Quietly Booming in Seattle
For Immediate Release: June 01, 2007
Seattle Savings Bank
NEW YORK - Seattle's not exactly a two-stoplight hamlet, but it has a close-knit business community. The city and surrounding communities are home to Boeing, Microsoft, Starbucks, and other giants, but even so the names Ben Smith and Robert Story are well known and respected even legendary. The families of the two men own Seattle Financial Group, which grew out of the Seattle Mortgage Co., founded in 1944. But while Smith and Story are well known in Seattle, the size, scope, and success of their operation is not. They're under the radar very low profile, says one admiring banker from the area.
Being a privately owned company, this family business can do things its own way, pretty much. Such was the case two months ago, when SFG announced that it was selling its fastgrowing reverse mortgage business to Bank of America for an undisclosed amount. The business was known as Reverse Mortgage of America and was a subsidiary of Seattle Savings Bank, in turn a sub of SFG. To give you an idea of what the deal means, approximately 400 of the company's 700 employees will join BofA. Also, the savings bank's total assets will drop from the mid $600s to the mid $300s. The deal was expected to be consummated this month.
Seattle Financial was a pioneer in reverse mortgages, starting up its business in 1995. Until recently it was one of only two reverse mortgage servicing companies (Financial Freedom is the other), and the rapid growth it experienced in recent years (loan growth of 93% in 2006) was due to the warehouse lines it carried before selling off the loans to Fannie Mae. The operation had a portfolio of 40,000 reverse mortgages (aggregate loan amount of $4 billion), on which the company held the servicing rights. Last summer, SFG worked with Bank of America Securities to create the first private-label reverse mortgage security.
So why did Seattle Savings exit the business that helped power it to the top of the rankings for non S-corp. banks between $100 million and $3 billion? It was in our five-year plan to spin off the business, says Rob Story, Jr., president of Seattle Financial Group. The business had grown rapidly the past two years, he says, and the opportunity to sell came faster than management anticipated. The timing was right; it was a good opportunity, says Story, who adds that all employees will be able to keep their jobs.
Working with BofA on the securities side opened the dialog, he says. The big bank's huge branch network will enable the business to grow more rapidly on the retail side than could have been done by Seattle Savings, a state-chartered stock savings bank.
A portion of the proceeds of the sale will be reinvested in the company to support other activities such as the launch of a commercial banking division and growth of our mortgage company branch network, says Story.
The first of those a small-business banking specialty would bring in both loans and low-cost transaction-account deposits. Currently the bank relies mainly on time deposits.
Focus on affordable
Seattle Savings Bank was started in 1999 and has had an outstanding Community Reinvestment Act rating ever since. This is largely because the parent company's roots have always been in construction loans to builders of affordable housing, as well as making mortgage loans to the people moving in. This niche has protected them from the vagaries of the high-end residential market, notes Ken North, president of the bank. While the bank's loan portfolio is heavily commercial real estate by regulatory definition, North points out that about 85% of it is loans to residential builders.
The bank has what could be described as a slow but steady approach to asset-liability management. Currently the margins of many banks and thrifts are being squeezed by the yield curve, but not at Seattle Savings Bank. It's year-end net interest margin was 3.42% not particularly high, admittedly, but it hasn't moved much for years, says North.
When we built the bank, says Story, we made the duration of our assets and liabilities very similar, which locks in a spread. It really doesn't matter to us what rates do. Nevertheless, Story hopes to increase that margin by the move into business lending funded by less-expensive transaction accounts.
Credit quality for the thrift at year-end was a pristine 0.01%. Less than 2% of its mortgage lending could be classified as subprime, according to Story. In addition, he observes that the family has grown up as mortgage bankers and knows the business inside out.
Still, they have been careful to diversify earnings to carry them over rough spots. Subsidiaries other than the mortgage company and the bank include an escrow company, a capital company (for more challenging projects than the bank would handle), and, most recently, an insurance company.
All that said, Story concedes that with the sale of the reverse mortgage unit, Seattle Savings Bank won't likely be at the top of the rankings again for a few years. Which is about where they like to be doing well, and under the radar.
Bill Streeter, editor-in-chief
For more information contact:
Bill Streeter
Editor, ABA Banking Journal
bstreeter@sbpub.com
