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Santa Cruz County Bank posts record profit despite tax reform hit

February 15, 2018

 Santa Cruz County Bank posted a record profit of $6.8 million for 2017, but the tax reform law signed after Christmas took away $1.5 million, money that could have been loaned for business expansion. 

“Banks are big winners from tax cut,” concluded The New York Times, reporting last month on the impact of the corporate tax rate dropping from 35 percent to 21 percent.

Santa Cruz County Bank, founded in 2004, has been reporting profits year after year, with no loans past due, and rated 24th in the nation last year for return on equity by American Banker magazine.

The largest construction lender in Santa Cruz County, the bank made $77 million in new construction loan commitments in 2017, according to regulatory reports. The bank has grown to 90 employees, signed a 20-year lease for more spacious quarters at 75 River St., is financing a number of local housing developments and is considering investing in social entrepreneur Sibley Simon’s New Way Homes.

So why the tax reform downside?

CONSERVATIVE

David Heald, Santa Cruz County Bank president and CEO, explained that the bank takes a more conservative approach than its peers when setting aside funds in case of loan losses.

Last year, banks with assets less than $1 billion set aside 1.3 percent of total loans in case of loan losses, according to the St. Louis Federal Reserve, which tracks the data.

Banks began boosting reserves for loan losses in 2008 after businesses and homeowners defaulted on loans, with reserves peaking at 2 percent in 2011.

Heald said Santa Cruz County Bank, with $630 million in assets and $453 million in loans, sets aside more than 2 percent of loans in case of losses.

“You reserve during the good times for when the bad times come,” he added. “We are setting the money aside but we don’t have losses.”

The tax law requires the value of such set-asides to be calculated based on the new tax rate, now 21 percent instead of 35 percent, and recognized on the bank’s income statement.

The Federal Reserve conceded this may decrease after-tax earnings for 2017, but the agency expects this to be a one-time event not adversely impacting core earnings or capital for most financial institutions over the long term.

FINANCING HOUSING

Among the housing developments Santa Cruz County Bank recently financed:

• A $2.5 million newly built complex of five buildings with 14 family apartments at 153 Riverside Drive, Watsonville.

• A new triplex at 660 24th Ave., Santa Cruz, where three families just moved in.

• Two separate construction loans during the fourth quarter for professors at UC Santa Cruz, which has a mortgage origination program to help faculty and senior managers buy a home.

“This year, our employees will volunteer for Habitat for Humanity on a construction buildout site to help contribute hours or the “sweat equity” to provide affordable home ownership for a local family,” said Mary Anne Carson, Santa Cruz County Bank senior vice president and director of marketing and community relations.

RENT FREEZE

Heald said he worries that the emergency rent freeze approved Tuesday by the Santa Cruz City Council may make it difficult for new housing developments to pencil out as profitable.

Investors will find some place else to put their money, he said, noting Seaside or Marina have no restrictions on rent.

“We need more (housing) units so people have choices and landlords don’t have the upper hand,” he said

The bank has posted openings in six categories, client service specialists, an electronic banking specialist, a systems administrator and three in small business lending.

Filling these positions may be a challenge, according to Heald, who sees a tighter job market and other companies head-hunting for talent among his staff.

BONUSES

Tax reform has prompted national and regional banks to give employees bonuses, according to the American Banking Association.

Bank of America, second in deposits in Santa Cruz County, gave out $1,000 bonuses. U.S. Bank gave $1,000 each to nearly 60,000 employees. Comerica gave 4,500 employees a $1,000 bonus.

Chase, Comerica, U.S. Bank and Bank of the West each raised the minimum wage to $15 per hour.

Wells Fargo, which has the most deposits in Santa Cruz County, pledged to raise minimum wages to $15 per hour in March and announced plans to boost charity donations to $400 million in 2018, a 40 percent increase.

Chase said it would increase philanthropic investments by 40 percent to $1.75 billion by 2023 and increase small business lending by $4 billion.

Asked about bonuses, Heald said, “We have a generous pay scale for employees,” then added, “It’s a little premature to make an announcement.”

He’s waiting to see how the bank is doing at the end of the first quarter.

SANTA CRUZ COUNTY BANK

Data 4th Quarter Change from a year ago

Assets $630 million Up 7 percent

Loans $453 million Up 9 percent

Loan loss allowance $9 million Up 11 percent

Deposits $563 million Up 6 percent

Net profit $845,800 $1.8 million Down 54 percent

Earnings/share $.35 $.84 Down 58 percent

Source: Santa Cruz County Bank

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