GRANDVILLE — In a move to diversify revenues to support further growth, the parent corporation for Grand River Bank has formed a mortgage company to write home loans across much of the nation.
Parent corporation Grand River Commerce Inc. launched Grand River Mortgage Co. LLC this fall, extending into a business that’s a core part of community banking and a line that can help to drive earnings growth.
The corporation created the mortgage company after considering “for some time” how best to “diversify the revenue streams that the company enjoys,” Grand River Bank CEO Pat Gill told MiBiz.
“We’ve looked at a number of alternatives in addition to geographic expansion with the primary objective of providing a safe, sound and stable additional revenue stream to benefit the shareholders, provide greater opportunities for the team members, and primarily as fuel to grow the core banking franchise, which is really where the value is for the company,” Gill said. “First and foremost, we wanted something that is consistent with the business in which we have been successful. We understand the mortgage business. This is a different arena, but essentially the same business. It’s really at the heart of financial services and it’s at the heart of community banking, which is what we do well and what we do every day.”
Grand River Mortgage Co. writes mortgages nationally and presently operates in 21 states, according to Grand River Commerce Chairman, President and CEO Bob Bilotti. Applications are pending in other states and Bilotti expects the mortgage company to secure licensing in about 46 states by early 2023.
The corporation has hired a lending staff for Grand River Mortgage of about 60 people who are based around the country, he said.
Capitalized with $8.25 million raised by issuing subordinated debt, Grand River Mortgage began writing loans this fall and “the volume’s ramping up,” Gill said.
Grand River Commerce formed the mortgage company in a rising interest rate environment that has dampened demand for home mortgages and reduced home sales and housing starts.
Rising interest rates pose a “challenge” to the new mortgage company from the uncertainty about how many more increases are ahead or when rates may stabilize, Bilotti said.
“The industry has gone through a few months of turmoil and we are in a constant phase of adjusting to the circumstances to best capitalize on the opportunities that are there,” Bilotti said. “We are gaining traction and momentum and are seeing improvement, so we remain optimistic.”
In its most recent U.S. economic outlook early this month, Comerica Inc. projected U.S. existing home sales to decline from an expected 4.5 million in 2022 to 3.7 million in 2023, then begin trending upward again in 2024. Economists generally expect the Federal Reserve to pause rate increases by mid 2023 as inflation eases with a cooling economy and then start bringing rates back down in 2024.
Bilotti formed Grand River Commerce, recruited investors and raised the needed capital to open Grand River Bank in 2009. The bank has two locations in Kent County.
At the end of the third quarter, Grand River Commerce had $526.8 million in total assets, an increase of more than 7.6 percent since the start of 2022. Total deposits grew more than 9 percent through the first nine months of the year to $467.1 million.
Startup costs from forming the mortgage company did lead to a $467,000 net loss for Grand River Commerce through three quarters and lower year-to-date net income of $77,000 for the bank. Minus those costs, the bank reported net income of $2.1 million through the first three quarters of the year, according to a financial statement.
“Fortunately — as planned — the bank’s strong earnings are able to comfortably support the subsidiary until it becomes revenue positive,” Bilotti, Gill and bank President and CFO Elizabeth Bracken wrote in the quarterly report to shareholders. “Our most-current forecast anticipates that GRMC will begin to generate meaningful revenue from loan originations during the fourth quarter. We expect to recapture its start-up expense in the first half of next year.”
Despite a decline in year-to-date net income associated with startup costs for the mortgage company, “Grand River Bank is absolutely rock solid and having an outstanding year,” Gill said. “The bank’s doing really well, as we have for many years.”
The origins for Grand River Mortgage Co. go back more than two years when Stephen Romano, an acquaintance of Bilotti’s, was considering forming a de novo bank in Chicago. Bilotti was offering advice and counsel to Romano, who eventually decided not to proceed with the plans in the pandemic.
Their conversation led them to discuss other options, particularly since Grand River Bank was looking to expand. Their talks led to the corporation considering whether to form a mortgage company, as opposed to pursuing the more costly option of expanding its branch network.
After a year of weighing the move with shareholders and third-party consultants, the corporation proceeded with forming the mortgage company, “given the prospect of significantly improved earnings that could fund our franchise in West Michigan, which really has been and remains the goal,” Bilotti said.
“We thought maybe if we were successful with the launch of a mortgage company on the national level, given the resources it would require to fund sufficiently, maybe we could leverage that success into the additional geographic expansion we had been considering previously on a more affordable basis,” he said.
Romano, based in Naples, Fla., heads the mortgage company.
In time, the corporation can scale Grand River Bank to $1 billion in assets in the next six years, with a “very good likelihood we will expand geographically within that period of time,” Bilotti said.
“We believe that the value for our shareholders is best realized with an increased scale,” he said.