Filed by NetBank, Inc.
Pursuant to Rule 425 under the Securities
Act of 1933 and deemed filed pursuant to
Rule 14a-12 under the Securities Exchange
Act of 1934
Subject Company: Resource Bancshares
Mortgage Group, Inc.
Commission File No. 000-21786
Date: November 26, 2001
This filing contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements include,
but are not limited to, (i) statements about the benefits of a merger between
NetBank and RBMG, including a lower-cost source of funding for RBMG, access to
higher-yield assets for NetBank, further diversification of NetBank's income
stream and greater cross-selling opportunities for both businesses; (ii)
statements with respect to NetBank's and RBMG's plans, objectives, expectations
and intentions and other statements that are not historical facts, including the
proposed management structure of the combined company; and (iii) other
statements identified by words such as "believes", "expects", "anticipates",
"estimates", "intends", "plans", "targets", "projects" and similar expressions.
These statements are based upon the current beliefs and expectations of
NetBank's and RBMG's management and are subject to significant risks and
uncertainties. Actual results may differ from those set forth in the
forward-looking statements.
The following factors, among others, could cause actual results to
differ materially from the anticipated results or other expectations expressed
in the forward-looking statements: (1) the businesses of NetBank and RBMG may
not be integrated successfully or such integration may be more difficult,
time-consuming or costly than expected; (2) NetBank may not attract sufficient
deposits to provide RBMG greater liquidity for loan funding;(3) RBMG may not
generate a consistent volume of varied loan products for NetBank to retain as
investments; (4) unexpected changes in existing senior management teams of
either company before the merger is complete; (5) revenues following the merger
may be lower than expected; (6) deposit attrition, operating costs, customer
loss and business disruption, including, without limitation, difficulties in
maintaining relationships with employees, customers, clients or suppliers, may
be greater than expected following the merger; (7) the regulatory approvals
required for the merger may not be obtained on the proposed terms or on the
anticipated schedule; (8) the failure of NetBank's and RBMG's shareholders to
approve the merger; (9) competitive pressures among financial services
institutions may increase significantly and may have an effect on pricing,
spending, third-party relationships and revenues; (10) the strength of the
United States economy in general and the strength of the local economies in
which the combined company will conduct operations may be different than
expected, resulting in, among other things, a deterioration in credit quality,
including the resultant effect on the combined company's loan portfolio and
allowance for loan losses; (11) changes in the U.S. and foreign legal and
regulatory framework; and (12) adverse
conditions in the stock market, the public debt market and other capital markets
(including changes in interest rate conditions) and the impact of such
conditions on the combined company's capital markets. Additional factors that
could cause NetBank's and RBMG's results to differ materially from those
described in the forward-looking statements can be found in NetBank's and RBMG's
reports (such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K) filed with the Securities and Exchange Commission
and available at the SEC's Internet site (WWW.SEC.GOV). All subsequent written
and oral forward-looking statements concerning the proposed transaction or other
matters attributable to NetBank or RBMG or any person acting on its behalf are
expressly qualified in their entirety by the cautionary statements above.
NetBank and RBMG do not undertake any obligation to update any forward-looking
statement to reflect circumstances or events that occur after the date the
forward-looking statements are made.
The proposed transaction will be submitted to NetBank's and RBMG's
shareholders for their consideration, and NetBank and RBMG will file a
registration statement, of which a joint proxy statement/prospectus will form a
part and other relevant documents concerning the proposed transaction with the
SEC. Shareholders are urged to read the registration statement and the joint
proxy statement/prospectus regarding the proposed transaction when it becomes
available and any other relevant documents filed with the SEC, as well as any
amendments or supplements to those documents, because they will contain
important information. You will be able to obtain a free copy of the joint proxy
statement/prospectus, as well as other filings containing information about
NetBank and RBMG, at the SEC's Internet site (WWW.SEC.GOV). Copies of the joint
proxy statement/prospectus and the SEC filings that will be incorporated by
reference in the joint proxy statement/prospectus can also be obtained, without
charge, by directing a request to NetBank, Inc., Investor Relations, Royal
Centre Three, Suite 100, 11475 Great Oaks Parkway, Alpharetta, GA 30022,
770-343-6006, or to Resource Bancshares Mortgage Group, Inc., Investor
Relations, 7909 Parklane Road, Columbia, SC 29223, 803-741-3000.
NetBank and RBMG, and their respective directors and executive
officers, may be deemed to be participants in the solicitation of proxies from
the shareholders of NetBank and RBMG in connection with the merger. Information
about the directors and executive officers of NetBank and their ownership of
NetBank common stock is set forth in the proxy statement, dated March 26, 2001,
for NetBank's 2001 annual meeting of shareholders, as filed with the SEC on a
Schedule 14A. Information about the directors and executive officers of RBMG and
their ownership of RBMG common stock is set forth in the proxy statement, dated
April 6, 2001, for RBMG's 2001 annual meeting of shareholders, as filed with the
SEC on a Schedule 14A. Additional information regarding the interests of those
participants may be obtained by reading the joint proxy statement/prospectus
regarding the proposed transaction when it becomes available.
The following is the transcript from an analyst conference call held on
November 19, 2001:
-2-
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 1
[NOTE: NetBank held a conference call with financial analysts on Monday,
November 19, 2001, at 11 a.m., to discuss its planned acquisition of Resource
Bancshares Mortgage Group, Inc. The following document is not offered as an
official transcript of that call. This translation was prepared by a third-party
company and has not been approved by NetBank management or its legal counsel.
NetBank cannot be held responsible for any misrepresentations or errors included
in this printed version of the call. A recording was made of the live call and
is available as an audio file on the bank's Web site at WWW.NETBANK.COM.]
NETBANK
NOVEMBER 19, 2001
9:00 A.M. CST
Coordinator Good morning, and welcome to the NetBank conference
call. All parties will be in a listen only mode until
the question and answer portion of the call. At the
request of NetBank, this conference is being
recorded. If there are any objections, you may
disconnect at this time.
