An Idaho bank holding company is shutting its own mortgage production operations and instead will use a third-party originator to provide mortgage funding for its clients as part of its expense reduction efforts.
Home Federal Bancorp Inc., Nampa, Idaho, had been originating mortgage loans for sale into the secondary market on a servicing-released basis since 2006.
In the company’s second-quarter 10-Q filing, it stated about its mortgage lending operations that it is “currently assessing the impact of new regulatory requirements and other rules that may be promulgated under the Dodd-Frank Act which could adversely impact the profitability of our mortgage loan activities. We may change the business model or exit this line of business if regulatory and legislative changes materially alter the risk profile or profitability of our mortgage loan and secondary market loan origination programs.”
But in the press release announcing the decision to leave the mortgage origination business as part of a package of other initiatives at Home Federal, the decision is posited as one of the moves that will allow the company to cut its expenses by $3.6 million over the next 12 months. Home Federal reported a $78,000 loss in the second quarter.
The press release states Home Federal will refer nearly all of its mortgage applicants to a third-party originator that will underwrite and close these loans. This arrangement goes into effect in November.
Home Federal does have the option to originate loans for its own portfolio, but management said it thinks very few loans will be originated for the bank or for sale by the bank in the secondary market.
Len E. Williams, president and chief executive, said, “For over 90 years, Home Federal Bank has ensured access to mortgage financing for homeowners in the Treasure Valley of Idaho. We are absolutely committed to continuing to offer mortgage loan financing to current and future clients of the bank, not only in our Idaho region, but also in our central and western Oregon regions. While the mechanics may change, Home Federal Bank is still here to serve the mortgage financing needs of our markets.”
By getting rid of its mortgage loan officers Home Federal will see its compensation expenses reduced. But it will also see a reduction in income with the new model since gains on loan sales will no longer be recorded. However, management said it expects compensation and expense reduction to exceed income reduction, improving overall profitability.
Another part of the plan has resulted in Home Federal selling nearly $28 million of mortgage-backed securities. These securities had a high risk of prepayment, and the recent rally in the bond market made that risk much higher. The sale resulted in a third-quarter gain of $590,000 for Home Federal.
Home Federal also repaid $48 million in Federal Home Loan Bank borrowers at a penalty of $2 million. Paying these back early will reduce its interest expense by $1.5 million in the 12-month period through Sept. 30, 2012 and by $600,000 for the succeeding 12 months.
The company is also closing four retail banking branches in Oregon and a standalone branch and a branch in a Wal-Mart in Idaho.
