But it was struggling nonetheless. Indeed, of all the banks that received bailout money as of Jan. 6, it had the second-highest ratio of bad loans, when compared with its capital and its cushion of reserves in case of further loan losses. Its assets are shrinking and it lost money in the third quarter. It began cutting its dividend last year, when it stood at 21 cents a share. It is now a penny a share. And it had lost millions of dollars from bad stock market investments.
But Independent is hardly a high roller plagued by gold-plated executive perks, and it was not a big subprime lender, as many banks were.
Based in Ionia, Mich., 30 miles east of Grand Rapids, it is the kind of local institution that foots the bill so the state’s high school bands can march in the annual Grand Rapids Santa Claus Parade. This month it has George Foreman grills stacked up in its lobbies to reward customers who bring in friends and neighbors to open new accounts. Independent is one of the biggest employers in Ionia, a city of 10,000 with classic, turn-of-the-century storefronts dominating its main street. Driving across suburban Detroit in his black Mercedes sedan, Keith Lightbody, a senior vice president at Independent Bank, said it was easy, in retrospect, to see how banks like his ended up where they are today.
Mr. Lightbody, a former JPMorgan Chase bank executive hired almost two years ago by Independent, tours the sites of the bank’s many broken dreams, like the Whispering Woods residential subdivision in Farmington Hills. The bank financed the construction of roads and utilities for the subdivision, only to see the developer go belly up before most of the lots were sold. Snowdrifts now nearly cover the “for sale” signs.
Perhaps even more distressing are the empty storefronts in Shelby Township, Mich., where a developer backed by the bank built what was supposed to be a vibrant streetscape, bustling with shops and shoppers.
Instead, other than a restaurant at the front of the complex, there is only a row of darkened windows, with the work halted on the would-be stores even before their floors were built, leaving the insides looking like a sandbox filled with random construction debris.
As of the end of September, the bank was burdened by $115 million in bad debts, or nearly 5 percent of its overall loan portfolio, compared with less than 1 percent in 2005. Each of these failed projects has something essential in common, Mr. Lightbody said.
“We didn’t step back and look at the big picture, asking ourselves, are we really doing the right thing with this loan?” he said. “Everyone was making a lot of money.”
Independent is publicly traded and under pressure from investors to shrink its troubled loan portfolio before lending anew. Yet it still very much wants to make loans, said Robert N. Shuster, Independent’s chief financial officer.
In normal times, Independent would lend up to $8 for every $1 in bank capital. The $72 million in federal money, therefore, could generate up to $576 million in loans — a powerful leveraging effect that was the goal of the TARP program.
“Our whole business is predicated on making loans — that is what we do, that is the mission of the bank,” he said. But the bank cannot afford to simply pass out money, Mr. Shuster said, or everyone involved will lose — the borrower, who would probably default on the loan; the bank, which would experience bigger losses; and the federal government, which is counting on Independent to pay back the $72 million, along with 5 percent dividend payments.
“That is what got us where we are today,” Mr. Shuster said, of the bank’s past easy-lending practices. “You can’t put consumers in a position where they aren’t going to be successful.”
Making Loan Decisions
Ms. Kimball, the chief lending officer, comes face to face with this debate each day.
She has continued to tighten lending standards, generally turning away applications, for example, for single-use commercial buildings, like restaurants, because of the difficulty in selling the properties if the bank needed to foreclose on the loan, she said. Independent is also taking a more critical look at appraisals submitted to justify housing loans, which is considered a necessity now, because national companies that buy up mortgages from banks like Independent are demanding such scrutiny.
“We are not going to lower our credit standards at this point to make a whole bunch of extra loans just to deploy the money,” Ms. Kimball said. “We need to make loans that are reasonable in this day and age.”
Working from the Troy office, Ms. Kimball, who has a cool, stern tone, and a self-confidence that comes from 25 years in the financial services business, is overseeing this effort as the bank moves, in particular, to cut the size of its real estate loan portfolio.
“It is not something that changes overnight,” she said from her corner office overlooking Troy. “It is like turning a ship around in the ocean.”