Stonegate Mortgage backs off distributed retail lending

Plans to optimize the 19 remaining branches

[Update: Correction made due to error in Seeking Alpha transcript. The original article and subhead said Stonegate closed seven branches during the third quarter and expects to close or sell an additional 67 branches or desk locations by the end of the fourth quarter. The story is updated to say Stonegate had already closed 63 locations but that 19 remain open and fully supported well into the future.]

Executives at Stonegate Mortgage disclosed in the fourth-quarter earnings call the lender’s plans to back off distributed retail lending, a decision that follows similar moves in the industry as of late.

Stonegate has already closed 63 locations, while 19 remain open and fully supported well into the future.

During the call, Jim Smith, president and chief operating officer of Stonegate, said "We remained focused during the quarter on optimizing our retail distributed branch structure to maximize shareholder value. We had 19 locations at the end of December, primarily throughout the Midwest, after closing or selling a significant portion of our branch locations during the third and fourth quarters."

“Going forward, our focus will be to optimize the remaining distributed retail footprint and increase our profitability,” he added.

Smith said that the remaining branches represent approximately 40% of its year-to-date distributed retail origination volume and comprised less than 30% of its overall expense base.

These remaining branches are also predominantly located in the Midwest, where Stonegate has longer-tenured employees and operations.

Smith was asked about Stonegate’s channel mix and if it is getting away from distributed retail. He was also asked if the company is looking for more correspondent originations or if its focus will continue to be 25% retail, just not distributed retail.

Smith responded saying, “If you look at the third quarter, our distributed retail platform really accounted, I think, for about 12% of our volume. The moves that we've made really carve out a segment of our distributed retail platform that, as I mentioned in my discussion earlier, really add value to the organization and have an opportunity for us to really develop that model out and develop that footprint.”

“The changes that we made really have a relatively small effect or impact on that mix,” Smith said. “We're basing all of our decisions today not on rising volume; we're basing it on a flat market.”

Smith emphasized in a follow-up response that this does not mean they are exiting the distributed retail business.

Stonegate isn’t the first lender to restructure its business away from distributed retail lending.

A side effect of digital mortgages as they gain prominence is the slow extinction of brick-and-mortar lending branches.

According to Accenture research, Kelly Adkisson, a managing director at Accenture Credit Services, said, “The number of borrowers who applied for a mortgage through the branch decreased by 25% since 2012. More than half of the top 10 mortgage lenders are non-traditional banking institutions, reinforcing the point that lenders do not need brick-and-mortar locations to successfully originate mortgages.”

This leaves brick-and-mortar branches in a tough position.

Back in December 2014, Ditech made a bold move and announced a broad push to open more retail branches despite reports already out at the time that digital banking was challenging retail bank branches.

Flash forward a little more than one year and Ditech recanted its stance on the matter. As of Jan. 8, Ditech exited its distributed retail lending channel due to changes in the market.

Not too long after Ditech’s announcement, BankUnited similarly announced it would no longer offer retail residential mortgage loans to consumers since they weren’t generating enough business.

Overall, Stongate’s mortgage loan origination volume decreased 29% to $2.27 billion during the fourth quarter of 2015, down from $3.20 billion in originations in the third quarter of 2015. This is also down 28% from origination volume of $3.14 billion in the fourth quarter of 2014.

The lender attributed the decline to several factors, including TRID implementation, normal seasonal declines and the company's restructuring changes.

Revenues increased 83% to $46.8 million in the fourth quarter of 2015 from $25.6 million in the third quarter of 2015 and increased 167% from $17.5 million in the fourth quarter of 2014.

"Throughout the fourth quarter, our executive team has been working diligently on ways to maximize shareholder value for Stonegate," said Rich Kraemer, interim CEO of Stonegate Mortgage.

"We have completed the implementation of certain operating efficiencies and restructuring changes, which have allowed us to make good progress on the expense base reductions while maintaining our most productive business operations and locations, as we discussed last quarter. These efforts reduced our annualized fixed expenses by more than $35 million, and as a result we are now well-positioned for 2016 with a lower fixed expense base and leaner operations."

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