W henOpus Bank ( OPB ) said earlier this week it would cut 10% of its workforce as part of a strategy to trim $7 million in expenses, investors reacted badly and sent shares down 3%.
Never mind that many of the cuts — part of a wider data and tech-driven efficiency effort — were in the commercial bank’s lightly used consumer retail banking branches. Or that redundant systems and services from third parties were reduced so that savings could be directed into other revenue enhancing investments.
“The market seems to have misinterpreted the announcement that this was due to slower growth. And that’s not the case at all,” said Piper Jaffray analyst Matthew Clark, who raised his earnings estimates after the announcement. “It has everything to do with becoming more efficient with the retail bank.”
Besides, he added, Opus is not really a consumer retail bank. It’s a commercial bank.
“And commercial customers don’t tend to go into the branches,” Clark said. “Opus gathers deposits from consumers, but they don’t lend to consumers. They lend to commercial businesses.”
The Middle Ground
Irvine, Calif.-based Opus Bank is noJPMorgan Chase ( JPM ). But it’s not exactly in the same league as other community banks, says Chief Executive Stephen Gordon, who started Opus in 2010 with $460 million in funds — his own and from private-equity investors.
Since then, Opus has grown quickly, largely through multifamily apartment lending and other commercial banking niches, such as technology and health care lending, as well as acquisitions.
“Growing from (nearly) zero to $6 billion in assets in just over five years doesn’t typically happen in a community bank,” Gordon said in an interview with IBD. “Maybe to $200 (million) to $300 million.”
Opus does business mostly in California and the Seattle/Puget Sound area of Washington. It also has a small presence in the Phoenix metro area and Portland, Ore.
“I like to look at us as a regional investment bank in the way we approach things,” Gordon said, noting that the firm’s merchant investment bank is run by a formerGoldman Sachs ( GS ) investment banker. Before his banking career in California took off in the late 1990s, Gordon was a partner at a hedge fund and an investment banker at Sandler O’Neill & Partners.
Opus’ per-share earnings have grown more than 40% annually on average the last few years. They’re expected to climb 35% in 2015 and 58% in 2016, according to an analysts’ poll by Thomson Reuters. Fourth-quarter and full-year results are due Jan. 25.
“The fourth quarter is going to be a very strong one,” Clark said.
Earnings growth this year and next will be driven by robust loan growth and core margin expansion, Clark says, especially in multifamily and specialty lines.
“And it’s all being funded with deposits,” he said. Opus had $4.9 billion in low-interest bearing deposits as of Sept. 30, up from $3.5 billion a year earlier.
Opus’ growing loans in commercial and specialty banking now make up around 60% of total loans vs. 40% in multifamily loans, Gordon says.
“We’re not trying to get away from multifamily. It’s just that we’re doing a lot more of the other stuff,” he said.
That other stuff also comes with better yields, causing core net interest margin — which excludes purchase accounting items — to expand, Clark says.
“Multifamily is probably the lowest-yielding asset on the books,” he said.
Though it has only 1% market share in multifamily apartment loans in its lending regions in major markets on the West Coast, it’s the second largest such lender in those markets after JPMorgan Chase, Gordon says.
And multifamily lending provides Opus with lots of growth in terms of sheer volume lending still to be tapped, Clark says.
“They can still pretty much do as much as they want in that type of business,” he said. “It’s a fairly efficient, boiler-plate form of asset to originate.”
If anyone seems to have a knack for banking, it’s Gordon. After moving from his native New York to Southern California, he founded Irvine, Calif.-based Commercial Capital Bancorp in 1998, and took it public at the end of 2002.
By 2006, it was one of the fastest growing banks in California. But he sensed trouble ahead.
“I had kind of a doomsday scenario in my head,” he said. “It was very clear to me that things were way off in the banking world and across America.”
Since he was its largest shareholder, Gordon decided to sell the bank. Washington Mutual bit, paying around $1 billion in October 2006.
Two years later and reeling from mortgage losses from the housing crisis, Washington Mutual was seized by federal regulators and the bulk of its troubled operations were sold toJPMorgan Chase ( JPM ). It remains the largest bank failure in U.S. history.
Meanwhile, bank regulators had asked Gordon to head up efforts to clean up troubled Fremont Investment and Loan ahead of a voluntary bankruptcy and sale. Among a laundry list of matters worked on, his team restructured the balance sheet, reduced costs, sold off nonperforming assets and facilitated the sale of 22 retail branches and $5.5 billion in deposits to CapitalSource.
Mission accomplished, Gordon looked for his next project. He and private equity investors Fortress Investment Group, Elliott Associates, Starwood Capital Group and a few others invested $460 million to buy and re-capitalize troubled Bay Cities National Bank, which they renamed Opus Bank.
Over-capitalize was more like it, since the tiny bank needed far less to meet regulator’s $40 million threshold to become compliant.
“Then we embarked on acquisitions and organic growth,” Gordon said. The two largest of six subsequent buys were completed in 2011: Cascade Financial, parent of Cascade Bank, with $1.3 billion in assets; and RMG Capital, parent of Fullerton Community Bank, with $592 million in assets.
Gordon took Opus public in April 2014. Original investors have sold some of their shares but still hold a collective stake of more than 50%.
Clark expects Opus to raise $100 million in capital markets later this year to support additional growth.
“They spent a lot up front to build a bank to be three to four times the size it is today,” Clark said. “They’ve been growing into it.”
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