James Rohr, president of PNC Bank Corp., led last month's acquisition of Sears Mortgage Group for $328 million. The deal vaults PNC into the top ranks of the nation's mortgage companies. American Banker reporter Christopher Noble recently spoke with him about the deal.

Q.: What are the broad, strategic reasons for the acquisition of Sears Mortgage Group?

ROHR: Strategically, as long as we're in the branch banking business, we're going to be in the mortgage business.

Q.: Why does that follow?

ROHR: Frankly, it's because you have customers coming in every day and asking for mortgages.

Moving from there, the reason is that currently we have 550 branches that are in the business of mortgage origination. And it takes a certain economy of scale to efficiently process the servicing for those mortgages.

By expanding to the point of acquiring Sears Mortgage, it really gives us the size to take advantage of those technological economies of scale.

Q.: Could you give us an example how those economies of scale work?

ROHR: Technologically, you have systems that process thousands and thousands of loans. It would cost you the same amount of money to buy a system to process fewer loans. So you can spread your technological development costs as well as your overhead and operating expenses over a much larger base.

Q.: Why would you make such a giant purchase at what could be considered the top of the mortgage lending market?

ROHR: There's a series of things. It's a strategic business that we've wanted to grow in. It's a fee income business that we think has strong profit margins. It's here to stay, and will be a very profitable contribution to our shareholders for a long period.

Secondly, while it may be the top of the market in terms of refinance volume, we think the price we paid is a very attractive price to our shareholders.

Thirdly, Sears is particularly attractive to us because from a technological point of view they have made a number of advances we would not have been able to make without paying a very significant cost over time. And Frankly, we were very impressed with the management team at Sears.

Q.: You mentioned fee income. Why is that important?

ROHR: When you look at fee income, some sources of it generate significant profitability and others lesser profitability. We think there's real profit opportunity in the mortgage banking business over the long run.

Q.: Why buy something instead of just increasing originations and building servicing that way?

ROHR: It's a question of value. We bought three different companies: a $6.5 billion savings bank in California whose asssets are very high quality and which really provides us with a wonderful asset, the mortgage banking company, and the securities corporation.

The securization company has been very successful at bundling packages of [of securities] and taking them to market And frankly, I know we can use that company to securitize other types of assets on our balance sheet as well.

Q.: Some say the refi boom is over. As those originations fall off, is your servicing going to become more valuable?

ROHR: It's the servicing side where the income really comes from. We find the $36 billion servicing portfolio that we have in place today has a pretty attractive life. Especially vis-a-vis what we paid for it.

No one's perfect in forecasting interest rates, but it certainly is probable that the mortgages that have been put on the books and the servicing that's being done currently will stay on the books for a long time. And if that's the case, the servicing income should be more attractive than it has been in recent years because there (won't be as many) prepayments.

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