I would now like to introduce the moderator for
today's conference call, Mr. Matthew Shepherd. Mr.
Shepherd, you may begin when you're ready.
M. Shepherd Good morning. We want to thank everyone for
participating today, those of you on the call, and
those listening to the audiocast.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 2
We appreciate your interest in NetBank and Resource
Bankshares Mortgage Group.
As you know the purpose of today's call is to discuss
NetBank's plan to acquire RBMG. Please be aware that
our commentary or responses to questions may contain
forward-looking statements, forward-looking
statements regarding the intent, belief or current
expectations of NetBank, RBMG or its officers can be
identified by the use of forward-looking terms.
Examples include may, will, should, believe, expect,
anticipate, estimate, continue or any other
comparable phrasing. Forward-looking statements made
during this presentation are subject to risk and
uncertainty. Information about the risks that could
cause our results to differ materially from any
forward-looking statement is set forth in our public
reports filed with the SEC, including our filing of
this presentation under Rule 425 of the Securities
Act of 1993.
D. R. Grimes, the CEO of NetBank and Doug Freeman,
the CEO of RBMG will lead today's discussion. D. R.
Grimes will begin.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 3
D. R. Grimes Thank you very much, Matthew. I want to also welcome
everybody to the conference call on what is clearly,
the most exciting day in the history of NetBank. We
believe that the transaction that we're discussing
today does represent the evolution of our company
from a start-up company a mere five years ago, to a
very powerful and diversified financial services
business today. We believe that it augurs well for
the future of our two combined companies. We're
excited about the possibilities of working together.
We're excited about what this merger may bring.
As many of you are aware, when we started 2001, we
had some very specific goals that we talked about.
NetBank had always been a company that had
experienced hyper-growth and a level of
profitability. In fact, we currently have recorded 14
consecutive profitable quarters, a feat unmatched by
any company in America operating primarily on the
Internet.
Having said that, however, we recognized that we
needed to achieve higher profitability moving ahead,
while continuing to sustain high growth rates as
well. So we began developing a strategy and
implementing a strategy to increase our operating
profit.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 4
That strategy involved many of the things that you
are very familiar with, things like increasing fee
income, increasing margins, lowering operating
expense and as you've seen this year, our fee income
has increased dramatically and our interest income
has increased as well, while operating expenses have
reduced.
One of the key components of increasing margins over
time was our belief that, we needed to acquire the
ability to generate our own assets. NetBank had
always been regarded as being very capable at
gathering deposits using the Internet and other
electronic media, as the primary vehicles for that
deposit gathering.
And in fact, there was a compelling value proposition
there because we were able to do that at roughly half
the operating expenses of traditional financial
institutions. However, because we were unable to
generate a large fraction of our assets over the
Internet, those transactions typically being much
more complex, and quite frankly, the technology being
not as advanced as it was for deposit gathering, we
were giving away some of that cost savings, in terms
of premiums on the portfolios that we were acquiring.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 5
So we began a search for companies that would give us
the ability to generate our own assets, and there
were a few things that were very important for us in
looking at that. Because of our desire to increase
our profitability and to do it quickly, we were
looking for companies that were already profitable.
We were looking for companies that had a proven track
record in their industries just like NetBank had in
its. And we were also looking for companies that had
strong management teams that had proven their ability
to generate assets on a profitable basis to do the
appropriate underwriting and to understand the credit
risks that were involved in that.
Resource Bankshares is such a company. It follows on
the acquisition that we did earlier this year of
Market Street Mortgage, which gave us a retail
lending capability in the mortgage industry as well.
However, Resource Bankshares has the ability to
generate a substantially larger number of mortgages
for us than other credits, and quite frankly does
that by leveraging a third party distribution
network, thus reducing the fixed costs and making us
less volatile, depending upon the interest rate
cycles.
Another thing that was very strong in our looking at
Resource Bankshares was their belief in leveraging
technology for both
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 6
customer service and lowering the cost of the
transactions. And in fact, there are several things
that they are doing with technology that we believe
will be a great fit with NetBank moving ahead, and
Doug is going to talk about those shortly.
We believe that Resource Bankshares has a very strong
and experienced management team. We believe that this
transaction has a compelling value proposition
because on the one hand, we will be able to generate
our own assets. And on the other hand we will be able
to provide funding for the assets that are generated
by Resource Bankshares at a much lower cost than they
are able to obtain today.
This transaction is not dependent upon integration or
execution risk. This transaction makes sense standing
on its own. That's not to say that over time, there
will not be some synergies and some benefits that
will come from integration. It simply means that
that's not a risk of doing the transaction. We
believe, lastly, that this transaction truly creates
an attractive and powerful national consumer
financial services franchise, one that we believe
will be the strongest financial services company
operating on the Internet.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 7
At this time, I'd like to turn it over to Doug
Freeman, the Chairman and CEO of Resource Bankshares,
to talk about the details of the transaction. Doug.
D. Freeman Thank you, D. R. We also are extremely excited to be
making our announcement this morning. The first thing
I'd like to do is run through the deal. The new
company's name will be NetBank, Incorporated,
operating under the same ticker symbol that it has
before, NTBK.
The consideration for this transaction will be 21
million shares of NetBank common stock, which was
valued at $164.85 million as of market close on
Friday, November 16, 2001. The exchange ratio works
out to 1.1382 NetBank shares for each RBMG share of
stock. We do not have a collar.
The approvals and closing, we will have normal
regulatory approval via the Office of Thrift
Supervision, and shareholder approvals with the
target date of first quarter of 2002 closing.
The management of the company will be as follows:
Steve Johnson, the current Chairman of the Board of
NetBank will remain Chairman of the Board of the new
combined company.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 8
D. R. Grimes, current Vice Chairman of the Board will
retain this title. I will assume position in the new
combined company as Chief Executive Officer.
