Notes to Consolidated Financial Statements
December 31, 2016
(In Thousands, Except Share and Per Share Data or As Otherwise Stated Herein)
1.
Organization and Operations
References to the terms “we”, “our”, “us”, “Stonegate” or the “Company” used throughout these Notes to Consolidated Financial Statements refer to Stonegate Mortgage Corporation and, unless the context otherwise requires, its wholly-owned subsidiaries. The Company was initially incorporated in the State of Indiana in January 2005. As a result of an acquisition and subsequent merger with Swain Mortgage Company ("Swain") in 2009, the Company is now an Ohio corporation. The Company’s headquarters is in Indianapolis, Indiana.
The Company is a leading, non-bank mortgage company focused on originating, financing, and servicing U.S.
residential mortgage loans that operates as an intermediary between residential mortgage borrowers and the ultimate investors
of these mortgages. The Company’s integrated and scalable residential mortgage banking platform includes a diversified
origination business which includes a retail branch network, a direct to consumer call center and a network of third party
originators consisting of mortgage brokers, mortgage bankers and financial institutions (banks and credit unions). The
Company predominantly sells mortgage loans to the Federal National Mortgage Association (“Fannie Mae” or “FNMA”), the
Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”), financial institution secondary market investors and
the Government National Mortgage Association (“Ginnie Mae” or “GNMA”) as pools of mortgage backed securities (“MBS”).
Both FNMA and FHLMC are considered government-sponsored enterprises ("GSEs"), for which the Company may perform
servicing of U.S. residential mortgage loans. The Company also provides warehouse financing through its NattyMac, LLC
subsidiary to third party correspondent lenders. The Company’s principal sources of revenue include (i) gains on sales of
mortgage loans from loan securitizations and whole loan sales and fee income from originations, (ii) fee income from loan
servicing, and (iii) fee and net interest and other income from its financing facilities and warehouse lending business. The
Company operates in
three
segments: Originations, Servicing and Financing. This determination is based on the Company’s
current organizational structure, which reflects the manner in which the chief operating decision maker evaluates the
performance of the business.
Proposed Merger with Home Point Financial Corporation
On January 26, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Home Point Financial Corporation, a New Jersey Corporation (“Home Point Financial”) and Longhorn Merger Sub, Inc. an Ohio corporation and wholly owned subsidiary of Home Point Financial (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company as the surviving entity (the “Merger”). See Note 24, "Subsequent Events" for additional information.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation:
The accompanying consolidated financial statements include the accounts of Stonegate and its subsidiaries and have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and in accordance with the instructions to Annual Report on Form 10-K as promulgated by the Securities and Exchange Commission. All intercompany accounts and transactions have been eliminated in consolidation.
Prior Period Reclassifications:
During 2015, the Company disposed of certain retail branches, or components of its Originations segment, and the assets associated with them, either through sale or disposal other than by sale. The Company has determined that the disposal of these retail branches met the criteria for presentation and disclosure as discontinued operations and has been reclassified as such in our results of operations. Discontinued operation amounts for the year ended December 31, 2016 are immaterial and are therefore not being presented separately. In addition, certain prior period amounts have been reclassified to conform to the current period presentation on the Consolidated Statements of Operations, Consolidated Statements of Cash Flows and within the Notes to Consolidated Financial Statements. Refer to Note 3 "Discontinued Operations" for additional information related to the Company's discontinued operations for the years ended December 31, 2016, 2015 and 2014.
Immaterial Error Corrections:
During 2015, the Company identified immaterial errors in its previously issued Consolidated Statement of Cash Flows for the year ended December 31,
2014
. These immaterial errors impacted the line items “Proceeds from borrowings under mortgage funding arrangements - mortgage loans and operating lines of credit” and “Repayments of borrowings under mortgage funding arrangements - mortgage loans and operating lines of credit” in an exact
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
offsetting manner, such that the subtotal “Net cash provided by financing activities” was not misstated. For the year ended December 31,
2014
, the offsetting misstatement was
$20,919,704
.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly significant relate to the Company’s fair value measurements of mortgage loans held for sale, mortgage servicing rights (“MSRs”), loans eligible for repurchase from GNMA and the related liability, derivative assets and liabilities, goodwill and other intangible assets, as well as its estimates for the reserve for mortgage repurchases and indemnifications and income tax estimates for deferred tax assets valuation allowance considerations.
Risks and Uncertainties:
In the normal course of business, companies in the mortgage banking industry encounter certain economic and regulatory risks. Economic risks include interest rate risk and credit risk. In an interest rate cycle in which rates decline over an extended period of time, the Company's mortgage origination activities’ results of operations could be positively impacted by higher loan origination volumes and gain on sale margins. In contrast, the Company's results of operations of its mortgage servicing activities could decline due to higher actual and projected loan prepayments related to its loan servicing portfolio. In an interest rate cycle in which rates rise over an extended period of time, the Company's mortgage origination activities' results of operations could be negatively impacted and its mortgage servicing activities’ results of operations could be positively impacted. Credit risk is the risk of default that may result from the borrowers’ inability or unwillingness to make contractually required payments during the period in which loans are being held for sale. The Company manages these various risks through a variety of policies and procedures, such as the hedging of the loans held for sale and interest rate lock commitments using forward sales of MBS, such as To Be Announced (“TBA”) securities, designed to quantify and mitigate the operational and financial risk to the Company to the extent possible. Specifically, the Company engages in hedging of interest rate risk of its mortgage loans held for sale and interest rate lock commitments with the use of TBA mortgage securities.
The Company sells loans to investors without recourse. As such, the investors have assumed the risk of loss or default by the borrower. However, the Company is usually required by these investors to make certain standard representations and warranties relating to credit information, loan documentation, collateral and regulatory compliance. To the extent that the Company does not comply with such representations, the Company may be required to repurchase the loans or indemnify these investors for any losses from borrower defaults. The Company performs due diligence prior to funding mortgage loans as part of its loan underwriting process, whereby the Company analyzes credit, collateral and compliance risk of all loans in an effort to ensure the mortgage loans meet the investors’ standards. However, if a loan is repurchased, the Company could incur a loss as part of recording such loan at fair value, which may be less than the amount paid to purchase the loan. In addition, if loans pay off within a specified time frame, the Company may be required to refund a portion of the sales proceeds to the investors.
The Company’s business requires substantial cash to support its operating activities. As a result, the Company is dependent on its lines of credit and other financing facilities in order to fund its continued operations. If the Company’s principal lenders decided to terminate or not to renew any of these credit facilities with the Company, the loss of borrowing capacity would have a material adverse impact on the Company’s financial statements unless the Company found a suitable alternative source of financing.
Consolidation:
The Company sells loans to FNMA and FHLMC, as well as in GNMA MBS by pooling eligible loans through a pool custodian and assigning rights to the loans to GNMA. FNMA, FHLMC and GNMA provide credit enhancement of the loans through certain guarantee provisions. These securitizations involve variable interest entities (“VIEs”) as the trusts or similar vehicles, by design, that either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.
The primary beneficiary of a VIE (i.e., the party that has a controlling financial interest) is required to consolidate the assets and liabilities of the VIE. The primary beneficiary is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company typically retains the right to service the loans. Because of the power of FNMA, FHLMC and GNMA over the VIEs that hold the assets from these residential mortgage loan securitizations, principally through its rights and responsibilities as master servicer for FNMA and FHLMC, and as approver of issuers for GNMA, and the guarantee provisions provided by FNMA, FHLMC and GNMA, the Company is not the primary beneficiary of the VIEs and, therefore, the VIEs are not consolidated by the Company.
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
The Company has concluded that on a consolidated basis it has a variable interest in NattyMac Funding ("NMF") resulting from any potential interest it may earn from the
49%
NMF earnings participation, as described in Note 14, "Debt". The Company has further concluded that it is not considered the primary beneficiary of its variable interest in NMF based on the fact that it does not have the power to direct the activities of NMF that most significantly impact NMF’s economic performance. NMF has the final authority over its operating policies. If at any time in the future the Company claims the right to the common capital stock of NMF in a default scenario as described in Note 14, "Debt", the primary beneficiary conclusion may change. The Company believes that its maximum exposure to loss as a result of this arrangement is the
$30,000
in subordinated loan receivable as of
December 31, 2016
.
The Company performs on-going reassessments of: (1) whether entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain events, and therefore become subject to the VIE consolidation framework; and (2) whether changes in the facts and circumstances regarding the Company’s involvement with a VIE cause the Company’s consolidation determination to change.
Revenue Recognition:
Mortgage Loans Held for Sale:
Loan originations that are intended to be sold in the foreseeable future, including residential mortgages, are reported as mortgage loans held for sale. Mortgage loans held for sale are carried at fair value under the fair value option with changes in fair value recognized in current period earnings. At the date of funding of the mortgage loan held for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less direct loan costs (including but not limited to correspondent fees, broker premiums and underwriting expenses) becomes the initial recorded investment in the mortgage loan held for sale. Such amount approximates the fair value of the loan.
Mortgage loans held for sale are considered de-recognized, or sold, when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets. Such transfers may involve securitizations, participation agreements or repurchase agreements. If the criteria above are not met, such transfers are accounted for as secured borrowings, in which the assets remain on the balance sheet, the proceeds from the transaction are recognized as a liability and no MSRs are recorded for those transferred loans.
Gains and losses from the sale of mortgages are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and is recorded in "Gains on mortgage loans held for sale, net" in the Consolidated Statements of Operations. The sales proceeds reflect the cash received and the initial fair value of the separately recognized mortgage servicing rights less the fair value of the liability for mortgage repurchases and indemnifications. Gain on mortgage loans held for sale also includes the unrealized gains and losses associated with the mortgage loans held for sale and the realized and unrealized gains and losses from derivatives.
Mortgage Servicing Rights and Change in Mortgage Servicing Rights Valuation:
The Company capitalizes MSRs at fair value when purchased or at the time the underlying loans are de-recognized, or sold, and when the Company retains the right to service such loans. To determine the fair value of the MSRs, the Company uses a valuation model that calculates the present value of future cash flows generated by the rights to service. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of the cost of servicing, the discount rate, float value, the inflation rate, estimated prepayment speeds, and default rates. MSRs currently are not actively traded in the markets, accordingly, considerable judgment is required to estimate their fair value and the exercise of that judgment can materially impact current period earnings.
The Company may sell from time to time a certain portion of its MSRs. At the time of the sale, based on the structure of the arrangement, the Company typically records a gain or loss on such sale based on the selling price of the MSRs less the carrying value and transaction costs. The MSRs are sold in separate transactions from the sale of the underlying loans. The MSRs sales are assessed to determine if they qualify as a sale transaction. A transfer of servicing rights related to loans previously sold qualifies as a sale at the date on which title passes, if substantially all risks and rewards of ownership have irrevocably passed to the transferee, and any protection provisions retained by the transferor are minor and can be reasonably estimated. In addition, if a sale is recognized and only minor protection provisions exist, a liability should be accrued for the estimated obligation associated with those provisions. As MSRs are not considered financial assets for accounting purposes, the accounting model used to determine if the transfer of an MSRs asset qualifies as a sale is based on a risks and rewards
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
approach. Upon completion of a sale, the Company would account for the transaction as a sale and derecognize the mortgage servicing rights from the Consolidated Balance Sheets.
Loan Origination and Other Loan Fees:
Loan origination and other loan fee income represents revenue earned from originating mortgage loans. Loan origination and other loan fees generally represent flat, per-loan fee amounts and are recognized as revenue, net of loan origination costs (excluding those direct loan origination costs that are recorded as a component of the recorded investment in mortgage loans held for sale), at the time the loans are funded.
Loan Servicing Fees:
Loan servicing fee income represents revenue earned for servicing mortgage loans. The servicing fees are based on a contractual percentage of the outstanding principal balance and recognized as revenue as earned, which is generally upon collection of the payments from the borrower. Corresponding loan servicing costs are charged to expense as incurred.
Interest Income:
Interest income on mortgage loans is accrued to income based upon the principal amount outstanding and contractual interest rates. Income recognition is discontinued when loans become 90 days delinquent or when in management’s opinion, the collectability of principal and income becomes doubtful.
Warehouse Lending Receivables:
During the year ended December 31, 2013, the Company introduced its warehouse lending products to its correspondent customers through warehouse line of credit agreements. Under the warehouse line of credit agreements, the Company lends funds to its correspondent customers to finance those correspondents' mortgage loan originations. The correspondent customers pledge, as security to the Company, the underlying mortgage loans, and pay interest on the related outstanding borrowings at a specified interest rate plus a margin, as defined in the underlying line of credit agreements with each correspondent customer. As of
December 31, 2016
, the Company had outstanding warehouse lending receivables from its correspondent customers of
$125,839
and recognized interest income from its warehouse lending activities of
$5,475
during the year ended
December 31, 2016
. As of
December 31, 2015
, the Company had outstanding warehouse lending receivables from its correspondent customers of
$199,215
and recognized interest income from its warehouse lending activities of
$5,325
during the year ended
December 31, 2015
. The Company periodically reviews the warehouse lending receivables for collectability based on a review of the counterparty, historical collection trends and management judgment regarding the ability to collect specific accounts. The Company has determined that
no
allowance for doubtful accounts was necessary as of
December 31, 2016
or
December 31, 2015
.
Derivative Financial Instruments:
All derivative financial instruments are recognized as either assets or liabilities and measured at fair value. The Company accounts for all of its derivatives as free-standing derivatives and does not designate any of these instruments for hedge accounting. Therefore, the gain or loss resulting from the change in the fair value of the derivative is recognized in the Company’s results of operations during the period of change.
The Company enters into commitments to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time, with customers who have applied for a loan and meet certain credit and underwriting criteria (interest rate lock commitments). These interest rate lock commitments (“IRLCs”) meet the definition of a derivative financial instrument and are reflected in the balance sheet at fair value with changes in fair value recognized in current period earnings. Unrealized gains and losses on the IRLCs are recorded as derivative assets and derivative liabilities, respectively, and are measured based on the value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of the mortgage servicing rights and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of estimated commission expenses.
The Company manages the interest rate and price risk associated with its outstanding IRLCs and loans held for sale by entering into derivative instruments such as forward loan sales commitments and mandatory delivery commitments, including TBA mortgage securities. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the IRLCs and loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and loans held for sale) it wants to economically hedge.
Reserve for Loan Repurchases and Indemnifications:
Loans sold to investors by the Company, and which were believed to have met investor and agency underwriting guidelines at the time of sale, may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company may, upon mutual agreement, agree to repurchase the loans or indemnify the investor against future losses on such loans. In such cases, the Company bears any subsequent credit loss on the loans. The Company has established an initial reserve liability for expected losses related to these representations and warranties at the date the loans are de-recognized from the balance sheet based on the fair value of such reserve liability. Subsequently, based on changing facts and circumstances or changes in certain estimates and assumptions, the reserve liability may be adjusted if there is a reasonable
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
possibility that future losses may be different from the initial reserve liability, with a corresponding amount recorded to provision for mortgage repurchases and indemnifications - change in estimate within the general and administrative expense in the Consolidated Statements of Operations. In assessing the adequacy of the reserve, management evaluates various factors including actual losses on repurchases and indemnifications during the period, historical loss experience, known delinquent and other problem loans, delinquency trends in the portfolio of sold loans and economic trends and conditions in the industry. The year ended
December 31, 2016
includes the release of
$1,500
of the repurchase reserve, which is described further in Note 15, "Reserve for Mortgage Repurchases and Indemnifications." Actual losses incurred are reflected as charge-offs against the reserve liability.
