Oct. 7: Bank earnings coming Friday – bank updates; state-level lending changes; thoughts on the current M&A environment for lenders

This is exciting – kind of like a WWII movie, where things are sent via code. (No foot tapping jokes please!) In this case, our government’s weather department is sending coded messages hoping the taxpayer will pay them: http://edition.cnn.com/2013/10/04/politics/weather-service-cryptic-message/index.html?hpt=hp_t2.


There are people changing homes all the time, moving possessions from one place to another. But for those who like a little trivia to start the week, here are six towns that were moved: http://gizmodo.com/moving-mountains-six-cities-and-towns-that-were-comple-1436927345


We’ll see Chase & Wells Fargo 3rd quarter earnings on Friday, and it is interesting to see The Economist’s list of the top 5 banks globally by Tier 1 capital. Not only is Tier 1 capital important for Basel considerations, but it is also interesting to see how they have changed from 2007 (pre-crisis) to 2012: HSBC (was #1, now #4), Citigroup (#2 to #6), RBS (#3 to out of top 10), JPMorgan (#4 to #2) and Bank of America (#5 to #3). Leading the pack in 2012 is ICBC (up from #8) and at #5 is China Construction Bank (not in top 10 in 2007).


Speaking of top 5 lists, according to research by Mortgage Daily, the top 5 largest mortgage lenders by volume in the 2nd quarter were Wells Fargo (22% of all mortgages originated), JPMorgan Chase (10%), Bank of America (5%), Quicken (5%) and U.S. Bank (4%). This group originated 46% of all mortgages. And you’ll notice that Wells’ volume nearly matched the other four combined. As we’ll see with earnings, the reliance on mortgage income is truly a two-edge sword.


With the Fed purchasing a significant percentage of agency MBS and CMOs, supply remains thin and yields somewhat low (or at least stable). Portfolio managers have welcomed better yields and more reasonable pre-payment speeds – in fact, as one would expect the drop in refinancing has impacted early payoffs – speeds have dropped. But for most community banks, loan growth remains difficult and margin compression has become a major concern. Banks should continue to address in their ALCO and planning sessions, the extension of this low rate environment for some time to come, but also cover the results of a steepening yield curve and how it could impact the balance sheet, both on the asset and on the liability side.


Certainly the pace of bank closures has fallen, and some banks & lenders are joining forces in an effort to increase efficiencies (“do we need two compliance departments?”), business channels, and geographic fit. Just recently Georgia Commerce Bank ($785mm, GA) will buy Brookhaven Bank ($179mm, GA) for an undisclosed sum. BOK Financial ($27.6B, OK) will buy GTrust Financial (OK) for an undisclosed sum. GTrust is an asset management fee-only financial planning company with $600mm under management. And in North Carolina New Century Bank (550mm) will buy Select Bank & Trust (265mm) for $31.1mm in stock.


I received this note from Jeff Babcock on current observations on mortgage company M&A. “Rob – As evidenced by the M&A-related news items included in your recent commentaries, mortgage banking acquisition activity appears to be on the ascent.  From STRATMOR’s vantage point, there are several forces at work which have come together to stimulate actual closed transactions (and not just conversations). Since mid-2012, we have been hearing about numerous discussions between Private Equity Investors and mid-size independent mortgage bankers. Yet few of these discussions have materialized in deals, largely because of a wide bid-ask spread on mortgage company valuations.  Until the origination market’s recent retreat and resulting margin compression, Sellers often held unrealistic company value expectations… i.e., some multiple of their 2012 earnings. At the same time, Private Equity Investors became increasingly uneasy about uncertainty surrounding the mortgage market outlook; hence the value gap became too wide to reconcile. Additionally, part of the issue is that Private Equity Investors only bring capital to the table, but no material acquisition synergies to improve the Seller’s go-forward financial performance. Therefore, an independent mortgage bank is theoretically worth more to an existing lender.”


