With its two acquisition deals last year, NetBank Inc. quietly but quickly vaulted itself into a top-20 mortgage lender and a major player in both online and offline home loan banking.
When the latest deal, for Resource Bancshares Mortgage Group Inc., is completed, NetBank would have a retail and correspondent origination machine capable of producing close to $15 billion of loans a year.
NetBank expects the Resource deal to close in the first half of this year. On June 29 the Alpharetta, Ga., Internet thrift purchased Market Street Mortgage, a Clearwater, Fla., home lender that originates $3 billion a year.
D.R. Grimes, the chief executive officer of NetBank, said that, though his company will remain a diversified financial services company, not a mortgage banking company like Countrywide Credit Industries Inc., mortgages have become one of NetBanks largest business lines.
Its pretty dominant from every point of view, from the volume originated to the percentage of assets that stay on our books, but thats what you would expect from a thrift, Mr. Grimes said in an interview Monday.
NetBank has always focused on high-quality loans with low credit risk, and given the relatively low risk of mortgages, they are now an important part of the companys strategy, he said.
Eighty percent of its loans are secured by single-family residential properties, Mr. Grimes said.
Yet until it acquired Market Street last year, NetBank had to buy the mortgages it held in portfolio from other lenders. That fact increased the cost of acquiring the loans and shut the company out of the fee income associated with the origination process, he said.
We would buy the loans, and they would take the money and loan it to other people, Mr. Grimes said. They got the fees, and we paid a premium, so our profitability numbers were just not as strong as we would like.
Because it already had access to cheap capital through its deposits something both Resource and Market Street lacked NetBank decided to buy the origination capability and avoid the middleman, he said.
Increasingly, a significant portion of its asset growth, including its loan portfolio, will be generated internally, said Mr. Grimes, who will hand over the reins of the company to Resources chief executive, Douglas K. Freeman, when the deal closes.
NetBank can provide Resource and Market Street a much lower funding cost than they can get on the market today, and at the same time, we will be earning fee income and turning that money over, Mr. Grimes said. We should get much higher earnings from that.
William J. Black, a portfolio manager at Second Curve Capital LLC in New York, called NetBanks deal for Resource Bancshares a banking marriage made in heaven in an online column on Dec. 31 for bankstocks.com.
The deal will allow each company to use its considerable competitive advantages to complement the others, Mr. Black wrote.
NetBanks lending capacity will rise, and with its lower funding costs, its margins will rise as well, he wrote. In the banking industrys long history of failed and misbegotten deals, this is one deal that really does make sense.
In describing his affection for the mortgage industry, Mr. Grimes stressed that it would be imprudent to assume that its origination levels this year will match those of last year, one of the strongest in the industrys history. However, he said he expects the first two quarters to be good, and that, more importantly, long-term demographics look great for the home lending business.
People have been buying homes forever, and many continued to purchase even 20 years ago, when interest rates rose to nearly 15%, he said.
The mortgage business is integral to the success of the American economy and has been part of tax policy and public policy for the last 80 years, Mr. Grimes said. Thats going to continue, he said. For the long haul, theres no question but that the mortgage business is going to be very successful. Im very optimistic about that.
Many observers say that both of NetBanks deals reflect a growing acknowledgement among online lenders that consumers are simply not ready to obtain mortgages over the Internet.
But even though many of the surviving online mortgage players say they remain optimistic that consumers will increasingly use their home computer for all financial transactions, and are thus willing to wait for mass adoption of online mortgage services, others, such as NetBank, are not so sure.
MortgageIT.com acquired a branch network, and solid profits, in August when it purchased IPI Skyscraper Inc., the largest mortgage broker in New York. (IPI had spun off MortgageIT.com in 1999.) ClosingGuard.com Inc.s purchase in June of MBH Settlement Group LC, a McLean, Va., company with $12 million of annual revenues, made the fledgling technology company profitable.
I believe we are a number of years away from people making a lot of mortgages just over the Internet, Mr. Grimes said. Getting a mortgage is a significant and complex financial transaction, and most consumers need hand holding through the process, he said.
They like somebody to explain the options to them, he said. Certainly the Internet is going to continue to play a big role, and its going to grow, but it may not be to the end consumer for a few years.
After he relinquishes day-to-day control of NetBank, Mr. Grimes, 54, said he is going to have fun for a time, but he will continue to be pretty close to the company.
I like Doug a lot, and I look forward to his being very successful, and Im sure Im going to stay in close touch with him, he said.
