EVER-6.30.13-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| | |
| Q | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2013. |
or
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| | |
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to |
EverBank Financial Corp
(Exact name of registrant as specified in its charter)
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| | | | |
Delaware | | 001-35533 | | 52-2024090 |
(State of incorporation) | | (Commission File Number) | | (I.R.S. Employer Identification No.) |
| | |
501 Riverside Ave., Jacksonville, FL | | | | 32202 |
(Address of principal executive offices) | | | | (Zip Code) |
904-281-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes Q No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes Q No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| | | |
| Large accelerated filer o | | Accelerated filer o |
| Non-accelerated filer Q (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No Q
As of July 29, 2013, there were 122,525,760 shares of common stock outstanding.
EverBank Financial Corp
Form 10-Q
Index
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Part I - Financial Information |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Part II - Other Information |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
Part I. Financial Information
Item 1. Financial Statements (unaudited)
EverBank Financial Corp and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(Dollars in thousands, except per share data)
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Assets | | | |
Cash and due from banks | $ | 40,841 |
| | $ | 175,400 |
|
Interest-bearing deposits in banks | 448,746 |
| | 268,514 |
|
Total cash and cash equivalents | 489,587 |
| | 443,914 |
|
Investment securities: | | | |
Available for sale, at fair value | 1,357,752 |
| | 1,619,878 |
|
Held to maturity (fair value of $114,853 and $146,709 as of June 30, 2013 and December 31, 2012, respectively) | 115,319 |
| | 143,234 |
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Other investments | 142,225 |
| | 158,172 |
|
Total investment securities | 1,615,296 |
| | 1,921,284 |
|
Loans held for sale (includes $1,327,883 and $1,452,236 carried at fair value as of June 30, 2013 and December 31, 2012, respectively) | 2,000,390 |
| | 2,088,046 |
|
Loans and leases held for investment: | | | |
Loans and leases held for investment, net of unearned income | 12,867,388 |
| | 12,505,089 |
|
Allowance for loan and lease losses | (73,469 | ) | | (82,102 | ) |
Total loans and leases held for investment, net | 12,793,919 |
| | 12,422,987 |
|
Equipment under operating leases, net | 39,850 |
| | 50,040 |
|
Mortgage servicing rights (MSR), net | 462,718 |
| | 375,859 |
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Deferred income taxes, net | 139,814 |
| | 170,877 |
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Premises and equipment, net | 65,930 |
| | 66,806 |
|
Other assets | 755,368 |
| | 703,065 |
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Total Assets | $ | 18,362,872 |
| | $ | 18,242,878 |
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Liabilities | | | |
Deposits: | | | |
Noninterest-bearing | $ | 1,205,326 |
| | $ | 1,445,783 |
|
Interest-bearing | 12,464,540 |
| | 11,696,605 |
|
Total deposits | 13,669,866 |
| | 13,142,388 |
|
Other borrowings | 2,667,700 |
| | 3,173,021 |
|
Trust preferred securities | 103,750 |
| | 103,750 |
|
Accounts payable and accrued liabilities | 372,173 |
| | 372,543 |
|
Total Liabilities | 16,813,489 |
| | 16,791,702 |
|
Commitments and Contingencies (Note 14) | | |
|
|
Shareholders’ Equity | | | |
Series A 6.75% Non-Cumulative Perpetual Preferred Stock, $0.01 par value (liquidation preference of $25,000 per share;10,000,000 shares authorized; 6,000 issued and outstanding at June 30, 2013 and December 31, 2012) | 150,000 |
| | 150,000 |
|
Common Stock, $0.01 par value (500,000,000 shares authorized; 122,383,260 and 120,987,955 issued and outstanding at June 30, 2013 and December 31, 2012, respectively) | 1,224 |
| | 1,210 |
|
Additional paid-in capital | 827,682 |
| | 811,085 |
|
Retained earnings | 650,866 |
| | 575,665 |
|
Accumulated other comprehensive income (loss) (AOCI) | (80,389 | ) | | (86,784 | ) |
Total Shareholders’ Equity | 1,549,383 |
| | 1,451,176 |
|
Total Liabilities and Shareholders’ Equity | $ | 18,362,872 |
| | $ | 18,242,878 |
|
See notes to unaudited condensed consolidated financial statements.
EverBank Financial Corp and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
(Dollars in thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Interest Income | | | | | | | |
Interest and fees on loans and leases | $ | 172,723 |
| | $ | 135,816 |
| | $ | 346,509 |
| | $ | 260,594 |
|
Interest and dividends on investment securities | 14,813 |
| | 20,699 |
| | 31,063 |
| | 41,248 |
|
Other interest income | 317 |
| | 82 |
| | 615 |
| | 186 |
|
Total Interest Income | 187,853 |
| | 156,597 |
| | 378,187 |
| | 302,028 |
|
Interest Expense | | | | | | | |
Deposits | 26,567 |
| | 20,419 |
| | 53,390 |
| | 41,393 |
|
Other borrowings | 20,069 |
| | 11,194 |
| | 39,764 |
| | 20,028 |
|
Total Interest Expense | 46,636 |
| | 31,613 |
| | 93,154 |
| | 61,421 |
|
Net Interest Income | 141,217 |
| | 124,984 |
| | 285,033 |
| | 240,607 |
|
Provision for Loan and Lease Losses | 29 |
| | 5,757 |
| | 1,948 |
| | 17,112 |
|
Net Interest Income after Provision for Loan and Lease Losses | 141,188 |
| | 119,227 |
| | 283,085 |
| | 223,495 |
|
Noninterest Income | | | | | | | |
Loan servicing fee income | 47,192 |
| | 42,483 |
| | 89,355 |
| | 88,039 |
|
Amortization and impairment of mortgage servicing rights | (3,373 | ) | | (64,277 | ) | | (25,896 | ) | | (108,760 | ) |
Net loan servicing income | 43,819 |
| | (21,794 | ) | | 63,459 |
| | (20,721 | ) |
Gain on sale of loans | 75,837 |
| | 69,926 |
| | 158,148 |
| | 118,103 |
|
Loan production revenue | 10,063 |
| | 9,852 |
| | 19,552 |
| | 17,289 |
|
Deposit fee income | 4,290 |
| | 5,828 |
| | 10,215 |
| | 12,067 |
|
Other lease income | 6,471 |
| | 8,822 |
| | 12,882 |
| | 17,485 |
|
Other | 6,324 |
| | 1,489 |
| | 15,857 |
| | 3,093 |
|
Total Noninterest Income | 146,804 |
| | 74,123 |
| | 280,113 |
| | 147,316 |
|
Noninterest Expense | | | | | | | |
Salaries, commissions and other employee benefits expense | 118,457 |
| | 76,277 |
| | 228,936 |
| | 142,867 |
|
Equipment expense | 20,707 |
| | 16,889 |
| | 40,559 |
| | 32,837 |
|
Occupancy expense | 7,547 |
| | 6,017 |
| | 14,931 |
| | 11,366 |
|
General and administrative expense | 66,829 |
| | 76,600 |
| | 140,930 |
| | 147,534 |
|
Total Noninterest Expense | 213,540 |
| | 175,783 |
| | 425,356 |
| | 334,604 |
|
Income before Provision for Income Taxes | 74,452 |
| | 17,567 |
| | 137,842 |
| | 36,207 |
|
Provision for Income Taxes | 28,459 |
| | 6,395 |
| | 52,703 |
| | 13,189 |
|
Net Income | $ | 45,993 |
| | $ | 11,172 |
| | $ | 85,139 |
| | $ | 23,018 |
|
Less: Net Income Allocated to Preferred Stock | (2,531 | ) | | (1,685 | ) | | (5,062 | ) | | (7,664 | ) |
Net Income Allocated to Common Shareholders | $ | 43,462 |
| | $ | 9,487 |
| | $ | 80,077 |
| | $ | 15,354 |
|
Basic Earnings Per Common Share | $ | 0.36 |
| | $ | 0.09 |
| | $ | 0.66 |
| | $ | 0.17 |
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Diluted Earnings Per Common Share | $ | 0.35 |
| | $ | 0.09 |
| | $ | 0.65 |
| | $ | 0.17 |
|
Dividends Declared Per Common Share | $ | 0.02 |
| | $ | — |
| | $ | 0.04 |
| | $ | — |
|
See notes to unaudited condensed consolidated financial statements.
EverBank Financial Corp and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(Dollars in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net Income | $ | 45,993 |
| | $ | 11,172 |
| | $ | 85,139 |
| | $ | 23,018 |
|
Unrealized Gains (Losses) on Debt Securities | | | | | | | |
Unrealized gains (losses) due to changes in fair value | (23,500 | ) | | (7,581 | ) | | (22,796 | ) | | 13,705 |
|
Tax effect | 8,932 |
| | 2,883 |
| | 8,668 |
| | (5,146 | ) |
Change in unrealized gains (losses) on debt securities | (14,568 | ) | | (4,698 | ) | | (14,128 | ) | | 8,559 |
|
Interest Rate Swaps | | | | | | | |
Net unrealized gains (losses) due to changes in fair value | 17,383 |
| | (32,932 | ) | | 21,766 |
| | (26,304 | ) |
Reclassification of net unrealized losses to interest expense | 6,011 |
| | 1,964 |
| | 11,368 |
| | 3,674 |
|
Tax effect | (8,891 | ) | | 11,769 |
| | (12,611 | ) | | 8,726 |
|
Change in interest rate swaps | 14,503 |
| | (19,199 | ) | | 20,523 |
| | (13,904 | ) |
Other Comprehensive Income (Loss) | (65 | ) | | (23,897 | ) | | 6,395 |
| | (5,345 | ) |
Comprehensive Income (Loss) | $ | 45,928 |
| | $ | (12,725 | ) | | $ | 91,534 |
| | $ | 17,673 |
|
See notes to unaudited condensed consolidated financial statements.
EverBank Financial Corp and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity (unaudited)
(Dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ Equity | | |
| Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss), Net of Tax | | Total Equity |
Balance, January 1, 2013 | $ | 150,000 |
| | $ | 1,210 |
| | $ | 811,085 |
| | $ | 575,665 |
| | $ | (86,784 | ) | | $ | 1,451,176 |
|
Net income | — |
| | — |
| | — |
| | 85,139 |
| | — |
| | 85,139 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 6,395 |
| | 6,395 |
|
Issuance of common stock | — |
| | 14 |
| | 10,456 |
| | — |
| | — |
| | 10,470 |
|
Share-based grants (including income tax benefits) | — |
| | — |
| | 6,141 |
| | — |
| | — |
| | 6,141 |
|
Cash dividends on common stock | — |
| | — |
| | — |
| | (4,875 | ) | | — |
| | (4,875 | ) |
Cash dividends on preferred stock | — |
| | — |
| | — |
| | (5,063 | ) | | — |
| | (5,063 | ) |
Balance, June 30, 2013 | $ | 150,000 |
| | $ | 1,224 |
| | $ | 827,682 |
| | $ | 650,866 |
| | $ | (80,389 | ) | | $ | 1,549,383 |
|
| | | | | | | | | | | |
Balance, January 1, 2012 | $ | 3 |
| | $ | 751 |
| | $ | 561,247 |
| | $ | 513,413 |
| | $ | (107,749 | ) | | $ | 967,665 |
|
Net income | — |
| | — |
| | — |
| | 23,018 |
| | — |
| | 23,018 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (5,345 | ) | | (5,345 | ) |
Conversion of preferred stock | (3 | ) | | 188 |
| | (185 | ) | | — |
| | — |
| | — |
|
Issuance of common stock, net of issue costs | — |
| | 226 |
| | 198,536 |
| | — |
| | — |
| | 198,762 |
|
Repurchase of common stock | — |
| | — |
| | (360 | ) | | — |
| | — |
| | (360 | ) |
Share-based grants (including income tax benefits) | — |
| | — |
| | 3,184 |
| | — |
| | — |
| | 3,184 |
|
Cash dividends on preferred stock | — |
| | — |
| | — |
| | (5,555 | ) | | — |
| | (5,555 | ) |
Balance, June 30, 2012 | $ | — |
| | $ | 1,165 |
| | $ | 762,422 |
| | $ | 530,876 |
| | $ | (113,094 | ) | | $ | 1,181,369 |
|
See notes to unaudited condensed consolidated financial statements.
EverBank Financial Corp and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(Dollars in thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
Operating Activities: | | | |
Net income | $ | 85,139 |
| | $ | 23,018 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Amortization of premiums and deferred origination costs | 19,303 |
| | 4,710 |
|
Depreciation and amortization of tangible and intangible assets | 20,121 |
| | 18,091 |
|
Reclassification of net loss on settlement of interest rate swaps | 11,368 |
| | 3,674 |
|
Amortization and impairment of mortgage servicing rights | 25,896 |
| | 108,760 |
|
Deferred income taxes (benefit) | 27,120 |
| | (8,347 | ) |
Provision for loan and lease losses | 1,948 |
| | 17,112 |
|
Loss on other real estate owned (OREO) | 2,855 |
| | 4,605 |
|
Share-based compensation expense | 3,147 |
| | 2,229 |
|
Payments for settlement of forward interest rate swaps | (30,181 | ) | | (14,002 | ) |
Other operating activities | 3 |
| | (2,778 | ) |
Changes in operating assets and liabilities: | | | |
Loans held for sale, including proceeds from sales and repayments | (665,369 | ) | | (788,325 | ) |
Other assets | 68,592 |
| | 37,043 |
|
Accounts payable and accrued liabilities | (2,982 | ) | | 1,638 |
|
Net cash provided by (used in) operating activities | (433,040 | ) | | (592,572 | ) |
Investing Activities: | | | |
Investment securities available for sale: | | | |
Purchases | (27,898 | ) | | (210,717 | ) |
Proceeds from prepayments and maturities | 265,572 |
| | 274,042 |
|
Investment securities held to maturity: | | | |
Purchases | (19,260 | ) | | (14,917 | ) |
Proceeds from prepayments and maturities | 46,691 |
| | 13,506 |
|
Purchases of other investments | (57,050 | ) | | (37,422 | ) |
Proceeds from sales of other investments | 72,997 |
| | — |
|
Net change in loans and leases held for investment | (32,012 | ) | | (880,630 | ) |
Cash paid for acquisition | — |
| | (351,071 | ) |
Purchases of premises and equipment, including equipment under operating leases | (9,246 | ) | | (31,267 | ) |
Purchases of mortgage servicing assets | (41,377 | ) | | — |
|
Proceeds related to sale or settlement of other real estate owned | 19,620 |
| | 18,664 |
|
Proceeds from insured foreclosure claims | 198,878 |
| | 61,869 |
|
Other investing activities | 3,546 |
| | (190 | ) |
Net cash provided by (used in) investing activities | 420,461 |
| | (1,158,133 | ) |
Financing Activities: | | | |
Net increase in nonmaturity deposits | 826,916 |
| | 343,692 |
|
Net increase (decrease) in time deposits | (269,741 | ) | | 182,987 |
|
Net change in repurchase agreements | (142,322 | ) | | — |
|
Net change in short-term Federal Home Loan Bank (FHLB) advances | (475,500 | ) | | 370,000 |
|
Proceeds from long-term FHLB advances | 225,000 |
| | 1,100,000 |
|
Repayments of long-term FHLB advances | (112,158 | ) | | (223,500 | ) |
Proceeds from issuance of common stock | 10,470 |
| | 207,514 |
|
Other financing activities | (4,413 | ) | | (6,737 | ) |
Net cash provided by financing activities | 58,252 |
| | 1,973,956 |
|
Net change in cash and cash equivalents | 45,673 |
| | 223,251 |
|
Cash and cash equivalents at beginning of period | 443,914 |
| | 294,981 |
|
Cash and cash equivalents at end of period | $ | 489,587 |
| | $ | 518,232 |
|
See Note 1 for disclosures related to supplemental noncash information.
See notes to unaudited condensed consolidated financial statements.
EverBank Financial Corp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(Dollars in thousands, except per share data)
1. Organization and Basis of Presentation
a) Organization — EverBank Financial Corp (the Company) is a thrift holding company with two direct operating subsidiaries, EverBank (EB) and EverBank Funding, LLC (EBF). EB is a federally chartered thrift institution with its home office located in Jacksonville, Florida. Its direct banking services are offered nationwide. In addition, EB operates financial centers in Florida and retail lending centers across the United States. EB (a) accepts deposits from the general public; (b) originates, purchases, services, sells and securitizes residential real estate mortgage loans, commercial real estate loans and commercial loans and leases; (c) originates consumer and home equity loans; and (d) offers full-service securities brokerage and investment advisory services.
EB’s subsidiaries are:
•AMC Holding, Inc., the parent of CustomerOne Financial Network, Inc.;
•Tygris Commercial Finance Group, Inc. (Tygris), the parent of EverBank Commercial Finance, Inc.;
•EverInsurance, Inc.;
•Elite Lender Services, Inc.;
•EverBank Wealth Management, Inc. (EWM); and
•Business Property Lending, Inc.
On January 31, 2012, as part of a tax-free reorganization, the assets, liabilities and business activities of EWM were transferred to EB.
On February 14, 2013, the Company formed EverBank Funding, LLC, a Delaware limited liability company, to facilitate the pooling and securitization of mortgage loans for issuance into the secondary market.
b) Reincorporation — In September 2010, EverBank Financial Corp, a Florida corporation (EverBank Florida), formed EverBank Financial Corp, a Delaware corporation (EverBank Delaware). Subsequent to its formation, EverBank Delaware held no assets, had no subsidiaries and did not engage in any business or other activities except in connection with its formation. In May 2012, EverBank Delaware completed an initial public offering with its common stock listed on the New York Stock Exchange (NYSE) under the symbol “EVER”. Immediately preceding the consummation of that offering, EverBank Florida merged with and into EverBank Delaware, with EverBank Delaware continuing as the surviving corporation and succeeding to all of the assets, liabilities and business of EverBank Florida. The merger resulted in the following:
| |
• | All of the outstanding shares of common stock of EverBank Florida were converted into approximately 77,994,699 shares of EverBank Delaware common stock; |
| |
• | All of the outstanding shares of Series B Preferred Stock of EverBank Florida were converted into 15,964,644 shares of EverBank Delaware common stock; |
| |
• | As a result of the reincorporation of EverBank Florida in Delaware, the Company is now governed by the laws of the State of Delaware. |
Reincorporation of EverBank Florida in Delaware did not result in any change in the business, management, fiscal year, assets, liabilities or location of the principal offices of the Company.
c) Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes necessary for a complete presentation of financial position, results of operations, comprehensive income, and cash flows in conformity with generally accepted accounting principles. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes to the financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for acquired companies are included from their respective dates of acquisition. In management’s opinion, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive income, and changes in cash flows have been made.
GAAP requires management to make estimates that affect the reported amounts and disclosures of contingencies in the condensed consolidated financial statements. Estimates by their nature are based on judgment and available information. Material estimates relate to the Company’s allowance for loan and lease losses, loans and leases acquired with evidence of credit deterioration, repurchase obligations, contingent liabilities, and the fair values of investment securities, loans held for sale, MSR and derivative instruments. Because of the inherent uncertainties associated with any estimation process and future changes in market and economic conditions, it is possible that actual results could differ significantly from those estimates.
d) Supplemental Cash Flow Information - Noncash investing activities are presented in the following table: |
| | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
Supplemental Schedules of Noncash Investing Activities: | | | |
Loans transferred to foreclosure claims from loans held for investment | $ | 220,783 |
| | $ | 67,487 |
|
Loans transferred to foreclosure claims from loans held for sale | 98,037 |
| | 142,519 |
|
Loans transferred from held for sale to held for investment | 745,262 |
| | 26,138 |
|
Loans transferred from held for investment to held for sale | 326,636 |
| | 1,604 |
|
| | | |
Supplemental Schedules of Noncash Financing Activities: | | | |
Conversion of preferred stock | $ | — |
| | $ | 135,585 |
|
2. Recent Accounting Pronouncements
Presentation of Comprehensive Income — In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. ASU 2011-05 is effective for the first quarter of 2012 and should be applied retrospectively. Adoption of this standard resulted in the presentation of a new statement of comprehensive income separate from the statement of shareholders’ equity but did not have any impact on the Company’s results of operations. In December 2011, the FASB issued ASU 2011-12,Comprehensive Income (Topic 220)- Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, to allow time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of AOCI on the components of net income and other comprehensive income for all periods presented. Adoption of this ASU did not have any impact on the Company’s condensed consolidated financial statements or results of operations. In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to require an entity to disaggregate the total change of each component of other comprehensive income and separately present reclassification adjustments and current period other comprehensive income. ASU 2013-02 also requires that entities either (1) present in a single note or parenthetically on the face of the financial statements the effect of significant amounts reclassified from each component of AOCI based on its source and the income line item affected by the reclassification if items are reclassified out of AOCI in their entirety or (2) cross reference to other required, related disclosures for additional information if items are not reclassified out of AOCI in their entirety. ASU 2013-02 is effective prospectively for annual reporting periods beginning after December 15, 2012, and interim periods within those annual periods. The adoption of this standard resulted in the additional disclosure of the lines of income or expense impacted by reclassifications out of AOCI within the statement of comprehensive income but did not have any impact on the Company's condensed consolidated financial statements or results of operations.
Balance Sheet Offsetting—In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities, which will enhance disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The guidance will require that entities disclose the gross and net information about both instruments that are offset in the balance sheet or are subject to a master netting arrangement. In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210)—Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which limits the scope of the new balance sheet offsetting disclosures to only (1) derivatives, including bifurcated embedded derivatives; (2) repurchase agreements and reverse repurchase agreements; and (3) securities borrowing and securities lending transactions, to the extent they are offset in the financial statements or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the statement of financial position. The requirements set forth in both ASU 2011-11 and ASU 2013-01 are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective disclosure necessary for all comparative periods presented. The adoption of these standards resulted in additional disclosures as presented in Note 12 but did not have any impact on the Company's condensed consolidated financial statements or results of operations.
Updates to Significant Accounting Policies
Loans Held for Sale—Loans held for sale represent loans originated or acquired by the Company with the intent to sell. The Company has elected the fair value option of accounting under U.S. GAAP for certain residential mortgage loans. Electing to use the fair value option of accounting allows a better offset of the changes in the fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. These loans are initially recorded and carried at fair value, with changes in fair value recognized in gain on sale of loans. Loan origination fees are recorded when earned, and related costs are recognized when incurred.
The Company has not elected the fair value option for other residential mortgage loans primarily because the Company expects to hold these loans for a short duration. These loans are carried at the lower of cost or fair value. In determining the lower of cost or fair value adjustment on loans held for sale, the Company pools loans based on similar risk characteristics such as loan type and interest rate. Direct loan origination fees and costs are deferred at loan origination or acquisition. These amounts are recognized as income at the time the loan is sold and included in gain on sale of loans. Gains and losses on sale of these loans are recorded in gain on sale of loans.
Loans and leases are transferred from loans and leases held for investment to held for sale when the Company no longer has the intent to hold them for the foreseeable future. Loans and leases are transferred from held for sale to held for investment when the Company determines its intent to hold these loans and leases for the foreseeable future. Loans and leases are transferred to loans and leases held for investment at the lower of cost or fair value on the date of reclassification with any lower of cost or fair value adjustment recognized as a basis adjustment.
Certain guarantees arise from agreements associated with servicing, securitization and sale of the Company's residential mortgage loans. Under these agreements, the Company may be obligated to repurchase, or otherwise indemnify or reimburse the investor or insurer for losses incurred, due to material breach of contractual representations and warranties with respect to non-GSE purchasers, or breach of contractual representations and warranties with respect to GSEs. These guarantees are accounted for in accordance with ASC 460, Guarantees, when the obligation is both probable and reasonably estimable. The guarantee is calculated at the fair value of the guarantee on the date of the loan sale or securitization. The corresponding provision is recognized as a reduction on net gains on loan sales and securitization, and is reduced, by a credit to earnings, as the guarantor is released from risk under the guarantee. The reserve for repurchase obligations is included in accounts payable and accrued liabilities on the consolidated balance sheets with changes to the reserve made through general and administrative expenses. See Note 5 and Note 14 for further information related to these guarantees.
3. Acquisition Activities
Acquisition of Business Property Lending, Inc. - On October 1, 2012, EB, a wholly owned subsidiary of the Company, acquired 100% of the outstanding common shares of Business Property Lending, Inc. (BPL), a wholly owned subsidiary of General Electric Capital Corporation (GECC) for cash consideration of $2,401,398. The acquisition provided the Company with an established and operating platform for expanding its originating capacity nationwide originating commercial real estate loans to small and mid-size business clients. The transaction was accounted for using the acquisition method with the consideration paid allocated to all identifiable assets and liabilities acquired.
Under the acquisition method of accounting, the measurement period for a transaction is to extend for a period necessary to obtain all available information to facilitate a complete and accurate recording of the transaction as of the acquisition date. This period, however, may not extend beyond a period of one year from the date of acquisition. In the event information not available at the time of acquisition is obtained during the measurement period that would affect the recording of the transaction, any applicable adjustments are to be performed retrospectively adjusting the initial recording of the acquisition.
The fair value of assets acquired included financing receivables for commercial real estate with a fair value of $2,337,123 that was comprised of both loans accounted for under ASC 310-20, Receivables, Nonrefundable Fees and Other Costs, as well as loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Subsequent to the initial recording of the transaction, additional reviews into the ASC 310-20 population identified that evidence of deteriorated credit quality existed for some of these loans at the date of acquisition based on information not previously available. Upon review of the impact of this updated information to the overall fair value of the acquired loans, it was determined that no retrospective adjustment of the fair value was necessary. Therefore, a prospective adjustment was performed to include these loans in the ASC 310-30 population. The following table presents a bridge from the unpaid principal balance (UPB), or contractual net investment, to carrying value for the acquired financing receivables by method of accounting as presented initially at the acquisition date, as well as, based on the updated loan stratification: |
| | | | | | | | | | | | | | | |
| As Initially Recorded | | As Updated |
| ASC 310-20 | | ASC 310-30 | | ASC 310-20 | | ASC 310-30 |
Unpaid principal balance at acquisition | $ | 2,229,822 |
| | $ | 89,993 |
| | $ | 2,174,738 |
| | $ | 145,077 |
|
Plus: contractual interest due or unearned income | 1,176,442 |
| | 62,517 |
| | 1,143,748 |
| | 95,211 |
|
Contractual cash flows due | 3,406,264 |
| | 152,510 |
| | 3,318,486 |
| | 240,288 |
|
Less: cash flows not expected to be collected (1) | 518,949 |
| | 42,387 |
| | 499,602 |
| | 61,734 |
|
Expected cash flows | 2,887,315 |
| | 110,123 |
| | 2,818,884 |
| | 178,554 |
|
Less: accretable yield | 629,788 |
| | 30,527 |
| | 617,297 |
| | 43,018 |
|
Carrying value at acquisition | $ | 2,257,527 |
| | $ | 79,596 |
| | $ | 2,201,587 |
| | $ | 135,536 |
|
(1) Cash flows not expected to be collected includes the effects of both credit losses as well as modeled prepayment assumptions.
4. Investment Securities
The amortized cost and fair value of investment securities with gross unrealized gains and losses were as follows as of June 30, 2013 and December 31, 2012: |
| | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Carrying Amount |
June 30, 2013 | | | | | | | | | |
Available for sale: | | | | | | | | | |
Residential collateralized mortgage obligations (CMO) securities - nonagency | $ | 1,340,741 |
| | $ | 17,840 |
| | $ | 7,263 |
| | $ | 1,351,318 |
| | $ | 1,351,318 |
|
Asset-backed securities (ABS) | 6,672 |
| | — |
| | 843 |
| | 5,829 |
| | 5,829 |
|
Other | 333 |
| | 272 |
| | — |
| | 605 |
| | 605 |
|
Total available for sale securities | $ | 1,347,746 |
| | $ | 18,112 |
| | $ | 8,106 |
| | $ | 1,357,752 |
| | $ | 1,357,752 |
|
Held to maturity: | | | | | | | | | |
Residential CMO securities - agency | $ | 61,526 |
| | $ | 2,187 |
| | $ | 31 |
| | $ | 63,682 |
| | $ | 61,526 |
|
Residential mortgage-backed securities (MBS) - agency | 48,806 |
| | 931 |
| | 1,116 |
| | 48,621 |
| | 48,806 |
|
Corporate securities | 4,987 |
| | — |
| | 2,437 |
| | 2,550 |
| | 4,987 |
|
Total held to maturity securities | $ | 115,319 |
| | $ | 3,118 |
| | $ | 3,584 |
| | $ | 114,853 |
| | $ | 115,319 |
|
December 31, 2012 | | |
| | | | | | |
Available for sale: | | | | | | | | | |
Residential CMO securities - nonagency | $ | 1,577,270 |
| | $ | 39,860 |
| | $ | 5,355 |
| | $ | 1,611,775 |
| | $ | 1,611,775 |
|
Asset-backed securities | 9,461 |
| | — |
| | 1,935 |
| | 7,526 |
| | 7,526 |
|
Other | 366 |
| | 211 |
| | — |
| | 577 |
| | 577 |
|
Total available for sale securities | $ | 1,587,097 |
| | $ | 40,071 |
| | $ | 7,290 |
| | $ | 1,619,878 |
| | $ | 1,619,878 |
|
Held to maturity: | | | | | | | | | |
Residential CMO securities - agency | $ | 106,346 |
| | $ | 3,497 |
| | $ | — |
| | $ | 109,843 |
| | $ | 106,346 |
|
Residential MBS - agency | 31,901 |
| | 1,986 |
| | — |
| | 33,887 |
| | 31,901 |
|
Corporate securities | 4,987 |
| | — |
| | 2,008 |
| | 2,979 |
| | 4,987 |
|
Total held to maturity securities | $ | 143,234 |
| | $ | 5,483 |
| | $ | 2,008 |
| | $ | 146,709 |
| | $ | 143,234 |
|
At June 30, 2013 and December 31, 2012, investment securities with a carrying value of $188,608 and $421,209, respectively, were pledged to secure other borrowings, public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.
There were no gross gains or gross losses realized on available for sale investments during the three and six months ended June 30, 2013 or 2012.
The gross unrealized losses and fair value of the Company’s investments in an unrealized loss position at June 30, 2013 and December 31, 2012, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or Greater | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
June 30, 2013 | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | |
Residential CMO securities - nonagency | $ | 349,489 |
| | $ | 5,767 |
| | $ | 45,914 |
| | $ | 1,496 |
| | $ | 395,403 |
| | $ | 7,263 |
|
Residential CMO securities - agency | 11,686 |
| | 31 |
| | — |
| | — |
| | 11,686 |
| | 31 |
|
Residential MBS - agency | 35,750 |
| | 1,116 |
| | — |
| | — |
| | 35,750 |
| | 1,116 |
|
Asset-backed securities | — |
| | — |
| | 5,829 |
| | 843 |
| | 5,829 |
| | 843 |
|
Corporate securities | — |
| | — |
| | 2,550 |
| | 2,437 |
| | 2,550 |
| | 2,437 |
|
Total debt securities | $ | 396,925 |
| | $ | 6,914 |
| | $ | 54,293 |
| | $ | 4,776 |
| | $ | 451,218 |
| | $ | 11,690 |
|
December 31, 2012 | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | |
Residential CMO securities - nonagency | $ | 57,715 |
| | $ | 299 |
| | $ | 183,285 |
| | $ | 5,056 |
| | $ | 241,000 |
| | $ | 5,355 |
|
Asset-backed securities | — |
| | — |
| | 7,526 |
| | 1,935 |
| | 7,526 |
| | 1,935 |
|
Corporate securities | — |
| | — |
| | 2,979 |
| | 2,008 |
| | 2,979 |
| | 2,008 |
|
Total debt securities | $ | 57,715 |
| | $ | 299 |
| | $ | 193,790 |
| | $ | 8,999 |
| | $ | 251,505 |
| | $ | 9,298 |
|
The Company had unrealized losses at June 30, 2013 and December 31, 2012 on residential nonagency CMO securities, residential agency CMO securities, residential agency MBS, ABS and corporate securities. These unrealized losses are primarily attributable to weak market conditions. Based on the nature of the impairment, these unrealized losses are considered temporary. The Company does not intend to sell nor is it more likely than not that it will be required to sell these investments before their anticipated recovery.
At June 30, 2013, the Company had 56 debt securities in an unrealized loss position. A total of 42 were in an unrealized loss position for less than 12 months. These 42 securities consisted of 31 residential nonagency CMO securities, two residential agency CMO securities and nine residential agency MBS. The remaining 14 debt securities were in an unrealized loss position for 12 months or longer. These 14 securities consisted of three ABS, one corporate security and 10 residential nonagency CMO securities. Of the $11,690 in unrealized losses, $7,856 relate to debt securities that are rated investment grade with the remainder representing securities for which the Company believes it has both the intent and ability to hold to recovery.
At December 31, 2012, the Company had 31 debt securities in an unrealized loss position. A total of 3 were in an unrealized loss position for less than 12 months, all of which were residential CMO securities. The remaining 28 debt securities were in an unrealized loss position for 12 months or longer. These 28 securities consisted of three ABS, one corporate security and 24 residential nonagency CMO securities. Of the $9,298 in unrealized losses, $5,355 relate to debt securities that are rated investment grade with the remainder representing securities for which the Company believes it has both the intent and ability to hold to recovery.
When certain triggers indicate the likelihood of an other-than-temporary-impairment (OTTI) or the qualitative evaluation performed cannot support the expectation of recovering the entire amortized cost basis of an investment, the Company performs cash flow analyses that project prepayments, default rates and loss severities on the collateral supporting each security. If the net present value of the investment is less than the amortized cost, the difference is recognized in earnings as a credit-related impairment, while the remaining difference between the fair value and the amortized cost is recognized in AOCI. There were no OTTI losses recognized on available for sale or held to maturity securities during the three and six months ended June 30, 2013 or 2012.
During the three and six months ended June 30, 2013 and 2012, interest and dividend income on investment securities was comprised of the following: |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Interest income on available for sale securities | $ | 13,420 |
| | $ | 18,728 |
| | $ | 28,285 |
| | $ | 37,599 |
|
Interest income on held to maturity securities | 658 |
| | 1,409 |
| | 1,282 |
| | 2,809 |
|
Other interest and dividend income | 735 |
| | 562 |
| | 1,496 |
| | 840 |
|
| $ | 14,813 |
| | $ | 20,699 |
| | $ | 31,063 |
| | $ | 41,248 |
|
All investment interest income recognized by the Company during the three and six months ended June 30, 2013 and 2012 was fully taxable.
5. Loans Held for Sale
Loans held for sale as of June 30, 2013 and December 31, 2012, consist of the following:
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Mortgage warehouse (carried at fair value) | $ | 1,039,977 |
|
| $ | 1,452,236 |
|
Government insured pool buyouts | 139,982 |
|
| 96,635 |
|
Other | 532,525 |
|
| 539,175 |
|
Other (carried at fair value) | 287,906 |
| | — |
|
Total loans held for sale | $ | 2,000,390 |
|
| $ | 2,088,046 |
|
The Company typically transfers residential mortgage loans originated or acquired to various financial institutions, government agencies, and GSEs. In addition, the Company enters into loan securitization transactions related to certain conforming residential mortgage loans. In connection with these transactions, loans are converted into mortgage-backed securities issued primarily by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), the Federal National Mortgage Association (FNMA or Fannie Mae) and the Government National Mortgage Association (GNMA or Ginnie Mae), and are subsequently sold to third party investors. Typically, the Company accounts for these transfers as sales and either retains or releases the right to service the loans. The servicing arrangement represents the Company's continuing involvement with these transferred loans.
In addition, the Company also may be exposed to limited liability related to recourse agreements and repurchase agreements made to our issuers and purchasers. This liability includes amounts related to loans sold that we may be required to repurchase, or otherwise indemnify or reimburse the investor or insurer for losses incurred, due to a material breach of contractual representations and warranties. Refer to Note 14 for the maximum exposure to loss for material breaches of contractual representations and warranties.
Other loans held for sale and carried at fair value of $287,906 represent preferred jumbo residential mortgage loans that the Company originated with the intent to market and sell in the secondary market either through third party sales or securitizations. The Company has elected the fair value option for these loans to provide a better offset of the changes in the fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.
The following is a summary of cash flows related to transfers accounted for as sales for the three and six months ended June 30, 2013 and 2012: |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Proceeds received from agency securitizations | $ | 2,688,840 |
| | $ | 1,869,387 |
| | $ | 5,093,450 |
| | $ | 3,790,357 |
|
Proceeds received from nonagency sales | 335,426 |
| | 5,452 |
| | 677,308 |
| | 18,247 |
|
| | | | | | | |
Servicing fees collected | 29,349 |
| | 23,944 |
| | 55,562 |
| | 47,900 |
|
| | | | | | | |
Repurchased loans from agency securitizations | 1,079 |
| | 2,045 |
| | 2,171 |
| | 3,516 |
|
Repurchased loans from nonagency sales | 4,939 |
| | 4,346 |
| | 10,216 |
| | 9,514 |
|
The Company periodically transfers conforming residential mortgages to GNMA in exchange for mortgage-backed securities. As of June 30, 2013 and December 31, 2012, the Company retained $141,438 and $99,121, respectively, of these securities backed by the transferred loans and maintained effective control over these pools of transferred assets. Accordingly, the Company did not record these transfers as sales. These transferred assets were recorded in the condensed consolidated balance sheets as loans held for sale. The remaining securities were sold to unrelated third parties and were recorded as sales.
The gains and losses on transfers which qualify as sales are recorded in the condensed consolidated statements of income in gain on sale of loans, which includes the gain or loss on sale, change in fair value related to fair value option loans, rate lock commitments, and the offsetting hedging positions.
In connection with these transfers, the Company recorded servicing assets in the amount of $27,491 and $50,992 for the three and six months ended June 30, 2013, respectively. All servicing assets are initially recorded at fair value using a Level 3 measurement technique. Refer to Note 8 for information relating to servicing activities and MSR.
During the three and six months ended June 30, 2013, the Company transferred $721,220 and $745,660 in residential mortgage loans from loans held for sale to loans held for investment at lower of cost or market. A majority of these loans were originated preferred jumbo ARM residential mortgages which were intended to be sold in the secondary market. As a result of changing economic conditions and the Company's capacity and desire to hold these loans on the balance sheet, the Company intends to hold these loans for the foreseeable future and has transferred these loans to the held for investment portfolio. During the three and six months ended June 30, 2012, the Company transferred $8,700 and $26,138 in residential mortgage and commercial real estate loans held for sale to loans held for investment at lower of cost or market as the Company has the intent to hold these loans for the foreseeable future.
During the three and six months ended June 30, 2013, the Company transferred $224,652 and $326,636 of loans held for investment to held for sale at lower of cost or market. The majority of these loans were government insured pool buyouts initially originated for the held for investment portfolio. These loans were transferred to held for sale based upon a change in intent to no longer hold these loans for the foreseeable future.
