Summit Financial Group Inc. of Moorefield, W.Va., reported a sharp decline in mortgage originations last quarter, and its chief financial officer said it is still trying to figure out why.
The $1.1 billion-asset company announced Tuesday that originations at its mortgage subsidiary fell 20% from the year-earlier quarter, to $67.1 million, and that Summit would miss earnings estimates by 9 or 10 cents as a result.
The CFO, Robert S. Tissue, said he believes the sudden slide had little to do with interest rates or a slowdown in housing starts, because the mortgage unit's main line of business is refinancing, not first mortgages. Specifically, Summit uses direct mail to reach people throughout the country who want to refinance consumer debt.
"This is refinancing of consumer credit, so our rates are going to be lower than what they are paying off," Mr. Tissue said. Competition could be the likeliest explanation for the decline in originations, he said.
Still, the Mortgage Bankers Association has forecast a drop-off in originations in general and refinancing in particular because of rising interest rates. Mike Fratantoni, a senior economist for the association, said that in 2005 there were $2.9 trillion of single-family mortgage originations, $1.5 trillion of purchase mortgages, and $1.4 trillion of refinancings.
The MBA predicts the total will drop to $2.4 trillion this year, with $1.48 trillion of purchase and $900 billion of refinance mortgages.
Mr. Fratantoni said, "It is more difficult for a borrower to lower their monthly payment by a refinance at this point."
Whatever the reason for Summit's earnings warning, investors were clearly spooked by the news. One of the two analysts who covers the company speculated in a research note that it would "consider strategic alternatives" for the mortgage unit.
Summit's stock price fell nearly 12% Tuesday to close at $20.29.
It was the latest blow to Summit's stock, which last month was dropped from the Russell 3000 index after its market capitalization dropped below the minimum requirement. The stock had only been listed on the index for a year.
Summit said second-quarter earnings would come in at 36 or 37 cents a share; analysts had estimated 46 cents. Summit reported earnings of 43 cents for last year's second quarter.
Albert Savastano, an analyst with Janney Montgomery Scott LLC in New York, said he thinks the market for refinancing is getting more competitive and that Summit might consider selling its mortgage unit.
"We basically assume the mortgage would break even going forward. It used to be a positive contributor to earnings," Mr. Savastano said. He added that Summit's core community banking subsidiaries in Virginia and West Virginia are still performing well.
Mr. Tissue said: "We are looking at whether this can be turned around or not. We will evaluate it like all our lines of business."