Bobby Bowers, the current CFO of NetBank will be the
CFO of the new integrated company. The Board
composition will have six Directors from NetBank,
we'll have four from RBMG, and we'll retain one
Director who currently serves on both boards, and the
headquarters will be in Alpharetta, Georgia.
With that being said, let me talk a little bit about
our vision and strategic direction for this new
combined company. And again as D. R. said, this is an
extremely exciting merger, or acquisition I should
say, to create exceptional value.
If you look at both companies, and you take the best
of both companies as D. R. discussed a minute ago,
you really have a new paradigm transaction here,
which will allow NetBank and RBMG combined, to be
able to redefine the traditional bank-operating
model. From a customer perspective we will create a
customer-centric organization, and because we will
have financial intermediary characteristics, we will
allow ourselves to be focused on meeting customer
needs without significant balance growth
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 9
requirements. So we intend to be an organization that
focuses on the customer and does a better job of
meeting their needs than other financial
institutions.
From a shareholder's perspective, we also are
extremely excited about our strategic direction. We
will implement rigorous customer and product
profitability requirements. We will target high
return on equity driven businesses, by increasing our
balance sheet velocity. In other words, we will
generate high fees and we will get high inventory or
balance sheet turn in the way we run the business.
We will use advanced technology platforms designed to
reduce operating cost, and that is, not only the
Internet based delivery from NetBank, but it's a
business-to-business delivery from RBMG, which in the
third quarter of 2001, over 50% of our business came
through our business-to-business conduits. So we
intend to continue to leverage these advanced
technology platforms and drive down operating costs,
while driving up quality.
We will together be an information, engineer,
customer acquisition company. Both NetBank and RBMG
have a plethora of customer information, that allows
us to be able to statistically get at using
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 10
information engineering, customer purchase proclivity
and customer retention strategies. So it's via this
information, engineering, and database that we intend
to be world class at acquiring customers.
From a core product perspective nothing sits better
as a retail banker than deposit accounts and
mortgages. They are the heart of a retail banking
franchise and together, these two companies provide a
superior base of deposit and mortgage products, from
which we can cross-sell additional products and
services.
We as a combined company also intend to utilize core
operating and technology competencies, to provide
fee-based services to third parties. For instance, a
resourced mortgage solutions product that we've
engineering, where we take our technology and
operating processes and push those out to small
thrifts and small savings and loans and small banks,
to allow them to be in the mortgage business is but
one capability that we have and one business
opportunity that we intend to exploit.
We will continue to partner with best-in-class
specialty product providers, to bring world-class
products and services to our
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 11
financial customers. And last but not least, the
company that we envision is also very efficient in
the use of capital.
From a financial summary perspective, we believe this
is a great deal. It will be accretive to projected
NetBank 2002 EPS by 40% to 50%. We believe it's
modestly dilutive to book value and when you look at
the combined companies, we'll have combined assets of
3.6 billion as of September 30, 2001. We'll have
combined equity of 415 million as of September 30,
2001, with a combined market cap of 370 million as of
November 16, 2001.
Our pro forma outstanding shares will be
approximately 50 million when the transaction is
complete, which does give us excess capital, and over
time excess capital will allow for buy-back options
subject to capital analysis and the will of our Board
of Directors.
We expect to generate strong positive cash flow from
operations, and that strong positive cash flow from
operations, coupled with a healthy capital position
allows our Board of Directors to consider when the
new company is formed modest cash dividends to return
capital to our shareholders.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 12
So again, we are very excited about the transaction.
We believe that it's going to be extremely positive
for our customers, for our shareholders and for the
communities in which we operate.
And with that, D. R., I will turn it back over to
you.
D. R. Grimes Thank you, Doug. I hope that one thing that everybody
hears today is the excitement that both Doug and I
have regarding this opportunity for these companies
moving ahead. We truly think that this represents a
great combination of two very highly successful
growth companies. We have complementary strengths;
NetBank on the one hand at deposit gathering, and
RBMG in asset generations and to a large extent as
Doug said, it's like two halves coming together to
make a whole, the gathering of retail deposits and
the making of mortgages.
The transaction is focused on maximizing the
synergies between the two companies. We have a strong
and seasoned management team actually existing in
both companies with common goals. As I mentioned
earlier, we believe that there is low execution risk.
While there are cost savings that are attainable, the
deal is not in any way dependent upon those cost
savings.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 13
The business model is focused on superior returns
from an efficient use of capital, combined with a
high balance sheet velocity and high profit margins
that we'll be able to generate going forward, and it
represents a significant value creation opportunity
for the shareholders of both companies. In short, we
believe that it's an incredibly exciting transaction.
Now before we begin to take questions, I want to just
mention one thing. Because of the fact that NetBank
is headquartered in Atlanta and RBMG is headquartered
in Columbia, Doug is in Columbia today for a series
of meetings with his managers and employees, and so
forth.
Steve Johnson and myself and Bobby Bowers are in
Atlanta today for meetings with our employees and so
forth. So we may have to do a little back and forth
on the questions as we go through that. I would just
ask for your patience in understanding that we're not
all sitting in the same room, but in fact we're where
we need to be with two of the major centers of
operation of this company.
The first question that I would like to take is a
question that was submitted by e-mail. It has to do
with the credit risk of a portion of RBMG's
portfolio. That is a relatively small amount of
sub-prime lending that is currently done by RBMG.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 14
The reason that we at NetBank feel strongly that it
does not represent a credit risk to us is that, there
are no residuals being retained. And in fact, if you
go back and look at the steps that Doug and his
management team took in the year 2000, it was to take
those kinds of residuals and other problems off the
balance sheet. That positioned their company to have
strong earnings this year without some of the credit
risk associated with the residuals, and other types
of lending that they did. We believe that that's the
appropriate way to manage that.
We certainly believe that the level of sub-prime
lending that's done by their company is appropriate
for the size institution that we're doing, and we
quite frankly have no concerns about that going
forward. We believe that the credit risk is mitigated
by the fact that the residuals are sold.