6. Loans and Leases Held for Investment, Net
Loans and leases held for investment as of June 30, 2013 and December 31, 2012 are comprised of the following:
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Residential mortgages | $ | 6,586,116 |
| | $ | 6,708,748 |
|
Commercial and commercial real estate | 5,090,332 |
| | 4,771,768 |
|
Lease financing receivables | 1,014,996 |
| | 836,935 |
|
Home equity lines | 169,296 |
| | 179,600 |
|
Consumer and credit card | 6,648 |
| | 8,038 |
|
Total loans and leases held for investment, net of discounts | 12,867,388 |
| | 12,505,089 |
|
Allowance for loan and lease losses | (73,469 | ) | | (82,102 | ) |
Total loans and leases held for investment, net | $ | 12,793,919 |
| | $ | 12,422,987 |
|
As of June 30, 2013 and December 31, 2012, the carrying values presented above include net purchased loan and lease discounts and net deferred loan and lease origination costs as follows:
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Net purchased loan and lease discounts | $ | 130,880 |
| | $ | 164,132 |
|
Net deferred loan and lease origination costs | 37,232 |
| | 25,275 |
|
Acquired Credit Impaired (ACI) Loans and Leases — At acquisition, the Company estimates the fair value of acquired loans and leases by segregating the portfolio into pools with similar risk characteristics. Fair value estimates for acquired loans and leases require estimates of the amounts and timing of expected future principal, interest and other cash flows. For each pool, the Company uses certain loan and lease information, including outstanding principal balance, probability of default and the estimated loss in the event of default to estimate the expected future cash flows for each loan and lease pool.
Acquisition date details of loans and leases acquired with evidence of credit deterioration during the six months ended June 30, 2013 are as follows: |
| | | |
| June 30, 2013 |
Contractual payments receivable for acquired loans and leases at acquisition | $ | 345,890 |
|
Expected cash flows for acquired loans and leases at acquisition | 193,549 |
|
Basis in acquired loans and leases at acquisition | 179,027 |
|
Information pertaining to the ACI portfolio as of June 30, 2013 and December 31, 2012 is as follows:
|
| | | | | | | | | | | |
| Bank of Florida | | Other Acquired Loans | | Total |
June 30, 2013 | | | | | |
Carrying value, net of allowance | $ | 391,565 |
| | $ | 938,180 |
| | $ | 1,329,745 |
|
Outstanding unpaid principal balance (UPB) | 431,343 |
| | 968,467 |
| | 1,399,810 |
|
Allowance for loan and lease losses, beginning of period | 16,789 |
| | 5,175 |
| | 21,964 |
|
Allowance for loan and lease losses, end of period | 14,867 |
| | 5,216 |
| | 20,083 |
|
|
| | | | | | | | | | | |
| Bank of Florida | | Other Acquired Loans | | Total |
December 31, 2012 | | | | | |
Carrying value, net of allowance | $ | 472,374 |
| | $ | 876,351 |
| | $ | 1,348,725 |
|
Outstanding unpaid principal balance | 520,873 |
| | 913,020 |
| | 1,433,893 |
|
Allowance for loan and lease losses, beginning of year | 11,638 |
| | 4,351 |
| | 15,989 |
|
Allowance for loan and lease losses, end of year | 16,789 |
| | 5,175 |
| | 21,964 |
|
The Company recorded a reduction of $867 and an additional expense of $689 in provision for loan and lease losses for the ACI portfolio for the three months ended June 30, 2013 and 2012, respectively. The Company recorded $665 and $4,329 in provision for loan and lease losses for the ACI portfolio for the six months ended June 30, 2013 and 2012, respectively. The adjustments to provision performed are the result of changes in expected cash flows on ACI loans.
The following is a summary of the accretable yield activity for the ACI loans during the six months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | |
| Bank of Florida | | Other Acquired Loans | | Total |
June 30, 2013 | | | | | |
Balance, beginning of period | $ | 99,201 |
| | $ | 121,207 |
| | $ | 220,408 |
|
Additions | — |
| | 12,173 |
| | 12,173 |
|
Accretion | (13,995 | ) | | (21,692 | ) | | (35,687 | ) |
Reclassifications to accretable yield | 7,256 |
| | 23,372 |
| | 30,628 |
|
Balance, end of period | $ | 92,462 |
| | $ | 135,060 |
| | $ | 227,522 |
|
June 30, 2012 | | | | | |
Balance, beginning of period | $ | 141,750 |
| | $ | 65,973 |
| | $ | 207,723 |
|
Accretion | (18,614 | ) | | (12,611 | ) | | (31,225 | ) |
Reclassifications (from) to accretable yield | (10,723 | ) | | 1,446 |
| | (9,277 | ) |
Balance, end of period | $ | 112,413 |
| | $ | 54,808 |
| | $ | 167,221 |
|
Covered Loans and Leases — Covered loans and leases are acquired and recorded at fair value at acquisition, exclusive of the loss share agreements with the Federal Deposit Insurance Corporation (FDIC) and the indemnification agreement with former shareholders of Tygris. All loans acquired through the loss share agreement with the FDIC and all loans and leases acquired in the purchase of Tygris are considered covered during the applicable indemnification period. As of June 30, 2013 and December 31, 2012, the Company does not expect to receive cash payments under these indemnification agreements due to the performance of the underlying loans.
The following is a summary of the recorded investment of major categories of covered loans and leases outstanding as of June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | |
| Bank of Florida | | Tygris | | Total |
June 30, 2013 | | | | | |
Residential mortgages | $ | 47,234 |
| | $ | — |
| | $ | 47,234 |
|
Commercial and commercial real estate | 365,680 |
| | — |
| | 365,680 |
|
Lease financing receivables | — |
| | 44,537 |
| | 44,537 |
|
Home equity lines | 17,569 |
| | — |
| | 17,569 |
|
Consumer and credit card | 636 |
| | — |
| | 636 |
|
Total recorded investment of covered loans and leases | $ | 431,119 |
| | $ | 44,537 |
| | $ | 475,656 |
|
December 31, 2012 | | | | | |
Residential mortgages | $ | 56,390 |
| | $ | — |
| | $ | 56,390 |
|
Commercial and commercial real estate | 441,998 |
| | — |
| | 441,998 |
|
Lease financing receivables | — |
| | 75,201 |
| | 75,201 |
|
Home equity lines | 17,992 |
| | — |
| | 17,992 |
|
Consumer and credit card | 1,378 |
| | — |
| | 1,378 |
|
Total recorded investment of covered loans and leases | $ | 517,758 |
| | $ | 75,201 |
| | $ | 592,959 |
|
7. Allowance for Loan and Lease Losses
Changes in the allowance for loan and lease losses for the three and six months ended June 30, 2013 and 2012 are as follows: |
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2013 | Residential Mortgages | | Commercial and Commercial Real Estate | | Lease Financing Receivables | | Home Equity Lines | | Consumer and Credit Card | | Total |
Balance, beginning of period | $ | 30,185 |
| | $ | 38,535 |
| | $ | 3,590 |
| | $ | 4,582 |
| | $ | 175 |
| | $ | 77,067 |
|
Provision for loan and lease losses | 1,654 |
| | (2,422 | ) | | 1,218 |
| | (387 | ) | | (34 | ) | | 29 |
|
Charge-offs | (3,271 | ) | | (2,781 | ) | | (988 | ) | | (627 | ) | | (17 | ) | | (7,684 | ) |
Recoveries | 117 |
| | 3,549 |
| | 253 |
| | 120 |
| | 18 |
| | 4,057 |
|
Balance, end of period | $ | 28,685 |
| | $ | 36,881 |
| | $ | 4,073 |
| | $ | 3,688 |
| | $ | 142 |
| | $ | 73,469 |
|
Three Months Ended June 30, 2012 | | | | | | | | | | | |
Balance, beginning of period | $ | 40,739 |
| | $ | 31,391 |
| | $ | 3,344 |
| | $ | 2,632 |
| | $ | 148 |
| | $ | 78,254 |
|
Provision for loan and lease losses | 957 |
| | 1,958 |
| | 1,704 |
| | 1,085 |
| | 53 |
| | 5,757 |
|
Charge-offs | (4,139 | ) | | (1,710 | ) | | (917 | ) | | (484 | ) | | (40 | ) | | (7,290 | ) |
Recoveries | 162 |
| | 411 |
| | 29 |
| | 55 |
| | 15 |
| | 672 |
|
Balance, end of period | $ | 37,719 |
| | $ | 32,050 |
| | $ | 4,160 |
| | $ | 3,288 |
| | $ | 176 |
| | $ | 77,393 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2013 | Residential Mortgages | | Commercial and Commercial Real Estate | | Lease Financing Receivables | | Home Equity Lines | | Consumer and Credit Card | | Total |
Balance, beginning of period | $ | 33,631 |
| | $ | 39,863 |
| | $ | 3,181 |
| | $ | 5,265 |
| | $ | 162 |
| | $ | 82,102 |
|
Provision for loan and lease losses | 3,166 |
| | (2,746 | ) | | 2,256 |
| | (710 | ) | | (18 | ) | | 1,948 |
|
Charge-offs | (8,340 | ) | | (4,228 | ) | | (1,696 | ) | | (1,116 | ) | | (37 | ) | | (15,417 | ) |
Recoveries | 228 |
| | 3,992 |
| | 332 |
| | 249 |
| | 35 |
| | 4,836 |
|
Balance, end of period | $ | 28,685 |
| | $ | 36,881 |
| | $ | 4,073 |
| | $ | 3,688 |
| | $ | 142 |
| | $ | 73,469 |
|
Six Months Ended June 30, 2012 | | | | | | | | | | | |
Balance, beginning of period | $ | 43,454 |
| | $ | 28,209 |
| | $ | 3,766 |
| | $ | 2,186 |
| | $ | 150 |
| | $ | 77,765 |
|
Provision for loan and lease losses | 4,793 |
| | 7,266 |
| | 2,427 |
| | 2,578 |
| | 48 |
| | 17,112 |
|
Charge-offs | (10,833 | ) | | (4,004 | ) | | (2,098 | ) | | (1,592 | ) | | (51 | ) | | (18,578 | ) |
Recoveries | 305 |
| | 579 |
| | 65 |
| | 116 |
| | 29 |
| | 1,094 |
|
Balance, end of period | $ | 37,719 |
| | $ | 32,050 |
| | $ | 4,160 |
| | $ | 3,288 |
| | $ | 176 |
| | $ | 77,393 |
|
The following tables provide a breakdown of the allowance for loan and lease losses and the recorded investment in loans and leases based on the method for determining the allowance as of June 30, 2013 and December 31, 2012: |
| | | | | | | | | | | | | | | |
June 30, 2013 | Individually Evaluated for Impairment | | Collectively Evaluated for Impairment | | ACI Loans | | Total |
Allowance for Loan and Lease Losses | | | | | | | |
Residential mortgages | $ | 11,762 |
| | $ | 11,707 |
| | $ | 5,216 |
| | $ | 28,685 |
|
Commercial and commercial real estate | 4,024 |
| | 17,990 |
| | 14,867 |
| | 36,881 |
|
Lease financing receivables | — |
| | 4,073 |
| | — |
| | 4,073 |
|
Home equity lines | — |
| | 3,688 |
| | — |
| | 3,688 |
|
Consumer and credit card | — |
| | 142 |
| | — |
| | 142 |
|
Total allowance for loan and lease losses | $ | 15,786 |
| | $ | 37,600 |
| | $ | 20,083 |
| | $ | 73,469 |
|
Loans and Leases Held for Investment at Recorded Investment | | | | | | | |
Residential mortgages | $ | 95,678 |
| | $ | 5,613,048 |
| | $ | 877,390 |
| | $ | 6,586,116 |
|
Commercial and commercial real estate | 83,001 |
| | 4,534,893 |
| | 472,438 |
| | 5,090,332 |
|
Lease financing receivables | — |
| | 1,014,996 |
| | — |
| | 1,014,996 |
|
Home equity lines | — |
| | 169,296 |
| | — |
| | 169,296 |
|
Consumer and credit card | — |
| | 6,648 |
| | — |
| | 6,648 |
|
Total loans and leases held for investment | $ | 178,679 |
| | $ | 11,338,881 |
| | $ | 1,349,828 |
| | $ | 12,867,388 |
|
| | | | | | | |
December 31, 2012 | Individually Evaluated for Impairment | | Collectively Evaluated for Impairment | | ACI Loans | | Total |
Allowance for Loan and Lease Losses | | | | | | | |
Residential mortgages | $ | 12,568 |
| | $ | 15,888 |
| | $ | 5,175 |
| | $ | 33,631 |
|
Commercial and commercial real estate | 5,569 |
| | 17,505 |
| | 16,789 |
| | 39,863 |
|
Lease financing receivables | — |
| | 3,181 |
| | — |
| | 3,181 |
|
Home equity lines | — |
| | 5,265 |
| | — |
| | 5,265 |
|
Consumer and credit card | — |
| | 162 |
| | — |
| | 162 |
|
Total allowance for loan and lease losses | $ | 18,137 |
| | $ | 42,001 |
| | $ | 21,964 |
| | $ | 82,102 |
|
Loans and Leases Held for Investment at Recorded Investment | | | | | | | |
Residential mortgages | $ | 95,274 |
| | $ | 5,747,862 |
| | $ | 865,612 |
| | $ | 6,708,748 |
|
Commercial and commercial real estate | 92,262 |
| | 4,174,429 |
| | 505,077 |
| | 4,771,768 |
|
Lease financing receivables | — |
| | 836,935 |
| | — |
| | 836,935 |
|
Home equity lines | — |
| | 179,600 |
| | — |
| | 179,600 |
|
Consumer and credit card | — |
| | 8,038 |
| | — |
| | 8,038 |
|
Total loans and leases held for investment | $ | 187,536 |
| | $ | 10,946,864 |
| | $ | 1,370,689 |
| | $ | 12,505,089 |
|
The Company uses a risk grading matrix to monitor credit quality for commercial and commercial real estate loans. Risk grades are continuously monitored and updated quarterly by credit administration personnel based on current information and events. The Company monitors the quarterly credit quality of all other loan types based on performing status.
The following tables present the recorded investment for loans and leases by credit quality indicator as of June 30, 2013 and December 31, 2012: |
| | | | | | | | | | | | | | | | | | | |
| | | Non-performing | | | | |
| Performing | | Accrual | | Nonaccrual | | Total | | |
June 30, 2013 | | | | | | | | | |
Residential mortgages: | | | | | | | | | |
Residential (1) | $ | 4,177,574 |
| | $ | — |
| | $ | 59,757 |
| | $ | 4,237,331 |
| | |
Government insured pool buyouts (2) (3) | 1,477,555 |
| | 871,230 |
| | — |
| | 2,348,785 |
| | |
Lease financing receivables | 1,012,395 |
| | — |
| | 2,601 |
| | 1,014,996 |
| | |
Home equity lines | 164,928 |
| | — |
| | 4,368 |
| | 169,296 |
| | |
Consumer and credit card | 6,405 |
| | — |
| | 243 |
| | 6,648 |
| | |
Total | $ | 6,838,857 |
| | $ | 871,230 |
| | $ | 66,969 |
| | $ | 7,777,056 |
| | |
| | | | | | | | | |
| Pass | | Special Mention | | Substandard | | Doubtful | | Total |
June 30, 2013 | | | | | | | | | |
Commercial and commercial real estate: | | | | | | | | | |
Commercial | $ | 1,772,176 |
| | $ | 302 |
| | $ | 6,811 |
| | $ | 3,434 |
| | $ | 1,782,723 |
|
Commercial real estate | 2,941,773 |
| | 72,377 |
| | 293,459 |
| | — |
| | 3,307,609 |
|
Total commercial and commercial real estate | $ | 4,713,949 |
| | $ | 72,679 |
| | $ | 300,270 |
| | $ | 3,434 |
| | $ | 5,090,332 |
|
| | | | | | | | | |
| | | Non-performing | | | | |
| Performing | | Accrual | | Nonaccrual | | Total | | |
December 31, 2012 | | | | | | | | | |
Residential mortgages: | | | | | | | | | |
Residential (1) | $ | 3,880,360 |
| | $ | — |
| | $ | 68,924 |
| | $ | 3,949,284 |
| | |
Government insured pool buyouts (2) (3) | 1,590,732 |
| | 1,168,732 |
| | — |
| | 2,759,464 |
| | |
Lease financing receivables | 834,925 |
| | — |
| | 2,010 |
| | 836,935 |
| | |
Home equity lines | 175,354 |
| | — |
| | 4,246 |
| | 179,600 |
| | |
Consumer and credit card | 7,699 |
| | — |
| | 339 |
| | 8,038 |
| | |
Total | $ | 6,489,070 |
| | $ | 1,168,732 |
| | $ | 75,519 |
| | $ | 7,733,321 |
| | |
|
| | | | | | | | | | | | | | | | | | | |
| Pass | | Special Mention | | Substandard | | Doubtful | | Total |
December 31, 2012 | | | | | | | | | |
Commercial and commercial real estate: | | | | | | | | | |
Commercial | $ | 1,368,054 |
| | $ | 565 |
| | $ | 8,416 |
| | $ | 4,405 |
| | $ | 1,381,440 |
|
Commercial real estate | 3,027,554 |
| | 79,779 |
| | 282,995 |
| | — |
| | 3,390,328 |
|
Total commercial and commercial real estate | $ | 4,395,608 |
| | $ | 80,344 |
| | $ | 291,411 |
| | $ | 4,405 |
| | $ | 4,771,768 |
|
| |
(1) | For the periods ended June 30, 2013 and December 31, 2012, performing residential mortgages included $1,113 and $14,682, respectively of ACI loans greater than 90 days past due and still accruing. |
| |
(2) | For the periods ended June 30, 2013 and December 31, 2012, performing government insured pool buyouts included $529,901 and $553,902, respectively of ACI loans greater than 90 days past due and still accruing. |
| |
(3) | Non-performing government insured pool buyouts represent loans that are 90 days or greater past due but remain on accrual status as the interest earned is insured and thus collectible from the insuring governmental agency. |
The following tables present an aging analysis of the recorded investment for loans and leases by class as of June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days and Greater Past Due | | Total Past Due | | Current | | Total Loans Held for Investment Excluding ACI |
June 30, 2013 | | | | | | | | | | | |
Residential mortgages: | | | | | | | | | | | |
Residential | $ | 13,906 |
| | $ | 7,522 |
| | $ | 59,757 |
| | $ | 81,185 |
| | $ | 4,069,343 |
| | $ | 4,150,528 |
|
Government insured pool buyouts (1) | 100,271 |
| | 57,901 |
| | 871,230 |
| | 1,029,402 |
| | 528,796 |
| | 1,558,198 |
|
Commercial and commercial real estate: | | | | | | | | | | | |
Commercial | 733 |
| | — |
| | 2,902 |
| | 3,635 |
| | 1,749,513 |
| | 1,753,148 |
|
Commercial real estate | 3,387 |
| | 136 |
| | 16,830 |
| | 20,353 |
| | 2,844,393 |
| | 2,864,746 |
|
Lease financing receivables | 7,376 |
| | 1,849 |
| | 506 |
| | 9,731 |
| | 1,005,265 |
| | 1,014,996 |
|
Home equity lines | 1,315 |
| | 301 |
| | 4,368 |
| | 5,984 |
| | 163,312 |
| | 169,296 |
|
Consumer and credit card | 45 |
| | 7 |
| | 44 |
| | 96 |
| | 6,552 |
| | 6,648 |
|
Total loans and leases held for investment | $ | 127,033 |
| | $ | 67,716 |
| | $ | 955,637 |
| | $ | 1,150,386 |
| | $ | 10,367,174 |
| | $ | 11,517,560 |
|
| | | | | | | | | | | |
December 31, 2012 | | | | | | | | | | | |
Residential mortgages: | | | | | | | | | | | |
Residential | $ | 12,648 |
| | $ | 4,844 |
| | $ | 68,924 |
| | $ | 86,416 |
| | $ | 3,759,325 |
| | $ | 3,845,741 |
|
Government insured pool buyouts (1) | 132,479 |
| | 70,915 |
| | 1,168,732 |
| | 1,372,126 |
| | 625,269 |
| | 1,997,395 |
|
Commercial and commercial real estate: | | | | | | | | | | | |
Commercial | 242 |
| | 271 |
| | 4,985 |
| | 5,498 |
| | 1,358,107 |
| | 1,363,605 |
|
Commercial real estate | — |
| | — |
| | 71,149 |
| | 71,149 |
| | 2,831,937 |
| | 2,903,086 |
|
Lease financing receivables | 4,250 |
| | 2,039 |
| | 571 |
| | 6,860 |
| | 830,075 |
| | 836,935 |
|
Home equity lines | 1,221 |
| | 1,108 |
| | 4,246 |
| | 6,575 |
| | 173,025 |
| | 179,600 |
|
Consumer and credit card | 57 |
| | 30 |
| | 339 |
| | 426 |
| | 7,612 |
| | 8,038 |
|
Total loans and leases held for investment | $ | 150,897 |
| | $ | 79,207 |
| | $ | 1,318,946 |
| | $ | 1,549,050 |
| | $ | 9,585,350 |
| | $ | 11,134,400 |
|
| |
(1) | Government insured pool buyouts remain on accrual status after 90 days as the interest earned is collectible from the insuring governmental agency. |
Impaired Loans — Impaired loans include loans identified as troubled loans as a result of a borrower’s financial difficulties and other loans on which the accrual of interest income is suspended. The Company continues to collect payments on certain impaired loan balances on which accrual is suspended.
The following tables present the unpaid principal balance, the recorded investment and the related allowance for impaired loans as of June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
| Unpaid Principal Balance | | Recorded Investment (1) | | Related Allowance | | Unpaid Principal Balance | | Recorded Investment (1) | | Related Allowance |
With an allowance recorded: | | | | | | | | | | | |
Residential mortgages: | | | | | | | | | | | |
Residential | $ | 84,490 |
| | $ | 77,662 |
| | $ | 11,762 |
| | $ | 77,501 |
| | $ | 75,111 |
| | $ | 12,568 |
|
Commercial and commercial real estate: | | | | | | | | | | | |
Commercial | 15,170 |
| | 3,837 |
| | 1,145 |
| | 12,356 |
| | 2,615 |
| | 371 |
|
Commercial real estate | 23,019 |
| | 18,502 |
| | 2,879 |
| | 56,997 |
| | 33,967 |
| | 5,198 |
|
Total impaired loans with an allowance recorded | $ | 122,679 |
| | $ | 100,001 |
| | $ | 15,786 |
| | $ | 146,854 |
| | $ | 111,693 |
| | $ | 18,137 |
|
| | | | | | | | | | | |
Without a related allowance recorded: | | | | | | | | | | | |
Residential mortgages: | | | | | | | | | | | |
Residential | $ | 23,604 |
| | $ | 18,016 |
| | $ | — |
| | $ | 25,602 |
| | $ | 20,163 |
| | $ | — |
|
Commercial and commercial real estate: | | | | | | | | | | | |
Commercial | 311 |
| | 94 |
| | — |
| | 5,413 |
| | 4,446 |
| | — |
|
Commercial real estate | 67,589 |
| | 60,568 |
| | — |
| | 59,332 |
| | 51,234 |
| | — |
|
Total impaired loans without an allowance recorded | $ | 91,504 |
| | $ | 78,678 |
| | $ | — |
| | $ | 90,347 |
| | $ | 75,843 |
| | $ | — |
|
| |
(1) | The primary difference between the unpaid principal balance and recorded investment represents charge offs previously taken. |
The following table presents the average investment and interest income recognized on impaired loans for the three and six months ended June 30, 2013 and 2012: |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2013 | | 2012 |
| Average Investment | | Interest Income Recognized | | Average Investment | | Interest Income Recognized |
With and without a related allowance recorded: | | | | | | | |
Residential mortgages: | | | | | | | |
Residential | $ | 95,736 |
| | $ | 706 |
| | $ | 91,238 |
| | $ | 654 |
|
Commercial and commercial real estate: | | | | | | | |
Commercial | 4,786 |
| | — |
| | 8,480 |
| | 12 |
|
Commercial real estate | 76,875 |
| | 250 |
| | 108,857 |
| | 468 |
|
Total impaired loans | $ | 177,397 |
| | $ | 956 |
| | $ | 208,575 |
| | $ | 1,134 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
| Average Investment | | Interest Income Recognized | | Average Investment | | Interest Income Recognized |
With and without a related allowance recorded: | | | | | | | |
Residential mortgages: | | | | | | | |
Residential | $ | 95,582 |
| | $ | 1,476 |
| | $ | 91,134 |
| | $ | 1,314 |
|
Commercial and commercial real estate: | | | | | | | |
Commercial | 5,544 |
| | 2 |
| | 10,490 |
| | 35 |
|
Commercial real estate | 79,650 |
| | 464 |
| | 115,188 |
| | 1,026 |
|
Total impaired loans | $ | 180,776 |
| | $ | 1,942 |
| | $ | 216,812 |
| | $ | 2,375 |
|
The following table presents the recorded investment for loans and leases on nonaccrual status by class and loans greater than 90 days past due and still accruing as of June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
| Nonaccrual Status | | Greater than 90 Days Past Due and Accruing | | Nonaccrual Status | | Greater than 90 Days Past Due and Accruing |
Residential mortgages: | | | | | | | |
Residential | $ | 59,757 |
| | $ | — |
| | $ | 68,924 |
| | $ | — |
|
Government insured pool buyouts | — |
| | 871,230 |
| | — |
| | 1,168,732 |
|
Commercial and commercial real estate: | | | | | | | |
Commercial | 4,680 |
| | — |
| | 4,985 |
| | — |
|
Commercial real estate | 55,956 |
| | — |
| | 71,149 |
| | — |
|
Lease financing receivables | 2,601 |
| | — |
| | 2,010 |
| | — |
|
Home equity lines | 4,368 |
| | — |
| | 4,246 |
| | — |
|
Consumer and credit card | 243 |
| | — |
| | 339 |
| | — |
|
Total non-performing loans and leases | $ | 127,605 |
| | $ | 871,230 |
| | $ | 151,653 |
| | $ | 1,168,732 |
|
Troubled Debt Restructurings (TDR) — Modifications considered to be TDRs are individually evaluated for credit loss based on a discounted cash flow model using the loan’s effective interest rate at the time of origination. The discounted cash flow model used in this evaluation is adjusted to reflect the modified loan’s elevated probability of future default based on the Company’s historical redefault rate. These loans are classified as nonaccrual and have been included in the Company’s impaired loan disclosures in the tables above. A loan is considered to redefault when it is 30 days past due. Once a modified loan demonstrates a consistent period of performance under the modified terms, generally six months, the Company returns the loan to an accrual classification. If a modified loan defaults under the terms of the modified agreement, the Company measures the allowance for loan and lease losses based on the fair value of collateral less cost to sell.
The following is a summary of information relating to modifications considered to be TDRs for the three and six months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2013 | | Six Months Ended June 30, 2013 |
| Number of Contracts | | Pre- modification Recorded Investment | | Post- modification Recorded Investment | | Number of Contracts | | Pre-modification Recorded Investment | | Post-modification Recorded Investment |
Residential mortgages: |
| | | | | | | | | | |
Residential | 6 |
| | $ | 2,300 |
| | $ | 2,310 |
| | 18 |
| | $ | 7,888 |
| | $ | 7,910 |
|
Commercial and commercial real estate: |
| | | | | | | | | | |
Commercial real estate | 1 |
| | 1,319 |
| | 1,319 |
| | 2 |
| | 1,695 |
| | 1,695 |
|
Total | 7 |
| | $ | 3,619 |
| | $ | 3,629 |
| | 20 |
| | $ | 9,583 |
| | $ | 9,605 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended June 30, 2012 | | Six Months Ended June 30, 2012 |
| Number of Contracts | | Pre- modification Recorded Investment | | Post- modification Recorded Investment | | Number of Contracts | | Pre- modification Recorded Investment | | Post- modification Recorded Investment |
Residential mortgages: |
| |
| |
| | | | | | |
Residential | 17 |
| | $ | 7,693 |
| | $ | 7,705 |
| | 33 |
| | $ | 13,707 |
| | $ | 13,726 |
|
Commercial and commercial real estate: | | | | | | | | | | | |
Commercial | 1 |
| | — |
| | — |
| | 4 |
| | 2,954 |
| | 2,954 |
|
Commercial real estate | 7 |
| | 13,066 |
| | 13,066 |
| | 13 |
| | 21,307 |
| | 21,307 |
|
Total | 25 |
| | $ | 20,759 |
| | $ | 20,771 |
| | 50 |
| | $ | 37,968 |
| | $ | 37,987 |
|
The Company included 131 loans with an unpaid principal balance of $14,562 in Chapter 7 bankruptcy as TDRs at June 30, 2013. Modifications made to residential loans during the period included extension of original contractual maturity date, extension of the period of below market rate interest only payments, or contingent reduction of past due interest. Commercial loan modifications made during the period included extension of original contractual maturity date, payment forbearance, reduction of interest rates, or extension of interest only periods.
The number of contracts and recorded investment of loans that were modified during the last 12 months and subsequently defaulted during the three and six months ended June 30, 2013 and 2012 are as follows:
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, 2013 | | Six Months Ended June 30, 2013 |
| Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
Residential mortgages: | | | | | | | |
Residential | 1 |
| | $ | 187 |
| | 1 |
| | $ | 187 |
|
Commercial and commercial real estate: | | | | | | | |
Commercial | 1 |
| | 728 |
| | 1 |
| | 728 |
|
Commercial real estate | 1 |
| | 136 |
| | 1 |
| | 136 |
|
Total | 3 |
| | $ | 1,051 |
| | 3 |
| | $ | 1,051 |
|
| | | | | | | |
| Three Months Ended June 30, 2012 | | Six Months Ended June 30, 2012 |
| Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
Residential mortgages: | | | | | | | |
Residential | 8 |
| | $ | 2,965 |
| | 9 |
| | $ | 3,111 |
|
Commercial and commercial real estate: | | | | | | | |
Commercial | 1 |
| | 860 |
| | 1 |
| | 860 |
|
Commercial real estate | 1 |
| | 3,687 |
| | 1 |
| | 3,687 |
|
Total | 10 |
| | $ | 7,512 |
| | 11 |
| | $ | 7,658 |
|
The recorded investment of TDRs as of June 30, 2013 and December 31, 2012 are summarized as follows:
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Loan Type: | | | |
Residential mortgages | $ | 95,678 |
| | $ | 95,275 |
|
Commercial and commercial real estate | 39,546 |
| | 64,674 |
|
Total recorded investment of TDRs | $ | 135,224 |
| | $ | 159,949 |
|
Accrual Status: | | | |
Current | $ | 76,835 |
| | $ | 86,495 |
|
30-89 days past-due accruing | 5,401 |
| | 3,600 |
|
90+ days past-due accruing | 481 |
| | 244 |
|
Nonaccrual | 52,507 |
| | 69,610 |
|
Total recorded investment of TDRs | $ | 135,224 |
| | $ | 159,949 |
|
| | | |
TDRs classified as impaired loans | $ | 135,224 |
| | $ | 159,949 |
|
Valuation allowance on TDRs | 12,892 |
| | 16,258 |
|
8. Servicing Activities and Mortgage Servicing Rights
A summary of MSR activities for the three and six months ended June 30, 2013 and 2012 is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Balance, beginning of period | $ | 375,641 |
| | $ | 462,420 |
| | $ | 375,859 |
| | $ | 489,496 |
|
Originated servicing rights capitalized upon sale of loans | 27,491 |
| | 18,498 |
| | 50,992 |
| | 37,027 |
|
Acquired servicing rights | 63,555 |
| | — |
| | 63,555 |
| | — |
|
Amortization | (35,945 | ) | | (34,142 | ) | | (71,023 | ) | | (63,481 | ) |
Decrease (increase) in valuation allowance | 32,572 |
| | (30,135 | ) | | 45,127 |
| | (45,279 | ) |
Other | (596 | ) | | (679 | ) | | (1,792 | ) | | (1,801 | ) |
Balance, end of period | $ | 462,718 |
| | $ | 415,962 |
| | $ | 462,718 |
| | $ | 415,962 |
|
Valuation allowance: | | | | | | | |
Balance, beginning of period | $ | 90,408 |
| | $ | 54,599 |
| | $ | 102,963 |
| | $ | 39,455 |
|
Increase in valuation allowance | — |
| | 30,135 |
| | — |
| | 45,279 |
|
Recoveries | (32,572 | ) | | — |
| | (45,127 | ) | | — |
|
Balance, end of period | $ | 57,836 |
| | $ | 84,734 |
| | $ | 57,836 |
| | $ | 84,734 |
|
Components of loan servicing fee income for the three and six months ended June 30, 2013 and 2012 are presented below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Contractually specified service fees, net | $ | 38,584 |
| | $ | 33,686 |
| | $ | 70,373 |
| | $ | 69,071 |
|
Other ancillary fees | 7,993 |
| | 8,247 |
| | 17,730 |
| | 17,866 |
|
Other | 615 |
| | 550 |
| | 1,252 |
| | 1,102 |
|
| $ | 47,192 |
| | $ | 42,483 |
| | $ | 89,355 |
| | $ | 88,039 |
|
Residential
On April 1, 2013, EverBank purchased the servicing rights to $12,962,454 of UPB of Fannie Mae residential servicing assets for $63,555, which transferred on July 1, 2013. The acquired servicing rights will be included in the residential class of MSR.
For loans securitized and sold with servicing retained during the three and six months ended June 30, 2013 and 2012, management used the following assumptions to determine the fair value of residential MSR at the date of securitization:
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, 2013 | | Six Months Ended June 30, 2013 |
Average discount rates | 9.61 | % | | — | | 9.67% | | 9.38 | % | | — | | 9.85% |
Expected prepayment speeds | 7.91 | % | | — | | 14.93% | | 7.91 | % | | — | | 14.93% |
Weighted-average life in years | 5.33 |
| | — | | 6.91 | | 5.33 |
| | — | | 6.91 |
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, 2012 | | Six Months Ended June 30, 2012 |
Average discount rates | 8.77 | % | | — | | 8.88% | | 8.60 | % | | — | | 9.14% |
Expected prepayment speeds | 10.50 | % | | — | | 12.07% | | 10.13 | % | | — | | 14.62% |
Weighted-average life in years | 6.03 |
| | — | | 6.65 | | 5.46 |
| | — | | 6.70 |
At June 30, 2013 and December 31, 2012, the Company estimated the fair value of its capitalized residential MSR to be approximately $457,643 and $363,173, respectively. The unpaid principal balance below excludes $7,172,000 and $7,049,000 at June 30, 2013 and December 31, 2012, respectively, for residential loans with no related MSR basis.
The characteristics used in estimating the fair value of the residential MSR portfolio at June 30, 2013 and December 31, 2012 are as follows:
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Unpaid principal balance | $ | 52,842,000 |
| | $ | 42,373,000 |
|
Gross weighted-average coupon | 4.48 | % | | 4.66 | % |
Weighted-average servicing fee | 0.30 | % | | 0.30 | % |
Expected prepayment speed (1) | 15.57 | % | | 19.73 | % |
| |
(1) | The prepayment speed assumptions include a blend of prepayment speeds that are influenced by mortgage interest rates, the current macroeconomic environment and borrower behaviors and may vary over the expected life of the asset. |
A sensitivity analysis of the Company’s fair value of residential MSR portfolio to hypothetical adverse changes of 10% and 20% to the weighted-average of certain key assumptions as of June 30, 2013 and December 31, 2012 is presented below.
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Prepayment Rate | | | |
10% adverse rate change | $ | 22,707 |
| | $ | 23,100 |
|
20% adverse rate change | 43,670 |
| | 44,232 |
|
Discount Rate | | | |
10% adverse rate change | 16,001 |
| | 12,696 |
|
20% adverse rate change | 30,952 |
| | 24,539 |
|
In the previous table, the effect of a variation in a specific assumption on the fair value is calculated without changing any other assumptions. This analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s residential mortgage servicing rights usually is not linear. The effect of changing one key assumption will likely result in the change of another key assumption which could impact the sensitivities.
Commercial
The carrying value and fair value of our commercial MSR was $9,357 at June 30, 2013. As of December 31, 2012, the carrying value and fair value of our commercial MSR was $12,700 and $15,698, respectively.
9. Income Taxes
For the three and six months ended June 30, 2013, the Company’s effective income tax rate of 38.2% for both periods differs from the statutory federal income tax rate primarily due to state income taxes. For the three and six months ended June 30, 2012, the Company's effective income tax rate of 36.4% for both periods, differs from the statutory federal income tax rate primarily due to state income taxes.
10. Share-Based Compensation
Option Plans - On March 6, 2013, the Company granted 537,154 options with a fair value on the grant date of $7.53. The fair value of each option award was estimated as of the grant date using the Black-Scholes option-pricing model. Significant assumptions used in the Black-Scholes option-pricing model to determine the fair value of stock options are as follows:
|
| | |
Risk-free interest rate | 1.76 | % |
Expected volatility | 38.93 | % |
Expected term (years) | 9.10 |
|
Dividend yield | 0.55 | % |
The risk-free interest rate is based on the U.S. Treasury constant maturity yield for treasury securities with maturities approximating the expected life of the options granted on the date of grant. The expected option terms were based on the Company’s historical exercise and post-vesting termination behaviors. The Company analyzes a group of publicly-traded peer institutions to determine the expected volatility of its stock. The peer group is assessed for adequacy annually, or as circumstances indicate significant changes to the composition of the peer group are warranted. Volatility for the Company's stock is estimated utilizing the average volatility calculated for the peer group, which is based upon daily price observations over the estimated term of the options granted.
During the six months ended June 30, 2013, 1,332,500 options were exercised with a total intrinsic value of $9,321.
Nonvested Stock - The Company issued 274,548 nonvested shares of stock to certain employees as an incentive for continued employment and certain directors in lieu of cash payouts for compensation during the six months ended June 30, 2013. The weighted-average grant date fair value of these shares was $16.60.
11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net income | $ | 45,993 |
| | $ | 11,172 |
| | $ | 85,139 |
| | $ | 23,018 |
|
Less dividends on preferred stock | (2,531 | ) | | (1,073 | ) | | (5,062 | ) | | (5,555 | ) |
Less undistributed net income allocated to participating preferred stock | — |
| | (612 | ) | | — |
| | (2,109 | ) |
Net income allocated to common shareholders | $ | 43,462 |
| | $ | 9,487 |
| | $ | 80,077 |
| | $ | 15,354 |
|
(Units in Thousands) | | | | | | | |
Average common shares outstanding | 122,281 |
| | 100,779 |
| | 121,934 |
| | 88,454 |
|
Common share equivalents: | | | | | | | |
Stock options | 1,683 |
| | 1,530 |
| | 1,730 |
| | 1,691 |
|
Nonvested stock | 70 |
| | 265 |
| | 71 |
| | 269 |
|
Average common shares outstanding, assuming dilution | 124,034 |
| | 102,574 |
| | 123,735 |
| | 90,414 |
|
Basic earnings per share | $ | 0.36 |
| | $ | 0.09 |
| | $ | 0.66 |
| | $ | 0.17 |
|
Diluted earnings per share | $ | 0.35 |
| | $ | 0.09 |
| | $ | 0.65 |
| | $ | 0.17 |
|
On January 25, 2012, the Company’s Board of Directors approved a special cash dividend of $4,482 to the holders of the Series A 6% Preferred Stock, which was paid on March 1, 2012, in order to induce conversion to shares of Common Stock. On April 24, 2012, the Company's Board of Directors approved a special cash dividend of $1,073 to the holders of the Series B 4% Preferred Stock, which was paid on June 19, 2012. In addition, the Company included the Series A 6% Preferred Stock and Series B 4% Preferred Stock as a participating security through the date of conversion and upon conversion, the Company included the shares in common shares outstanding.
