snl 1114 CLOSE 11-19-14 · 2015-01-28 · US housing market indicators—including permits for new construction, housing starts, completions, home prices, refinancings, ... This Industry

Please see General Disclaimers on the last page of this report.

Current Environment ............................................................................................ 1

Industry Profile .................................................................................................... 12

Industry Trends ................................................................................................... 13

How the Industry Operates ............................................................................... 20

Key Industry Ratios and Statistics ................................................................... 26

How to Analyze a Bank or Thrift Institution ................................................... 28

Glossary ................................................................................................................ 33

Industry References ........................................................................................... 36

Comparative Company Analysis ...................................................................... 37

This issue updates the one dated April 2014.

Industry Surveys Thrifts & Mortgage Finance Erik Oja, Financials Sector Equity Analyst

NOVEMBER 2014

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S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into a computer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; and Lucy Fato, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, S&P SMALLCAP 600, and S&P EUROPE 350 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

INDUSTRY SURVEYS THRIFTS & MORTGAGE FINANCE / NOVEMBER 2014 1

CURRENT ENVIRONMENT

Improving US economy bodes well for housing market

US housing market indicators—including permits for new construction, housing starts, completions, home prices, refinancings, sales of existing homes, and apartment rents—confirm that the US economy, the financial services industry, and the mortgage origination industry all appear to be making a comeback, six years after the unprecedented downturn in 2008. Household formation, population growth, low levels of construction in 2008–2012, and expanding credit should continue to drive the US housing market, while increasing levels of student loan debt and rising interest rates hinder a stronger recovery.

US economic indicators, while not robust, at least indicate that domestic employment and manufacturing are expanding. In the absence of fiscal stimulus such as tax cuts or targeted spending, the Federal Reserve (Fed) has provided unprecedented support for the US economy. An improving housing market and a growing economy have also eased the heavy burden of legacy issues, such as foreclosures, “underwater” mortgages, and undercapitalized banks. Interest rates, which until recently were historically low, combined with government incentives, made it easier for homeowners to refinance into more affordable mortgages. Foreclosure sales have picked up, and inventories of foreclosed homes are falling. Private investors are buying homes and mortgage-backed securities.

Banks hit hard by the housing and economic downturn have worked diligently to rebuild capital and the confidence of shareholders and regulators. US banks have paid billions of dollars in fines to settle regulatory charges of improper foreclosures, and they have paid billions more to buy back mortgages that have defaulted or that had underwriting issues.

According to the Federal Deposit Insurance Corporation (FDIC), US banking industry net income increased to $40.2 billion in the second quarter of 2014, up 5.3% from $38.2 billion in the second quarter of 2013. Recent figures reflect improvement from 2009, when the industry collectively lost $18.3 billion. The recovery was driven by a fall-off in legacy credit costs and an increase in noninterest income, including mortgage banking fees.

Capital levels have mirrored the earnings improvements, as total bank equity capital for the industry rose to $1.7 trillion as of the second quarter of 2014, an annual rate increase of 5.7% from $1.3 trillion at the height of the financial crisis during the fourth quarter of 2008.

Note: This Industry Survey covers the US residential mortgage origination and servicing industry. Thrift-chartered institutions are one part of this industry. The term “thrift” applies to four types of organizations: savings and loan associations (S&Ls), savings banks, cooperative banks, and credit unions. All provide credit for residential housing, but differ in other respects, as discussed in more detail in the “How the Industry Operates” section of this Survey. This Survey covers the activities of larger US banks with significant mortgage origination and servicing revenues, such as Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co., as well as regional banks and community banks.

POSITIVE HOUSING INDICATORS, BUT AT A SLOWER PACE

Home prices The S&P/Case-Shiller 20-City Composite Home Price Index measures the residential housing market by tracking changes in the value of residential real estate in 20 metropolitan regions in the US; it had a base value of 100 in January 2000. After falling 32.6% from its peak in July 2006 to its trough in April 2009, this index has staged three slight rebounds (in September 2009, July 2010, and August 2011), each followed by a small decline. In July 2014, prices increased 6.7% from the prior year, and 0.6% on a month-on-month basis. According to the September 2014 S&P/Case-Shiller Home Price Index, the July figures follow the downward trending year-over-year home prices, while month-on-month prices are still rising, although

2 THRIFTS & MORTGAGE FINANCE / NOVEMBER 2014 INDUSTRY SURVEYS

at a slower rate than the past few years. Current home prices in the US are back to their autumn 2004 levels—up 29.3% from the post-crisis low in March 2012, and 17.0% below the all-time high reached in July 2006.

Existing home sales US existing home sales, according to the National Association of Realtors, hit a seasonally adjusted annual rate (SAAR) of 5.05 million units in August 2014, down 5.3% from 5.33 million in the prior year, and 1.8% below the July 2014 rate. August home sales are at the second highest pace of 2014 and 49% above the 3.39 million trough recorded in July 2010.

All of these readings are well below the heady figures generated during the height of the real estate boom nine years ago: US existing home sales peaked in September 2005 at 7.25 million units.

The US Federal Housing Finance Agency (FHFA) maintains a House Price Index (HPI) that tracks the change in single-family house prices nationally for homes with conforming mortgages. As of July 2014, the HPI rose 4.4% from July 2013, and 0.1% from June 2014. This is the eighth consecutive monthly house price increase. The index is 6.4% below its April 2007 peak and roughly the same as the July 2005 index level.

New home sales As reported by the US Commerce Department, new home sales exhibit a similar trend. New home sales peaked in July 2005, at an annualized rate of 1.389 million, and then steadily fell to an April 2009 low of 337,000. Prodded by both government and homebuilders’ initiatives, sales rose to a high of 422,000 in April 2010, but fell sharply again, to an all-time low of 273,000 in February 2011. In January 2012, sales rose to 339,000 and ended the year at 378,000 in December. In January 2013, sales increased further to 458,000 (annualized), up 35.5% from January 2012. In December 2013, sales dropped to an annualized rate of 427,000; nevertheless, this figure was up 7.83% from 396,000 in December 2012. In August 2014, new home sales reached a SAAR of 504,000 units, the highest level in more than six years. The rate is up 33.0% from August 2013, and up 18.0% from the previous month.

Housing starts Since mid–2011, housing starts have been on a firmer footing due to stronger multifamily construction, with most monthly readings above 850,000 units (annualized). Multifamily starts jumped 62% in 2011, 42% in 2012, and 26% in 2013, due to demand for rental units. As of August 2014, multifamily housing starts increased 19.2% year on year.

Single-family construction starts in 2011 were 7.8% lower than in 2010, continuing this measure’s weakness after it plunged 80% in late 2008 from its September 2005 peak. In 2012, single-family starts were up 23%, year over year, and, in 2013, they were up 15.5%. As of August 2014, single-family construction starts increased 4.2% from August 2013.

In each month from January 2012 through August 2013, total housing starts were up by a median of 26% over the year-earlier period. However, rising interest rates beginning in May 2013 have strongly affected housing starts. In September 2013, starts increased only 1.2% from a year earlier. Since then, housing starts have risen, year over year, by a median of 7.5%. As of August 2014, total housing starts grew 5.6% month-on-month and 5.3% on a year-on-year basis.

Chart FinanH06: S&P/CASE-SHILLER HOME PRICE INDEX

406080

100120140160180200220240

1994 96 98 00 02 04 06 08 10 12 2014†

10-city index 20-city index*

S&P/CASE-SHILLER HOME PRICE INDEX(January 2000=100)

*Index started in January 2000. †Data through June.Source: S&P Capital IQ Indices.


Mortgage rates According to Wells Fargo, as of October 6, 2014, the 30-year, conforming mortgage fixed-rate was 4.250%, with an annual percentage rate (APR) of 4.335%, and the 30-year, FHA (Federal Housing Administration) mortgage fixed-rate was 4.000%, with an APR of 5.583%. The 30-year fixed-rate jumbo mortgage was 4.125%, with an APR of 4.153%.

The Mortgage Bankers Association (MBA) expects mortgage originations to decline to $1.007 trillion in 2014, from an estimated $1.755 trillion in 2013. It projects a significant drop in refinance and purchase originations. The MBA expects refinance originations to be approximately $438 billion this year, significantly down from $1.1 trillion in 2013. It expects $569 billion in purchase originations in 2014, a 14.6% drop from $652 billion in 2013.

Total US residential mortgage debt outstanding decreased 0.32% in 2013, 1.9% in 2012, and 2.2% in 2011 (compared with increases of 8.0% in 2007 and 11.5% in 2006). As of June 2014, the Fed estimated that outstanding US residential mortgage debt stood at approximately $10.8 trillion, including nearly $9.9 trillion of single-family mortgages and $957.6 billion of multifamily residence mortgages. The June 2014 outstanding residential mortgage debt was down 0.05% from the second quarter of 2013.

RISING INTEREST RATES OFFER PROMISE AND PERIL FOR MORTGAGE LENDERS

Persistently low short-term US interest rates were a boon for banks’ funding costs. However, low long-term rates also meant lower revenues from lending. In 2012, low interest rates, combined with the promise of rising rates, and further fueled by various government programs to aid homeowners, triggered a wave of

refinancings, giving a quick, short-term boost to fee income and total revenues. This was partly offset by lower and uncertain servicing fees that banks received, due to early repayments of mortgages. Overall, taking all of these offsetting positives and negatives into account, banks’ total net revenues grew slowly in the last few years.

In early May 2013, US interest rates jumped in response to comments from the Fed Chairman Ben Bernanke that investors interpreted as indicating that the Fed’s purchases of bonds would taper off in the fall of 2013. Rates have risen strongly since then, peaking on December 31, 2013, when the yield on the 10-year Treasury note reached 3.04%, up from a 2013 low of only 1.66% on

May 2, and up from a 2012 low of 1.43%. The yield on the five-year Treasury reached a high of 1.85% on September 5, 2013, up from a 2013 low of 0.65% and a 2012 low of 0.56%.

Rates started to ease in December 2013 and into 2014, until July, when rates started a moderately upward trend. In July 2014, the five-year Treasury note averaged 1.70% and the 10-year Treasury note averaged 2.54%. As of October 3, 2014, the five-year note was at 1.73%, while the 10-year note slid to 2.45%.

Interest rates are also sensitive to inflation expectations, though inflation, by official measures, is currently relatively benign. The consumer price index (CPI-W) rose 3.6% in 2011, 2.1% in 2012, and 1.4% in 2013. As of September 2014, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) expected a 1.9% increase in the consumer price index (CPI) in 2014 due to expected economic growth and wage increase.

Chart H02 Yield Curve

0.00.51.01.52.02.53.03.54.04.55.05.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

10-year T-note 3-month T-bill

*Data through September.Source: Federal Reserve Board.

YIELD CURVE (In percent)


Taking all factors into account (inflationary expectations, economic growth outlook, and safe harbors), as of September 2014, Standard & Poor’s Economics was forecasting that the average rate on the 10-year note and the 30-year bond would be 2.6% and 4.2%, respectively, for 2014, compared with 2.4% and 4.0% in 2013.

Previously low short-term interest rates enabled US banks to borrow large quantities of money at extremely low rates. However, banks have invested much of the deposit inflows in US government securities, due to a lack of consumer and residential lending opportunities. US banks’ investment securities portfolios, which contain a mix of US government, agency, corporate, and municipal securities, yielded a median of 2.60% at mid-2014, according to our compilations of reported data. Loans outstanding yielded a median of about 4.16% at mid-2014. Thus, banks’ net interest margins over the last few years were under pressure from the increased holdings of securities.

Due to varying and often long maturities of loans, investment securities, and deposits, bank net interest spreads and net interest margins react slowly to market interest rates. According to the FDIC, the quarterly industry net interest spread for all FDIC-insured banks was down to 3.15% in the second quarter of 2014, from a recent high of 3.84% in the first quarter of 2010, a significant drop that constrained revenue growth over this period.

MORTGAGE SETTLEMENTS

In February 2012, due to the “robo-signing” scandal that broke in mid-September 2010, the top five US mortgage servicers (JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, and Ally Financial) entered into a $25 billion settlement with 49 states and the federal government (known as the National Mortgage Settlement).

In April 2012, a US District Court Judge approved the 49-state mortgage settlement. It provides for $16.7 billion in borrower assistance, $5.9 billion in federal and state penalties, and $2.4 billion in refinancing mortgages. Bank of America is set to pay $11.9 billion, JPMorgan Chase and Wells Fargo $5.3 billion each, Citigroup $2.2 billion, and Ally Financial $310 million. The settlement requires principal reductions, refinancing, and payments to be completed within a three-and-a-half-year period.

The “robo-signing” scandal broke when an employee of GMAC (now known as Ally Financial) testified that about 10,000 foreclosures per month were approved without verifying the validity of the applications for the foreclosures. Few, if any, of the foreclosures were initiated against homeowners who were current on their mortgage payments—the foreclosure proceedings were initiated by banks after the mortgage loans became nonperforming. This news brought into question the legal validity of any foreclosure conducted by GMAC. Furthermore, this issue quickly widened to include all US mortgage originators, as well as holders and servicers, and it threatened to bring US foreclosures to a halt.

Caught up in the controversy were all large mortgage servicers, including JPMorgan Chase, Citigroup, Wells Fargo, and large regional banks such as First Horizon National Corp., PNC Financial Services Group, and SunTrust Banks. Each bank, after reviewing its practices and finding errors, announced safeguards to ensure that they would conduct foreclosures in full accordance with local, state, and federal laws.

The foreclosure crisis and its related problems were the result of a collision between the US legal system, which is rooted in decades-old legal precedent and which mandates full compliance with a host of regulations, and modern finance, which emphasizes innovation, volume, and speed. Modern mortgage finance, dating back to the late 1960s, demanded speedy processing and recording of mortgages, so that they could be bundled into securities and sold to yield-hungry investment funds. At the same time, the state laws governing mortgages and foreclosures were decades behind. The overwhelming volume of foreclosure proceedings compounded this situation. Banks did not have the necessary staffing to properly complete the foreclosures.

Termination of the IFR leads to another settlement The Independent Foreclosure Review (IFR) was established in mid–2011 to identify homeowners who suffered financial injury because of the errors or problems during their home foreclosure process between January 1, 2009, and December 31, 2010. However, the IFR lasted only 18 months, ending when Thomas Curry, the Comptroller of the Currency, saw that consultants and lawyers hired by the banks had run up


bills of $2 billion without completing the reviews. He thought that this spending could be better directed toward helping distressed homeowners.

As a result, in January 2013, agreements were reached between 13 mortgage servicers and federal banking regulators that terminated the IFR. These companies agreed to provide more than $9.3 billion in cash payments and other assistance to help borrowers—$3.6 billion in direct cash payments to borrowers covered by the agreement (referred to as a Qualified Settlement Fund), and $5.7 billion in other foreclosure prevention assistance, such as loan modifications and forgiveness of deficiency judgments. The allocation of the settlement was as follows: Bank of America ($1.1 billion), Wells Fargo ($766 million), and JPMorgan Chase ($753 million), as well as Aurora Bank, Citibank, Goldman Sachs, HSBC, MetLife Bank, Morgan Stanley, PNC, Sovereign Bank, SunTrust, and US Bancorp. By no later than January 7, 2015, the banks must provide full mitigation or other foreclosure prevention actions.

In addition, payments to more than 232,000 borrowers whose mortgages were serviced by GMAC Mortgage began in January 2014, following an agreement announced by the Fed the previous July.

Impact of the settlements on the housing market According to RealtyTrac data, the number of foreclosure starts dropped 46% in the period from October 2010, when the “robo-signing” scandal broke, through December 2011. In May 2012, foreclosure starts increased 16%, year over year, following 27 consecutive months of year-over-year declines. Then, in November 2012, foreclosure starts dropped 28%, year over year—the lowest level since December 2006. The decline could have been a result of lenders still getting accustomed to the new rules imposed by the National Mortgage Settlement, along with other court rulings and laws, according to RealtyTrac data.

RealtyTrac reported that in January 2013, foreclosure starts dropped further, reaching their lowest level in 79 months, due to a 75% year-over-year drop in foreclosure starts in California. As of August 2014, foreclosure starts were down 9%, year over year—the smallest decrease in the last 47 months of year-over-year declines. However, in August 2014, foreclosures were up in 19 states, year over year.

In addition, the loans covered by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) were excluded from the loan modification agreements under the settlements. As these two agencies cover half of the mortgages outstanding, there could be fewer borrowers benefiting from the settlement, estimated at around 1.8 million. This compares with CoreLogic’s estimate of 5.3 million homeowners who are “underwater” on their mortgages.

According to CoreLogic, a market and business research company, at the end of the second quarter of 2014, 5.3 million Americans owed more money on their homes than the homes were worth, and negative equity totaled almost $345.1billion. Completed foreclosures totaled 363,000 as of August 2014; in August alone, total foreclosures totaled 45,000. It reached 620,000 in 2013, down from 767,000 in 2012 and 830,000 in 2011, according to CoreLogic. Total foreclosure inventory reached 629,000 in August 2014, down 32.8% compared with August 2013. The level of foreclosure inventory recorded the 23rd month of double-digit year-over-year declines, and the 34th monthly decline.

According to RealtyTrac’s August 2014 “US Foreclosure Market Report,” foreclosure filings were reported on 116,913 US properties in August, down 9% from the same period in 2013. According to RealtyTrac, the foreclosure numbers in August 2014 demonstrate the lingering aftermath of the distress caused by the housing bust in many markets. Florida reported the highest foreclosure rate (one in every 400 housing units) in the second quarter of 2014, followed by Nevada (one in every 524 housing units), Maryland (one in every 532 housing units), New Jersey (one in every 533 units), and Georgia (one in every 582 housing units). Other states ranked among the nation’s top 10 with the highest foreclosure rates were Delaware (one in every 746 housing units), Ohio (one in every 840 housing units), Illinois (one in every 842 housing units), Indiana (one in every 893 housing units), and South Carolina (one in every 949 housing units).

Benefits and risks for mortgage lenders and servicers The settlements spurred improvements in the banks’ foreclosure practices and new servicing rules to ensure that incidents like “robo-signing” do not recur in the future. These rules require that any foreclosure


filing/affidavit is attested by a lawyer to ensure the accuracy of the filing; a notice is sent to the borrower 14 days prior to initiating any foreclosure process; borrowers’ accounts are accurate and other statements are well documented; and that quarterly reviews are conducted.

