James W. Brody, Esq. Chairman of Mortgage Banking Group Johnston Thomas, Attorneys at Law, P.C. T: 415/ E:

Transcription

1 James W. Brody, Esq. Chairman of Mortgage Banking Group Johnston Thomas, Attorneys at Law, P.C. T: 415/ E: Thursday, May 10, :30 a.m. PST/1:30 p.m. EST

2 Important Notice(s): Johnston Thomas, Attorneys at Law, P.C. ( Johnston Thomas ) makes available the information ("Information") in this presentation ( Presentation ) for general informational purposes only. The Information is not intended to constitute, and does not constitute, legal advice or a solicitation for the formation of an attorney-client relationship. No attorney-client relationship is created through your use of or your receipt of the Information contained within the Presentation. Johnston Thomas accepts clients only in accordance with certain formal procedures, and renders legal advice only after the completion of those procedures, and/or completion and execution of an appropriate retainer agreement. Any and all statements made by the moderator and the presenters, as part of this webinar program, reflect his or her own viewpoint and not necessarily that of the program host, Johnston Thomas. 2

3 Johnston Thomas is a full suite boutique law firm, which amongst other practices such as real estate and commercial litigation, has a nationally recognized Mortgage Banking Practice Group. With an experienced team of mortgage banking lawyers (including senior litigation attorneys, former in-house General Counsel and in-house Compliance Counsel from a well-known bank and mortgage company, etc.), certified fraud examiner(s) and forensic underwriter(s), and an extremely competent support staff, all of whom are dedicated to aggressively and competently serving the needs of our valued clientele, Johnston Thomas Mortgage Banking Practice Group is known all across the country for the experience and results that it brings to the areas of regulatory compliance, mortgage banking litigation, and a broad range of mitigation services. Amongst the many legal services Johnston Thomas offers the mortgage banking industry (e.g., brokers, lenders, servicers, vendors and more), such include, but are in no way limited to, as follows: Mortgage Repurchase and Make-Whole Indemnification Litigation and Mitigation (e.g., Secondary Market Investors, Agencies, etc.) Mortgage Industry Litigation (e.g., Servicer and Sub-Servicer Disputes, 3rd Party Fraud Recovery, CPL and Title Policy Actions, Appraiser E&O Claims, Loan Officer Actions, etc. Mortgage Repurchase and Make-Whole Alternative Dispute Resolution (e.g., Arbitration, Mediation, etc.) Regulatory Compliance, Administrative and Business Services (e.g., Mock Audits, LO Compensation, MSAs, Licensing, CA Dep t of Business Oversight, HUD Review Board, etc.) Transactional Matters (e.g., Drafting and Negotiating Broker and Correspondent Loan Purchase Agreements, Mergers & Acquisitions, etc.) 3

4 James W. Brody, Esq. As the Chairman of the Mortgage Banking Practice Group, Mr. Brody actively manages all the complex mortgage banking litigation, mitigation, and compliance matters for Johnston Thomas and its diverse clientele. Being one of the founding and managing attorneys for his prior mortgage banking firm, as well as having practiced law for close to 20 years with nearly 15 of those years being spent in the mortgage banking industry, Mr. Brody has been instrumental in the firm s development and in its continued success. Mr. Brody has successfully resolved hundreds of mitigation and litigation cases that involve complex mortgage fraud schemes, as well as large-scale repurchase and/or make-whole disputes. Mr. Brody s experience centers on those legal issues that arise during and through loan originations, loan purchase sales, loan securitizations, foreclosures, bankruptcies, and repurchase and indemnification claims. 4

5 Michael Fratantoni, Ph.D. Michael Fratantoni is MBA's Chief Economist and SVP of Research and Industry Technology. In this role, he is responsible for overseeing MBA's industry surveys, benchmarking studies, economic and mortgage originations forecasts, industry technology efforts, and policy development research for both single-family and commercial/multifamily markets. Additionally, Fratantoni is president and member of the Board of Directors of MISMO and serves on the CSP's Industry Advisory Group and the membership committee of MERS. Ken Richey, Founding Partner Ken Richey has over 30 years of experience serving clients in the mortgage banking industry, including consulting on business transactions, providing assistance with due diligence and structuring in mergers and acquisitions, financings, asset sales and business liquidation events. Ken is well respected in the mortgage industry nationally, with professional organizations, trade associations and business groups often seeking Ken s insights on a variety of issues. Joe DeDominicis, CFO Joe leads the Accounting, Treasury, Finance and Human Resource activities at NRL. He began his mortgage banking career over 25 years ago and has held senior leadership roles with First Franklin, Clayton Holdings, FirstCity, SN Servicing, National City and Vantium Capital. Joe brings a unique combination of skills and experience, combining Accounting/Finance, Risk Management, Operations and Portfolio Management. He is a member of the National Mortgage Bankers Association and recently relocated to the Houston area where he lives with his wife and three daughters. Joe completed his Bachelor s Degree in Accounting at the University of Maryland at College Park, MD and is a licensed CPA (Inactive) 5