Doug, I think you have some other questions that were
submitted by e-mail as well?
D. Freeman I do, D. R., thank you. The first that I will read,
What regulatory approvals are necessary to complete
the transaction?" I mentioned
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 15
a second ago that we will be looking to the Office of
Thrift Supervision, the OTS for approval.
Number two, "When do you expect the filings to be
made, including the S4 and the Proxy?" We will begin
work on those ASAP, and our goal would be to have
that done by the end of December.
Number three; "Are there any walkway provisions or
performance tests?" There is a break-up fee that we
will not disclose the details of, and one of the
performance tests that's in there is a capital
covenant. What we have agreed to is to deliver to
NetBank by closing date a certain amount of capital,
and we feel very comfortable with that.
Number four, "Are there any caps collars on the
exchange ratio?" As we disclosed a minute ago, no.
Five, "What level of synergies do you expect, and how
accretive will the transaction be?" We talked about
our belief that it will be accretive in the terms of
40% to 50% of projected NetBank earnings.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 16
In terms of level of synergies, let me take a stab at
this, and then I'd like D. R. to talk about it, too.
This is not a transaction that we're doing in an
attempt to cut non-interest expense out of the
organization. This is a transaction we're doing to
generate revenue. The fact that NetBank is an
excellent deposit acquirer, and the fact that RBMG is
an excellent quality, high yield earning asset
acquirer, it allows us to be able to make this a
revenue play to get to the accretion, not necessarily
synergies or expense cuts.
There will be some naturally as one looks at some of
the hierarchical issues and external vendor issues,
but at the end of the day, this is all about revenue.
It's not all about expenses.
D. R., would you like to add any color to that?
D. R. Grimes Well, the only thing that I would like to add is my
firm belief that you've expressed it very well here.
I think it's a revenue opportunity. I think the
synergies exist in the opportunity for cross selling
banking customers mortgage and other credit products,
and selling mortgage customers deposit products that
we can offer and other fee-based products as well. I
might add that one of the things that's also
attractive is the fact that you have a B2B play that
has already been established here that I believe can
be the foundation for distributing other banking
products throughout the United
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 17
States. That's one of the things that's always been
very important to NetBank.
We have depositors in all 50 states and we have had
for three years. We would like the ability to
distribute other products nationally as well, so I
would only second what you said, Doug. The synergies
are primarily on the revenue side, the cross-selling
side. I think they only add to the value of this
deal, but in no way is the deal dependent upon it.
D. Freeman Great. Let's go on to the next question. "What
exclusions are there to the material adverse change
clause?" None. "When did negotiations begin?" Around
the first of August. "Is due diligence complete?" The
answer is yes on both sides. "Who are the advisors on
a legal and a banking perspective?" On the RBMG side
we use Scadden Arps as our legal advisor, and Sandler
O'Neill as our banker, and on the NetBank side they
use Powell Goldstein on the legal side, and Raymond
James on the banking side.
Then the last written question that we have, D. R.,
before I suspect we turn it over to questions from
the audience is, "How does this lever the NetBank
platform?" And we've hit all around this, but at
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 18
the end of the day, my net is NetBank has spent the
last five years creating the retail bank delivery
model that all of the big banks would love to have
and they really cannot produce.
So at the end of the day, if you are a retail banker,
you would say okay now what do I really need to push
over this platform that we have spent five years
creating to take care of retail customer needs, and
in my opinion they are all at the heart transaction
accounts, money manager money market type of
accounts, savings and investments products and on the
asset side, first and second mortgages.
So if you look at our business, and D. R.'s business,
and you forget for a minute about the technology or
you forget about five year's worth of work on D. R.'s
side, or the two year restructuring on our side, this
is all about creating the new bank of the future, the
one that takes care of the customer's needs by
providing the products and services that make sense
for our customer base, and providing those products
and services over distribution conduits, which
provide us a sustainable competitive cost advantage
over the large banks.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 19
So, D. R., that's kind of my two cents worth of it,
and I'll see if you want to add something to it.
D. R. Grimes I don't think I could have expressed that any better,
Doug. Let's go to questions from the audience.
Coordinator At this time, are you ready to begin questions?
D. R. Grimes Yes, we are.
Coordinator At this time, we have a first question from Mike
Vinciquerra with Raymond James.
M. Vinciquerra Thanks very much and congratulations on the merger,
guys. I have a question, a detail question regarding
how exactly you plan on or what exactly the combined
company plans on doing with the assets that Resource
can generate, both from a conventional mortgage
standpoint, as well as a sub-prime standpoint? Also
what you plan on doing, as far as the mortgage
servicing rights?
Can you give us an idea about what you'll portfolio,
and what you'll be looking to sell out into the
secondary market if there's a percentage breakdown
and how you're going to handle that?
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 20
D. Freeman Okay, Mike. D. R., I'll take a shot at this one.
Let's take the easy one first. On the non-prime
alternate product that we do, we intend to continue
to sell all of that for cash into the marketplace.
Mike, as you know, everything that we generate under
our Meritage brand we generate into forward
commitments that are sold for cash servicing release.
We wouldn't envision making any change to that
strategy whatsoever because we believe that's the
smartest strategy for that market segment for our
company.
On the conforming side of the business, again to be a
new visioned financial institution, we need to blend
the best of the portfolio characteristics of NetBank
with the financial intermediary characteristics of
RBMG. In other words, RBMG's ability to book high
quality, high yielding earning assets, book the fees
associated with those and have the very short
duration that would meet the funding that naturally
ascribes to NetBank, so I think that you're going to
see our initial position to run RBMG very similar to
the way it's been run before. Which is to generate
those high-quality earning assets, use NetBank, think
of it as a virtual warehouse to allow us to be able
to warehouse those high-yielding, high quality
earning assets and continue to sell them off into the
marketplace, and generate the fees ascribed to that.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
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Frankly, I like that because it keeps disciplines in
our organization. Too many times, I've seen mortgage
companies get lazy because they have a balance sheet
they can put stuff on. That's not how you're going to
see us run the new company.