Certain securities were antidilutive and were therefore excluded from the calculation of diluted earnings per share. Common shares attributed to these antidilutive securities had these securities been exercised or converted as of June 30, 2013 and 2012 are as follows:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Stock Options | 3,201,156 |
| | 4,121,160 |
| | 4,673,609 |
| | 5,905,837 |
|
12. Derivative Financial Instruments
The fair values of derivatives are reported in other assets, deposits, or accounts payable and accrued liabilities. The fair values are derived using the valuation techniques described in Note 13. The total notional or contractual amounts and fair values as of June 30, 2013 and December 31, 2012 are as follows:
|
| | | | | | | | | | | |
| | | Fair Value |
| Notional Amount | | Asset Derivatives | | Liability Derivatives |
June 30, 2013 | | | | | |
Qualifying hedge contracts accounted for under Accounting Standards Codification (ASC) 815, Derivatives and Hedging | | | | | |
Cash flow hedges: | | | | | |
Forward interest rate swaps | $ | 478,000 |
| | $ | — |
| | $ | 53,219 |
|
Derivatives not designated as hedging instruments under ASC 815, Derivatives and Hedging | | | | | |
Freestanding derivatives: | | | | | |
Interest rate lock commitments (IRLCs) | 1,359,696 |
| | 1,935 |
| | 18,361 |
|
Forward and optional forward sales commitments | 2,901,268 |
| | 95,341 |
| | 19,426 |
|
Interest rate swaps | 55,096 |
| | — |
| | 582 |
|
Foreign exchange contracts | 884,508 |
| | 1,075 |
| | 30,605 |
|
Equity, foreign currency, commodity and metals indexed options | 146,155 |
| | 8,827 |
| | — |
|
Options embedded in client deposits | 145,263 |
| | — |
| | 8,801 |
|
Indemnification assets | 208,107 |
| | 8,931 |
| | — |
|
Total freestanding derivatives | | | 116,109 |
| | 77,775 |
|
Netting and cash collateral adjustments (1) | | | (6,879 | ) | | (80,439 | ) |
Total derivatives | | | $ | 109,230 |
| | $ | 50,555 |
|
|
| | | | | | | | | | | |
| | | Fair Value |
| Notional Amount | | Asset Derivatives | | Liability Derivatives |
December 31, 2012 | | | | | |
Qualifying hedge contracts accounted for under ASC 815, Derivatives and Hedging | | | | | |
Fair value hedges: | | | | | |
Interest rate swaps | $ | 31,247 |
| | $ | — |
| | $ | 579 |
|
Cash flow hedges: | | | | | |
Forward interest rate swaps | 703,000 |
| | — |
| | 105,166 |
|
Derivatives not designated as hedging instruments under ASC 815, Derivatives and Hedging | | | | | |
Freestanding derivatives: | | | | | |
IRLCs | 1,737,555 |
| | 10,904 |
| | 970 |
|
Forward and optional forward sales commitments | 2,781,788 |
| | 2,498 |
| | 6,481 |
|
Foreign exchange contracts | 963,820 |
| | 10,368 |
| | 2,121 |
|
Equity, foreign currency, commodity and metals indexed options | 150,885 |
| | 15,880 |
| | — |
|
Options embedded in client deposits | 150,181 |
| | — |
| | 15,750 |
|
Indemnification assets | 273,687 |
| | 9,092 |
| | — |
|
Total freestanding derivatives | | | 48,742 |
| | 25,322 |
|
Netting and cash collateral adjustments (1) | | | (15,481 | ) | | (110,641 | ) |
Total derivatives | | | $ | 33,261 |
| | $ | 20,426 |
|
| |
(1) | Amounts represent the effect of legally enforceable master netting agreements that allow the Company to settle positive and negative positions as well as cash collateral and related accrued interest held or placed with the same counterparties. Amounts as of June 30, 2013 and December 31, 2012 include derivative positions netted totaling $261 and $651, respectively. |
Cash Flow Hedges
Activity for derivatives in cash flow hedge relationships for the three and six months ended June 30, 2013 and 2012 is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Pretax losses recognized in interest expense (ineffective portion) | $ | — |
| | $ | (205 | ) | | $ | — |
| | $ | (270 | ) |
All changes in the value of the derivatives were included in the assessment of hedge effectiveness.
As of June 30, 2013, AOCI included $28,574 of deferred pre-tax net losses expected to be reclassified into earnings during the next 12 months for derivative instruments designated as cash flow hedges of forecasted transactions. The Company is hedging its exposure to the variability of future cash flows for forecasted transactions of fixed-rate debt for a maximum of 10 years.
Freestanding Derivatives
The following table shows the net losses recognized for the three and six months ended June 30, 2013 and 2012 in the condensed consolidated statements of income related to derivatives not designated as hedging instruments under ASC 815, Derivatives and Hedging. These gains and losses are recognized in other noninterest income, except for the indemnification assets which are recognized in general and administrative expense.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Freestanding derivatives | | | | | | | |
Gains (losses) on interest rate contracts (1) | $ | 56,027 |
| | $ | (36,358 | ) | | $ | 78,059 |
| | $ | (48,188 | ) |
Gains (losses) on indemnification assets (2) | 16 |
| | 570 |
| | (161 | ) | | 843 |
|
Other | (6 | ) | | (49 | ) | | (146 | ) | | 397 |
|
Total | $ | 56,037 |
| | $ | (35,837 | ) | | $ | 77,752 |
| | $ | (46,948 | ) |
(1) Interest rate contracts include interest rate lock commitments, forward and optional forward sales commitments, and interest rate swaps.
(2) Refer to Note 13 for additional information relating to the indemnification asset.
Interest rate contracts are predominantly used as economic hedges of interest rate lock commitments and loans held for sale. Other derivatives are predominantly used as economic hedges of foreign exchange, commodity, metals and equity risk.
Credit Risk Contingent Features
Certain of the Company’s derivative instruments contain provisions that require the Company to post collateral when derivatives are in a net liability position. The provisions generally are dependent upon the Company’s credit rating based on certain major credit rating agencies or dollar amounts in a liability position at any given time which exceed specified thresholds, as indicated in the relevant contracts. In these circumstances, the counterparties could demand additional collateral or require termination or replacement of derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features in a net liability position on June 30, 2013 and December 31, 2012 was $84,406 and $107,215, respectively. The Company offsets derivative instruments against the rights to reclaim cash collateral or the obligations to return cash collateral in the balance sheet. As of June 30, 2013 and December 31, 2012, $80,700 and $109,990, respectively, in collateral was netted against liability derivative positions subject to master netting agreements. As of June 30, 2013 and December 31, 2012, $100 and $40,260, respectively, of collateral was posted for positions not subject to master netting agreements.
Counterparty Credit Risk
The Company is exposed to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. If the counterparty fails to perform, counterparty credit risk equals the amount reported as derivative assets in the balance sheet. The amounts reported as derivative assets are derivative contracts in a gain position, and to the extent subject to master netting arrangements, net of derivatives in a loss position with the same counterparty and cash collateral received. The Company minimizes this risk through obtaining credit approvals, monitoring credit limits, monitoring procedures, and executing master netting arrangements and obtaining collateral, where appropriate. The Company offsets derivative instruments against the rights to reclaim cash collateral or the obligations to return cash collateral in the balance sheet. As of June 30, 2013 and December 31, 2012, $7,140 and $14,830, respectively, in collateral was netted against asset derivative positions subject to master netting agreements. As of June 30, 2013 and December 31, 2012, the Company held $7,140 and $15,220, respectively, in collateral from its counterparties. Counterparty credit risk related to derivatives is considered in determining fair value.
13. Fair Value Measurements
Asset and liability fair value measurements have been categorized based upon the fair value hierarchy described below:
Level 1 – Valuation is based upon quoted market prices for identical instruments in active markets.
Level 2 – Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates or assumptions that market participants would use in pricing the assets or liabilities. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Recurring Fair Value Measurements
As of June 30, 2013 and December 31, 2012, assets and liabilities measured at fair value on a recurring basis, including certain loans held for sale for which the Company has elected the fair value option, are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Netting | | Total |
June 30, 2013 | | | | | | | | | |
Financial assets: | | | | | | | | | |
Available for sale securities: | | | | | | | | | |
Residential CMO securities - nonagency | $ | — |
| | $ | 1,351,318 |
| | $ | — |
| | $ | — |
| | $ | 1,351,318 |
|
Asset-backed securities | — |
| | 5,829 |
| | — |
| | — |
| | 5,829 |
|
Other | 331 |
| | 274 |
| | — |
| | — |
| | 605 |
|
Total available for sale securities | 331 |
| | 1,357,421 |
| | — |
| | — |
| | 1,357,752 |
|
Loans held for sale | — |
| | 1,039,977 |
| | 287,906 |
| | — |
| | 1,327,883 |
|
Financial liabilities: | | | | | | | | | |
FDIC clawback liability | — |
| | — |
| | 48,993 |
| | — |
| | 48,993 |
|
Derivative financial instruments: | | | | | | | | | |
Derivative assets (Note 12) | 1,075 |
| | 104,168 |
| | 10,866 |
| | (6,879 | ) | | 109,230 |
|
Derivative liabilities (Note 12) | 30,605 |
| | 82,028 |
| | 18,361 |
| | (80,439 | ) | | 50,555 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Netting | | Total |
December 31, 2012 | | | | | | | | | |
Financial assets: | | | | | | | | | |
Available for sale securities: | | | | | | | | | |
Residential CMO securities - nonagency | $ | — |
| | $ | 1,611,775 |
| | $ | — |
| | $ | — |
| | $ | 1,611,775 |
|
Asset-backed securities | — |
| | 7,526 |
| | — |
| | — |
| | 7,526 |
|
Other | 267 |
| | 310 |
| | — |
| | — |
| | 577 |
|
Total available for sale securities | 267 |
| | 1,619,611 |
| | — |
| | — |
| | 1,619,878 |
|
Loans held for sale | — |
| | 1,452,236 |
| | — |
| | — |
| | 1,452,236 |
|
Financial liabilities: | | | | | | | | | |
FDIC clawback liability | — |
| | — |
| | 50,720 |
| | — |
| | 50,720 |
|
Derivative financial instruments: | | | | | | | | | |
Derivative assets (Note 12) | 10,368 |
| | 29,282 |
| | 9,092 |
| | (15,481 | ) | | 33,261 |
|
Derivative liabilities (Note 12) | 2,121 |
| | 128,946 |
| | — |
| | (110,641 | ) | | 20,426 |
|
Changes in assets and liabilities measured at Level 3 fair value on a recurring basis for the three and six months ended June 30, 2013 and 2012 are as follows:
|
| | | | | | | | | | | |
| Loans Held for Sale (1) | | FDIC Clawback Liability (2) | | Freestanding Derivatives, net (3) |
Three Months Ended June 30, 2013 | | | | | |
Balance, beginning of period | $ | — |
| | $ | (52,188 | ) | | $ | 15,544 |
|
Issuances | 291,288 |
| | — |
| | 91,793 |
|
Settlements | — |
| | — |
| | (40,259 | ) |
Gains (losses) included in earnings for the period | (3,382 | ) | | 3,195 |
| | (74,574 | ) |
Balance, end of period | $ | 287,906 |
| | $ | (48,993 | ) | | $ | (7,496 | ) |
Change in unrealized net gains (losses) included in net income related to assets and liabilities still held as of June 30, 2013 | $ | (3,382 | ) | | $ | 3,195 |
| | $ | (23,040 | ) |
| | | | | |
Three Months Ended June 30, 2012 | | | | | |
Balance, beginning of period | $ | — |
| | $ | (43,694 | ) | | $ | 8,814 |
|
Gains (losses) included in earnings for the period | — |
| | (3,044 | ) | | 569 |
|
Balance, end of period | $ | — |
| | $ | (46,738 | ) | | $ | 9,383 |
|
Change in unrealized net gains (losses) included in net income related to assets and liabilities still held as of June 30, 2012 | $ | — |
| | $ | (3,044 | ) | | $ | 569 |
|
|
| | | | | | | | | | | |
| Loans Held for Sale (1) | | FDIC Clawback Liability (2) | | Freestanding Derivatives, net (3) |
Six Months Ended June 30, 2013 | | | | | |
Balance, beginning of period | $ | — |
| | $ | (50,720 | ) | | $ | 9,092 |
|
Issuances | 291,288 |
| | — |
| | 91,793 |
|
Transfers into Level 3 | — |
| | — |
| | 6,628 |
|
Settlements | — |
| | — |
| | (40,259 | ) |
Gains (losses) included in earnings for the period | (3,382 | ) | | 1,727 |
| | (74,750 | ) |
Balance, end of period | $ | 287,906 |
| | $ | (48,993 | ) | | $ | (7,496 | ) |
Change in unrealized net gains (losses) included in net income related to assets and liabilities still held as of June 30, 2013 | $ | (3,382 | ) | | $ | 1,727 |
| | $ | (23,216 | ) |
| | | | | |
Six Months Ended June 30, 2012 | | | | | |
Balance, beginning of period | $ | 15,462 |
| | $ | (43,317 | ) | | $ | 8,539 |
|
Settlements | (623 | ) | | — |
| | — |
|
Transfers out of Level 3 | (14,946 | ) | | — |
| | — |
|
Gains (losses) included in earnings for the period | 107 |
| | (3,421 | ) | | 844 |
|
Balance, end of period | $ | — |
| | $ | (46,738 | ) | | $ | 9,383 |
|
Change in unrealized net gains (losses) included in net income related to assets and liabilities still held as of June 30, 2012 | $ | 107 |
| | $ | (3,421 | ) | | $ | 844 |
|
| |
(1) | Net realized and unrealized gains on loans held for sale are included in gain on sale of loans. |
| |
(2) | Changes in fair value of the FDIC clawback liability are recorded in general and administrative expense. |
| |
(3) | Net realized and unrealized gains (losses) on IRLCs are included in gain on sale of loans. Changes in the fair value of the indemnification assets are recorded in general and administrative expense. |
The Company monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the Company reports the transfer at the end of the reporting period.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | |
Level 3 Fair Value Measurement | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Significant Unobservable Input Value |
June 30, 2013 | | | | | | | | | | | |
FDIC clawback liability | | $ | 48,993 |
| | Discounted cash flow | | Servicing cost | | $7,493 | - | $15,746 | (1) |
Indemnification asset | | 8,931 |
| | Discounted cash flow | | Discount Rate | | 4.35 | % | - | 4.35% | |
| | | | | | Reinstatement rate | | 6.2 | % | - | 61.5% | (2) |
| | | | | | Loss duration (in months) | | 9 |
| - | 78 | (2) |
| | | | | | Loss severity (3) (5) | | (3.8 | )% | - | 17.1% | (2) |
IRLCs, net | | 16,426 |
| | Discounted cash flow | | Loan closing ratio | | 0.0 | % | - | 99.0% | (4) |
Loans held for sale | | 287,906 |
| | Discounted cash flow | | Discount rate | | 3.39 | % | - | 3.97% | |
| | | | | | Prepayment rate | | 8.00 | % | - | 8.00% | |
| | | | | | Default rate | | 0.20 | % | - | 3.18% | |
| | | | | | Weighted average life (in years) | | 5.38 |
| - | 8.44 | |
| | | | | | Cumulative loss | | 0.0 | % | - | 1.11% | |
| | | | | | Loss severity | | 0.0 | % | - | 46.73% | |
December 31, 2012 | | | | | | | | | | | |
FDIC clawback liability | | $ | 50,720 |
| | Discounted cash flow | | Servicing cost | | $6,790 | - | $14,558 | (1) |
Indemnification asset | | 9,092 |
| | Discounted cash flow | | Reinstatement rate | | 3.8 | % | - | 79.5% | (2) |
| | | | | | Loss duration (in months) | | 8 |
| - | 50 | (2) |
| | | | | | Loss severity (3) | | 2.4 | % | - | 11.3% | (2) |
| |
(1) | The range represents the sum of the highest and lowest servicing cost values for all tranches that we use in our valuation process. The servicing cost represents 1% of projected UPB of the underlying loans. |
| |
(2) | The range represents the sum of the highest and lowest values for all tranches that we use in our valuation process. |
| |
(3) | Loss severity represents the interest loss severity as a percentage of UPB. |
| |
(4) | The range represents the highest and lowest loan closing rates used in the IRLC valuation. The range includes the closing ratio for rate locks unclosed at the end of the period, as well as the closing ratio for loans which have settled during the period. |
| |
(5) | Negative loss severity results from the indemnifying party receiving a debenture rate interest from the insuring agency that more than offsets the lower note rate interest payments due from the indemnifying party under the indemnification agreement. |
The significant unobservable input used in the fair value measurement of the FDIC clawback liability is servicing cost. Significant increases (decreases) in this input in isolation could result in a significantly lower (higher) fair value measurement. The Company estimates the fair value of the FDIC clawback liability using a discounted cash flow model. The Company enters observable and unobservable inputs into the model to arrive at fair value. Changes in the estimate are primarily driven by changes in the interpolated discount rate (an observable input) and changes in servicing cost as a result of changes in projected UPB. The assumptions are reviewed and updated on a quarterly basis by management.
The significant unobservable inputs used in the fair value measurement of the indemnification asset are the reinstatement rate, loss severity and duration. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. The reinstatement rate is determined by analyzing historical default activity of similar loans. Loss severity is estimated as the interest rate spread between the note and debenture rate of the government insured loans as well as advance costs that are not reimbursable by the Federal Housing Administration (FHA), which is then extrapolated over the expected duration. In assessing the note to debenture rate spread in estimating severity, an analysis is performed to evaluate the cash flows related to the indemnified loans as experienced by the indemnifying party. In certain situations, the debenture rate interest received by the indemnifying party may exceed the note rate interest guaranteed under the indemnification, which will result in positive cash flows for the indemnifying party and negative severity experienced on any tranches for which the weighted average debenture rate exceeds the weighted average note rate. The Company’s portfolio management group is responsible for analyzing and updating the assumptions and cash flow model of the underlying loans on a quarterly basis, which includes corroboration with historical experience.
The significant unobservable input used in the fair value measurement of the Company's IRLCs is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally, the fair value of an IRLC is positive (negative) if the prevailing interest rate is lower (higher) than the IRLC rate. Therefore, an increase in the loan closing probability (i.e., higher percentage of loans estimated to close) will result in the fair value of the IRLC to increase if in a gain position, or decrease if in a loss position. The loan closing ratio is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock through the time the loan closes. The closing ratio is computed by our secondary marketing system using historical data and the ratio is periodically reviewed by the Company's secondary marketing department of the portfolio management group for reasonableness.
The Company estimates the fair value of Level 3 loans held for sale utilizing a discounted cash flow approach which includes an evaluation of the collateral and underlying loan characteristics, as well as assumptions to determine the discount rate such as credit loss and prepayment forecasts, and servicing costs. In determining the appropriate discount rate, prepayment and credit assumptions, the Company monitors other capital markets activity for similar collateral being traded and/or interest rates currently being offered for similar products. Discussions related to the fair value of these loans held for sale are held between our internal valuation specialists and executive and business unit management to discuss the key assumptions used in arriving at our estimates.
Loans Held for Sale Accounted for under the Fair Value Option
The following table presents information on loans held for sale reported under the fair value option at June 30, 2013 and December 31, 2012:
|
| | | |
| Total |
June 30, 2013 | |
Fair value carrying amount | $ | 1,327,883 |
|
Aggregate unpaid principal balance | 1,335,129 |
|
Fair value carrying amount less aggregate unpaid principal | $ | (7,246 | ) |
December 31, 2012 | |
Fair value carrying amount | $ | 1,452,236 |
|
Aggregate unpaid principal balance | 1,387,423 |
|
Fair value carrying amount less aggregate unpaid principal | $ | 64,813 |
|
No loans recorded under the fair value option were on nonaccrual status at June 30, 2013 or December 31, 2012.
Differences between the fair value carrying amount and the aggregate unpaid principal balance include changes in fair value recorded at and subsequent to funding, gains and losses on the related loan commitment prior to funding and premiums or discounts on acquired loans.
The net gain from initial measurement of loans accounted for under the fair value option and subsequent changes in fair value were $26,304 and $87,935 for the three and six months ended June 30, 2013, respectively, and $111,464 and $176,173 for the three and six months ended June 30, 2012, respectively, and are included in gain on sale of loans. These amounts exclude the impact from offsetting hedging arrangements which are also included in gain on sale of loans in the condensed consolidated statements of income. An immaterial portion of the change in fair value was attributable to changes in instrument-specific credit risk.
Non-recurring Fair Value Measurements
Certain assets and liabilities are measured at fair value on a non-recurring basis and therefore are not included in the tables above. These measurements primarily result from assets carried at the lower of cost or fair value or from impairment of individual assets. Gains and losses disclosed below represent changes in fair value recognized subsequent to initial classification. The change in the MSR value represents a change due to impairment or recoveries on previous write downs. The carrying value of assets measured at fair value on a non-recurring basis and held at June 30, 2013 and December 31, 2012 and related changes in fair value are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total | | Loss (Gain) Due to Change in Fair Value |
June 30, 2013 | | | | | | | | | |
Collateral-dependent loans | $ | — |
| | $ | — |
| | $ | 12,699 |
| | $ | 12,699 |
| | $ | (2,051 | ) |
Other real estate owned (1) | — |
| | — |
| | 10,936 |
| | 10,936 |
| | (1,933 | ) |
Mortgage servicing rights (2) | — |
| | — |
| | 389,774 |
| | 389,774 |
| | (45,127 | ) |
Loans held for sale | — |
| | — |
| | 456,540 |
| | 456,540 |
| | (6,872 | ) |
December 31, 2012 | | | | | | | | | |
Collateral-dependent loans | $ | — |
| | $ | — |
| | $ | 48,048 |
| | $ | 48,048 |
| | $ | 6,163 |
|
Other real estate owned (1) | — |
| | 4,030 |
| | 26,787 |
| | 30,817 |
| | 6,230 |
|
Mortgage servicing rights (2) | — |
| | — |
| | 320,901 |
| | 320,901 |
| | 63,508 |
|
| |
(1) | Gains and losses resulting from subsequent measurement of OREO are included in the condensed consolidated statements of income as general and administrative expense. OREO is included in other assets in the condensed consolidated balance sheets. |
| |
(2) | The fair value for mortgage servicing rights represents the value of the strata with impairment or recoveries on previous valuation allowances. |
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2013 and December 31, 2012: |
| | | | | | | | | | | | | | |
Level 3 Fair Value Measurement | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Significant Unobservable Input Value |
June 30, 2013 | | | | | | | | | | | |
Collateral-dependent loans | | $ | 12,699 |
| | Appraised value | | Appraised value | | NM | (1) |
Other real estate owned | | 10,936 |
| | Appraised value | | Appraised value | | NM | (1) |
Mortgage servicing rights | | 389,774 |
| | Discounted cash flow | | Prepayment speed | | 13.6 | % | - | 21.7% | (2) |
| | | | | | Discount rate | | 9.5 | % | - | 10.0% | (3) |
Loans held for sale | | 456,540 |
| | Discounted cash flow | | Discount rate | | 3.39 | % | - | 3.97% | |
| | | | | | Prepayment rate | | 8 | % | - | 8% | |
| | | | | | Default rate | | 0.20 | % | - | 3.18% | |
| | | | | | Weighted average life (in years) | | 5.38 |
| - | 8.44 | |
| | | | | | Cumulative loss | | 0.0 | % | - | 1.11% | |
| | | | | | Loss severity | | 0.0 | % | - | 46.73% | |
December 31, 2012 | | | | | | | | | | | |
Collateral-dependent loans | | $ | 36,609 |
| | Sales comparison approach | | Appraisal value adjustment | | 0 | % | - | 47% | |
Collateral-dependent loans | | 11,439 |
| | Discounted appraisals | | Collateral discounts | | 5.0 | % | - | 5.0% | |
Other real estate owned | | 23,359 |
| | Sales comparison approach | | Appraisal value adjustment | | 0.0 | % | - | 82.0% | |
Other real estate owned | | 3,428 |
| | Discounted appraisals | | Collateral discounts | | 5.0 | % | - | 10.0% | |
Mortgage servicing rights | | 320,901 |
| | Discounted cash flow | | Prepayment speed | | 16.5 | % | - | 19.8% | (2) |
| | | | | | Discount rate | | 9.2 | % | - | 9.8% | (3) |
| |
(2) | The prepayment speed assumptions include a blend of prepayment speeds that are influenced by mortgage interest rates, the current macroeconomic environment and borrower behaviors and may vary over the expected life of the asset. The range represents the highest and lowest values for the strata with recoveries on previous valuation allowances. |
| |
(3) | The discount rate range represents the highest and lowest values for the MSR strata with recoveries on previous valuation allowances. |
The Company estimates the fair value of collateral-dependent loans and OREO using appraisal valuation. Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company's valuation services group reviews the assumptions and approaches utilized in the appraisal. To assess the reasonableness of the fair value, the Company's valuation services group compares the assumptions to independent data sources such as recent market data or industry-wide statistics. For collateral dependent loans in which a new appraisal is expected in the next quarter, the appraisal is reviewed by an officer and an adjustment may be made based on a review of the property, historical property value changes, and current market rates.
The fair value of mortgage servicing rights is determined by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The assumptions are a combination of market and company-specific data. On a quarterly basis, the portfolio management group compares the Company’s estimated fair value of the mortgage servicing rights to a third-party valuation as part of
the valuation process. Discussions are held between executive management and the independent third-party to discuss the key assumptions used by the respective parties in arriving at those estimates.
The Company estimates the fair value of Level 3 loans held for sale utilizing a discounted cash flow approach which includes an evaluation of the collateral and underlying loan characteristics, as well as assumptions to determine the discount rate such as credit loss and prepayment forecasts, and servicing costs. In determining the appropriate discount rate, prepayment and credit assumptions, the Company monitors other capital markets activity for similar collateral being traded and/or interest rates currently being offered for similar products. Discussions related to the fair value of these loans held for sale are held between our internal valuation specialists and executive and business unit management to discuss the key assumptions used in arriving at our estimates.
Disclosures about Fair Value of Financial Instruments
The following table presents the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2013 and December 31, 2012. This table excludes financial instruments with short-term or no stated maturity, prevailing market rates and limited credit risk, where carrying amounts approximate fair value. For financial assets such as cash and due from banks, FHLB restricted stock, and other investments, the carrying amount is a reasonable estimate of fair value. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings and money market deposits, the carrying amount is a reasonable estimate of fair value as these liabilities have no stated maturity.
|
| | | | | | | | | | | | | | | | | | | |
| Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
June 30, 2013 | | | | | | | | | |
Financial assets: | | | | | | | | | |
Investment securities: | | | | | | | | | |
Held to maturity | $ | 115,319 |
| | $ | 114,853 |
| | $ | — |
| | $ | 112,303 |
| | $ | 2,550 |
|
Loans held for sale (1) | 672,507 |
| | 684,038 |
| | — |
| | 151,513 |
| | 532,525 |
|
Loans held for investment (2) | 11,782,996 |
| | 11,788,877 |
| | — |
| | — |
| | 11,788,877 |
|
Financial liabilities: | | | | | | | | | |
Time deposits | $ | 3,816,076 |
| | $ | 3,856,360 |
| | $ | — |
| | $ | 3,856,360 |
| | $ | — |
|
Other borrowings | 2,667,700 |
| | 2,613,783 |
| | — |
| | 2,613,783 |
| | — |
|
Trust preferred securities | 103,750 |
| | 84,707 |
| | — |
| | — |
| | 84,707 |
|
December 31, 2012 | | | | | | | | | |
Financial assets: | | | | | | | | | |
Investment securities: | | | | | | | | | |
Held to maturity | $ | 143,234 |
| | $ | 146,709 |
| | $ | — |
| | $ | 143,730 |
| | $ | 2,979 |
|
Loans held for sale (1) | 635,810 |
| | 658,091 |
| | — |
| | 642,437 |
| | 15,654 |
|
Loans held for investment (2) | 11,589,233 |
| | 11,716,283 |
| | — |
| | — |
| | 11,716,283 |
|
Financial liabilities: | | | | | | | | | |
Time deposits | $ | 4,123,594 |
| | $ | 4,165,065 |
| | $ | — |
| | $ | 4,165,065 |
| | $ | — |
|
Other borrowings (3) | 3,050,698 |
| | 3,085,174 |
| | — |
| | 3,085,174 |
| | — |
|
Trust preferred securities | 103,750 |
| | 78,112 |
| | — |
| | — |
| | 78,112 |
|
| |
(1) | The carrying value of loans held for sale excludes $1,327,883 and $1,452,236 in loans measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, respectively. |
| |
(2) | The carrying value of loans held for investment is net of the allowance for loan loss of $69,396 and $78,921 as of June 30, 2013 and December 31, 2012, respectively. In addition, the carrying values excludes $1,010,923 and $833,754 of lease financing receivables as of June 30, 2013 and December 31, 2012, respectively. |
| |
(3) | The carrying value of other borrowings excludes $122,323 in repurchase agreements which have remaining maturities of less than one month as of December 31, 2012. |
Following are descriptions of the valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not carried at fair value:
Investment Securities — Fair values are derived from quoted market prices and values from third party pricing services for which management understands the methods used to determine fair value and is able to assess the values. The Company also performs an assessment on the pricing of investment securities received from third party pricing services to ensure that the prices represent a reasonable estimate of fair value. The procedures include, but are not limited to, initial and on-going review of pricing methodologies and trends. The Company has the ability to challenge values and discuss its analysis with the third party pricing service provider in order to ensure that investments are recorded or disclosed at the appropriate fair value.
When the level and volume of trading activity for certain securities has significantly declined and/or when the Company believes that third party pricing may be based in part on forced liquidations or distressed sales, the Company analyzes each security for the appropriate valuation methodology based on a combination of the market approach reflecting third party pricing information and a discounted cash flow approach. In calculating the fair value derived from the income approach, the Company makes certain significant assumptions in addition to those discussed above related to the liquidity risk premium, specific non-performance and default experience specific to the collateral underlying the security. The values resulting from each approach (i.e., market and income approaches) are weighted to derive the final fair value for each security trading in an inactive market. As of June 30, 2013 and December 31, 2012, management did not make any adjustments to the prices provided by the third party pricing service as a result of illiquid or inactive markets. In addition, the Company has one corporate security that is valued using the income approach. To determine the price, the Company determines the cash flows based on the contract terms which include
London Interbank Offered Rate (LIBOR) plus the spread and then discounts those cash flows at a rate that makes the present value of total discounted cash flows of a newly issued security approximate par. The spread to swap curve is interpolated based on the comparable securities that would issue in the market on the valuation date. Industry and rating factors are used to determine the comparable securities. This security has been classified as level 3.
Loans Held for Sale — Fair values for loans held for sale valued under the fair value option were derived from quoted market prices or from models using loan characteristics (product type, pricing features and loan maturity dates) and economic assumptions (prepayment estimates and discount rates) based on prices currently offered in secondary markets for similar loans.
Fair values for loans carried at lower of cost or fair value were derived from models using characteristics of the loans (e.g., product type, pricing features and loan maturity dates) and economic assumptions (e.g., prepayment estimates, discount rates and estimated credit losses). Certain loans are valued using market observable pricing. All other loans are classified as level 3.
Loans Held for Investment — The fair value of loans held for investment is derived from discounted cash flows and includes an evaluation of the collateral and underlying loan characteristics, as well as assumptions to determine the discount rate such as credit loss and prepayment forecasts, and servicing costs. Held for investment loans are classified as level 3.
Impaired Loans — At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Fair value is determined primarily by using an income, cost, or market approach and is normally provided through appraisals. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. For collateral-dependent loans for which a new appraisal is expected in the next quarter, the appraisal is reviewed by an officer and an adjustment may be made based on a review of the property, historical changes, and current market rates. Such adjustments are usually significant and typically result in a level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a level 3 fair value classification. Impaired loans are evaluated at least quarterly for additional impairment and adjusted accordingly. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses.
Other Real Estate Owned — Foreclosed assets are carried at the lower of carrying value or fair value. Foreclosed assets are adjusted to fair value less costs to sell upon transfer of the loans to foreclosed assets. Fair value is generally based upon appraisals or independent market prices that are periodically updated subsequent to classification as OREO. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments on OREO are usually significant and typically result in a level 3 classification of the inputs for determining fair value.
Mortgage Servicing Rights — Mortgage servicing rights are evaluated for impairment on a quarterly basis. If the carrying amount of an individual stratum exceeds fair value, a valuation allowance is recorded on that stratum so that the servicing asset is carried at fair value. Additionally, subsequent to the impairment, the MSR asset can recover its value up to the amount of valuation allowance recorded. A third-party valuation is obtained quarterly. The servicing portfolio is valued using all relevant positive and negative cash flows including servicing fees, miscellaneous income and float, costs of servicing, the cost of carry of advances, foreclosure losses, and applying certain prevailing assumptions used in the marketplace. Mortgage servicing rights do not trade in an active, open market with readily observable prices. Due to the nature of the valuation inputs, mortgage servicing rights are classified within level 3 of the hierarchy.
Time Deposits — The fair value of fixed-rate certificates of deposit is estimated using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third party pricing services. The Company considers the impact of its own credit spreads in the valuation of these liabilities. The credit risk is determined by reference to observable credit spreads in the secondary cash market.
Other Borrowings — For advances that bear interest at a variable rate, the carrying amount is a reasonable estimate of fair value. For fixed-rate advances and repurchase agreements, fair value is estimated using quantitative discounted cash flow models that require the use of interest rate inputs that are currently offered for fixed-rate advances and repurchase agreements of similar remaining maturities. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third party pricing services. For hybrid advances, fair value is obtained from an FHLB proprietary model mathematical approximation of the market value of the underlying hedge. The terms of the hedge are similar to the advances.
Trust Preferred Securities — Fair value is estimated using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate pricing curves. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third party pricing services. The Company interpolates its own credit spreads in the valuation of these liabilities. Due to the significance of the credit spread in the valuation inputs, trust preferred securities are classified within level 3 of the hierarchy.
FDIC Clawback Liability — The fair value of the FDIC clawback liability represents the net present value of expected true-up payments due 45 days after the fifth and tenth anniversaries of the closing of the Bank of Florida acquisition pursuant to the purchase and assumption agreements between the Company and the FDIC. On the true-up measurement dates, the Company is required to make a true-up payment to the FDIC in an amount equal to 50% of the excess, if any, of (1) 20% of the intrinsic loss estimate (an established figure by the FDIC) less (2) the sum of (a) 25% of the asset discount, (part of the Company’s bid) plus (b) 25% of the cumulative loss share payments plus (c) a 1% servicing fee based on the principal amount of the covered assets over the term (calculated annually based on the average principal amount at the beginning and end of each year and then summed up for a total fee included in the calculation). The liability was discounted using an estimated cost of debt capital, based on an interpolated cost of debt capital of banks with credit quality comparable to the Company’s (using USD US Bank (BBB) BFV Curve index). This liability is considered to be contingent consideration as it requires the return of a portion of the initial consideration in the event contingencies are met. Due to the nature of the valuation inputs, FDIC clawback liability is classified within level 3 of the hierarchy.
Fair Value and Cash Flow Hedges — The fair value of interest rate swaps is determined by a third party from a derivative valuation model. The inputs for the valuation model primarily include start and end swap dates, swap coupon, interest rate curve and notional amounts. See Note 12 for additional information on fair value and cash flow hedges.
Freestanding Derivatives — The fair value of forward sales and optional forward sales commitments is determined based upon the difference between the settlement values of the commitments and the quoted market values of the securities. Fair values of foreign exchange contracts are based on quoted prices for each foreign currency at the balance sheet date. For indexed options and embedded options, the fair value is determined by obtaining market or dealer quotes for instruments with similar characteristics. The Company uses a cash flow model to project cash flows for GNMA pool buyouts with and without recourse to determine the fair value for the indemnification asset. As this derivative is based on company-specific assumptions and is not actively traded, the indemnification asset is classified within level 3 of the hierarchy. Fair values of interest rate lock commitments are derived by using valuation models incorporating current market information or by obtaining market or dealer quotes for instruments with similar characteristics, subject to anticipated loan funding probability or fallout. The funding probability is the loan closing ratio. This ratio is estimated based primarily upon historical experience by product. Because of the significance of the closing ratio in the fair value calculation, interest rate locks are classified within level 3 of the hierarchy. Counterparty credit risk is taken into account when determining fair value. See Note 12 for additional information on freestanding derivatives.
14. Commitments and Contingencies
Commitments — Commitments to extend credit are agreements to lend to customers in accordance with predetermined contractual provisions. These commitments, predominantly at variable interest rates, are for specific periods or contain termination clauses and may require the payment of a fee. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon.
In order to meet the needs of its clients, the Company also issues standby letters of credit, which are conditional commitments generally to provide credit support for some creditors in case of default. The credit risk and potential cash requirements involved in issuing standby letters of credit are essentially the same as those involved in extending loan facilities to clients.
Unfunded credit extension commitments at June 30, 2013 and December 31, 2012 are as follows:
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Commercial(1) | $ | 1,364,532 |
| | $ | 1,094,900 |
|
Leasing | 168,857 |
| | 172,808 |
|
Residential | 67,916 |
| | — |
|
Home equity lines of credit | 36,248 |
| | 40,915 |
|
Credit card lines of credit | 34,989 |
| | 32,496 |
|
Standby letters of credit | 1,341 |
| | 1,274 |
|
Total unfunded credit extension commitments | $ | 1,673,883 |
| | $ | 1,342,393 |
|
| |
(1) | Unfunded commercial commitments include $877,531 and $609,619 of conditional commitments for which certain requirements must be met in order to obtain an advance under the existing commitment as of June 30, 2013 and December 31, 2012, respectively. |
In the ordinary course of business, the Company enters into commitments to originate residential mortgage loans held for sale at interest rates determined prior to funding. Interest rate lock commitments for loans that the Company intends to sell are considered freestanding derivatives and are recorded at fair value. See Note 12 for information on interest rate lock commitments as they are not included in the table above.
The Company has an agreement with the Jacksonville Jaguars of the National Football League whereby the Company obtained the naming rights to the football stadium in Jacksonville, Florida. Under the agreement, the Company is obligated to pay $400 during the remainder of 2013. The amount due in 2014 is $3,647, which is a 5% increase from the total obligation due in 2013.
Guarantees — The Company sells and securitizes conventional conforming and federally insured single-family residential mortgage loans predominantly to GSEs, such as Fannie Mae and Freddie Mac. The Company also sells residential mortgage loans, primarily those that do not meet criteria for whole loan sales to GSEs, through whole loan sales to private non-GSE purchasers. In doing so, representations and warranties regarding certain attributes of the loans are made to the GSE or the third-party purchaser. Subsequent to the sale, if it is determined that the loans sold are (1) with respect to the GSEs, in breach of these representations or warranties or (2) with respect to non-GSE purchasers, in material breach of these representations and warranties, the Company generally has an obligation to either: (a) repurchase the loan for the UPB, accrued interest and related advances, (b) indemnify the purchaser or (c) make the purchaser whole for the economic benefits of the loan. From 2004 through June 30, 2013, the Company originated and securitized approximately $54,296,396 of mortgage loans to GSEs and private non-GSE purchasers. A majority of the loans sold to non-GSEs were agency deliverable products that were eventually sold by large aggregators of agency product who eventually securitized and sold to the agencies.
