The Fed’s Rate Cut Puts a Crimp in
Earnings for Banks
Imperial Capital Bank, the largest financial institution based in San Diego, took a big step toward becoming much larger by agreeing to buy Los Angeles-based Asahi Bank of California earlier this month.
It’s not that Asahi comes with a great deal of assets. At the end of September, it was only about $80 million, and half of that will likely be returned to Japan, where its parent bank is located.
The reason behind the deal, which should be completed by early next year, is Asahi has a commercial bank charter, something Imperial Capital covets.
Imperial Capital now operates as an industrial bank, an odd duck in the world of finance. It can make commercial real estate loans, and takes in deposits in the form of CDs, but provides little else in the way of banking services.
Imperial President George Haligowski said the Asahi purchase will provide it with a first-class bank operating system. Once Imperial obtains regulatory approval to change its charter, the bank can offer a full range of commercial bank products, including checking accounts, credit cards and consumer loans.
Along with those new products, Haligowski expects to gain plenty of new customers.
“Our goal is to gain a bigger share of the market than we currently enjoy,” he said.
How big?
“We intend to double our size.”
That’s an impressive goal, since Imperial Capital already holds more than $1.2 billion in assets, making it the biggest in the county. California Bank & Trust, with about $7 billion in assets, is really owned by Zions Bancorporation, based in Salt Lake City.
Imperial Capital’s parent, ITLA Capital Corp., agreed to pay $6 million for Asahi, which is a subsidiary of Asahi Bank based in Japan, with about $251 billion in total assets. That means ITLA paid about 1.5 times book value for Asahi, below the average of two times book value that most commercial banks were selling for this year, Haligowski said.
Asahi of California has only two offices and a staff 28. Haligowski said he will retain some of the employees. ITLA, which also is parent to Imperial Capital Real Estate Investment Trust, has 130 employees. The bank has six offices in the region, including one in San Diego.
Haligowski said the Asahi purchase was the result of its Japanese parent bank merging with another Japanese lender, Diwa Bank, and being forced to divest itself of its international bank assets.
Haligowski, a longtime financier in Japan and fluent in Japanese, said he was able to “pre-empt an open bidding” on the California bank, and structure an advantageous deal.
At the end of the third quarter, Imperial Capital Bank reported net income through the nine months of $10.2 million. It had total loans of $1.3 billion. ITLA Capital earned a net profit of $4 million for its third quarter, and had net income of $13.5 million for the nine months. The company’s stock was trading at $19.95 on Nasdaq on Nov. 14, just below its 52-week high of $20.50.
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Banks See Earnings Decline:
The Federal Reserve Bank’s aggressive cuts to short-term interest rates for a 10th time this year are intended to spur consumer spending but are putting a crimp in earnings for many banks.
Particularly hurt are smaller banks that do a good deal of lending to small businesses and other loans that are generally tied to the federal funds rate.
These interest rate declines mean banks are receiving less income on their outstanding loans while still paying out higher rates on longer term deposits and CDs.
San Diego National Bank blamed the rapid decline of interest rates for its reduced earnings for the nine months ended Sept. 30. During the year, the bank’s net income was $20.2 million compared to last year during the same period when its net was $20.8 million. The decline occurred despite assets growing from $1.4 billion to $1.6 billion this year.
Likewise, Borrego Springs Bank reported net income of $52,000 for the first three quarters compared to $479,000 during the same period last year.
The bank attributed part of the profit decline to expanding its Indian gaming division, but President Frank Riolo said declining interest rates also came into play.
“Deposit rates on everything but CDs are about as low as they can possibly go, while loan rates have continued to decrease, putting pressure on earnings,” he said.
Of course, not all earnings decreases are the result of interest rate cuts. Some banks that saw increases in their problem loans were forced to boost their loan loss reserves, which reduce the amount of their profits.
Community National Bank of Fallbrook did exactly that in the face of problem loans that tripled over the full year from $200,000 to $670,000 at the end of September. Because of the additional reserves, net income was $233,000 compared to $326,000 in the third quarter of last year.
The bank reported holding $4.7 million in problem loans at Sept. 30, or 1.67 percent of its total loans.
American Residential Forms Subsidiary:
Del Mar-based American Residential Investment Trust, a real estate investment trust specializing in home mortgages, has formed a new subsidiary, American Mortgage Network, to originate mortgage loans.
AMN already has two of the planned four regional offices staffed, in Roseville, near Sacramento, and Lake Oswego, near Portland, Ore. It will open two other offices shortly in Shelton, Conn., and Atlanta. It will open eight more next year.
The new business line will provide the REIT with an important source of revenue on the sale of the mortgages to the secondary market, said Senior Vice President Clay Strittmatter.
The company expects AMN’s loan volume to reach about $500,000 per month by the end of 2002 and double that by the end of 2003.
David Striplin, a former regional wholesale vice president for Fleet Mortgage, will head up the AMN’s western division, while Dennis Walls, a former area manager for Homecomings Financial Network, is in charge of the eastern offices.
American Residential is also changing its address, moving from the old Jenny Craig building in Del Mar off Interstate 5 to a 25,000-square-foot building in Sorrento Mesa. By year-end, the home office will have about 60 employees, and AMN’s offices will employ 120 people.
The expansion plan should result in 12 branch offices by the end of 2003 employing 300 persons, and the home office to have 100 employees, Strittmatter said.
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How Low Can They Go:
Where did those double-digit CD yields go? With interest rates falling faster than the Chargers’ playoff prospects, so are the rates offered on ultra-safe CDs.
Earlier this month the rates for a six-month CD was averaging a little better than 2 percent, but those rates will likely drop following the latest rate cut by the Fed, its 10th in 10 months for a total of 4.5 percent.
That makes the offering by 1st Pacific Bank that much more enticing. To celebrate its one-year anniversary last week, the bank rolled out a Birthday Liquid CD for 3.25 percent. The minimum deposit is $10,000 and comes with a free checking account and online banking.
Bank Notes:
San Diego National Bank opened its newest office last month at 1075 Rosecrans Street in Point Loma. It is the bank’s 16th office in the county. Vice President Raymond Simas is the branch’s manager and is assisted by Pamela Bogoisian. Minneapolis-based U.S. Bank with 19 offices in the county, is now accepting identification issued by the Mexican Consulate to open a bank account or cash checks drawn on U.S. Bank.
The move is part of an overall campaign launched in July to lure more Hispanic customers. The bank has also made more materials available in Spanish, enhanced Spanish options on its phone and ATM service, hired more bilingual employees in key areas and has become more active in Hispanic communities and organizations.
With $168 billion in total assets, U.S. Bancorp, the parent firm of U.S. Bank and Firstar Bank, operates 2,186 offices, and is the eighth-largest bank in the nation.
Send any news dealing with finance and banking to Allen at mallen@sdbj.com.
