When Commercial Capital Bancorp posts its second-quarter results next week, Wall Street will be looking at its deposit growth.
Analysts may even look past the Irvine-based thrift’s net income, widely expected to rise 21% to about $18.8 million, versus a year earlier, according to Thomson First Call.
Deposits,and how they are gathered,are key to making loans cheaply. If Commercial Capital isn’t growing deposits fast enough, or from the right sources, it may have to turn to more expensive backing for its loans to apartment and commercial office building owners.
When funding costs rise faster than loan returns, profits get squeezed.
Commercial Capital is California’s fastest growing thrift by assets during the past three years, according to the Federal Deposit Insurance Corp. It also ranks as the second biggest apartment building lender in the state, according to DataQuick Information Systems.
“They have generated loans at a faster pace than really any bank in the country,” said James Abbott, bank analyst with Friedman, Billings, Ramsey & Co. in Arlington, Va.
Commercial Capital had assets of $5.3 billion at the end of the first quarter, up from $2 billion a year earlier. Its deposits nearly tripled to $2 billion in the period, and were up 6% compared to the fourth quarter.
“I’m quite confident that this will be a $10 billion to $20 billion asset institution in the next three to five years,” said Mike McMahon, an analyst with Sandler O’Neill & Partners LP in San Francisco.
The heady growth works two ways on Wall Street: Analysts are cheered by the gains but are looking to see how Commercial Capital plans to maintain the growth.
Stephen H. Gordon, the thrift’s chief executive, shakes off the Wall Street chatter.
“You can predict this firm will get things done and continue to be opportunistic whether organically or by bringing on talent. If it makes sense, we’ll do it,” Gordon said. “A lot of companies have opportunities but don’t go after them. We make our own lot.”
Nevertheless, the company’s stock price reflects investor jitters. Shares have fallen 20% to about $19 this year. Its market value is $1 billion.
Commercial Capital may have to sell off some of its past loans if it can’t grow its deposit base fast enough, said Kevin Timmons, an analyst with CL King & Associates Inc. in Albany, N.Y.
“An alternative outcome would be that the company’s board could elect to seek a buyer,” Timmons wrote in a recent research note. “We do not believe that to be at all likely in the near term, but we would point out that the company would make an attractive acquisition candidate for a larger, deposit-rich banking institution.”
Commercial Capital gets backing to make loans several ways. Deposits are the cheapest way, with advances from the Federal Home Loan Bank of San Francisco or other borrowing activities more costly.
Earlier this year, it boosted deposits when it picked up a pair of tax-deferred real estate exchanges, Timcor Exchange Corp. and North American Exchange Co. Together, they contributed about $600 million in deposits to Commercial Capital.
“If he (Gordon) did nothing but raise deposits the old fashioned way, his profitability would be under pressure,” said Sandler O’Neill’s McMahon. “This is one of Gordon’s keys to success.”
1031 Exchanges
Tax-deferred exchanges tap Section 1031 of the tax code to help investors avoid paying capital gains taxes on profits from other building sales. As long as investors use proceeds from one sale to buy another building within about six months, they can avoid a big tax hit.
Meanwhile, Commercial Capital has brought in a retail banking executive to boost deposits.
Richard Grout recently was tapped for the thrift’s newly created position of executive vice president and director in charge of retail banking.
Grout is the former retail banking head of Newport Beach-based Downey Financial Corp. He was responsible for the thrift’s 170 branches, and is said to have improved the size of its deposit base from 2000 to 2004.
One wild card is the commercial and apartment building sectors. As property values increase, Commercial Capital attracts more deposits from investors flush with cash.
Both sectors have seen big increases in property values of late, with most analysts expecting things to cool off some. Few expect long-term interest rates to rise sharply enough to batter the market.
Commercial Capital grew out of the wave of mid-1990s bank and thrift consolidation in California. At the time, the state’s economy was recovering from an early-decade recession that saw many banks fall into bankruptcy. Assets of struggling banks were being bought by stronger ones.
This was when Gordon and his friend, David DiPillo, Commercial Capital’s president and chief operating officer, decided to start a company that loaned money primarily to apartment building investors.
New York-bred Gordon, 42, earned his spurs in East Coast banking circles, rising to become partner in the early 1990s with Sandler O’Neill.
DiPillo, a 43-year old former banker with H.F. Ahmanson & Co.’s Home Savings ran the thrift’s $14 billion portfolio of apartment loans.
A decade ago, Gordon traded his 104th floor office in the World Trade Center for a glitzy office at the Balboa Bay Club in Newport Beach where he launched Financial Institutional Partners Mortgage Corp. The fund invested in underperforming banks and thrifts.
He met DiPillo through the local bank scene. To get Commercial Capital started, the duo hired 30 of Ahmanson’s apartment loan underwriters in the area.
Commercial Capital soon bought Mission Savings and Loan of Riverside, which had assets of $40 million. The deal gave Commercial Capital the thrift charter it needed to begin pumping out loans.
Commercial Capital went public in 2002. It then began to string together a handful of acquisitions to grab a bigger piece of the region’s apartment and commercial real estate loan market.
The thrift nearly doubled in size last year when it bought Hawthorne Financial Corp. The acquisition gave Commercial Capital a network of retail branches in coastal communities of Southern California.
It also gave the thrift about $900 million in adjustable rate, low-returning home loans. Commercial Capital said recently it plans to sell the loans.
