UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172018
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission File Number: 001-16577
(Exact name of registrant as specified in its charter).
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| Michigan | | 38-3150651 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| Incorporation or organization) | | Identification No.) |
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| 5151 Corporate Drive, Troy, Michigan | | 48098-2639 |
| (Address of principal executive offices) | | (Zip code) |
(248) 312-2000
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | ¨ | Accelerated filer | ý |
| Non-accelerated filer | o (Do not check if smaller reporting company) | Smaller reporting company | ¨ |
| | | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý.
As of NovemberAugust 2, 20172018, 57,181,53657,599,907 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.
FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20172018
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| Item 1. | | |
| | Consolidated Statements of Financial Condition – SeptemberJune 30, 20172018 (unaudited) and December 31, 20162017 (unaudited) | |
| | Consolidated Statements of Operations – For the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 (unaudited) | |
| | Consolidated Statements of Comprehensive Income – For the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 (unaudited) | |
| | Consolidated Statements of Stockholders’ Equity – For the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (unaudited) | |
| | Consolidated Statements of Cash Flows – For the ninesix months ended SeptemberJune 30, 20172018 and 20162017 (unaudited) | |
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| Item 3. | | |
| Item 4. | | |
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| Item 1A. | | |
| Item 2. | | |
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| Item 4. | | |
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GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The following list of abbreviations and acronyms are provided as a tool for the reader and may be used throughout this Report, including the Consolidated Financial Statements and Notes: |
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| Term | | Definition | | Term | | Definition |
| AFS | | Available for Sale | | HELOC | | Home Equity Lines of Credit |
| Agencies | | Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association, Collectively | | HELOAN | | Home Equity Loan |
| ALCO | | Asset Liability Committee | | Home equityHOLA | | second mortgages, HELOANs, HELOCsHome Owners Loan Act |
| ALLL | | Allowance for Loan & Lease Losses | | HTMHome equity | | Held to MaturitySecond Mortgages, HELOANs, HELOCs |
| AOCI | | Accumulated Other Comprehensive Income (Loss) | | LIBORHTM | | London Interbank Offered RateHeld to Maturity |
| ASU | | Accounting Standards Update | | LHFILIBOR | | Loans Held-for-InvestmentLondon Interbank Offered Rate |
| Basel III | | Basel Committee on Banking Supervision Third Basel Accord | | LHFSLHFI | | Loans Held-for-SaleHeld-for-Investment |
| C&I | | Commercial and Industrial | | LTVLHFS | | Loan-to-ValueLoans Held-for-Sale |
| CDARS | | Certificates of Deposit Account Registry Service | | LTV | | Loan-to-Value Ratio |
| CET1 | | Common Equity Tier 1 | | Management | | Flagstar Bancorp’s Management |
| CFPB | | Consumer Financial Protection Bureau | | MBIA | | MBIA Insurance Corporation |
| CLTV | | Combined Loan to Value Ratio | | MBS | | Mortgage-Backed Securities |
| Common Stock | | Common Shares | | MD&A | | Management's Discussion and Analysis |
| CRE | | Commercial Real Estate | | MSR | | Mortgage Servicing Rights |
DFASTDCB | | Dodd-Frank Stress TestDesert Community Bank | | N/A | | Not Applicable |
DOJDFAST | | United States Department of JusticeDodd-Frank Stress Test | | NYSE | | New York Stock Exchange |
DTADOJ | | Deferred Tax AssetUnited States Department of Justice | | OCC | | Office of the Comptroller of the Currency |
| DTA | | Deferred Tax Asset | | OTTI | | Other-Than-Temporary-Impairment |
| EVE | | Economic Value of Equity | | OTTIQTL | | Other-Than-Temporary-ImpairmentQualified Thrift Lending |
Fannie Mae/FNMAMae | | Federal National Mortgage Association | | QTLREO | | Qualified Thrift LendingReal estate and other nonperforming assets, net |
| FASB | | Financial Accounting Standards Board | | RWA | | Risk Weighted Assets |
| FDIC | | Federal Deposit Insurance Corporation | | SEC | | Securities and Exchange Commission |
FEMAFHA | | Federal Emergency Management AgencyHousing Administration | | SFR | | Single Family Residence |
FHAFHLB | | Federal Housing AdministrationHome Loan Bank | | TARP Preferred | | Troubled Asset Relief Program Fixed Rate Cumulative Perpetual Preferred Stock, Series C |
FHLBFICO | | Federal Home Loan BankFair Isaac Corporation | | TDR | | Trouble Debt Restructuring |
FICOFRB | | Fair Isaac CorporationFederal Reserve Bank | | UPB | | Unpaid Principal Balance |
FRBFreddie Mac | | Federal Reserve BankHome Loan Mortgage Corporation | | U.S. Treasury | | United States Department of Treasury |
Freddie MacFTE | | Federal Home Loan Mortgage CorporationFull Time Equivalent Employees | | VIE | | Variable Interest Entities |
FTE | | Full Time Equivalent | | XBRL | | eXtensible Business Reporting Language |
| GAAP | | United States Generally Accepted Accounting Principles | | XBRL | | eXtensible Business Reporting Language |
PART I. FINANCIAL INFORMATION
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| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following is Management's Discussion and Analysis of the financial condition and results of operations of Flagstar Bancorp, Inc. for the thirdsecond quarter of 2017,2018, which should be read in conjunction with the financial statements and related notes set forth in Part I, Item 1 of this Form 10-Q and Part II, Item 8 of Flagstar Bancorp, Inc.'s 2016 Annual Report onExhibit 99.1 to our June 1, 2018 Form 10-K for the year ended December 31, 2016.8-K Report.
Certain statements in this Form 10-Q, including but not limited to statements included within the Management’s Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements are based on the current beliefs and expectations of our management. Actual results may differ from those set forth in forward-looking statements. See Forward-Looking Statements on page 3835 of this Form 10-Q and Part I, Item 1A, Risk Factors of Flagstar Bancorp, Inc.'s 20162017 Annual Report oron Form 10-K for the year ended December 31, 2016.2017. Additional information about Flagstar can be found on our website at www.flagstar.com.
Where we say "we," "us," "our," the "Company," "Bancorp" or "Flagstar," we usually mean Flagstar Bancorp, Inc. However, in some cases, a reference to "we," "us," "our," the "Company" or "Flagstar" will include our wholly-owned subsidiary Flagstar Bank, FSB (the "Bank"). See the Glossary of Abbreviations and Acronyms on page 3 for definitions used throughout this Form 10-Q.
Introduction
We are a leading Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. Based on our assets at September 30, 2017, we are one of the largest banks headquartered in Michigan, providingWe provide commercial small business, and consumer banking services and we are the 5th largest bank mortgage originator in the nation. At SeptemberJune 30, 2017,2018, we had 3,4953,682 full-time equivalent employees inclusive of account executives and loan officers.employees. Our common stock is listed on the NYSE under the symbol "FBC." As of SeptemberAt June 30, 2017,2018, we arewere no longer considered a controlled company"controlled company" for NYSE purposes, because approximately 62.3 percent ofas on June 14, 2018, our common stock is owned byformer majority shareholder, MP Thrift Investments L.P. which is managed by MatlinPatterson,, completed a leading global alternative asset manager.secondary offering of eight million shares of common stock, reducing their common stock ownership from approximately 62 percent to 48 percent.
We have a unique, relationship-based business model which leverages our full-service bank’s capabilities with our national mortgage customer baseplatform to create and build enduring commercialfinancial relationships with growth opportunities. Our banking network emphasizes the delivery of a complete set of banking and mortgage products and services and we distinguish ourselves by crafting specialized solutions for our customers, local delivery, high quality customer service and competitive product pricing. Our community bank growth model has focused on attracting seasoned bankers with larger, regional bank lending experience who can bring their long-term customer relationships to Flagstar.customers. At SeptemberJune 30, 2017,2018, we operated 99107 full service banking branches throughout Michigan's major markets where wethat offer a full set of banking products to consumer, commercial, and government customers. Our banking footprint spans throughout Michigan and contiguous states as well as the high desert region of California.
We originate mortgages through a wholesale network of brokers and correspondents in all 50 states, as well as 95and our own loan officers from 88 retail locations in 2731 states representing the combined retail branchesand two call centers, which includes our direct-to-consumer lending team. Flagstar is also a leading national servicer of Flagstarmortgage loans and Opes Advisors' mortgage division. The Bank has the opportunity to expand these relationships by providing warehouseprovides complementary ancillary offerings including, MSR lending, mortgage servicing advance lending and other services to our third party originators.recapture services. Servicing and subservicing of loans provides fee income and generates a stable long-term source of funding through company controlledcustodial deposits.
In the second quarter 2018, we signed a definitive agreement to acquire 52 Wells Fargo branches in Indiana, Michigan, Wisconsin and Ohio. We believe our transformation into a strong commercial bank, our flexible mortgage servicing platform, and focus on service creates a significant competitive advantageexpect to close this transaction late in the markets in which we compete. The management team we have assembled is focused on developing substantial and attractive growth opportunities that generate profitable results from operations. We believe our lower risk profile and strong capital level position us to take advantagefourth quarter of opportunities to deliver attractive shareholder returns over the long term.2018.
Operating Segments
Our operations are conducted through our three operating segments: Community Banking, Mortgage Originations, and Mortgage Servicing. Additionally, our Other segment includes the remaining reported activities. For additional information, please see MD&A - Operating Segments and Note 1918 - Segment Information.
Selected Financial Ratios
(Dollars in millions, except share data)
| | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | 2018 | | 2017 | | 2018 | | 2017 |
| | 2017 | | 2016 (1) | | 2017 | | 2016 (1) | (In millions, except per share data and percentages) |
| Selected Mortgage Statistics: | | | | | | | | | | | | | | |
Mortgage rate lock commitments (fallout-adjusted) (2) | $ | 8,898 |
| | $ | 8,291 |
| | $ | 23,896 |
| | $ | 23,281 |
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Mortgage rate lock commitments (fallout-adjusted) (1) | | $ | 9,011 |
| | $ | 9,002 |
| | $ | 16,734 |
| | $ | 14,998 |
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| Mortgage loans sold and securitized | 8,924 |
| | 8,723 |
| | 22,397 |
| | 23,611 |
| 9,260 |
| | 8,989 |
| | 16,506 |
| | 13,473 |
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| Selected Ratios: | | | | | | | | | | | | | | |
| Interest rate spread | 2.58 | % | | 2.36 | % | | 2.56 | % | | 2.43 | % | |
Interest rate spread (2) | | 2.58 | % | | 2.59 | % | | 2.56 | % | | 2.55 | % |
| Net interest margin | 2.78 | % | | 2.58 | % | | 2.74 | % | | 2.62 | % | 2.86 | % | | 2.77 | % | | 2.81 | % | | 2.72 | % |
| Return on average assets | 0.99 | % | | 1.61 | % | | 0.94 | % | | 1.40 | % | 1.12 | % | | 1.04 | % | | 0.97 | % | | 0.91 | % |
| Return on average equity | 11.10 | % | | 16.53 | % | | 10.23 | % | | 12.59 | % | 13.45 | % | | 11.57 | % | | 11.73 | % | | 9.77 | % |
| Return on average common equity | 11.10 | % | | 17.45 | % | | 10.23 | % | | 14.52 | % | |
| Equity/assets ratio (average for the period) | 8.95 | % | | 9.75 | % | | 9.16 | % | | 11.05 | % | |
| Equity-to-assets ratio (average for the period) | | 8.29 | % | | 9.02 | % | | 8.28 | % | | 9.29 | % |
| Efficiency ratio | 73.5 | % | | 59.9 | % | | 73.9 | % | | 66.9 | % | 74.4 | % | | 72.0 | % | | 76.9 | % | | 74.2 | % |
| Effective tax provision rate | 32.4 | % | | 34.3 | % | | 32.3 | % | | 33.8 | % | 20.4 | % | | 31.8 | % | | 20.2 | % | | 32.3 | % |
| Average Balances: | | | | | | | | | | | | | | |
| Average common shares outstanding | 57,162,025 |
| | 56,580,238 |
| | 57,062,696 |
| | 56,556,188 |
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| Average fully diluted shares outstanding | 58,186,593 |
| | 57,933,806 |
| | 58,133,296 |
| | 57,727,262 |
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| Average interest-earning assets | $ | 14,737 |
| | $ | 12,318 |
| | $ | 13,709 |
| | $ | 11,944 |
| $ | 15,993 |
| | $ | 14,020 |
| | $ | 15,675 |
| | $ | 13,187 |
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| Average interest paying liabilities | $ | 12,297 |
| | $ | 9,773 |
| | $ | 11,481 |
| | $ | 9,600 |
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| Average interest-paying liabilities | | 13,164 |
| | 11,804 |
| | 13,069 |
| | 11,066 |
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| Average stockholders' equity | $ | 1,471 |
| | $ | 1,379 |
| | $ | 1,412 |
| | $ | 1,515 |
| 1,475 |
| | 1,418 |
| | 1,445 |
| | 1,382 |
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| | | | | | | | | June 30, 2018 | | December 31, 2017 | | June 30, 2017 |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2016 (1) | (In millions, except per share data and percentages) |
| Selected Statistics: | | | | | | | | | | |
| Book value per common share | $ | 25.38 |
| | $ | 23.50 |
| | $ | 22.72 |
| $ | 25.61 |
| | $ | 24.40 |
| | $ | 24.64 |
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Tangible book value per share (3)
| $ | 25.01 |
| | $ | 23.50 |
| | $ | 22.72 |
| $ | 24.37 |
| | $ | 24.04 |
| | $ | 24.29 |
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| Number of common shares outstanding | 57,181,536 |
| | 56,824,802 |
| | 56,597,271 |
| 57,598,406 |
| | 57,321,228 |
| | 57,161,431 |
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| Equity-to-assets ratio | 8.60 | % | | 9.50 | % | | 9.01 | % | |
| Common equity-to-assets ratio | 8.60 | % | | 9.50 | % | | 9.01 | % | 8.14 | % | | 8.27 | % | | 8.82 | % |
| Capitalized value of MSRs | 1.15 | % | | 1.07 | % | | 0.96 | % | |
| Capitalized value of mortgage servicing rights | | 1.34 | % | | 1.16 | % | | 1.14 | % |
Bancorp Tier 1 leverage (to adjusted avg. total assets) (4) | 8.80 | % | | 8.88 | % | | 8.88 | % | 8.65 | % | | 8.51 | % | | 9.10 | % |
Bank Tier 1 leverage (to adjusted avg. total assets) | 9.38 | % | | 10.52 | % | | 10.55 | % | 9.04 | % | | 9.04 | % | | 10.26 | % |
| Number of banking centers | 99 |
| | 99 |
| | 99 |
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| Number of FTE | 3,495 |
| | 2,886 |
| | 2,881 |
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| Number of bank branches | | 107 |
| | 99 |
| | 99 |
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| Number of FTE employees | | 3,682 |
| | 3,525 |
| | 3,432 |
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| (1) | Includes redemption of TARP Preferred occurring on July 29, 2016, which resulted in a reduction of $372 million in stockholder's equity. Also, includes $250 million issuance of 6.125% Senior Note occurring on July 11, 2016, which was used to redeem and bring current the dividends on the TARP Preferred. |
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(2) | Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on previous historical experience and the level of interest rates. |
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| (2) | Interest rate spread is the difference between the annualized yield earned on average interest-earning assets for the period and the annualized rate of interest paid on average interest-bearing liabilities for the period. |
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| (3) | Excludes goodwill and intangibles of $71 million, $21 million, zero, and zero $20 millionat SeptemberJune 30, 2018, December 31, 2017, and June 30, 2017, December 31, 2016, and September 30, 2016, respectively, included in Other Assets on the Consolidated Statement of Financial Condition.respectively. See Non-GAAP Financial Measures for further information. |
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| (4) | The Basel III transitional.transitional phase-in rules were applicable to December 31, 2017 and June 30, 2017. |
Executive Overview
The thirdsecond quarter 2017of 2018 resulted in solid earningsnet income of $40$50 million, or $0.70$0.85 per diluted share. Our transformation into a strong commercial bank continued this quarter. Inshare, up $9 million or $0.14 per diluted share compared to the ninesecond quarter of 2017. For the six months ended SeptemberJune 30, 2018 compared to the same period in 2017, net interest income was $47increased $41 million, on average earning asset growth of $1.8 billion, or 1523 percent, led by increasesgrowth in our commercial loan portfolio. The expansionaverage earning assets of our commercial loan portfolio has generated$2.5 billion and a 9 basis point increase in net interest income growth and provides earnings stability in a challenging mortgage environment. We alsomargin.
The Community Banking segment continued to maintain solid liquidityperform well, boosted by the acquisitions of the Desert Community Bank ("DCB") branches and disciplined deposit growth, which saw total average deposits increase $244 million, or 3 percentthe Santander warehouse business late in the first ninequarter. When comparing the six months of 2017 driven by higher retail deposits.ended June 30, 2018 to the same period last year, average commercial loans have increased $1.4 billion, or 45 percent with growth across all portfolios and average deposits have increased $1.1 billion, or 13 percent.
Even inDuring the currently challengingfirst half of 2018, we sold $18.4 billion UPB of mortgage market,servicing rights with 100 percent of the sub-servicing retained, increasing the profitability of our mortgage closingsservicing business. Since the beginning of 2018, we have increased 3the number of loans serviced by 93,000 or 21 percent inand are well positioned to add more scale later this year.
Our fallout-adjusted lock volume for the nine months ended September 30, 2017first half of 2018 compared to the first nine months ended September 30, 2016 driven by ourhalf of 2017, acquisitions of Opes Advisors (Opes) andincreased 12 percent, or $1.7 billion, while the delegated correspondent business of Stearns Lending (Stearns). Our gain on loan sale margin was 84 basis points at September 30, 2017 reflecting the increase in distributed retail due to the integration of Opes. We believe this shift in mix should positively impact our gain on sale margin going forward.
Our noninterest expense increased $47 millionfell 2 basis points to 0.74 percent. This was driven by a challenging mortgage environment resulting in the first nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 largely due to our ongoing growth initiatives and operating expenses from Opes. The remaining expenses, associated with balance sheet expansion and growing Community Bank revenues, reflected our cost discipline and had a very low, incremental efficiency ratio. Credit costs were negligible, as net charge-offs, nonperforming loans and delinquencies remain at very low levels.
The federal banking agencies issued a notice of proposed rulemaking (NPR) regarding several proposed simplifications of the Basel III capital rules. If enacted as proposed, these changes would accelerate the capital formation necessary to support further balance sheet growth, improve our capital flexibility to better manage the uncertainties of the MSR market and allow us to hold more MSRs which are a high yielding asset that we fund efficiently and hedge well. We believe this should improve our position to continue to execute on our business strategy, matching superior asset generation capabilities, supported by the capital and liquidity to grow the Bank prudently, thereby creating value for our shareholders.significant pricing competition.
Earnings Performance
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (Dollars in millions, except share data) | (Dollars in millions, except share data) |
| Net interest income | $ | 103 |
| | $ | 80 |
| | $ | 23 |
| | $ | 283 |
| | $ | 236 |
| | $ | 47 |
| $ | 115 |
| | $ | 97 |
| | $ | 18 |
| | $ | 221 |
| | $ | 180 |
| | $ | 41 |
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| Provision (benefit) for loan losses | 2 |
| | 7 |
| | (5 | ) | | 4 |
| | (9 | ) | | 13 |
| (1 | ) | | (1 | ) | | — |
| | (1 | ) | | 2 |
| | (3 | ) |
Total noninterest income (1) | 130 |
| | 156 |
| | (26 | ) | | 346 |
| | 389 |
| | (43 | ) | 123 |
| | 116 |
| | 7 |
| | 234 |
| | 216 |
| | 18 |
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| Total noninterest expense | 171 |
| | 142 |
| | 29 |
| | 465 |
| | 418 |
| | 47 |
| 177 |
| | 154 |
| | 23 |
| | 350 |
| | 294 |
| | 56 |
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| Provision for income taxes | 20 |
| | 30 |
| | (10 | ) | | 52 |
| | 73 |
| | (21 | ) | 12 |
| | 19 |
| | (7 | ) | | 21 |
| | 32 |
| | (11 | ) |
| Net income | $ | 40 |
| | $ | 57 |
| | $ | (17 | ) | | $ | 108 |
| | $ | 143 |
| | $ | (35 | ) | $ | 50 |
| | $ | 41 |
| | $ | 9 |
| | $ | 85 |
| | $ | 68 |
| | $ | 17 |
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| Income per share | | | | | | | | | | | | | | | | | | | | | | |
| Basic | $ | 0.71 |
| | $ | 0.98 |
| | $ | (0.27 | ) | | $ | 1.90 |
| | $ | 2.21 |
| | $ | (0.31 | ) | $ | 0.86 |
| | $ | 0.72 |
| | $ | 0.14 |
| | $ | 1.47 |
| | $ | 1.18 |
| | $ | 0.29 |
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| Diluted | $ | 0.70 |
| | $ | 0.96 |
| | $ | (0.26 | ) | | $ | 1.86 |
| | $ | 2.16 |
| | $ | (0.30 | ) | $ | 0.85 |
| | $ | 0.71 |
| | $ | 0.14 |
| | $ | 1.45 |
| | $ | 1.16 |
| | $ | 0.29 |
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(1) | Included in both the three and nine months ended September 30, 2016 is a $24 million benefit ($16 million after tax benefit) related to a decrease in the fair value of the Department of Justice ("DOJ") settlement liability. |
Net income decreased $17increased to $50 million or $0.85 per diluted share for the three months ended June 30, 2018, compared to $41 million or $0.71 per diluted share for the three months ended June 30, 2017. Net interest income increased $18 million for the three months ended SeptemberJune 30, 2017,2018, compared to the threesame period in 2017, primarily driven by a higher net interest margin and a $2.0 billion increase in average interest-earnings assets, led by commercial loan growth. The $7 million increase in noninterest income primarily resulted from higher loan fees and charges and returns on MSRs, partially offset by lower gains on loan sales. Growth from acquisitions resulted in higher compensation and benefits, commissions and occupancy and equipment expenses.
Net income increased to $85 million or $1.45 per diluted share for the six months ended SeptemberJune 30, 2016.2018 as compared to $68 million or $1.16 per diluted share for the six months ended June 30, 2017. Net interest income increased $23$41 million for the threesix months ended SeptemberJune 30, 2017,2018, compared to the three months ended September 30, 2016same period in 2017, primarily driven by a $2.4 billion19 percent increase in average interest-earning assets led by strong commercial loan growth and higher LHFS along with an increase in average rates. The improvement in net interest income was more than offset by a $29 millionmargin. The increase in noninterest expense primarily driven by ongoing growth initiatives and operating expenses associated with the recent acquisition of Opes and a $26 milliondecrease in noninterest income primarily resultingresulted from a $24 million decrease in the fair value of the DOJ settlement liability we recognized in the third quarter of 2016.
Net income decreased $35 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. Net interest income increased $47 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily driven by growth in interest-earning assets, partially offset by a $9 million
increase in interest expense related to our Senior Notes which were issued in the third quarter 2016 to fund the redemption of our TARP Preferred. The increase in net interest income was offset by an increase in noninterest expense of $47 million, primarily driven by an increase in operating expenses associated with our 2017 acquisitions of Opes and Stearns. In addition, we had a decrease in noninterest income of $43 million, primarily due to lower nethigher gain on loan sales and loan fees and charges, partially offset by a $24 million decreaselower return on MSRs. Our 2017 mortgage acquisitions drove an increase in the fair valueoriginations resulting in higher volume driven expenses as well as an increase in compensation and benefits and occupancy and equipment expenses.
Additional details of the DOJ settlement liability recognizedeach key driver have been further explained in the third quarter of 2016. In the nine months ended September 30, 2017, our provision for loan losses of $4 million reflects the strong credit quality of our loan portfolios and the sustained low level of net charge-offs. The $9 million benefit for loan losses for the nine months ended September 30, 2016 resulted primarily from the sale of $1.2 billion UPB of performing residential first mortgage loans and $110 million UPB of nonperforming, TDR and non-agency loans.Management's discussion below.
Net Interest Income
The following tables present, on a consolidated basis, interest income from average assets and liabilities, expressed in dollars and yields:
| | | | Three Months Ended September 30, | Three Months Ended June 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| | Average Balance | Interest | Annualized Yield/ Rate | | Average Balance | Interest | Annualized Yield/ Rate | Average Balance | Interest | Annualized Yield/ Rate | | Average Balance | Interest | Annualized Yield/ Rate |
| | (Dollars in millions) | (Dollars in millions) |
| Interest-Earning Assets | | | | | | | | | | |
| Loans held-for-sale | $ | 4,476 |
| $ | 45 |
| 3.99 | % | | $ | 3,416 |
| $ | 30 |
| 3.51 | % | $ | 4,170 |
| $ | 47 |
| 4.50 | % | | $ | 4,269 |
| $ | 42 |
| 4.00 | % |
| Loans held-for-investment | | | | | | | | | | |
| Residential first mortgage | 2,594 |
| 22 |
| 3.32 | % | | 2,090 |
| 17 |
| 3.17 | % | 2,875 |
| 25 |
| 3.53 | % | | 2,495 |
| 21 |
| 3.38 | % |
| Home equity | 486 |
| 6 |
| 5.11 | % | | 460 |
| 6 |
| 5.03 | % | 679 |
| 8 |
| 5.05 | % | | 439 |
| 6 |
| 4.91 | % |
| Other | 26 |
| — |
| 4.52 | % | | 30 |
| — |
| 4.59 | % | 57 |
| 1 |
| 5.39 | % | | 27 |
| — |
| 4.54 | % |
| Total Consumer loans | 3,106 |
| 28 |
| 3.61 | % | | 2,580 |
| 23 |
| 3.52 | % | 3,611 |
| 34 |
| 3.85 | % | | 2,961 |
| 27 |
| 3.61 | % |
| Commercial Real Estate | 1,646 |
| 19 |
| 4.43 | % | | 1,082 |
| 9 |
| 3.43 | % | 2,017 |
| 26 |
| 5.09 | % | | 1,477 |
| 16 |
| 4.16 | % |
| Commercial and Industrial | 1,073 |
| 13 |
| 4.77 | % | | 633 |
| 7 |
| 4.27 | % | 1,257 |
| 17 |
| 5.30 | % | | 936 |
| 11 |
| 4.77 | % |
| Warehouse Lending | 978 |
| 12 |
| 4.82 | % | | 1,553 |
| 17 |
| 4.21 | % | 1,495 |
| 19 |
| 5.03 | % | | 850 |
| 10 |
| 4.71 | % |
| Total Commercial loans | 3,697 |
| 44 |
| 4.63 | % | | 3,268 |
| 33 |
| 3.96 | % | 4,769 |
| 62 |
| 5.13 | % | | 3,263 |
| 37 |
| 4.48 | % |
| Total loans held-for-investment (1) | 6,803 |
| 72 |
| 4.16 | % | | 5,848 |
| 56 |
| 3.77 | % | 8,380 |
| 96 |
| 4.58 | % | | 6,224 |
| 64 |
| 4.07 | % |
| Loans with government guarantees | 264 |
| 3 |
| 4.58 | % | | 432 |
| 4 |
| 3.88 | % | 280 |
| 2 |
| 3.66 | % | | 295 |
| 3 |
| 4.02 | % |
| Investment securities | 3,101 |
| 20 |
| 2.58 | % | | 2,516 |
| 16 |
| 2.55 | % | 3,049 |
| 21 |
| 2.72 | % | | 3,166 |
| 20 |
| 2.57 | % |
| Interest-earning deposits | 93 |
| — |
| 1.23 | % | | 106 |
| — |
| 0.48 | % | 114 |
| 1 |
| 1.72 | % | | 66 |
| — |
| 1.07 | % |
| Total interest-earning assets | 14,737 |
| 140 |
| 3.77 | % | | 12,318 |
| 106 |
| 3.42 | % | 15,993 |
| 167 |
| 4.17 | % | | 14,020 |
| 129 |
| 3.69 | % |
| Other assets | 1,702 |
| | | | 1,830 |
| | | 1,791 |
| | | | 1,690 |
| | |
| Total assets | $ | 16,439 |
| | | | $ | 14,148 |
| | | $ | 17,784 |
| | | | $ | 15,710 |
| | |
| Interest-Bearing Liabilities | | | | | | | | | | |
| Retail deposits | | | | | | | | | | |
| Demand deposits | $ | 489 |
| $ | — |
| 0.14 | % | | $ | 509 |
| $ | — |
| 0.20 | % | $ | 704 |
| $ | 1 |
| 0.60 | % | | $ | 510 |
| $ | — |
| 0.15 | % |
| Savings deposits | 3,838 |
| 7 |
| 0.76 | % | | 3,751 |
| 8 |
| 0.77 | % | 3,412 |
| 8 |
| 0.86 | % | | 3,933 |
| 8 |
| 0.75 | % |
| Money market deposits | 276 |
| — |
| 0.57 | % | | 250 |
| — |
| 0.41 | % | 247 |
| — |
| 0.54 | % | | 239 |
| — |
| 0.42 | % |
| Certificates of deposit | 1,182 |
| 4 |
| 1.19 | % | | 1,071 |
| 3 |
| 1.05 | % | 2,006 |
| 8 |
| 1.63 | % | | 1,094 |
| 3 |
| 1.08 | % |
| Total retail deposits | 5,785 |
| 11 |
| 0.78 | % | | 5,581 |
| 11 |
| 0.75 | % | 6,369 |
| 17 |
| 1.06 | % | | 5,776 |
| 11 |
| 0.75 | % |
| Government deposits | | | | | | | | | | |
| Demand deposits | 250 |
| — |
| 0.43 | % | | 243 |
| — |
| 0.39 | % | 243 |
| — |
| 0.47 | % | | 200 |
| — |
| 0.39 | % |
| Savings deposits | 362 |
| 1 |
| 0.71 | % | | 478 |
| 1 |
| 0.52 | % | 488 |
| 2 |
| 1.26 | % | | 411 |
| 1 |
| 0.56 | % |
| Certificates of deposit | 329 |
| 1 |
| 0.89 | % | | 355 |
| — |
| 0.52 | % | 380 |
| 1 |
| 1.35 | % | | 291 |
| — |
| 0.68 | % |
| Total government deposits | 941 |
| 2 |
| 0.70 | % | | 1,076 |
| 1 |
| 0.49 | % | 1,111 |
| 3 |
| 1.12 | % | | 902 |
| 1 |
| 0.56 | % |
| Wholesale deposits and other | 35 |
| — |
| 1.49 | % | | — |
| — |
| —% |
| 264 |
| 1 |
| 1.96 | % | | 4 |
| — |
| 0.48 | % |
| Total interest-bearing deposits | 6,761 |
| 13 |
| 0.78 | % | | 6,657 |
| 12 |
| 0.71 | % | 7,744 |
| 21 |
| 1.10 | % | | 6,682 |
| 12 |
| 0.72 | % |
| Short-term Federal Home Loan Bank advances and other | 3,809 |
| 11 |
| 1.17 | % | | 1,073 |
| 1 |
| 0.44 | % | |
| Short-term Federal Home Loan Bank advances | | 3,646 |
| 17 |
| 1.85 | % | | 3,429 |
| 8 |
| 0.98 | % |
| Long-term Federal Home Loan Bank advances | 1,234 |
| 6 |
| 1.99 | % | | 1,576 |
| 7 |
| 1.81 | % | 1,280 |
| 7 |
| 2.25 | % | | 1,200 |
| 6 |
| 1.91 | % |
| Other long-term debt | 493 |
| 7 |
| 5.09 | % | | 467 |
| 6 |
| 4.86 | % | 494 |
| 7 |
| 5.60 | % | | 493 |
| 6 |
| 5.06 | % |
| Total interest-bearing liabilities | 12,297 |
| 37 |
| 1.19 | % | | 9,773 |
| 26 |
| 1.06 | % | 13,164 |
| 52 |
| 1.58 | % | | 11,804 |
| 32 |
| 1.10 | % |
| Noninterest-bearing deposits (2) | 2,244 |
| | | | 2,469 |
| | | 2,670 |
| | | | 2,057 |
| | |
| Other liabilities | 427 |
| | | | 527 |
| | | 475 |
| | | | 431 |
| | |
| Stockholders’ equity | 1,471 |
| | | | 1,379 |
| | | 1,475 |
| | | | 1,418 |
| | |
| Total liabilities and stockholders' equity | $ | 16,439 |
| | | | $ | 14,148 |
| | | $ | 17,784 |
| | | | $ | 15,710 |
| | |
| Net interest-earning assets | $ | 2,440 |
| | | | $ | 2,545 |
| | | |
| Net interest income | | $ | 103 |
| | | | $ | 80 |
| | | $ | 115 |
| | | | $ | 97 |
| |
| Interest rate spread (3) | | 2.58 | % | | | 2.36 | % | | 2.58 | % | | | 2.59 | % |
| Net interest margin (4) | | 2.78 | % | | | 2.58 | % | | 2.86 | % | | | 2.77 | % |
| Ratio of average interest-earning assets to interest-bearing liabilities | | 119.9 | % | | | 126.0 | % | | 121.5 | % | | | 118.8 | % |
| |
| (1) | Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 4 - Loans Held-for-Investment. |
| |
| (2) | Includes noninterest-bearing company controlledcustodial deposits that arise due to the servicing of loans for others. |
| |
| (3) | Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities. |
| |
| (4) | Net interest margin is net interest income divided by average interest-earning assets. |
| | | | Nine Months Ended September 30, | Six Months Ended June 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| | Average Balance | Interest | Annualized Yield/ Rate | | Average Balance | Interest | Annualized Yield/ Rate | Average Balance | Interest | Annualized Yield/ Rate | | Average Balance | Interest | Annualized Yield/ Rate |
| | (Dollars in millions) | (Dollars in millions) |
| Interest-Earning Assets | | | | | | | | | | |
| Loans held-for-sale | $ | 4,014 |
| $ | 119 |
| 3.96 | % | | $ | 3,071 |
| $ | 83 |
| 3.64 | % | $ | 4,201 |
| $ | 90 |
| 4.31 | % | | $ | 3,780 |
| $ | 74 |
| 3.94 | % |
| Loans held-for-investment | | | |
| | | | | |
| | |
| Residential first mortgage | 2,497 |
| 62 |
| 3.34 | % | | 2,365 |
| 56 |
| 3.14 | % | 2,824 |
| 49 |
| 3.47 | % | | 2,447 |
| 41 |
| 3.35 | % |
| Home equity | 453 |
| 17 |
| 5.04 | % | | 485 |
| 19 |
| 5.23 | % | 674 |
| 17 |
| 5.13 | % | | 436 |
| 11 |
| 5.01 | % |
| Other | 26 |
| 1 |
| 4.52 | % | | 29 |
| 1 |
| 4.82 | % | 42 |
| 1 |
| 5.12 | % | | 26 |
| — |
| 4.52 | % |
| Total Consumer loans | 2,976 |
| 80 |
| 3.61 | % | | 2,879 |
| 76 |
| 3.51 | % | 3,540 |
| 67 |
| 3.80 | % | | 2,909 |
| 52 |
| 3.61 | % |
| Commercial Real Estate | 1,482 |
| 47 |
| 4.15 | % | | 936 |
| 24 |
| 3.40 | % | 1,986 |
| 50 |
| 4.98 | % | | 1,399 |
| 28 |
| 3.99 | % |
| Commercial and Industrial | 929 |
| 33 |
| 4.71 | % | | 601 |
| 19 |
| 4.12 | % | 1,237 |
| 33 |
| 5.25 | % | | 855 |
| 20 |
| 4.67 | % |
| Warehouse Lending | 840 |
| 30 |
| 4.70 | % | | 1,279 |
| 41 |
| 4.25 | % | 1,173 |
| 30 |
| 5.07 | % | | 770 |
| 18 |
| 4.62 | % |
| Total Commercial loans | 3,251 |
| 110 |
| 4.45 | % | | 2,816 |
| 84 |
| 3.94 | % | 4,396 |
| 113 |
| 5.08 | % | | 3,024 |
| 66 |
| 4.34 | % |
| Total loans held-for-investment (1) | 6,227 |
| 190 |
| 4.05 | % | | 5,695 |
| 160 |
| 3.72 | % | 7,936 |
| 180 |
| 4.51 | % | | 5,933 |
| 118 |
| 3.98 | % |
| Loans with government guarantees | 300 |
| 10 |
| 4.41 | % | | 450 |
| 12 |
| 3.40 | % | 285 |
| 5 |
| 3.69 | % | | 318 |
| 7 |
| 4.34 | % |
| Investment securities | 3,093 |
| 59 |
| 2.55 | % | | 2,589 |
| 50 |
| 2.58 | % | 3,140 |
| 43 |
| 2.71 | % | | 3,090 |
| 39 |
| 2.54 | % |
| Interest-earning deposits | 75 |
| 1 |
| 1.08 | % | | 139 |
| 1 |
| 0.50 | % | 113 |
| 1 |
| 1.69 | % | | 66 |
| 1 |
| 0.97 | % |
| Total interest-earning assets | 13,709 |
| 379 |
| 3.68 | % | | 11,944 |
| 306 |
| 3.40 | % | 15,675 |
| 319 |
| 4.06 | % | | 13,187 |
| 239 |
| 3.63 | % |
| Other assets | 1,697 |
| | | | 1,767 |
| | | 1,764 |
| | | | 1,694 |
| | |
| Total assets | $ | 15,406 |
| | | | $ | 13,711 |
| | | $ | 17,439 |
| | | | $ | 14,881 |
| | |
| Interest-Bearing Liabilities | | | | | | | | | | |
| Retail deposits | | | | | | | | | | |
| Demand deposits | $ | 502 |
| $ | 1 |
| 0.16 | % | | $ | 479 |
| $ | 1 |
| 0.17 | % | $ | 626 |
| $ | 1 |
| 0.46 | % | | $ | 509 |
| $ | — |
| 0.17 | % |
| Savings deposits | 3,899 |
| 22 |
| 0.76 | % | | 3,720 |
| 21 |
| 0.78 | % | 3,451 |
| 14 |
| 0.83 | % | | 3,930 |
| 15 |
| 0.76 | % |
| Money market deposits | 264 |
| 1 |
| 0.49 | % | | 285 |
| 1 |
| 0.44 | % | 226 |
| 1 |
| 0.49 | % | | 258 |
| 1 |
| 0.44 | % |
| Certificates of deposit | 1,116 |
| 9 |
| 1.12 | % | | 789 |
| 7 |
| 1.21 | % | 1,814 |
| 14 |
| 1.55 | % | | 1,083 |
| 6 |
| 1.07 | % |
| Total retail deposits | 5,781 |
| 33 |
| 0.76 | % | | 5,273 |
| 30 |
| 0.77 | % | 6,117 |
| 30 |
| 0.99 | % | | 5,780 |
| 22 |
| 0.75 | % |
| Government deposits | | | | | | | | | | |
| Demand deposits | 228 |
| 1 |
| 0.41 | % | | 234 |
| 1 |
| 0.39 | % | 242 |
| 1 |
| 0.51 | % | | 217 |
| — |
| 0.39 | % |
| Savings deposits | 410 |
| 2 |
| 0.59 | % | | 432 |
| 2 |
| 0.52 | % | 485 |
| 3 |
| 1.18 | % | | 435 |
| 1 |
| 0.54 | % |
| Certificates of deposit | 314 |
| 1 |
| 0.73 | % | | 563 |
| 1 |
| 0.35 | % | 391 |
| 2 |
| 1.27 | % | | 305 |
| 1 |
| 0.65 | % |
| Total government deposits | 952 |
| 4 |
| 0.59 | % | | 1,229 |
| 4 |
| 0.42 | % | 1,118 |
| 6 |
| 1.07 | % | | 957 |
| 2 |
| 0.54 | % |
| Wholesale deposits and other | 16 |
| — |
| 1.21 | % | | — |
| — |
| — | % | 217 |
| 2 |
| 1.94 | % | | 6 |
| — |
| 0.42 | % |
| Total interest-bearing deposits | 6,749 |
| 37 |
| 0.74 | % | | 6,502 |
| 34 |
| 0.70 | % | 7,452 |
| 38 |
| 1.03 | % | | 6,743 |
| 24 |
| 0.72 | % |
| Short-term Federal Home Loan Bank advances and other | 3,028 |
| 23 |
| 1.01 | % | | 1,190 |
| 4 |
| 0.41 | % | |
| Short-term Federal Home Loan Bank advances | | 3,838 |
| 32 |
| 1.68 | % | | 2,630 |
| 12 |
| 0.89 | % |
| Long-term Federal Home Loan Bank advances | 1,211 |
| 17 |
| 1.92 | % | | 1,587 |
| 22 |
| 1.88 | % | 1,285 |
| 14 |
| 2.17 | % | | 1,200 |
| 11 |
| 1.89 | % |
| Other long-term debt | 493 |
| 19 |
| 5.06 | % | | 321 |
| 10 |
| 4.05 | % | 494 |
| 14 |
| 5.49 | % | | 493 |
| 12 |
| 5.05 | % |
| Total interest-bearing liabilities | 11,481 |
| 96 |
| 1.12 | % | | 9,600 |
| 70 |
| 0.97 | % | 13,069 |
| 98 |
| 1.50 | % | | 11,066 |
| 59 |
| 1.08 | % |
| Noninterest-bearing deposits (2) | 2,098 |
| | | | 2,101 |
| | | 2,443 |
| | | | 2,024 |
| | |
| Other liabilities | 415 |
| | | | 495 |
| | | 482 |
| | | | 409 |
| | |
| Stockholders’ equity | 1,412 |
| | | | 1,515 |
| | | 1,445 |
| | | | 1,382 |
| | |
| Total liabilities and stockholders' equity | $ | 15,406 |
| | | | $ | 13,711 |
| | | $ | 17,439 |
| | | | $ | 14,881 |
| | |
| Net interest-earning assets | $ | 2,228 |
| | | | $ | 2,344 |
| | | |
| Net interest income | | $ | 283 |
| | | | $ | 236 |
| | | $ | 221 |
| | | | $ | 180 |
| |
| Interest rate spread (3) | | 2.56 | % | | | 2.43 | % | | 2.56 | % | | | 2.55 | % |
| Net interest margin (4) | | 2.74 | % | | | 2.62 | % | | 2.81 | % | | | 2.72 | % |
| Ratio of average interest-earning assets to interest-bearing liabilities | | 119.4 | % | | | 124.4 | % | | 119.9 | % | | | 119.2 | % |
| |
| (1) | Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 4 - Loans Held-for-Investment. |
| |
| (2) | Includes noninterest-bearing company controlledcustodial deposits that arise due to the servicing of loans for others. |
| |
| (3) | Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities. |
| |
| (4) | Net interest margin is net interest income divided by average interest-earning assets. |
Rate/Volume Analysis
The following tables present the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). The rate/volume variances are allocated to rate. |
| | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2018 Versus 2017 Increase (Decrease) Due to: |
| | Rate | | Volume | | Total |
| | (Dollars in millions) |
| Interest-Earning Assets | | | | | |
| Loans held-for-sale | $ | 5 |
| | $ | — |
| | $ | 5 |
|
| Loans held-for-investment | | | | | |
| Residential first mortgage | 1 |
| | 3 |
| | 4 |
|
| Home equity | — |
| | 2 |
| | 2 |
|
| Other | 1 |
| | — |
| | 1 |
|
| Total Consumer loans | 2 |
| | 5 |
| | 7 |
|
| Commercial Real Estate | 5 |
| | 5 |
| | 10 |
|
| Commercial and Industrial | 2 |
| | 4 |
| | 6 |
|
| Warehouse Lending | 1 |
| | 8 |
| | 9 |
|
| Total Commercial loans | 8 |
| | 17 |
| | 25 |
|
| Total loans held-for-investment | 10 |
| | 22 |
| | 32 |
|
| Loans with government guarantees | (1 | ) | | — |
| | (1 | ) |
| Investment securities | 1 |
| | — |
| | 1 |
|
| Interest-earning deposits and other | 1 |
| | — |
| | $ | 1 |
|
| Total interest-earning assets | $ | 16 |
| | $ | 22 |
| | $ | 38 |
|
| Interest-Bearing Liabilities | | | | | |
| Interest-bearing deposits | $ | 7 |
| | $ | 2 |
| | $ | 9 |
|
| Short-term Federal Home Loan Bank advances | 8 |
| | 1 |
| | 9 |
|
| Long-term Federal Home Loan Bank advances | 1 |
| | — |
| | 1 |
|
| Other long-term debt | 1 |
| | — |
| | 1 |
|
| Total interest-bearing liabilities | 17 |
| | 3 |
| | 20 |
|
| Change in net interest income | $ | (1 | ) | | $ | 19 |
| | $ | 18 |
|
|
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 Versus 2016 Increase (Decrease) Due to: |
| | Rate | | Volume | | Total |
| | (Dollars in millions) |
| Interest-Earning Assets | | | | | |
| Loans held-for-sale | $ | 6 |
| | $ | 9 |
| | $ | 15 |
|
| Loans held-for-investment | | | | | |
| Residential first mortgage | 1 |
| | 4 |
| | 5 |
|
| Total Consumer loans | 1 |
| | 4 |
| | 5 |
|
| Commercial Real Estate | 5 |
| | 5 |
| | 10 |
|
| Commercial and Industrial | 1 |
| | 5 |
| | 6 |
|
| Warehouse Lending | 1 |
| | (6 | ) | | (5 | ) |
| Total Commercial loans | 7 |
| | 4 |
| | 11 |
|
| Total loans held-for-investment | 8 |
| | 8 |
| | 16 |
|
| Loans with government guarantees | 1 |
| | (2 | ) | | (1 | ) |
| Investment securities | — |
| | 4 |
| | 4 |
|
| Total interest-earning assets | $ | 15 |
| | $ | 19 |
| | $ | 34 |
|
| Interest-Bearing Liabilities | | | | | |
| Interest-bearing deposits | $ | 1 |
| | $ | — |
| | $ | 1 |
|
| Short-term Federal Home Loan Bank advances and other | 7 |
| | 3 |
| | 10 |
|
| Long-term Federal Home Loan Bank advances | 1 |
| | (2 | ) | | (1 | ) |
| Other long-term debt | — |
| | 1 |
| | 1 |
|
| Total interest-bearing liabilities | 9 |
| | 2 |
| | 11 |
|
| Change in net interest income | $ | 6 |
| | $ | 17 |
| | $ | 23 |
|
| | | | Nine Months Ended September 30, | Six Months Ended June 30, |
| | 2017 Versus 2016 Increase (Decrease) Due to: | 2018 Versus 2017 Increase (Decrease) Due to: |
| | Rate | | Volume | | Total | Rate | | Volume | | Total |
| | (Dollars in millions) | (Dollars in millions) |
| Interest-Earning Assets | | | | | | | | | | |
| Loans held-for-sale | $ | 10 |
| | $ | 26 |
| | $ | 36 |
| $ | 8 |
| | $ | 8 |
| | $ | 16 |
|
| Loans held-for-investment | | | | | | | | | | |
| Residential first mortgage | 3 |
| | 3 |
| | 6 |
| 2 |
| | 6 |
| | 8 |
|
| Home equity | — |
| | (2 | ) | | (2 | ) | 1 |
| | 5 |
| | 6 |
|
| Other | | — |
| | 1 |
| | 1 |
|
| Total Consumer loans | 3 |
| | 1 |
| | 4 |
| 3 |
| | 12 |
| | 15 |
|
| Commercial Real Estate | 9 |
| | 14 |
| | 23 |
| 10 |
| | 12 |
| | 22 |
|
| Commercial and Industrial | 4 |
| | 10 |
| | 14 |
| 4 |
| | 9 |
| | 13 |
|
| Warehouse Lending | 3 |
| | (14 | ) | | (11 | ) | 3 |
| | 9 |
| | 12 |
|
| Total Commercial loans | 16 |
| | 10 |
| | 26 |
| 17 |
| | 30 |
| | 47 |
|
| Total loans held-for-investment | 19 |
| | 11 |
| | 30 |
| 20 |
| | 42 |
| | 62 |
|
| Loans with government guarantees | 2 |
| | (4 | ) | | (2 | ) | (1 | ) | | (1 | ) | | (2 | ) |
| Investment securities | (1 | ) | | 10 |
| | 9 |
| 3 |
| | 1 |
| | 4 |
|
| Total interest-earning assets | $ | 30 |
| | $ | 43 |
| | $ | 73 |
| $ | 30 |
| | $ | 50 |
| | $ | 80 |
|
| Interest-Bearing Liabilities | | | | | | | | | | |
| Interest-bearing deposits | $ | 1 |
| | $ | 2 |
| | $ | 3 |
| $ | 11 |
| | $ | 3 |
| | $ | 14 |
|
| Short-term Federal Home Loan Bank advances and other | 14 |
| | 5 |
| | 19 |
| |
| Short-term Federal Home Loan Bank advances | | 15 |
| | 5 |
| | 20 |
|
| Long-term Federal Home Loan Bank advances | — |
| | (5 | ) | | (5 | ) | 2 |
| | 1 |
| | 3 |
|
| Other long-term debt | 4 |
| | 5 |
| | 9 |
| 2 |
| | — |
| | 2 |
|
| Total interest-bearing liabilities | 19 |
| | 7 |
| | 26 |
| 30 |
| | 9 |
| | 39 |
|
| Change in net interest income | $ | 11 |
| | $ | 36 |
| | $ | 47 |
| $ | — |
| | $ | 41 |
| | $ | 41 |
|
Comparison to Prior Year Quarter
Net interest income increased $23$18 million, or 2919 percent, for the three months ended SeptemberJune 30, 2017,2018, compared to the same period in 2016.2017. This increase was primarily driven by growth in average interest-earning assets, and an increaseled by continued growth in average rates within the commercial LHFI and LHFS portfolios. This was partially offset by an increase in average rates and average balance on short-term FHLB advances.portfolio.