In addition, the new rules have imposed various restrictions on the time frame for conducting a modification process, and the servicing fees charged by the lenders. Further, to carry out the additional tasks mentioned above, the banks and servicers will have to ensure that they have adequate manpower, and that they maintain adequate standards for the qualification, training, and supervision of their employees. This will result in higher costs for the banks and services.

FINANCIAL FIRMS FACE ADDITIONAL LIABILITIES

The national foreclosure settlement, as important as it is, is not the end of the issue. It does not release banks from additional liabilities, such as Mortgage Electronic Registry System (MERS) claims and representation and warranty claims, and it is separate from other state and federal investigations into mortgage fraud.

The MERS system A collaboration of top mortgage servicers, mortgage insurers, and Fannie Mae and Freddie Mac created the Mortgage Electronic Registry System (MERS) to facilitate the speedy electronic recording of deeds and mortgages. More than 70 million mortgage loans have been registered in the MERS system. In the aftermath of the housing crash and the “robo-signing” scandal, several state attorneys general, municipal officials, homeowners, and plaintiffs’ attorneys have claimed that MERS allows financial institutions to evade county recording fees and avoid the need to publicly record mortgage transfers, in their haste to rapidly sell and securitize a large number of home mortgages.

For instance, in February 2012, the attorney general of New York State sued Bank of America, Wells Fargo, and JPMorgan Chase, accusing them of fraud in their use of MERS. The suit sought to stop the use of the MERS system, alleging that it is an unreliable and inaccurate database. In response, the mortgage finance industry claimed that federal and state courts across the US have repeatedly upheld the validity of MERS. The 49-state foreclosure settlement does not affect this MERS legal action.

Representation and warranty claims In May 2014, Freddie Mac loosened the selling Representation and Warranty (R&W) framework rules in an effort to stimulate mortgage lending and spur the housing market. The R&W framework, introduced in 2012, includes rules that have forced banks to buy back billions worth of defaulted home loans through the embedded loan-buyback policies in the contracts. Changes include relaxing the acceptable payment history requirement for determining when a mortgage is eligible for relief and implementing an alternative to repurchasing a mortgage.

When banks sell mortgages to Fannie Mae, Freddie Mac, other agencies, and private investors, they usually contain a “Representation and Warranty” clause that opens a doorway for an investor to demand that a bank buy back the mortgage. Many reasons can be used in such a repurchase request, such as failure to verify the borrower’s income, and existing liens against the property. Thus far, banks have managed to keep under control this warranty clause, against which they have reserves. However, if shoddy or fraudulent paperwork on securitized loans becomes more evident, the Rep and Warranty issue may eventually prove to be even costlier than the foreclosure issue.

Agency claims are winding down, while private label claims is still running high. For instance, Bank of America’s total unresolved private label claims amounted to $20.56 billion as of June 30, 2014, 14.5% higher than December 2013. Meanwhile, the bank’s agency claims decreased by 55.3% as of June 30, 2014, to $76 million.

Large mortgage fraud settlement with Citigroup In February 2012, Citigroup agreed to pay $158 million to settle claims that its mortgage unit fraudulently misled the FHA, the federal mortgage insurer, into insuring about 30,000 risky mortgage loans made over a


six-year period. According to the settlement, CitiMortgage, a unit of Citigroup, knowingly submitted “recklessly false” certifications to the FHA that these loans were eligible for federal mortgage insurance, when it turned out they did not meet the stringent FHA requirements. Since 2004, about 30% of these FHA-insured loans went into default, and default rates soared to 47% on loans originated in 2006 and 2007.

Bank of America faces historic single-entity settlement On August 21, 2014, the US Department of Justice announced that Bank of America will pay a record $16.65 billion settlement—the largest civil settlement with a single entity in American history—to resolve federal and state claims against the bank and its subsidiaries, including Countrywide Financial Corporation and Merrill Lynch. Almost $10 billion of the total amount will be paid to settle federal and state civil claims related to residential mortgage-backed securities (RMBS), collateralized debt obligations (CDOs), and other types of fraud. The bank has agreed to pay a $5 billion civil penalty under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). In addition, fraud claims related to the bank’s origination and sale of mortgages will cost Bank of America $1.8 billion to settle, of which $1.03 million will be paid to settle claims by the FDIC, and $135.83 million will be paid to settle claims by the Securities and Exchange Commission (SEC). The balance will be allocated to settle other claims against the bank.

In January 2013, Bank of America entered into a settlement agreement with Fannie Mae to resolve substantially all outstanding mortgage repurchase claims from that entity. At year-end 2012, prior to this settlement, mortgage repurchase claims from Fannie Mae totaled $12.2 billion. Bank of America’s total unresolved claims at year-end 2012 were $28.3 billion, so the removal of the Fannie Mae claims left a net outstanding amount of only $170 million at year-end 2013, much of which was from bond insurance companies and private investors.

In January 2011, Bank of America reached a settlement with Freddie Mac by paying $1.28 billion for the bad loans that were sold by Countrywide through 2008. As of mid–2012, the bank stated that it would buy back previously securitized loans that went bad, worth $330 million, from Freddie Mac. Going forward, in December 2013, Bank of America entered into an agreement with Freddie Mac to settle all repurchase liabilities on loans sold to Freddie Mac from 2000 to 2009. According to the agreement, Bank of America will pay $404 million to resolve all past and future losses caused to Freddie Mac.

MORTGAGE REDUCTION INITIATIVES

Private lenders have reduced mortgage principal While Fannie Mae and Freddie Mac have resisted principal reduction, private lenders have increasingly offered such reduction to troubled borrowers, upon receiving incentives from the government. Private lenders believe that an appropriate use of mortgage principal reduction during loan modification can prove beneficial in preventing foreclosures. With the reduction in principal payments, borrowers were able to get out of their “underwater” state and enter a comfortable zone to pay off the rest of their debt. As a result, this method is helping reduce foreclosures when compared with other methods, such as interest rate reduction or forbearance.

Local initiatives to boost housing There have been several local-level initiatives considered in US cities, including the use of “eminent domain” to seize “underwater” mortgages.

In June 2012, San Bernardino County, California, announced that it was evaluating the option of using its eminent domain power to seize underwater privately held mortgages. In late July 2012, the city of Chicago, with over 660,000 underwater mortgages, passed a resolution to explore the option of acquiring and restructuring the underwater mortgages, but nothing came of this.

In August 2012, the FHFA issued a notice stating that it would take action against those municipalities if they went ahead with their plans to use eminent domain for refinancing underwater mortgages. In its notice, the FHFA raised concerns that such programs would increase taxpayers’ losses, leading to a tighter credit situation in the mortgage market.


In July 2013, the Bay Area city of Richmond, California, initiated its mortgage reduction plan by sending offers on 624 underwater mortgages to the banks that service them. According to an analysis by Forbes magazine, most of these mortgages are current on their payments, were originated before 2008, and thus have a low chance of defaulting, especially since area housing prices are rising rapidly. In August 2013, in response to Richmond’s initiatives, the FHFA again warned that it would take action to curtail lending if this were to happen. In a City Council meeting held in December 2013, Richmond passed a resolution that will help prioritize those neighborhoods adversely affected by the housing crisis.

THE EVOLVING ROLE OF THE FHA

The Federal Housing Administration (FHA) was created under the National Housing Act of 1934 in response to the banking crisis of the 1930s. As a government agency, the FHA was entrusted with the responsibility of insuring home mortgages, as well as regulating the terms and rate of interest on them. Before the inception of the FHA, large waves of foreclosures were apparent in the market, as home mortgages were of a short duration (three to five years) and could be called by the lender at any time.

After the creation of the FHA, the home mortgage market expanded greatly because many more homebuyers were able to afford long-term, fixed-rate mortgages. In 1965, the FHA was incorporated into the US Department of Housing and Urban Development (HUD). The FHA has insured about 34 million mortgages since its creation in 1934 and currently has around 4.8 million single-family mortgages totaling about $1.1 trillion under its coverage, according to the data from HUD.

Former Congressman Mel Watt new Director of FHFA Melvin Watt was nominated to head the FHFA in May 2013 and was sworn in to lead in January 2014, replacing Acting Director Edward DeMarco. The former representative from North Carolina was a longtime member of the House financial services committee, which oversees housing issues. Mr. Watt has long advocated relief measures for distressed homeowners, such as principal reduction, further protections for taxpayers, and a reduction of the government’s role in housing.

In a Wall Street Journal article on May 16, 2014, Mr. Watt mentioned his plans for leadership, including shrinking the risk exposure of Fannie Mae and Freddie Mac, his view on ending the conservatorship of these institutions, and the institution’s responsibility to taxpayers.

Financial stability of the FHA comes into question According to the FHA’s Fiscal Years 2013 and 2012 Financial Statements Audit, the agency’s liabilities exceeded assets by $1.01 billion in 2013, lower than the reported $15.10 billion in 2012. In addition, the FHA’s mutual mortgage insurance fund was valued at $30.0 billion in 2013 compared with $42.7 billion in 2012. In our view, the situation at the FHA is relatively stable, but bears close watching due to the agency’s importance to the US housing market.

In 2012, the FHA increased annual mortgage insurance premiums and upfront premiums, to shore up its reserves, and to encourage private capital to increase housing lending. In January 2013, the FHA announced that it would impose additional increases, ranging from 0.05% to 0.1%, on annual mortgage insurance premiums, effective April 1, thus increasing the monthly mortgage payments for borrowers. Although the FHA does not directly make loans to homeowners, it insures mortgages that fit its guidelines, and it has enabled borrowers with less than sterling credit scores to buy a home for as little as 3.5% down. Since US banks have tightened lending standards in the last few years, an FHA-insured mortgage is the only option for multitudes of lower-income or lower-credit score applicants. The FHA now insures about 35% of all new mortgages, up from only 4.5% in 2005.

Offering loans to lower-income or lower-credit score applicants has left the FHA with around $100 billion of loans on its books for which repayment is uncertain. Due to a weak capital position and defaulting borrowers, the FHA has been taking steps to improve its financial condition so that it can avoid a bailout. Increasing fees was one of those steps, along with raising the credit score requirement for its borrowers. The FHA has also been tightening its lending standards, but if the standards are too restrictive, they may affect the borrowers in need.


Higher premiums at the FHA would pass on some business to the private mortgage insurers, as new borrowers with good credit scores might consider taking a conventional loan with a private mortgage insurer.

THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

In a bid to improve consumer protection by enhancing the regulatory environment of US financial services, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010.

Our focus in this Industry Survey is on the consumer protection aspects of the law, and changes to the thrift regulators. We cover other aspects of this massive legislation, such as the Volcker Rule and debit interchange caps, in the Banking Industry Survey.

Predatory lending activities that helped consumers purchase more expensive homes than they could readily afford are often cited as a reason for the recent financial collapse. In addition, many lawmakers aim to protect consumers from excess credit card rates and fees, and from other forms of unsecured lending such as payday loans.

The Dodd-Frank Act established the new Consumer Financial Protection Bureau (CFPB), an agency within the Federal Reserve Board that supervises and regulates consumer financial laws and products, including credit cards, mortgage loans, student loans, and auto loans. With a better-informed consumer and restrictions placed on lenders, the goal is to provide fair, sustainable, and transparent financial products for consumers. We expect additional rules, covering deposit and payment products, and lending activities. We think this will likely affect banking results by limiting noninterest income (such as overdraft and ATM fees) associated with banking products.

In early 2012, President Obama announced the recess appointment of former Ohio Attorney General Richard Cordray as the first director of the CFPB. Mr. Cordray was finally confirmed by the US Senate in July 2013 for a five-year term.

The Dodd-Frank Act also mandated the merger of the Office of Thrift Supervision (OTS) with the Office of the Comptroller of the Currency (OCC). With the elimination of the OTS in October 2011, its authority was split among three different agencies. The OCC now regulates national banks and federal savings associations (thrifts). The FDIC regulates state thrifts and state banks that are not members of the Federal Reserve System. The Fed regulates savings and loan holding companies, state-chartered banks, state member banks, and bank holding companies. The thrift charter continues to exist.

Effects on mortgage lenders and servicers During the financial crisis, many mortgage servicers—those responsible for collecting mortgage payments (interest as well as principal repayments) from borrowers on behalf of mortgage lenders—were not following practices in full accordance with local, state, and federal laws. In turn, these bad practices made foreclosure and loan modification difficult for borrowers.

New regulations compel mortgage servicers and lenders to adhere strictly to the requirements imposed on them by the CFPB. Such requirements include providing clear and timely information to borrowers about their mortgages by sending monthly mortgage statements; providing disclosures before any interest rate adjustments in the case of adjustable-rate mortgages; informing borrowers before charging them for force-placed insurance; and making good-faith efforts to inform them in advance, and to provide them with options, to avoid a possible foreclosure.

In addition, servicers are expected to be careful in handling consumer accounts, to correct errors as soon as they are notified, and to conduct a thorough review before offering options to avoid a foreclosure. The financial crisis resulted in a tightening of lending standards in the mortgage market. In January 2014, the CFPB released a new set of mortgage rules for lenders to follow. According to a Reuters article dated January 7, 2014, the new rules will focus on safer home loans, stricter underwriting requirements, protection against mortgage steering, and other mortgage service rules.


HIGHER CAPITAL STANDARDS IN PLACE

The current Basel II capital standards allow banks to use internal models to calculate the risks of their assets. During the height of the recent financial crisis, the drawbacks of this approach became painfully clear, as many banks found they did not have the capital levels necessary to withstand the losses on loans and securities that proved to be much riskier than their models had suggested. As a result, the new Basel III capital standards, in addition to Dodd-Frank, will ensure a more rigorous approach to the evaluation of bank capital levels and the components of bank capital.

The Basel III committee has proposed stricter rules over what goes into the calculations of risk-weighted assets, and a narrower definition of what counts as capital, plus a requirement for banks to set aside extra money when they hold certain riskier assets. The Basel III committee will also impose a limit on the amount of assets a bank can have in relation to its equity and will require banks to have enough cash to meet short-term liabilities.

Specifically, the Basel III capital guidelines, which became effective at the start of 2013, will require 4.5% common equity capital to risk-weighted assets, plus a 2.5% “conservation buffer,” totaling 7.0%. Once Basel III is fully implemented, another 1.0% to 2.5% common equity buffer may be required, depending on the size and global interconnectedness of each bank. This component is the SIFI (Systematically Important Financial Institution) buffer.

In addition, as part of the Dodd-Frank Act, banks have five years to phase out the inclusion of trust-preferred securities as part of their Tier 1 capital calculations. Trust-preferred securities are hybrid securities that possess the characteristics of both subordinated debt and preferred stock and are a significant source of capital for many regional banks.

The result could be that many banks, particularly the largest banks in the US, and smaller banks with less equity capital, will need to retain most of their earnings in the next several years in order to raise additional equity capital to meet these higher capital standards.

Stress tests for the largest banks The Fed conducts annual stress testing exercises to ensure sound practices of large banks in managing and allocating their capital resources. As a part of the exercise, it evaluates the resiliency and capital adequacy processes of large domestic bank holding companies through the Comprehensive Capital Analysis and Review (CCAR). In March 2014, the Fed completed the fourth annual CCAR, which covered the 30 largest US bank holding companies.

Under the CCAR, the Fed evaluates the internal capital planning processes of these banks and their planned capital actions, which include dividend payments, or repurchases or redemptions of stock after the review and approval of each bank’s board of directors. The evaluation process facilitates the assessment of a bank’s ability to maintain a sufficient level of capital to sustain its lending activities, even in a difficult economic environment. The Fed also tests these institutions under an adverse scenario that includes a recessionary environment in which economic growth is falling, while factors such as unemployment are rising.

OUTLOOK IS IMPROVING

We have a neutral outlook for the thrifts and mortgage finance sub-industry for the next 12 months, due to concerns over competition and market share, partly alleviated by these firms’ high capital levels and attractiveness as takeover candidates. The companies in this sub-industry have taken significant actions to shed higher-cost borrowings and they have also fortified their capital positions. However, the revenues and profits of these companies face strong competitive challenges from the largest U.S. banks, which have aggressively taken a commanding share of the U.S. mortgage origination market.

Second quarter 2014 profits for the sub-industry totaled $59 million, down 3.7% from the same period in 2013. Net revenues fell 13%, to $238 million, on a 17% year-over-year decrease in net interest income (85% of net revenues), partly offset by a 24% increase in noninterest income (contributing to 15% of


revenues). Second quarter 2014 net interest income was weighed down by the 7% shrinkage of total loans from the prior-year period. The median second quarter net interest margin for the group fell to 1.80%, from 1.93% a year earlier.

We think that the next 12 months for the institutions in the industry will depend on the interest rate environment, housing prices, and regulatory development.

Higher profits will help banks and thrifts strengthen their capital levels. We also view the larger companies in this sub-industry, such as Astoria Financial Corp. and Hudson City Bancorp, as well capitalized by historical standards, with an average Tier 1 capital to risk-weighted assets ratio of 14.1% on June 20, 2014.

Our outlook for the very largest US banks is tempered by their global exposure and significant legacy costs. We view with caution the legacy costs of mortgages underwritten and securitized during the peak of the housing market, increasing regulatory costs and limitations, and the costs of implementing Basel III. In addition, the foreclosure documentation scandal, as well as high legal costs, and the costs of forced buybacks of securitized mortgages could pressure earnings for the foreseeable future.

Regulatory reform has led to permanently higher legal and compliance costs, and the Volcker Rule prohibiting proprietary trading could hurt market-making activities. Basel III compliance will divert profits to capital, away from dividend expansion, and will likely lower banks’ return on equity (ROE) and their return on invested capital (ROIC).

Despite recent financial regulatory reform that outlawed the concept of “too big to fail,” we think the largest banks in the US will thrive on their ultra-low-cost funding bases, and on the common perception that the US government will always backstop them, due to their multi-trillion-dollar asset bases, and complex interconnections with the global economy.

Mixed stock prices Year to date through September 12, 2014, the S&P 1500 Thrifts and Mortgage Finance stock subindex fell 2.5%, trailing a 7.0% increase for the S&P 1500 Stock Index. The S&P 1500 Diversified Banks stock subindex (which includes the largest US banks) was up 8.7%. In 2013, the Thrifts and Mortgage Finance subindex increased 25.8%, and the Diversified Banks subindex rose 31.8%, versus a 30.1% rise in the S&P 1500.


INDUSTRY PROFILE

Mortgage industry consolidation

The US mortgage industry is currently dominated by large banks—Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., and Citigroup Inc. Other large residential mortgage lenders include HSBC USA, Capital One Financial, SunTrust Banks, PNC Financial Services Group, BB&T Corp., and New York Community Bank.