In some cases, the Company also has an obligation to repurchase loans in the event of early payment default (EPD) which is typically triggered if a borrower does not make the first several payments due after the loan has been sold to an investor. The Company’s private investors have agreed to waive EPD provisions for conventional conforming and federally insured single-family residential mortgage loans and certain jumbo loan products. However, the Company is subject to EPD provisions on the community reinvestment loans the Company originates and sells under the State of Florida housing program, which represents a minimal amount of total originations.
The Company’s obligations vary based upon the nature of the repurchase demand and the current status of the mortgage loan. The Company establishes reserves for estimated losses inherent in the Company’s origination of mortgage loans. In estimating the accrued liability for loan repurchase and make-whole obligations, the Company estimates probable losses inherent in the population of all loans sold based on trends in claims requests and actual loss severities experienced. The liability includes accruals for probable contingent losses in addition to those identified in the pipeline of repurchase or make-whole requests. There is additional inherent uncertainty in the estimate because the Company historically sold a majority of loan servicing released prior to 2009 and currently does not have servicing performance metrics on a majority of those loans it originated and sold. The estimation process is designed to include amounts based on actual losses experienced from actual repurchase activity. The baseline for the repurchase reserve uses historical loss factors that are applied to loan pools originated in 2003 through June 30, 2013 and sold in years 2004 through June 30, 2013. Loss factors, tracked by year of loss, are calculated using actual losses incurred on repurchase or make-whole arrangements. The historical loss factors experienced are accumulated for each sale vintage (year loan
was sold) and are applied to more recent sale vintages to estimate inherent losses not yet realized. The Company’s estimated recourse related to these loans was $21,960 and $27,000 at June 30, 2013 and December 31, 2012, respectively, and is recorded in accounts payable and accrued liabilities.
In the ordinary course of its loan servicing activities, the Company routinely initiates actions to foreclose real estate securing serviced loans. For certain serviced loans, there are provisions in which the Company is either obligated to fund foreclosure-related costs or to repurchase loans in default. Additionally, as servicer, the Company could be obligated to repurchase loans from or indemnify GSEs for loans originated by defunct originators. The outstanding principal balance on loans serviced at June 30, 2013 and December 31, 2012, was $61,700,811 and $49,422,104, respectively, including residential mortgage loans held for sale. The amount of estimated recourse recorded in accounts payable and accrued liabilities related to servicing activities at June 30, 2013 and December 31, 2012, was $23,518 and $26,026, respectively.
Federal Reserve Requirement — The Federal Reserve Board (FRB) requires certain institutions, including EB, to maintain cash reserves in the form of vault cash and average account balances with the Federal Reserve Bank. The reserve requirement is based on average deposits outstanding and was approximately $147,678 and $154,706 at June 30, 2013 and December 31, 2012, respectively.
Legal Actions — On April 13, 2011, each of the Company and EverBank entered into a consent order with the Office of Thrift Supervision (OTS) with respect to EverBank's mortgage foreclosure practices and the Company's oversight of those practices. The Office of the Comptroller of the Currency (OCC) succeeded the OTS with respect to EverBank's consent order, and the Board of Governors of the FRB succeeded the OTS with respect to the Company's consent order. The consent orders require, among other things, that the Company establish a new compliance program for mortgage servicing and foreclosure operations and that the Company ensures that it has dedicated resources for communicating with borrowers, policies and procedures for outsourcing foreclosure or related functions and management information systems that ensure timely delivery of complete and accurate information. The Company is also required to retain an independent firm to conduct a review of residential foreclosure actions that were pending from January 1, 2009 through December 31, 2010 in order to determine whether any borrowers sustained financial injury as a result of any errors, misrepresentations or deficiencies and to provide remediation as appropriate. The outcome of these processes could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, as well as significant legal costs in responding to governmental examinations and additional litigation for the Company. As of June 30, 2013, the independent consultant completed a portion of the review and provided a remediation plan based upon certain identified deficiencies. The Company accrued $12,841 based upon information available in the current remediation plan. As of June 30, 2013, the Company is unable to determine a possible range of loss as the review is not complete and the findings have not been finalized. There is at least a reasonable possibility that an exposure to loss exists in excess of the amount accrued.
In January 2013, thirteen mortgage servicing companies that were subject to similar consent orders reached an agreement in principle with the OCC and the FRB to terminate the independent foreclosure review requirements of the enforcement actions. As a result of this agreement, the participating servicers would cease their respective independent foreclosure reviews and instead make payments to borrowers within a framework established in the settlement agreement. For mortgage servicing companies like the Company and EverBank that did not enter into the settlement, the independent foreclosure review process will continue. The Company may be subject to civil monetary penalties with respect to the consent order, but the federal banking agencies have not indicated what the amount of any such penalties would be.
In addition, other government agencies, including state attorneys general and the U.S. Department of Justice, continue to investigate various mortgage related practices of the Company and other major mortgage servicers. The Company continues to cooperate with these investigations. These investigations could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, as well as significant legal costs in responding to governmental investigations and additional litigation. The Company has evaluated subsequent events through the date in which financial statements are available to be issued and currently, the Company is unable to estimate any loss that may result from penalties or fines imposed by the OCC or other governmental agencies and hence, no amounts have been accrued.
In the ordinary course of business, the Company and its subsidiaries are routinely involved in various claims and legal actions. In light of the uncertainties involved in these government proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by the Company.
15. Variable Interest Entities
The Company, in the normal course of business, engages in certain activities that involve variable interest entities (VIEs), which are legal entities that lack sufficient equity to finance their activities, or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The primary beneficiary of a VIE is generally the enterprise that has both the power to direct the activities most significant to the economic performance of the VIE and the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. The Company evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Company is the primary beneficiary and should consolidate the entity based on the variable interests it held both at inception and when there is a change in circumstances that requires a reconsideration. If the Company is determined to be the primary beneficiary of a VIE, it must account for the VIE as a consolidated subsidiary. If the Company is determined not to be the primary beneficiary of a VIE but holds a variable interest in the entity, such variable interests are accounted for under accounting standards as deemed appropriate.
Non-consolidated VIEs
The table below summarizes select information related to variable interests held by the Company at June 30, 2013 and December 31, 2012: |
| | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Non-consolidated VIEs | Total Assets | | Maximum Exposure | | Total Assets | | Maximum Exposure |
Loans provided to VIEs | $ | 168,525 |
| | $ | 168,525 |
| | $ | 185,000 |
| | $ | 185,000 |
|
On-balance-sheet securitizations | 141,438 |
| | 141,438 |
| | 99,121 |
| | 99,121 |
|
Debt securities | 1,467,753 |
| | 1,467,753 |
| | 1,757,858 |
| | 1,757,858 |
|
Loans provided to VIEs
The Company has provided funding to certain unconsolidated VIEs sponsored by third parties. These VIEs are generally established to finance certain small business loans originated by third parties and are not considered to have significant equity at risk. The entities are primarily funded through the issuance of loans from the Company and a certified development company (CDC). The Company's loan is secured by a first lien. Although the Company retains the servicing rights to the loan, the Company is unable to unilaterally make all decisions necessary to direct the activities that most significantly impact the VIE; therefore, it is not the primary beneficiary. The principal risk to which these entities are exposed is credit risk related to the underlying assets. The loans to these VIEs are included in the Company’s overall analysis of the ALLL and reserve for unfunded commitments, respectively. The Company does not provide any implicit or explicit liquidity guarantees or principal value guarantees to these VIEs. The Company records the commercial loans on its condensed consolidated balance sheet as loans held for investment.
On-balance sheet securitizations
The Company engages in on-balance-sheet securitizations which are securitizations that do not qualify for sales treatment; thus, the assets remain on the Company’s condensed consolidated balance sheet. The Company securitizes mortgage loans generally through a GSE, such as GNMA, FNMA or FHLMC (U.S. agency-sponsored mortgages). Occasionally, the Company will transfer conforming residential mortgages to GNMA in exchange for mortgage-backed securities. The Company maintains effective control over pools of transferred assets that remain unsold at the end of the period. Accordingly, the Company has not recorded these transfers as sales. These transferred assets are recorded in the condensed consolidated balance sheet as loans held for sale.
Debt securities
All MBS, CMO and ABS securities owned by the Company are issued through VIEs. The related VIEs were not consolidated, as the Company was not determined to be the primary beneficiary. See Note 4 for information related to debt securities.
Mortgage securitizations
The Company provides a variety of mortgage loan products to a diverse customer base. Once originated, the Company often securitizes these loans through the use of VIEs. These VIEs are funded through the issuance of trust certificates backed solely by the transferred assets. These mortgage loan securitizations are non-recourse except in accordance with the Company's standard obligations under representations and warranties. Thereby, the transaction effectively transfers the risk of future credit losses to the purchasers of the securities issued by the trust. The Company generally retains the servicing rights of the transferred assets but does not retain any other interest in the entities.
As noted above, the Company securitizes mortgage loans through government-sponsored entities or through private label (non-agency sponsored) securitizations. The Company is not the primary beneficiary of its U.S. agency-sponsored mortgage securitizations, because the Company does not have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance. Therefore, the Company does not consolidate these U.S. agency-sponsored mortgage securitizations. Additionally, the Company does not consolidate VIEs of private label securitizations. Although the Company is the servicer of the VIE, the servicing relationship is deemed to be a fiduciary relationship and, therefore, the Company is not deemed to be the primary beneficiary of the entity. Refer to Note 5 for information related to sales of residential mortgage receivables and Note 8 for information related to mortgage servicing rights.
16. Segment Information
The Company has three reportable segments: Banking and Wealth Management, Mortgage Banking, and Corporate Services. The Company’s reportable business segments are strategic business units that offer distinctive products and services marketed through different channels. These segments are managed separately because of their marketing and distribution requirements.
The Banking and Wealth Management segment includes all banking, lending and investing products and services offered to customers either over the web or telephone or through financial centers or financial advisors. Activity relating to recent acquisitions has been included in the Banking and Wealth Management segment.
The Mortgage Banking segment includes the origination and servicing of mortgage loans and focuses primarily on residential loans for purposes of resale to GSEs, institutional investors or for investment by the Banking and Wealth Management segment.
The Corporate Services segment consists of services provided to the Banking and Wealth Management and Mortgage Banking segments including executive management, technology, legal, human resources, marketing, corporate development, treasury, accounting, finance and other services and transaction-related items. Direct expenses are allocated to the operating segments. Unallocated expenses are included in Corporate Services. Certain other expenses, including interest expense on trust preferred debt and transaction-related items, are included in the Corporate Services segment.
The chief operating decision maker’s review of each segment’s performance is based on segment income, which is defined as income from operations before income taxes and certain corporate allocations. Additionally, total net revenue is defined as net interest income before provision for loan and lease losses and total noninterest income.
Intersegment revenue among the Company’s business units reflects the results of a funds transfer pricing (FTP) process, which takes into account assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities. This provides for the creation of an economic benchmark, which allows the Company to determine the profitability of the Company’s products and cost centers by calculating profitability spreads between product yields and internal references. However, business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.
FTP serves to transfer interest rate risk to the treasury function through a transfer pricing methodology and cost allocating model. The basis for the allocation of net interest income is a function of the Company’s methodologies and assumptions that management believes are appropriate to accurately reflect business segment results. These factors are subject to change based on changes in current interest rates and market conditions.
The results of each segment are reported on a continuing basis. The following table presents financial information of reportable segments as of and for the three and six months ended June 30, 2013 and 2012. The eliminations column includes intersegment eliminations required for consolidation purposes.
|
| | | | | | | | | | | | | | | | | | | |
| As of and for the Three Months Ended June 30, 2013 |
| Banking and Wealth Management | | Mortgage Banking | | Corporate Services | | Eliminations | | Consolidated |
Net interest income (expense) | $ | 127,072 |
| | $ | 15,719 |
| | $ | (1,574 | ) | | $ | — |
| | $ | 141,217 |
|
Total net revenue | 159,726 |
| | 129,620 |
| (1) | (1,325 | ) | | — |
| | 288,021 |
|
Intersegment revenue | 4,613 |
| | (4,613 | ) | | — |
| | — |
| | — |
|
Depreciation and amortization | 7,180 |
| | 1,256 |
| | 1,785 |
| | — |
| | 10,221 |
|
Income before income taxes | 89,076 |
| | 10,347 |
| (1) | (24,971 | ) | (3) | — |
| | 74,452 |
|
Total assets | 15,588,567 |
| | 2,805,876 |
| | 194,395 |
| | (225,966 | ) | | 18,362,872 |
|
| | | | | | | | | |
| As of and for the Three Months Ended June 30, 2012 |
| Banking and Wealth Management | | Mortgage Banking | | Corporate Services | | Eliminations | | Consolidated |
Net interest income (expense) | $ | 114,801 |
| | $ | 11,790 |
| | $ | (1,607 | ) | | $ | — |
| | $ | 124,984 |
|
Total net revenue | 140,406 |
| | 60,314 |
| (2) | (1,613 | ) | | — |
| | 199,107 |
|
Intersegment revenue | (2,277 | ) | | 2,277 |
| | — |
| | — |
| | — |
|
Depreciation and amortization | 7,080 |
| | 409 |
| | 1,798 |
| | — |
| | 9,287 |
|
Income before income taxes | 59,819 |
| | (7,872 | ) | (2) | (34,380 | ) | | — |
| | 17,567 |
|
Total assets | 13,327,046 |
| | 1,902,152 |
| | 124,406 |
| | (312,780 | ) | | 15,040,824 |
|
| | | | | | | | | |
| As of and for the Six Months Ended June 30, 2013 |
| Banking and Wealth Management | | Mortgage Banking | | Corporate Services | | Eliminations | | Consolidated |
Net interest income (expense) | $ | 259,445 |
| | $ | 28,733 |
| | $ | (3,145 | ) | | $ | — |
| | $ | 285,033 |
|
Total net revenue | 319,880 |
| | 248,003 |
| (1) | (2,737 | ) | | — |
| | 565,146 |
|
Intersegment revenue | 7,768 |
| | (7,768 | ) | | — |
| | — |
| | — |
|
Depreciation and amortization | 14,230 |
| | 2,560 |
| | 3,331 |
| | — |
| | 20,121 |
|
Income before income taxes | 165,506 |
| | 23,794 |
| (1) | (51,458 | ) | (3) | — |
| | 137,842 |
|
Total assets | 15,588,567 |
| | 2,805,876 |
| | 194,395 |
| | (225,966 | ) | | 18,362,872 |
|
| | | | | | | | | |
| As of and for the Six Months Ended June 30, 2012 |
| Banking and Wealth Management | | Mortgage Banking | | Corporate Services | | Eliminations | | Consolidated |
Net interest income (expense) | $ | 221,346 |
| | $ | 22,286 |
| | $ | (3,025 | ) | | $ | — |
| | $ | 240,607 |
|
Total net revenue | 272,179 |
| | 118,683 |
| (2) | (2,939 | ) | | — |
| | 387,923 |
|
Intersegment revenue | (4,901 | ) | | 4,901 |
| | — |
| | — |
| | — |
|
Depreciation and amortization | 13,470 |
| | 996 |
| | 3,625 |
| | — |
| | 18,091 |
|
Income before income taxes | 121,652 |
| | (22,394 | ) | (2) | (63,051 | ) | | — |
| | 36,207 |
|
Total assets | 13,327,046 |
| | 1,902,152 |
| | 124,406 |
| | (312,780 | ) | | 15,040,824 |
|
| | | | | | | | | |
| |
(1) | Segment earnings in the Mortgage Banking segment included a $32,572 recovery on the MSR valuation allowance for the three months ended June 30, 2013 and a $45,127 recovery on the MSR valuation allowance for the six months ended June 30, 2013. |
| |
(2) | Segment earnings in the Mortgage Banking segment included a $30,135 charge for MSR impairment for the three months ended June 30, 2012 and a $45,279 charge for MSR impairment for the six months ended June 30, 2012 . |
| |
(3) | Income before income taxes includes additional allocation of intersegment expenses beginning in 2013. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist readers in understanding the condensed consolidated financial condition and results of operations of the Company during the three and six month periods ended June 30, 2013 and should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the period ended December 31, 2012, as filed with the SEC on March 15, 2013.
Forward-Looking Statements
This report contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. We generally identify forward-looking statements by terminology such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “could,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or
Management’s Discussion and Analysis of Financial Condition and Results of Operations
other comparable words. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements. Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements contained in this report. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in Item 1A “Risk Factors” contained in our Annual Report on Form 10-K for the period ended December 31, 2012, as filed with the SEC on March 15, 2013. These factors include without limitation:
| |
• | deterioration of general business and economic conditions, including the real estate and financial markets, in the United States and in the geographic regions and communities we serve; |
| |
• | risks related to liquidity, including the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs; |
| |
• | changes in interest rates that affect the pricing of our financial products, the demand for our financial services and the valuation of our financial assets and liabilities, mortgage servicing rights and mortgage loans held for sale; |
| |
• | risk of higher loan and lease charge-offs; |
| |
• | legislative or regulatory actions affecting or concerning mortgage loan modification, refinancing and foreclosure; |
| |
• | our ability to comply with any supervisory actions to which we are or become subject as a result of examination by our regulators; |
| |
• | our ability to complete the independent foreclosure review in a timely manner and comply with the consent order; |
| |
• | concentration of our commercial real estate loan portfolio; |
| |
• | higher than normal delinquency and default rates affecting our mortgage banking business; |
| |
• | limited ability to rely on brokered deposits as a part of our funding strategy; |
| |
• | concentration of mass-affluent clients and jumbo mortgages; |
| |
• | the effectiveness of the hedging strategies we use to manage our mortgage pipeline; |
| |
• | the effectiveness of our derivatives to manage interest rate risk; |
| |
• | delinquencies on our equipment leases and reductions in the resale value of leased equipment; |
| |
• | increases in loan repurchase requests and our reserves for loan repurchases; |
| |
• | failure to prevent a breach to our Internet-based system and online commerce security; |
| |
• | soundness of other financial institutions; |
| |
• | changes in currency exchange rates or other political or economic changes in certain foreign countries; |
| |
• | the competitive industry and market areas in which we operate; |
| |
• | historical growth rate and performance may not be a reliable indicator of future results; |
| |
• | fraudulent and negligent acts by loan applicants, mortgage brokers, other vendors and our employees; |
| |
• | compliance with laws, rules, regulations and orders that govern our operations; |
| |
• | failure to establish and maintain effective internal controls and procedures; |
| |
• | impact of current and future legal and regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) and the capital requirements promulgated by the Basel Committee on Banking Supervision ("Basel Committee"); |
| |
• | effects of changes in existing U.S. government or government-sponsored mortgage programs; |
| |
• | changes in laws and regulations that may restrict our ability to originate or increase our risk of liability with respect to certain mortgage loans; |
| |
• | risks related to the continuing integration of acquired businesses and any future acquisitions; |
| |
• | legislative action regarding foreclosures or bankruptcy laws; |
| |
• | changes to generally accepted accounting principles (GAAP); |
| |
• | environmental liabilities with respect to properties that we take title to upon foreclosure; and |
| |
• | inability of EverBank, our banking subsidiary, to pay dividends. |
Reclassifications
Certain prior period information in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) has been reclassified to conform to current period classifications.
Introduction and Overview
We are a thrift holding company which operates primarily through our direct subsidiary, EverBank (EB or EverBank). EB is a federally chartered thrift institution with its home office located in Jacksonville, Florida. References to “we,” “our,” “us,” or the “Company” refer to the holding company and its subsidiaries that are consolidated for financial reporting purposes. We are a diversified financial services company that provides innovative banking, lending and investment products and services to clients nationwide through scalable, low-cost distribution channels. Our business model attracts financially sophisticated, self-directed, mass-affluent clients and a diverse base of small and medium-sized business clients. We market and distribute our products and services primarily through our integrated on-line financial portal, which is augmented by our nationwide network of independent financial advisors, high-volume financial centers in targeted Florida markets and other business offices
Management’s Discussion and Analysis of Financial Condition and Results of Operations
throughout the country. These channels are connected by technology-driven centralized platforms, which provide operating leverage throughout our business.
We have a suite of asset origination and fee income businesses that individually generate attractive financial returns and collectively leverage our core deposit franchise and client base. We originate, invest in, sell and service residential mortgage loans, equipment leases, and various other consumer and commercial loans, as market conditions warrant. Our organic origination activities are scalable, significant relative to our balance sheet size and provide us with substantial growth potential. Our origination, lending and servicing expertise positions us to acquire assets in the capital markets when risk-adjusted returns available through acquisition exceed those available through origination. Our rigorous analytical approach provides capital markets discipline to calibrate our levels of asset origination, retention and acquisition. These activities diversify our earnings, strengthen our balance sheet and provide us with flexibility to capitalize on market opportunities.
Our deposit franchise fosters strong relationships with a large number of financially sophisticated clients and provides us with a stable and flexible source of low, all-in cost funding. We have a demonstrated ability to grow our client deposit base significantly with short lead time by adapting our product offerings and marketing activities rather than incurring the higher fixed operating costs inherent in more branch-intensive banking models. Our extensive offering of deposit products and services includes proprietary features that distinguish us from our competitors and enhance our value proposition to clients. Our products, distribution and marketing strategies allow us to generate substantial deposit growth while maintaining an attractive mix of high-value transaction and savings accounts.
Key Factors Affecting Our Business and Financial Statements
Economic and Interest Rate Environment
The results of our operations are highly dependent on economic conditions and market interest rates. Beginning in 2007, turmoil in the financial sector resulted in a reduced level of confidence in financial markets among borrowers, lenders and depositors, as well as extreme volatility in the capital and credit markets. In response to these conditions, the Board of Governors of the Federal Reserve Board (FRB) began decreasing short-term interest rates, with 11 consecutive decreases totaling 525 basis points between September 2007 and December 2008. To stimulate economic activity and stabilize the financial markets, the FRB maintained historically low market interest rates from 2009 to 2013. While market conditions and home prices improved during this period, continued economic uncertainty resulted in high unemployment and low consumer confidence. As part of a sustained effort to spur economic growth, the FRB has reaffirmed their pledge to hold short-term interest rates low into 2014.
Net interest income is our largest source of income and is driven primarily as a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the contractual yield on such assets and the contractual cost of such liabilities. These factors are influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as the local economy, competition for loans and deposits, the monetary policy of the FRB and market interest rates. The cost of our deposits is largely based on short-term interest rates which are driven primarily by the FRB’s actions. However, the yields generated by our loans and securities are typically driven by longer-term interest rates which are set by the market, or, at times by the FRB’s actions. Our net interest income is therefore influenced by movements in interest rates and the pace at which these movements occur. Currently, short-term and long-term interest rates are at near historic lows, with overall market and industry margins tightening.
In the latter half of the second quarter of 2013, the FRB indicated their intention to reduce their bond buying activities associated with quantitative easing 3 (QE3) if the economy continued to show improvement. The uncertainty around the FRB's intent created volatility in the capital markets and resulted in a market sell-off which drove the 10-year treasury yield from 1.7% on May 2, 2013 to 2.6% on June 25, 2013. This had a direct impact on mortgage rates which increased sharply from 3.7% at the beginning of the second quarter 2013 to 4.4% at the end of the quarter. In addition, the spreads over the treasury curve widened to levels higher than we've seen since the FRB's first quantiative easing program. The move in mortgage rates impacts origination volume as the number of borrowers eligible to refinance into lower rates is reduced. However, we have made substantial investments in our retail platform focused on purchase business in anticipation of the higher rate environment. The expectation of slower prepayments due to refinancing has a positive impact on the fair value and amortization of our mortgage servicing rights. While in the near term there are both positive and negative effects of this move, the steepening of the yield curve where yields are low on short term lending but higher on the back end of the yield curve should have a positive long term effect on our business.
Regulatory Changes
Our financial condition and the results of our operations are dependent upon the composition of our balance sheet and the assets which we originate, sell, and/or retain for investment. Proposed changes to the regulatory capital treatment of certain securities and asset classes could cause our management to reevaluate components of our capital structure as well as our exposure to certain assets.
In July 2013, our primary federal regulator, the Federal Reserve, published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules implement the Basel Committee's December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including us and EverBank, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee's 2004 “Basel II” capital accords. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules. The Basel III Capital Rules will become effective for the Company and EverBank on January 1, 2015 (subject to phase-in periods as discussed below).
The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments from capital as compared to existing regulations.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require us to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively
Management’s Discussion and Analysis of Financial Condition and Results of Operations
resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority's risk-adjusted measure for market risk).
Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2015 will be as follows:
| |
• | 4.5% CET1 to risk-weighted assets. |
| |
• | 6.0% Tier 1 capital to risk-weighted assets. |
| |
• | 8.0% Total capital to risk-weighted assets. |
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, certain banking organizations, including us and EverBank, may make a one-time permanent election to continue to exclude these items. The Basel III Capital Rules also preclude counting certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies. However for bank holding companies that had assets of less than $15 billion as of December 31, 2009 like us, trust preferred securities issued prior to May 19, 2010 can be treated as Tier 1 capital to the extent that they do not exceed 25% of Tier 1 capital after applying all capital deductions and adjustments.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter until fully phased-in at January 1, 2018). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
With respect to EverBank, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk-based capital requirement for any “prompt corrective action” category.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specific changes to current rules impacting our determination of risk-weighted assets include, among other things:
| |
• | Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans. |
| |
• | Assigning a 150% risk weight to exposures (other than residential mortgage exposures, which remains at an assigned risk weighting of 100%) that are 90 days past due. |
| |
• | Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%). |
| |
• | Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction. |
| |
• | Providing for a 100% risk weight for claims on securities firms. |
| |
• | Eliminating the current 50% cap on the risk weight for OTC derivatives. |
In addition, the Basel III Capital Rules also provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increases the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
Management believes, at June 30, 2013, that we and EverBank would meet all capital adequacy requirements under the Basel III and Standardized Approach Proposals on a fully phased-in basis if such requirements were currently effective. There can be no guarantee that the Basel III Capital Rules will not be changed before the effective date and phase-in periods or what changes may be made.
Performance Highlights
| |
• | GAAP diluted earnings per share was $0.35, a 17% increase from $0.30 in the first quarter 2013 and a 289% increase from $0.09 in the second quarter 2012. |
| |
• | Adjusted diluted earnings per share was $0.28, a 15% decrease from $0.33 in the first quarter 2013 and a 15% decrease from $0.33 in the second quarter 2012.1 |
| |
• | Return on equity ("ROE") was 12.7% and adjusted ROE was 10.2%. |
| |
• | Net income of $46 million, an increase of 17% compared to the prior quarter and an increase of 312% compared to the second quarter of 2012. |
| |
• | Adjusted net income of $37 million, a decrease of 15% compared to the prior quarter and an increase of 2% compared to the second quarter of 2012. |
| |
• | Revenue of $288 million, an increase of 4% compared to the prior quarter and an increase of 45% compared to the second quarter of 2012. |
| |
• | Total organic asset generation of $3.8 billion, an increase of 15% compared to the prior quarter and an increase of 39% compared to the second quarter of 2012. |
| |
• | Total loans and leases held for investment were $12.9 billion, an increase of 5% compared to the prior quarter. |
| |
• | Annualized net charge-offs to average loans and leases held for investment were 0.12% for the quarter. |
| |
• | Tangible common equity per common share was $11.00 at June 30, 2013, an increase of 3% compared to the prior quarter and an increase of 10% compared to the second quarter 2012. |
| |
• | Our board of directors approved a 50% increase in the quarterly common stock dividend to $0.03 per share. |
1 Reconciliations of Non-GAAP financial measures can be found in Table 1, Table 1A, Table 1B, Table 7A, Table 7B, Table 7C, Table 7D and Table 18
Balance Sheet
Diversified Loan Growth
Total portfolio loans held for investment were $12.9 billion at June 30, 2013, an increase of $0.6 billion, or 5%, from the prior quarter. Year over year, this represents a $5.1 billion, or 65%, increase. Loans held for investment for the second quarter 2013 were comprised of:
|
| | | | | | | | | | | |
(dollars in millions) | June 30, 2013 | | March 31, 2013 | | June 30, 2012 |
Residential mortgages | $ | 6,586 |
| | $ | 6,280 |
| | $ | 5,061 |
|
Commercial and commercial real estate | 3,798 |
| | 3,722 |
| | 1,320 |
|
Warehouse finance | 1,292 |
| | 1,161 |
| | 527 |
|
Lease financing receivables | 1,015 |
| | 911 |
| | 681 |
|
Other | 176 |
| | 181 |
| | 196 |
|
Total HFI | $ | 12,867 |
| | $ | 12,255 |
| | $ | 7,785 |
|
During the second quarter, residential loans HFI increased by 5% compared to the prior quarter to $6.6 billion as we experienced significant growth in our prime jumbo hybrid ARM portfolio. Based on the current rate environment, we expect to continue to originate prime jumbo loans for our balance sheet and will selectively evaluate capital market executions. This strategy is consistent with our approach of retaining high quality loans with attractive risk-adjusted returns for our portfolio.
Our commercial lending and leasing platforms experienced strong growth in the quarter and represent approximately 47% of loans HFI in the second quarter compared to approximately 32% a year ago. Our focus on high quality commercial lending and leasing assets positions us to benefit from higher interest rate levels.
Loan Origination Activities
Organic asset generation totaled $3.8 billion and retained organic production totaled $1.1 billion for the second quarter of 2013, an increase of 15% and 111%, respectively, from the prior quarter. Total commercial loans and leases originated during the quarter were $0.5 billion, including commercial real estate originations of $0.2 billion. This represents an increase of 31% and 149%, respectively, compared to the prior quarter.
Residential loan originations were $3.2 billion for the second quarter, an increase of 12% compared to the prior quarter. Origination volume from our retail channel was $1.2 billion in the second quarter, an increase of 45% from the prior quarter and a 293% increase year over year. Purchase transactions represented 32% of total volumes and 49% of retail volumes, compared to 19% and 32%, respectively, in the prior quarter. We originated record prime jumbo loan volume of $1.1 billion during the second quarter, an increase of 36% over the prior quarter, including hybrid ARM volume of $0.5 billion and fixed-rate volume of $0.6 billion.
Subsequent to the end of the quarter, we executed a sale of our fixed-rate prime jumbo loans classified as held for sale at June 30, 2013. The transaction is expected to close in the third quarter, subject to customary closing conditions.
Deposit Growth
Total deposits were $13.7 billion at June 30, 2013, flat quarter over quarter, as increased transaction, savings and money market balances were offset by lower time deposit balances. Year over year, total deposits grew by $2.9 billion, or 27%, from $10.8 billion. At June 30, 2013, our deposits were comprised of the following:
|
| | | | | | | | | | | |
(dollars in millions) | June 30, 2013 | | March 31, 2013 | | June 30, 2012 |
Noninterest-bearing demand | $ | 1,205 |
| | $ | 1,287 |
| | $ | 1,357 |
|
Interest-bearing demand | 3,082 |
| | 2,933 |
| | 2,159 |
|
Savings and money market accounts | 5,153 |
| | 4,902 |
| | 3,960 |
|
Global market-based accounts | 1,051 |
| | 1,136 |
| | 1,266 |
|
Time, excluding market-based | 3,179 |
| | 3,416 |
| | 2,062 |
|
Total deposits | $ | 13,670 |
| | $ | 13,674 |
| | $ | 10,804 |
|
Other Funding Sources
Total other borrowings were $2.7 billion at June 30, 2013, a decrease of 1% quarter over quarter. We expect to continue to replace a portion of our wholesale borrowings with core deposits over time.
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| | | | | | | | | | | | | | | |
Financial Highlights | | | | | Table 1 |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands, except per share amounts) | 2013 | | 2012 | | 2013 | | 2012 |
For the Period: | | | | | | | |
Operating Results: | | | | | | | |
Total revenue | $ | 288,021 |
| | $ | 199,107 |
| | $ | 565,146 |
| | $ | 387,923 |
|
Net interest income | 141,217 |
| | 124,984 |
| | 285,033 |
| | 240,607 |
|
Provision for loan and lease losses | 29 |
| | 5,757 |
| | 1,948 |
| | 17,112 |
|
Noninterest income | 146,804 |
| | 74,123 |
| | 280,113 |
| | 147,316 |
|
Noninterest expense | 213,540 |
| | 175,783 |
| | 425,356 |
| | 334,604 |
|
Net income | 45,993 |
| | 11,172 |
| | 85,139 |
| | 23,018 |
|
Net earnings per common share, basic | 0.36 |
| | 0.09 |
| | 0.66 |
| | 0.17 |
|
Net earnings per common share, diluted | 0.35 |
| | 0.09 |
| | 0.65 |
| | 0.17 |
|
Performance Metrics: | | | | | | | |
Adjusted net income(1) | $ | 37,303 |
| | $ | 36,462 |
| | $ | 81,040 |
| | $ | 63,716 |
|
Adjusted net earnings per common share, basic(2) | 0.28 |
| | 0.34 |
| | 0.62 |
| | 0.63 |
|
Adjusted net earnings per common share, diluted(2) | 0.28 |
| | 0.33 |
| | 0.61 |
| | 0.62 |
|
Yield on interest-earning assets | 4.40 | % | | 4.80 | % | | 4.43 | % | | 4.88 | % |
Cost of interest-bearing liabilities | 1.23 | % | | 1.11 | % | | 1.23 | % | | 1.14 | % |
Net interest spread | 3.17 | % | | 3.69 | % | | 3.20 | % | | 3.74 | % |
Net interest margin | 3.33 | % | | 3.86 | % | | 3.37 | % | | 3.91 | % |
Return on average assets | 1.00 | % | | 0.31 | % | | 0.93 | % | | 0.33 | % |
Return on average equity(3) | 12.71 | % | | 4.11 | % | | 11.89 | % | | 4.41 | % |
Adjusted return on average assets(4) | 0.81 | % | | 1.01 | % | | 0.88 | % | | 0.93 | % |
Adjusted return on average equity(5) | 10.17 | % | | 13.41 | % | | 11.28 | % | | 12.22 | % |
Credit Quality Ratios: | | | | | | | |
Net charge-offs to average loans and leases held for investment | 0.12 | % | | 0.34 | % | | 0.17 | % | | 0.49 | % |
Banking and Wealth Management Metrics: | | | | | | | |
Efficiency ratio(6) | 45.1 | % | | 53.8 | % | | 48.7 | % | | 49.7 | % |
Mortgage Banking Metrics: | | | | | | | |
Unpaid principal balance of loans originated (in millions) | $ | 3,242.2 |
| | $ | 2,260.0 |
| | $ | 6,140.6 |
| | $ | 4,166.3 |
|
|
| | | | | | | |
Financial Highlights | Table 1 (cont.) | |
(dollars in thousands, except per share amounts) | June 30, 2013 | | December 31, 2012 |
As of Period End: | | | |
Balance Sheet Data: | | | |
Cash and cash equivalents | $ | 489,587 |
| | $ | 443,914 |
|
Investment securities | 1,615,296 |
| | 1,921,284 |
|
Loans held for sale | 2,000,390 |
| | 2,088,046 |
|
Loans and leases held for investment, net | 12,793,919 |
| | 12,422,987 |
|
Total assets | 18,362,872 |
| | 18,242,878 |
|
Deposits | 13,669,866 |
| | 13,142,388 |
|
Total liabilities | 16,813,489 |
| | 16,791,702 |
|
Total shareholders’ equity | 1,549,383 |
| | 1,451,176 |
|
Credit Quality Ratios: | | | |
Adjusted non-performing assets as a percentage of total assets (see Table 18) | 0.92 | % | | 1.08 | % |
Allowance for loan and lease losses (ALLL) as a percentage of loans and leases held for investment (see Table 19) | 0.57 | % | | 0.66 | % |
Capital Ratios: | | | |
Tier 1 leverage ratio (bank level) (see Table 31) | 8.3 | % | | 8.0 | % |
Tier 1 risk-based capital ratio (see Table 31) | 13.1 | % | | 12.8 | % |
Total risk-based capital ratio (bank level) (see Table 31) | 13.7 | % | | 13.5 | % |
Tangible equity to tangible assets (see Table 1B) | 8.2 | % | | 7.7 | % |
Deposit Metrics: | | | |
Deposit growth (trailing 12 months) | 26.5 | % | | 28.0 | % |
Mortgage Banking Metrics: | | | |
Unpaid principal balance of loans serviced for the Company and others (in millions) | $ | 61,700.8 |
| | $ | 51,198.7 |
|
Tangible Common Equity Per Common Share: | | | |
Excluding accumulated other comprehensive loss(7) | $ | 11.65 |
| | $ | 11.02 |
|
Including accumulated other comprehensive loss(8) | 11.00 |
| | 10.30 |
|
| |
(1) | Adjusted net income includes adjustments to our net income for certain material items that we believe are not reflective of our ongoing business or operating performance. For a reconciliation of adjusted net income to net income, which is the most directly comparable GAAP measure, see Table 1A. |
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(2) | Both basic and diluted adjusted net earnings per common share are calculated using a numerator based on adjusted net income. Adjusted net earnings per common share, basic is a non-GAAP financial measure and its most directly comparable GAAP measure is net earnings per common share, basic. Adjusted net earnings per common share, diluted is a non-GAAP financial measure and its most directly comparable GAAP measure is net earnings per common share, diluted. For 2012, both basic and diluted adjusted net earnings per common share have been adjusted to exclude the impact of the $4.5 million special cash dividend paid in March 2012 to holders of the Series A 6% Cumulative Convertible Preferred Stock and the $1.1 million special cash dividend paid in June 2012 to holders of the Series B 4% Cumulative Convertible Preferred Stock. The special cash dividends were paid in connection with the conversion of all shares of both the Series A 6% Cumulative Convertible Preferred Stock and the Series B 4% Cumulative Convertible Preferred Stock into common stock. |
| |
(3) | Due to the issuance of non-participating perpetual preferred stock during the fourth quarter of 2012, we amended our calculation for return on average equity. Beginning with the fourth quarter of 2012, return on average equity is calculated as net income less dividends declared on the Series A 6.75% Non-Cumulative Perpetual Preferred Stock divided by average common shareholders' equity (average shareholders' equity less average Series A 6.75% Non-Cumulative Perpetual Preferred Stock). Prior to the fourth quarter of 2012, return on average equity was calculated as net income divided by average shareholders' equity. |
| |
(4) | Adjusted return on average assets equals adjusted net income divided by average total assets. Adjusted net income is a non-GAAP measure of our financial performance and its most directly comparable GAAP measure is net income. For a reconciliation of net income to adjusted net income, see Table 1A. |
| |
(5) | Due to the issuance of non-participating perpetual preferred stock during the fourth quarter of 2012, we amended our calculation for adjusted return on average equity. Beginning with the fourth quarter of 2012, adjusted return on average equity is calculated as adjusted net income less dividends declared on the Series A 6.75% Non-Cumulative Perpetual Preferred Stock divided by average common shareholders' equity. Prior to the fourth quarter of 2012, adjusted return on average equity was calculated as adjusted net income divided by average shareholders' equity. Adjusted net income is a non-GAAP measure of our financial performance and its most directly comparable GAAP measure is net income. For a reconciliation of net income to adjusted net income, see Table 1A. |
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(6) | The efficiency ratio represents noninterest expense from our Banking and Wealth Management segment as a percentage of total revenues from our Banking and Wealth Management segment. We use the efficiency ratio to measure noninterest costs expended to generate a dollar of revenue. Because of the significant costs we incur and fees we generate from activities related to our mortgage production and servicing operations, we believe the efficiency ratio is a more meaningful metric when evaluated within our Banking and Wealth Management segment. |
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(7) | Calculated as adjusted tangible common shareholders' equity divided by shares of common stock. Adjusted tangible common shareholders' equity equals shareholders' equity less goodwill, other intangible assets, perpetual preferred stock and accumulated other comprehensive loss (see Table 1B). Tangible common equity per common share is calculated using a denominator that includes |
actual period end common shares outstanding and for periods prior to the fourth quarter of 2012, additional common shares assuming conversion of all outstanding convertible preferred stock to common stock. Tangible common equity per common share excluding accumulated other comprehensive loss is a non-GAAP financial measure, and its most directly comparable GAAP financial measure is book value per common share.
