Tax cut impact: Will record bank profits persistNovember 5, 2018
SANTA CRUZ — With banks reporting record profits after the federal tax cut on Jan. 1, investors in the two locally owned banks were likely expecting that trend to persist.
During the third quarter, Santa Cruz County Bank, founded in 2004, reported a record $2.9 million profit — the best in the bank’s history — up from $2.1 million a year ago and up from $2.7 million in the prior quarter.
Lighthouse Bank, founded in 2007, reported profit of $1.1 million, up from $978,000 a year ago, but down from $1.2 million in the prior quarter.
Both saw income taxes decline from a year ago, from $1.4 million to $1.2 million for Santa Cruz County Bank and from $560,000 to $470,000 for Lighthouse Bank.
The bottom-line explanation: It’s all about risk. Will borrowers pay back their loans?
Santa Cruz County Bank, which opened a new headquarters at 75 River St., reported no loans past due and downsized its set-aside for potential loan losses by $63,000 compared to the prior quarter.
Lighthouse Bank, which opened a branch in Silicon Valley last year, set aside an another $400,000 compared to the prior quarter in case of a loss.
Lane Lawson, Lighthouse Bank CEO, said the reason was a single client with multiple loans that were “downgraded,” which means weaker prospects of repayment.
“We have always taken a conservative approach with regard to risk mitigation,” Lawson said, noting the client is paying as agreed.
Santa Cruz County Bank reported expenses were up $350,000 compared to a year ago because of the move to the new headquarters but that was more than offset by a $1.2 million increase in interest income, buoyed by higher interest rates.
David Heald, president and CEO of Santa Cruz County Bank, noted that “achieving a third consecutive quarter of historical earnings put us on pace to complete a record year.”
He said the bank made $56.7 million in commitments to borrowers, including $10 million in commercial lines of credit and $7 million for commercial real estate.
Loans totaled $469 million at the end of the third quarter after $26 million in loan payoffs, up 5 percent from a year ago.
As of Sept. 30, the bank had 92 employees and six job openings.
A notable loan during the quarter was to Monte Vista Christian School in Watsonville to build a $10 million theater, a dream the school community has had for nearly 60 years, according to Mitchell Salerno, head of the school.
The loan covers half the cost, with the rest funded by donations and school funds.
The school, which has 1,000 students, broke ground in August on the Don Price Performing Arts Chapel, a 16,660-square-foot building designed by Anderson Brule of San Jose. If all goes well, it could be completed in two years. The builder is Bogard Construction of Santa Cruz.
At Lighthouse Bank, Lawson sees a downside to the tax cut.
“We are finding an increasingly competitive market for deposits, therefore our cost of funds is increasing,” he said. “We are seeing a slowing in the real estate market brought on by an increase in interest rates, both short term and long term, and increased construction costs due to a labor shortage as well an increase in materials (cost). All has slowed construction projects in our area.”
Loans totaled $236 million at the end of the third quarter, up 16 percent from a year ago.
As of Sept. 30, the bank had 34 employees and and one opening for a customer service