For Dime Bancorp, the mortgage tail will no longer wag the dog.
The New York thrift's planned merger with Hudson United Bancorp to create a new bank holding company would reduce its exposure to mortgage banking a cyclical business that is highly vulnerable to changes in interest rates.
The mortgage bank will contribute less to earnings at the combined company than it has at Dime, said Frank Wright, an executive vice president at Dime.
The benefit will be "a by-product of the transaction," Mr. Wright said, but it was "not necessarily the driver for the transaction."
"The driver is that this made great strategic sense and creates value for the shareholders."
But observers said diluting the influence on earnings of Dime's mortgage operation was likely part of the impetus for the deal.
"They think it's hurting their stock price," said Kenneth A. Posner, an analyst at Morgan Stanley Dean Witter. "Investors are generally negative on the mortgage sector when rates go up," as has been the case this year.
In 1997, Dime, until then a regional player, acquired North American Mortgage, a top-10 originator. It moved North American's headquarters from Santa Rosa, Calif., to Tampa, where its homegrown mortgage unit was based. Mortgages becamea huge part of the company's business.
The following year Dime and others enjoyed a record boom for mortgage originations, as falling interest rates prompted legions of homeowners to refinance their loans, and others to buy or trade up. But rates have gone back up this year, hurting lenders' volumes, North American's profits, and Dime's stock price.
Profits from mortgage banking fell 34% to $15.5 million in the second quarter, even as the bank's total earnings grew 13% to $61 million. Friday morning, Dime's stock was trading at $17, off 34% from mid-March.
Even before the Hudson United acquisition, Dime was one of many thrifts trying to de-emphasize mortgages by expanding its consumer and commercial lending.
Mortgage banking accounted for 24.2% of Dime's profits in the second quarter. That was down from 37.5% in the same period last year -- but still twice as big as the share of profits that come from mortgage banking at other comparable institutions, said Kevin T. Timmons, an analyst at First Albany Corp.
"Everyone expects a thrift to have a mortgage banking operation," Mr. Timmons said. "But it's so big for Dime it stands out."
Lawrence Toal, Dime's chairman, has said publicly he would like to reduce the mortgage unit's share of profits to between 10% and 15%.
The servicing piece of Dime's mortgage business has also been the focus of some controversy. The company appeared to be placing an unusually high value on its servicing rights. At the end of the first quarter, for example, Dime serviced $32.5 billion of residential loans for other investors, which it calculated to be worth $891 million, or 2.74% of the face value. By comparison, at the end of last year, Washington Mutual Inc. serviced $52 billion for others but valued it at only $461 million, or 0.89%.
However, some observers said that Dime's valuation might me justified, given that it has been creating higher servicing fees by selling loans for less in the secondary market.
Thomas Donatacci, a managing director at Cohane Rafferty Securities Inc., a Harrison, N.Y. servicing brokerage, said that Dime's servicing auctions have always been well-received. "The pricing on the servicing they sell is a good confirmation of value for the servicing they retain and put on their balance sheet," he said.
Still, analysts complained that Dime did not disclose enough information to explain how it was valuing the servicing. It was reluctant "to explain its strategy or give people a sense of the range of assumptions that went into its calculations," said Mr. Posner, the Morgan Stanley analyst. "That hurt folks' confidence."
Mr. Wright, the Dime executive, said the company's disclosure "probably ranks among the best" among banks that have large mortgage operations. Besides, he said, in this rising-rate environment, the issue of whether Dime is valuing its servicing properly "has become less important." ?