Valuing and Assessing Mortgage Company Acquisitions: New

New Jersey Bankers Association
Valuing and Assessing Mortgage Company Acquisitions:
Is this the market to enter/expand residential lending?
May 17, 2013
Speaker: Richard A. “Dick” Vader, Senior Managing Director,
Griffin Financial Group LLC
MEMBER FINRA/SIPC
New Jersey Bankers - Speaker Synopsis
Valuing and Assessing Mortgage Company Acquisitions:
Is this the market to enter/expand residential lending?
In this session, attendees will learn the pros and cons of entering the mortgage banking market.
Strategic issues, as well as various operational considerations, will be discussed, including
recommendations for how to structure such a transaction and properly incent both sides to create a
“win-win deal.”
Speaker: Richard A. “Dick” Vader, Senior Managing Director, Griffin Financial Group LLC
2
Mortgage Banking |
Past – Present – Future
Volumes – Mix – Rates
3
Mortgage Banking Environment
The housing bubble burst in 2007, halting new and existing home sales. In some states, home
owners lost more than 40-50% of their home values.
Home Price Performance (2012 vs. 2006)
Source: Freddie Mac Investor Presentation
4
Mortgage Banking Environment
Housing prices have recently shown positive momentum, except for New Jersey where
foreclosures are subject to long delays arising from “New Jersey’s Judicial Review Process”.
Home Price Performance (2012 vs. 2011)
Source: Freddie Mac Investor Presentation
5
Mortgage Banking Environment
The volume of mortgage originations declined precipitously under the weight of the Recession,
residential housing depression and mortgage market abuses.
Quarterly 1 – 4 Family Mortgage Originations
1,400
Originations ($billions)
1,200
1,000
800
600
400
200
0
Source: Mortgage Banking Association Mortgage Finance Data
6
Mortgage Banking Environment
The “Private-label” MBS Market collapsed, thereby ceding the residential mortgage market
to the GSE’s.
MBS Issuance and Volume
Source: Freddie Mac Investor Presentation
7
Mortgage Banking Environment
Loans purchased or guaranteed by the GSE’s now make up 84% of total originations.
Origination by Product
Source: Mortgage Daily News. “8.6 Million Mortgage Originations in 2012, Highest Since 2007” By Jann Swanson
8
Mortgage Banking Environment
Originations have shown signs of improvement since the beginning of 2011.
Quarterly 1 – 4 Family Mortgage Originations
600
11% compound quarterly growth rate
Originations ($billions)
500
400
300
200
100
0
2011Q1
2011Q2
2011Q3
Source: Mortgage Banking Association Mortgage Finance Data
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
9
Mortgage Banking Environment
But, the strength of the mortgage market has been driven by “refinancing activity” which made
up 70% of total originations in 2012 compared to 48% in 2006.
Quarterly 1 – 4 Family Mortgage Originations
3,000
48%
Originations ($billions)
2,500
52%
67%
2,000
69%
52%
1,500
65%
70%
1,000
500
0
2006
2007
2008
2009
Purchase
Source: Mortgage Banking Association Mortgage Finance Data
2010
2011
2012
Refinance
10
Mortgage Banking Environment
Borrowers have been enticed to refinance mortgages by historically low interest rates.
30-Year Mortgage Rates
Source: Freddie Mac Investor Presentation
11
Mortgage Banking Environment
Low interest rates, and improved employment, economy, home prices and home equity have
increased the number of those eligible to refinance their mortgages.
$s Outstanding
Refinancibility
Source: Mortgage Daily News. “8.6 Million Mortgage Originations in 2012, Highest Since 2007” By Jann Swanson
12
Mortgage Banking Environment
Refinancing activity has been promoted by various Government programs including HARP –
Home Affordability Refinance Program that expires 12.31.15
GSE Purchases Under HARP
Source: Freddie Mac Investor Presentation
13
Mortgage Banking Environment
Yet, the Mortgage Banking Association projects a sharp decline in refinance related originations.
Quarterly 1 – 4 Family Mortgage Originations (Refi Only) vs. 10-year Treasury Yield
450
5.0
400
4.0
$s of Originatios
300
3.0
250
200
2.0
150
100
10-year Treasury Yield
350
1.0
50
0
0.0
2012Q4
2013Q1
2013Q2
2013Q3
Source: Mortgage Banking Association Mortgage Finance Data
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
14
Mortgage Banking Environment
While purchase activity is expected to increase modestly, this will NOT be enough to offset the
expected decline in refinancing activity.
Quarterly 1 – 4 Family Mortgage Originations (Purchase Only)
250
$s of Originatios
200
150
100
50
0
2012Q4
2013Q1
2013Q2
2013Q3
Source: Mortgage Banking Association Mortgage Finance Data
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
15
Mortgage Banking Environment
The Mortgage Bankers Association estimates total originations to fall from $1.8 trillion for 2012 to
$1.5 trillion in 2013 and in $1.1 trillion in 2014
Quarterly 1 – 4 Family Mortgage Originations
1,400
Actual
Forecast
$s of Originatios
1,200
1,000
$1,478
originations
800
$1,750
originations
600
$1,091
originations
400
200
0
Purchase
Source: Mortgage Banking Association Mortgage Finance Data
Refinance
16
Mortgage Banking Environment
The MBA estimates a 37% decline of all mortgage originations and 69% drop of refinanced mortgages (2012 vs 2014) .
