At its annual meeting last month, CF Bankshares in Columbus, Ohio, highlighted the “extraordinary” increase in profits generated by its three-year-old national direct-to-consumer mortgage platform – more than three-quarters of its total revenues for 2020.
Then last week the bank announced its intention to pull out of the business.
According to CF, the 129-year-old holding company of CFBank, declining margins, stiffer competition and heightened price volatility prompted the decision to bail out the predominantly online channel.
“During 2021, the mortgage environment in our view, and in particular the DTC, has changed significantly,” CEO Timothy O’Dell wrote in an email to American Banker on Tuesday. “Our mortgage focus will be on more traditional retail loan arrangements,” such as broker business and word of mouth referrals.
In 2020, CF’s net gains on mortgage sales totaled $ 58.37 million on arrangements exceeding $ 2 billion. Although the proportion of loan sales to total income fell to 37% in the first quarter, down from 66% in the fourth quarter and 76% for the full year of 2020, the contribution of mortgages remained significant, with net gains on loan sales totaling $ 6.36 million in the three months ended March 31.
There is no doubt that this move will result in a short-term profit slump. Indeed, the CF $ 1.6 billion in assets said Thursday its second quarter results would include about $ 2.5 million in after-tax losses associated with DTC’s mortgages.
Brendan Nosal, who covers CF for Piper Sandler, called the exit decision a “sharp shift in strategy” in a research note Thursday. In a follow-up note on Friday, Nosal lowered its estimate of second-quarter earnings from 37% to 51 cents per share.
“This may underestimate the magnitude of the loss of DTC in the second trimester,” Nosal wrote. He reduced his estimate for the year 2021 by 26% to $ 2.28 per share. CF reported net earnings of $ 6.4 million, or 96 cents per share, for the quarter ended March 31, and $ 29.6 million, or $ 4.47 per share, for 2020.
O’Dell declined to provide further details on the impact of the exit decision on earnings, or whether CF plans to replace direct-to-consumer mortgages with another line of business. He cited the period of calm ahead of the release of his second quarter earnings report, which is expected to be released on August 4.
At the same time, O’Dell said he was confident that expanding the company’s core banking business would quickly close any revenue gap. Improved cash management capabilities – paid for in large part by mortgage profits – have led to a doubling of non-interest deposits, while commercial lending pipelines are at record levels, he said in a statement on Thursday. Press.
CF entered the Indianapolis market in the first quarter, hiring veteran local banker Dan Cobb to recruit a team of lenders. The bank says it is on track to hit $ 1 billion in assets in each of its four major markets, Columbus, Cleveland, Cincinnati and Indianapolis.
“DTC mortgages have made a significant contribution to commission income over the past two years, allowing us to accelerate investment and growth in our core banking franchise,” O’Dell wrote in the e -mail.
CF’s abandonment of direct-to-consumer mortgages comes as the post-pandemic real estate boom, which pushed the dollar volume of mortgage origination to a record $ 3.8 trillion in 2020, appears to be fading. In its latest mortgage financing forecast, the Mortgage Bankers Association forecast a 9% drop in origination volume for 2021, followed by a more pronounced drop next year.
At the same time, the net gain per loan for lenders, while still substantial, has markedly decreased since the record high reached in the third quarter of 2020, according to the MBA.
MBA declined to comment on CF’s decision, citing a policy prohibiting commenting on the business activities of individual lenders.
Nosal says the decision to opt out of direct-to-consumer mortgages will be seen as a plus – eventually.
“As the mortgage grew as a percentage of earnings, earnings exhibited significant seasonality, as well as cyclicality,” Nosal wrote in the follow-up note. “Exiting DTC activity will provide much higher profit visibility coupled with lower volatility. We see this as a key positive.
As part of its plan to phase out direct-to-consumer mortgages, CF suspended its new rate foreclosure commitments on June 30. The company said in its press release that it would shut down its existing pipeline “within the next few months.”