Resource Bancshares Mortgage Group's Monday announcement that it has sold the residual assets of six subprime securitizations is the second part of the Columbia, S.C., company's short-term plan to resuscitate profits and refocus its business.
Douglas Freeman, who became Resource's chief executive officer in January, quickly decided that three of the company's interests, termed "noncore" by officials, could be restructured or jettisoned: Laureate Capital, which was sold to BB&T Corp. last week; the residual assets, whose sale was announced Monday; and Republic Leasing.
Resource recently retained First Union Corp. to advise it on its options for Republic Leasing, including an outright sale.
Though the sale of the residuals, which are the riskiest pieces of subprime mortgage securitizations, will prompt a $20 million writedown in Resource's third-quarter results, analysts and company officials appeared buoyed by the development. The residuals fetched "in excess of $20 million," the company said.
"This reduces the asset side of the balance sheet and also then therefore frees up capital to invest in higher-yielding investments for the shareholders," said Michael McMahon, an analyst at Sandler O'Neill & Partners. "It converts a $48 million asset the market was giving them little or no credit for into $20 million in cash, and that's a good thing."
Mr. McMahon said that, with a sale of Republic Leasing imminent, the company could net almost $50 million of cash from jettisoning the three interests. The money, in his view, could be used to buy back shares that Wednesday were trading at $5.75, off 65% from their two-year high.
"I would argue that with the stock selling so far below book value it is a no-brainer to buy dollars for 60 cents all day long as often as you can, as fast as you can, for as long as you can," he said. "I think that's exactly what they intend to do."
Indeed, Steven F. Herbert, chief financial officer at Resource, said the company will use some of the capital raised from the sales to bolster its stock buyback program and to support its overall business plan. The lender expects to resolve the fate of its leasing business by yearend, he said.
Mr. Herbert said that Resource officials intend to shore up and focus on their core business, prime and nonprime mortgage banking, "with an eye toward achieving cost efficiencies and greater productivity levels."