Source: Mortgage Banking Association Mortgage Finance Data
17
Summary of Current and Forecasted Origination Activity
♦
♦
♦
Since the beginning of the “Great Recession”, overall mortgage origination activity has dropped
considerably:
•
Mortgage originations related to purchase activity have dropped from a high of $432 billion in the 2nd
quarter of 2005 to $123 billion in the 4th quarter of 2012
•
Mortgage originations related to refinance activity has remained strong as low absolute interest rates and
Government programs have bolstered volume
Both the Mortgage Bankers Association and Moody’s Analytics expect a sharp decline of mortgage
originations starting in the second half of 2013:
•
Mortgage activity related to purchases will remain depressed relative to historical levels, but will show
signs of improvement over the next few years with new household formation
•
Mortgage activity related to refinancing is expected to fall by approximately 75% from the 4th quarter of
2012 to the 4th quarter of 2013
The growth rates of mortgage banking revenue looks to be unsustainable going forward (and may have
peaked in 2012Q3), as the decline of volume will reduce revenue and profitability (fewer loans to absorb
fixed costs).
18
Recent Mortgage Banking Operating Performance
19
Operating Performance
The MBA reports “average profits per loan” have increased from $575 in Q2 2011 to $2,256 in Q4
2012 and from 33 to 107 basis points per loan, respectively, both topping in the 3rd quarter 2012 at
$2,465 and 120 basis points.
Average Profit Per Loan
4th '12
MBA
Key Findings
3rd '12
2nd '12
Quarters
1st '12
4th '11
3rd ' 11
2nd '11
(current quarter versus prior linked quarter)
Total Loan Production Expense per loan:
commissions, compensation, occupancy &
equipment, other production expenses and
corporate allocations
Net Cost to Originate per loan: all production
operating expenses + commissions, minus all fees
(excluding secondary marketing gains, capitalized
servicing, servicing released premiums and
warehouse interest spread
Avg. profit per loan
Avg. production profit (net production income)
Avg. secondary marketing income
Avg. production volume per company (millions)
Avg. volume by count per company
Source: Mortgage Banking Association
$
5,603 $
5,163 $
5,128 $
5,292 $
5,118 $
5,315
$
5,644
$
3,813 $
3,353 $
3,224 $
3,413 $
3,324 $
3,360
$
3,513
2,256 $
2,465 $
2,152 $
1,651 $
1,093 $
1,263
107 bp
120 bp
107 bp
82 bp
59 bp
66 bp
279 bp
271 bp
257 bp
243 bp
215 bp
229 bp
For The 311 Companies Reporting
$
488 $
450 $
371 $
301 $
313 $
237
2,132
2,010
1,700
1,380
1,093
1,263
$
575
$
33 bp
210 bp
$
174
866
20
Operating Performance – 4th Quarter 2012 vs. 4th Quarter 2011
The MBA most recently reports profits per loan of $2,256 vs. $1,093 or 107 vs. 58 basis points on the
strength of Net Secondary Marketing Income.
Profit Metrics 4th Quarter 2012 vs. 2011
Basis Points
2012
Dollars Per Loan
Basis Points
2011
Dollars Per Loan
% Change
Revenues:
Total Loan Production Revenues: 60% origination fees,
and 32% underwriting, processing, adm fees (a)
Expenses:
Total Personnel: 46% sales, 24% fulfillment, 19% production
Occupancy & Equipment
Technology
Total Other Direct
Direct Loan Production Expenses
Corporate Allocation
Total Loan Production Expenses (b)
Net Loan Production Operating Income (Loss) (a-b)
Net Interest Income - Warehousing
Net Secondary Marketing Income
Total Net Production Income
Source: Mortgage Banking Association
82
$
1,790
162 $
11
4
60
238 $
18
255 $
3,569
247
91
1,311
5,218
385
5,603
(173)
1
279
107
$
83
$
1,794
-0.2%
158 $
14
4
59
235 $
14
249 $
3,226
287
87
1,225
4,825
293
5,118
10.6%
-13.9%
4.6%
7.0%
8.1%
31.4%
9.5%
(3,325)
62
4,344
14.7%
1,093
106.4%
(3,813)
23
6,046
(160)
3
215
2,256
58
$
39.2%
21
Operating Performance – By Type of Mortgage Banker
The MBA most recently reports banks having the lowest Net Loan Production Operating Income
(Loss), but also the lowest Net Secondary Marketing Income.
Profit Metrics 4th Quarter 2012
Bank / Thrift
2012 - Roll-up (basis points)
Independents
Others
Total
Total Loan Production Revenues
66
85
85
82
Total Loan Production Expenses
194
272
234
255
(128)
(187)
(148)
(173)
Net Secondary Marketing Income
229
288
287
279
Total Net Production Income
107
101
140
107
Net Loan Production Operating Income (Loss)
Source: Mortgage Banking Association
22
Secondary Market Spreads Are at Historical Highs
♦
While the mortgage market has typically been very efficient, investors clawing for yield have bid up
mortgages in the secondary market. The spread between the 30-year current coupon yield and the average
mortgage rate reached 170 bps in September 2012. Today the spread is around 110 bps.
30-Year FNMA Current Coupon Yield vs. National Avg. Mortgage Rate
170 bps
Data source: Bloomberg
23
Other Considerations In Entering Mortgage Banking
24
Other Mortgage Banking Considerations - Pipeline Risk
♦
Mortgages are considered in the “pipeline” from the point of application until the loan is
either (1) is sold into the secondary market, (2) is put into the originators loan portfolio or (3)
“falls out”
•
♦
Pipeline Risk is a function of potential rate movements between application and closing, and
the possibility the loan falling out.
•
♦
A mortgage “falls out” when the customer does not close on the mortgage after being granted a “rate
lock”
If the loan is being sold into the secondary market, there is also risk that the secondary market yield
will move against the “rate lock” before closing
In order to hedge the interest rate risk, an institution can use several strategies to “lock in” the
sale of the loan at prevailing market rates. The institution then either locks the loan and rate
in with an investor and commits to deliver the loan if settlement occurs (“Best Efforts”) or
commits to deliver the locked loan in a binding (“Mandatory”) delivery program with an
investor.