6 8

7 GDP Growth 2.6% 2.3% 2.3% 1.9% Inflation 2.1% 2.3% 2.4% 2.5% Unemployment 4.4% 3.9% 3.7% 3.8% Fed Funds 1.375% 2.375% 3.125% 3.125% 10-year Treasury 2.4% 3.2% 3.5% 3.5% 30-year Mortgage 3.9% 4.9% 5.4% 5.4% New home sales (000s) Existing home sales (000s) 5,542 5,659 5,791 5,991 Purchase originations ($B) 1,110 1,168 1,250 1,317 Refi originations ($ B) Total originations ($B) 1,710 1,611 1,645 1,712 Mortgage debt outstanding ($B) 10,010 10,370 10,760 11,130 Source: MBA Forecast

8 Purchase Mortgage Applications Index (by week of the year, NSA) Week of the Year Source: MBA Weekly Applications Survey

9 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Index Rate 6,000.0 Refinance Index and 30 Yr Fixed Mortgage Rate , yr Fixed Rate , , , Source: MBA Weekly Applications Survey , Refinance Index 0.00 Refi Index (left axis) 30 Yr Fixed rate (right axis) 9

10 Billions of dollars in originations $2,500 $2,000 Mortgage Originations: Forecast for 2018: $1,500 $1,000 Refi Purchase $500 $ Source: MBA Forecast

11 Source: Federal Reserve, Freddie Mac, MBA 11

12 Source: NAR, MBA 12

13 Source: FHFA, BLS 13

14 4% 5% 5% 5% 5% 5% 7% 7% 7% 8% 8% 7% 20% 19% 16% 17% 18% 18% 30% 27% 24% 21% 21% 25% 26% 26% 25% 25% 23% 22% 27% 26% 28% 31% 36% 36% 34% 40% 42% 46% 48% 51% 41% 45% 47% 47% 49% 52% Share of Home Purchase Volume (#) by Company Type Share of Refinancing Volume (#) by Company Type 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% Large Depository Community Bank Credit Union (<$10bn Assets) Independent Mortgage Bank 0% Large Depository Community Bank Credit Union (<$10bn Assets) Independent Mortgage Bank Source: HMDA 14

15 Consumer Direct Avg. Purchase Production Volume $22.5B $12.9B $1.3B $1.9B 1% 1% 12% 4% 5% 6% 1% 15% Correspondent 50% 56% Broker Wholesale 2% 12% 89% 77% Retail 35% 32% Large Banks Large Independents Mid-Size Banks Mid-Size Independents Source: PGR (2016): MBA and STRATMOR Peer Group Roundtables: 15

16 200.0 Large Banks Large Independents Mid-Size Banks Mid-Size Independents (29) (50.0) H2017 Source: PGR: MBA and STRATMOR Peer Group Roundtables: 16

17 IMB Net Production Income (basis points) $ Net Production Income (bps) $ Avg. Production Volume ($M) $ $600 $ $ $ $200 $100 (8.3) $0 Q417 Q317 Q217 Q117 Q416 Q316 Q216 Q116 Q415 Q315 Q215 Q115 Q414 Q314 Q214 Q114 Q413 Q313 Q213 Q113 Q412 Source: MBA s Quarterly Mortgage Bankers Performance Report, 17

18 45% 1st Mtg Volume - Servicing Retained (% based on $) - Full Sample 1st Mtg. Volume - Servicing Retained (% based on $) - Lenders with < 50% Gov't Volume 1st Mtg. Volume - Servicing Retained (% based on $) - Lenders with >= 50% Gov't Volume 40% 35% 34.6% 30% 25% 20% 23.7% 15% 10% 14.8% 5% 0% Q417 Q317 Q217 Q117 Q416 Q316 Q216 Q116 Q415 Q315 Q215 Q115 Q414 Q314 Q214 Q114 Q413 Q313 Q213 Q113 Q412 Q312 Q212 Q112 Q411 Q311 Q211 Q111 Q410 Q310 Q210 Q110 Q409 Q309 Q209 Q109 Q408 Q308 Source: MBA s Quarterly Mortgage Bankers Performance Report:

