City Securities buys lender in bid to reach new markets

It took 82 years, but City Securities Corp. has made its first acquisition.

One of the largest investment firms based in Indiana, City Securities purchased Columbus, Ohio-based ReCasa Financial Group LLC, a specialty lender focused on rehabs of dilapidated houses. Terms of the deal, which closed July 14, were not disclosed.

"I could write a book about this. I earned my MBA again over the past four months," said City Securities CEO Mike Bosway. "This really has the power to catapult our growth."

A holding company City Securities formed in May suggests it's poised to expand through acquisitions. The holding company, City Financial Corp., is the parent of both City Securities and ReCasa.

With total assets of $29.2 million and total liabilities of just $5.7 million, according to the most recent financial statements posted on its Web site, City Securities seems well-positioned to buy its way into new markets and new lines of business.

"This is monumental in our thinking about being outside the state of Indiana," Bosway said. "I don't know what we're going to look like 10 years from now, but if we're going to continue to grow, we're going to tell the regional story."

Although he wouldn't disclose City Securities' revenue, Bosway said his firm is poised to grow as much as 50 percent over the "next few years."

Founded in 1924, City Securities is best known for its decades of experience in municipal bonds. But the company has been diversifying its services in recent years. These days, it also offers a brokerage and expertise in wealth management, insurance and real estate. Its headquarters are in downtown Indianapolis, but City Securities has established field offices around the state. ReCasa represents its first foray beyond Indiana's borders.

The acquisition has its roots in friendship. Mark Quinlan and Richard Rudek, who met in 1989 in Bank One's training program in Ohio, founded ReCasa six years ago. Their banking careers taught them about the underserved market for home-rehab lending. But they set that knowledge aside in the mid 1990s when Bill Oesterle, then a partner with Indianapolis-based venture capital firm CID Capital, recruited them to an Ohio startup.

The startup, RFC Capital, was a specialty financier for telecommunications resellers, a hot market during the Internet boom. After it was purchased in 1999 by Providence, R.I.-based Textron Financial Corp., Quinlan and Rudek started ReCasa. Its niche is nine-month loans averaging $70,000 to finance rehabbers as they repair unoccupied houses. It structures loans so they're large enough to cover acquisition of the property, the price of its repair, and all connected closing costs. It bases the loan's valuation on the expected worth of the finished house. By June, Quinlan said, ReCasa had made a total of 1,100 loans over its history.

All the while, Quinlan stayed in touch with Oesterle. Their families still vacation together, Quinlan said. Oesterle–today CEO of locally based home improvement rating service Angie's List–is a City Securities board member.

"You never know what can happen when you associate yourself with good people," Bosway said. "When you least expect it, opportunities present themselves."

By last October, City Securities had extended ReCasa a $1 million letter of credit and Bosway had joined ReCasa's board. By March, Bosway was ready to propose an outright acquisition.

"[Bosway said,] 'I know this is going to take you by surprise and it's earlier than you thought, but what if we were your exit?' So Rich and I drove to Richmond. We all met in a Bob Evans for four hours," Quinlan said. "We brainstormed about the marriage and valuation. Both parties walked away even more pumped up about it."

Bosway stressed the similarities between the two firms' corporate cultures, which should smooth the transition. Quinlan and Rudek will remain ReCasa's managers, becoming executive vice presidents on City Securities' steering committee. Bosway hopes to leverage ReCasa's network of contacts to extend City Securities' services to new markets across the Midwest.

Bankers familiar with home-rehab lending said City Securities is getting into a challenging business.

Jerry Koors, vice president of Indiana and Kentucky mortgages for National City Bank, said traditional banks are most concerned about avoiding loans to "flippers," or rehabbers who try to unfairly milk modest improvements to dilapidated houses into massive profits. That's why it most frequently lends to rehabbers who plan to occupy the house they're fixing.

"You have to be careful in the marketplace," Koors said. "Flipping doesn't happen a lot, but the [regulatory] agencies look at it as a very bad thing. We want owners, because [flipping] doesn't happen if you're going to occupy the property. It protects everybody in the neighborhood."

Mike Renninger, a banking consultant for locally based Renninger and Associates LLC, didn't immediately see the synergy between City Securities' portfolio of high-end financial services and ReCasa's specialized home rehabbing niche. A more obvious acquisition would have been an out-of-state firm that specializes in municipal debt, he said.

"To finance a rehabber, wow, you've got to have some guts," Renninger said. "Some of these folks, if they get upside down in a property, they walk away and the owner is stuck with a partially finished project. Nobody wants that."

But City Securities is known for its savvy, Renninger said. So most likely, the deal is a good one for Bosway's firm.

"They're a sharp group of guys," he said. "It's a clear signal City Securities is looking for new and innovative ways to grow. That bodes well for them remaining independent."