The note went on: “By contrast, most of the transaction activity which we observe involves larger bank-owned and independent mortgage lenders seeking to acquire mid-size players as a strategic initiative to achieve a critical mass of production and/or to diversify into new geographic markets.  And these existing industry buyers can bring substantial competitive and financial benefits to a Seller. STRATMOR is still experiencing greater investor demand to acquire well-run retail origination franchises than there are quality mortgage platforms available for sale, but that situation is indeed moving towards a more equilibrium state. The M&A market value of a mortgage origination platform is driven by a confluence of several factors: purchase business share, sustainability of earnings, production momentum/recruiting success, stability and tenure of management, sales force quality/productivity, quality manufacturing, counterparty reputation and, most importantly, corporate culture. We believe that a prospective Seller is at risk of quickly becoming unmarketable if such performance measures of quality are allowed to deteriorate as market conditions become increasingly more challenging.


“So what’s the message here?  We strongly suggest that mortgage company ownership should be evaluating their economic viability at their present production scale.  If you are concerned about your ability to remain profitable at current production levels, and are prepared to explore company sale opportunities, we recommend that you don’t defer this action until you become a ‘necessitous seller’ … by which time your value proposition has been seriously compromised.” Thank you Jeff! [Editor’s note: STRATMOR served as the transaction advisor to Wintrust Mortgage in its acquisition of Surety Financial, the announcement for which appeared in this Commentary on Tuesday, October 1. If you wish to discuss M&A market dynamics, e-mail jeff.babcock@stratmorgroup.com or jim.cameron@stratmorgroup.com.]


Switching gears, the commentary has been posting 4506-T updates. Let’s try to get caught up on some state-level news – since state changes are not reliant on the Federal government’s wallowing – to check the trends out there.


Louisiana’s Legislature has recently acted to amend and reinstitute provisions relating to administrative adjudication procedures regarding blighted property and health, housing, fire code, environmental, or other ordinance violations. In Louisiana any municipality or parish may prescribe civil fines for property declared blighted or violations of public health, housing, fire code, environmental and historic district ordinances by owners of immovable property. Full details of Senate Bill No. 51 which has been signed by the governor can be found here: http://www.legis.la.gov/Legis/ViewDocument.aspx?d=831544


Oregon Department of Justice recently amended its rules regarding foreclosure avoidance measure notices. The rules implement the foreclosure avoidance measure notice provisions found in Oregon Laws 2013, chapter 304. These rules describe and procedure that a beneficiary must follow when seeking to foreclose a residential trust deed. Rule 137 makes changes to the procedures a beneficiary must follow where the grantor is either ineligible for a foreclosure avoidance measure, or where the grantor does not comply with a foreclosure avoidance measure previously agreed to. Under these conditions, the beneficiary or the beneficiary’s agent must mail a notice to the grantor within ten days of making the determination. The notice must specifically describe in plain language the basis for the beneficiary’s determination that the grantor is either not eligible for a foreclosure avoidance measure, or that the grantor has not complied with an agreement for forbearance, a loan modification, a short sale, a deed-in-lieu of foreclosure, or a different foreclosure avoidance measure.


Delaware has recently amended the Delaware Code regarding its real estate foreclosure proceedings. Plaintiffs to a mortgage foreclosure involving an owner-occupied one-to-four family primary residence must wait 45 days before filing the action after sending a Notice of Intent to Foreclose to the borrower. Such notice may only be sent after the borrower defaults on the obligations set forth in the original loan agreement. House Bill 40’s key provisions include: the plaintiff must send the Notice (of default) to the borrower by both postage-paid certified mail and first-class mail, if the borrower is eligible for any federal or proprietary loss mitigation program, the plaintiff must include a list of potentially applicable programs and details, the plaintiff must include an accounting of the mortgage obligations covering the 12 month period preceding the alleged default, and the Superior Court no longer has the judicial power to create new procedures allowing plaintiffs to re-schedule mediation conferences in connection with filing a complaint. Full details of the provisions in HB 40 can be seen here: http://openstates.org/de/bills/147/HB40/documents/DED00003357/


Recently, Under Secretary for Domestic Finance Mary Miller spoke at an event hosted by the Michigan State Housing Development Authority (MSHDA). Treasury established the Hardest Hit Fund in February of 2010 as part of the Administration’s overall strategy for restoring stability to the housing markets. In total, the Hardest Hit Fund has committed $7.6 billion to 19 state housing finance agencies to develop locally-tailored foreclosure prevention solutions. Michigan has been allocated nearly $500 million under this program. Through this program (https://www.stepforwardmichigan.org/) government has provided nearly $95 million in relief to more than 13,000 Michigan homeowners, nearly half of whom reside in Southeast Michigan and more than 10 percent of whom reside in Detroit. These programs have provided direct assistance in the form of loan modifications for struggling homeowners, and have helped unemployed homeowners make their mortgage payments. The Secretary’s official comments at this function can be found here: http://www.treasury.gov/press-center/press-releases/Pages/jl2151.aspx.