Loans Eligible for Repurchase from GNMA:
As discussed above, the Company routinely sells loans in GNMA guaranteed MBS by pooling eligible loans through a pool custodian and assigning rights to the loans to GNMA. When these GNMA loans are initially pooled and securitized, the Company meets the criteria for sale treatment and de-recognizes the loans. Subsequently, when the Company has the unconditional right, as servicer, to repurchase GNMA pool loans it has previously sold (generally loans that are more than
90 days
past due), the Company then puts back the loans on its balance sheet, initially reflected at fair value. An offsetting liability is also recorded.
Servicing Advances, net:
Servicing advances, net represent principal, interest, escrow and corporate advances paid by the Company on behalf of customers to cover delinquent balances for principal, interest, property taxes, insurance premiums and other out-of-pocket costs. Advances are made in accordance with the servicing agreements and are recoverable upon collection of future borrower payments or foreclosure of the underlying loans. The Company is exposed to losses only to the extent that the respective servicing guidelines are not followed or in the event there is a shortfall in liquidation proceeds and records a reserve against the advances when it is probable that the servicing advance will be uncollectible. In certain circumstances, the Company may be required to remit funds on a non-recoverable basis, which are expensed as incurred. As of
December 31, 2016
and 2015, the recorded reserve for uncollectible servicing advances was
$2,084
and
$1,424
, respectively.
Property and Equipment:
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from
three
to
10 years
for furniture and office equipment,
three
to
five years
for purchased computer software and equipment, and the shorter of the related lease term or useful life for leasehold improvements. The Company capitalizes internally developed computer software costs during the development stage, which include external direct costs of materials and services, as well as employee costs related to time spent on the project. Capitalized costs related to internally developed software are amortized using the straight-line method over the estimated useful lives of the assets, which range from
one
to
three years
.
The Company periodically assesses property and equipment for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If management identifies an impairment indicator, it assesses recoverability by comparing the carrying amount of the asset to the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is recognized in earnings whenever the carrying amount is not recoverable. During the years ended
December 31, 2016
and 2015, the Company recognized impairment charges of
$195
and
$1,726
, respectively. The prior year expense is primarily associated with the assets related to the discontinued operations discussed above.
No
such impairment was recognized during the year ended
December 31, 2014
.
Goodwill and Other Intangible Assets:
Business combinations are accounted for using the acquisition method of accounting. Acquired intangible assets are recognized and reported separately from goodwill. Goodwill represents the excess cost of acquisition over the fair value of net assets acquired. Finite-lived purchased intangible assets consist of customer relationships, non-compete agreement and an active agent list, which have useful lives of
eight years
,
three years
and
five years
, respectively. Intangible assets with finite lives are amortized over their estimated lives using an amortization method that reflects the pattern in which the economic benefits of the asset are consumed. The Company evaluates the estimated remaining useful lives on intangible assets to determine whether events or changes in circumstances warrant a revision to the remaining periods of amortization. If an intangible asset’s estimated useful life is changed, the remaining net carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. Additionally, an intangible asset that initially is deemed to have a finite useful life would cease being amortized if it is subsequently determined to have an indefinite useful life. Such intangible assets are then tested for impairment. The Company reviews such intangibles for impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable, in which case any impairment charge would be recorded to earnings.
Indefinite-lived purchased intangible assets consist of the NattyMac trade name. Goodwill and other intangible assets with an indefinite useful life are not subject to amortization, but are reviewed for impairment annually or more frequently whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. For indefinite-lived intangible assets other than goodwill, the Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that is more likely than not the assets are impaired. If the
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
Company determines that it is more likely than not that the intangible assets are impaired, a quantitative impairment test is performed. For the quantitative impairment test, the Company estimates and compares the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, the amount of the impairment is measured as the difference between the carrying amount of the asset and its fair value. Impairment is permanently recognized by writing down the asset to the extent that the carrying value exceeds the estimated fair value.
The Company's goodwill relates to the Retail reporting unit of its Originations segment. For goodwill, GAAP allows a qualitative assessment prior to requiring a quantitative impairment test. For the quantitative impairment test, at the reporting unit level, the Company estimates and compares the fair value to the book value. If the reporting unit's book value exceeds its fair value, the Company then performs a hypothetical purchase price allocation for the reporting unit. This is done by marking all assets and liabilities to fair value and calculating an implied goodwill value. If the implied goodwill value is less than the carrying value of the goodwill, the amount of impairment is measured as the difference and is permanently recognized by writing down the goodwill to the extent the carrying value exceeds the implied value.
Stock-Based Compensation:
The Company grants stock options and restricted stock units to certain executive officers, key employees and independent directors. Stock options have been granted for a fixed number of shares with an exercise price at least equal to the fair value of the shares at the date of grant. Restricted stock units have been granted for a fixed number of shares with a fair value equal to the fair value of the Company's common stock on the grant date. The stock options and restricted stock units granted are recognized as compensation expense in the statement of operations based on their grant-date fair values.
Advertising and Marketing:
The Company uses primarily print, broadcast and web-based advertising and marketing to promote its products. These expenses also include purchased leads of mortgage loans related to our retail channel and are expensed as incurred. Advertising and marketing expenses related to continuing operations totaled
$634
,
$2,067
and
$2,347
for the years ended
December 31, 2016
,
2015
and
2014
. Advertising and marketing expenses related to discontinued operations totaled
$1,148
and
$869
for the years ended December 31,
2015
and
2014
.
No
advertising and marketing expenses related to discontinued operations were incurred during the year ended
December 31, 2016
.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recorded a valuation allowance in the amount of
$1,554
as of
December 31, 2015
and released
$657
during the period ending
December 31, 2016
related to its continuing operations. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than
50%
likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The Company’s income tax expense includes assessments related to uncertain tax positions taken or expected to be taken by the Company. ASC 740-10,
Income Taxes
, requires financial statement recognition of the impact of a tax position if a position is more likely than not of being sustained on audit, based on the technical merits of the position. Management assesses this as facts and circumstances related to the Company's business and operations change in a period. If applicable, the Company will recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The open tax years subject to examination by taxing authorities include the years ended
December 31, 2015
,
2014
, 2013 and
2012
. The Company had no federal or state tax examinations in process as of
December 31, 2016
.
Cash and Cash Equivalents:
The Company classifies cash and temporary investments with original maturities of three months or less as cash and cash equivalents. The Company typically maintains cash in financial institutions in excess of FDIC limits. The Company evaluates the creditworthiness of these financial institutions in determining the risk associated with these cash balances.
Restricted Cash:
The Company maintains certain cash balances that are restricted under broker margin account agreements associated with its derivative activities. Additionally, certain funding received for the repurchase of eligible loans from GNMA, as discussed above, is reflected as restricted cash on the consolidated balance sheets until such repurchases are made.
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
3. Discontinued Operations
As discussed in Note 2, during 2015, the Company disposed of certain retail branches, or components of its Originations segment, and the assets associated with them, either through sale or disposal other than by sale to better manage the expenses associated with retail originations. During 2015, the Company completed the closure of
62
of its retail branches and sale of an additional
14
retail branches. The Company determined that the disposal of these retail branches met the criteria for being reported as discontinued operations under ASU No. 2014-08, and has been reclassified as such in our results of operations. There were no additional material amounts classified as discontinued operations during the year ended December 31, 2016. The following table provides the components of loss from discontinued operations, net of tax for the years ended
December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2015
|
|
2014
|
Total revenues
|
$
|
34,371
|
|
|
$
|
27,580
|
|
Total expenses
|
44,069
|
|
|
36,328
|
|
Income before income taxes
|
(9,698
|
)
|
|
(8,748
|
)
|
Income tax expense
|
(3,669
|
)
|
|
(3,497
|
)
|
Income from discontinued operations, net of tax
|
$
|
(6,029
|
)
|
|
$
|
(5,251
|
)
|
Total expenses for the year ended
December 31, 2015
includes impairment charges, based on estimated future recoverable amounts related to the associated assets, of approximately
$1,009
, early termination contractual charges of
$1,144
and the write off of certain guaranteed incentive payments for
$782
.
In connection with the sale, the Company is entitled to a contingent consideration, which payment is contingent upon the buyer's ability to close mortgage loans in the pipeline but unlocked by the Company prior to the sale date. If such loans are closed by the buyer, the Company will receive from the buyer two annual payments equal to a multiple of this actual total mortgage loan volume of the buyer. During the year ended December 31, 2016, the Company received payments totaling
$224
, which are included in "Interest and other income" on the Company's consolidated statements of operations.
No
amounts were recognized during the year ended December 31, 2015.
Cash flows from discontinued operations related to depreciation expense were
$855
and
$187
for the years ended
December 31, 2015
and
2014
, respectively. Capital expenditures related to discontinued operations were
$760
and
$1,515
for the years ended
December 31, 2015
and
2014
, respectively.
4. (Loss) Per Share
The following is a reconciliation of net (loss) income attributable to common stockholders and a table summarizing the basic and diluted (loss) earnings per share calculations for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Numerator:
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
(Loss) from continuing operations, net of tax
|
$
|
(3,082
|
)
|
|
$
|
(16,241
|
)
|
|
$
|
(25,428
|
)
|
(Loss) from discontinued operations, net of tax
|
—
|
|
|
(6,029
|
)
|
|
(5,251
|
)
|
Net (loss) attributable to common stockholders
|
$
|
(3,082
|
)
|
|
$
|
(22,270
|
)
|
|
$
|
(30,679
|
)
|
|
|
|
|
|
|
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted average shares outstanding
(in thousands)
:
|
|
|
|
|
|
Weighted average shares outstanding - Basic
|
25,922
|
|
|
25,783
|
|
|
25,770
|
|
Weighted average shares outstanding - Diluted
|
25,922
|
|
|
25,783
|
|
|
25,770
|
|
|
|
|
|
|
|
Basic (loss) per share:
|
|
|
|
|
|
From continuing operations
|
$
|
(0.12
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.99
|
)
|
From discontinued operations
|
—
|
|
|
(0.23
|
)
|
|
(0.20
|
)
|
Total (loss) attributable to common stockholders
|
$
|
(0.12
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(1.19
|
)
|
|
|
|
|
|
|
Diluted (loss) per share:
|
|
|
|
|
|
From continuing operations
|
$
|
(0.12
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.99
|
)
|
From discontinued operations
|
—
|
|
|
(0.23
|
)
|
|
(0.20
|
)
|
Total (loss) attributable to common stockholders
|
$
|
(0.12
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(1.19
|
)
|
During the years ended
December 31, 2016
,
2015
and
2014
weighted average shares of
756,469
,
1,471,920
and
1,818,049
, respectively, were excluded from the denominator for diluted (loss) earnings per share because the shares (which related to stock options, restricted stock units and stock warrants) were anti-dilutive.
5. Business Combinations
Acquisition of Medallion Mortgage Company
On February 4, 2014, the Company completed its acquisition of Medallion Mortgage Company ("Medallion"), a residential mortgage originator based in southern California. Medallion serviced customers with an extensive portfolio of residential real estate loan programs and had
10
offices along the southern and central coast of California, Utah and a new operations center in Ventura, California. In the acquisition of Medallion, the Company agreed to purchase certain assets, assume certain liabilities and offer employment to certain employees.
The acquisition of Medallion was accounted for as a business combination. The following table summarizes the total consideration transferred to acquire Medallion and the fair values of the assets acquired and liabilities assumed on the acquisition date:
|
|
|
|
|
Consideration:
|
|
Cash consideration
|
$
|
258
|
|
Fair value of contingent consideration
|
603
|
|
Total consideration
|
861
|
|
Fair value of net assets acquired:
|
|
Property and equipment
|
190
|
|
Other assets
|
94
|
|
Accounts payable and accrued expenses
|
(50
|
)
|
Total fair value of net assets acquired
|
234
|
|
Goodwill
|
$
|
627
|
|
Acquisition-related expenses
1
|
$
|
49
|
|
1
Legal and miscellaneous expenses classified as general and administrative expenses.
As part of the acquisition of Medallion, the Company agreed to pay Medallion's seller a contingent consideration, which payment was contingent upon Medallion achieving certain predetermined minimum mortgage loan origination goals during the
two
year period following the acquisition date (the "earnout"). If such goals were met by Medallion, the Company would pay the seller
two
annual payments equal to a multiple of the actual total mortgage loan volume of Medallion. The earn-out was uncapped in amount. The fair value of the earn-out was estimated to be approximately
$603
as of the acquisition date and was estimated using a calibrated Monte-Carlo simulation. The fair value was primarily based on (i) the Company’s estimate of the mortgage loan origination volume of Medallion over the
two
year earn-out period, (ii) an asset volatility factor of
16.90%
and (iii) a discount rate of
6.05%
. The first of the
two
potential earn-out payments was determined to be
$200
and was paid in April 2015. Based on the mortgage loan origination volume of Medallion during 2015, the Company would not need to pay
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
the second of the
two
potential earn-out payments, as the predetermined minimum mortgage loan origination goals were not met. As such, a liability was
no
longer reflected on the consolidated balance sheets as of
December 31, 2015
.
Acquisition of Crossline Capital, Inc.
On December 19, 2013, the Company completed its acquisition of Crossline Capital, Inc. ("Crossline"), a California-based mortgage lender that originated, funded, and serviced residential mortgages. The acquisition of Crossline allowed the Company to increase its origination volume through geographic expansion. At the time of the acquisition, Crossline was licensed to originate mortgages in
20
states including Arizona, California, Colorado, Connecticut, Florida, Georgia, Idaho, Maryland, Massachusetts, New Hampshire, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Utah, Virginia and Washington, and was an approved FNMA Seller Servicer. In addition, it operated
two
national mortgage origination call centers in Lake Forest, CA and Scottsdale, AZ and also operated retail mortgage origination branches in
seven
other locations in Southern California.
The following table summarizes the total consideration transferred to acquire Crossline and the fair values of assets acquired and liabilities assumed on the acquisition date:
|
|
|
|
|
Consideration:
|
|
Cash consideration
|
$
|
9,765
|
|
Fair value of contingent consideration
|
1,706
|
|
Total consideration
|
11,471
|
|
Fair value of assets acquired:
|
|
Cash and cash equivalents (including restricted cash)
|
3,688
|
|
Mortgage loans held for sale
|
28,394
|
|
Identified intangible assets
|
2,204
|
|
MSRs
|
344
|
|
Other assets
|
2,333
|
|
Total fair value of assets acquired
|
36,963
|
|
Fair value of liabilities assumed:
|
|
Warehouse lines of credit
|
27,454
|
|
Other liabilities
|
1,676
|
|
Total fair value of liabilities assumed
|
29,130
|
|
Fair value of net assets acquired
|
7,833
|
|
Goodwill
|
$
|
3,638
|
|
Acquisition-related expenses
|
$
|
122
|
|
As part of the acquisition of Crossline, the Company agreed to pay Crossline's seller a deferred purchase price, which payment was contingent upon the seller meeting certain conditions. The first contingent payment was conditional upon the following:
during the six month period following the acquisition, the seller must sign letters of intent with at least two mortgage loan origination businesses who employ at least five licensed mortgage loan originators and whose total mortgage loan origination volume during the prior twelve month period was at least $50,000 in aggregate unpaid principal balance.
If such conditions were met, the seller would be due a payment equal to a multiple of the actual total mortgage loan volume of Crossline during such six month period, not to exceed
$500
(the "on-boarding payment"). During the year ended
December 31, 2014
, the Company paid the seller
$167
in contingent on-boarding payments.