19 $650 $550 $450 $350 $250 $150 $50 ($50) ($150) ($250) Net Financial Income Net Operating Income Source: MBA s Servicing Operations Study and Forum (Prime Servicers): PGR 1H2017

20 20

21 Tricia Migliazzo Vice President, Member Engagement

22 8

23 Business Advisory Partner, has over 30 years of experience serving clients in the mortgage banking industry, including consulting on business transactions, providing assistance with due diligence and structuring in mergers and acquisitions, financings, asset sales and business liquidation events. Ken is well respected in the mortgage industry nationally, with professional organizations, trade associations and business groups often seeking Ken s insights on a variety of issues. Ken Richey Founding Partner

24 The Market Highlights of IMB financial performance Deal Structure Company Valuation Concepts

25 What factors are driving the current M&A environment? Is consolidation picking up or slowing down? Is it still a seller s market? For how long?

26 Capital: requirements, access and costs are all rising simultaneously Financial success is more elusive for many smaller lenders Uncertainty of future interest rates and housing inventory Risk sharing objectives (buyers with sellers) are emerging Funding/Capital/Securitization lower cost of capital (for sellers); better secondary execution Customer Reach new segments and geographics Diversification new distribution channels and products Scale and Margin realize operating efficiencies of scale Better Technology, Marketing, Compliance, HR & Benefits Package Deeper Talent Pool

27 Volume trending down but still reaching record highs for some Secondary margins trending down Profits trending down

28 2017 Average: 2.4 billion (612 million per quarter) YoY trend down 9% Q Average: ~506 million QoQ trend down 17%; YoY trend up 5% Unfunded Lock Pipelines up 44% QoQ; down 2% YOY

29 2017 Average: 337 bps YoY trend up 2 bps Q Average: ~322 bps QoQ trend down 13 bps; YoY trend down 36 bps

30 2017 Average: $8,214 per loan YoY trend up $728 per loan Q Average: ~$8,993 per loan QoQ trend up $695; YoY trend up $172

31 2017 Average: 27 bps YoY trend down 28 bps Q Average: ~8 bps QoQ trend up 8 bps; YoY trend down 14 bps

32 What are the different transaction types? (assets vs. entity) Who drives the decisions? Can I get an upfront premium? How are earn outs structured? Indemnifications for legacy liabilities Is there value in my GSE/GNMA approvals? What do I do with my MSRs?

33 Balance Sheet Owners Equity (adj. to FMV) = Net Assets Value Full or Partial Transfer (skinny balance sheet) P&L: Growth and sustainable future profitability drives value (prem. & EO) Net Assets Value + Premium + Earn Out = $ Transaction Value/Price

34 Valuation is based on after tax cash flows Investors consider corporate and personal taxes TCJA lowers taxes Valuations, generally, are expected to increase

35 Cost of Debt Lower tax rate = lower interest tax shield Limits on deductibility of interest : (ATI), as defined 2022-Beyond: 30% of EBITDA, or adjusted taxable income 30% of EBIT, or ATI* (more strict) Cost of Equity Many expecting the cost of equity to increase - waiting to see the data Higher cost of capital will put downward pressure on all valuations, but impact will be greater for those with a lot of expensive debt

36 First-time, or less experienced buyers with strong equity and liquidity Mature, repeat buyers are getting more astute and skilled at transaction execution and integration Very anxious to buy retail, purchase production especially where significant synergies & profitability enhancement opportunities exist Wider discrepancies in buyers financial performance compared to peers potentially yielding greater discrepancies between buyers bid prices and terms Some buyers willing to pay bps x production as portion of earn out (less seller risk) Earn outs based on forward pretax income under new platform is most common (1 to 3x+) Slightly longer earn out periods Some very aggressive closing premiums where appropriate attributes & value is present

37 Decision process to sell/partner is multi-faceted, takes time and should not be rushed Most sellers are slow to transfer their origination platforms for <1.5+x pretax earnings plus balance sheet value unless they are under sustained financial duress Some sellers are very cautious about their ability to retain production especially if integration to a buyer brings on too many changes including origination platform, compensation, benefits, etc. Sellers continuing with the company want autonomy or the ability to be part of the broader corporate decision making process and to keep their name/dba LOs want: Same or better pricing, fewest changes, loans to close, more products, no less compensation or benefits, better technology