| |
(8) | Calculated as tangible common shareholders' equity divided by shares of common stock. Tangible common shareholders' equity equals shareholders' equity less goodwill, other intangible assets and perpetual preferred stock (see Table 1B). Tangible common equity per common share is calculated using a denominator that includes actual period end common shares outstanding and for periods prior to the fourth quarter of 2012, additional common shares assuming conversion of all outstanding convertible preferred stock to common stock. Tangible common equity per common share including accumulated other comprehensive loss is a non-GAAP financial measure, and its most directly comparable GAAP financial measure is book value per common share. |
A reconciliation of adjusted net income to net income, which is the most directly comparable GAAP measure, is as follows:
|
| | | | | | | | | | | | | | | |
Adjusted Net Income | | | | | Table 1A | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands, except per share data) | 2013 | | 2012 | | 2013 | | 2012 |
Net income | $ | 45,993 |
| | $ | 11,172 |
| | $ | 85,139 |
| | $ | 23,018 |
|
Transaction expense, net of tax | — |
| | 2,363 |
| | — |
| | 3,184 |
|
Non-recurring regulatory related expense, net of tax | 12,042 |
| | 3,780 |
| | 23,467 |
| | 6,843 |
|
Increase (decrease) in Bank of Florida non-accretable discount, net of tax | (538 | ) | | 463 |
| | 412 |
| | 2,598 |
|
MSR impairment (recovery), net of tax | (20,194 | ) | | 18,684 |
| | (27,978 | ) | | 28,073 |
|
Adjusted net income | $ | 37,303 |
| | $ | 36,462 |
| | $ | 81,040 |
| | $ | 63,716 |
|
Adjusted net income allocated to preferred stock | 2,531 |
| | 2,206 |
| | 5,062 |
| | 7,696 |
|
Adjusted net income allocated to common shareholders | $ | 34,772 |
| | $ | 34,256 |
| | $ | 75,978 |
| | $ | 56,020 |
|
Adjusted net earnings per common share, basic | $ | 0.28 |
| | $ | 0.34 |
| | $ | 0.62 |
| | $ | 0.63 |
|
Adjusted net earnings per common share, diluted | $ | 0.28 |
| | $ | 0.33 |
| | $ | 0.61 |
| | $ | 0.62 |
|
Weighted average common shares outstanding: | | | | | | | |
(units in thousands) | | | | | | | |
Basic | 122,281 |
| | 100,779 |
| | 121,934 |
| | 88,454 |
|
Diluted | 124,034 |
| | 102,574 |
| | 123,735 |
| | 90,414 |
|
A reconciliation of tangible equity, tangible common equity and adjusted tangible equity to shareholders’ equity, which is the most directly comparable GAAP measure, and tangible assets to total assets, which is the most directly comparable GAAP measure, is as follows:
|
| | | | | | | |
Tangible Equity, Tangible Common Equity, Adjusted Tangible Common Equity and Tangible Assets | Table 1B | |
(dollars in thousands) | June 30, 2013 | | December 31, 2012 |
Shareholders’ equity | $ | 1,549,383 |
| | $ | 1,451,176 |
|
Less: |
| | |
Goodwill | 46,859 |
| | 46,859 |
|
Intangible assets | 6,867 |
| | 7,921 |
|
Tangible equity | 1,495,657 |
| | 1,396,396 |
|
Less: | | | |
Perpetual preferred stock | 150,000 |
| | 150,000 |
|
Tangible common equity | 1,345,657 |
| | 1,246,396 |
|
Less: | | | |
Accumulated other comprehensive loss | (80,389 | ) | | (86,784 | ) |
Adjusted tangible common equity | $ | 1,426,046 |
| | $ | 1,333,180 |
|
Total assets | $ | 18,362,872 |
| | $ | 18,242,878 |
|
Less: | | | |
Goodwill | 46,859 |
| | 46,859 |
|
Intangible assets | 6,867 |
| | 7,921 |
|
Tangible assets | $ | 18,309,146 |
| | $ | 18,188,098 |
|
Analysis of Statements of Income
The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) net interest spread; and (v) net interest margin.
|
| | | | | | | | | | | | | | | | | | | | | |
Average Balance Sheet, Interest and Yield/Rate Analysis | | Table 2A | |
| Three Months Ended |
| June 30, 2013 | | June 30, 2012 |
(dollars in thousands) | Average Balance | | Interest | | Yield/Rate | | Average Balance | | Interest | | Yield/Rate |
Assets: | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | 616,553 |
| | $ | 317 |
| | 0.21 | % | | $ | 128,325 |
| | $ | 82 |
| | 0.26 | % |
Investment securities | 1,569,234 |
| | 14,077 |
| | 3.59 | % | | 2,108,672 |
| | 20,137 |
| | 3.82 | % |
Other investments | 136,249 |
| | 736 |
| | 2.17 | % | | 122,919 |
| | 562 |
| | 1.84 | % |
Loans held for sale | 2,559,305 |
| | 22,371 |
| | 3.50 | % | | 2,974,918 |
| | 37,446 |
| | 5.03 | % |
Loans and leases held for investment: |
| |
| |
| |
| |
| |
|
Residential mortgages | 6,220,190 |
| | 68,346 |
| | 4.40 | % | | 5,225,570 |
| | 53,390 |
| | 4.09 | % |
Commercial and commercial real estate | 4,805,116 |
| | 61,261 |
| | 5.07 | % | | 1,642,813 |
| | 20,324 |
| | 4.89 | % |
Lease financing receivables | 943,101 |
| | 18,311 |
| | 7.77 | % | | 621,667 |
| | 21,298 |
| | 13.70 | % |
Home equity lines | 170,039 |
| | 2,371 |
| | 5.59 | % | | 191,673 |
| | 3,297 |
| | 6.92 | % |
Consumer and credit card | 7,221 |
| | 63 |
| | 3.50 | % | | 8,045 |
| | 61 |
| | 3.05 | % |
Total loans and leases held for investment | 12,145,667 |
| | 150,352 |
| | 4.94 | % | | 7,689,768 |
| | 98,370 |
| | 5.11 | % |
Total interest-earning assets | 17,027,008 |
| | $ | 187,853 |
| | 4.40 | % | | 13,024,602 |
| | $ | 156,597 |
| | 4.80 | % |
Noninterest-earning assets | 1,342,084 |
| | | | | | 1,437,511 |
| | | | |
Total assets | $ | 18,369,092 |
| | | | | | $ | 14,462,113 |
| | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Deposits: | | | | | | | | | | | |
Interest-bearing demand | $ | 3,006,281 |
| | $ | 5,776 |
| | 0.77 | % | | $ | 2,123,862 |
| | $ | 3,816 |
| | 0.72 | % |
Market-based money market accounts | 421,180 |
| | 758 |
| | 0.72 | % | | 435,496 |
| | 823 |
| | 0.76 | % |
Savings and money market accounts, excluding market-based | 5,024,910 |
| | 9,465 |
| | 0.76 | % | | 3,861,879 |
| | 7,266 |
| | 0.76 | % |
Market-based time | 683,027 |
| | 1,269 |
| | 0.75 | % | | 851,735 |
| | 1,905 |
| | 0.90 | % |
Time, excluding market-based | 3,345,856 |
| | 9,299 |
| | 1.11 | % | | 1,940,577 |
| | 6,609 |
| | 1.37 | % |
Total deposits | 12,481,254 |
| | 26,567 |
| | 0.85 | % | | 9,213,549 |
| | 20,419 |
| | 0.89 | % |
Borrowings: | | | | | | | | | | | |
Trust preferred securities | 103,750 |
| | 1,644 |
| | 6.36 | % | | 103,750 |
| | 1,607 |
| | 6.23 | % |
Federal Home Loan Bank (FHLB) advances | 2,533,707 |
| | 18,425 |
| | 2.88 | % | | 2,068,750 |
| | 9,500 |
| | 1.85 | % |
Repurchase agreements | — |
| | — |
| | 0.00 | % | | 20,283 |
| | 87 |
| | 1.73 | % |
Total interest-bearing liabilities | 15,118,711 |
| | $ | 46,636 |
| | 1.23 | % | | 11,406,332 |
| | $ | 31,613 |
| | 1.11 | % |
Noninterest-bearing demand deposits | 1,393,071 |
| | | | | | 1,462,506 |
| | | | |
Other noninterest-bearing liabilities | 339,039 |
| | | | | | 505,365 |
| | | | |
Total liabilities | 16,850,821 |
| | | | | | 13,374,203 |
| | | | |
Total shareholders’ equity | 1,518,271 |
| | | | | | 1,087,910 |
| | | | |
Total liabilities and shareholders’ equity | $ | 18,369,092 |
| | | | | | $ | 14,462,113 |
| | | | |
Net interest income/spread | | | $ | 141,217 |
| | 3.17 | % | | | | $ | 124,984 |
| | 3.69 | % |
Net interest margin | | | | | 3.33 | % | | | | | | 3.86 | % |
| | | | | | | | | | | |
Memo: Total deposits including non-interest bearing | $ | 13,874,325 |
| | $ | 26,567 |
| | 0.76 | % | | $ | 10,676,055 |
| | $ | 20,419 |
| | 0.77 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
Average Balance Sheet, Interest and Yield/Rate Analysis | Table 2B | |
| Six Months Ended |
| June 30, 2013 | | June 30, 2012 |
(dollars in thousands) | Average Balance | | Interest | | Yield/Rate | | Average Balance | | Interest | | Yield/Rate |
Assets: | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | 583,800 |
| | $ | 615 |
| | 0.21 | % | | $ | 146,720 |
| | $ | 186 |
| | 0.25 | % |
Investment securities | 1,640,574 |
| | 29,567 |
| | 3.61 | % | | 2,096,297 |
| | 40,408 |
| | 3.86 | % |
Other investments | 137,427 |
| | 1,496 |
| | 2.20 | % | | 110,725 |
| | 840 |
| | 1.53 | % |
Loans held for sale | 2,494,176 |
| | 42,680 |
| | 3.42 | % | | 2,840,935 |
| | 71,395 |
| | 5.03 | % |
Loans and leases held for investment: | | | | | | | | | | | |
Residential mortgages | 6,383,075 |
| | 138,925 |
| | 4.35 | % | | 4,954,469 |
| | 101,478 |
| | 4.10 | % |
Commercial and commercial real estate | 4,716,687 |
| | 122,525 |
| | 5.18 | % | | 1,411,401 |
| | 36,770 |
| | 5.15 | % |
Lease financing receivables | 902,270 |
| | 37,724 |
| | 8.36 | % | | 602,573 |
| | 45,164 |
| | 14.99 | % |
Home equity lines | 173,342 |
| | 4,523 |
| | 5.26 | % | | 194,746 |
| | 5,667 |
| | 5.85 | % |
Consumer and credit card | 7,213 |
| | 132 |
| | 3.69 | % | | 7,952 |
| | 120 |
| | 3.03 | % |
Total loans and leases held for investment | 12,182,587 |
| | 303,829 |
| | 4.98 | % | | 7,171,141 |
| | 189,199 |
| | 5.27 | % |
Total interest-earning assets | 17,038,564 |
| | $ | 378,187 |
| | 4.43 | % | | 12,365,818 |
| | $ | 302,028 |
| | 4.88 | % |
Noninterest-earning assets | 1,341,590 |
| | | | | | 1,395,033 |
| | | | |
Total assets | $ | 18,380,154 |
| | | | | | $ | 13,760,851 |
| | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Deposits: | | | | | | | | | | | |
Interest-bearing demand | $ | 2,908,343 |
| | $ | 11,234 |
| | 0.78 | % | | $ | 2,115,810 |
| | $ | 7,555 |
| | 0.72 | % |
Market-based money market accounts | 426,333 |
| | 1,597 |
| | 0.76 | % | | 443,092 |
| | 1,675 |
| | 0.76 | % |
Savings and money market accounts, excluding market-based | 4,855,737 |
| | 18,498 |
| | 0.77 | % | | 3,817,059 |
| | 14,314 |
| | 0.75 | % |
Market-based time | 704,210 |
| | 2,840 |
| | 0.81 | % | | 876,462 |
| | 4,269 |
| | 0.98 | % |
Time, excluding market-based | 3,569,336 |
| | 19,221 |
| | 1.09 | % | | 1,923,743 |
| | 13,580 |
| | 1.42 | % |
Total deposits | 12,463,959 |
| | 53,390 |
| | 0.86 | % | | 9,176,166 |
| | 41,393 |
| | 0.91 | % |
Borrowings: | | | | | | | | | | | |
Trust preferred securities | 103,750 |
| | 3,286 |
| | 6.39 | % | | 103,750 |
| | 3,025 |
| | 5.86 | % |
Federal Home Loan Bank (FHLB) advances | 2,564,154 |
| | 36,256 |
| | 2.81 | % | | 1,565,464 |
| | 16,829 |
| | 2.16 | % |
Repurchase agreements | 28,146 |
| | 222 |
| | 1.59 | % | | 21,289 |
| | 174 |
| | 1.64 | % |
Other | — |
| | — |
| | 0.00 | % | | 18 |
| | — |
| | 0.00 | % |
Total interest-bearing liabilities | 15,160,009 |
| | $ | 93,154 |
| | 1.23 | % | | 10,866,687 |
| | $ | 61,421 |
| | 1.14 | % |
Noninterest-bearing demand deposits | 1,385,131 |
| | | | | | 1,383,610 |
| | | | |
Other noninterest-bearing liabilities | 338,343 |
| | | | | | 467,487 |
| | | | |
Total liabilities | 16,883,483 |
| | | | | | 12,717,784 |
| | | | |
Total shareholders’ equity | 1,496,671 |
| | | | | | 1,043,067 |
| | | | |
Total liabilities and shareholders’ equity | $ | 18,380,154 |
| | | | | | $ | 13,760,851 |
| | | | |
Net interest income/spread | | | $ | 285,033 |
| | 3.20 | % | | | | $ | 240,607 |
| | 3.74 | % |
Net interest margin | | | | | 3.37 | % | | | | | | 3.91 | % |
| | | | | | | | | | | |
Memo: Total deposits including non-interest bearing | $ | 13,849,090 |
| | $ | 53,390 |
| | 0.77 | % | | $ | 10,559,776 |
| | $ | 41,393 |
| | 0.79 | % |
| |
(1) | The average balances are principally daily averages, and for loans, include both performing and non-performing balances. |
| |
(2) | Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments. |
| |
(3) | All interest income was fully taxable for all periods presented. |
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Analysis of Change in Net Interest Income | | | | | | | | | | | Table 3 |
|
| Three Months Ended | | Six Months Ended |
| June 30, 2013 Compared | | June 30, 2013 Compared |
| to June 30, 2012 | | to June 30, 2012 |
| Increase (Decrease) Due to | | Increase (Decrease) Due to |
(dollars in thousands) | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest-earning assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | 316 |
| | $ | (81 | ) | | $ | 235 |
| | $ | 542 |
| | $ | (113 | ) | | $ | 429 |
|
Investment securities | (5,138 | ) | | (922 | ) | | (6,060 | ) | | (8,723 | ) | | (2,118 | ) | | (10,841 | ) |
Other investments | 61 |
| | 113 |
| | 174 |
| | 203 |
| | 453 |
| | 656 |
|
Loans held for sale | (5,212 | ) | | (9,863 | ) | | (15,075 | ) | | (8,649 | ) | | (20,066 | ) | | (28,715 | ) |
Loans and leases held for investment: |
| |
| |
| |
| |
| |
|
Residential mortgages | 10,142 |
| | 4,814 |
| | 14,956 |
| | 29,046 |
| | 8,401 |
| | 37,447 |
|
Commercial and commercial real estate | 38,553 |
| | 2,384 |
| | 40,937 |
| | 84,412 |
| | 1,343 |
| | 85,755 |
|
Lease financing receivables | 10,979 |
| | (13,966 | ) | | (2,987 | ) | | 22,278 |
| | (29,718 | ) | | (7,440 | ) |
Home equity lines | (373 | ) | | (553 | ) | | (926 | ) | | (621 | ) | | (523 | ) | | (1,144 | ) |
Consumer and credit card | (6 | ) | | 8 |
| | 2 |
| | (11 | ) | | 23 |
| | 12 |
|
Total loans and leases held for investment | 59,295 |
| | (7,313 | ) | | 51,982 |
| | 135,104 |
| | (20,474 | ) | | 114,630 |
|
Total change in interest income | 49,322 |
| | (18,066 | ) | | 31,256 |
| | 118,477 |
| | (42,318 | ) | | 76,159 |
|
Interest-bearing liabilities: | | | | | | | | | | | |
Deposits: | | | | | | | | | | | |
Interest-bearing demand | $ | 1,584 |
| | $ | 376 |
| | $ | 1,960 |
| | $ | 2,830 |
| | $ | 849 |
| | $ | 3,679 |
|
Market-based money market accounts | (27 | ) | | (38 | ) | | (65 | ) | | (63 | ) | | (15 | ) | | (78 | ) |
Savings and money market accounts, excluding market-based | 2,204 |
| | (5 | ) | | 2,199 |
| | 3,863 |
| | 321 |
| | 4,184 |
|
Market-based time | (379 | ) | | (257 | ) | | (636 | ) | | (837 | ) | | (592 | ) | | (1,429 | ) |
Time, excluding market-based | 4,800 |
| | (2,110 | ) | | 2,690 |
| | 11,588 |
| | (5,947 | ) | | 5,641 |
|
Total deposits | 8,182 |
| | (2,034 | ) | | 6,148 |
| | 17,381 |
| | (5,384 | ) | | 11,997 |
|
Borrowings: | | | | | | | | | | | |
Trust preferred securities | — |
| | 37 |
| | 37 |
| | — |
| | 261 |
| | 261 |
|
FHLB advances | 2,145 |
| | 6,780 |
| | 8,925 |
| | 10,697 |
| | 8,730 |
| | 19,427 |
|
Repurchase agreements | (87 | ) | | — |
| | (87 | ) | | 56 |
| | (8 | ) | | 48 |
|
Total change in interest expense | 10,240 |
| | 4,783 |
| | 15,023 |
| | 28,134 |
| | 3,599 |
| | 31,733 |
|
Total change in net interest income | $ | 39,082 |
| | $ | (22,849 | ) | | $ | 16,233 |
| | $ | 90,343 |
| | $ | (45,917 | ) | | $ | 44,426 |
|
| |
(1) | The effect of changes in volume is determined by multiplying the change in volume by the previous period's average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous period's volume. Changes applicable to both volume and rate have been allocated to rate. |
Net Interest Income
Net interest income is affected by both changes in interest rates and the amount and composition of earning assets and interest-bearing liabilities. Net interest margin is defined as net interest income as a percentage of average interest-earning assets.
Net interest income increased by $16.2 million, or 13%, in the second quarter of 2013 compared to the same period in 2012 due to an increase in interest income of $31.3 million, or 20%, partially offset by an increase in interest expense of $15.0 million, or 48%.
Net interest income increased by $44.4 million, or 18%, in the first six months of 2013, compared to the same period in 2012, due to an increase in interest income of $76.2 million or 25%, and an increase in interest expense of $31.7 million or 52%.
Our net interest margin decreased by 53 basis points in the second quarter of 2013 and 54 basis points in the first six months of 2013 compared to the same periods in 2012, which was led by a decrease in yields in our interest-earning assets.
Yields on our interest-earning assets decreased by 40 basis points in the second quarter of 2013 and by 45 basis points in the first six months of 2013, compared to the same periods in 2012, primarily due to a decrease in yields for both our loans and leases held for investment and our loans held for sale. Our lease financing receivables portfolio led the decrease in loans and leases held for investment yields as a result of a decrease in excess accretion as well as continued organic production of lease financing receivables at market interest rates. We define excess accretion as above market yields as a result of the market dislocation in 2008 and 2009. We recognized $4.9 million, a decrease of $5.7 million, in excess accretion in the second quarter of 2013 compared to the same period in 2012. We recognized $11.3 million, a decrease of $12.5 million, in excess accretion in the first six months of 2013 compared to the same period in 2012. Excess accretion is currently limited to our acquired Tygris leases which included a significant liquidity discount at acquisition. The decrease in yields on our loans held for sale is due primarily to the transfer of $1.9 billion of mortgage pool buyouts with attractive yields from loans held for sale to loans held for investment during the third quarter of 2012 offset by organic production of fixed rate, jumbo mortgages at market interest rates.
Average balances of our interest-earning assets increased by $4.0 billion, or 31%, in the second quarter of 2013 compared to the same period in 2012 primarily due to a $4.5 billion increase in loans and leases held for investment.
Average balances of our interest-earning assets increased by $4.7 billion, or 38%, in the first six months of 2013 compared to the same period in 2012 primarily due to a $5.0 billion increase in loans and leases held for investment.
The increase in the average balance of loans held for investment for the three and six months ended June 30, 2013, compared to the same periods in 2012 was due primarily to our commercial and commercial real estate and residential mortgage portfolios. Our fourth quarter 2012 acquisition of BPL contributed to the growth in our commercial and commercial real estate portfolio with a $2.2 billion increase in our average balance in the second quarter of 2013 and $2.2 billion increase in the first six months of 2013. Our warehouse finance acquisition, which closed in the second quarter of 2012, contributed $720 million to the increase in our average balance in the second quarter of 2013 and $790 million in the first six months of 2013.
The increase in the average balance of our residential mortgage portfolio increased primarily due to the transfer of mortgage pool buyouts during the third quarter of 2012 as well as a transfer of jumbo preferred residential mortgage and commercial loans from loans held for sale to loans held for investment at the lower of cost or fair value during the three months ended June 30, 2013. The preferred adjustable rate mortgage (ARM) loans were transferred to our portfolio as the credit profile and duration of these loans offer attractive risk adjusted returns.
Average balances in our interest-bearing liabilities increased by $3.7 billion, or 33%, in the second quarter of 2013 and by $4.3 billion, or 40% in the first six months of 2013, compared to the same periods in 2012 primarily due to an increase in average balances in our interest-bearing deposits and FHLB advances. Average balances in our interest-bearing deposits increased by $3.3 billion, or 35%, in the second quarter of 2013 and $3.3 billion, or 36%, in the first six months of 2013 compared to the same periods in 2012 primarily due to growth in time deposits (excluding market-based), savings and money market accounts (excluding market-based), and interest-bearing demand deposits. The growth in lower-cost deposits was the result of successful sales and marketing efforts and clients' increased preference for more liquid products during 2013. We continued to focus on marketing and promoting products in the second quarter of 2013 and expect to replace a portion of our wholesale borrowings with core deposits over time. Due to the significant deposit growth through the first half of 2013, we reduced the interest rates being paid on our interest bearing demand and money market accounts by 15 basis points from 0.76% to 0.61% from May 30, 2013 to July 1, 2013. Average balances in our FHLB advances increased by $0.5 billion in the second quarter of 2013 and by $1.0 billion in the first six months of 2013, compared to the same periods in 2012 to fund strategic acquisitions and other asset growth in 2013 and to take advantage of historically low interest rates.
Provision for Loan and Lease Losses
We assess the allowance for loan and lease losses and make provisions for loan and lease losses as deemed appropriate in order to maintain the adequacy of the allowance for loan and lease losses. Increases in the allowance for loan and lease losses are achieved through provisions for loan and lease losses that are charged against net interest income. Additional allowance may result from a reduction of the net present value (NPV) of our acquired credit impaired (ACI) loans. We recorded a provision for loan and lease losses of $0.03 million in the second quarter of 2013, which is a decrease of 99% from $5.8 million in the same period in 2012. We recorded a provision for loan and lease losses of $1.9 million in the first six months of 2013, which is a decrease of 89% from $17.1 million in the same period in 2012. Provision expense increased $0.7 million during the second quarter of 2013 as compared to the same period in 2012 due to adjustable loans resetting at higher interest rates. For the first six months of 2013, provision for loan and lease losses decreased for both our residential and commercial portfolios compared to the same period in 2012. The residential provision decreased primarily due to sustained performance in preferred product originations, continued loan performance from the portfolio acquisition in the first six months of 2012 and fewer charge-offs on our home equity lines. In addition, our provision related to residential TDRs decreased due to improved expected performance of these loans and lower charge-off amounts.
The commercial and commercial real estate loan provision decreased due to new originations with increased credit quality. The net commercial provision also decreased due to favorable property sales, lower charge off amounts and an increase in performing TDRs that resulted in a change in our default assumption. Commercial impairment decreased due to increases in residual values of collateral as well as the increases in expected cash flows.
Noninterest Income
Noninterest income increased by $72.7 million or 98%, in the second quarter of 2013 and by $132.8 million, or by 90%, in the first six months of 2013, compared to the same periods in 2012. The following table illustrates the primary components of noninterest income for the periods indicated.
|
| | | | | | | | | | | | | | | |
Noninterest Income | | | | | | | Table 4 |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2013 | | 2012 | | 2013 | | 2012 |
Loan servicing fee income | $ | 47,192 |
| | $ | 42,483 |
| | $ | 89,355 |
| | $ | 88,039 |
|
Amortization of MSR | (35,945 | ) | | (34,143 | ) | | (71,023 | ) | | (63,481 | ) |
Recovery (impairment) of MSR | 32,572 |
| | (30,134 | ) | | 45,127 |
| | (45,279 | ) |
Net loan servicing income | 43,819 |
| | (21,794 | ) | | 63,459 |
| | (20,721 | ) |
Gain on sale of loans | 75,837 |
| | 69,926 |
| | 158,148 |
| | 118,103 |
|
Loan production revenue | 10,063 |
| | 9,852 |
| | 19,552 |
| | 17,289 |
|
Deposit fee income | 4,290 |
| | 5,828 |
| | 10,215 |
| | 12,067 |
|
Other lease income | 6,471 |
| | 8,822 |
| | 12,882 |
| | 17,485 |
|
Other | 6,324 |
| | 1,489 |
| | 15,857 |
| | 3,093 |
|
Total Noninterest Income | $ | 146,804 |
| | $ | 74,123 |
| | $ | 280,113 |
| | $ | 147,316 |
|
The increase in noninterest income was driven primarily by net loan servicing income, gain on sale of loans and other noninterest
income.
Net loan servicing income increased by $65.6 million in the second quarter of 2013 and by $84.2 million in the first six months of 2013, compared to the same periods in 2012. The increase was primarily due to recoveries recognized on MSR valuation allowance in the first and second quarters of 2013 compared to MSR impairment recognized in the first and second quarters of 2012. MSR recovery is due to lower projected prepayment speeds as a result of increases in mortgage interest rates. This increase in net loan servicing income was offset by increased amortization of $1.8 million in the second quarter of 2013 and $7.5 million in the first six months of 2013, compared to the same periods in 2012 due to elevated prepayment levels driven by refinancing demand and government sponsored refinancing programs, such as HARP. In addition, servicing fees increased by $4.7 million in the second quarter of 2013 and $1.3 million in the first six months of 2013, as the UPB of our servicing portfolio increased by $8.4 billion, to $61.7 billion as of June 30, 2013 due to the acquisition of $13.0 billion of residential servicing on April 1, 2013, compared to the same period in 2012.
Gain on sale of loans increased by $5.9 million, or 8%, in the second quarter of 2013 and by $40 million, or 34% in the first six months of 2013, compared to the same periods in 2012, primarily driven by low interest rates for most of the period which resulted in increased lending volume. This increase was offset by a reduction in our gain on sale margin which was impacted by the market sell-off at quarter end as well as spread widening in spread products such as HARP 2.0 specified pools and the non-agency market. Refinancing demand was most notably due to the Home Affordable Refinance Program (HARP) 2.0 and the low mortgage interest rate environment throughout the period. Lending volume also benefited from the continued expansion of our retail lending channel and increased lending of some of our preferred products. Mortgage lending volume increased by $982.2 million, or 43%, to $3.2 billion in the second quarter of 2013 compared to the same period in 2012. Mortgage lending volume increased by $2.0 billion, or 47%, to $6.1 billion in the first six months of 2013 compared to the same period in 2012.
Deposit fee income decreased by $1.5 million, or 26%, in the second quarter of 2013 and $1.9 million, or 15%, in the first six months of 2013, compared to the same periods in 2012. The decrease was due to the decline in deposit principal as the dollar performed well against other foreign currencies.
Other lease income decreased by $2.4 million, or 27%, in the second quarter of 2013 and $4.6 million, or 26%, in the first six months of 2013, compared to the same periods in 2012. Lease income decreased as a result of lower income related to late fees, lower operating lease revenue due to the declining operating lease portfolio and higher net losses on lease terminations.
Other noninterest income increased by $4.8 million in the second quarter of 2013 and $12.8 million in the first six months of 2013, compared to the same periods in 2012 due primarily to prepayment penalty income related to serviced loans in the business lending trusts (BLTs), acquired with the BPL acquisition as well as income related to the recovery of losses experienced on loans and servicing rights previously acquired.
Noninterest Expense
Noninterest expense increased by $37.8 million, or 21%, in the second quarter of 2013 and $90.8 million, or 27%, in the first six months of 2013 compared to the same periods in 2012. The following table illustrates the primary components of noninterest expense for the periods indicated.
|
| | | | | | | | | | | | | | | |
Noninterest Expense | | | | | | | Table 5 |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2013 | | 2012 | | 2013 | | 2012 |
Salaries, commissions and other employee benefits expense | $ | 118,457 |
| | $ | 76,277 |
| | $ | 228,936 |
| | $ | 142,867 |
|
Equipment expense | 20,707 |
| | 16,889 |
| | 40,559 |
| | 32,837 |
|
Occupancy expense | 7,547 |
| | 6,017 |
| | 14,931 |
| | 11,366 |
|
General and administrative expense: | | | | | | | |
Professional fees | 24,754 |
| | 19,319 |
| | 47,802 |
| | 34,929 |
|
Foreclosure and other real estate owned (OREO) expense | 9,614 |
| | 14,969 |
| | 16,641 |
| | 25,928 |
|
Other credit-related expenses | 1,850 |
| | 5,806 |
| | 4,178 |
| | 17,616 |
|
Federal Deposit Insurance Corporation (FDIC) premium assessment and other agency fees | 8,358 |
| | 9,352 |
| | 22,060 |
| | 18,613 |
|
Advertising and marketing expense | 6,320 |
| | 8,646 |
| | 16,701 |
| | 14,553 |
|
Other | 15,933 |
| | 18,508 |
| | 33,548 |
| | 35,895 |
|
Total general and administrative expense | 66,829 |
| | 76,600 |
| | 140,930 |
| | 147,534 |
|
Total Noninterest Expense | $ | 213,540 |
| | $ | 175,783 |
| | $ | 425,356 |
| | $ | 334,604 |
|
The increase in noninterest expense was driven by increases in salaries, commissions and employee benefits, occupancy and equipment expense partially offset by decreases in general and administrative expense.
Salaries, commissions and employee benefits increased by $42.2 million, or 55% in the second quarter of 2013 and $86.1 million, or 60%, in the first six months of 2013, compared to the same periods in 2012 due primarily to growth in our Mortgage Banking reporting segment. Mortgage Banking salaries, commissions and employee benefits increased by $27.1 million in the second quarter of 2013 and $54.1 million in the first six months of 2013, which included an increase in variable commissions of $11.3 million and $21.5 million, respectively. Salary and headcount increases were driven by increased mortgage lending and the expansion of our retail and consumer direct production channels. Additional growth was also due to headcount increases in our Corporate Services and Banking and Wealth Management reporting segments due to the acquisitions of warehouse finance and BPL in 2012, legal and regulatory compliance, as well as general operations growth. Headcount growth was 61%, 22%, and 33% in our Mortgage Banking, Banking and Wealth Management and Corporate Services reporting segments, respectively, as of June 30, 2013 compared to the same period in 2012.
Occupancy and equipment expense increased by $5.3 million, or 23%, in the second quarter of 2013 and by $11.3 million, or 26%, in the first six months of 2013, compared to the same periods in 2012. The increase was primarily due to increased costs associated with the
expansion of our retail lending channels. Additionally, increased expenses are due to our warehouse finance and BPL acquisitions and overall expansion and growth of the business.
General and administrative expense decreased by $9.8 million, or 13%, in the second quarter of 2013 and $6.6 million, or 4%, in the first six months of 2013, compared to the same periods in 2012. For the second quarter of 2013 decreases were experienced in foreclosure and OREO expense, other credit-related expenses, advertising and marketing expense, FDIC premium assessment and other agency fees and other general and administrative expense, partially offset by an increase in professional fees compared to the same period in 2012. For the first six months of 2013 decreases were experienced in other credit-related expenses, foreclosure and OREO expense, and other general and administrative expense, partially offset by increases in professional fees, FDIC premium assessment and other agency fees and advertising and marketing expense compared to the same period in 2012.
Professional fees increased by $5.4 million, or 28%, in the second quarter of 2013 and $12.9 million, or 37%, in the first six months of 2013, compared to the same periods in 2012. The increase was primarily associated with the increase in consultant costs associated with the consent order remediation process we are undergoing.
Foreclosure and OREO expense decreased by $5.4 million, or 36%, in the second quarter of 2013 and by $9.3 million, or 36%, in the first six months of 2013, compared to the same periods in 2012 due primarily to a decrease in foreclosure-related expenses. Foreclosure expenses decreased by $3.8 million in the second quarter of 2013 and by $5.6 million in the first six months of 2013, compared to the same periods in 2012 due to improved credit quality and the decrease in government insured pool buyout activity over the past year. OREO expense decreased $1.6 million in the second quarter of 2013, and by $3.7 million in the first six months of 2013, due to stabilizing property values and declining losses incurred on OREO properties as a result.
Other credit-related expenses decreased by $4.0 million, or 68%, in the second quarter of 2013 and by $13.4 million, or 76%, in the first six months of 2013, compared to the same periods in 2012 primarily due to a decrease in our repurchase reserve expenses related to our originated and serviced loans. We describe our reserves for loans subject to representations and warranties in Note 14 in our condensed consolidated financial statements and in our Analysis of Statements of Condition in the "Loans Subject to Representations and Warranties" section of this Quarterly Report on Form 10-Q.
FDIC insurance premium assessment and other agency fees decreased by $1.0 million, or 11%, in the second quarter of 2013 and increased by $3.4 million, or 19%, in the first six months of 2013 compared to the same periods in 2012. The increase in the first six months of 2013 was due to retrospective fee assessment which was charged during the first quarter of 2013.
Advertising and marketing expense decreased by $2.3 million, or 27%, in the second quarter of 2013, and increased by $2.1 million, or 15%, in the first six months of 2013, compared to the same periods in 2012. The decrease in the second quarter of 2013 was due to the reduction in overall advertising as well as sponsorships. The increase in the first six months of 2013 was due primarily to our deposit gathering initiatives and our sponsorship of the Professional Golfers' Association (PGA) Golf Tournament during the first quarter of 2013.
Subsequent to quarter end, we announced we will cease originating residential mortgages through our wholesale broker lending channel. Origination volume attributable to the wholesale broker channel was $0.5 billion in the second quarter and $1.2 billion year-to-date. These actions will eliminate approximately 150 positions nationwide and result in a one-time after-tax charge of $2.0 to $4.0 million which will be recognized in the third quarter of 2013.
Provision for Income Taxes and Effective Tax Rates
|
| | | | | | | | | | | | | | | |
Provision for Income Taxes and Effective Tax Rates | | Table 6 |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2013 | | 2012 | | 2013 | | 2012 |
Provision for income taxes | $ | 28,459 |
| | $ | 6,395 |
| | $ | 52,703 |
| | $ | 13,189 |
|
Effective tax rates | 38.2 | % | | 36.4 | % | | 38.2 | % | | 36.4 | % |
For the three and six months ended June 30, 2013 and 2012, our effective income tax rate differs from the statutory federal income tax rate primarily due to state income taxes.
Segment Results
We evaluate our overall financial performance through three financial reporting segments: Banking and Wealth Management, Mortgage Banking and Corporate Services. To generate financial information by operating segment, we use an internal profitability reporting system which is based on a series of management estimates and allocations. We continually review and refine many of these estimates and allocations, many of which are subjective in nature. Any changes we make to estimates and allocations that may affect the reported results of any business segment do not affect our consolidated financial position or consolidated results of operations. Beginning in 2013, we updated our intersegment allocation of expenses for legal, human resources, and marketing expenses from the Corporate Services segment to the Banking and Wealth Management and Mortgage Banking segments, as applicable.
We use funds transfer pricing in the calculation of the respective operating segment’s net interest income to measure the value of funds used in and provided by an operating segment. The difference between the interest income on earning assets and the interest expense on funding liabilities and the corresponding funds transfer pricing charge for interest income or credit for interest expense results in net interest income. We allocate risk-adjusted capital to our segments based upon the credit, liquidity, operating and interest rate risk inherent in the segment’s asset and liability composition and operations. These capital allocations are determined based upon formulas that incorporate regulatory, GAAP and economic capital frameworks including risk-weighting assets, allocating noninterest expense and incorporating economic liquidity premiums for assets deemed by management to lower liquidity profiles.
Our Banking and Wealth Management segment often invests in loans originated from asset generation channels contained within our Banking and Wealth Management and Mortgage Banking segments as well as third party loan acquisitions. When intersegment acquisitions take place, we assign an estimate of the market value to the asset and record the transfer as a market purchase. In addition, intersegment cash balances are eliminated in segment reporting. The effects of these intersegment allocations and transfers are eliminated in consolidated reporting.
