Gateway Financial Holdings Inc. in Elizabeth City, N.C., is counting on its new mortgage unit to boost its sluggish performance ratios.
The $986 million-asset company is winding down its four-year mortgage partnership with a larger bank and is set to open an in-house mortgage unit, Gateway Financial Mortgage Inc., this week. It has hired a longtime North Carolina mortgage banker, Kevin Pack, to run the unit, and its chief executive is betting the division will turn a profit this year and be a major contributor to earnings starting next year.
Analysts' opinions, though, are mixed. One questioned the wisdom of starting a mortgage division at all, and while another applauded the decision, he had concerns about the costs.
Gateway has been expanding rapidly of late. Its assets have nearly tripled in the last two years as it has actively opened branches in fast-growing coastal cities in North Carolina and Virginia, converted loan production offices into branches, and lured experienced lenders away from larger banks.
But while profits are up - they rose 69% in the first quarter, to $1.4 million - expansion costs have kept Gateway's returns on assets and equity well below industry averages. Its ROA in the first quarter was 0.60%, just a 3-basis-point improvement from the first quarter of 2005, and its 5.38% ROE was only slightly above the 5.04% it reported a year earlier.
Gateway expects to hit the $1.5 billion-asset mark by the end of 2007, said D. Ben Berry, its chairman, president, and CEO. He is shooting for an ROA of 1% and an ROE of 15% by then and sees the new unit helping him reach those goals.
"It's a revenue enhancer that adds profit to the bottom line," Mr. Berry said of Gateway Financial Mortgage. "Any profit you make off it increases your ROA and your ROE."
The unit will operate throughout the company's 22 branches beginning June 1.
Chris Marinac, an analyst with FIG Partners LLC in Atlanta, said that for a bank Gateway's size, "a mortgage business is more trouble than it's worth. I would think that they would want to put more emphasis on a business line that would get a high price-to-earnings multiple from investors."
Megan Malanga, an associate vice president at BankAtlantic Bancorp's Ryan Beck & Co. in Boca Raton, Fla., disagrees. "By the end of this year you're going to see some positive momentum in this unit, and certainly into 2007," she said.
Mr. Berry said he expects that with Mr. Pack's experience and the "pipeline of business" he has brought with him, the mortgage unit will be profitable by the third quarter.
Mr. Pack has been a mortgage banker in the Raleigh area for 15 years. He spent 10 years at Central Carolina Bank in Durham, and then nine months at SunTrust Banks Inc. after the $178 billion-asset SunTrust bought Central Carolina's parent in October 2004.
After leaving SunTrust he joined another mortgage firm, where he came into contact with Mr. Berry. Soon after, Mr. Berry asked Mr. Pack if he would be interested in joining Gateway, and Gateway Financial Mortgage was born. "We saw the potential to expand our mortgage subsidiary … if we could get the right people with a proven track record," Mr. Berry said.
Since October 2002, Gateway has made mortgages through a joint venture with National City Corp. of Cleveland, with Gateway originating the mortgages and National City responsible for underwriting, servicing, and selling the loans into the secondary market. Their agreement expires this week.
Gateway Financial Mortgage employs four lenders and Mr. Pack said he hopes to have 15 officers on the mortgage team by the end of the year, and his goal for the mortgage unit is to reach $250 million of loans within its first year of operation and $1 billion within its first three years.
He concedes these objectives are ambitious but says he is confident he will meet them with the help of the business relationships he has cultivated throughout his career in the mortgage business.
"Most of my contacts have already been calling," he said.
Mr. Marinac said Mr. Berry's goals of an ROA of 1% and an ROE of 15% are aggressive but not unattainable.
"They look a long way from that today," the analyst said. "But a lot can change between now and then."
Samuel Caldwell, a research analyst and vice president with Keefe, Bruyette & Woods Inc., said that building a mortgage unit instead of buying one "is pretty low-risk." But he added that "it's just a question of how long it's going to be a drag on earnings."
