Many community banks are looking to residential mortgage lending as one of the ways to increase their profit margins in the era of Dodd-Frank, notes a compliance expert at a banking industry technology provider.
Paul Reymann, the chief risk officer at HEIT, a subsidiary of Computer Services Inc., speaks with banking industry participants on a formal and informal basis to get a handle on key trends to help understand what will be important for financial institutions over the next six to 12 months.
Community bankers and credit unions were telling him that while Dodd-Frank compliance is important, they were not seeing information out there that would help them to address their revenue challenges.
Reymann noted that because of the difficulties in the mortgage market, these banks had seen their income related to the product dry up in recent years. Another challenge is from having to replace lost credit card transaction interchange fees.
So it would be seen as ironic that they would turn to mortgage lending to drive income and increase capital. Yet there are a number of examples of banks doing just that.
This past summer, Monarch Community Bancorp Inc., Coldwater, Mich., added residential mortgage production offices in Kalamazoo and Okemos, Mich., in an effort to increase fee income.
When Bank of North Carolina, Thomasville, N.C., announced its agreement to buy Regent Bank, Greenville, S.C., part of the motivation was the separate opportunity to add a team of four mortgage originators with volume of $15 million per year from that market.
In its third-quarter earnings release, Gerry Banmiller, president and chief executive of 1st Colonial Bancorp Inc., Collingswood, N.J., said, “To compensate for a lack of commercial loans, we underwent an initiative to book home equity consumer loans. A major advertising campaign yielded almost triple the dollar volume of home equity loans in the third quarter than we had in the second quarter of 2011.”
Meanwhile, Astoria Federal Savings, Lake Success, N.Y., has hired a commercial mortgage lending team and is returning to that line of business after an absence of approximately two years.
Reymann declared a community financial institution is in business to do three things: lend, take deposits and/or invest. “If they can't do those, then they are not in business very long. And everything else they do, just supports those three key functions.”
Now, the new regulations and the general economics of the market are creating significant challenges for those institutions.
So when he asked these institutions what are they planning to do to replace the lost income, one highlighted answer was that they planned to do more residential and commercial mortgage lending.
“Kudos for that. I was so happy to hear that because that is why they are in business,” Reymann said. “That is really the prudent strategy. All these other peripheral activities of generating income and fees are important, but one of those three main reasons they're in business is to do mortgage originations.
“And they know that, they haven't lost sight of that. And while they continued to get challenged both from the economic side and the regulatory side, they're holding the course, they're staying focused” on that lending mission.
The survey did not drill down as far as whether these institutions were going to portfolio the loans or sell them on the secondary market. Typically, they keep adjustable-rate mortgages but sell fixed-rate loans and those sold loans could be subject to risk-retention requirements.
Reymann asked rhetorically how much these institutions could lend and not move off the balance sheet because of concentration risk? And keeping the loans on their books leads to other things, including the ability to manage it.
Still increasing mortgage lending activity as a fee revenue enhancer is a more viable option for these institutions than adding new fees for various services which they had been providing for free, he said.
