A West Virginia bank holding company in search of a new money-maker has plunged into mortgage servicing at a time when others are exiting the sometimes risky business.
City Holding Co. of Charleston acquired a $600 million servicing portfolio of FHA Title I home improvement loans from the former Prime Financial Corp., Costa Mesa, Calif., last month
The purchase raised City Holding's mortgage servicing portfolio to nearly $900 million. The portfolio is now expected to contribute about 20% of the company's future income.
"Our goal was to break away from our relying on just core bank earnings for future growth," said Steven J. Day, president and chief executive of City Holding. "Nationwide, bank deposits are shrinking. We were looking for alternative income streams."
Tackling a servicing portfolio of that size is virtually uncharted territory for a company as small as City Holding, which has $1.1 billion of assets. Its servicing portfolio, handled through its mortgage subsidiary, is expected to reach about $1 billion in the first quarter this year.
Title I loans, available to borrowers with low and moderate incomes, are more labor-intensive than other types, so the fees for collecting and processing monthly payments are higher than on conventional loans.
City Holding's servicing portfolio size - and its ability to earn big profits from lucrative Title I servicing - caught the eye of Chip Wittman, an analyst at Wheat First Butcher Singer in Richmond, Va. This month, he raised his rating on City Holding's stock to a "buy" from a "hold," saying the acquisition should push the stock price up more than 40% over the next 12 months.
"You hear a lot of banks talk about trying to get more fee income," Mr. Wittman said. "It makes City Holding one of the more unique banks. Servicing revenue will become part of the overall revenue mix."
But City Holding has entered what analysts consider a shrinking business.
"I think you're going to continue to see servicing fall into fewer and fewer hands," said Thomas O'Donnell, a savings and loan analyst at Smith Barney Inc. in New York. "It's more of a big-entity phenomenon. A lot of smaller companies are farming out" servicing.
Mr. O'Donnell said consolidation in the mortgage industry was one reason for the drop. Also, he said some companies that got into mortgage banking realize they don't have what it takes to stay in the business.
In particular, Mr. O'Donnell said companies need economies of scale, capital, low expenses, and good control of risk and technology. "Not everybody has them," he said.