While the Obama administration urges banks to increase small business lending, Verdier contends that qualified businesses are few and far between. He claims that while the economy remains uncertain many businesses are cautious about taking on additional debt to expand, hire personnel, or make acquisitions. “Those kinds of marginal calculations have an impact on banks that service those small businesses.” But the good news is, as the economy continues to recover there will be increased demand for business loans.
In the meantime, the decline in valuations has created a demand from consumers looking to purchase undervalued properties. “The real estate market is a tale of two cities. It’s looked at unfavorably right now because of the meltdown and the valuations of people’s mortgages, but it’s looked at favorably because there’s so much stimulus money chasing it,” says Davis. “Our mortgage company is poised to tap into that. We do commercial lending as well, but our emphasis now is in the retail mortgage business because that’s where the dollars are.” Davis says the sweet spot is low- to moderate-income houses and first-time homebuyers.
The economic climate also made it a buyers’ market for lending institutions with available cash reserves—particularly those with TARP funds. “We made tremendous strides acquiring distressed assets. When a bank is being liquidated, a customer has to be moved and we’ll ‘buy’ that customer,” says Davis. “So we’ve done $15 million or so in the last quarter.”
Banking on Real Estate
Davis’ advantage is residential mortgage loans. While cautious lending institutions eye each application warily, properties are still being sold. “It may not be as fast as people like but it is happening,” says Verdier. “Banking is a risk-taking activity and if banks don’t take risks then the economy do esn’t grow. It’s as simple as that.”
First Independence should realize a growth in assets to about $175 million as it continues its expansion plans, according to Davis. In addition to the mortgage business, the bank opened its fifth location last year in Farmington Hills, Michigan. “We look to get a couple new branches as we seek choice branches closed down via liquidation,” predicts Davis. “So we’ll go after them to capture the deposits there.”
Expect First Independence to continue being acquisitive. According to Davis, Michigan has targeted more than a dozen banks for closure, and as these banks are liquidated solid assets will be sold for dimes on the dollar. “Those are opportunities for banks like ours to cherry-pick the loans that we want to take over. There’s a lot of opportunity for banks that have the capital.”
Davis isn’t sure that the worst of the financial crisis is over, but he believes there are bright spots to be seen now and in the future. Other insiders agree. “I think for the vast majority of community banks, the prognosis is relatively favorable,” says Verdier. “The condition is stable, but the patient needs continued care and watching. Some of those patients won’t make it but the vast majority took their vaccine in the boom time and maintained high capital, and they will survive as a result of that foresight.”
Davis plans for First Independence to keep playing its sweet song of profitability for years to come.
This article originally appeared in the March 2010 issue of Black Enterprise magazine.