Calnet Business Bank in Sacramento invested heavily in technology when it opened in late 2001 so that it could offer sophisticated fee-based products and services, such as electronic draft processing, and would not have to rely too heavily on lending.
These days, though, traditional banking is driving the $147 million-asset Calnet's earnings.
Regulators' concerns with its merchant processing business have forced it to weed out some of its merchant customers. But Calnet has more than made up for the resulting decline in fee income with double-digit loan growth - thanks to the Sacramento area's strong economy.
This week Calnet announced that it had entered a formal agreement July 21 with the Office of the Comptroller of the Currency in which it said it would improve risk management practices for its electronic processing business. The bank offers automated clearing house transaction services for companies that process electronic payments for other companies, such as merchants or utility companies.
"We were monitoring our processes on an overall basis, but we weren't monitoring merchant by merchant," Kevin R. Watson, the chief financial officer, said.
Calnet started dropping some of its riskier customers this year, when regulators first raised concerns. Mr. Watson would not say why those customers posed more risks than others, but the OCC generally cites banks if they have inadequate monitoring procedures to ensure against fraud, operational errors, or violations of the Bank Secrecy Act or other laws.
Under the agreement with the OCC, Calnet must hire outside consultants and auditors to analyze its risk management policies and make frequent progress reports to the agency.
Calnet's second-quarter noninterest income was essentially flat from a year earlier, but fell by half from the first quarter, to $324,000. The reduction stemmed in part from the board's decision to exit the draft processing business in March. The bank had been processing one-time electronic drafts for merchants and other companies but found that the high rate of returns because of insufficient funds was too burdensome, Mr. Watson said.
Peter Raffetto, the president and chief executive, said he expects fee income to stabilize in the near future. In the meantime, Calnet is focusing on building its core banking business.
"We're in a great market, and we have a great team of lenders and business development folks," Mr. Raffetto said.
Net income rose 85% in the second quarter, to $404,000, largely because of a 34.7% increase in total loans, to $98.3 million.
Dave Alford, a bank consultant in Sacramento, said that even if fee income continues to slow, Calnet's earnings should still grow at a steady clip from its traditional banking business lines.
"The Sacramento area is just so dynamic right now that each community bank here has done very well," Mr. Alford said.
Mr. Raffetto said it will still heavily push its fee-based businesses and may develop more in the future. One of its technology-based offerings is a unique contribution management service for political campaigns. Calnet has developed software that processes donations made through a campaign's Web site by credit card, through PayPal, or by electronic debits from the donor's bank account. Funds are then transferred to the campaign's account at Calnet.
More than two dozen campaigns, including Arnold Schwarzenegger's successful bid for governor in 2003, have used Calnet's campaign contribution management service. Calnet executives like it because it provides both fee income and a steady source of deposits.
