Tuesday, January 25, 2005

California Bankin'

By Stephen D. Simpson, Motley Fool

Dude! Commercial Capital Bancorp (Nasdaq: CCBI) posted fourth-quarter results on Monday that left its investors dreaming for a little more from this California-based bank. While earnings of $0.36 per share slightly beat the Wall Street mean estimate of $0.35, the real story lies in the nitty-gritty numbers.

First, the bad news. Core loan originations were down 9% to $496 million from the third quarter and the net interest margin declined by 11 basis points to 3.38%. The bank's taxes were also somewhat artificially low, as management took advantage of tax credits related to low-income lending. Finally, the company sold about $160 million of attractive loans during the quarter, a sale that helped goose the EPS figures.

Even though it appears that the company had to strain a bit to meet analyst expectations, there are plenty of things to like about it. Bad debt expense remains incredibly low, with only 0.13% of loans (a total of $6.4 million) being reported as non-performing. Commercial Capital continues to position its investment portfolio for higher interest rates, and the loan pipeline for March stands at $483 million. If the company can continue its historical trend of producing actual loan originations at a rate of about 1.3 times, that suggests over $624 million in loan originations.

Fools should also note that this bank isn't your typical savings and loan. Over 71% of the bank's loans are made for multifamily housing and commercial projects. What's more, this bank actually keeps most of the loans it makes. This helps insulate the bank from the boom-bust cycle that many mortgage lenders have begun to experience with the slowing housing market. So, while compressing interest margins and a tougher mortgage market aren't great news, Commercial Capital may not be as vulnerable as others.

This bank has been smokin', and the valuation reflects it. The trailing price-to-earnings ratio is over 19 and the price-to-book is about two times. Neither of those numbers seems high until you realize that a more normal industry P/E is in the low teens and a more normal price to book is below 1.5. So even though the bank operates in an attractive niche, investors need to ask themselves how much of a premium they want to pay -- especially when Commercial Capital looks to be just squeaking by on its estimates. Risk-tolerant investors may find the bank's growth too sweet to pass up, but more conservative dudes and dudettes might just wanna chill out and wait for a better price.