Mondays announcement that NetBank Inc. will acquire Resource Bancshares Mortgage Group Inc. came with the surprising revelation that D.R. Grimes, NetBanks chief executive officer and one of the best-known names in Internet banking, will step aside.
Resources CEO Douglas K. Freeman will succeed Mr. Grimes when the deal closes, probably in the first half. Mr. Grimes will remain vice chairman of NetBank, whose headquarters will move from Atlanta to Alpharetta, Ga.
In five years at NetBank, Mr. Grimes has made the profitable company the standard bearer for Internet banking. But the bank now stands out as much for its diversified strategy as its method of acquiring deposits.
In a process that Mr. Grimes described as more evolutionary than revolutionary, NetBank has added more layers of business since its start in 1996 as a retail bank focused on gathering deposits through the Internet.
Earlier this year it acquired Market Street Mortgage, a consumer mortgage lender based in Clearwater, Fla., that contributed 1 cent per share to NetBanks earnings in the third quarter. Resource would add wholesale and subprime mortgage lending.
Resource has struggled mightily in recent quarters, losing $42 million last year, but Mr. Freeman, formerly the president of Bank of Americas consumer finance group, managed to turn the company around since taking the helm in January 2000. He changed the focus from originating as many loans as possible to making profits from each customer.
He also expanded Resources product line to include higher-margin loans and, after analyzing the companys product and customer revenues, implemented a compensation system directly tied to profitability. Additionally, Resource made major technology investments and started a business that provides private-label mortgages to smaller banks, thrifts, and other originators.
In an interview Monday, Mr. Grimes said that the shift in management does not signal a change in direction for NetBank.
Were a company thats grown from a start-up company to one thats going to be a very large company, he said. Sometimes that requires different skill sets, different backgrounds, and more planning and strategy. We looked at what our needs were and what the companys needs were, and this just makes sense to me.
The underlying theme behind NetBanks diversification strategy has been to seek out profitable acquisition targets with strong management teams and track records in their respective industries, Mr. Grimes said. The Resource acquisition will help complete NetBanks transition from a start-up retail bank to a sizeable, diversified financial services company, he said.
We believe that this transaction has a compelling value proposition, he said. We will be able to generate our own assets and also provide funding for the assets generated by Resource Bancshares at a much lower cost than theyre able to today. Its a continuation of the strategy we have been following and have espoused for the last 18 months.
Mr. Freeman said Resource Bancshares generates more than $1 million monthly in mortgage products but must borrow from Wall Street and various commercial banks to finance its products. Each of us goes through a middleman NetBank to generate the assets and us to get the liquidity and this middleman has extracted some nice profits, he said. Were both able to eliminate the middleman this way, so its very, very attractive.
NetBank is rare among Internet banks for its profits. It reported assets of $2.5 billion and net income of $2.1 million last quarter.
About 31% of its assets are cash and investments, such as mortgage-backed securities. The balance is primarily high-quality loans. At quarter end the bank held $1.58 billion of loans, with 79% of the total secured by single-family residential properties.
The combined company will have about 1,950 employees, $3.6 billion of assets, and $415 million of equity. It had a combined market cap of $370 million at the market close last Friday.
Each Resource Mortgage share would be swapped for 1.1382 NetBank shares. That works out to $164.85 million at NetBanks closing price on Friday.
Richard Repetto, an analyst with Putnam Lovell Securities Inc., said the deal appears positive, since it is expected to produce 40% to 50% accretion next year without factoring in revenue growth or cost savings. The acquisition will also allay criticism of NetBank for not having the capacity to generate assets, he said.
From a strategic viewpoint, it makes sense, he said. It just depends on whether the volatility of the mortgage business will affect them.
James Van Dyke, the research director of financial services and payments for the New York consulting firm Jupiter Media Metrix, said that NetBank had not previously undertaken an affinity marketing strategy or product-centered approach and was therefore vulnerable because they didnt have anything that made them unique.
The Resource deal, he said, is part of a trend of financial institutions becoming increasingly product-focused. As an example, he pointed to Citibanks decision last week to stop charging fees for its online payment service c2it in an effort to attract customers.
NetBank is turning into a much more product-focused company, he said. If they can get more relationships with customers through more products and use that to branch those customers into other types of banking products, that might work out well for them.
However, he said, NetBank will have its share of competitors as companies such as E-Loan and Quicken vie for market share.
Its not an uncrowded field, he said. A lot of people want the online lending business.
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