An upbeat earnings report did not appear to reassure investors about Resource Bancshares Mortgage Group's plan to buy a subprime lender.
Shares of the Columbia, S.C., conventional mortgage lender slipped 12.5 cents Monday despite the disclosure late Friday that its acquisition target, Walsh Holding Co., earned $18.4 million for the quarter.
Shares of Resource had fallen 18% since it announced the merger last month. Walsh, privately held, specializes in loans to people with weak credit histories-a business that has been in turmoil lately.
But in a release put out after the close of the stock market on Friday, Resource reported that Walsh's net income for the last 12 months was $26.6 million. Most of the earnings were generated in this year's first quarter. Walsh's reported net income for the quarter was more than four times what Resource earned in the comparable period.
Michael P. McMahon, an analyst with UBS Securities, said the merger should bolster Resource's earnings since the subprime area that Walsh specializes in is more profitable than Resource's bread-and-butter business of originating conventional A quality loans.
Still, Mr. McMahon added that Walsh's margins may come under pressure as competition increases from conventional mortgage banks seeking to enter the subprime lending market.
Steven F. Herbert, Resource's chief financial officer, said the company delayed the release of data because it "wanted to be sure that we had adequate time to review and validate" Walsh's balance sheets and income statements.
Walsh's founder, Robert C. Walsh, will remain with the new company as head of its subprime division. Resource is issuing 21.4 million shares to Parsippany, N.J.- based Walsh to pay for the deal. Based on the price of Resource's stock at the time of the merger announcement, the deal was valued at $320 million.
This price was questioned by several investment bankers and analysts since the merger announcement came closely on the heels of H&R Block's decision to buy Fleet Financial Group's subprime unit, Option One. H&R Block paid $190 million for the Fleet unit. But Option One originated more than Walsh did last year and also has a servicing portfolio, something Walsh lacks.
"They announced a deal which had a price that appeared to be a large premium," Mr. McMahon said. But in light of Walsh's earnings, Mr. McMahon thinks Resource paid a fair price.
Adding to investor confusion about the deal was the fact that Resource, despite being the nation's 11-largest mortgage originator, is not closely followed by many Wall Street analysts.
In fact, one analyst who followed Resource, Deborah Beylus of JW Charles, dropped coverage after the merger was announced. Ms. Beylus cited difficulties in trying to value the merged company as her primary reason for ceasing coverage.
In addition to the Walsh merger, Resource is also merging with its parent company, Resource Bancshares, an originator of commercial mortgages and an equipment leaser.
Mr. McMahon said Resource Bancshares shouldn't contribute much to the merged company's earnings. Resource Bancshares Mortgage will change its name to BCA Financial once the two mergers are completed.