For community bankers, it was always a romantic notion—the idea that they could give mortgage lending short shrift and beat the big guys on commercial loans.
Mortgage lending is looking pretty good to these bankers now. So much so that, post-crisis, a number of them are re-entering the business or expanding existing mortgage operations. In some instances, banks have even accelerated lending outside of their core markets, sometimes well beyond, despite the inherent risks.
"The opportunities have become attractive" for smaller lenders, says Bose George, an analyst at Keefe, Bruyette & Woods.
The financial crisis stung larger home lenders, and the heightened regulation that followed hasn't done them any favors, either. Those now emphasizing commercial loans have driven down rates there, making it tough for small banks to make money in that field. For community banks now, the grass can appear greener back in mortgage lending.
"We continue to look at lines of business that differentiate us…but we won't be able to do that through C&I at rates that are getting lower and lower," says Bartow Morgan Jr., the chief executive of Brand Banking in Lawrenceville, Ga.
Mortgage trends have shifted significantly in the past year. In the first quarter, the 25 biggest banks grew mortgage volume by a narrow 2% from a quarter earlier, according to data from the Federal Reserve Board. Mortgages grew 17% at all other banks over the same period. Still, the biggest banks, on average, originate roughly double the volume of all other banks each month.
Returns have something to do with that. While interest rates are low, mortgage returns have risen because such loans have become more attractive to secondary buyers, partly because of stricter underwriting standards following the housing meltdown.
"Mortgages are a less commoditized product than they were a few years ago," George says. "It's very difficult to get them, so it makes sense that people would pay more."
For some bankers, that incremental increase in fee revenue is critical at a time when regulation has dried up other opportunities.
"Mortgage banking is consistently 30% to 40% of our monthly net profit," says Curt Gabardi, the president and chief executive of Metropolitan BancGroup in Ridgeland, Miss. "As a stand-alone, monoline business, it takes very little capital and virtually no call-back risk. We originate it, we sell it and, when we sell it, we make our profit."
The $536.8 million-asset Metropolitan recently expanded into Nashville, Tenn., by hiring a team of mortgage officers in the market. The team has helped boost mortgage production by 30% in the past 60 days, to nearly $10 million, executives say. While most of that is from moving existing business into the bank, Gabardi says the bank has found "real cross-sale" opportunities through its mortgage strategy.
A handful of other community bankers have said they will expand into new markets or start up new mortgage operations.