And then from a mortgage servicing rights
perspective, RBMG's strategy was to allow through
natural process, those MSRs to run down over time. We
have not added to them since I got here, and I
suspect you're going to see that strategy continue to
play out in the new company.
We're very comfortable. Those are high quality, high
yielding assets, but again, we envision ourselves
more as a financial intermediary than a mortgage bank
that holds lots of MSRs on it's balance sheet.
M. Vinciquerra Okay. And just a follow-up on the sub-prime side, you
guys have done a great job of increasing your
capabilities on that side of the business. I'm
curious with this combination now, do you think that
that will also continue to increase your
opportunities to make sub-prime or Alt-A type of
mortgages? If that's the case is there any reason you
have to go back to your take-out partner there, to
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make sure that they have an appetite for as much as
you guys will be able to generate?
D. Freeman I think that one of our goals in the new company is
to provide products to our customers irrespective of
whether they happen to have a 680-bureau store or
679. So I think that you're going to see us try to
find through the market, products and services that
meet our customers needs and provide those.
Do I think there's opportunity in market Street to
take a few customers who are currently being turned
down, and to book those customers and push them
through our non-traditional conduits? Yes I do. Do I
see that as a large opportunity? No, not really
because those conduits operate very differently.
Do I think my take-outs are prepared to take any
marginal volume that we get from this transaction?
Absolutely. As a matter of fact, they keep asking us
for more as we go forward. So I'm comfortable on our
take-outs. I'm comfortable as we execute a
customer-centric strategy that we are going to do a
better job of meeting the whole range of our
customers financial needs.
D. R. Grimes Doug, if I could just answer a little bit of that
question maybe from a NetBank balance sheet point of
view, the one thing that I would
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add and certainly you are right on target with the
type of mortgages that we are interested in, and not
interested in. I totally agree with the discipline
issue. It is true that we do have an appetite, and
have always had an appetite for second mortgages and
for HELOCs, and those are typically the most
expensive products for us to go out into the
marketplace and acquire. One of the things that I
think we would like to see the combined company be
able to do over time is, to offer those products
really simultaneously along with other banking
products, and I think that we have the ability to do
that given the database marketing, and the customer
stratification capabilities that the two companies
have.
So to a certain extent I would expect the portfolio
implications to be larger as we move ahead through
time, not so much immediately with the transactions
that are being conducted today.
D. Freeman Good catch, D. R.
M. Vinciquerra Very good, guys. Thanks a lot.
Coordinator Yes, sir. At this time, our next question is coming
from Mike McMahon with Sandler O'Neill & Partners.
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PAGE 24
M. McMahon Good morning and congratulations on the transaction.
D. R. Grimes Thank you.
M. McMahon I wanted to confirm, you talked earlier about the 40%
to 50% EPS accretion expectation. Am I correct that
does not rely upon any revenue growth goals that you
hope to attain from this transaction, nor any
significant cost saves, other than an almost
automatic cost save from lower borrowing costs
through the deposits? D. Freeman Correct.
M. McMahon Good. And it might be helpful, Doug, to explain a
little bit about your asset generation capability,
who your customers are and your use of the Intranet?
D. Freeman Okay, that's a good question, Mike. Resource
Bankshares Mortgage Group or RMBG does business
predominantly with small correspondents and brokers
on the mortgage side. Small correspondents would be
defined as small credit unions, small thrifts, small
commercial banks who have the ability to close
mortgages in their name, pool those mortgages
together and sell them to an intermediary like us.
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The brokers on the other hand are your average real
estate broker who will facilitate customers getting a
first mortgage. We buy these loans from them on a
deal-by-deal basis that flow through our system.
In both cases in January of 2000, we implemented a
business-to-business Internet-based conduit called
eRBMG. eRBMG automates substantially the paper
process associated with taking a mortgage, and it
squeezes paper out of the system and it squeezes time
float out of the system.
So it allows us to be able to get automated
underwriting. It allows us to be able to link into
Web sites that look at flood searches and those types
of things. So what we really do is, we provide a
higher level of service to our customers by allowing
them to navigate the complex mortgage process with
the head of an entity, versus having to have 50
years' worth of experience to know what to do next.
This conduit is substantially cheaper for us to use
than our paper process, and has allowed our company
to be able to drive the operating costs associated
with an agency business from 120 basis
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points when we arrived in January of 2000, to roughly
about 50 basis points this year.
So at the end of the day, it's a better conduit for
customers. It's faster for our customers, and it's
cheaper for us to operate. As I said before, over 50%
of our volume in the third quarter came through this
conduit and our goal is to continue a rapid
escalation of that percentage over time.
M. McMahon Thank you, Doug.
Coordinator Our next question is from Tim Butler with Pacific
Crest.
T. Butler Hello, guys.
D. Freeman Hello, Tim. How are you?
T. Butler Just great. You talked a little bit about what the
equity was going to be like for the combined company
at $415 million and $3.6 billion in assets. That
gives you an equity to asset ratio of about 11 1/2%,
and you said that you were going to be
over-capitalized at that point. How far down can you
get this number to go? How much leverage do you want
to use?
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D. Freeman I think that would be at the pleasure of the board.
I think that we have a business to integrate and we
have to prove to our investors and our regulators
that, we can integrate these two businesses with very
small risk to the shareholders and to our depositors.
So I think job one is to get the two companies
integrated. Job two is to get them performing at an
EPS run rate that we are all proud of, and then job
three, working with the board of directors will be to
assess excess capital and figure out what we would do
with that. I don't know that we want to be much more
specific than that.
T. Butler Okay. And, D.R., maybe you can talk a little bit
about how the organization shapes up over the next
three years or so? The numbers that you threw out on
accretion earnings of 40% to 50% above next year's
expectations, that by my calculations gets you to an
ROE for the combined entity of about 6% to 6 1/2%.
