Between bank failures, climbing interest rates, liquidity concerns, commercial real estate (non)occupancy rates and labor market problems, the economy of 2023 has no shortage of worries to offer community bankers. Offering his perspective on the state of the industry both national and local is David Lamb, president and CEO of Oxford Bank, based on the northern edge of the Detroit metro.
Lamb, who’s been in the role since 2015, previously led Hantz Bank and spent time at Fifth Third Bank and Bank One. He sits on the board of the Michigan Community Bankers Service Company. Like most community banks, the $822 million Oxford-based bank has a focus on small business lending. The following interview has been lightly edited and condensed.
What is worrying community bankers economically?
David Lamb: Economic conditions by the numbers and experts’ opinions on recession look positive for stabilizing without much if any recession. However, most community bankers don’t actually believe it, because the aggressive tightening after huge amounts of stimulus from the pandemic intuitively have to cause economic slowness. It may be that community bankers believe their banks suffer more than non-banks, from the present conditions going into the future because of the already adverse impact on liquidity and slowing loan demand because of high interest rates.
I also believe that community bankers are more exposed to fixed rent real estate loans like office or retail centers than other banking segments. That will have some impact on credit quality in the future but depth or breadth might be less than anticipated.
In the end, forecasting the future for bankers is almost always an exercise in pessimism because we live in a cyclical industry and have seen it all before. My personal belief is always in diversification and sticking to the core of our business, because no one knows what is going to happen. We should fight the temptation to make material changes based on a forecast or intuition.
What about conditions in the Detroit area?
D.L.: I think most industries are concerned about high interest rates impacting consumer demand, which of course directly impacts industrial demand. In Metro Detroit, some companies are concerned about a strike at all of the Big Three auto companies this fall. Many aren’t overly concentrated in one company but worry about the stability of their customers, who might be leveraged or have bigger concentrations to one of the Big Three.
[Editor’s note: The United Auto Workers began a targeted strike against Ford, General Motors and Stellantis (formerly Chrysler) on Sept. 15. Walkouts were initially set to affect a Ford plant in Wayne, Mich., as well as a GM facility in Wentzville, Mo., and a Stellantis plant in Toledo, Ohio. They had not reached a deal by the time of publication, with UAW threatening to expand the strike further.]
We are not overly concentrated in auto suppliers; however a strike will impact pretty much every business in Michigan and cause at least a temporary recession here. As far as potential for growth industries, we expect continued growth in franchise restaurants and certain manufacturers who support “in-sourcing” i.e., bringing more of production back to the U.S.
CRE conversions to residential is a bit of a national trend — is this building capable of being changed over from office to residential? And the city of Detroit has done a marvelous job of encouraging development in the last five, maybe 10 years in the core there. There’s a lot of people living in Detroit now, and a lot of that has come from them converting offices into apartments. There are some buildings where it just doesn’t make sense because they’re too big. There’s got to be a market for it. I think that that is going to be a continuing trend, although we’ve never been big into CRE. Mostly, it wasn’t because we had some crystal ball; it was not having an adequate deposit relationship with that kind of loan.
A lot of our businesses are doing very well because they have pricing power that ebbs and flows. I think with the tightening, the general news media loves to fan fear. We really keep track of what’s going on with our borrowers and they seem to be doing fine, which is really weird. You talk to somebody on their anxiety about what’s gonna happen, and it’s at an all-time high. You look at the numbers and you’re like, “Why?”
Are you seeing any drastic pullback because of that?
D.L.: No, and here’s why: Tightening works. Why does raising rates work? Because do you want to take on this project at 10 percent? SBA is a perfect example. Most SBA loans are done at 200 over prime, right? That was less than a year ago, and now it’s 10 and a half. What happens is marginal projects that worked at six don’t work at 10. Those don’t get done. And the business owner doesn’t wanna do them. What we’re doing is a lot of SBA loans, because we have a very good SBA shop and our bankers are really good at understanding it and the real value to people. It is a very valuable product.
We still see some M&A, but that’s pretty hard. We have businesses that have a 40 percent return on equity. What do they care if it’s six or 10? That’s still pretty darn good, right? And so they do that, popular franchises don’t stop growing at all. But there’s less of that. And look, we’re right on track where we expected to be. We expected that to happen.
We got into factoring and asset-based lending because it’s countercyclical and it’s a very good diversification, but also because our whole brand is helping people. We want customers to come to us even if they get turned down by other lenders. We aren’t trying to do big deals — I’m sorry for using a sports analogy here, but it’s so easy with this one — we’re trying to hit singles and doubles. We’re not swinging for the fences.
Every bank probably would like to be in that business, and we would’ve liked to be in it sooner, too, but we had to wait till we had the right people. There ended up being a dislocation from what in effect was a failed merger, all these people who are experts who decided they wanted to do something different. We recruited them so we could go all in on it. It’s not a high risk business; it’s a high cost business. These aren’t real numbers, but I might have 1.5 FTE working on a conventional deal, for example, and we probably have five people working on a factoring deal. We might not even have a quarter of an FTE on the day-to-day servicing of a conventional deal. There are at least two people every day touching these factoring accounts, every single one.