The student loan outsourcer First Marblehead Corp. plans to buy a federal savings bank that it has told analysts and investors it would use as a laboratory for testing new products.
People who have spoken with executives at the Boston company say it intends to have Union Federal Savings Bank of North Providence, R.I., fund loans originated under First Marblehead's Astrive brand. Currently, First Marblehead must get permission from the clients that fund its loans to conduct such experiments, they said.
Several analysts said the plan could spook First Marblehead's current and potential customers by putting it into competition with them, though less so if it used the bank for research-and-development purposes only.
But investors responded favorably. The company's shares, which have swung widely at several times in the past year over questions about its ability to retain clients, were up 1.67% Tuesday.
First Marblehead announced late Monday that it had submitted an application to the Office of Thrift Supervision to buy Union Federal Savings from the holding company, Union Bank, also of North Providence.
It did not say what it would pay for the $40 million-asset, one-branch bank. Analysts figured the price tag could not be more than a few million dollars.
Though it was not part of the impetus for the deal the company expressed to them, analysts said they also saw the purchase giving First Marblehead the potential to build a portfolio of loans; to fund loans for new partners not able to do so themselves; or to provide such partners with lines of credit to make their own loans.
An outside spokesman said the company had no further comment. Its press release - which said the deal would allow First Marblehead to "provide a greater range of services to its current and prospective clients" - "spoke for itself," he said.
Loans made under First Marblehead's Astrive brand have been funded by Charter One Bank NA, a unit of Royal Bank of Scotland Group PLC's Citizens Financial Group Inc. A Citizens spokeswoman had no comment.
"While we believe this move does help to vertically integrate the company and opens up options long-term, it raises near-term risks, as the company will now fund loans in direct competition with its partners," Matt J. Snowling of Friedman, Billings, Ramsey & Co. Inc. wrote in a note issued Tuesday.
Scott Coren, an analyst at Bear Stearns & Cos. Inc., however, saw the risks of client concerns further down the road, if First Marblehead were to build out a proprietary lending business. Such a business could be "lucrative," he said in a research note.
"Historically, First Marblehead has considered itself 'Switzerland,' because it generally does not self-originate or finance product," Mr. Coren noted.
Zach Maxfield, an analyst with the New York hedge fund Second Curve Capital LLC, which owns First Marblehead shares and is a big supporter of the company through its bankstocks.com Web site, called such worries "kind of ridiculous."
He said that First Marblehead's big clients, like JPMorgan Chase & Co. and Bank of America Corp., "could care less if First Marblehead is doing $10 million, $15 million, $20 million" of loans, compared to the much greater amounts it helps them to fund. He said that it already puts the Astrive brand in competition with its bank partners' to a small degree, and that the deal would "only make it more efficient" to use it as a test lab.
Ivan Feinseth, an analyst at Matrix USA LLC, said the plan generally sounded like a "good idea." But, he added, the smaller banks First Marblehead has started courting more aggressively could be more upset than its traditional large clients, and "competing with the people they're trying to partner with" could be a problem.
Revenues related to First Marblehead's top three clients made up about 65% of its total in its fiscal year that ended June 30, 2005; as of April it was projecting that would fall to 55% to 60% in its last fiscal year, partially as a result of growth in its client roster.
