In 2007, First State Bank of Eastpointe, Mich., was faced with some tough decisions. “Our loans were deteriorating, brought on by large measure by what was becoming a difficult economy in southeast Michigan. I don’t know if the recession hit southeast Michigan earlier than the rest of the country or if we just felt the effects of it. But in 2007, we looked at our balance sheet and could see the need to recognize some losses,” said Gene Lovell, president and CEO of the bank, which has $664 million in assets.
“I remember back then talking to the board, our decision to take a hard look at our loans and identify as many loan losses as possible, recognize them and hope to go forward from there in a positive way. I don’t think we anticipated the depth of the recession that hit us,” Lovell said.
The bank went from an income of $1.6 million in 2006 to a loss of $8.7 million in 2007 as it worked to clean up troubled loans and sold two pools of troubled mortgages. “It caused us to take some hits in 2007 … but ultimately it cleaned up our balance sheet and took away a lot of the burden that might otherwise have been required to work those loans out,” he said. Identifying those issues early “forced us to make the structural changes within the bank that helped see us through what turned out to be a rather prolonged economic downturn.”
The next two years also held operating losses for First State Bank. However, in “three years, we were back to profitability. In four years, we were able to provide our shareholders with a dividend. We did that without ever requiring, requesting or receiving one penny from the federal government, and we’re quite proud of that,” Lovell said. “I think it speaks well to the bank because we have always maintained a conservative balance sheet and, as painful as the losses were, we were never at a point where I felt we were at risk as a continuing concern. We were never under any type of consent agreement with the regulators although clearly they were keeping an eye on all financial institutions at the time.”
And the bank continued to make loans during the entire recession while most national and regional banks shut down their lending to southeast Michigan. “We were there when times were difficult; we worked with our customers to get through that financial crisis, and they helped us survive the financial crisis,” Lovell said.
Meanwhile, most of the other banks in the county were closed by regulators. “Before the financial crisis, there were probably about eight community banks doing business in Macomb County,” Lovell said. First State Bank is the only remaining bank chartered in that county.
At one point, the bank’s loan loss reserve was at 3.3 percent. As the bank celebrated its centennial, the bank’s loan loss reserve stands at just under 1.5 percent of outstanding loans. “I think that’s probably much more than what’s absolutely necessary, but again, that’s trying to take a conservative approach,” Lovell said. The bank’s Tier 1 capital ratio is at 10.5 percent.
The bank opened its doors in October 1917 as Halfway State Bank, a nod to the fact its village was the halfway point on the stage coach line between downtown Detroit and the county seat of Macomb. In 1935, the bank was recapitalized with funds from town mayor and butcher Christian Nill. To this day, his descendants own controlling shares in the bank and are represented by four directors on the board.
“They are a wonderful family,” Lovell said about the Nills. “They have grown up with the bank being part of their lives. If I used the financial crisis as an example, the benefit here was immeasurable. In 2007, when things were looking really difficult, I didn’t have to contend with outside shareholders. I did not have to contend with financial analysts about what was going on with our financials. I could meet with the board of directors, who in turn represented our shareholders, and tell them straight up, ‘This is our problem. Let’s recognize it now and move forward.’ And they understood. They were willing to look at a difficult situation with the cold eyes that that situation needed and look at it objectively, look at the bank’s long-term best interests.”
As the bank celebrated 100 years, it took some time for reflection. “We’ve got a few customers who have been with us at least 80 years,” Lovell said. “I’ve talked with a couple of them, and they will tell me how their parents opened an account for them the year they were born.” He also said nearly 500 customers have been with the bank for at least 50 years. “That is another blessing we’ve had with First State Bank, and we do have a tremendous base of what I guess we could call core customers — customers who have been with us for many decades. And during good times and bad times, they’ve stayed with us.”
After the recession, Lovell said it became clear to the bank that “if we were going to thrive as a community bank, we needed to help ensure our community thrived. We needed to focus our efforts on giving back to the communities we serve in.”
As the bank looks to the future, “we’re still a very solid, financially sound community bank,” Lovell said. First State recently expanded its market and is looking to open its 12th branch this year. The possibilities with information technology, too, are vast and affordable, Lovell said.
“You don’t need to be a mega bank to make the kind of investment necessary to offer those services. We can really offer, in many ways, the same quality of services as a large bank, but we still have that hometown community feel of a community bank, and I really think there’s a lot of value there.”