FLAGSTAR BANCORP INC – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Edgar Online, Inc. |
Where we say "we," "us," or "our," we usually meanFlagstar Bancorp, Inc. However, in some cases, a reference to "we," "us," or "our" will include our wholly-owned subsidiaryFlagstar Bank, FSB , andFlagstar Capital Markets Corporation ("FCMC"), our wholly-owned subsidiary, which we collectively refer to as the"Bank." FORWARD - LOOKING STATEMENTS This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in a forward-looking statement. Examples of forward-looking statements include statements regarding our expectations, beliefs, plans, goals, objectives and future financial or other performance. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. Except to fulfill our obligations under the U.S. securities laws, we undertake no obligation to update any such statement to reflect events or circumstances after the date on which it is made.
There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include:
(1) Volatile interest rates-which affect, among other things, (i) the mortgage business, (ii) our ability to originate loans and sell assets at a profit, (iii) prepayment speeds and (iv) our cost of funds-could adversely affect earnings;
(2) Competitive factors for mortgage loan originations could negatively
affect gain on loan sale margins;
(3) Competition from banking and non-banking companies for deposits and
loans can affect our earnings, gain on sale margins and market share; (4) Changes in the regulation of financial services companies and government-sponsored housing enterprises and, in particular, declines in the liquidity of the secondary market for
residential
mortgage loan sales could adversely affect our business; (5) Changes in regulatory capital requirements or an inability to achieve or maintain desired capital ratios could adversely affect our earnings opportunities and our ability to originate certain types of loans, as well as our ability to sell certain types of assets for fair market value;
(6) General business and economic conditions, including unemployment
rates, movements in interest rates, the slope of the yield curve, any increase in mortgage fraud and other related criminal activity and the further decline of asset values in certain geographic markets, may significantly affect our business activities, loan losses, reserves, earnings and business prospects; (7) Repurchases and indemnity demands by mortgage loan purchasers, guarantors and insurers, uncertainty related to foreclosure procedures, and the outcome of current and future legal or regulatory proceedings could result in unforeseen consequences and adversely affect our business activities and earnings; (8) Both the volume and the nature of consumer actions and other forms of litigation against financial institutions have increased, and to the extent that such actions are brought against us, the cost of defending such suits as well as potential exposure could increase our costs of operations; (9) Our compliance with the terms and conditions of the agreement with theU.S. Department of Justice , the impact of performance and enforcement of commitments under, and provisions contained in the agreement, and our accuracy and ability to estimate the financial impact of that agreement, including the fair value of the future payments required, could accelerate our related litigation settlement expenses; (10) Our, or the Bank's, failure to comply with the terms and conditions of the supervisory agreement with theBoard of Governors of the Federal Reserve or the consent order with theOffice of the Comptroller of the Currency , respectively, could result in further enforcement actions against us, which could negatively affect our results of operations and financial condition; and 64
--------------------------------------------------------------------------------
Table of Contents
(11) The downgrade of the long-term credit rating ofthe United States . by one or more ratings agencies could materially affect global and domestic financial markets and economic conditions, which may affect our business activities, financial condition, and liquidity. All of the above factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such factor on our business. Please also refer to Item 1A to Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2012 and Item 1A to Part II of this Quarterly Report on Form 10-Q, which are incorporated by reference herein, for further information on these and other factors affecting us. Although we believe that these forward-looking statements are based on reasonable estimates and assumptions, they are not guaranties of future performance and are subject to known and unknown risks, uncertainties, contingencies and other factors. Accordingly, we cannot give you any assurance that our expectations will in fact occur or that actual results will not differ materially from those expressed or implied by such forward-looking statements. In light of the significant uncertainties inherent in forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. 65 --------------------------------------------------------------------------------
General
We are aMichigan -based savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. AtJune 30, 2013 , our total assets were$12.7 billion , making us the largest bank headquartered inMichigan and one of the 10 largest savings banks inthe United States . Our common stock is listed on theNew York Stock Exchange ("NYSE") under the symbol "FBC." We are considered a controlled company forNYSE purposes, becauseMP Thrift Investments, L.P. ("MP Thrift") held approximately 63.5 percent of our common stock as ofJune 30, 2013 . As a savings and loan holding company, we are subject to regulation, examination and supervision by theBoard of Governors of the Federal Reserve (the "Federal Reserve"). The Bank is subject to regulation, examination and supervision by theOffice of the Comptroller of the Currency ("OCC") of theU.S. Department of the Treasury ("U.S. Treasury"). The Bank is also subject to regulation, examination and supervision by theFederal Deposit Insurance Corporation ("FDIC") and the Bank's deposits are insured by theFDIC through theDeposit Insurance Fund ("DIF"). The Bank is also subject to the rule-making, supervision and examination authority of theConsumer Financial Protection Bureau (the "CFPB"), which is responsible for enforcing the principal federal consumer protection laws. The Bank is a member of theFederal Home Loan Bank ("FHLB") ofIndianapolis . Our primary business is conducted through our Mortgage Banking segment, in which we originate or purchase residential first mortgage loans throughout the country and sell them into securitization pools, primarily to Fannie Mae, Freddie Mac andGinnie Mae (collectively, government sponsored entities or the "GSEs") or as whole loans. Approximately 99.4 percent of our total loan originations during the three months endedJune 30, 2013 represented mortgage loans that were collateralized by residential first mortgages on single-family residences and were eligible for sale to the GSEs. Our revenue primarily consists of net gain on loan sales, loan fees and charges, net loan administration income, and interest income from residential first mortgage loans held-for-investment and held-for-sale, and second mortgage loans held-for-investment. We originate residential first mortgage loans through our wholesale relationships with approximately 1,500 mortgage brokers and over 1,000 correspondents, which are located in all 50 states and serviced by 136 account executives. We also operate 40 home lending centers located in 17 states, which primarily originate one-to-four family residential first mortgage loans as part of our Mortgage Banking segment. These loan origination centers employ approximately 200 loan officers. We also originate mortgage loans through referrals from our banking centers, consumer direct call center and our website, www.flagstar.com. The combination of our home lending, broker and correspondent channels gives us broad access to customers across diverse geographies to originate, fulfill, sell and service our residential first mortgage loan products. Our servicing activities primarily include collecting cash for principal, interest and escrow payments from borrowers, assisting homeowners through loss mitigation activities, and accounting for and remitting principal and interest payments to mortgage-backed securities investors and escrow payments to third parties. Our business also includes the activities conducted through our Community Banking segment, in which our revenue includes net interest income and fee-based income from community banking services. AtJune 30, 2013 , we operated 111 banking centers (of which 11 are located in retail stores), all of which are located inMichigan . Of the 111 banking centers, 66 facilities are owned and 45 facilities are leased. Through our banking centers, we gather deposits and offer a line of consumer and commercial financial products and services to individuals and businesses. We provide deposit and cash management services to governmental units on a relationship basis. We leverage our banking centers to cross-sell loan and deposit products to existing customers and to increase our customer base by attracting new customers. AtJune 30, 2013 , we had a total of$7.5 billion in deposits, including$5.9 billion in retail deposits,$0.8 billion in company controlled deposits,$0.7 billion in government deposits, and$0.1 billion in wholesale deposits.
At
Operating Segments
Our business is comprised of two primary operating segments - Community Banking and Mortgage Banking. Our Community Banking segment currently offers a line of financial products and services to individuals, small and middle market businesses, and mortgage lenders. Our Mortgage Banking segment originates, acquires, sells and services residential first mortgage loans on one-to-four family residences. In addition to the two primary segments, we also have an Other segment which includes corporate treasury, tax benefits not assigned to specific operating segments, and miscellaneous other expenses of a corporate nature. Each operating segment supports and complements the operations of the other. For example, funding for the Mortgage Banking segment is primarily provided by deposits obtained through the Community Banking segment. Financial information regarding the three operating segments is set forth in Note 19 of the Notes to Consolidated Financial Statements in Item 1. Financial Statements, herein. A more detailed discussion of the three operating segments is set forth below. 66
--------------------------------------------------------------------------------
Table of Contents
Community Banking
Our Community Banking segment consists primarily of four groups: Branch Banking, Commercial and Business Banking, Government Banking, and Warehouse Lending. Our Community Banking segment's two strategic responsibilities are providing a stable funding source for the Mortgage Banking segment and operating as a standalone, profitable line of business. The groups within the Community Banking segment originate consumer loans, commercial loans and warehouse loans, gather consumer, business and governmental deposits, and offer liquidity management products. The liquidity management products include customized treasury management solutions, equipment and technology leasing, international services, capital markets services such as interest rate risk protection products, foreign exchange hedging, and trading of securities. AtJune 30, 2013 , Branch Banking included 111 banking centers located throughoutMichigan . Commercial and Business Banking includes relationship and portfolio managers throughoutMichigan's major markets. Government Banking provides deposit and cash management services to all sizes of government units and school districts on a relationship basis throughoutMichigan and others. Warehouse Lending offers lines of credit to other mortgage lenders, allowing those lenders to fund the closing of residential first mortgage loans. Our Community Banking segment intends to achieve our strategic objective of becoming a standalone, profitable line of business through implementation of a number of important initiatives, including strengthening the leadership team, enhancing the sales process, improving operating efficiencies, and developing a streamlined account opening strategy. Branch Banking intends to continue optimizing our network of offices through strategic growth and relocations. Commercial and Business Banking intends to continue our focus on acquiring new customer relationships throughoutMichigan , and Government Banking anticipates acquiring new and expanding existing relationships through a focus on checking accounts and treasury services. Our Community Banking segment's mission is to build strong and lasting relationships with customers, and such relationships are intended to include the delivery of multiple financial products and services. Regardless of whether customers are first introduced to us through a deposit account, mortgage loan, or other product, the Community Banking segment's focus is to strengthen those relationships by meeting multiple additional financial needs. Our Community Banking segment also cross-sells primary products, such as checking accounts, savings accounts, investment products, and consumer loans, to new and existing customers. Commercial loans held-for-investment. Our Commercial and Business Banking group includes relationship and portfolio managers throughoutMichigan's major markets. Our commercial loans held-for-investment totaled$642.0 million atJune 30, 2013 and$737.2 million atDecember 31, 2012 , and consists of three loan types: commercial real estate, commercial and industrial and commercial lease financing, each of which is discussed in more detail below. During the three and six months endedJune 30, 2013 , we originated$56.1 million and$122.3 million , respectively, in commercial loans, compared to$197.1 million and$464.0 million , respectively, during the three and six months endedJune 30, 2012 . The following table identifies the commercial loan held-for-investment portfolio by loan type and selected criteria atJune 30, 2013 andDecember 31, 2012 . 67
--------------------------------------------------------------------------------
Table of Contents Commercial Loans Held-for-Investment Loan on Unpaid Principal Non-accrual June 30, 2013 Balance (1) Average Note Rate Status (Dollars in thousands) Commercial real estate loans: Fixed rate$ 283,860 5.57 %$ 43,168 Adjustable rate 192,953 3.36 % 15,075 Total commercial real estate loans 476,813$ 58,243 Net deferred fees and other (313 ) Total commercial real estate loans$ 476,500 Commercial and industrial loans: Fixed rate$ 13,792 3.86 % $ 248 Adjustable rate 146,966 2.87 % 88 Total commercial and industrial loans 160,758 $ 336 Net deferred fees and other (499 )
Total commercial and industrial loans
$ 4,548 6.21 % $ 5,206 Net deferred fees and other 742 Total commercial lease financing loans $ 5,290 Total commercial loans: Fixed rate$ 302,200 5.50 %$ 48,622 Adjustable rate 339,919 3.15 % 15,163 Total commercial and industrial loans 642,119$ 63,785 Net deferred fees and other (70 )
Total commercial and industrial loans
68
--------------------------------------------------------------------------------
Table of Contents Commercial Loans Held-for-Investment Loan on Unpaid Principal Non-accrual December 31, 2012 Balance (1) Average Note Rate Status (Dollars in thousands) Commercial real estate loans: Fixed rate$ 342,296 5.5 %$ 38,909 Adjustable rate 299,489 4.1 % 47,458 Total commercial real estate loans 641,785$ 86,367 Net deferred fees and other (1,470 ) Total commercial real estate loans$ 640,315 Commercial and industrial loans: Fixed rate$ 33,124 3.5 % $ - Adjustable rate 58,544 2.7 % 41 Total commercial and industrial loans 91,668 $ 41 Net deferred fees and other (1,103 )
Total commercial and industrial loans
$ 5,634 6.2 % $ - Net deferred fees and other 666 Total commercial lease financing loans $ 6,300 Total commercial loans: Fixed rate$ 381,054 $ 38,909 Adjustable rate 358,033 47,499 Total commercial and industrial loans 739,087$ 86,408 Net deferred fees and other (1,907 )
Total commercial and industrial loans
(1) Unpaid principal balance does not include premiums or discounts.
