(Photo by Glenn Triest)

For more than three decades, Donald Davis played the six string, performing on an array of hits for the old Motown and Stax record labels. In fact, his guitar can be heard on Motown’s first hit single, “Money (That’s What I Want).” Some 50 years later, the 71-year-old Davis—now chairman and CEO of Detroit-based First Independence Bank (No. 15  on the B.E. Banks list with $161.1 million in assets)—has discovered a bold new beat. The three-time Grammy winner is banking on declining real estate values to be the bridge to greater profitability for his financial institution.

You’re probably wondering how a banker in  the region perhaps most devastated by the U.S. housing slump could feel at all optimistic about the real estate market, particularly in light of eroded valuations, increased banking regulation, a decline in credit markets, and an overall slump in the financial services sector. The answer: He has found the upside in sliding home prices. The Detroit area is seeing homes being unloaded at fire-sale prices. In 2009, the median sale price for a nonforeclosed home in the city was a meager $15,405, according to Realcomp, a Michigan-based provider of multiple listing services; the median sale price in Wayne County, which includes Detroit, reached only $85,929. By comparison, the median sale price nationwide, according to the National Association of Realtors, was $173,200.

Declining housing values have left thousands of homeowners facing a dilemma. Those carrying a $300,000 mortgage on a home now valued at $200,000 must have the mortgage agreement rewritten, or continue to pay the current mortgage despite the lower valuation, or give up the house. If the home is relinquished, it will be sold at a lower price and the new buyer will either purchase it at a short sale or buy it out of foreclosure at a reduced price. That’s the market Davis is looking to tap. To achieve that end, in November, First Independence paid $750,000 to acquire the mortgage business of Warren, Michigan-based Warren Bank, shut down last year by the Michigan Office of Financial and Insurance Regulation.

Davis plans to focus on moderately priced home mortgages—an area of increased activity due to the federal government’s stimulus efforts as well as people looking to purchase a home on the cheap. According to Davis, the business—now Independence Mortgage Co., or IMCO—had some 450 mortgage applications as of January. “And now we’re clipping at around $15 million in volume a month, which is the largest I’d say for a black mortgage company out here today. We truly intend to be somewhere around $35 million a month by spring when all our operations are running properly.” The more than $50 million in income IMCO had generated as of January has been music to Davis’ ears.

But he concedes that the downturn eliminated his weaker competitors, enabling his five-branch bank to acquire their assets at a low cost while holding on to the $3.2 million in funds the bank received last year from the Troubled Asset Relief Program, better known as TARP. First Independence also remained relatively untouched by subprime-related toxicity, placing it in a favorable position to make loans during the credit crunch as well as seek out more branch acquisitions.

Risky Business
Last year was among the most brutal for banks of all sizes in more than a generation, with 140 institutions failing, two of them black-owned. And this year promises a continuation of this punishing environment as risk-averse lending institutions keep purse strings tight. In December, President Barack Obama and Treasury Secretary Timothy Geithner were among government officials who met with community bankers to increase lending to small businesses and to support a revision of financial regulations. The government wants money flowing from banks to homeowners and businesses to jolt the economy, but community banks contend that heightened regulation combined with low interest rates (and therefore low profitability) make them reluctant to take on additional risk.

“Examiners are coming in and saying those loans you made a few years ago, the value of the property is down so you have to write down the value of the loan. That’s even if the loan is being paid,” maintains Steve Verdier, executive vice president and director of Congressional Relations Group for the Washington, D.C.-based Independent Community Bankers of America, a community bank advocacy group with nearly 5,000 members. “The underlying collateral has lost value and you can be forced to write the loan down or off even if it’s being paid. So the economic environment and the regulatory environment are militating against what the president and other people would really like the banks to do.”

Recovery Mode
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.

Woods has traditionally turned to major banks for his lending needs. But after last week’s announcement that the Treasury Department will provide up to $1 billion in Troubled Asset Relief Program Funds to spur lending by Community Development Financial Institutions to businesses in the areas hardest hit by the economy, he’ll be taking a closer look at some of the participating CDFIs that may well be the key to restarting his construction project.