Our net interest margin for the three months ended SeptemberJune 30, 20172018 was 2.782.86 percent, as compared to 2.582.77 percent for the three months ended SeptemberJune 30, 2016.2017. The increase in net 20 basis point increaseinterest margin was primarily driven by an increasethe growth in higher yieldingour commercial loans and higher interest income on LHFS. This increase wasloan portfolios, partially offset by higher average rates on short-term FHLB advances.deposits. Our deposit costs experienced modest growth despite the rising rate environment and slight extension of duration driven by holding a higher percentage of certificates of deposits.
ForAverage interest-earning assets increased $2.0 billion for the three months ended SeptemberJune 30, 2017 as2018, compared to the three months ended SeptemberJune 30, 2016, total interest-earning assets increased $2.4 billion to $14.7 billion, led by growth in LHFS2017, primarily due to accumulation of loans in support of residential mortgage backed securitizations. Additionally, the $955 millionan increase in LHFI average balancebalances. The LHFI portfolio increase was primarily driven by growth in the commercial loan portfolios which increased $1.5 billion, or 46 percent, as we executed on the acquisition of the Santander warehouse business and continued to build a $526 million increase in consumer loans through the addition of high quality jumbo loans and HELOCs and a $429 million increase in average commercial loans was consistent with our strategy to grow the community bank. Average warehouse loans have decreased $575 million which is more than offset by increases in our C&I and CRE portfolios demonstrating our shift todiversified, higher yielding loans.commercial loan portfolio.
Average interest-bearing liabilities increased $2.5$1.4 billion for the three months ended SeptemberJune 30, 2017,2018, compared to the three months ended SeptemberJune 30, 2016. The2017. This increase was primarily drivendue to average interest-bearing deposits increasing $1.1 billion led by the recent DCB branch acquisition as well as organic growth in retail certificates of deposit and wholesale deposits, partially offset by a $2.7 billion increasedecline in short-term FHLB advances used to fund our most liquid assets including LHFS.retail savings deposits.
Comparison to Prior Year to Date
Net interest income increased $47$41 million, or 23 percent, for the ninesix months ended SeptemberJune 30, 2017,2018, compared to the same period in 2016,2017. This increase was primarily driven by growth in average interest-earning assets, led by an increase in LHFS, and an increase in average rates. This was partially offset by an increase in average rates and average balances of borrowings, primarily related to short-term FHLB advances and the issuance of our Senior Notescontinued growth in the third quarter 2016.commercial LHFI portfolio and higher average LHFS balances.
Our net interest margin for the ninesix months ended SeptemberJune 30, 20172018 was 2.742.81 percent, as compared to 2.622.72 percent for the ninesix months ended SeptemberJune 30, 2016.2017. The increase in net 12interest margin was primarily driven by rising yields on our LHFI portfolios, which increased 53 basis points, representing a loan beta of 71 percent, more than offsetting the 31 basis point increase was positively impacted byin average costs of deposits, representing a deposit beta of 30 percent.
Average interest-earning assets increased $2.5 billion for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to an increase in market rates, a higher yielding commercial loanLHFI and LHFS average balances. The LHFI portfolio and stable core deposits. This improvementincrease was partially offset by higher rates on short-term FHLB advancesprimarily driven by an increase in market rates and the issuance$1.4 billion of our Senior Notes in the third quarter 2016.
For the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, average interest-earning assets increased $1.8 billion, led by a $943 million increase in LHFS due to extending turn times and accumulation of loans in support of residential mortgage backed securitizations. The combined $939 million increase in average investment securities and average commercial loans was consistent with our strategy to grow the community bank and enhance the yield on our interest-earning assets. Commercial loans increased 15 percent due to growth in the CRE and C&I portfolios, including growth in home builder lending allloans along with higher average warehouse balances driven by the acquisition of which more than offset the decrease inSantander warehouse lending.business.
Average interest-bearing liabilities increased $1.9$2.0 billion for the ninesix months ended SeptemberJune 30, 2017,2018, compared to the ninesix months ended SeptemberJune 30, 2016. The increase was2017, primarily driven by a net $1.5 billiondue to an increase in FHLB advances used to fund balance sheet growth, $247growth. The recent DCB branch acquisition as well as higher retail and wholesale deposits drove a $709 million increase in total deposits and the issuance of our Senior Notes in the third quarter 2016.average interest-bearing deposits.
Provision (Benefit) for Loan Losses
Comparison to Prior Year Quarter
The provision (benefit) for loan losses was a provisionbenefit of $2$1 million during both the three months ended SeptemberJune 30, 2018 and June 30, 2017, compared to a provision of $7 million during the three months ended September 30, 2016. During the three months ended September 30, 2017, the $2 million provisionwhich reflects our continued low level of net charge-offs and the strong credit quality, including low delinquencies and charge-offs, along with growth of our loan portfolios. The $7 million provision during the three months ended September 30, 2016 was largelyportfolio in areas we believe to reserve for loans with government guarantees.pose lower levels of credit risk.
Comparison to Prior Year to Date
The provision (benefit) for loan losses was a provisionbenefit of $4$1 million forduring the ninesix months ended SeptemberJune 30, 2017,2018, compared to a benefitprovision of $9$2 million during the ninesix months ended SeptemberJune 30, 2016.2017. The $4 millionimprovement in the provision for the nine months ended September 30, 2017 reflects our continued low level of net charge-offs and the strong credit quality with lower levels of charge-offs along with growth of the loan portfolio. The $9 million benefit for the nine months ended September 30, 2016 resulted primarily from the saleportfolio in areas we believe to pose lower levels of $1.2 billion UPB of performing residential first mortgage loans and $110 million UPB of nonperforming, TDR and non-agency loans.credit risk.
For further information on the provision for loan losses see MD&A - Allowance for Loan Losses.Credit Quality.
Noninterest Income
The following tables provide information on our noninterest income along with additional details related to our net gain on loan sales and other mortgage metrics:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (Dollars in millions) | (Dollars in millions) |
| Net gain on loan sales | $ | 75 |
| | $ | 94 |
| | $ | (19 | ) | | $ | 189 |
| | $ | 259 |
| | $ | (70 | ) | $ | 63 |
| | $ | 66 |
| | $ | (3 | ) | | $ | 123 |
| | $ | 114 |
| | $ | 9 |
|
| Loan fees and charges | 23 |
| | 22 |
| | 1 |
| | 58 |
| | 56 |
| | 2 |
| 24 |
| | 20 |
| | 4 |
| | 44 |
| | 35 |
| | 9 |
|
| Deposit fees and charges | 5 |
| | 5 |
| | — |
| | 14 |
| | 17 |
| | (3 | ) | 5 |
| | 5 |
| | — |
| | 10 |
| | 9 |
| | 1 |
|
| Loan administration income | 5 |
| | 4 |
| | 1 |
| | 16 |
| | 14 |
| | 2 |
| 5 |
| | 6 |
| | (1 | ) | | 10 |
| | 11 |
| | (1 | ) |
| Net return (loss)on mortgage servicing rights | 6 |
| | (11 | ) | | 17 |
| | 26 |
| | (21 | ) | | 47 |
| |
| Representation and warranty benefit | 4 |
| | 6 |
| | (2 | ) | | 11 |
| | 12 |
| | (1 | ) | |
| Net return on mortgage servicing rights | | 9 |
| | 6 |
| | 3 |
| | 13 |
| | 20 |
| | (7 | ) |
| Other noninterest income | 12 |
| | 36 |
| | (24 | ) | | 32 |
| | 52 |
| | (20 | ) | 17 |
| | 13 |
| | 4 |
| | 34 |
| | 27 |
| | 7 |
|
| Total noninterest income | $ | 130 |
| | $ | 156 |
| | $ | (26 | ) | | $ | 346 |
| | $ | 389 |
| | $ | (43 | ) | $ | 123 |
| | $ | 116 |
| | $ | 7 |
| | $ | 234 |
| | $ | 216 |
| | $ | 18 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
Mortgage rate lock commitments (fallout-adjusted) (1) | $ | 8,898 |
| | $ | 8,291 |
| | $ | 23,896 |
| | $ | 23,281 |
|
Net margin on mortgage rate lock commitments (fallout-adjusted) (1) (2) | 0.84 | % | | 1.13 | % | | 0.79 | % | | 1.05 | % |
| Gain on loan sales LHFS + net return (loss) on the MSR | $ | 81 |
| | $ | 83 |
| | $ | 215 |
| | $ | 223 |
|
| Mortgage loans sold and securitized | 8,924 | | 8,723 | | 22,397 | | 23,611 |
| Net margin on loans sold and securitized | 0.84 | % | | 1.08 | % | | 0.84 | % | | 1.03 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (Dollars in millions) | | |
Mortgage rate lock commitments (fallout-adjusted) (1) | $ | 9,011 |
| | $ | 9,002 |
| | $ | 9 |
| | $ | 16,734 |
| | $ | 14,998 |
| | $ | 1,736 |
|
Net margin on mortgage rate lock commitments (fallout-adjusted) (1)(2) | 0.71 | % | | 0.73 | % | | (0.02 | )% | | 0.74 | % | | 0.76 | % | | (0.02 | )% |
| Mortgage loans sold and securitized | 9,260 | | 8,989 | | 271 | | 16,506 | | 13,473 | | 3,033 |
| |
| (1) | Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the level of interest rates. |
| |
| (2) | Gain on loan sale marginvolume is based on net gain on loan sales related to LHFS to fallout-adjusted mortgage rate lock commitments. |
Comparison to Prior Year Quarter
Total noninterest income decreased $26increased $7 million during the three months ended SeptemberJune 30, 2017,2018, compared to the same period in 2016.2017.
Net gain on loan sales decreased $19$3 million during the three months ended SeptemberJune 30, 2017,2018, compared to the three months ended SeptemberJune 30, 2016. The2017, primarily due to a 2 basis point decrease in net gain on loan salessale margin decreased 24 basis points with fallout adjustedon relatively flat fallout-adjusted rate lock yields decreasing 0.29 basis pointsvolume. The decrease in net gain on loan sale margin is being driven by overcapacity in the mortgage industry resulting in increased pricing competition.
Loan fees and charges increased $4 million during the three months ended June 30, 2018, compared to 0.84 percentthe threemonths ended June 30, 2017, primarily due to a shift in channel mix from third party to retail originations which more competitive pricing. Lower margins were partiallythan offset by a 7.3 percent increasethe decrease in fallout adjustedtotal mortgage locks driven primarily by the Opes and Stearns acquisitions that occurred in 2017.loan closings.
Net return on MSRs, (includingincluding the impact of economic hedges)hedges, increased $17$3 million during the three months ended SeptemberJune 30, 2017,2018, compared to the three months ended SeptemberJune 30, 2016.2017. The increase was primarily driven by improvements in fair value due to a more stable prepayment environmenthigher net return from the MSR asset and improvementslower transaction costs related to less sales volume in our hedging program, partially offset by a decrease in service fee income resulting from lower MSR balance due to sales that occurred throughout 2017.the three months ended June 30, 2018 than the same period last year.
Other noninterest income decreased $24increased $4 million during the three months ended SeptemberJune 30, 2017,2018, compared to the three months ended SeptemberJune 30, 20162017. The increase was primarily due to a $24 million reductionhigher FHLB stock dividend income attributable to an increase in FHLB stock holdings and higher rental income driven by growth within the DOJ settlement liability that occurred in the third quarter of 2016.equipment finance portfolio.
Comparison to Prior Year to Date
Total noninterest income decreased $43increased $18 million during the ninesix months ended SeptemberJune 30, 2017,2018, compared to the same period in 2016.2017.
Net gain on loan sales decreased $70increased $9 million during the ninesix months ended SeptemberJune 30, 2017,2018, compared to the ninesix months ended SeptemberJune 30, 2016. The net gain on loan sales margin decreased 192017. Fallout-adjusted rate locks increased 12 percent, boosted by our 2017 mortgage business acquisitions. This volume increase was partially offset by a 2 basis points primarily driven by more competitive pricing and our decision to extend turn times on sales of LHFS which shifts earnings from gain on sale to net interest income. During the nine months ended September 30, 2017, turn times on sales of LHFS were an average of 52 days compared to an average of 35 days during the nine months ended September 30, 2016. As of September 30, 2017, we continue to selectively decide whether to extend turn times on sale of LHFS if, in its estimation, such extensions provide favorable economics. Thepoint decrease in net gain on loan sales was also attributedsale margin due to overcapacity in the market and increased pricing competition.
Loan fees and charges increased $9 million during the six months ended June 30, 2018, compared to the sale of performing LHFI that occurred during the nine sixmonths ended SeptemberJune 30, 2016 which resulted in a $14 million gain. The decreases in net gain on loan sales were partially offset by a shift in mix which includes2017, primarily due to an increase in distributedmortgage loan closings and shift in channel mix from third party originations to retail due to the integration of Opes.
Deposit fees and charges decreased $3 million during the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease was primarily due to lower exchange fee income resulting from limitations set by the Durbin amendment, which became applicable to the Bank on July 1, 2016.channels.
Net return on MSRs, was $26 million forincluding the nine months ended September 30, 2017, compared to a lossimpact of $21hedges, decreased $7 million during the ninesix months ended SeptemberJune 30, 2016. The $47 million increase was2018, compared to the six months ended June 30, 2017, primarily driven by a more stable prepayment environment and improvements in our hedging program, partially offset bydue to lower servicing fee income resultingnet return from the MSR asset, along with a lower average MSR balance and higher transaction costs driven by MSR sales that occurred in the first nine months of 2017. During the nine months ended September 30, 2017, we sold MSRs with a fair value of $260 million.balance.
Other noninterest income decreased $20increased $7 million during the ninesix months ended SeptemberJune 30, 2017,2018, compared to the ninesix months ended SeptemberJune 30, 2016.2017. The decreaseincrease was primarily due to higher FHLB stock dividend income attributable to an increase in FHLB stock holdings and a $24 million reductionsupplemental dividend received in the DOJ settlement liability that occurred in the thirdfirst quarter of 2016.2018, higher rental income driven by growth within the equipment finance portfolio, and higher investment and insurance income.
Noninterest Expense
The following table sets forth the components of our noninterest expense:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (Dollars in millions) | (Dollars in millions) |
| Compensation and benefits | $ | 76 |
| | $ | 69 |
| | $ | 7 |
| | $ | 219 |
| | $ | 203 |
| | $ | 16 |
| $ | 80 |
| | $ | 71 |
| | $ | 9 |
| | $ | 160 |
| | $ | 143 |
| | $ | 17 |
|
| Commissions | 23 |
| | 16 |
| | 7 |
| | 49 |
| | 40 |
| | 9 |
| 25 |
| | 16 |
| | 9 |
| | 43 |
| | 26 |
| | 17 |
|
| Occupancy and equipment | 28 |
| | 21 |
| | 7 |
| | 75 |
| | 64 |
| | 11 |
| 30 |
| | 25 |
| | 5 |
| | 60 |
| | 47 |
| | 13 |
|
| Federal insurance premiums | | 6 |
| | 4 |
| | 2 |
| | 12 |
| | 7 |
| | 5 |
|
| Loan processing expense | 15 |
| | 13 |
| | 2 |
| | 41 |
| | 40 |
| | 1 |
| 15 |
| | 14 |
| | 1 |
| | 29 |
| | 26 |
| | 3 |
|
| Legal and professional expense | 7 |
| | 5 |
| | 2 |
| | 22 |
| | 20 |
| | 2 |
| 6 |
| | 8 |
| | (2 | ) | | 12 |
| | 15 |
| | (3 | ) |
| Other noninterest expense | 22 |
| | 18 |
| | 4 |
| | 59 |
| | 51 |
| | 8 |
| 15 |
| | 16 |
| | (1 | ) | | 34 |
| | 30 |
| | 4 |
|
| Total noninterest expense | $ | 171 |
| | $ | 142 |
| | $ | 29 |
| | $ | 465 |
| | $ | 418 |
| | $ | 47 |
| $ | 177 |
| | $ | 154 |
| | $ | 23 |
| | $ | 350 |
| | $ | 294 |
| | $ | 56 |
|
| Efficiency ratio | 73.5 | % | | 59.9 | % | | 13.6 | % | | 73.9 | % | | 66.9 | % | | 7.0 | % | 74.4 | % | | 72.0 | % | | 2.4 | % | | 76.9 | % | | 74.2 | % | | 2.7 | % |
| | | | | | | | | | | | | |
| | September 30, 2017 | | June 30, 2017 | | Change | | September 30, 2017 | | December 31, 2016 | | Change | |
| Number of FTE | 3,495 |
| | 3,432 |
| | 63 |
| | 3,495 |
| | 2,886 |
| | 609 |
| |
| Average number of FTE | | 3,664 |
| | 3,263 |
| | 401 |
| | 3,641 |
| | 3,100 |
| | 541 |
|
Comparison to Prior Year Quarter
Noninterest expense increased $29 million to $171$23 million during the three months ended SeptemberJune 30, 2017,2018, compared to $142the three months ended June 30, 2017.
Compensation and benefits increased $9 million during the three months ended SeptemberJune 30, 2016.2018, compared to the three months ended June 30, 2017. This increase is primarily due to 12 percent higher average FTE due to acquisitions and growth in our business.
Commissions increased $9 million, during the three months ended June 30, 2018, compared to the three months ended June 30, 2017, primarily due to the acquisition of the Opes in 2017, which has increased our retail mortgage originations versus our predominately third party origination model.
Occupancy and equipment increased $5 million during the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The increase is driven by growth initiatives and operating expenses associated with the recent acquisition of Opes which will support future revenue growth. Increases in those related expenses include an increase in compensation and benefitswas primarily due to a higher headcount, an increase in commissions attributable to increased loan production,average depreciable asset base and an increase in occupancy and equipment costsrent expense relating to support the capital needs of our expanded business.acquisitions.
Comparison to Prior Year to Date
Noninterest expense increased $47 million to $465$56 million during the ninesix months ended SeptemberJune 30, 2017,2018, compared to $418the six months ended June 30, 2017.
Compensation and benefits increased $17 million during the ninesix months ended SeptemberJune 30, 2016.2018, compared to the six months ended June 30, 2017, primarily due to 17 percent higher average FTE, driven by acquisitions and growth in our business.
Commissions increased $17 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase is primarily due to the acquisition of Opes in 2017, which has increased our retail mortgage originations versus our predominately third party origination model, and $1.7 billion higher loan originations in the six months ended June 30, 2018 compared to the same period a year ago.
Occupancy and equipment increased $13 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase was primarily driven bydue to a higher operating expenses associated with growth initiativesaverage depreciable asset base and our 2017 acquisitions of Opes and Stearns, including an increase in compensation and benefitsvendor services supporting business growth.
FDIC insurance premiums increased $5 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to growth in our total assets.
Other noninterest expense increased $4 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to an increase in headcount and higher commissions. Additionally, noninterest expense increased as a result of higher occupancy and equipmentadvertising expenses to support the capital needs of our expanded business and an increase in advertising related to a direct mail andraise brand awareness campaign.awareness.
Provision (benefit) for Income Taxes
Our provision for income taxes for the three and ninesix months ended SeptemberJune 30, 20172018 was $20$12 million and $52$21 million, respectively, compared to a provision of $30$19 million and $73$32 million duringfor the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively. These decreases are primarily due to the reduction in the statutory corporate tax rate from 35 percent to 21 percent as a result of the Tax Cuts and Jobs Act.
Our effective tax provision rate for the three and ninesix months ended SeptemberJune 30, 20172018 was 32.420.4 percent and 32.320.2 percent, respectively, compared to 34.331.8 percent and 33.832.3 percent for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively.
Our effective tax provision rate for the three and nine months ended September 30, 2017 differs from the combined federal and state statutory tax rate primarily due to a benefit fromnon-taxable bank owned life insurance and other tax-exempt earnings, partially offset by nondeductible expenses.
Operating Segments
For further information, seedetail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 1518 - Income Taxes.Segment Information.
Loan Originations, Sales and ServicingCommunity Banking
The majorityOur Community Banking segment services consumer, governmental and commercial customers in our banking footprint which spans throughout Michigan and contiguous states as well as the high desert region of California. We also serve home builders, correspondents, and commercial customers on a national basis.
Our commercial customers are from a diversified range of industries including financial, insurance, service, manufacturing, and distribution. We offer financial products to these customers for use in their normal business operations and financing of working capital needs, equipment purchases and other capital investments. Additionally, our totalcommercial real estate business supports income producing real estate and home builder. These loans are made to finance properties such as owner-occupied, retail, multi-family apartment buildings, office, industrial buildings, and home builder.
Our Community Banking segment has seen continued growth and our transformation into a commercial bank continues to be a key component in our overall business model. Our commercial loan originations during the nine months ended Septemberportfolio has grown to $5.1 billion as of June 30, 2017 represented mortgage loans that were collateralized by2018, representing a 37 percent increase from June 30, 2017.
Mortgage Originations
We are a leading national originator of residential first mortgages on single-family residencesmortgages. Our Mortgage Origination segment originates, acquires and were eligible for sale to the Agencies. During the nine months ended September 30, 2017, sales of loans totaled $22.4 billion, or 90.8 percent of originations compared to $23.6 billion, or 99.0 percent of originations during the nine months ended September 30, 2016, with the decrease primarily due to the accumulation of loans in support of our residential mortgage backed securitizations. As of September 30, 2017, we had outstanding commitments to sell $6.6 billion of mortgage loans. Generally, these commitments are funded within 120 days. At September 30, 2017 and December 31, 2016, consumer LHFS totaled $4.9 billion and $3.2 billion, respectively, which are primarilysells one-to-four family residential mortgage loans. The $1.7 billion increase is the result of seasonally higher mortgage activity and the accumulation of loans in support of our next residential mortgage backed securitization.
On October 31, 2017, the Company closed on a securitization of $576 million of residential mortgage-backed certificates (RMBS) issued by Flagstar Mortgage Trust 2017-2 (FSMT 2017-2). On July 31, 2017, the Company closed on a securitization of $444 million of RMBS issued by Flagstar Mortgage Trust 2017-1 (FSMT 2017-1). Both loan sales are comprised of loans Flagstar originated through our retail, broker and correspondent channels. The collateral consists of high-quality 15 to 30 year, fully amortizing conforming and jumbo fixed-rate loans.
In addition, we originate or purchase residential first mortgage loans, other consumer loans, and commercial loans for our LHFI portfolios. Our revenues include noninterest income from sales of residential first mortgages to the Agencies, net interest income, and revenue from servicing of loans for others.
We utilize multiple production channels to originate or acquire mortgage loans on a national scale to generate high returns on capital. This helps grow the servicing business and provides stable, low cost funding for the Community Bank segment. in all 50 states.
We continue to leverage technology to streamline the mortgage origination process, thereby bringing service and
convenience to borrowers and correspondents. We also continue to make available to our customers various web-based tools that facilitate the mortgage loan process through each of our production channels. We intend to continue to seek new ways to expand our relationships with borrowers and correspondents to provide the necessary capital and liquidity to grow the Mortgage Servicing and the Community Bank segments.
The following table presents loan originations by portfolio:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Consumer loans | | | | | | | |
| Residential first mortgage | $ | 9,572 |
| | $ | 9,192 |
| | $ | 24,659 |
| | $ | 23,856 |
|
Home equity (1) | 94 |
| | 50 |
| | 225 |
| | 137 |
|
| Total consumer loans | 9,666 |
| | 9,242 |
| | 24,884 |
| | 23,993 |
|
Commercial loans (2) | 265 |
| | 248 |
| | 932 |
| | 496 |
|
| Total loan originations | $ | 9,931 |
| | $ | 9,490 |
| | $ | 25,816 |
| | $ | 24,489 |
|
| |
(1) | Includes second mortgage loans, HELOC loans, and other consumer loans. |
| |
(2) | Includes commercial real estate and commercial and industrial loans. |
Additionally, ourMortgage Servicing
The Mortgage Servicing segment provides servicing of residential mortgages forservices our own LHFI portfolio and may service or subservicesubservices mortgage loans which we have sold or securitized. Mortgage loans are serviced and subserviced for others through a scalable servicing platform on a fee for service basis and we may also collect ancillary fees and earn income through the use of noninterest-bearingnoninterest bearing escrows. The loans we service generate custodial deposits which provide a stable funding source. Revenue for those serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the delinquency status of the underlying loans. The Mortgage Servicing segment also services residential mortgages for our LHFI portfolio in the Community Banking segment and our own MSR portfolio in the Mortgage Originations segment for which it earns intersegment revenue.
The following table presents the UPB (net of write downs) of residential loans serviced and subserviced and the number of accounts associated with those loans.
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | Amount | | Number of accounts | | Amount | | Number of accounts | Unpaid Principal Balance (1) | | Number of accounts | | Unpaid Principal Balance (1) | | Number of accounts |
| | (Dollars in millions) | (Dollars in millions) |
| Residential loan servicing | | | | | | | | | | | | | | |
Serviced for own loan portfolio (1)(2) | $ | 7,376 |
| | 31,135 |
| | $ | 5,816 |
| | 29,244 |
| $ | 7,303 |
| | 32,012 |
| | $ | 7,013 |
| | 29,493 |
|
| Serviced for others | 21,342 |
| | 87,215 |
| | 31,207 |
| | 133,270 |
| 19,249 |
| | 78,898 |
| | 25,073 |
| | 103,137 |
|
Subserviced for others (2)(3) | 62,351 |
| | 296,913 |
| | 43,127 |
| | 220,075 |
| 93,761 |
| | 424,331 |
| | 65,864 |
| | 309,814 |
|
| Total residential loans serviced | $ | 91,069 |
| | 415,263 |
| | $ | 80,150 |
| | 382,589 |
| $ | 120,313 |
| | 535,241 |
| | $ | 97,950 |
| | 442,444 |
|
| |
| (1) | UPB, net of write downs, does not include premiums or discounts. |
| |
| (2) | Includes LHFI (residential first mortgage and home equity), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets. |
| |
(2)(3) | Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets. |
Overview
For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 19 - Segment Information, and other sections of this report for a full understanding of our consolidated financial performance.Other
The following table presents net income (loss) by operating segment:Other segment includes the treasury functions, which include, the impact of interest rate risk management, balance sheet funding activities and the administration of the investment securities portfolios, as well as miscellaneous other expenses of a corporate nature. In addition, the Other segment includes revenue and expenses not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage Servicing segments.