AtJune 30, 2013 , our commercial real estate loans held-for-investment totaled$476.5 million , or 11.2 percent of our held-for-investment loan portfolio, our commercial and industrial held-for-investment loan portfolio was$160.3 million , or 3.8 percent of our held-for-investment loan portfolio, and our commercial lease financing loans held-for-investment totaled$5.3 million , or 0.1 percent of our held-for-investment loan portfolio. AtDecember 31, 2012 , our commercial real estate held-for-investment loan portfolio totaled$640.3 million , or 11.8 percent of our held-for-investment loan portfolio, our commercial and industrial held-for-investment loan portfolio was$90.6 million , or 1.7 percent of our held-for-investment loan portfolio, and our commercial lease financing held-for-investment loans totaled$6.3 million , or 0.1 percent of our held-for-investment loan portfolio.
The following table sets forth the unpaid principal balance of our commercial loan held-for-investment portfolio at
2009 and
Year of Origination Prior 2010 2011 2012
2013 Total
(Dollars in thousands)
Commercial real estate
$ 52,356 $ 476,813 Commercial and industrial 874 671 33,323 41,946 83,944 160,758 Commercial lease financing - - 3,781 509 258 4,548 Total$ 321,933 $ 12,925 $ 56,075 $ 114,628 $ 136,558 $ 642,119 The average loan balance in our total commercial held-for-investment loan portfolio was approximately$0.8 million for the six months endedJune 30, 2013 , with the largest loan being$39.5 million . There are approximately 24 loans with more than$5.0 million of unpaid principal balance and those loans comprised approximately$212.3 million , or 33.1 percent, of the total commercial held-for-investment loan portfolio in the aggregate. 69
--------------------------------------------------------------------------------
Table of Contents
Commercial real estate loans. Our commercial real estate held-for-investment loan portfolio is comprised of loans that are collateralized by real estate properties intended to be income-producing in the normal course of business and consists of commercial real estate loans originated prior to 2011, including commercial real estate loans refinanced during 2009 and 2010 and commercial real estate loans originated during 2011 and after. The following table discloses our total unpaid principal balance of commercial real estate held-for-investment loans by geographic concentration atJune 30, 2013 . June 30, 2013 State Percent Amount (1) (Dollars in thousands) Michigan 69.3 %$ 330,520 Indiana 7.6 % 36,413 Georgia 4.6 % 21,700 Florida 3.1 % 15,042 California 2.9 % 13,626 Kentucky 2.0 % 9,454 Other 10.5 % 50,058 Total 100.0 %$ 476,813
(1) Unpaid principal balance does not include premiums or discounts.
In early 2008, we ceased the origination of commercial real estate loans and allowed the amortization of our remaining commercial real estate portfolio. For the management of such loans, we replaced the previous commercial real estate management and loan officers with experienced workout officers and relationship managers. In addition, we prepared a comprehensive review, including customized workout plans for all classified loans, and risk assessments were prepared on a loan level basis for the entire commercial real estate portfolio. Such loans are managed by our special assets group, whose primary objectives are working out troubled loans, reducing classified assets and taking pro-active steps to prevent deterioration in performance. We expect to retain a portion of these loans in our loans held-for-investment portfolio while continuing to dispose of the remainder through workouts, charge offs and payoffs.
In
Commercial and industrial loans. Commercial and industrial held-for-investment loan facilities typically include lines of credit to our small or middle market businesses for use in normal business operations to finance working capital needs, equipment purchases and expansion projects. Commercial lease financing loans. Our commercial lease financing held-for-investment loan portfolio is comprised of equipment leased to customers in a direct financing lease. The net investment in financing leases includes the aggregate amount of lease payments to be received and the estimated residual values of the equipment, less unearned income. Income from lease financing is recognized over the lives of the leases on an approximate level rate of return on the unrecovered investment. The residual value represents the estimated fair value of the leased asset at the end of the lease term. Unguaranteed residual values of leased assets are reviewed at least annually for impairment. If any declines in residual values are determined to be other-than-temporary they will be recognized in earnings in the period such determinations are made. Warehouse lending. We also continue to offer warehouse lines of credit to other mortgage lenders. These allow the lender to fund the closing of residential first mortgage loans. Each extension or drawdown on the line is collateralized by the residential first mortgage loan being funded. During the six months endedJune 30, 2013 , we subsequently acquired approximately 81.7 percent of residential first mortgage loans funded through the warehouse lines. Underlying mortgage loans are predominately originated using GSE underwriting standards. These lines of credit are, in most cases, personally guaranteed by one or more principal officers of the borrower. The aggregate committed amount of adjustable rate warehouse lines of credit granted to other mortgage lenders atJune 30, 2013 was$2.2 billion , of which$0.7 billion was outstanding and bearing an average interest rate of 5.2 percent, compared to$2.3 billion committed atDecember 31, 2012 , of which$1.3 billion was outstanding with an average interest rate of 5.4 percent. The levels of outstanding balances of such warehouse lines are generally correlated to the level of our overall production levels because many of our correspondents (from whom we purchase mortgage loans) are also warehouse lending customers. During the six months endedJune 30, 2013 , our warehouse lines funded approximately 60.4 percent of the 70
--------------------------------------------------------------------------------
Table of Contents
loans in our correspondent channel, as compared to approximately 67.9 percent during the six months endedJune 30, 2012 . There were 292 warehouse lines of credit to other mortgage lenders with an average size of$7.7 million atJune 30, 2013 , compared to 311 warehouse lines of credit with an average size of$7.5 million atDecember 31, 2012 . AtJune 30, 2013 , we had$0.1 million on non-accrual status, compared to no warehouse lines on non-accrual status atDecember 31, 2012 .
Mortgage Banking
Our Mortgage Banking segment originates, acquires, sells and services one-to-four family residential first mortgage loans. The origination or acquisition of residential first mortgage loans held-for-sale constitutes our most significant lending activity.
During 2012 and continuing into 2013, we remained one of the country's leading mortgage loan originators. We utilize three production channels to originate or acquire mortgage loans: home lending centers (also referred to as "retail"), as well as brokers and correspondents (also collectively referred to as "wholesale"). Each production channel produces similar mortgage loan products and applies the same underwriting standards. We expect to continue to leverage technology to streamline the mortgage origination process and bring service and convenience to brokers and correspondents. Sales support offices are maintained that assist brokers and correspondents nationwide. We also continue to make increasing use of the Internet as a tool to facilitate the mortgage loan origination process through each of our production channels. Brokers and correspondents are able to register and lock loans, check the status of inventory, deliver documents in electronic format, generate closing documents, and request funds through the Internet. Most mortgage loans that closed in 2012 and continuing into 2013 utilized the Internet in the completion of the mortgage origination or acquisition process. During the second quarter 2013, approximately 29 percent of our residential first mortgage originations were purchase mortgages, as compared to approximately 19 percent in the first quarter 2013. We believe the purchase/refinance mix of our mortgage originations has historically tracked close to the mix of the overall mortgage industry, and we expect will continue to do so. We believe this to be the case in each of our production channels as well. Home Lending Centers. In a home lending center transaction, loans are originated through a nationwide network of our stand-alone loan origination centers, as well as referrals from our Banking segment and the national call center. When loans are originated on a retail basis, the origination documentation is completed internally inclusive of customer disclosures and other aspects of the lending process and the funding of the transactions. AtJune 30, 2013 we maintained 40 loan origination centers. At the same time, our centralized loan processing gains efficiencies and allows lending sales staff to focus on originations. Broker. In a broker transaction, an unaffiliated bank or mortgage brokerage company completes the loan paperwork, but the loans are underwritten on a loan-level basis to our underwriting standards and we supply the funding for the loan at closing (also known as "table funding") thereby becoming the lender of record. Currently, we have active broker relationships with approximately 1,500 banks, credit unions, and mortgage brokerage companies located in all 50 states. Correspondent. In a correspondent transaction, an unaffiliated bank or mortgage company completes the loan paperwork and also supplies the funding for the loan at closing. After the bank or mortgage company has funded the transaction, we purchase the loan at a market price. We do not acquire loans from correspondents on a bulk basis without prior review. Instead, we perform a full review of each loan, purchasing only those that were originated in accordance with our underwriting guidelines. We have active correspondent relationships with over 1,000 companies, including banks, credit unions, and mortgage companies located in all 50 states. 71
--------------------------------------------------------------------------------
Table of Contents
As of
Three Months Ended December 31, September 30, June 30, 2013 March 31, 2013 2012 2012 June 30, 2012 (Dollars in thousands) Home Lending Centers$ 575,016 $ 697,340 $ 998,804 $ 961,591 $ 751,075 Broker 2,974,555 3,201,371 4,524,775 4,117,742 3,156,949 Correspondent 7,332,558 8,524,540 9,833,218 9,434,287 8,638,977 Total$ 10,882,129 $ 12,423,251 $ 15,356,797 $ 14,513,620 $ 12,547,001 Purchase originations$ 3,146,501 $ 2,339,269 $ 2,915,724 $ 3,267,788 $ 3,324,501 Refinance originations 7,735,628 10,083,982 12,441,073 11,245,832 9,222,500 Total$ 10,882,129 $ 12,423,251 $ 15,356,797 $ 14,513,620 $ 12,547,001 Conventional$ 7,681,337 $ 8,591,784 $ 10,427,131 $ 10,020,863 $ 8,762,268 Government 2,535,378 2,799,000 3,363,134 3,178,563 3,085,247 Jumbo 665,414 1,032,467 1,566,532 1,314.194 699,486 Total$ 10,882,129 $ 12,423,251 $ 15,356,797 $ 14,513,620 $ 12,547,001 Underwriting
During the six months ended
Residential first mortgage loans
AtJune 30, 2013 , most of our held-for-investment residential first mortgage loans had been originated in 2008 or prior years with underwriting criteria that varied by product and with the standards in place at the time of origination. Loans originated after 2008 are loans that generally satisfy specific criteria for sale into securitization pools insured by the GSEs or were repurchased from the GSEs subsequent to such sales. AtJune 30, 3013 , the largest geographic concentrations of our residential first mortgage loans in our held-for-investment portfolio were inCalifornia ,Florida andMichigan , which represented 51.2 percent. Set forth below is a table describing the characteristics of the residential first mortgage loans in our held-for-investment portfolio atJune 30, 2013 , by year of origination. Total / Weighted Year of Origination 2009 and Prior 2010 2011 2012 2013 Average (Dollars in thousands)
Unpaid principal balance (1)
3.99 % 4.74 % 4.47 % 3.85 % 4.00 % 4.00 % Average original FICO score 711 716 735 743 742 712 Average current FICO score (2) 703 724 742 755 742 704 Average original LTV ratio 76.2 % 76.7 % 77.9 % 71.8 % 71.3 % 76.2 % Housing Price Index LTV, as recalculated (3) 89.5 % 75.4 % 74.6 % 67.1 % 70.6 % 88.9 % Underwritten with low or stated income documentation 35.0 % - % 1.0 % - % - % 34.0 %
(1) Unpaid principal balance does not include premiums or discounts.