In addition, the Company agreed to pay Crossline's seller a second contingent payment that was conditional upon Crossline achieving certain predetermined minimum mortgage loan origination goals during the two year period following the acquisition date (the "earnout"). If such goals were met by Crossline, the Company would pay the seller quarterly payments equal to a multiple of the actual total mortgage loan volume of Crossline. The earnout was uncapped in amount. Effective September 30, 2014, the Company amended the agreement governing the earn-out provisions related to the acquisition of Crossline. As a result of the amendment, the remaining earn-out amount to be paid to the original seller was fixed and was no longer contingent. During the year ended
December 31, 2014
, the Company paid the seller
$1,094
in contingent earn-out payments. The remaining payment of
$722
was paid in February 2015.
6. Derivative Financial Instruments
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
The Company does not designate any of its derivative financial instruments as hedges for accounting purposes. The following summarizes the Company’s outstanding derivative instruments as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
Fair Value
|
|
Notional
|
|
Balance Sheet Location
|
|
Asset
|
|
(Liability)
|
Interest rate lock commitments
|
$
|
800,168
|
|
|
Derivative assets/liabilities
|
|
$
|
7,035
|
|
|
$
|
(1,672
|
)
|
|
|
|
|
|
|
|
|
MBS forward sales contracts
|
1,473,514
|
|
|
|
|
|
|
|
MBS forward purchase contracts
|
491,600
|
|
|
|
|
|
|
|
Total MBS forward trades
|
1,965,114
|
|
|
Derivative assets/liabilities
|
|
14,236
|
|
|
(2,864
|
)
|
Total derivative financial instruments
|
$
|
2,765,282
|
|
|
|
|
$
|
21,271
|
|
|
$
|
(4,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
Fair Value
|
|
Notional
|
|
Balance Sheet Location
|
|
Asset
|
|
(Liability)
|
Interest rate lock commitments
|
$
|
1,169,768
|
|
|
Derivative assets/liabilities
|
|
$
|
10,596
|
|
|
$
|
(334
|
)
|
|
|
|
|
|
|
|
|
MBS forward sales contracts
|
1,705,995
|
|
|
|
|
|
|
|
MBS forward purchase contracts
|
522,800
|
|
|
|
|
|
|
|
Total MBS forward trades
|
2,228,795
|
|
|
Derivative assets/liabilities
|
|
1,564
|
|
|
(2,183
|
)
|
Total derivative financial instruments
|
$
|
3,398,563
|
|
|
|
|
$
|
12,160
|
|
|
$
|
(2,517
|
)
|
The following summarizes the net gains (losses) recognized by the Company on its derivative financial instruments, which are included in "Gains on mortgage loans held for sale, net" on its consolidated statements of operations, for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Interest rate lock commitments
|
$
|
(4,900
|
)
|
|
$
|
(1,942
|
)
|
|
$
|
10,945
|
|
MBS forward trades
1
|
(3,593
|
)
|
|
8,069
|
|
|
(23,581
|
)
|
Net derivative (losses) gains
|
$
|
(8,493
|
)
|
|
$
|
6,127
|
|
|
$
|
(12,636
|
)
|
1
Amount includes pair-off settlements.
The Company has exposure to credit loss in the event of contractual non-performance by its trading counterparties and counterparties to the over-the-counter derivative financial instruments that the Company uses in its interest rate risk management activities. The Company manages this credit risk by selecting only counterparties that the Company believes to be financially strong, spreading the credit risk among many such counterparties, by placing contractual limits on the amount of unsecured credit extended to any single counterparty and by entering into netting agreements with the counterparties, as appropriate.
The Company has entered into agreements with derivative counterparties, a portion of which include netting arrangements whereby the counterparties are entitled to settle their positions on a net basis. However, with respect to this portion of its derivatives, the Company presents such amounts on a gross basis as shown in the table above. In certain circumstances, the Company is required to provide certain derivative counterparties collateral against derivative financial instruments. As of
December 31, 2016
and
2015
, counterparties held
$0
and
$4,045
, respectively, of the Company’s cash and cash equivalents in margin accounts as collateral (which is classified as "Restricted cash" on the Company's consolidated balance sheets), after which the Company was in a net credit gain position of
$11,372
and
$3,426
at
December 31, 2016
and
2015
, respectively, to those counterparties. For the years ended
December 31, 2016
and
2015
, the Company incurred
no
credit losses due to non-performance of any of its counterparties.
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
7.
Mortgage Loans Held for Sale, at Fair Value
The following summarizes mortgage loans held for sale at fair value as of
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Conventional
1
|
$
|
199,350
|
|
|
$
|
230,438
|
|
Government insured
2
|
355,131
|
|
|
357,442
|
|
Non-agency/Other
|
23,909
|
|
|
57,816
|
|
Total mortgage loans held for sale, at fair value
|
$
|
578,390
|
|
|
$
|
645,696
|
|
1
Conventional includes FNMA and FHLMC mortgage loans, as well as mortgage loans to various housing agencies.
2
Government insured includes GNMA mortgage loans. GNMA portfolio balance is made up of Federal Housing Administration ("FHA"), Veterans Affairs ("VA"), and United States Department of Agricultural ("USDA") home loans, as well as mortgage loans to various housing agencies.
Under certain of the Company’s mortgage funding arrangements (including secured borrowings and warehouse lines of credit), the Company is required to pledge mortgage loans as collateral to secure borrowings. The mortgage loans pledged as collateral must equal at least
100%
of the related outstanding borrowings under the mortgage funding arrangements. The outstanding borrowings are monitored and the Company is required to deliver additional collateral if the amount of the outstanding borrowings exceeds the fair value of the pledged mortgage loans. As of
December 31, 2016
, the Company had pledged
$548,392
(
$611,926
as of
December 31, 2015
) in fair value of mortgage loans held for sale as collateral to secure debt under its mortgage funding arrangements, with the remaining
$29,998
(
$33,770
as of
December 31, 2015
) of mortgage loans held for sale funded with the Company’s excess cash. The mortgage loans held as collateral by the respective lenders are restricted solely to satisfy the Company’s borrowings under those mortgage funding arrangements. Refer to Note 14 “Debt” for additional information related to the Company’s outstanding borrowings as of
December 31, 2016
and
December 31, 2015
.
The following are the fair values and related UPB due upon maturity for loans held for sale accounted under the fair
value method as of
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Fair Value
|
|
UPB
|
|
Fair Value
|
|
UPB
|
Current through 89 days delinquent
|
$
|
548,794
|
|
|
$
|
538,331
|
|
|
$
|
603,778
|
|
|
$
|
588,189
|
|
90 or more days delinquent
1
|
29,596
|
|
|
30,217
|
|
|
41,918
|
|
|
42,918
|
|
Total
|
$
|
578,390
|
|
|
$
|
568,548
|
|
|
$
|
645,696
|
|
|
$
|
631,107
|
|
1
Includes
$20,868
and
$21,472
in fair value and related UPB, respectively, of eligible loans repurchased out of GNMA pools, as described in Note 9 - Fair Value Measurements, as of
December 31, 2016
, and
$34,540
and
$35,547
in fair value and related UPB, respectively, of eligible loans repurchased out of GNMA pools, as of
December 31, 2015
.
8. Mortgage Servicing Rights
The Company sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold. Upon sale, the MSRs are capitalized as an asset, which represents the current fair value of the future net cash flows that are expected to be realized for performing the servicing activities.
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
The Company’s total mortgage servicing portfolio as of
December 31, 2016
and
December 31, 2015
is summarized as follows (based on the unpaid principal balance ("UPB") of the underlying mortgage loans):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
FNMA
|
$
|
4,046,750
|
|
|
$
|
5,468,904
|
|
GNMA:
|
|
|
|
FHA
|
4,875,867
|
|
|
3,990,276
|
|
VA
|
3,475,218
|
|
|
2,731,822
|
|
USDA
|
883,696
|
|
|
805,783
|
|
FHLMC
|
2,917,616
|
|
|
4,449,796
|
|
Other investors
|
87,692
|
|
|
74,150
|
|
Total mortgage servicing portfolio
|
$
|
16,286,839
|
|
|
$
|
17,520,731
|
|
|
|
|
|
MSRs balance
|
$
|
211,532
|
|
|
$
|
199,637
|
|
|
|
|
|
MSRs balance as a percentage of total mortgage servicing portfolio
|
1.30
|
%
|
|
1.14
|
%
|
At
December 31, 2016
and
December 31, 2015
, the Company held
$311,329
and
$342,474
of escrow funds in custodial bank accounts for its customers for which it services mortgage loans.
A summary of the changes in the balance of MSRs for the years ended
December 31, 2016
,
2015
and
2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of period
|
$
|
199,637
|
|
|
$
|
204,216
|
|
|
$
|
170,294
|
|
MSRs originated in connection with loan sales
|
112,102
|
|
|
157,749
|
|
|
157,264
|
|
MSRs sold and derecognized
|
(47,780
|
)
|
|
(97,524
|
)
|
|
(44,692
|
)
|
Purchased MSRs
|
—
|
|
|
86
|
|
|
2,009
|
|
Changes in valuation inputs and assumptions
1
|
(18,180
|
)
|
|
(23,361
|
)
|
|
(56,924
|
)
|
Actual portfolio runoff (payoffs and principal amortization)
|
(34,247
|
)
|
|
(41,529
|
)
|
|
(23,735
|
)
|
Balance at end of period
|
$
|
211,532
|
|
|
$
|
199,637
|
|
|
$
|
204,216
|
|
1
Represents the unrealized portion of the "Changes in mortgage servicing rights valuation" on the Company's consolidated statements of
operations. The Company realized a gain of
$5,514
, a loss of
$7,034
and a gain of
$1,082
related to its MSRs sales for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
On March 31, 2015, the Company completed a sale of MSRs with a UPB of
$2.7 billion
in FNMA and FHLMC loans to an unrelated party. This pool of MSRs was somewhat geographically focused, had average mortgage interest rates that were different than current mortgage rates, and did not include any GNMA MSRs, which have a different historical performance than FNMA and FHLMC MSRs.
On April 30, 2015, September 30, 2015 and December 31, 2015, in separate transactions, the Company completed sales of MSRs with an underlying UPB of
$1.9 billion
,
$1.5 billion
and
$2.0 billion
, respectively, in GNMA loans to an unrelated party. These pools of MSRs did not include any FNMA or FHLMC MSRs, which have a different historical performance than GNMA MSRs. Thus, the characteristics of each sold pool do not represent the characteristics of the Company’s MSRs portfolio as a whole.
In 2015, the Company entered into a flow sale agreement for the sale of MSRs in
$0.7 billion
in GNMA loans to an unrelated party. The sales occurred monthly during the covered period, from September 2015 through April 2016. The flow sales occurring in 2015 totaled
.7 billion
and in 2016 totaled
.6 billion
. The characteristics of the pools sold are similar to those associated with the Company's current GNMA production.
On June 30, 2016, the Company completed a bulk sale of MSRs with an underlying unpaid principal balance of
$5.1 billion
in FNMA and FHLMC loans to an unrelated party. This pool of MSRs had average mortgage interest rates that were higher than current mortgage rates, and did not include any GNMA MSRs, which have a different historical performance than FNMA and FHLMC MSRs.
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
On September 30, 2016, the Company completed a bulk sale of MSRs with an underlying unpaid principal balance of
$1.2 billion
in GNMA loans to an unrelated party. This pool of MSRs had average mortgage interest rates that were higher than current mortgage rates, and did not include any FNMA and FHLMC MSRs, which have a different historical performance than GNMA MSRs.
The Company performs temporary sub-servicing activities with respect to the pools of underlying loans described
above through the established loan file transfer dates of each sale for a fee, during which time the Company is entitled to certain
other ancillary income amounts. The Company uses the proceeds to reinvest back into newly originated MSRs through its
origination platform. Each of these MSRs sale transactions met the criteria for derecognition as of their respective sale dates,
allowing for the MSRs assets to be derecognized and a gain or loss to be recorded at the time of derecognition, based on the
respective fair values as of the sale dates. The recognized gains or losses were recorded net of direct transaction expenses and estimated protection provisions.
The following table sets forth information related to outstanding loans sold as of
December 31, 2016
and
December 31, 2015
for which the Company has continuing involvement through servicing agreements:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Total unpaid principal balance
|
$
|
16,286,839
|
|
|
$
|
17,520,731
|
|
Loans 30-89 days delinquent
|
$
|
358,300
|
|
|
$
|
307,736
|
|
Loans delinquent 90 or more days or in foreclosure
|
$
|
160,706
|
|
|
$
|
114,298
|
|
The key weighted average assumptions (or range of assumptions), based on market participant inputs for the industry,
used in determining the fair value of the Company’s MSRs as of
December 31, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Discount rates
|
9.25% - 11.00%
|
|
9.25% - 11.00%
|
Annual prepayment speeds (by investor type):
|
|
|
|
FNMA
|
10.1%
|
|
13.0%
|
GNMA:
|
|
|
|
FHA
|
9.6%
|
|
11.5%
|
VA
|
9.6%
|
|
8.8%
|
USDA
|
9.9%
|
|
10.5%
|
FHLMC
|
9.2%
|
|
11.6%
|
Other investors
|
11.1%
|
|
12.4%
|
Cost of servicing (per loan)
|
$91
|
|
$85
|
MSRs are generally subject to loss in value when mortgage rates decrease. Decreasing mortgage rates normally
encourage increased mortgage refinancing activity. Increased refinancing activity reduces the expected life of the loans underlying the MSRs, thereby reducing MSRs value. Reductions in the value of MSRs affect income through changes in fair value. These factors have been considered in the estimated prepayment speed assumptions used to determine the fair value of the Company’s MSRs.
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
In addition to the assumptions provided above, the Company uses assumptions for delinquency rates in determining
the fair value of MSRs. These assumptions are based primarily on internal estimates, and the Company also obtains third party
data, where applicable, to assess the reasonableness of its internal assumptions. The Company's assumptions for lifetime delinquency rates for FNMA, GNMA, FHLMC and Other Investors mortgage loans as of
December 31, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
FNMA
|
4.05%
|
|
4.01%
|
GNMA:
|
|
|
|
FHA
|
6.52%
|
|
6.58%
|
VA
|
6.46%
|
|
6.52%
|
USDA
|
6.51%
|
|
6.53%
|
FHLMC
|
4.01%
|
|
3.94%
|
Other investors
|
6.61%
|
|
6.37%
|
The delinquency rates represent the Company’s estimate of the loans that will eventually enter delinquency over the
entire term of the portfolio’s life. These assumptions affect the future cost to service loans, future revenue earned from the
portfolio and future assumed foreclosure losses. Because the Company’s portfolio is generally comprised of recent vintages,
actual future delinquencies may differ from the Company’s assumptions.
