Resource Bancshares Mortgage Group, one of the nation's top originators of home loans, is making a big play for the booming subprime market.
Resource, based in Columbia, S.C., said Monday it has agreed to acquire Walsh Holding Co., a subprime specialist, for about $320 million in common stock.
The deal would instantly make Resource one of the largest originators of loans to people with blemished credit histories. Walsh, based in Parsippany, N.J., originated $660 million in subprime mortgages last year, and the combined company could well produce more than $1 billion of the loans this year.
A broad range of lenders, attracted by the high profit margins on subprime mortgages, have been jumping into the volatile market.
Last week, H&R Block Inc. bought Fleet Financial's Option One unit. Earlier this year, a group led by financier Leon Black bought Weyerhaeuser Mortgage Co., a lender that is expanding its subprime operations.
Richard M. Duncan, executive vice president of loan production for Resource Bancshares Mortgage, said the merger would allow Resource to continue its efforts to diversify beyond conventional mortgage lending.
Resource produced $10 billion in mortgages last year, making it the 11th-largest mortgage originator.
Resource will issue 21.4 million new shares to the owners of Walsh Holding, giving Walsh a 49% stake in the new company. The stake is worth about $320 million based on Resource Mortgage's stock price at Monday's close.
Robert C. Walsh, chief executive officer of Walsh Holding, would join the combined company as president. Of the 49% of the new company's stock, Mr. Walsh and other members of his family would hold 70%. Edward J. Sebastian, Resource's chairman and chief executive officer, would retain these posts at BCA.
The new company is to be called BCA Financial, reflecting its range of products-"B&C" loans and traditional "A" credits.
The Walsh business was originally formed in 1991 by Mr. Walsh as a subsidiary of Gruntal & Co., New York. The company originates loans exclusively through a network of other lenders and brokers. Mr. Walsh led a management buyout of the company last year.
Earlier this month Resource completed a deal to buy Meritage Mortgage Corp., a Portland, Ore.-based originator of subprime loans. Meritage originated $109 million of loans last year.
In the first quarter, Walsh originated approximately $250 million while Meritage produced $49 million.
BCA would enjoy a network over 4,700 brokers.
"We're going to mine the relationship both ways," said John Reilly, counsel for Walsh. Brokers who served either company would now be able to offer conforming and nonconforming products, he explained.
The deal disappointed investors, who had previously bid up the shares of Resource. Resource's stock price fell more than 10% on Monday, closing at $14.875.
E. Gareth Plank, an analyst with UBS Securities, said the merger caught investors by surprise. Last week, Resource's stock price rose on speculation that the company would be acquired, he said.
Some analysts questioned the purchase price, saying $320 million was a lot to pay for a broker network of that size.
H&R Block agreed to pay $190 million for Option One. Option One originated $1 billion in 1996, mainly through correspondent channels.
One investment banker who listened to Resource's conference call said evaluation of the merger is difficult since pro forma earnings and balance sheets were not available for Walsh.
Before this transaction, Resource will also merge with its former parent company, Resource Bancshares, a privately held commercial mortgage lender and equipment leaser. Resource Bancshares currently owns 38% of Resource Bancshares Mortgage stock.
Resource Bancshares Mortgage will issue two million shares to its parent to finance the merger.
Upon completion of both transactions, the new company will have 43.6 million shares outstanding. Both transactions will be structured as tax- free reorganizations, Resource Bancshares Mortgage said.