After a deal to buy a competitor fell apart last year, Home Federal Savings and Loan Association of Shreveport, La., had to come up with another way to jump-start its growth.
Now the $150 million-asset thrift is working to develop commercial lending as a new line of business. Last month it brought on a team of commercial bankers from Regions Financial Corp. of Birmingham, Ala., and made one of them, James Barlow, its president and chief operating officer.
Though the 85-year-old Home Federal had been content to be a sleepy traditional thrift, its new goal is to triple in size over the next three to five years.
"Right now is a time for a community bank to increase market share," said Barlow, who worked at Regions for 11 years, most recently as an area manager of commercial real estate for the company's Arkansas, Louisiana and Texas region. "The regional banks are tightening up so much that we see this as a window of opportunity to go after top-tier clients in this market."
Home Federal will pursue growth on several fronts, he said. It aims to increase its fee income, possibly by buying an insurance or brokerage business. This also would allow it to be "a full-service provider," so it can do more for the commercial customers it attracts.
Four people came with him from the $142 billion-asset Regions — two with experience in commercial real estate and two business bankers. They are pursuing loans of $500,000 to $5 million to put Home Federal's excess capital to work.
The former mutual thrift completed a first-step conversion in 2005, selling a minority of its shares to the public and retaining the rest in a mutual holding company. It raised $14.2 million, and its total risk-based capital ratio remains elevated at 69.45%. For thrifts nationwide, the ratio averaged 13.34% at yearend, according to data from the Federal Deposit Insurance Corp.
The plethora of capital means Home Federal's new team will have plenty of lending power to build a commercial portfolio, Barlow said.
Last year the thrift intended to conduct a second-step stock offering to go fully public and make an acquisition simultaneously. It had a deal to buy the $121 million-asset First Louisiana Bancshares Inc. for $23.7 million in cash and stock. But the stock offering did not attract enough investors, and Home Federal had to call it off, along with the deal.
Barlow said his thrift is likely to pursue a second-step offering again, after the down cycle ends and banking and thrift stocks come back into favor.
Industry observers said the recession will make finding high-quality loans a challenge for Home Federal. However, if it became more like a commercial bank — at yearend government-backed securities accounted for 97% of its earning assets, and the rest was mostly residential mortgages — any future second-step offering would be more attractive to investors, they said.
"I like this strategy," said Jeff Fair, the president of the Baton Rouge bank consulting firm American Planning Corp. "It is a good move for an old-line thrift that didn't have a lot of future in its existing business but does have the resources after the first half of their conversion."
Fair, who had been a consultant to First Louisiana during the abandoned deal, said some thrifts have stumbled when trying to develop commercial lending in the past, because they lacked expertise. But he said bringing in people with experience helps mitigate that risk.
"If this is a team of community bankers that have good projects at Regions that they can bring over — and hopefully cherry-pick the best, in light of the current economy — then I don't see the risk, other than management and the board may not be up to overseeing that kind of activity," he said.
Regions, one of several large banking companies operating in the Shreveport area, has about 25% of the deposit market share there, FDIC data shows. Home Federal has a 1.71% share.
A Regions spokesman would not discuss its former employees, but said the company is "very committed" to commercial lending in Shreveport. "We plan to grow that market."
In the quarter that ended Dec. 31, Home Federal's earnings fell 8% from a year earlier, to $139,000. It had no nonperforming loans, but Barlow conceded that its previous strategy had been to sell most of its loans.
"The bank hasn't kept a whole lot of loans on the balance sheet," he said. "It's been more of a home loan bank that originates and sells into the secondary market."
Nontransaction accounts hold roughly 88% of Home Federal's $80 million of deposits. Barlow said his team has been busy designing deposit accounts for commercial customers, who would be expected to bring deposits with them when getting a loan.
"As we grow loans, we'll grow deposits," he said. "Hopefully, it will have a compounding effect, and we will increase capacity to do even more."
Home Federal was hardly alone in struggling to complete a conversion last year.
Mike Shafir, an analyst with Sterne, Agee & Leech Inc., said investors have been reticent to participate in such offerings, because so many thrift stocks are trading well below book value. Conversions that include a simultaneous acquisition are particularly unappealing, he said, because of the dilution.
Shafir said the plan to expand Home Federal before converting fully to a public company is a good one. Since loan spreads have widened, "this is an opportune time to grow the balance sheet with new assets."
Hiring people who are familiar with the market and know how to underwrite commercial loans is a smart approach, he added.
Barlow said Home Federal expects to capitalize on a perception among business owners that they are not being served well by distracted larger competitors, where they may have done their banking for a decade or more.
"If the economy wasn't in the shape it is in right now, we wouldn't be able to go after that client. Their relationship with the regional bank would be solidified," he said. "Now we can get in the door and offer them proposals they are going to be interested in hearing."