The largest independent thrifts were acquired or converted their charters The bursting of the housing bubble and the financial crisis in 2008 and 2009 resulted in a dramatic reorganization of the thrift industry. Of the 10 leading thrift institutions ranked by assets as of the end of 2007, three were taken into receivership (one of which was subsequently sold), and another three were acquired. As of the end of 2007, the largest thrift was Washington Mutual Inc. (WaMu), with more than $325 billion in assets, followed by Countrywide Financial Corp., with approximately $210 billion in assets.

In July 2008, Countrywide Financial was acquired by Bank of America Corp., and IndyMac Bancorp, the fifth largest thrift as of the end of 2007, was taken into receivership by the Federal Deposit Insurance Corporation (FDIC).

In September 2008, following losses totaling $6.1 billion and a $16.7 billion outflow of deposits, the Office of Thrift Supervision (OTS) closed Washington Mutual, and the FDIC was named receiver. Subsequent to the closure, JPMorgan Chase & Co. acquired the assets and most of the liabilities of Washington Mutual Bank from the FDIC.

In January 2009, Sovereign Bancorp Inc., the third largest thrift at the end of 2007, was acquired by Banco Santander S.A. In May 2009, BankUnited Financial FSB, the ninth largest thrift as of the end of 2007, was taken into receivership by the FDIC and eventually sold to an investor group. In 2009, New York Community Bancorp Inc. switched its charter from a thrift (regulated by the OTS), to a bank holding company regulated by the FDIC.

Therefore, the first, second, third, fifth, and ninth largest thrifts, in terms of assets as of the end of 2007, lost their independent status during 2008 and 2009. These five thrifts—Washington Mutual, Countrywide Financial, Sovereign Bancorp, IndyMac Bancorp, and BankUnited Financial—accounted for over 80% of the assets of the top 10 thrifts at year-end 2007. Prior to that, Wachovia’s acquisition of Golden West Financial, in the spring of 2006, removed a large thrift competitor from the national landscape.

The largest surviving thrifts now include Astoria Financial Corp. and Hudson City Bancorp, both operating in the New York City area. In August 2012, Hudson City Bancorp accepted a $3.7 billion takeover offer from M&T Bank Corp., which was still pending regulatory reviews as of September 2014. In December 2013, the companies said that the deadline for completing the deal had been extended to December 31, 2014.

Three agencies now handle mortgage industry supervision In October 2011, the OTS merged with the Office of the Comptroller of the Currency (OCC). With the elimination of the OTS, its authority was split among three different agencies. The OCC now regulates national banks and federal savings associations (thrifts), the FDIC regulates state thrifts and state banks that

Table B08: Leading Independent Thrift Institutions

LEADING INDEPENDENT THRIFT INSTITUTIONS*(Ranked by second quarter assets)

COMPANY 6/30/12 6/30/13 6/30/14

1. Hudson City Bancorp Inc. 43,590 39,696 37,7012. People's United Financial Corp. 28,144 31,345 33,9213. Everbank Financial 15,041 18,363 19,7544. Astoria Financial Corp. 17,573 16,101 15,7425. Federal Agricultural Mortgage 12,050 12,936 14,6706. Washington Federal Inc. 13,564 13,116 14,3657. TFS Financial Corp. 11,287 11,122 11,5348. Nationstar Mortgage 4,896 11,988 11,1689. Flagstar Bancorp Inc. 14,368 12,735 9,933

10. Capitol Federal Financial 9,573 9,394 9,115*Supervised by the Office of the Comptroller of the Currency.Source: Capital IQ Compustat.


are not members of the Federal Reserve System, and the Fed regulates savings and loan holding companies, state-chartered banks, state member banks, and bank holding companies.

Integration successes and challenges JPMorgan Chase digested its acquisition of Washington Mutual, raised capital, and has generally resumed a fairly normal earnings growth trajectory. Similarly, Wells Fargo successfully completed and integrated its 2008 acquisition of Wachovia, also raised equity capital, and resumed strong earnings growth.

On the other hand, Bank of America’s acquisition of Countrywide Financial has proven to be a nightmare of litigation, settlements, representation and warranty claims, and goodwill writedowns. According to a January 31, 2014, article in The Wall Street Journal, Countrywide has cost Bank of America as much as $50 billion in fines and legal costs. In August 2014, Bank of America agreed to an almost $17 billion deal to settle claims against the bank and its subsidiaries including Countrywide Financial.

INDUSTRY TRENDS

Below we look at some of the trends affecting the thrift and mortgage finance industry.

FROM FIXED-RATE MORTGAGES, TO ARMS, TO EXOTIC MORTGAGES, AND BACK

Historically, mainly insurance companies offered home mortgages in the US. Mortgages were of short duration, often only five years long, with a large balloon payment at the end. Alternatively, they were interest-only (non-amortizing) loans, with a balloon payment at the end.

However, with the passage of the Federal Home Loan Bank Act of 1932, which established the Federal Home Loan Bank (FHLB), banks became involved in mortgage lending, and the savings and loan industry was born.

For decades, mortgage interest rates were fixed-rate, which was fine while interest rates were stable. However, rapid spikes in short- and long-term interest rates during the early 1980s threatened the solvency of banks. For instance, banks received 7% or 8% interest on fixed 30-year mortgages written earlier, while their short-term financing costs in 1981 rose into the 15% range. At the same time, potential homeowners were not going to sign up for an 18% annual rate mortgage, and then have to pay heavy refinancing costs when interest rates fell. Therefore, an alternative to the fixed-rate mortgage was needed.

In the early 1980s, adjustable-rate mortgages (ARMs) became popular. Customers were drawn to ARMs, particularly in periods of declining interest rates, and in higher-priced regions, where the low early payments were often the only way they could afford to buy a house. Two kinds of ARMs predominated. East Coast lenders preferred one-year ARMs, which adjust once a year, with the interest rate on the mortgage tied to Treasury bill rates. Large California thrifts focused on the origination of ARMs that adjusted monthly, with yields based on a cost-of-funds index.

Some ARMs reset once a year based on a one-year Treasury bill index; others adjust monthly, based on a cost-of-funds index. Still others are based on the London Interbank Offered Rate (LIBOR). Hybrid ARMs offer an opening fixed-rate period, generally ranging from three to five years, before adjusting on an annual basis. The list goes on. Despite differences in the mechanism, ARMs have one thing in common: they help produce a stable interest rate spread (the yield earned on loans and other investments, minus the rate paid on deposits and other borrowings). Because ARMs tend to track changes in borrowing costs, they help to protect lenders’ margins.

Most companies prefer this stability to volatility: it helps in internal planning and leads to higher stock market valuations. For the most part, though, ARMs have higher credit risk because when they reset, borrowers may have a harder time paying back these loans.

During the housing bubble, as home prices appreciated, banks relied more heavily on alternative mortgages requiring little or no documentation from the borrower. Many offered special “teaser” rates in the beginning


years of the loan, which enabled homebuyers to purchase higher-priced homes than they ordinarily would have been able to afford. In mid–2007, however, with delinquencies on subprime and no-document loans on the rise, the secondary market balked when it came to purchasing these loans, and lenders returned to more traditional agency-backed loans.

Indy Mac Bancorp Inc. was one of the lenders that specialized in alternative mortgages. The company’s mortgage business focused on low- or no-document loans, and it was a leader in the issuance of option ARMs. Severe deterioration in the quality of those loans caused IndyMac to post large losses in the second half of 2007 and the first half of 2008, leading to the FDIC placing IndyMac in receivership in July 2008. Lenders that allow borrowers to purchase homes with little or no equity are the most vulnerable when housing prices decline.

According to the Federal Reserve Bank of New York, the ARM share of mortgages climbed to a record 65% in late 1994, fell to about 15% in 1998, rose to 40% in 2000, fell again in 2002, and rose to 40% in late 2004. The current share, as of October 1, 2014, was 7.6%, according to the Mortgage Bankers Association (MBA), and this share is climbing. The reason for the share increase is that rates of ARMs are still relatively low, as compared with the 30-year fixed-rate mortgage, and buyers are willing to take the interest rate risk of an ARM.

Refinancing activity trends Driven by historically low mortgage rates, refinancing activity surged in 2009 through 2012. While we think demand for mortgages will remain mixed, we think mortgage refinancing will decline, as interest rates stop falling, and the available pool of customers completes their refinancings. As of September 17, 2014, the MBA projected that mortgage originations would total $1.007 trillion in 2014, comprised of $569 billion in purchase originations, and $438 billion in refinancings. Total mortgage originations totaled $1.75 trillion in 2013.

ROOTS OF THE 2008 CRISIS

Before the federal government entered the US residential market in the 1930s, homes were financed with short-duration balloon mortgages, often only five years in length. Refinancings were difficult, and homes could be seized quickly. As a response, Congress created the Federal Housing Administration (FHA), which helped to develop, standardize, and insure longer-term fixed-rate mortgages. The 30-year fixed mortgage, due to its long duration, would possibly not have existed without some form of government backing.

In 1938, Congress established the Federal National Mortgage Association (FNMA), now colloquially known as Fannie Mae, which created a secondary market for FHA-insured mortgages. Congress further enhanced the secondary mortgage markets in 1968, with the creation of the Government National Mortgage Association (GNMA, or Ginnie Mae). In 1970, Congress created a companion to Fannie Mae, the Federal Home Loan Mortgage Corp. (FHLMC, or Freddie Mac). These organizations were able to purchase large volumes of residential mortgages, and initially limited themselves to the highest quality ones.

In 1977, Congress passed the Community Reinvestment Act. This law made federal approval of bank merger and expansion plans contingent on proof of banks’ efforts to broaden lending to underserved communities. In 1994, the Clinton Administration pushed for a greater expansion of housing. Fannie Mae and Freddy Mac were central to this initiative due to their ability to purchase a large volume of residential mortgages.

Following the recession of 2001, the Federal Reserve lowered short-term interest rates to 1.0%. This action led to lower mortgage rates and made it easier for speculators to purchase additional houses on credit. Thrifts, banks, and Wall Street firms were drawn to the large profits that came from making home loans, and securitizing them. Ratings firms often assigned top investment grade ratings to most of these securities. Over time, mortgage securitizers started to add lower-quality mortgages to the pools of securitized mortgages. Housing prices rose dramatically from 2002 until reaching a peak in July 2006. Rising interest rates, starting in the fall of 2005, were the catalyst for the bursting of the housing bubble.


GROWTH OF THE MORTGAGE BANKING INDUSTRY

By engaging in mortgage banking, many banks and thrifts sold their fixed-rate mortgage production into the secondary market. This shift was led by the larger banks, which had the scale necessary to manage the costs of mortgage banking and to negotiate terms in the secondary market. However, many of the banks that led the shift into mortgage banking suffered some of the worst losses as the housing market declined in 2007 and 2008, including Washington Mutual Inc. and IndyMac Bancorp Inc., both of which were placed in receivership in 2008. The banks and thrifts that embraced mortgage banking often ended up with riskier mortgages in their portfolios. Many believe that the option of selling off mortgages into the secondary market had a negative effect on underwriting standards of banks and thrifts alike.

It appears that the trend of selling most of the loans originated to the secondary market may be reversing. Illiquidity in the secondary markets has narrowed the gain-on-sale margin, spurring banks to hold more of these loans. This model of holding onto more loans favors banks that are more highly capitalized. We think this trend will continue until the gain-on-sale margin starts to widen.

WHERE IS THE THRIFT INDUSTRY GOING?

The Federal Home Loan Bank Act of 1932 established the Federal Home Loan Bank System, which provided liquidity to “building and loan” institutions, later known as savings and loan associations, allowing them to write long-term amortized mortgages. The thrift industry also benefitted from Regulation

Q (1966), which allowed them to pay higher rates on savings deposits than commercial banks were permitted to pay on checking deposits.

Huge interest rate spikes in the early 1980s, combined with public pressure, and a bipartisan atmosphere of deregulation led to the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980. This act allowed thrifts to offer

checking accounts, make consumer loans (up to 20% of assets) and commercial real estate loans (up to 20% of assets), and issue credit cards. Thrifts had to have 65% of lending in residential mortgages or other consumer loans.

Due to industry consolidation, stand-alone, independent thrifts are in secular decline, as large banks take market share. In 1980, there were 3,993 regulated thrifts. From 1986 to 1995, peaking in 1989, the thrift industry, especially in the Sunbelt, went through a period of consolidation. This was due to poor lending decisions, capital erosion, and federal bailouts. In 1986, the beginning of the crisis, there were 3,236 thrifts. By 1990, only 2,359 thrifts remained. By the end of the crisis in 1995, there were 1,645, and at the end of 2013, only 936 remained.

Demutualization has been another major thrift trend over the last four decades. Originally, thrifts were mutually owned by their depositors, in the same way that life insurance companies were (and are) owned. Over time, especially at larger and healthier thrifts, the accumulation of wealth locked up in the mutual ownership structure became tremendous. It was only a matter of time before the regulatory environment allowed for de-mutualizations to proceed.

The conversion of a thrift from mutual to public ownership confers a number of advantages to their owners. First, it raises capital that can be used to support the thrift’s current lending and investment activities, or future expansion or diversification efforts. Second, it enables the thrift’s members, as stockholders, to benefit more directly from the institution’s growth. Last, it gives thrifts greater access to public equity and debt markets.

Table B03 Share of mortgage debt outstanding

SHARE OF MORTGAGE DEBT OUTSTANDING(In percent)

LIFE FEDERAL MORTGAGE

DEPOSITORY INSURANCE & RELATED POOLS OR INDIVIDUALS TOTAL

YEAR INSTITUTIONS COMPANIES AGENCIES TRUSTS & OTHERS (BIL. $)

*2014 30.7 2.8 37.3 20.7 8.5 13,3042013 30.5 2.7 37.5 21.3 8.1 13,2562012 30.8 2.6 37.2 22.1 7.4 13,2832011 30.5 2.5 37.3 22.3 7.4 13,4912010 30.9 2.3 37.2 22.2 7.4 13,794

*As of second quarter.Source: Federal Reserve Board.


One negative aspect of mutual-to-stock conversions was a decrease in the thrift’s return on equity (ROE), at least at the outset, due to the capital generated through the sale of the thrift’s stock. Post-conversion, managements typically instituted employee stock ownership programs and stock option plans, potentially diluting the claims of current shareholders. In the end, however, the benefits of becoming a shareholder in a thrift’s initial public offering (IPO) outweighed the negatives associated with the conversion. In 1980, 80% of thrifts were mutually held by account holders. By 1990, only 56% were, and currently about 25% are.

Competition in their core residential mortgage business and the search for greater profits have prompted a number of thrifts to pursue a commercial/consumer banking model. Thrifts that pursued bank-like strategies included Sovereign Bancorp, which was acquired in early 2009 by Banco Santander S.A. By shifting their mix of assets and liabilities, many thrifts hope to boost their profitability to the level of commercial/ consumer banks. On the liability (or funding) side, these thrifts are pushing checking accounts in an effort to lower their cost of funds. On the asset side, thrifts are expanding consumer and business lending in order to boost yields. Thrifts are also striving to sell more investment products to increase fee income.

Many thrifts believe that there is no future in the thrift business. Proponents of this position cite the industry’s poor growth prospects, the post–World War II decline in the deposits-to-loans ratio, and ongoing pressure on margins from Fannie Mae and Freddie Mac. For many firms, the move to become a bank is not so much an embrace of commercial and consumer banking as it is an abandonment of the traditional thrift business. The shift to a commercial/consumer banking model is certainly not a panacea for all of the thrift industry’s ills. For one thing, many of these business lines are hotly competitive and subject to similar profit squeezes. In addition, underwriting consumer and business loans requires different kinds of expertise than underwriting mortgages, and thrift managers need to be familiar with the risks inherent in these lines of business.

FANNIE MAE AND FREDDIE MAC: PAST, PRESENT, AND FUTURE

Most US mortgages today are securitized by the bank or mortgage company that originated them. Securitization enables banks to record revenues and profits more quickly than if they had held the loans to maturity. Banks sell mortgages to the FNMA (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac), other agencies, and private investors.

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that purchase, guarantee, and securitize mortgages for sale to investors, or hold them in their own portfolios. For many years, investors have (correctly) seen Fannie Mae and Freddie Mac as having the implicit backing of the US government. This has led to an obvious competitive advantage for the GSEs, as they were able to access long-term, fixed-interest-rate debt via the bond market at rates lower than those available to commercial banks and thrifts. This special access to long-term, fixed-rate debt enabled the GSEs to invest in long-term, fixed-rate assets (i.e., fixed-rate mortgages). Fixed-rate mortgages are usually more popular than adjustable-rate loans, especially during periods of declining mortgage rates. Due to their huge role in the US housing market and their status in the government’s conservatorship since September 2008, the privatization of these firms is being widely considered. According to a Wall Street Journal article on May 22, 2014, there are some challenges posed in privatizing these institutions. One problem is that the government, under its bailout agreements with the firms, gave the Federal Housing Finance Agency (FHFA) and the Treasury Department the power to take Fannie Mae and Freddie Mac’s profits as a provision of the Housing and Economic Recovery Act. Currently, the firms have a combined credit line of $265 billion from Treasury.

In October 2014, a US federal judge dismissed lawsuits filed by investors, including Fairholme Capital Management LLC and Perry Capital LLC, over allegedly promised dividends and liquidation, and what they call the Treasury Department’s illegal “taking” of Fannie Mae and Freddie Mac’s profits. A US district judge claimed that the government is allowed to sweep “nearly all” profits from the two institutions under the 2012 amendment to the companies’ 2008 bailout agreements.


The GSEs dominated the secondary market for such conventional conforming loans, with some estimates placing their participation (as either holders or guarantors) at about 90%. A conforming loan is one that meets underwriting requirements set by the GSEs.

Fannie Mae and Freddie Mac have operated in a US government conservatorship since September 2008. As part of this takeover, the US Department of the Treasury bought $1.0 billion of senior preferred stock in each and received warrants representing an ownership stake of just under 80% in each GSE. These GSEs also entered into purchase agreements with the Treasury, under which the companies were allowed to draw funds up to a maximum of $200 billion. (This restriction was removed in December 2009.)

The FHFA was created on July 30, 2008, when President Bush signed into law the Housing and Economic Recovery Act of 2008. The FHFA combined the staffs of the Office of Federal Housing Enterprise Oversight (OFHEO), the Federal Housing Finance Board (FHFB), and the GSE mission office at the Department of Housing and Urban Development (HUD).

