A small Atlanta bank is aiming to play a big role in redeveloping the nation's inner cities.
Omni National Bank, which specializes in lending to investors who fix up and then sell inner-city homes, is planning to expand this year in Texas, where it recently converted a loan office into full-service branch. Over the next few years it wants to open branches or loan offices in a number of major metropolitan markets where it sees demand for purchase-and-rehab loans.
"We've identified 50 major cities in the U.S. where this product could be successfully deployed," Stephen Klein, the chief executive officer of the $770 million-asset bank and its holding company, Omni Financial Services Inc. "We think we can open [in] a few markets a year."
Omni is not the only bank making such loans; the $2.5 billion-asset HomeStreet Bank in Seattle and the $2 billion-asset ShoreBank in Chicago started making them to inner-city developers years ago. But industry watchers said Omni is believed to be the first community bank to be using the loans in a nationwide expansion strategy.
It got its start in 1992 as a private-development lender in Atlanta and became a bank when it bought the troubled $57 million-asset United National Bank in North Carolina in 2000.
Omni Financial now has branches or loan offices in seven states: Georgia, Texas, Illinois, North Carolina, Florida, Alabama, and Pennsylvania. It went public in October and plans to use part of the proceeds from the offering to fund its planned expansion.
Historically, bankers have been skittish about fronting the cost of fixing up a house unless the borrower intends to live in it. Because bankers typically stay out of rehabilitation lending, most of Omni Bank's competition comes from nondepository institutions, like hard-money lenders, that often charge higher interest rates.
Omni makes the short-term redevelopment loans to investors who then purchase dilapidated, inner-city houses, remodel them, and sell them. The loans, which make up about 25% of Omni's portfolio, have much higher-than-average interest rates, typically about 16% or 17%, largely because they require more oversight than typical construction loans, Mr. Klein said.
In Texas, it has identified Dallas, Houston, San Antonio, and Austin as markets with the highest demand for its loans. It purchased a Texas bank charter last month and used that charter to convert its Dallas loan office into a branch. Omni intends to open a second Texas branch in Houston around Sept. 1.
The company has not made any concrete plans to enter Austin or San Antonio, but Mr. Klein said that would happen sooner rather than later.
"We think the dynamics of the Texas marketplace" could make it "among our best markets," he said. "We've also looked at Washington, Baltimore, and Nashville … but right now we'll focus on the Texas market."
Brian Klock, an analyst who follows Omni for KBW Inc.'s Keefe, Bruyette & Woods Inc. in Atlanta, said that Omni's hands-on approach includes frequent inspections of a property to ensure that its redevelopment is on schedule.
The loans also are structured differently from traditional construction loans, which accrue interest and are paid off in a lump sum, he said. Omni requires its borrowers make monthly interest payments until the project is completed and sold.
"Omni views that as an incentive to get the project done, because it is eating into the borrower's cash flow," Mr. Klock said. "That is a definite sign of their credit culture."
That culture is one Mr. Klein does not feel many banks could replicate easily, because it is so labor intensive. Every week lenders examine every property under construction before a borrower can draw on the loan.
"It's an exceedingly significant undertaking," he said, since each lender might see 30 to 90 properties in one day.
One of the challenges Omni faces in expanding into new markets is finding qualified lenders.
Lenders are in short supply to begin with, and rehabilitation lending is so specialized that Omni's new lenders must go through six months of training in Atlanta, Mr. Klein said. New lenders are required to get their real estate licenses and be trained in conducting inspections.
"We train concurrently four people at a time," he said, and each office opens with two lenders.
Mr. Klein added that Omni spends "several hundred thousand dollars" to train new groups of lenders because they spend Monday through Friday in Atlanta. "It is very, very, very expensive to properly train our lenders to manage this risk," he said.
That diligence is paying off for Omni.
For the first quarter it reported a net chargeoff rate of 0.04%, according to Federal Deposit Insurance Corp. data. The average for commercial banks with $500 million to $1 billion of assets was 0.18%.
"We are very aggressive in collecting money due to us," Mr. Klein said. "At 31 days we start the most aggressive collection techniques that are legal, because if we can get our arms around the collateral supporting the loan, we can mitigate losses."
Omni also reported a first-quarter net interest margin of 4.95%, 88 basis points above the average for banks in its asset class.
"There are a lot of banks that would be jealous of their margin," said Craig Colasono, an analyst who covers Omni Financial at Sandler O'Neill & Partners LP in New York.
Omni has achieved that margin even though it does not generate much in the way of core deposits, he said. "If they can reduce their cost of funds, their margin could expand."
Its return on equity has slipped of late, from 18.66% in December 2005 to 10.51% at the end of March, largely because it had excess capital after raising about $30 million in its initial public offering. But Mr. Klein said that Omni is deploying the capital, and that he expects the return to climb back to around 15% sometime in the first or second quarter.