(2) Current FICO scores obtained at various times during the six months endedJune 30, 2013 (3) The housing price index ("HPI") loan-to-value ("LTV) is updated from the original LTV based onMetropolitan Statistical Area-level Office of Federal Housing Enterprise Oversight ("OFHEO") data as ofMarch 31, 2013 . 72
--------------------------------------------------------------------------------
Table of Contents
Average original LTV represents the loan balance at origination, as a percentage of the original appraised value of the property. LTVs are refreshed quarterly based on estimates of home prices using the most current OFHEO data, and reflect the modest recovery in home prices over the past 18 months. Residential first mortgage loans are underwritten on a loan-by-loan basis rather than on a pool basis. Generally, residential first mortgage loans in the held-for-investment loan portfolio were initially reviewed by one of our in-house loan underwriters or by a contract underwriter. In all cases, loans must be underwritten to our underwriting standards. Our current criteria for underwriting generally includes, but are not limited to, full documentation of borrower income and other relevant financial information, fully indexed rate consideration for variable rate loans, and for GSE loans, the specific GSEs eligible LTV ratios with full appraisals when required. Variances from any of these standards are permitted only to the extent allowable under the specific program requirements. These specific program requirements include the ability to originate loans with less than full documentation and variable rate loans with an initial interest rate less than the fully indexed rate. Mortgage loans are collateralized by a first or second mortgage on a one-to-four family residential property. In general, for loans originated in 2008 and prior, those loans with a balance under$1,000,000 require a valid GSE automated underwriting system ("AUS") response for approval consideration. Documentation and ratio guidelines are driven by the AUS response. A FICO credit score for the borrower is required and a full appraisal of the underlying property that serve as collateral is obtained. For loan balances over$1,000,000 , traditional manual underwriting documentation and ratio requirements are required as are two years plus year to date of income documentation and two months of bank statements. Income documentation based solely on a borrower's statement was an available underwriting option for each loan category. Even so, in these cases employment of the borrower was verified under the vast majority of loan programs, and income levels were typically checked against third party sources to confirm validity. We believe that our underwriting process, which relies on the electronic submission of data and images and is based on an imaging workflow process, allows for underwriting at a higher level of accuracy and with more timeliness than exists with processes that rely on paper submissions. We also provide our underwriters with integrated quality control tools, such as automated valuation models, multiple fraud detection engines and the ability to electronically submitIRS Form 4506 to ensure underwriters have the information that they need to make informed decisions. The process begins with the submission of an electronic application and an initial determination of eligibility. The application and required documents are then uploaded to our corporate underwriting department and all documents are identified by optical character recognition or our underwriting staff. The underwriter is responsible for checking the data integrity and reviewing credit. The file is then reviewed in accordance with the applicable guidelines established by us for the particular product. Quality control checks are performed by the underwriting department using the tools outlined above, as necessary, and a decision is then made and communicated to the prospective borrower. 73
--------------------------------------------------------------------------------
Table of Contents
The following table identifies our held-for-investment mortgages by major category, at
Average Weighted Unpaid Average Current Average Average Housing Price Principal Average Original FICO Score Maturity Original LTV Index LTV, as June 30, 2013 Balance (1) Note Rate FICO Score (2) (months) Ratio recalculated (3) (Dollars in thousands) Residential first mortgage loans Amortizing 3/1 ARM$ 132,462 3.50 % 691 698 259 80.3 % 82.3 % 5/1 ARM 341,907 3.61 % 717 724 274 73.9 % 76.6 % 7/1 ARM 29,079 4.28 % 728 749 299 73.1 % 71.3 % Other ARM 57,222 3.16 % 676 686 251 83.4 % 78.2 % Fixed mortgage loans (4) 871,769 4.45 % 698 661 330 78.4 % 94.6 %
Total amortizing 1,432,439 4.10 % 702 683
306 77.6 % 88.0 % Interest only 3/1 ARM 185,609 3.57 % 722 721 266 74.3 % 87.5 % 5/1 ARM 716,018 3.37 % 724 737 267 75.0 % 87.5 % 7/1 ARM 42,398 6.23 % 732 731 287 73.8 % 98.7 % Other ARM 38,538 3.41 % 723 728 269 76.2 % 92.5 % Other interest only 148,677 6.33 % 727 721 289 73.9 % 98.9 % Total interest only 1,131,240 3.90 % 724 731 276 74.6 % 89.6 % Option ARMs 39,105 3.05 % 717 712 303 69.3 % 99.0 % Subprime (5) 3/1 ARM 49 10.30 % 685 726 268 95.0 % 71.1 % Other ARM 166 9.89 % 591 644 284 90.0 % 83.4 % Other subprime 2,698 8.37 % 624 650 287 72.6 % 98.0 % Total subprime$ 2,913 8.49 % 623 651 286 73.9 % 96.8 % Total residential first mortgage loans$ 2,605,697 4.00 % 712 704 291 76.2 % 88.9 % Second mortgage loans (6) (7)$ 180,784 7.22 % 730 730 116 20.4 % 22.2 % HELOC loans (6) (7)$ 321,431 5.58 % 727 727 41 26.3 % 28.7 %
(1) Unpaid principal balance does not include premiums or discounts.
(2) Current FICO scores obtained at various times during the six months endedJune 30, 2013 . (3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as ofMarch 31, 2013 .
(4) Includes substantially fixed rate mortgage loans.
(5) Subprime loans are defined in accordance with the
regulations definitions for subprime loans, which includes loans with FICO
scores below 620 or similar characteristics.
(6) Reflects lower LTV only as to second liens because information regarding
the first liens is not available. (7) Includes$73.3 million and$170.5 million of second mortgage and home equity line of credit ("HELOC") loans, respectively, that were reconsolidated as a result of the settlements withMBIA Insurance Corporation ("MBIA") andAssured Guaranty Municipal Corp. , formerly known asFinancial Security Assurance Inc. ("Assured") and accounted for under the fair value option atJune 30, 2013 . The LTV information is not available for these loans. 74
--------------------------------------------------------------------------------
Table of Contents
The following table sets forth characteristics of those loans in our held-for-investment mortgage portfolio as ofJune 30, 2013 that were originated with less documentation than is now required by the GSEs. Loans as to which underwriting information was accepted from a borrower without validating that particular item of information are referred to as "low doc" or "stated." Substantially all of those loans were underwritten with verification of employment, but with the related job income, personal assets, or both, stated by the borrower without verification of actual amount. The lack of verification of borrower provided information may increase the risk profile of those loans. Loans as to which underwriting information was supported by third party documentation or procedures are referred to as "full doc," and the information therein is referred to as "verified." Also set forth are different types of loans that may have a higher risk of non-collection than other loans. Low Doc % of Residential First Unpaid Principal June 30, 2013 % of Held-for-Investment loans Mortgage loans Balance (1) (Dollars in thousands) Characteristics SISA (stated income, stated asset) 1.89 % 3.23 % $ 84,217 SIVA (stated income, verified assets) 10.85 % 18.60 % 484,765 High LTV (i.e., at or above 95% at origination) 0.17 % 0.30 % 7,779 Second lien products (HELOCs, second mortgages) 3.37 % 5.78 % 150,513 Loan types Option ARM loans 0.52 % 0.89 % 23,072 Interest-only loans 9.09 % 15.59 % 406,194 Subprime (2) 0.03 % 0.06 % 1,488
(1) Unpaid principal balance does not include premiums or discounts.
(2) Subprime loans are defined in accordance with the
regulations definitions for subprime loans, which includes loans with FICO
scores below 620 or similar characteristics.
Adjustable-rate mortgage loans. Adjustable rate mortgage ("ARM") loans held-for-investment were originated using Fannie Mae and Freddie Mac guidelines as a base framework, and the debt-to-income ratio guidelines and documentation typically followed the AUS guidelines. Our underwriting guidelines were designed with the intent to minimize layered risk. The maximum ratios allowable for purposes of both the LTV ratio and the combined loan-to-value ("CLTV") ratio, which includes second mortgages on the same collateral, was 100 percent, but subordinate (or second mortgage) financing was not allowed over a 90 percent LTV ratio. At a 100 percent LTV ratio with private mortgage insurance, the minimum acceptable FICO score, or the "floor," was 700, and at lower LTV ratio levels, the FICO floor was 620. All occupancy and specific-purpose loan types were allowed at lower LTVs. At times ARMs were underwritten at an initial rate, also known as the "start rate," that was lower than the fully indexed rate but only for loans with lower LTV ratios and higher FICO scores. Other ARMs were either underwritten at the note rate if the initial fixed term was two years or greater, or at the note rate plus two percentage points if the initial fixed rate term was six months to one year. Set forth below is a table describing the characteristics of our ARM loans in our residential first mortgage held-for-investment loan portfolio atJune 30, 2013 , by year of origination. Total / Weighted Year of Origination 2009 and Prior 2010 2011 2012 2013 Average (Dollars in thousands) Unpaid principal balance (1)$ 1,530,958 $ 8,137 $ 18,347 $ 17,918 $ 7,193 $ 1,582,553 Average note rate 3.52 % 4.16 % 4.24 % 3.79 % 3.99 % 3.54 % Average original FICO score 717 740 741 761 741 718 Average current FICO score (2) 725 757 754 773 741 726 Average original LTV ratio 75.4 % 71.4 % 73.9 % 63.6 % 71.8 % 75.2 % Housing Price Index LTV, as recalculated (3) 85.4 % 71.5 % 70.0 % 59.8 % 71.1 % 84.8 % Underwritten with low or stated income documentation 35.0 % - % 1.0 % - % - % 33.0 %
(1) Unpaid principal balance does not include premiums or discounts.
(2) Current FICO scores obtained at various times during the six months endedJune 30, 2013 . (3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as ofMarch 31, 2013 . 75
--------------------------------------------------------------------------------
Table of Contents
Option ARMs. We previously offered option ARMs, which are adjustable rate mortgage loans that permit a borrower to select one of three monthly payment options when the loan is first originated: (i) a principal and interest payment that would fully repay the loan over its stated term, (ii) an interest-only payment that would require the borrower to pay only the interest due each month but would have a period (usually 10 years) after which the entire amount of the loan would need to be repaid or refinanced, and (iii) a minimum payment amount selected by the borrower and which might exclude principal and some interest, with the unpaid interest added to the balance of the loan (i.e., a process known as "negative amortization"). Set forth below is a table describing specific characteristics of option ARMs in our held-for-investment mortgage portfolio atJune 30, 2013 , which were originated in 2008 or prior. Year of Origination 2008 and Prior (Dollars in thousands) Unpaid principal balance (1) $ 39,105 Average note rate 3.05 % Average original FICO score 717 Average current FICO score (2) 712 Average original LTV ratio 69.3 % Average original CLTV ratio 75.1 % Housing Price Index LTV, as recalculated (3) 99.0 % Underwritten with low or stated income documentation $ 23,072
Total principal balance with any accumulated negative amortization $
25,281
Percentage of total ARMS with any accumulated negative amortization
1.6 %
Amount of net negative amortization (i.e., deferred interest) accumulated as interest income during the six months ended
2,464
(1) Unpaid principal balance does not include premiums or discounts.
(2) Current FICO scores obtained at various times during the six months endedJune 30, 2013 . (3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as ofMarch 31, 2013 . Set forth below are the accumulated amounts of interest income arising from the net negative amortization portion of loans during the six months endedJune 30, 2013 and 2012. Unpaid Principal Balance of Amount of Net Negative Loans in Negative Amortization At Amortization Accumulated as Year-End (1) Interest Income During Period (Dollars in thousands) 2013 $ 25,281 $ 2,464 2012 $ 54,898 $ 5,340
(1) Unpaid principal balance does not include premiums or discounts.
Set forth below are the frequencies at which the interest rate on ARM loans outstanding atJune 30, 2013 , will reset. Reset frequency # of Loans Balance % of the Total (Dollars in thousands) Monthly 110$ 21,888 1.4 % Semi-annually 3,250 998,390 63.1 % Annually 2,783 403,070 25.5 % No reset - non-performing loans 543 159,205 10.0 % Total 6,686$ 1,582,553 100.0 % 76
--------------------------------------------------------------------------------
Table of Contents
Set forth below as ofJune 30, 2013 , are the amounts of the ARM loans in our held-for-investment loan portfolio with interest rate reset dates in the periods noted. As noted in the above table, loans may reset more than once over a three-year period and non-performing loans do not reset while in the non-performing status. Accordingly, the table below may include the same loans in more than one period. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (Dollars in thousands) 2013 (1) N/A N/A$ 572,921 $ 602,814 2014 603,192 631,299 650,918 627,652 2015 644,859 649,794 673,692 645,377 Later years (2) 666,735 665,705 696,131 668,879
(1) Reflect loans that have reset through
(2) Later years reflect one reset period per loan.
Interest only mortgages. We offered adjustable rate, fixed term loans with 10-year, interest only options. These loans were originated using Fannie Mae and Freddie Mac guidelines as a base framework. We generally applied the debt-to-income ratio guidelines and documentation using the automated underwriting Approve/Reject response requirements of Fannie Mae and Freddie Mac.
Set forth below is a table describing the characteristics of the interest only mortgage loans in our held-for-investment mortgage portfolio atJune 30, 2013 , by year of origination. Total / Weighted Year of Origination 2009 and Prior 2010 2011 2012 2013 Average (Dollars in thousands) Unpaid principal balance (1) (2)$ 1,130,295 $ 945 $ - $ - $ -$ 1,131,240 Average note rate 3.90 % 5.16 % - % - % - % 3.90 % Average original FICO score 724 688 - - - 724 Average current FICO score (3) 731 712 - - - 731 Average original LTV ratio 74.7 % 57.5 % - % - % - % 74.6 % Housing Price Index LTV, as recalculated (4) 89.6 % 57.7 % - % - % - % 89.6 % Underwritten with low or stated income documentation 36.0 % - % - % - % - % 36.0 %
(1) Unpaid principal balance does not include premiums or discounts.
