More Agency Updates; Why Bank M&A is Expected to Continue in 2015
I love it when I receive an e-mail warning me, "You've had unusual and suspicious activity on your American Express Card." I don't have an American Express Card. Think your IT's security is up to speed? Think again - this e-mail got through, didn't it? Seriously, thanks to Len Tichy who sent along this recent analysis of the current state of IT security issues.
"Big money goes around the world,
Big money underground.
Big money got a mighty voice,
Big money make no sound.
Big money pull a million strings,
Big money hold the prize.
Big money weave a mighty web,
Big money draw the flies."
So strummed Rock & Roll Hall of Fame band Rush. FDIC-insured institutions earned $36.9 billion in the fourth quarter of 2014, down $2.9 billion from a year earlier. The drop in earnings is due to a $4.4 billion increase in litigation expenses but banks were more profitable in the fourth quarter of 2014 compared to last year. Community banks performed the best in the fourth quarter, as earnings were up 28 percent from the previous year. Loan and lease balances increased $149.4 billion in the fourth quarter to $8.3 trillion and over the past year, loan and lease balances increased 5.3 percent. Full year earnings equaled $152.7 billion and total net income for 2014 was $1.7 billion less than what the industry had reported in 2013, which marks the first decline in annual net income in five years. The average return on assets dropped to 0.96 percent from 1.09 percent a year earlier and the average return on equity fell to 8.56 percent from 9.76 percent. For more information regarding the FDIC's fourth quarter earnings, click here.
Mergers and acquisitions in banking and mortgage banking will continue in 2015 - there is no doubt about it. Before discussing deals in the last week, let's gather some historical perspective. In 2014, the 301 depository bank deals represented a slight uptick from the previous year. The deals completed represented a total value of $18.6 billion (versus 247 deals completed in 2013 for $14.5 billion). Though a handful of multi-billion dollar deals fell into the mix in 2014 as has been the case over the past few years, the majority of M&A activity occurred between community banks, and primarily those on the smaller side. In fact, only 5 of the 301 deals last year were valued above $500mm.
Whether you're a bank or a mortgage bank, new rules and regulatory changes are having an impact on fixed costs in banks of all sizes and especially in smaller institutions, so many are "looking for a better way." Big banks are grappling with higher capital standards and heightened regulatory requirements that are now being applied to any company deemed to be a Systemically Important Financial Institution (SIFI), so deal activity from the industry's largest banks is expected to take place almost solely in the form of divestitures. These banks are retooling and unloading their weakest business lines and those that use the most capital. Don't look for big banks to be adding assets, and will probably be more interested in less capital-intensive, fee based businesses.
M&A activity in the non-SIFI group of banks is expected to continue rising among small community banks, as these institutions struggle to deal with the increasing cost of regulations, keep up with technology and deal with extreme levels of competition from larger banks and nonbanks. Many community banks have found it difficult to effectively walk the line between cutting enough costs to help boost their bottom lines and keeping the cuts from impacting the overall quality of customer service. As such, some community banks have shifted their focus to specializations where they can carve out a niche or where minimal competition provides an edge. Those specializations can be geographic, product or demographic specific. As such, merging with like-sized, like-minded banks with similar business models and customer bases remains a seemingly easy way for small banks to leverage fixed costs.
But Pacific Coast Banker's Bank points out that many studies show most M&A transactions don't work out. Consider that one study of 302 significant deals, found acquirers underperformed industry peers on average in providing returns to shareholders. Still others have shown as many as 60% of all deals turn out poorly for the buyer, so extreme care is warranted. Cultural fit is so underrated yet so critical - don't ignore it.
But hope springs eternal. In the last week we learned that Providence Bank ($682mm, MO) will acquire Community First Bank ($211mm, IL). In New Jersey Peapack-Gladstone Bank ($2.7B) will acquire Wealth Management Consultants. In Indiana (home of David Letterman) Peoples Bank SB ($775mm) will acquire Liberty Savings Bank, FSB ($59mm). Bank of Stockton ($2.4B, CA) will acquire 2 branches in CA from the First Bank ($5.9B, MO). In South Carolina (motto: "We're just south of North Carolina") Carolina Alliance Bank ($418mm) will acquire Pinnacle Bank of South Carolina ($154mm) for about $23.3mm in cash (20%) and stock (80%).
Lenders everywhere are following changes from Fannie and Freddie. Interestingly, after going after smaller lenders the two Agencies appear to have shifted their marketing efforts back to larger lenders in an effort to limit their counterparty risk. But their changes impact the entire industry. Earlier this week this commentary discussed some recent updates, including Fannie's delay on self-employed borrower changes, so let's keep playing catch up.
The Mortgage Bankers Association joined nearly a dozen industry trade groups in urging the Senate Budget Committee to forward an amendment to a budget bill that would prevent Fannie Mae/Freddie Mac credit risk guarantee fees from being used to offset unrelated costs.
Fannie Mae released selling guide updates to include changes to clarifications of project standards policies, reorganization of co-op topics, updating effective dates for pricing and credit score delivery and lender breach of contract. Fannie Mae has moved the effective date for lenders to adopt the project standards policy updates to April 18 in order to align with the Condo Project Manager release date. Fannie Mae has also updated the policy as it pertains to pricing loans for borrowers without credit scores, to remove the reference to pricing loans for co-borrowers without credit scores and refer to the LLPA Matrix in its place. Fannie Mae is also delaying the mandatory implementation requiring lenders, when there are more than two borrowers on the loan, to deliver credit scores for the borrowers with the highest and lowest representative credit scores, disregarding any borrower without a credit score. Finally, Fannie Mae has the discretion to determine whether a change in the lender's financial or business or operation conditions warrants a breach of contract if it constitutes a material and adverse change.