•
The most common forward delivery tool is the “To Be Announced” market. This is the forward
mortgage backed security pass-through market.
•
Some mortgage divisions will use futures contracts and over the counter mortgage options as well
25
Other Mortgage Banking Considerations - Hold or Sell the Loans
♦
The model has typically been to sell loans that conform to secondary market standards and hold loans
that do not conform as to principal or documentation.
•
It is important to understand the liquidity issues that arise from holding non-conforming mortgages
in that they may be tough to unload when your institution needs liquidity or capital
•
Additionally, there are increased risks in selling into the secondary market
♦
The scarcity of earning assets for banks encourages some to also hold conforming loans
♦
The profile of the mortgage origination market has changed drastically since the “Great Recession”
•
Most loans originated are refinance
•
Very few ARMs
•
Very low rates and long tenors
•
Pressured borrowers
•
Increased risk of “put back liabilities” due to scrutiny of underwriting standards – longer and more
aggressive put back terms
•
Increased scrutiny by Regulators on all aspects of origination and documentation and greater risk of
fines and penalties
•
Reputation risk associated with lending to lesser credit worthy customers
♦
The combination of these factors have resulted in increased risk: credit risk (which goes without
saying) and an enormous increase in interest rate risk
♦
In today’s new mortgage banking environment, greater understanding and consideration needs to be
taken before originating mortgages – whether they are sold immediately or not!
26
Other Mortgage Banking Considerations - Servicing
♦
There is economic value in holding the Mortgage Servicing Rights (MSRs) associated with originated
mortgages. The originator can monetize the value of these rights in two ways:
•
•
Selling the loans as “servicing released.” This allows for better initial price execution (i.e. you get paid more for
releasing the rights)
Selling the loans “servicing retained.” This allows the originator to collect the fees associated with servicing the
loans
♦
A mortgage servicer earns a percentage of each mortgage payment made by a borrower to a mortgage
servicer as compensation for keeping a record of payments, collecting and making escrow payments,
passing principal and interest payments along to the noteholder, etc. Servicing fees generally range from
0.25-0.50% of the remaining principal balance of the mortgage each month.
♦
Mortgage servicers also benefit from being able to invest and earn interest on a borrower's escrow
payments as they are collected until they are paid out to taxing authorities, insurance companies, etc.
♦
The business of mortgage servicing has also come under the pressure of regulators and legislators.
Compliance costs have increased substantially as additional rules and procedures have been put in place
to protect consumers.
♦
As a result, many of the larger banks have sold down their MSR portfolios. Most notably, Bank of
America has sold a large portion of its MSR portfolio in the past year.
27
Mortgage Banking | Regulatory Actions
28
Compliance
♦
♦
In many ways, the residential loan market is much different than it used to be. Perhaps the
most significant of these changes, especially for those looking to enter the space, is the
increase in compliance needed to operate a mortgage banking business.
•
Since the onset of the “Great Recession”, we have witnessed an increased role in how the
government interacts with banking and mortgage finance:
•
TARP, TALF, SBLF, etc…
•
Dodd-Frank
•
Quantitative Easing (unprecedented in scale and scope)
•
HARP and HAMP
•
SAFE Act (licensing of mortgage officers)
•
GSE reform
•
Consumer Financial Protection Bureau
•
Regulation Z
The result is a need for more resources dedicated to compliance, which translates into higher
costs.
29
Regulatory Landscape
Truth in Lending Act, Regulation Z, Dodd Frank and the CFPB
Originator Qualification and Compensation (Regulation Z):
♦
The new rule (generally effective January 10, 2014) prohibits a loan officer or broker from
being compensated based on loan terms (other than size)
♦
Prohibits the loan officer or broker from being paid by both the consumer and the lender i.e.
dual compensation
♦
Sets uniform standards for qualifying and screening loan originators:
•
Must meet character, fitness, and financial responsibility reviews;
•
Must be screened for felony convictions; and,
•
Required to undertake training to ensure they have the knowledge about the rules governing the
types of loans they originate.
♦
Extends recordkeeping requirements to both the creditors and mortgage brokers for three
years
♦
Prohibits mandatory arbitration (effective June 1, 2013)
Source: Mortgage Bankers Association, Consumer Financial Protection Bureau
30
CFPB – Qualified Mortgages
♦
Qualified Mortgages that have a safe harbor status, are generally lower-priced, prime loans
that are given to consumers who are considered to be less risky.
♦
These loans require documentation of the borrower’s ability to repay, but will offer lenders
the greatest legal certainty that they are complying with the new Ability-to-Repay rule.
♦
Under the Ability-to-Repay rule, all new mortgages must comply with basic requirements that
protect consumers from taking on loans they don’t have the financial means to pay back.
•
Financial information has to be supplied and verified
•
A borrower has to have sufficient assets or income to pay back the loan
•
Teaser rates can not mask the true cost of a mortgage
♦
Two Tests: (1.) P&I equal to or less than 43% of pre-tax income, or (2.) a “Pass Grade” when
fed into the automated underwriting engines maintained by Fannie Mae, Freddie Mac or the
FHA which test will be eliminated when those agencies come out of bankruptcy. Subject to
the government loan ceilings which stand at $417,000 nationally, but rise to as high as
$729,750 in high-cost housing markets such as New York, Los Angeles and San Francisco.