The hypothetical effect of an adverse change in these key assumptions would result in a decrease in the fair values of
MSRs as follows as of
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
% of Average Portfolio
|
|
December 31, 2015
|
|
% of Average Portfolio
|
Discount rates:
|
|
|
|
|
|
|
|
Impact of discount rate + 1%
|
$
|
(9,027
|
)
|
|
4
|
%
|
|
$
|
(8,578
|
)
|
|
4
|
%
|
Impact of discount rate + 2%
|
$
|
(17,351
|
)
|
|
8
|
%
|
|
$
|
(16,470
|
)
|
|
8
|
%
|
Impact of discount rate + 3%
|
$
|
(25,045
|
)
|
|
12
|
%
|
|
$
|
(23,753
|
)
|
|
12
|
%
|
|
|
|
|
|
|
|
|
Prepayment speeds:
|
|
|
|
|
|
|
|
Impact of prepayment speed * 105%
|
$
|
(4,744
|
)
|
|
2
|
%
|
|
$
|
(5,502
|
)
|
|
3
|
%
|
Impact of prepayment speed * 110%
|
$
|
(9,322
|
)
|
|
4
|
%
|
|
$
|
(10,792
|
)
|
|
5
|
%
|
Impact of prepayment speed * 120%
|
$
|
(18,010
|
)
|
|
9
|
%
|
|
$
|
(20,778
|
)
|
|
10
|
%
|
|
|
|
|
|
|
|
|
Cost of servicing:
|
|
|
|
|
|
|
|
Impact of cost of servicing * 105%
|
$
|
(1,415
|
)
|
|
1
|
%
|
|
$
|
(1,365
|
)
|
|
1
|
%
|
Impact of cost of servicing * 110%
|
$
|
(2,830
|
)
|
|
1
|
%
|
|
$
|
(2,731
|
)
|
|
1
|
%
|
Impact of cost of servicing * 120%
|
$
|
(5,660
|
)
|
|
3
|
%
|
|
$
|
(5,462
|
)
|
|
3
|
%
|
As the table demonstrates, the Company’s methodology for estimating the fair value of MSRs is sensitive to changes in assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSRs fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may indicate higher prepayments; however, this may be partially offset by lower prepayments due to other factors such as a borrower’s diminished opportunity to refinance), which may magnify or counteract the sensitivities. Thus, any measurement of MSRs fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
Under certain of the Company's secured borrowing arrangements, the Company is required to pledge mortgage servicing rights as collateral to the secured borrowings. As of
December 31, 2016
and
December 31, 2015
, the Company had pledged
$210,734
and
$199,007
, respectively, in fair value of mortgage servicing rights as collateral to secure debt under certain of its secured borrowing arrangements. However, the financial institutions would be limited to selling the pledged
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
MSRs to the amount needed to satisfy their respective debt, including any accrued but unpaid interest and fees, as applicable. As of
December 31, 2016
and
December 31, 2015
, the outstanding borrowings secured by MSRs were
$56,898
and
$77,069
, respectively. Refer to Note 14 “Debt” for additional information related to the Company’s outstanding borrowings as of
December 31, 2016
and
December 31, 2015
.
The following is a summary of the components of loan servicing fees as reported in the Company’s consolidated statements of operations for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Contractual servicing fees
|
$
|
47,534
|
|
|
$
|
51,775
|
|
|
$
|
42,429
|
|
Late fees
|
2,699
|
|
|
2,997
|
|
|
1,978
|
|
Loan servicing fees
|
$
|
50,233
|
|
|
$
|
54,772
|
|
|
$
|
44,407
|
|
|
|
|
|
|
|
Servicing fees as a percentage of average portfolio
(annualized)
|
0.31
|
%
|
|
0.30
|
%
|
|
0.28
|
%
|
9.
Fair Value Measurements
The Company uses fair value measurements in fair value disclosures and to record certain assets and liabilities at fair value on a recurring basis, such as mortgage loans held for sale, derivative financial instruments, MSRs and loans eligible for repurchase from GNMA, or on a nonrecurring basis, such as when measuring intangible assets and long-lived assets. The Company has elected fair value accounting for loans held for sale to more closely align the Company’s accounting with its interest rate risk strategies without having to apply the operational complexities of hedge accounting.
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
|
|
Level Input:
|
Input Definition:
|
Level 1
|
Unadjusted, quoted prices in active markets for identical assets or liabilities.
|
Level 2
|
Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and others.
|
Level 3
|
Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity), unobservable inputs may be used. Unobservable inputs reflect the Company's own assumptions about the factors that market participants would use in pricing the asset or liability, and are based on the best information available in the circumstances.
|
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
While the Company believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methods or assumptions to estimate the fair value of certain financial statement items could result in a different estimate of fair value at the reporting date. Those estimated values may differ significantly from the values that would have been used had a readily available market for such items existed, or had such items been liquidated, and those differences could be material to the consolidated financial statements.
Management incorporates lack of liquidity into its fair value estimates based on the type of asset or liability measured and the valuation method used. The Company uses discounted cash flow techniques to estimate fair value. These techniques incorporate forecasting of expected cash flows discounted at appropriate market discount rates that are intended to reflect the lack of liquidity in the market.
The following describes the methods used in estimating the fair values of certain financial statement items:
Mortgage Loans Held for Sale:
The majority of the Company's mortgage loans held for sale at fair value are saleable
into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2. A smaller portion of the Company's mortgage loans held for sale consist of 1) loans deemed non-saleable prior to sale to the GSEs; 2) loans repurchased from the GSEs that have subsequently been deemed to be non-saleable to GSEs when certain representations and warranties are breached; 3) loans repurchased from the GSE in our loan modification program; and 4) loans repurchased from GNMA securities pursuant to our unilateral right, as servicer, to repurchase such GNMA loans we have previously sold. The fair values of these loans are estimated using a discounted cash flow analysis with significant unobservable inputs, such as prepayment speeds, default rates, the spread between bid and ask prices and loss severities, which are identified as Level 3 inputs. Changes in fair value of the Company's mortgage loans held for sale are recognized through "Gains on mortgage loans held for sale, net" on its consolidated statements of operations.
Derivative Financial Instruments:
The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of the MSRs and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of commission expenses. The Company estimates the fair value of forward sales commitments based on quoted MBS prices, which are considered Level 2. With respect to its interest rate lock commitments ("IRLCs"), management determined that a Level 3 classification was most appropriate based on the various significant unobservable inputs utilized in estimating the fair value of its IRLCs. Changes in fair value of the Company's derivative financial instruments are recognized through "Gains on mortgage loans held for sale, net" on its consolidated statements of operations.
Mortgage Servicing Rights:
The Company uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of value. The Company obtains valuations from an independent third party on a monthly basis, to support the reasonableness of the fair value estimate generated by the internal model. Therefore, the Company classifies MSRs as Level 3. The key assumptions used in the estimation of the fair value of MSRs include prepayment speeds, discount rates, default rates, cost to service, contractual servicing fees and escrow earnings. In valuing the fair value of MSRs, the Company uses a forward yield curve as an input which will impact pre-pay estimates and the value of escrows as compared to a flat rate environment. The Company believes that the use of the forward yield curve better represents fair value of MSRs because the forward yield curve is the market’s expectation of future interest rates based on its expectation of inflation and other economic conditions. Changes in fair value of the Company's mortgage servicing rights are recognized through "Changes in mortgage servicing rights valuation" on its consolidated statements of operations.
Loans Eligible for Repurchase from GNMA:
The Company uses a liquidation based discounted cash flow analysis to estimate the fair value of the assets and liabilities on the consolidated balance sheet for certain delinquent government guaranteed or insured mortgage loans from GNMA guaranteed pools in its servicing portfolio. Therefore, the Company classifies loans from GNMA as Level 3. The Company's right to purchase such loans arises as the result of the borrower's failure to make payments for at least
90 days
preceding the month of repurchase by the Company and provides an alternative to the Company's obligation to continue advancing principal and interest at the coupon rate of the related GNMA security. The key assumptions used in the discounted cash flow analysis include the Company's historical ability to make the GNMA loan salable, by becoming current either through the borrower's performance or through completion of a modification of the loan's terms, and the Company's historical ability to receive insurance reimbursements for related claims filed. Changes in fair value of the Company's loans eligible for repurchase from GNMA are recognized between "Loans eligible for repurchase from GNMA" and "Liability for loans eligible for repurchase from GNMA" on its consolidated balance sheets.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Mortgage loans held for sale - saleable to GSEs
|
$
|
—
|
|
|
$
|
503,300
|
|
|
$
|
—
|
|
|
$
|
503,300
|
|
Mortgage loans held for sale - non-saleable to GSEs
|
—
|
|
|
—
|
|
|
49,346
|
|
|
49,346
|
|
Mortgage loans held for sale - repurchased GNMA loans
|
—
|
|
|
—
|
|
|
25,744
|
|
|
25,744
|
|
Derivative assets (IRLCs)
|
—
|
|
|
|
|
|
7,035
|
|
|
7,035
|
|
Derivative assets (MBS forward trades)
|
—
|
|
|
14,236
|
|
|
—
|
|
|
14,236
|
|
MSRs
|
—
|
|
|
—
|
|
|
211,532
|
|
|
211,532
|
|
Loans eligible for repurchase from GNMA
|
—
|
|
|
—
|
|
|
118,748
|
|
|
118,748
|
|
Total assets
|
$
|
—
|
|
|
$
|
517,536
|
|
|
$
|
412,405
|
|
|
$
|
929,941
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities (IRLCs)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,672
|
|
|
$
|
1,672
|
|
Derivative liabilities (MBS forward trades)
|
—
|
|
|
2,864
|
|
|
—
|
|
|
2,864
|
|
Liability for loans eligible for repurchase from GNMA
|
—
|
|
|
—
|
|
|
118,748
|
|
|
118,748
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
2,864
|
|
|
$
|
120,420
|
|
|
$
|
123,284
|
|
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Mortgage loans held for sale - saleable to GSEs
|
$
|
—
|
|
|
$
|
549,561
|
|
|
$
|
—
|
|
|
$
|
549,561
|
|
Mortgage loans held for sale - non-saleable to GSEs
|
|
|
|
|
58,799
|
|
|
58,799
|
|
Mortgage loans held for sale - repurchased GNMA loans
|
—
|
|
|
—
|
|
|
37,336
|
|
|
37,336
|
|
Derivative assets (IRLCs)
|
—
|
|
|
|
|
|
10,596
|
|
|
10,596
|
|
Derivative assets (MBS forward trades)
|
—
|
|
|
1,564
|
|
|
—
|
|
|
1,564
|
|
MSRs
|
—
|
|
|
—
|
|
|
199,637
|
|
|
199,637
|
|
Loans eligible for repurchase from GNMA
|
—
|
|
|
—
|
|
|
80,794
|
|
|
80,794
|
|
Total assets
|
$
|
—
|
|
|
$
|
551,125
|
|
|
$
|
387,162
|
|
|
$
|
938,287
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities (IRLCs)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
334
|
|
|
$
|
334
|
|
Derivative liabilities (MBS forward trades)
|
—
|
|
|
2,183
|
|
|
—
|
|
|
2,183
|
|
Liability for loans eligible for repurchase from GNMA
|
—
|
|
|
—
|
|
|
80,794
|
|
|
80,794
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
2,183
|
|
|
$
|
81,128
|
|
|
$
|
83,311
|
|
A reconciliation of the beginning and ending balances of the Company’s assets and liabilities classified within Level 3 of the valuation hierarchy for the years ended
December 31, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Mortgage Loans Held for Sale - non-saleable to GSEs
|
Mortgage Loans Held for Sale - Repurchased GNMA Loans
|
Derivative Assets
|
Derivative Liabilities
|
Loans eligible for repurchase from GNMA
|
Liability for loans eligible for repurchase from GNMA
|
Balance at beginning of period
|
$
|
58,799
|
|
$
|
37,336
|
|
$
|
10,596
|
|
$
|
334
|
|
$
|
80,794
|
|
$
|
80,794
|
|
Changes in fair value
|
1,413
|
|
412
|
|
(3,561
|
)
|
1,338
|
|
(4,606
|
)
|
(4,606
|
)
|
Purchases
|
34,327
|
|
2,207
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Sales
|
(38,847
|
)
|
(7,774
|
)
|
—
|
|
—
|
|
(2,207
|
)
|
(2,207
|
)
|
Issuances
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Settlements
|
(35,311
|
)
|
(4,545
|
)
|
—
|
|
—
|
|
44,767
|
|
44,767
|
|
Transfers into Level 3
1
|
31,081
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Transfers out of Level 3
2
|
(2,116
|
)
|
(1,892
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
Balance at end of period
|
$
|
49,346
|
|
$
|
25,744
|
|
$
|
7,035
|
|
$
|
1,672
|
|
$
|
118,748
|
|
$
|
118,748
|
|
1
On an ongoing basis, for Mortgage Loans Held for Sale - non-saleable to GSEs measured at fair value, transfers into Level 3 represent those deemed unsaleable to GSEs in the current period. Transfers between levels are deemed to have occurred on the last day of the quarter in which a change in classification is determined.
2
On an ongoing basis, for Mortgage Loans Held for Sale - Repurchased GNMA Loans, transfers out of Level 3 represent those which the Company has moved to real estate owned ("REO").
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans Held for Sale - non-saleable to GSEs
|
Mortgage Loans Held for Sale - Repurchased GNMA Loans
|
Derivative Assets
|
Derivative Liabilities
|
Loans eligible for repurchase from GNMA
|
Liability for loans eligible for repurchase from GNMA
|
Balance at beginning of period
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
109,397
|
|
$
|
109,397
|
|
Changes in fair value
|
(5,580
|
)
|
(1,089
|
)
|
—
|
|
—
|
|
(2,314
|
)
|
(2,314
|
)
|
Purchases
|
45,688
|
|
40,209
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Sales
|
(5,581
|
)
|
(1,560
|
)
|
—
|
|
—
|
|
(40,209
|
)
|
(40,209
|
)
|
Issuances
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Settlements
|
(19,750
|
)
|
(1,204
|
)
|
—
|
|
—
|
|
13,920
|
|
13,920
|
|
Transfers into Level 3
1
|
45,308
|
|
1,286
|
|
10,596
|
|
334
|
|
—
|
|
—
|
|
Transfers out of Level 3
2
|
(1,286
|
)
|
(306
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
Balance at end of period
|
$
|
58,799
|
|
$
|
37,336
|
|
$
|
10,596
|
|
$
|
334
|
|
$
|
80,794
|
|
$
|
80,794
|
|
1
On an ongoing basis, for Mortgage Loans Held for Sale - non-saleable to GSEs measured at fair value, transfers into Level 3 represent those deemed unsaleable to GSEs in the current period. For Mortgage Loans Held for Sale - Repurchased GNMA Loans, purchases represent those sales out of Loans Eligible for Repurchase from GNMA and the related liability, in the current period. For the Company's Derivative Financial Instruments, transfers into Level 3 represent interest rate lock commitments. Management determined in 2015 that a Level 3 classification was most appropriate based on the various significant unobservable inputs utilized in estimating the fair value of its IRLCs. Transfers between levels are deemed to have occurred on the last day of the quarter in which a change in classification is determined.
2
On an ongoing basis, for Mortgage Loans Held for Sale - Repurchased GNMA Loans, transfers out of Level 3 represent those which the Company has moved to REO.
Refer to Note 8, "Mortgage Servicing Rights", for a reconciliation of the beginning and ending balances for the years ended
December 31, 2016
,
2015
and
2014
, as well as a discussion of significant observable inputs related to the Company's MSRs and relative ranges of those used in determining their fair value.
Fair Value of Other Financial Instruments
As of
December 31, 2016
and
December 31, 2015
, all financial instruments were either recorded at fair value or the carrying value approximated fair value. For financial instruments that were not recorded at fair value, such as cash, restricted cash, servicing advances, subordinated loan receivable, short-term secured borrowings, warehouse and operating lines of credit, accounts payable and accrued expenses, their carrying values approximated fair value due to the short-term nature of such instruments. For our long-term secured borrowings not recorded at fair value, the carrying value approximated fair value due to the collateralization of such borrowings.
10.
Property and Equipment
The following summarizes property and equipment as of
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Computer software and equipment
|
$
|
30,116
|
|
|
$
|
28,765
|
|
Furniture and office equipment
|
5,222
|
|
|
5,287
|
|
Leasehold improvements
|
1,331
|
|
|
1,429
|
|
Property and equipment, gross
|
36,669
|
|
|
35,481
|
|
Accumulated depreciation and amortization
|
(21,830
|
)
|
|
(12,558
|
)
|
Property and equipment, net
|
$
|
14,839
|
|
|
$
|
22,923
|
|
Total depreciation and amortization expense from continuing operations related to property and equipment for the years ended
December 31, 2016
,
2015
and
2014
was
$9,628
,
$7,200
and
$4,028
, respectively. Total depreciation and amortization expense from discontinued operations related to property and equipment for the years ended December 31,
2015
and
2014
was
$1,148
and
$152
, respectively. There was
no
depreciation and amortization expense related to discontinued operations during the year ended
December 31, 2016
.
