Net interest income declines
BB&T’s (BBT) Residential Mortgage Banking segment’s net interest income for 2014 decreased, primarily due to lower average loan balances. A decrease in loan balances is consistent with the company’s current strategy of selling substantially all conforming mortgage loan production. This mitigates interest rate risk associated with holding the loans.
A conforming mortgage is said to be one that conforms to Fannie Mae and Freddie Mac guidelines relating to the size of the loan, borrower’s loan-to-value ratio, debt-to-income ratio, credit history, and documentation.
The challenging market impacted BB&T’s originations as well. Mortgage originations totaled $17.4 billion in 2014. This was a decrease of $14.2 billion compared to 2013. The trends in mortgage originations are impacting other banks including SunTrust Bank (STI), Regions Financial (RF), and big banks like JPMorgan Chase (JPM). Financial sector ETFs are also impacted—like the Financial Select Sector SPDR ETF (XLF) and the iShares U.S. Financials ETF (IYF).
The above graph shows BB&T’s Residential Mortgage Banking segment’s net-interest income, non-interest revenue, and net income.
Decline in non-interest income
Non-interest income is showing a huge decline. The decline is driven by lower fee income on originations due to lower volumes. It also decreased due to lower gains on the sale of loans. Depressed demand for mortgages resulted in increased competition among providers. This resulted in lower premiums or gains on sold mortgages.
The decrease was partially offset by an increase in net servicing income. This was primarily due to slower prepayment speeds and an increase in the servicing portfolio.
For 2014, the non-interest expense increased. This reflected a $27 million charge related to the ongoing review of mortgage processes. The expenses also increased due to adjustments totaling $118 million in 2Q14. The adjustments were related to FHA (Federal Housing Administration) insured loan exposures. The company created a reserve related to its FHA-insured loans based on its expectations of an ongoing audit outcome by FHA.
As a result of the decrease in non-interest and net interest income, combined with a simultaneous increase in expenses, Residential Mortgage Banking’s net income decreased 46.7% compared to 2013.