The mortgage subsidiary of First Commercial Bank in Little Rock bought a $1.2 billion servicing package from another Arkansas bank, Simmons First National Bank.
The purchase, coming as Regions Financial Corp. is about to buy First Commercial's parent company, exemplifies a trend: Smaller servicers either expanding their portfolios or leaving the increasingly competitive and consolidated business.
"If you have a servicing portfolio of $1.2 billion these days and you're relatively small, there are others out there who could probably service it at a lower cost," said Geoffrey Glick, executive vice president at Hamilton, Carter, Smith & Co., a servicing broker. "It's worth more in their hands than retaining it."
First Commercial Mortgage Co. has been trying to increase its portfolio for several years. The Simmons deal would boost it to $8 billion, from $7 billion last year and $3 billion in 1994.
Regions expects to buy First Commercial Corp. this quarter. The deal would increase its servicing portfolio to $23 billion, putting it among the top 25 in the business.
"Getting bigger enables you to give greater returns to your shareholders," said Jack Fleischauer, chairman, president, and chief executive officer of First Commercial Bank.
For Simmons, however, selling the servicing rights to First Commercial was an exit strategy.
"Because the competitive environment has changed, the margin of profit has dropped significantly," said CEO Thomas May. "The success of this business is often determined by your size and your ability to grow your servicing portfolio, and we've found it very difficult to be able to underwrite enough loans to replace the annual principal reductions."
Simmons intends to stay in the business of originating mortgage and home equity loans, he added.
Neither Mr. Fleischauer nor Mr. May would disclose the price at which the portfolio traded. Mr. Fleischauer would only say it was "a very fair market price."
Both executives said the portfolio was a mix of "conventional" loans purchased by Fannie Mae and Freddie Mac and "government" loans bought by Ginnie Mae, but they did not disclose the breakdown between the two categories. The loans were primarily on homes in Arkansas, Texas, Kansas, and Oklahoma, Mr. Fleischauer said.
Servicing brokers not involved in the deal estimated that, with conventional loan packages trading at 125 to 150 basis points and governments trading in the high 190s, the Simmons portfolio could have sold for as much as 150 to 160 basis points, or $18 million to $20 million.
The banks did not use a broker for the deal. Simmons is based in Pine Bluff, only about 50 miles from First Commercial's home office in Little Rock, Mr. Fleischauer noted.
"Though we're competitors, we have a friendly relationship," he said.