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
11. Goodwill and Other Intangible Assets
Total goodwill was
$4,265
at both
December 31, 2016
and 2015. As described in Note 5, "Business Combinations," the Company's goodwill relates to its acquisitions of Crossline in 2013 and Medallion in 2014. Goodwill recognized from the acquisition of Medallion primarily related to the expected future growth of Medallion's business. Goodwill recognized from the acquisition of Crossline primarily related to the expected future growth of Crossline's business and future economic benefits arising from expected synergies. The Company performed its annual assessment of goodwill impairment during the fourth quarter. This assessment is performed more frequently if events and circumstances indicate that impairment may have occurred. The Company's goodwill is allocated to and tested at the Retail reporting unit level, a component of the Originations segment of the business, inclusive of the Company's retail direct and remaining retail distributed operations. No impairment was noted as a result of this analysis for each of the years ended December 31, 2016, 2015 or 2014.
The Company's other intangible assets relate to its asset acquisition of NattyMac, LLC. in 2013, and the acquisition of Crossline in 2013 as described in Note 5, "Business Combinations." The components of the Company's other intangible assets as of
December 31, 2016
and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
2,350
|
|
|
$
|
(1,273
|
)
|
|
$
|
1,077
|
|
|
$
|
2,350
|
|
|
$
|
(979
|
)
|
|
$
|
1,371
|
|
Non-compete agreement
|
380
|
|
|
(380
|
)
|
|
—
|
|
|
380
|
|
|
(254
|
)
|
|
126
|
|
Active agent list
|
330
|
|
|
(286
|
)
|
|
44
|
|
|
330
|
|
|
(220
|
)
|
|
110
|
|
Total finite-lived intangible assets
|
$
|
3,060
|
|
|
$
|
(1,939
|
)
|
|
$
|
1,121
|
|
|
$
|
3,060
|
|
|
$
|
(1,453
|
)
|
|
$
|
1,607
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
$
|
1,030
|
|
|
$
|
—
|
|
|
$
|
1,030
|
|
|
$
|
1,030
|
|
|
$
|
—
|
|
|
$
|
1,030
|
|
Total indefinite-lived intangible assets
|
1,030
|
|
|
—
|
|
|
1,030
|
|
|
1,030
|
|
|
—
|
|
|
1,030
|
|
Total other intangible assets
|
$
|
4,090
|
|
|
$
|
(1,939
|
)
|
|
$
|
2,151
|
|
|
$
|
4,090
|
|
|
$
|
(1,453
|
)
|
|
$
|
2,637
|
|
The Company recorded amortization expense related to its definite-lived intangible assets of
$486
,
$486
and
$1,019
during the years ended
December 31, 2016
,
2015
and
2014
, respectively, all related to its continuing operations. Estimated future amortization expense for each of the years ended December 31, is as follows:
2017
,
$338
;
2018
,
$294
;
2019
,
$294
;
2020
,
$195
; thereafter,
$0
. Estimated amortization expense was based on existing intangible asset balances as of
December 31, 2016
. Actual amortization expense may vary from these estimates.
The Company performed its annual impairment test of existing other intangible assets with indefinite lives during the fourth quarter.
No
impairment was noted as a result of this analysis for each of the years ended December 31, 2016, 2015 or 2014. Additionally,
no
impairment was recorded related to the Company's existing other intangible assets with finite lives during the years ended December 31, 2016 or 2015.
During the year ended December 31, 2014, the Company recognized an impairment charge of
$1,290
related to the Crossline trade name, which represented the remaining net carrying amount of the asset at that time. Given the formation of Stonegate Direct in October 2014, which was integrated through the call center operations of Crossline, the Company determined there was a significant change in the manner in which the Crossline trade name was used and as a result determined the change to be a triggering event for an impairment analysis to be performed in accordance with the guidance of long-lived assets. The Crossline trade name and associated impairment charge related to our Originations segment.
12. Other Assets
The following summarizes other assets as of
December 31, 2016
and
December 31, 2015
:
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Receivables from servicing sales, interest and loan related payments, net
|
$
|
11,748
|
|
|
$
|
18,739
|
|
Prepaid expenses and other
|
4,411
|
|
|
6,431
|
|
Real estate owned, net
1
|
1,005
|
|
|
1,446
|
|
Deposits
|
421
|
|
|
801
|
|
Total other assets
|
$
|
17,585
|
|
|
$
|
27,417
|
|
1
Real estate owned assets are reflected at their net realizable value.
13.
Transfers and Servicing of Financial Assets
Residential mortgage loans are primarily sold to FNMA or FHLMC or transferred into pools of GNMA MBS. The Company has continuing involvement in mortgage loans sold through servicing arrangements and the liability for loan indemnifications and repurchases under the representations and warranties it makes to the investors and insurers of the loans it sells. The Company is exposed to interest rate risk through its continuing involvement with mortgage loans sold, including the MSRs, as the value of the asset fluctuates as changes in interest rates impact borrower prepayment.
The Company also sells non-agency residential mortgage loans to non-GSE third parties generally without retaining the servicing rights to such loans.
All loans are sold on a non-recourse basis; however, certain representations and warranties have been made that are customary for loan sale transactions, including eligibility characteristics of the mortgage loans and underwriting responsibilities, in connection with the sales of these assets.
In order to facilitate the origination and sale of mortgage loans held for sale, the Company entered into various agreements with warehouse lenders. Such agreements are in the form of loan participations and repurchase agreements with banks and other financial institutions. Mortgage loans held for sale are considered sold when the Company surrenders control over the financial assets and such financial assets are legally isolated from the Company in the event of bankruptcy. If the sale criteria are not met, the transfer is recorded as a secured borrowing in which the assets remain on the balance sheet and the proceeds from the transaction are recognized as a liability. From time to time, the Company may sell loans whereby the underlying risks and cash flows of the mortgage loan have been transferred to a third party through the issuance of participating interests. The terms and conditions of these interests are governed by the participation agreements. The Company will receive a marketing fee paid by the participating entity upon completion of the sale. In addition, the Company will also subservice the underlying mortgage loans to the participation agreement for the period that the participating interests are outstanding. As of
December 31, 2016
and
2015
, all transfers pursuant to the Company's mortgage funding arrangements (the collective term for the Company's mortgage loan participation, warehouse lines of credit, repurchase and other credit arrangements) are accounted for by the Company as secured borrowings.
The following table sets forth information regarding cash flows for the years ended
December 31, 2016
,
2015
and
2014
relating to loan sales in which the Company has continuing involvement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Proceeds from new loan sales
1
|
$
|
9,400,745
|
|
|
$
|
12,643,769
|
|
|
$
|
12,239,776
|
|
1
Represents proceeds from sales and excludes payments received from borrowers.
14.
Debt
Borrowings outstanding as of
December 31, 2016
and
2015
are as follows:
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Amount Outstanding
|
|
Weighted Average Interest Rate
|
|
Amount
Outstanding
|
|
Weighted Average Interest Rate
|
Secured borrowings - mortgage loans
1
|
$
|
277,789
|
|
|
3.94
|
%
|
|
$
|
492,799
|
|
|
4.16
|
%
|
Secured borrowings - mortgage servicing rights
|
56,898
|
|
|
5.17
|
%
|
|
77,069
|
|
|
5.58
|
%
|
Secured borrowings - eligible GNMA loan repurchases
2
|
24,738
|
|
|
3.18
|
%
|
|
37,615
|
|
|
3.17
|
%
|
Mortgage repurchase borrowings
|
371,534
|
|
|
2.55
|
%
|
|
279,421
|
|
|
2.47
|
%
|
Warehouse lines of credit
|
170
|
|
|
4.25
|
%
|
|
1,306
|
|
|
4.25
|
%
|
Operating lines of credit
|
9,928
|
|
|
4.00
|
%
|
|
5,000
|
|
|
4.00
|
%
|
Total mortgage funding arrangements and operating lines of credit
|
$
|
741,057
|
|
|
|
|
$
|
893,210
|
|
|
|
1
The Company’s costs for secured borrowings on mortgage loans are shown in the table above based on the average underlying mortgage rates. These costs are reduced by earnings and fees specific to each of the secured borrowing facilities.
2
The Company's costs for financing GNMA loan repurchases under this funding arrangement (remittance rate) are based on a borrowing rate over and above the debenture rate, which is set on each loan by HUD at a required spread to the constant maturity 10-year treasury at that point in time.
The Company maintains mortgage loan participation, warehouse lines of credit, repurchase and other credit
arrangements listed above (collectively referred to as “mortgage funding arrangements”) with various financial institutions,
primarily to fund the origination and purchase of mortgage loans. As of
December 31, 2016
, the Company held mortgage funding arrangements with
six
separate financial institutions and a total maximum borrowing capacity of
$1,652,000
, including the operating lines of credit and funding arrangement for GNMA loan repurchases. Except for our operating lines of credit, each mortgage funding arrangement is collateralized by the underlying mortgage loans. Separately, the Company had
two
mortgage funding arrangements for the funding of MSRs, each of which is collateralized by the MSRs pledged to the respective facilities.
The following tables summarize the amounts outstanding, maximum borrowing capacity, interest rates and maturity dates under the Company’s various mortgage funding arrangements as of
December 31, 2016
and
December 31, 2015
:
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Funding Arrangements
1
|
|
Amount Outstanding
|
|
Maximum Borrowing Capacity
|
|
Interest Rate
|
|
Maturity Date
|
|
Merchants Bank of Indiana - Participation Agreement
|
|
$
|
105,189
|
|
|
$
|
600,000
|
|
2
|
Same as the underlying mortgage rates, less contractual service fee
|
|
July 2017
|
|
Merchants Bank of Indiana - NattyMac Funding
|
|
172,600
|
|
|
—
|
|
3
|
Same as the underlying mortgage rates, less 49% of facility earnings
|
|
March 2017
|
|
Total secured borrowings - mortgage loans
|
|
277,789
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty Bank
|
|
24,738
|
|
|
50,000
|
|
|
Coupon rate of underlying loans, less debenture rate
|
7
|
N/A
|
8
|
Total secured borrowings - eligible GNMA loan repurchases
|
|
24,738
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclays Bank PLC
|
|
64,691
|
|
|
300,000
|
|
|
LIBOR plus applicable margin
|
|
February 2017
|
11
|
Bank of America, N.A.
|
|
214,969
|
|
|
425,000
|
|
4
|
LIBOR plus applicable margin
|
|
August 2017
|
|
EverBank
|
|
35,734
|
|
|
125,000
|
|
|
LIBOR plus applicable margin
|
|
January 2017
|
9
|
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Bank N.A.
|
|
56,140
|
|
|
140,000
|
|
|
LIBOR plus applicable margin
|
|
January 2017
|
10
|
Total mortgage repurchase borrowings
|
|
371,534
|
|
|
990,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchants Bank of Indiana - Warehouse Line of Credit
|
|
170
|
|
|
2,000
|
|
|
Prime plus 1.00%
|
|
July 2017
|
|
Total warehouse lines of credit
|
|
170
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclays Bank PLC - MSRs Secured
|
|
15,128
|
|
|
—
|
|
5
|
LIBOR plus applicable margin
|
|
February 2017
|
11
|
EverBank - MSRs Secured
|
|
41,770
|
|
|
—
|
|
6
|
LIBOR plus applicable margin
|
|
January 2017
|
9
|
Total secured borrowings - MSRs
|
|
56,898
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
731,129
|
|
|
$
|
1,642,000
|
|
|
|
|
|
|
1
Does not include our operating lines of credit for which we have a maximum borrowing capacity of
$10,000
.
2
Merchants Bank of Indiana will periodically constrain the aggregate maximum borrowing capacity. During the year ended
December 31, 2016
, the lowest amount to which the aggregate maximum borrowing capacity was limited approximated
$550,000
. The highest amount to which it was expanded approximated
$700,000
. At
December 31, 2016
, the aggregate maximum borrowing capacity was
$600,000
.
3
The maximum borrowing capacity is a sublimit of the Merchants Participation Agreement maximum borrowing capacity referred to in Note 2 above.
4
The Bank of America maximum borrowing includes
$200,000
of mortgage repurchase and
$225,000
of mortgage gestation repurchase facilities.
5
Governed by the Barclays Bank PLC maximum borrowing capacity of
$300,000
, with a sub-limit of
$60,000
.
6
Governed by the EverBank maximum borrowing capacity of
$125,000
, with a sub-limit of
$60,000
.
7
Borrowing carries an interest rate of the coupon rate of the underlying mortgage loans, less the debenture rate funded by Guaranty Bank.
8
Borrowing matures no later than
four
years from the date of most recent purchase from GNMA pools.
9
On January 6, 2017 the Company amended its mortgage repurchase financing agreement with EverBank to extend the maturity date to January 5, 2018.
10
On January 18, 2017 the Company amended its mortgage repurchase agreement with Wells Fargo Bank N.A. to extend the maturity date to January 30, 2018.
11
On February 21, 2017 the Company amended its agreements with Barclays Bank to extend the maturity date to July 31, 2017.
As of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Funding Arrangements
1
|
|
Amount Outstanding
|
|
Maximum Borrowing Capacity
|
|
Interest Rate
|
|
Maturity Date
|
|
Merchants Bank of Indiana - Participation Agreement
|
|
$
|
169,589
|
|
|
$
|
600,000
|
|
2
|
Same as the underlying mortgage rates, less contractual service fee
|
|
July 2016
|
|
Merchants Bank of Indiana - NattyMac Funding
|
|
323,210
|
|
|
—
|
|
3
|
Same as the underlying mortgage rates, less 49% of facility earnings
|
|
March 2017
|
|
Total secured borrowings - mortgage loans
|
|
492,799
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty Bank
|
|
37,615
|
|
|
50,000
|
|
|
Coupon rate of underlying loans, less debenture rate
|
7
|
N/A
|
8
|
Total secured borrowings - eligible GNMA loan repurchases
|
|
37,615
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclays Bank PLC
|
|
45,956
|
|
|
300,000
|
|
|
LIBOR plus applicable margin
|
|
December 2016
|
|
Bank of America, N.A.
|
|
184,804
|
|
|
700,000
|
|
4
|
LIBOR plus applicable margin
|
|
June 2016
|
|
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EverBank
|
|
—
|
|
|
150,000
|
|
|
LIBOR plus applicable margin
|
|
November 2016
|
|
Wells Fargo Bank N.A.
|
|
48,661
|
|
|
140,000
|
|
|
LIBOR plus applicable margin
|
|
January 2017
|
|
Total mortgage repurchase borrowings
|
|
279,421
|
|
|
1,290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchants Bank of Indiana - Warehouse Line of Credit
|
|
1,306
|
|
|
2,000
|
|
|
Prime plus 1.00%
|
|
July 2016
|
|
Total warehouse lines of credit
|
|
1,306
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclays Bank PLC - MSRs Secured
|
|
58,979
|
|
|
—
|
|
5
|
LIBOR plus applicable margin
|
|
December 2016
|
|
EverBank - MSRs Secured
|
|
18,090
|
|
|
—
|
|
6
|
LIBOR plus applicable margin
|
|
November 2016
|
|
Total secured borrowings - MSRs
|
|
77,069
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
888,210
|
|
|
$
|
1,942,000
|
|
|
|
|
|
|
1
Does not include our operating lines of credit for which we have a maximum borrowing capacity of
$5,000
as of December 31, 2015.