♦
CFPB grants the strongest level of legal (creditor rights) protection to loans that carry a prime
mortgage rate, or a rate within 1.5 percentage points of the national average
31
Other Issues
Licensing Costs
♦
States have traditionally licensed mortgage companies; however a growing number of states
are moving beyond corporate licensing and requiring the licensing of loan officers and even
support staff. Additionally, an increasing number of states are adding onerous requirements to
existing mortgage company licensing. These new laws and regulations are adding significant
costs to mortgage companies, particularly for national and multi-state lenders. In NJ:
•
Company is required to have a net worth of $50,000 and a surety bond for $150,000
•
Control persons are required to undergo federal and state criminal background checks
•
Individuals must pass a written exam
•
Individual pre-licensing requirements include approved education courses of 20 or more hours,
including 4 hours of New Jersey specific courses
Employee vs Sub Contractor
♦
Qualification requirements and the complex safe harbor provisions of Regulation Z, along
with the state licensing issues, team up to effectively require many brokers to become
employees of the originator. This generates a host of legal, tax and administrative issues, that
all translate into higher costs.
Fines & Penalties
♦
Fines and penalties assessed to the mortgage industry for poor documentation or practices like
robo signing, improper foreclosures and collection practices, liberal loan products, etc. have
become more severe and more commonplace
Source: Mortgage Bankers Association, Consumer Financial Protection Bureau, NJ Department of Banking & Insurance
32
Schedule RC-P Analysis
33
Schedule RC-P – Reporting B&T Mortgage Banking Activities
♦
♦
Schedule RC-P is to be completed by
1.
all banks with $1 billion or more in total assets, and
2.
those banks with less than $1 billion in total assets where any of the following (domestic)
residential mortgage banking activities exceeds $10 million for two consecutive quarters for:
Closed and Open Ended First and Junior liens 1-4 family residential mortgage loans originations,
sales or held for sale or trading.
If the bank is less than $1 billion, complete Sch. RC-P beginning the 2nd quarter in which the
$10 million threshold is exceeded and continue schedule through the end of the calendar year.
•
Open-end mortgages (HELOCs) should be reported using the “total commitment under the lines of
credit”.
•
Closed end 1-4 family residential mortgages are defined in Schedule RC-C, part 1.c.(2), and Openend 1-4 family residential mortgages are defined in Schedule RC-C, part I, item 1.c.(1). And, held
for trading are defined in Schedule RC-D and RC, item 5, “Trading assets”.
•
Open-end loans Sch. RC-P (1) “total commitment under the lines of credit” means the total amount
of the lines of credit granted to customers at the time originated; (2) for originations of such openend loans, “principal amount funded under the lines of credit” means the total amount at initial
funding of newly established lines of credit, and (3) open-end loans purchased, sold, held for sale or
trading, and repurchased or indemnified, “principal amount funded under the lines of credit” means
the principal balance outstanding of loans at the transaction date or at quarter-end, as appropriate.
Instruction to complete Call Report Schedule RC-P “1-4 Family Residential Mortgage Banking Activities”: link
http://www.ffiec.gov/PDF/FFIEC_forms/FFIEC031_FFIEC041_201203_i.pdf
34
Schedule RC-P – Observations
♦
B&T - Retail and Wholesale Originations
♦
♦
♦
♦
♦
The volume of 2012 B&T Originations reached 1.5 trillion a +43% increase over the prior year after declines of
(16%) and (11%) in 2011 and 2010, respectively and a +78% increase in 2009 versus 2008.
2008 represents the low point.
The Top 25 B&Ts (based on 2012 rankings) Share of Market declined to 79% after topping 87% earlier, and
The Top 25’s mix of Direct versus Wholesale originations declined to 43% and 57%, respectively in 2012, after
having ranged 43 – 52% Direct and 57 – 48% Wholesale, in the past.
Top 25 standings:
♦
♦
♦
Wells Fargo topped the charts every year since 2007 with 2012 originations totaling $461 billion. That’s twice the
volume of its nearest rival JP Morgan.
Bank of American’s volumes continues to decline precipitously. Countrywide’s acquisition was heralded as a
“Milestone”, but continues to be a “Millstone”.
Six Thrifts joined the ranks of the Top 25 as they are now required to file Call Reports and Sch. RC-P:
♦
♦
♦
♦
♦
♦
Flagstar Bancorp, Inc., MI
United Services Automobile Association, TX
Viewpoint Financial Services Group, Inc., TX
EverBank Financial Group, Inc., FL
Union Savings Bank, OH
Silver Queen Financial Services, Inc., CO
SNL DataSource | Schedule RC-P 1-4 Family Residential Mortgage Banking Activities
35
Top Bank & Thrift Mortgage Originators
Retail and Wholesale Originations
Company Name
State
Rank
2012
2011
2010
2009
2008
2007
79%
1,194,938,375
1,505,858,835
43%
85%
897,775,673
1,050,447,227
-16%
86%
1,075,398,721
1,250,065,596
-11%
87%
1,219,142,818
1,397,897,791
78%
86%
676,550,603
786,209,966
1%
81%
626,317,700
775,781,851
43%
57%
48%
52%
52%
48%
52%
48%
48%
52%
46%
54%
461,246,000
230,417,000
77,974,000
53,504,669
52,833,000
51,110,694
44,499,974
30,252,000
26,581,016
26,394,946
327,008,000
169,085,000
44,236,000
51,572,000
27,234,903
114,769,007
54,580,000
17,646,222
17,445,415
357,979,000
149,450,000
51,866,000
57,141,000
22,821,981
243,640,760
67,994,000
24,302,635
20,167,246
401,061,000
148,002,000
52,777,000
71,255,000
16,373,682
350,204,150
47,609,369
32,134,942
206,185,000
128,712,000
31,825,000
83,052,000
7,421,878
136,789,531
36,822,602
13,610,577
217,289,000
112,495,000
25,884,000
105,334,000
3,905,519
71,324,391
57,925,722
7,850,035
6,689 Banks & Thrifts
919 Banks & Thrifts reporting Mortgage Volumes
Volumes
Top 25 Share
Top 25 Volume
Total Volume
Y-O-Y Changes
Mix for Top 25
Direct
Wholesale
Top 10
Wells Fargo & Company
JPMorgan Chase & Co.
