Principal, Citimortgage Deal Signals Industry Consolidation

May 14, 2004

Principal parent expects to net $710 million

By Coco Salazar

Citigroup will buy Principal Financial Group's mortgage operations in a deal expected to close later this year. The acquisition isn't the only one brewing, as the mortgage industry braces for a wave of consolidation.

The parent company of Citimortgage Inc. will acquire Des Moines, Iowa-based Principal Residential Mortgage Inc. for approximately $1.26 billion -- an amount $290 million in excess of the net book value of assets and liabilities transferred, according to a Principal announcement Wednesday.

The acquisition strengthens Citimortgage's position "as a leading servicer and provider of residential mortgages and supports our stated objective to grow our servicing portfolio and customer base," said Carl Levinson, chairman of the mortgage unit, in a statement.

If the transaction were hypothetically completed on April 30, Citimortgage's managed assets would have increased to $352 billion from $234 billion, spokeswoman Anita Gupta said. The company's customer assets, which include assets from mortgage loans, comprise $70 billion of the total, its servicing assets add $164 billion, and the remaining $118 billion would have come from Principal's servicing portfolio.

"It will strengthen and expand our franchise -- that's the rationale," Gupta added.

Citigroup said the transaction includes $6.9 billion in assets and $137 million of franchise premium, which it expects will be accretive to its 2004 earnings. Its mortgage franchise currently employs over 5,000 people, Gupta said.

Principal said its board of directors has approved the transaction, which is expected to close in third quarter 2004, subject to regulatory approval. Under the terms of the agreement, Citigroup will acquire Principal Residential's stock and its 1,500 employees, according to a Principal spokeswoman.

Principal reported mortgage originations of $6.8 billion during the first quarter, of which wholesale originations comprised $1.8 billion. A company spokeswoman said its wholesale channel consists of 4,432 participating mortgage loan brokers across the United States.

Given that production at Principal is poised to dramatically decrease -- nearly three-fourths of its reported first quarter fundings were refinances -- Citigroup's interest is probably primarily in the servicing portfolio.

The Iowa thrift said selling the mortgage business will allow it to strategically focus on its core retirement and risk protection businesses, while at the same time, help it "go forward from an improved capital position, with better financial flexibility and greater stability of earnings."

While Principal anticipates the transaction will initially reduce its quarterly operating earnings by 8 cents to 10 cents a share, it expects net income to improve as resources from its mortgage business are redirected. The company intends to use the transaction's proceeds -- $710 million after tax -- primarily toward organic growth of its core businesses, strategic acquisitions, and share repurchase. Directors authorized the repurchase of up to $700 million of the company's outstanding common stock.

Word of the acquisition follows recent merger announcements by IndyMac, which said it will acquire reverse lender Financial Freedom, and General Electric, which recently announced its intention to buy subprime wholesaler WMC Finance. Both of those transactions are also slated to close later this year.

Cendant Mortgage is rumored to be on the block, with Countrywide reported as a possible acquirer.

Regions Financial Corp. and Union Planters Corp., which plan to merge this summer, expect to cut 450 mortgage positions as a result of that transaction.


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