(2) Interest only loans placed in portfolio in 2010 comprise loans that were
initially originated for sale. There are two loans in this population.
(3) Current FICO scores obtained at various times during the six months endedJune 30, 2013 . (4) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as ofMarch 31, 2013 .
Set forth below is a table describing the amortization date and payment shock of current interest only mortgage loans at the dates indicated in our held-for-investment mortgage portfolio at
Total / Weighted 2013 2014 2015 2016 2017 Thereafter Average (Dollars in thousands) Unpaid principal balance (1)$ 20,236 $ 309,272 $ 376,720 $ 63,173 $ 304,432 $ 12,464 $ 1,086,297 Weighted average rate 3.50 % 3.49 % 3.47 % 3.73 % 4.65 % 5.25 % 3.74 % Average original monthly payment per loan (dollars)$ 1,293 $ 1,371 $ 1,408 $ 1,723 $ 2,696 $ 1,913 $ 1,662 Average current monthly payment per loan (dollars)$ 979 $ 913 $ 820 $ 1,059 $ 2,032 $ 1,590 $ 1,104 Average amortizing payment per loan (dollars)$ 1,668 $ 2,168 $ 1,625 $ 1,864 $ 3,212 $ 2,152 $ 2,111 Loan count 70 992 1,339 204 613 38 3,256 Payment shock (dollars)$ 689 $ 1,255 $ 805 $ 805 $ 1,181 $ 562 $ 1,008 Payment shock (percent) 70.0 % 138.0 % 98.0 % 76.0 % 44.0 % 35.0 % 91.0 %
(1) Unpaid principal balance does not include premiums or discounts.
77
--------------------------------------------------------------------------------
Table of Contents
Second mortgage loans. The majority of second mortgages we originated were closed in conjunction with the closing of the residential first mortgages originated by us. We generally required the same levels of documentation and ratios as with our residential first mortgages. For second mortgages closed in conjunction with a residential first mortgage loan that was not being originated by us, our allowable debt-to-income ratios for approval of the second mortgages were capped at 40 percent to 45 percent. In the case of a loan closing in which full documentation was required and the loan was being used to acquire the borrower's primary residence, we allowed a CLTV ratio of up to 100 percent; for similar loans that also contained higher risk elements, we limited the maximum CLTV to 90 percent. FICO floors ranged from 620 to 720, and fixed and adjustable rate loans were available with terms ranging from five to 20 years. Set forth below is a table describing the characteristics of the second mortgage loans in our held-for-investment portfolio atJune 30, 2013 , by year of origination. Total / Weighted Year of Origination 2009 and Prior 2010 2011 2012 2013 Average (Dollars in thousands) Unpaid principal balance (1)$ 179,985 $ 349 $ 45 $ 293 $ 112 $ 180,784 Average note rate 7.23 % 6.85 % 6.99 % 4.34 % 5.20 % 7.22 % Average original FICO score 730 696 664 763 757 730 Average original LTV ratio (2) 20.4 % 14.7 % 17.8 % 21.0 % 14.7 % 20.4 % Average original CLTV ratio 50.6 % 65.5 % 94.1 % 79.0 % 86.6 % 50.7 % Housing Price Index LTV, as recalculated (3) 22.2 % 13.7 % 15.8 % 20.5 % 14.4 % 22.2 %
(1) Unpaid principal balance does not include premiums or discounts.
(2) Reflects lower LTV only as to second liens because information regarding
the first liens is not available. (3) The HPI LTV is updated from the original LTV based on Metropolitan
Statistical Area-level OFHEO data as of
available for the loans associated with the MBIA Settlement. (4) Includes$73.3 million of second mortgage that were reconsolidated as a result of the MBIA Settlement Agreement and accounted for under the fair
value option at
for these loans. Home Equity Line of Credit loans. We originated HELOC loans from 2002 to mid-2009. The majority of these HELOC loans were closed in conjunction with the closing of related first mortgage loans originated and serviced by us. Documentation requirements for HELOC applications were generally the same as those required of borrowers for the first mortgage loans originated by us, and debt-to-income ratios were capped at 50 percent. For HELOCs closed in conjunction with the closing of a first mortgage loan that was not being originated by us, our debt-to-income ratio requirements were capped at 40 percent to 45 percent and the LTV was capped at 80 percent. The qualifying payment varied over time and included terms such as either 0.75 percent of the line amount or the interest only payment due on the full line based on the current rate plus 0.5 percent. HELOCs were available in conjunction with primary residence transactions that required full documentation, and the borrower was allowed a CLTV ratio of up to 100 percent. For similar loans that also contained higher risk elements, we limited the maximum CLTV to 90 percent. FICO floors ranged from 620 to 720. The HELOC terms called for monthly interest only payments with a balloon principal payment due at the end of 10 years. At times, initial teaser rates were offered for the first three months.
HELOC loan originations were re-launched in
78
--------------------------------------------------------------------------------
Table of Contents
Set forth below is a table describing the characteristics of the HELOCs in our held-for-investment portfolio at
Total / 2009 and Weighted
Year of Origination Prior (1) 2010 2011 2012
2013 Average (Dollars in thousands) Unpaid principal balance (2)$ 302,017 $ -$ 1,937 $
10,288$ 7,189 $ 321,431 Average note rate (3) 5.70 % - % 3.87 % 3.74 % 3.60 % 5.58 % Average original FICO score 724 - 753 765 762 727 Average original LTV ratio 25.1 % - % 42.3 % 46.2 % 42.4 % 26.3 % Housing Price Index LTV, as recalculated (4) 28.4 % - % 32.5 % 35.7 % 31.5 % 28.7 %
(1) Includes
result of the Assured Settlement Agreement and accounted for under the
fair value option at
available for these loans.
(2) Unpaid principal balance does not include premiums or discounts.
(3) Average note rate reflects the rate that is currently in effect. As these
loans adjust on a monthly basis, the average note rate could increase, but
would not decrease, as currently the minimum rate on virtually all of the
loans is in effect. (4) The HPI LTV is updated from the original LTV based on Metropolitan
Statistical Area-level OFHEO data as of
because these are second liens and information regarding the first lien is
not available. The HPI LTV is not available for the loans reconsolidated
as part of the Assured Settlement. 79
--------------------------------------------------------------------------------
Table of Contents
Summary of Operations
Our net income applicable to common stock for the three months endedJune 30, 2013 was$65.8 million ($1.10 per diluted share), compared to$86.0 million ($1.47 per diluted share) for the three months endedJune 30, 2012 . Our net income applicable to common stock for the six months endedJune 30, 2013 was$87.9 million ($1.43 per diluted share), compared to$77.3 million ($1.26 per diluted share) for the six months endedJune 30, 2012 . The increase during the six months endedJune 30, 2013 , compared to the six months endedJune 30, 2012 , was affected by the following factors:
• Provision for loan losses decreased by
ended
the estimation process during the first quarter of 2012, lower quarterly
loss rates and decreased qualitative factors;
• Representation and warranty reserve - change in estimate decreased
million to
primarily due to the refinements to the estimation process during the first quarter of 2012;
• Net gain on loan sales decreased
mortgage rate lock commitments and a lower base gain on sale margin;
• Net interest income decreased by
six months ended
residential first mortgage loans held-for-sale and warehouse and residential first mortgage loans held-for-investment, as well as a lower rate environment. Net interest margin decreased to 1.75 percent, as compared to 2.34 percent for the six months endedJune 30, 2012 ;
• Income of
to the reconsolidation, at fair value, of the HELOC securitization trusts
as a result of the Assured Settlement Agreement; and
• Legal and professional expense increased
for the six months ended
expense. 80
--------------------------------------------------------------------------------
Table of Contents Selected Financial Ratios (Dollars in thousands, except share data) Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 Return on average assets 2.03 % 2.37 % 1.32 % 1.08 % Return on average equity 21.23 % 31.09 % 14.57 % 13.78 % Efficiency ratio 65.3 % 53.7 % 73.1 % 58.5 % Efficiency ratio (credit-adjusted) (1) 53.5 % 41.2 % 61.1 % 41.8 % Equity/assets ratio (average for the period) 9.56 % 7.62 % 9.06 % 7.81 % Mortgage loans originated (2)$ 10,882,129 $ 12,547,017 $ 23,305,492 $ 23,716,426 Other loans originated$ 67,763 $ 203,584 $ 142,503 $ 475,029 Mortgage loans sold and securitized$ 11,123,821 $ 12,777,311 $ 23,946,700 $ 23,607,109 Interest rate spread - bank only (3) 1.46 % 2.10 % 1.55 % 2.12 % Net interest margin - bank only (4) 1.72 % 2.37 % 1.81 % 2.39 % Interest rate spread - consolidated (3) 1.43 % 2.08 % 1.52 % 2.10 % Net interest margin - consolidated (4) 1.66 % 2.32 % 1.75 % 2.34 % Average common shares outstanding 56,053,922 55,740,558 56,014,126 55,701,431 Average fully diluted shares outstanding 56,419,163 56,182,130 56,417,122 56,008,232 Average interest earning assets$ 11,311,945 $ 12,943,237 $ 11,691,470 $ 12,791,952 Average interest paying liabilities$ 9,642,543 $ 11,100,307 $ 9,988,671 $ 11,047,283 Average stockholders' equity$ 1,238,787 $ 1,106,224 $ 1,206,563 $ 1,121,421 Charge-offs to average LHFI 6.96 % 3.24 % 4.88 % 6.18 % Charge-offs to average LHFI, adjusted (5) 3.56 % 3.24 % 3.24 % 6.18 % June 30, 2013 December 31, 2012 June 30, 2012 Equity-to-assets ratio 9.84 % 8.23 % 8.20 % Tier 1 leverage ratio (to adjusted total assets) (6) 11.00 % 9.26 % 9.07 % Total risk-based capital ratio (to risk-weighted assets) (6) 25.01 % 17.18 % 17.03 % Book value per common share$ 17.66 $ 16.12$ 16.50 Number of common shares outstanding 56,077,528 55,863,053 55,772,262 Mortgage loans serviced for others$ 68,320,534 $ 76,821,222 $ 76,192,099 Weighted average service fee (basis points) 29.5 29.2 30.4 Capitalized value of mortgage servicing rights 1.07 % 0.93 % 0.84 % Ratio of allowance for loans losses to non-performing LHFI (7) (8) 94.2 % 76.3 % 66.5 % Ratio of allowance for loan losses to LHFI (7)(8) 5.75 % 5.61 % 4.38 % Ratio of non-performing assets to total assets (bank only) 2.71 % 3.70 % 3.75 % Number of banking centers 111 111 111 Number of loan origination centers 40 31 30 Number of employees (excluding loan officers and account executives) 3,418 3,328 3,184 Number of loan officers and account executives 341 334 336
(1) See Non-GAAP reconciliation.
(2) Includes residential first mortgage and second mortgage loans.
(3) Interest rate spread is the difference between the annualized average
yield earned on average interest-earning assets for the period and the annualized average rate of interest paid on average interest-bearing liabilities for the period.
(4) Net interest margin is the annualized effect of the net interest income
divided by that period's average interest-earning assets. (5) Excludes charge-offs of$38.3 million related to the sale of
non-performing and TDR loans, during both the three and six months ended
(6) Based on adjusted total assets for purposes of tangible capital and core
capital, and risk-weighted assets for purposes of risk-based capital and
total risk-based capital. These ratios are applicable to the Bank only.
(7) Bank only and does not include non-performing loans held-for-sale.
(8) Excludes loans carried under the fair value option.