OPERATING SEGMENT PERFORMANCE
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| | (Dollars in millions) |
| Community Banking | $ | 10 |
| | $ | 7 |
| | $ | 3 |
| | $ | 26 |
| | $ | 34 |
| | $ | (8 | ) |
| Mortgage Originations | 31 |
| | 39 |
| | (8 | ) | | 87 |
| | 99 |
| | (12 | ) |
| Mortgage Servicing | (4 | ) | | (3 | ) | | (1 | ) | | (12 | ) | | (9 | ) | | (3 | ) |
| Other | 3 |
| | 14 |
| | (11 | ) | | 7 |
| | 19 |
| | (12 | ) |
| Total net income | $ | 40 |
| | $ | 57 |
| | $ | (17 | ) | | $ | 108 |
| | $ | 143 |
| | $ | (35 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| Community Banking | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (Dollars in millions) |
| Summary of Operations | | | | | | | | | | | |
| Net interest income | $ | 80 |
| | $ | 57 |
| | $ | 23 |
| | $ | 150 |
| | $ | 108 |
| | $ | 42 |
|
| (Provision) benefit for loan losses | — |
| | — |
| | — |
| | (1 | ) | | (2 | ) | | 1 |
|
| Net interest income after (provision) benefit for loan losses | 80 |
| | 57 |
| | 23 |
| | 149 |
| | 106 |
| | 43 |
|
| Net gain (loss) on loan sales | (5 | ) | | (1 | ) | | (4 | ) | | (7 | ) | | (3 | ) | | (4 | ) |
| Other noninterest income | 9 |
| | 6 |
| | 3 |
| | 17 |
| | 14 |
| | 3 |
|
| Total noninterest income | 4 |
| | 5 |
| | (1 | ) | | 10 |
| | 11 |
| | (1 | ) |
| Compensation and benefits | (17 | ) | | (15 | ) | | (2 | ) | | (34 | ) | | (31 | ) | | (3 | ) |
| Other noninterest expense and directly allocated overhead | (28 | ) | | (22 | ) | | (6 | ) | | (54 | ) | | (42 | ) | | (12 | ) |
| Total noninterest expense | (45 | ) | | (37 | ) | | (8 | ) | | (88 | ) | | (73 | ) | | (15 | ) |
| Income before indirect overhead allocations and income taxes | 39 |
| | 25 |
| | 14 |
| | 71 |
| | 44 |
| | 27 |
|
| Overhead allocations | (9 | ) | | (10 | ) | | 1 |
| | (20 | ) | | (20 | ) | | — |
|
| Provision for income taxes | 7 |
| | 5 |
| | 2 |
| | 11 |
| | 8 |
| | 3 |
|
| Net income | $ | 23 |
| | $ | 10 |
| | $ | 13 |
| | $ | 40 |
| | $ | 16 |
| | $ | 24 |
|
| Key Metrics | | | | | | | | | | | |
| Efficiency Ratio | 53.1 | % | | 59.7 | % | | (6.6 | )% | | 54.8 | % | | 61.3 | % | | (6.5 | )% |
| Return on average assets | 1.1 | % | | 0.6 | % | | 0.5 | % | | 1.0 | % | | 0.5 | % | | 0.5 | % |
| Average number of FTE employees | 826 |
| | 700 |
| | 126 |
| | 794 |
| | 694 |
| | 100 |
|
Community Banking
Comparison to Prior Year Quarter
During the three months ended September 30, 2017, theThe Community Banking segment reported net income of $10 million, compared to $7$23 million for the three months ended SeptemberJune 30, 2016.2018, compared to $10 million for the three months ended June 30, 2017. The $13 million increase in net income was primarily due to a $9$23 million increase in net interest income fromdriven by higher average loan balances, led by growth incommercial loans. Average commercial loans and higher average loan yields as well as a $6 million improvement in provisionincreased $1.5 billion for loan lossesthe three months ended June 30, 2018 compared to the three months ended June 30, 2017, due to improved credit quality. These increases were
organic growth and the acquisitions of Desert Community Bank branches and the Santander warehouse business in 2018. The increase in net interest income was partially offset by a $7an $8 million increase in noninterest expense driven by higher volume-driven expensescompensation and growth initiatives which will support future revenue growth.benefits and occupancy and equipment expense primarily due to acquisitions, and an increase in FDIC premiums primarily due to higher total assets.
Comparison to Prior Year to Date
During the nine months ended September 30, 2017, theThe Community Banking segment reported net income of $26 million, compared to $34$40 million for the ninesix months ended SeptemberJune 30, 2016.2018, compared to $16 million for the six months ended June 30, 2017. The $8$24 million decreaseincrease in net income was primarily due to a $15 million decrease in net gain on loans sales and a $12 million increase in provision for loan losses, primarily resulting from the sale of performing residential loans out of the LHFI portfolio during the nine months ended September 30, 2016. These decreases were partially offset by a $21$42 million increase in net interest income driven by average commercial loan growth of $1.4 billion for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. This average commercial loan growth was due to loanorganic growth ledand the acquisitions of Desert Community Bank branches and Santander warehouse business in 2018. The increase in net interest income was partially offset by a $15 million increase in noninterest expense driven by growth initiatives, which include higher compensation and benefits, occupancy and equipment expense, and advertising costs along with an increase in commercial loanscommunity reinvestment programs and FDIC premiums primarily due to higher average loan yields.total assets.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| Mortgage Originations | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (Dollars in millions) |
| Summary of Operations | | | | | | | | | | | |
| Net interest income | $ | 33 |
| | $ | 32 |
| | $ | 1 |
| | $ | 64 |
| | $ | 62 |
| | $ | 2 |
|
| (Provision) benefit for loan losses | (1 | ) | | — |
| | (1 | ) | | (1 | ) | | (2 | ) | | 1 |
|
| Net interest income after (provision) benefit for loan losses | 32 |
| | 32 |
| | — |
| | 63 |
| | 60 |
| | 3 |
|
| Net gain on loan sales | 68 |
| | 67 |
| | 1 |
| | 130 |
| | 117 |
| | 13 |
|
| Other noninterest income | 27 |
| | 24 |
| | 3 |
| | 46 |
| | 50 |
| | (4 | ) |
| Total noninterest income | 95 |
| | 91 |
| | 4 |
| | 176 |
| | 167 |
| | 9 |
|
| Compensation and benefits | (28 | ) | | (24 | ) | | (4 | ) | | (57 | ) | | (44 | ) | | (13 | ) |
| Other noninterest expense and directly allocated overhead | (47 | ) | | (38 | ) | | (9 | ) | | (88 | ) | | (65 | ) | | (23 | ) |
| Total noninterest expense | (75 | ) | | (62 | ) | | (13 | ) | | (145 | ) | | (109 | ) | | (36 | ) |
| Income before indirect overhead allocations and income taxes | 52 |
| | 61 |
| | (9 | ) | | 94 |
| | 118 |
| | (24 | ) |
| Overhead allocation | (17 | ) | | (14 | ) | | (3 | ) | | (35 | ) | | (31 | ) | | (4 | ) |
| Provision for income taxes | 7 |
| | 17 |
| | (10 | ) | | 12 |
| | 31 |
| | (19 | ) |
| Net income (loss) | $ | 28 |
| | $ | 30 |
| | $ | (2 | ) | | $ | 47 |
| | $ | 56 |
| | $ | (9 | ) |
| Key Metrics | | | | | | | | | | | |
| Efficiency Ratio | 59.3 | % | | 50.4 | % | | 8.9 | % | | 60.5 | % | | 47.6 | % | | 12.9 | % |
| Return on average assets | 2.1 | % | | 2.2 | % | | (0.1 | )% | | 1.7 | % | | 2.2 | % | | (0.5 | )% |
Mortgage rate lock commitments (fallout-adjusted) (1) | $ | 9,011 |
| | $ | 9,002 |
| | $ | 9 |
| | $ | 16,734 |
| | $ | 14,998 |
| | $ | 1,736 |
|
| Average number of FTE employees | 1,608 |
| | 1,415 |
| | 193 |
| | 1,630 |
| | 1,263 |
| | 367 |
|
| |
| (1) | Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the level of interest rates. |
Mortgage Originations
Comparison to Prior Year Quarter
The Mortgage Originations segment'ssegment reported net income decreased $8of $28 million to $31 million duringfor the three months ended SeptemberJune 30, 2017,2018, compared to $39$30 million infor the three months ended SeptemberJune 30, 2016.2017. The decrease was primarily due to a $24 millionan increase in noninterest expense during the three months ended September 30, 2017, primarily driven by higheran $8 million increase in commissions resulting from an increased mix of retail production and a $4 million increase in compensation and benefits duerelated to growth initiatives and higher commissions resultingincreased headcount from higher loan production. Additionally, the net gain on loans sales decreased $16 million driven by a 29 basis point decrease in margin resulting from a more competitive market and product mix.acquisitions. These decreases in net income were partially offset by a $17 million increase in thehigher noninterest income primarily resulting from higher net return on MSRs driven by increases infrom the interest rate environment experienced during the third quarter of 2017 which resulted in lower prepayments and favorable fair value adjustments, as well as a $10 million increase in net interest income primarily due to an increase in mortgage volume and the benefit of extended turn times which shifts earnings from gain on sale to net interest income.MSR asset.
Comparison to Prior Year to Date
The Mortgage Originations segment'ssegment reported net income decreased $12of $47 million for the six months ended June 30, 2018, compared to $87$56 million for the six months ended June 30, 2017. Our 2017 acquisitions drove increased mortgage volumes resulting in $1.7 billion higher fallout adjusted locks during the ninesix months ended SeptemberJune 30, 2017,2018 as compared to $99 million in the ninesix months ended September 30, 2016. The decrease was primarily due to
a $55 million decrease inended June 30, 2017. Consequently, net gain on loan sales driven by a 26 basis point decrease in margin resulting from product mix and a more competitive market. Other noninterest expenseloan fees and charges, increased $39$13 million primarily dueand $4 million, respectively. The increased mortgage volume led to higher operating expenses associated with growth initiatives, which include anvariable costs, including $15 million higher commissions and $2 million higher loan processing expense. The acquisitions also primarily drove a $13 million increase in compensation and benefits and higher commissions resulting from an increase in mortgage volume. These decreases in net income were partially offset by a $47$5 million increase in occupancy and equipment expense. The net return on MSRs primarily due to an increaseMSR decreased $7 million driven by a decrease in the interest rate environment in the first nine months of 2017 which resulted in lower prepayments and favorable fair value adjustments. Net interest income increased $29 million primarilyour average MSR asset resulting from an increase in mortgage activity and the benefit of extending turn times.MSR sales.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| Mortgage Servicing | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (Dollars in millions) |
| Summary of Operations | | | | | | | | | | | |
| Net interest income | $ | 1 |
| | $ | 2 |
| | $ | (1 | ) | | $ | 3 |
| | $ | 5 |
| | $ | (2 | ) |
| Provision for loan losses | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net interest income after provision for loan losses | 1 |
| | 2 |
| | (1 | ) | | 3 |
| | 5 |
| | (2 | ) |
| Net gain on loan sales | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other noninterest income | 22 |
| | 17 |
| | 5 |
| | 41 |
| | 33 |
| | 8 |
|
| Total noninterest income | 22 |
| | 17 |
| | 5 |
| | 41 |
| | 33 |
| | 8 |
|
| Compensation and benefits | (5 | ) | | (4 | ) | | (1 | ) | | (9 | ) | | (8 | ) | | (1 | ) |
| Other noninterest expense and directly allocated overhead | (15 | ) | | (16 | ) | | 1 |
| | (31 | ) | | (32 | ) | | 1 |
|
| Total noninterest expense | (20 | ) | | (20 | ) | | — |
| | (40 | ) | | (40 | ) | | — |
|
| Income (loss) before indirect overhead allocations and income taxes | 3 |
| | (1 | ) | | 4 |
| | 4 |
| | (2 | ) | | 6 |
|
| Overhead allocations | (5 | ) | | (5 | ) | | — |
| | (10 | ) | | (11 | ) | | 1 |
|
| Provision (benefit) for income taxes | (2 | ) | | (3 | ) | | 1 |
| | (2 | ) | | (5 | ) | | 3 |
|
| Net income (loss) | $ | — |
| | $ | (3 | ) | | $ | 3 |
| | $ | (4 | ) | | $ | (8 | ) | | $ | 4 |
|
| Key Metrics | | | | | | | | | | | |
| Efficiency Ratio | 84.4 | % | | 105.3 | % | | (20.9 | )% | | 89.6 | % | | 105.3 | % | | (15.7 | )% |
| Return on average assets | (13.0 | )% | | (30.8 | )% | | 17.8 | % | | (29.2 | )% | | (40.0 | )% | | 10.8 | % |
| Average number of residential loans serviced | 495,191 | | 404,067 | | 91,124 | | 477,054 | | 395,441 | | 81,613 |
| Average number of FTE employees | 218 | | 196 | | 22 | | 213 | | 198 | | 15 |
Mortgage Servicing
Comparison to Prior Year Quarter
The Mortgage Servicing segment reported a net lossincome of $4less than $1 million for the three months ended SeptemberJune 30, 2017,2018, compared to a net loss of $3 million for the three months ended SeptemberJune 30, 2016.2017. The increase in net losses iswas primarily due to an increase in loans serviced which drove higher volume related income, including a decrease$2 million increase in loan administration income partially offset by higher subservicingand a $3 million increase in late fees driven byand other ancillary fees. Higher loan volume also drove an increase in average portfolio volumenoninterest expense and an improvementa decrease in other noninterest expenses.net interest income resulting from higher interest expense on custodial balances.
Comparison to Prior Year to Date
The Mortgage Servicing segment reported a net loss of $12$4 million for the ninesix months ended SeptemberJune 30, 2017,2018, compared to a net loss of $9$8 million for the ninesix months ended SeptemberJune 30, 2016. The increase in net losses is2017, primarily due to a decreasethe growth in the number of loans serviced, volume driven income resulting from late fees, ancillary fees and loan administration income has increased a total of $9 million. This increase was partially offset by volume related costs increasing noninterest expense and a decrease in net interest income due to lower average company controlled deposits, partially offset by higher subservicing fees driven by higher average portfolio volume.interest expense on custodial balances.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
Other | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (Dollars in millions) |
| Summary of Operations | | | | | | | | | | | |
Net interest income (1) | $ | 1 |
| | $ | 6 |
| | $ | (5 | ) | | $ | 4 |
| | $ | 5 |
| | $ | (1 | ) |
| (Provision) benefit for loan losses | 2 |
| | 1 |
| | 1 |
| | 3 |
| | 2 |
| | 1 |
|
| Net interest income after (provision) benefit for loan losses | 3 |
| | 7 |
| | (4 | ) | | 7 |
| | 7 |
| | — |
|
| Net gain (loss) on loan sales | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other noninterest income (1) | 2 |
| | 3 |
| | (1 | ) | | 7 |
| | 5 |
| | 2 |
|
| Total noninterest income | 2 |
| | 3 |
| | (1 | ) | | 7 |
| | 5 |
| | 2 |
|
| Compensation and benefits | (30 | ) | | (28 | ) | | (2 | ) | | (60 | ) | | (60 | ) | | — |
|
Other noninterest expense and directly allocated overhead (1) | (7 | ) | | (7 | ) | | — |
| | (17 | ) | | (12 | ) | | (5 | ) |
| Total noninterest expense | (37 | ) | | (35 | ) | | (2 | ) | | (77 | ) | | (72 | ) | | (5 | ) |
| Income (loss) before indirect overhead allocations and income taxes | (32 | ) | | (25 | ) | | (7 | ) | | (63 | ) | | (60 | ) | | (3 | ) |
| Overhead allocations | 31 |
| | 29 |
| | 2 |
| | 65 |
| | 62 |
| | 3 |
|
| Provision (benefit) for income taxes | — |
| | — |
| | — |
| | — |
| | (2 | ) | | 2 |
|
| Net income (loss) | $ | (1 | ) | | $ | 4 |
| | $ | (5 | ) | | $ | 2 |
| | $ | 4 |
| | $ | (2 | ) |
| Key Metrics | | | | | | | | | | | |
| Average number of FTE employees | 1,012 |
| | 952 |
| | 60 |
| | 1,004 |
| | 945 |
| | 59 |
|
| |
| (1) | Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposit income for subservicing clients. |
Other
Comparison to Prior Year Quarter
For the three months ended September 30, 2017, theThe Other segment'ssegment reported net income was $3 million, compared to net incomeloss of $14$1 million, for the three months ended SeptemberJune 30, 2016.2018, compared to net income of $4 million for the three months ended June 30, 2017. The $11 million decrease in net income is primarily due to a $24 million decreasehigher interest rates driving an increase in the fair value of the DOJ settlement liability which was recorded in the third quarter of 2016. This decrease isunallocated intersegment funding costs, partially offset by an increase in net interesthigher dividend income due to higher average investment balances due to the pulling ahead of planned purchases of investments to take advantage of a higher market return.on FHLB stock.
Comparison to Prior Year to Date
ForThe Other segment reported net income of $2 million for the ninesix months ended SeptemberJune 30, 2017, the Other segment's net income was $7 million,2018, compared to net income of $19$4 million for the ninesix months ended SeptemberJune 30, 2016.2017. The $12 million decrease was primarily due a $24 million decrease in the fair value of the DOJ settlement liability which was recorded in the third quarter of 2016,to higher interest expense on FHLB borrowings, partially offset by decreasehigher dividend income on FHLB stock and a FHLB stock supplemental dividend which we received in noninterest expense.the first quarter 2018.
RISK MANAGEMENT
Like all financial services companies, we engage in business activities and assume the related risks. The risks we are subject to in the normal course of business include, but are not limited to, credit, regulatory compliance, legal, reputation, liquidity, market, operational, and strategic. We have made significant investments in our risk management activities which are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. We hold capital to protect from the risk of unexpected loss.loss arising from these risks.
A comprehensive discussion of risks affecting us can be found in the Risk Factors section included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Some of the more significant processes used to manage and control credit, market, liquidity market, and operational risks are described in the following paragraphs.
Credit Risk
Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or performance terms. We provide loans, extend credit, purchase securities, and enter into financial derivative contracts, all of which have related credit risk.
We maintain a strict credit limit,limits, in compliance with regulatory requirements, in order to maintain a diversified loan portfolio and manage our credit exposure to any one borrower or obligor.requirements. Under the Home Owners Loan Act ("HOLA"), savings associations are generally subject to national bank limits on loans to one borrower. Generally, per HOLA, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 and Tier 2 capital plus any portion of the allowance for loan losses not included in the Tier 2 capital. This lending limit was $249$260 million as of SeptemberJune 30, 2017. Flagstar maintains2018.
We maintain a more conservative maximum internal Bank limit than required by HOLA, of $100 million (commitment level) to any one borrower/obligor relationship, with the exception of warehouse borrower/obligor relationships which is more conservative than thehave an internal Bank limit required by HOLA. Allof $125 million. We have a tracking and reporting process to monitor lending concentration levels and all credit exposures to a single borrower that exceed $50 million must be approved by the Board of Directors. As part of the Santander warehouse acquisition in the first quarter of 2018, the Board of Directors approved a short term exception to the internal Bank limit on loans to an individual borrower/obligor for two warehouse borrowers while Flagstar completes a syndication process to reduce exposure down to the $125 million limit.
Loan Originations
The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We manage our credit riskfollowing table presents loan originations by establishing sound credit policies for underwriting and adhering to well controlled processes. We utilize various credit risk management and monitoring activities to mitigate risks associated with loans that we hold, acquire, and originate.portfolio:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) |
| Consumer loans | | | | | | | |
| Residential first mortgage | $ | 9,040 |
| | $ | 9,184 |
| | $ | 16,926 |
| | $ | 15,087 |
|
Home equity (1) | 77 |
| | 73 |
| | 140 |
| | 127 |
|
| Other | 64 |
| | 2 |
| | 66 |
| | 4 |
|
| Total consumer loans | 9,181 |
| | 9,259 |
| | 17,132 |
| | 15,218 |
|
Commercial loans (2) | 317 |
| | 400 |
| | 486 |
| | 671 |
|
| Total loan originations | $ | 9,498 |
| | $ | 9,659 |
| | $ | 17,618 |
| | $ | 15,889 |
|
| |
| (1) | Includes second mortgage loans and HELOC loans. |
| |
| (2) | Includes CRE and C&I loans that were net funded within the period. |
Loans held-for-investment
The following table summarizes loans held-for-investment by category:
| | | | September 30, 2017 | | December 31, 2016 | | Change | June 30, 2018 | | December 31, 2017 | | Change |
| | (Dollars in millions) | (Dollars in millions) |
| Consumer loans | | | | | | | | | | |
| Residential first mortgage | $ | 2,665 |
| | $ | 2,327 |
| | $ | 338 |
| $ | 2,986 |
| | $ | 2,754 |
| | $ | 232 |
|
Home equity | 496 |
| | 443 |
| | 53 |
| 685 |
| | 664 |
| | 21 |
|
| Other | 26 |
| | 28 |
| | (2 | ) | 88 |
| | 25 |
| | 63 |
|
| Total consumer loans | 3,187 |
| | 2,798 |
| | 389 |
| 3,759 |
| | 3,443 |
| | 316 |
|
| Commercial loans | | | | |
| | | | |
|
Commercial real estate (1)(2) | 1,760 |
| | 1,261 |
| | $ | 499 |
| 2,020 |
| | 1,932 |
| | $ | 88 |
|
| Commercial and industrial | 1,097 |
| | 769 |
| | 328 |
| 1,324 |
| | 1,196 |
| | 128 |
|
| Warehouse lending | 1,159 |
| | 1,237 |
| | (78 | ) | 1,801 |
| | 1,142 |
| | 659 |
|
| Total commercial loans | 4,016 |
| | 3,267 |
| | 749 |
| 5,145 |
| | 4,270 |
| | 875 |
|
| Total loans held-for-investment | $ | 7,203 |
| | $ | 6,065 |
| | $ | 1,138 |
| $ | 8,904 |
| | $ | 7,713 |
| | $ | 1,191 |
|
| |
| (1) | Includes $270second mortgages and HELOC loans. |
| |
| (2) | Includes NBV of $332 million and $245$307 million of owner occupied commercial real estate loans at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. |
Loans held-for-investment increased $1.1$1.2 billion at September 30, 2017 from December 31, 2016.2017 to June 30, 2018. This increase was due to growth in our continued effort to grow bothCommunity Banking segment, combined with the consumer loan portfolioacquisitions of Santander Bank’s warehouse lending business and commercial loan portfolio.Desert Community Bank branches from the first quarter of 2018.
The commercial loan portfolio growth strengthensWe continue to strengthen our Community Banking segment by improving margins through the additions of higher yielding loans. As a result, thegrowing interest earning assets. The commercial loan portfolio has grown $749grew $875 million, or 2320 percent, sincefrom December 31, 2016. During the nine months ended September2017 to June 30, 2017, our CRE portfolio grew $4992018, led by a $659 million and C&I $328 million.increase in warehouse loans.
For further information, see Note 4 - Loans Held-for-Investment.
Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. The LTV requirements vary depending on occupancy, property type, loan amount, and FICO scores. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. We hold for investment, higher yielding loans and loans that will diversify or enhance the interest rate characteristics of our balance sheet.
The following table presents our total residential first mortgage LHFI by major category:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Current estimated LTV ratios | | | | |
Less than 80% and refreshed FICO scores (1): | | | | |
Estimated LTVs (1) | | | | |
Less than 80% and refreshed FICO scores (2): | | | | |
| Equal to or greater than 660 | $ | 2,389 |
| | $ | 2,077 |
| $ | 2,530 |
| | $ | 2,441 |
|
| Less than 660 | 76 |
| | 95 |
| 75 |
| | 73 |
|
80% and greater and refreshed FICO scores (1): | | | | |
80% and greater and refreshed FICO scores (2): | | | | |
| Equal to or greater than 660 | 132 |
| | 78 |
| 308 |
| | 168 |
|
| Less than 660 | 8 |
| | 9 |
| 25 |
| | 12 |
|
| U.S. government guaranteed | 60 |
| | 68 |
| 48 |
| | 60 |
|
| Total | $ | 2,665 |
| | $ | 2,327 |
| $ | 2,986 |
| | $ | 2,754 |
|
| Geographic region | | | | | | |
| California | $ | 1,059 |
| | $ | 858 |
| $ | 1,248 |
| | $ | 1,127 |
|
| Michigan | 267 |
| | 236 |
| 301 |
| | 275 |
|
| Florida | 193 |
| | 193 |
| 201 |
| | 201 |
|
| Washington | | 199 |
| | 169 |
|
| Texas | 174 |
| | 138 |
| 198 |
| | 182 |
|
| Washington | 160 |
| | 136 |
| |
| Illinois | 97 |
| | 84 |
| 105 |
| | 101 |
|
| Arizona | 73 |
| | 65 |
| 75 |
| | 76 |
|
| New York | 72 |
| | 68 |
| 72 |
| | 62 |
|
| Colorado | 66 |
| | 60 |
| 67 |
| | 69 |
|
| Maryland | 65 |
| | 59 |
| 61 |
| | 65 |
|
| Others | 439 |
| | 430 |
| 459 |
| | 427 |
|
| Total | $ | 2,665 |
| | $ | 2,327 |
| $ | 2,986 |
| | $ | 2,754 |
|
| |
| (1) | LTVs reflect UPB at the date reported, as a percentage of property values as appraised at loan origination. |
| |
| (2) | FICO scores are updated at least on a quarterly basis or soonermore frequently if available. |
The following table presents our total residential first mortgage LHFI by year of origination:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 and Prior | | Total |
| | (Dollars in millions) | | |
| Residential first mortgage loans (UPB) | $ | 440 |
| | $ | 816 |
| | $ | 611 |
| | $ | 695 |
| | $ | 424 |
| | $ | 2,986 |
|
| Percent of total | 14.7 | % | | 27.3 | % | | 20.5 | % | | 23.3 | % | | 14.2 | % | | 100.0 | % |
Home equity. Our home equity portfolio includes first and second lien positions for HELOANs and HELOCs. These loans require full documentation and are underwritten and priced in an effort to ensure high credit quality and loan profitability. Our
debt-to-income ratio on second mortgagesHELOANS is capped at 43 percent and for HELOCs is capped at 45 percent. We currently limit the maximum CLTV to 89.99 percent and FICO scores to a minimum of 660. Current second mortgage loans/HELOANS are fixed rate loans and are available with terms up to 15 years. HELOC loans are adjustable-ratevariable-rate loans that contain a 10-year interest-only draw period followed by a 20-year amortizing period.
Commercial real estate loans. The commercial real estate portfolio contains loans collateralized by diversified property types which are primarily income producing in the normal course of business. The majority of our retail exposure is to high-quality, single tenant locations, including many drug stores, with limited exposure to big box retail centers and malls. Generally, the maximum LTV is 80 percent, or 85 percent for owner-occupied real estate, and debt service coverage of 1.20 to 1.35 times. At June 30, 2018, our average LTV and average debt service coverage for our CRE portfolio was 53 percent and 2.00 times, respectively. This portfolio also includes owner occupied real estate loans and secured home builder loans.
We have built a national home builder finance program which has helped grow our balance sheet, increase commercial deposits and generate incremental revenue through our retail purchase mortgage channel. Through this program, we now finance and have active relationships with homebuilders nationwide. At June 30, 2018, loans committed to home builders totaled $1.1 billion, of which $667 million UPB was drawn or used. Of that, $139 million UPB is unsecured which is included in our C&I portfolio and $528 million UPB is collateralized and included in either the single family residence or land-residential categories of our CRE portfolio.
The following table presents our total CRE LHFI by collateral location and collateral type:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Michigan | | Texas | | Colorado | | Florida | | California | | Other | | Total | | % by collateral type |
| | (Dollars in millions) | | |
| June 30, 2018 | | | | | | | | | | | | | | | |
Single family residence (1) | $ | 17 |
| | $ | 80 |
| | $ | 122 |
| | $ | 82 |
| | $ | 25 |
| | $ | 69 |
| | $ | 395 |
| | 19.5 | % |
| Owner occupied | 239 |
| | 4 |
| | — |
| | 2 |
| | 28 |
| | 59 |
| | 332 |
| | 16.4 | % |
Retail (2) | 180 |
| | 2 |
| | 6 |
| | 4 |
| | 7 |
| | 85 |
| | 284 |
| | 14.1 | % |
| Multi family | 97 |
| | 35 |
| | 15 |
| | 29 |
| | 8 |
| | 88 |
| | 272 |
| | 13.5 | % |
| Office | 179 |
| | — |
| | — |
| | 3 |
| | 16 |
| | 14 |
| | 212 |
| | 10.5 | % |
Land - Residential (3) | 5 |
| | 36 |
| | 32 |
| | 27 |
| | 34 |
| | 37 |
| | 171 |
| | 8.5 | % |
| Hotel/motel | 95 |
| | 17 |
| | — |
| | — |
| | 1 |
| | 28 |
| | 141 |
| | 7.0 | % |
| Senior Living facility | 3 |
| | — |
| | — |
| | — |
| | — |
| | 66 |
| | 69 |
| | 3.4 | % |
| Industrial | 40 |
| | — |
| | — |
| | — |
| | — |
| | 27 |
| | 67 |
| | 3.3 | % |
Shopping Mall (4) | — |
| | — |
| | — |
| | — |
| | — |
| | 27 |
| | 27 |
| | 1.3 | % |
All other (5) | 27 |
| | 2 |
| | 1 |
| | 8 |
| | 2 |
| | 10 |
| | 50 |
| | 2.5 | % |
| Total | $ | 882 |
| | $ | 176 |
| | $ | 176 |
| | $ | 155 |
| | $ | 121 |
| | $ | 510 |
| | $ | 2,020 |
| | 100.0 | % |
| Percent by state | 43.7 | % | | 8.7 | % | | 8.7 | % | | 7.7 | % | | 6.0 | % | | 25.2 | % | | 100.0 | % | | |
| |
| (1) | Includes home builder loans secured by SFR 1-4 properties whether under construction or completed. |
| |
| (2) | Includes multipurpose retail space, neighborhood centers, strip centers and single-use retail space. |
| |
| (3) | Includes home builder loans secured by land. Land residential includes development and unimproved vacant land. |
| |
| (4) | Comprised of one shopping mall. |
| |
| (5) | All other primarily includes: parking garage, non-profit, mini-storage facilities, data centers, movie theater, etc. |
Commercial and industrial loans. Commercial and industrial LHFI facilities typically include lines of credit and term loans and leases to businesses for use in normal business operations to finance working capital, equipment and capital purchases, acquisitions and expansion projects. We lend to customers with a history of profitability and a long-term business model. Generally, leverage conforms to industry standards and the minimum debt service coverage is 1.20.1.20 times. Most of our C&I loans earn interest at a variable rate.
The following table presents our total C&I LHFI by borrower's geographic location and industry type:
| | | | Michigan | | Texas | | Florida | | California | | Tennessee | | Other | | Total | | % by industry | Michigan | | Texas | | California | | Virginia | | Connecticut | | Other | | Total | | % by industry |
| | (Dollars in millions) | (Dollars in millions) | | |
| September 30, 2017 | | | | | | | | | | | | | | | | |
| June 30, 2018 | | | | | | | | | | | | | | | | |
| Industry Type | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Services | | $ | 122 |
| | $ | — |
| | $ | 50 |
| | $ | — |
| | $ | 44 |
| | $ | 77 |
| | $ | 293 |
| | 22.1 | % |
| Financial & Insurance | $ | 23 |
| | $ | — |
| | $ | 50 |
| | $ | — |
| | $ | 12 |
| | $ | 228 |
| | $ | 313 |
| | 28.5 | % | 15 |
| | — |
| | — |
| | 71 |
| | — |
| | 179 |
| | 265 |
| | 20.0 | % |
Services (1) | 71 |
| | 73 |
| | — |
| | 34 |
| | — |
| | 114 |
| | 292 |
| | 26.6 | % | |
| Manufacturing | 61 |
| | 5 |
| | — |
| | 23 |
| | — |
| | 87 |
| | 176 |
| | 16.0 | % | 82 |
| | 14 |
| | — |
| | — |
| | — |
| | 114 |
| | 210 |
| | 15.9 | % |
| Homebuilder | | — |
| | 88 |
| | 11 |
| | — |
| | — |
| | 40 |
| | 139 |
| | 10.5 | % |
| Healthcare | 29 |
| | 7 |
| | 1 |
| | 1 |
| | 44 |
| | 27 |
| | 109 |
| | 9.9 | % | 24 |
| | 10 |
| | 10 |
| | — |
| | — |
| | 71 |
| | 115 |
| | 8.7 | % |
| Rental & Leasing | | 77 |
| | — |
| | — |
| | — |
| | — |
| | 26 |
| | 103 |
| | 7.8 | % |
| Distribution | 57 |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | 59 |
| | 5.4 | % | 80 |
| | — |
| | 20 |
| | — |
| | — |
| | — |
| | 100 |
| | 7.5 | % |
| Government & Education | | 29 |
| | — |
| | — |
| | — |
| | 24 |
| | 24 |
| | 77 |
| | 5.8 | % |
| Commodities | | 5 |
| | — |
| | 3 |
| | — |
| | — |
| | 5 |
| | 13 |
| | 1.0 | % |
| Servicing advances | — |
| | — |
| | 21 |
| | — |
| | — |
| | 25 |
| | 46 |
| | 4.2 | % | — |
| | — |
| | — |
| | — |
| | — |
| | 9 |
| | 9 |
| | 0.7 | % |
| Rental & leasing | 44 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 46 |
| | 4.2 | % | |
| Government & education | 9 |
| | — |
| | — |
| | — |
| | — |
| | 36 |
| | 45 |
| | 4.1 | % | |
| Commodities | 5 |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | 11 |
| | 1.0 | % | |
| Total | $ | 299 |
| | $ | 85 |
| | $ | 72 |
| | $ | 60 |
| | $ | 56 |
| | $ | 525 |
| | $ | 1,097 |
| | 100.0 | % | $ | 434 |
| | $ | 112 |
| | $ | 94 |
| | $ | 71 |
| | $ | 68 |
| | $ | 545 |
| | $ | 1,324 |
| | 100.0 | % |
| Percent by state | 27.3 | % | | 7.7 | % | | 6.6 | % | | 5.5 | % | | 5.1 | % | | 47.9 | % | | 100.0 | % | | | 32.8 | % | | 8.5 | % | | 7.1 | % | | 5.3 | % | | 5.1 | % | | 41.2 | % | | 100.0 | % | | |
| |
(1) | Includes unsecured home builder loans of $98 million at September 30, 2017. |
Commercial real estate loans. Flagstar has a well-diversified commercial real estate portfolio, largely based in Michigan. Generally, the maximum LTV is 80 percent, or 85 percent for owner-occupied real estate, and debt service coverage of 1.20 to 1.35 times. This portfolio also includes owner occupied real estate loans and secured home builder loans.
In 2016, we launched a national home builder finance program to grow our balance sheet, increase commercial deposits and develop incremental revenue through our retail purchase mortgage channel. We finance and have active relationships with homebuilders nationwide. At September 30, 2017, home builder loans totaled $516 million. Of that $98 million is unsecured which is included in our C&I portfolio and $418 million is collateralized which is included in our CRE portfolio. We had an additional $505 million of unused home builder lending commitments at September 30, 2017.
The following table presents our total CRE LHFI by borrower's geographic location and collateral type:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Michigan | | Florida | | California | | Colorado | | Texas | | Ohio | | Other | | Total (1) |
| | (Dollars in millions) |
| September 30, 2017 | | | | | | | | | | | | | | | |
| Collateral Type | | | | | | | | | | | | | | | |
Single family residence (2) | $ | 54 |
| | $ | 78 |
| | $ | 28 |
| | $ | 80 |
| | $ | 81 |
| | $ | — |
| | $ | 51 |
| | $ | 372 |
|
Retail (3) | 185 |
| | 30 |
| | 7 |
| | — |
| | — |
| | 5 |
| | 14 |
| | 241 |
|
| Apartments | 125 |
| | 23 |
| | — |
| | 7 |
| | — |
| | 47 |
| | 39 |
| | 241 |
|
| Industrial | 155 |
| | — |
| | 35 |
| | — |
| | — |
| | — |
| | 4 |
| | 194 |
|
| Office | 164 |
| | — |
| | 19 |
| | — |
| | — |
| | — |
| | — |
| | 183 |
|
Land - Residential (4) | 11 |
| | 21 |
| | 32 |
| | 24 |
| | 11 |
| | — |
| | 31 |
| | 130 |
|
| Hotel/motel | 79 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 35 |
| | 114 |
|
| Senior Living facility | 50 |
| | — |
| | — |
| | — |
| | — |
| | 12 |
| | 10 |
| | 72 |
|
| Parking garage/Lot | 68 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 68 |
|
| Non Profit | 37 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10 |
| | 47 |
|
Shopping Mall (5) | 27 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 27 |
|
| Marina | 23 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 23 |
|
| Movie Theater | 20 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 20 |
|
All other (6) | 21 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 6 |
| | 28 |
|
| Total | $ | 1,019 |
| | $ | 152 |
| | $ | 122 |
| | $ | 111 |
| | $ | 92 |
| | $ | 64 |
| | $ | 200 |
| | $ | 1,760 |
|
| Percent by state | 57.9 | % | | 8.6 | % | | 6.9 | % | | 6.3 | % | | 5.2 | % | | 3.6 | % | | 11.4 | % | | 100.0 | % |
| |
(1) | Includes $270 million of commercial owner occupied real estate loans at September 30, 2017. |
| |
(2) | Includes home builder loans secured by SFR 1-4 properties whether under construction or completed. |
| |
(3) | Includes multipurpose retail space, neighborhood centers, strip centers and single-use retail space. |
| |
(4) | Land residential includes development and unimproved vacant land. |
| |
(5) | Comprised of one shopping mall with an anchor store. |
| |
(6) | All other primarily includes: condominium, mini storage facilities, ice arena, golf course, gas station, car wash, etc. |
Warehouse lending. We offer warehouse lines of credit to other mortgage lenders which allow the lender to fund the closing of residential mortgage loans. Each extension, advance, or draw-down on the line is fully collateralized by residential mortgage loans and is paid off when the lender sells the loan to an outside investor or, in some instances, to the Bank. For the three months ended September 30, 2017, the
The following table presents our warehouse advance amount of loans sold to the Bank totaled $2.9 billion or 36.3 percent. For the nine months ended September 30, 2017, the warehouse advance amount of loans sold to the Bank totaled $8.0 billion or 38.5 percent.Bank:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) |
| UPB of loans sold to the bank | $ | 2,422 |
| | $ | 2,844 |
| | $ | 4,669 |
| | $ | 5,112 |
|
| Percentage of total advances | 25 | % | | 41 | % | | 28 | % | | 40 | % |
Underlying mortgage loans are predominantly originated using the Agencies' underwriting standards. The guideline for debt to tangible net worth is 15 to 1. Despite the contraction in warehouse lending which occurred in the first quarter 2017, we are continuing to focus on increasing market share in the warehouse lending market through our strategic initiative to increase lending to customers who originate loans they then sell to outside third party investors. We have a national platform with relationship managers covering both coasts and a large Michigan-based sales team.across the country. The aggregate committed amount of adjustable-rate warehouse lines of credit granted to other mortgage lenders at SeptemberJune 30, 20172018 was $2.7$4.2 billion, of which $1.2$1.8 billion was outstanding, compared to $2.9$2.8 billion at December 31, 2016,2017, of which $1.2$1.1 billion was outstanding. This increase is primarily due to our acquisition of the warehouse business from Santander Bank.
Credit Quality
Trends in certain credit quality characteristics such as nonperforming loans and past due statistics remain very strong and continue to show improvement.strong. This is predominantly a result of our focus on effectively managing credit risksrisk and our sales of legacy portfolios that included greater levels of nonperforming and TDR loans which have been replaced by new loans with strong credit characteristics. The credit quality of our loan portfolios is demonstrated by low delinquency levels, minimal charge-offs and low levels of nonperforming loans.