I'm just wondering how long it takes you to get to an
ROE above 15% as the organization progresses?
D. R. Grimes And I think, Tim, the important thing there is that
while Doug has described that process that we will go
through by no means do I think that's going to be a
lengthy process. I think he's right; we
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have to integrate the companies together. We've got
to convince the regulators and our investors that we
are able to do that with relatively little credit
risk.
There are some strategies that we can use in order to
reduce that capital. However as you know, we also
have the capacity to grow fairly rapidly using the
Internet. We believe that that opportunity is going
to remain available to us for a period of time. So
while the numbers that we are talking about look
relatively conservative, my expectation is that we
will get to a significant ROE before the end of that
three-year period.
T. Butler Okay. And with the combined organization, can you
talk about what happens to your net interest margins
over the next several quarters?
D. R. Grimes The challenge there, Tim, is going to be similar to
the challenge that we faced this summer. On the one
hand, the net interest margin that we report goes
down because the percentage of mortgages in our
portfolio goes up. On the other hand, we're getting
earnings out of the company where we're providing the
funding for those mortgages. So I would expect that
there will be relatively little change on net
interest margin as reported by the
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bank. What the key is going to be is to look at the
earnings that are being generated out of the
subsidiaries from the use of those deposits.
T. Butler Okay. So are you going to provide some more detailed
guidance on the fees?
D. R. Grimes I'm sorry for interrupting you. Yes, we are. One of
the things that we anticipate doing over the next
couple of weeks is putting together a program for
coming out and visiting with analysts, and with
significant investors and talking about in more
detail, the financial projections for this company
going forward. Doug and I have talked about doing
that in an early December time frame.
T. Butler Okay. Thanks a lot.
D. R. Grimes Great. Have a great day.
Coordinator Our next question is from Rich Repetto with Putnam
Lovell Securities.
R. Repetto Yes, hello, guys. I just had a question on whether
there's any overlap between Market Street mortgage
and Resource Bankshares? I'm not as familiar with
Resource Bankshares
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operation. Whether there's overlap and then whether
there's going to be any integration there as well?
D. Freeman Rich, this is Doug. I'll field that question. Market
Street is a retail mortgage originator, which stated
another way, they do business directly with consumers
through a number of stores. RBMG is a broker and a
correspondent originator, so if you look at it, they
are different channels and as such, there's very
little sales overlap between the distribution
conduits. So again, this transaction is not all about
figuring out how to get two basis points out of the
cost structure. It's about how do we integrate and
grow revenues.
R. Repetto And so you'll just have multi-distribution channels
in originating loans?
D. Freeman Correct.
R. Repetto Okay. And then, just a little bit, D. R., in the
press release, I was just going to ask where do you
go forward here? What was some of the background on
the CEO position?
D. R. Grimes I think the way that I view this and this is how I
have expressed this today, this is a company that has
now grown from a couple of
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PAGE 31
billion dollars and 145 employees, to almost four
billion dollars and 2,000 employees in something like
eight or ten months. That's fairly remarkable growth.
One of the things that we have always looked for in
doing acquisitions, and you've heard me say this over
and over again, is strong management teams. I've said
that about Market Street and I think the management
team at Market Street has done a magnificent job, and
that's why we've seen such positive results.
I think Doug and his team are experienced veterans.
We've had a lot of meetings together. There's great
synergy among the individuals there. So I believe
that what we have done is enhanced the overall
management team at NetBank.
And I'm looking forward to working with Doug and
Steve, and the rest of the board, to put these
companies together, and to make this the best
financial services that we can. Well, not the best
that we can, the best financial services company
operating on the Internet, and quite frankly, I'm not
looking out beyond that.
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R. Repetto Okay. From the announcement that you're not going to
be part of the management team, the operating
management team going forward.
D. R. Grimes I will not be part of the day-to-day operating
management team after this transaction is
consummated.
R. Repetto Okay, thank you.
Coordinator Our next question is from Paul Miller with Friedman
Billings Ramsey & Company.
P. Miller Hello, how are you doing?
D. R. Grimes Hello, Paul. How are you?
P. Miller Great acquisition.
D. R. Grimes Thank you.
P. Miller A couple of questions, though. On the 40% to 50%
accretion, I would expect most of that, I know that's
been asked a couple of times, but I just can't get my
hands around it, is this mainly coming from fee
income and it's coming from both the lower cost
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of funding of RBMG. Is that where the entire
accretion is coming from?
D. R. Grimes What we are saying is, and Doug, forgive me for
jumping in, you may want to amplify this. What we're
saying is that without any risks associated with
integration and cost savings we believe that this
deal is accretive at least by 40% to 50% next year.
We've also said that we are putting together
financial projections, and that we're going to come
out, and meet with all of you, and go over the
details of those, so that you can have input into the
models that you have to run to determine where we're
going to wind up.
To me, I think that what we're doing is we're saying
that this is a conservative expectation and shows how
powerful this combination can be. In fact as Steve
remarked earlier today, when was the last time that
you saw two financial services institutions combine
and get a 40% to 50% earnings accretion?
P. Miller What type of assumptions are you making? I would
expect that 40% to 50% is highly dependent on
production levels at RBMG next year, am I correct?
D. R. Grimes Doug, do you want to talk about where that's going to
come from?
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D. Freeman Yes, the 40% to 50%, if you think about RBMG's core
business, today we're financing our warehouse with
commercial banks. If you replace commercial banks
with deposit funding, you get a substantial net
interest margin life out of that transaction, just as
we were able to see the effect of that same concept
with Market Street mortgage bringing the same
conceptual model to NetBank in the third quarter. So
there's systematically based and a lot of the 40% to
50% based on that transaction. There's also a lot of
the 40% to 50% based on the run rate business of RBMG
next year. What do we anticipate volumes to be? We
peg off the MBA forecast, which shows origination
volumes to be off 20% or more next year, so that's
backed into that also. So these are, as D. R. said,
reasonably conservative assumptions that go into our
modeling as we project 2002 outlook.