81
--------------------------------------------------------------------------------
Table of Contents
Net Interest Income
Net interest income is primarily the dollar value of the average yield we earn on the average balances of our interest-earning assets, less the dollar value of the average cost of funds we incur on the average balances of our interest-bearing liabilities. Interest income recorded on loans is reduced by the amortization of net premiums and net deferred loan origination costs. We recognized$47.1 million in net interest income for the three months endedJune 30, 2013 , which represented a decrease of 37.6 percent, compared to$75.5 million reported for the three months endedJune 30, 2012 . The$28.4 million decrease for the three months endedJune 30, 2013 is primarily due to a decrease in average yield on interest-earning assets and a decrease in average balances of loans held-for-investment. Net interest income represented 20.6 percent of our total revenue during the three months endedJune 30, 2013 , compared to 23.9 percent for the three months endedJune 30, 2012 . Interest expense for the three months endedJune 30, 2013 decreased to$38.0 million , compared to$47.4 million for three months endedJune 30, 2012 . The average cost of interest-bearing liabilities decreased 14 basis points to 1.58 percent for the three months endedJune 30, 2013 from 1.72 percent for the three months endedJune 30, 2012 and the average yield on interest-earning assets decreased 79 basis points, to 3.01 percent for the three months endedJune 30, 2013 from 3.80 percent for the three months endedJune 30, 2012 . As a result, our interest rate spread was 1.43 percent for the three months endedJune 30, 2013 , compared to 2.08 percent for the three months endedJune 30, 2012 . Our consolidated net interest margin for the three months endedJune 30, 2013 was 1.66 percent, compared to 2.32 percent for the three months endedJune 30, 2012 . The Bank had a net interest margin of 1.72 percent for the three months endedJune 30, 2013 , compared to 2.37 percent for the three months endedJune 30, 2012 . For the six months endedJune 30, 2013 , we recognized$102.8 million in net interest income, which represented a decrease of 31.6 percent, compared to$150.2 million recorded for the six months endedJune 30, 2012 . The$47.4 million decrease for the six months endedJune 30, 2013 , is primarily due to a decrease of$1.1 billion in average interest earning assets and yield reductions of 76 basis points on interest earning assets. Net interest income as a percentage of total revenue was 21.9 percent during the six months endedJune 30, 2013 , compared to 24.5 percent for the six months endedJune 30, 2012 . For the six months endedJune 30, 2013 , we had average interest-earning assets of$11.7 billion , compared to$12.8 billion for the six months endedJune 30, 2012 . The decrease in average interest-earning assets is primarily due to a$1.9 billion decrease in average loans held-for-investment. Average interest bearing liabilities totaled$10.0 billion for the six months endedJune 30, 2013 , compared to$11.0 billion for the six months endedJune 30, 2012 . The decrease reflects a$1.0 billion decrease in averageFHLB advances. As a result, our interest rate spread was 1.52 percent for the six months endedJune 30, 2013 , compared to 2.10 percent for the six months endedJune 30, 2012 . Our consolidated net interest margin was negatively impacted by the contraction of our interest rate spread during the six months endedJune 30, 2013 . The result was a net interest margin for the six months endedJune 30, 2013 of 1.75 percent, compared to 2.34 percent the six months endedJune 30, 2012 . The Bank recorded a net interest margin of 1.81 percent for the six months endedJune 30, 2013 , compared to 2.39 percent for the six months endedJune 30, 2012 . 82
--------------------------------------------------------------------------------
Table of Contents
The following table presents interest income from average earning assets, expressed in dollars and yields, and (on a consolidated basis, rather than on a Bank-only basis) interest expense on average interest-bearing liabilities, expressed in dollars and rates. Interest income recorded on our loans is adjusted by the amortization of net premiums, net deferred loan origination costs and the amount of negative amortization (i.e., capitalized interest) arising from our option ARM loans. These adjustments to interest income during the three and six months endedJune 30, 2013 was a net reduction of$0.5 million and$1.6 million , respectively, compared to a net reduction of$0.1 million and$2.1 million during the three and six months endedJune 30, 2012 , respectively. Non-accruing loans are included in the average loans balance. Three Months Ended June 30, 2013 2012 Annualized Annualized Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate (Dollars in thousands) Interest-Earning Assets Loans held-for-sale$ 2,630,309 $ 22,202 3.38 %$ 2,977,233 $ 29,092 3.91 % Loans repurchased with government guarantees 1,540,798 13,220 3.43 % 2,067,022 17,385 3.36 % Loans held-for-investment Consumer loans (1) 3,845,503 39,230 4.08 % 4,635,259 50,713 4.38 % Commercial loans (1) 669,253 7,079 4.18 % 1,835,897 18,421 3.97 % Loans held-for-investment 4,514,756 46,309 4.10 % 6,471,156 69,134 4.27 % Investment securities available-for-sale or trading 240,296 1,838 3.06 % 642,389 6,850 4.27 % Interest-earning deposits and other 2,385,786 1,489 0.25 % 785,437 462 0.24 % Total interest-earning assets 11,311,945 85,058 3.01 % 12,943,237 122,923 3.80 % Other assets 1,649,000 1,571,239 Total assets$ 12,960,945 $ 14,514,476 Interest-Bearing Liabilities Demand deposits$ 395,137 $ 205 0.21 %$ 361,916 $ 219 0.24 % Savings deposits 2,627,166 4,753 0.73 % 1,829,592 3,418 0.75 % Money market deposits 345,694 223 0.26 % 482,296 588 0.49 % Certificates of deposit 2,353,775 5,338 0.91 % 3,113,134 9,815 1.27 % Total retail deposits 5,721,772 10,519 0.74 % 5,786,938 14,040 0.98 % Demand deposits 114,707 115 0.40 % 95,805 117 0.49 % Savings deposits 169,122 122 0.29 % 272,119 381 0.56 % Certificates of deposit 413,177 457 0.44 % 361,315 595 0.66 % Total government deposits 697,006 694 0.40 % 729,239 1,093 0.60 % Wholesale deposits 73,910 935 5.07 % 339,018 3,188 3.78 % Total deposits 6,492,688 12,148 0.75 % 6,855,195 18,321 1.07 %Federal Home Loan Bank advances 2,901,102 24,171 3.34 % 3,996,527 27,386 2.76 % Other 248,753 1,643 2.65 % 248,585 1,738 2.81 % Total interest-bearing liabilities 9,642,543 37,962 1.58 % 11,100,307 47,445 1.72 % Other liabilities (2) 2,079,615 2,307,945 Stockholders' equity 1,238,787 1,106,224 Total liabilities and stockholders' equity$ 12,960,945 $ 14,514,476 Net interest-earning assets$ 1,669,402 $ 1,842,930 Net interest income$ 47,096 $ 75,478 Interest rate spread (3) 1.43 % 2.08 % Net interest margin (4) 1.66 % 2.32 % Ratio of average interest-earning assets to interest-bearing liabilities 117.3 % 116.6 % (1) Consumer loans include: residential first mortgage, second mortgage, warehouse lending, HELOC and other consumer loans. Commercial loans
include: commercial real estate, commercial and industrial, and commercial
lease financing loans. (2) Includes company controlled deposits that arise due to the servicing of loans for others, which do not bear interest.
(3) Interest rate spread is the difference between rates of interest earned on
interest-earning assets and rates of interest paid on interest-bearing
liabilities. (4) Net interest margin is net interest income divided by average interest-earning assets. 83
--------------------------------------------------------------------------------
Table of Contents Six Months Ended June 30, 2013 2012 Annualized Annualized Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Interest-Earning Assets Loans held-for-sale$ 3,120,529 $ 49,010 3.14 %$ 2,685,479 $ 53,334 3.97 % Loans repurchased with government guarantees 1,656,872 28,225 3.41 % 2,044,680 34,459 3.37 % Loans held-for-investment Consumer loans (1) 3,990,157 81,914 4.12 % 4,813,043 104,628 4.36 % Commercial loans (1) 683,681 14,531 4.23 % 1,795,907 37,098 4.09 % Loans held-for-investment 4,673,838 96,445 4.13 % 6,608,950 141,726 4.28 % Investment securities available-for-sale or trading 294,112 3,932 2.67 % 714,332 15,421 4.32 % Interest-earning deposits and other 1,946,119 2,435 0.25 % 738,511 874 0.24 % Total interest-earning assets 11,691,470 180,047 3.08 % 12,791,952 245,814 3.84 % Other assets 1,633,267 1,568,874 Total assets$ 13,324,737 $ 14,360,826 Interest-Bearing Liabilities Demand deposits$ 391,820 $ 444 0.23 %$ 354,229 $ 441 0.25 % Savings deposits 2,472,870 9,033 0.74 % 1,719,894 6,723 0.79 % Money market deposits 366,581 553 0.30 % 484,602 1,236 0.51 % Certificates of deposit 2,641,070 11,846 0.90 % 3,099,009 20,145 1.31 % Total retail deposits 5,872,341 21,876 0.75 % 5,657,734 28,545 1.01 % Demand deposits 106,619 220 0.42 % 97,265 239 0.49 % Savings deposits 238,581 479 0.40 % 271,360 767 0.57 % Certificates of deposit 442,347 1,151 0.52 % 376,985 1,243 0.66 % Total government deposits 787,547 1,850 0.47 % 745,610 2,249 0.61 % Wholesale deposits 77,921 1,930 4.99 % 348,275 6,514 3.76 % Total Deposits 6,737,809 25,656 0.77 % 6,751,619 37,308 1.11 %Federal Home Loan Bank advances 3,002,764 48,332 3.25 % 4,047,079 54,778 2.72 % Other 248,098 3,295 2.68 % 248,585 3,517 2.84 % Total interest-bearing liabilities 9,988,671 77,283 1.56 % 11,047,283 95,603 1.74 % Other liabilities (2) 2,129,503 2,192,122 Stockholders' equity 1,206,563 1,121,421 Total liabilities and stockholders' equity$ 13,324,737 $ 14,360,826 Net interest-earning assets$ 1,702,799 $ 1,744,669 Net interest income$ 102,764 $ 150,211 Interest rate spread (3) 1.52 % 2.10 % Net interest margin (4) 1.75 % 2.34 % Ratio of average interest-earning assets to interest-bearing liabilities 117.0 % 115.8 % (1) Consumer loans include: residential first mortgage, second mortgage, warehouse lending, HELOC and other consumer loans. Commercial loans
include: commercial real estate, commercial and industrial, and commercial
lease financing loans. (2) Includes company controlled deposits that arise due to the servicing of loans for others, which do not bear interest.
(3) Interest rate spread is the difference between rates of interest earned on
interest-earning assets and rates of interest paid on interest-bearing
liabilities. (4) Net interest margin is net interest income divided by average interest-earning assets. 84
--------------------------------------------------------------------------------
Table of Contents
Rate/Volume Analysis
The following tables present the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities that are presented in the preceding table. The table below distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). Changes attributable to both a change in volume and a change in rates were included as changes in rate. Three Months Ended June 30, 2013 Versus 2012 Increase (Decrease) Due to: Rate Volume Total (Dollars in thousands) Interest-Earning Assets Loans held-for-sale$ (3,499 ) $ (3,391 ) $ (6,890 ) Loans repurchased with government guarantees 261 (4,426 ) (4,165 ) Loans held-for-investment Consumer loans (1) (2,827 ) (8,656 ) (11,483 ) Commercial loans (2) 234 (11,576 ) (11,342 ) Total loans held-for-investment (2,593 ) (20,232 ) (22,825 ) Securities available-for-sale or trading (724 ) (4,288 ) (5,012 ) Interest-earning deposits and other 83 944 1,027 Total other interest-earning assets$ (6,472 ) $ (31,393 ) $ (37,865 ) Interest-Bearing Liabilities Demand deposits$ (35 ) $ 21$ (14 ) Savings deposits (163 ) 1,498 1,335 Money market deposits (197 ) (168 ) (365 ) Certificates of deposit (2,068 ) (2,409 ) (4,477 ) Total retail deposits (2,463 ) (1,058 ) (3,521 ) Demand deposits (26 ) 24 (2 ) Savings deposits (114 ) (145 ) (259 ) Certificates of deposit (225 ) 87 (138 ) Total government deposits (365 ) (34 ) (399 ) Wholesale deposits 253 (2,506 ) (2,253 ) Total deposits (2,575 ) (3,598 ) (6,173 ) Federal Home Loan Bank advances 4,333 (7,548 ) (3,215 ) Other (95 ) - (95 ) Total interest-bearing liabilities$ 1,663 $ (11,146 ) $ (9,483 ) Change in net interest income$ (8,135 ) $
(20,247 )
(1) Consumer loans include residential first mortgage, second mortgage, warehouse lending, HELOC and other consumer loans. (2) Commercial loans include commercial real estate, commercial and industrial, and commercial lease financing loans. 85
--------------------------------------------------------------------------------
Table of Contents Six Months Ended June 30, 2013 Versus 2012 Increase (Decrease) Due to: Rate Volume Total (Dollars in thousands) Interest-Earning Assets Loans held-for-sale$ (12,965 ) $ 8,641 $ (4,324 ) Loans repurchased with government guarantees 301 (6,535 ) (6,234 ) Loans held-for-investment Consumer loans (1) (4,794 ) (17,920 ) (22,714 ) Commercial loans (2) 156 (22,723 ) (22,567 ) Total loans held-for-investment (4,638 ) (40,643 ) (45,281 ) Securities available-for-sale or trading (2,411 ) (9,078 ) (11,489 ) Interest-earning deposits and other 126 1,435 1,561 Total other interest-earning assets$ (19,587 ) $ (46,180 ) $ (65,767 ) Interest-Bearing Liabilities Demand deposits$ (44 ) $ 47$ 3 Savings deposits (649 ) 2,959 2,310 Money market deposits (380 ) (303 ) (683 ) Certificates of deposit (5,306 ) (2,993 ) (8,299 ) Total retail deposits (6,379 ) (290 ) (6,669 ) Demand deposits (41 ) 22 (19 ) Savings deposits (195 ) (93 ) (288 ) Certificates of deposit (310 ) 218 (92 ) Total government deposits (546 ) 147 (399 ) Wholesale deposits 499 (5,083 ) (4,584 ) Total deposits (6,426 ) (5,226 ) (11,652 ) Federal Home Loan Bank advances 7,767 (14,213 ) (6,446 ) Other (215 ) (7 ) (222 ) Total interest-bearing liabilities$ 1,126 $ (19,446 ) $ (18,320 ) Change in net interest income$ (20,713 ) $
(26,734 )
(1) Consumer loans include residential first mortgage, second mortgage, warehouse lending, HELOC and other consumer loans. (2) Commercial loans include commercial real estate, commercial and industrial, and commercial lease financing loans. 86
--------------------------------------------------------------------------------
Table of Contents
Provision for Loan Losses
The provision reflects our estimate to maintain the allowance for loan losses at a level to cover probable losses inherent in the portfolio for each of the respective periods.