For all loan categories within the consumer and commercial loan portfolio, loans are placed on nonaccrual status when any portion of principal or interest is 90 days past due (or nonperforming), or earlier when we become aware of information indicating that collection of principal and interest is in doubt. While it is the goal of management to collect on loans, we attempt to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations and minimize losses incurred by the Bank. When a loan is placed on nonaccrual status, the accrued interest income is reversed. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.
Nonperforming assets
The following table sets forth our nonperforming assets:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| LHFI | | | | | | |
| Consumer loans | | | | | | |
| Residential first mortgage | $ | 14 |
| | $ | 18 |
| $ | 12 |
| | $ | 12 |
|
| Home equity | 1 |
| | 4 |
| 1 |
| | 1 |
|
| Commercial | | | | |
| CRE | 1 |
| | — |
| |
| Total nonperforming LHFI | 16 |
| | 22 |
| 13 |
| | 13 |
|
| TDRs | | | | | | |
| Consumer loans | | | | | | |
| Residential first mortgage | 11 |
| | 11 |
| 10 |
| | 12 |
|
| Home equity | 4 |
| | 7 |
| 4 |
| | 4 |
|
| Total nonperforming TDRs | 15 |
| | 18 |
| 14 |
| | 16 |
|
Total nonperforming LHFI and TDRs (1) | 31 |
| | 40 |
| 27 |
| | 29 |
|
| Real estate and other nonperforming assets, net | 9 |
| | 14 |
| 7 |
| | 8 |
|
| LHFS | 8 |
| | 6 |
| 7 |
| | 9 |
|
| Total nonperforming assets | $ | 48 |
| | $ | 60 |
| $ | 41 |
| | $ | 46 |
|
Nonperforming assets to total assets (2) | 0.24 | % | | 0.39 | % | 0.19 | % | | 0.22 | % |
| Nonperforming LHFI and TDRs to LHFI | 0.44 | % | | 0.67 | % | 0.30 | % | | 0.38 | % |
Net charge-offs to LHFI ratio (annualized) (1) | 0.08 | % | | 0.13 | % | |
Nonperforming assets to LHFI and repossessed assets (2) | 0.58 | % | | 0.90 | % | 0.38 | % | | 0.48 | % |
Nonperforming assets to Tier 1 capital (to adjusted total assets) + ALLL (2)(3) | 2.57 | % | | 3.93 | % | |
| |
| (1) | Includes less than 90 day past due performing loans placed on nonaccrual. Interest is not being accrued on these loans. |
| |
(3) | Refer to MD&A - Use of Non-GAAP Financial Measures for calculation of ratio. |
At SeptemberJune 30, 2017,2018, we had $48$41 million of nonperforming assets compared to $60$46 million of nonperforming assets at December 31, 2016. This decrease was primarily due to a $7 million decrease in2017. The consistent, low levels of nonperforming consumer LHFI offset by a $1 million increase in nonperforming commercial LHFI at September 30, 2017 compared to December 31, 2016. Additionally, nonperforming TDRs decreased $3 million at September 30, 2017 compared to December 31, 2016. The overall improvement inloans reflect our nonperforming assets is due to our continued effort to growfocus on growing our loan portfolioportfolios with strong credit quality loans combined with a slowing emergence of nonperforming loans driven by decreased levels of delinquencies.loans.
The ratio of nonperforming assets, excluding LHFS, to total assets decreased to 0.24 percent at September 30, 2017 from 0.39 percent at December 31, 2016. Net charge-offs in the third quarter 2017 were 0.08 percent of LHFI compared to 0.13 percent at December 31, 2016.
The following table sets forth activity related to our nonperforming LHFI and TDRs: | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Beginning balance | $ | 30 |
| | $ | 44 |
| | $ | 40 |
| | $ | 66 |
| $ | 29 |
| | $ | 28 |
| | $ | 29 |
| | $ | 40 |
|
| Additions | 5 |
| | 7 |
| | 19 |
| | 30 |
| 4 |
| | 5 |
| | 8 |
| | 13 |
|
| Reductions | | | | | | | | | | | | | | |
Principal payments and loan sales | (2 | ) | | (2 | ) | | (6 | ) | | (9 | ) | (2 | ) | | (2 | ) | | (4 | ) | | (22 | ) |
| Charge-offs | — |
| | — |
| | (2 | ) | | (4 | ) | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
| Returned to performing status | (1 | ) | | (8 | ) | | (1 | ) | | (15 | ) | (2 | ) | | — |
| | (3 | ) | | — |
|
| Transfers to REO | (1 | ) | | (1 | ) | | (19 | ) | | (28 | ) | (1 | ) | | — |
| | (2 | ) | | — |
|
Total nonperforming LHFI and TDRs (1)(2) | $ | 31 |
| | $ | 40 |
| | $ | 31 |
| | $ | 40 |
| $ | 27 |
| | $ | 30 |
| | $ | 27 |
| | $ | 30 |
|
| |
| (1) | Carrying value of loans as of sale date. |
| |
| (2) | Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.loans |
As of SeptemberDuring the six months ended June 30, 2017,2018, we did not sell any nonperforming consumer loans decreased $9 million from December 31, 2016, dueloans. In an effort to improve the sale of nonperforming loans and improvements to the overall credit quality of our loan portfolios. We had a decrease in additions to nonperforming LHFI and TDRs along with an increase in loans returning to performing statusportfolio, during both the three and ninesix months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016, respectively. During the three months ended SeptemberJune 30, 2017, we had no charge-offs.sold $25 million UPB, of nonperforming consumer loans, of which $4 million UPB, was nonperforming TDRs.
Delinquencies
The following table sets forth our performing LHFI which are30-89 days past due 30-89 days:performing LHFI: | | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Performing loans past due 30-89: | | | | | | |
| Consumer loans | | | | | | |
| Residential first mortgage | $ | 3 |
| | $ | 6 |
| $ | 2 |
| | $ | 4 |
|
| Home equity | 2 |
| | 3 |
| 1 |
| | 1 |
|
| Other | — |
| | 1 |
| |
| Total performing loans past due 30-89 days | $ | 5 |
| | $ | 10 |
| $ | 3 |
| | $ | 5 |
|
EarlyAs a result of our continued focus on growing our loan portfolio with high quality loans, early stage delinquencies remained low with theas loans 30 to 89 days past due loans decreasing to $5were $3 million at SeptemberJune 30, 2017, compared to $102018 and $5 million at December 31, 2016.2017. There were no past due commercial loans at SeptemberJune 30, 2017 and2018 or December 31, 2016.2017.
For further information, see Note 4 - Loans Held-for-Investment.
Troubled debt restructurings (held-for-investment)
Troubled debt restructurings ("TDRs") are modified loans in which a borrower demonstrates financial difficulties and for which a concession has been granted as a result.granted. Nonperforming TDRs are included in nonaccrual loans. TDRsloans and remain in nonperforming status until a borrower has made at least six consecutive months of payments under the modified terms. Performing TDRs are excluded from nonaccrual loans, because based on our evaluation, it is reasonably assured that all contractual principal and interest due under the restructured terms will be collected.
The following table sets forth a summary of TDRs by performing status:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Performing TDRs | | | | | | |
| Residential first mortgage | $ | 20 |
| | $ | 22 |
| $ | 21 |
| | $ | 19 |
|
| Home equity | 26 |
| | 45 |
| 22 |
| | 24 |
|
| Total performing TDRs | 46 |
| | 67 |
| 43 |
| | 43 |
|
| Nonperforming TDRs | 4 |
| | 8 |
| | | |
| Nonperforming TDRs | | 4 |
| | 5 |
|
| Nonperforming TDRs at inception but performing for less than six months | 11 |
| | 10 |
| 10 |
| | 11 |
|
| Total nonperforming TDRs | 15 |
| | 18 |
| 14 |
| | 16 |
|
Total TDRs (1) | $ | 61 |
| | $ | 85 |
| $ | 57 |
| | $ | 59 |
|
| |
| (1) | The ALLL on consumer TDR loans totaled $12$11 million and $9$13 million at SeptemberJune 30, 20172018 and December 31, 2016.2017. |
At SeptemberJune 30, 20172018 our total TDR loans decreased $24$2 million as compared to December 31, 20162017 primarily due to the sale of nonperforming loans and lower delinquency rates during the nine months ended September 30, 2017.pay-downs. Of our total TDR loans, 75.575.6 percent were in performing status at SeptemberJune 30, 2018, as compared to 73.7 percent at December 31, 2017.
For further information, see Note 4 - Loans Held-for-Investment.
Allowance for Loan Losses
The ALLL represents management's estimate of probable losses that are inherent in our LHFI portfolio but which have not yet been realized. For further information, see Note 4 - Loans Held-for-Investment.
The ALLL was $137 million and $140 million at June 30, 2018 and December 31, 2017, respectively. The decrease was primarily driven by continued strong credit quality, including sustained lower levels of net charge-offs and delinquencies, offset by growth in the LHFI portfolio.
The ALLL as a percentage of LHFI decreased to 2.01.5 percent as of SeptemberJune 30, 20172018 from 2.41.8 percent as of December 31, 2016. This decrease is2017, primarily attributable to the continued low levelsgrowth of delinquencies and net charge-offs in our portfolio. Additionally, our loan growth has been in high credit quality assets across$1.2 billion UPB consisting of both our consumer and commercial portfolios.loans, in addition to sustained levels of low charge-offs and delinquencies, and growth of the portfolio in areas we believe to pose lower levels of credit risk. At SeptemberJune 30, 2017, our2018, we had a 1.7 percent allowance as a percentcoverage of our consumer loan portfolio was 2.3and a 1.4 percent and our allowance as percentcoverage of our commercial loan portfolio was 1.7 percent.
The percentage of ALLL to LHFI and loans with government guarantees (excluding fair value loans), decreased to 1.9 percent as of September 30, 2017 from 2.2 percent as of December 31, 2016. portfolio.
The following tables settable sets forth certain information regarding the allocation of our ALLL to each loan category:
| | | | September 30, 2017 | June 30, 2018 |
| | Loans
Held-for-Investment | | Percent
of
Portfolio | | Allowance
Amount | | Allowance as a Percent of Loan Portfolio | Investment Loan Portfolio | | Percent of Portfolio | | Allowance Amount | | Allowance as a Percent of Loan Portfolio |
| | (Dollars in millions) | (Dollars in millions) |
| Consumer loans | | | | | | | | | | | | | | |
| Residential first mortgage | $ | 2,656 |
| | 36.9 | % | | $ | 52 |
| | 2.0 | % | $ | 2,978 |
| | 33.4 | % | | $ | 45 |
| | 1.5 | % |
| Home equity | 492 |
| | 6.8 | % | | 20 |
| | 4.1 | % | |
| Home Equity | | 682 |
| | 7.7 | % | | 19 |
| | 2.8 | % |
| Other | 26 |
| | 0.4 | % | | 1 |
| | 3.8 | % | 88 |
| | 1.0 | % | | 1 |
| | 1.1 | % |
| Total consumer loans | 3,174 |
| | 44.1 | % | | 73 |
| | 2.3 | % | 3,748 |
| | 42.1 | % | | 65 |
| | 1.7 | % |
| Commercial loans | | | | | | | | | | | | | | |
| Commercial real estate | 1,760 |
| | 24.5 | % | | 42 |
| | 2.4 | % | 2,020 |
| | 22.7 | % | | 45 |
| | 2.2 | % |
| Commercial and industrial | 1,097 |
| | 15.3 | % | | 19 |
| | 1.7 | % | 1,324 |
| | 14.9 | % | | 21 |
| | 1.6 | % |
| Warehouse lending | 1,159 |
| | 16.1 | % | | 6 |
| | 0.5 | % | 1,801 |
| | 20.3 | % | | 6 |
| | 0.3 | % |
| Total commercial loans | 4,016 |
| | 55.9 | % | | 67 |
| | 1.7 | % | 5,145 |
| | 57.9 | % | | 72 |
| | 1.4 | % |
Total consumer and commercial loans (1) | $ | 7,190 |
| | 100.0 | % | | $ | 140 |
| | 1.9 | % | $ | 8,893 |
| | 100.0 | % | | $ | 137 |
| | 1.5 | % |
| |
| (1) | Excludes loans carried under the fair value option. |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Beginning balance | $ | 140 |
| | $ | 150 |
| | $ | 142 |
| | $ | 187 |
|
Provision (benefit) for loan losses (1) | 2 |
| | — |
| | 4 |
| | (16 | ) |
| Charge-offs | | | | | | | |
| Consumer loans | | | | | | | |
| Residential first mortgage | (1 | ) | | (7 | ) | | (6 | ) | | (26 | ) |
| Home equity | (2 | ) | | (1 | ) | | (3 | ) | | (4 | ) |
| Other consumer | — |
| | (1 | ) | | (1 | ) | | (3 | ) |
| Total charge offs | (3 | ) | | (9 | ) | | (10 | ) | | (33 | ) |
| Recoveries | | | | | | | |
| Consumer loans | | | | | | | |
| Residential first mortgage | — |
| | — |
| | 1 |
| | 1 |
|
| Home equity | 1 |
| | 1 |
| | 2 |
| | 2 |
|
| Other consumer | — |
| | 1 |
| | 1 |
| | 2 |
|
| Total recoveries | 1 |
| | 2 |
| | 4 |
| | 5 |
|
| Charge-offs, net of recoveries | (2 | ) | | (7 | ) | | (6 | ) | | (28 | ) |
| Ending balance | $ | 140 |
| | $ | 143 |
| | $ | 140 |
| | $ | 143 |
|
| |
(1) | Does not include $7 million provision for loan losses recorded in the Consolidated Statements of Operations to reserve for repossessed loans with government guarantees during the three and nine months ended September 30, 2016. |
The following table provides information on our charge-offs and credit quality ratios:presents changes in ALLL:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| | (Dollars in millions) |
| Charge-offs, net of recoveries | $ | 2 |
| | $ | 7 |
| | $ | (5 | ) | | $ | 6 |
| | $ | 28 |
| | $ | (22 | ) |
| Charge-offs associated with loans with government guarantees | 1 |
| | 6 |
| | (5 | ) | | 3 |
| | 13 |
| | (10 | ) |
| Charge-offs associated with the sale or transfer of nonperforming loans and TDRs | — |
| | — |
| | — |
| | 1 |
| | 8 |
| | (7 | ) |
Charge-offs, net of recoveries, adjusted (1) | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | 2 |
| | $ | 7 |
| | $ | (5 | ) |
Net charge-offs to LHFI ratio (annualized) (2) | 0.08 | % | | 0.51 | % | | (0.43 | )% | | 0.12 | % | | 0.66 | % | | (0.54 | )% |
Net charge-off ratio, adjusted (annualized)(1)(2) | 0.06 | % | | 0.15 | % | | (0.09 | )% | | 0.05 | % | | 0.15 | % | | (0.10 | )% |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) |
| Beginning balance | $ | 139 |
| | $ | 141 |
| | $ | 140 |
| | $ | 142 |
|
| Provision for loan losses | (1 | ) | | (1 | ) | | (1 | ) | | 2 |
|
| Charge-offs | | | | | | | |
| Consumer loans | | | | | | | |
| Residential first mortgage | — |
| | (1 | ) | | (1 | ) | | (5 | ) |
| Home equity | (1 | ) | | (1 | ) | | (2 | ) | | (1 | ) |
| Other consumer | (1 | ) | | — |
| | (1 | ) | | (1 | ) |
| Total consumer loans | (2 | ) | | (2 | ) | | (4 | ) | | (7 | ) |
| Total charge offs | (2 | ) | | (2 | ) | | (4 | ) | | (7 | ) |
| Recoveries | | | | | | | |
| Consumer loans | | | | | | | |
| Residential first mortgage | — |
| | 1 |
| | — |
| | 1 |
|
| Home equity | 1 |
| | 1 |
| | 2 |
| | 1 |
|
| Other consumer | — |
| | — |
| | — |
| | 1 |
|
| Total consumer loans | 1 |
| | 2 |
| | 2 |
| | 3 |
|
| Total recoveries | 1 |
| | 2 |
| | 2 |
| | 3 |
|
| Charge-offs, net of recoveries | (1 | ) | | — |
| | (2 | ) | | (4 | ) |
| Ending balance | $ | 137 |
| | $ | 140 |
| | $ | 137 |
| | $ | 140 |
|
Net charge-off to LHFI ratio (1) | 0.02 | % | | 0.04 | % | | 0.04 | % | | 0.15 | % |
| |
| (1) | Excludes charge-offs associated with loans with government guarantees and charge-offs associated with the sale or transfer of nonperforming loans and TDRs. |
| |
(2) | Excludes loans carried under theat fair value optionvalue. |
As a result of the strong credit quality throughout our loan portfolios, net charge-offs for the three months ended September 30, 2017 decreased to $2 million, compared to $7 million for the three months ended September 30, 2016. As a percentage of average LHFI, net charge-offs for the three months ended September 30, 2017 decreased to 0.08 percent from 0.51 percent for the three months ended September 30, 2016.
Net charge-offs for the ninethree and six months ended SeptemberJune 30, 2017 decreased to $62018 were $1 million and $2 million, respectively, compared to $28less than $1 million and $4 million for the ninethree and six months ended SeptemberJune 30, 2016, primarily from the sale of $110 million UPB of nonperforming, TDR and non-agency loans and net2017, respectively. Net charge-offs associated with loans with government guarantees. Asas a percentage of average LHFI decreased to 0.02 percent and 0.04 percent, respectively, for the three and six months ended June 30, 2018 compared to 0.04 percent and 0.15 percent, respectively, for the three and six months ended June 30, 2017. The
low levels of net charge-offs forand net charge-offs as a percentage of LHFI reflects the nine months ended September 30, 2017 decreased to 0.12 percent from 0.66 percent for the nine months ended September 30, 2016, partially driven bycredit quality of our loan portfolio combined with sales of nonperforming loans which occurred in the first nine months of 2016.
There were no net charge-offs of commercial loans for the nine months ended September 30, 2017 and September 30, 2016. during 2017.
Market Risk
Market risk is the risk of reduced earnings and/or declines in the net market value of the balance sheet due to changes in market rates. Our primary market risk is interest rate risk which impacts our net interest income, fee income related to interest sensitive activities such as mortgage origination and servicing income, and loan and deposit demand.
We are subject to interest rate risk due to:
The maturity or repricing of assets and liabilities at different times or for different amounts
Differences in short-term and long-term market interest rate changes
The remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change
The Asset/Liability Committee ("ALCO"), which is composed of our executive officers and certain members of other management, monitors interest rate risk on an on-going basis in accordance with policies approved by our board of directors. The ALCO reviews interest rate positions and considers the impact projected interest rate scenarios have on earnings, capital, liquidity, business strategies, and other factors. However, management has the latitude to change interest rate positions within certain limits if, in management's judgment, the change will enhance profitability.profitability or minimize risk.
To assess and manage interest rate risk, sensitivity analysis is used to determine the impact on earnings and the net market value of the balance sheet across various interest rate scenarios, balance sheet trends, and strategies.
Net interest income sensitivity
Management uses a simulation model to analyze the sensitivity of net interest income to changes in interest rates across various interest rate scenarios which demonstrates the level of interest rate risk inherent in the existing balance sheet. The analysis holds the current balance sheet values constant and does not take into account management intervention. In addition, we assume certain correlation rates, often referred to as a “deposit beta,” offor interest-bearing deposits, wherein the
rates paid to customers change at a different pace when comparedrelative to changes in benchmark interest rates. The effect on net interest income over a 12 month time horizon due to hypothetical changes in market interest rates is presented in the table below. In this interest rate shock test,simulation, as of the periods presented, interest rates have been adjusted by instantaneous parallel changes rather than in a ramp testsimulation which applies interest rate changes over time. All rates, short-term and long-term, are changed by the same amount (plus or minus 200 basis points) resulting in the shape of the yield curve remaining unchanged. The minus 200 basis point shock scenarioFor the scenarios simulated, our established internal policy limit on the change in net interest income, is effectively a flattener scenario as rates are floored at zero given15 percent. At June 30, 2018 and December 31, 2017, the current interest rate levels.results of the simulation were within the internal policy limit.
| | | September 30, 2017 | |
| June 30, 2018 | | June 30, 2018 |
| Scenario | | Net interest income | | $ Change | | % Change | | Net interest income | | $ Change | | % Change |
| | | (Dollars in millions) | | | | (Dollars in millions) | |
| 200 | | $ | 458 |
| | $ | 25 |
| | 5.9 | % | | $490 | | $21 | | 4.4% |
| Constant | | 433 |
| | — |
| | — | % | | 469 | | — | | —% |
| (200) | | 373 |
| | (60 | ) | | (14.0 | )% | | 444 | | 25 | | (5.5)% |
| December 31, 2016 | |
| December 31, 2017 | | December 31, 2017 |
| Scenario | | Net interest income | | $ Change | | % Change | | Net interest income | | $ Change | | % Change |
| | | (Dollars in millions) | | | | (Dollars in millions) | | |
| 200 | | $ | 321 |
| | $ | 19 |
| | 6.3 | % | | $449 | | $16 | | 3.6% |
| Constant | | 301 |
| | — |
| | — | % | | 433 | | — | | —% |
| (200) | | 245 |
| | (57 | ) | | (18.9 | )% | | 397 | | (37) | | (8.5)% |
In the net interest income simulation,simulations, our balance sheet exhibits slight asset sensitivity. When interest rates rise our net interest income increases. Conversely, when interest rates fall our net interest income decreases. At SeptemberJune 30, 2017,2018, the $132$36 million increase in the net interest income in the constant scenario as compared to December 31, 20162017 was primarily driven by the increased size of the average balance sheet.
As of SeptemberJune 30, 2017,2018, we have also projected the potential impact to net interest income in a hypothetical "bear flattener" interest rate scenario, in which short-term interest rates have been instantaneously increased by 100 basis points while holding the longer term interest rates constant. Over a 12-month and 24-month period, based on our existing balance sheet, the simulation resulted in a loss of $39$35 million and $52$97 million, respectively.
The net interest income sensitivity analysis has certain limitations and makes various assumptions. Key elements of this interest rate risk exposure assessment include maintaining a static balance sheet and parallel rate shocks. The direction of future interest rates not moving in a parallel manner across the yield curve, how the balance sheet will respond and shift based on a change in future interest rates and how the Company will respond are not included in this analysis and limit the predictive value of these scenarios.
Economic value of equity
Management also utilizes (EVE),EVE, a point in time analysis of the economic value of our current balance sheet position, which measures interest rate risk over a longer term. The EVE calculation represents a hypothetical valuation of equity, and is defined as the market value of assets, less the market value of liabilities, adjusted for the market value of off-balance sheet instruments. The assessment of both short-term earnings (Net Interest Income Sensitivity) and long-term valuation (EVE) approaches provides a more comprehensive analysis of interest rate risk exposure than Net Interest Income Sensitivity alone.
There are assumptions and inherent limitations in any methodology used to estimate the exposure to changes in market interest rates and as such, sensitivity calculations used in this analysis are hypothetical and should not be considered to be predictive of future results. This analysis evaluates risks to the current balance sheet only and does not incorporate future growth assumptions. Additionally, the analysis assumes interest rate changes are instantaneous and the new rate environment is constant but does not include actions management may undertake to manage risk in response to interest rate changes. Each rate scenario reflects unique prepayment repricing, and reinvestmentrepricing assumptions. Management derives these assumptions by considering published market prepayment expectations, repricing characteristics, our historical experience, and our asset and liability management strategy. This analysis assumes that changes in interest rates may not affect or could partially affect certain instruments based on their characteristics.
The following table is a summary of the changes in our EVE that are projected to result from hypothetical changes in market interest rates.rates as well as our internal policy limits for changes in our EVE based on the different scenarios. The interest rates, as of the dates presented, are adjusted by instantaneous parallel rate changes upward to +300 basis pointsincreases and downward (100) basis points.decreases as indicated in the scenarios shown in the table below.
| | | September 30, 2017 | | December 31, 2016 | |
| June 30, 2018 | | June 30, 2018 | | December 31, 2017 | | |
| Scenario | | EVE | | EVE% | | $ Change | | % Change | | Scenario | | EVE | | EVE% | | $ Change | | % Change | | EVE | | EVE% | | $ Change | | % Change | | Scenario | | EVE | | EVE% | | $ Change | | % Change | | Policy Limits |
| | | (Dollars in millions) | | (Dollars in millions) | |
| (Dollars in millions) | | (Dollars in millions) | | |
| 300 | | $ | 2,109 |
| | 12.6 | % | | $ | (155 | ) | | (6.9 | )% | | 300 | | $ | 1,927 |
| | 13.9 | % | | $ | (173 | ) | | (8.2 | )% | | $ | 1,468 |
| | 8.2 | % | | $ | (275 | ) | | (15.8 | )% | | 300 | | $ | 1,941 |
| | 11.6 | % | | $ | (172 | ) | | (8.1 | )% | | 22.5 | % |
| 200 | | 2,185 |
| | 13.0 | % | | (79 | ) | | (3.5 | )% | | 200 | | 2,005 |
| | 14.4 | % | | (95 | ) | | (4.5 | )% | | 1,577 |
| | 8.8 | % | | (166 | ) | | (9.5 | )% | | 200 | | 2,020 |
| | 12.0 | % | | (93 | ) | | (4.4 | )% | | 15.0 | % |
| 100 | | 2,250 |
| | 13.4 | % | | (14 | ) | | (0.6 | )% | | 100 | | 2,073 |
| | 14.9 | % | | (28 | ) | | (1.3 | )% | | 1,673 |
| | 9.3 | % | | (70 | ) | | (4.1 | )% | | 100 | | 2,089 |
| | 12.4 | % | | (24 | ) | | (1.2 | )% | | 7.5 | % |
| Current | | 2,264 |
| | 13.5 | % | | — |
| | — | % | | Current | | 2,100 |
| | 15.1 | % | | — |
| | — | % | | 1,743 |
| | 9.7 | % | | — |
| | — | % | | Current | | 2,113 |
| | 12.6 | % | | — |
| | — | % | | — | % |
| (100) | | 2,233 |
| | 13.3 | % | | (31 | ) | | (1.4 | )% | | (100) | | 2,067 |
| | 14.9 | % | | (33 | ) | | (1.6 | )% | | 1,765 |
| | 9.9 | % | | 22 |
| | 1.2 | % | | (100) | | 2,082 |
| | 12.4 | % | | (31 | ) | | (1.5 | )% | | 7.5 | % |
Our balance sheet exhibits liability sensitivity in a rising interest rate scenario as the EVE decreases.scenario. The decrease in EVE is the result of the amount of liabilities that would be expected to reprice exceeding the amount of assets repriced in the +200 scenario. TheAt June 30, 2018 and December 31, 2016 (100)2017, for each scenario shown, the percentage change in our EVE is effectively a flattener scenario as shorter term rates are unable to decrease 100 basis points due to the absolute level of rates. Therefore, the yields of the longer term variable rate assets decrease by the full 100 basis points, but the liabilities repricing to shorter term rates decrease to less than 100 basis points, leading to a reduction in EVE.within our internal policy limit.
Derivative financial instruments
As a part of our risk management strategy, we use derivative financial instruments to minimize fluctuation in earnings caused by interest rate risk. We use interest rate swaps, swaptions and forward sales commitments to hedge our unclosed mortgage origination pipeline and funded mortgage LHFS and MSRs.LHFS. All of our derivatives and mortgage loan production originated for sale are accounted for at fair market value. Changes to mortgage commitments are based on changes in fair value of the underlying loan, which is impacted most significantly by changes in interest rates and changes in the probability that the loan will not fund within the terms of the commitment, referred to as a fallout factor or pull through rate. Market risk on interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments. The adequacy of these hedging strategies, the ability to fully
or partially hedge market risk, rely on various assumptions or projections, including a fallout factor.factor, which is based on a statistical analysis of our actual rate lock fallout history. For further information, see Note 8 - Derivative Financial Instruments and Note 1817 - Fair Value Measurements.
Mortgage Servicing Rights (MSRs)
Our MSRs are sensitive to interest rate volatility and are highly susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve. We utilize derivatives, including interest rate swaps and other fair value assetsswaptions, as part of our overall hedging strategy to manage the impact of changes in the fair value of the MSRs, buthowever these risk management strategies do not completely eliminate repricing risk. Our hedging strategies rely on assumptions and projections regarding assets and general market factors, many of which are outside of our control. If one or more of these assumptions or projections proves to be incorrect our hedging strategies may not adequately mitigate the impact of changes in interest rates or prepayment speeds, and as a result may negatively impact earnings. For further information, see Note 7 - Mortgage Servicing Rights, and Note 8 - Derivative Financial Instruments.Instruments and Note 17 - Fair Value Measurements.
Liquidity Risk
Liquidity risk is the risk that we will not have sufficient funds to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects the ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate and market opportunities. The ability of a financial institution to meet current financial obligations is a function of the balance sheet structure, the ability to liquidate assets, and access to various sources of funds.
Parent Company Liquidity
The Company currently obtains its liquidity primarily from multiple sources, including dividends from the Bank and the issuance of debt and equity securities.Bank. The primary uses of the Company's liquidity are debt service and operating expenses, which includes compensation and benefits, legal and professional expense and general and administrative expenses. At SeptemberJune 30, 2017,2018, the Company held $200$216 million of cash at the Bank, or 3.86.0 years of expense and debt service coverage.coverage when excluding the redemption of $250 million of senior notes which mature on July 15, 2021.
The OCC regulates all capital distributions made by the Bank, directly or indirectly, to the holding company, including dividend payments. A subsidiary of a savings and loan holding company, such as the Bank, mustis required to file a notice or application with the OCC at least 30 days prior to each proposed capital distribution. Whether an application is required is based on a number of factors including whether the institution qualifies for expedited treatmentas an eligible association under the OCC rules and regulations or if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years. In addition, as a subsidiary of
a savings and loan holding company, the Bank must receive approval from the FRB before declaring any dividends. Additional restrictions on dividends apply if the Bank fails the QTL test. At June 30, 2018, as reported to the OCC, we passed the QTL test.
In the third quarter 2017, we paid dividendsaddition, as a subsidiary of $84 milliona savings and loan holding company a 30-day notice from the Bank must be provided to the Bancorp. To supportFederal Reserve prior to declaring or paying dividends and under the on-going debt service andSupervisory Agreement, the Company agreed to request prior non-objection of the Federal Reserve to pay any dividends or make any other Bancorp expenses, we also intend to reduce our Bancorp double leverage and debt to equity ratios to be more consistent with such ratios at other mid-sized banks, which would likely require further dividend payments from the Bank to the Bancorp for the foreseeable future.capital distributions.
For further information and restrictions related to the Bank's payment of dividends, see MD&A - Capital and Regulatory Risk.Capital.
Bank Liquidity
We primarily originate agency-eligible LHFS and therefore the majority of new residential first mortgage loan originations are readily convertible to cash, either by selling them as part of our monthly agency sales, RMBS, private party whole loan sales, or by pledging them to the FHLB of Indianapolis and borrowing against them. We use the FHLB of Indianapolis as a significant source for funding our residential mortgage banking business due to the flexibility in terms of being ablewhich allows us to borrow or repay borrowings as daily cash needs require.
We have arrangements with the FRB of Chicago to borrow as appropriate from its discount window. The discount window is also a borrowing facility that is intended to be used only for short-term liquidity needs arising from special or unusual circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we provide. To collateralize the line, we pledge investment securities and loans that are eligible based on FRB of Chicago guidelines. At September 30, 2017 and December 31, 2016, we had no borrowings outstanding against this line of credit.
The amount we can borrow, or the value we receive for the assets pledged to our liquidity providers, varies based on the amount and type of pledged collateral as well as the perceived market value of the assets and the "haircut" of the market value of the assets. That value is sensitive to the pricing and policies of our liquidity providers and can change with little or no notice.
Our Consolidated Statements of Cash Flows shows cash used in operating activities of $19.2 billion and $10.1 billion for the nine months ended September 30, 2017 and 2016, respectively. This primarily reflects our mortgage operations and is a reflection of the manner in which we execute certain loan sales for which the cash outflow is considered an operating activity and the corresponding cash inflow is considered an investing activity. For the period ending September 30, 2017, operating cash flows declined primarily due to our election to extend the amount of time we hold mortgage-backed securities related to our LHFS portfolio.
As governed and defined by our internal liquidity policy, we maintain adequate excess liquidity levels appropriate to cover unanticipated liquidity needs. In addition to this liquidity, we also maintain targeted minimum levels of unused collateralized borrowing capacity as another cushion against unexpected liquidity needs. Each business day, we forecast 90 days of daily cash needs. This allows us to determine our projected near term daily cash fluctuations and also to plan and adjust, if necessary, future activities. As a result, in an adverse environment, we would be able to make adjustments to operations as required to meet the liquidity needs of our business, including adjusting deposit rates to increase deposits, planning for additional FHLB borrowings, accelerating sales of LHFS (agencies and/or private), selling LHFI or investment securities, borrowing through the use of repurchase agreements, reducing originations, making changes to warehouse funding facilities, or borrowing from the discount window.
Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. We balance the liquidity of our loan assets to our available funding sources. Our LHFI portfolio is funded with stable core deposits whereas our warehouse and LHFS may be funded with FHLB borrowings.borrowings and custodial deposits.
Management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.liquidity.
Liquidity Table
|
| | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | Change |
| | (Dollars in millions) |
| Demand deposit accounts | $ | 1,234 |
| | $ | 1,134 |
| | $ | 100 |
|
| Savings accounts | 3,718 |
| | 3,887 |
| | (169 | ) |
| Money market demand accounts | 291 |
| | 247 |
| | 44 |
|
| Certificates of deposit/CDARS | 1,297 |
| | 1,056 |
| | 241 |
|
| Total retail deposits | 6,540 |
| | 6,324 |
| | 216 |
|
| Government deposits | 1,068 |
| | 1,030 |
| | 38 |
|
| Wholesale deposits | 43 |
| | — |
| | 43 |
|
| Company controlled deposits | 1,510 |
| | 1,446 |
| | 64 |
|
| Total deposits | $ | 9,161 |
| | $ | 8,800 |
| | $ | 361 |
|
| Federal Home Loan Bank advances | $ | 5,365 |
| | $ | 2,980 |
| | $ | 2,385 |
|
| Other long-term debt | 493 |
| | 493 |
| | — |
|
| Total borrowed funds | $ | 5,858 |
| | $ | 3,473 |
| | $ | 2,385 |
|
|
| | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 | | Change |
| | (Dollars in millions) |
| Demand deposit accounts | $ | 1,689 |
| | $ | 1,219 |
| | $ | 470 |
|
| Savings accounts | 3,347 |
| | 3,553 |
| | (206 | ) |
| Money market demand accounts | 257 |
| | 193 |
| | 64 |
|
| Certificates of deposit/CDARS | 2,100 |
| | 1,493 |
| | 607 |
|
| Total retail deposits | 7,393 |
| | 6,458 |
| | 935 |
|
| Government deposits | 1,102 |
| | 1,073 |
| | 29 |
|
| Wholesale deposits | 392 |
| | 45 |
| | 347 |
|
| Custodial deposits | 1,701 |
| | 1,358 |
| | 343 |
|
| Total deposits | $ | 10,588 |
| | $ | 8,934 |
| | $ | 1,654 |
|
| Federal Home Loan Bank advances | $ | 5,120 |
| | $ | 5,665 |
| | $ | (545 | ) |
| Other long-term debt | 494 |
| | 494 |
| | — |
|
| Total borrowed funds | $ | 5,614 |
| | $ | 6,159 |
| | $ | (545 | ) |
Deposits
The following table presents a composition of our deposits:
| | | | September 30, 2017 | | December 31, 2016 | | | June 30, 2018 | | December 31, 2017 | | |
| | Balance | | % of Deposits | | Balance | | % of Deposits | | Change | Balance | | % of Deposits | | Balance | | % of Deposits | | Change |
| | (Dollars in millions) | (Dollars in millions) |
| Retail deposits | | | | | | | | | | | | | | | | | | |
| Branch retail deposits | | | | | | | | | | | | | | | | | | |
| Demand deposit accounts | $ | 930 |
| | 10.2 | % | | $ | 852 |
| | 9.7 | % | | $ | 78 |
| $ | 1,169 |
| | 11.0 | % | | $ | 931 |
| | 10.4 | % | | $ | 238 |
|
| Savings accounts | 3,653 |
| | 39.9 | % | | 3,824 |
| | 43.5 | % | | (171 | ) | 3,251 |
| | 30.7 | % | | 3,482 |
| | 39.0 | % | | (231 | ) |
| Money market demand accounts | 214 |
| | 2.3 | % | | 138 |
| | 1.6 | % | | 76 |
| 156 |
| | 1.5 | % | | 124 |
| | 1.4 | % | | 32 |
|
| Certificates of deposit/CDARS (1) | 1,295 |
| | 14.1 | % | | 1,055 |
| | 12.0 | % | | 240 |
| 2,080 |
| | 19.6 | % | | 1,491 |
| | 16.7 | % | | 589 |
|
| Total branch retail deposits | 6,092 |
| | 66.5 | % | | 5,869 |
| | 66.7 | % | | 223 |
| 6,656 |
| | 62.8 | % | | 6,028 |
| | 67.5 | % | | 628 |
|
| Commercial retail deposits | | |
|
| | | |
|
| | | | |
|
| | | |
|
| | |
| Demand deposit accounts | 304 |
| | 3.3 | % | | 282 |
| | 3.2 | % | | 22 |
| 520 |
| | 4.9 | % | | 288 |
| | 3.2 | % | | 232 |
|
| Savings accounts | 65 |
| | 0.7 | % | | 63 |
| | 0.7 | % | | 2 |
| 96 |
| | 0.9 | % | | 71 |
| | 0.8 | % | | 25 |
|
| Money market demand accounts | 77 |
| | 0.8 | % | | 109 |
| | 1.2 | % | | (32 | ) | 101 |
| | 1.0 | % | | 69 |
| | 0.8 | % | | 32 |
|
| Certificates of deposit/CDARS (1) | 2 |
| | — | % | | 1 |
| | — | % | | 1 |
| 20 |
| | 0.2 | % | | 2 |
| | — | % | | 18 |
|
| Total commercial retail deposits | 448 |
| | 4.9 | % | | 455 |
| | 5.2 | % | | (7 | ) | 737 |
| | 7.0 | % | | 430 |
| | 4.8 | % | | 307 |
|
| Total retail deposits | $ | 6,540 |
| | 71.4 | % | | $ | 6,324 |
| | 71.9 | % | | $ | 216 |
| $ | 7,393 |
| | 69.8 | % | | $ | 6,458 |
| | 72.3 | % | | $ | 935 |
|
| Government deposits | | |
|
| | | |
|
| | | | |
|
| | | |
|
| | |
| Demand deposit accounts | $ | 272 |
| | 3.0 | % | | $ | 250 |
| | 2.8 | % | | $ | 22 |
| $ | 282 |
| | 2.7 | % | | $ | 251 |
| | 2.8 | % | | $ | 31 |
|
| Savings accounts | 414 |
| | 4.5 | % | | 451 |
| | 5.1 | % | | (37 | ) | 464 |
| | 4.4 | % | | 446 |
| | 5.0 | % | | 18 |
|
| Certificates of deposit/CDARS (1) | 382 |
| | 4.2 | % | | 329 |
| | 3.7 | % | | 53 |
| 356 |
| | 3.3 | % | | 376 |
| | 4.2 | % | | (20 | ) |
| Total government deposits (2) | 1,068 |
| | 11.7 | % | | 1,030 |
| | 11.7 | % | | 38 |
| 1,102 |
| | 10.4 | % | | 1,073 |
| | 12.0 | % | | 29 |
|
| Wholesale deposits | 43 |
| | 0.5 | % | | — |
| | — | % | | — |
| 392 |
| | 3.7 | % | | 45 |
| | 0.5 | % | | 347 |
|
| Company controlled deposits (3) | 1,510 |
| | 16.5 | % | | 1,446 |
| | 16.4 | % | | 64 |
| |
Custodial deposits (3) | | 1,701 |
| | 16.1 | % | | 1,358 |
| | 15.2 | % | | 343 |
|
| Total deposits (4) | $ | 9,161 |
| | 100.0 | % | | $ | 8,800 |
| | 100.0 | % | | $ | 361 |
| $ | 10,588 |
| | 100.0 | % | | $ | 8,934 |
| | 100.0 | % | | $ | 1,654 |
|
| |
| (1) | The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.3$1.8 billion and $1.0$1.4 billion at SeptemberJune 30, 20172018 and December 31, 2016. 2017, respectively. |
| |
| (2) | Government deposits include funds from municipalities and schools. |
| |
| (3) | These accounts represent a portion of the investor custodial accounts and escrows controlled by us in connection with loans serviced for others and that have been placed on deposit with the Bank. |
| |
| (4) | The aggregate amount ofTotal exposure related to uninsured deposits with a balance over $250,000 was approximately $4.2$2.7 billion and $4.0$2.6 billion at SeptemberJune 30, 20172018 and December 31, 2016.2017, respectively. |
Total deposits increased $361 million,$1.7 billion, or 4.119 percent at SeptemberJune 30, 2017,2018, compared to December 31, 2016,2017, primarily due to growthdriven by the acquisition of eight Desert Community Bank branches, brokered CD's and an increase in branch retail deposits. Branch retail depositsour servicing portfolio. The number of loans serviced and sub-serviced increased $223 millionby 93,000, or 21 percent, at SeptemberJune 30, 20172018, compared to December 31, 2016, primarily due to an increase in retail certificates of deposit/CDARS.2017.
