After financing the construction of thousands of southern California homes, Vineyard National Bancorp in Corona, Calif., is turning its lending focus to building the dry cleaner stores, gas stations, and coffee shops that will serve the new homeowners.
Vineyard's assets have grown more than tenfold since 2001, when it began aggressively making construction loans for million-dollar homes along the southern California coast and for affordable tract homes farther east, in the so-called Inland Empire, as well as apartment loans to income-property investors.
But demand for new homes has slowed considerably - particularly inland - and Vineyard's president and chief executive, Norman Morales, said that the $2.2 billion-asset company intends to partially offset the expected softening of its bread-and-butter business by making more loans to retail and strip mall developers.
"Now that these houses have been built, people are moving in, and we have a lot of consumers who need more stores," Mr. Morales said.
He also said that businesses are continuing to move their headquarters as well as call centers and warehouses from Los Angeles and Orange counties to the more affordable Riverside and San Bernardino counties. These projects will need construction loans as well, he said.
Analysts say the strategy is sound, though they expect loan growth to slow nevertheless - from 30%-plus annually in recent years to perhaps 20% this year.
Investors, though, appear skeptical. Vineyard's stock is down about 25% in the last 12 months, and it hit a three-year low of $21.23 a share on Dec. 13. It closed at $22.09 a share Friday.
Historically, construction loans for commercial properties have made up just 3% of Vineyard's portfolio, but Mr. Morales said he expects to boost this share to at least 10% during 2007.
The company is also making more commercial and industrial loans, and it is aiming for a 20% share of such loans in its portfolio by the end of 2009, up from about 6% now.
"For the last six years we were focused on real estate lending and construction," Mr. Morales said, "and the next three years we really want to focus on core commercial banking and lending to entrepreneurs."
Vineyard has already been moving in that direction. Though its construction loan portfolio is more than twice what it was three years ago, construction loans make up a significantly smaller share of overall loans as commercial, multifamily real estate, and consumer lending all have grown rapidly.
Aaron Deer, an analyst at Royal Bank of Canada's RBC Capital Markets in San Francisco, said Vineyard's efforts to diversify should insulate it from additional regulatory scrutiny under new guidelines on commercial real estate and construction lending.
Last month, the Federal Reserve Board, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency said that banks with high levels of such loans on their books and that had increased their concentrations in these categories by more than 50% in the past three years will be required to more closely monitor those portfolios.
Vineyard's concentrations are well above industry averages, but they have declined in the past three years, Mr. Deer noted.
The company has no intention of turning its back on residential construction lending, it said, however.
Mr. Morales said demand for tract housing in the Inland Empire region has slackened with the increased supply but that demand for luxury homes along the California coast remains strong. Indeed, in the past year Vineyard has opened loan production offices in Westlake and Monterey, Calif., and converted a loan office into a branch in tony Marin County, near San Francisco.
This year, the company expects to hire four more custom-home lenders and open more loan production offices in central and northern California, Mr. Morales added.
Though California's housing market has cooled some, said Mr. Deer, the analyst, it is, overall, very healthy. Banks like Vineyard "have stepped up their underwriting and are being more cautious to whom they will lend," he added, and credit quality remains strong.
Nevertheless, Mr. Deer last month reduced his estimate of Vineyard's 2006 earnings per share to $1.86, from $1.87, and its 2007 earnings per share to $2.15, from $2.30. The lending slowdown plays a part, but the main culprit is a continued squeeze on Vineyard's net interest margin from the inverted yield curve. In 2005 Vineyard earned $18.9 million, or $1.97 a share. It will report its 2006 earnings the last week of January.
Michael McMahon, an analyst at Sandler O'Neill & Partners LP in San Francisco, is more bullish. The stock has been unfairly punished, he said, and like Mr. Morales, he believes plenty of lending opportunities remain, beyond residential construction. In particular, he said, Vineyard could benefit from the explosive rise in imports coming to the ports of Los Angeles and Long Beach, with the resulting need for warehouse space in the Inland Empire.
"I think Vineyard will be able to grow its loans overall in 2007 and surprise the skeptics," Mr. McMahon said.