The following table summarizes segment income and total assets for each of our segments as of and for each of the periods shown:
|
| | | | | | | | | | | | | | | | | | | |
Business Segments Selected Financial Information | | | | Table 7A |
|
| Banking and Wealth Management | | Mortgage Banking | | Corporate Services | | Eliminations | | Consolidated |
(dollars in thousands) | | | | | | | | | |
Three Months Ended June 30, 2013 | | | | | | | | | |
Net interest income (loss) | $ | 127,072 |
| | $ | 15,719 |
| | $ | (1,574 | ) | | $ | — |
| | $ | 141,217 |
|
Provision for loan and lease losses | (1,320 | ) | | 1,349 |
| | — |
| | — |
| | 29 |
|
Net interest income after provision for loan and lease losses | 128,392 |
| | 14,370 |
| | (1,574 | ) | | — |
| | 141,188 |
|
Noninterest income | 32,654 |
| | 113,901 |
| | 249 |
| | — |
| | 146,804 |
|
Noninterest expense: | | | | | | | | | |
Foreclosure and OREO expense | 6,577 |
| | 3,037 |
| | — |
| | — |
| | 9,614 |
|
Other credit-related expenses | 1,238 |
| | 612 |
| | — |
| | — |
| | 1,850 |
|
All other noninterest expense | 64,155 |
| | 114,275 |
| | 23,646 |
| | — |
| | 202,076 |
|
Income (loss) before income tax | 89,076 |
| | 10,347 |
| | (24,971 | ) | | — |
| | 74,452 |
|
Adjustment items (pre-tax): | | | | | | | | | |
Decrease in Bank of Florida non-accretable discount | (867 | ) | | — |
| | — |
| | — |
| | (867 | ) |
MSR impairment (recovery) | — |
| | (32,572 | ) | | — |
| | — |
| | (32,572 | ) |
Transaction and non-recurring regulatory related expense | — |
| | 18,012 |
| | 1,410 |
| | — |
| | 19,422 |
|
Adjusted income (loss) before income tax | $ | 88,209 |
| | $ | (4,213 | ) | | $ | (23,561 | ) | | $ | — |
| | $ | 60,435 |
|
Total assets as of June 30, 2013 | $ | 15,588,567 |
| | $ | 2,805,876 |
| | $ | 194,395 |
| | $ | (225,966 | ) | | $ | 18,362,872 |
|
|
| | | | | | | | | | | | | | | | | | | |
Business Segments Selected Financial Information | | | | Table 7B |
|
| Banking and Wealth Management | | Mortgage Banking | | Corporate Services | | Eliminations | | Consolidated |
(dollars in thousands) | | | | | | | | | |
Three Months Ended June 30, 2012 | | | | | | | | | |
Net interest income (loss) | $ | 114,801 |
| | $ | 11,790 |
| | $ | (1,607 | ) | | $ | — |
| | $ | 124,984 |
|
Provision for loan and lease losses | 5,041 |
| | 716 |
| | — |
| | — |
| | 5,757 |
|
Net interest income after provision for loan and lease losses | 109,760 |
| | 11,074 |
| | (1,607 | ) | | — |
| | 119,227 |
|
Noninterest income | 25,605 |
| | 48,524 |
| | (6 | ) | | — |
| | 74,123 |
|
Noninterest expense: | | | | | | | | | |
Foreclosure and OREO expense | 12,378 |
| | 2,591 |
| | — |
| | — |
| | 14,969 |
|
Other credit-related expenses | 1,604 |
| | 4,193 |
| | 9 |
| | — |
| | 5,806 |
|
All other noninterest expense | 61,564 |
| | 60,686 |
| | 32,758 |
| | — |
| | 155,008 |
|
Income (loss) before income tax | 59,819 |
| | (7,872 | ) | | (34,380 | ) | | — |
| | 17,567 |
|
Adjustment items (pre-tax): | | | | | | | | | |
Increase in Bank of Florida non-accretable discount | 747 |
| | — |
| | — |
| | — |
| | 747 |
|
MSR impairment | — |
| | 30,135 |
| | — |
| | — |
| | 30,135 |
|
Transaction and non-recurring regulatory related expense | — |
| | 5,461 |
| | 4,448 |
| | — |
| | 9,909 |
|
Adjusted income (loss) before income tax | $ | 60,566 |
| | $ | 27,724 |
| | $ | (29,932 | ) | | $ | — |
| | $ | 58,358 |
|
Total assets as of June 30, 2012 | $ | 13,327,046 |
| | $ | 1,902,152 |
| | $ | 124,406 |
| | $ | (312,780 | ) | | $ | 15,040,824 |
|
|
| | | | | | | | | | | | | | | | | | | |
Business Segments Selected Financial Information | | | | Table 7C |
|
| Banking and Wealth Management | | Mortgage Banking | | Corporate Services | | Eliminations | | Consolidated |
(dollars in thousands) | | | | | | | | | |
Six Months Ended June 30, 2013 | | | | | | | | | |
Net interest income (loss) | $ | 259,445 |
| | $ | 28,733 |
| | $ | (3,145 | ) | | $ | — |
| | $ | 285,033 |
|
Provision for loan and lease losses | (1,399 | ) | | 3,347 |
| | — |
| | — |
| | 1,948 |
|
Net interest income after provision for loan and lease losses | 260,844 |
| | 25,386 |
| | (3,145 | ) | | — |
| | 283,085 |
|
Noninterest income | 60,435 |
| | 219,270 |
| | 408 |
| | — |
| | 280,113 |
|
Noninterest expense: | | | | | | | | | |
Foreclosure and OREO expense | 11,862 |
| | 4,779 |
| | — |
| | — |
| | 16,641 |
|
Other credit-related expenses | 1,908 |
| | 2,270 |
| | — |
| | — |
| | 4,178 |
|
All other noninterest expense | 142,003 |
| | 213,813 |
| | 48,721 |
| | — |
| | 404,537 |
|
Income (loss) before income tax | 165,506 |
| | 23,794 |
| | (51,458 | ) | | — |
| | 137,842 |
|
Adjustment items (pre-tax): | | | | | | | | | |
Increase in Bank of Florida non-accretable discount | 665 |
| | — |
| | — |
| | — |
| | 665 |
|
MSR impairment (recovery) | — |
| | (45,127 | ) | | — |
| | — |
| | (45,127 | ) |
Transaction and non-recurring regulatory related expense | 5,252 |
| | 29,543 |
| | 3,056 |
| | — |
| | 37,851 |
|
Adjusted income (loss) before income tax | $ | 171,423 |
| | $ | 8,210 |
| | $ | (48,402 | ) | | $ | — |
| | $ | 131,231 |
|
Total assets as of June 30, 2013 | $ | 15,588,567 |
| | $ | 2,805,876 |
| | $ | 194,395 |
| | $ | (225,966 | ) | | $ | 18,362,872 |
|
|
| | | | | | | | | | | | | | | | | | | |
Business Segments Selected Financial Information | | | | Table 7D |
|
| Banking and Wealth Management | | Mortgage Banking | | Corporate Services | | Eliminations | | Consolidated |
(dollars in thousands) | | | | | | | | | |
Six Months Ended June 30, 2012 | | | | | | | | | |
Net interest income (loss) | $ | 221,346 |
| | $ | 22,286 |
| | $ | (3,025 | ) | | $ | — |
| | $ | 240,607 |
|
Provision for loan and lease losses | 15,356 |
| | 1,756 |
| | — |
| | — |
| | 17,112 |
|
Net interest income after provision for loan and lease losses | 205,990 |
| | 20,530 |
| | (3,025 | ) | | — |
| | 223,495 |
|
Noninterest income | 50,833 |
| | 96,397 |
| | 86 |
| | — |
| | 147,316 |
|
Noninterest expense: | | | | | | | | | |
Foreclosure and OREO expense | 20,340 |
| | 5,588 |
| | — |
| | — |
| | 25,928 |
|
Other credit-related expenses | 1,421 |
| | 16,183 |
| | 12 |
| | — |
| | 17,616 |
|
All other noninterest expense | 113,410 |
| | 117,550 |
| | 60,100 |
| | — |
| | 291,060 |
|
Income (loss) before income tax | 121,652 |
| | (22,394 | ) | | (63,051 | ) | | — |
| | 36,207 |
|
Adjustment items (pre-tax): | | | | | | | | | |
Increase in Bank of Florida non-accretable discount | 4,191 |
| | — |
| | — |
| | — |
| | 4,191 |
|
MSR impairment | — |
| | 45,279 |
| | — |
| | — |
| | 45,279 |
|
Transaction and non-recurring regulatory related expense | — |
| | 10,183 |
| | 5,990 |
| | — |
| | 16,173 |
|
Adjusted income (loss) before income tax | $ | 125,843 |
| | $ | 33,068 |
| | $ | (57,061 | ) | | $ | — |
| | $ | 101,850 |
|
Total assets as of June 30, 2012 | $ | 13,327,046 |
| | $ | 1,902,152 |
| | $ | 124,406 |
| | $ | (312,780 | ) | | $ | 15,040,824 |
|
Banking and Wealth Management
|
| | | | | | | | | | | | | | | |
Banking and Wealth Management | | | Table 8 | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2013 | | 2012 | | 2013 | | 2012 |
Interest income | | | | | | | |
Interest and fees on loans and leases | $ | 152,385 |
| | $ | 126,296 |
| | $ | 309,997 |
| | $ | 243,197 |
|
Interest and dividends on investment securities | 14,813 |
| | 20,699 |
| | 31,063 |
| | 41,248 |
|
Other interest income (1) | 12,397 |
| | 8,084 |
| | 23,058 |
| | 15,285 |
|
Total interest income | 179,595 |
| | 155,079 |
| | 364,118 |
| | 299,730 |
|
Interest expense |
| |
| |
| |
|
Deposits | 26,560 |
| | 20,411 |
| | 53,378 |
| | 41,379 |
|
Other borrowings | 18,425 |
| | 9,587 |
| | 36,478 |
| | 17,004 |
|
Other interest expense (2) | 7,538 |
| | 10,280 |
| | 14,817 |
| | 20,001 |
|
Total interest expense | 52,523 |
| | 40,278 |
| | 104,673 |
| | 78,384 |
|
Net interest income | 127,072 |
| | 114,801 |
| | 259,445 |
| | 221,346 |
|
Provision for loan and lease losses | (1,320 | ) | | 5,041 |
| | (1,399 | ) | | 15,356 |
|
Net interest income after provision for loan and lease losses | 128,392 |
| | 109,760 |
| | 260,844 |
| | 205,990 |
|
Noninterest income |
| |
| |
| |
|
Gain on sale of loans | 17,539 |
| | 10,918 |
| | 25,868 |
| | 21,470 |
|
Other | 15,115 |
| | 14,687 |
| | 34,567 |
| | 29,363 |
|
Total noninterest income | 32,654 |
| | 25,605 |
| | 60,435 |
| | 50,833 |
|
Noninterest expense |
| |
| |
| |
|
Salaries, commissions and employee benefits | 30,566 |
| | 22,048 |
| | 61,369 |
| | 42,712 |
|
Equipment and occupancy | 13,718 |
| | 12,283 |
| | 27,272 |
| | 23,631 |
|
Foreclosure and OREO | 6,577 |
| | 12,378 |
| | 11,862 |
| | 20,340 |
|
Other general and administrative | 21,109 |
| | 28,837 |
| | 55,270 |
| | 48,488 |
|
Total noninterest expense | 71,970 |
| | 75,546 |
| | 155,773 |
| | 135,171 |
|
Income before income taxes | $ | 89,076 |
| | $ | 59,819 |
| | $ | 165,506 |
| | $ | 121,652 |
|
| |
(1) | Other interest income includes interest income from interest-bearing cash and cash equivalents and intersegment interest income. |
| |
(2) | Other interest expense represents intersegment interest expense. |
Banking and Wealth Management segment earnings increased by $29.3 million, or 49%, in the second quarter of 2013 compared to the same period in 2012 primarily due to increases in net interest income, noninterest income and gain on sale of loans as well as a decrease in provision for loan and lease losses and noninterest expense. Segment earnings increased by $43.9 million, or 36%, in the first six months of 2013 compared to the same period in 2012 primarily due to increases in net interest income, noninterest income and a decrease in the provision for loan and lease losses, partially offset by an increase in noninterest expense.
Net interest income increased by $12.3 million, or 11%, in the second quarter of 2013, and by $38.1 million, or 17%, in the first six months of 2013 compared to the same periods in 2012 due to an increase in interest income from acquisitions of $24.5 million in the second quarter of 2013 and $64.4 million in the first six months of 2013, partially offset by an increase in interest expense of $12.2 million in the second quarter of 2013, and $26.3 million in the first six months of 2013 . The warehouse finance acquisition, completed in the second quarter of 2012, and BPL acquisition, completed in the fourth quarter of 2012, contributed $10.4 million and $47.0 million, respectively, to interest income during the first six months of 2013. Interest expense increased primarily due to growth in FHLB advances and deposits throughout 2012 to fund a portion of our asset growth and to take advantage of historically low fixed borrowing rates. For a detailed explanation of changes in net interest income, please refer to our volume/rate analysis in Table 3.
Provision for loan and lease losses decreased by $6.4 million, or 126%, in the second quarter of 2013 and by $16.8 million, or 109%, in the first six months of 2013 compared to the same periods in 2012 due primarily to improving credit performance in our residential and commercial portfolios. Our loan portfolio experienced net charge-offs of $3.6 million and $10.6 million for the three and six months ended June 30, 2013 compared to $6.6 million and $17.5 million in the same periods of 2012. The improved credit performance resulted in an annualized net charge-off ratio of 0.12% in the second quarter of 2013 compared to 0.34% in the same period in 2012. For a detailed explanation of changes in our allowance for loan and lease losses, please refer to "Loan and Lease Quality."
Noninterest income increased by $7.0 million, or 28%, in the second quarter of 2013 and by $9.6 million, or 19%, in the first six months of 2013, compared to the same periods in 2012. The warehouse finance and BPL acquisitions contributed $1.5 million and $3.4 million, respectively, to noninterest income during the second quarter of 2013, and $2.1 million and $6.6 million, respectively, in the first six months of 2013. Prepayment penalty income related to commercial loan servicing drove the noninterest income contributed by the BPL acquisition. Additionally, we generated $4.0 million in the first six months of 2013, of noninterest income related to the recovery of losses experienced on loans and servicing rights previously acquired. Increases were offset by a $2.4 million decrease in lease income for the second quarter of 2013 and a $4.6 million decrease for the first six months of 2013, compared to the same periods of 2012, as late fees related to our deferred financing leases are included in net interest income. Additionally, there was a $6.6 million increase in gains from third party loan sales for the first quarter and $4.4 for the first six months of 2013. Increased gain on sale of loans for the second quarter of 2013 increased $6.6 million compared to the same period in 2012 due to gains on loan sales related to securitization and sales activities related primarily to the redelivery of reperforming
pool buyouts into GNMA securities.
Noninterest expense decreased by $3.6 million, or 5%, in the second quarter of 2013 and increased by $20.6, or 15%, in the first six months of 2013 compared to the same periods in 2012. The decrease in the second quarter of 2013 was primarily due to a decrease in our foreclosure and OREO expenses and other general and administrative expenses partially offset by an increase in salaries, commissions, and employee benefits. The increase in the first six months of 2013 compared to the same period in 2012 was primarily due to an increase in salaries, commissions, and employee benefits and other general and administrative expenses partially offset by a decrease in foreclosure and OREO expenses.
Salaries, commissions, and employee benefits increased by $8.5 million, or 39%, in the second quarter of 2013 and by $18.7 million, or 44%, in the first six months of 2013, compared to the same periods in 2012 due to the warehouse finance and BPL acquisitions. Total Banking and Wealth Management headcount increased by 22% as of June 30, 2013, compared to the same period in 2012.
Equipment and occupancy expense increased by $1.4 million, or 12%, in the second quarter of 2013 and by $3.6 million, or 15%, in the first six months of 2013 compared to the same periods in 2012 primarily due to growth within the business segment due to our warehouse finance and BPL acquisitions. Additional growth is due to our new WorldCurrency® system and overall expansion and growth of the segment.
Foreclosure and OREO expense decreased by $5.8 million, or 47%, in the second quarter of 2013 and $8.5 million, or 42%, in the first six months of 2013 compared to the same period in 2012 primarily due to stabilizing property values and declining losses on OREO properties as a result. OREO related expenses and provisions decreased by $0.8 million in the second quarter of 2013 and by $1.4 million in the first six months of 2013, compared to the same periods in 2012. Additionally, foreclosure expenses decreased by $4.1 million in the second quarter of 2013, and by $5.0 million for the first six months of 2013, compared to the same periods in 2012 due to improved credit quality and home prices and the decrease in government insured pool buyout activity over the past year.
Other general and administrative expense decreased by $7.7 million, or 27%, in the second quarter of 2013 and increased by $6.8 million, or 14%, in the first six months of 2013, compared to the same periods in 2012. The decrease in the second quarter of 2013 was driven primarily by decreases in advertising expenses, FDIC insurance assessment and other agency fees, deferred origination costs and FDIC clawback expense, partially offset by an increase in corporate allocations. The increase in the first six months of 2013 was driven primarily by increases in corporate allocations, professional and legal expenses, FDIC insurance assessment and other agency fees and production reserves and losses, partially offset by decreases in deferred origination costs and FDIC clawback expense. Corporate allocations increased by $3.9 million in the second quarter of 2013 and by $7.5 million in the first six months of 2013, compared to the same periods in 2012. The increase in corporate allocation was due primarily to the allocation of additional corporate expenses to our business segments to more closely align cost with utilization by the segments, as well as an increase in marketing allocations, as we continue to focus on increasing our deposit base. The FDIC clawback liability decreased during the second quarter of 2013 due to a rise in interest rates and a corresponding increase in the discount rate used to value the liability. Therefore, FDIC clawback expense decreased by $6.2 million in the second quarter of 2013, and by $5.1 million in the first six months of 2013 compared to the same periods in 2012. FDIC insurance assessment and other agency fees decreased by $1.3 million in the second quarter 2013, and increased by $2.9 million in the first six months of 2013 compared to the same periods in 2012. The increase in the first six months was due to additional FDIC fees recorded in the first quarter of 2013 for a fee assessment which was assessed on a retrospective basis.
Mortgage Banking
|
| | | | | | | | | | | | | | | |
Mortgage Banking | | | | | | | Table 9 |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2013 | | 2012 | | 2013 | | 2012 |
Net interest income | $ | 15,719 |
| | $ | 11,790 |
| | $ | 28,733 |
| | $ | 22,286 |
|
Provision for loan and lease losses | 1,349 |
| | 716 |
| | 3,347 |
| | 1,756 |
|
Net interest income after provision for loan and lease losses | 14,370 |
| | 11,074 |
| | 25,386 |
| | 20,530 |
|
Noninterest income | | | | | | | |
Gain on sale of loans | 58,296 |
| | 59,006 |
| | 132,276 |
| | 96,631 |
|
Loan servicing fee income: | | | | | | | |
Loan servicing fee income | 48,228 |
| | 44,697 |
| | 91,318 |
| | 92,386 |
|
Amortization and impairment of MSR | (1,771 | ) | | (64,278 | ) | | (22,553 | ) | | (108,760 | ) |
Net loan servicing income | 46,457 |
| | (19,581 | ) | | 68,765 |
| | (16,374 | ) |
Other | 9,148 |
| | 9,099 |
| | 18,229 |
| | 16,140 |
|
Total noninterest income | 113,901 |
| | 48,524 |
| | 219,270 |
| | 96,397 |
|
Noninterest expense | | | | | | | |
Salaries, commissions and employee benefits | 63,254 |
| | 36,176 |
| | 119,722 |
| | 65,613 |
|
Equipment and occupancy | 8,179 |
| | 4,684 |
| | 15,604 |
| | 9,157 |
|
Professional fees | 15,456 |
| | 4,778 |
| | 28,938 |
| | 10,927 |
|
Foreclosure and OREO | 3,037 |
| | 2,591 |
| | 4,779 |
| | 5,588 |
|
Other credit-related expenses | 612 |
| | 4,193 |
| | 2,270 |
| | 16,183 |
|
Other general and administrative | 27,386 |
| | 15,048 |
| | 49,549 |
| | 31,853 |
|
Total noninterest expense | 117,924 |
| | 67,470 |
| | 220,862 |
| | 139,321 |
|
Income (loss) before income taxes | $ | 10,347 |
| | $ | (7,872 | ) | | $ | 23,794 |
| | $ | (22,394 | ) |
Second Quarter of 2013 compared to Second Quarter of 2012
Mortgage Banking segment earnings increased by $18.2 million, in the second quarter of 2013 compared to the same period in 2012 primarily due to an increase in noninterest income partially offset by an increase in noninterest expense.
Net interest income increased by $3.3 million, or 30%, in the second quarter of 2013 compared to the same period in 2012. The increase was driven by an increased volume in the amount of loans being carried in our loans held for sale account compared to the same period in 2012. For a detailed explanation of changes in net interest income, please refer to our volume/rate analysis in Table 3.
Noninterest income increased by $65.4 million, or 135%, in the second quarter of 2013 compared to the same period in 2012. The increase was driven by an increase in net loan servicing income of $66.0 million in the second quarter of 2013 compared to the same period in 2012. Amortization and impairment of MSR decreased by $62.5 million, or 97%, in the second quarter of 2013 due primarily to a $30.1 million MSR impairment charge recorded during the second quarter of 2012. We recognized a MSR recovery of $32.6 million of the related valuation allowance in the second quarter of 2013. Impairment during 2012 was due to a combination of a declining rate environment that resulted in higher prepayment speeds including the impact from HARP 2.0. In the second quarter of 2013, expected and actual prepayment speeds decreased from the previous quarter due to a significant increase in mortgage rates during the quarter which reduced the number of borrowers that would benefit from refinance.
Additionally, loan servicing fees increased by $3.5 million, or 8%, in the second quarter of 2013 compared to the same period in 2012. The increase in loan servicing fees is due an increase in the UPB of loans serviced primarily as a result of the residential MSR portfolio acquisition in the second quarter of 2013.
Noninterest expense increased by $50.5 million, or 75%, in the second quarter of 2013 compared to the same period in 2012 primarily due to increases in salaries, commissions, and employee benefits, professional fees, and other general and administrative costs. These increases were partially offset by decreases in other credit-related expenses due to a decrease in our repurchase reserve expenses.
Salaries, commissions, and employee benefits increased $27.1 million, or 75%, in the second quarter of 2013 compared to the same period in 2012. The increase is directly attributable to an increase in headcount of 61% as of June 30, 2013 compared to the same period in 2012. The increase in headcount is due to the expansion of our retail and consumer direct production channels and our servicing default services.
Professional fees increased by $10.7 million, in the second quarter of 2013 compared to the same period in 2012 primarily related to third party costs associated with the consent order remediation process.
Other general and administrative expenses increased by $12.3 million, or 82%, in the second quarter of 2013 compared to the same period in 2012. This was due primarily to an increase in corporate allocations of $7.3 million in the second quarter of 2013. Additional corporate expenses were allocated to our business segments to more closely align cost with utilization by the segments. Additional increases are due to operating cost growth associated with growth within our segment.
Other credit-related expenses decreased by $3.6 million, or 85%, in the second quarter of 2013 compared to the same period in 2012. This decrease was due to the decrease in repurchase reserve expenses related to our originated and serviced loans. We describe our reserves related to loans subject to representations and warranties in Note 14 in our condensed consolidated financial statements and in our Analysis of Statements of Condition in "Loans Subject to Representations and Warranties."
Six Months Ended June 30, 2013 compared to Six Months Ended June 30, 2012
Mortgage Banking segment earnings increased by $46.2 million in the first six months of 2013 compared to the same period in 2012 primarily due to an increase in noninterest income partially offset by an increase in noninterest expense.
Net interest income increased by $4.9 million, or 24%, in the first six months of 2013 compared to the same period in 2012. The increase was driven by an increased volume in the amount of loans being carried in our loans held for sale account compared to the same period in 2012. For a detailed explanation of changes in net interest income, please refer to our volume/rate analysis in Table 3.
Noninterest income increased by $122.9 million, or 127% in the first six months of 2013 compared to the same period in 2012. The increase was driven by an increase in net loan servicing income of $85.1 and an increase in gain on sale of loans in our mortgage lending business of $35.6 million in the first six months of 2013, compared to the same period in 2012.
Gain on sale of loans increased by $35.6 million in the first six months of 2013 compared to the same period in 2012 primarily due to an increase in mortgage lending volume. Lending volume increased by $2.0 billion, or 47%, to $6.1 billion in the first six months of 2013, compared to the same period in 2012. Lending volume benefited substantially from growth in our retail channel, which generated 83% of the increase in lending volume. Refinancing demand and government sponsored programs, such as HARP, continued to contribute to lending growth as well as increased lending of certain jumbo mortgage products. In addition to an increase in lending volume, we continued to benefit from pricing power on the refinancing demand as gain on sale continued to benefit from strong margins that are greater than the historical norm. While gain on sale continues to benefit from the high margins associated with the conforming product, we saw spreads widen on the non-agency jumbo fixed rate product we have been originating for resale. As a result of this move in spreads, we saw a decline in our reported gain on sale margins.
Net loan servicing income increased $85.1 million in the first six months of 2013 compared to the same period in 2012 primarily due to a decrease in amortization and impairment of MSR. Amortization and impairment of MSR decreased by $86.2 million, or 79%, in the first six months of 2013, due primarily to an impairment charge of $45.3 million recorded in the first six months of 2012. Additionally, we recognized recoveries of the related valuation allowance of $45.1 million in the first six months of 2013. Impairment during 2012 was due to a combination of a declining rate environment that resulted in higher prepayment speeds including the impact from HARP 2.0. In the second quarter of 2013, expected and actual prepayment speeds decreased from the previous quarter due to a significant increase in mortgage rates during the quarter which reduced the number of borrowers that would benefit from refinance.
Noninterest expense increased by $81.5 million, or 59%, in the first six months of 2013, compared to the same period in 2012 primarily due to increases in salaries, commissions, and employee benefits, professional fees, and other general and administrative costs. These increases were partially offset by decreases in other credit-related expenses due to a decrease in our repurchase reserve expenses.
Salaries, commissions, and employee benefits increased $54.1 million, or 82%, in the second quarter of 2013 compared to the same period in 2012. The increase is directly attributable to an increase in headcount of 61% as of June 30, 2013 compared to the same period in 2012. The increase in headcount is due to the expansion of our retail and consumer direct production channels and our servicing default services.
Professional fees increased by $18.0 million in the first six months of 2013 compared to the same periods in 2012 primarily related to third party costs associated with the consent order remediation process.
Other general and administrative expenses increased by $17.7 million, or 56%, in the first six months of 2013 compared to the same period in 2012. This was due primarily to an increase in corporate allocations of $14.2 million in the first six months of 2013. Additional corporate expenses were allocated to our business segments to more closely align cost with utilization by the segments. Additional increases are due to operating cost growth associated with growth within our segment. The year to date increase was offset by a $2.4 million decrease in Federal National Mortgage Association (FNMA) compensatory fees in the first six months of 2013.
Other credit-related expenses decreased by $13.9 million, or 86%, in the first six months of 2013, compared to the same period in 2012. This decrease was due to the decrease in repurchase reserve expenses related to our originated and serviced loans. We describe our reserves related to loans subject to representations and warranties in Note 14 in our condensed consolidated financial statements and in our Analysis of Statements of Condition in "Loans Subject to Representations and Warranties."
Corporate Services
|
| | | | | | | | | | | | | | | |
Corporate Services | | | | | | | Table 10 |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2013 | | 2012 | | 2013 | | 2012 |
Net interest income | $ | (1,574 | ) | | $ | (1,607 | ) | | $ | (3,145 | ) | | $ | (3,025 | ) |
Noninterest income | 249 |
| | (6 | ) | | 408 |
| | 86 |
|
Noninterest expense | | | | | | | |
Salaries, commissions and employee benefits | 24,637 |
| | 18,053 |
| | 47,845 |
| | 34,542 |
|
Equipment and occupancy | 6,357 |
| | 5,939 |
| | 12,614 |
| | 11,415 |
|
Other general and administrative | 12,758 |
| | 19,006 |
| | 29,649 |
| | 30,519 |
|
Intersegment allocations | (20,106 | ) | | (10,231 | ) | | (41,387 | ) | | (16,364 | ) |
Total noninterest expense | 23,646 |
| | 32,767 |
| | 48,721 |
| | 60,112 |
|
Loss before income taxes | $ | (24,971 | ) | | $ | (34,380 | ) | | $ | (51,458 | ) | | $ | (63,051 | ) |
Corporate Services segment loss decreased by $9.4 million, or 27%, in the second quarter of 2013 and by $11.6 million, or 18%, in the first six months of 2013, compared to the same periods in 2012. Noninterest expense decreased by $9.1 million, or 28%, in the second quarter of 2013 and by $11.4 million, or 19%, in the first six months of 2013, compared to the same periods in 2012, due to decreases in general operating costs partially offset by increases in salaries, commissions, and employee benefits and occupancy and equipment. Headcount increased 33% in the six months ended June 30, 2013 compared to the same periods in 2012. The growth is due to continued business development and the need for additional support services due to increased governance and regulatory requirements.
Other general and administrative costs decreased by $6.2 million, or 33%, in the second quarter of 2013, and by $0.9 million, or 3%, in the first six months of 2013, compared to the same periods in 2012 partially due to decreased operating expenses as a result of the settlement of the amounts in escrow related to certain representations made in a previous divestiture during the first quarter of 2013 as well as a decrease in overall company growth. Professional fees decreased by $4.9 million, or 52%, in the second quarter of 2013, and by $6.1 million, or 42%, in the first six months of 2013, compared to the same periods in 2012, due primarily to decreases in costs associated with strategic business acquisitions as well as costs associated with our initial public offering (IPO). The decreases are offset by increases in our risk management functions which have increased to fulfill compliance requirements associated with becoming a public company. Corporate allocations increased by $9.9 million in the second quarter of 2013, and by $25.0 million in the first six months of 2013, compared to the same periods in 2012. Additional corporate expenses were allocated to our business segments to more closely align cost with utilization by the segments.
Analysis of Statements of Condition
Investment Securities
Our overall investment strategy focuses on acquiring investment-grade senior mortgage-backed securities backed by seasoned loans with high credit quality and credit enhancements to generate earnings in the form of interest and dividends while offering liquidity, credit and interest rate risk management opportunities to support our asset and liability management strategy. Within our investment strategy, we also utilize highly rated structured products including Re-securitized Real Estate Mortgage Investment Conduits (Re-REMICs) for the added protection from credit losses and ratings deteriorations that accompany alternative securities. All securities investments satisfy our internal guidelines for credit profile and have a relatively short duration which helps mitigate interest rate risk arising from historically low market interest rates.
Available for sale securities are used as part of our asset and liability management strategy and may be sold in response to, or in anticipation of, factors such as changes in market conditions and interest rates, changes in security prepayment rates, liquidity considerations and regulatory capital requirements.
The following tables show the amortized cost and fair value of investment securities as of June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | |
Investment Securities | | Table 11 |
|
(dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Carrying Amount |
June 30, 2013 | | | | | | | | | |
Available for sale: | | | | | | | | | |
Residential CMO securities - nonagency | $ | 1,340,741 |
| | $ | 17,840 |
| | $ | 7,263 |
| | $ | 1,351,318 |
| | $ | 1,351,318 |
|
Asset-backed securities (ABS) | 6,672 |
| | — |
| | 843 |
| | 5,829 |
| | 5,829 |
|
Other | 333 |
| | 272 |
| | — |
| | 605 |
| | 605 |
|
Total available for sale securities | 1,347,746 |
| | 18,112 |
| | 8,106 |
| | 1,357,752 |
| | 1,357,752 |
|
Held to maturity: | | | | | | | | | |
Residential CMO securities - agency | 61,526 |
| | 2,187 |
| | 31 |
| | 63,682 |
| | 61,526 |
|
Residential MBS - agency | 48,806 |
| | 931 |
| | 1,116 |
| | 48,621 |
| | 48,806 |
|
Corporate securities | 4,987 |
| | — |
| | 2,437 |
| | 2,550 |
| | 4,987 |
|
Total held to maturity securities | 115,319 |
| | 3,118 |
| | 3,584 |
| | 114,853 |
| | 115,319 |
|
Total investment securities | $ | 1,463,065 |
| | $ | 21,230 |
| | $ | 11,690 |
| | $ | 1,472,605 |
| | $ | 1,473,071 |
|
December 31, 2012 | | | | | | | | | |
Available for sale: | | | | | | | | | |
Residential CMO securities - nonagency | $ | 1,577,270 |
| | $ | 39,860 |
| | $ | 5,355 |
| | $ | 1,611,775 |
| | $ | 1,611,775 |
|
Asset-backed securities | 9,461 |
| | — |
| | 1,935 |
| | 7,526 |
| | 7,526 |
|
Other | 366 |
| | 211 |
| | — |
| | 577 |
| | 577 |
|
Total available for sale securities | 1,587,097 |
| | 40,071 |
| | 7,290 |
| | 1,619,878 |
| | 1,619,878 |
|
Held to maturity: | | | | | | | | | |
Residential CMO securities - agency | 106,346 |
| | 3,497 |
| | — |
| | 109,843 |
| | 106,346 |
|
Residential MBS - agency | 31,901 |
| | 1,986 |
| | — |
| | 33,887 |
| | 31,901 |
|
Corporate securities | 4,987 |
| | — |
| | 2,008 |
| | 2,979 |
| | 4,987 |
|
Total held to maturity securities | 143,234 |
| | 5,483 |
| | 2,008 |
| | 146,709 |
| | 143,234 |
|
Total investment securities | $ | 1,730,331 |
| | $ | 45,554 |
| | $ | 9,298 |
| | $ | 1,766,587 |
| | $ | 1,763,112 |
|
Residential — Agency
At June 30, 2013, our residential agency portfolio consisted of both residential agency CMO securities and residential agency MBS securities. Investments in residential agency CMO securities totaled $61.6 million, or 4%, of our investment securities portfolio. Our residential agency MBS portfolio totaled $49.0 million, or 3%, of our investment securities portfolio. The residential agency MBS available for sale securities are included in Other in the table above. Our residential agency portfolio is secured by seasoned first-lien fixed and adjustable rate residential mortgage loans insured by government sponsored entities (GSEs).
Our residential agency CMO securities decreased by $44.8 million, or 42%, to $61.6 million at June 30, 2013 from $106.4 million at December 31, 2012 primarily due to reductions of amortized cost resulting from principal payments received and the amortization of premiums and discounts. Our residential agency MBS securities increased by $16.9 million, or 53%, to $49.0 million at June 30, 2013, from $32.1 million at December 31, 2012 primarily due to purchases of additional securities.
Residential — Nonagency
At June 30, 2013, our residential nonagency portfolio consisted entirely of investments in residential nonagency CMO securities. Investments in residential nonagency CMO securities totaled $1.4 billion, or 92%, of our investment securities portfolio. Our residential nonagency CMO securities decreased by $260.5 million, or 16%, to $1.4 billion, at June 30, 2013, from $1.6 billion at December 31, 2012 primarily due to reductions to amortized cost resulting from principal payments received, the amortization of premiums and discounts and reductions in the fair value of the portfolio driven by macroeconomic factors. Although the overall credit rating of the portfolio remained static, unrealized gains on the portfolio declined $24.3 million due to a depressed bond market in which slower trading and climbing interest rates resulted in overall bond price declines.
Our residential nonagency CMO securities are secured by seasoned first-lien fixed and adjustable rate residential mortgage loans backed by loan originators other than GSEs. Mortgage collateral is structured into a series of classes known as tranches, each of which contains a different maturity profile and pay-down priority in order to suit investor demands for duration, yield, credit risk and prepayment volatility. We have primarily invested in CMO securities rated in the highest category assigned by a nationally recognized statistical ratings organization. Many of these securities are Re-REMICs, which adds credit subordination to provide protection against future losses and rating downgrades. Re-REMICs constituted $0.9 billion, or 67%, of our residential nonagency CMO investment securities at June 30, 2013.
We have internal guidelines for the credit quality and duration of our residential nonagency CMO securities portfolio and monitor these on a regular basis. At June 30, 2013, the portfolio carried a weighted average Fair Isaac Corporation, or FICO, score of 731, an amortized loan-to-value ratio, or LTV, of 59%, and were seasoned 111 months. This portfolio includes protection against credit losses through subordination in the securities structures and borrower equity.
During the first six months of 2013, there were no sales of residential agency or residential nonagency CMO securities.
Loans Held for Sale
The following table presents the balance of each major category in our loans held for sale portfolio at June 30, 2013 and December 31, 2012:
|
| | | | | | | |
Loans Held for Sale | | | Table 12A |
|
(dollars in thousands) | June 30, 2013 | | December 31, 2012 |
Mortgage warehouse (carried at fair value) | $ | 1,039,977 |
| | $ | 1,452,236 |
|
Government insured pool buyouts | 139,982 |
| | 96,635 |
|
Other | 532,525 |
| | 539,175 |
|
Other (carried at fair value) | 287,906 |
| | — |
|
| $ | 2,000,390 |
| | $ | 2,088,046 |
|
Mortgage Warehouse
At June 30, 2013, our fair value, agency mortgage warehouse loans accounted for at fair value totaled $1.0 billion, or 52%, of our total loans held for sale portfolio. Our mortgage warehouse loans are comprised of agency deliverable products that we typically sell within three months subsequent to origination. We hedge our mortgage warehouse portfolio with forward sales commitments designed to protect against potential changes in fair value. Due to the short duration that these loans are present on our balance sheet, we have elected fair value accounting on this portfolio of loans due to the burden of complying with the requirements of hedge accounting. Mortgage warehouse loans accounted for at fair value decreased by $412.3 million, or 28%, from December 31, 2012 due to a decrease in the amount of agency deliverable loans originated in the quarter compared to the fourth quarter of 2012 and an increase in sales for the period.
The following table represents the length of time the mortgage warehouse loans have been classified as held for sale: |
| | | | | | | |
Mortgage Warehouse | | | Table 12B |
|
(dollars in thousands) | June 30, 2013 | | December 31, 2012 |
30 days or less | $ | 752,254 |
| | $ | 898,908 |
|
31- 90 days | 240,374 |
| | 486,419 |
|
Greater than 90 days | 47,349 |
| | 66,909 |
|
| $ | 1,039,977 |
| | $ | 1,452,236 |
|
Subsequent to June 30, 2013, we sold $32.7 million of the mortgage warehouse loans classified as held for sale that were held for more than 90 days. The remaining $21.3 million of warehouse loans were made up of conforming or government product and were current at June 30, 2013.
Government Insured
At June 30, 2013, our government insured pool buyout loans totaled $140.0 million, or 7%, of our total loans held for sale portfolio. During the six months ended June 30, 2013, we transferred $178.3 million of conforming mortgages to GNMA in exchange for mortgage-backed securities. At June 30, 2013, we securitized and retained $141.4 million of these GNMA securities that were transferred and are included in the loans held for sale balance above as we retained effective control of these assets. In addition to the ability to work-out these assets and securitize into GNMA pools, we have acquired a significant portion of these assets at a discount to UPB. The UPB and a portion of the interest is government insured which provides an attractive overall return on the underlying delinquent assets.
Other Loans Held for Sale
Our other loans held for sale totaled $820.4 million, or 41%, of our total loans held for sale portfolio. Other loans increased by $281.3 million, from $539.2 million at December 31, 2012, due to increased origination activity of certain fixed rate, longer duration jumbo preferred loans. We have a history of originating high credit quality loans that are attractive to other market participants due to current increased demand in the secondary markets for these loans. At June 30, 2013 this population of loans consisted of only fixed rate jumbo mortgages. During the three months ended June 30, 2013, we sold $305.9 million compared to $178.2 million during the three months ended December 31, 2012.