We utilize local governmental agencies and other public units, as an additional source for deposit funding. As a
Michigan bank, weWe are not required to hold collateral against our government deposits from Michigan government entities as they are covered by the Michigan Business and Growth Fund. This resultsWe are required to hold collateral on our government deposits in higher margins earned on these deposits which can be used to fund loans.California that are in excess of $250,000. Government deposit accounts include $382$356 million of certificates of deposit with maturities typically less than one year and $686$746 million in checking and savings accounts at SeptemberJune 30, 2017.2018.
Company controlledCustodial deposits arise due to our servicing or sub-servicing of loans for others and represent the portion of the investor custodial accounts on deposit with the Bank. Certain deposits require us to reimburse the owner for the spread on these funds. This cost is a component of net loan administration income. During the nine months ended September 30, 2017, theseCustodial deposits increased $64 million, primarily due to the increase in subservicing and taxes and insurance.
Company controlled depositsshort term FHLB advances are used to fund our most liquid assets including LHFS and warehouse loans. As not all asset categories require the same level of liquidity, our loan-to-deposit ratio shows how we manage our liquidity position, how much liquidity we have and the agility of our balance sheet. The Company's HFI loan-to-deposit ratio, which excludes warehouse loans and company controlledcustodial deposits, was 78 percent at SeptemberJune 30, 2017, which provides substantial liquidity for continued growth.2018.
We participate in the CDARS program, through which certain customer CDs are exchanged for CDs of similar amounts from other participating banks. This gives customers the potential to receive FDIC insurance up to $50 million. At September
June 30, 2017,2018, we had $199$165 million of total CDs enrolled in the CDARS program. The total CDARS balances decreased $31program, a decrease of $25 million at September 30, 2017 from December 31, 2016.2017.
FHLB Advances
The FHLB provides loans, also referred to as advances, on a fully collateralized basis, to savings banks and other member financial institutions. We rely upon advances from the FHLB as a source of funding for the origination or purchase of loans for sale in the secondary market and for providing duration specific short-term and long-term financing. The outstanding balance of FHLB advances fluctuates from time to time depending on our current inventory of mortgage LHFS and the availability of lower cost funding sources. Our portfolio includes short-term fixed rate advances, long-term LIBOR adjustable advances, and long-term fixed rate advances. Interest rates on the LIBOR index advances reset every three months and the advances may be prepaid without penalty, with notification, at scheduled three-month intervals after an initial 12-month lockout period.intervals.
The FHLB provides loans, also referred to as advances, on a fully collateralized basis, to savings banks and other member financial institutions. We are currently authorized through a resolution of our board of directors to apply for advances from the FHLB using approved loan types as collateral, which includes residential first mortgage loans, home equity lines of credit, and commercial real estate loans. At SeptemberJune 30, 2017, we had the authority2018, our Board of Directors authorized and approval from the FHLB to utilizeapproved a line of credit with the FHLB of up to $7.0$10.0 billion, which is further limited based on our total assets and we may access that line toqualified collateral, as determined by the extent that collateral is provided.FHLB. At SeptemberJune 30, 2017,2018, we had $5.4$5.1 billion of advances outstanding and an additional $1.1$1.2 billion of collateralized borrowing capacity available at the FHLB. Further, as a result of the pending acquisition of 52 Wells Fargo branches, which includes $2.3 billion in deposits, we will have increased flexibility in our liquidity position as we expect to use this funding to repay short-term FHLB advances.
Federal Reserve Discount Window
We have arrangements with the FRB of Chicago to borrow from its discount window. The discount window is a borrowing facility that we may utilize for short-term liquidity needs arising from special or unusual circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we provide. To collateralize the line, we pledge investment securities and loans that are eligible based on FRB of Chicago guidelines.
At SeptemberJune 30, 2018, we pledged collateral to the Federal Reserve Discount Window amounting to $474 million with a lendable value of $435 million. At December 31, 2017, we pledged collateral to the Federal Reserve Discount Window amounting to $435$467 million with a lendable value of $418$433 million. At December 31, 2016, we pledged collateral to the Federal Reserve Discount Window amounting to $496 million with a lendable value of $474 million. At SeptemberJune 30, 20172018 and December 31, 2016,2017, we had no borrowings outstanding against this line of credit.
Debt
As part of our overall capital strategy, we previously raised capital through the issuance of junior subordinated notes to our special purpose trusts formed for the offerings, which issued Tier 1 qualifying preferred stock (trust preferred securities). The trust preferred securities are callable by us at any time. Interest is payable on a quarterly basis; however, we may defer interest payments for up to 20 quarters without default or penalty. At SeptemberJune 30, 2017,2018, we had no deferredare current on all interest payments.
On July 11, 2016, we issued $250 million of Senior Notes which mature on July 15, 2021. The proceeds from these notes were used to bring current and redeem our then outstanding TARP Preferred Stock.
Prior to June 15, 2021, we may redeem some or all of the Senior Notes at a redemption price equal to the greater of 100 percent of the aggregate principal amount of the Senior Notes to be redeemed or the sum of the present values of the remaining scheduled payments plus, in each case, accrued and unpaid interest.
For further information, see Note 9 - Borrowings.
Operational Risk
Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls; violations of, or noncompliance with, laws, rules and regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthenadapt our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk.
We evaluate internal systems, processes, and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses. The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational and fraud losses, and enhance our overall performance.
Natural disasters or other catastrophic events may cause damage or disruption to our operations. We have a nationwide mortgage lending presence through a network of brokers, correspondents and retail locations, as well as employees, customers and loans collateralized by properties across the country. As such, events like Hurricanes Harvey and Irma, as well as the recent California wildfires have the potential to impact our business.
During the third quarter of 2017, Hurricanes Harvey and Irma made landfall in Texas and Florida which represent our second and third largest markets for mortgage originations, respectively. These hurricanes could potentially affect credit losses, our ability to close mortgages and generate new loans, or cause us to incur greater losses when repurchasing FHA loans. While our assessment of the impact of these events is still ongoing, our LHFI portfolio contains approximately $279 million loans at risk within the counties which have been deemed disaster areas by FEMA. Based on our initial assessment, we believe damages and any credit impact from the hurricanes will not be significant and that our allowance coverage levels established at September 30, 2017 are adequate to cover any exposure we might have to further credit risk. In accordance with investor guidelines, homeowners within FEMA counties in Texas, Florida, Puerto Rico and the U.S. Virgin Islands have been offered a 90 day forbearance on their mortgage payments and we are working with borrowers on repayment plans in order to allow them extra time for payments to ease their financial burden.
Loans with government guarantees
Substantially all of our loans with government guarantees continue to be insured or guaranteed by the FHA or the U.S. Department of Veterans AffairsAffairs. In the event of a government guaranteed loan borrower default, Flagstar has a unilateral option to repurchase loans sold to GNMA that are 90 days past due and management believes thatrecover losses through a claims process from the reimbursement process is proceeding appropriately.insurer. Nonperforming repurchased loans in this portfolio earn interest at a rate based upon the 10-year U.S. Treasury note rate from the time the underlying loan becomes delinquent, which is not paid by the FHA until claimed. Additionally, if the Bank cures the loan, it can be re-sold to GNMA. If not, the Bank can begin the process of collecting the government guarantee by filing a claim in accordance with established guidelines. Certain loans within our portfolio may be subject to indemnifications and insurance limits which exposesexpose us to limited credit risk.
In the three and ninesix months ended SeptemberJune 30, 2017,2018, we experienced net charge-offs of less than $1 million and $3$1 million, respectively, and have reserved for the remaining risks within other assets and as a component of our ALLL on residential first mortgages. These charge-offs arise due to insurance limits on VA insured loans and FHA property foreclosure and preservation requirements that may result in a loss, all or in part, of the guarantee.
Our loans with government guarantees portfolio totaled $253$278 million at SeptemberJune 30, 2017,2018, as compared to $365$271 million at December 31, 2016.2017. The decreaseincrease is primarily due to new purchases out-pacing loans transferred to LHFS and resold to Ginnie Mae out-pacing new purchases.Mae.
For further information, see Note 5 - Loans with Government Guarantees.
Representation and warranty reserve
When we sell mortgage loans, we make customary representations and warranties to the purchasers, including sponsored securitization trusts and their insurers (primarily Fannie Mae and Freddie Mac).
The representation and warranty benefit An estimate of $4 million and $11 million during the three and nine months ended September 30, 2017, respectively,fair value of the guarantee associated with the mortgage loans is recorded in other liabilities in the Consolidated Statements of Financial Condition, which was primarily due to lower loss severities for agency repurchases, and sustained lower volumes of repurchases and the continued reduction in our repurchase demand pipeline.
During the nine months ended September 30, 2017, we had $12 million in Fannie Mae new repurchase demands and $6 million in Freddie Mac new repurchase demands. These amounts are downat June 30, 2018, as compared to the nine months ended September 30, 2016 when we had $14 million in Fannie Mae new repurchase demands and $10 million in Freddie Mac new repurchase demands. The total UPB of 2009 and later vintage loans, which are subject to the representation and warranty reserve, sold to Fannie Mae and Freddie Mac was $195 million and $177$15 million at September 30, 2017 and September 30, 2016, respectively.
For further information on Representation and Warranty Reserve, see Note 10 - Representation and Warranty Reserve.December 31, 2017.
Regulatory Risks
Consent OrdersOrder
On September 29, 2014, the Bank entered into a Consent Order with the CFPB. The Consent Order relates to alleged violations of federal consumer financial laws arising from the Bank’s residential first mortgage loan loss mitigation practices and default servicing operations dating back to 2011. Under the terms of the Consent Order, the Bank paid $28 million for borrower remediation and $10 million in civil money penalties. The settlement does not involve any admission of wrongdoing on the part of the Bank or our employees, directors, officers, or agents. For further information and a complete description of all of the terms of the Consent Order, please refer to the copy of the Supervisory Agreement filed with the SEC as an exhibit to our Current Report on2016 Form 8-K filed on September 29, 2014.10-K for the year ended December 31, 2016.
Supervisory Agreement
On January 28, 2010, we became subject to the Supervisory Agreement, which will remain in effect until terminated, modified, or suspended in writing by the Federal Reserve. The failure to comply with the Supervisory Agreement could result in the initiation of further enforcement action by the Federal Reserve, including the imposition of further operating restrictions, and could result in additional enforcement actions against us. We have taken actions which we believe are appropriate to comply with, and intend to maintain compliance with, all of the requirements of the Supervisory Agreement. For further information and a complete description of all of the terms of the Supervisory Agreement, please refer to the copy of the Supervisory Agreement filed with the SEC as an exhibit to our 2016 Form 10-K for the year ended December 31, 2016.
Department of Justice Settlement Agreement
On February 24, 2012, the Bank entered into a Settlement Agreement with the DOJ under which we made an initial payment of $15 million and agreed to make future payments totaling $118 million in annual increments of up to $25 million upon meeting all of the following conditions which are evaluated quarterly and include: (a) the reversal of the DTA valuation allowance, which occurred at the end ofin 2013; (b) the repayment of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "TARP Preferred"), which occurred in July 2016; and (c) the Bank having a Tier 1 Leverage Capital Ratio of 11 percent or greater as filed in the Call Report with the OCC. At June 30, 2018, the Company had a Tier 1 Leverage Capital Ratio of 9.04 percent.
No payment would be required until six months after the Bank files its Call Report first reporting that its Tier 1 Leverage Capital Ratio was 11 percent or greater. If all other conditions were then satisfied, an initial annual payment of $25 million would be due at that time. The next annual payment is only made if all conditions continue to be satisfied otherwise payments are delayed until all such conditions are met. Further, making such a payment must not violate any material banking regulatory requirement, and the OCC must not object in writing.
The combination of (a) future dividends from the Bank to Bancorp and (b) continued growth in earning assets at the Bank are expected to continue to limit the growth rate of the Bank’s Tier 1 Leverage Capital Ratio, which could have an impact on the timing of expected cash flows under the Settlement Agreement.
Consistent with our business and regulatory requirements, Flagstar shall seek in good faith to fulfill the conditions, and will not undertake any conduct or fail to take any action the purpose of which is to frustrate or delay our ability to fulfill any of the conditions.
Additionally, if the Bank or Bancorp become party to a business combination in which the Bank and Bancorp represent less than 33.3 percent of the resulting company’s assets, annual payments would commence twelve months after the date of that business combination.
The Settlement Agreement meets the definition of a financial instrument for which we elected the fair value option. The fair value of the liability is subject to significant uncertainty and is impacted by forecasted estimates of equity, earnings, timing and amount of dividends and growth of the balance sheet and their related impacts on forecasted Tier 1 Leverage Capital Ratio. We consider the assumptions a market participant would make to transfer the liability and evaluate multiple possible outcomes and our estimates of the likelihood of these outcomes, which may change over time. For further information on the fair value of the liability, see Note 17 - Fair Value Measurements.
Capital
UnderManagement actively reviews and manages our capital position and strategy. We make adjustments to our balance sheet composition taking into consideration potential business risks, regulatory requirements and the OCC's capital distribution regulations, a savings bank that is a subsidiary of a savings and loan holding company must either notify or seek approval from the OCC of a capital distribution at least 30 days priorflexibility to the declaration of a dividend or the approval by the board of directors of the proposed capital distribution. The 30-day period allows the OCC to determine whether the distribution would not be advisable. Also, under Federal Reserve requirements, the Bank must provide a 30-day notice to the Federal Reserve prior to declaring or paying dividends. In addition, under the Supervisory Agreement, the Company agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital distributions.support future growth. We seek toprudently manage our capital levels and overall business in a manner which we consider to be prudentposition and work with our regulators to ensure that our capital levels are appropriate considering our risk profile and evaluation of the capital levels maintained by peer institutions.
Regulatory Capital Composition - Transitionprofile.
The maintenance of appropriate levels of capital is monitored by management on a regular basis. We manage our funding and capital positions by making adjustments to our balance sheet size and composition and hold capital to protect liability holders from the risk of loss.
The Company and the Bankstandards we are subject to various regulatory capitalinclude requirements administeredcontemplated by the federal banking agencies. UnderDodd-Frank Act as well as guidelines under Basel III. These risk-based capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specificare intended to measure capital guidelines that involve quantitative measures of our assets, liabilities, and certainadequacy with regard to a banking organization’s balance sheet, including off-balance sheet itemsexposures such as calculated under regulatory accounting practices.unused portions of loan commitments, letters of credit, and recourse arrangements. Our capital amounts and classificationratios are also subjectmaintained at levels in excess of those considered to qualitative judgmentsbe "well-capitalized" by regulators about components, risk weightings, and other factors. We are currently subject to regulatory capital rules issued by U.S. banking regulators.
Effective January Tier 1 2015, we became subject to the Basel III rules, which include certain transition provisions. Capital deductions to the Company's MSRs and deferred tax assets are recognized in 20leverage was 8.65 percent annual increments, and will be fully recognized as of January 1, 2018. When presented onat June 30, 2018 providing a fully phased-in365 basis capital, risk-weighted assets, and the capital ratios assume all regulatory capital adjustments and deductions are fully recognized. At September 30, 2017, the Company and the Bank were subject to the transitional phase-in limitation on deductions related to MSRs and certain deferred tax assets. The annual incremental change in the deductions due to the increase in the transitional phase-in from 60 percent in 2016 to 80 percent in 2017 reduced our regulatory capital ratios. These transitional phase in amounts increase to 100 percent in 2018.
Effective January 1, 2016, we became subject to the capital conservation buffer under the Basel III rules, subjecting a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservationpoint stress buffer above the minimum risk basedlevel needed to be considered “well-capitalized.” Additionally, total risk-based capital requirements. Theto RWA was 14.04 percent at June 30, 2018 providing a 404 basis point stress buffer above the minimum level needed to be considered "well-capitalized". For additional information on our capital conservation buffer for 2017 must be greater than 1.25 percent in order to not be subject to limitations. The Company and the Bank had a capital conservation buffer of 7.0 percent and 7.9 percent, respectively, as of September 30, 2017. When fully phased-in on January 1, 2019, the capital conservation buffer must be greater than 2.5 percent.requirements, see Note 15 - Regulatory Capital.
Dodd-Frank Act Section 171, commonly known as the Collins Amendment, grandfatheredestablished minimum Tier 1 leverage and risk-based capital requirements for insured depository institutions, depository institution holding companies, and non-bank financial companies that are supervised under the regulatory capital treatment ofFederal Reserve. Under the amendment, certain hybrid securities, such as trust preferred securities, issued prior to May 9, 2010,may be included in Tier 1 capital for banks orbank holding companies with less thanthat had total assets below $15 billion as of December 31, 2009. As we were below $15 billion in total consolidated assets as of December 31, 2009.
At September 30, 2017, we were considered "well-capitalized" for regulatory purposes.
The following tables show2009, the regulatory capital ratiostrust preferred securities classified as of the dates indicated:
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Amount | | Ratio | | Amount | | Ratio |
| | (Dollars in millions) |
| Bancorp | | | | | | | |
| Tier 1 leverage (to adjusted avg. total assets) | $ | 1,423 |
| | 8.80 | % | | $ | 1,256 |
| | 8.88 | % |
Total adjusted avg. total asset base (1) | 16,165 |
| | | | 14,149 |
| | |
| Tier 1 capital (to RWA) | $ | 1,423 |
| | 13.72 | % | | $ | 1,256 |
| | 15.12 | % |
| Common equity Tier 1 (to RWA) | 1,208 |
| | 11.65 | % | | 1,084 |
| | 13.06 | % |
| Total capital (to RWA) | 1,554 |
| | 14.99 | % | | 1,363 |
| | 16.41 | % |
Risk-weighted asset base (1) | $ | 10,371 |
| | | | $ | 8,305 |
| | |
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Amount | | Ratio | | Amount | | Ratio |
| | (Dollars in millions) |
| Bank | | | | | | | |
| Tier 1 leverage (to adjusted avg. total assets) | $ | 1,519 |
| | 9.38 | % | | $ | 1,491 |
| | 10.52 | % |
Total adjusted avg. total asset base (1) | 16,191 |
| | | | 14,177 |
| | |
| Tier 1 capital (to RWA) | $ | 1,519 |
| | 14.61 | % | | $ | 1,491 |
| | 17.90 | % |
| Common equity Tier 1 (to RWA) | 1,519 |
| | 14.61 | % | | 1,491 |
| | 17.90 | % |
| Total capital (to RWA) | 1,651 |
| | 15.88 | % | | 1,598 |
| | 19.18 | % |
Risk-weighted asset base (1) | $ | 10,396 |
| | | | $ | 8,332 |
| | |
| |
(1) | Based on adjusted total assets for purposes of Tier 1 leverage capital and RWA for purposes Tier 1, common equity Tier 1, and total risk-based capital. |
Our Bancorplong term debt on our balance sheet will be included as Tier 1 leverage ratio decreased at September 30, 2017, compared to December 31, 2016, primarily ascapital while they are outstanding, unless we complete an acquisition of a result of an increase in average assets during the nine months ended September 30, 2017.
Banks with assets greater than $10 billion are required to submit a DFAST under the final rules established by their primary regulator. DFAST requires banks to project results over a nine-quarter planning horizon under three scenarios (baseline, adverse, and severely adverse) published by the Federal Reserve and to show that the bank would exceed regulatory minimum capital standards for the Tier 1 leverage ratio, Tier 1 common ratio, Tier 1 risk-based capital ratio, and the Total risk-based capital ratio under all of these scenarios. We are not subject to the Federal Reserve’s Comprehensive Capital Analysis and Review program.depository institution holding company.
Additionally, we conduct quarterly capital stress tests and capital adequacy assessments. These quarterly capital stress tests utilize internally defined scenarios that are designed to help management and the Board better understand the integrated sensitivity of various risk exposures through quantifying the potential financial and capital impacts of hypothetical stressful events and scenarios.
The following table contains certain regulatory capital ratios for the Bank and the Company:
|
| | | | | | | | | | | |
| | Regulatory Minimums | | Regulatory Minimums to be Well-Capitalized | | Bank | | Bancorp |
| September 30, 2017 | | | | | | | |
| Basel III Ratios (transitional) | | | | | | | |
| Common equity Tier I capital ratio | 4.50 | % | | 6.50 | % | | 14.61 | % | | 11.65 | % |
| Tier I leverage ratio | 4.00 | % | | 5.00 | % | | 9.38 | % | | 8.80 | % |
Basel III Ratios (fully phased-in) (1) | | | | | | | |
| Common equity Tier I capital ratio | 4.50 | % | | 6.50 | % | | 13.80 | % | | 10.58 | % |
| Tier I leverage ratio | 4.00 | % | | 5.00 | % | | 9.13 | % | | 8.43 | % |
| |
(1) | Refer to MD&A - Use of Non-GAAP Financial Measures. |
Regulatory Capital Simplification
The impact underBank and Flagstar have been subject to the fully phased incapital requirements of the Basel III rules to our Tiersince January 1, leverage ratio is mostly driven by2015. On October 27, 2017, the treatment that MSRs receive under Basel III. Once fully phased in,agencies issued a notice of proposed rulemaking (“NPR”) which would simplify certain aspects of the Basel III capital rules. The agencies expect that the capital treatment and transition provisions for items covered by this final rule will change once the simplification proposal is finalized and effective. Specifically, the proposal would increase the limit on MSRs to 25 percent of CET1 and eliminate the aggregate 15 percent CET1 deduction threshold for MSRs and temporary difference DTAs. In response to comments received from bankers and trade associations, the regulators may change these proposed rules prior to issuing them and it is uncertain when the rules will significantly reduce the allowable amount of the fair value of MSRs includedbe issued in Tier 1 capital. At September 30, 2017, we had $246 million of MSRs, representing 17.3 percent of Tier 1 capital. Our ratio of MSRs to Tier 1 capital was 26.7 percent at December 31, 2016. During the nine months ended September 30, 2017, we had $260 million in bulk MSR sales. Over the long term, we plan to continue to reduce our MSRs to Tier 1 ratio, taking into consideration market conditions to guide our pace of MSR reduction.their final form.
On August 22, 2017, in In preparation for the NPR, the Basel III implementation phase-in has been halted for the treatment of MSRs and certain DTAs. The agencies issued a forthcoming proposal that would simplify regulatory capital requirements, the federal banking regulators proposed afinal rule that would extendwill maintain the existing transitional capital treatmentrules’ 2017 transition provisions for certainseveral regulatory capital deductions and risk weights. The Agenciescertain other requirements that are proposingsubject to extendmulti-year phase-in schedules in the existingregulatory capital rules. Specifically, the final rule will maintain the capital rules’ 2017 transition provisions at 80 percent for a targeted set of items: MSRs, certain DTAs, investments in the capital instruments of unconsolidated financial institutions, and minority interests. This proposal would postpone the implementation of the fully phased-in requirements for these items by banking organizations that are not subject to the advanced approaches capital rules prior to the Agencies’ consideration of simplification to the capital rules.
On September 27, 2017, the federal banking agencies released a Notice of Proposed Rulemaking (NPR), proposing changes to certain aspects of the bank capital rules under the “standardized approach.” The proposal is to modify the approach to theregulatory capital treatment of acquisition, development, and construction (ADC) loans characterized under the current capital rules as high volatility commercial real estate (HVCRE) exposures. The rule is intended to simplify the capital treatment of ADC loans and broaden the number ADC loans subject to a higher risk weighting, while reducing the risk weight for covered loansfollowing items: (i) MSRs, (ii) DTAs arising from 150% to 130%.
In addition, the new proposal would simplify the threshold deduction treatment for MSRs, temporary difference DTAsdifferences that could not realizablebe realized through carryback, and investments in the capital of unconsolidated financial institutions. The proposal would require that non-advanced approaches banking organizations deduct from common equity tier 1 capital any amount of MSRs, temporary difference DTAs, andnet operating loss carrybacks, (iii) investments in the capital of unconsolidated financial institutions, that individually exceeds 25 percentand (iv) minority interests. As of the common equity tier 1 capital deduction threshold. Consistent with the capital rule, under the proposal, a banking organization would continue to apply a 250 percent risk weight to anyJune 30, 2018, we had $257 million in MSRs, or$54 million in DTAs arising from temporary DTAs not deducted. Also, anydifferences and no material investments in the capital of unconsolidated financial institutions that are not deducted, would be assigned a risk weight according toor minority interest. This final rule will maintain the exposure category of the investment.
We are currently reviewing the proposed rules and the potential impact they may have2017 transition provisions for certain items for non-advanced approach banks. For additional information on our regulatory capital. If enacted as proposed, we believe the rules should accelerate the capital formation necessary to support further balance sheet growth and, under a limit of 25 percent of capital, give us the flexibility to better manage the uncertainties that may exist within the MSR market at any given time. This will allow us to hold more MSRs which are a high yielding asset that we fund efficiently and for which we hedge exposure to changes in interest rates, convexity and implied future volatility. Flagstar Bancorp's Tier 1 Leverage ratio should increase approximately 70 basis points after applying the simplified capital rules under the NPR.requirements, see Note 15 - Regulatory Capital.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures such as the estimated fully implemented Basel III capital levels and ratios and tangible book value per share. We believe these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying performance and trends of the Company.
Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To mitigate these limitations, we have practices in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that our performance is properly reflected to facilitate consistent period-to-period comparisons. Our method of calculating these non-GAAP measures may differ from methods used by other companies. Although we believe the non-GAAP financial measures disclosed in this report enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for those financial measures prepared in accordance with GAAP. Where non-GAAP financial measures are used, the most directly comparable GAAP or regulatory financial measure, as well as the reconciliation to the most directly comparable GAAP or regulatory financial measure, can be found in this report.
Nonperforming assets / Tier 1 + Allowance for Loan Losses. The ratio of nonperforming assets to Tier 1 and ALLL divides the total level of nonperforming LHFI assets by Tier 1 capital (to adjusted total assets), as defined by bank regulations, plus ALLL. We believe these measurements are meaningful measures of capital adequacy used by investors, regulators, management and others to evaluate the adequacy of capital in comparison to other companies within the industry.
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in millions) |
| Nonperforming assets | $ | 40 |
| | $ | 54 |
|
| Tier 1 capital (to adjusted total assets) | 1,423 |
| | 1,256 |
|
| Allowance for loan losses | 140 |
| | 142 |
|
| Tier 1 capital + ALLL | $ | 1,563 |
| | $ | 1,398 |
|
| Nonperforming assets / Tier 1 capital + ALLL | 2.6 | % | | 3.9 | % |
Tangible book value per share. The Company believes that tangible book value per share provides a meaningful representation of its operating performance on an ongoing basis. Management uses this measure to assess performance of the Company against its peers and evaluate overall performance. The Company believes this non-GAAP financial measure provides useful information for investors, securities analysts and others because it provides a tool to evaluate the Company’s performance on an ongoing basis and compared to its peers.
| | | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 | June 30, 2018 | | December 31, 2017 | | June 30, 2017 |
| | (Dollars in millions, except share data) | (Dollars in millions, except share data) |
| Total stock holders' equity | $ | 1,451 |
| | $ | 1,336 |
| | $ | 1,286 |
| |
| Preferred stock | — |
| | — |
| | — |
| |
| Goodwill and intangibles | 21 |
| | — |
| | — |
| |
| Total stockholders' equity | | $ | 1,475 |
| | $ | 1,399 |
| | $ | 1,408 |
|
| Less: Goodwill and intangibles | | 71 |
| | 21 |
| | 20 |
|
| Tangible book value | $ | 1,430 |
| | $ | 1,336 |
| | $ | 1,286 |
| $ | 1,404 |
| | $ | 1,378 |
| | $ | 1,388 |
|
| | | | | | | | | | | |
| Number of common shares outstanding | 57,181,536 |
| | 56,824,802 |
| | 56,597,271 |
| 57,598,406 |
| | 57,321,228 |
| | 57,161,431 |
|
| Tangible book value per share | $ | 25.01 |
| | $ | 23.50 |
| | $ | 22.72 |
| $ | 24.37 |
| | $ | 24.04 |
| | $ | 24.29 |
|
Basel III (transitional) to Basel III (fully phased-in) reconciliation. On January 1, 2015, the Basel III rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity Tier 1 capital and Tier 1 capital. When fully phased-in, Basel III, will increase capital requirements through higher minimum capital levels as well as through increases in risk-weights for certain exposures. Additionally, the final Basel III rules place greater emphasis on common equity. In October 2013, the OCC and Federal Reserve released final rules detailing the U.S. implementation of Basel III and the application of the risk-based and leverage capital rules to top-tier savings and loan holding companies. We have transitioned to the Basel III framework beginning in January 2015 and are subject to a phase-in period extending through 2018. Accordingly, the calculations provided below and on the previous page, are estimates. These measures are considered to be non-GAAP financial measures because they are not formally defined by GAAP and the Basel III implementation regulations. The Common Equity Tier 1, Tier 1, Total Capital and Leverage ratios will not be fully phased-in until January 1, 2018 and the Capital Conservation buffer will not be fully phased-in until January 1, 2019. The regulations are subject to change as clarifying guidance becomes available and the calculations currently include our interpretations of the requirements including informal feedback received through the regulatory process. The federal banking regulators have issued a series of new proposals regarding regulatory capital which may freeze or eliminate the transitional rules. See MD&A -Regulatory Capital Composition - Transition section for further information. Other entities may calculate the Basel III ratios differently from ours based on their interpretation of the guidelines. Since analysts and banking regulators may assess our capital adequacy using the Basel III framework, we believe that it is useful to provide investors information enabling them to assess our capital adequacy on the same basis.
|
| | | | | | | | | | | | | | | |
| | Common Equity Tier 1 (to RWA) | | Tier 1 leverage (to adjusted avg. total assets) | | Tier 1 Capital (to RWA) | | Total Risk-Based Capital (to RWA) |
| | (Dollars in millions) |
| September 30, 2017 | | | | | | | |
| Flagstar Bancorp | | | | | | | |
| Regulatory capital – Basel III (transitional) to Basel III (fully phased-in) | | | | | | | |
| Basel III (transitional) | $ | 1,208 |
| | $ | 1,423 |
| | $ | 1,423 |
| | $ | 1,554 |
|
| Increased deductions related to deferred tax assets, MSRs, and other capital components | (90 | ) | | (65 | ) | | (65 | ) | | (62 | ) |
| Basel III (fully phased-in) capital | $ | 1,118 |
| | $ | 1,358 |
| | $ | 1,358 |
| | $ | 1,492 |
|
| Risk-weighted assets – Basel III (transitional) to Basel III (fully phased-in) | | | | | | | |
| Basel III assets (transitional) | $ | 10,371 |
| | $ | 16,165 |
| | $ | 10,371 |
| | $ | 10,371 |
|
| Net change in assets | 191 |
| | (65 | ) | | 191 |
| | 191 |
|
| Basel III (fully phased-in) assets | $ | 10,562 |
| | $ | 16,100 |
| | $ | 10,562 |
| | $ | 10,562 |
|
| Capital ratios | | | | | | | |
| Basel III (transitional) | 11.65 | % | | 8.80 | % | | 13.72 | % | | 14.99 | % |
| Basel III (fully phased-in) | 10.58 | % | | 8.43 | % | | 12.86 | % | | 14.13 | % |
|
| | | | | | | | | | | | | | | |
| | Common Equity Tier 1 (to RWA) | | Tier 1 leverage (to adjusted avg. total assets) | | Tier 1 Capital (to RWA) | | Total Risk-Based Capital (to RWA) |
| | (Dollars in millions) |
| September 30, 2017 | | | | | | | |
| Flagstar Bank | | | | | | | |
| Regulatory capital – Basel III (transitional) to Basel III (fully phased-in) | | | | | | | |
| Basel III (transitional) | $ | 1,519 |
| | $ | 1,519 |
| | $ | 1,519 |
| | $ | 1,651 |
|
| Increased deductions related to deferred tax assets, MSRs, and other capital components | (44 | ) | | (44 | ) | | (44 | ) | | (41 | ) |
| Basel III (fully phased-in) capital | $ | 1,475 |
| | $ | 1,475 |
| | $ | 1,475 |
| | $ | 1,610 |
|
| Risk-weighted assets – Basel III (transitional) to Basel III (fully phased-in) | | | | | | | |
| Basel III assets (transitional) | $ | 10,396 |
| | $ | 16,191 |
| | $ | 10,396 |
| | $ | 10,396 |
|
| Net change in assets | 293 |
| | (45 | ) | | 293 |
| | 293 |
|
| Basel III (fully phased-in) assets | $ | 10,689 |
| | $ | 16,146 |
| | $ | 10,689 |
| | $ | 10,689 |
|
| Capital ratios | | | | | | | |
| Basel III (transitional) | 14.61 | % | | 9.38 | % | | 14.61 | % | | 15.88 | % |
| Basel III (fully phased-in) | 13.80 | % | | 9.13 | % | | 13.80 | % | | 15.06 | % |
Critical Accounting Estimates
Various elements of our accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain accounting policies that, due to the judgment, estimates and assumptions in those policies are critical to an understanding of our Consolidated Financial Statements and the Notes, are described in Item 1. These policies relate to: (a) the determination of our ALLL; and (b) fair value measurements. We believe the judgment, estimates and assumptions used in the preparation of our Consolidated Financial Statements and the Notes are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements and the Notes to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations and/or financial condition. For further information on our critical accounting policies, please refer to the Critical Accounting Estimates section of Item 7 of Exhibit 99.1 to our June 1, 2018 Form 10-K for the year ended December 31, 2016,8-K Report, which is available on our website, flagstar.com, under the Investor Relations section, or on the website of the Securities and Exchange Commission, at sec.gov.
FORWARD – LOOKING STATEMENTS
Certain statements in this Form 10-Q, including but not limited to statements included within the Management’s Discussion and Analysis of Financial Condition and Results of Operations, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. In addition, Flagstar Bancorp, Inc. may make forward-looking statements in our other documents filed with or furnished to the SEC, and our management may make forward-looking statements orally to analysts, investors, representatives of the media and others.
Generally, forward-looking statements are not based on historical facts but instead represent management’s beliefs regarding future events. Such statements may be identified by words such as believe, expect, anticipate, intend, plan, estimate, may increase, may fluctuate, and similar expressions or future or conditional verbs such as will, should, would and could. Such statements are based on management’s current expectations and are subject to risks, uncertainties and changes in circumstances. Actual results and capital and other financial conditions may differ materially from those included in these statements due to a variety of factors, including without limitation the precautionary statements included within each individual business’ discussion and analysis of our results of operations and the risk factors listed and described in Item 1A1A. to Part I, of our Annual Report on Form 10-K for the year ended December 31, 20162017 and Item 1A1A. to Part II, of this Quarterly Report on Form 10-Q, which are incorporated by reference herein.
Other than as required under United States securities laws, Flagstar Bancorp does not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.
