Why This 125-Year-Old Thrift Is Get­ting Into Com­mer­cial Lend­ing

National Mortgage News - - Origination - By Jackie Ste­wart

Af­ter 125 years, Capi­tol Fed­eral Fi­nan­cial in Topeka, Kan., is step­ping out­side its com­fort zone.

The $9 bil­lion-as­set com­pany had been an in­dus­try stal­wart, liv­ing up to its sta­tus as a thrift by fo­cus­ing heav­ily on mort­gages. In re­cent years, how­ever, it has built a small com­mer­cial real es­tate book by buy­ing loan par­tic­i­pa­tions.

Capi­tol Fed­eral is set to dis­tance it­self even more from its past with the pend­ing pur­chase of the $ 434 mil­lion-as­set Cap­i­tal City Bancshares, which is known more for its com­mer­cial fo­cus. The $ 38 mil­lion deal will add busi­ness bank­ing to Capi­tol Fed­eral’s of­fer­ings for the first time.

The shift makes sense given chal­lenges in the mort­gage busi­ness and the ben­e­fits that can come with hav­ing cheaper com­mer­cial de­posits, in­dus­try ex­perts said.

It also high­lights the over­all chal­lenges that mort­gage-cen­tric thrifts face main­tain­ing their busi­ness mod­els. The num­ber of sav­ings in­sti­tu­tions has de­creased by about 40% over the past decade, to about 750 in­sti­tu­tions, ac­cord­ing to data from the Fed­eral De­posit In­surance Corp.

Other banks, in­clud­ing Flagstar Ban­corp, have de-em­pha­sized mort­gages to pour more re­sources into com­mer­cial lend­ing.

“Ev­ery­one is want­ing to get more into com­mer­cial lend­ing,” said Lynn David, CEO of Com­mu­nity Bank Con­sult­ing Ser­vices. “A lot of your com­mer­cial ac­counts are non­in­ter­est bear­ing. That’s still a rea­son why [banks] go af­ter com­mer­cial loans — be­cause they want the com­mer­cial de­posits.”

Capi­tol Fed­eral, for its part, has no plans to com­pletely scrap its old model. It will still orig­i­nate and hold res­i­den­tial mort­gages.

“We won’t aban­don our re­tail op­er­a­tions,” said Kent Townsend, the com­pany’s chief fi­nan­cial of­fi­cer and trea­surer. “This is re­ally just be­ing adap­tive. [Cap­i­tal City] matches up with our con­ser­va­tive as­sets.”

Capi­tol Fed­eral orig­i­nates a va­ri­ety of fixedand ad­justable-rate mort­gages that it keeps on its book. It also buys res­i­den­tial mort­gages from other lenders. Roughly two-thirds of its loans are 30-year fixed-rate mort­gages, Townsend said,

The model has his­tor­i­cally suc­ceeded be­cause of the com­pany’s scale and its use of tech­nol­ogy to ad­dress com­pli­ance is­sues, Townsend said. Capi­tol Fed­eral’s ef­fi­ciency ra­tio was around 43% on March 31. In con­trast, the av­er­age ef­fi­ciency ra­tio for banks with $1 bil­lion to $10 bil­lion of as­sets was al­most 60%, ac­cord­ing to FDIC data.

Still, Capi­tol Fed­eral de­cided to ex­pand into com­mer­cial lend­ing to help off­set some of its risk tied to long-term res­i­den­tial lend­ing, Townsend said.

Due to his­tor­i­cally low in­ter­est rates, it’s likely that the mort­gages on Capi­tol Fed­eral’s bal­ance sheet will stick around longer than nor­mal, said Da­mon DelMonte, an an­a­lyst at Keefe, Bruyette & Woods. That will weigh against the com­pany as in­ter­est rates rise and in­sti­tu­tions start to pay more for de­posits.

“I think they could have con­tin­ued with their pre­vi­ous busi­ness model, but their over­all prof­itabil­ity is start­ing to shrink,” DelMonte said. “Their fund­ing has be­come an is­sue.”

Capi­tol Fed­eral has re­lied on mostly re­tail de­posits and whole­sale funds to sup­port its loan growth. Its loan-to-de­posit ra­tio is 133%, ac­cord­ing to the FDIC.

Com­mer­cial loans tend to have shorter du­ra­tions and reprice faster, while re­tail de­posits typ­i­cally cost more than com­mer­cial fund­ing, in­dus­try ex­perts said.

Cap­i­tal City ad­dresses those is­sues. Capi­tol Fed­eral has been ex­per­i­ment­ing with com­mer­cial lend­ing, amass­ing about $ 460 mil­lion in com­mer­cial real es­tate loans over the past five years, tap­ping into its net­work of cor­re­spon­dent banks. Do­ing so al­lowed man­age- ment to be­come fa­mil­iar with com­mer­cial lend­ing with lit­tle risk.

“Capi­tol Fed­eral is en­ter­ing [com­mer­cial lend­ing] the right way,” said Bob Wray, a manag­ing di­rec­tor of Cap­i­tal Corp., which ad­vised Cap­i­tal City on the deal. “First, they dipped their toe in by buy­ing par­tic­i­pa­tions so they could see how they work.”

The deal also helps with Capi­tol Fed­eral’s fund­ing is­sues by bring­ing in lower-cost com­mer­cial de­posits. Core de­posits make up more than 93% of Cap­i­tal City’s fund­ing, the com­pa­nies said.

Com­mer­cial de­posit ac­counts are gen­er­ally larger than re­tail ac­counts, es­pe­cially for a bank of Capi­tol Fed­eral’s size and po­ten­tial le­gal lend­ing lim­its, said An­drew Chris­tians, a manag­ing di­rec­tor at Don­nelly Pen­man & Part­ners. And banks of­ten give com­mer­cial clients bet­ter loan rates if they bring their de­posits over.

While the deal draws at­ten­tions to chal­lenges with the thrift model, it should not be viewed as a death knell, in­dus­try ex­perts said.

“I would never say the in­dus­try is dead but just chal­lenged,” Chris­tians said. “It has been for some time. “If in­ter­est rates start in­creas­ing and the econ­omy stays strong, it is a vi­able busi­ness model.”

Capi­tol Fed­eral plans to stay below $10 bil­lion of as­sets, a thresh­old that trig­gers more reg­u­la­tion, Townsend said. Man­age­ment doesn’t have set tar­gets for com­mer­cial lend­ing, though it may buy fewer par­tic­i­pa­tions as orig­i­na­tions in­crease.

Ad­di­tional ac­qui­si­tions are pos­si­ble if this first foray into com­mer­cial lend­ing goes well, said An­drew Li­esch, an an­a­lyst at San­dler O’Neill. But he also noted that the ac­qui­si­tion of Cap­i­tal City was a unique sit­u­a­tion that in­cludes keep­ing Pres­i­dent and CEO Bob Kobbe­man on to help run the com­mer­cial lend­ing plat­form.

“I think they will start with this one and see how it goes,” Li­esch added.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.