On April 1, 2013, we elected the fair value option on newly originated jumbo fixed rate loans to provide a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them. Other loans held for sale included $287.9 million of loans carried at fair value at June 30, 2013.
During the three and six months ended June 30, 2013, we transferred $721.2 million and $745.7 million in residential mortgage loans from loans held for sale to loans held for investment at lower of cost or market. A majority of these loans were originated preferred jumbo ARM residential mortgages which were intended to be sold in the secondary market. As a result of changing economic conditions and our capacity and desire to hold these loans on the balance sheet, we intend to hold these loans for the foreseeable future and transferred these loans to the held for investment portfolio.
Subsequent to June 30, 2013, we entered into a forward sales commitment with a third party to sell the $820.4 million of other loans held for sale at June 30, 2013 along with additional fixed rate loans closed subsequent to quarter end, together, not to exceed a total of $1.02 billion. The sale is expected to close August 30, 2013.
Loans and Leases Held for Investment
The following table presents the balance of each major category in our loan and lease held for investment portfolio at June 30, 2013 and at December 31, 2012:
|
| | | | | | | |
Loans and Leases Held for Investment | Table 13 | |
(dollars in thousands) | June 30, 2013 | | December 31, 2012 |
Residential mortgages: | | | |
Residential | $ | 4,237,331 |
| | $ | 3,949,284 |
|
Government insured pool buyouts | 2,348,785 |
| | 2,759,464 |
|
Commercial and commercial real estate | 5,090,332 |
| | 4,771,768 |
|
Lease financing receivables | 1,014,996 |
| | 836,935 |
|
Home equity lines | 169,296 |
| | 179,600 |
|
Consumer and credit card | 6,648 |
| | 8,038 |
|
Total loans and leases, net of discounts | 12,867,388 |
| | 12,505,089 |
|
Allowance for loan and lease losses | (73,469 | ) | | (82,102 | ) |
Total loans and leases, net | $ | 12,793,919 |
| | $ | 12,422,987 |
|
The balances presented above include: |
Net purchase loan and lease discounts | $ | 130,880 |
| | $ | 164,132 |
|
Net deferred loan and lease origination costs | 37,232 |
| | 25,275 |
|
Residential Mortgage Loans
At June 30, 2013, our residential mortgage loans totaled $4.2 billion, or 33%, of our total held for investment loan and lease portfolio. We primarily offer our customers residential closed-end mortgage loans typically secured by first liens on one-to-four family residential properties. Additionally, we invest in government-insured GNMA pool buyouts purchased from GNMA pool securities and other loans secured by residential real estate.
Residential mortgage loans increased by $288.0 million, or 7%, to $4.2 billion at June 30, 2013 from $3.9 billion at December 31, 2012. The increase was due primarily to the transfer of loans from held for sale to held for investment as disclosed in Note 5 partially offset by paydowns and payoffs of existing loans.
Government Insured Buyouts
At June 30, 2013, our government insured buyout loan portfolio totaled $2.3 billion, or 18%, of our total loans held for investment portfolio. Government insured pool buyouts decreased by $410.7 million, or 15%, from $2.8 billion at December 31, 2012. The decrease was the result of $328.3 million of loans transferred from loans held for investment to loans held for sale and $316.7 million of delinquent loans reaching foreclosure partially offset by mortgage pool buyout purchases of $340.5 million with the remaining decline the product of paydowns and modifications. We continue to acquire government insured pool buyouts for our portfolio. However, the pace of our acquisition activity through the six months ended June 30, 2013 has been offset entirely by transfers to foreclosure of delinquent loans as well as subsequent securitizations through GNMA.
We have a history of servicing Federal Housing Administration, or FHA, loans. As a servicer, the buyout opportunity is the right to purchase above market rate, government insured loans at par (i.e., the amount that has to be passed through to the GNMA security holder when repurchased). For banks like us, with cost effective sources of short term capital, this strategy represents a very attractive return with limited additional investment risk.
Each loan in a GNMA pool is insured or guaranteed by one of several federal government agencies, including the FHA, Department of Veterans’ Affairs or the Department of Agriculture’s Rural Housing Service. The loans must at all times comply with the requirements for maintaining such insurance or guarantee. Prior to our acquisition of these loans, we perform due diligence to ensure a valid guarantee is in place; therefore we believe that no principal is at risk.
Duration is a potential risk of holding these loans and exposes us to interest rate risk and funding mismatch. In most cases, acquired loans or loans purchased out of our servicing assets are greater than 89 days past due upon purchase. Loans that go through foreclosure have an expected duration of one to two years, depending on the state’s servicing timelines. Bankruptcy proceedings and loss mitigation requirements could extend the duration of these loans. Extensions for these reasons do not impact the insurance or guarantee and are modeled into the acquisition price.
Loans can re-perform on their own or through loss mitigation and/or modification. Most loans are 20 to 30 year fixed rate instruments. Re-performing loans earn a higher yield as they can earn an above market note rate rather than a government guaranteed reimbursement rate. In order to mitigate the duration risk on re-performing loans, we have the ability to securitize and sell those loans into the secondary market.
Operational capacity poses a lesser risk to the claim through missed servicing milestones. Servicing operations must comply with the government agencies' servicing requirements in order to avoid interest curtailments (principal is not at risk). For acquired pool buyouts, we, in general, purchase loans early in the default cycle to obtain control of the files before processing errors jeopardize claims.
Commercial and Commercial Real Estate Loans
At June 30, 2013, our commercial and commercial real estate loans, which include owner-occupied commercial real estate, commercial investment properties, asset-backed commercial and small business commercial loans, totaled $5.1 billion, or 40%, of our total held for investment loan and lease portfolio.
Commercial and commercial real estate loans increased by $318.6 million, or 7%, to $5.1 billion at June 30, 2013 from $4.8 billion at December 31, 2012. The increase was the result of originations of $583.5 million and increased utilization by existing customers on lines of credit of $32.3 million partially offset by paydowns of $283.3 million and loans moved to REO of $17.1 million. The exhibited growth in commercial and commercial real estate is the result of the investment in commercial lending activities we performed during 2012 as well as continued growth in our other commercial lending operations.
Lease Financing Receivables
Lease financing receivables increased by $178.1 million, or 21%, to $1,015.0 million, or 8%, of our total held for investment loan and lease portfolio at June 30, 2013 from $836.9 million at December 31, 2012. The increase was the result of lease originations of $338.0 million, earned income of $29.5 million and purchase accounting discount adjustments of $11.4 million, which was partially offset by paydowns of existing leases of $193.6 million, amortization of deferred origination costs of $5.1 million and charge-offs of $1.9 million. Our leases generally consist of short-term and medium-term leases and loans secured by essential use office product, healthcare, industrial and technology equipment to small and mid-size lessees and borrowers. All of our lease financing receivables were either purchased as a part of the Tygris acquisition or originated out of the operations of Tygris, which was re-branded ECF.
Home Equity Lines
At June 30, 2013, our home equity lines totaled $169.3 million, or 1%, of our total held for investment loan and lease portfolio. We offer home equity closed-end loans and revolving lines of credit typically secured by junior or senior liens on one-to-four family residential properties. Home equity lines decreased by $10.3 million, or 6%, to $169.3 million at June 30, 2013 from $179.6 million at December 31, 2012, due to paydowns on our existing lines of credit.
Consumer and Credit Card Loans
At June 30, 2013, consumer and credit card loans, in the aggregate, totaled $6.6 million, or less than 1% of our total held for investment portfolio. These loans include direct personal loans, credit card loans and lines of credit, automobile and other loans to our customers which are generally secured by personal property. Lines of credit are generally floating rate loans that are unsecured or secured by personal property.
Mortgage Servicing Rights
The following table presents the change in our MSR portfolio for the three and six months ended at June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
Change in Mortgage Servicing Rights | | | | | | | Table 14 |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Balance, beginning of period | $ | 375,641 |
| | $ | 462,420 |
| | $ | 375,859 |
| | $ | 489,496 |
|
Originated servicing rights capitalized upon sale of loans | 27,491 |
| | 18,498 |
| | 50,992 |
| | 37,027 |
|
Acquired servicing rights | 63,555 |
| | — |
| | 63,555 |
| | — |
|
Amortization | (35,945 | ) | | (34,142 | ) | | (71,023 | ) | | (63,481 | ) |
Decrease (increase) in valuation allowance | 32,572 |
| | (30,135 | ) | | 45,127 |
| | (45,279 | ) |
Other | (596 | ) | | (679 | ) | | (1,792 | ) | | (1,801 | ) |
Balance, end of period | $ | 462,718 |
| | $ | 415,962 |
| | $ | 462,718 |
| | $ | 415,962 |
|
Valuation allowance: | | | | | | | |
Balance, beginning of period | $ | 90,408 |
| | $ | 54,599 |
| | $ | 102,963 |
| | $ | 39,455 |
|
Increase in valuation allowance | — |
| | 30,135 |
| | — |
| | 45,279 |
|
Recoveries | (32,572 | ) | | — |
| | (45,127 | ) | | — |
|
Balance, end of period | $ | 57,836 |
| | $ | 84,734 |
| | $ | 57,836 |
| | $ | 84,734 |
|
We carry MSR at amortized cost net of any required valuation allowance. We amortize MSR in proportion to and over the period of estimated net servicing income and evaluate MSR quarterly for impairment.
Originated servicing rights increased by $9.0 million, or 49%, in the second quarter of 2013 compared to the same period in 2012, and by $14.0 million, or 38%, during the six months ended June 30, 2013 compared to the same period in 2012. The increase was primarily due to increased mortgage lending volume of $1.0 billion and $2.0 billion for the three and six months ended June 30, 2013 compared to the same periods in 2012.
Acquired servicing rights increased by $63.6 million for the three and six months ended June 30, 2013 due to the purchase of servicing rights of Fannie Mae residential servicing assets on April 1, 2013. The acquired servicing rights have been included in the residential class of MSR. At June 30, 2013, there were 86,324 loans with a weighted average interest rate of 5.1%. We will earn a weighted average servicing fee of 27 basis points on the acquired UPB allowing us to generate additional servicing income by utilizing our already existing servicing platform.
Amortization expense increased by $7.5 million, or 12%, during the six months ended June 30, 2013, compared to the same period in 2012. The increase in amortization expense was due to refinancing activity resulting in higher prepayment speeds compared to the same period in 2012. The increase in prepayment speeds is attributable to borrowers taking advantage of the historically low rate environment and government sponsored programs. Annualized amortization rates as of June 30, 2013 and 2012 approximated 30.1% and 26.8%, respectively.
A decrease in actual prepayment speeds as compared to expected speeds was the primary driver for the recovery of the MSR valuation allowance during the six months ended June 30, 2013. At June 30, 2013, we estimate that approximately 31.6% of our portfolio was eligible to refinance under the HARP program. As such, near term annualized prepayment speeds were estimated at 18.7% at June 30, 2013. At
June 30, 2012, the impact of HARP 2.0 and a further decline in interest rates caused our prepayment speeds to exceed our expectations and resulted in an impairment of $45.3 million for the six months ended June 30, 2012.
Other Assets
The following table sets forth other assets by category as of June 30, 2013 and December 31, 2012: |
| | | | | | | | |
Other Assets | | | | Table 15 |
|
(dollars in thousands) | | June 30, 2013 | | December 31, 2012 |
Foreclosure claims receivable, net of allowance of $11,970 and $11,721, respectively | | $ | 201,878 |
| | $ | 196,952 |
|
Servicing advances, net of allowance of $9,533 and $11,518, respectively | | 117,639 |
| | 125,118 |
|
Accrued interest receivable | | 79,859 |
| | 82,965 |
|
Other real estate owned (OREO), net of allowance of $14,355 and $16,051, respectively | | 57,722 |
| | 55,277 |
|
Margin receivable, net | | 100 |
| | 40,260 |
|
Corporate advances, net | | 51,075 |
| | 47,778 |
|
Goodwill | | 46,859 |
| | 46,859 |
|
Fair value of derivatives, net | | 109,230 |
| | 33,261 |
|
Prepaid assets | | 13,339 |
| | 8,841 |
|
Intangible assets, net | | 6,867 |
| | 7,921 |
|
Other | | 70,800 |
| | 57,833 |
|
| | $ | 755,368 |
| | $ | 703,065 |
|
Other assets increased by $52.3 million to $755.4 million at June 30, 2013, from $703.1 million at December 31, 2012. The increase was driven primarily by an increase in the fair value of derivatives partially offset by decreases in margin receivable.
The fair value of derivatives increased by $76.0 million, or 228%, from December 31, 2012, primarily due to the mark to market adjustments associated with our use of forward commitments to manage interest rate risk related to changes in the fair value of loans held for sale. Due to the rapid rise in mortgage rates in the last month of the second quarter of 2013, the forward sales commitments increased in value which helped to offset losses related to the mark to market on our loans held for sale.
Margin receivable decreased by $40.2 million, or 100%, during the six months ended June 30, 2013, compared to December 31, 2012. The decrease was primarily attributable to a decrease in collateral posted for certain derivative trading activity related to hedging of our pipeline that is not subject to a master netting arrangement in the previous quarter. Because of the rapid rise in mortgage rates, our forward sales commitments were in gain positions and as a result we were required to pledge less collateral. See Note 12 in our condensed consolidated financial statements for more information related to our netting and cash collateral adjustments.
Deferred Tax Asset
Our net deferred tax asset decreased by $31.1 million to $139.8 million at June 30, 2013, from $170.9 million at December 31, 2012, primarily due to changes in other comprehensive income related to interest rate swaps and the recovery of MSR impairment during the period.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income increased by $6.4 million to a loss of $80.4 million at June 30, 2013, from a loss of $86.8 million at December 31, 2012, primarily due to the reclassifications of unrealized losses to interest expense during the period and a reduction in net unrealized losses as a result of changes in fair value related to our interest rate swaps.
Loan and Lease Quality
We use a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our portfolio of loans and leases. Our underwriting policies and practices govern the risk profile, credit and geographic concentration of our loan and lease portfolios. We also have a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level. In addition to our ALLL, we have additional protections against potential credit losses, including credit indemnification and similar support agreements with the FDIC and other parties, purchase discounts on acquired loans and leases and other credit-related reserves, such as those on unfunded commitments.
Discounts on Acquired Loans and Lease Financing Receivables
For ACI loans accounted for under Accounting Standards Codification (ASC) 310-30, we periodically reassess cash flow expectations at a pool or loan level. In the case of improving cash flow expectations for a particular loan or pool of loans, we reclassify an amount of non-accretable difference as accretable yield, thus increasing the prospective yield of the pool. In the case of deteriorating cash flow expectations, we record a provision for loan and lease losses following the allowance for loan loss framework. For more information on ACI loans accounted for under ASC 310-30, see Note 6 in our condensed consolidated financial statements.
The following table presents a bridge from UPB, or contractual net investment, to carrying value for ACI loans accounted for under ASC 310-30 at June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | |
Carrying Value of ACI Loans | | | | Table 16 |
|
(dollars in thousands) | Bank of Florida | | Other | | Total |
Under ASC 310-30 | | | | | |
June 30, 2013 | | | | | |
UPB or contractual net investment | $ | 431,343 |
| | $ | 968,467 |
| | $ | 1,399,810 |
|
Plus: contractual interest due or unearned income | 180,999 |
| | 763,669 |
| | 944,668 |
|
Contractual cash flows due | 612,342 |
| | 1,732,136 |
| | 2,344,478 |
|
Less: nonaccretable difference | 113,448 |
| | 653,680 |
| | 767,128 |
|
Less: Allowance for loan losses | 14,867 |
| | 5,216 |
| | 20,083 |
|
Expected cash flows | 484,027 |
| | 1,073,240 |
| | 1,557,267 |
|
Less: accretable yield | 92,462 |
| | 135,060 |
| | 227,522 |
|
Carrying value | $ | 391,565 |
| | $ | 938,180 |
| | $ | 1,329,745 |
|
Carrying value as a percentage of UPB or contractual net investment | 91 | % | | 97 | % | | 95 | % |
December 31, 2012 | | | | | |
UPB or contractual net investment | $ | 520,873 |
| | $ | 913,020 |
| | $ | 1,433,893 |
|
Plus: contractual interest due or unearned income | 214,682 |
| | 753,274 |
| | 967,956 |
|
Contractual cash flows due | 735,555 |
| | 1,666,294 |
| | 2,401,849 |
|
Less: nonaccretable difference | 147,191 |
| | 663,561 |
| | 810,752 |
|
Less: Allowance for loan losses | 16,789 |
| | 5,175 |
| | 21,964 |
|
Expected cash flows | 571,575 |
| | 997,558 |
| | 1,569,133 |
|
Less: accretable yield | 99,201 |
| | 121,207 |
| | 220,408 |
|
Carrying value | $ | 472,374 |
| | $ | 876,351 |
| | $ | 1,348,725 |
|
Carrying value as a percentage of UPB or contractual net investment | 91 | % | | 96 | % | | 94 | % |
In the Bank of Florida ACI portfolio, an impairment charge of $0.7 million was recognized for the six months ended June 30, 2013, due to a reduction in cash flow expectations in certain pools of loans. During the six months ended June 30, 2013, we also reclassified $7.3 million from nonaccretable difference to accretable yield due to increases in cash flow expectations in some of our other pools of loans.
In our other ACI portfolio, no significant impairment was recognized for the six months ended June 30, 2013. Within this portfolio, we reclassified $23.4 million to accretable yield as there was an increase in expected cash flows in certain pools of loans.
For non-ACI loans and lease financing receivables accounted for under ASC 310-20, we periodically monitor the accretable purchase discount and recognize an allowance for loan and lease loss if the discount is not sufficient to absorb incurred losses. The following table presents a bridge from UPB, or contractual net investment, to carrying value for non-ACI loans and lease financing receivables accounted for under ASC 310-20 at June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | |
Recorded Investment of Non-ACI Loans and Leases (1) | | | | Table 17 |
|
(dollars in thousands) | Residential | | Commercial and Commercial Real Estate | | Lease Financing Receivables | | Other | | Total |
Under ASC 310-20 | | | | | | | | | |
June 30, 2013 | | | | | | | | | |
UPB or contractual net investment | $ | 2,545,558 |
| | $ | 2,040,419 |
| | $ | 53,401 |
| | $ | 29,704 |
| | $ | 4,669,082 |
|
Less: net purchase discount (premium) | 73,140 |
| | (19,932 | ) | | 8,864 |
| | 11,499 |
| | 73,571 |
|
Recorded investment | $ | 2,472,418 |
| | $ | 2,060,351 |
| | $ | 44,537 |
| | $ | 18,205 |
| | $ | 4,595,511 |
|
Recorded investment as a percentage of UPB or contractual net investment | 97 | % | | 101 | % | | 83 | % | | 61 | % | | 98 | % |
December 31, 2012 | | | | | | | | | |
UPB or contractual net investment | $ | 3,069,948 |
| | $ | 2,099,190 |
| | $ | 93,042 |
| | $ | 31,838 |
| | $ | 5,294,018 |
|
Less: net purchase discount (premium) | 89,595 |
| | (22,018 | ) | | 17,841 |
| | 12,469 |
| | 97,887 |
|
Recorded investment | $ | 2,980,353 |
| | $ | 2,121,208 |
| | $ | 75,201 |
| | $ | 19,369 |
| | $ | 5,196,131 |
|
Recorded investment as a percentage of UPB or contractual net investment | 97 | % | | 101 | % | | 81 | % | | 61 | % | | 98 | % |
| |
(1) | This presentation of non-ACI loans and losses has been amended to report loans based on portfolio segment. Commercial and commercial real estate includes loans acquired from Business Property Lending, Inc. (BPL), which have been revised as of December 31, 2012 based on the updated loan stratification as disclosed in Note 3. |
Our residential non-ACI portfolio consists of loans we have strategically acquired over the years. During the three and six months ended June 30, 2013, we recognized $0.4 million and $2.3 million, respectively, in related premiums as well as $9.9 million and $18.4 million, respectively, in discount accretion through interest income.
Our commercial non-ACI portfolio consists of loans acquired from Bank of Florida and BPL. Loans acquired from Bank of Florida consist of revolving lines of credit that do not fall within the scope of ASC 310-30 due to their revolving nature. Loans acquired from BPL consist of commercial real estate loans to small and mid-size business clients that did not have evidence of credit deterioration since origination at the time we purchased these loans. During the three and six months ended June 30, 2013, we recognized $0.9 million and $2.1 million, respectively, in related premiums through interest income with no significant change in the amount of purchase discount.
Our lease financing receivables non-ACI portfolio consists of leases acquired from Tygris that did not have evidence of credit deterioration since origination when we purchased these leases. The purchase discount related to the this portfolio is considered to be the additional discount when comparing our carrying value to the contractual net investment of the leases as recorded by Tygris prior to our acquisition and represents additional yield in addition to the normal yield associated with these leases. During the three and six months ended June 30, 2013, we recognized $3.9 million and $8.8 million, respectively, in discount accretion through interest income.
Our other non-ACI portfolio consists of home equity lines and consumer loans acquired from Bank of Florida that either do not fall within the scope of ASC 310-30 due to their revolving nature or that did not have evidence of credit deterioration since origination at the time we purchased these loans. During the three and six months ended June 30, 2013 there was no significant change in the amount of purchase discount.
Problem Loans and Leases
Loans and leases are placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual, which is generally when the loan becomes 90 days past due, with the exception of government insured loans and ACI loans. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed from interest income and interest income is recorded as collected.
For purposes of disclosure in the table below, we exclude government insured pool buyout loans from our definition of non-performing loans and leases. We also exclude ACI loans from non-performing status because we expect to fully collect their new carrying value which reflects significant purchase discounts. If our expectation of reasonably estimable future cash flows deteriorates, these loans may be classified as nonaccrual loans and interest income will not be recognized until the timing and amount of future cash flows can be reasonably estimated.
Real estate we acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold, and is carried at the balance of the loan at the time of foreclosure or at estimated fair value less estimated costs to sell, whichever is less.
In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a TDR. Loans restructured with terms and at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are not considered to be impaired loans in calendar years subsequent to the restructuring.
The following table sets forth the composition of our non-performing assets (NPA), including nonaccrual, accruing loans and leases past due 90 or more days, TDR and OREO, as of the dates indicated. The balances of NPA reflect the net investment in such assets including deductions for purchase discounts.
|
| | | | | | | |
Non-Performing Assets (1) | | | Table 18 |
|
(dollars in thousands) | June 30, 2013 | | December 31, 2012 |
Nonaccrual loans and leases: | | | |
Residential mortgages | $ | 64,230 |
| | $ | 73,752 |
|
Commercial and commercial real estate | 60,636 |
| | 76,289 |
|
Lease financing receivables | 2,601 |
| | 2,010 |
|
Home equity lines | 4,368 |
| | 4,246 |
|
Consumer and credit card | 243 |
| | 332 |
|
Total nonaccrual loans and leases | 132,078 |
| | 156,629 |
|
Accruing loans 90 days or more past due | — |
| | — |
|
Total non-performing loans (NPL) | 132,078 |
| | 156,629 |
|
Other real estate owned | 36,528 |
| | 40,492 |
|
Total non-performing assets | 168,606 |
| | 197,121 |
|
Troubled debt restructurings less than 90 days past due | 82,236 |
| | 90,094 |
|
Total NPA and TDR (1) | $ | 250,842 |
| | $ | 287,215 |
|
Total NPA and TDR | $ | 250,842 |
| | $ | 287,215 |
|
Government insured 90 days or more past due still accruing | 1,405,848 |
| | 1,729,877 |
|
Loans and leases accounted for under ASC 310-30: | | | |
90 days or more past due | 54,054 |
| | 79,984 |
|
OREO | 21,194 |
| | 16,528 |
|
Total regulatory NPA and TDR | $ | 1,731,938 |
| | $ | 2,113,604 |
|
|
| | | | | |
Adjusted credit quality ratios: (1) | | | |
NPL to total loans | 0.89 | % | | 1.08 | % |
NPA to total assets | 0.92 | % | | 1.08 | % |
NPA and TDR to total assets | 1.37 | % | | 1.57 | % |
Credit quality ratios including government insured loans and loans and leases accounted for under ASC 310-30 : | | | |
NPL to total loans | 10.76 | % | | 13.55 | % |
NPA to total assets | 8.98 | % | | 11.09 | % |
NPA and TDR to total assets | 9.43 | % | | 11.59 | % |
| |
(1) | We define NPA as nonaccrual loans, accruing loans past due 90 days or more and foreclosed property. Our NPA calculation excludes government insured pool buyout loans for which payment is insured by the government. We also exclude ACI loans and foreclosed property accounted for under ASC 310-30 because we expect to fully collect the carrying value of such loans and foreclosed property. |
Total NPA and TDR decreased by $36.4 million, or 13%, to $250.8 million at June 30, 2013 from $287.2 million at December 31, 2012. This decrease was primarily attributable to a $24.6 million decrease in nonaccrual loans and leases and a $7.9 million decrease in TDRs less than 90 days past due.
Total regulatory NPA and TDR decreased by $381.7 million, or 18% , to $1.7 billion at June 30, 2013 from $2.1 billion at December 31, 2012. This decrease was primarily attributable to a $324.0 million decrease in governmental insured 90 days or more past due still accruing, a $25.9 million decrease in 90 days or more past due loans and leases accounted for under ASC 310-30 and a $24.6 million decrease in nonaccrual loans and leases.
We use an asset risk classification system in compliance with guidelines established by the Office of the Comptroller of Currency (OCC) Handbook as part of our efforts to monitor asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset is not warranted. Commercial loans with adverse classifications are reviewed by the commercial credit committee of our executive credit committee monthly.
In addition to the problem loans described above, as of June 30, 2013, we had special mention loans and leases totaling $79.8 million, which are not included in either the non-accrual or 90 days past due loan and lease categories but which, in our opinion, were subject to potential future rating downgrades. Special mention loans and leases decreased by $11.2 million, or 12%, to $79.8 million at June 30, 2013, from $91.0 million at December 31, 2012. Loans and leases rated as special mention totaled $79.8 million, or 0.5%, of the total loan portfolio and
0.6% of the noncovered loan portfolio at June 30, 2013, including $18.7 million acquired from Bank of Florida and $51.5 million acquired in the BPL acquisition.
Analysis for the Allowance for Loan and Lease Losses
The tables below set forth the calculation of the ALLL based on the method for determining the allowance. |
| | | | | | | | | | | | | | | | | | | | | | | |
Analysis for Loan and Lease Losses | | | | | | | | | | | Table 19 |
| June 30, 2013 | | December 31, 2012 |
(dollars in thousands) | Excluding ACI Loans | | ACI Loans | | Total | | Excluding ACI Loans | | ACI Loans | | Total |
Residential mortgages | $ | 23,469 |
| | $ | 5,216 |
| | $ | 28,685 |
| | $ | 28,456 |
| | $ | 5,175 |
| | $ | 33,631 |
|
Commercial and commercial real estate | 22,014 |
| | 14,867 |
| | 36,881 |
| | 23,074 |
| | 16,789 |
| | 39,863 |
|
Lease financing receivables | 4,073 |
| | — |
| | 4,073 |
| | 3,181 |
| | — |
| | 3,181 |
|
Home equity lines | 3,688 |
| | — |
| | 3,688 |
| | 5,265 |
| | — |
| | 5,265 |
|
Consumer and credit card | 142 |
| | — |
| | 142 |
| | 162 |
| | — |
| | 162 |
|
Total ALLL | $ | 53,386 |
| | $ | 20,083 |
| | $ | 73,469 |
| | $ | 60,138 |
| | $ | 21,964 |
| | $ | 82,102 |
|
ALLL as a percentage of loans and leases held for investment | 0.46 | % | | 1.49 | % | | 0.57 | % | | 0.54 | % | | 1.60 | % | | 0.66 | % |
| | | | | | | | | | | |
Residential mortgages | $ | 5,708,726 |
| | $ | 877,390 |
| | $ | 6,586,116 |
| | $ | 5,843,136 |
| | $ | 865,612 |
| | $ | 6,708,748 |
|
Commercial and commercial real estate | 4,617,894 |
| | 472,438 |
| | 5,090,332 |
| | 4,266,691 |
| | 505,077 |
| | 4,771,768 |
|
Lease financing receivables | 1,014,996 |
| | — |
| | 1,014,996 |
| | 836,935 |
| | — |
| | 836,935 |
|
Home equity lines | 169,296 |
| | — |
| | 169,296 |
| | 179,600 |
| | — |
| | 179,600 |
|
Consumer and credit card | 6,648 |
| | — |
| | 6,648 |
| | 8,038 |
| | — |
| | 8,038 |
|
Total loans and leases held for investment | $ | 11,517,560 |
| | $ | 1,349,828 |
| | $ | 12,867,388 |
| | $ | 11,134,400 |
| | $ | 1,370,689 |
| | $ | 12,505,089 |
|
The recorded investment in loans and leases held for investment, excluding ACI loans, increased by $383.2 million, or 3%, to $11.5 billion at June 30, 2013 from $11.1 billion at December 31, 2012. The increase is primarily attributable to new originations within commercial and commercial real estate and lease financing receivables partially offset by fewer residential originations.
The recorded investment in residential mortgages, excluding ACI loans, decreased by $134.4 million, or 2%, to $5.7 billion at June 30, 2013, from $5.8 billion at December 31, 2012. The ALLL for residential mortgages, excluding ACI loans, decreased by $5.0 million, or 18%, to $23.5 million at June 30, 2013, from $28.5 million at December 31, 2012 as a result of the continued performance of our high credit quality residential first portfolio. Charge-off activity for residential mortgages decreased by 23% to $8.3 million for the six months ended June 30, 2013 from $10.8 million for the six months ended June 30, 2012. Loan performance and historical loss rates are analyzed using the prior 12 months delinquency rates and actual charge-offs.
The recorded investment for commercial and commercial real estate, excluding ACI loans, increased by $351.2 million, or 8%, to $4.6 billion at June 30, 2013, from $4.3 billion at December 31, 2012. The increase is primarily due to organic growth in our commercial portfolio generated by our warehouse finance operations during the six months ended June 30, 2013. The warehouse finance portfolio is characterized by large revolving lines with current outstanding balances of $1.3 billion as of June 30, 2013.
The ALLL for commercial and commercial real estate, excluding ACI loans, decreased by 5%, to $22.0 million at June 30, 2013, from $23.1 million at December 31, 2012. The reserve on loans collectively evaluated for impairment increased by 3% to $18.0 million at June 30, 2013 from $17.5 million at December 31, 2012. The reserves on loans individually evaluated for impairment decreased by 28% to $4.0 million at June 30, 2013, from $5.6 million at December 31, 2012. The outstanding balance of loans individually evaluated for impairment decreased by 10% from December 31, 2012 to June 30, 2013. The ALLL as a percentage of loans and leases held for investment for commercial and commercial real estate, excluding ACI loans, decreased to 0.48% as of June 30, 2013 compared with 0.54% at December 31, 2012. The decreased coverage ratio is due to improvement in the credit quality of our loans along with growth in the portfolio within the warehouse finance operations. Newly originated loans adhere to higher underwriting standards than in previous periods.
For commercial and commercial real estate loans, the most significant historical loss factors include credit quality and charge-off activity. The loss factors used in our allowance calculation have remained consistent over the periods presented. Charge-off activity is analyzed using a 15 quarter time period to determine loss rates consistent with loan segments used in recording the allowance estimate. During periods of more consistent and stable performance, this 15 quarter period is considered the most relevant starting point for analyzing the reserve. During periods of significant volatility and severe loss experience, a shortened time period may be used which is more reflective of expected future losses. At June 30, 2013, two segments that are included in commercial and commercial real estate loans used shortened historical loss periods of 10 and 7 quarters as compared to three segments utilizing shortened historical loss periods of 8, 7 and 5 quarters at December 31, 2012. The difference is due to additional loan history that is more indicative of future expected losses. Charge-off activity for commercial and commercial real estate increased by 6% to $4.2 million for the six months ended June 30, 2013, from $4.0 million for the six months ended June 30, 2012. Loan delinquency is one of the leading indicators of credit quality. As of June 30, 2013, 0.5% of the recorded investment in commercial and commercial real estate was past due as compared to 1.8% as of December 31, 2012.
The following table provides an analysis of the ALLL, provision for loan and lease losses and net charge-offs for the three and six months ended June 30, 2013 and 2012: |
| | | | | | | | | | | | | | | |
Allowance for Loan and Lease Losses Activity | | | | | | | Table 20 |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2013 | | 2012 | | 2013 | | 2012 |
ALLL, beginning of period | $ | 77,067 |
| | $ | 78,254 |
| | $ | 82,102 |
| | $ | 77,765 |
|
Charge-offs: |
| |
| |
| |
|
Residential mortgages | 3,271 |
| | 4,139 |
| | 8,340 |
| | 10,833 |
|
Commercial and commercial real estate | 2,781 |
| | 1,710 |
| | 4,228 |
| | 4,004 |
|
Lease financing receivables | 988 |
| | 917 |
| | 1,696 |
| | 2,098 |
|
Home equity lines | 627 |
| | 484 |
| | 1,116 |
| | 1,592 |
|
Consumer and credit card | 17 |
| | 40 |
| | 37 |
| | 51 |
|
Total charge-offs | 7,684 |
| | 7,290 |
| | 15,417 |
| | 18,578 |
|
Recoveries: | | |
| | | | |
Residential mortgages | 117 |
| | 162 |
| | 228 |
| | 305 |
|
Commercial and commercial real estate | 3,549 |
| | 411 |
| | 3,992 |
| | 579 |
|
Lease financing receivables | 253 |
| | 29 |
| | 332 |
| | 65 |
|
Home equity lines | 120 |
| | 55 |
| | 249 |
| | 116 |
|
Consumer and credit card | 18 |
| | 15 |
| | 35 |
| | 29 |
|
Total recoveries | 4,057 |
| | 672 |
| | 4,836 |
| | 1,094 |
|
Net charge-offs | 3,627 |
| | 6,618 |
| | 10,581 |
| | 17,484 |
|
Provision for loan and lease losses | 29 |
| | 5,757 |
| | 1,948 |
| | 17,112 |
|
ALLL, end of period | $ | 73,469 |
| | $ | 77,393 |
| | $ | 73,469 |
| | $ | 77,393 |
|
Net charge-offs to average loans held for investment | 0.12 | % | | 0.34 | % | | 0.17 | % | | 0.49 | % |
The level of the ALLL has decreased by $3.9 million, or 5%, to $73.5 million at June 30, 2013 from $77.4 million at June 30, 2012. The decrease is attributable to a reduction in provision for loan and lease losses offset by a reduction in net charge-offs. The provision for loan and lease losses decreased by $15.2 million, or 89%, to $1.9 million at June 30, 2013 from $17.1 million at June 30, 2012. The decrease is attributable to a release of provision for residential mortgages due to improvement of flow rates and delinquency metrics of the general reserve population combined with the improved expected performance of residential TDRs. The commercial and commercial real estate provision for loan and lease losses decreased due to new originations with increased credit quality and an increase in performing TDRs.
The reduction in net charge-offs is due to increased originations in the portfolio of higher credit quality which resulted in a decrease of charge-offs by 17% to $15.4 million for the six months ended June 30, 2013 from $18.6 million for the six months ended June 30, 2012. The remaining reduction in net charge-offs is due to an increase in commercial and commercial real estate recoveries on loans previously charged off.
Loans Subject to Representations and Warranties
We originate residential mortgage loans, primarily first-lien home loans, through our direct and wholesale channels with the intent of selling a majority of them in the secondary mortgage market. We sell and securitize conventional conforming and federally insured single-family residential mortgage loans predominantly to GSEs, such as FNMA and FHLMC. A majority of the loans sold to non-GSEs were agency deliverable product that were eventually sold by large aggregators of agency product who securitized and sold the loans to the agencies. We also sell residential mortgage loans that do not meet criteria for whole loan sales to GSEs (nonconforming mortgage loans) and to private non-GSE purchasers through whole loan sales.
Although we structure all of our loan sales as non-recourse sales, the underlying sale agreements require us to make certain market standard representations and warranties at the time of sale, which may vary from agreement to agreement. Such representations and warranties typically include those made regarding the existence and sufficiency of file documentation, credit information, compliance with underwriting guidelines and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. We have exposure to potential loss because, among other things, the representations and warranties we provide purchasers typically survive for the life of the loan.
Beginning in 2009, higher loan delinquencies, resulting from deterioration in overall economic conditions and trends, particularly those impacting the residential housing sector, caused investors to carefully examine and re-underwrite credit files for those loans in default to determine if there had been a breach of a representation or a warranty in the sale agreement. Investors have most often cited missing documentation and income misrepresentations as the grounds for us to repurchase loans.
Upon receipt of a repurchase demand from an investor, we review the allegations and re-underwrite the loan. We also verify any third-party information included as support for the repurchase demand. In certain cases, we may request the investor to provide additional information to assist us in our determination whether to repurchase the loan.
Upon completion of our own internal investigation as to the validity of a repurchase claim, our findings are discussed by senior management and subject-matter experts as part of our loan repurchase subcommittee. If the subcommittee determines that we are obligated to repurchase a loan, such recommendation is presented to executive management for review and approval.
If it is determined that the loans sold are (1) with respect to the GSEs, in breach of these representations or warranties, or (2) with respect to non-GSE purchasers, in material breach of these representations and warranties, we generally have an obligation to either: (a) repurchase the loan for the UPB, accrued interest and related advances, which we refer to collectively as the Repurchase Price, (b) indemnify the purchaser or (c) make the purchaser whole for the economic benefits of the loan. Our obligations vary based upon the nature of the repurchase demand and the current status of the mortgage loan. For example, if an investor has already liquidated the mortgage loan, the investor no longer has a mortgage asset that we could repurchase.
Of the three courses of action described above, a loan repurchase is the only remedy where we will place the loan asset that is the subject of the repurchase demand on our balance sheet. In the case of indemnification, the investor still owns the loan asset and we indemnify the investor for losses incurred resulting from our breach of a representation and warranty. In the case of a make-whole payment, the investor or subsequent purchaser of a loan asset has liquidated the loan and there is no loan asset for us to repurchase. We are solely obligated to make the investor whole for losses incurred between the initial purchase price and the liquidation price, and related costs.
At the time we repurchase a loan, we determine whether to hold the loan for sale or for investment. If the loan is sellable on the secondary market, we may elect to do so. If the loan is not sellable on the secondary market or there are other reasons why we would elect to retain the loan, we will service the asset to minimize our losses. This may include, depending on the status of the loan at the time of repurchase, modifying the loan, or foreclosure on the loan and subsequent liquidation of the mortgage property.
When we sell residential mortgage loans on the secondary mortgage market, our repurchase obligations are typically not limited to any specific period of time. Rather, the contractual representations and warranties we make on these loans survive indefinitely for the life of the loan.
We also have a limited repurchase exposure for early payment defaults (EPD) which are typically triggered if a borrower does not make the first several payments due after the mortgage loan has been sold to an investor. Certain of our private investors have agreed to waive EPD provisions for conventional conforming and federally insured single-family residential mortgage loans and certain jumbo loan products. However, we are subject to EPD provisions and prepayment protection provisions on non-conforming jumbo loan products and community reinvestment loans. Total non-conforming UPB sold subject to prepayment and default protection was $616.6 million at June 30, 2013. Total originations of community reinvestment loans sold under the State of Florida housing program were minimal.