Item 1. Financial Statements
Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In millions, except share data) | | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | (Unaudited) | | (Unaudited) | (Unaudited) | | |
| Assets | | | | | | |
| Cash | $ | 88 |
| | $ | 84 |
| $ | 139 |
| | $ | 122 |
|
| Interest-earning deposits | 145 |
| | 74 |
| 220 |
| | 82 |
|
| Total cash and cash equivalents | 233 |
| | 158 |
| 359 |
| | 204 |
|
| Investment securities available-for-sale | 1,637 |
| | 1,480 |
| 1,871 |
| | 1,853 |
|
| Investment securities held-to-maturity | 977 |
| | 1,093 |
| 748 |
| | 939 |
|
| Loans held-for-sale ($4,907 and $3,145 measured at fair value, respectively) | 4,939 |
| | 3,177 |
| |
| Loans held-for-investment ($13 and $72 measured at fair value, respectively) | 7,203 |
| | 6,065 |
| |
| Loans held-for-sale ($4,272 and $4,300 measured at fair value, respectively) | | 4,291 |
| | 4,321 |
|
| Loans held-for-investment ($11 and $12 measured at fair value, respectively) | | 8,904 |
| | 7,713 |
|
| Loans with government guarantees | 253 |
| | 365 |
| 278 |
| | 271 |
|
| Less: allowance for loan losses | (140 | ) | | (142 | ) | (137 | ) | | (140 | ) |
| Total loans held-for-investment and loans with government guarantees, net | 7,316 |
| | 6,288 |
| 9,045 |
| | 7,844 |
|
| Mortgage servicing rights | 246 |
| | 335 |
| 257 |
| | 291 |
|
| Net deferred tax asset | 248 |
| | 286 |
| 119 |
| | 136 |
|
| Federal Home Loan Bank stock | 264 |
| | 180 |
| 303 |
| | 303 |
|
| Premises and equipment, net | 314 |
| | 275 |
| 355 |
| | 330 |
|
| Goodwill and intangible assets | | 71 |
| | 21 |
|
| Other assets | 706 |
| | 781 |
| 711 |
| | 670 |
|
| Total assets | $ | 16,880 |
| | $ | 14,053 |
| $ | 18,130 |
| | $ | 16,912 |
|
| Liabilities and Stockholders’ Equity | | | | | | |
| Noninterest bearing deposits | $ | 2,272 |
| | $ | 2,077 |
| $ | 2,781 |
| | $ | 2,049 |
|
| Interest bearing deposits | 6,889 |
| | 6,723 |
| 7,807 |
| | 6,885 |
|
| Total deposits | 9,161 |
| | 8,800 |
| 10,588 |
| | 8,934 |
|
| Short-term Federal Home Loan Bank advances | 4,065 |
| | 1,780 |
| 3,840 |
| | 4,260 |
|
| Long-term Federal Home Loan Bank advances | 1,300 |
| | 1,200 |
| 1,280 |
| | 1,405 |
|
| Other long-term debt | 493 |
| | 493 |
| 494 |
| | 494 |
|
| Representation and warranty reserve | 16 |
| | 27 |
| |
| Other liabilities ($60 and $60 measured at fair value, respectively) | 394 |
| | 417 |
| 453 |
| | 420 |
|
| Total liabilities | 15,429 |
| | 12,717 |
| 16,655 |
| | 15,513 |
|
| Stockholders’ Equity | | | | | | |
| Common stock $0.01 par value, 80,000,000 and 70,000,000 shares authorized; 57,181,536 and 56,824,802 shares issued and outstanding, respectively | 1 |
| | 1 |
| |
| Common stock $0.01 par value, 80,000,000 and 80,000,000 shares authorized; 57,598,406 and 57,321,228 shares issued and outstanding, respectively | | 1 |
| | 1 |
|
| Additional paid in capital | 1,511 |
| | 1,503 |
| 1,514 |
| | 1,512 |
|
| Accumulated other comprehensive loss | (8 | ) | | (7 | ) | (32 | ) | | (16 | ) |
| Accumulated deficit | (53 | ) | | (161 | ) | (8 | ) | | (98 | ) |
| Total stockholders’ equity | 1,451 |
| | 1,336 |
| 1,475 |
| | 1,399 |
|
| Total liabilities and stockholders’ equity | $ | 16,880 |
| | $ | 14,053 |
| $ | 18,130 |
| | $ | 16,912 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc. Consolidated Statements of Operations (In millions, except per share data) | Flagstar Bancorp, Inc. Consolidated Statements of Operations (In millions, except per share data) | Flagstar Bancorp, Inc. Consolidated Statements of Operations (In millions, except per share data) |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Unaudited) | (Unaudited) |
| Interest Income | | |
| Loans | $ | 120 |
| | $ | 90 |
| | $ | 319 |
| | $ | 256 |
| $ | 145 |
| | $ | 108 |
| | $ | 275 |
| | $ | 199 |
|
| Investment securities | 20 |
| | 16 |
| | 59 |
| | 50 |
| 21 |
| | 20 |
| | 43 |
| | 39 |
|
| Interest-earning deposits and other | — |
| | — |
| | 1 |
| | — |
| 1 |
| | 1 |
| | 1 |
| | 1 |
|
| Total interest income | 140 |
| | 106 |
| | 379 |
| | 306 |
| 167 |
| | 129 |
| | 319 |
| | 239 |
|
| Interest Expense | | | | | | | | | | | | | | |
| Deposits | 13 |
| | 12 |
| | 37 |
| | 34 |
| 21 |
| | 12 |
| | 38 |
| | 24 |
|
| Short-term Federal Home Loan Bank advances and other | 11 |
| | 1 |
| | 23 |
| | 4 |
| |
| Short-term Federal Home Loan Bank advances | | 17 |
| | 9 |
| | 32 |
| | 12 |
|
| Long-term Federal Home Loan Bank advances | 6 |
| | 7 |
| | 17 |
| | 22 |
| 7 |
| | 5 |
| | 14 |
| | 11 |
|
| Other long-term debt | 7 |
| | 6 |
| | 19 |
| | 10 |
| 7 |
| | 6 |
| | 14 |
| | 12 |
|
| Total interest expense | 37 |
| | 26 |
| | 96 |
| | 70 |
| 52 |
| | 32 |
| | 98 |
| | 59 |
|
| Net interest income | 103 |
| | 80 |
| | 283 |
| | 236 |
| 115 |
| | 97 |
| | 221 |
| | 180 |
|
| Provision (benefit) for loan losses | 2 |
| | 7 |
| | 4 |
| | (9 | ) | |
| Net interest income after provision (benefit) for loan losses | 101 |
| | 73 |
|
| 279 |
| | 245 |
| |
| Provision for loan losses | | (1 | ) | | (1 | ) | | (1 | ) | | 2 |
|
| Net interest income after provision for loan losses | | 116 |
| | 98 |
|
| 222 |
| | 178 |
|
| Noninterest Income | | | | | | | | | | | | | | |
| Net gain on loan sales | 75 |
| | 94 |
| | 189 |
| | 259 |
| 63 |
| | 66 |
| | 123 |
| | 114 |
|
| Loan fees and charges | 23 |
| | 22 |
| | 58 |
| | 56 |
| 24 |
| | 20 |
| | 44 |
| | 35 |
|
| Deposit fees and charges | 5 |
| | 5 |
| | 14 |
| | 17 |
| 5 |
| | 5 |
| | 10 |
| | 9 |
|
| Loan administration income | 5 |
| | 4 |
| | 16 |
| | 14 |
| 5 |
| | 6 |
| | 10 |
| | 11 |
|
| Net return (loss) on mortgage servicing rights | 6 |
| | (11 | ) | | 26 |
| | (21 | ) | |
| Representation and warranty benefit | 4 |
| | 6 |
| | 11 |
| | 12 |
| |
| Net return on mortgage servicing rights | | 9 |
| | 6 |
| | 13 |
| | 20 |
|
| Other noninterest income | 12 |
| | 36 |
| | 32 |
| | 52 |
| 17 |
| | 13 |
| | 34 |
| | 27 |
|
| Total noninterest income | 130 |
| | 156 |
| | 346 |
| | 389 |
| 123 |
| | 116 |
| | 234 |
| | 216 |
|
| Noninterest Expense | | | | | | | | | | | | | | |
| Compensation and benefits | 76 |
| | 69 |
| | 219 |
| | 203 |
| 80 |
| | 71 |
| | 160 |
| | 143 |
|
| Commissions | 23 |
| | 16 |
| | 49 |
| | 40 |
| 25 |
| | 16 |
| | 43 |
| | 26 |
|
| Occupancy and equipment | 28 |
| | 21 |
| | 75 |
| | 64 |
| 30 |
| | 25 |
| | 60 |
| | 47 |
|
| Federal insurance premiums | | 6 |
| | 4 |
| | 12 |
| | 7 |
|
| Loan processing expense | 15 |
| | 13 |
| | 41 |
| | 40 |
| 15 |
| | 14 |
| | 29 |
| | 26 |
|
| Legal and professional expense | 7 |
| | 5 |
| | 22 |
| | 20 |
| 6 |
| | 8 |
| | 12 |
| | 15 |
|
| Other noninterest expense | 22 |
| | 18 |
| | 59 |
| | 51 |
| 15 |
| | 16 |
| | 34 |
| | 30 |
|
| Total noninterest expense | 171 |
| | 142 |
| | 465 |
| | 418 |
| 177 |
| | 154 |
| | 350 |
| | 294 |
|
| Income before income taxes | 60 |
| | 87 |
| | 160 |
| | 216 |
| 62 |
| | 60 |
| | 106 |
| | 100 |
|
| Provision for income taxes | 20 |
| | 30 |
| | 52 |
| | 73 |
| 12 |
| | 19 |
| | 21 |
| | 32 |
|
| Net income | $ | 40 |
| | $ | 57 |
| | $ | 108 |
| | $ | 143 |
| $ | 50 |
| | $ | 41 |
| | $ | 85 |
| | $ | 68 |
|
| Net income per share | | | | | | | | | | | | | | |
| Basic | $ | 0.71 |
| | $ | 0.98 |
| | $ | 1.90 |
| | $ | 2.21 |
| $ | 0.86 |
| | $ | 0.72 |
| | $ | 1.47 |
| | $ | 1.18 |
|
| Diluted | $ | 0.70 |
| | $ | 0.96 |
| | $ | 1.86 |
| | $ | 2.16 |
| $ | 0.85 |
| | $ | 0.71 |
| | $ | 1.45 |
| | $ | 1.16 |
|
| Weighted average shares outstanding | | | | | | | | | | | | | | |
| Basic | 57,162,025 |
| | 56,580,238 |
| | 57,062,696 |
| | 56,556,188 |
| 57,491,714 |
| | 57,101,816 |
| | 57,424,557 |
| | 57,012,208 |
|
| Diluted | 58,186,593 |
| | 57,933,806 |
| | 58,133,296 |
| | 57,727,262 |
| 58,258,577 |
| | 58,138,938 |
| | 58,286,327 |
| | 58,106,070 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Unaudited) | (Unaudited) |
| Net income | $ | 40 |
| | $ | 57 |
| | $ | 108 |
| | $ | 143 |
| $ | 50 |
| | $ | 41 |
| | $ | 85 |
| | $ | 68 |
|
| Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | |
| Investment securities | 1 |
| | (4 | ) | | 3 |
| | 12 |
| (9 | ) | | 2 |
| | (38 | ) | | 2 |
|
| Derivatives and hedging activities | — |
| | 3 |
| | (4 | ) | | (34 | ) | 7 |
| | (5 | ) | | 22 |
| | (4 | ) |
| Other comprehensive income (loss), net of tax | 1 |
| | (1 | ) | | (1 | ) | | (22 | ) | (2 | ) | | (3 | ) | | (16 | ) | | (2 | ) |
| Comprehensive income | $ | 41 |
| | $ | 56 |
| | $ | 107 |
| | $ | 121 |
| $ | 48 |
| | $ | 38 |
| | $ | 69 |
| | $ | 66 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
(In millions, except share data)
| | | | Preferred Stock | Common Stock | | Common Stock | |
| | Number of Shares Outstanding | Amount of Preferred
Stock | Number of Shares Outstanding | Amount of Common
Stock | Additional
Paid in
Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity | Number of Shares Outstanding | Amount of Common
Stock | Additional
Paid in
Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity |
| Balance at December 31, 2015 | 266,657 |
| $ | 267 |
| 56,483,258 |
| $ | 1 |
| $ | 1,486 |
| $ | 2 |
| $ | (227 | ) | $ | 1,529 |
| |
| Balance at December 31, 2016 | | 56,824,802 |
| $ | 1 |
| $ | 1,503 |
| $ | (7 | ) | $ | (161 | ) | $ | 1,336 |
|
| (Unaudited) | | | | | | |
| Net income | — |
| — |
| — |
| — |
| — |
| — |
| 143 |
| 143 |
| — |
| — |
| — |
| — |
| 68 |
| 68 |
|
| Total other comprehensive income (loss) | — |
| — |
| — |
| — |
| — |
| (22 | ) | — |
| (22 | ) | |
| Preferred stock redemption | (266,657 | ) | (267 | ) | — |
| — |
| — |
| — |
| — |
| (267 | ) | |
| Dividends on preferred stock | — |
| — |
| — |
| — |
| — |
| — |
| (105 | ) | (105 | ) | |
| Total other comprehensive income | | — |
| — |
| — |
| (2 | ) | — |
| (2 | ) |
| Warrant exercise | | 154,313 |
| — |
| 4 |
| — |
| — |
| 4 |
|
| Stock-based compensation | — |
| — |
| 114,013 |
| — |
| 8 |
| — |
| — |
| 8 |
| 182,316 |
| — |
| 2 |
| — |
| — |
| 2 |
|
| Balance at September 30, 2016 | — |
| $ | — |
| 56,597,271 |
| $ | 1 |
| $ | 1,494 |
| $ | (20 | ) | $ | (189 | ) | $ | 1,286 |
| |
| Balance at December 31, 2016 | — |
| $ | — |
| 56,824,802 |
| $ | 1 |
| $ | 1,503 |
| $ | (7 | ) | $ | (161 | ) | $ | 1,336 |
| |
| Balance at June 30, 2017 | | 57,161,431 |
| $ | 1 |
| $ | 1,509 |
| $ | (9 | ) | $ | (93 | ) | $ | 1,408 |
|
| Balance at December 31, 2017 | | 57,321,228 |
| $ | 1 |
| $ | 1,512 |
| $ | (16 | ) | $ | (98 | ) | $ | 1,399 |
|
| (Unaudited) | | | | | | |
| Net income | — |
| — |
| — |
| — |
| — |
| — |
| 108 |
| 108 |
| — |
| — |
| — |
| — |
| 85 |
| 85 |
|
| Total other comprehensive income (loss) | — |
| — |
| — |
| — |
| — |
| (1 | ) | — |
| (1 | ) | — |
| — |
| — |
| (11 | ) | — |
| (11 | ) |
| Shares issued from Employee Stock Purchase Plan | — |
| — |
| 19,897 |
| — |
| — |
| — |
| — |
| — |
| 64,943 |
| — |
| — |
| — |
| — |
| — |
|
| Warrant exercise | — |
| — |
| 154,313 |
| — |
| 4 |
| — |
| — |
| 4 |
| |
| Stock-based compensation | — |
| — |
| 182,524 |
| — |
| 4 |
| — |
| — |
| 4 |
| 212,235 |
| — |
| 2 |
| — |
| — |
| 2 |
|
| Balance at September 30, 2017 | — |
| $ | — |
| 57,181,536 |
| $ | 1 |
| $ | 1,511 |
| $ | (8 | ) | $ | (53 | ) | $ | 1,451 |
| |
Reclassification of certain income tax effects (1) | | — |
| — |
| — |
| (5 | ) | 5 |
| — |
|
| Balance at June 30, 2018 | | 57,598,406 |
| $ | 1 |
| $ | 1,514 |
| $ | (32 | ) | $ | (8 | ) | $ | 1,475 |
|
| |
| (1) | Income tax effects of the Tax Cuts and Jobs Act are reclassified from AOCI to retained earnings due to the adoption of ASU 2018-02. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc. Condensed Consolidated Statements of Cash Flows (In millions) | Flagstar Bancorp, Inc. Condensed Consolidated Statements of Cash Flows (In millions) | Flagstar Bancorp, Inc. Condensed Consolidated Statements of Cash Flows (In millions) |
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| | (Unaudited) | (Unaudited) |
| Operating Activities | | | | | | |
| Net cash used in operating activities | $ | (19,239 | ) | | $ | (10,128 | ) | $ | (11,849 | ) | | $ | (11,981 | ) |
| Investing Activities | | | | | | |
| Proceeds from sale of AFS securities including loans that have been securitized | $ | 17,949 |
| | $ | 10,876 |
| $ | 11,794 |
| | $ | 10,853 |
|
| Collection of principal on investment securities AFS | 158 |
| | 116 |
| 105 |
| | 106 |
|
| Purchase of investment securities AFS and other | (593 | ) | | (203 | ) | (5 | ) | | (300 | ) |
| Collection of principal on investment securities HTM | 116 |
| | 126 |
| 47 |
| | 79 |
|
| Purchase of investment securities HTM and other | — |
| | (15 | ) | |
| Proceeds received from the sale of LHFI | 78 |
| | 228 |
| 2 |
| | 78 |
|
| Net Origination, purchase, and principal repayments of LHFI | (1,231 | ) | | (1,297 | ) | |
| Net origination, purchase, and principal repayments of LHFI | | (635 | ) | | (800 | ) |
| Purchase of bank owned life insurance | (50 | ) | | (85 | ) | — |
| | (50 | ) |
| Net purchase of FHLB stock | (84 | ) | | (2 | ) | — |
| | (80 | ) |
| Acquisition of premises and equipment, net of proceeds | (74 | ) | | (44 | ) | (33 | ) | | (48 | ) |
| Proceeds from the sale of MSRs | 252 |
| | 35 |
| 218 |
| | 217 |
|
| Other, net | 4 |
| | 14 |
| (10 | ) | | 1 |
|
| Net cash provided by investing activities | $ | 16,525 |
| | $ | 9,749 |
| $ | 11,483 |
| | $ | 10,056 |
|
| Financing Activities | | | | | | |
| Net change in deposit accounts | $ | 361 |
| | $ | 1,436 |
| $ | 1,039 |
| | $ | (105 | ) |
| Net change in short term FHLB borrowings and other short term debt | 2,285 |
| | (1,211 | ) | |
| Proceeds from long term FHLB advances | 150 |
| | 395 |
| |
| Repayment of long term FHLB advances | (50 | ) | | — |
| |
| Net change in short-term FHLB borrowings and other short-term debt | | (420 | ) | | 1,890 |
|
| Proceeds from increases in FHLB long-term advances and other debt | | 200 |
| | — |
|
| Repayment of FHLB long-term advances | | (325 | ) | | — |
|
| Net receipt of payments of loans serviced for others | 24 |
| | 91 |
| 11 |
| | 128 |
|
| Preferred stock dividends | — |
| | (105 | ) | |
| Redemption of preferred stock | — |
| | (267 | ) | |
| Net receipt of escrow payments | 19 |
| | 6 |
| 16 |
| | 14 |
|
| Other | | (2 | ) | | — |
|
| Net cash provided by financing activities | $ | 2,789 |
| | $ | 345 |
| $ | 519 |
| | $ | 1,927 |
|
| Net increase (decrease) in cash and cash equivalents | 75 |
| | (34 | ) | |
| Beginning cash and cash equivalents | 158 |
| | 208 |
| |
| Ending cash and cash equivalents | $ | 233 |
| | $ | 174 |
| |
Net increase in cash, cash equivalents and restricted cash (1) | | 153 |
| | 2 |
|
Beginning cash, cash equivalents and restricted cash (1) | | 223 |
| | 208 |
|
Ending cash, cash equivalents and restricted cash (1) | | $ | 376 |
| | $ | 210 |
|
| Supplemental disclosure of cash flow information | | | | | | |
| Non-cash reclassification of investment securities HTM to AFS | | $ | 144 |
| | $ | — |
|
| Non-cash reclassification of loans originated LHFI to LHFS | $ | 106 |
| | $ | 1,331 |
| $ | 5 |
| | $ | 106 |
|
| Non-cash reclassification of LHFS to AFS securities | $ | 17,657 |
| | $ | 10,588 |
| $ | 11,794 |
| | $ | 10,789 |
|
| MSRs resulting from sale or securitization of loans | $ | 178 |
| | $ | 173 |
| $ | 183 |
| | $ | 103 |
|
| Operating section supplemental disclosures | | | | | | |
| Cash proceeds from sales of LHFS | $ | 5,547 |
| | $ | 14,097 |
| $ | 4,967 |
| | $ | 3,174 |
|
| Origination, premium paid and purchase of LHFS, net of principal repayments | $ | (24,518 | ) | | $ | (23,826 | ) | $ | (16,829 | ) | | $ | (14,974 | ) |
| |
| (1) | For further information on restricted cash, see Note 8 - Derivatives. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying financial statements of Flagstar Bancorp, Inc. ("Flagstar," or the "Company"), including its wholly owned principal subsidiary, Flagstar Bank, FSB (the "Bank"), have been prepared using U.S. GAAP for interim financial statements. Where we say "we," "us," "our," the "Company," "Bancorp" or "Flagstar," we usually mean Flagstar Bancorp, Inc. However, in some cases, a reference to "we," "us," "our," the "Company" or "Flagstar" will include the Bank.
These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the SEC. These interim financial statements are unaudited and include, in our opinion, all adjustments necessary for a fair statement of the results for the periods indicated, which are not necessarily indicative of results which may be expected for the full year. These consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and footnotes thereto included in Part II, Item 8 of Exhibit 99.1 to our AnnualCurrent Report on Form 10-K for the year ended December 31, 2016,8-K dated June 1, 2018 ("June 1, 2018 Form 8-K Report"), which is available on our website, at flagstar.com, and on the SEC website, at sec.gov. Certain prior period amounts have been reclassified to conform to the current period presentation.
Acquisitions
On June 4, 2018, we signed a definitive agreement to acquire 52 Wells Fargo Bank branches in Indiana, Michigan, Wisconsin, and Ohio, with approximately $2.3 billion in deposits and $130 million in loans. The transaction is subject to regulatory approval and the satisfaction of other customary closing conditions and is expected to close late in the fourth quarter 2018.
On March 12, 2018, we closed the purchase of the mortgage loan warehouse business from Santander Bank, with $499 million outstanding warehouse loans and $1.7 billion in commitments. Additionally, on March 19, 2018, we completed the acquisition of eight Desert Community Bank branches in San Bernardino County, California, with $614 million in deposits and $59 million in loans. Together, these acquisitions increased goodwill and intangible assets by $51 million.
Note 2 - Investment Securities
The following table presents our investment securities:
| | | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | | | | | | | |
| June 30, 2018 | | | | | | | | |
| Available-for-sale securities | | | | | | | | |
| Agency - Commercial | | $ | 1,093 |
| | $ | — |
| | $ | (42 | ) | | $ | 1,051 |
|
| Agency - Residential | | 763 |
| | — |
| | (34 | ) | | 729 |
|
| Municipal obligations | | 34 |
| | — |
| | (1 | ) | | 33 |
|
| Corporate debt obligations | | 41 |
| | 1 |
| | — |
| | 42 |
|
| Other MBS | | 16 |
| | — |
| | — |
| | 16 |
|
Total available-for-sale securities (1) | | $ | 1,947 |
| | $ | 1 |
| | $ | (77 | ) | | $ | 1,871 |
|
| Held-to-maturity securities | | | | | | | | |
| Agency - Commercial | | $ | 366 |
| | $ | — |
| | $ | (16 | ) | | $ | 350 |
|
| Agency - Residential | | 382 |
| | — |
| | (13 | ) | | 369 |
|
Total held-to-maturity securities (1) | | $ | 748 |
| | $ | — |
| | $ | (29 | ) | | $ | 719 |
|
| December 31, 2017 | | | | | | | | |
| Available-for-sale securities | | | | | | | | | | | | | | |
| Agency - Commercial | $ | 755 |
| | $ | 1 |
| | $ | (6 | ) | | $ | 750 |
| $ | 1,004 |
| | $ | — |
| | $ | (17 | ) | | $ | 987 |
|
| Agency - Residential | 818 |
| | 2 |
| | (11 | ) | | 809 |
| 811 |
| | — |
| | (17 | ) | | 794 |
|
| Municipal obligations | 44 |
| | — |
| | — |
| | 44 |
| 35 |
| | — |
| | (1 | ) | | 34 |
|
| Corporate debt obligations | 33 |
| | 1 |
| | — |
| | 34 |
| 37 |
| | 1 |
| | — |
| | 38 |
|
Total available-for-sale securities (1) | $ | 1,650 |
| | $ | 4 |
| | $ | (17 | ) | | $ | 1,637 |
| $ | 1,887 |
| | $ | 1 |
| | $ | (35 | ) | | $ | 1,853 |
|
| Held-to-maturity securities | | | | | | | | | | | | | | |
| Agency - Commercial | $ | 542 |
| | $ | 1 |
| | $ | (5 | ) | | $ | 538 |
| $ | 526 |
| | $ | — |
| | $ | (9 | ) | | $ | 517 |
|
| Agency - Residential | 435 |
| | — |
| | (2 | ) | | 433 |
| 413 |
| | — |
| | (6 | ) | | 407 |
|
Total held-to-maturity securities (1) | $ | 977 |
| | $ | 1 |
| | $ | (7 | ) | | $ | 971 |
| $ | 939 |
| | $ | — |
| | $ | (15 | ) | | $ | 924 |
|
| December 31, 2016 | | | | | | | | |
| Available-for-sale securities | | | | | | | | |
| Agency - Commercial | $ | 551 |
| | $ | 2 |
| | $ | (5 | ) | | $ | 548 |
| |
| Agency - Residential | 913 |
| | 1 |
| | (16 | ) | | 898 |
| |
| Municipal obligations | 34 |
| | — |
| | — |
| | 34 |
| |
Total available-for-sale securities (1) | $ | 1,498 |
| | $ | 3 |
| | $ | (21 | ) | | $ | 1,480 |
| |
| Held-to-maturity securities | | | | | | | | |
| Agency - Commercial | $ | 595 |
| | $ | — |
| | $ | (6 | ) | | $ | 589 |
| |
| Agency - Residential | 498 |
| | 1 |
| | (4 | ) | | 495 |
| |
Total held-to-maturity securities (1) | $ | 1,093 |
| | $ | 1 |
| | $ | (10 | ) | | $ | 1,084 |
| |
| |
| (1) | There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10 percent of stockholders’ equity at SeptemberJune 30, 20172018 or December 31, 2016.2017. |
We evaluate AFS and HTM investment securities for other than temporary impairmentOTTI on a quarterly basis. An OTTI is considered to have occurred when the fair value of a debt security is below its amortized costs and we (1) have the intent to sell the security, (2) will more likely than not be required to sell the security before recovery of its amortized cost, or (3) do not expect to recover the entire amortized cost basis of the security. Investments that have an OTTI are written down through a charge to earnings for the amount representing the credit loss on the security. Gains and losses related to all other factors are
recognized in other comprehensive income (loss). Agency securities, which are either explicitly or implicitly backed by the federal government, comprised 97 percent of our total securities at June 30, 2018. This factor is considered when evaluating our investment securities for OTTI. During the three and ninesix months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016,2017, we had no OTTI losses.OTTI.
Available-for-sale securities
Securities available-for-sale are carried at fair value, with unrealizedvalue. Unrealized gains and losses on AFS securities, to the extent they are temporary in nature, and are reported as a component of other comprehensive income.
We purchased $300$1 million and $600$5 million of AFS securities, which were comprised of U.S. government sponsored agency MBS and corporate debt obligations during the three and six months ended June 30, 2018, respectively. In addition, we retained $16 million of passive interests in our own private MBS during both the three and six months ended June 30, 2018. We purchased $77 million and $300 million of AFS securities, which included U.S. government sponsored agency MBS, corporate debt obligations, and municipal obligations during the three and ninesix months ended SeptemberJune 30, 2017, respectively. We purchased $136 million and $203 million of AFS securities, which included U.S. government sponsored agencies comprised of MBS and municipal obligations, during the three and nine months ended September 30, 2016, respectively.
Gains on sales of AFS securities are reported in other noninterest income in the Consolidated Statements of Operations. There were less than $1 million in sales of AFS securities during both the three and six months ended June 30, 2018, except those related to mortgage loans that had been securitized for sale in the normal course of business. We sold $227 million and $289$62 million of AFS securities during both the three and nine monthssix ended SeptemberJune 30, 2017, respectively, which did not include those AFS securities related to mortgage
loans that had been securitized for sale in the normal course of business. These sales resulted in a realized gain of $2$1 million and $3 million during both the three and ninesix months ended SeptemberJune 30, 2017, respectively. During the three and nine months ended September 30, 2016, there were $115 million and $290 million, respectively, in sales of AFS securities, which did not include those related to mortgage loans that had been securitized for sale in the normal course of business. These sales resulted in a realized gain of $3 million and $4 million during the three and nine months ended September 30, 2016, respectively.2017.
Held-to-maturity securities
Investment securities HTM are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method. Unrealized losses are not recorded to the extent they are temporary in nature.
In conjunction with adoption of ASU 2017-12 (Targeted Improvements to Accounting for Hedging Activities) the Company elected to transfer $144 million of investment securities from HTM to AFS during the first quarter of 2018, as permitted by the standard, which resulted in a de minimis impact to OCI.
There were no purchases of HTM securities during the three and nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, we purchased zero and $15 million of HTM securities, respectively. There were noor sales of HTM securities during both the three and ninesix months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016.2017.
The following table summarizes, by duration, the unrealized loss positions on investment securities:
| | | | Unrealized Loss Position with Duration 12 Months and Over | | Unrealized Loss Position with Duration Under 12 Months | Unrealized Loss Position with Duration 12 Months and Over | | Unrealized Loss Position with Duration Under 12 Months |
| | Fair Value | | Number of Securities | | Unrealized Loss | | Fair Value | | Number of Securities | | Unrealized Loss | Fair Value | | Number of Securities | | Unrealized Loss | | Fair Value | | Number of Securities | | Unrealized Loss |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | | | | | | | | | | | |
| June 30, 2018 | | | | | | | | | | | | |
| Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | |
| Agency - Commercial | $ | 34 |
| | 3 |
| | $ | (1 | ) | | $ | 582 |
| | 40 |
| | $ | (5 | ) | $ | 204 |
| | 20 |
| | $ | (11 | ) | | $ | 863 |
| | 56 |
| | $ | (31 | ) |
| Agency - Residential | 98 |
| | 10 |
| | (3 | ) | | 501 |
| | 40 |
| | (8 | ) | 417 |
| | 38 |
| | (25 | ) | | 296 |
| | 46 |
| | (9 | ) |
| Municipal obligations | 1 |
| | 1 |
| | — |
| | 21 |
| | 8 |
| | — |
| 6 |
| | 3 |
| | — |
| | 25 |
| | 16 |
| | (1 | ) |
| Corporate debt obligations | — |
| | — |
| | — |
| | 3 |
| | 1 |
| | — |
| — |
| | — |
| | — |
| | 11 |
| | 3 |
| | — |
|
| Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | | | |
| Agency - Commercial | $ | 16 |
| | 2 |
| | $ | — |
| | $ | 395 |
| | 26 |
| | $ | (5 | ) | $ | 294 |
| | 22 |
| | $ | (14 | ) | | $ | 56 |
| | 4 |
| | $ | (2 | ) |
| Agency - Residential | 16 |
| | 2 |
| | — |
| | 319 |
| | 40 |
| | (2 | ) | 144 |
| | 21 |
| | (6 | ) | | 225 |
| | 39 |
| | (7 | ) |
| December 31, 2016 | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | |
| Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | |
| Agency - Commercial | $ | 6 |
| | 1 |
| | $ | — |
| | $ | 345 |
| | 29 |
| | $ | (5 | ) | $ | 218 |
| | 20 |
| | $ | (7 | ) | | $ | 744 |
| | 41 |
| | $ | (11 | ) |
| Agency - Residential | — |
| | — |
| | — |
| | 748 |
| | 55 |
| | (16 | ) | 452 |
| | 36 |
| | (14 | ) | | 263 |
| | 33 |
| | (3 | ) |
| Municipal obligations | — |
| | — |
| | — |
| | 17 |
| | 8 |
| | — |
| 6 |
| | 3 |
| | — |
| | 22 |
| | 9 |
| | — |
|
| Corporate debt obligations | | — |
| | — |
| | — |
| | 3 |
| | 1 |
| | — |
|
| Held-to-maturity securities | | | | | | | | | | | | | | | | | | | | | | |
| Agency - Commercial | $ | — |
| | — |
| | $ | — |
| | $ | 528 |
| | 34 |
| | $ | (6 | ) | $ | 348 |
| | 25 |
| | $ | (8 | ) | | $ | 99 |
| | 8 |
| | $ | (1 | ) |
| Agency - Residential | — |
| | — |
| | — |
| | 385 |
| | 43 |
| | (4 | ) | 111 |
| | 16 |
| | (3 | ) | | 293 |
| | 43 |
| | (3 | ) |
The following table presentsshows the amortized cost and estimated fair value of securities by contractual maturity:
| | | | Investment Securities Available-for-Sale | | Investment Securities Held-to-maturity | Investment Securities Available-for-Sale | | Investment Securities Held-to-maturity |
| | Amortized Cost | | Fair Value | | Weighted Average Yield | | Amortized Cost | | Fair Value | | Weighted Average Yield | Amortized Cost | | Fair Value | | Weighted Average Yield | | Amortized Cost | | Fair Value | | Weighted Average Yield |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | | | | | | | | | | | |
| June 30, 2018 | | | | | | | | | | | | |
| Due after one year through five years | $ | 17 |
| | $ | 17 |
| | 3.37 | % | | $ | — |
| | $ | — |
| | — | % | $ | 59 |
| | $ | 58 |
| | 2.50 | % | | $ | 10 |
| | $ | 10 |
| | 2.45 | % |
| Due after five years through 10 years | 44 |
| | 45 |
| | 4.83 | % | | 61 |
| | 61 |
| | 2.50 | % | 47 |
| | 48 |
| | 4.94 | % | | 12 |
| | 11 |
| | 2.20 | % |
| Due after 10 years | 1,589 |
| | 1,575 |
| | 2.34 | % | | 916 |
| | 910 |
| | 2.43 | % | 1,841 |
| | 1,765 |
| | 2.41 | % | | 726 |
| | 698 |
| | 2.47 | % |
| Total | $ | 1,650 |
| | $ | 1,637 |
| | | | $ | 977 |
| | $ | 971 |
| | | $ | 1,947 |
| | $ | 1,871 |
| | | | $ | 748 |
| | $ | 719 |
| | |
We pledge investment securities, primarily agency collateralized and municipal taxable mortgage obligations, to collateralize lines of credit and/or borrowings. At Septemberboth June 30, 2018 and December 31, 2017, we had pledged investment securities of $1.3 billion compared to $879 million at December 31, 2016.
Note 3 - Loans Held-for-Sale
The majority of our mortgage loans originated as LHFS are sold into the secondary market on a whole loan basis or by securitizing the loans into agency, mortgage backed securities, through retailgovernment, or private label mortgage-backed securitizations or on a whole loan basis. At Septembersecurities. LHFS totaled $4.3 billion at both June 30, 20172018 and December 31, 2016, LHFS totaled $4.9 billion and $3.2 billion, respectively.2017. For the three and ninesix months ended SeptemberJune 30, 2017,2018 we had net gainsgain on loan sales associated with LHFS of $75$63 million and $189$123 million, respectively. Duringrespectively as compared to $66 million and $114 million for the three and ninesix months ended SeptemberJune 30, 2016, excluding the gains from the sale of mortgage loans transferred from loans held-for-investment, we had $94 million and $244 million, respectively, of net gains on loan sales associated with LHFS.2017, respectively.
At both SeptemberJune 30, 20172018 and December 31, 2016, $322017, $19 million and $21 million, respectively, of LHFS were recorded at lower of cost or fair value. The remainder of the loans in the portfolio are recorded at fair value as we have elected the fair value option for such loans.option.
Note 4 - Loans Held-for-Investment
The following table presents our loans held-for-investment:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Consumer loans | | | | | | |
| Residential first mortgage | $ | 2,665 |
| | $ | 2,327 |
| $ | 2,986 |
| | $ | 2,754 |
|
| Home equity | 496 |
| | 443 |
| 685 |
| | 664 |
|
| Other | 26 |
| | 28 |
| 88 |
| | 25 |
|
| Total consumer loans | 3,187 |
| | 2,798 |
| 3,759 |
| | 3,443 |
|
| Commercial loans | | | | | | |
Commercial real estate (1) | 1,760 |
| | 1,261 |
| 2,020 |
| | 1,932 |
|
| Commercial and industrial | 1,097 |
| | 769 |
| 1,324 |
| | 1,196 |
|
| Warehouse lending | 1,159 |
| | 1,237 |
| 1,801 |
| | 1,142 |
|
| Total commercial loans | 4,016 |
| | 3,267 |
| 5,145 |
| | 4,270 |
|
| Total loans held-for-investment | $ | 7,203 |
| | $ | 6,065 |
| $ | 8,904 |
| | $ | 7,713 |
|
| |
| (1) | Includes $270NBV of $332 million and $245$307 million of owner occupied commercial real estate loans at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. |
During the ninesix months ended SeptemberJune 30, 2018, we sold performing consumer loans with UPB of $2 million. Upon a change in our intent, the loans were transferred to LHFS and subsequently sold resulting in a net gain of less than $1 million during the six months ended June 30, 2018, which is recorded in net gain on loan sales on the Consolidated Statements of Operations.
During the six months ended June 30, 2017, we sold performing and nonperforming consumer loans with UPB oftotaling $103 million, of which $25 million were nonperforming. Upon a change in our intent, the loans were transferred to LHFS and subsequently sold resulting in a net gain of $1 million during the ninesix months ended SeptemberJune 30, 2017, which is recorded in net gain on loan sales on the Consolidated Statements of Operations.
We had no loan purchases during the six months ended June 30, 2018. During the ninesix months ended September 30, 2016, we sold performing and nonperforming consumer loans with UPB totaling $1.3 billion, of which $110 million were nonperforming. Upon a change in our intent, the loans were transferred to LHFS and subsequently sold resulting in a net gain on sale of $12 million, during the nine months ended September 30, 2016, which is recorded in net gain on loan sales on the Consolidated Statements of Operations.
During the nine months ended SeptemberJune 30, 2017, we purchased residential first mortgage loans with a UPB of $6 million and HELOC loans with a UPB of $100 million. A premium of $4 million was associated with these loan purchases. During the nine months ended September 30, 2016, we purchased jumbo residential first mortgage loans with a UPB of $150 million and a premium of $1$75 million.
We have pledged certain LHFI, LHFS, and loans with government guarantees to collateralize lines of credit and/or borrowings with the FHLB of Indianapolis and the FRB of Chicago. At Septemberboth June 30, 20172018 and December 31, 2016,2017, we had pledged loans of $7.7 billion and $5.3 billion, respectively.$7.1 billion.
Allowance for Loan Losses
We determine the estimate of the ALLL on at least a quarterly basis. Refer to Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies in Part II, Item 8 of Exhibit 99.1 to the consolidated financial statements in the Annualour June 1, 2018 Form 8-K Report on Form 10-K for the year ended December 31, 2016 for a description of the methodology. The ALLL, other than for loans that have been identified for individual evaluation for impairment, is determined on a loan pool basis by grouping loan types with common risk characteristics to determine our best estimate of incurred losses.
