As National City Corp. contemplates offers for its subprime lending subsidiary First Franklin Loan Corp., many in the industry are wondering if one of those suitors could be a Wall Street investment bank. Spurred by visions of more profitable and streamlined home equity ABS businesses, many dealers have recently scooped up sometimes - and now more frequently - ailing subprime lenders.
During the firm's second quarter earnings conference call, National City Chairman and Chief Executive David Daberko last week said that several "interested parties" are currently courting the company. A decision, he said, would be made by the end of the quarter. (ASR, 07/17/06.)
Several industry sources so far have named Merrill Lynch, Morgan Stanley and possibly even Deutsche Bank as potential First Franklin buyers. Deutsche, however, could have its hands full with two recent acquisitions. Deutsche on July 12 announced it would acquire the New York-based MortgageIT Holdings Inc. for $429 million. The prime and Alt-A lender (which quit originating subprime loans when its profits dwindled) will be enveloped into Deutsche's RMBS operations upon completion of the deal expected for the fourth quarter. Deutsche also purchased wholesale subprime lender Chapel Funding in May.
Although, NatCity last week during its second quarter earnings conference call at least said it would consider options other than the outright sale of First Franklin. When asked, Daberko said the company would consider the possibility of spinning off First Franklin.
In any case, he seemed hopeful that higher-than-anticipated second quarter loan volumes would play into the subsidiary's price tag. "Hopefully whatever is going on in this business will be reflective of the prices we have to contemplate," Daberko said. "We are talking to interested parties at this time, and a decision will be made by the end of the quarter."
Although exceededing analyst expectations, NatCity's profits fell by 24% in the second quarter because of hedging losses. Additionally, the regional bank is in the process of buying Harbor Florida Bancshares, which has some 40 Florida-area branches. And while it seems determined to rid itself of First Franklin, the subsidiary accounted for more than 20% of dollar volume net income during the quarter.
Meanwhile, the company allocated $60 million for loan losses, compared with only $26 million set aside during the second quarter of last year. Although, Daberko said First Franklin losses "surprised us on the downside." Regardless, the company's decision last year to shift to a "originate and sell" model - meaning it is no longer adding First Franklin loans to its portfolio - has contributed to a more seasoned bunch of loans, aiding the appearance of increasing loan losses. Gain-on-sale margins, which hit a low in the fourth quarter among sharp competition, rose to 2.8% in the quarter, up from 2.28% in the first.
"We are continuing to see strong demand for the product, and I think we will continue to see gain-on-sale margins closer to those we saw in the second quarter," said John Gellhausen, executive vice president at NatCity.
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