Commercial Capital Rides Apartments to High-Rent District
4-Year-Old Bank Holding Company Targets $1B in Assets by Year’s End
by Rajiv Vyas
As a result of its presence in the booming California apartment market, 4-year-old Irvine-based Commercial Capital Bancorp is poised to become the largest OC-based commercial bank this year.
“Right now, we have the best of all situations,” said Stephen Gordon, chief executive of Commercial Capital Bancorp. “We don’t have any delinquent loans, and we don’t have any problem with growth.”
Commercial Capital Ban-corp is the holding company of Commercial Capital Bank, a savings bank, and Financial Institutional Part-ners Mortgage Co., or FIP Mortgage, a commercial multifamily mortgage loan originator.
In the two years since Commercial Capital started its bank unit, the holding company has grown its assets at a compounded rate of more than 300%, from $44 million in January 2000 to around $420 million at the end of 2001.
Gordon and his partner, David DePillo, the company’s president and chief operating officer, are projecting about $600 million in total assets by the end of next month and $1 billion or more by year’s end.
(Tustin-based First Fidelity Investment & Loan topped last year’s Business Journal list of OC-based banks with $598 million in assets.)
“Everything seems to be on our side right now. We are able to grow assets very quickly without acquisitions,” Gordon said.
Commercial Capital has done this by generating loans through its mortgage lending arm,which has been able to take advantage of its market presence, low interest rates to increase volume,while raising equity capital and deposits through its bank to make the loans.
Once loans are made, they are sold to the bank, which is able to leverage its equity 15 to 20 times to fund the loan purchases. The bank uses subsidiaries to raise equity through debt offerings (see accompanying story ). The loans sold to the bank also give it an income stream, which boosts equity.
The result is a company with big growth, but one that also is highly leveraged and potentially vulnerable to a rise in loan delinquencies. Its growth projections could be thrown off by a rise in interest rates and a fall in the rental market in California, which some analysts predict for this year.
The holding company started its operations in March 1998 as FIP Mortgage, when DePillo decided to join Gordon and start a loan origination company.
Gordon was a former partner and investment banker at Sandler O’Neill and Partners LP, a New York-based investment banking and brokerage firm that specializes in services for middle-market financial institutions. He joined Sandler O’Neill at its inception in 1988, became a managing director in 1991, and was a partner of the firm from 1992 until July 1995.
After leaving Sandler O’Neill, Gordon moved to California, and through the end of 1996, he was the sole shareholder, director, and president of Gen Fin Inc., the general partner of Genesis Financial Partners LP, a hedge fund that invested exclusively in underperforming, mid-market financial institutions.
Meanwhile, DePillo ran the income property banking division at what was then the $50 billion-in-assets Home Savings of America. Home Savings was acquired by Washington Mutual Inc. soon after DePillo and Gordon started Commercial Capital.
The two proceeded to bring on some top loan agents from Home Savings, American Savings & Loan (another Washington Mutual pickup) and other large commercial mortgage operations in California.
FIP mainly finances and refinances acquisition of apartment communities. It originates loans and then sells them to banks and thrifts for a premium.
But, said Gordon, originating the loan and selling it in the wholesale market does not generate a recurring income stream.
“It’s a one-time gain,” he said. “We sell it, the loan is gone.”
So in January 2000, the pair bought Mission Savings and Loan, a thrift with a branch in Riverside County and $44 million in total assets. They renamed it Commercial Capital Bank and added a branch in Irvine, where the company now makes its headquarters, too.
Then they started leveraging the loans.
“The advantage we have is we set up a commercial mortgage company first,” Gordon said. “Our goal was to build this to be the major lender in the state. This machine would then feed the growth of the financial institution (bank),” he said. “It is only once the machine (FIP Mortgage) was at a point of consistently growing loan origination that we decided to go and buy a bank.”
In 2001, FIP Mortgage was the fourth-largest multifamily commercial mortgage loan originator in the state, at around $500 million in lending. In 2002, the bank has set a target of originating $750 million in loans, which could make it the third-largest commercial mortgage originator in California.
“Most banks don’t have this type of machine,” Gordon said. “Banks are running around to find the next client. We already have that client and already have that franchise.”
But when FIP originates mortgage loans and sells it in a wholesale market, it passes on the risk of default on those loans to the buyer. By selling it to Commercial Capital, the default risk remains within the holding company.
Right now, the apartment rental market in booming and Commercial Capital has no delinquent loans, but when the rental market turns down, banks, including Commercial Capital, could see some non-performing assets.
Thus, DePillo and Gordon are diversifying to other markets and businesses. Last year, Commercial Capital began providing asset management services, through Oaks, Pa.-based SEI Investments. Gordon said the bank has $25 million under management and that by the end of 2002 it is targeting $100 million under management.
The bank has also started tapping a more diverse clientele for its deposit and lending activity. It now extends loans, which include secured and unsecured lines of credit, to law firms, doctors, title and escrow companies, software makers, manufacturers and insurance and reinsurance companies.
The loans that Commercial Capital Bank purchases from FIP are funded through warehouse funding lines provided by RFC Commercial Funding. The bank funds its asset growth with a combination of customer deposit, borrowing from the Federal Home Loan Bank, other wholesale funding and its equity capital base. Its shareholders include Henry Samueli of Broadcom Corp. and other wealthy investors.
SUPPORTING GROWTH
To support its fast growth, Commercial Capital Bancorp has set up subsidiaries that are intricately tied together, supporting and fueling each other’s growth.
In late November, CCB Capital Trust I, a Commercial Capital’s subsidiary, issued $15 million of trust preferred securities. The money CCB Capital raised was pushed down into Commercial Capital Bank in the form of equity, thereby supporting the bank’s fast growth in assets and profitability without diluting its shareholder equity.
Banking regulations require banks to maintain a “capital adequacy ratio,” or minimum level of equity capital as a percentage of assets. This equity capital requirement is to protect the bank and its depositors from loan losses.
CCB has infused $13.5 million into the bank.
“According to banking regulation the bank can now leverage up that capital by 15 to 20 times, which we have begun doing,” said Stephen Gordon, chief executive of Commercial Capital Bancorp.
Gordon said that CCB is currently paying 6% interest on bonds, which on after tax basis works out to 3.6% for the company.
“We would leverage this money and make around 4% on that new growth. This could add an additional $5 million to $6 million to profits” in 2002, Gordon said.
The CCB’s issue was structured as a pooled offering involving 46 other banks and financial institutions, and it raised $760 million. The offering was structured and underwritten by Sandler O’Neill & Partners LP and Salomon Smith Barney. The interest rates on these bonds are variable and carry a rate of 3.75% above the six-month LIBOR index. The maximum interest rate payable is around 11%.
Leveraging is good and profitable when the spreads are wide and loan losses are low. But if the spreads narrow and loan losses picked up, a bank could have trouble supporting its profitability.
“Right now, we are in a completely benign interest rate environment situation,” said Gordon. “There are no real signs of inflation and all our loans are holding up,” he said. “The banking environment doesn’t get much better this.”
Gordon said that he knows that the economy is not always going to be wonderful.
“For that rainy day we consistently reserve for potential loan losses,” he said.
,Rajiv Vyas