The following table presents changes in ALLL, by class of loan:
| | | | Residential First Mortgage (1) | | Home Equity | | Other Consumer | | Commercial Real Estate | | Commercial and Industrial | | Warehouse Lending | | Total | Residential First Mortgage (1) | | Home Equity | | Other Consumer | | Commercial Real Estate | | Commercial and Industrial | | Warehouse Lending | | Total |
| | (Dollars in millions) | (Dollars in millions) |
| Three Months Ended September 30, 2017 | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 | | | | | | | | | | | | | | |
| Beginning balance ALLL | $ | 56 |
| | $ | 19 |
| | $ | 1 |
| | $ | 37 |
| | $ | 21 |
| | $ | 6 |
| | $ | 140 |
| $ | 47 |
| | $ | 21 |
| | $ | 1 |
| | $ | 44 |
| | $ | 20 |
| | $ | 6 |
| | $ | 139 |
|
| Charge-offs (2) | (1 | ) | | (2 | ) | | — |
| | — |
| | — |
| | — |
| | (3 | ) | |
| Charge-offs | | — |
| | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
| | (2 | ) |
| Recoveries | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Provision (benefit) | (3 | ) | | 2 |
| | — |
| | 5 |
| | (2 | ) | | — |
| | 2 |
| (2 | ) | | (2 | ) | | 1 |
| | 1 |
| | 1 |
| | — |
| | (1 | ) |
| Ending balance ALLL | $ | 52 |
| | $ | 20 |
| | $ | 1 |
| | $ | 42 |
| | $ | 19 |
| | $ | 6 |
| | $ | 140 |
| $ | 45 |
| | $ | 19 |
| | $ | 1 |
| | $ | 45 |
| | $ | 21 |
| | $ | 6 |
| | $ | 137 |
|
| Three Months Ended September 30, 2016 | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 | | | | | | | | | | | | | | |
| Beginning balance ALLL | $ | 81 |
| | $ | 30 |
| | $ | 1 |
| | $ | 19 |
| | $ | 11 |
| | $ | 8 |
| | $ | 150 |
| $ | 61 |
| | $ | 21 |
| | $ | 1 |
| | $ | 32 |
| | $ | 20 |
| | $ | 6 |
| | $ | 141 |
|
| Charge-offs (2) | (7 | ) | | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
| | (9 | ) | |
| Recoveries | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | 2 |
| |
| Provision (benefit)(3) | (4 | ) | | (5 | ) | | — |
| | 6 |
| | 3 |
| | — |
| | — |
| |
| Ending balance ALLL | $ | 70 |
| | $ | 25 |
| | $ | 1 |
| | $ | 25 |
| | $ | 14 |
| | $ | 8 |
|
| $ | 143 |
| |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 | | | | | | | | | | | | | | |
| Beginning balance ALLL | $ | 65 |
| | $ | 24 |
| | $ | 1 |
| | $ | 28 |
| | $ | 17 |
| | $ | 7 |
| | $ | 142 |
| |
| Charge-offs (2) | (6 | ) | | (3 | ) | | (1 | ) | | — |
| | — |
| | — |
| | (10 | ) | |
| Charge-offs | | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (2 | ) |
| Recoveries | 1 |
| | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | 4 |
| 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
| Provision (benefit) | (8 | ) | | (3 | ) | | — |
| | 14 |
| | 2 |
| | (1 | ) | | 4 |
| (5 | ) | | (2 | ) | | — |
| | 5 |
| | 1 |
| | — |
| | (1 | ) |
| Ending balance ALLL | $ | 52 |
| | $ | 20 |
| | $ | 1 |
| | $ | 42 |
| | $ | 19 |
| | $ | 6 |
| | $ | 140 |
| $ | 56 |
| | $ | 19 |
| | $ | 1 |
| | $ | 37 |
| | $ | 21 |
| | $ | 6 |
|
| $ | 140 |
|
| Nine Months Ended September 30, 2016 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 | | | | | | | | | | | | | | |
| Beginning balance ALLL | $ | 116 |
| | $ | 32 |
| | $ | 2 |
| | $ | 18 |
| | $ | 13 |
| | $ | 6 |
| | $ | 187 |
| $ | 47 |
| | $ | 22 |
| | $ | 1 |
| | $ | 45 |
| | $ | 19 |
| | $ | 6 |
| | $ | 140 |
|
| Charge-offs (2) | (26 | ) | | (4 | ) | | (3 | ) | | — |
| | — |
| | — |
| | (33 | ) | |
| Charge-offs | | (1 | ) | | (2 | ) | | (1 | ) | | — |
| | — |
| | — |
| | (4 | ) |
| Recoveries | 1 |
| | 2 |
| | 2 |
| | — |
| | — |
| | — |
| | 5 |
| — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
| Provision (benefit)(3) | (21 | ) | | (5 | ) | | — |
| | 7 |
| | 1 |
| | 2 |
| | (16 | ) | |
| Provision (benefit) | | (1 | ) | | (3 | ) | | 1 |
| | — |
| | 2 |
| | — |
| | (1 | ) |
| Ending balance ALLL | $ | 70 |
| | $ | 25 |
| | $ | 1 |
| | $ | 25 |
| | $ | 14 |
| | $ | 8 |
| | $ | 143 |
| $ | 45 |
| | $ | 19 |
| | $ | 1 |
| | $ | 45 |
| | $ | 21 |
| | $ | 6 |
| | $ | 137 |
|
| Six Months Ended June 30, 2017 | | | | | | | | | | | | | | |
| Beginning balance ALLL | | $ | 65 |
| | $ | 24 |
| | $ | 1 |
| | $ | 28 |
| | $ | 17 |
| | $ | 7 |
| | $ | 142 |
|
| Charge-offs | | (5 | ) | | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
| | (7 | ) |
| Recoveries | | 1 |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | 3 |
|
| Provision (benefit) | | (5 | ) | | (5 | ) | | — |
| | 9 |
| | 4 |
| | (1 | ) | | 2 |
|
| Ending balance ALLL | | $ | 56 |
| | $ | 19 |
| | $ | 1 |
| | $ | 37 |
| | $ | 21 |
| | $ | 6 |
| | $ | 140 |
|
| |
| (1) | Includes allowance and charge-offs related to loans with government guarantees. |
| |
(2) | Includes charge-offs of zero related to the transfer and subsequent sale of loans during the three months ended September 30, 2017 and September 30, 2016, respectively, and $1 million and $8 million during the nine months ended September 30, 2017 and September 30, 2016, respectively. Also includes charge-offs related to loans with government guarantees of $1 million and $6 million during the three months ended September 30, 2017 and September 30, 2016, respectively, and $3 million and $13 million during the nine months ended September 30, 2017 and September 30, 2016, respectively.
|
| |
(3) | Does not include $7 million provision for loan losses recorded in the Consolidated Statements of Operations to reserve for repossessed loans with government guarantees during the three and nine months ended September 30, 2016.
|
The following table sets forth the method of evaluation, by class of loan:
| | | | Residential First Mortgage (1) | | Home Equity | | Other Consumer | | Commercial Real Estate | | Commercial and Industrial | | Warehouse Lending | | Total | Residential First Mortgage (1) | | Home Equity | | Other Consumer | | Commercial Real Estate | | Commercial and Industrial | | Warehouse Lending | | Total |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | | | | | | | | | | | | | |
| June 30, 2018 | | | | | | | | | | | | | | |
| Loans held-for-investment (2) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated | $ | 35 |
| | $ | 29 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 65 |
| $ | 34 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 59 |
|
| Collectively evaluated | 2,621 |
| | 463 |
| | 26 |
| | 1,759 |
| | 1,097 |
| | 1,159 |
| | 7,125 |
| 2,944 |
| | 657 |
| | 88 |
| | 2,020 |
| | 1,324 |
| | 1,801 |
| | 8,834 |
|
| Total loans | $ | 2,656 |
| | $ | 492 |
| | $ | 26 |
|
| $ | 1,760 |
|
| $ | 1,097 |
|
| $ | 1,159 |
|
| $ | 7,190 |
| $ | 2,978 |
| | $ | 682 |
| | $ | 88 |
|
| $ | 2,020 |
|
| $ | 1,324 |
|
| $ | 1,801 |
|
| $ | 8,893 |
|
| Allowance for loan losses (2) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated | $ | 6 |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15 |
| $ | 5 |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 14 |
|
| Collectively evaluated | 46 |
| | 11 |
| | 1 |
| | 42 |
| | 19 |
| | 6 |
| | 125 |
| 40 |
| | 10 |
| | 1 |
| | 45 |
| | 21 |
| | 6 |
| | 123 |
|
| Total allowance for loan losses | $ | 52 |
| | $ | 20 |
| | $ | 1 |
|
| $ | 42 |
|
| $ | 19 |
|
| $ | 6 |
|
| $ | 140 |
| $ | 45 |
| | $ | 19 |
| | $ | 1 |
|
| $ | 45 |
|
| $ | 21 |
|
| $ | 6 |
|
| $ | 137 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | | |
| Loans held-for-investment (2) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated | $ | 46 |
| | $ | 29 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 75 |
| $ | 34 |
| | $ | 27 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 61 |
|
| Collectively evaluated | 2,274 |
| | 349 |
| | 28 |
| | 1,261 |
| | 769 |
| | 1,237 |
| | 5,918 |
| 2,712 |
| | 633 |
| | 25 |
| | 1,932 |
| | 1,196 |
| | 1,142 |
| | 7,640 |
|
| Total loans | $ | 2,320 |
| | $ | 378 |
| | $ | 28 |
| | $ | 1,261 |
| | $ | 769 |
| | $ | 1,237 |
| | $ | 5,993 |
| $ | 2,746 |
| | $ | 660 |
| | $ | 25 |
| | $ | 1,932 |
| | $ | 1,196 |
| | $ | 1,142 |
| | $ | 7,701 |
|
| Allowance for loan losses (2) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated | $ | 5 |
| | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13 |
| $ | 6 |
| | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 16 |
|
| Collectively evaluated | 60 |
| | 16 |
| | 1 |
| | 28 |
| | 17 |
| | 7 |
| | 129 |
| 41 |
| | 12 |
| | 1 |
| | 45 |
| | 19 |
| | 6 |
| | 124 |
|
| Total allowance for loan losses | $ | 65 |
| | $ | 24 |
| | $ | 1 |
| | $ | 28 |
| | $ | 17 |
| | $ | 7 |
| | $ | 142 |
| $ | 47 |
| | $ | 22 |
| | $ | 1 |
| | $ | 45 |
| | $ | 19 |
| | $ | 6 |
| | $ | 140 |
|
| |
| (1) | Includes allowance related to loans with government guarantees. |
| |
| (2) | Excludes loans carried under the fair value option. |
Loans are considered to be past due when any payment of principal or interest is 30 days past the scheduled payment date. While it is the goal of management to collect on loans, we attempt to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations and minimize losses incurred by the Bank.
We cease the accrual of interest on all classes of consumer and commercial loans upon the earlier of, becoming 90 days past due, or when doubt exists as to the ultimate collection of principal or interest (classified as nonaccrual or nonperforming loans). When a loan is placed on nonaccrual status, the accrued interest income is reversed and the loan may only return to accrual status when principal and interest become current and are anticipated to be fully collectible.
Interest income is recognized on nonaccrual loans using a cash basis method. Interest that would have been accrued on impaired loans totaled zero and $1 million during the three and nine months ended September 30, 2017, respectively, and $1 million and $2 million during the three and nine months ended September 30, 2016, respectively. At September 30, 2017 and December 31, 2016, we had no loans 90 days past due and still accruing interest.
The following table sets forth the LHFI aging analysis of past due and current loans:
| | | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater Past Due (1) | | Total Past Due | | Current | | Total LHFI | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater Past Due (1) | | Total Past Due | | Current | | Total LHFI |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | | | | | | | | | | | |
| June 30, 2018 | | | | | | | | | | | | |
| Consumer loans | | | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgage | $ | 3 |
| | $ | 1 |
| | $ | 24 |
| | $ | 28 |
| | $ | 2,637 |
| | $ | 2,665 |
| $ | 2 |
| | $ | — |
| | $ | 22 |
| | $ | 24 |
| | $ | 2,962 |
| | $ | 2,986 |
|
| Home equity | 1 |
| | — |
| | 6 |
| | 7 |
| | 489 |
| | 496 |
| 1 |
| | — |
| | 5 |
| | 6 |
| | 679 |
| | 685 |
|
| Other | — |
| | — |
| | — |
| | — |
| | 26 |
| | 26 |
| — |
| | — |
| | — |
| | — |
| | 88 |
| | 88 |
|
| Total consumer loans | 4 |
| | 1 |
| | 30 |
| | 35 |
| | 3,152 |
| | 3,187 |
| 3 |
| | — |
| | 27 |
| | 30 |
| | 3,729 |
| | 3,759 |
|
| Commercial loans | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | — |
| | — |
| | 1 |
| | 1 |
| | 1,759 |
| | 1,760 |
| — |
| | — |
| | — |
| | — |
| | 2,020 |
| | 2,020 |
|
| Commercial and industrial | — |
| | — |
| | — |
| | — |
| | 1,097 |
| | 1,097 |
| — |
| | — |
| | — |
| | — |
| | 1,324 |
| | 1,324 |
|
| Warehouse lending | — |
| | — |
| | — |
| | — |
| | 1,159 |
| | 1,159 |
| — |
| | — |
| | — |
| | — |
| | 1,801 |
| | 1,801 |
|
| Total commercial loans | — |
| | — |
| | 1 |
| | 1 |
| | 4,015 |
| | 4,016 |
| — |
| | — |
| | — |
| | — |
| | 5,145 |
| | 5,145 |
|
Total loans (2) | $ | 4 |
| | $ | 1 |
| | $ | 31 |
| | $ | 36 |
| | $ | 7,167 |
| | $ | 7,203 |
| $ | 3 |
| | $ | — |
| | $ | 27 |
| | $ | 30 |
| | $ | 8,874 |
| | $ | 8,904 |
|
| December 31, 2016 | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | |
| Consumer loans | | | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgage | $ | 6 |
| | $ | — |
| | $ | 29 |
| | $ | 35 |
| | $ | 2,292 |
| | $ | 2,327 |
| $ | 2 |
| | $ | 2 |
| | $ | 23 |
| | $ | 27 |
| | $ | 2,727 |
| | $ | 2,754 |
|
| Home equity | 1 |
| | 2 |
| | 11 |
| | 14 |
| | 429 |
| | 443 |
| |
| Home Equity | | 1 |
| | — |
| | 6 |
| | 7 |
| | 657 |
| | 664 |
|
| Other | 1 |
| | — |
| | — |
| | 1 |
| | 27 |
| | 28 |
| — |
| | — |
| | — |
| | — |
| | 25 |
| | 25 |
|
| Total consumer loans | 8 |
| | 2 |
| | 40 |
| | 50 |
| | 2,748 |
| | 2,798 |
| 3 |
| | 2 |
| | 29 |
| | 34 |
| | 3,409 |
| | 3,443 |
|
| Commercial loans | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | — |
| | — |
| | — |
| | — |
| | 1,261 |
| | 1,261 |
| — |
| | — |
| | — |
| | — |
| | 1,932 |
| | 1,932 |
|
| Commercial and industrial | — |
| | — |
| | — |
| | — |
| | 769 |
| | 769 |
| — |
| | — |
| | — |
| | — |
| | 1,196 |
| | 1,196 |
|
| Warehouse lending | — |
| | — |
| | — |
| | — |
| | 1,237 |
| | 1,237 |
| — |
| | — |
| | — |
| | — |
| | 1,142 |
| | 1,142 |
|
| Total commercial loans | — |
| | — |
| | — |
| | — |
| | 3,267 |
| | 3,267 |
| — |
| | — |
| | — |
| | — |
| | 4,270 |
| | 4,270 |
|
Total loans (2) | $ | 8 |
| | $ | 2 |
| | $ | 40 |
| | $ | 50 |
| | $ | 6,015 |
| | $ | 6,065 |
| $ | 3 |
| | $ | 2 |
| | $ | 29 |
| | $ | 34 |
| | $ | 7,679 |
| | $ | 7,713 |
|
| |
| (1) | Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans. |
| |
| (2) | Includes $4 million and $13 million of loans 90 days or greater past due, accounted for under the fair value option at Septemberboth June 30, 20172018 and December 31, 2016, respectively.2017. |
Interest income is recognized on nonaccrual loans using a cash basis method. Interest that would have been accrued on impaired loans totaled $1 million during both the three and six months ended June 30, 2018 and less than $1 million and $1 million during the three and six months ended June 30, 2017, respectively. At June 30, 2018 and December 31, 2017, we had no loans 90 days past due and still accruing interest.
Troubled Debt Restructurings
We may modify certain loans in both our consumer and commercial loan portfolios to retain customers or to maximize collection of the outstanding loan balance. We have programs designed to assist borrowers by extending payment dates or reducing the borrower's contractual payments. All loan modifications are made on a case-by-case basis. Our standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. TDRs result in those instances in which a borrower demonstrates financial difficulty and for which a concession has been granted, which includes reductions of interest rate, extensions of amortization period, principal and/or interest forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. These loans are classified as nonperforming TDRs if the loan was nonperforming prior to the restructuring, or based upon the results of a contemporaneous credit evaluation. Such loans will continue on nonaccrual status until the borrower has established a willingness and ability to make the restructured payments for at least six months, after which they will be classified as performing TDRs and begin to accrue interest. Performing and nonperforming TDRs remain impaired as interest and principal will not be received in accordance with the original contractual terms of the loan agreement.
Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, but may give rise to potential incremental losses. We measure impairments using a discounted cash flow method for performing TDRs and measure impairment based on collateral values for nonperforming TDRs.
The following table provides a summary of TDRs by type and performing status:
| | | | TDRs | TDRs |
| | Performing | | Nonperforming | | Total | Performing | | Nonperforming | | Total |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | | | | | |
| June 30, 2018 | | | | | | |
Consumer loans (1) | | | | | | | | | | |
| Residential first mortgage | $ | 20 |
| | $ | 11 |
| | $ | 31 |
| $ | 21 |
| | $ | 10 |
| | $ | 31 |
|
| Home equity | 26 |
| | 4 |
| | 30 |
| 22 |
| | 4 |
| | 26 |
|
Total TDRs (2) | $ | 46 |
| | $ | 15 |
| | $ | 61 |
| |
| December 31, 2016 | | | | | | |
Total TDRs (1)(2) | | $ | 43 |
| | $ | 14 |
| | $ | 57 |
|
| December 31, 2017 | | | | | | |
Consumer loans (1) | | | | | | | | | | |
| Residential first mortgage | $ | 22 |
| | $ | 11 |
| | $ | 33 |
| $ | 19 |
| | $ | 12 |
| | $ | 31 |
|
| Home equity | 45 |
| | 7 |
| | 52 |
| 24 |
| | 4 |
| | 28 |
|
Total TDRs (2) | $ | 67 |
| | $ | 18 |
| | $ | 85 |
| |
Total TDRs (1)(2) | | $ | 43 |
| | $ | 16 |
| | $ | 59 |
|
| |
| (1) | The ALLL on consumer TDR loans totaled $12$11 million and $9$13 million at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. |
| |
| (2) | Includes $3 million and $25 million of TDR loans accounted for under the fair value option at Septemberboth June 30, 20172018 and December 31, 2016, respectively.2017. |
The following table provides a summary of newly modified TDRs: | | | | New TDRs | New TDRs |
| | Number of Accounts | | Pre-Modification Unpaid Principal Balance | | Post-Modification Unpaid Principal Balance (1) | | Increase in Allowance at Modification | Number of Accounts | | Pre-Modification Unpaid Principal Balance | | Post-Modification Unpaid Principal Balance (1) | | Increase in Allowance at Modification |
| | | | (Dollars in millions) | | | (Dollars in millions) |
| Three Months Ended September 30, 2017 | | | | | | | | |
| Residential first mortgages | 9 |
| | $ | 3 |
| | $ | 3 |
| | $ | — |
| |
Home equity (2) | 37 |
| | 2 |
| | 2 |
| | 1 |
| |
| Other consumer | — |
| | — |
| | — |
| | — |
| |
| Total TDR loans | 46 |
| | $ | 5 |
|
| $ | 5 |
| | $ | 1 |
| |
| | | | | | | | | |
| Three Months Ended September 30, 2016 | | | | |
| Three Months Ended June 30, 2018 | | | | | | | | |
| Residential first mortgages | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| 4 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
|
Home equity (2)(3) | 17 |
| | 1 |
| | 1 |
| | — |
| 4 |
| | — |
| | — |
| | — |
|
| Total TDR loans | 18 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| 8 |
| | $ | 1 |
|
| $ | 1 |
| | $ | — |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| | | | | | | |
| Three Months Ended June 30, 2017 | | | | |
| Residential first mortgages | 17 |
| | $ | 4 |
| | $ | 4 |
| | $ | — |
| 6 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
|
Home equity (2) | 71 |
| | 5 |
| | 5 |
| | 2 |
| |
Home equity (2)(3) | | 21 |
| | 1 |
| | 1 |
| | — |
|
| Other consumer | 1 |
| | — |
| | — |
| | — |
| 1 |
| | — |
| | — |
| | — |
|
| Total TDR loans | 89 |
| | $ | 9 |
| | $ | 9 |
| | $ | 2 |
| 28 |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
| | | | | | | |
| Six Months Ended June 30, 2018 | |
| | | | | | |
| Residential first mortgages | 17 |
| | $ | 3 |
| | $ | 4 |
| | $ | — |
| 11 |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
|
Home equity (2)(3) | 128 |
| | 8 |
| | 7 |
| | — |
| 8 |
| | — |
| | — |
| | — |
|
| Commercial and industrial | 1 |
| | 2 |
| | 1 |
| | — |
| |
| Total TDR loans | 146 |
| | $ | 13 |
| | $ | 12 |
| | $ | — |
| 19 |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
|
| | | | | | | | | |
| Six Months Ended June 30, 2017 | |
| | | | | | |
| Residential first mortgages | | 8 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
|
Home equity (2)(3) | | 34 |
| | 2 |
| | 2 |
| | — |
|
| Other consumer | | 1 |
| | — |
| | — |
| | — |
|
| Total TDR loans | | 43 |
| | $ | 3 |
| | $ | 3 |
| | $ | — |
|
| |
| (1) | Post-modification balances include past due amounts that are capitalized at modification date. |
| |
| (2) | Home equity post-modification unpaid principal balanceUPB reflects write downs. |
| |
| (3) | Includes loans carried at the fair value option. |
There was one residential first mortgage loan with a UPB of less than $1 million that was modified in the previous 12 months, which hasthat subsequently defaulted during the three and ninesix months ended SeptemberJune 30, 2017 as2018, compared to three home equity loansone residential first mortgage loan with a UPB of less than $1 million for each class whichmodified in the previous 12 months, that subsequently defaulted during the three and six months ended SeptemberJune 30, 2016 and one residential first mortgage loan and seven home equity loans with a UPB of less than $1
million for each class which subsequently defaulted during the nine months ended September 30, 2016.2017. There was no increase or decreasechange in the allowance associated with these TDRs at subsequent default. All TDR
classes within the consumer and commercial portfolios are considered subsequently defaulted when greater than 90 days past due. Subsequent default is defined as a payment re-defaulteddue within 12 months of the restructuring date.
Impaired Loans
The following table presents individually evaluated impaired loans and the associated allowance:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | Recorded Investment | | Net Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Net Unpaid Principal Balance | | Related Allowance | Recorded Investment | | Net Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Net Unpaid Principal Balance | | Related Allowance |
| | (Dollars in millions) | (Dollars in millions) |
| With no related allowance recorded | | | | | | | | | | | | | | | | | | | | | | |
| Consumer loans | | | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgage | $ | 15 |
| | $ | 15 |
| | $ | — |
| | $ | 6 |
| | $ | 6 |
| | $ | — |
| $ | 11 |
| | $ | 12 |
| | $ | — |
| | $ | 11 |
| | $ | 12 |
| | $ | — |
|
| Total consumer loans with no related allowance recorded | $ | 15 |
| | $ | 15 |
| | $ | — |
| | $ | 6 |
| | $ | 6 |
| | $ | — |
| |
| Total loans with no related allowance recorded | | $ | 11 |
| | $ | 12 |
| | $ | — |
| | $ | 11 |
| | $ | 12 |
| | $ | — |
|
| With an allowance recorded | | | | | | | | | | | | | | | | | | | | | | |
| Consumer loans | | | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgage | $ | 20 |
| | $ | 20 |
| | $ | 6 |
| | $ | 40 |
| | $ | 40 |
| | $ | 5 |
| $ | 23 |
| | $ | 22 |
| | $ | 5 |
| | $ | 22 |
| | $ | 22 |
| | $ | 6 |
|
| Home equity | 28 |
| | 29 |
| | 9 |
| | 29 |
| | 29 |
| | 8 |
| 25 |
| | 25 |
| | 9 |
| | 24 |
| | 27 |
| | 10 |
|
| Commercial loans | | | | | | | | | | | | |
| Commercial real estate | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| |
| Total consumer loans with an allowance recorded | $ | 49 |
| | $ | 50 |
| | $ | 15 |
| | $ | 69 |
| | $ | 69 |
| | $ | 13 |
| |
| | | | | | | | | | | | | |
| Total loans with an allowance recorded | | $ | 48 |
| | $ | 47 |
| | $ | 14 |
| | $ | 46 |
| | $ | 49 |
| | $ | 16 |
|
| Total Impaired loans | | | | | | | | | | | | | | | | | | | | | | |
| Consumer Loans | | | | | | | | | | | | |
| Residential first mortgage | $ | 35 |
| | $ | 35 |
| | $ | 6 |
| | $ | 46 |
| | $ | 46 |
| | $ | 5 |
| $ | 34 |
| | $ | 34 |
| | $ | 5 |
| | $ | 33 |
| | $ | 34 |
| | $ | 6 |
|
| Home equity | 28 |
| | 29 |
| | 9 |
| | 29 |
| | 29 |
| | 8 |
| 25 |
| | 25 |
| | 9 |
| | 24 |
| | 27 |
| | 10 |
|
| Commercial real estate | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| |
| Total impaired loans | $ | 64 |
| | $ | 65 |
| | $ | 15 |
| | $ | 75 |
| | $ | 75 |
| | $ | 13 |
| $ | 59 |
| | $ | 59 |
| | $ | 14 |
| | $ | 57 |
| | $ | 61 |
| | $ | 16 |
|
The following table presents average impaired loans and the interest income recognized:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| | (Dollars in millions) | (Dollars in millions) |
| Consumer loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential first mortgage | $ | 37 |
| | $ | 1 |
| | $ | 43 |
| | $ | — |
| | $ | 39 |
| | $ | 1 |
| | $ | 55 |
| | $ | 1 |
| $ | 34 |
| | $ | — |
| | $ | 36 |
| | $ | — |
| | $ | 34 |
| | $ | — |
| | $ | 39 |
| | $ | — |
|
| Home equity | 28 |
| | — |
| | 30 |
| | — |
| | 28 |
| | 1 |
| | 31 |
| | 1 |
| 26 |
| | — |
| | 27 |
| | — |
| | 26 |
| | 1 |
| | 27 |
| | 1 |
|
| Commercial loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Commercial and industrial | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
|
| Total impaired loans | $ | 66 |
| | $ | 1 |
| | $ | 74 |
| | $ | — |
| | $ | 67 |
| | $ | 2 |
| | $ | 88 |
| | $ | 2 |
| $ | 63 |
| | $ | — |
| | $ | 63 |
| | $ | — |
| | $ | 63 |
| | $ | 1 |
| | $ | 66 |
| | $ | 1 |
|
Credit Quality
We utilize an internal risk rating system which is applied to all consumer and commercial loans. Descriptions of our internal risk ratings as they relate to credit quality follow the ratings used by the U.S. bank regulatory agencies as listed below.
Pass. Pass assets are not impaired nor do they have any known deficiencies that could impact the quality of the asset.
Watch. Watch assets are defined as pass rated assets that exhibit elevated risk characteristics or other factors that deserve management’s close attention and increased monitoring. However, the asset does not exhibit a potential or well-defined weakness that would warrant a downgrade to criticized or adverse classification.
Special mention. Assets identified as special mention possess credit deficiencies or potential weaknesses deserving management's close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk that, if
not corrected, could weaken the assets and increase risk in the future. Special mention assets are criticized, but do not expose an institution to sufficient risk to warrant adverse classification.
Substandard. Assets identified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the full collection or liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. For home equity loans and other consumer loans, we evaluate credit quality based on the aging and status of payment activity and any other known credit characteristics that call into question full repayment of the asset. Nonperforming loans are classified as either substandard, doubtful or loss.
Doubtful. An asset classified as doubtful has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. A doubtful asset has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Because ofDue to the high probability of loss, non-accrual accounting treatment is required for doubtful assets.assets are placed on non-accrual.
Loss. An asset classified as loss is considered uncollectible and of such little value that the continuance as a bankable asset is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather that it is not practical or desirable to defer writing off this basically worthlessthe asset even though partial recovery may be affectedoccur in the future.
Commercial Loans
Management conducts periodic examinations which serve as an independent verification of the accuracy of the ratings assigned. Loan grades are based on different factors within the borrowing relationship: entity sales, debt service coverage, debt/total net worth, liquidity, balance sheet and income statement trends, management experience, business stability, financing structure, and financial reporting requirements. The underlying collateral is also rated based on the specific type of collateral and corresponding LTV. The combination of the borrower and collateral risk ratings results in the final rating for the borrowing relationship.
Consumer Loans
The same rating principles are used for consumer and commercial loans, but the principles are applied differently for consumer loans. Consumer loans consist of open and closed end loans extended to individuals for household, family, and other personal expenditures, and includesinclude consumer loans, and loans to individuals secured by their personal residence, including first mortgage, home equity, and home improvement loans. Because consumer loans are usually relatively small-balance, homogeneous exposures, consumer loans are rated primarily on payment performance. Payment performance is a proxy for the strength of repayment capacity and loans are generally classified based on their payment status rather than by an individual review of each loan.
In accordance with regulatory guidance, we assign risk ratings to consumer loans in the following manner:
•Consumer loans are classified as Watch once the loan becomes 60 days past due.
•Open and closed-end consumer loans 90 days or more past due are classified Substandard.
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Pass | | Watch | | Special Mention | | Substandard | | Total Loans |
| | (Dollars in millions) |
| Consumer Loans | | | | | | | | | |
| Residential First Mortgage | $ | 2,614 |
| | $ | 24 |
| | $ | — |
| | $ | 27 |
| | $ | 2,665 |
|
| Home equity | 465 |
| | 26 |
| | — |
| | 5 |
| | 496 |
|
| Other Consumer | 26 |
| | — |
| | — |
| | — |
| | 26 |
|
| Total Consumer Loans | $ | 3,105 |
| | $ | 50 |
| | $ | — |
| | $ | 32 |
| | $ | 3,187 |
|
| | | | |
| Commercial Loans | | | | | | | | | |
| Commercial Real Estate | $ | 1,727 |
| | $ | 30 |
| | $ | — |
| | $ | 3 |
| | $ | 1,760 |
|
| Commercial and Industrial | 1,003 |
| | 82 |
| | — |
| | 12 |
| | 1,097 |
|
| Warehouse | 1,119 |
| | 40 |
| | — |
| | — |
| | 1,159 |
|
| Total Commercial Loans | $ | 3,849 |
| | $ | 152 |
| | $ | — |
| | $ | 15 |
| | $ | 4,016 |
|
Management conducts periodic examinations which serve as an independent verification of the accuracy of the ratings assigned. Loan grades are based on different factors within the borrowing relationship: entity sales, debt service coverage, debt/total net worth, liquidity, balance sheet and income statement trends, management experience, business stability, financing structure, and financial reporting requirements. The underlying collateral is also rated based on the specific type of collateral and corresponding LTV. The combination of the borrower and collateral risk ratings results in the final rating for the borrowing relationship.
| | | | December 31, 2016 | June 30, 2018 |
| | Pass | | Watch | | Special Mention | | Substandard | | Total Loans | Pass | | Watch | | Special Mention | | Substandard | | Total Loans |
| | (Dollars in millions) | (Dollars in millions) |
| Consumer Loans | | | | | | | | | | | | | | | | | | |
| Residential First Mortgage | $ | 2,273 |
| | $ | 23 |
| | $ | — |
| | $ | 31 |
| | $ | 2,327 |
| |
| Residential first mortgage | | $ | 2,938 |
| | $ | 25 |
| | $ | — |
| | $ | 23 |
| | $ | 2,986 |
|
| Home equity | 386 |
| | 46 |
| | — |
| | 11 |
| | 443 |
| 657 |
| | 22 |
| | — |
| | 6 |
| | 685 |
|
| Other Consumer | 28 |
| | — |
| | — |
| | — |
| | 28 |
| |
| Other consumer | | 88 |
| | — |
| | — |
| | — |
| | 88 |
|
| Total Consumer Loans | $ | 2,687 |
| | $ | 69 |
| | $ | — |
| | $ | 42 |
| | $ | 2,798 |
| $ | 3,683 |
| | $ | 47 |
| | $ | — |
| | $ | 29 |
| | $ | 3,759 |
|
| | | | | | | |
| Commercial Loans | | | | | | | | | | | | | | | | | | |
| Commercial Real Estate | $ | 1,225 |
| | $ | 27 |
| | $ | 3 |
| | $ | 6 |
| | $ | 1,261 |
| |
| Commercial and Industrial | 678 |
| | 59 |
| | 21 |
| | 11 |
| | 769 |
| |
| Commercial real estate | | $ | 1,988 |
| | $ | 27 |
| | $ | — |
| | $ | 5 |
| | $ | 2,020 |
|
| Commercial and industrial | | 1,255 |
| | 37 |
| | 23 |
| | 9 |
| | 1,324 |
|
| Warehouse | 1,168 |
| | 16 |
| | 53 |
| | — |
| | 1,237 |
| 1,659 |
| | 92 |
| | 50 |
| | — |
| | 1,801 |
|
| Total Commercial Loans | $ | 3,071 |
| | $ | 102 |
| | $ | 77 |
| | $ | 17 |
| | $ | 3,267 |
| $ | 4,902 |
| | $ | 156 |
| | $ | 73 |
| | $ | 14 |
| | $ | 5,145 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Pass | | Watch | | Special Mention | | Substandard | | Total Loans |
| | (Dollars in millions) |
| Consumer Loans | | | | | | | | | |
| Residential first mortgage | $ | 2,706 |
| | $ | 23 |
| | $ | — |
| | $ | 25 |
| | $ | 2,754 |
|
| Home equity | 633 |
| | 25 |
| | — |
| | 6 |
| | 664 |
|
| Other consumer | 25 |
| | — |
| | — |
| | — |
| | 25 |
|
| Total Consumer Loans | $ | 3,364 |
| | $ | 48 |
| | $ | — |
| | $ | 31 |
| | $ | 3,443 |
|
| | | | |
| Commercial Loans | | | | | | | | | |
| Commercial real estate | $ | 1,902 |
| | $ | 23 |
| | $ | 7 |
| | $ | — |
| | $ | 1,932 |
|
| Commercial and industrial | 1,135 |
| | 32 |
| | 24 |
| | 5 |
| | 1,196 |
|
| Warehouse | 1,014 |
| | 128 |
| | — |
| | — |
| | 1,142 |
|
| Total Commercial Loans | $ | 4,051 |
| | $ | 183 |
| | $ | 31 |
| | $ | 5 |
| | $ | 4,270 |
|
Note 5 - Loans with Government Guarantees
Substantially all loans with government guarantees are insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs. FHA loans earn interest at a rate based upon the 10-year U.S. Treasury note rate at the time the underlying loan becomes delinquent, which is not paid by the FHA or the U.S. Department of Veterans Affairs until claimed. Certain loans within our portfolio may be subject to indemnifications and insurance limits which expose us to limited credit risk. We have reserved for these risks within other assets and as a component of our ALLL on residential first mortgages.
At SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, loans with government guarantees totaled $253$278 million and $365$271 million.
At SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, repossessed assets and the associated claims recorded in other assets totaled $92$66 million and $135$84 million.
Note 6 - Variable Interest Entities
We have no consolidated VIEs as of SeptemberJune 30, 20172018 and December 31, 2016.2017.
WeIn connection with our securitization activities, we have retained a five percent interest in the investment securities ("other MBS") and are contracted as the sub-servicer of the underlying loans, compensated based on market rates, which constitutes a continuing involvement in the trust. Although we have a variable interest in the securitization trust, we are not its primary beneficiary due to the relative size of our investment in comparison to the total amount of securities issued by the VIE and our inability to direct activities that most significantly impact the VIE’s economic performance. As a result, we have not consolidated the assets and liabilities of the VIE in our Statements of Financial Condition. The Bank’s maximum exposure to
loss is limited to our investment in the VIE, as well as the standard representations and warranties made in conjunction with the loan transfer. See Note 2 - Investment Securities and Note 17 - Fair Value Measurements, for additional information.
In addition, we have a continuing involvement, but are not the primary beneficiary for onean unconsolidated VIE related to the FSTAR 2007-1 mortgage securitization trust. In accordance with the settlement agreement with MBIA, there is no further recourse to us related to FSTAR 2007-1, unless MBIA fails to meet their obligations. At SeptemberJune 30, 20172018 and December 31, 2016,2017, the FSTAR 2007-1 mortgage securitization trust included 2,0351,709 loans and 2,4531,911 loans, respectively, with an aggregate principal balance of $70$57 million and $89$65 million, respectively.
Note 7 - Mortgage Servicing Rights
We have investments in MSRs that result from the sale of loans to the secondary market for which we retain the servicing. TheWe account for MSRs at their fair value. A primary risk associated with MSRs is the potential reduction in fair value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates or government intervention. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than previously anticipated. We utilize derivatives as economic hedges to offset changes in the fair value of the MSRs resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments. There is also a risk of valuation decline due to higher than expected increases in default rates, which we do not believe can be effectively managed using derivatives. For further information See Note 8 - Derivative Financial Instruments, regarding the derivative instruments utilized to manage our MSR risks.risks, see Note 8 - Derivative Financial Instruments.
