When executives at Commercial Capital Bancorp Inc. in Irvine, Calif., learned that a top deposit generator at Comerica Inc. was looking for a new home, they jumped at an opportunity to bring in a rainmaker - and his team - who would help the fast-growing company lower its funding costs.
What they also got was a legal fight.
Fearing that the employees who defected to the $5.2 billion-asset Commercial Capital last month would take files and "trade secrets" with them, Comerica sought and received a restraining order prohibiting Commercial Capital from using proprietary information to solicit Comerica customers or recruit any more of its employees. A California judge issued a temporary injunction last week and a hearing on the issue is scheduled in Superior Court for San Francisco County on Sept. 6.
Still, Stephen H. Gordon, Commercial Capital's chairman and chief executive, is unfazed. He said in a news release Monday that the Commercial Capital would "vigorously" fight the restraining order and a corresponding lawsuit seeking a permanent injunction, and he insists that the new team would continue to do what it was brought in to do - gather deposits.
"We would never consider using any trade secrets of a competitor - we do not need to," Mr. Gordon said in an interview. "As far as we're concerned, it's business as usual."
Last month Commercial Capital announced it had started a commercial banking division that will solicit deposits and offer cash management and treasury services to title and escrow companies, homeowner associations, property management firms, and other companies.
The division is headed by James R. Daley, formerly an executive vice president and head of a similar division at Comerica Bank. Shortly after the announcement, 22 additional employees - about a third of the work force for the El Segundo, Calif., Comerica division - also defected to Commercial Capital.
Commercial Capital could really use the deposits that its new division stands to attract to trim its cost of funds, Mr. Gordon said. Home Loan bank advances make up about one-third of the company's liabilities. While in line with other thrifts, the company's cost of funds - 2.27% for the second quarter - dampens its net interest margin, which was 3.28% in the second quarter.
"This is much lower-cost funding than alternative funding sources, such as Federal Home Loan borrowings," which will help the company make more loans, Mr. Gordon said.
But Commercial Capital's gain could be Comerica's loss. Comerica's El Segundo division had average deposit balances of $8.5 billion during the second quarter, 21% of the Detroit-based parent company's total. Analysts predict that a good chunk of those deposits will shift to Commercial Capital as customers look to keep their business with bankers they have come to know and trust.
Walter G. Moeling 4th, an attorney with Powell Goldstein LLP in Atlanta, said that restraining orders prohibiting the use of trade secrets to steal customers are highly unusual in the banking industry, mainly because most banking products are pretty generic. He said that even in cases like this one where the product lines and their supporting software are specialized, it may be very difficult for Comerica to prove that Commercial Capital had used specific proprietary information to solicit customers.
Mr. Moeling added that he thinks the legal battle will probably help, not hurt, Commercial Capital's deposit-gathering efforts.
"For a smaller bank to get hit with such a lawsuit from a larger competitor, they couldn't buy that kind of publicity provided they are, in fact, clean," Mr. Moeling said. "Comerica is giving tremendous validation to this 'lift-out' group, and publicly saying that they are threatened by this viable competitor."
Michael McMahon, an analyst at Sandler O'Neill & Partners LP in San Francisco, said that Commercial Capital should be able to cut its cost of funds by taking in at least $1 billion, if not $2 billion, of additional deposits over the next year.
"By reducing their funding costs, this will also enable them to be more aggressive on offering higher rates on money market and NOW accounts, which will make them more competitive in their retail banking," Mr. McMahon said. As such, net interest margin should improve even further.
The additional deposits would probably be used to fund more apartments loans, Commercial Capital's bread-and-butter business. The company's mortgage arm was built around a team of lenders headed by David DePillo at the former $51 billion-asset Home Savings of America, before it and its parent, H.F. Ahmanson & Co. in Irwindale, Calif., were bought in 1998 by Washington Mutual Inc. of Seattle.
In 2000, Mr. Gordon and Mr. DePillo bought a small savings bank, renamed it Commercial Capital Bank, and created Commercial Capital Bancorp. In 2004 the company bought the $2.7 billion-asset Hawthorne Financial Corp. in El Segundo, mainly to get the low-cost retail deposits from its 13 branches.
Since then Commercial Capital has started selling most of the fixed-rate home loans it acquired, in an effort to keep the bulk of its loan portfolio in higher-yielding adjustable-rate apartment loans. (It still makes home loans but immediately sells most of them.)
This year Commercial Capital gained another funding source when it bought two companies that help investors defer capital gains taxes by holding the proceeds of real estate transactions for them until they are ready to buy another property. The business line also gives Commercial Capital another source of fee income.
While it works to improve its margin, Commercial Capital nevertheless continues to post impressive results. Second-quarter net income rose 77%, to $19.3 million, on both strong loan growth and the upward repricing of adjustable-rate apartment loans, and the sale of lower-rate home loans. Total loans rose 11%, to $4 billion, with apartment loans making up 74% of the portfolio. The company also makes commercial real estate and construction loans.
The real estate investor business has brought in $659.3 million of deposits, helping total deposits increase 13%, to $2.7 billion, in the second quarter. Just as important, the boost in deposits helped decrease the amount of advances from the Federal Home Bank; advances fell 25%, to $1.5 billion, from the first quarter after Commercial Capital acquired the first company.
The business line also made $1.3 million of fee income in the quarter, 20% of the company's total fee income for that period.