2
Merchants Bank of Indiana will periodically constrain the aggregate maximum borrowing capacity. During the year ended December 31, 2015, the lowest amount to which the aggregate maximum borrowing capacity was limited approximated
$550,000
. The highest amount to which it was expanded approximated
$700,000
. At December 31, 2015, the aggregate maximum borrowing capacity was
$600,000
.
3
The maximum borrowing capacity is a sublimit of the Merchants Participation Agreement maximum borrowing capacity referred to in Note 2 above.
4
The Bank of America maximum borrowing includes
$400,000
of mortgage repurchase and
$300,000
of mortgage gestation repurchase facilities.
5
Governed by the Barclays Bank PLC maximum borrowing capacity of
$300,000
, with a sub-limit of
$60,000
.
6
Governed by the EverBank maximum borrowing capacity of
$150,000
, with a sub-limit of
$70,000
.
7
Borrowing carries an interest rate of the coupon rate of the underlying mortgage loans, less the debenture rate funded by Guaranty Bank.
8
Borrowing matures no later than
four years
from the date of most recent purchase from GNMA pools.
On February 29, 2016, the Company amended its mortgage repurchase financing with Bank of America, N.A. to decrease the amount available under the line from
$400,000
to
$300,000
and on March 31, 2016, the Company amended its mortgage repurchase financing with Bank of America, N.A. to decrease the amount available under the line from
$300,000
to
$250,000
, decreasing the maximum borrowing capacity of the mortgage funding arrangements with Bank of America from
$700,000
to
$550,000
.
On March 1, 2016, the Company amended its mortgage repurchase financing with EverBank to decrease the amount available under the line from
$150,000
to
$125,000
, and decrease the MSR sublimit from
$70,000
to
$60,000
. On October 24, 2016, the Company amended this facility to extend the maturity date to January 7, 2017. On January 6, 2017 the Company amended its mortgage repurchase financing agreement with EverBank to extend the maturity date to January 5, 2018.
On June 3, 2016, the Company amended its mortgage repurchase financing agreement with Bank of America, N.A. to extend the maturity date to July 8, 2016. On July 8, 2016, the Company amended its mortgage repurchase financing agreement with Bank of America, N.A. to extend the maturity date to August 5, 2016. On August 3, 2016, the Company renewed and amended its mortgage repurchase financing agreement with Bank of America, N.A. to extend the maturity date to August 2, 2017. The renewed agreement has a repurchase facility size of
$200,000
and a gestation facility size of
$225,000
. The repurchase and gestation facility sizes were
$250,000
and
$300,000
, respectively, prior to the renewal.
On June 17, 2016, the Company amended its operating line of credit agreement with Merchants to temporarily increase the maximum borrowing capacity from
$5,000
to
$10,000
through August 31, 2016, which was extended on August 30, 2016 through November 15, 2016 when it reverted back to
$5,000
. On November 30, 2016, the Company renewed at
$10,000
through January 15, 2017, reverting to
$5,000
after January 15, 2017 through the remainder of the renewal period. On December 31, 2016, the Company renewed its operating line of credit agreement with Merchants at
$10,000
through its maturity date of July 31, 2017.
On July 29, 2016, the Company amended its master participation agreement, warehouse and security agreement and operating line of credit facilities with Merchants to extend their maturity dates to July 31, 2017.
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
On December 15, 2016, the Company amended its master repurchase agreement with Barclays to extend the maturity date to February 20, 2017.
The Company reviews and monitors its operating lines of credit during the quarter and amends the borrowing capacity and maturity date throughout the quarter based on current operations.
As of
December 31, 2016
, the Company was in breach of certain debt covenants with respect to the master repurchase and master loan purchase and servicing agreements with Barclays and Guaranty Bank, respectively, due to failure to reporting certain loss mitigation data to HUD timely, leading to the Company's Tier II rating being lowered temporarily to Tier III during the current reporting period. The Company has corrected the reporting submission failure and waivers were obtained from both lenders for third-quarter reporting; however, the reporting errors carried over into the fourth quarter reporting period, leaving the rating at Tier III. The Barclays agreement has been amended to allow for a Tier III ranking through the extended maturity date of the debt agreement of February 20, 2017 and a waiver of the covenant is effective through March 31, 2017 for the Guaranty Bank agreement. The Company does not anticipate that the breach will have a material effect on the Company's financial condition or the Company's ability to utilize these funding sources going forward.
The above mortgage funding and operating lines of credit agreements contain covenants which include certain customary financial requirements, including maintenance of minimum tangible net worth, maximum debt to tangible net worth ratio, minimum liquidity, minimum current ratio, minimum profitability and limitations on additional debt and transactions with affiliates, as defined in the respective agreement. As of
December 31, 2016
and
December 31, 2015
, the Company was in compliance with the covenants contained in these agreements, except as discussed above. The Company intends to renew the mortgage funding arrangements when they mature and has no reason to believe the Company will be unable to do so.
15.
Reserve for Mortgage Repurchases and Indemnifications
Representations and warranties are provided to investors and insurers on loans sold and are also assumed on purchased mortgage loans. In the event of a breach of these representations and warranties, the Company may be required to repurchase the mortgage loan or indemnify the investor against loss. In limited circumstances, the full risk of loss on loans sold is retained to the extent the liquidation of the underlying collateral is insufficient. In some instances where the Company has purchased loans from third parties, it may have the ability to recover the loss from the third party originator. Repurchase-related reserves
are maintained for probable losses related to repurchase and indemnification obligations.
The following is a summary of changes in the reserve for mortgage repurchases and indemnifications for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
5,536
|
|
|
$
|
4,967
|
|
|
$
|
3,709
|
|
Provision for mortgage repurchases and indemnifications - new loan sales
1
|
2,649
|
|
|
3,378
|
|
|
2,415
|
|
Provision for mortgage repurchases and indemnifications - change in estimate
2
|
(1,500
|
)
|
|
592
|
|
|
822
|
|
Losses on repurchases and indemnifications
|
(1,152
|
)
|
|
(3,401
|
)
|
|
(1,979
|
)
|
Balance at end of period
|
$
|
5,533
|
|
|
$
|
5,536
|
|
|
$
|
4,967
|
|
1
Recognized as a reduction to "Gain on mortgage loans held for sale, net" in the consolidated statements of operations.
2
Accounts for change in estimate made subsequent to the initial reserve for new loan sales being made.
Because of the inherent uncertainties involved in the various estimates and assumptions used by the Company in determining the mortgage repurchase and indemnifications liability, there is a reasonable possibility that future losses may be in excess of the recorded liability. In assessing the adequacy of the reserve, management evaluates various factors including actual losses on repurchases and indemnifications during the period, historical loss experience, known delinquent and other problem loans, delinquency trends in the portfolio of sold loans and economic trends and conditions in the industry.
As part of our ongoing risk management and monitoring activities, we continuously evaluate and make necessary enhancements to our methodology and assumptions to estimate the losses inherent from our repurchase and indemnification exposure. Such changes generally reflect changes in key assumptions, such as the level of loan sales, the party to whom the loans are sold, the expectation of severity of loss on repurchases and indemnifications, our success rate at appealing repurchase demands and our ability to recover any losses from third parties. After evaluating the assumptions, the composition of loans originated, quality control standards, current trends, historical repurchase requests and the passage of time, we reduced our repurchase reserve by
$1,500
during the year ended
December 31, 2016
to reflect loans where the repurchase provision expired and to reflect our best estimate of possible future requests. We believe the analysis used to evaluate future expected repurchase exposure is appropriate and our period-end repurchase reserve balance is adequate.
16.
Related Party Transactions
On September 1, 2015, the Company entered into a consulting agreement with its former CEO for services following the termination of his employment with the Company, commencing September 11, 2015 through March 11, 2016, for which he received a monthly retainer of
$10
for up to
40 hours
of service per month, with services exceeding
forty hours
in any month to be compensated at an hourly rate. The total fees amounted to
$30
for both the years ended
December 31, 2016
and
2015
, and are included in "General and administrative expenses" on the Company's consolidated statements of operations. As of
December 31, 2015
, the Company had
$10
of amounts due to the former CEO related to this agreement, which is included in "Other liabilities" on the Company's consolidated balance sheets. There were
no
amounts due to the former CEO as of
December 31, 2016
.
On September 1, 2015, the Company entered into a letter agreement with its Chairman of the Board to employ him, effective as of September 10, 2015, on an at-will basis as Interim Chief Executive Officer, for which he received a base salary at a weekly rate of
$11
(effective as of August 31, 2015). On April 27, 2016, he was granted a special transition award at the completion of his service as Interim Chief Executive Officer paid in the form of a restricted stock unit award for
178,891
shares of common stock, that vests in full on the third anniversary of grant (or earlier upon a change in control, termination for death or disability, or termination (other than for cause or separation) after the first anniversary of the grant date). He was also entitled to reimbursement of reasonable expenses incurred for his travel and housing in connection with the performance of his duties. During the period of his employment, he was also entitled to all standard employee benefits afforded to Stonegate’s executive employees. The total compensation amounted to
$183
and
$185
for the years ended
December 31, 2016
and
2015
, respectively,
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
and is included in "Salaries, commissions and benefits" on the Company's consolidated statements of operations. He served as Interim Chief Executive Officer until April 18, 2016 and as an employee until April 30, 2016.
17.
Income Taxes
The components of income tax (benefit) from continuing operations are as follows for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current federal income tax expense
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current state income tax (benefit) expense
|
(122
|
)
|
|
217
|
|
|
115
|
|
Deferred federal income tax (benefit) expense
|
954
|
|
|
(5,714
|
)
|
|
(12,851
|
)
|
Deferred state income tax (benefit) expense
|
(951
|
)
|
|
(36
|
)
|
|
(200
|
)
|
Total income tax (benefit)
|
$
|
(119
|
)
|
|
$
|
(5,533
|
)
|
|
$
|
(12,936
|
)
|
The following is a reconciliation of income tax (benefit) from continuing operations recorded on the Company's consolidated statements of operations to the expected statutory federal corporate income tax rates for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
Statutory federal income tax (benefit)
|
$
|
(1,120
|
)
|
|
35.0
|
%
|
|
$
|
(7,620
|
)
|
|
35.0
|
%
|
|
$
|
(13,427
|
)
|
|
35.0
|
%
|
State income tax (benefit) expense, net of federal tax (benefit)
|
(122
|
)
|
|
3.8
|
%
|
|
(779
|
)
|
|
3.6
|
%
|
|
(1,520
|
)
|
|
4.0
|
%
|
State tax refunds - amended returns
|
(219
|
)
|
|
6.8
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Non-deductible expenses
|
104
|
|
|
(3.2
|
)%
|
|
124
|
|
|
(0.6
|
)%
|
|
171
|
|
|
(0.5
|
)%
|
Equity compensation forfeiture
|
71
|
|
|
(2.2
|
)%
|
|
2,070
|
|
|
(9.5
|
)%
|
|
—
|
|
|
—
|
%
|
Valuation allowance
|
(657
|
)
|
|
20.5
|
%
|
|
1,554
|
|
|
(7.1
|
)%
|
|
—
|
|
|
—
|
%
|
Uncertain tax positions
|
(329
|
)
|
|
10.3
|
%
|
|
583
|
|
|
(2.7
|
)%
|
|
—
|
|
|
—
|
%
|
State tax rate adjustment to state deferred
|
2,110
|
|
|
(65.9
|
)%
|
|
(1,234
|
)
|
|
5.7
|
%
|
|
1,801
|
|
|
(4.7
|
)%
|
Other
|
43
|
|
|
(1.4
|
)%
|
|
(231
|
)
|
|
1.0
|
%
|
|
39
|
|
|
(0.1
|
)%
|
Total income tax (benefit)
|
$
|
(119
|
)
|
|
3.7
|
%
|
|
$
|
(5,533
|
)
|
|
25.4
|
%
|
|
$
|
(12,936
|
)
|
|
33.7
|
%
|
The tax effects of significant temporary differences which gave rise to the Company's deferred tax assets and liabilities are as follows as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred tax assets relating to:
|
|
|
|
Net operating loss carryforwards
|
$
|
71,478
|
|
|
$
|
68,996
|
|
Intangible assets
|
495
|
|
|
533
|
|
Reserve for mortgage repurchases and indemnifications
|
2,194
|
|
|
2,134
|
|
Stock-based compensation
|
1,724
|
|
|
1,302
|
|
Deferred rent and leasehold improvements
|
730
|
|
|
706
|
|
Vacation accrual and contributions
|
293
|
|
|
536
|
|
Loans held for sale and related derivatives
|
31,973
|
|
|
22,342
|
|
Accrued Other
|
$
|
582
|
|
|
$
|
—
|
|
Bad debts
|
—
|
|
|
240
|
|
Tax credits
|
5
|
|
|
5
|
|
Total gross deferred tax assets
|
$
|
109,474
|
|
|
$
|
96,794
|
|
Less: valuation allowance
|
(896
|
)
|
|
(1,554
|
)
|
Less: FIN 48 reserve
|
(255
|
)
|
|
(582
|
)
|
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Total net deferred tax assets
|
$
|
108,323
|
|
|
$
|
94,658
|
|
|
|
|
|
Deferred tax liabilities relating to:
|
|
|
|
Mortgage servicing rights
|
$
|
110,316
|
|
|
$
|
96,392
|
|
Property and equipment
|
189
|
|
|
514
|
|
Goodwill
|
205
|
|
|
116
|
|
Other intangible assets
|
71
|
|
|
—
|
|
Total deferred tax liabilities
|
$
|
110,781
|
|
|
$
|
97,022
|
|
Net deferred tax liabilities
|
$
|
2,458
|
|
|
$
|
2,364
|
|
During the years ended
December 31, 2016
and 2015, the Company recognized an income tax benefit from continuing operations of
$119
and
$5,533
, respectively, which represented effective tax rates of
3.7%
and
25.4%
, respectively. The income tax benefit from continuing operations for the year ended December 31, 2015 includes the impact of recording a
$1,554
valuation allowance to offset our deferred tax assets, as we determined that it was more likely than not that a portion of our deferred tax assets will not be realized (see additional discussion below). In 2016, the Company released
$657
after consideration of relevant current facts and circumstances and made a determination that the federal valuation allowance recorded in prior quarters during 2016 was no longer required. The remaining balance of
$896
as of December 31, 2016 reflects the state valuation allowance. Additionally, the decrease in the effective tax rate in the current period is due to adjustments to state net deferred tax liabilities based on an increased state effective tax rate and provision to tax return adjustments.
As of
December 31, 2016
, the Company had total company federal and state net operating loss carryforwards of
$182,979
and
$142,143
, respectively. The Company's federal and state net operating loss carryforwards are available to offset future taxable income and expiring from
2029
to
2036
. As of
December 31, 2015
, the Company had total company federal and state net operating loss carryforwards of
$176,137
and
$150,481
, respectively. During the year ended
December 31, 2015
, the Company entered into a three-year cumulative loss position. As a result of the cumulative loss position and changes in the Company's level of activity in various states, the Company has recorded a state valuation allowance of
$896
as of
December 31, 2016
and
$1,554
as of
December 31, 2015
. In future periods, the allowance could be adjusted if sufficient evidence exists indicating that it is more likely than not that a portion or all of these deferred tax assets will or will not be realized.