U.S. Bancorp
Flagstar Bancorp, Inc.
Citigroup Inc.
Texas Capital Bancshares, Inc.
Bank of America Corporation
Ally Financial Inc.
SunTrust Banks, Inc.
BB&T Corporation
CA
NY
MN
MI
NY
TX
NC
MI
GA
NC
1
2
3
4
5
6
7
8
9
10
36
New Jersey B&Ts by Mortgage Originations
•
First Choice Bank, First Choice Loan Services, Inc. leads New Jersey in the volume of Mortgage Originations
having acquired the mortgage banking staff from Citizens First, Ridgewood on Jan. 28, 2009.
•
FCLS teamed-up with Costcofinance.com to offer mortgages with FCB and four other banks, May 3, 2012.
•
Grand Bank NA, meanwhile, has abandoned its national wholesale mortgage banking business having first sold
ICON Residential Lending, Carnegie Mortgage LLC to Real Estate Mortgage Network, River Edge, NJ, then
Rushmore Loan Management, Irvine, CA after REMN abandoned the deal.
•
First Choice Bank, Grand Bank NA, Investors Bank and Somerset Hills each have separate downstream mortgage
banking subsidiaries.
Retail and Wholesale Originations
Company Name
First Choice Bank
Grand Bank, National Association
Valley National Bancorp
Investors Bancorp, MHC
First Hope Bank, A National Banking Association
Sun Bancorp, Inc.
OceanFirst Financial Corp.
Somerset Hills Bank
Unity Bancorp, Inc.
Peapack-Gladstone Financial Corporation
Cross River Bank
Stewardship Financial Corporation
1st Colonial Community Bank
BCB Bancorp, Inc.
Provident Financial Services, Inc.
Columbia Bank MHC
Center Bancorp, Inc.
Spencer Savings Bank, SLA
State
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
NJ
Rank
52
57
104
122
172
178
365
501
503
556
599
687
715
848
849
866
868
931
2012
2,260,570
2,022,355
1,052,125
812,464
498,968
470,572
171,599
105,024
103,992
90,809
80,967
61,431
54,905
27,218
27,200
21,474
21,336
1,370
2011
1,213,887
2,990,415
324,647
513,562
224,997
136,816
76,971
36,423
33,623
85,614
43,045
30,280
11,307
13,096
-
2010
910,905
2,986,621
409,560
696,029
181,651
189,160
128,122
42,747
73,902
29,229
18,138
8,347
-
2009
582,708
1,782,178
554,462
844,747
149,010
144,634
186,403
67,768
20,529
98,653
3,453
-
2008
687,292
52,148
309,100
55,966
194,049
12,204
16,391
1,708
-
2007
249,521
54,886
54,125
64,355
216,995
3,522
6,409
2,066
-
37
New Jersey B&Ts by Gain on Sale / Originations
•
First Choice Bank’s Gain on Sale have grown exponentially. And, others like Valley, Investors and
Sun have seen significant improvements during 2012.
•
Gain on Sale as a percentage of Originations range 2.23% - 2.57% - 2.98%, and a high of 4.47% at
Valley. First Choice has been able to maintain these levels in 2012 – 2011.
•
While Gain on Sales have contributed handsomely to other community banks.
•
BCB’s loss was an anomaly as the loss on loan sales was not attributed to mortgage banking loans, but
other loans.
Gain on Sales of Loans
Company Name
First Choice Bank
Grand Bank, National Association
Valley National Bancorp
Investors Bancorp, MHC
First Hope Bank, A National Banking Association
Sun Bancorp, Inc.
OceanFirst Financial Corp.
Somerset Hills Bank
Unity Bancorp, Inc.
Peapack-Gladstone Financial Corporation
Cross River Bank
Stewardship Financial Corporation
1st Colonial Community Bank
BCB Bancorp, Inc.
Provident Financial Services, Inc.
Columbia Bank MHC
Center Bancorp, Inc.
Spencer Savings Bank, SLA
2012Y
67,477
21,152
46,998
20,866
134
10,479
3,968
1,362
2,962
3,301
887
1,810
(9,389)
1,961
661
484
69
Percentage
2.98%
1.05%
4.47%
2.57%
0.03%
2.23%
2.31%
1.30%
2.85%
0.00%
4.08%
1.44%
3.30%
-34.50%
7.21%
3.08%
2.27%
5.04%
2011Y
36,595
30,835
10,699
9,736
54
3,247
786
1,913
1,454
1,209
1,050
1,016
1,281
251
Percentage
3.01%
1.03%
3.30%
1.90%
0.02%
2.37%
1.02%
5.25%
0.00%
2010Y
16,340
43,610
12,591
12,784
62
3,560
Percent
1.79%
1.46%
3.07%
1.84%
0.03%
1.88%
1.00%
3.63%
0.00%
1.41%
2.44%
3.36%
11.33%
1,281
1,552
3
671
911
294
1,177
1.92%
140
1.68%
2.30%
6.49%
38
Mortgage Banking as a “Lifeline”
•
•
Mortgage Banking revenue has been a “Lifeline” for those having net losses and inadequate capital.
Common Stock pricing metrics have little basis for the under-capitalized B&Ts with losses.
Company Name
State
Total Assets
($000)
2012Y
Net Gain on
Sale of Loans Net Gain to
Net Income and Leases Absolute Net
($000)
Income
($000)
2012Y
2012Y
2012Y
ROAA
(% )
2012Y
Public Banks & Thrifts with assets of $5 billion or less, Net Losses or TCE of Less
Naugatuck Valley Financial Corporation
CT
532,743
-9,528
338
3.5%
First Marblehead Corporation
MA
538,222
-38,425
149
0.4%
First Mariner Bancorp
MD
1,379,349
17,009
48,068
282.6%
Carolina Bank Holdings, Inc.
