I was poking around this week to see if there is a standard format for generating mortgage bank financial statements.  Over the past several years, we’ve visited over a 100 mortgage banks conducting FOCIS or FOCIS-plus reviews and have seen an array of financial statement formats.  What we’ve found is there is no standard format approach for interim financial statements.  Everyone states they use GAAP, but this isn't what I mean. I am referring to how revenues and expenses are grouped on your financials. Often times this data is organized in a manner that makes weekly/daily measurements and benchmarking difficult to absorb. 

The two areas that appear to be inconsistent are revenue details and loan level expenses. 

Let’s discuss these two areas:

1. Revenues:  As we review companies, we find over 60% of the P&Ls summarize all the revenues into two categories:  Loan fees and interest.  Loan fees include loan origination, gain-on-sale, hedging gain/loss, servicing income, processing fees, doc prep fees, and incidental fees. Interest is displayed as revenue, but the interest paid to warehouse banks is shown as a G&A expense. 

We believe it is critical to segregate all revenues as line items on the financial statements. Without breaking out the revenues, there is no way for management, shareholders and creditors to identify potential problems within an organization.

For example, if secondary market gain-on-sale is declining for 3 months in a row, a P&L with summary revenues would not identify the specific reason for the overall decline in revenues. 

Another example is a summary financial statement may not catch a decline in loan origination fees.  Revenues would be declining, but the root of the decline may not be clear. 

2. Loan Level Expenses:  Another area of the P&L needing attention is where loan level expenses should be displayed.  We believe loan level expenses are “Cost of Goods or Cost to Produce” and should be noted in the revenue area of the P&L.  Expenses include loan officer commission, fees paid to investors, automated underwriting fees, document preparation fees, etc.   Most of the time, we see mortgage bankers reflecting loan level costs in the expense area of the financial statement.

Recently we found loan officer commissions and salaries all lumped together in expenses as compensation.  This approach distorts the cost of origination and prevents management and the board from measuring a key component of a mortgage bank – commissions paid to loan officers.

It’s hard to manage a company without have the details of revenues, cost of goods sold and expenses.   Appropriate placement of the details on the P&L is equally important.  Without the details and relevant format, management, boards and shareholders may have difficultly identifying problems and opportunities.