LUM Income Statement Analysis

You can download the LUM Income Statement here.


The income statement is split between Interest Income and other income as the company’s revenue. The costs are labeled as Expenses. Once income is totaled they will total expenses they will deduct expenses and income taxes to arrive at the net income. The interest income consists of...







Mortgage loan and securitization portfolio: This is the interest income received from the pool of mortgage loans as well as the interest coupon from MBS’s (cell B11).



Spread Portfolio: This is the income received from investments in US agency and other AAA rated single family, adjustable rate and hybrid adjustable rate mortgage securities.



Credit sensitive bond portfolio: This is the interest income received from credit sensitive residential MBS’s where LUM did not contribute collateral. These MBS’s have credit ratings below AAA.







Once the different interest incomes are determined they are added to calculate the total interest income of which interest expense is then deducted ( these are from commercial papers and notes the company issues, for further details see the liabilities section of the balance sheet). Now we need to add other income(expenses).





Realized and unrealized gains (losses) on derivative instruments, net: The Company enters into derivatives contracts to hedge a specific part of the portfolio. Even if the hedge was effective it could still be reported as a loss. This entry on the income statement simply shows that if the derivative contracts were sold in the market before the term was expired, what was the profit or loss relative to the price paid (see cell B20).



Impairment losses on mortgage-backed securities: This part of the income statement describes the total losses from delinquent mortgages which affected the MBS portfolio. For example, a Mortgage bond which is exposed to a particular high risk geographical area losses $ 1million in value because of delinquencies, this will be the figure on the income statement.



Gains (losses) on sales of mortgage-backed securities, net: This should not be confused with the above entry, where losses are due to actual default of mortgages which make up the MBS’s. This entry is simply the profit or loss of mortgage securities which were bought as investments and sold. If the MBS securities were sold lower than what they were bought, it would be reported as a loss and vice versa. The change in value of MBS could be attributed to various reasons such as changes of interest rates in the economy, credit risk, demand and supply as well as changes in prepayment speeds. (This will be discussed further in the forthcoming article on MBS securities).



We can split the above entries from rows 20 to 23 as the income or expenses of the “value” of the portfolio and rows 11-16 as income from “interest received” from the portfolio. A portfolio’s total return is split into the dividend income and capital appreciation. A similar analogy can placed here.



Management compensation, incentive compensation and salaries can be simply viewed as the “labor costs” of the company. This is similar to wages, salaries and related costs for ExpressJet (See ExpressJet Income Statement) and General and administrative expenses for W&T Offshore (See WTI Income statement). A finance and investment company will display this differently because incentives and bonuses are a major factor in the profitability of an investment company. A much larger proportion of wages at LUM will be devoted to employees who have to make actual strategic decisions, in comparison to WTI and XJT where a lot of labor and services are used.



Servicing expense(row 31) is simply the expense associated with owning securities, this can be viewed as the management fee if a person owns apartments inside a building. An investment company needs to pay servicing fees to a prime broker to transfer the securities as well as pay brokerage fees when securities are bought and sold. Other fees include reconciliation and back office, where most prime brokers provide the service.



Provisions for loan losses:- This should also not be confused with Impairment losses and Gain (losses on sales of MBS’s described above. Here we are dealing purely with losses associated with defaults on non securitized mortgages that LUM owns and not losses on mortgage backed securities. In the income statement we described the first entry as Mortgage loan and securitization portfolio, this loss is from the mortgage loan and not the securitization portfolio.



Professional services includes legal and accounting services.



Insurance expense:- The Company by law requires mortgage insurance on all loans with loan to value ratios exceeding 80% and in certain pools they purchase supplemental insurance down to 75% of loan to value ratio (this is described on page 2 of the 2006 annual report).