Why would Humboldt Bancorp's new chief executive officer unload the company's merchant processing unit when it has been one of its most profitable lines of business?
Because merchant processing can be risky and, more important, the revenue was making banking employees complacent, said Robert M. Daugherty, who took over as president and CEO of $982 million-asset Humboldt in April.
Eureka, Calif.-based Humboldt announced a deal July 23 to sell the 9-year-old merchant processing division to iPayment Holdings Inc. of Nashville for $34 million in cash. The sale is expected to close Aug. 31.
Humboldt had more than 90,000 businesses as merchant processing customers at yearend; the merchant unit processed $4.7 billion of credit-card transactions last year and accounted for 17%, or $16.5 million, of revenues. The company said the sale would reduce per-share earnings by 20 cents on an annual basis; that is 15% of analysts' consensus estimate for 2003.
However, Mr. Daugherty, a former executive vice president at Zions Bancorp in Salt Lake City, said Humboldt had "no sales culture whatsoever" because merchant processing was bringing millions of dollars in no-cost demand deposits.
Employees "were not asking for multiple relationships," Mr. Daugherty said in an interview last week. "The business provides a huge amount of deposits from the merchants, so our bankers never had to be aggressive."
Now they will. In selling off the unit, Humboldt stands to lose about $80 million of its checking deposits - about 10%.
Mr. Daugherty expressed confidence that the company would be able to plug the gap in its balance sheet within 18 months by strengthening its community banking franchise.
The $34 million it is receiving would also give it additional capital to use for acquisitions, particularly north of Sacramento, in Chico and Redding, he said.
"We are planning to build a branch in each of those cities, but if an opportunity arose, we could easily put off building the branch and go with an acquisition," Mr. Daugherty said.
Chargeoffs related to its merchant processing activities were just $181,000 in 2001, but they have been as high as $1.75 million, in 1998, and "the potential always exists for larger losses," said Patrick Rusnak, Humboldt's chief financial officer.
"The best time to sell a business is when it is still profitable," Mr. Rusnak said.
In merchant processing, a bank serves as the middleman between a small business and its customers who pay by credit card. The bank transfers money from the customer's credit card account to a checking account that the merchant maintains in the bank, after subtracting a fee based on the purchase price for its services. The risk comes into play if consumers later challenge their bills or request refunds. If the merchant's account doesn't hold enough money to cover the chargebacks, the bank is left holding the tab.
Brett D. Rabatin, an analyst at Midwest Research in Cleveland, said the success of the merchant banking unit has masked anemic performance by its core banking business. Humboldt's return on assets in the second quarter was 1.46%, but Mr. Rabatin said: "If you strip out merchant processing, their return on assets in the second quarter was around 1%. That is an uninspiring, middle-of-the-road performance."
