Centerbank, based in Waterbury, Conn., stopped accumulating mortgages for its portfolio a few years ago. And no wonder.
With the slump in the New England real estate market and the stagnation of the region's economy, the bank lost money from 1989 through 1991 because of bad loans.
But the bank didn't leave the mortgage business. It just changed its focus.
Eager to avoid risk from both credit and interest rates, the bank took to originating loans and selling them all on the secondary market, through its Centerbank Mortgage Co.
Nowadays, the mortgage unit is clearly on the move. Lending volume more than doubled last year, to $2 billion, and last month the unit agreed to buy the assets of Beneficial Mortgage Corp.
The package includes $1.6 billion of servicing rights, which will bring Centerbank's total servicing portfolio to $7.1 billion. Centerbank will also get a network of correspondent lenders that originated $800 million in loans last year.
Perhaps the most significant acquisition, though, came early in 1989 - and it entailed a person rather than a company. The mortgage unit hired Thomas C. Brown as president and chief executive. He had been an executive vice president of Goldome Realty Credit Corp., Buffalo.
Earlier, Mr. Brown was managing director of the real estate finance group at Merrill Lynch & Co. and chairman of Merrill Lynch Mortgage Backed Securities Inc.
Starting from nearly zero, Mr. Brown has built Centerbank Mortgage into a national business servicing or originating loans in 40 states.
The bank has just this year begun to take a few mortgages into its portfolio when its asset-and-liability strategy permits. With nationwide originations, geographic diversification is readily available.
This strategic shift has helped Centerbank climb back into the black. It showed a profit of more than $7 million in 1992, partly on the strength of a surge in loan originations by the mortgage unit.
"Our strategy is to diversify our balance sheet in a way that better positions us into the year 2000 as a financial services business. Previously, we had been primarily a bank, but in 1986 we decided to diversify," says Robert J. Narkis, chairman and chief executive.
Developing a Presence
That strategy stayed on the back burner until a management change was made late in 1989 and Mr. Narkis, a lawyer, became chairman. He had been a board member for 22 years.
"At that point, we decided our strategy was correct, and we provided $34 million to grow the mortgage business - to acquire servicing and become a presence in mortgage banking."
The investment has paid off, with originations more than doubling in 1992. With the acquisition of Beneficial's origination capability, in addition to some ambitious marketing plans, Mr. Brown is looking for additional growth this year.
He is especially proud of the fact that the servicing portfolio grew last year because originations were strong enough to replace heavy runoff from refinancings.
The national scope of the mortgage company has helped break Centerbank out of lockstep with the New England economy. Now, 80% of mortgage revenues come from outside Connecticut.
Part of Mr. Brown's expansion plan is the development of a large network of storefront loan offices called the Mortgage Corner, some of them in partnership with real estate brokers.
He is also pressing for new production from a joint venture established last year with the American Automobile Association. The venture markets mortgages to AAA members at a preferred rate.
"A lot of lenders are beginning to pursue affinity lending." says Mr. Brown. "We are looking for ways to have a more direct line to the customer. Our origination costs are lower in these arrangements because we can do centralized originations. But the market is competitive in terms of pricing. Since we process and underwrite centrally, it's easy business for us to do."
Nurturing a Hybrid
The success of the mortgage company has played neatly into Centerbank's overall strategy.
"We're small to mid-size, and we're almost the sole remaining independent bank in Connecticut," says Mr. Nakris. "But we compete head-on with Fleet, with Shawmut, and with community banks in our area."
Mr. Nakris now sees Centerbank as a hybrid: a supercommunity bank serving three separate areas of Connecticut - Meriden, Waterbury, and New Haven - and a diversified financial services company without geographic constraints. It acquired the assets of two failed thrifts in 1991.
The bank has also been developing a leasing business, which has shown rapid growth recently, and has its eyes on forming a trust operation.
Meanwhile, the success of the mortgage business is providing the bank with a lot of the momentum it needs to accomplish its transition into a new-age hybrid.