First Independence’s Sweet Song of Growth

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.