Since its establishment in July 2008, the FHFA has taken a series of actions to utilize Fannie Mae and Freddie Mac to help modify loans and prevent foreclosures. The most significant of these is a program that will allow delinquent borrowers to modify the terms of their mortgages to defer payment on part of the principal, reduce interest rates, or extend loan maturities. This is called forbearance. The FHFA is currently pushing back against demands from several state attorneys general to reduce the principal on some loans.

In February 2011, the Obama Administration delivered a report to Congress that provided a path toward reforming the US housing finance market. The Administration had a general outline, but not a concrete plan, to wind down Fannie Mae and Freddie Mac and shrink the government’s current footprint in housing finance on a responsible timeline. This plan also lays out reforms to fix the fundamental flaws in the mortgage market through stronger consumer protection, increased transparency for investors, improved underwriting standards, and other critical measures. Additionally, it will help provide targeted support to creditworthy but underserved families that want to own their own home, as well as affordable rental options.

The common theme in all of the proposals is that the role of the government may be curtailed and the private sector will become the key provider for housing finance. Although we think this report will start the discussion for reforming the housing financing market, it will be a long-term process to reach final legislation. In the meantime, we think the government will continue to provide liquidity to the fragile housing market via Fannie Mae and Freddie Mac. We think any legislation that increases privatization will benefit thrifts, mortgage lenders, and insurers, reflecting our outlook for potentially higher customer demand, lower competition from government agencies, and attractive financial incentives to compete in the mortgage market.

We expect Congress, the Federal Reserve, and the Treasury to continue to rely on Fannie Mae and Freddie Mac to provide liquidity to the housing markets. These two GSEs are still responsible for a significantly majority of mortgage-backed security issuance. Other than the GSEs, the secondary mortgage market has virtually disappeared. In the meantime, we expect Fannie Mae and Freddie Mac to continue to provide much-needed liquidity to the market.

US GOVERNMENT ACTIONS TO SUPPORT THE HOUSING MARKET SINCE 2008

Since the onset of the housing bubble crash and the ensuing financial crisis and recession, the US government has taken a number of actions intended to stabilize markets, improve the strength of financial institutions, enhance market liquidity, and provide support to homeowners. Such efforts to support the housing market include the following.

Housing and Economic Recovery Act of 2008. Enacted in July 2008, this emergency legislation authorized the FHA to guarantee up to $300 billion in new 30-year fixed-rate mortgages, to subprime borrowers. Most importantly, this legislation placed Fannie Mae and Freddie Mac under federal government conservatorship.


American Recovery and Reinvestment Act of 2009. A small portion of this giant legislative package of $800 billion directed $15 billion toward boosting the US housing market, including funds for modernizing existing housing, rental assistance, low-income construction, and lead paint abatement.

Homeowner Affordability and Stability Plan (February 2009). The Obama Administration announced this plan as part of its strategy to help reestablish confidence in the housing markets and to support a broader economic recovery. Key components of the plan were as follows: Providing access to low-cost refinancing for responsible homeowners suffering from falling home prices Creating a $75 billion mortgage loan modification program to reach up to three to four million at-risk

homeowners Supporting low mortgage rates by strengthening confidence in the Federal National Mortgage

Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac)

Fannie Mae and Freddie Mac. In late 2009, the US Treasury removed restrictions on the amount of capital that it would provide for Fannie Mae and Freddie Mac. Previously, the government had a cap of $200 billion that it would provide to each company. We think the government will continue to fund Fannie Mae and Freddie Mac in order to provide liquidity in the housing market.

Federal Reserve actions (2008 to present). In late 2008, the Federal Reserve expanded a program to purchase direct obligations of Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks, and to purchase mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and the GNMA (Ginnie Mae). The increased amounts were $200 billion in direct obligations, and up to $1.25 trillion in mortgage-backed securities (MBS). The Fed also announced that, to help improve conditions in private credit markets, it would purchase up to $300 billion of longer-term Treasury securities. The Federal Reserve began purchasing debt and MBS under this program in January 2009 and completed the program in March 2010. This program became better known as Quantitative Easing 1.

Following the European debt and banking crisis, which began in the spring of 2010, the Fed decided in August 2010 to use the principal amounts from maturing mortgage securities to purchase Treasury securities, which would help maintain liquidity in the financial system. This program, known as Quantitative Easing 2, ran until June 2011. From September 2011 to December 2012, the Fed conducted Operation Twist, buying bonds with longer maturities, and selling bonds with short maturities. In September 2012, the Fed embarked on a program to buy $40 billion of MBS each month, a program known as Quantitative Easing 3. Quantitative Easing 4 began in December 2012, with monthly purchases of $40 billion of agency-backed mortgage securities, and $45 billion of longer-term Treasury securities. In May 2013, the Federal Reserve announced that it was considering steps to “taper” off these bond purchases, but it also highlighted that the decision would depend on continuing improvements in the economy and the labor market. In December 2013, the Fed announced a reduction of $10 billion in its monthly bond-buying program, to $75 billion a month starting in January. In February and March, it made further reductions of $10 billion a month, bringing its purchases down to $55 billion a month.

Home Affordable Refinance Program (HARP). In March 2009, HARP was introduced to help homeowners refinance their “underwater” (loan-to-value ratio over 100%) mortgages. This program provides for the refinancing of mortgage loans owned or guaranteed by Fannie Mae or Freddie Mac. It targets borrowers who have demonstrated an acceptable payment history on their mortgage loans, but have been unable to refinance due to a decline in home prices or the unavailability of mortgage insurance. Loans are available under this program only if the new mortgage loan either reduces the monthly principal and interest payment for the borrower or provides a more stable loan product (such as movement from an adjustable-rate to a fixed-rate mortgage loan). Since HARP shielded lenders from fraud that may have been committed on the original loan, many lenders participated in this program. This led to a refinancing boom in the second half of 2012. Following an extension in April 2013, HARP is scheduled to end December 31, 2015. Interest rate increases since late 2012 have led to much lower participation rates.

According to the November 2013 Refinance Report of the FHFA, refinancing activity has fallen from 1.07 million mortgages refinanced in 2012 to 862,892 in 2013 (through November). The report also noted that a


total of 3.03 million mortgages (through November 2013) have been refinanced through HARP since its inception in 2009.

Home Affordable Modification Program (HAMP). Also introduced in March 2009, HAMP was designed to help the estimated four million to eight million homeowners who were in danger of foreclosure. This program provided for the modification (temporary interest rate reductions) of mortgage loans owned or guaranteed by Fannie Mae or Freddie Mac, as well as other qualifying mortgage loans. It was aimed at helping borrowers whose mortgage was either currently delinquent or at imminent risk of default by modifying their loan to make their monthly payments more affordable. The program was designed to provide a uniform, consistent regimen for servicers to use in modifying mortgage loans to prevent foreclosures. The US Treasury estimates that 1 million homeowners have participated in HAMP.

In March 2010, the Treasury Department adjusted HAMP to allow mortgage servicers to help homeowners who are unemployed or whose mortgages are “underwater” (the loan is higher than the home’s value). It also introduced two new programs to compliment the HAMP: the Second Lien Modification Program, which offers homeowners a way to lower payments on second mortgages, and the Home Affordable Foreclosure Alternatives Program, which helps homeowners avoid foreclosure and utilize short sales or deed-in-lieu of foreclosures to exit their properties in a timely manner. HAMP, just like HARP, expires December 31, 2015.

The Department of the Treasury has engaged Fannie Mae and Freddie Mac to serve as program administrators for loans modified under HAMP, which are not owned or guaranteed by the GSEs. The GSEs will bear the costs of loan modifications under the HAMP for loans owned or guaranteed by them, while the Treasury will bear the costs for all other loans modified under the program. The Treasury also generally will compensate investors other than the GSEs for 50% of the amount by which a payment is reduced due to the modification, subject to certain limits. It also will pay an upfront incentive fee of $1,500 to such investors if the borrower was current on the loan before the trial period and the borrower’s monthly mortgage payment was reduced by 6% or more.

$8,000 tax credit for first time homebuyers. In November 2009, President Obama extended an $8,000 tax credit to first time homebuyers, a program begun under the Bush Administration. This program gave homeowners until June 2010 to close on their purchase.

Help for the Hardest Hit Housing Markets Program. The “Hardest Hit” program was rolled out by the Obama Administration in February 2010. This $2 billion program was focused on helping homeowners in states where housing prices had fallen more than 20% from their peak. The funds from this program were supplied to state housing agencies and similar organizations to develop local programs, such as helping unemployed homeowners, assisting borrowers whose mortgage balances are above the value of their homes, solving issues with second mortgages, and encouraging affordable home ownership.

Dodd-Frank Reform and the Consumer Financial Protection Bureau (CFPB). As noted in the “Current Environment” section of this Survey, the Dodd-Frank reforms were signed into law by President Obama in July 2010. This law included provisions reforming the mortgage lending industry, enacting further consumer protections, and standardizing mortgage contracts, with “plain English” documentation. The CFPB was enacted by the Dodd-Frank reforms, and it has further pursued the creation of a “Qualified Mortgage” (“QM”) standard, which would shield mortgage underwriters from liability, assuming they followed its rules.

HARP 2.0 and 3.0. Initiated in December 2011, HARP 2.0 expanded eligibility to deeply underwater homeowners. In his State of the Union address in January 2012, President Obama proposed a $10 billion plan to refinance mortgages held by Fannie Mae and Freddie Mac, as well as private investors, a plan that became known as HARP 3.0. This legislation has not yet passed, and it will likely remain tabled.

Expanded HAMP eligibility. In January 2012, the Obama Administration expanded HAMP eligibility to borrowers with higher debt loads, and increased incentives to banks, and to Fannie Mae and Freddie Mac, to cut mortgage principal.


$25 billion mortgage settlement and the independent foreclosure review (IFR). In February 2012, the largest US mortgage lenders and servicers agreed to this settlement, following the revelation, in mid–2010, of widespread abuses in the foreclosure process. Of the total, $20 billion was set aside for writedowns to underwater borrowers; the remaining $5 billion was allocated to federal and state governments, with $1.5 billion of this amount earmarked for small payments to homeowners who were improperly foreclosed on.

The most recent initiatives from the Obama Administration. In March 2012, President Obama announced plans to cut refinancing fees for any loan insured by the FHA, and also announced a plan to review foreclosures made on homes owned by active-duty service members.

In April 2013, the Administration announced three additional foreclosure prevention programs: The US Treasury, the US Department of Labor, and the Department of Housing and Urban Development (HUD) are each working with community groups to expand awareness of the options that homeowners have to save their homes from foreclosure and navigate the foreclosure process.

HOW THE INDUSTRY OPERATES

The following section covers how the banking industry and the thrift industry operate, with a focus on the latter. (The largest US banks are covered in more detail in the Financial Services: Diversified Industry Survey, while US regional banks are covered in the Banking Industry Survey.) Of course, the thrift industry and the commercial banking industry have many common features and, where applicable, we will note such.

The primary business of thrifts is to provide credit for residential housing; retail deposits and short-term borrowings supply these funds. The US is not unique in having an industry devoted to supplying funds for housing; many other nations have similar systems in place.

What is a thrift? The term “thrift” applies to four kinds of organizations: savings and loan associations (S&Ls), savings banks, cooperative banks, and credit unions. All provide residential housing credit, but differ in other respects.

Savings and loan associations (S&Ls). Also called federal savings banks, S&Ls have a federal thrift charter, are regulated by the OCC (the successor to the OTC), and are typically insured by the Deposit Insurance Fund (DIF). S&Ls are required to keep 65% of their assets in housing-related investments. They operate in all 50 states. In the Midwest, certain federal S&Ls are still called “building and loans.” Of all the thrift charters available, the federal S&L charter is the most liberal in what these banks can and cannot do. Federal S&Ls can create subsidiaries through which they can engage in real estate, insurance, discount brokerage, and other non-thrift activities, and may be owned by nonbank entities.

Savings banks. These state-chartered depository institutions are more like banks than other thrifts in that they tend to hold higher balances of commercial and consumer loans. Savings banks are mostly located in the Northeast; their deposits are insured by the DIF.

Cooperatives. Cooperatives are state-chartered thrifts located in New England, principally Massachusetts. They are the same as S&Ls in all but name. Most are insured by the DIF; some are insured by state insurance funds.

Credit unions. Credit unions are nonprofit organizations that offer various banking services to people who are part of a given group—typically, those who work for the same employer. Credit unions are federally insured through their own DIF and are regulated by the National Credit Union Administration.

Distinguishing features Thrifts are distinguished by a number of other characteristics, including size, location, and ownership. These categories, which may be used to describe a single institution, are also useful for spotting industry trends, comparing institutions, reviewing management compensation, or performing refined industry analysis.


Size. A thrift’s most obvious characteristic is its size. Generally, thrift size is determined by its assets: how much the company is worth in outstanding loans, investment securities, and anything that will produce future revenues.

Another gauge of size is the dollar value of a thrift’s deposits—the funds that individuals or companies place in savings or checking accounts and are subject to withdrawal. Measurements of thrift assets and deposits are often interchangeable because assets are overwhelmingly funded by deposits.

The US thrift industry is highly fragmented. Most institutions are small in size and local in scope; some thrifts, however, are very large. As of the second quarter of 2014, the assets of the 899 savings institutions under the regulation of the FDIC totaled $1.058 trillion.

Location. Next to size, location is probably a thrift’s most distinguishing characteristic. Several of the sizable thrifts cover wide expanses of the US. Some thrifts, however, cover only a small geographic area. Understanding the regional economy in which a thrift operates can provide analysts with a lot of insight. A booming local economy augurs well for a thrift: unemployment is likely to be low and demand for housing robust. In addition, nonperforming assets and charge-offs are likely to wane. Conversely, a local economy in recession poses a number of problems: it increases a thrift’s credit risk and the likelihood that nonperforming assets and charge-offs will rise over time. In addition, a fragile economy is likely to reduce demand for housing loans, the thrift’s main product.

Ownership. Classifying a thrift by form of ownership tells you whether the savings institution is owned mutually or through stock. Mutual thrifts are owned by their member savers and borrowers, who have the right to vote on business issues affecting the thrift. Anyone may become a member by opening an account. Publicly owned thrifts issue capital stock, which is traded on an organized exchange or over the counter. Stock may be held by another organization, such as a bank holding company, or by a group of individuals.

Charter. Thrift charters are issued at either the federal or the state level, in an arrangement similar to the dual-charter system used for commercial banks. By definition, a federally chartered thrift institution is an S&L or a federal savings bank. Following the demise of the OTS, these institutions are subject to regulation by the OCC and the Federal Deposit Insurance Corp. (FDIC), which insures thrifts’ deposits through the DIF. Thrifts chartered under the statutes of their respective states are known as savings banks. They are examined by state authorities and are insured by a separate DIF. About one-third of the states allow them.

In most cases, S&Ls and savings banks enjoy a somewhat broader range of permissible activities than do state-chartered thrifts. For instance, an S&L may create a subsidiary corporation, offer insurance and commercial or consumer loans in addition to mortgages, and engage in other activities. S&Ls operate in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, and the Territory of Guam.

Capital level. A bank and thrift’s financial strength is revealed by its capital level—the amount of equity it holds relative to its assets. Thrifts must satisfy certain capital requirements to stay in business. Other things being equal, a thrift with an equity-to-assets ratio of more than 11.5% would be overcapitalized, in our view. In other words, it would have more net worth than it needs in relation to its business risks or to what it could profitably reinvest in new loans. A ratio in the range of 9.5% to 11.5% would be strong; 7.5% to 9.5% would be solid; and 4.5% to 7.5% would be adequate. Anything less than 4.5% raises concerns about the institution’s stability.

While capital ratios are still important measures for the industry, investors must consider the probability of future loan defaults when assessing a thrift’s financial health. Capital ratios can diminish very quickly. Before Washington Mutual was closed and placed into receivership in September 2008 (at which time it was the largest thrift in terms of assets), it had maintained a well-capitalized status. In fact, for both Washington Mutual and IndyMac Bancorp (which was placed in receivership in July 2008), the driving force behind

Table B07: SAVINGS INSTITUTION DISTRIBUTION, BY ASSET SIZE

SAVINGS INSTITUTION DISTRIBUTION, BY ASSET SIZE(As of first-half, 2014)

NUMBER OF

CATEGORY INSTITUTIONS

Over $5 billion 30$1 billion–$5 billion 100$100 million–$1 billion 538Under $100 million 231

Total 899

Source: Federal Deposit Insurance Corporation.


their failures was a loss of depositor confidence. Despite the poor quality of loans on their balance sheets, neither had seen major declines in capital ratios due to the delayed nature of loss taking.

Asset mix. Asset mix refers to the percentage of loans a thrift holds in such categories as commercial real estate, single-family mortgages, apartment mortgages, mortgage-backed securities (MBS), and the like, as well as consumer loans.

Types of loan products. The two broad categories of single-family home mortgages are fixed-rate mortgages (typically 15-year and 30-year) and adjustable-rate mortgages (ARMs). In the past, fixed-rate mortgages were more popular with borrowers by a wide margin, though this can change when interest rates on ARMs become relatively attractive.

ARMs vary by how often they adjust (monthly, quarterly, or annually), as well as the interest rate measure upon which they adjust. ARMs are commonly adjusted according to the movements of a cost-of-funds index or on the one-year Treasury bill rate. Some lenders issue mortgages tied to the prime rate, while other loans are tied to the London Interbank Offered Rate (LIBOR), a practice that facilitates the sale of loans to international investors.

Many thrifts offer hybrid ARMs, which have a period (usually three to 10 years) during which the rate is fixed. The rate then adjusts (typically annually) thereafter. Option ARMs—loans with the added flexibility of making one of several possible payments each month, enabling the customer to better manage monthly cash flow—grew in popularity between 2002 and 2006 due to the low-interest-rate environment. In addition to mortgages, thrifts may offer consumer loans, though these are much less prevalent.

Wholesale versus retail thrifts. Thrifts may be oriented toward retail or wholesale business; this distinction extends to both assets and liabilities.

Retail-oriented thrifts are funded by deposits from the public. More than 85% of assets are in mortgages for single-family homes that they originate. The advantage of holding originated loans generally relates to the higher yield that these assets carry.

Wholesale thrifts, in contrast, hold more than 40% of total assets in MBS. Additionally, they rely more heavily than the retail thrifts on Federal Home Loan Bank (FHLB) advances and capital market borrowings and, to a lesser extent, deposits solicited from brokers. The advantages of holding MBS include a higher permitted capital ratio under the risk-based capital standard, the ability to loan out the MBS in repurchase agreements, and the savings from not having to maintain expensive loan origination capacity. The disadvantage is the lower yield on an MBS as opposed to an originated loan.

