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Small Bank Is Facing Some Big Competition in a Slow Market


President: Byron Webb III.

Assets: $128 million.

Net income: $2.8 million in 2011; $3.2 million in 2010.

No. of local branches: One.

No. of local employees: 18.

Headquarters: Pacific Beach.

Year founded: 1981.

Company description: Commercial bank.

Key factors for success: Family owned since inception; knowledgeable and conservative underwriting.

Home Bank of California, based in Pacific Beach and with a single office, had a so-so year in 2011, the result of more borrowers paying off loans and lining up fewer new clients to replace them, according to bank President Byron Webb.

Part of the problem is that bigger banks are being far more aggressive about making smaller loans in recent years, said Webb.

“When we see a deal that makes sense, it’s often being snapped up by a big bank,” Webb said. “There’s enormous competition going on (for loans) among all banks.”

For the full year, Home Bank reported net income of $2.8 million, down from $3.2 million in net income for 2010.

A major reason is the bank’s loans dropped from $126 million at the end of 2010 to $108 million at end of 2011. Home Bank’s total assets decreased to $128 million at the end of last year from $146.7 million at the end of 2010.

Difficult Regulatory Environment

Webb said a combination of a reduced loan portfolio, a regulatory environment that discourages the bank from making commercial real estate loans, and a still uncertain economy caused the shrinkage.

Nearly all of Home Bank’s loans are for commercial real estate, for properties such as warehouses, retail stores, and apartments. Webb says the bank doesn’t make any loans beyond a two-hour drive of its office, or speculative development loans.

Its stock and trade are loans for income generating properties, with sufficient cash flow to make the payments, he said.

However, because regulators are scrutinizing banks far more carefully, the effect is to discourage this type of lending, Webb said.

If a bank has more than 300 percent of its capital devoted to a single type of lending, regulators want the bank to have special processes in place to more closely monitor the commercial credits, he said.

As of December, some 460 percent of Home’s capital of $19.5 million was deployed in commercial real estate loans. At one point, the bank had more than 1,000 percent of its capital in that category, Webb said. “They won’t let us do that anymore.”

To diversify, Home has been trying to get into small business lending, and is looking to hire a couple of small business loan officers. “What we need are people who understand business credit and we need people who can get out on the street…to walk and knock on doors,” Webb said.

However, finding quality borrowers these days is difficult, say most bankers.

“There’s very limited loan demand for C&I (commercial and industrial or business loans) today,” said Mike Perry, chief executive at San Diego Trust Bank. “Most banks are treading water or their (C&I) balances are going down.”

San Diego Trust, with $213 million in assets, held only $38.2 million in loans on its books, down from $48.4 million at the end of 2010.

Perry said since the financial crisis of 2008, the entire nation, including most businesses and individual borrowers, have been deleveraging debt and shunning new debt.

“For the most part, business owners don’t have a need or desire to expand because of all the uncertainty in the economy,” he said. “The notion that banks don’t want to lend is nothing more than political rhetoric.”

Perry said his bank, like many others, is doing some lending but most of the activity revolves around refinancing existing loans.

Strategies for Success

Among other strategies Home Bank is using to drum up new business is expanding its online presence and launching a new single family mortgage division, Webb said.

Home Bank also closed down its branch in Oceanside, which affected its deposit base a bit, Webb said. Total deposits at year-end were $81 million, compared with $93 million at the end of 2010.

Another metric — which showed a welcome decrease — was the bank’s nonperforming assets, which fell to $7.6 million compared with $8.3 million at the end of 2010.

The bank maintains plenty of excess capital. At year-end, its total risk-based capital ratio was 20.56 percent, more than double the 10 percent ratio needed to be classified as well-capitalized.

Webb says shrinking in size isn’t that new; the bank followed the same action during the recession of the early 1990s. “I’d rather shrink my loan portfolio than put bad loans into the portfolio because in the long run those bad loans will cost you more,” he said.


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