unemployment rate hit a historic high of 7.2%, but Hudson sees the glass half full and notes that despite an increased credit risk, about 93% of people are still working. In light of President Obama’s goal to create 3 million new jobs, he feels there’s reason for optimism because individuals and businesses still need loans. “Even in this economic environment, people will still require financing.â€
Hudson expects Broadway’s single-family mortgage lending to now account for 35% to 40% of new originations; in contrast, it historically accounted for 10% to 15% of originations. He also expects that Broadway will benefit from reduced competition resulting from the closure or acquisition of banks such as Countrywide, IndyMac, Downey Savings, and Washington Mutual, as well as from banks that have canceled loan programs or eliminated certain loan products. As of Sept. 30, 2008, Broadway’s assets exceeded $400 million; the bank operates five full-service branches, four in Los Angeles and one in Inglewood, California.
The economy dictates that banks change the way they do business, and Broadway is no exception. The bank isn’t lending to out-of-state borrowers. It has also reduced its loan-to-value ratio for home purchases, from 90% to 80%, and it now requires a 20% down payment from borrowers, compared with 10% previously. Such changes may reduce the number of eligible borrowers, Hudson concedes, but they may deter borrowers from overleveraging themselves.
“The ethical question is, do banks have a responsibility to verify that borrowers can afford the loans they’re requesting, and do they have an obligation to offer loan products that best meet the consumers’ financial interests?†Hudson theorizes. “We believe that verifying that the borrower can afford the loan, and offering the best loan product to meet the borrower’s financial needs are not only in the best interests of the borrower, but also good for the company and its shareholders.†Broadway’s average home loan is $350,000, so Hudson projects that the bank could reach 143 new customers if it lends $50 million home loans this year. The new lending could also boost the bank’s profitability by generating fee income from things such as servicing mortgages. But the biggest gain would come from an increase in the bank’s net interest margin, the spread between what the bank charges on loans and pays on deposits. Even so, the bank increased its loan loss provision, an expense set aside to offset future loan losses, from $194,000 during the same period in 2007 to $947,000–a move that reflects the realities of the sluggish economy and how it may affect borrowers.
Hudson says it’s likely that more black-owned banks will seek capital from the Treasury. “In the current economic environment, most banks, particularly black-owned banks, will need to acquire additional capital.â€
This story originally appeared in the March 2009 issue of Black Enterprise magazine.