Undifferentiated products The products that thrifts offer—residential mortgage loans, checking and savings accounts, and certificates of deposit (CDs)—are essentially undifferentiated commodity products. Mortgages typically carry terms from 15 years to 30 years. While these mortgages can have fixed or adjustable rates, or require various graduated payments and down payments, similar products are nearly identical. The standardization of loan products serves a vital function: it facilitates the sale of loans to secondary agencies, which pool similar mortgages and market them as securities. On the liability side, the lack of product differentiation is even more pronounced. Savings accounts and CDs are distinguished primarily by rate and term.

Interest rate sensitivity Thrift profits vary inversely with the direction of interest rates. This is because thrift liabilities (principally deposits) are short-term in nature, while thrift assets (mainly mortgages) are long-term. When interest rates rise, deposit costs tend to rise faster than mortgage yields, putting pressure on spreads. Conversely, falling rates quickly reduce deposit costs, while loan yields adjust more slowly, resulting in a widening of the spread.

Since the early 1980s, when high interest rates produced negative spreads and large losses, a number of thrifts have pursued strategies designed to minimize the effect that interest rate swings had on their profitability. The most widely adopted method was to issue ARMs instead of fixed-rate mortgages.


East Coast lenders preferred one-year ARMs, which adjust once a year, with the interest rate on the mortgage tied to Treasury bill rates, while the large California thrifts originated of ARMs that adjusted monthly, with yields based on a cost-of-funds index. Although a loan that is adjusted monthly is effective in reducing interest rate risk, it is far from perfect. Despite the monthly adjustments, ARM rates still change more slowly than market rates do, meaning that the instrument is, at best, an imperfect hedge.

Lenders offering ARMs face two possible risks. First, rates could spike higher than the ceiling or “cap” imposed on the loan. Second, borrowers who may qualify for a loan under an initial “teaser” rate—a low introductory interest rate offered to attract borrowers, a frequent practice with ARMs—might later be unable to make payments at the higher rate, causing them to default.

ARMs enjoy considerable popularity with consumers when interest rates are forecast to fall. In low-rate environments, however, many borrowers prefer fixed-rate mortgages as a way to lock in a good rate. Nonetheless, ARMs have been essential in reducing thrifts’ vulnerability to interest rate changes.

Managing assets and liabilities Asset and liability management is at the heart of thrift operations. Nearly all major thrifts have an asset/liability committee to address issues such as the coming year’s loan targets, including what volume of loans to sell and how much to borrow from the FHLB. In addition, the committees discuss ongoing concerns, including how to invest incoming cash flows (principally new deposits and mortgage payments) and how to minimize interest rate risk. Headed by the thrift chairman or other senior manager, such committees typically meet once a week.

The loan origination process is a significant aspect of thrift operations. In many cases, loans are originated through salaried personnel whose primary function is to record information on an applicant’s creditworthiness. Some firms also use field representatives, or loan agents, who receive a commission for originating each loan. Realtors are an especially valuable source of referral business for loan agents.

The branch system The branch system enables thrifts to achieve critical mass in originating mortgages by building a highly visible presence in a given geographic area. Branches also facilitate the sale of various products, such as mutual funds, which generate fee income. Customers at thrift branch divisions generally fall into three markets: senior citizens (who generally hold deposits, but tend not to borrow), customers aged 35 to 55 (who use credit cards and make investments), and customers aged 25 to 35 (who may have savings accounts, but tend to be net borrowers).

To save costs at branch locations, managers may employ techniques such as using part-time rather than full-time personnel and conducting studies to determine how best to allocate employees during peak hours. The success of the branch system is related to service factors such as number and convenience of branch locations, the availability of parking, hours of operation, and employee courteousness.

BANK AND THRIFT INDUSTRY REGULATION

A bank and thrift regulator’s most important responsibilities are setting regulatory capital standards and initiating enforcement action against savings institutions that fail to comply with those standards. Regulators also oversee the chartering of federal institutions, the periodic examination of federally insured savings institutions, the administration of the Qualified Thrift Lender test (QTL test) and liquidity requirements, and the conversion of mutual associations to stock institutions.

The Federal Reserve System Federal Reserve member banks include all nationally chartered banks and most state-chartered banks. The remaining state-chartered banks are supervised by the FDIC.

Some of the Fed’s regulations—such as the Truth in Lending Act of 1968 (Regulation Z), the Equal Credit Opportunity Act of 1974 (Regulation B), and the Home Mortgage Disclosure Act (HMDA) of 1975—apply to all banks in the banking system; other regulations apply only to member banks.


The Fed can influence long and short-term interest rates, as well as the money supply, and prices, through several tools that it has at its disposal. The Fed can raise or lower the discount rate and the fed funds rate target. A second tool used by the Fed is conducting open-market operations, such as buying and selling Treasury bills. The Fed can increase the money supply by buying Treasury bills from its member banks and paying them with newly created money, which they can use as reserves. The Fed’s third tool to control money supply is the ability to raise or lower banks’ reserve requirements on deposits. Reserves are the funds that banks must keep on hand, as a percentage of what they have loaned.

The Federal Deposit Insurance Corporation (FDIC) The FDIC was created by the Banking Act of 1933, as a response to numerous banking panics of the 19th and early 20th centuries. These panics were accompanied by bank runs that often wiped out depositors’ entire accounts and left them without any recourse. Today, almost every bank in the US has its deposits insured by the FDIC, though there are a handful of state-charted banks whose deposits are not FDIC-insured.

Through the Bank Insurance Fund (BIF), the FDIC provided commercial banks with deposit insurance, which guaranteed the safety of savings and checking accounts. Thrifts and home lenders were covered by the Federal Savings and Loan Insurance Corporation (FSLIC). The FSLIC, which became insolvent in 1989 as a result of the savings & loan crisis, was merged into the FDIC and became the Savings Association Insurance Fund (SAIF).

In 2006, the SAIF and the BIF were merged into a single fund, named the Deposit Insurance Fund (DIF). Deposits are currently insured up to a level of $250,000, recently increased from the $100,000 maximum that stood since 1980. The FDIC maintains the levels of the DIF by assessing each depository institution a premium that is based on the level of risk that the institutions poses to the DIF, as well as the amount of deposits controlled by that institution. The FDIC has the power to declare insolvent any insured bank that it deems to be undercapitalized: when this happens, the FDIC either runs the bank or sells it to a well-capitalized institution of its choosing.

The Office of the Comptroller of the Currency (OCC) The OCC is a US federal agency that operates as an independent bureau of the US Treasury Department. The National Bank Act of 1863 established a system of nationally chartered banks and created the OCC to serve as their primary regulator. The OCC and the FDIC supervise all national banks, and since they are all members of the Federal Reserve System, they are also regulated by the Fed.

Today, the OCC supervises more than 1,600 national banks and about 50 foreign banks with operations in the US. The national banks fund the OCC through assessments paid by the banks based on their assets and fees they pay for special services. The OCC claims “pre-emption” over state banking regulators. This means that state banking regulators, who may often be more strict, have found themselves powerless to stop lending abuses they have seen, and this has been a major source of friction between federal and state regulators. Some observers of the banking industry have pointed to the OCC’s lack of regulation over subprime lending as one source of the recent financial crisis.

The Office of Thrift Supervision (OTS) was an independent bureau of the US Treasury Department established in 1989 to regulate federal savings institutions, a category that includes federal savings banks and federal savings & loans. The Dodd–Frank Wall Street Reform and Consumer Protection Act eliminated the OTS. The OCC’s authority was split among three different agencies: the OCC regulates federal thrifts, the FDIC regulates state thrifts, and the Federal Reserve regulates savings and loan holding companies. These changes will bring the thrift and bank charters closer together, and thrift holding companies are likely to be treated nearly the same as bank holding companies. At the same time, however, the existing restrictions on thrift institutions, such as the QTL test, remain in effect.

State regulatory agencies Many US banks are state chartered. They are regulated by the Department of Financial Institutions of the state in which their headquarters are located. In addition, state banks, that are members of the Federal Reserve, are regulated by the Federal Reserve; non-member state banks are usually regulated by the FDIC. Therefore, almost every state bank has both a state and federal regulator.


BANK AND THRIFT CAPITAL

Capital is what banks and thrifts must have on hand to meet the day-to-day obligations of staying in business. In its most basic form, capital is equity, calculated by taking the difference between a bank’s assets (loans, investments, cash, real estate, and intangible assets), and the bank’s liabilities (deposits and borrowings, mainly). If the value of a bank’s assets decline, while liabilities remain the same, equity and capital will fall. Banks must have a cushion of capital on hand to meet anticipated withdrawals—a cushion large enough, as a percentage of assets, to meet anticipated losses on loans and securities.

Using the international Basel standards—the common name for capital guidelines issued by the Bank for International Settlements (BIS) in Basel, Switzerland—the Federal Reserve System has established two basic measures of regulatory capital adequacy with which US bank holding companies must comply: a leverage measure and a risk-based measure. These ratios are as follows:

Leverage ratio. This ratio is calculated by dividing Tier 1 capital (mainly comprised of common stock, retained earnings and perpetual preferred stock) by average total consolidated assets.

Tier 1 capital ratio. This ratio is calculated by dividing Tier 1 capital by risk-weighted assets.

Total capital ratio. This ratio is calculated by dividing total capital (Tier 1 plus Tier 2 capital, which includes loan loss allowances and subordinated debt) by risk-weighted assets.

The first ratio is the leverage ratio, which does not have a risk-weighted denominator. The Fed’s minimum leverage ratio guidelines for bank holding companies demands a 4.0% minimum ratio of Tier 1 capital to average assets, less goodwill and certain intangible assets. Bank holding companies making acquisitions are expected to maintain capital positions substantially above the minimum supervisory level. To meet the regulatory requirement to be classified as well capitalized, the financial institution must have a leverage capital ratio of at least 5%.

The last two are risk-based standards, which consider differences in the risk profiles among banks to account for off–balance-sheet exposure and to encourage banks to hold liquid assets. Assets and off–balance-sheet items are assigned to broad risk categories, each representing various weightings. Capital ratios represent capital as a percentage of total risk-weighted assets. To be considered adequately capitalized, a bank must have a Tier 1 capital ratio of at least 4.0% of risk-weighted assets; regulators consider a ratio of 6.0% to be well capitalized.

The third ratio is the total capital ratio. To be considered adequately capitalized, the minimum ratio of total capital to risk-weighted assets is 8.0%. At least half of total capital must consist of Tier 1 capital (i.e., common equity and certain preferred stock, plus retained earnings, less goodwill and other intangible assets). A bank with total capital ratio of 10.0% is considered well capitalized.

Capital tests for thrifts FDIC-insured thrifts must meet three capital tests. These standards are generally as stringent as the ones imposed on national banks, although the regulators can impose stricter requirements on individual associations on a case-by-case basis.

The purpose of the tests is, like the other legislation, to help keep the thrift industry in top financial form. Key to the regulations is core, or Tier 1, capital. The regulations define core capital as including common stockholders’ equity, noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, less intangibles (with certain exceptions), plus purchased mortgage-servicing rights in an amount not to exceed 50% of core capital. The regulations create three capital requirements: minimum levels of tangible capital, core (or leverage) capital, and risk-based capital, as follows:

Tangible capital equal to at least 1.5% of adjusted total assets. Tangible capital is core capital less all intangibles, except certain purchased mortgage-servicing rights.

Core capital equal to at least 4.0% of adjusted total assets. Core capital generally comprises common stockholders’ equity and noncumulative perpetual preferred stock and related surplus and minority interests


in consolidated subsidiaries, minus most intangible assets. For thrifts in the most highly rated category, as determined by bank supervisory authorities, core capital requirements are 3.0%.

Risk-based capital equal to at least 8.0% of risk-weighted assets. Total capital comprises core capital plus supplementary capital. Supplementary capital may include permanent capital instruments such as cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, various maturing capital instruments, and the general valuation loan and lease loss allowances up to 1.25% of risk-weighted assets. Risk-weighted assets reflect the loss potential of a thrift’s assets.

In the risk-based capital test, risk-weighted assets are obtained by multiplying each asset category by a certain weight and adding up the results. The four risk weights range from 0% for cash and government securities to 100% for certain delinquent loans and foreclosed property. Qualifying residential mortgage loans are assigned a 50% risk weight.

Interest rate risk is part of the risk-based capital rule. The interest rate component requires an institution with an “above normal” level of interest rate risk to deduct from total capital one-half of its exposure to a 200-basis-point increase or decrease in interest rates, in excess of 2%, as measured by fluctuations in net portfolio value. Institutions that have risk-based capital ratios above 12% and less than $300 million in assets are not subject to this rule.

The Qualified Thrift Lender test for thrifts The Qualified Thrift Lender (QTL) test ensures that a savings institution invests at least 65% of its portfolio assets in housing-related investments, on a monthly basis, for nine of the last 12 months. The OCC, as successor to the OTS, administers the test continually.

Qualified thrift investments include residential mortgages; mortgage-backed securities; home improvement and repair loans; home equity loans; consumer loans; obligations of the Federal Savings & Loan Insurance Corp. (FSLIC), the FDIC, the Resolution Funding Corp., and the Resolution Trust Corp.; FHLB, Federal National Mortgage, and Federal Home Loan Mortgage stock; and other assets. An institution that fails the QTL test must convert to a bank charter or operate under certain regulatory restrictions. The Dodd-Frank Act introduced three new restrictions in the event of QTL noncompliance: the one-year grace period to become compliant is eliminated, dividend payments must be approved by the Fed and the OCC, and the OCC can now bring formal enforcement action.

KEY INDUSTRY RATIOS AND STATISTICS

Interest rates. The two interest rates have the most significance for thrifts: the six-month Treasury bill (T-bill) and the 30-year fixed-rate mortgage. The six-month T-bill rate is important because it is a proxy for deposit costs (the average term for a thrift certificate of deposit (CD) is about six months). The 30-year fixed-rate mortgage figure indicates the yield a given institution might receive on its new housing loans.

On October 2, 2014, the yield on the three-month T-bill was 0.01%. The interest rate for a 30-year fixed-rate mortgage averaged 4.19% for the week ending October 2, according to the Primary Mortgage Market Survey, issued weekly by Freddie Mac.

Net interest margin (NIM). This figure, generally defined as net interest income divided by average earning assets, constitutes the industry’s profit margin. For example, a bank’s average loans to customers was $1,000 in a year, while it earned interest income of $50 and paid interest of $25. The NIM then is computed as ($50–$25) / $1,000 = 2.50%. Results can vary widely by lender: margins are relatively stable for adjustable-rate mortgage (ARM) lenders, but can be volatile for fixed-rate lenders.

Net interest spread. The interest yield on earning assets minus the interest rate paid on borrowed funds. For example, a bank’s interest-earnings assets (loans plus investment securities) yield 5.0% in a year, while its interest-bearing liabilities (deposits and debts) pay 3.0% in that year. Using these numbers, the bank’s net interest spread for the year would be 2.0% (5.0% minus 3.0%)


Yield curve. The yield curve is a graph that plots the yields of similar-quality bonds with maturities that range from the shortest to the longest available. Thus, it illustrates the structure of interest rates across the economy. When short-term rates are lower than long-term rates (which is the typical pattern), the result is a positive yield curve. When short-term rates are higher, the yield curve is negative or inverted.

In general, an upward-sloping yield curve is favorable for the thrift industry because it implies positive yield spreads. The flatter the yield curve, the narrower the spread that a thrift can earn on its core lending operations. An inverted, or negative, yield curve is problematic, because a thrift could find that its cost of funds is higher than the rate it earns on the money it lends. Currently, the yield curve is slightly upward sloping, with historically low interest rates at the short end, and relatively low rates at the long end.

Mortgage origination volume. This measure represents the total amount of mortgages for one- to four-family homes that are originated during a given period. It includes mortgages originated by all kinds of lending institutions, including thrifts, commercial banks, and mortgage companies. Because mortgage origination volume is the cornerstone of thrift operations, it is an important measure for investors to analyze. Mortgage volume is highly cyclical, varying primarily with interest rates and the economy’s strength, both of which influence home buying activity.

Level of net charge-offs. Net charge-offs represent a thrift’s periodic recognition of reductions in the value of its loans (usually due to the inability of a borrower to repay), net of any recovery on previously charged-off loans. Net charge-offs are subtracted from the allowance for loan losses. The level of net charge-offs reflects both the financial condition of borrowers and the value of the assets (typically residential real estate) collateralizing the loan portfolio. Thus, it is a comprehensive indicator of a bank or thrift’s real asset quality.

To maintain its allowance for loan losses, a thrift needs to provision for loan losses (an income statement item) in an amount equal to net charge-offs. Thus, net charge-offs can also be viewed as reflecting a thrift’s true credit costs.

Banking industry net charge-offs in June 2014 amounted to 0.51%, lower than the 0.78% in the prior year. Net charge-offs were 0.69%in 2013, versus 1.10% in 2012, 1.55% in 2011, and 2.55% in 2010.

Level of nonperforming assets. Nonperforming assets (NPAs) are comprised of restructurings of troubled debt, loans in which the lender has made concessions to the borrower in order to keep the loan current, and problem assets. Problem assets are defined as the sum of loans delinquent by 90 days or more, plus foreclosed real estate.

The level of NPAs is a rough projection of a worst-case scenario, a means to assess the loss of equity that would be incurred if all currently troubled assets were completely written off. However, the level at which NPAs become a problem for a thrift depends on its strategy. For example, the measure is less important to a traditional thrift than to a commercial bank (or a thrift pursuing a bank-like model) because its NPAs are usually collateralized, typically by real estate.

As a leading indicator of the level of charge-offs, trends in asset quality are as important as the absolute level of NPAs. If NPAs are building, it is possible that the institution will see an increase in charge-offs, which may eventually require additional provisions to the reserves of loan losses.

At year-end 2013, the industrywide ratio of noncurrent loans to total loans amounted to 2.62%, down from 3.60% at the end of 2012, 4.09% at the end of 2011, and 4.87% at the end of 2010. For FDIC-insured mortgage lenders, the ratio of noncurrent loans to total loans was 2.24% in the second quarter of 2014—the lowest level since the second quarter of 2008. The ratios were 2.62% in 2013, down from 3.82% at the end of 2012, 3.86% at the end of 2011, and 4.29% at the end of 2010.