NC
692,093
7,502
13,479
179.7%
1st Financial Services Corporation
NC
710,431
1,270
3,080
242.5%
Uwharrie Capital Corp
NC
545,007
404
4,016
994.1%
Randolph Bank & Trust Company
NC
295,553
-146
1,608
1101.4%
First National Bank of Shelby
NC
853,808
-3,414
1
0.0%
Four Oaks Fincorp, Inc.
NC
869,058
-3,747
410
10.9%
Yadkin Valley Financial Corporation
NC
1,923,572
-8,673
1,942
22.4%
First Bancorp
NC
3,246,859
-23,406
2,381
10.2%
NewBridge Bancorp
NC
1,708,707
-25,254
2,636
10.4%
First South Bancorp, Inc.
NC
707,713
-10,977
1,975
18.0%
FNB United Corp.
NC
2,151,564
-40,005
2,035
5.1%
New Millennium Bank
NJ
188,507
-1,665
4
0.2%
Sun Bancorp, Inc.
NJ
3,224,030
-50,491
10,479
20.8%
Suffolk Bancorp
NY
1,622,464
-1,748
1,937
110.8%
Carver Bancorp, Inc.
NY
640,637
-7,174
852
11.9%
First National Community Bancorp, Inc.
PA
968,274
-13,711
858
6.3%
Royal Bancshares of Pennsylvania, Inc.
PA
775,195
-14,600
2,057
14.1%
Orrstown Financial Services, Inc.
PA
1,232,668
-38,454
2,420
6.3%
First Reliance Bancshares, Inc.
SC
419,130
276
1,331
482.2%
Palmetto Bancshares, Inc.
SC
1,145,939
-1,864
-913
-49.0%
HCSB Financial Corporation
SC
472,694
-5,865
375
6.4%
First Federal of South Carolina, FSB (MHC)
SC
104,895
-1,703
379
22.3%
First Security Group, Inc.
TN
1,063,555
-37,570
974
2.6%
First Capital Bancorp, Inc.
VA
542,949
-6,006
669
11.1%
Village Bank and Trust Financial Corp.
VA
508,154
-10,399
8,562
82.3%
Tang
Common
Eqty/ Tang
Assts (% )
2012Y
Than 6%
-1.71
NA
1.38
1.11
0.18
0.08
-0.05
-0.39
-0.41
-0.44
-0.71
-1.47
-1.50
-1.75
-0.83
-1.60
-0.11
-1.14
-1.35
-1.77
-2.84
0.06
-0.16
-1.12
-1.53
-3.38
-1.13
-1.97
13.72
32.12
-0.54
5.53
0.45
5.93
5.76
11.19
3.00
7.30
6.81
4.96
10.01
4.09
3.09
6.94
10.06
1.61
3.75
3.25
7.05
5.49
8.58
-4.58
5.45
-0.38
7.67
4.72
Price/ LTM
Earnings Price/ TBV
NM
NM
1.4
5.8
12.0
NM
NM
NM
NM
NM
NM
NM
NM
NM
NA
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
77
91
NM
98
89
70
41
65
62
120
118
116
90
188
NA
124
110
186
170
70
136
31
172
NM
11
NM
95
87
39
Valuation Considerations
40
Valuation Considerations
♦
Mortgage banking revenues are volatile as the fundamentals change rapidly with interest rates
and economic factors:
•
Interest rates drive refinance activity
•
The economy, household formations and demand for housing drive purchase activity
•
Government programs (as we have seen in this last recession) can drive both refinance (HOPE,
HARP, Obama Mortgages – Making Home Affordable) and purchases (loans and equity subsidies,
First Time Home Buyer Tax Credits in the Housing and Economic Recovery Act 2008 repayable
over 15 years)
♦
As revenues are volatile, institutional investors often look at mortgage banking income
differently than income driven by core banking and apply a discount to that earnings stream in
determining valuations
♦
Griffin identified banks having mortgage banking revenue as a significant contributor to
revenue. Virginia banks appear to have significant mortgage banking businesses among the
10 largest by Net Gains to Assets.
41
Valuation Considerations – Segment Analysis
♦
♦
♦
While Mortgage Banking may be a
significant contributor to the top line its
contribution to the bottom line may be
muted!
Mortgage banking is less expense
efficient than community banking as
Non-interest Expense to Total Income
ratios for mortgage banking exceeds those
of community banks by a wide margin.
Mortgage banking grosses-up both
revenue and expenses.