The provision for loan losses was
During the six months endedJune 30, 2013 , we recorded a provision for loan losses of$52.0 million , as compared to$173.1 million recorded during the six months endedJune 30, 2012 . The decrease in the provision during the six months endedJune 30, 2013 was primarily due to the refinements to the estimation process in the first quarter of 2012, lower quarterly loss rates, decreased qualitative factors and the release of reserves resulting from the sale of commercial loans. Net charge-offs for the three months endedJune 30, 2013 totaled$78.6 million , compared to$52.4 million for the three months endedJune 30, 2012 . As a percentage of the average loans held-for-investment, annualized net charge-offs for the three months endedJune 30, 2013 increased to 6.96 percent from 3.24 percent for the three months endedJune 30, 2012 , primarily the result of the charge-offs related to the sale of non-performing and TDR loans during the three months endedJune 30, 2013 . Net charge-offs for the six month period endedJune 30, 2013 totaled$114.0 million , compared to$204.1 million during the six months endedJune 30, 2012 . The decrease was primarily due to the refinements in the estimation process that occurred during the first quarter 2012 from the write-off of all specific valuation allowances to conform with the OCC's application of regulatory guidance as the Bank transitioned to Call Report requirements forMarch 31, 2012 . The impact of the refinements adopted during the first quarter of 2012 resulted in an increase to our allowance for loan loss of$59.0 million in the consumer portfolio and$11.0 million in the commercial portfolio. As a percentage of the average loans held-for-investment, annualized net charge-offs for the six months endedJune 30, 2013 decreased to 4.88 percent from 6.18 percent during the six months endedJune 30, 2012 .
See the section captioned "Allowance for Loan Losses" in this discussion for further analysis of the provision for loan losses.
Non-Interest Income
The following table sets forth the components of our non-interest income.
Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (Dollars in thousands) Loan fees and charges$ 29,916 $ 34,783 $ 63,276 $ 64,757 Deposit fees and charges 5,193 5,039 10,339 9,961 Loan administration 36,157 25,012 56,513 63,898 Net gain (loss) on trading securities 21 3,711 72 (2,260 ) Net gain on loan sales 144,791 212,666 282,331 417,518 Net transactions costs on sales of mortgage servicing rights (4,264 ) (983 ) (8,483 ) (3,299 ) Net gain on securities available-for-sale - 20 - 330 Net gain (loss) on sale of assets 1,064 (26 ) 2,022 - Total other-than-temporary impairment (loss) gain (8,789 ) (1,707 ) (8,789 ) 2,810 Gain (loss) recognized in other comprehensive income before taxes - 690 - (5,002 ) Net impairment losses recognized in earnings (8,789 ) (1,017 ) (8,789 ) (2,192 ) Representation and warranty reserve - change in estimate (28,940 ) (46,028 ) (46,336 ) (106,566 ) Other non-interest income 44,810 7,157 53,957 19,563 Total non-interest income$ 219,959 $ 240,334 $ 404,902 $ 461,710 87
--------------------------------------------------------------------------------
Table of Contents
Total non-interest income was$220.0 million during the three months endedJune 30, 2013 , which was a$20.3 million decrease from$240.3 million of non-interest income during the three months endedJune 30, 2012 . The decrease during the three months endedJune 30, 2013 , was due to a decrease in net gain on loan sales, partially offset by a decrease in representation and warranty reserve - change in estimate and an increase in other non-interest income relating to the net fair value of the assets and liabilities associated with the reconsolidation of the HELOC securitization trusts. During the six months endedJune 30, 2013 , total non-interest income decreased to$404.9 million , from$461.7 million of non-interest income during the six months endedJune 30, 2012 . The changes during the six months endedJune 30, 2013 , were primarily due to the same reasons stated above. Loan administration income decreased for the six months endedJune 30, 2013 , compared to the six months endedJune 30, 2012 , primarily due to losses incurred in our MSR hedging activity. Loan fees and charges. Our Community Banking and Mortgage Banking segments both earn loan origination fees and collect other charges in connection with originating residential first mortgages, commercial loans and other consumer loans. For the three months endedJune 30, 2013 , we recorded loan fees and charges of$29.9 million , a decrease of$4.9 million from the$34.8 million recorded during the three months endedJune 30, 2012 . Loan fees and charges during the six months endedJune 30, 2013 were$63.3 million , compared to$64.8 million recorded during the six months endedJune 30, 2012 . The decrease in loan fees and charges during the three and six months endedJune 30, 2013 , is primarily due to a decrease in consumer loan production of$1.7 billion and$0.4 billion , respectively, compared to the three and six months endedJune 30, 2012 . Commercial loan origination fees are capitalized and added as an adjustment to the basis of the individual loans originated. These fees are accreted into income as an adjustment to the loan yield over the life of the loan or when the loan is sold. We account for substantially all residential first mortgage originations as held-for-sale using the fair value method and no longer apply deferral of non-refundable fees and costs to those loans. Deposit fees and charges. Our banking operation collects deposit fees and other charges such as fees for non-sufficient funds checks, cashier check fees, ATM fees, overdraft protection, and other account fees for services we provide to our banking customers. Our total number of customer checking accounts increased 2.6 percent from approximately 107,500 onJune 30, 2012 to 110,270 as ofJune 30, 2013 . Total deposit fees and charges slightly increased during the three months endedJune 30, 2013 compared to the three months endedJune 30, 2012 . Total deposit fees and charges increased$0.3 million to$10.3 million , or 3.8 percent, during the six months endedJune 30, 2013 from$10.0 million during the six months endedJune 30, 2012 . The primary reason for the increase in deposit fees and charges for both the three and six months endedJune 30, 2013 is due to the growth in personal and business checking accounts. Loan administration. When our Mortgage Banking segment sells mortgage loans in the secondary market, it usually retains the right to continue to service these loans and earn a servicing fee, also referred to herein as loan administration income. Our MSRs are accounted for utilizing the fair value method. See Note 9 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein.
The following table summarizes loan administration income.
Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (Dollars in thousands) Servicing income on residential first mortgage servicing Servicing fees, ancillary income and charges (1)$ 50,841 $ 50,743 $ 105,117 $ 99,242 Fair value adjustments 30,503 (84,656 ) 14,862 (91,583 ) (Loss) gain on hedging activity (45,187 ) 58,925 (63,466 ) 56,239 Total loan administration (2)$ 36,157 $ 25,012 $ 56,513 $ 63,898 (1) Includes the servicing fees, ancillary income and charges on other consumer mortgage servicing. (2) Loan administration income does not reflect the impact of securities deployed as economic hedges of MSR assets. These positions, recorded as
securities - trading, provided less than
gains during the three and six months ended
compared to$3.7 million in gains and$2.3 million in losses for the three and six months endedJune 30, 2012 , respectively. These positions, which
are on the balance sheet, also contributed
in interest income for the three and six months endedJune 30, 2013 , respectively, compared to$0.4 million and$1.8 million during the three and six months endedJune 30, 2012 , respectively. 88
--------------------------------------------------------------------------------
Table of Contents
The increase in loan administration income during the three months endedThe following table provides information on our net gain on loan sales reported in our Consolidated Financial Statements, in Item 1. Financial Statements herein, and loans sold within the period.June 30, 2013 was primarily attributable to income associated with bulk sales of mortgage servicing rights and favorable adjustments to our MSRs, partially offset by losses incurred in our hedging activity. Servicing fees, ancillary income and charges on our residential first mortgage servicing remained essentially unchanged during the three months endedJune 30, 2013 , compared to the three months endedJune 30, 2012 . The total unpaid principal balance of loans serviced for others atJune 30, 2013 was$68.3 billion , compared to$76.2 billion atJune 30, 2012 . Loan administration income was$56.5 million for the six months endedJune 30, 2013 , compared to$63.9 million during the six months endedJune 30, 2012 . The decrease was primarily due to losses incurred in our MSR hedging activity, partially offset by favorable fair value adjustments to our MSRs and increases in servicing fees, ancillary income and charges on our residential first mortgage servicing. During the six months endedJune 30, 2013 and 2012, we sold servicing rights on a bulk basis associated with underlying mortgage loans totaling$23.4 billion and$2.4 billion , respectively. Net gain on loan sales. Our Mortgage Banking segment records the transaction fee income it generates from the origination. The amount of net gain on loan sales recognized is a function of the volume of mortgage loans originated for sale and the fair value of these loans, net of related selling expenses. Net gain on loan sales is increased or decreased by any mark to market pricing adjustments on loan commitments and forward sales commitments, increases to the representation and warranty reserve related to loans sold during the period, and related administrative expenses. The volatility in the gain on sale spread is attributable to market pricing, which changes with demand and the general level of interest rates. Historically, pricing competition on mortgage loans is lower in periods of low or decreasing interest rates, due to higher consumer demand usually evidenced by higher loan origination levels, resulting in higher spreads on origination. Conversely, pricing competition increases when interest rates rise, which generally reduces consumer demand, thus decreasing spreads on origination and compressing gain on sale. Increases or decreases in competition may also arise as competitors enter and/or leave the loan origination market.
