Cit­i­zens Bank’s deal for Franklin puts new fo­cus on ser­vic­ing

Cit­i­zens Bank’s ac­qui­si­tion of Franklin Amer­i­can Mort­gage will beef up the bank’s ser­vic­ing port­fo­lio and di­ver­sify its orig­i­na­tion busi­ness at a time when higher in­ter­est rates have put a damper on re­fi­nance vol­ume.

National Mortgage News - - Contents - By Andy Peters

On its face, Cit­i­zens Fi­nan­cial Group’s de­ci­sion to buy a large mort­gage lender seems to be a case of swim­ming against the tide. Sev­eral banks have re­cently di­aled down, or out­right ex­ited, large-scale mort­gage lend­ing as ris­ing in­ter­est rates put a damper on re­fi­nanc­ing ac­tiv­ity.

A closer look shows the logic be­hind the $154 bil­lion-as­set com­pany’s deal for Franklin Amer­i­can Mort­gage. For starters, the $511 mil­lion ac­qui­si­tion, which is ex­pected to close in the third quar­ter, will dra­mat­i­cally boost Cit­i­zens’ fee in­come at a time when all banks are strug­gling with weak loan de­mand.

And Franklin Amer­i­can’s spe­cialty — ser­vic­ing home­own­ers’ monthly loan pay­ments — is the part of the mort­gage in­dus­try that typ­i­cally per­forms well in a ris­ing- rate en­vi­ron­ment.

While banks like Flagstar Ban­corp, MB Fi­nan­cial and Cap­i­tal One Fi­nan­cial have tapped the brakes, oth­ers have qui­etly stepped up to fill the gap, said Peter Win­ter, an an­a­lyst at Wed­bush Se­cu­ri­ties, adding that the ac­qui­si­tion should help Cit­i­zens form deeper re­la­tion­ships with con­sumer clients.

“If you’re a tra­di­tional bank, mort­gage is a key prod­uct,” Win­ter said. “You get de­posits. It’s a good op­por­tu­nity for cross-sell­ing and it helps build cus­tomer re­la­tion­ships.”

Be­cause Franklin Amer­i­can sells most of its orig­i­na­tions to Fan­nie Mae and Fred­die Mac, the bulk of its profit comes from fees.

That’s ex­actly what Cit­i­zens wanted, and what many other banks need.

Bor­rower de­mand, es­pe­cially for com­mer­cial and in­dus­trial loans, has been tepid across the in­dus­try de­spite De­cem­ber’s cor­po­rate in­come tax cut.

Cit­i­zens, mean­while, has been try­ing to gen­er­ate more fees for years, fo­cus­ing on wealth man­age­ment and adding a roboad­vi­sory ser­vice. The ef­fort has been a strug­gle; first-quar­ter non­in­ter­est in­come fell 2% from a year ear­lier, to $ 371 mil­lion, be­cause of lower cap­i­tal mar­kets fees and a de­crease in cus­tomer ser­vice charges.

“In our fee-in­come busi­nesses, we were un­der­in­vested prior to the IPO three years ago,” John Woods, the com­pany’s chief fi­nan­cial of­fi­cer, said dur­ing a May 15 in­vestor con­fer­ence.

Franklin Amer­i­can helps Cit­i­zens move away from the side of the mort­gage busi­ness that is harmed by higher in­ter­est rates.

There was “gen­eral mar­ket soft­ness” dur­ing the first quar­ter, Bruce Van Saun, Cit­i­zens’ chair­man and CEO, told an­a­lysts dur­ing an April 20 con­fer­ence to dis­cuss earn­ings. “There was a shift away from re­fis, rates have gone up and so it was just a tougher quar­ter than we ex­pected.”

Adding Franklin’s $ 41 bil­lion port­fo­lio of mort­gage ser­vic­ing rights will help, said Brad Con­ner, Cit­i­zens’ vice chair­man and head of con­sumer bank­ing.

Home­own­ers tend to make fewer pre­pay­ments as in­ter­est rates rise and monthly pay­ments in­crease, which re­duces a bank’s in­come. But they con­tinue to make pay­ments, which in­creases the un­der­ly­ing value of ser­vic­ing the loans.

“Mort­gage ser­vic­ing rights are a nat­u­ral busi­ness hedge,” Con­ner said in an in­ter­view. “MSRs be­come more valu­able as rates rise and orig­i­na­tions fall. We’re bal­anc­ing our ex­po­sure.”

And Cit­i­zens will han­dle mort­gage ser­vic­ing for the as­sets that it’s buy­ing from Franklin in its ex­ist­ing Rich­mond, Va., op­er­a­tions cen­ter.

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