As of June 30, 2013, we had 259 active repurchase requests. We have summarized the activity for the three and six months ended June 30, 2013 and 2012 below regarding repurchase requests received, requests successfully defended, and loans that we repurchased or for which we indemnified investors or made investors whole with the corresponding origination years:
|
| | | | | | | | | | | | | | | |
Loan Repurchase Activity |
| | | Table 21 | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2013 | | 2012 | | 2013 | | 2012 |
Agency | 26 |
|
| 46 |
| | 76 |
| | 81 |
|
Agency Aggregators / Non-GSE (1) | 54 |
|
| 84 |
| | 120 |
| | 164 |
|
Repurchase requests received | 80 |
|
| 130 |
| | 196 |
| | 245 |
|
Agency | 24 |
|
| 43 |
| | 47 |
| | 57 |
|
Agency Aggregators / Non-GSE (1) | 38 |
|
| 76 |
| | 94 |
| | 82 |
|
Requests successfully defended | 62 |
|
| 119 |
| | 141 |
| | 139 |
|
Agency | 6 |
|
| 19 |
| | 14 |
| | 25 |
|
Agency Aggregators / Non-GSE (1) | 22 |
|
| 31 |
| | 49 |
| | 33 |
|
Loans repurchased, indemnified or made whole | 28 |
|
| 50 |
| | 63 |
| | 58 |
|
Agency | $ | 576 |
|
| $ | 576 |
| | $ | 1,302 |
| | $ | 2,183 |
|
Agency Aggregators / Non-GSE (1) | 2,116 |
|
| 1,851 |
| | 4,454 |
| | 3,478 |
|
Net realized losses on loan repurchases | $ | 2,692 |
|
| $ | 2,427 |
| | $ | 5,756 |
| | $ | 5,661 |
|
Years of origination of loans repurchased | 2006-2013 |
|
| 2001-2011 |
| | 2004-2013 |
| | 2001-2011 |
|
| |
(1) | Includes a majority of agency deliverable products that were sold to large aggregators of agency product who securitized and sold the loans to the agencies. |
We have summarized repurchase statistics by vintage below: |
| | | | | | | | | | | | | | | |
Summary Statistics by Vintage | | | | | | | Table 22 |
|
Losses to date | 2004-2005 | | 2006-2008 | | 2009-2013 | | Total |
(dollars in thousands) | | | | | | | |
Total sold UPB | $ | 11,334,198 |
| | $ | 11,977,829 |
| | $ | 30,984,369 |
| | $ | 54,296,396 |
|
Request rate(2) | 0.36 | % | | 2.31 | % | | 0.31 | % | | 0.79 | % |
Requests received | 183 |
| | 1,328 |
| | 420 |
| | 1,931 |
|
| | | | | | | |
Pending requests | 13 |
| | 209 |
| | 30 |
| | 252 |
|
Resolved requests | 170 |
| | 1,119 |
| | 390 |
| | 1,679 |
|
Repurchase rate | 42 | % | | 41 | % | | 28 | % | | 38 | % |
| | | | | | | |
Loans repurchased | 71 |
| | 454 |
| | 111 |
| | 636 |
|
Average loan size | $ | 221,770 |
| | $ | 208,597 |
| | $ | 227,949 |
| | $ | 222,111 |
|
Loss severity | 12 | % | | 48 | % | | 29 | % | | 38 | % |
| | | | | | | |
Losses realized | $ | 1,815 |
| | $ | 44,994 |
| | $ | 7,323 |
| | $ | 54,132 |
|
Losses realized (bps) (1) | 2 |
| | 38 |
| | 2 |
| | 10 |
|
| |
(2) | Request rate is calculated as the number of requests received to date, compared to the total number of loans sold for the period. |
The most common reasons for loan repurchases and make-whole payments relate to missing documentation, program violation, and claimed misrepresentations related to falsified employment documents and/or verifications, occupancy, credit and/or stated income. Additionally, in the same time period we received requests to repurchase or make whole loans because they did not meet the specified investor guidelines. Repurchase demands relating to early payment defaults generally surface sooner, typically within six months of selling the loan to an investor. Prior to 2009, we sold loans servicing released, therefore the lack of servicing statistics and status of the loans sold is not known. As such, there is additional uncertainty surrounding the reserves for repurchase obligations for loans sold or securitized.
Along with the contingent obligation associated with representations and warranties noted above, the Company also has a noncontingent obligation to stand ready to perform over the term of the representation and warranties. A liability is established when the obligation is both probable and reasonably estimable and is recognized as a reduction on net gains on loan sales and securitizations. When calculating the reserve associated with this noncontingent obligation, we estimated the probable losses inherent in the population of all loans sold based on trends in repurchase requests and actual loss severities experienced.
The following is a rollforward of our reserves for repurchase losses for the three and six months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
Reserves for Loans Sold or Securitized | | | | | | | Table 23 |
|
| Three Months Ended | | Six Months Ended |
(dollars in thousands) | June 30, 2013 | | June 30, 2012 | | June 30, 2013 | | June 30, 2012 |
Balance, beginning of period | $ | 24,866 |
| | $ | 35,000 |
| | $ | 27,000 |
| | $ | 32,000 |
|
Provision for new sales/securitizations | 846 |
| | 306 |
| | 2,112 |
| | 690 |
|
Provision for changes in estimate of existing reserves | (1,060 | ) | | 1,121 |
| | (1,396 | ) | | 6,971 |
|
Net realized losses on repurchases | (2,692 | ) | | (2,427 | ) | | (5,756 | ) | | (5,661 | ) |
Balance, end of period | $ | 21,960 |
| | $ | 34,000 |
| | $ | 21,960 |
| | $ | 34,000 |
|
|
|
| |
| |
| |
|
Quarters of coverage ratio(1) | 5 |
| | 13 |
| | 5 |
| | 13 |
|
| |
(1) | Quarters of coverage ratio is calculated as the current reserve for repurchases divided by the average realized losses over the previous four quarters. |
The liability for repurchase losses was $22.0 million as of June 30, 2013, compared to $34.0 million as of June 30, 2012. The decrease in the liability since June 30, 2012 is primarily due to the continued run-off of losses that were estimated in the prior periods partially offset by the provisioning for new sales and securitizations as well as changes in estimates due to increased information and clarity into the repurchase loan pipeline. Our provision for new sales/securitizations increased by $1.4 million for the six months ended June 30, 2013 compared to the same period in 2012 and our provision for changes in estimate of existing reserves decreased by $8.4 million for the six months ended June 30, 2013 compared to the same period in 2012, due to a decreased volume of repurchase requests as well as the stabilization of property values over the last six months compared to the same period in 2012. The amount of incoming repurchase requests remained elevated.
We have summarized the new activity for repurchase requests in UPB as well as a summarized the outstanding UPB within the pending pipeline by vintage for the 2004-2009 vintages as of and for the three months ended June 30, 2013, March 31, 2013 and June 30, 2012: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase Requests (UPB) | | | | | | | | | | Table 24 |
|
(dollars in thousands) | 2004 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | Total |
June 30, 2012 | $ | — |
| | $ | 2,658 |
| | $ | 2,617 |
| | $ | 10,463 |
| | $ | 6,117 |
| | $ | 3,899 |
| | $ | 25,754 |
|
March 31, 2013 | — |
| | 565 |
| | 1,917 |
| | 7,652 |
| | 5,589 |
| | 1,601 |
| | 17,324 |
|
June 30, 2013 | 318 |
| | 268 |
| | 2,771 |
| | 4,995 |
| | 2,059 |
| | 340 |
| | 10,751 |
|
| | | | | | | | | | | | | |
Pending Pipeline (UPB) | | | | | | | | | | Table 25 |
|
(dollars in thousands) | 2004 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | Total |
June 30, 2012 | $ | 973 |
| | $ | 3,238 |
| | $ | 6,444 |
| | $ | 30,058 |
| | $ | 16,288 |
| | $ | 5,817 |
| | $ | 62,818 |
|
March 31, 2013 | 662 |
| | 1,423 |
| | 5,456 |
| | 22,323 |
| | 14,763 |
| | 2,740 |
| | 47,367 |
|
June 30, 2013 | 852 |
| | 1,000 |
| | 5,362 |
| | 21,073 |
| | 13,025 |
| | 2,007 |
| | 43,319 |
|
As noted in the summary table above, repurchase requests for the 2004 - 2009 vintages have been decreasing steadily since June 30, 2012. Along with the decline in recent repurchase requests, we have also experienced a steady decline in the outstanding UPB within the pending pipeline. The decline in pending pipeline is due to higher rescission rates and previous repurchases. Furthermore, we have experienced a lower request rate on vintages post 2009, which leads to a lower reserve requirement.
Our quarters of coverage ratio showed approximately 5 quarters of coverage given our current reserve levels at June 30, 2013. Until 2009, we sold a majority of our loans servicing released and as a result, we have less visibility into the current delinquency status of these populations of loans and thus the elevated coverage ratio. Unlike reserves for loans we service where we have insight into the current delinquency status of the population, the calculated repurchase reserve is based on historical repurchase trends.
We performed a sensitivity analysis on our loan repurchase reserve by varying the frequency and severity assumptions independently for each loan sale vintage year. By increasing the frequency and severity by 20%, the reserve balance as of June 30, 2013 would have increased by 25% from the baseline. Conversely, by decreasing the frequency and the severity 20%, the reserve balance as of June 30, 2013 would have decreased by 20%. Based upon qualitative and quantitative factors, including the number of pending repurchase requests, rescission rates and trends in loss severities, we may make adjustments to the base reserve balance to incorporate recent, known trends.
The sensitivity analysis for the loan repurchase reserve as of June 30, 2013 is as follows:
|
| | | | | | | | | | | | | | | | | | | |
Sensitivity of Repurchase Reserve | | | | | | | | | Table 26 |
|
| Frequency and Severity |
(dollars in thousands) | Up 20% | | Up 10% | | Base | | Down 10% | | Down 20% |
Reserve for originated loan repurchases | $ | 27,429 |
| | $ | 24,570 |
| | $ | 21,960 |
| | $ | 19,598 |
| | $ | 17,485 |
|
Loan Servicing
When we service residential mortgage loans where FNMA or FHLMC is the owner of the underlying mortgage loan asset, we are subject to potential repurchase risk for: (1) breaches of loan level representations and warranties even though we may not have originated the mortgage loan; and (2) failure to service such loans in accordance with the applicable GSE servicing guide. If a loan purchased or securitized by FNMA or FHLMC is in breach of an origination representation and warranty, such GSE may look to the loan servicer for repurchase. If we are obligated to repurchase a loan from either FNMA or FHLMC, we seek indemnification from the counterparty that sold us the MSR if the counterparty is a third party, which presents potential counterparty risk if such party is unable or unwilling to satisfy its indemnification obligations.
Total acquired UPB for counterparties unable or unwilling to satisfy their indemnification obligations subject to repurchase risk was $6.3 billion at June 30, 2013. At June 30, 2013, we were actively servicing $1.4 billion of remaining UPB. During 2013, no new counterparties were identified that were unwilling or unable to satisfy their indemnification obligations.
The following is a rollforward of our reserves for servicing repurchase losses related to these counterparties for the three and six months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
Reserves for Repurchase Obligations for Loans Serviced | | |
|
| | | | Table 27 |
|
| Three Months Ended | | Six Months Ended |
(dollars in thousands) | June 30, 2013 | | June 30, 2012 | | June 30, 2013 | | June 30, 2012 |
Balance, beginning of period | $ | 23,599 |
|
| $ | 30,427 |
| | $ | 26,026 |
| | $ | 30,364 |
|
Provision for changes in estimate of existing reserves (2) | 1,690 |
|
| 2,868 |
| | 1,289 |
| | 5,899 |
|
Net realized losses on repurchases(2) | (1,771 | ) |
| (5,655 | ) | | (3,797 | ) | | (8,623 | ) |
Balance, end of period | $ | 23,518 |
|
| $ | 27,640 |
| | $ | 23,518 |
| | $ | 27,640 |
|
|
|
|
| | | | | |
Quarters of coverage ratio (1) | 9 |
| | 6 |
| | 9 |
| | 6 |
|
| |
(1) | Quarters of coverage ratio is calculated as the current reserve for repurchases divided by the average realized losses over the previous four quarters. |
| |
(2) | We have restated realized losses and the provision for the quarter ended March 31, 2013 due to an overstatement in the amount of losses realized. |
We performed a sensitivity analysis on our loan servicing repurchase reserve by varying the frequency and severity assumptions. By increasing the frequency and severity 20%, the reserve balance as of June 30, 2013 would have increased by 45% from the baseline. Conversely, by decreasing the frequency and the severity by 20%, the reserve balance as of June 30, 2013 would have decreased by 36%. Based upon qualitative and quantitative factors, including the number of pending repurchase requests, rescission rates and trends in loss severities, management may make adjustments to the base reserve balance to incorporate recent, observable trends.
The following is a sensitivity analysis as of June 30, 2013 of our reserve related to our estimated servicing repurchase losses based on ASC Topic 460, Guarantees: |
| | | | | | | | | | | | | | | | | | | |
Sensitivity of Servicing Repurchase Losses | | | | | | Table 28 |
|
| Frequency and Severity |
(dollars in thousands) | Up 20% | | Up 10% | | Base | | Down 10% | | Down 20% |
Reserve for servicing repurchase losses | $ | 36,105 |
| | $ | 30,338 |
| | $ | 23,518 |
| | $ | 20,309 |
| | $ | 16,047 |
|
Loans in Foreclosure
Losses can arise from certain government agency agreements which limit the agency’s repayment guarantees on foreclosed loans, resulting in certain minimal foreclosure costs being borne by servicers. In particular, government insured loans serviced under GNMA guidelines require servicers to fund any foreclosure claims not otherwise covered by insurance claim funds of the U.S. Department of Housing and Urban Development and/or the U.S. Department of Veterans Affairs.
Other than foreclosure-related costs associated with servicing government insured loans, we have not entered into any servicing agreements that require us as servicer to cover foreclosure-related costs.
Funding Sources
Deposits obtained from clients are our primary source of funds for use in lending, acquisitions and other business purposes. We generate deposit client relationships through our consumer direct, financial center and financial intermediary distribution channels. The consumer direct channel includes: internet, email, telephone and mobile device access to product and customer support offerings. Our differentiated products, integrated online financial portal and value-added account features deepen our interactions and relationships with our clients resulting in high retention rates. Other funding sources include short-term and long-term borrowings and shareholders’ equity. Borrowings have become an important funding source as we have grown.
Deposits
The following table shows the distribution of our deposits by type of deposit at the dates indicated:
|
| | | | | | | |
Deposits | | | Table 29 |
|
(dollars in thousands) | June 30, 2013 | | December 31, 2012 |
Noninterest-bearing demand | $ | 1,205,326 |
| | $ | 1,445,783 |
|
Interest-bearing demand | 3,081,670 |
| | 2,681,769 |
|
Market-based money market accounts | 413,722 |
| | 439,399 |
|
Savings and money market accounts, excluding market-based | 5,153,072 |
| | 4,451,843 |
|
Market-based time | 637,145 |
| | 736,612 |
|
Time, excluding market-based | 3,178,931 |
| | 3,386,982 |
|
Total deposits | $ | 13,669,866 |
| | $ | 13,142,388 |
|
Our major source of funds and liquidity is our deposit base, which provides funding for our investment securities, loan and lease portfolios. We carefully manage our interest paid on deposits to control the level of interest expense we incur. The mix and type of interest-bearing and noninterest-bearing deposits in our deposit base changes due to our funding needs, marketing activities and market conditions. We have experienced deposit growth as a result of the increased marketing initiatives we executed as part of our growth plan.
Total deposits increased by $527.5 million, or 4%, to $13.7 billion at June 30, 2013, from $13.1 billion at December 31, 2012. This strong growth in retail deposits during the first six months of 2013 allowed us to replace a portion of our more costly wholesale funding sources such as FHLB borrowings and repurchase agreements. During the first six months of 2013, noninterest-bearing demand deposits decreased by $240.5 million, to $1.2 billion, primarily due to decreases in escrow deposits and business accounts. Interest-bearing deposits increased by $767.9 million to $12.5 billion, or 7%, at June 30, 2013 from $11.7 billion at December 31, 2012. This increase in interest-bearing deposits was primarily due to growth in savings and money market accounts and interest-bearing demand accounts as we continue our marketing efforts to acquire new depositors.
FHLB Borrowings
In addition to deposits, we use borrowings from the FHLB as a source of funds to meet the daily liquidity needs of our clients and fund growth in earning assets. Our FHLB borrowings decreased by $0.4 billion, or 12%, to $2.7 billion at June 30, 2013 from $3.0 billion at December 31, 2012. The decrease in FHLB borrowings were primarily funded by growth in retail deposits.
The table below summarizes the average outstanding balance of our FHLB advances, the weighted average interest rate, and the maximum amount of borrowings in each category outstanding at any month end during the three and six months ended June 30, 2013 and 2012, respectively.
|
| | | | | | | | | | | | | | | |
FHLB Borrowings | | | Table 30 | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2013 | | 2012 | | 2013 | | 2012 |
Fixed-rate advances: | | | | | | | |
Average daily balance | $ | 2,507,634 |
| | $ | 1,734,722 |
| | $ | 2,480,635 |
| | $ | 1,263,496 |
|
Weighted-average interest rate | 1.95 | % | | 1.55 | % | | 1.98 | % | | 1.84 | % |
Maximum month-end amount | $ | 2,542,700 |
| | $ | 1,670,586 |
| | $ | 2,542,700 |
| | $ | 1,670,586 |
|
Convertible advances: | | | | | | | |
Average daily balance | $ | 13,077 |
| | $ | 31,692 |
| | $ | 15,028 |
| | $ | 37,132 |
|
Weighted-average interest rate | 4.24 | % | | 4.45 | % | | 4.24 | % | | 4.44 | % |
Maximum month-end amount | $ | 17,000 |
| | $ | 34,000 |
| | $ | 17,000 |
| | $ | 44,000 |
|
Overnight advances: | | | | | | | |
Average daily balance | $ | 12,912 |
| | $ | 301,555 |
| | $ | 68,343 |
| | $ | 263,901 |
|
Weighted-average interest rate | 0.36 | % | | 0.40 | % | | 0.39 | % | | 0.39 | % |
Maximum month-end amount | $ | 125,000 |
| | $ | 840,500 |
| | $ | 200,500 |
| | $ | 840,500 |
|
Repurchase Agreements
Repurchase agreements decreased by $142.3 million to $0 at June 30, 2013 from $142.3 million at December 31, 2012. The decrease in repurchase agreements was funded by growth in retail deposits.
The table below summarizes the average outstanding balance of our repurchase agreements, the weighted average interest rate, and the maximum amount of repurchase agreements at any month-end during the three and six months ended June 30, 2013 and 2012. |
| | | | | | | | | | | | | | | |
Repurchase Agreements | | | | | | | Table 31 |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2013 | | 2012 | | 2013 | | 2012 |
Repurchase agreements: | | | | | | | |
Average daily balance | $ | — |
| | $ | 20,000 |
| | $ | 28,121 |
| | $ | 20,965 |
|
Weighted-average interest rate | — | % | | 3.29 | % | | 1.94 | % | | 3.21 | % |
Maximum month-end amount | $ | — |
| | $ | 20,000 |
| | $ | 20,000 |
| | $ | 20,000 |
|
Liquidity Management
Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements.
Funds invested in short-term marketable instruments, the continuous maturing of other interest-earning assets, cash flows from self-liquidating investments such as mortgage-backed securities, the possible sale of available for sale securities, and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through issuance of deposits and borrowed funds. In addition, equity capital raises provide us with sources of liquidity. To manage fluctuations in short-term funding needs, we utilize borrowings under lines of credit with other financial institutions, such as the Federal Home Loan Bank of Atlanta, securities sold under agreements to repurchase, federal fund lines of credit with correspondent banks, and, for contingent purposes, the Federal Reserve Bank Discount Window. We also have access to term advances with the FHLB, as well as brokered certificates of deposits, for longer term liquidity needs. We believe our sources of liquidity are sufficient to meet our cash flow needs for the foreseeable future.
We continued to maintain a strong liquidity position during the second quarter of 2013. Cash and cash equivalents were $489.6 million, available for sale investment securities were $1.4 billion, and total deposits were $13.7 billion as of June 30, 2013.
As of June 30, 2013, we had a $3.5 billion line of credit with the FHLB, of which $2.7 billion was outstanding. Based on asset size, the maximum potential line available with the FHLB was $5.5 billion at June 30, 2013, assuming eligible collateral to pledge. As of June 30, 2013, we pledged collateral with the FRB that provided $61.3 million of borrowing capacity at the discount window but did not have any borrowings outstanding. The maximum potential borrowing at the FRB is limited only by eligible collateral.
At June 30, 2013, our availability under Promontory Interfinancial Network, LLC’s CDARS® One-Way BuySM deposits was $2.7 billion with $12.2 million in outstanding balances. Although our availability under Promontory Interfinancial Network, LLC’s CDARS® One-Way BuySM deposits was $2.7 billion at June 30, 2013, funding from this source is also limited by the overall network volume of CDARS One-Way Buy deposits available in the marketplace. Our treasury function views $500 million as the practical maximum availability for this type of funding. As of June 30, 2013, our availability under federal funds commitments was $40.0 million with no outstanding borrowings.
We own certain investment securities that are available for pledging under repurchase agreements. As of June 30, 2013, the principal balance of our repurchase agreements was $0 and therefore, no securities were currently pledged for this type of borrowing.
We continue to evaluate the ultimate impact of the implementation of the new capital and liquidity standards under the Basel III Capital Rules and the Dodd-Frank Act on the Company's liquidity management functions.
Capital Management
Management, including our Board of Directors, regularly reviews our capital position to help ensure it is appropriately positioned under various operating and market environments.
2013 Capital Actions
On July 23, 2013, the Company's Board of Directors declared a quarterly cash dividend of $0.03 per common share, payable on August 23, 2013, to stockholders of record as of August 12, 2013. Also on July 23, 2013, the Company's Board of Directors declared a quarterly cash dividend of $421.875, payable on October 5, 2013, for each share of Series A Preferred Stock held as of September 20, 2013.
On April 23, 2013, the Company's Board of Directors declared a quarterly cash dividend of $0.02 per common share, which was paid on May 21, 2013, to stockholders of record as of May 9, 2013. Also on April 23, 2013, the Company's Board of Directors declared a quarterly cash dividend of $421.875, which was paid on July 5, 2013, for each share of Series A Preferred Stock held as of June 20, 2013.
Capital Ratios
As a savings and loan holding company, we are not currently subject to specific statutory capital requirements. However, we are required to serve as a source of strength for EverBank and must have the ability to provide financial assistance if EverBank experiences financial distress.
As a result of recent regulatory requirements pursuant to the Dodd-Frank Act and Basel III, we will be subject to increasingly stringent regulatory capital requirements. For a discussion of the regulatory capital requirements please see "Regulatory Changes" under Key Factors Affecting our Business and Financial Statements above.
At June 30, 2013, EverBank exceeded all currently effective regulatory capital requirements and is considered to be “well-capitalized” with a Tier 1 leverage ratio of 8.3% and a total risk-based capital ratio of 13.7%. Management believes, at June 30, 2013, that we and EverBank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective.
The table below shows regulatory capital and risk-weighted assets for EB at June 30, 2013 and December 31, 2012:
|
| | | | | | | | |
Regulatory Capital (bank level) | Table 32 | |
(dollars in thousands) | June 30, 2013 | | December 31, 2012 |
Shareholders’ equity | $ | 1,598,419 |
| | $ | 1,518,934 |
|
Less: | Goodwill and other intangibles | (51,807 | ) | | (54,780 | ) |
| Disallowed servicing asset | (36,182 | ) | | (32,378 | ) |
| Disallowed deferred tax asset | (65,406 | ) | | (67,296 | ) |
Add: | Accumulated losses on securities and cash flow hedges | 78,181 |
| | 83,477 |
|
Tier 1 Capital | 1,523,205 |
| | 1,447,957 |
|
Add: | Allowance for loan and lease losses | 73,469 |
| | 82,102 |
|
Total regulatory capital | $ | 1,596,674 |
| | $ | 1,530,059 |
|
Adjusted total assets | $ | 18,287,359 |
| | $ | 18,141,856 |
|
Risk-weighted assets | 11,656,698 |
| | 11,339,415 |
|
The regulatory capital ratios for EB, along with the capital amounts and ratios for the minimum OCC requirement and the framework for prompt corrective action are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
Regulatory Capital Ratios (bank level) | | Table 33 | |
| Actual | | For OCC Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
(dollars in thousands) | Capital | | Ratio | | Minimum Amount | | Ratio | | Minimum Amount | | Ratio |
June 30, 2013 | | | | | | | | | | | |
Tier 1 capital to adjusted tangible assets | $ | 1,523,205 |
| | 8.3 | % | | $ | 731,494 |
| | 4.0 | % | | $ | 914,368 |
| | 5.0 | % |
Total capital to risk-weighted assets | 1,596,674 |
| | 13.7 |
| | 932,536 |
| | 8.0 |
| | 1,165,670 |
| | 10.0 |
|
Tier 1 capital to risk-weighted assets | 1,523,205 |
| | 13.1 |
| | N/A |
| | N/A |
| | 699,402 |
| | 6.0 |
|
December 31, 2012 | | | | | | | | | | | |
Tier 1 capital to adjusted tangible assets | $ | 1,447,957 |
| | 8.0 | % | | $ | 725,674 |
| | 4.0 | % | | $ | 907,093 |
| | 5.0 | % |
Total capital to risk-weighted assets | 1,530,059 |
| | 13.5 |
| | 907,153 |
| | 8.0 |
| | 1,133,942 |
| | 10.0 |
|
Tier 1 capital to risk-weighted assets | 1,447,957 |
| | 12.8 |
| | N/A |
| | N/A |
| | 680,365 |
| | 6.0 |
|
Restrictions on Paying Dividends
Federal banking regulations impose limitations upon certain capital distributions by savings banks, such as certain cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The OCC regulates all capital distributions by EB directly or indirectly to us, including dividend payments. EB may not pay dividends to us if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements, or in the event the OCC notifies EB that it is subject to heightened
supervision. Under the Federal Deposit Insurance Act, an insured depository institution such as EB is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized.” Payment of dividends by EB also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an “unsafe and unsound” banking practice.
Asset and Liability Management and Market Risk
Interest rate risk is our primary market risk and results from our investments in interest-earning assets with funds obtained from interest-bearing deposits and borrowings. Interest rate risk is defined as the risk of loss of future earnings or market value due to changes in interest rates. We are subject to this risk because:
•assets and liabilities may mature or re-price at different times or by different amounts;
•short-term and long-term market interest rates may change by different amounts;
•similar term rate indices may exhibit different re-pricing characteristics; and
•the life of assets and liabilities may shorten or lengthen as interest rates change.
Interest rates may also have a direct or indirect effect on loan demand, credit losses, mortgage origination volume, the fair value of MSRs and other items affecting earnings. Our objective is to measure the impact of interest rate changes on our capital and earnings and manage the balance sheet in order to decrease interest rate risk.
Interest rate risk is primarily managed by the Asset and Liability Committee (ALCO), which is composed of certain executive officers and other members of management, in accordance with policies approved by our Board of Directors. ALCO has employed policies that attempt to manage our interest-sensitive assets and liabilities, in order to control interest rate risk and avoid incurring unacceptable levels of credit or concentration risk. We manage our exposure to interest rates by structuring our balance sheet according to these policies in the ordinary course of business. In addition, the ALCO policy permits the use of various derivative instruments to manage interest rate risk or hedge specified assets and liabilities.
Consistent with industry practice, we primarily measure interest rate risk by utilizing the concept of "Economic Value of Equity" (EVE) which is defined as the present value of assets less the present value of liabilities. EVE scenario analysis estimates the fair value of the balance sheet in alternative interest rate scenarios. The EVE does not consider management intervention and assumes the new rate environment is constant and the change is instantaneous. Further, as this framework evaluates risks to the current balance sheet only, changes to the volumes and pricing of new business opportunities that can be expected in the different interest rate outcomes are not incorporated in this analytical framework. For instance, analysis of our history suggests that declining interest rate levels are associated with higher loan production volumes at higher levels of profitability. While this business hedge historically offsets most, if not all, of the heightened amortization of our MSR portfolio and other identified risks associated with declining interest rate scenarios, these factors fall outside of the EVE framework. As a result, we further evaluate and consider the impact of other business factors in a separate net income sensitivity analysis.
If EVE rises in a different interest rate scenario, that would indicate incremental prospective earnings in that hypothetical rate scenario. A perfectly matched balance sheet would result in no change in the EVE, no matter what the rate scenario. The table below shows the estimated impact on EVE of increases in interest rates of 1%, 2% and 3% and decreases in interest rates of 1%, as of June 30, 2013 and December 31, 2012.
|
| | | | | | | | | | | | | |
Interest Rate Sensitivity | Table 34 | |
(dollars in thousands) | June 30, 2013 | | December 31, 2012 |
| Net Change in EVE | | % Change of EVE | | Net Change in EVE | | % Change of EVE |
Up 300 basis points | $ | 248,633 |
| | 11.6 | % | | $ | 392,915 |
| | 17.1 | % |
Up 200 basis points | 228,875 |
| | 10.7 | % | | 348,431 |
| | 15.2 | % |
Up 100 basis points | 154,636 |
| | 7.2 | % | | 217,315 |
| | 9.5 | % |
Down 100 basis points | (244,866 | ) | | (11.5 | )% | | (300,577 | ) | | (13.1 | )% |
The projected exposure of EVE to changes in interest rates at June 30, 2013 was in compliance with established policy guidelines. Exposure amounts depend on numerous assumptions. Due to historically low interest rates, the table above may not predict the full effect of decreasing interest rates upon our net interest income that would occur under a more traditional, higher interest rate environment because short-term interest rates are near zero percent and facts underlying certain of our modeling assumptions, such as the fact that deposit and loan rates cannot fall below zero percent, distort the model’s results.
Use of Derivatives to Manage Risk
Interest Rate Risk
An integral component of our interest rate risk management strategy is our use of derivative instruments to minimize significant fluctuations in earnings caused by changes in interest rates. As part of our overall interest rate risk management strategy, we enter into contracts or derivatives to hedge interest rate lock commitments, loans held for sale, certain loans in our held for sale portfolio, trust preferred debt, and forecasted issuances of debt. These derivatives include forward sales commitments, optional forward sales commitments, and forward interest rate swaps.
We enter into these derivative contracts with major financial institutions. Credit risk arises from the inability of these counterparties to meet the terms of the contracts. We minimize this risk through collateral arrangements, exposure limits and monitoring procedures.
Commodity and Equity Market Risk
Commodity risk represents exposures to deposit instruments linked to various commodity and metals markets. Equity market risk represents exposures to our equity-linked deposit instruments. We offer market-based deposit products consisting of MarketSafe® products, which provide investment capabilities for customers seeking portfolio diversification with respect to commodities and other indices, which are
typically unavailable from our banking competitors. MarketSafe® deposits rate of return is based on the movement of a particular market index. In order to manage the risk that may occur from fluctuations in the related markets, we enter into offsetting options with exactly the same terms as the commodity and equity linked MarketSafe® deposits, which provide an economic hedge.
Foreign Exchange Risk
Foreign exchange risk represents exposures to changes in the values of deposits and future cash flows denominated in currencies other than the U.S. dollar. We offer WorldCurrency® deposit products which provide investment capabilities to customers seeking portfolio diversification with respect to foreign currencies. The products include WorldCurrency® single-currency certificates of deposit and money market accounts denominated in the world’s major currencies. In addition, we offer foreign currency linked MarketSafe® deposits which provide returns based upon foreign currency linked indices. Exposure to loss on these products will increase or decrease over their respective lives as currency exchange rates fluctuate. In addition, we offer foreign exchange contracts to small and medium size businesses with international payment needs. Foreign exchange contract products, which include spot and simple forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate. These types of products expose us to a degree of risk. To manage the risk that may occur from fluctuations in world currency markets, we enter into offsetting short-term forward foreign exchange contracts with terms that match the amount and the maturity date of each single-currency certificate of deposit, money market deposit instrument, or foreign exchange contract. In addition, we enter into offsetting options with exactly the same terms as the foreign currency linked MarketSafe® deposits, which provide an economic hedge. For more information, including the notional amount and fair value, of these derivatives, see Note 12 in our condensed consolidated financial statements.
Off Balance Sheet Arrangements
On June 7, 2013, we closed our second private securitization transaction in which a special purpose wholly-owned subsidiary of the Company, EverBank Funding, LLC (EverBank Funding), sold approximately $303.2 million of residential mortgage pass-through certificates issued by EverBank Mortgage Loan Trust 2013-2 pursuant to a pooling and servicing agreement. The execution of this securitization, in combination with the securitization performed last quarter, resulted in total securitizations by EverBank Funding through June 30, 2013 of $610.6 million. These securitization transactions issued certificates that were offered and sold to qualified institutional buyers. Unless so registered, the offered certificates may not be offered or sold in the United States except pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended.
In connection with both transactions, we sold, on a servicing-retained basis, certain residential mortgage loans we originated to unaffiliated purchasers (the Sellers). The Sellers subsequently sold such mortgage loans to EverBank Funding, which transferred the mortgage loans to the trusts in exchange for the offered certificates and certain non-offered certificates. None of the certificates were retained by EverBank Funding or any affiliate of EverBank Funding.
We retained the servicing rights associated with the mortgages held by the trusts that performed the securitizations, and we will continue to service the loans. Additionally, the creditors of the trusts have no recourse against us except in accordance with our obligations under standard representations and warranties. Neither of the trusts has been consolidated into the financial statements as we are not the primary beneficiary of the trusts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See the “Asset and Liability Management and Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of June 30, 2013. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2013.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2013 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
We are subject to various claims and legal actions in the ordinary course of our business. Some of these matters include employee-related matters and inquiries and investigations by governmental agencies regarding our employment practices. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, operating results, financial condition or cash flows.
In addition to the legal proceedings previously disclosed in our Annual Report on Form 10-K as filed with the SEC on March 15, 2013, as updated in our Quarterly Report on Form 10-Q as filed with the SEC on April 30, 2013, we are currently subject to the following legal proceedings:
Mortgage Electronic Registration Services Related Litigation
MERS, EverHome Mortgage Company, EverBank and other lenders and servicers that have held mortgages through MERS are parties to the following class action lawsuits where the plaintiffs allege improper mortgage assignment and, in some instances, the failure to pay recording fees in violation of state recording statutes: (1) State of Ohio, ex. rel. David P. Joyce, Prosecuting Attorney General of Geauga County, Ohio v. MERSCORP, Inc., Mortgage Electronic Registration Services, Inc. et al. filed in October 2011 in the Court of Common Pleas for Geauga County, Ohio, later removed to federal court and subsequently remanded to state court; (2) State of Iowa, by and through Darren J. Raymond, Plymouth County Attorney v. MERSCORP, Inc., Mortgage Electronic Registration Services, Inc., et al., filed in March 2012 in the Iowa District Court for Plymouth County and later removed to federal court; (3) Boyd County, ex. rel. Phillip Hedrick, County Attorney of Boyd County, Kentucky, et al. v. MERSCORP, Inc., Mortgage Electronic Registration Services, Inc., et al. filed in April 2012 in the United States District Court for the Eastern District of Kentucky; (4) St. Clair County, Illinois v. Mortgage Electronic Registration Systems, Inc., MERSCORP, Inc. et al., filed in May 2012 in the Circuit Court of the Twentieth Judicial Circuit, St. Clair County, Illinois; (5) Macon County, Illinois v. MERSCORP, Inc., Mortgage Electronic Registration Systems, Inc., et al. filed in July 2012 in the Circuit Court of the Sixth Judicial Circuit, Macon County, Illinois and later removed to federal court; (6) County of Multnomah v. Mortgage Electronic Registration Systems, Inc., et al., filed in December 2012 in an Oregon state court, later removed to federal court and subsequently remanded to state court; (7) County of Union Illinois, et al. v. MERSCORP, Inc., Mortgage Electronic Registration Services, Inc., et al. filed in April 2012 in the Circuit Court for the First Judicial Circuit, Union County, Illinois, later removed to federal court and now pending on appeal in the United States Court of Appeals for the Seventh Circuit; (8) County of Ramsey and County of Hennepin, Minnesota v. MERSCORP Holdings, Inc., et al. filed in February 2013 in the Second Judicial District Court and subsequently removed to the U.S. District Court, District of Minnesota; and (9) Jackson County, Missouri v. MERSCORP, Inc., Mortgage Electronic Registrations Systems, Inc., et al., filed in April 2012 in the Circuit Court of Jackson County, Missouri and later removed to federal court where the court granted the defendants' motion to dismiss, and now stayed due to the bankruptcy filing of defendant GMAC. In these class action lawsuits, the plaintiffs in each case generally seek judgment from the courts compelling the defendants to record all assignments, restitution, compensatory and punitive damages, and appropriate attorneys' fees and costs. We believe the plaintiff's claims are without merit and intend to contest all such claims vigorously. EverBank was previously subject to one additional lawsuit: (1) Christian County Clerk, et al. v. MERS and EverHome Mortgage Company filed in April 2011 in the United States District Court for the Western District of Kentucky, which was the subject of an appeal in the United States Court of Appeals for the Sixth Circuit that upheld the lower court's dismissal of the complaint.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. You should carefully consider the risks and uncertainties described in our prior filings. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business, financial condition and results of operation. There have not been any material changes from the discussion of risk factors affecting the Company previously disclosed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 15, 2013. The Risk Factors set forth the material factors that could affect our financial condition and operations. Readers should not consider any descriptions of such factors to be a complete set of all potential risks that could affect the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | EverBank Financial Corp |
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Date: | July 31, 2013 | | /s/ Robert M. Clements |
| | | Robert M. Clements |
| | | Chairman of the Board and Chief Executive Officer |
| | | (Principal Executive Officer) |
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Date: | July 31, 2013 | | /s/ Steven J. Fischer |
| | | Steven J. Fischer |
| | | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
EXHIBIT INDEX
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Exhibit No. | | Description |
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3.1 | | Amended and Restated Certificate of Incorporation of EverBank Financial Corp (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 13, 2012 and incorporated herein by reference) |
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3.2 | | Amended and Restated Bylaws of EverBank Financial Corp (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 30, 2012 and incorporated herein by reference) |
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31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** |
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31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** |
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32.1 | | Certification of Chief Executive Officer pursuant to Rule pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
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32.2 | | Certification of Chief Financial Officer pursuant to Rule pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
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101 | | The following materials from the Company’s 10-Q for the period ended June 30, 2013, formatted in Extensible Business Reporting Language (XBRL): (a) Condensed Consolidated Balance Sheets; (b) Condensed Consolidated Statements of Income; (c) Condensed Consolidated Statements of Comprehensive Income (Loss); (d) Condensed Consolidated Statements of Shareholders’ Equity; (e) Condensed Consolidated Statements of Cash Flows; and (f) Notes to Condensed Consolidated Financial Statements.* |
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* | | Furnished herewith. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
** | | Filed herewith |