Three Months Ended June 30, 2013 March 31, 2013 December 31, 2012
(Dollars in
thousands)
Net gain on loan sales$ 144,791 $ 137,540 $ 238,953 $ 344,426$ 212,666 Mortgage rate lock commitments (gross)$ 12,359,000 $ 12,142,000 $ 16,242,000 $ 18,089,000 $ 17,534,000 Loans sold or securitized$ 11,123,821 $ 12,822,879 $ 15,610,590 $ 13,876,627 $ 12,777,311 Net margin on loan sales 1.30 % 1.07 % 1.53 % 2.42 % 1.66 % Mortgage rate lock commitments (fallout adjusted) (1)$ 9,837,573 $ 9,848,417 $ 12,587,980 $ 13,972,922 $ 13,346,568 Net margin on mortgage rate lock commitments (fallout adjusted) (1) 1.47 % 1.40 % 1.90 % 2.39 % 1.59 %
(1) Fallout adjusted are mortgage rate lock commitments which are adjusted by
a percentage of mortgage loans in the pipeline that are not expected to
close based on previous historical experience and the level of interest
rates. Net gain on loan sales increased for the three months endedJune 30, 2013 , compared to the three months endedJune 30, 2012 , primarily due to an increase in interest rates. For the three months endedJune 30, 2013 , the gross mortgage rate-lock commitments of$12.4 billion decreased, compared to$17.5 billion in the three months endedJune 30, 2012 . Loan sales of$11.1 billion in loans for the three months endedJune 30, 2013 decreased, compared to$12.8 billion sold during the three months endedJune 30, 2012 . The decrease in the gross mortgage rate lock commitments during the three months endedJune 30, 2013 , as compared to the three months endedJune 30, 2012 was reflective of the increase in mortgage interest rates, as well as increased competition in the mortgage market during 2013. Net gain on loan sales decreased during the six months endedJune 30, 2013 , from the six months endedJune 30, 2012 . The decrease included the sale of$23.9 billion in loans during the six months endedJune 30, 2013 , compared to$23.6 billion sold in the six months endedJune 30, 2012 . For the six months endedJune 30, 2013 , the mortgage rate lock commitments decreased to$24.5 billion , compared to$32.4 billion in the six months endedJune 30, 2012 . The decrease in gain on loan sales was primarily due to a lower volume of mortgage rate lock commitments and a lower gain on sale margin, reflecting lower base production margin, as well as higher hedging costs, loan level pricing adjustments and the impact from guarantee fee changes from the GSEs. 89
--------------------------------------------------------------------------------
Table of Contents
The net gain on loan sale includes changes in amounts related to derivatives, lower of cost or market adjustments on loans transferred to held-for-investment and provisions to representation and warranty reserve. Changes in amounts related to loan commitments and forward sales commitments amounted to a gain of$91.9 million and$52.2 million for the three and six months endedJune 30, 2013 , respectively, compared to a gain of$17.0 million and$58.1 million during the three and six months endedJune 30, 2012 , respectively. The provision for representation and warranty reserve included in net gain on loan sales reflects our initial estimate of losses on probable mortgage repurchases arising from current loan sales and amounted to$5.1 million and$10.9 million for the three and six months endedJune 30, 2013 , respectively, compared to$5.6 million and$10.7 million during the three and six months endedJune 30, 2012 , respectively. Net transactions costs on sales of mortgage servicing rights. As part of our business model, our Mortgage Banking segment occasionally sells MSRs in transactions separate from the sale of the underlying loans. We carry our MSRs at fair value. Our income or loss on changes in the valuation of MSRs is recorded through our loan administration income. The gain or loss recognized is the transaction costs and the reserves on the sales completed during the period or adjustments to transaction costs or reserves from prior sales. For the three months endedJune 30, 2013 , we recorded costs on sales of MSRs of$4.3 million , compared to$1.0 million for the three months endedJune 30, 2012 . During the three months endedJune 30, 2013 , we sold on a bulk basis servicing rights with respect to$12.7 billion of underlying mortgage loans, and sold servicing rights with respect to$0.1 billion of mortgage loans when we sold the underlying loans on a servicing released basis. During the three months endedJune 30, 2012 , we had no sales of servicing rights on a bulk basis associated with underlying mortgage loans and$0.2 billion on a servicing released basis. We recorded costs on sales of MSRs of$8.5 million for the six months endedJune 30, 2013 , compared to$3.3 million loss recorded for the six months endedJune 30, 2012 . During the six months endedJune 30, 2013 , we sold$23.4 billion of servicing rights on a bulk basis associated with underlying mortgage loans and$0.2 billion on a servicing released basis (i.e., sold together with the sale of the underlying loans). During the six months endedJune 30, 2012 , we sold servicing rights on a bulk basis associated with underlying mortgage loans totaling$2.4 billion and on a servicing released basis (i.e., sold together with the sale of the underlying loans) totaling$0.3 billion . Net impairment loss recognized through earnings. We recognize other-than-temporary impairments ("OTTI") related to credit losses through operations with any remainder recognized through other comprehensive income (loss). We dissolved our mortgage securitization during the three months endedJune 30, 2013 and we no longer carry any OTTI associated with the mortgage securitization as ofJune 30, 2013 . During both the three and six months endedJune 30, 2013 , there was$8.8 million of credit losses recognized with respect to the mortgage securitization. During the three and six months endedJune 30, 2012 , there was$1.0 million and$2.2 million , respectively, of credit losses recognized with respect to the CMOs, as the result of forecasted continued depreciation in home values which serve as collateral for these securities. All OTTI due to credit losses were recognized as expense in current operations. Representation and warranty reserve - change in estimate. We maintain a representation and warranty reserve to account for the expected losses related to loans we might be required to repurchase (or the indemnity payments we may have to make to purchasers). The representation and warranty reserve takes into account both our estimate of expected losses on loans sold during the current accounting period, as well as adjustments due to our change in estimate of expected losses from probable repurchase obligations related to loans sold in prior periods. Estimating the balance of the representation and warranty reserve involves using assumptions regarding future repurchase request volumes, expected loss severity on these requests and claims appeal success rates. The assumptions used to estimate the representation and warranty reserve contain a level of uncertainty and risk that could have a material impact on the reserve balance if they differ from actual results. For instance, to illustrate the sensitivity, among other factors, of the reserve to adverse changes, if the expected levels of demands in the model assumptions increased or decreased by 20.0 percent atJune 30, 2013 , the result would be a$35.0 million increase or decrease in the representation and warranty reserve balance. If our loss severity rate increased or decreased by 20.0 percent atJune 30, 2013 , the result would be a$38.0 million increase or decrease in the representation and warranty reserve balance. In order to estimate the sensitivity of the representation and warranty reserve to a particular factor, the factors varied within the model while keeping the other variables constant. For example, when estimating the impact to the representation and warranty reserve due to a change in expected levels of demands, the level of expected demands for vintages within the model varied by the percentages, holding other factors constant. During the three months endedJune 30, 2013 , we recorded an expense of$28.9 million , compared to the$46.0 million expense recorded in the three months endedJune 30, 2012 . The decrease from the three months endedJune 30, 2012 is primarily 90
--------------------------------------------------------------------------------
Table of Contents
due to the second quarter 2012 industry trends, as the GSEs were more aggressive in the number of pre-2009 loans files being reviewed and their interpretation of their rights under the related representations and warranties.
During the six months ended
Other non-interest income. Other non-interest income includes certain miscellaneous fees, including dividends received on
During the three months endedJune 30, 2013 , we recorded$2.6 million in dividends on an average outstanding balance ofFederal Home Loan Bank stock of$301.7 million , compared to$2.2 million in dividends on an average balance ofFederal Home Loan Bank stock outstanding of$301.7 million for the three months endedJune 30, 2012 . During the six months endedJune 30, 2013 , we recorded$5.3 million in dividends on an average outstanding balance ofFHLB stock of$301.7 million , compared to$4.5 million in dividends on an average balance ofFHLB stock outstanding of$301.7 million for the six months endedJune 30, 2012 .
Non-Interest Expense
The following table sets forth the components of our non-interest expense.
Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (Dollars in
thousands)
Compensation and benefits$ 70,935 $ 65,402 $ 148,144 $ 131,390 Commissions 15,402 17,838 32,863 33,305 Occupancy and equipment 22,198 18,706 41,574 35,656 Asset resolution 15,921 20,851 32,366 57,621 Federal insurance premiums 7,791 12,104 19,031 24,428 Loan processing expense 15,389 11,132 32,500 21,818 Legal and professional expense 16,390 13,084 45,229 29,901 Other non-interest expense 10,371 10,380 19,279 24,124 Total non-interest expense$ 174,397 $ 169,497 370,986 358,243 Efficiency ratio (1) 65.3 % 53.7 % 73.1 % 58.5 % Efficiency ratio (credit-adjusted) (2) 53.5 % 41.2 % 61.1 % 41.8 % (1) Total operating and administrative expenses divided by the sum of net interest income and non-interest income.
(2) Based on efficiency ratios as calculated, less representation and warranty
reserve - change in estimate and asset resolution expense, see "Use of Non-GAAP Financial Measures." The 2.9 percent and 3.6 percent increase in non-interest expense during the three and six months endedJune 30, 2013 , compared to the three and six months endedJune 30, 2012 , was primarily due to increases in compensation and benefits, legal and professional fees and loan processing expense, offset in part by decreases in commissions, asset resolution and federal insurance premium expense. The efficiency ratio generally measures how effective the company is operating, measured by dividing non-interest expense by total revenues (net interest income plus non-interest income). Given the significant amount of credit-related costs that flow through our non-interest expense and non-interest income, we show our efficiency ratio on a credit adjusted basis as well. Our efficiency ratio worsened to 65.3 percent and 73.1 percent during the three and six months endedJune 30, 2013 , respectively, as compared to 53.7 percent and 58.5 percent during the three and six months endedJune 30, 2012 . In each case, the increase in our efficiency was driven primarily by declines in non-interest income and net interest income, both resulting from a decrease in mortgage banking activity over the same period in 2012. 91
--------------------------------------------------------------------------------
Table of Contents
Compensation and benefits. The$5.5 million increase in compensation and benefits expense for the three months endedJune 30, 2013 , compared to the three months endedJune 30, 2012 . For the six months endedJune 30, 2013 , compared to the six months endedJune 30, 2012 , compensation and benefits expense increased$16.7 million the increases are primarily attributable to a higher level of full-time equivalent employees during the three months endedJune 30, 2013 . Our full-time equivalent non-commissioned salaried employees increased overall by 234 fromJune 30, 2012 to a total of 3,418 atJune 30, 2013 . Commissions. Commission expense, which is a variable cost associated with loan originations, totaled$15.4 million , equal to 14 basis points of total loan originations during the three months endedJune 30, 2013 , compared to$17.8 million , equal to 14 basis points of total loan originations in the three months endedJune 30, 2012 . The decrease in commissions was primarily due to the decrease in loan originations for the three months endedJune 30, 2013 . Loan originations decreased to$10.9 billion for the three months endedJune 30, 2013 from$12.8 billion for the three months endedJune 30, 2012 . During the six months endedJune 30, 2013 , commission expense totaled$32.9 million , equal to 14 basis points of total loan originations, compared to$33.3 million , equal to 14 basis points of total loan originations in the six months endedJune 30, 2012 . The decrease in commissions is primarily due to a decrease in loan originations during the six months endedJune 30, 2013 . Loan originations decreased to$23.4 billion for the six months endedJune 30, 2013 from$24.2 billion in the six months endedJune 30, 2012 . Occupancy and equipment. Our occupancy and equipment expense increased$3.5 million for the three months endedJune 30, 2013 , compared to the three months endedJune 30, 2012 . For the six months endedJune 30, 2013 , our occupancy and equipment expense was$41.6 million , compared to$35.7 million for the six months endedJune 30, 2012 . Overall, the increase was primarily due to higher depreciation due to completion of various capitalized projects during the six months endedJune 30, 2013 . Asset resolution. Asset resolution expenses consist of expenses associated with foreclosed properties (including the foreclosure claims in process with respect to government insured loans for which we file claims with theU.S. Department of Housing and Urban Development ) and other disposition and carrying costs, loss provisions, and gains and losses on the sale of real estate owned properties that we have obtained through foreclosure or other proceedings. For the three months endedJune 30, 2013 asset resolution expenses decreased$5.0 million to$15.9 million , as compared to$20.9 million during the three months endedJune 30, 2012 . The decrease was primarily due to a$5.1 million decrease in debenture interest expense on repurchase loans. For the six months endedJune 30, 2013 , asset resolution expense decreased$25.2 million to$32.4 million , compared to$57.6 million for the six months endedJune 30, 2012 . The decrease was primarily due decreases in debenture interest expense on government insured loans, agency fee accruals and commercial and residential real estate owned valuations, primarily due to improvement in home prices. Federal insurance premiums. OurFDIC insurance expense decreased for the three months endedJune 30, 2013 , compared to the three months endedJune 30, 2012 . The decrease was primarily due to a five annual basis point reduction in our assessment rate. For the six months endedJune 30, 2013 , ourFDIC insurance premiums were$19.0 million , compared to$24.4 million for the six months endedJune 30, 2012 . Overall, the decrease in our assessment rate reflected improvement in risk assessment values related to balance sheet liquidity and lower underperforming assets, a decrease in our average total assets used in the calculation of our assessment base. Loan processing expense. Loan processing expense increased to$15.4 million for the three months endedJune 30, 2013 , compared to$11.1 million for the three months endedJune 30, 2012 , primarily due to increased servicing expenses. During the six months endedJune 30, 2013 loan processing expense increased to$32.5 million , compared to$21.8 million for the six months endedJune 30, 2012 , reflecting increased servicing related and underwriting expenses for the six months endedJune 30, 2013 . Legal and professional expense. Legal and professional expense increased to$16.4 million during the three months endedJune 30, 2013 , compared to the three months endedJune 30, 2012 , primarily due to a$9.6 million increase in consulting costs and an increase in the legal liability relating to the DOJ litigation, partially offset by the release of$10.0 million in legal reserves related to the Settlement Agreements with MBIA and Assured. During the six months endedJune 30, 2013 legal and professional expense increased to$45.2 million , compared to$29.9 million for the six months endedJune 30, 2012 . The increase was primarily due to a$21.0 million increase in outside consulting and legal expenses, which increased to$48.2 million for the six months endedJune 30, 2013 from$27.2 million for the six months endedJune 30, 2012 . 92
--------------------------------------------------------------------------------
Table of Contents
Provision for Federal Income Taxes
For the three and six months endedJune 30, 2013 , our benefit for federal income taxes as a percentage of pretax income was 10.0 percent and 7.2 percent, respectively, compared to a provision of 0.6 percent for both the three and six months endedJune 30, 2012 . For each year, the provision (benefit) for federal income taxes varies from statutory rates primarily because of a change in balance to our valuation allowance for net deferred tax assets. Due to the MBIA Settlement Agreement, the FSTAR 2006-1 mortgage securitization, which was recorded as available-for-sale investment securities, was collapsed and we then transferred the second mortgage loans associated with the mortgage securitization trust to our loans held-for-investment portfolio at fair value and dissolved the FSTAR 2006-1 mortgage securitization trust. As a result of this action, we also recognized$6.1 million of tax benefits representing the recognition of the residual tax effect associated with previously unrealized losses on this security recorded in other comprehensive income. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, a deferred tax asset is recorded for net operating loss carry forwards and unused tax credits. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. We had a$308.1 million and$341.9 million valuation allowance against deferred tax assets as ofJune 30, 2013 andDecember 31, 2012 , respectively. We will continue to regularly assess the realizability of our deferred tax assets. In doing so, we consider historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Our evaluation is based on current tax laws as well as our expectations of future performance. Changes in historical earnings performance and future earnings projections, among other factors, may cause us to adjust our valuation allowance, which will impact our income tax expense in the period we determine that these factors have changes. See Note 16 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements, herein.