Select Segment Reports Summary
Monarch Financial Holdings, Inc
Net interest income
Provision expense
Non-interest income
Non-interest expense
Pre-tax net income
Non-int. exp. to TOI
2012
$
$
Mortgage
Banking
Banking
39,677,512 $
874,720
(4,831,133)
5,222,612
86,056,021
(24,168,712)
(81,604,729)
15,900,279 $
5,326,012
-54%
-94%
2012
Access National Corporation
Net interest income
Provision expense
Non-interest income
Non-interest expense
Pre-tax net income
Non-int. exp. to TOI
$
$
Mortgage
Banking
Banking
30,975,000 $
1,196,000
2,664,000
51,319,000
(18,909,000)
(36,859,000)
14,730,000 $ 15,656,000
-56%
-70%
2012
Cardinal Financial Corporation
Net interest income
Provision expense
Non-interest income
Non-interest expense
Pre-tax net income
Non-int. exp. to TOI
$
$
Mortgage
Banking
Banking
89,472,000 $
2,365,000
(6,865,000)
(285,000)
5,868,000
54,794,000
(43,495,000)
(29,529,000)
44,980,000 $ 27,345,000
-46%
-52%
42
Valuation Considerations: Banks with Significant MB Revenue
♦
Community banks having significant mortgage banking operations are valued differently than
community banks without mortgage banking revenue:
Banks & Thrifts With Significant Mortgage Banking Operations
Price/
Price/Earnings Tangible Book
Value
2012 ROAE
Significant Mortgage Banking
8.8x
120%
11.51%
Some Mortgage Banking
13.6x
130%
8.16%
No Mortgage Banking
15.4x
118%
7.99%
Public B&T Between $1 B & $20 B
13.4x
128%
8.13%
SNL U.S. Bank & Thrift Index*
11.8x
147%
Data source: SNL Financial. Population includes public banks & thrifts between $1 billion and $20 billion in total assets
“Significant”: mortgage banking loan sales > 25% of total assets
“Some”: mortgage banking loan sales > 0 and <25% of total assets
* SNL U.S. Bank & Thrift Index is weighted by market cap
43
Valuation Considerations
♦
Banks with a concentration in mortgage banking revenues don’t get full credit – and trade
lower as a multiple of earnings
Price / LTM Earnings
20
18
16
P/E Multiple
14
12
10
8
6
4
VGBK
Source: SNL Financial
ANCX
MNRK
SNL U.S. Bank and Thrift
44
Building or Buying a Mortgage Banking Operations
45
Building Mortgage Banking Business – Pros & Cons
Pros
♦
Entering slowly will allow time for bank
management to adjust, building upon existing
infrastructure
♦
Many banks have the right community
contacts resident within the bank and board:
sourcing through local relators, accountants,
financial planners and lawyers is key
♦
Small changes in the bank’s business model
will meet with a more favorable reaction
from the primary regulator
♦
Growth and focus can be more easily
controlled and directed
♦
Overall costs can be less, providing it is well
planned and executed
♦
Complementary businesses (i.e. title
insurance) can be added as the business
grows
Cons
♦
Building will be costly and time
consuming. Must hire the right people,
sign the right contracts and get the
infrastructure in place
♦
It may take a good amount of time to
ramp-up the amount of volume needed to
cover fixed costs and be profitable
♦
Expertise to manage the business may
not be resident in-house, and be costly to
acquire
46
Buying a Mortgage Banking Business – Pros & Cons
Pros
♦
The infrastructure is already built, saving
management a great deal of time and effort in
hiring people, bidding out contracts, etc.
♦
The mortgage bank will have licenses and a
track record with GSEs
♦
♦
A transaction may be accretive to earnings
immediately depending upon consideration
paid and structure
Immediate revenue enhancement
opportunities as you will be able to cross sell
the mortgage banking platform to current
customers
Cons
♦
Risk of overpaying is high, as sellers’
price expectations are very high, despite
the uncertainty in the future of
originations
♦
Likely will add goodwill and intangibles
and be dilutive to tangible book value
♦
Maintaining purchased origination
volume generally means that principals
and brokers need to be retained and
incented
♦
Mortgage banking is a relationship
driven business, and purchased
relationships are often difficult to
maintain
♦
A stock merger as opposed to a purchase
could potentially expose the buyer to
pre-transaction repurchase or put
obligations.
♦
Thorough due diligence is required
47
Buying A Mortgage Bank: Valuation
♦
Valuing a mortgage bank based on comparable transactions is generally difficult, given that
there are few in number, and most transactions involving small mortgage originators are
generally:
•
Not public with little information publicly disclosed
•
Involve originators with varying business models and concentrations, and distribution channels
•
Involve constituents with different interests, motivations and varying levels of post transaction
involvement and incentive
♦
However, if a relevant comparable transaction or group can be established, this can serve as a
data point.
♦
Using publicly traded companies as an input for value can also be helpful, but also is subject
to similar constraints:
•
Larger mortgage operations have different economies of scale, and often reach different markets for
both originating, acquiring and selling loans
•
May have other operations such as servicing and wealth management, investment banking, etc.
•
[Trading] prices exclude any change of control premium associated with a sale of a company
♦
A discounted cash flow model is often the most useful for valuing a mortgage business, and
this requires in-depth knowledge of the company, as well as the basis for future expectations
for the host of environmental factors that will influence the company’s future performance
♦
Science? No, “Art” at best!
48
Buying A Mortgage Bank: Earn Outs & Incentives
♦
Given the prognosis for volatility of future earnings, including a portion of the purchase price
as an earn out is prudent.
♦
Earn outs can be tied to future origination volumes, revenues, EBITDA, or other metrics, and
sometimes comprise 50% or more of the purchase price.
♦
Typically the principals are critical to continued success, and their continued employment is
generally required. Non compete agreements for other key personnel are also commonplace.
♦
Non competes with former owners generate intangible assets that are valued as part of the
consideration and amortized over the term. Non competes with employees are compensation
expense recorded during the period.
♦
The fair value of the earn out is also part of the purchase price. The estimated value is
recorded at the close of the transaction (typically on a probability weighted and discounted
basis), with changes in value recorded in earnings over the earn out period. Introduces more
earnings volatility than community banking
♦
A “win-win” structure effectively incents the seller to stay and grow the business, while the
buyer provides a platform to grow the business better.
49
Acquisition Studies – Select Mortgage Banking Acquisitions
50
Yadkin Financial Acquisition of Sidus Mortgage - IRR
♦
Yadkin Financial Corporation acquired Sidus Financial LLC | First Mortgage Corp.,
Greenville, NC, on October 1, 2004. Sidus offered Title, Reinsurance and mortgage
brokerage. Sidus had 2005 originations of $838 million.
♦
Purchase price totaled $6.9 million consisting of 0.347 :1.0 shares of common stock (699k
new shares issued) plus $4.82 cash per share, plus certain performance based consideration,
Sidus had tangible equity at close of $3.0 million.
