Banks and Lenders Adjusting Business Models

This article first appeared at Mortgage News Daily:

Boss: “Working hard here, Jimmy?” Jimmy: “Yep, ever since I heard you coming down the stairs!” Mortgage banks are working hard, but banks and other financial institutions have the inside track when it comes to offering other products – more a few paragraphs down. While we’re talking about working, here’s a column from the Sunday New York Times’ Adam Bryant on how to hire the right person from his interviews with CEOs.
Changing business models for financial institutions

There is no law barring financial institutions from branching out into offering other services, and in fact many use this tool as a way to expand and recruit. SoFi, for example, notes that nearly 30% of its clients take advantage of other product the finance company offers. Lenders such as California’s Opes Advisors gives loan originators the potential for training in financial planning consulting.

I mention this because this week it was announced that PNC Bank ($366B, PA) will acquire the US equipment finance business of Canadian company ECN Capital for about $1.3B in cash. The move gives PNC $1.1B in loans and leases. Indiana’s MainSource Bank ($4.1B will acquire independent investment advisory firm First Service Capital Management Inc. (KY). B. Riley Financial will acquire investment banking firm FBR for about $160mm in stock. Synchrony Bank ($72B, UT) will acquire health card portfolio Citi Health Card from Citibank for an undisclosed sum. The move gives Synchrony 110,000 consumer accounts and connections to more than 14,500 providers.

And for various reasons depository banks continue to merge. In Indiana First Merchants Bank ($7.2B) will acquire the remaining portion of IAB Financial Bank ($1.1B) for about $251mm in stock, after purchasing 12% prior. West Town Bank & Trust ($280mm, IL) will acquire Sound Banking Co. ($185mm, NC) for about $24.6mm in cash (35%) and stock (65%) or roughly 1.4x tangible book. The mother’s milk of banking is lending, of course, and earning the spread between what they pay for deposits versus what they earn by lending.

And through it all lenders continue to want to help their clients in a compliant, cost-effective manner while keeping an eye on what is happening in Washington DC. Word went out this week about a “Call to Action” from the MBA and others to tell your Representative to support and assist H.R. 916, a bipartisan bill that prohibits unfair housing taxes. In other words, not to use the g-fee to support other government operations.

“Answer the Call to Action. It literally takes 2 minutes to support your clients, your neighbors, and your industry. Do you remember when G-Fees increased to pay for 2 week extension of unemployment benefits? Do you remember when Congress tried to raise G-Fees to pay for the Gulf Coast Cleanup? Do you remember when Congress tried to use G-Fees to pay for highways? When G-Fees go up, consumers pay more and housing affordability is already an issue in this country. The bottom line is simple. Artificially raising the price of homeownership to pay for non-housing items is bad policy and possibly unconstitutional. H.R. 916 is a great example of bipartisan ‘make sense’ legislation which will prohibit taxing homeowners to pay for non-housing related items. (READ THE BILL HERE).”

We don’t need to make loans more expensive for consumers, especially with some of the drop-offs in business many are already seeing. Freddie Mac has a somewhat gloomy outlook for origination this year, forecasting a drop of 25% from 2016’s level of $2 trillion in origination. Their team sees the 30-year mortgage rate averaging 4.4% and total home sales falling from 6 million to 5.75 million. House price growth is expected to moderate to 4.7% from 6%. Freddie Mac is baking in some possibility of expansionary fiscal policy coming out of Washington, especially with respect to tax reform, where an increase in the standard deduction will reduce the incentive to itemize and reduce the subsidy from the mortgage interest deduction.