Fleet Weighs Sale of Stake in Mortgage Unit

Fleet/Norstar Financial Group Inc. says it may sell a stake in its huge mortgage banking operation, the second largest in the United States.

A successful offering could set the stage for similar moves by other big commercial banks looking for ways to capitalize on rising investor interest in mortgage banking.

Strong Market Stirs Investors

Shares of the only publicly traded mortgage bank, Countrywide Credit Industries, have more than tripled in price this year, partly because low interest rates have spurred the market for fixed-rate home loans.

Just last week, Primerica Corp. said it hoped to raise $296 million by spinning off Margaretten Financial Corp., a mortgage banking subsidiary, in an initial public offering.

Fleet, based in Providence, R.I., said in a regulatory filing that it is considering "a sale or spin-off of a minority or majority in interest" in its mortgage operation, which has 119 branches nationwide. Its $56 billion servicing portfolio is second only to Citicorp's $69 billion portfolio.

According to a common industry yardstick, Fleet's portfolio is valued at roughly $840 million - or 1.5% of the loans serviced. But the actual value of the operation could be much higher, observers said.

Earnings Surge

Fleet's mortgage unit earned $60 million in the first nine months this year, nearly twice as much as in the period last year.

Nancy Bush, an analyst at Brown Brothers Harriman & Co., said she would be surprised if Fleet sold more than a 25% stake.

"I cannot see Fleet, under any circumstances, exiting this business," she added. "It's just too important to them."

In the filing, Fleet warned that any sale would depend on several factors, including market conditions and operational matters.

Fleet officials declined to elaborate on the filing.

A public offering by Fleet would mark the first such step by a commercial bank.

Many bankers were already intrigued by Primerica's plan to sell Margaretten. "I would not be surprised" if the Primerica deal inspires imitation by banks, said Gary Gordon, a thrift and mortgage analyst with Paine-Webber Inc. "It's a business that's working very well right now with the low fixed rates."

Few Obvious Candidates

Most major banks have mortgage banking operations, but good candidates for a public offering are hard to identify, said Jonathan E. Gray, mortgage analyst for Sanford C. Bernstein & Co. He said financial reports conceal how much mortgage banking units contribute to net income.

Primerica's move follows the run-up in value of Countrywide's shares to $35 from less than $9.

"The investment community is intrigued by mortgage banking as a phenomenon," said Mr. Gray. Mortgage companies, which specialize in fixed-rate loans, have benefited more from falling rates than have many thrifts, which primarily offer adjustable-rate mortgages.

Offering for Margaretten

Primerica expects to sell Margaretten, based Perth Amboy, N.J., by offering 12 million shares at $16 to $19 a share. The newly formed Margaretten Financial Corp. will sell another 2.8 million shares, with proceeds earmarked to increase loan production capability and expand its mortgage servicing business.

According to a prospectus, Margaretten lent $3.1 billion in the nine months ended Sept. 30, up 29% from the level in the preceding year. The portfolio of loans it services also grew by 32%, to $3.3 million.

Earnings more than tripled to $10.5 million, compared to the $4.2 million earned in the first nine months of 1990.

Unit Is Relatively Small

Although growing rapidly, Margaretten is far smaller than Countrywide, which serviced a portfolio of $17.2 billion of loans to rank 14th at midyear.

It is smaller still than the mortgage banking units of numerous banks, including Citicorp and second-ranked Fleet.

The mortgage banking unit of Chase Manhattan Corp. ranks third among banks, at $32 billion. According to American Banker estimates, it will be followed closely by NationsBank, being formed in the merger of NCNB and C&S/Sovran.

To be sure, Primerica is selling a branch system along with the servicing business that comprises most of the bank-owned mortgage companies.

If the Countrywide experience is any indication, investors today are willing to pay a premium to particiapte in the growing mortgage banking business.

Strong Multiple

Countrywide announced Monday earnings of 56 cents a share for the quarter, fora price-earnings ratio of about 16, about twice what banks shares command, Mr. Gordon said.

Ironically, Mr. Gordon said, tighter loan standards by banks, who fuel mortgage banking operations by providing warehouse lines of credit, are one factor that is driving mortgage bankers to the stock market to raise capital.

Their window of opportunity will last only as long as rates remain low, the analysts suggested. "If you get back to an adjustable-rate-mortgage market, I guarantee the banks and thrifts will grow their market share," Mr. Gordon said. [Tabular Data Omitted]

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