P. Miller Yes, my only concern is, and I don't believe this,
there is a concern that say, if we want to V-shape
recovery and we do get the ten years shooting up and
mortgage rates go in the 7 1/2 to 7 3/4, are we still
looking at this type of accretion? That's my
question.
D. R. Grimes And we believe that we are, Paul. This is based on
the best estimates that any of us have. As I said in
our last earnings
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conference call, none of us in this industry are
basing next year's forecast, I hope nobody is and, I
can tell you that NetBank is not, based on continuing
the run rates that we're experiencing today.
What we're doing as Doug said is, we're looking at
what the MBA says is a reasonable expectation for
next year; we're looking at opportunities to lower
our cost because of the funding mechanisms that we
have available to us. We believe that even in a
V-shape scenario, which I might add will undoubtedly
cause a slow down in refinancings, but will not have
as significant an effect on purchases. There will
still be home purchases made.
So if that V should come, and we don't know that it
will, but if it does, we still believe that we'll be
able to attain these numbers next year, and we all
feel very strongly about that.
P. Miller Okay. My last question is do you expect any major
balance sheet transformations on the NetBank balance
sheet? Are you still going to be shooting for the 50%
fixed, 50% ARMs on the residential?
D. R. Grimes We will be shooting for I think higher than 50% on
ARMs; I think our goal all along has been higher than
50%. I think that the basic answer to your question
is no. But I can tell you what will happen.
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You're going to see first mortgages as a percentage
of our balance sheet increase because of the nature
of this business, and so we're going to have to do
some rebalancing of that portfolio.
B. Bowers Hello, Paul. This is Bobby.
P. Miller Hello, Bobby.
B. Bowers One of the things to realize, though, that those
first mortgages only stay on your books about 30 to
45 days, so they're churning. It's almost like
short-term paper at current rates, so if you do have
an interest rate move, that will reprice just like an
adjustable rate tool will reprice. Now all along our
first mortgages represented primarily adjustable
rates, not fixed. That is not part of our outcome
model.
D. R. Grimes In fact, that means that the warehouse if you want to
view it as a warehouse line, the warehouse line
reprices much more like a commercial loan than it
does a typical residential mortgage.
P. Miller Okay.
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D. R. Grimes That will work in our favor very strongly in an
increasing interest rate environment, and I guess
that's just another reason that we feel strongly
about these numbers.
P. Miller Okay, thank you very much.
D. R. Grimes All right, Paul. Thank you.
Coordinator Our next question is from Mike Vinciquerra with
Raymond James.
M. Vinciquerra Thanks. I'm just trying to get a feel for this. What
you just said there, D. R., made it seem to me that
you are building cyclicality into the NetBank
business model by if you're going to be selling the
majority of the loans out there, you're going to have
the same cyclicality issue that Resource did as a
stand-alone entity. Can you just give us a little
more perspective on how much of these you figure the
conforming conventional you might keep on the balance
sheet, and how much you're planning on selling?
Obviously, the advantage you have in being able to
portfolio the loans is that you've got those earning
assets on the books even as interest rates rise and
the potential for mortgage originations to decline
occurs.
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D. R. Grimes All right, I'll take a stab at that, and then, Doug,
I'd like for you to maybe amplify that some. As we
said earlier, we see the opportunity to both
portfolio some loans, but perhaps more importantly,
take on second mortgages and HELOCs into our
portfolio over time.
What I was referring to in the answer to the previous
question was the funding that we are doing for the
loans that are being originated at RBMG. And those
loans are funded, but stay on the books of the
company for a relatively short period of time, so the
point we were making was that if we get into an
increasing interest rate environment they reprice
very quickly, in fact, much quicker than a typical
portfolio of 3.1 or 5.1 ARMs that you might be
looking at on a classical Adjustable Rate Mortgage.
M. Vinciquerra I see.
D. R. Grimes I don't think that we're building cyclicality in
here. What we're trying to do is we're trying to
balance all of the different lines of business that
we have, and our loan portfolio in order to wring
some of that volatility out of it.
M. Vinciquerra I see. That makes sense.
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D. R. Grimes Doug?
D. Freeman I think you answered it well, D. R. Just, Mike,
remember that one of the problems that RBMG had in
the late '90s was the only product they sold was a
30-year fixed rate loan. Being a part of a bank, we
have the ability to switch our production from fixed
to ARMs because customers will switch their product
proclivity from fixed to ARMs as rates go up. So the
statement that it builds cyclicality into the balance
sheet, I don't buy that. I think it builds stability
into the balance sheet.
M. Vinciquerra Sure, yes. I just wanted to get a few more details to
clarify it, because that's the issue that Resources
had by itself, and this seems to take that major
issue away from you.
D. Freeman Absolutely.
M. Vinciquerra Okay, thank you.
D. R. Grimes Conversely and I think that's the point that we've
been trying to make today is, it does give us the
opportunity to acquire assets where we have been
perhaps, more at the mercy of the market over
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time. As I've said before, in 1998 and 2001 it was
pretty difficult to acquire products. In 1999 and
2000, it was relatively easy. The ability to generate
and portfolio those products that we choose will work
very much in our favor moving ahead. Next question?
Coordinator The next question is from Joe Jolson with Jolson
Merchant Partners.
J. Jolson Hello, guys, congratulations on the transaction.
D. R. Grimes Thank you, Joe.
J. Jolson I had a couple of questions. I'm curious how the
experience has been with Market Street so far. Have
you been offering any kind of direct deposit fee
break on the mortgage lending at Market Street?
D. R. Grimes We have not yet offered any direct deposit fee break,
although we are working on a program there. We have
been offering for about 45 days, second mortgages in
HELOCs, and we're up to about $5 million already in a
relatively short period of time, so we've been very
pleased with our success at cross-selling products
that can come into the NetBank portfolio so far.