Industry earnings. Industry earnings are an important measure of profitability and overall viability. About 55 days after the end of each quarter, the OCC publishes financial results for thrifts, and the Federal Deposit Insurance Corp. publishes similar information for savings banks.


An important statistic is return on assets (ROA), or net income divided by period-average assets, which adjusts for consolidation. ROA has its limitations. It can be inflated by nonrecurring gains on the sale of loans, for example, or depressed by large one-time writedowns. To correct for these influences, some analysts prefer another measure: operating earnings divided by period-average assets, which provides cleaner year-to-year comparisons.

Noninterest expense. Banks and thrifts typically incur certain expenses in their quest to generate revenue. A useful measure to compare the efficiencies of various institutions is to look at noninterest expenses as a percentage of average assets, which indicates how well they manage their cost base relative to their asset base, and in turn, how much of that revenue flows to the bottom line. Another measure of noninterest expense is the efficiency ratio, which is adjusted core expenses, divided by core net revenues. An efficient institution can endure relatively adverse credit conditions or interest-spread tightening while remaining profitable.

In the second quarter of 2014, noninterest expenses for FDIC-insured banks were an annualized 2.79%, versus 2.88% of average assets in 2013, 2.99% in 2012, 3.04% in 2011, and 2.97% in 2010. For mortgage lenders, it was 2.47% in the second quarter of 2014, 2.35% in 2013, 2.33% in 2012, 2.19% in 2011, and 1.78% in 2010. The efficiency ratio for FDIC-insured banks was 60.96% in the second quarter of 2014, 60.54% in 2013, 61.6% in 2012, 61.4% in 2011, and 57.2% in 2010. For mortgage lenders, it was 65.11% in the second quarter of 2014, 62.22% in 2013, 58.75% in 2012, 60.9% in 2011, and 49.2% in 2010.

HOW TO ANALYZE A BANK OR THRIFT INSTITUTION

Two basic steps are involved in analyzing a bank or thrift. The first is to calculate various ratios to measure the institution’s profitability, credit quality, operating efficiency, exposure to interest rate changes, financial strength, and other characteristics, and compare them to historical data for signs of improvement or deterioration. Many of these ratios rely on “common size” analysis and thus are computed in relation to a specific reference point. For banks and thrifts, this reference point is usually total earning assets or total revenues, defined as the sum of net interest income before loan loss provisions and noninterest income. The sections that follow list the more important ratios and how to interpret them.

The second step is to compare the data for an individual company with peer group averages. For example, the company’s cost structure may be well below peer and industry averages, as compiled by the FDIC, by financial data providers such as SNL Financial, and by investment analysts. Peer comparisons must be tempered by such considerations as asset size, market capitalization, business mix, region, and other factors that are needed to provide a meaningful comparison.

CAPITAL: THE FINANCIAL FOUNDATION

The fundamental measure of a bank or thrift’s financial strength is its net worth, or capitalization. Capital is a cushion against losses, a means of expansion, and a measure of its ability to pay dividends.

The ratio that S&P Capital IQ uses to gauge a bank or thrift’s net worth is tangible shareholders’ equity divided by total tangible assets. (Tangible assets equal assets minus intangible assets such as goodwill. Tangible equity equals tangible assets minus liabilities.) For a thrift that focuses on low-risk, single-family lending, a ratio of 5.0% to 6.0% is probably adequate. A ratio of tangible equity to tangible assets that is above 8.5% generally puts a bank or thrift on a strong financial footing. However, an equity-to-assets ratio much higher than 11.0%–12.0% is probably too high; the institution is carrying excess capital and would probably improve its earnings if it further leveraged its asset base by holding more mortgages.

The equity-to-assets ratio is sometimes flipped and expressed as assets to equity. To say that a company is leveraged 20-to-1 means the same thing as a 5% equity-to-assets ratio ($5 of equity for every $100 of assets).

The risk-based capital ratio, a more sophisticated measure of capital adequacy, offers another means of gauging a company’s financial strength. This ratio calculates net worth in relation to overall loss potential (risk) of the assets on the balance sheet.


Capitalization and profitability are related. Although the accounting ideas behind this phenomenon are complex, the upshot is that more capital means more free funds and thus higher profits. Well-capitalized thrifts often have a surplus of interest-earning assets (in the form of loans and investment securities) over their interest-bearing liabilities (deposits and borrowings). This positive balance is termed interest-free funds.

Conversely, an institution that has more interest-bearing liabilities than interest-earning assets—in other words, that has a negative interest-free funds position—endures a net interest margin lower than its net interest spread. It must seek to overcome this drag with income from other areas.

INTEREST RATE SPREAD: THE BANK AND THRIFT PROFIT MARGIN

The net interest spread (or simply “spread”) is analogous to a manufacturing firm’s profit margin and is thus an important measure of operating performance. Net interest spread is defined as the difference between the average rate a thrift earns on interest-earning assets (loans) and the average rate it pays for interest-bearing liabilities (deposits). A number of spreads can be computed that incorporate different components of asset yields or funding costs, but the one just defined is the most widely used.

Many thrifts with poor spreads also have low basic profitability. Some are able to overcome narrow spreads with a low operating cost structure. (See the heading “Cost structure” later in this section.) Spread does not increase with the ratio of interest-earning assets to interest-bearing liabilities on a thrift’s balance sheet.

Analyzing the individual components that make up the spread can reveal important additional facts about a company. For instance, asset yields may be depressed because the thrift carries a large balance of low-yielding, fixed-rate mortgages on its books. High funding costs could indicate a firm’s reliance on long-term deposits or debt. Low funding costs might signal a base of low-rate passbook accounts. The New York City metropolitan area, with its dense population, and Florida, with its many senior residents, are good markets for these low-rate passbook accounts.

A frequently cited statistic that is similar to spread is the net interest margin (NIM), which is simply interest earned on assets minus interest paid on liabilities, as a percentage of average interest-earning assets. The NIM, like the net interest spread, reflects the difference between asset yields and the cost of funds. Unlike the net interest spread, however, the NIM increases with the ratio of interest-earning assets to interest-bearing liabilities on a thrift’s balance sheet.

ASSET QUALITY

Asset quality (or credit quality) is an extremely important dimension of thrift assessment, ranking on a par with spread. Nothing can bring a thrift to its knees faster than bad loans. Yet asset quality is often difficult to gauge, requiring more technical and qualitative research to evaluate than other financial measures.

Discerning asset quality The goal in analyzing asset quality is to determine if a thrift institution is fully reserved against both present and future potential loan losses. There are three basic steps in this process: determining the level of nonperforming assets, determining the level of net charge-offs, and assessing the adequacy of reserves.

Determine the level of an institution’s nonperforming assets (NPAs). NPAs are typically problematic assets on which thrifts may lose money. NPAs, typically expressed as a percentage of total assets, include loans that are delinquent by 90 days or more, foreclosed real estate and troubled debt restructurings, or loans in which the lender has granted the borrower a concession in order to keep the loan current.

In addition to considering the absolute level of NPAs, it is also important to look at their direction. An increase in the level of NPAs can indicate that economic conditions have deteriorated, jobs have been lost, or conditions have worsened in the thrift’s real estate market, making it more difficult to sell foreclosed real estate. The reverse is also true.


To get some indication of how that trend may play out in coming quarters, take a look at delinquencies in their earlier states (30- or 60-day delinquencies). Although delinquencies are often cured before reaching nonperforming status, a rise in this measure is generally a leading indicator of a rise in NPAs.

A word of caution is in order here. Falling NPAs generally indicate a positive trend in credit quality, but not always. For example, a bank or thrift with rising delinquencies can reduce its NPAs by selling foreclosed property at distressed prices; an analyst might conclude that the thrift is doing better than it actually is. Alternatively, this institution might charge off a delinquent loan, lowering its nonperforming asset total but increasing losses.

Absent a deliberate shift in strategy toward the origination of higher-yielding, higher-risk loans (e.g., subprime mortgages, or consumer or commercial loans), a rising level of NPAs is usually bad news and can signal the need to boost the loan loss provision, an income statement item.

In determining if the loan loss provision should be increased, it is necessary to assess the composition of the nonperforming loans. A large balance of risky commercial real estate loans, for example, suggests a greater ultimate loss potential than is likely from a portfolio of mainly single-family mortgages. This is mainly because residential real estate values appreciate more consistently and are less volatile than their commercial counterparts are. Therefore, a thrift can generally count on recovering a large portion, if not the principal balance of, a charged-off single-family mortgage loan.

The analyst should also compare the level of nonperformers with tangible shareholders’ equity. When a thrift’s nonperformers exceed tangible equity, its situation is extremely worrisome: its solvency is threatened. Depending on an institution’s reserve levels and local economic conditions, NPAs equal to 250% or more of tangible equity generally signal the point of no return; the institution has a high probability of failing. Nonetheless, some thrifts have staged remarkable comebacks with even higher levels of NPAs.

Determine the level of an institution’s net charge-offs (NCOs). NCOs are total debt deemed uncollectible, net of any recoveries on previously charged-off loans. NCOs reduce reserves; because reserves are replenished with the income statement item of loan loss provisioning, NCOs truly represent the bottom line when it comes to asset quality. NCOs are frequently measured as a percentage of average loans on an annualized basis.

A high level of nonperformers may be less problematic if a bank or thrift, or the defaulted borrower, can recover all or most of the value of the nonperforming loan by selling the underlying collateral (typically a single-family residence). Such recoveries will be reflected in NCOs. Thus, a healthy residential real estate market can mitigate the potential effect of a high level of single-family residential nonperformers.

Therefore, in considering whether to emphasize NPAs or NCOs in an asset quality analysis (or reserve adequacy, discussed later in this section), consider how well collateralized the bank or thrift’s nonperforming loans are. If the institution’s NPAs are mostly unsecured loans or loans secured with dubious collateral, as is often the case with commercial banks or thrifts with a commercial bank-type model, we would tend to emphasize NPAs. However, if NPAs are mostly first-lien, single-family mortgages in a healthy real estate market—as is often the case with plain-vanilla thrifts—we would tend to emphasize NCOs.

Assess the adequacy of the thrift’s reserves. Where loss coverage is warranted, how much has been set aside to provide for present and expected loan losses? The ratio of reserves to nonperforming or nonaccrual loans gives a picture of how well these loans are “covered” by reserves. (This ratio excludes foreclosed real estate because thrift accounting conventions require that foreclosed property be periodically written down to market value.)

The ratio of reserves to annualized NCOs is another measure of reserve adequacy. In theory, it measures how long a thrift could withstand current levels of NCOs without bolstering its reserve with additional provisioning for loan losses. Of course, it would be unwise for any thrift to absorb NCOs repeatedly in its reserves without provisioning for additional loan losses.


In general, we think it is prudent for banks and thrifts to bolster their reserves regularly with loan loss provisions equal to, or in excess of, NCOs. When analyzing a bank or thrift, be on the alert for several quarters in which charge-offs exceed the provision for loan losses, which can indicate that the management is running down the reserve. However, a single quarter in which charge-offs significantly exceed the institution’s loss provision does not necessarily indicate a fundamental problem; it might reflect, for example, that housing market conditions were considerably worse than management had expected.

COST STRUCTURE

Another area to assess is the efficiency with which a thrift operates. A widely employed measure is the efficiency ratio, which is noninterest expenses over the sum of net interest income and noninterest income. Noninterest expense includes nearly all of the operating expenses associated with running a thrift: personnel, occupancy, advertising, deposit insurance, and miscellaneous items. Low-cost operators have an efficiency ratio of less than 50%.

A thrift’s efficiency ratio may be high for a variety of reasons. A particular thrift may have an extensive branch network system, or its management compensation could be excessive—a more frequent situation than is often realized. Conversely, low general and administrative costs could reflect large holdings of mortgage-backed securities (which require little overhead), a limited loan origination network, a high-volume branch network with economies of scale, or even asset growth that is not matched by a corresponding increase in costs.

EARNINGS QUALITY

Another important variable to consider is earnings quality. Earnings can be defined in two ways: as reported income (income obtained from all sources) or as recurring income (income that can be expected to recur year after year). Although banks and thrifts usually do not report recurring income per se, we prefer this measure because it excludes nonrecurring and one-time earnings, thus giving a better indication of the profits a firm obtains from its basic operations.

At a minimum, recurring income equals net interest income plus fee and other income, less the loan loss provision and gains on asset sales. The intent of this equation is to measure what an institution earns from the spread on its loan portfolio and in fee income, with its overhead factored out.

In addition, S&P Capital IQ is inclined to include gains from loan and securities sales as recurring income, on a case-by-case determination. For example, for a thrift with heavy mortgage banking operations, gains from loan sales are clearly recurring income because such thrifts routinely sell mortgages into the secondary market. For many traditional portfolio-lending thrifts, however, such gains are relatively infrequent and thus are arguably of lower quality.

We generally feel that the timing and extent of loan and securities sales are guided by management decisions regarding capital and interest rate risk. Such decisions are a part of an institution’s recurring operations and affect future net interest income.

COVERAGE RATIO

Perhaps the best measure of an institution’s overall operating health is the coverage ratio: net interest income (before the loan loss provision) divided by general and administrative costs. This statistic—which generally ranges from 95% to 250%—indicates how much of a thrift’s overhead is being covered by its spread income, which comes from its recurring business of making loans and accepting retail deposits.

Consider the case of a thrift experiencing losses because of significant reserve additions. If this thrift had a good coverage ratio, it might well pull through a difficult time. If it had a coverage ratio of less than 100%, however, it could be in serious trouble. In that case, it must rely on fee income sources to remain profitable.


INTEREST RATE RISK

The most commonly used measure of a bank or thrift’s vulnerability to changes in interest rates is the one-year gap: the difference between the assets and the liabilities scheduled to reprice in one year, expressed as a percentage of assets. The gap can be positive or negative. A positive gap means that more assets than liabilities will reprice or assume market rates in the next year. This is the preferable situation when interest rates are rising: in this case, an institution’s asset yields climb faster than its deposit costs, which help earnings. A negative gap means that more liabilities than assets will reprice or assume market rates in the next year.

For banks and thrifts, interest rate risk is an important factor. Unfortunately, the one-year gap is, at best, only a rough measure of interest rate risk. Even a company that is perfectly matched on a gap basis may see its earnings fluctuate in response to interest rate changes. The worst possible situation would be one in which rates peaked at a time when low-cost deposits matured—and then subsequently bottomed when assets were due to be repriced.

FINANCIAL PERFORMANCE MEASURES

Return on assets. ROA, which equals net income divided by average assets, gauges how well management has performed with the assets at its disposal. In the second quarter of 2014, the banking industry’s return on average assets was 1.04% versus 1.09% in the prior-year period. ROA was 1.07% in 2013, versus 1.0% in 2012.

Return on equity. ROE equals net income divided by average shareholder equity. It measures the percentage of income that accrues to shareholders. In many instances, a low ROE may indicate the presence of excess capital. Likewise, a high ROE can reflect, at least partially, a relatively high degree of leverage and relatively low levels of capital. In the second quarter of 2014, the banking industry’s ROE was 9.27% compared with 9.74% in the second quarter of 2013. In 2013, ROE was 9.56% (annualized), versus 8.91% in 2012.

EQUITY VALUATION

There are many valuation methodologies for the bank and thrift industry. You can use price-to-total assets, price-to-deposits, dividend yield, ROE, price-to-tangible book value, and price-to-earnings. We think the two important valuation methods are price-to-tangible book value and price-to-earnings, reflecting our view that these ratios are relevant for equity investors.

The price-to–tangible book value ratio is useful for valuing banks and thrifts. Tangible book value is basically book value, less preferred shares and goodwill. By stripping a company down to its basic level, relative valuations become useful. A thrift with loans and securities that are more solid will generally trade at a higher price/tangible book value than one with assets that are more suspect.

The other key valuation method is price-to-earnings (P/E). If a bank or thrift’s earnings are relatively stable, then a P/E valuation is appropriate because it would be easy to compare the current P/E ratio to the historical range. If the current P/E is near historical highs, then the stock is expensive on a relative basis. However, a high P/E also indicates that investors perceive the growth prospects for this company to be higher. If the current P/E is near historical lows, then the stock is cheap on a relative basis. However, investors believe the future prospects for this company are limited.


GLOSSARY

Asset—Any object, such as real or personal property, that has monetary value and can be used as debt collateral.

Basis point—The equivalent of one hundredth of one percent (0.01%). This unit is generally used to measure movements in interest rates.

Book value per share—The accounting value of a share of common stock, determined by dividing total shareholders’ equity by the total number of shares outstanding at the end of a given period.

Capital—Equity funds invested in a financial institution, including common stocks, qualifying preferred stock, and certain other items such as retained earnings.

Certificate account—A savings deposit made for a fixed or specified minimum term, usually subject to a penalty (such as loss of interest) for early withdrawal; also known as a certificate of deposit (CD).

Clearinghouse—An institution in which mutual claims and accounts are settled, such as the reciprocal exchange of checks and drafts between banks.

Comptroller of the Currency—The chief US regulator of banks that are national in scope. The president of the United States appoints the Comptroller of the Currency for a five-year term, with Senate confirmation. Congress created the office in 1863 as a part of the national banking system.

Consumer loan—A loan made to an individual for any nonbusiness purpose except the construction of buildings or purchase of real estate.

Contributed capital—The initial funding needed to charter a bank; it acts as a cushion against operating losses and as protection for depositors’ money.

Core deposits—The total of demand deposits (checking accounts), negotiable order of withdrawal (NOW) accounts, and consumer time deposits (savings certificates and regular passbook savings accounts).

Deposits—Cash, checks, or drafts placed with a financial institution for credit to a customer’s account.

Deposit Insurance Fund (DIF)—A fund that insures customer deposits at savings and loans associations and other US banks. Administered by the Federal Deposit Insurance Corp., the DIF is capitalized by contributions from insured members, based on their respective deposit levels and financial strength. DIF replaced the Savings Association Insurance Fund (SAIF) in 2006. The SAIF replaced the Federal Savings and Loan Insurance Corp. (FSLIC) in 1989.

Discount rate—Interest rate at which an eligible depository institution may borrow funds directly from a Federal Reserve Bank. These secured borrowings are typically for a short period.

Disintermediation—The flow of funds out of one class of financial intermediary into another financial market instrument.

Fannie Mae—The Federal National Mortgage Association (FNMA). Originally part of the Federal Housing Authority (FHA), Fannie Mae is authorized to buy only FHA-insured loans. (The FHA is now an agency within the Department of Housing and Urban Development’s Office of Housing.) Since 1968, Fannie Mae has been a private, shareholder-owned company that operates under a congressional charter. This corporation’s mandate is to increase the availability and affordability of homeownership for low-, moderate-, and middle-income Americans; it does this by working with lenders to ensure that they do not run out of mortgage funds. Though it does not lend money directly to homebuyers, it is the nation’s largest provider of funds for home mortgages.