“These institutions operate in parts of the country where unemployment is way above the national average and where there’s been a huge amount of damage to people’s faith and confidence in the system,” Treasury Secretary Tim Geithner told a group of reporters following the announcement. “This program is a very powerful way to try to make sure that we’re starting to open up some of the credit channels for businesses in parts of the country where it’s most needed, and we think there’s going to be a very high return.”

The terms of the program, first announced last October, have been enhanced based on input from members of the CDFI community.

The amount of capital available to participating institutions has been increased from 2% to 5% of their risk-weighted assets or loans, and credit unions can apply for an equivalent amount of total assets. CDFIs that previously received TARP funding will be allowed to transfer that capital to the new program. Participants will pay a dividend rate of 2%, compared to the 5% rate applied under the Capital Purchase Program. That rate will increase to 9% after eight years. The Treasury will begin accepting applications for funds by the end of February.

According to Dorothy Bridges, CEO of Washington, D.C.-based City First Bank, she and several other community bankers had several extensive discussions with Geithner, members of Treasury’s CDFI staff and, on occasion, President Barack Obama himself about how the program could be improved.

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“They needed to hear from us what we thought would work for our communities and what would work for our financial institutions with regard to the terms and condition,” said Bridges. “They listened, and where they could make some changes, they did.”

CDFIs that do not receive regulator approval will be allowed to participate in the program if they can raise enough private capital investment that, when combined with matching funds from Treasury, they’ll meet the viability standard.

“The big banks go to the public markets to raise capital any time there’s a shortfall, and regardless of how much money they’ve lost, they’ve still been able to raise capital,” said Joe Haskins, CEO of Harbor Bank of Maryland (No. 10 on the BE Banks list with $285 million in assets). “We don’t have that luxury. This gives us an opportunity to enhance our capital base.”

Bridges believes that the new terms will have “a very definite and significant” impact on black businesses and hopes that learning about the program will give them a more positive outlook on the lending landscape.

“They listen to the same media that we do and because they’re hearing that—for a number of reasons—banks aren’t lending, many of them didn’t approach banks like ours to inquire about loans,” she said. “I hope this will ease their uncertainty and make them feel like the administration is very serious about its efforts, and that community banks and CDFIs are serious about lending again. Something like this will jump-start their desire to get back in business.”

Deborah Wright, CEO of Carver Federal Savings Bank (No. 1 on the BE Banks list with $789.9 million in assets), said the community bankers who met with Geithner this week explained to Treasury officials that the economy has had a more debilitating effect on the financials at black businesses.

“Part of the capital will be used to make loans to companies that may not look as pristine as they did a couple of years ago. But when you have a cushion, you can take more risks as a bank,” said Wright. “There was a lot of pressure from our regulators to preserve capital, so this will be a shot in the arm for our industry. We have to let people know that we’re back in business.”
The news has been very satisfying for black lawmakers on Capitol Hill who had begun grumbling that the Obama administration had turned a blind eye to the devastation taking place in their districts, and its domino effect on local black businesses.

“The administration is finally realizing that yes, there is such a thing as targeting—just as we targeted those big banks on Wall Street—and focusing help where the need is greatest,” said Rep. David Scott (D-Georgia), who sits on the House financial services committee. “That need is greatest in minority communities.”

Monroe wasn’t happy. He felt he wasn’t the credit risk his slightly blemished FICO score implied.

So the couple kept looking. In the end, the Monroes found a new lender in Illinois Service Federal Savings and Loan Association (No. 16 on the B.E. Banks list with $143.8 million in assets), a small community bank headquartered just five blocks from their home in Chicago’s Bronzeville neighborhood.

One of the bank’s executives knew Monroe from their work together as part of a community group. Illinois Service offered the Monroes a 30-year, fixed-rate mortgage at 5.4% with no extra fees. Since receiving their loan, the Monroes moved their savings and checking accounts to the bank. “I feel foolish that I didn’t do this a long time ago,” says Monroe. “This bank has outstanding service and a real sense of kinship with the neighborhood. More importantly, they trust that we’re good folks and will pay our loans back.”

