Commercial Capital Bancorp has been California’s fastest-growing thrift by assets for the past three years.
But the past three months have seen anything but growth on Wall Street.
Irvine-based Commercial Capital’s stock is off about 25% since the start of the year. The drop has sunk Commercial Capital’s market value from $1 billion to $770 million last week.
The worry: profits.
The costs of a buying spree may be catching up with Commercial Capital. At the same time, rising interest rates have pushed up what the thrift pays to lure deposits.
There are other issues.
A newly formed commercial banking unit is the subject of litigation with Comerica Inc. and has brought “court-imposed operational limitations” on the business.
And starting this quarter, the thrift plans to start provisioning for loan losses.
Results for the first quarter are due April 24. Analysts expect the company to earn $16 million, off by about a third from a year earlier.
Revenue is seen coming in at $46 million, up nearly 10% from $42 million a year ago and helped in part by acquisitions.
Lending to buyers of apartment buildings and office buildings is a big part of Commercial Capital’s business.
The thrift has a complex strategy based on deposits,and how they are gathered. 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.
When funding costs rise faster than loan returns,as they are now with rising short-term interest rates,profits get squeezed.
Last week, the company said it plans to lay off some of its 550 workers and cut other expenses. No area of the company was left untouched.
Commercial Capital, which has an estimated 100 jobs locally, also said it would take a one-time pretax charge of about $850,000 this quarter to pay for severance and other compensation costs. A company spokesman declined to say how many jobs would be cut.
Boosting Deposits
Since going public in 2002, Commercial Capital has boosted its deposits in different ways. Last year, it picked up a pair of tax-deferred real estate exchanges, Timcor Exchange Corp. and North American Exchange.
They contributed about $600 million in deposits to Commercial Capital. Last month, it added another exchange, Oakland-based Lawyers Asset Management Inc.
Tax-deferred exchanges use 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 put off the tax bill.
Commercial Capital also has bought financial institutions. The latest was a $40 million in stock buy of Sacramento-based Calnet Business Bank, which analyst Mike McMahon of Sandler O’Neill & Partners LP estimates had increased the thrift’s deposits by 10% to $2.5 billion.
The thrift nearly doubled its size two years ago when it bought El Segundo-based Hawthorne Financial Corp. for about $500 million.
“The main benefit of these deposits is their ability to fund Commercial Capital’s loan portfolio at a very low rate,” McMahon said.
Managing costs amid rising interest rates leaves little room for error, said James Abbott, senior vice president and equity analyst for community banks and thrifts with Friedman, Billings, Ramsey & Co. in Arlington, Va.
In January, Abbott said he was wrong about Commercial Capital turning the corner after reporting less than stellar results in the past five quarters.
Commercial Capital’s turn may not come until the second half, Abbott said. That may be an “eternity for a real estate lender funded significantly by rate-sensitive sources in a flat yield curve environment,” he wrote.
A smaller issue for the company is its legal battle with Comerica over two dozen bankers that bolted from the Detroit-based bank’s El Segundo office last summer.
The bankers provided escrow, deposit and credit services to Comerica’s title insurance and escrow clients, among others.
Comerica filed suit in California Superior Court in San Francisco to try and stop its ex-employees from disclosing confidential information on Comerica’s clients.
Last fall, Comerica won a court order that prevented its former employees from using, destroying or disclosing trade secrets.
The order was amended in December to give Commercial Capital wiggle room in soliciting business from Comerica’s customers should the prospects take first steps to contact the Irvine thrift.
The fight isn’t unusual. But Commercial Capital said in a regulatory filing that the court order has restricted the unit’s growth and brought “significant legal fees and costs.”
No trial date has been set.
