ARCS Postpones Plan to Go Public : Loans: The Bank of New York’s mortgage subsidiary is not alone in its decision to wait because of the saturated market for such stock offerings.
In February, Bank of New York Co. had a good idea. It decided to spin off its ARCS Mortgage subsidiary in Calabasas in an initial public stock offering that it hoped would raise $58 million for the mortgage banking company, and help ARCS reduce its sizable debt.
At the time mortgage companies were getting renewed attention because lower interest rates were luring homeowners to refinance their mortgages.
Last September Countrywide Credit Industries in Pasadena, the nation’s largest independent mortgage banker, completed a $160-million stock offering. Unfortunately for Bank of New York, other stock sales by mortgage companies prompted a rash of similar stock offerings in the past several months, which saturated the market.
As a result, the ARCS stock offering has not gone through. Bank of New York spokeswoman Margaret Southerland said that ARCS still plans to go public, although no date has been set for the offering.
ARCS is not alone. Other proposed mortgage company stock offerings have also been slow to hit the market.
“Investor fascination with mortgage banking IPOs has faded somewhat as refinancing volume has gone down,” said James M. Marks, an analyst at SNL Securities, a Charlottesville, Va., investment firm specializing in banks and savings and loans.
Analysts said that the ARCS stock offering still makes sense for Bank of New York.
Despite the ups and downs of the mortgage business, ARCS revenues doubled from 1988 to $45.9 million in 1991, while its profits rose from $1.94 million to $9.45 million last year. Its margin of profit, a respectable 9% in 1988, grew to 21% in 1991.
Nonetheless, small operations like ARCS that are owned by big bank holding companies are often overlooked by investors, said analyst Joan T. Goodman at Pershing & Co., a Jersey City, N.J., investment firm. Spinning off part of a mortgage company to the public “sets a value and investors can see it on your balance sheet,” she said.
Marks expects that the ARCS stock offering will eventually be completed, but the timing depends largely on the direction of interest rates. “If long-term rates come down, we’ll see a whole other wave of refinancings and home buying. Then all of a sudden these offerings will look great again,” he said.
According to documents filed with the Securities and Exchange Commission in February, ARCS hopes to sell 3.07 million shares at $19 apiece. Another 927,800 shares are to be sold by Bank of New York. After the offering, Bank of New York would own about 53% of the equity of ARCS and would control 77% of the voting power of the mortgage company.
ARCS has 53 offices in the West and Northeast, and has 578 employees. More than half its business comes from California; its second largest market is New York.
Although it originates mortgage loans and buys loans from other lenders, ARCS sells most of those loans in the secondary market and reaps most of its revenues from fees it receives for servicing the loans--a relatively stable business that partially insulates it from the volatility of mortgage lending.
As of Dec. 31, ARCS debt totaled $231 million, including $118.8 million in notes payable to Bank of New York. In contrast, its assets totaled $275.1 million.
ARCS said in the SEC filing that $43 million of the proceeds from the stock sale would be used to pay debt owed to Bank of New York. The rest of the proceeds would be used for general corporate purposes, including originating new loans and buying mortgage servicing rights, it said.
The company also warned in the SEC filing that although its loan servicing operations were generally predictable, it saw an increase in the rates of mortgage delinquencies and foreclosures in 1991. Troubled loans generally require special handling and cost more to administer, it said. Also, if economic conditions in California and New York continue to be weak, it said, that could result in fewer loans being made and more problem loans.
ARCS was founded in 1971 by its current chairman and chief executive, Howard J. Levine.
