back at Bransky. It’s a mutual back-scratching.
“A lot of banks look at a credit report and make their decision just on that,” says Bransky. “But when they want to look deeper at my company, that’s when I know that my bank has my back. It’s all about relationships.” ❚