Battered by huge losses on loans to developers in Georgia and Florida, Omni National Bank in Atlanta has put its plan to open branches or loan offices throughout the United States on hold.
The $933 million-asset bank specializes in lending to developers who rehabilitate and sell run-down inner-city homes. This time last year it was busy expanding into Texas, and it was eyeing markets such as Baltimore, Washington, and Nashville.
But since the subprime mortgage market collapsed last summer Omni National's once-stellar credit quality has deteriorated sharply, and shares of its parent company have plunged more than 90%, to 78 cents at midday Tuesday.
Now the goal is preserving capital, not spending it, according to Stephen Klein, the chairman and chief executive officer of the bank and the holding company. Just last week Omni Financial said it would defer interest payments on its trust-preferred securities for up to four quarters.
"We have a lot of troubled assets that we're dealing with, and capital is king," Mr. Klein said in an interview last week.
His company, which went public in late 2006, is still trying to get a handle on the extent of its loan troubles. It has yet to file its annual report for last year with the Securities and Exchange Commission, and its stock could be delisted if it does not do so by July 15.
Omni also has delayed filing its first-quarter earnings report, though preliminary documents filed with the Federal Deposit Insurance Corp. show that its nonaccruing loans more than quadrupled from a year earlier, to $27 million.
Omni is considered well capitalized, based on March 31 FDIC data, but how long it stays that way remains to be seen.
Jeff K. Davis, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp., pointed out that Omni's ratio of nonaccrual loans to total loans was over 9% at March 31, a figure he called "off the charts."
If the company has "a massive load of nonperforming loans, their capital position may not be as strong as it appears," Mr. Davis said.
Most of Omni's problems can be traced to the real estate downturn, though there are indications that some lenders made loans they should not have.
Jeffrey Levine, an Omni co-founder, ran its redevelopment lending program but abruptly retired in December after the company said it had "detected lending policy violations and internal control deficiencies" in the program.
Mr. Klein would not say directly whether Mr. Levine caused some of Omni's current problems. "We did an internal investigation. We determined that there were in fact policy violations, and Mr. Levine retired," he said.
In addition, Mr. Klein noted that Mr. Levine oversaw the Georgia and Florida markets, where Omni's loan problems are most severe.
Omni got its start in 1992 as a private-development lender in Atlanta and became a banking company when it bought a small, troubled North Carolina bank in 2000. Since then it has opened branches or loan offices in Georgia, Texas, Illinois, North Carolina, Florida, Alabama, and Pennsylvania, and it planned to use the proceeds from its initial public offering to accelerate its expansion.
In an interview with American Banker in July, Mr. Klein said that Omni had identified "50 major cities" in the United States where it believed there would be sufficient demand for its purchase-and-rehab loans.
Most banking companies are reluctant to cover the cost of fixing up a house unless the borrower intends to live in it, so Omni's competition for such loans tends to come from nondepository lenders, which often charge higher interest rates.
The loans historically have been Omni's most profitable ones, helping it achieve healthy net interest margins despite a relatively high cost of funds. (Roughly two-thirds of its deposits are brokered, according to FDIC data.)
But the company's fortunes changed abruptly in the fourth quarter, at the height of the subprime crisis. Developers who took out loans with Omni suddenly could not find buyers for the homes they had fixed up.
That is because many of the potential buyers were subprime borrowers who could no longer obtain loans, according to Craig Colasono, an analyst with Sandler O'Neill & Partners LP.
"Banks tightened lending standards for all types of credits, but subprime pretty much evaporated in a relatively short amount of time," he said.
Omni has yet to file its fourth-quarter earnings with the SEC, but according to FDIC data, it lost $11.2 million in the quarter after earning nearly $1.8 million a quarter earlier. In the first quarter of this year it lost $28,000, according to FDIC, though Mr. Colasono said his company could actually report a higher loss once it completes an audit of the properties on which it has foreclosed.
Last month Mr. Colasono downgraded Omni's stock to "sell," from "hold," and wrote in a note that its credit quality was still deteriorating rapidly.
"The longer the bank's unresolved valuation issue … with its auditors drags on, the more uncomfortable we are becoming about the financial health of the bank," Mr. Colasono wrote. "There is a possibility that the bank will have higher losses for the periods for which it has not filed audited financial statements, and that future losses may continue."
Mr. Klein said Omni is working with its independent auditor, Crowe Chizek & Co. LLC, to assess its other real estate owned properties.
"The company is hopeful that it will get a resolution in the near future, but I can't define that time frame," he said.
Mr. Klein said he has met with the Nasdaq listing qualifications panel to request extensions on filing its 10-K and quarterly reports. It has until July 15 to file its reports for last year and Aug. 15 to file its 10-Q for the first quarter of this year.
On Monday, Omni announced that Shaun Williams, its acting chief financial officer since April, plans to resign July 18 to pursue other interests. The company said in an SEC filing that no disagreements with the management or board led to Mr. Williams' decision
Mr. Colasono said that without current information, it is hard to say what Omni must do to right itself. He also said he does not think it is a particularly strong acquisition target, because most of its deposits are brokered, and its branches are too dispersed to draw interest from most community banks.
John Blaylock, an associate director of Sheshunoff & Co. Investment Banking, said that with so many financial institutions becoming regional or national in scope, a scattered branch structure "might fit someone's footprint."