Connecticut recently enacted provisions concerning private transfer fees, Senate Bill 859, which redefines private transfer fees and invalidates the practice of imposing private transfer fee obligations against titles of real property. Bankers Advisory write, “Under the new provisions, any fee payable at the conveyance of an interest in real property or for the right to make/accept such conveyance shall be considered a private transfer fee. However, the definition does not include any consideration paid by a grantee to a grantor for the conveyance of an interest in real property. The same exclusion carries to any subsequent conveyance if such is a one-time charge and the obligation to pay does not bind successors in title.”


A couple months back Nebraska has changed its loan broker provisions in Legislative Bill 279. Bankers Advisory write, “Earlier this year Nebraska made changes to its state laws relating to loan brokers…eliminating some of the confusion behind the wide range of loan servicing businesses and business entities, the amendments now specifically exclude banks, trust companies, savings and loan associations, and credit unions. Mortgage bankers, installment loan, credit card and insurance companies no longer qualify as loan brokers either, as well as, lenders approved by the Federal Housing Administration or Department of Veteran Affairs.” Full details of the provisions under LB 279 can be found here: http://bankersadvisory.blogspot.com/2013/08/nebraska-changes-loan-broker-provisions.html.


And as a reminder, back in June the Utah Division of Real Estate recently published amendments to provisions of the Residential Mortgage Practices and Licensing Rules.  The changes (i) remove the term “principal” from references to “principal lending manager” in conformity with the description used by the National Mortgage Licensing System, (ii) modify certain requirements for schools providing licensure-related courses, and (iii) impose a requirement that licensees annually complete a division-approved course on Utah law. Here you go: http://www.rules.utah.gov/publicat/bulletin/2013/20130615/37678.htm.


There is a fair amount of scheduled news this week, but most of that will be postponed just as the unemployment data was on Friday. In addition, not only does the press have the partial shutdown to yap about, but bank earnings season kicks off Fri 10/11 with JPM Chase and Wells Fargo reporting in the early morning. Not only is bank sentiment low, but we’ll also see actual numbers behind the mortgage slowdown – and few expect them to be pretty.


Although tapering has dropped off radar screens (and this shutdown, which dampens GDP and certainly hiring, delays it anyway), the Fed minutes from the 9/17-18 meeting will be published Wednesday at 2PM EDT. And the nomination for the Fed chairman is still hanging fire – don’t look for Yellen to be nominated by President Obama until the present fiscal impasse ends.


In spite of the probably postponement of the data, here is what is supposed to come out. Tomorrow is the Trade Balance numbers, Wednesday is the MBA application indices, Thursday is Weekly Jobless Claims, Export & Import prices, and then Friday are Retail Sales, the Producer Price Index, and Michigan Sentiment. Stocks are taking it on the chin. Rate-wise it is pretty quiet out there – on Friday the 10-yr closed at a yield of 2.65% and is now sitting around 2.61% and agency MBS prices are better by .125-.250.



Here are some facts for football fans, part 1 of 2:

The huddle was created by deaf QB Paul D. Hubbard so the other team could not read his hand signals.

The total play time in a football game averages 11 minutes.

The Houston Texans are the fourth professional team to use the name “Texans”…three defunct pro hockey teams also used the name.

Football evolved in medieval Europe from “Mob Football.” There were an unlimited number of players and you had to get the ball to the center of town anyway you could…as long as it did not lead to manslaughter.

Since the American Professional Football Association became the NFL in 1922, the Chicago Bears are the only team not to change its name or the city.

Every single NFL football is made in a Wilson factory in the village of Ada, OH. Pop 6000.

The highest score in football ever occurred in 1916 when Georgia Tech beat Cumberland 222-0. The Baltimore Ravens are named after Edgar Allen Poe’s famous poem “The Raven”…not the actual bird.




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Rob Chrisman