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J. Jolson To the extent that you can leverage RBMG's wholesale
network through brokers and correspondents by giving
them a quarter of a point off their fees on the
mortgage, I think there could be enormous leverage in
acquiring customers. What are you thoughts on that?
D. R. Grimes I think you're absolutely right, and what we want to
do, and what I think you've heard both Doug and I say
is that we want to use, regardless of where the lead
came from, the capabilities that both companies have
to market a full set of products. Furthermore, to
build a long-term customer relationship that's based
on customer doing business with us on a daily basis,
not on doing business with us on a once every three
years or five years, depending upon interest rates
kind of basis.
So I think that we both feel very strongly about
leveraging that technology. In fact, if you look at
our companies, I would say the two things that stand
out to me as similarities in our companies, or two of
the things that stand out at any rate are, our use of
technology in order to increase variable cost and
reduce fixed costs to reach the maximum number of
customers. And, our use of database marketing in
order to understand our customers and sell them the
maximum number of products that we can. That's the
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two areas that I think you hear us come back and
refer to over and over and over again. The
combination of those leads to the customer-centric,
long-term relationship that we want to build that
will allow us to cross-sell over time.
D. Freeman Joe, this is Doug. Just to give you a practical
example of this, if you go back to a mortgage
application called a 1003 we asked the customer
everything, including their shoe size. We've done
statistical work that would lead us to believe that
Internet financial service distribution usage
proclivity can be predicted within a reasonable
degree of freedom, using the information off the
1003. So we already have the capability to be able to
analyze all of the customers that come through our
conduits and sort out those with the Internet usage
proclivity versus those without. So I would tend to
tell you that the cross selling, and the synergies
will come out of this merger sooner, not later.
J. Jolson Now another question on the actual merger, do both
shareholders have to approve this or just the RBMG?
D. R. Grimes Both sets of shareholders have to approve it, Joe,
because of the size of the transaction.
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J. Jolson What's the insider ownership of both companies with
board of directors?
D. R. Grimes About 15% for NetBank. Doug, what's your insider,
about 3% or 4% do you think?
D. Freeman Yes, probably 5%. We can get that number.
J. Jolson That's okay. I was just curious of the magnitude of
it. Then I was also curious, just in terms of the
outlook for earnings next year. If you look at, Doug,
your guys' earnings outlook, particularly after you
bought the B of A sub-prime offices?
D. Freeman Right.
J. Jolson And you look at NetBank's earnings outlook, I mean
why isn't it more than 40% to 50% accretive?
D. R. Grimes Because we want to hold them to it, Joe. That was
D. R.
D. R. Grimes Doug, you go ahead.
J. Jolson I'm just saying if I just add the two companies
earnings together and divide by the shares without
any synergies or cost of fund
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savings that you're talking about, you get a bigger
number than $0.50 next year. I was just curious, were
you just being conservative or what was the thought
there?
D. Freeman I think you're going to find our company one that
always gives numbers that we feel very confident that
we can make. Therefore, these are conservative
numbers. And as both D. R. and I have both said,
we're extremely optimistic about the future prospects
of this company and neither of us would be surprised
to see us exceed your expectations on these numbers.
J. Jolson Does that mean that your estimates before were too
high?
D. R. Grimes Joe, one thing that I think maybe in your addition of
those numbers, there are some expenses associated
with this that maybe need to be factored in. But what
I would like to do, is I would like to ask you to let
us have the opportunity to come sit down with you,
and talk about how we see the transaction, and how we
see where we're going to be next year, and let you
have the input to put into your model.
J. Jolson Okay.
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D. Freeman And remember, Joe, this probably won't close until
the end of the first quarter.
J. Jolson Okay. That's one thing right there.
D. R. Grimes Right, and the transaction costs are not
insignificant on this deal.
J. Jolson Just so I understand it, you're figuring in that
accretion the non-recurring charge for transaction
cost, as well as only having three-quarters of the
year?
D. Freeman That's correct.
J. Jolson How big do you expect that transaction cost to be?
D. R. Grimes You know it's going to be several million dollars,
probably in the range of four to six million, but I
don't really know that I could be any more specific
with confidence today.
J. Jolson Okay. That would be calculated what you expect the
combined company's?
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D. R. Grimes Right. As Doug said, and Doug we've always tried at
our company to deliver on the numbers that we've
committed to, we don't ever want to be more
conservative than we need to be. But we also don't
want to make the rosiest of predictions for the
economy, the mortgage market, the V-shape of the
recovery if that kind of thing occurs. So we're
trying to work with a lot of unknowns here. We're
coming off the record year for the mortgage industry.
Quite frankly about the only thing that we all know
about the economy is that the Fed can't lower
interest rates much further than they already are.
Everything else is open for discussion and for
different interpretations at this point.
So we're trying to give you something that we can
stand up and be counted for and commit that we can
deliver on.
J. Jolson No, I appreciate the conservatism. Thank you.
D. R. Grimes All right. Good to talk to you.
J. Jolson Yes, you, too.
Coordinator At this time, we are showing no further questions at
this time, sir.
NETBANK
MODERATOR: D.R. GRIMES
NOVEMBER 19, 2001/9:00 A.M. CST
PAGE 47
D. R. Grimes All right. For my part I would just like to thank
everybody as I always do for their continued support
of NetBank. I want to thank the people who are
interested in RBMG. As I said at the beginning, I
think this is an incredibly exciting day. I know that
I'm personally very excited about the future and the
opportunities that we have. I'm personally very
excited about working with Doug, and his team to
bring those possibilities to reality. Doug, do you
have any closing comments?
D. Freeman Yes, I echo D. R. From the investors and analysts who
followed RBMG, you followed our improvement over the
last two years. Today represents from our
perspective, a new era for us to create a new
financial services paradigm that allows us to be able
to continue the kind of good things that both NetBank
and RBMG have been at over the past few years and
really show the world what a great company can
produce.
D. R. Grimes Thank you all very much.
D. Freeman Thank you.