The banking industry’s problems are well known—perhaps too much so. Fortunately, consumers have choices that go beyond the big, national financial institutions. There are nearly 8,000 community banks in the U.S. and more than 50,000 branch locations; many of them are growing, innovating, and challenging their larger competitors for customers. This new movement among smaller banks comes after more than a decade of losing out to national, name-brand banking firms.

In 1994, for instance, community banks held the majority of U.S. deposits—70%. Today, only 30% of U.S. deposits are kept in community institutions. Experts believe consumers flocked to the larger banks because they offered more active products such as online banking, free ATM use, and free checking—at a time when community banks were hesitant to modernize.

Community banks see now as a perfect time to make their move. Many are offering the same innovative products as the big boys, without any of the worries. “Consumers are definitely waking up. And they’re realizing that the TARP-ridden mega-banks may not be the most beneficial banking relationship for them over the long term,” notes Gabe Krajicek, CEO of BancVue, a consultancy that helps community banks modernize. BancVue provides software, marketing, and other services for more than 550 community banks.

“Consumers look at the news. They see the meltdowns that have taken place because of the large financial institutions and feel a real lack of confidence and trust,” says Karen Tyson, spokeswoman for the Independent Community Bankers of America, or ICBA, a trade association for nearly 5,000 community banks. “People are looking to work with a bank they trust, one they know is looking out for their best interests and the best interests of their communities. They find that with a community bank.”

That’s not just talk. In the first three months of 2009, ICBA member banks tripled their mortgage loan volume compared to the same period in 2008. In a press release trumpeting the jump, Dave Petro, president and CEO of ICBA’s mortgage arm, called the increase “a dramatic indication that community bankers are regaining lost market shares in the residential mortgage arena. It also demonstrates that despite the challenging economic environment, our nation’s [community] banks are commonsense lenders that continue to lend to their customers in cities and towns throughout America.”

Although some smaller banks have run into trouble, “most of them avoided the crazy loans made by so many larger banks,” says Greg McBride, senior financial analyst at Bankrate.com. Thus, many community banks, including credit unions, are still making loans. A good number are also offering higher yields and lower fees than their larger competitors to attract deposits.

Sure, your local community bank might offer half a percentage point less on a money market deposit account than you could find online: that’s $50 a year (before tax) for every $10,000 you keep there. In return for giving up a smidgen of yield, you have the opportunity to deal with real people, face-to-face, and to resolve any problems personally. Mell Monroe, for instance, says he loves the fact that customer service reps at Illinois Service Federal recognize his voice when he calls.

Of course, there can be some drawbacks to community banks. For example, some offer limited products and services. Your local bank may not offer as many mortgage options, investments, annuities, and financial advisory services as JPMorgan Chase or Bank of America.

Even so, your local bank might offer you the best (or only) deal you’ll find. “Officers and directors of local community banks have often lived in the same small town their entire lives,” says Bedda D’Angelo, president of Fiduciary Solutions, a financial planning firm in Durham, North Carolina.

“If you start hanging around the local Chamber of Commerce, you will meet attorneys, real estate agents, and bankers who went to school together and do business together. One of my former clients bought her house from a real estate agent who talked the executive lending officer of the community bank into approving a mortgage. The transaction would never have met Fannie Mae standards, but she got her loan.”

For customers like the Monroes, community banks are living up to their name as vital economic engines in their local environs. The couple is preparing a business plan to turn their five-bedroom 1890s historic Bronzeville home into a bed-and-breakfast. Where do they hope to get their small business loan?  Illinois Service Federal. Says Monroe, “When I talk to friends now who bank with those big, national banks, I ask them: ‘Do they really know you?’”

– John Simons contributed to this article.

This story originally appeared in the July 2009 issue of Black Enterprise magazine.