Fannie Mae has communicated the following updates to the Servicing Guide: Updates to the Use of Multiple Custodial Accounts, Updates to Property (Hazard) and Flood Insurance Losses, Updates to Delinquency Status Code Hierarchy and Definitions, New Requirements for Reimbursing Fannie Mae for a Cancelled Mortgage Loan Modification, Updates to Fannie Mae Standard and Streamlined Modifications, Updates to Notifying Fannie Mae of Changes to a Servicer's Organization and Introduction of the Non-Routine Litigation Form (Form 20).
Fannie Mae is introducing a New Non-Routine Litigation Form. Effective March 23 the servicer or law firm must fill out the Non-Routine Litigation Form (Form 20). Once the form is completed with all the relevant information, the servicer or law firm must click on the "Submit" button and an email will open with the "To" line automatically populated with the regional Fannie Mae in-house counsel that will serve as your point of contact on the matter. When submitting Form 20, please note that all items denoted with an asterisk mark (*) are required before the form can be submitted.
Fannie Mae has updated its appraisal findings report. This report now provides an appraisal risk score, risk flags, and new messages from Collateral Underwriter (CU), a proprietary appraisal risk assessment application, when an appraisal is submitted to the Uniform Collateral Data Portal (UCDP). The Appraisal Findings Report, available via Message Manager, will be updated in April 2015 to include CU feedback. The report, available to Fannie Mae Seller/Servicers, provides a monthly summary to supplement the submission-level Fannie Mae feedback.
On to interest rates! Long term rates have scooted back up, resulting in "curve-steepening." We've seen plenty of intra-day rate changes this week, and Thursday's bond market activity puzzled many: bond prices had every reason to go higher and rates lower, what with a flight to quality given the invasion of Yemen and the selloff in the stock markets. Initial Jobless Claims came in slightly better than expected at only +282k. Atlanta Fed President Lockhart, viewed as a "middle of the road kind of Fed Governor, said that economic growth in the first quarter appears very soft and that a liftoff in short term rates should be at the June, July, or September meeting.
As a side note, oil prices have shot higher. Yemen exports less than 150k barrels of crude oil per day, but its strategic location next to the strait through which Saudi Arabia exports its oil to Asia has concerned the oil market.
We will have the March Michigan Consumer Sentiment number, along with the Q4 Gross Domestic Product (for the third time & final time). Rates are little changed overnight: the 10-year saw a 1.99% 3PM close and a 2.01% 5PM close, is sitting at 2.00% with agency MBS prices about the same as Thursday afternoon.
Jobs and Announcements
Peoples Bank (Kansas and Colorado) is looking for a VP/Internal Audit Manager in either Kansas City or Colorado Springs. Peoples Banks' combined asset size is approximately $700MM and 2014 mortgage production was $2.8 billion. The ideal candidate will have a minimum of seven years' Internal Audit experience in a banking and mortgage banking environment with recent experience managing the Internal Audit function. Please click here for more information or to apply.
Residential lender Privlo continues to grow and is searching for a Director of Loan Production and National Director of Sales, along with senior loan processors and licensed loan officers to handle direct incoming leads and convert them to loans. The company is also searching for Wholesale AEs in TX, CA, CO, VA, WA, IL and MD. Headquartered in Southern California, Privlo is currently lending in California, Colorado, Idaho, Illinois, Maryland, Minnesota, New Mexico, Tennessee, Texas, Virginia and Washington through direct and wholesale channels, and over the last several months it has "launched, tested, and fine-tuned its business on both the operations as well as the sales fronts. The outcome has been advanced technology to decision Non-QM, Non-Prime loans faster and better as well as a bevy of business partnerships with upstream referral providers or top independent mortgage originators." More information on Privlo, including the job descriptions, can be found here. Please send Resumes & your brief thoughts on how technology can fundamentally improve your job function to recruiting@privlo. com.
In the mortgage technology sphere, American Financial Resources/eLEND is seeking a dynamic Chief Information Officer (CIO) with mortgage or financial services experience to continue its growth story. The CIO will work closely with the AFR/eLEND leadership team to develop long and short range technology plans to support new and existing business. The position is available in AFR's headquarters located in Parsippany, NJ. American Financial Resources and eLEND (its growing consumer direct division) is a nationwide home mortgage lender with FNMA and Freddie Seller/Servicer authority as well as being a GNMA issuer. The opportunity to meet in Orlando is available if you're attending the MBA's National Technology in Mortgage Banking conference. Please forward your confidential inquiries, potential meeting requests and resumes to Chief Strategy Officer Robert Pieklo.
And Genworth's Global Mortgage Insurance division, in Raleigh, North Carolina, is hiring a Product Development Manager. This person would be responsible for leading the enterprise-wide product development strategy and execution through the Product and Service Development Process to drive profitable financial returns and market share growth. This person will also identify and analyze product opportunities through the use of market trends, industry and competitive intelligence data, regulatory environment and business leadership to create a pipeline of ideas and enhancements. The successful candidate must solid experience in mortgage insurance/mortgage banking and project/product management, and a strong knowledge of the secondary mortgage market and capital markets. For more information and to apply, please view the job posting and enter GMI17493 in the requisition field. Candidates can also forward their resume to Kristin Miller.