ASC 740-10,
Income Taxes
, requires financial statement recognition of the impact of a tax position if a position is more likely than not of being sustained on audit, based on the technical merits of the position. As of December 31, 2016, the Company accrued a liability for uncertain tax positions of
$254
against the Company’s state NOL carryforward balances. The following is a reconciliation of the ASC 740-10 unrecognized tax positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance at the beginning of year
|
$
|
583
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Increases/(decreases) for tax positions of prior years
|
(329
|
)
|
|
583
|
|
|
—
|
|
Balance at end of year
|
$
|
254
|
|
|
$
|
583
|
|
|
$
|
—
|
|
As of December 31, 2016, the Company had
$254
of gross unrecognized tax benefits which, if recognized, would affect our effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our uncertain tax positions will increase or decrease during the next 12 months; however, we do not expect the change to have a significant effect on our results of operations, financial condition or cash flows.
The Company is subject to U.S. federal income tax as well as income tax of multiple states and local jurisdictions. With a few insignificant exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2012.
18.
Commitments and Contingencies
Commitments to Extend Credit
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
The Company enters into IRLCs with customers who have applied for residential mortgage loans and meet certain credit and underwriting criteria. These commitments expose the Company to market risk if interest rates change and the loan is not economically hedged or committed to an investor. The Company is also exposed to credit loss if the loan is originated and not sold to an investor and the customer does not perform. The collateral upon extension of credit typically consists of a first deed of trust in the mortgagor’s residential property. Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. Total commitments to originate loans as of
December 31, 2016
and
December 31, 2015
approximated
$800,168
and
$1,169,768
, respectively, in estimated principal loan amount. The related fair value of these commitments are recognized in the consolidated balance sheet within either “Derivative assets" or "Derivative liabilities".
Leases
The Company leases office space and equipment under non-cancelable operating agreements expiring through October 2022. Rent expense related to continuing operations amounted to
$4,371
,
$5,621
and
$5,936
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Rent expense related to discontinued operations amounted to
$4,956
and
$3,301
for the years ended December 31,
2015
and
2014
, respectively. Future minimum rental payments under the leases having an initial or remaining non-cancelable term in excess of one year are as follows at
December 31, 2016
:
|
|
|
|
|
2017
|
$
|
6,532
|
|
2018
|
5,420
|
|
2019
|
3,888
|
|
2020
|
2,194
|
|
2021
|
1,487
|
|
Thereafter
|
1,239
|
|
Total minimum rental payments
1
|
$
|
20,760
|
|
1
Total minimum rental payments presented above do not include sublease revenue amounts. Sublease revenue amounts for the years 2017 through 2020 are
$763
,
$659
,
$567
and
$131
, respectively.
Regulatory Net Worth Requirements
The Company is subject to various regulatory capital requirements administered by the Department of Housing and Urban Development ("HUD"), which governs non-supervised, direct endorsement mortgagees, and GNMA, FNMA and FHLMC, which governs issuers of GNMA, FNMA and FHLMC securities. Additionally, the Company is required to maintain minimum net worth requirements for many of the states in which it sells and services loans. Each state has its own minimum net worth requirement; these range from
$0
to
$1,000
, depending on the state.
Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary remedial actions by regulators that, if undertaken, could (i) remove the Company’s ability to sell and service loans to or on behalf of the agencies and (ii) have a direct material effect on the Company’s financial statements. In accordance with the regulatory capital guidelines, the Company must meet specific quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Further, changes in regulatory and accounting standards, as well as the impact of future events on the Company’s results, may significantly affect the Company’s net worth adequacy.
The Company met all minimum net worth requirements to which it was subject as of
December 31, 2016
and
2015
. The Company’s required and actual net worth amounts are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Net Worth
1
|
|
Net Worth Required
|
|
Net Worth
1
|
|
Net Worth Required
|
HUD
|
$
|
253,532
|
|
|
$
|
2,500
|
|
|
$
|
254,725
|
|
|
$
|
2,500
|
|
GNMA
|
$
|
253,532
|
|
|
$
|
36,631
|
|
|
$
|
254,725
|
|
|
$
|
29,742
|
|
FNMA
|
$
|
253,532
|
|
|
$
|
12,617
|
|
|
$
|
254,725
|
|
|
$
|
16,172
|
|
FHLMC
|
$
|
253,532
|
|
|
$
|
9,794
|
|
|
$
|
254,725
|
|
|
$
|
13,624
|
|
Various States
|
$
|
253,532
|
|
|
$ 0-1,000
|
|
|
$
|
254,725
|
|
|
$ 0-1,000
|
|
1
Calculated in compliance with the respective agencies' or states' requirements.
Litigation
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
The Company is subject to various legal proceedings arising out of the ordinary course of business. As of
December 31, 2016
, there were
no
current or pending claims against the Company, which could have a material impact on the Company's statement of financial position, net income or cash flows. Any liabilities which are probable to occur and estimable have been recorded in the balance sheet.
Regulatory Contingencies
The Company is subject to periodic audits and examinations, both formal and informal in nature, from various federal and state agencies, including those made as part of regulatory oversight of our mortgage origination, servicing and financing activities. Such audits and examinations could result in additional actions, penalties or fines by state or federal governmental bodies, regulators or the courts with respect to our mortgage origination, servicing and financing activities, which may be applicable generally to the mortgage industry or to us in particular. During 2014, we received a report of examination from a state regulatory agency that certain fees that were charged to borrowers in connection with the origination of loans through our wholesale and retail channels were impermissible and must be refunded to such borrowers. The total amount of these fees is
$417
. The Company disagrees with the findings in the report of examination and has communicated its reasoning as to why the related fees are permissible to the state regulatory agency. However, there can be no assurance that the state regulatory agency will agree with our position and that we will not be ultimately required to refund the fees to the related borrowers.
Other Contingencies
During 2013, the Company became aware that it had purchased certain refinancing loans, with a total principal amount of
$5,163
, from a correspondent lender where the prior mortgage loan on the property securing the mortgage loan that was purchased from the correspondent was not satisfied and released by the correspondent’s title company at the time the loan from the correspondent was made. As part of the Company’s process in purchasing a mortgage loan from a correspondent, it generally requires that a closing protection letter be issued by the title insurer in favor of the borrower. A closing protection letter was obtained with respect to each of these purchased loans. As a result, the Company believes the borrower is insured against any liens prior to ours that were not identified in connection with the issuance of that closing protection letter. The Company believes that its procedures, including conducting a post-purchase audit, were effective in identifying the failure by the correspondent to obtain a release of the prior mortgage loan and that the Company’s practice of obtaining closing protection letters is appropriate to protect it in these situations. The Company reached a settlement with the title company during 2016. The Company received cash consideration in connection with this settlement, which was recognized in "Interest and other income" on its consolidated statements of operations. During the year ended December 31, 2016, the Company also recorded an impairment of the purchased loans in substantially the same amount as the settlement income recognized. This impairment was recorded in "General and administrative expense" on its consolidated statements of operations, and represented the carrying value of the purchased loans at the time of the settlement. As a result of recording the settlement income and the impairment for substantially the same amount, there was an immaterial impact to the Company's overall consolidated statements of operations.
19.
Capital Stock
Initial Public Offering
On October 16, 2013, the Company completed its initial public offering of
8,165,000
shares of common stock (including
1,065,000
shares exercised pursuant to an overallotment option granted to the underwriters) at a price to the public of
$16.00
per share, resulting in gross proceeds of approximately
$130,640
. The underwriting discounts and commissions related to this offering totaled
$6,712
and the Company incurred additional equity issuance costs totaling
$3,259
related to the initial public offering.
Equity Restructuring
On May 14, 2013, all outstanding shares of the Company’s convertible preferred stock (Series B, C and D) were converted into shares of the Company’s common stock on a
one
-for-one basis. On May 14, 2013, immediately following the conversion of preferred stock to common stock, each share of common stock held was split into
13.861519
shares of common stock.
On May 15, 2013, the Company sold
6,388,889
shares of its common stock at a per share price of
$18.00
, for total gross proceeds of
$115,000
, under a private offering under the exemptions of the Securities Act of 1933, as amended (the
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
“Securities Act”). The initial purchaser’s discount and placement fee related to the May 2013 offering totaled
$7,700
and the Company incurred additional equity issuance costs totaling
$2,700
related to the May 2013 offering.
Issuance of Warrants
On
March 29, 2013
, in conjunction with a
$10,000
term loan the Company entered into with a stockholder, the Company issued warrants to the stockholder for the right to purchase
277,777
shares of its common stock at a price of
$18.00
per share. The warrants are exercisable at any time through
May 15, 2018
. Because the warrants met the criteria of a derivative financial instrument that is indexed to the Company's own stock, the warrants' allocable fair value of
$1,522
was recorded as a component of "Additional paid in capital" and resulted in a debt discount in the same amount. The debt discount was fully amortized into interest expense upon the repayment of the term loan in full, resulting in
$1,522
of interest expense during the year ended
December 31, 2014
.
Use of Capital and Common Stock Repurchases
The Company had no preferred stockholders during the years ended
December 31, 2016
,
2015
and 2014. The Company does not expect to pay dividends on its common stock for the foreseeable future. The declaration of future dividends and the establishment of the per share amount, record dates and payment dates for any such future dividends are subject to the final determination of the Company’s Board of Directors and will be dependent upon future earnings, cash flows, financial requirements and other factors.
Common stock repurchases are discretionary as the Company is under no obligation to repurchase shares. The Company may repurchase shares when it believes it is a prudent use of capital. There were
no
repurchases of common stock during the years ended
December 31, 2016
,
2015
or 2014.
20. Stock-Based Compensation
During 2011, the Company adopted the 2011 Omnibus Incentive Plan (the “2011 Plan”) for employees, consultants and non-employee directors. The Plan provided for the grant of stock options (both incentive stock options and nonqualified stock options), stock appreciation rights ("SARs"), restricted stock, performance units, phantom stock, restricted stock units and stock awards.
On August 29, 2013, the Company adopted the 2013 Omnibus Incentive Plan (the "2013 Plan") for employees and consultants. The 2013 Plan provides for the grant of stock options (both incentive stock options and non-qualified stock options), SARs, restricted stock, restricted stock units, dividend equivalent rights, other stock-based or cash-based awards (collectively, “awards”), with each grant evidenced by an award agreement providing the terms of the award. Incentive stock options may be granted only to employees; all other awards may be granted to employees and consultants. Non-employee directors are not permitted to participate in the 2013 Plan. The 2013 Plan is applicable to all awards granted on or after August 29, 2013 and replaced the 2011 Plan. No new stock-based compensation grants were made under the 2011 Plan after the adoption of the 2013 Plan. The terms and conditions of awards granted under the 2011 Plan prior to the adoption of the 2013 will not be affected by the adoption of the 2013 Plan, and the 2011 Plan will remain effective with respect to such awards. Upon adoption on August 29, 2013, a total of
419,250
shares of the Company's common stock were reserved and available for issuance under the 2013 Plan, which included the
315,925
remaining number of shares available for grant under the 2011 Plan.
On June 29, 2016, the Company adopted the 2016 Omnibus Incentive Plan (the "2016 Plan") for employees and consultants. The 2016 Plan does not contain any material substantive differences from the 2013 Omnibus Incentive Compensation Plan (the "2013 Plan"), other than the shares available for issuance. Upon adoption on June 29, 2016, a total of
200,000
shares of the Company's common stock were reserved and available for issuance under the 2016 Plan. As of
December 31, 2016
,
104,418
shares and
100,000
shares were available for future grants under the 2013 Plan and 2016 Plan, respectively.
Additionally, on June 29, 2016, the Company amended the 2013 Non-Employee Director Plan to increase the number of shares available for issuance by
200,000
shares to
304,812
shares. As of
December 31, 2016
,
123,133
shares were available for future grants under this plan.
The Company’s current policy for issuing shares of its common stock upon exercise of stock options or vesting of restricted stock units is to either issue new shares or repurchase outstanding shares of its common stock to settle stock option exercises. The Company currently has no plans to repurchase shares of its common stock.
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
Stock Options
Nonqualified stock options are granted for a fixed number of shares with an exercise price at least equal to the fair value of the shares at the grant date. Nonqualified stock options generally vest over
four
equal installments and have a term of
ten years
from the grant date. Stock options granted do not contain any voting or dividend rights prior to exercise. The Company recognizes compensation expense associated with the stock option grants using the straight-line method over the requisite service period.
A summary of stock option activity for the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Underlying Options
|
|
Weighted Average
Exercise Price Per Share
|
|
Weighted Average
Remaining Contractual Life (Years)
|
|
Aggregate Intrinsic Value
|
Outstanding at December 31, 2015
|
361,594
|
|
|
$
|
13.72
|
|
|
|
|
|
|
Forfeited or expired
|
(53,740
|
)
|
|
15.69
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
307,854
|
|
|
13.37
|
|
|
6.0
|
|
$
|
203
|
|
Exercisable at December 31, 2016
|
256,265
|
|
|
$
|
12.44
|
|
|
5.9
|
|
$
|
203
|
|
There were no options exercised during the years ended December 31, 2016, 2015 or 2014.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted. There were no options granted during the years ended December 31, 2016 and 2015. The following assumptions were used to estimate the fair value of options granted during the year ended
December 31, 2014
:
|
|
|
|
|
|
Years Ended December 31,
|
|
2014
|
Fair value of underlying common stock
|
$
|
14.04
|
|
Volatility
|
41.30
|
%
|
Dividend yield
|
—
|
%
|
Risk-free interest rate
|
2.01
|
%
|
Expected term (years)
|
6.25
|
|
The weighted average grant-date fair value per share of the stock options granted during the year ended
December 31, 2014
was
$6.07
.
Volatility was estimated based on the historical volatility of comparable publicly traded companies. The dividend yield was based on an estimate of future dividend yields. The risk-free interest rate was based on the U.S. Treasury zero-coupon yield curve in effect at the time of the grants. The expected term was calculated for each grant using the simplified method, as the Company’s outstanding stock option grant met certain SEC criteria for the use of the simplified method.
A summary of the nonvested stock option activity for the year ended December 31, 2016 is as follows:
|
|
|
|
|
|
|
|
|
Number of Shares Underlying Options
|
|
Weighted Average Grant Date Fair Value Per Share
|
Nonvested at December 31, 2015
|
126,661
|
|
|
$
|
7.05
|
|
Vested
|
(51,588
|
)
|
|
7.27
|
|
Forfeited or expired
|
(23,484
|
)
|
|
6.07
|
|
Nonvested at December 31, 2016
|
51,589
|
|
|
$
|
7.27
|
|
Restricted Stock Units
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
Restricted stock units are granted for a fixed number of shares with a fair value equal to the fair value of the Company's common stock at the grant date and generally vest over
three
equal installments. Restricted stock units granted do not contain any voting or dividend rights prior to vesting. The Company recognizes compensation expense associated with the restricted stock units using the straight-line method over the requisite service period.
A summary of the restricted stock unit grants for each of the years in the period ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Units granted
|
418,379
|
|
|
151,843
|
|
|
10,448
|
|
Weighted average grant date fair value per share
|
$
|
4.90
|
|
|
$
|
8.82
|
|
|
$
|
13.65
|
|
Weighted average vesting period (years)
|
2.4
|
|
|
1.1
|
|
|
2.9
|
|
A summary of the nonvested restricted stock unit activity for the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted Average Grant Date Fair Value Per Share
|
Nonvested at December 31, 2015
|
94,630
|
|
|
$
|
9.37
|
|
Granted
|
418,379
|
|
|
4.90
|
|
Vested
|
(123,982
|
)
|
|
6.32
|
|
Forfeited
|
(11,737
|
)
|
|
17.04
|
|
Nonvested at December 31, 2016
|
377,290
|
|
|
$
|
5.16
|
|
The total fair value of restricted stock units converted into common stock was
$248
,
$89
and
$200
during the years ended
December 31, 2016
, 2015 and 2014, respectively.