The banking industry’s problems are well known—perhaps too much so. Fortunately, though, consumers have choices that go beyond big, super-sized financial institutions: community banks.

There are nearly 8,000 community banks in the U.S., with over 50,000 branch locations, and many of them are growing, innovating and challenging their larger competitors for customers. This new movement among smaller banks comes after more than a decade of losing out to national, name-brand banking firms. In 1994, for instance, community banks held the majority of U.S. deposits—70%, that is. Today, only 30% of U.S. deposits sit in community institutions. Experts believe consumers flocked to the larger banks because they offered more active products such as online banking, free ATM use, and free checking—at a time when community banks were hesitant to modernize.

Community banks see this as a perfect time to make their move. Many are offering the same innovative products as the big boys, without any of the worries. “Consumers are definitely waking up. And they’re realizing that the TARP-ridden mega-banks may not be the most beneficial banking relationship for them over the long term, notes Gabe Krajicek, CEO of BancVue, a consultancy that helps community banks modernize. Bancvue provides software, marketing, and other services for more than 550 community banks.

Although some community banks have run into trouble, “Most of them avoided the crazy loans made by so many larger banks,” says Greg McBride, senior financial analyst, Bankrate.com. Thus, many community banks (including credit unions) are still making loans. A good number are also offering higher yields and lower fees than their larger competitors in order to attract deposits. Here are the three main reasons consumers are giving community banks a closer look:

1) Higher yields. While money market mutual funds pay almost nothing (0.21%, on average, in mid-April), several community banks are paying over 2% on money market deposit accounts. These accounts are backed by the Federal Deposit Insurance Corp. (FDIC), up to $250,000 per depositor per bank, which is true for all accounts at FDIC-member banks. Money market deposit accounts are liquid and safe, so you might want to consider them for your cash reserves now. At www.bankrate.com, you can search for the highest yields on all types of bank accounts.

Even higher yields are available at the thousands of community banks offering so-called “rewards checking,” developed by BancVue. Yields generally are 3% or more. First Robinson Savings Bank (www.frsb.com) of Robinson, Illinois recently topped the list with a 6.01% yield. Rewards checking accounts typically have no fees or minimum balances; you can find participating community banks at www.checkingfinder.com.

“Rewards checking works for some people but not for everyone,” says McBride. “To get the high yield, you usually have to agree to direct deposit of your paychecks, online statements, and use of the bank’s debit cards at least 10 times each month. If you use your debit card nine times in one month, your yield will drop sharply that month.”

2) Lower interest rates. Community banks offer attractive loan rates, especially on so-called “jumbo” mortgages, according to McBride. Such loans usually are larger than $417,000, and the national average for a 30-year, fixed-rate jumbo loan is now around 6.7%.

A recent look at Bankrate.com found lenders willing to make jumbo loans at rates around 5.4% to creditworthy borrowers. Community banks often hold onto the mortgage loans they make so they’ve avoided the problems of the mortgage-backed securities market, which enables them to quote lower rates on jumbo loans. “Considering the size of the loans and the difference in yields,” says McBride, “consumers may enjoy notable savings by going to community banks for jumbo mortgages.”

3) Personal service. You don’t have to shop the Internet to find a community bank. Chances are, you can walk around the corner and find one of those 50,000 branches.

Sure, your local community bank might offer half a percentage point less on a money market deposit account than you could find online: that’s $50 a year (before tax) for every $10,000 you keep there. In return for giving up a smidgen of yield, you have the opportunity to deal with real people, face-to-face, and to resolve any problems personally.

What’s more, your local bank might offer you the best (or only) deal you’ll find. “Officers and directors of local community banks have often lived in the same small town their entire lives,” says Bedda D’Angelo, president, Fiduciary Solutions, a financial planning firm in Durham, North Carolina. “If you start hanging around the local Chamber of Commerce, you will meet attorneys, realtors, and bankers who went to school together and do business together. One of my former clients bought her house from a realtor who talked the executive lending officer of the community bank into approving a mortgage. The transaction would never have met Fannie Mae standards but she got her loan.”