Cash Flows and IRR:
IRR:
17.1%
Purchase Price $
(6,900)
Net Income:
2005 $
763
2006 $
874
2007 $
907
2008 $
2,800
2009 $
7,900
2010 $
2,400
2011* $
(2,900)
* The 2011 net loss of $2.9 million
excludes a $5 million goodwill
impariment charge
51
MVB Financial’s Acquisition of Potomac
♦
MVB Financial Corporation ($726 million in assets), Fairmont, West Virginia acquired
Potomac Mortgage Group, LLC, Fairfax, Virginia on December 12, 2012
♦
The aggregate purchase price was $19 million ($17 million cash and 83,333 shares of
MVB Financial common stock), creating $16.7 million in goodwill
♦
MVB entered into a 5 year (with a 3 year extension term) employment agreement with Pres.
& CEO of Potomac that provides for a base salary that is greater than the total compensation
of the President & CEO of the MVB
•
♦
President & CEO of MVB total compensation: $432,703
President of Mortgage Banking subsidiary:
•
Base Salary:
$500,000
•
Commissions:
Yes
•
Annual Bonus:
7.5% of PMG’s Pre-tax profits
•
Performance Bonuses: Bonuses based on pretax earnings exceeding certain thresholds
•
Options:
5,000 options vesting over 5-years
•
Severance w/o cause:
18-months of gross compensation
52
Summary of Thoughts
♦
Origination volumes are expected to fall from currents highs
♦
Secondary market spreads and overall profitability will likely fall from current highs
♦
Valuations on this kind of business line are subject to discounts due to volatility of earnings
♦
Mortgage banking can provide a bank with meaningful tangible book value creation;
however, consider limiting mortgage banking operations in order to control earnings volatility
and potential negative impact on valuation
♦
Building or buying a mortgage bank requires thoughtfulness around strategy, structure and
cultural dynamics that result from this kind of business
53
Call To Action
♦
The Halcyon Days of Banking are OVER!
♦
Structural, cyclical, legal and regulatory developments threaten small banks.
♦
Core portfolio lending businesses have been eviscerated by:
•
•
♦
the lending market’s evolution to securitization, and
the emergence and now resurrection of “Shadow Banks”.
Monetary Policies have led to:
•
•
•
artificially low interest rates,
low net interest income, and
low net income, as demand for credit remains muted.
♦
Fiscal stimulus policies are not sustainable, and the “Aging of America” will redirect spending to the care
of our Senior Citizens.
♦
Mortgage lending has been an especially prosperous business for those able to capture the refinance
business that appears to have crested.
♦
New Jersey, Pennsylvania and New York’s mortgage market is vast, notwithstanding the mortgage
market’s ebbs and flows.
♦
New Jersey’s “Judicial Review Logjam” and backlog of foreclosure inventory should soon free homes
for sale and create a period of purchase mortgage lending opportunities.
♦
Banks that are deeply invested in residential mortgage lending already have expressed a desire to rampup their residential and commercial multi-family mortgage banking activities.
54
Call To Action
♦
Building a mortgage banking operation may be preferable to Buying a mortgage banking
operation.
♦
The Commitment to Mortgage Banking as a Profit Center
•
The “Minimum commitment to mortgage banking as a ‘profit center or business line’ should be 5 –
6 mortgage brokers producing $10 million or more a month, or $120 – $250 million of annual
production for mandatory delivery. Otherwise mortgages are just a “product and not a profit
center”.
55
56
Richard Vader
Senior Managing Director
Financial Institutions Group
Griffin Financial Group LLC
620 Freedom Business Center
King of Prussia, PA 19406
Phone: 484.663.1936
Email: RAV@griffinfingroup.com
• 30 years of investment banking and commercial banking experience with niche, major and
regional investment banks, broker dealers and banks
• Experience includes senior responsibility for 45 mergers and acquisitions and 25 securities
offerings, including bank and insurance companies’ mutual-to-stock conversions
• Professional experience includes tenures with bank boutiques Keefe, Bruyette & Woods, Inc.
and Alex Sheshunoff & Co., Inc.; major and regional securities firms Kidder, Peabody & Co.,
Inc., The First Boston Corporation and Advest, Inc.; and niche firm of McColl Partners LLC
• Former Corporate Finance Director of a multi-billion dollar community bank
57
Disclosure Statement
This presentation is not considered complete without the accompanying oral presentation made by
Griffin Financial Group (“Griffin”).
Any projections or recommendations contained herein involve many assumptions regarding trends,
company-specific operating characteristics, financial market perceptions and the general state of the
economy as well as internal factors within management control, such as capital investment. As such, any
projections contained herein represent only one of an infinite number of outcomes and should not be
construed as the only possible outcome.
The information contained in this presentation and attached exhibits have been obtained from sources
that are believed to be reliable. Griffin makes no representations or warranties as to the accuracy or
completeness of the information herein.
All terms and conditions contained herein are based upon current market conditions and are estimates
based upon prevailing market rates. Any or all estimates may or may not change as market conditions
dictate. As such, any or all terms and conditions presented herein are preliminary in nature and should
not be construed, either in whole or in part, as a commitment to perform or provide any specific services.
Any and all services that may be provided by Griffin or any other entity referred to in this discussion
outline will be contingent upon the signing of a proposal or contract.
Griffin Financial Group, Inc. does not provide legal, tax or accounting advice. Any statement contained
in this communication (including any attachments) concerning U.S. tax matters was not intended or
written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue
Code, and was written to support the promotion or marketing of the transaction(s) or matter(s)
addressed. Clients of Griffin Financial Group, Inc. should obtain their own independent tax and legal
advice based on their particular circumstances.
58