During the years ended
December 31, 2016
,
2015
and
2014
, the Company recognized total stock-based compensation expense related to stock options and restricted stock units of
$1,403
, $
3,823
and
$3,253
, respectively. As of
December 31, 2016
,
2015
and
2014
, the Company recognized related tax benefits of
$1,724
,
$1,302
and
$2,087
, respectively. Total unrecognized stock-based compensation costs related to nonvested stock options and restricted stock units as of
December 31, 2016
was
$141
and
$1,502
, respectively, and will be recognized using the straight-line method over the weighted average remaining requisite service periods of
0.4
and
2.0
years, respectively.
21. Retirement Benefit Plans
The Company maintains 401(k) profit sharing plans covering substantially all employees. Employees may contribute amounts subject to certain IRS and plan limitations. The Company may make discretionary matching and non-elective contributions, subject to certain limitations. During the years ended
December 31, 2016
,
2015
and
2014
, the Company contributed
$1,800
,
$2,574
and
$1,873
, respectively, to the 401(k) profit sharing plans related to its continuing operations. During the years ended December 31,
2015
and
2014
, the Company contributed
$620
and
$402
, respectively, to the 401(k) profit sharing plans related to its discontinued operations. The Company did not contribute to the 401(k) profit sharing plans related to discontinued operations during the year ended
December 31, 2016
.
22.
Segment Information
The Company's organizational structure is currently comprised of
three
operating segments: Originations, Servicing
and Financing. This determination is based on the Company's current organizational structure, which reflects how the chief
operating decision maker evaluates the performance of the business and focuses primarily on the services performed.
The Originations segment primarily originates and sells residential mortgage loans, which conform to the underwriting
guidelines of the GSEs and government agencies and non-agency whole loan investors. The Servicing segment includes loan administration, collection and default activities, including the collection and remittance of loan payments, responding to customer inquiries, collection of principal and interest payments, holding custodial funds for the payment of property taxes and insurance premiums, counseling delinquent mortgagors, modifying loans and supervising foreclosures on the Company’s property dispositions. The Financing segment includes warehouse-lending activities to correspondent customers by the Company’s NattyMac subsidiary, which commenced operations in July 2013. Other/Eliminations includes intersegment eliminations and certain corporate income and expenses not allocated to the three reportable segments, such as those related to our accounting, executive administration, finance, internal audit, investor relations and legal departments.
The accounting policies of each reportable segment are the same as those of the Company. Certain consolidated back-office operations, such as risk and compliance, human resources, information technology, business processes and marketing, are
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
allocated to each individual segment. Expenses are allocated to individual segments based on the estimated value of services performed, including estimated utilization of square footage and corporate personnel.
Financial highlights by segment are as follows:
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
December 31, 2016
|
|
December 31, 2015
|
Originations
|
$
|
589,938
|
|
|
$
|
647,287
|
|
Servicing
|
391,967
|
|
|
353,097
|
|
Financing
|
158,199
|
|
|
232,061
|
|
Other/Eliminations
1
|
36,638
|
|
|
48,181
|
|
Total
|
$
|
1,176,742
|
|
|
$
|
1,280,626
|
|
1
Includes intersegment eliminations and assets not allocated to the
three
reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Originations
|
|
Servicing
|
|
Financing
|
|
Other/Eliminations
|
|
Consolidated
|
Revenues
|
|
|
|
|
|
|
|
|
|
Gains on mortgage loans held for sale, net
|
$
|
117,068
|
|
|
$
|
1,168
|
|
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
$
|
118,226
|
|
Changes in mortgage servicing rights valuation
|
—
|
|
|
(12,666
|
)
|
|
—
|
|
|
—
|
|
|
(12,666
|
)
|
Payoffs and principal amortization of mortgage servicing rights
|
—
|
|
|
(34,247
|
)
|
|
—
|
|
|
—
|
|
|
(34,247
|
)
|
Loan origination and other loan fees
|
19,661
|
|
|
—
|
|
|
1,751
|
|
|
21
|
|
|
21,433
|
|
Loan servicing fees
|
—
|
|
|
50,233
|
|
|
—
|
|
|
—
|
|
|
50,233
|
|
Interest income
|
20,504
|
|
|
618
|
|
|
7,535
|
|
|
4,323
|
|
|
32,980
|
|
Total revenues
|
157,233
|
|
|
5,106
|
|
|
9,286
|
|
|
4,334
|
|
|
175,959
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Salaries, commissions and benefits
|
62,272
|
|
|
6,518
|
|
|
1,715
|
|
|
24,933
|
|
|
95,438
|
|
General and administrative expense
|
10,306
|
|
|
2,654
|
|
|
855
|
|
|
16,039
|
|
|
29,854
|
|
Interest expense
|
18,189
|
|
|
2,760
|
|
|
2,235
|
|
|
4,079
|
|
|
27,263
|
|
Occupancy, equipment and communication
|
7,710
|
|
|
1,663
|
|
|
244
|
|
|
6,874
|
|
|
16,491
|
|
Depreciation and amortization
|
7,837
|
|
|
575
|
|
|
407
|
|
|
1,295
|
|
|
10,114
|
|
Corporate allocations
|
22,018
|
|
|
3,468
|
|
|
506
|
|
|
(25,992
|
)
|
|
—
|
|
Total expenses
|
128,332
|
|
|
17,638
|
|
|
5,962
|
|
|
27,228
|
|
|
179,160
|
|
Income (loss) from continuing operations before taxes
|
$
|
28,901
|
|
|
$
|
(12,532
|
)
|
|
$
|
3,324
|
|
|
$
|
(22,894
|
)
|
|
$
|
(3,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
Originations
|
|
Servicing
|
|
Financing
|
|
Other/Eliminations
|
|
Consolidated
|
Revenues
|
|
|
|
|
|
|
|
|
|
Gains on mortgage loans held for sale, net
|
$
|
142,772
|
|
|
$
|
(1,088
|
)
|
|
$
|
—
|
|
|
$
|
135
|
|
|
$
|
141,819
|
|
Changes in mortgage servicing rights valuation
|
—
|
|
|
(30,395
|
)
|
|
—
|
|
|
—
|
|
|
(30,395
|
)
|
Payoffs and principal amortization of mortgage servicing rights
|
—
|
|
|
(41,529
|
)
|
|
—
|
|
|
—
|
|
|
(41,529
|
)
|
Loan origination and other loan fees
|
22,751
|
|
|
—
|
|
|
1,205
|
|
|
—
|
|
|
23,956
|
|
Loan servicing fees
|
—
|
|
|
54,772
|
|
|
—
|
|
|
—
|
|
|
54,772
|
|
Interest income
|
26,729
|
|
|
124
|
|
|
7,111
|
|
|
153
|
|
|
34,117
|
|
Total revenues
|
192,252
|
|
|
(18,116
|
)
|
|
8,316
|
|
|
288
|
|
|
182,740
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, commissions and benefits
|
78,885
|
|
|
8,200
|
|
|
1,962
|
|
|
27,294
|
|
|
116,341
|
|
General and administrative expense
|
13,851
|
|
|
2,063
|
|
|
866
|
|
|
15,480
|
|
|
32,260
|
|
Interest expense
|
19,347
|
|
|
7,904
|
|
|
3,259
|
|
|
553
|
|
|
31,063
|
|
Occupancy, equipment and communication
|
7,422
|
|
|
1,976
|
|
|
250
|
|
|
7,222
|
|
|
16,870
|
|
Depreciation and amortization
|
5,581
|
|
|
455
|
|
|
411
|
|
|
1,533
|
|
|
7,980
|
|
Corporate allocations
|
25,313
|
|
|
3,571
|
|
|
361
|
|
|
(29,245
|
)
|
|
—
|
|
Total expenses
|
150,399
|
|
|
24,169
|
|
|
7,109
|
|
|
22,837
|
|
|
204,514
|
|
Income (loss) from continuing operations before taxes
|
$
|
41,853
|
|
|
$
|
(42,285
|
)
|
|
$
|
1,207
|
|
|
$
|
(22,549
|
)
|
|
$
|
(21,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
Originations
|
|
Servicing
|
|
Financing
|
|
Other/Eliminations
|
|
Consolidated
|
Revenues
|
|
|
|
|
|
|
|
|
|
Gains on mortgage loans held for sale, net
|
$
|
133,405
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
133,390
|
|
Changes in mortgage servicing rights valuation
|
—
|
|
|
(55,842
|
)
|
|
—
|
|
|
—
|
|
|
(55,842
|
)
|
Payoffs and principal amortization of mortgage servicing rights
|
—
|
|
|
(23,735
|
)
|
|
—
|
|
|
—
|
|
|
(23,735
|
)
|
Loan origination and other loan fees
|
24,193
|
|
|
—
|
|
|
455
|
|
|
(67
|
)
|
|
24,581
|
|
Loan servicing fees
|
—
|
|
|
44,407
|
|
|
—
|
|
|
—
|
|
|
44,407
|
|
Interest income
|
32,271
|
|
|
—
|
|
|
3,280
|
|
|
(315
|
)
|
|
35,236
|
|
Total revenues
|
189,869
|
|
|
(35,170
|
)
|
|
3,735
|
|
|
(397
|
)
|
|
158,037
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Salaries, commissions and benefits
|
84,722
|
|
|
5,972
|
|
|
1,726
|
|
|
23,780
|
|
|
116,200
|
|
General and administrative expense
|
10,593
|
|
|
1,378
|
|
|
596
|
|
|
21,978
|
|
|
34,545
|
|
Interest expense
|
21,904
|
|
|
3,251
|
|
|
1,049
|
|
|
(197
|
)
|
|
26,007
|
|
Occupancy, equipment and communication
|
6,793
|
|
|
1,794
|
|
|
231
|
|
|
5,783
|
|
|
14,601
|
|
Depreciation and amortization
|
1,093
|
|
|
84
|
|
|
479
|
|
|
3,392
|
|
|
5,048
|
|
Corporate allocations
|
26,619
|
|
|
3,279
|
|
|
160
|
|
|
(30,058
|
)
|
|
—
|
|
Total expenses
|
151,724
|
|
|
15,758
|
|
|
4,241
|
|
|
24,678
|
|
|
196,401
|
|
Income (loss) from continuing operations before taxes
|
$
|
38,145
|
|
|
$
|
(50,928
|
)
|
|
$
|
(506
|
)
|
|
$
|
(25,075
|
)
|
|
$
|
(38,364
|
)
|
23. Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
2016
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
4,976
|
|
|
$
|
26,494
|
|
|
$
|
66,277
|
|
|
$
|
78,212
|
|
Total expenses
|
|
$
|
44,282
|
|
|
$
|
43,617
|
|
|
$
|
50,421
|
|
|
$
|
40,840
|
|
(Loss) income from continuing operations before income tax expenses
|
|
$
|
(39,306
|
)
|
|
$
|
(17,123
|
)
|
|
$
|
15,856
|
|
|
$
|
37,372
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(37,523
|
)
|
|
$
|
(17,152
|
)
|
|
$
|
15,574
|
|
|
$
|
36,019
|
|
(Loss) income from discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net (loss) income
|
|
$
|
(37,523
|
)
|
|
$
|
(17,152
|
)
|
|
$
|
15,574
|
|
|
$
|
36,019
|
|
Basic (loss) earnings per share
1
:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.45
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
0.60
|
|
|
$
|
1.39
|
|
From discontinued operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total basic (loss) earnings per share
|
|
$
|
(1.45
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
0.60
|
|
|
$
|
1.39
|
|
Diluted (loss) earnings per share
1
:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.45
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
0.60
|
|
|
$
|
1.39
|
|
From discontinued operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total diluted (loss) earnings per share
|
|
$
|
(1.45
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
0.60
|
|
|
$
|
1.39
|
|
2015
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
34,920
|
|
|
$
|
75,446
|
|
|
$
|
25,557
|
|
|
$
|
46,817
|
|
Total expenses
|
|
$
|
50,799
|
|
|
$
|
54,702
|
|
|
$
|
54,852
|
|
|
$
|
44,161
|
|
(Loss) income from continuing operations before income tax expenses
|
|
$
|
(15,879
|
)
|
|
$
|
20,744
|
|
|
$
|
(29,295
|
)
|
|
$
|
2,656
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(9,668
|
)
|
|
$
|
12,564
|
|
|
$
|
(20,190
|
)
|
|
$
|
1,053
|
|
(Loss) income from discontinued operations, net of tax
|
|
$
|
(1,451
|
)
|
|
$
|
(1,430
|
)
|
|
$
|
(2,614
|
)
|
|
$
|
(534
|
)
|
Net (loss) income
|
|
$
|
(11,119
|
)
|
|
$
|
11,134
|
|
|
$
|
(22,804
|
)
|
|
$
|
519
|
|
Basic (loss) earnings per share
1
:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.38
|
)
|
|
$
|
0.49
|
|
|
$
|
(0.78
|
)
|
|
$
|
0.04
|
|
From discontinued operations
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.02
|
)
|
Total basic (loss) earnings per share
|
|
$
|
(0.43
|
)
|
|
$
|
0.43
|
|
|
$
|
(0.88
|
)
|
|
$
|
0.02
|
|
Diluted (loss) earnings per share
1
:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.38
|
)
|
|
$
|
0.49
|
|
|
$
|
(0.78
|
)
|
|
$
|
0.04
|
|
From discontinued operations
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.02
|
)
|
Total diluted (loss) earnings per share
|
|
$
|
(0.43
|
)
|
|
$
|
0.43
|
|
|
$
|
(0.88
|
)
|
|
$
|
0.02
|
|
1
Basic and diluted earnings (loss) per share are computed independently for each of the quarters presented. Therefore, the sum of the quarters' earnings (loss) per share may not equal the total computed for the year.
24.
Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through March 9, 2017, the date on which the financial statements were issued.
Stonegate Mortgage Corporation
Notes to Consolidated Financial Statements
December 31, 2016
Proposed Merger with Home Point Financial
As discussed in Note 1, "Organization and Operations", on January 26, 2017, the Company entered into a Merger Agreement with Home Point Financial and Merger Sub, pursuant to which Merger Sub will merge with and into the Company, with the Company as the surviving entity. Under the terms of the Merger Agreement, each outstanding share of our common stock (other than certain excluded shares) will be converted into the right to receive
$8.00
in cash, without interest, less any applicable tax withholdings, which represents a per share premium of approximately
61 percent
over our
90
-day volume weighted average price on January 26, 2017 and
34 percent
over our closing price per share on January 26, 2017.
The Company's Board of Directors unanimously approved the Merger following a comprehensive review of the transaction and strategic alternatives. The Merger is subject to certain customary closing conditions, including, among other things, approval by the Company's stockholders and regulatory approvals. The Merger is expected to close by the end of the second quarter of 2017.
In connection with the entry by the Company into the Merger Agreement, on January 26, 2017, the Board of Directors of the Company adopted a Tax Asset Protection Plan (the “Plan”) with Broadridge Corporate Issuer Solutions, Inc., as Rights Agent. The Plan is designed to protect the Company's tax assets during the period prior to the closing of the Merger. As of
December 31, 2016
, the Company had approximately
$183.0 million
in net operating loss carryforwards for U.S. federal income tax purposes.
Other Subsequent Events
On January 6, 2017 the Company amended its mortgage repurchase financing agreement with EverBank to extend the maturity date to January 5, 2018.
On January 18, 2017 the Company amended its mortgage repurchase agreement with Wells Fargo Bank N.A. to extend the maturity date to January 30, 2018.
On February 21, 2017 the Company amended its agreements with Barclays Bank to extend the maturity date to July 31, 2017.