Federal funds—Short-term transactions in immediately available funds (cash or cash equivalents) between depository and certain other institutions that maintain accounts with the Federal Reserve; usually not collateralized. Federal Reserve member banks make such purchases to achieve mandatory reserve levels required by regulators.


Federal funds rate—The interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight.

Financial futures contract—An obligation to buy or sell a financial instrument at some future point. Parties to the contract usually expect that a change in its value will offset a change in the value of the specific asset or liability being hedged.

Float—The portion of gross checking account (demand deposit) balances that is in the process of being collected.

Foreclosure—A legal procedure whereby a debt holder takes possession of property mortgaged as security for a loan when the borrower defaults. The property is then sold to pay the debt.

Freddie Mac—The Federal Home Loan Mortgage Corporation; a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of funds to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases mortgages from lenders and packages them into securities that are sold to investors.

Gap—The difference between the maturity or repricing of a financial institution’s liabilities and those of its assets at a given time. A negative gap occurs when more liabilities than assets are due to mature or reprice within a given timeframe; the institution is said to be liability-sensitive in that period. A positive gap occurs when more assets will mature or reprice than liabilities; the institution is then said to be asset-sensitive. When short-term interest rates fall, a bank with a negative short-term gap will see net interest margins widen; when rates rise, a bank with a positive gap will benefit.

Ginnie Mae—The Government National Mortgage Association (GNMA) is a US government corporation within the Department of Housing and Urban Development (HUD). It insures the timely payment of principal and interest from approved issuers (such as mortgage bankers, thrifts, and commercial banks) of qualifying loans, such as those issued by the Federal Housing Administration (FHA).

Hedging—The process seeking to minimize foreign exchange or interest rate risk via the purchase or sale of specialized financial instruments.

Interest rate sensitivity—The degree to which a depository institution’s net interest income or net asset value is subject to interest rate fluctuations.

Interest rate swap—A contract for a specified time period between two parties that agree to exchange payments. One party makes payments based on a fixed interest rate, the other makes payments based on a floating rate.

Money market deposit account—A combined savings and checking account that allows a certain number of preauthorized transfers per month. Interest rates paid are usually linked to rate changes on money market instruments such as Treasury bills.

Mortgage bank—A lender that originates mortgages for resale to investors, as opposed to a portfolio lender. (See Portfolio lender.)

Mortgage broker—A firm or individual that brings a borrower and a lender together and receives a commission if a loan results. A mortgage broker does not retain servicing on the loan.

Multifamily dwelling—A rental property with more than four units.

Mutual institution (mutual savings bank)—A savings institution owned solely by its customers (current savers and borrowers) who elect its board of directors; also called a “mutual.” Profits are distributed to the owner/customers in proportion to the business they do with the institution.

Negotiable certificates of deposit (CDs)—Marketable receipts for funds deposited in a financial institution at interest for a specified period, usually between 30 and 90 days. Negotiable CDs are sold in denominations of $100,000 or more and are a type of certificate account.

Net charge-off—The portion of loans that are no longer likely to be collected and are written off as bad debt expense, minus any payments received on loans previously charged off.

Net interest income—Total interest revenues minus total interest expenses.


Net interest margin—Net interest income divided by average interest-earning assets.

Net interest spread—The difference between the average rate a thrift receives from its earning assets and the average rate it pays for deposits and borrowed funds.

Nonaccrual loans—Loans or other assets typically in default, whose income is recognized when cash is actually collected; also called cash-basis loans. Cash receipts from nonaccrual assets are sometimes credited directly to principal.

Noninterest income—All income sources other than interest: loan origination fees, fees for retail and financial services to customers, net gain (or loss) on the sale of assets, and any miscellaneous income.

Nonperforming assets—The total of nonaccrual loans, renegotiated-rate loans, and other real estate owned, from which principal and interest payments are not being received in accordance with original agreements.

Nonperforming loans—The sum of nonaccrual loans and renegotiated loans.

Operating efficiency—A ratio calculated by dividing noninterest expenses by net interest income plus noninterest income; indicates how much of each revenue dollar is consumed by operating expenses.

Other real estate owned (OREO)—Real estate acquired (through foreclosure or other means) in lieu of payment on a troubled debt, as partial or full satisfaction of the obligation.

Portfolio lender—A lender that retains the loans it originates, as opposed to a mortgage bank. (See Mortgage bank.)

Qualified Thrift Lender test (QTL test)—A regulatory test which requires that 65% of a savings association’s assets be invested in assets related to residential mortgage loans.

Renegotiated loan—A loan for which the interest rate or repayment terms have been revised due to credit deterioration.

Reserve for loan losses—A contra account to the portfolio of loans; consists of accumulated earnings that are set aside to protect the loan portfolio from potential losses.

Return on average assets (ROAA)—A financial ratio calculated by dividing net operating income by total average assets; an indicator of operating performance.

Return on average equity (ROAE)—A performance measure calculated by dividing net income by average common shareholders’ equity.

Reverse repurchase agreement—An agreement to purchase mortgage-backed securities from a party with a simultaneous agreement to resell them at a specified future date and price.

Risk-based capital—A measure used by regulators to assess a thrift’s capital adequacy relative to the riskiness of its assets. Federal guidelines determine how capital is to be measured and how assets (including off-balance-sheet items) must be adjusted to reflect their various levels of credit risk.

Savings and loan association (S&L)—A depository financial institution whose primary purpose has historically been to provide loans for purchasing and building homes.

Savings bank—A depository financial institution that accepts customer deposits and invests its assets in commercial or residential mortgages and high-grade securities. Most savings banks are located in the Northeast.

Servicing—The collection of payments and the management of operational procedures related to a mortgage.

Thrift institution—Thrift-chartered institutions are one part of the US residential mortgage origination and servicing industry. The term “thrift” applies to four types of organizations: savings and loan associations (S&Ls), savings banks, cooperative banks, and credit unions, all of which provide credit for residential housing, though they differ in other respects.


INDUSTRY REFERENCES

PERIODICALS

American Banker http://www.americanbanker.com Daily; covers all legislative, product, and financial developments affecting depository institutions.

The FDIC Quarterly Banking Profile http://www2.fdic.gov/qbp/default.asp Quarterly; contains earnings and balance sheet data for FDIC-insured institutions.

Federal Reserve Bulletin http://www.federalreserve.gov/pubs/bulletin Monthly; provides data and articles on banking and economic developments.

Inside Mortgage Finance http://www.imfpubs.com Monthly; discusses trends in origination, servicing, and regulation, as well as the primary and secondary marketing of mortgages.

Mortgage Banking National Delinquency Survey http://www.mbaa.org The first is a monthly that discusses trends in origination, servicing, and regulation, as well as the primary and secondary marketing of mortgages; the second is a quarterly that tracks mortgage delinquencies and foreclosures for single-family homes.

National Mortgage News http://www.nationalmortgagenews.com Weekly; covers secondary market news, trends in mortgage volume, and information on investor choices of mortgage-backed securities.

Weekly Primary Mortgage Market Survey http://www.freddiemac.com/pmms Weekly; covers rates on 30 fixed-rate mortgages, 15-year FRMs, 5/1 ARMs, and one-year ARMs.

RESEARCH FIRMS

SNL Financial http://www.snl.com Provider of news, financial data, and expert analysis on the financial institutions industry.

TRADE ASSOCIATIONS

American Bankers Association http://www.aba.com Represents the interests of the banking industry.

Mortgage Bankers Association (MBA) http://www.mbaa.org Trade association for the nation’s mortgage bankers.

The National Association of Realtors (NAR) http://www.realtor.org Trade association for real estate professionals.

REGULATORY GROUPS

Federal Deposit Insurance Corp. (FDIC) http://www.fdic.gov Independent federal agency that oversees the Deposit Insurance Fund (DIF), the S&L deposit insurance fund.

Federal Housing Finance Agency (FHFA) http://www.fhfa.gov Independent federal agency that is currently the primary regulator of government-sponsored home lending enterprises—the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (FHLMC or Freddie Mac)—although regulatory reform is under consideration. In addition, FHFA is the author of considerable research on the mortgage and residential housing markets, including a quarterly index of home prices.


COMPARATIVE COMPANY ANALYSIS

Net Income

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

THRIFTS & MORTGAGE FINANCE‡AF † ASTORIA FINANCIAL CORP DEC 66.6 53.1 67.2 73.7 27.7 75.3 196.8 -10.3 -2.4 25.4 34 27 34 37 14BKMU § BANK MUTUAL CORP DEC 10.8 6.8 (47.6) (72.6) 13.7 17.2 22.6 -7.1 -8.8 59.8 48 30 (210) (321) 61BOFI § BOFI HOLDING INC JUN 40.3 29.5 20.6 21.1 7.1 4.2 1.7 37.0 57.2 36.7 2,329 1,704 1,190 1,221 413BRKL § BROOKLINE BANCORP INC DEC 35.4 37.1 27.6 26.9 19.2 12.9 14.5 9.3 22.5 -4.7 244 257 191 186 133DCOM § DIME COMMUNITY BANCSHARES DEC 43.5 40.3 47.3 41.4 26.2 28.0 51.3 -1.6 9.2 8.0 85 79 92 81 51

HCBK [] HUDSON CITY BANCORP INC DEC 185.2 249.1 (736.0) 537.2 527.2 445.6 207.4 -1.1 -16.1 -25.7 89 120 (355) 259 254NYCB † NEW YORK CMNTY BANCORP INC DEC 475.5 501.1 480.0 541.0 398.6 77.9 323.4 3.9 43.6 -5.1 147 155 148 167 123NWBI § NORTHWEST BANCSHARES INC DEC 66.7 63.6 64.2 57.5 32.7 48.2 41.7 4.8 6.7 5.0 160 152 154 138 78ORIT § ORITANI FINANCIAL CORP JUN 39.5 31.6 28.5 8.4 5.6 9.0 NA NA 34.6 24.9 ** ** ** ** NAPBCT [] PEOPLE'S UNITED FINL INC DEC 232.4 245.3 198.8 85.7 101.2 139.5 63.8 13.8 10.7 -5.3 364 384 312 134 159

PFS § PROVIDENT FINANCIAL SVCS INC DEC 70.5 67.3 57.3 49.7 (121.8) 41.6 18.7 14.2 11.1 4.9 376 359 306 265 (650)TRST § TRUSTCO BANK CORP/NY DEC 39.8 37.5 33.1 29.3 28.1 34.1 53.0 -2.8 3.2 6.1 75 71 62 55 53WAFD † WASHINGTON FEDERAL INC SEP 151.5 138.2 111.1 118.7 48.2 62.3 145.0 0.4 19.4 9.6 104 95 77 82 33

DIVERSIFIED BANKS‡BAC [] BANK OF AMERICA CORP DEC 11,431.0 4,188.0 1,446.0 (2,238.0) 6,276.0 4,008.0 10,810.0 0.6 23.3 172.9 106 39 13 (21) 58C [] CITIGROUP INC DEC 13,403.0 7,690.0 10,955.0 10,622.0 (1,161.0) (32,094.0) 17,853.0 -2.8 NM 74.3 75 43 61 59 (7)CMA [] COMERICA INC DEC 541.0 521.0 393.0 260.0 16.0 212.0 661.0 -2.0 20.6 3.8 82 79 59 39 2JPM [] JPMORGAN CHASE & CO DEC 17,923.0 21,284.0 18,976.0 17,370.0 11,652.0 3,699.0 6,719.0 10.3 37.1 -15.8 267 317 282 259 173USB [] U S BANCORP DEC 5,836.0 5,647.0 4,872.0 3,317.0 2,205.0 2,946.0 3,710.1 4.6 14.7 3.3 157 152 131 89 59

WFC [] WELLS FARGO & CO DEC 21,878.0 18,897.0 15,869.0 12,362.0 12,275.0 2,655.0 6,202.0 13.4 52.5 15.8 353 305 256 199 198

OTHER COMPANIES WITH SIGNIFICANT MORTAGE FINANCE OPERATIONS BBT [] BB&T CORP DEC 1,679.0 1,979.0 1,289.0 816.0 853.0 1,519.0 1,064.9 4.7 2.0 -15.2 158 186 121 77 80FITB [] FIFTH THIRD BANCORP DEC 1,836.0 1,576.0 1,297.0 753.0 737.0 (2,113.0) 1,721.6 0.6 NM 16.5 107 92 75 44 43PNC [] PNC FINANCIAL SVCS GROUP INC DEC 4,220.0 3,013.0 3,056.0 3,039.0 2,402.0 882.0 1,029.0 15.2 36.8 40.1 410 293 297 295 233RF [] REGIONS FINANCIAL CORP DEC 1,135.0 1,179.0 189.0 (539.0) (1,031.0) (5,584.3) 651.8 5.7 NM -3.7 174 181 29 (83) (158)STI [] SUNTRUST BANKS INC DEC 1,344.0 1,958.0 647.0 189.0 (1,563.7) 795.8 1,332.3 0.1 11.1 -31.4 101 147 49 14 (117)

Note: Data as originally reported. CAGR-Compound annual growth rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. **Not calculated; data for base year or end year not available.


Net Interest Margin (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

THRIFTS & MORTGAGE FINANCE‡AF † ASTORIA FINANCIAL CORP DEC 2.3 2.2 2.3 2.3 2.1 0.4 0.3 0.4 0.4 0.1 4.4 4.2 5.4 6.0 2.3BKMU § BANK MUTUAL CORP DEC 3.1 2.7 2.8 1.5 2.1 0.5 0.3 NM NM 0.4 3.9 2.5 NM NM 3.4BOFI § BOFI HOLDING INC JUN 3.8 3.7 3.7 3.8 3.0 1.4 1.3 1.2 1.5 0.5 17.7 17.4 15.2 20.1 8.4BRKL § BROOKLINE BANCORP INC DEC 3.6 3.8 3.8 3.7 3.3 0.7 0.9 0.9 1.0 0.7 5.8 6.7 5.5 5.5 3.9DCOM § DIME COMMUNITY BANCSHARES DEC 3.4 2.9 3.6 3.5 3.0 1.1 1.0 1.2 1.0 0.7 10.5 10.7 13.7 13.3 9.2

HCBK [] HUDSON CITY BANCORP INC DEC 1.6 2.1 1.9 2.0 2.2 0.5 0.6 NM 0.9 0.9 3.9 5.4 NM 9.9 10.3NYCB † NEW YORK CMNTY BANCORP INC DEC 3.0 3.2 3.5 3.5 3.1 1.0 1.2 1.2 1.3 1.1 8.3 8.9 8.7 9.9 8.3NWBI § NORTHWEST BANCSHARES INC DEC 3.5 3.7 3.7 3.5 3.6 0.8 0.8 0.8 0.7 0.4 5.8 5.6 5.2 4.4 3.4ORIT § ORITANI FINANCIAL CORP JUN 3.7 3.5 3.4 3.3 2.8 1.4 1.2 1.1 0.4 0.3 7.7 5.5 4.4 1.9 2.1PBCT [] PEOPLE'S UNITED FINL INC DEC 3.3 3.9 4.1 3.7 3.2 0.7 0.8 0.8 0.4 0.5 4.8 4.8 3.8 1.7 2.0

PFS § PROVIDENT FINANCIAL SVCS INC DEC 3.3 3.4 3.5 3.5 3.1 1.0 0.9 0.8 0.7 NM 7.1 7.0 6.1 5.5 NMTRST § TRUSTCO BANK CORP/NY DEC 3.1 3.2 3.4 3.5 3.3 0.9 0.9 0.8 0.8 0.8 11.0 10.8 11.1 11.7 11.7WAFD † WASHINGTON FEDERAL INC SEP 3.3 3.2 3.3 2.8 2.8 1.2 1.1 0.8 0.9 0.3 7.9 7.3 5.9 6.6 2.6

DIVERSIFIED BANKS‡BAC [] BANK OF AMERICA CORP DEC 2.5 2.3 2.5 2.8 2.7 0.5 0.1 0.0 NM NM 4.6 1.3 0.0 NM NMC [] CITIGROUP INC DEC NA NA NA NA NA 0.7 0.4 0.6 0.6 NM 6.9 4.2 6.4 6.7 NMCMA [] COMERICA INC DEC 2.8 3.0 3.2 3.2 2.7 0.8 0.8 0.7 0.2 NM 7.7 7.5 6.2 2.6 NMJPM [] JPMORGAN CHASE & CO DEC 2.2 2.5 2.7 3.1 3.1 0.7 0.9 0.8 0.8 0.4 8.7 11.1 10.7 10.3 6.3USB [] U S BANCORP DEC 3.4 3.6 3.7 3.9 3.7 1.6 1.6 1.5 1.1 0.7 15.8 16.5 16.1 12.9 8.4

WFC [] WELLS FARGO & CO DEC 3.4 3.8 3.9 4.3 4.3 1.4 1.3 1.2 0.9 0.6 13.9 13.1 12.1 10.5 9.3

OTHER COMPANIES WITH SIGNIFICANT MORTAGE FINANCE OPERATIONS BBT [] BB&T CORP DEC 3.7 3.9 4.1 4.0 3.7 0.9 1.1 0.8 0.5 0.5 8.0 10.5 7.6 5.0 5.0FITB [] FIFTH THIRD BANCORP DEC 3.3 3.5 3.7 3.7 3.3 1.4 1.3 1.0 0.4 0.4 13.4 11.8 9.4 5.0 5.8PNC [] PNC FINANCIAL SVCS GROUP INC DEC 3.6 3.9 3.9 4.1 3.8 1.3 1.0 1.1 1.0 0.7 10.7 8.4 9.7 10.2 9.9RF [] REGIONS FINANCIAL CORP DEC 3.2 3.1 3.1 2.9 2.7 0.9 0.8 NM NM NM 7.3 7.5 NM NM NMSTI [] SUNTRUST BANKS INC DEC 3.2 3.4 3.5 3.4 3.0 0.7 1.1 0.3 NM NM 6.4 9.7 2.6 NM NM

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year.