38 Conforming cultures Growing, profitable, high purchase % retail production is king Dynamic leadership teams willing to stay on post-transaction nearly always bring a premium Unique or strategic attributes incl. technology, products, etc. Internal servicing platforms

39 High historic refinance volume Wholesale, except for higher volume, higher profitability platforms Consumer direct channel High jumbo volume percentage Reverse mortgage

40 Strong leadership team with clear vision Cultures are close Business models reasonably match up Financially qualified to buy (buy side diligence) Superior financial performance Experience with previous successful transactions Do not fall in love with the first opportunity Highest bidder may not be the best buyer

41 Prior to Sale Some buyers are seeking distressed situations or walk-overs and likely not to pay market value Other buyers understand the market and are willing to pay competitively PE buyers often expect more than production including leadership, sustainable profitability or other unique or strategic attributes (e.g. technology, etc.) Selling/partnering or capital raising is a very demanding, time consuming and exhausting process Post Sale The key: a smooth and effective integration/transition plan well executed with very minimal immediate operational changes Expect employee turnover Use retention compensation to prevent loss of key executives and high producing LOs

42 Questions? Ken Richey Direct Number

43 43 NRL MORTGAGE NRLMORTGAGE.COM Presented By: Joe DeDominicis

44 44 What are motivating Sellers? With the changes in rate volatility, economic and the housing market, reasons to motivate sellers change based on trends. The main reasons why sellers are motivated are because: Rate Term Refinances are gone High costs of Compliance Increasing competition for borrowers & sales talent Starting to see margin compression Capital at Risk for owners

45 45 What are motivating Buyers? Potential Returns Growth opportunities on both origination & servicing Opportunity to deploy substantial amounts of capital Opportunity to tap into customer database for cross sell Faster to buy than build organically

46 46 Who are the Buyers? PE Firms Small to Medium Sized Banks Medium to Large IMB s

47 47 Private Equity Capital in Mortgage Buyer /Sponsor Ta rget Buyer /Sponsor Ta rget 6

48 48 Different Types of Buyers? Strategic Buyers Bank Buyers IMB s seeking to grow their production, typically in areas where they do not have a presence or a significant presence Potentially to expand into different origination channels (Broker, Correspondent, etc ) Adding production volume to grow servicing portfolio Regional and Community Banks looking to enter or expand their mortgage presence Opportunities to expand their bank footprint Ability to tap into larger customer base to cross sell

49 49 Success Goals of a Transaction Buyers Perspective Increase production scale (geographic, channel mix, product mix) Increase operational efficiency and overall profitability Retain salespeople and key management Replace servicing run-off Seller Perspective Cultural Fit Maximize Return on Sale Opportunity to earn premium to purchase valuation through earn out Exit strategy that enhances or preserves existing company values and employees

50 50 Typical Deal Structure Mortgage Servicing Rights Fair Market Value supported by a third-party valuation. With assumptions that can be supported. Tangible Book Value Premium to BV The value associated with any differentiators which your company is able to demonstrate to interested buyers (e.g., technology, process, client acquisition model, etc ). Typically structured as part of earnout Total Transaction Value Tangible Assets less tangible liabilities (including reserves)

51 51 Transaction Payout All proceeds paid at closing Payment of BV with an earnout Combination of some payment and some stock Payment with holdback to fund contingent liabilities

52 52 Stock Sale Easier in terms of governmental approvals and third-party consents Allows for seamless business continuation, day after closing, with the opportunity to take time to integrate the two companies Requires buyer to take on potential contingent liabilities of seller Can lead to acquisition of bad vendor contract, leases, etc

53 53 Asset Sale Purchaser can be more selective in the assets, liabilities and operations it wishes to assume Generally allows for purchaser to avoid legacy liabilities from prior company Can lead to delays in part or all of the acquisition due to state and MLO licensing Can lead to parts of company not being acquired

54 54 DEAL HURDLES Agreement on true FMV of key assets (i.e., MSR s) Conversion of key branches and/or LO s Quantification of contingent liabilities Audit and/or compliance issues Underwriting quality

55 55 Provide believable revenue and net income forecasts Emphasize key differentiators & be able to tell the story Assist in conversion of key branches and loan officers KEYS TO A SUCCESSFUL DUE DILLIGENCE Make sure everything is organized & be realistic with expectations

56 THANK YOU! 56