We're not like the big boys: that has been Beech Street Capital's motto.
Problem is the multifamily mortgage lender is poised to become one of them now that Capital One Financial (COF) has agreed to buy it.
The deal will be a major test of a large banking company's ability to acquire a successful upstart without ruining its mojo. Executives of the $297 billion-asset Capital One say they recognize the importance of preserving Beech Street's independent spirit.
"I've always been a fan of the medical phrase, 'Do no harm,'" says Rick Lyon, the head of commercial real estate banking for Capital One, based in McLean, Va. "We want to keep what is wonderful about Beech. We want to take our time, move slowly and learn from the Beech folks and then move judiciously and thoughtfully. We don't want to do one of these bank mergers that throw things together and picks up the pieces later."
Capital One says the deal, announced Friday, would fulfill its desire to increase its multifamily operation's geographic scope and its ability to sell apartment loans to Fannie Mae, Freddie Mac and the Federal Housing Finance Agency.
The four-year-old firm originated $4 billion in loans in 2012, making it the sixth-largest agency originator in the United States, and the company says repeatedly on its website that its key to success has been its speed and its commitment to customer service. It is independent, not owned by a mega financial institution.
Capital One hasn't decided exactly how it will integrate the lender, but it is very familiar with its winning formula, Lyon says. "We've known Beech for a long time as a warehouse lending client," he says.
For a company so proud of its independence it is unclear what prompted Beech Street to sell. Attempts to reach executives of the company on Monday were unsuccessful, and Lyon declined to discuss if the deal was negotiated between the two companies or if it was an auction.
Beech Street could have been motivated to sell to secure better funding, says Matthew Anderson, managing director of Trepp, an analytics firm that tracks housing and banking. That kind of move is increasingly common, as companies look for ways to lower their cost of funding.
Given Fannie Mae and Freddie Mac's uncertain future, the company could have also been motivated to sell before the government acts on housing reform.
"The uncertainty in what is going to happen with the agencies could be a motivator," Anderson says. "If you think the market that you are in is set for a structural shift, you might start planning for that."
Conversely, Lyon says, Capital One has long sought the ability to originate to sell to the agencies. The company is mindful that an integral piece of Beech Street's business model could be overhauled.
"We obviously looked at that but don't think that is a near-term risk," Lyon says. "Quite frankly, whatever comes down the road … whatever Fannie or Freddie morph into, we think we are in a great position to take advantage of it."
Analysts say they like the deal because the originate-to-sell model wouldn't burn up capital and it could improve Capital One's return on assets. It is essentially a move to boost fee income, says Scott Valentin, an analyst at FBR Capital Markets.
Capital One is already a significant multifamily lender in the Northeast, the Gulf Coast and Texas, through its acquisitions of banks like Hibernia Corp. and North Fork Bank. The existing business, however, is made up of portfolio loans.
Sameer Gokhale, an analyst at Janney Montgomery Scott, said he was curious to know if the deal could eventually lead to growth in Capital One's multifamily loan book. Maybe, Lyon says.
"There is always the possibility," Lyon says. "We can offer customers a portfolio loan or one through
Fannie or Freddie and see which best suits their needs."
Gokhale says the deal also could be a sign that Capital One is looking to expand the focus and breadth of its commercial business, which often is overshadowed by the company's credit card and auto lending business.
"I'm not surprised by the deal - one of the biggest holes from a strategic standpoint is in the commercial lending business," Gokhale says.
Lyon says that Beech's presence across the country was an attraction.
"We like the West Coast, the Southeast, the Southwest and Chicago. Beech has a lot of nice coverage that fits us," Lyon says.