Total Assets (Million $) Total Loans (Million $) Total Deposits (Million $)


THRIFTS & MORTGAGE FINANCE‡AF † ASTORIA FINANCIAL CORP DEC 15,794 16,497 17,022 18,089 20,252 12,303 13,078 13,117 14,022 15,587 9,855 10,444 11,246 11,599 12,812 BKMU § BANK MUTUAL CORP DEC 2,347 2,418 2,498 2,592 3,512 1,509 1,402 1,320 1,324 1,506 1,763 1,868 2,022 2,078 2,138 BOFI § BOFI HOLDING INC JUN 3,091 2,387 1,940 1,421 1,302 2,257 1,721 1,325 775 615 2,092 1,615 1,340 968 649 BRKL § BROOKLINE BANCORP INC DEC 5,325 5,148 3,299 2,721 2,616 4,314 4,138 2,689 2,224 2,133 3,835 3,616 2,252 1,811 1,634 DCOM § DIME COMMUNITY BANCSHARES DEC 4,028 3,905 4,021 4,040 3,952 3,679 3,485 3,441 3,451 3,374 2,577 2,562 2,416 2,419 2,283

HCBK [] HUDSON CITY BANCORP INC DEC 38,607 40,596 45,356 61,166 60,268 23,942 26,886 29,137 30,774 31,721 21,472 23,484 25,508 25,173 24,578 NYCB † NEW YORK CMNTY BANCORP INC DEC 46,688 44,145 42,024 41,191 42,154 32,421 30,376 29,115 27,835 28,265 25,661 24,878 22,274 21,809 22,316 NWBI § NORTHWEST BANCSHARES INC DEC 7,881 7,943 7,958 8,148 8,025 5,735 5,614 5,479 5,446 5,228 5,669 5,765 5,780 5,764 5,624 ORIT § ORITANI FINANCIAL CORP JUN 2,832 2,701 2,587 2,477 1,914 2,276 1,993 1,673 1,506 1,279 1,420 1,390 1,381 1,290 1,128 PBCT [] PEOPLE'S UNITED FINL INC DEC 33,214 30,324 27,568 25,037 21,257 24,203 21,549 20,217 17,346 14,061 22,557 21,751 20,816 17,933 15,446

PFS § PROVIDENT FINANCIAL SVCS INC DEC 7,487 7,284 7,097 6,825 6,836 5,130 4,834 4,579 4,341 4,323 5,202 5,428 5,157 4,878 4,899 TRST § TRUSTCO BANK CORP/NY DEC 4,521 4,347 4,244 3,955 3,680 2,861 2,637 2,473 2,313 2,244 3,927 3,804 3,736 3,554 3,305 WAFD † WASHINGTON FEDERAL INC SEP 13,083 12,473 13,441 13,486 12,582 7,824 7,740 8,318 8,958 8,983 9,090 8,577 8,666 8,826 7,842

DIVERSIFIED BANKS‡BAC [] BANK OF AMERICA CORP DEC 2,102,273 2,209,974 2,129,046 2,264,909 2,223,299 910,805 883,640 892,417 898,555 862,928 1,119,271 1,105,261 1,033,041 1,010,430 991,611 C [] CITIGROUP INC DEC 1,880,382 1,864,660 1,873,878 1,913,902 1,856,646 791,866 775,164 767,224 755,924 705,958 851,086 820,793 778,674 791,865 806,363 CMA [] COMERICA INC DEC 65,227 65,359 61,008 53,667 59,249 44,872 45,428 41,953 39,335 41,176 53,292 52,202 47,755 40,471 39,665 JPM [] JPMORGAN CHASE & CO DEC 2,415,689 2,359,141 2,265,792 2,117,605 2,031,989 709,924 707,454 693,485 655,208 596,980 1,287,765 1,193,593 1,127,806 930,369 938,367 USB [] U S BANCORP DEC 364,021 353,855 340,122 307,786 281,176 230,985 218,905 205,082 191,751 190,329 262,123 249,183 230,885 204,252 183,242

WFC [] WELLS FARGO & CO DEC 1,527,015 1,422,968 1,313,867 1,258,128 1,243,646 811,297 782,514 750,259 734,245 758,254 1,079,177 1,002,835 920,070 847,942 824,018

OTHER COMPANIES WITH SIGNIFICANT MORTAGE FINANCE OPERATIONS BBT [] BB&T CORP DEC 183,010 183,872 174,579 157,081 165,764 114,185 112,585 105,213 100,859 101,056 127,475 133,075 124,939 107,213 114,965 FITB [] FIFTH THIRD BANCORP DEC 130,443 121,894 116,967 111,007 113,380 87,032 83,928 78,763 74,487 73,030 99,275 89,517 85,710 81,648 84,305 PNC [] PNC FINANCIAL SVCS GROUP INC DEC 320,296 305,107 271,205 264,284 269,863 192,004 181,820 154,667 145,708 152,471 220,931 213,142 187,966 183,390 186,922 RF [] REGIONS FINANCIAL CORP DEC 117,396 121,347 127,050 132,351 142,318 73,268 72,076 74,849 79,679 87,560 92,453 95,474 95,627 94,614 98,680 STI [] SUNTRUST BANKS INC DEC 175,335 173,442 176,859 172,874 174,165 125,833 119,296 120,038 113,001 110,555 129,759 132,316 127,922 123,044 121,864



Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

THRIFTS & MORTGAGE FINANCE‡AF † ASTORIA FINANCIAL CORP DEC 24 - 15 20 - 15 22 - 9 22 - 15 57 - 19 27 45 74 67 173 1.7 - 1.1 3.1 - 2.3 7.9 - 3.4 4.5 - 3.0 8.9 - 3.0BKMU § BANK MUTUAL CORP DEC 31 - 18 32 - 21 NM - NM NM - NM 41 - 22 43 33 NM NM 117 2.4 - 1.4 1.6 - 1.1 2.5 - 1.2 4.5 - 2.6 5.2 - 2.9BOFI § BOFI HOLDING INC JUN 27 - 9 12 - 6 9 - 6 8 - 4 15 - 5 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0BRKL § BROOKLINE BANCORP INC DEC 20 - 16 18 - 14 25 - 15 25 - 19 38 - 23 67 64 72 74 164 4.1 - 3.4 4.5 - 3.5 4.8 - 2.9 3.9 - 2.9 7.1 - 4.3DCOM § DIME COMMUNITY BANCSHARES DEC 14 - 11 13 - 11 11 - 7 13 - 9 17 - 8 45 47 40 45 71 4.2 - 3.1 4.5 - 3.7 5.8 - 3.5 5.0 - 3.6 8.7 - 4.1

HCBK [] HUDSON CITY BANCORP INC DEC 26 - 21 18 - 11 NM - NM 14 - 10 15 - 7 54 64 NM 55 55 2.6 - 2.0 5.6 - 3.6 7.7 - 2.9 5.3 - 4.1 7.9 - 3.7NYCB † NEW YORK CMNTY BANCORP INC DEC 16 - 12 13 - 10 18 - 10 16 - 11 13 - 7 93 88 92 81 88 7.8 - 5.9 8.7 - 6.6 9.0 - 5.2 7.0 - 5.2 13.0 - 6.8NWBI § NORTHWEST BANCSHARES INC DEC 20 - 16 19 - 16 21 - 17 24 - 19 38 - 19 68 88 67 75 130 4.2 - 3.3 5.4 - 4.6 4.0 - 3.2 3.9 - 3.1 6.7 - 3.4ORIT § ORITANI FINANCIAL CORP JUN 18 - 15 21 - 17 26 - 21 85 - 56 NM - 64 109 69 69 144 0 7.1 - 6.1 4.0 - 3.2 3.2 - 2.7 2.6 - 1.7 0.0 - 0.0PBCT [] PEOPLE'S UNITED FINL INC DEC 21 - 17 19 - 16 25 - 18 71 - 51 62 - 49 87 89 110 257 202 5.3 - 4.1 5.7 - 4.6 6.0 - 4.3 5.1 - 3.6 4.1 - 3.3

PFS § PROVIDENT FINANCIAL SVCS INC DEC 16 - 12 14 - 11 15 - 10 18 - 11 NM - NM 46 60 47 50 NM 3.9 - 2.8 5.4 - 4.4 4.6 - 3.0 4.4 - 2.8 5.6 - 2.9TRST § TRUSTCO BANK CORP/NY DEC 18 - 12 15 - 13 17 - 10 19 - 14 27 - 13 62 66 67 67 80 5.1 - 3.4 5.2 - 4.4 6.7 - 4.0 4.9 - 3.6 6.3 - 3.0WAFD † WASHINGTON FEDERAL INC SEP 17 - 11 14 - 11 19 - 12 20 - 13 44 - 21 23 23 23 19 78 2.2 - 1.4 2.1 - 1.6 1.9 - 1.2 1.4 - 0.9 3.7 - 1.8

DIVERSIFIED BANKS‡BAC [] BANK OF AMERICA CORP DEC 17 - 12 45 - 22 NM - NM NM - NM NM - NM 4 15 400 NM NM 0.4 - 0.3 0.7 - 0.3 0.8 - 0.3 0.4 - 0.2 1.6 - 0.2C [] CITIGROUP INC DEC 13 - 9 16 - 10 14 - 6 14 - 8 NM - NM 1 2 1 0 NM 0.1 - 0.1 0.2 - 0.1 0.1 - 0.1 0.0 - 0.0 1.0 - 0.1CMA [] COMERICA INC DEC 17 - 11 13 - 10 21 - 10 58 - 38 NM - NM 23 21 19 32 NM 2.2 - 1.4 2.1 - 1.6 1.9 - 0.9 0.8 - 0.5 1.7 - 0.6JPM [] JPMORGAN CHASE & CO DEC 13 - 10 9 - 6 11 - 6 12 - 9 21 - 7 31 22 18 5 24 3.1 - 2.3 3.7 - 2.5 2.9 - 1.7 0.6 - 0.4 3.5 - 1.1USB [] U S BANCORP DEC 14 - 11 12 - 10 12 - 8 16 - 12 26 - 8 29 27 20 11 21 2.8 - 2.2 2.9 - 2.2 2.5 - 1.7 1.0 - 0.7 2.5 - 0.8

WFC [] WELLS FARGO & CO DEC 12 - 9 11 - 8 12 - 8 15 - 10 18 - 4 29 26 17 9 28 3.3 - 2.5 3.1 - 2.4 2.1 - 1.4 0.9 - 0.6 6.3 - 1.6

OTHER COMPANIES WITH SIGNIFICANT MORTAGE FINANCE OPERATIONS BBT [] BB&T CORP DEC 17 - 13 13 - 9 16 - 10 30 - 18 26 - 11 50 28 35 51 107 3.8 - 3.0 3.0 - 2.2 3.4 - 2.2 2.8 - 1.7 9.6 - 4.2FITB [] FIFTH THIRD BANCORP DEC 10 - 7 10 - 7 13 - 8 25 - 16 15 - 1 23 21 23 6 5 3.1 - 2.2 3.0 - 2.2 3.1 - 1.8 0.4 - 0.3 4.0 - 0.4PNC [] PNC FINANCIAL SVCS GROUP INC DEC 10 - 8 13 - 10 11 - 7 14 - 10 13 - 4 23 29 20 8 22 2.9 - 2.2 2.9 - 2.3 2.7 - 1.8 0.8 - 0.6 5.9 - 1.7RF [] REGIONS FINANCIAL CORP DEC 13 - 9 10 - 6 NM - NM NM - NM NM - NM 13 5 NM NM NM 1.4 - 1.0 1.0 - 0.5 1.4 - 0.5 0.8 - 0.4 5.5 - 1.4STI [] SUNTRUST BANKS INC DEC 15 - 11 9 - 5 35 - 17 NM - NM NM - NM 14 6 13 NM NM 1.3 - 0.9 1.1 - 0.6 0.8 - 0.4 0.2 - 0.1 3.7 - 0.7


20092013 2012 2011 2010


Earnings per Share ($) Book Value per Share ($) Share Price (High-Low, $)


THRIFTS & MORTGAGE FINANCE‡AF † ASTORIA FINANCIAL CORP DEC 0.60 0.55 0.70 0.78 0.30 14.06 13.28 12.97 13.15 13.03 14.16 - 9.22 11.08 - 8.03 15.25 - 6.58 17.55 - 11.55 17.25 - 5.85BKMU § BANK MUTUAL CORP DEC 0.23 0.15 (1.03) (1.59) 0.29 6.05 5.87 5.75 6.84 8.74 7.23 - 4.24 4.75 - 3.09 5.10 - 2.42 7.68 - 4.45 11.76 - 6.51BOFI § BOFI HOLDING INC JUN 3.00 2.45 1.88 2.31 0.79 19.17 15.82 13.67 12.25 9.79 82.27 - 28.02 28.44 - 15.48 16.90 - 11.46 19.27 - 9.55 11.49 - 3.90BRKL § BROOKLINE BANCORP INC DEC 0.51 0.53 0.47 0.46 0.33 8.73 8.74 8.56 8.45 8.32 10.10 - 8.21 9.78 - 7.54 11.68 - 7.12 11.63 - 8.63 12.50 - 7.57DCOM § DIME COMMUNITY BANCSHARES DEC 1.24 1.18 1.40 1.24 0.79 11.86 10.96 10.28 9.50 8.57 17.92 - 13.33 15.01 - 12.56 15.89 - 9.61 15.62 - 11.18 13.60 - 6.46

HCBK [] HUDSON CITY BANCORP INC DEC 0.37 0.50 (1.49) 1.09 1.08 8.98 8.90 8.64 10.46 10.14 9.79 - 7.67 8.79 - 5.69 13.26 - 5.09 14.75 - 11.34 15.89 - 7.46NYCB † NEW YORK CMNTY BANCORP INC DEC 1.08 1.13 1.09 1.24 1.13 13.01 12.88 12.73 12.69 12.39 16.89 - 12.90 15.05 - 11.47 19.24 - 11.13 19.33 - 14.24 14.81 - 7.68NWBI § NORTHWEST BANCSHARES INC DEC 0.74 0.68 0.64 0.53 0.30 12.27 12.05 11.85 11.85 11.90 15.05 - 11.98 13.08 - 11.03 13.36 - 10.74 12.79 - 10.24 11.48 - 5.81ORIT § ORITANI FINANCIAL CORP JUN 0.94 0.72 0.54 0.15 0.10 11.43 11.30 11.63 11.45 4.31 16.90 - 14.49 15.39 - 12.43 14.00 - 11.57 12.68 - 8.40 11.36 - 6.37PBCT [] PEOPLE'S UNITED FINL INC DEC 0.74 0.72 0.57 0.24 0.30 15.28 15.21 14.99 14.91 15.20 15.67 - 12.22 13.79 - 11.20 14.49 - 10.50 17.08 - 12.20 18.54 - 14.72

PFS § PROVIDENT FINANCIAL SVCS INC DEC 1.23 1.18 1.01 0.88 (2.16) 16.87 16.37 15.88 15.38 14.79 19.93 - 14.41 16.25 - 13.13 15.52 - 10.12 15.66 - 10.01 15.35 - 7.81TRST § TRUSTCO BANK CORP/NY DEC 0.42 0.40 0.39 0.38 0.37 3.83 3.82 3.62 3.31 3.21 7.67 - 5.13 6.00 - 5.01 6.59 - 3.93 7.18 - 5.19 9.86 - 4.71WAFD † WASHINGTON FEDERAL INC SEP 1.45 1.29 1.00 1.06 0.46 18.91 17.89 17.49 16.37 15.55 24.00 - 15.78 18.42 - 14.22 18.53 - 12.15 21.65 - 13.97 20.17 - 9.75

DIVERSIFIED BANKS‡BAC [] BANK OF AMERICA CORP DEC 0.94 0.26 0.01 (0.37) (0.29) 20.71 20.24 20.09 20.99 22.45 15.98 - 10.98 11.69 - 5.62 15.31 - 4.92 19.86 - 10.91 19.10 - 2.53C [] CITIGROUP INC DEC 4.27 2.56 3.69 3.70 (7.60) 65.23 61.57 60.70 56.15 53.50 53.68 - 40.28 40.18 - 24.61 51.50 - 21.40 50.70 - 31.10 75.85 - 9.70CMA [] COMERICA INC DEC 2.92 2.68 2.11 0.79 (0.80) 39.24 36.87 34.80 32.82 32.27 48.69 - 30.73 34.00 - 26.25 43.53 - 21.48 45.85 - 29.68 32.30 - 11.72JPM [] JPMORGAN CHASE & CO DEC 4.39 5.22 4.50 3.98 2.25 53.25 51.27 46.59 43.04 39.88 58.55 - 44.20 46.49 - 30.83 48.36 - 27.85 48.20 - 35.16 47.47 - 14.96USB [] U S BANCORP DEC 3.02 2.85 2.47 1.74 0.97 19.92 18.31 16.43 14.36 12.79 40.83 - 31.99 35.46 - 27.21 28.94 - 20.10 28.43 - 20.44 25.59 - 8.06

WFC [] WELLS FARGO & CO DEC 3.95 3.40 2.85 2.23 1.76 29.50 27.66 24.65 22.50 20.03 45.64 - 34.43 36.60 - 27.94 34.25 - 22.58 34.25 - 23.02 31.53 - 7.80

OTHER COMPANIES WITH SIGNIFICANT MORTAGE FINANCE OPERATIONS BBT [] BB&T CORP DEC 2.22 2.74 1.85 1.18 1.16 28.52 27.21 24.98 23.67 23.47 37.42 - 29.18 34.37 - 25.26 29.60 - 18.92 35.72 - 21.72 29.81 - 12.90FITB [] FIFTH THIRD BANCORP DEC 2.05 1.69 1.20 0.63 0.73 15.85 15.10 13.92 13.06 12.44 21.14 - 15.19 16.16 - 12.04 15.75 - 9.13 15.95 - 9.81 11.20 - 1.01PNC [] PNC FINANCIAL SVCS GROUP INC DEC 7.48 5.36 5.70 5.08 4.30 72.17 67.07 61.51 56.26 47.55 78.36 - 58.96 67.89 - 53.36 65.19 - 42.70 70.45 - 49.43 57.86 - 16.20RF [] REGIONS FINANCIAL CORP DEC 0.79 0.76 (0.02) (0.62) (1.27) 11.12 10.63 10.39 10.63 11.97 10.52 - 7.13 7.73 - 4.21 8.09 - 2.82 9.33 - 5.12 9.07 - 2.35STI [] SUNTRUST BANKS INC DEC 2.43 3.62 0.94 (0.18) (3.98) 38.38 37.38 36.66 36.09 35.07 36.99 - 26.93 30.79 - 18.07 33.14 - 15.79 32.02 - 20.16 30.18 - 6.00

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the following calendar year. J-This amount includes intangibles that cannot be identified.

The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poor’s.

In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poor’s.

The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.


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