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Keys: Interest Rates and Housing Market

Keys: Interest Rates and Housing Market

By RAJIV VYAS

The financial industry is looking ahead to 2003 with hope,and some trepidation.

Interest rates, the stock market and a looming war with Iraq are key factors that will drive the finance and banking sectors next year.

Investment banks and brokers hope that a third year of declining markets in 2002 puts the worst behind them. But most market observers expect interest rates to rise, ramifications of which will vary among different segments of the industry.

The bright spot in the financial industry has been banks. A hot housing market amid low interest rates has helped Orange County-based banks post strong earnings this year.

“Bank earnings should remain about the same next year,” said Ed Carpenter, chief executive of Carpenter & Co., an Irvine-basedinvestment bank.

If interest rates rise, Carpenter said banks’ earnings could rise above the record levels he says they posted in 2002. That’s because banks re-price assets more quickly than liabilities,savings accounts, for example. As long as rates don’t rise too far, too fast, OC banks should benefit from some increase.

A wild card for the banking industry, and the finance sector in general, is potential war with Iraq.

“If that happens, then consumer confidence and business confidence would be shaken in the short term,” Carpenter said.

Expect more community banks to pop up next year.

Five OC community banks have opened in the past three years, and Carpenter said four banks are on schedule to start operations by the fourth quarter. Three probably will come out with public offerings.

A bank to watch next year: Irvine-based Commercial Capital Bancorp. Earlier this month, the bank raised $40 million in an initial public offering, less than it had hoped for. But the funds should help it continue to grow. At the end of the third quarter, the bank’s assets had more than tripled to $753 million vs. a year earlier.

OC’s subprime lenders could be at risk if interest rate hikes spur a housing slowdown.

The local crop of companies that lend to homeowners with less-than-stellar credit includes Irvine-based BNC Mortgage Inc., Irvine’s Option One Mortgage, part of H & R; Block Inc., Orange-based Ameriquest Mortgage Co. and Irvine-based New Century Financial Corp.

Subprime lenders have posted record loan origination as homeowners take advantage of low rates and rising home values by refinancing their mortgages. Loan volume likely would fall if rates rise, while delinquencies could rise.

After almost two years of inactivity, venture and private equity investments could pick up this year. Venture funds raised a lot of money in 2001, but since have sat on the sidelines waiting for better opportunities.

“2002 was the year we licked our wounds and regrouped,” said Greg Yurkovich, an associate at Newport Beach-based Forrest Binkley & Brown.

Yurkovich said deal volume was picking up in the fourth quarter.

“You can’t hold on to this money forever,” he said.

Murray Rudin, head of Riordan, Lewis & Haden’s Irvine office, said the general malaise is lifting some.

“Credit markets are loosening a bit and business results are modestly improving,” he said.

Biotechnology, healthcare and medical device makers are likely to get the bulk of OC’s venture money next year,same as 2002.

Consolidation at brokerage firms may continue in 2003 unless the markets post solid gains.

“The consolidation is not over,” said Lance Hicks, chief executive of Irvine-based Finance 500 Inc.

“Although many of the firms that only had borderline viability during the boom years of the ’90s are now gone, many others remain on the ropes and are struggling to maintain a fragile existence,” he said.

Big brokerages that have slimmed OC operations include Merrill Lynch & Co., which consolidated three offices in 2002. U.S. Bancorp Piper Jaffray Inc. left the county in the latter part of 2001. And Newport Beach-based Roth Capital Partners LLC shut down its retail stock brokerage operation last year.




PERSON to watch: Chuck Martin

Will he or won’t he?

The venture industry will be watching to see if Chuck Martin, the dean of Orange County’s venture scene, gets back into the fund game in 2003.

Last year, venture capital sources said Martin was thinking about spearheading a new fund.

For his part, Martin downplays the speculation.

The one-time managing partner at La Jolla-based Enterprise Partners Venture Capital spent 2002 writing a book, advising private equity investors, investing his own money and working on favorite charities. He says 2003 will be no different.

The semi-retired Martin, a Laguna Beach resident, said he expects to invest his own money in two to three private equity deals next year,same as 2002,and publish his book on investing, “The Little Black Book,A Guide to Successful Investing in the Stock Market.”

Plus, he plans to continue as senior adviser to Newport Beach-based private equity firm ClearLight Partners LLC, which has $300 million in assets to invest; maintain his partner emeritus status at Costa Mesa-based Westar Capital LLC; and do board work at Aliso Viejo-based e-dn.com Inc. and San Francisco-based NoteAble Holdings Inc.

When Martin stepped down at Enterprise Partners in 2000, he expected to take a back seat when it came to investing.

But he says so many various groups came to him looking for advice and help, he couldn’t turn many of them down.

“A lot of it is informal,” Martin said.

,Rajiv Vyas

COMPANY to watch: New Century Financial

New Century Financial Corp. has made good use of the buoyant housing market to boost sales and profits to record levels.

Now the really tough work begins.

The biggest challenge for the company in 2003: “To somewhat replicate the fourth quarter and do it four times in a row,” said Robert Cole, chairman and chief executive of Irvine-based New Century.

New Century, which makes mortgage loans to borrowers of less-than-stellar credit quality, has seen loan volume skyrocket as homeowners refinance or make housing purchases amid low interest rates and rising home values.

The company’s November loan volume was up 135% to $1.3 billion vs. a year ago. Its full-year target is $13.6 billion, more than double that of 2001. Loan volume should grow 17.6% in 2003, according to the company.

Earnings, meanwhile, are projected to grow 5.8% in 2003 if the company makes the top-end of its forecast this year.

If the housing market is hit hard, New Century likely would see a slowdown in loan volume and quality.

Cole seems to be preparing for a slacker market.

“We want to keep our costs down and (make) good-quality loans,” Cole said.

,Rajiv Vyas

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