With CRE Credit, Home Bank Prospers

Home Bank of California S-corp bank over $100 million If you went by general trends and conventional wisdom, Home Bank of California should be on life support--not gracing a spot among the top 25 institutions in its class. First off, virtually every loan in the $149.8 million-assets bank's portfolio is a real-estate credit. The vast majority of those loans are commercial real estate loans. Not business loans that happen to be secured by commercial real estate, but real, honest-to-goodness loans made on income-producing property. And the remainder that isn't CRE consists of construction loans and multifamily and single-family mortgages. The bank doesn't have any C&I loans and is only beginning to raise deposits through noninterest-bearing demand accounts. And yet the bank manages to have exactly one piece of OREO, a bed and breakfast that didn't catch on. And its yearend 2008 ratio of nonperforming loans to total loans was 0.43%--though Byron B. Webb III, president and chairman, admits that a couple of loans are giving management a fit or two. As a result, the family-owned S corp bank has produced a very consistent return for its shareholders, ranging between 29% and nearly 36% in the last four years, hitting 31.73% in 2008. Atypical state-chartered roots Webb, 48, is the third generation of his family to work in banking. His father started Home Bank in San Diego's middle-class Pacific Beach area as an uninsured state-chartered thrift and loan association in 1981. The bank became FDIC insured in 1985 and eventually changed its name to Home Bank of California. Through all of that time, and until the end of 2007, the company maintained the thrift and loan charter. As a thrift and loan, Home Bank could not accept demand deposits, so its funds gathering was limited chiefly to time deposits, and Federal Home Loan Bank advances. Webb explains that this structure favored finding higher-paying credits, such as commercial real estate loans, to make up for the higher-cost funding base. In late 2007 the company changed to a commercial bank charter, to expand its funding mix further. Webb says that the effort to raise checking deposits remains in its early stages. At present, the bank's borrower base and depositor base have almost no overlap at all. Deposits are chiefly local, and can be readily raised in the highly competitive market so long as the bank is willing to pay consumers the going rate or better. The bank is currently exploring two national rate listing services as well as the ABA-endorsed CDARS program. Building up a commercial deposit base will take time, as many borrowers don't come from the bank's immediate geographic vicinity, and those that do generally think of Home Bank strictly as a credit source. [ILLUSTRATION OMITTED] Making CRE perform What's the secret ingredient, the special factor at Home Bank? There isn't one actually. Home Bank doesn't emphasize any particular type of property, nor does it avoid any specific type of CRE loan. With appropriate due diligence, it will even do gas stations. But you won't find Donald Trump or his ilk coming to Home Bank for credit. We're not even on his radar, says Webb, and you won't find the Fortune 500 on the bank's customer list. The typical borrower is a business person who owns two or three small- to medium-sized investment properties. They generally either want to buy an additional property on credit, or they wish to access equity in their existing holdings. …