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All In The Family

Finance Enterprises Refocuses Through Finance Factors.

With the regulatory monkey almost off its back, Finance Enterprises Ltd. is getting out of real estate development and getting back to basics. Basic in the sense of focusing in on its flagship company Finance Factors Ltd.’s strength, mortgage lending. It’s a goal that makes sense when you consider the value of the Hawaii mortgage lending market last year — $12.6 billion.

Russell J. Lau, Finance Enterprises president and chief operating officer and Finance Factors vice chairman and chief executive officer, says the closely held “family of companies” is trying to bulk sell some of its land holdings by the end of the year. The largest holdings are part of the master-planned community of Makakilo, which Finance Realty Ltd. started developing under an agreement with The Estate of James Campbell more than 35 years ago. Finance Enterprises values the raw developable land at $14 million.

“It’s a much more efficient way to do it and with the real estate economy the way it is currently, we find that people are not buying as many homes and so we’ve pared back that area of business and we don’t see that as a long-term core competency,” says Lau.

Leeward Land: Finance Enterprises President Russell J. Lau wants Finance Realty to sell off raw developable Makakilo lands.

Lau stresses that the companies are not closing down commercial real estate operations. Subsidiaries Finance Realty Ltd. and Finance Investment Ltd. hold title to income-producing commercial properties, including four downtown office buildings.

“We will continue to hold real estate,” Lau says. “Once we’ve restructured our real estate operations to the point where everyone’s satisfied, until I’m satisfied, we hope to be able to grow those commercial real estate operations as opposed to the raw land real estate development operations.”

Another business that doesn’t fit the long-term plans is Grand Pacific Life. At press time, Finance Enterprises was working out the details to merge Grand Pacific into Sterling Investors Life Insurance Company of Florida. Lau says, “It was an economic decision based upon, not only the financial economics for all of our family of companies, as well as for the market for the industry that (Grand Pacific) was in.”

Finance Factors Ltd. slipped from 167 to 168 in Hawaii Business’ ranking of the Top 250 Hawaii businesses this year. Gross sales slid 5.4 percent from $42.8 million in 1999 to $40.5 million in 2000.

In April of this year, the Federal Deposit Insurance Corp. (FDIC), lifted a cease-and-desist order it had placed on Finance Factors in February 2000 because of concerns over asset quality and affiliate transactions. Under a subsequent written agreement with the FDIC, Finance Factors must get approval for any transactions with affiliated companies.

“You will see the written agreement will become moot in the sense that there’s no reason for any insolence from any affiliates or any other transactions coming from an affiliate,” says Lau.

Six local Chinese families founded Finance Factors in 1952. Ownership of the parent company Finance Enterprises and the group of companies remains in family hands today, with the exception of some outside minority shareholders of Grand Pacific Life. Lau is quick to point out that just three out of the six founding families have members actively managing the group of companies.

Says Lau: “Particularly since 1997, I’ve made sure that we’ve moved toward a more professional-type management program. So even though it’s a family-owned company or group of companies, we’ve brought in professional managers.”

One of the top managers is Steven J. Teruya, president and chief operating officer of Finance Factors Ltd. Teruya is homegrown management. He started with the company 26 years ago and has been president and chief operating officer since September 1998. In the October 1999 issue of Hawaii Business, Teruya, fresh from a company-wide strategic planning process, said that Finance Factors was aiming for “20 and 2 in 2002” or a 20 percent return on equity and a 2 percent return on assets by the year 2002.

Teruya says the company is still aiming for those targets, although he’s not sure they’ll hit them by the end of 2002. The FDIC order was a setback. But the focus on mortgage lending as Finance Factors’ core activity remains unchanged. Teruya says mortgage recordings in Hawaii are on course to hit record highs of 1993, when 69,000 mortgages were recorded worth $12.6 billion. And as interest rates continue to fall, customers are refinancing their old homes, or buying new ones. As of June this year, 23,000 mortgages had been recorded with a value of $5.1 billion.

“We want to at least double our market share,” says Teruya. “While it sounds ambitious, it’s really not because our market share is so small.” The aim is to grow from 2 percent to 4 percent. To do so Finance Factors is expanding its products and services in that area. In September, the company offered a “Fix-Your-Home Loan” that used the value of a home after improvements to buy or refinance, plus $500 towards closing costs.

Teruya predicts that Finance Factors — a finance company that takes deposits — will be the last Hawaii-based institution of its kind by the end of the year. And while Finance Factors is not a bank, he would like it to move up from the last quadrant to the top 25 percent for peer bank performance.

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