OPERATING SEGMENTS
Overview
For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 19 of the Notes to Consolidated Financial Statements, in Item 1. Financial Statements, herein, for a full understanding of our consolidated financial performance. The operating segments are based on an internally-aligned segment leadership structure, which is how the results are monitored and performance assessed. We have three major operating segments: Community Banking, Mortgage Banking and Other. The Community Banking segment originates loans to and collects deposits from consumer and business customers through Commercial, Business, Government and Branch Banking groups. Products offered through these groups include checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans and commercial loans. Other financial services available to consumer and commercial customers include lines of credit, revolving credit, customized treasury management solutions, equipment leasing, inventory and accounts receivable lending and capital markets services such as interest rate risk protection products. The Mortgage Banking segment originates, acquires, sells and services mortgage loans. The origination and acquisition of mortgage loans is the majority of the lending activity. Mortgage loans are originated through home lending centers, national call centers, the Internet, unaffiliated banks and mortgage brokerage companies, where the net interest income and the gains from sales associated with these loans are recognized in the Mortgage Banking segment. Also, the Mortgage Banking segment services mortgage loans for others and sells MSRs into the secondary market. The Other segment includes corporate treasury, income and expense impact of equity and cash, the effect of eliminations of transactions between segments, tax benefits not assigned to specific operating segments, the impact of interest rate risk management, the impact of balance sheet funding activities, charges or credits of unusual or infrequent nature that are not reflective of the normal operations of the operating segments and miscellaneous other expenses of a corporate nature. Each operating segment supports and complements the operations of the other, with funding for the Mortgage Banking segment primarily provided by deposits obtained through Community Banking and with the Community Banking segment providing warehouse lines of credit to mortgage originators, most of which sell loans to the Mortgage Banking segment. A discussion of our three operating segments is set forth below. 93
--------------------------------------------------------------------------------
Table of Contents
The operating segment results are generated utilizing our management reporting system, which assigns balance sheet and income statement items to each of the operating segments. The process is designed around our organizational and management structure and, accordingly, the results derived may not be directly comparable with similar information published by other financial institutions. Revenue is recorded in the operating segment responsible for the related product or service. The management accounting process that develops the operating segment reporting utilizes various estimates and allocation methodologies to measure the performance of the operating segments. Expenses are allocated to operating segments using a two-phase approach. The first phase consists of measuring and assigning costs to activities within each operating area to create a driver-based cost. These driver-based costs are then allocated, with the resulting amount allocated to operating segments that own the related products. The second phase consists of the allocation of overhead costs to all three operating segments from the Other segment. The net income (loss) by operating segment is presented in the following table. Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (Dollars in thousands) Community Banking$ (17,677 ) $ (11,043 ) $ (32,207 ) $ (44,703 ) Mortgage Banking 69,501 120,843 131,025 161,741 Other 15,379 (22,413 )
(8,008 ) (36,961 )
Total net income (loss)$ 67,203 $ 87,387
The selected average balances by operating segment are presented in the following table.
Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (Dollars in thousands) Average loans held-for-sale Community Banking$ 33,545 $ -$ 326,245 $ - Mortgage Banking 2,596,764 2,977,233 2,794,284 2,685,479 Average loans held-for-investment Community Banking$ 1,369,029 $ 2,897,281 $ 1,462,013 $ 2,838,567 Mortgage Banking 3,137,042 3,565,120 3,203,945 3,761,265 Other 8,685 8,755 7,880 9,118 Average total assets Community Banking$ 1,573,343 $ 3,000,600 $ 1,960,577 $ 2,943,669 Mortgage Banking 8,305,851 9,523,985 8,673,491 9,487,366 Other 3,081,751 1,989,891 2,690,669 1,929,791 Average interest-bearing deposits Community Banking$ 6,473,247 $ 6,582,121 $ 6,715,809 $ 6,469,742 Other 19,441 273,074 21,999 281,877 Community Banking Our Community Banking segment's two strategic responsibilities are providing a stable funding source for the Mortgage Banking segment and operating as a standalone, profitable line of business. The groups within the Community Banking segment originate consumer loans, commercial loans and warehouse loans, gather consumer, business and governmental deposits, and offer liquidity management products. The liquidity management products include customized treasury management solutions, equipment and technology leasing, international services, capital markets services such as interest rate risk protection products, foreign exchange hedging, and trading of securities. 94
--------------------------------------------------------------------------------
Table of Contents Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (Dollars in thousands) Net interest income$ 28,776 $ 37,716 $ 58,897 $ 73,017 Provision for loan losses (14,681 ) (13,893 ) (16,216 ) (42,763 ) Non-interest income 9,359 10,693 20,390 20,222 Non-interest expense (41,131 ) (45,559 ) (95,278 ) (95,179 ) Net loss$ (17,677 ) $ (11,043 ) $ (32,207 ) $ (44,703 ) Average balances Total loans held-for-investment$ 1,369,029 $ 2,897,281 $ 1,462,013 $ 2,838,567 Total assets 1,573,343 3,000,600
1,960,577 2,943,669 Total interest-bearing deposits 6,473,247 6,582,121 6,715,809 6,469,742
The Community Banking segment reported a$6.6 million increase in net loss for the three months endedJune 30, 2013 , compared to the three months endedJune 30, 2012 . This increase in net loss was largely driven by decreases in average warehouse loans, which was a result of a$1.8 billion decrease in mortgage loan originations during the three months endedJune 30, 2013 , compared to the three months endedJune 30, 2012 . During the six months endedJune 30, 2013 , the Community Banking segment reported a$12.5 million decrease in net loss as compared to the six months endedJune 30, 2012 . The decrease in net interest income is largely driven by lower average commercial and warehouse loans, as a result of a commercial loan sale completed during the first quarter 2013 and a decrease in mortgage originations during the six months endedJune 30, 2013 , compared to the six months endedJune 30, 2012 .
Mortgage Banking
Our Mortgage Banking segment originates, acquires, sells and services one-to-four family residential first mortgage loans. The Mortgage Banking segment also services mortgage loans on a fee basis for others and sells MSRs into the secondary market. Funding for our Mortgage Banking segment is provided primarily by deposits and borrowings obtained by our Community Banking segment. Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (Dollars in thousands) Net interest income$ 40,743 $ 50,153 $ 85,756 $ 95,971 Provision for loan losses (16,882 ) (44,535 ) (35,762 ) (130,338 ) Net gain on loan sales 144,651 212,497 282,040 417,178 Representation and warranty reserve - change in estimate (28,940 ) (46,028 ) (46,336 ) (106,566 ) Other non-interest income 56,726 62,129 107,072 121,734 Asset resolution (16,231 ) (19,486 ) (33,119 ) (51,124 ) Other non-interest expense (110,566 ) (93,887 ) (228,626 ) (185,114 ) Net income$ 69,501 $ 120,843 $ 131,025 $ 161,741 Average balances Total loans held-for-sale$ 2,596,764 $ 2,977,233 $ 2,794,284 $ 2,685,479 Total loans held-for-investment 3,137,042 3,565,120 3,203,945 3,761,265 Total assets 8,305,851 9,523,984 8,673,491 9,487,366 The Mortgage Banking segment net income decreased$51.3 million during the three months endedJune 30, 2013 , compared to the three months endedJune 30, 2012 . This decrease was primarily due to a$67.8 million decrease in net gain on loan sales and a$17.1 million decrease in representation and warranty reserve - change in estimate. The decreases in net gain on loan sales was primarily due to lower residential first mortgage rate lock commitments and a lower base gain on sale margin, as well as higher hedging costs, loan level pricing adjustments, and the impact from guarantee fee changes from the GSEs during the three months endedJune 30, 2013 . The decrease in the representation and warranty reserve - change in estimate for the three 95
--------------------------------------------------------------------------------
Table of Contents
months ended
The Mortgage Banking segment net income decreased$30.7 million during the six months endedJune 30, 2013 , compared to the six months endedJune 30, 2012 . This decrease was primarily due to a decrease in mortgage loan originations resulting in lower net gain on loan sales during the six months endedJune 30, 2013 , compared to the six months endedJune 30, 2012 . For the three months endedJune 30, 2013 , net loan fees and charges decreased to$27.7 million , as compared to$31.8 million for the three months endedJune 30, 2012 . For the six months endedJune 30, 2013 , net loan fees and charges decreased to$58.7 million , as compared to$59.1 million for the six months endedJune 30, 2012 . Net servicing revenue, which is the combination of net loan administration income (including the off-balance sheet hedges of MSRs) and the gain (loss) on trading securities (i.e., the on-balance sheet hedges of MSRs), increased to$36.2 million for the three months endedJune 30, 2013 , as compared to$28.5 million for the three months endedJune 30, 2012 , primarily due to a gain associated with bulk sales of MSRs, partially offset by unfavorable fair value adjustments to our MSRs and a decrease in hedge performance gain during the three months endedJune 30, 2013 , compared to the three months endedJune 30, 2012 . Net servicing revenue decreased to$56.5 million for the six months endedJune 30, 2013 , as compared to$61.6 million for the six months endedJune 30, 2012 . Other The Other segment includes the treasury, income and expense impact of equity and cash, the effect of eliminations of transactions between segments, tax benefits not assigned to specific operating segments, the funding revenue associated with stockholders' equity, the impact of interest rate risk management, the impact of balance sheet funding activities, and changes or credit of an unusual or infrequent nature that are not reflective of the normal operations of the operating segments and miscellaneous other expenses of a corporate nature. Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (Dollars in thousands) Net interest expense$ (22,423 ) $ (12,391 ) $ (41,889 ) $ (18,777 ) Non-interest income 38,163 1,043 41,736 9,142 Non-interest expense (6,469 ) (10,565 ) (13,963 ) (26,826 ) Income (loss) before taxes 9,271 (21,913 ) (14,116 ) (36,461 ) Benefit (provision) for income taxes 6,108 (500 ) 6,108 (500 ) Net income (loss)$ 15,379 $ (22,413 ) $ (8,008 ) $ (36,961 ) Average balances Total assets$ 3,081,751 $ 1,989,891 $ 2,690,669 $ 1,929,791 Net interest income includes the impact of administering our investment securities portfolios and the net impact of derivatives used to hedge interest rate sensitivity. Non-interest income includes insurance income, miscellaneous fee income not allocated to other operating segments, such as bank owned life insurance income and any Treasury related items and trading asset gains or losses. Non-interest expense includes certain corporate administrative and other miscellaneous expenses. The provision for income taxes is not allocated to the operating segments as new corporate income tax liability will not occur until after the utilization of the existing deferred tax assets. For the three months endedJune 30, 2013 , the Other segment net income increased by$37.8 million , as compared to the three months endedJune 30, 2012 . The increase was primarily due to a$44.1 million fair value adjustment in the three months endedJune 30, 2013 related to the reconsolidation of the securitization trusts as a result of the Assured Settlement Agreement, partially offset by decreases in the allocation of funding costs and expenses to other business units.
For the six months ended
96
--------------------------------------------------------------------------------
Table of Contents
Wordcount: | 18837 |
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News