The following table presents changesChanges in the carryingfair value of residential first mortgage MSRs accounted for at fair value:were as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Balance at beginning of period | $ | 184 |
| | $ | 301 |
| | $ | 335 |
| | $ | 296 |
| $ | 239 |
| | $ | 295 |
| | $ | 291 |
| | $ | 335 |
|
| Additions from loans sold with servicing retained | 75 |
| | 51 |
| | 178 |
| | 173 |
| 99 |
| | 82 |
| | 183 |
| | 103 |
|
| Reductions from sales | (4 | ) | | (17 | ) | | (260 | ) | | (41 | ) | (81 | ) | | (191 | ) | | (222 | ) | | (256 | ) |
Changes in fair value due to (1) | | | | | | | | |
| Decrease in MSR due to payoffs, pay-downs and run-off | (5 | ) | | (19 | ) | | (15 | ) | | (45 | ) | |
Changes in fair value due to (1): | | | | | | | | |
| Decrease in MSR value due to pay-offs, pay-downs and run-off | | (4 | ) | | (4 | ) | | (8 | ) | | (10 | ) |
Changes in estimates of fair value (2) | (4 | ) | | (14 | ) | | 8 |
| | (81 | ) | 4 |
| | 2 |
| | 13 |
| | 12 |
|
| Balance at end of period | $ | 246 |
| | $ | 302 |
| | $ | 246 |
| | $ | 302 |
| |
| Fair value of MSRs at end of period | | $ | 257 |
| | $ | 184 |
| | $ | 257 |
| | $ | 184 |
|
| |
| (1) | Changes in fair value are included within net return (loss) on MSRsmortgage servicing rights on the Consolidated Statements of Operations. |
| |
| (2) | Represents estimated MSR value change resulting primarily from market-driven changes. |
The following table summarizes the hypothetical effect on the fair value of servicing rights using adverse changes of 10 percent and 20 percent to the weighted average of certain significant assumptions used in valuing these assets. The significant assumptionsunobservable inputs used in the fair value measurement of the MSRs are option adjusted spread, prepayment rate and prepayment rate.cost to service. Significant increases (decreases) in both of theseall three assumptions in isolation would result in a significantly lower (higher) fair value measurement.
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | | | Fair value after | | | | Fair value after | | | Fair value impact due to | | | | Fair value impact due to |
| | Actual | | 10% adverse change | | 20% adverse change | | Actual | | 10% adverse change | | 20% adverse change | Actual | | 10% adverse change | | 20% adverse change | | Actual | | 10% adverse change | | 20% adverse change |
| | (Dollars in millions) | | | (Dollars in millions) | | | | (Dollars in millions) |
| Option adjusted spread | 5.81 | % | | $ | 242 |
| | $ | 238 |
| | 7.78 | % | | $ | 326 |
| | $ | 318 |
| 5.43 | % | | $ | 253 |
| | $ | 250 |
| | 6.29 | % | | $ | 286 |
| | $ | 282 |
|
| Constant prepayment rate | 9.64 | % | | 238 |
| | 231 |
| | 16.68 | % | | 322 |
| | 311 |
| 8.95 | % | | 249 |
| | 242 |
| | 9.93 | % | | 283 |
| | 277 |
|
| Weighted average annual cost to service per loan | $ | 71.00 |
| | 244 |
| | 241 |
| | $ | 68.18 |
| | 330 |
| | 326 |
| |
| Weighted average cost to service per loan | | $ | 79.72 |
| | 255 |
| | 252 |
| | $ | 73.00 |
| | 288 |
| | 286 |
|
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse 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. To isolate the effect of the specified change, the fair value shock analysis is consistent with the identified adverse change, while holding all other assumptions constant. In practice, a change in one assumption generally impacts other assumptions, which may either magnify or counteract the effect of the change. For further information on the fair value disclosures relating toof MSRs, see Note 1817 - Fair Value Measurements.
Contractual servicing and subservicing fees. Contractual servicing and subservicing fees, including late fees and other ancillary income are presented below. Contractual servicing fees are included within net (loss) return on MSRsmortgage servicing rights on the Consolidated Statements of Operations. Contractual subservicing fees including late fees and other ancillary income are included within loan administration income on the Consolidated Statements of Operations. Subservicing fee income is recorded for fees earned on subserviced loans, net of third party subservicing costs, for loans subserviced.costs.
The following table summarizes income and fees associated with contractualowned mortgage servicing rights:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Net return (loss) on mortgage servicing rights | | | | | | | | |
| Net return on mortgage servicing rights | | | | | | | | |
Servicing fees, ancillary income and late fees (1) | $ | 14 |
| | $ | 22 |
| | $ | 43 |
| | $ | 60 |
| $ | 15 |
| | $ | 9 |
| | $ | 29 |
| | $ | 29 |
|
| Changes in fair value | (9 | ) | | (33 | ) | | (7 | ) | | (126 | ) | — |
| | (2 | ) | | 5 |
| | 2 |
|
Net return (loss) on MSR derivatives (2) | — |
| | (1 | ) | | (3 | ) | | 44 |
| |
Gain (loss) on MSR derivatives (2) | | (5 | ) | | 5 |
| | (16 | ) | | (3 | ) |
| Net transaction costs | 1 |
| | 1 |
| | (7 | ) | | 1 |
| (1 | ) | | (6 | ) | | (5 | ) | | (8 | ) |
| Total net return (loss) on mortgage servicing rights | $ | 6 |
| | $ | (11 | ) | | $ | 26 |
| | $ | (21 | ) | |
| Total return included in net return on mortgage servicing rights | | $ | 9 |
| | $ | 6 |
| | $ | 13 |
| | $ | 20 |
|
| |
| (1) | Servicing fees are recorded on thean accrual basis. Ancillary income and late fees are recorded on a cash basis. |
| |
| (2) | Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs. |
The following table summarizes income and fees associated with our mortgage loans subserviced:subserviced for others:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Loan administration income on mortgage loans subserviced | | | | | | | | | | | | | | |
Servicing fees, ancillary income and late fees (1) | $ | 9 |
| | $ | 7 |
| | $ | 26 |
| | $ | 21 |
| $ | 12 |
| | $ | 9 |
| | $ | 22 |
| | $ | 17 |
|
| Other servicing charges | (4 | ) | | (3 | ) | | (10 | ) | | (7 | ) | (7 | ) | | (3 | ) | | (12 | ) | | (6 | ) |
| Total income on mortgage loans subserviced, included in loan administration | $ | 5 |
| | $ | 4 |
| | $ | 16 |
| | $ | 14 |
| $ | 5 |
| | $ | 6 |
| | $ | 10 |
| | $ | 11 |
|
| |
| (1) | Servicing fees are recorded on thean accrual basis. Ancillary income and late fees are recorded on cash basis. |
Note 8 - Derivative Financial Instruments
Derivative financial instruments are recorded at fair value in other assets and other liabilities on the Consolidated Statements of Financial Condition. The Company's policy is to present its derivative assets and derivative liabilities on the Consolidated Statement of Financial Condition on a gross basis, even when provisions allowing for set-off are in place. However, for derivative contracts cleared through certain central clearing parties, variation margin payments are recognized as settlements. We are exposed to non-performance risk by the counterparties to our various derivative financial instruments. A majority of our derivatives are centrally cleared through a Central Counterparty Clearing House or consist of residential mortgage interest rate lock commitments further limiting our exposure to non-performance risk. We believe that the non-performance risk inherent in our remaining derivative contracts is minimal based on credit standards and the collateral provisions of the derivative agreements.
Derivatives not designated as hedging instruments: We maintain a derivative portfolio of interest rate swaps, futures and forward commitments used to manage exposure to changes in interest rates, MSR asset values and to meet the needs of customers. We also enter into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Market risk on interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments. Changes in fair value of derivatives not designated as hedging instruments are recognized in the Consolidated Statements of Income.
Derivatives designated as hedging instruments:We have designated certain interest rate swaps as cash flowfair value hedges of certain interestfixed rate paymentscertificates of our variable-rate FHLB advances.deposit.
ChangesDuring the second quarter of 2018, we de-designated all of our remaining cash flow hedge relationships. Historically, changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) on the Consolidated Statement of Financial Condition and reclassified into interest expense in the same period in which the hedgehedged transaction is recognized in earnings. At SeptemberJune 30, 2017,2018, we had $3$24 million (net-of-tax) of accumulated unrealized lossesgains on derivatives previously designated as cash flow hedges recorded in accumulated other comprehensive income, compared to $2 million (net-of-tax) of accumulated unrealized gains on derivatives designated as cash flow hedges recorded in accumulated other comprehensive income (loss), compared to $1 million of unrealized gains at December 31, 2016.2017. We evaluate the probability of hedged transactions occurring on at least a quarterly basis relating to amounts deferred in OCI. The estimated amount to be reclassified from other comprehensive income into earnings during the next 12 months represents $3 million of lossesgains (net-of-tax). For further information, see Note 11 - Accumulated Other Comprehensive Income.
Derivatives that are designated in hedging relationships are assessed for effectiveness using regression analysis at inception and throughout the hedge period.inception. All hedge relationships were and are expected to be highly effective as of SeptemberJune 30, 2017.2018. Cash flows and the profitincome impact associated with designated hedges are reported in the same line item as the underlying hedged item.
The following table presents the notional amount, estimated fair value and maturity of our derivative financial instruments:
| | | | September 30, 2017 (1) | June 30, 2018 (1) |
| | Notional Amount | | Fair Value (2) | | Expiration Dates | Notional Amount | | Fair Value (2) | | Expiration Dates |
| | (Dollars in millions) | (Dollars in millions) |
| Derivatives designated as hedging instruments: | | | | | |
| Assets | | | | | |
| Interest rate swaps on FHLB advances | $ | 830 |
| | $ | 1 |
| | 2023-2026 | |
| Derivatives in fair value hedge relationships: | | | | | |
| Liabilities | | | | | |
| Interest rate swaps on CDs | | $ | 30 |
| | $ | — |
| | 2019 |
| | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | |
| Assets | | | | | | | | |
| Futures | $ | 1,091 |
| | $ | — |
| | 2017-2022 | $ | 1,567 |
| | $ | 1 |
| | 2018-2023 |
| Mortgage backed securities forwards | 4,740 |
| | 12 |
| | 2017 | 822 |
| | 1 |
| | 2018 |
| Rate lock commitments | 4,478 |
| | 33 |
| | 2017 | 4,171 |
| | 33 |
| | 2018 |
| Interest rate swaps and swaptions | 1,331 |
| | 14 |
| | 2017-2047 | 1,416 |
| | 14 |
| | 2018-2028 |
| Total derivative assets | $ | 11,640 |
| | $ | 59 |
| | $ | 7,976 |
| | $ | 49 |
| |
| Liabilities | | | | | | | | |
| Futures | $ | 671 |
| | $ | 3 |
| | 2017-2022 | $ | 1,323 |
| | $ | — |
| | 2018-2023 |
| Mortgage backed securities forwards | 2,089 |
| | 4 |
| | 2017 | 5,382 |
| | 21 |
| | 2018 |
| Rate lock commitments | 326 |
| | 1 |
| | 2017 | 257 |
| | 1 |
| | 2018 |
| Interest rate swaps | 920 |
| | 2 |
| | 2017-2032 | 881 |
| | 11 |
| | 2018-2048 |
| Total derivative liabilities | $ | 4,006 |
| | $ | 10 |
| | $ | 7,843 |
| | $ | 33 |
| |
| | | | December 31, 2016 | December 31, 2017 (1) |
| | Notional Amount | | Fair Value (2) | | Expiration Dates | Notional Amount | | Fair Value (2) | | Expiration Dates |
| | (Dollars in millions) | (Dollars in millions) |
| Derivatives designated as hedging instruments: | | | | | |
| Assets | | | | | |
| Interest rate swaps on FHLB advances | $ | 600 |
| | $ | 20 |
| | 2023-2026 | |
| Derivatives in cash flow hedge relationships: | | | | | |
| Liabilities | | | | | | | | |
| Interest rate swaps on FHLB advances | $ | 230 |
| | $ | 1 |
| | 2025-2026 | $ | 830 |
| | $ | 1 |
| | 2023-2026 |
| Derivatives not designated as hedging instruments: | | | | | | | | |
| Assets | | | | | | | | |
| Futures | $ | 4,621 |
| | $ | 2 |
| | 2017-2020 | $ | 1,597 |
| | $ | — |
| | 2018-2022 |
| Mortgage backed securities forwards | 3,776 |
| | 43 |
| | 2017 | 2,646 |
| | 4 |
| | 2018 |
| Rate lock commitments | 3,517 |
| | 24 |
| | 2017 | 3,629 |
| | 24 |
| | 2018 |
| Interest rate swaps and swaptions | 2,231 |
| | 35 |
| | 2017-2033 | 1,441 |
| | 11 |
| | 2018-2048 |
| Total derivative assets | $ | 14,145 |
| | $ | 104 |
| | $ | 9,313 |
| | $ | 39 |
| |
| Liabilities | | | | | | | | |
| Futures | $ | 134 |
| | $ | — |
| | 2017 | $ | 209 |
| | $ | — |
| | 2018-2021 |
| Mortgage backed securities forwards | 1,893 |
| | 11 |
| | 2017 | 3,197 |
| | 6 |
| | 2018 |
| Rate lock commitments | 598 |
| | 6 |
| | 2017 | 214 |
| | — |
| | 2018 |
| Interest rate swaps | 1,129 |
| | 37 |
| | 2017-2047 | 617 |
| | 4 |
| | 2018-2027 |
| Total derivative liabilities | $ | 3,754 |
| | $ | 54 |
| | $ | 4,237 |
| | $ | 10 |
| |
| |
| (1) | At September 30, 2017, variationVariation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day’sday's fair value of open positions, is considered settlement of the derivative position for accounting purposes. At December 31, 2016, variation margin was not recognized as settlement. |
| |
| (2) | Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively. |
The following tables present the derivatives subject to a master netting arrangement, including the cash pledged as collateral: | | | | | | Gross Amounts Netted in the Statement of Financial Position | | Net Amount Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | | Gross Amounts Netted in the Statement of Financial Position | | Net Amount Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position |
| | Gross Amount | | Financial Instruments | | Cash Collateral | Gross Amount | | Financial Instruments | | Cash Collateral |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | | | | | | | | | |
| Derivatives designated as hedging instruments: | | | | | | | | | | |
| Assets | | | | | | | | | | |
Interest rate swaps on FHLB advances (1) | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 23 |
| |
| | | | | | | | | | | |
| June 30, 2018 | | | | | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | | | |
| Mortgage backed securities forwards | $ | 12 |
| | $ | — |
| | $ | 12 |
| | $ | — |
| | $ | 2 |
| $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
Interest rate swaps and swaptions (1) | 14 |
| | — |
| | 14 |
| | — |
| | 11 |
| 14 |
| | — |
| | 14 |
| | — |
| | 11 |
|
| Futures | | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
| Total derivative assets | $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | — |
| | $ | 13 |
| $ | 16 |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 11 |
|
| | | | | | | | | |
| | | | | | | | |
|
| Liabilities | | | | | | | | | | | | | | | | | | |
| Futures | $ | 3 |
| | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 4 |
| |
| Mortgage backed securities forwards | 4 |
| | — |
| | 4 |
| | — |
| | 10 |
| $ | 21 |
| | $ | — |
| | $ | 21 |
| | $ | — |
| | $ | 28 |
|
Interest rate swaps (1) | 2 |
| | — |
| | 2 |
| | — |
| | 9 |
| 11 |
| | — |
| | 11 |
| | — |
| | 19 |
|
| Total derivative liabilities | $ | 9 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 23 |
| $ | 32 |
| | $ | — |
| | $ | 32 |
| | $ | — |
| | $ | 47 |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | | |
Interest rate swaps on FHLB advances (1) | $ | 20 |
| | $ | 1 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| |
| Liabilities | | | | | | | | | | | | | | | | | | |
Interest rate swaps on FHLB advances (1) | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 33 |
| $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 17 |
|
| | | | | | | | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | | | |
| Futures | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | — |
| |
| Mortgage-backed securities forwards | 43 |
| | — |
| | 43 |
| | — |
| | 44 |
| $ | 4 |
| | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 8 |
|
Interest rate swaps and swaptions (1) | 35 |
| | — |
| | 35 |
| | — |
| | 30 |
| 11 |
| | — |
| | 11 |
| | — |
| | 10 |
|
| Total derivative assets | $ | 80 |
| | $ | — |
| | $ | 80 |
| | $ | — |
| | $ | 74 |
| $ | 15 |
| | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | 18 |
|
| | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | |
| Futures | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2 |
|
| Mortgage-backed securities forwards | 11 |
| | — |
| | 11 |
| | — |
| | — |
| 6 |
| | — |
| | 6 |
| | — |
| | 2 |
|
Interest rate swaps (1) | 37 |
| | — |
| | 37 |
| | — |
| | 20 |
| 4 |
| | — |
| | 4 |
| | — |
| | 5 |
|
| Total derivative liabilities | $ | 48 |
| | $ | — |
| | $ | 48 |
| | $ | — |
| | $ | 21 |
| $ | 10 |
| | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | 9 |
|
| |
| (1) | At September 30, 2017, variationVariation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day’sday's fair value of open positions, is considered settlement of the derivative position for accounting purposes. At December 31, 2016, variation margin was not recognized as settlement and we had an additional $15 million in variation margin in excess of the amounts disclosed above. |
WeThe fair value basis adjustment on our hedged CDs is included in interest bearing deposits on our Consolidated Statements of Operations. The carrying amount of our hedged CDs was $30 million at June 30, 2018 and zero at December 31, 2017 and the cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged CDs was de minimis and zero at June 30, 2018 and December 31, 2017, respectively.
At June 30, 2018, we pledged a total of $23$47 million related to derivative financial instruments, consisting of $30 million of cash collateral on derivative liabilities and $23$17 million of maintenance margin on derivative assets to counterpartiescentrally cleared derivatives and had an obligation to return cash of $13$11 million on derivative assets at September 30, 2017.assets. We pledged a total of $54$26 million related to derivative financial instruments, consisting of $7 million of cash collateral to counterpartieson derivatives and $19 million of maintenance margin on centrally cleared derivatives and had an obligation to return cash of $74$18 million on derivative assets at December 31, 2016 for2017. Within the Consolidated Statements of Financial Condition, the collateral related to derivative activities. The net cash pledgedactivity is included in other assets onand other liabilities and the Consolidated Statements of Financial Condition.cash pledged as maintenance margin is restricted and included in in other assets.
The following table presents the net gain (loss) recognized on designated instruments, net of the impact of offsetting positions:
|
| | | | | | | | | | | | | | | | |
| | | Amount Recorded in Net Interest Income (1) |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| | | (Dollars in millions) |
| Gain (loss) on cash flow hedging relationships in interest contracts | | | | | | | | |
| Amount of gain (loss) reclassified from AOCI into income | | $ | — |
| | $ | 5 |
| | $ | (1 | ) | | $ | 5 |
|
| Total gain (loss) on hedges | | $ | — |
| | $ | 5 |
| | $ | (1 | ) | | $ | 5 |
|
| |
| (1) | We had no gain/(loss) on fair value hedging relationships in interest contracts for the three and six months ending June 30, 2018 and June 30, 2017. |
The following table presents net gain (loss) recognized in income on derivative instruments, net of the impact of offsetting positions:
| | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| | | (Dollars in millions) | | (Dollars in millions) |
| Derivatives not designated as hedging instruments: | Location of Gain/(Loss) | | | | | | | | Location of Gain (Loss) | | | | | | | |
| Futures | Net return (loss) on mortgage servicing rights | $ | (1 | ) | | $ | 4 |
| | $ | (1 | ) | | $ | 8 |
| Net return on mortgage servicing rights | $ | (1 | ) | | $ | — |
| | $ | (3 | ) | | $ | — |
|
| Interest rate swaps and swaptions | Net return (loss) on mortgage servicing rights | (2 | ) | | (7 | ) | | (7 | ) | | 21 |
| Net return on mortgage servicing rights | (3 | ) | | 3 |
| | (8 | ) | | (5 | ) |
| Mortgage-backed securities forwards | Net return (loss) on mortgage servicing rights | 2 |
| | 2 |
| | 5 |
| | 15 |
| Net return on mortgage servicing rights | — |
| | 3 |
| | (4 | ) | | 3 |
|
| Rate lock commitments and forward agency and loan sales | Net gain (loss) on loan sales | (8 | ) | | 15 |
| | (16 | ) | | 14 |
| Net gain on loan sales | (1 | ) | | 41 |
| | (9 | ) | | (8 | ) |
| Rate lock commitments | Other noninterest income | — |
| | — |
| | — |
| | 1 |
| |
Interest rate swaps (1) | Other noninterest income | — |
| | 2 |
| | 1 |
| | 3 |
| Other noninterest income | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| Total derivative gain (loss) | | $ | (9 | ) | | $ | 16 |
| | $ | (18 | ) | | $ | 62 |
| | $ | (4 | ) | | $ | 48 |
| | $ | (23 | ) | | $ | (9 | ) |
| |
| (1) | Includes customer-initiated commercial interest rate swaps. |
Note 9 - Borrowings
Federal Home Loan Bank Advances
The following table presentsis a breakdown of our FHLB advances outstanding:
| | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | Amount | | Rate | | Amount | | Rate | Amount | | Rate | | Amount | | Rate |
| | (Dollars in millions) | (Dollars in millions) |
| Short-term fixed rate term advances | $ | 4,065 |
| | 1.14 | % | | $ | 1,780 |
| | 0.62 | % | $ | 3,840 |
| | 1.97 | % | | $ | 4,260 |
| | 1.40 | % |
| Total Short-term Federal Home Loan Bank advances | 4,065 |
| | | | 1,780 |
| | | 3,840 |
| | | | 4,260 |
| | |
| Long-term LIBOR adjustable advances | 1,025 |
| | 1.49 | % | | 1,025 |
| | 1.12 | % | 1,130 |
| | 2.53 | % | | 1,130 |
| | 1.76 | % |
Long-term fixed rate advances (1) | 275 |
| | 1.41 | % | | 175 |
| | 1.12 | % | 150 |
| | 1.53 | % | | 275 |
| | 1.41 | % |
| Total Long-term Federal Home Loan Bank advances | 1,300 |
| | | | 1,200 |
| | | 1,280 |
| | | | 1,405 |
| | |
| Total Federal Home Loan Bank advances | $ | 5,365 |
| | | | $ | 2,980 |
| | | $ | 5,120 |
| | | | $ | 5,665 |
| | |
| |
| (1) | Includes the current portion of fixed rate advances of $125$0 million and $50$125 million at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. |
We are required to maintain a minimum amount of qualifying collateral.collateral securing FHLB advances. In the event of default, the FHLB advance is similar to a secured borrowing, whereby the FHLB has the right to sell the pledged collateral to settle the fair value of the outstanding advances.
At SeptemberJune 30, 2017, we had the authority2018, our Board of Directors authorized and approval from the FHLB to utilizeapproved a line of credit with the FHLB of up to $7.010.0 billion, which is further limited based on our total assets and we may access that line toqualified collateral, as determined by the extent that collateral is provided.FHLB. At SeptemberJune 30, 2017,2018, we had $5.4$5.1 billion of advances outstanding and an additional $1.1$1.2 billion of collateralized borrowing capacity available at the FHLB. The advances can be collateralized by non-delinquent single-family residential first mortgage loans, loans with government guarantees, certain other loans and investment securities.
At SeptemberJune 30, 2017, $1.02018, $1.1 billion of the outstanding advances were long-term adjustable rate, with interest rates that reset every three months and are based on the three-month LIBOR index. The advances may be prepaid without penalty, with notification at scheduled three month intervals after an initial 12 month lockout period which is based on the settlement date of each advance. The outstanding advances included $830 million in a cash flow hedge relationship as discussed in Note 8 - Derivative Financial Instruments.intervals.
The following table contains detailed information on our FHLB advances and other borrowings:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Maximum outstanding at any month end | $ | 5,365 |
| | $ | 3,182 |
| | $ | 5,365 |
| | $ | 3,557 |
| $ | 5,207 |
| | $ | 4,870 |
| | $ | 5,740 |
| | $ | 4,870 |
|
| Average outstanding balance | 5,043 |
| | 2,649 |
| | 4,239 |
| | 2,777 |
| 4,926 |
| | 4,629 |
| | 5,123 |
| | 3,830 |
|
| Average remaining borrowing capacity | 1,182 |
| | 1,626 |
| | 1,297 |
| | 1,106 |
| 1,917 |
| | 1,042 |
| | 1,659 |
| | 1,356 |
|
| Weighted average interest rate | 1.36 | % | | 1.26 | % | | 1.26 | % | | 1.25 | % | 1.94 | % | | 1.22 | % | | 1.79 | % | | 1.20 | % |
The following table outlines the maturity dates of our FHLB advances and other borrowings:
| | | | September 30, 2017 | June 30, 2018 |
| | (Dollars in millions) | (Dollars in millions) |
| 2017 | $ | 4,065 |
| |
| 2018 | 125 |
| $ | 3,840 |
|
| 2019 | 50 |
| 50 |
|
| 2020 | — |
| — |
|
| 2021 | | — |
|
| Thereafter | 1,125 |
| 1,230 |
|
| Total | $ | 5,365 |
| $ | 5,120 |
|
Parent Company Senior Notes and Trust Preferred Securities
The following table presents long-term debt, net of debt issuance costs:
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Amount | | Interest Rate | | Amount | | Interest Rate |
| | (Dollars in millions) |
| Senior Notes | | | | | | | |
| Senior notes, matures 2021 | $ | 246 |
| | 6.125 | % | | $ | 246 |
| | 6.125 | % |
| Trust Preferred Securities | | | | | | | |
| Floating Three Month LIBOR | | | | | | | |
| Plus 3.25%, matures 2032 | $ | 26 |
| | 4.58 | % | | $ | 26 |
| | 4.25 | % |
| Plus 3.25%, matures 2033 | 26 |
| | 4.55 | % | | 26 |
| | 4.13 | % |
| Plus 3.25%, matures 2033 | 26 |
| | 4.55 | % | | 26 |
| | 4.25 | % |
| Plus 2.00%, matures 2035 | 26 |
| | 3.30 | % | | 26 |
| | 2.88 | % |
| Plus 2.00%, matures 2035 | 26 |
| | 3.30 | % | | 26 |
| | 2.88 | % |
| Plus 1.75%, matures 2035 | 51 |
| | 3.07 | % | | 51 |
| | 2.71 | % |
| Plus 1.50%, matures 2035 | 25 |
| | 2.80 | % | | 25 |
| | 2.38 | % |
| Plus 1.45%, matures 2037 | 25 |
| | 2.77 | % | | 25 |
| | 2.41 | % |
| Plus 2.50%, matures 2037 | 16 |
| | 3.82 | % | | 16 |
| | 3.46 | % |
| Total Trust Preferred Securities | 247 |
| | | | 247 |
| | |
| Total other long-term debt | $ | 493 |
| | | | $ | 493 |
| | |
|
| | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| | Amount | | Interest Rate | | Amount | | Interest Rate |
| | (Dollars in millions) |
| Senior Notes | | | | | | | |
| Senior notes, matures 2021 | $ | 247 |
| | 6.125 | % | | $ | 247 |
| | 6.125 | % |
| Trust Preferred Securities | | | | | | | |
| Floating Three Month LIBOR Plus: | | | | | | | |
| 3.25%, matures 2032 | $ | 26 |
| | 5.59 | % | | $ | 26 |
| | 4.92 | % |
| 3.25%, matures 2033 | 26 |
| | 5.60 | % | | 26 |
| | 4.61 | % |
| 3.25%, matures 2033 | 26 |
| | 5.56 | % | | 26 |
| | 4.94 | % |
| 2.00%, matures 2035 | 26 |
| | 4.35 | % | | 26 |
| | 3.36 | % |
| 2.00%, matures 2035 | 26 |
| | 4.35 | % | | 26 |
| | 3.36 | % |
| 1.75%, matures 2035 | 51 |
| | 4.09 | % | | 51 |
| | 3.34 | % |
| 1.50%, matures 2035 | 25 |
| | 3.85 | % | | 25 |
| | 2.86 | % |
| 1.45%, matures 2037 | 25 |
| | 3.79 | % | | 25 |
| | 3.04 | % |
| 2.50%, matures 2037 | 16 |
| | 4.84 | % | | 16 |
| | 4.09 | % |
| Total Trust Preferred Securities | 247 |
| | | | 247 |
| | |
| Total other long-term debt | $ | 494 |
| | | | $ | 494 |
| | |
Senior Notes
On July 11, 2016, we issued $250 million of senior notes (“Senior Notes”) which mature on July 15, 2021. The proceeds from these notes were used to bring dividends current and redeem our outstanding TARP Preferred. The notes are unsecured and rank equally and ratably with the unsecured senior indebtedness of Flagstar Bancorp, Inc.
Prior to June 15, 2021, we may redeem some or all of the Senior Notes at a redemption price equal to the greater of 100 percent of the aggregate principal amount of the notes to be redeemed or the sum of the present values of the remaining
scheduled payments discounted to the redemption date on a semi-annual basis using a discount rate equal to the Treasury Rate plus 0.50 percent, plus, in each case accrued and unpaid interest.
Trust Preferred Securities
We sponsor nine trust subsidiaries, which issued preferred stock to third party investors. We issued trust preferred securities to those trusts, which we have included in long-term debt. The trust preferred securities are the sole assets of those trusts.
The trust preferred securities are callable by us at any time. Interest is payable quarterly; however, we may defer interest payments for up to 20 quarters without default or penalty. As of SeptemberJune 30, 2017,2018, we had no deferred interest.
Note 10 - Representation and Warranty Reserve
At the time a loan is sold, an estimate of the fair value of the guarantee associated with the mortgage loans is recorded in the representation and warranty reserve in the Consolidated Statements of Financial Condition which reduces the net gain on loan sales in the Consolidated Statements of Operations.
The following table shows the activity impacting the representation and warranty reserve:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
| Balance at beginning of period | $ | 20 |
| | $ | 36 |
| | $ | 27 |
| | $ | 40 |
|
| Provision (benefit) | | | | | | | |
| Gain on sale reduction for representation and warranty liability | 1 |
| | 1 |
| | 3 |
| | 4 |
|
| Representation and warranty provision (benefit) | (4 | ) | | (6 | ) | | (11 | ) | | (12 | ) |
| Total | (3 | ) | | (5 | ) | | (8 | ) | | (8 | ) |
| (Charge-offs) recoveries, net | (1 | ) | | 1 |
| | (3 | ) | | — |
|
| Balance at end of period | $ | 16 |
| | $ | 32 |
| | $ | 16 |
| | $ | 32 |
|
Note 11 - Warrants
May Investor Warrant
We granted warrants (the "May Investor Warrants") on January 30, 2009 under anti-dilution provisions applicable to certain investors (the "May Investors") in our May 2008 private placement capital raise.
During the ninesix months ended SeptemberJune 30, 2017, a total of 237,627 May Investor Warrants were exercised, resulting in the net issuance of 154,313 shares of Common Stock. As of SeptemberJune 30, 2017,2018, there arewere no remaining May Investor Warrants outstanding and the related liability iswas reduced to zero.
At December 31, 2016, the liability was $4 million. For further information, see Note 18 - Fair Value Measurements.
TARP Warrant
On January 30, 2009, in conjunction with the sale of 266,657 shares of TARP Preferred, we issued a warrant to purchase up to approximately 645,138 shares of Common Stock at an exercise price of $62.00 per share (the "Warrant").
The Warrant is exercisable through January 30, 2019 and remains outstanding.
Note 1211 - Accumulated Other Comprehensive Income (Loss)
The following table sets forth the components in accumulated other comprehensive income (loss):
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Investment securities | | | | | | | | | | | | | | |
| Beginning balance | $ | (6 | ) | | $ | 21 |
| | $ | (8 | ) | | $ | 5 |
| $ | (47 | ) | | $ | (8 | ) | | $ | (18 | ) | | $ | (8 | ) |
| Unrealized gain | — |
| | 1 |
| | 2 |
| | 27 |
| |
| Unrealized gain (loss) | | (12 | ) | | 2 |
| | (44 | ) | | 2 |
|
| Less: Tax (benefit) provision | | (3 | ) | | 1 |
| | (11 | ) | | 1 |
|
| Net unrealized gain (loss) | | (9 | ) | | 1 |
| | (33 | ) | | 1 |
|
Reclassifications out of AOCI (1) | | — |
| | 2 |
| | — |
| | 2 |
|
| Less: Tax provision | — |
| | — |
| | 1 |
| | 10 |
| — |
| | 1 |
| | — |
| | 1 |
|
| Net unrealized gain | — |
| | 1 |
| | 1 |
| | 17 |
| |
Reclassifications out of AOCI (1) | 1 |
| | (8 | ) | | 3 |
| | (8 | ) | |
| Less: Tax (benefit) provision | — |
| | (3 | ) | | 1 |
| | (3 | ) | |
| Net unrealized gain (loss) reclassified out of AOCI | 1 |
| | (5 | ) | | 2 |
| | (5 | ) | |
| Other comprehensive income/(loss), net of tax | 1 |
| | (4 | ) | | 3 |
| | 12 |
| |
| Net unrealized gain reclassified out of AOCI | | — |
| | 1 |
| | — |
| | 1 |
|
Reclassification of certain income tax effects (2) | | — |
| | — |
| | (5 | ) | | — |
|
| Other comprehensive income (loss), net of tax | | (9 | ) | | 2 |
| | (38 | ) | | 2 |
|
| Ending balance | $ | (5 | ) | | $ | 17 |
| | $ | (5 | ) | | $ | 17 |
| $ | (56 | ) | | $ | (6 | ) | | $ | (56 | ) | | $ | (6 | ) |
| | | | | | | | | | | | | | | |
| Cash Flow Hedges | | | | | | | | | | | | | | |
| Beginning balance | $ | (3 | ) | | $ | (40 | ) | | $ | 1 |
| | $ | (3 | ) | $ | 17 |
| | $ | 2 |
| | $ | 2 |
| | $ | 1 |
|
| Unrealized gain (loss) | — |
| | 2 |
| | (2 | ) | | (61 | ) | 9 |
| | (4 | ) | | 28 |
| | (2 | ) |
| Less: Tax (benefit) provision | — |
| | 2 |
| | (1 | ) | | (17 | ) | |
| Net unrealized (loss) | — |
| | — |
| | (1 | ) | | (44 | ) | |
| Less: Tax provision (benefit) | | 2 |
| | (2 | ) | | 7 |
| | (1 | ) |
| Net unrealized gain (loss) | | 7 |
| | (2 | ) | | 21 |
| | (1 | ) |
Reclassifications out of AOCI (1) | — |
| | 3 |
| | (5 | ) | | 10 |
| — |
| | (5 | ) | | 1 |
| | (5 | ) |
| Less: Tax (benefit) | — |
| | — |
| | (2 | ) | | — |
| |
| Less: Tax provision (benefit) | | — |
| | (2 | ) | | — |
| | (2 | ) |
| Net unrealized gain (loss) reclassified out of AOCI | — |
| | 3 |
| | (3 | ) | | 10 |
| — |
| | (3 | ) | | 1 |
| | (3 | ) |
| Other comprehensive income/(loss), net of tax | — |
| | 3 |
| | (4 | ) | | (34 | ) | |
| Other comprehensive income (loss), net of tax | | 7 |
| | (5 | ) | | 22 |
| | (4 | ) |
| Ending balance | $ | (3 | ) | | $ | (37 | ) | | $ | (3 | ) | | $ | (37 | ) | $ | 24 |
| | $ | (3 | ) | | $ | 24 |
| | $ | (3 | ) |
| |
| (1) | Reclassifications are reported in other noninterest incomeinterest expense on the Consolidated Statement of Operations. |
| |
| (2) | Income tax effects of the Tax Cuts and Jobs Act are reclassified from AOCI to retained earnings due to early adoption of ASU 2018-02. |
Note 1312 - Earnings Per Share
Basic earnings per share, excluding dilution, is computed by dividing earnings applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that could then share in our earnings.
The following table sets forth the computation of basic and diluted earnings per share of common stock:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions, except share data) | (Dollars in millions, except share data) |
| Net income | $ | 40 |
| | $ | 57 |
| | $ | 108 |
| | $ | 143 |
| $ | 50 |
| | $ | 41 |
| | $ | 85 |
| | $ | 68 |
|
| Deferred cumulative preferred stock dividends | — |
| | (2 | ) | | — |
| | (18 | ) | |
| Net income applicable to common stockholders | $ | 40 |
| | $ | 55 |
| | $ | 108 |
| | $ | 125 |
| |
| Weighted average shares | | | | | | | | |
| Weighted Average Shares | | | | | | | | |
| Weighted average common shares outstanding | 57,162,025 |
| | 56,580,238 |
| | 57,062,696 |
| | 56,556,188 |
| 57,491,714 |
| | 57,101,816 |
| | 57,424,557 |
| | 57,012,208 |
|
| Effect of dilutive securities | | | | | | | | | | | | | | |
| May Investor Warrants | — |
| | 364,791 |
| | 16,383 |
| | 339,893 |
| — |
| | — |
| | — |
| | 24,575 |
|
| Stock-based awards | 1,024,568 |
| | 988,777 |
| | 1,054,217 |
| | 831,181 |
| 766,863 |
| | 1,037,122 |
| | 861,770 |
| | 1,069,287 |
|
| Weighted average diluted common shares | 58,186,593 |
| | 57,933,806 |
| | 58,133,296 |
| | 57,727,262 |
| 58,258,577 |
| | 58,138,938 |
| | 58,286,327 |
| | 58,106,070 |
|
| Earnings per common share | | | | | | | | | | | | | | |
| Basic earnings per common share | $ | 0.71 |
| | $ | 0.98 |
| | $ | 1.90 |
| | $ | 2.21 |
| $ | 0.86 |
| | $ | 0.72 |
| | $ | 1.47 |
| | $ | 1.18 |
|
| Effect of dilutive securities | | | | | | | | | | | | | | |
| May Investor Warrants | — |
| | — |
| | — |
| | (0.02 | ) | — |
| | — |
| | — |
| | — |
|
| Stock-based awards | (0.01 | ) | | (0.02 | ) | | (0.04 | ) | | (0.03 | ) | (0.01 | ) | | (0.01 | ) | | (0.02 | ) | | (0.02 | ) |
| Diluted earnings per common share | $ | 0.70 |
| | $ | 0.96 |
| | $ | 1.86 |
| | $ | 2.16 |
| $ | 0.85 |
| | $ | 0.71 |
| | $ | 1.45 |
| | $ | 1.16 |
|
Under the terms of the TARP Preferred, the Company elected to defer payments of preferred stock dividends beginning with the February 2012 dividend. Although, while being deferred, the impact was not included in quarterly net income from continuing operations, the deferral did impact net income applicable to common stock for the purpose of calculating earnings per share, as shown above. On July 29, 2016, we completed the $267 million redemption of our TARP Preferred.
Note 1413 - Stock-Based Compensation
We had stock-based compensation expense of $2 million and $8$4 million for the three and ninesix months ended SeptemberJune 30, 2017.2018, respectively. For the three and six months ended June 30, 2017 stock-based compensation expense was $2 million and $6 million, respectively.
Restricted Stock and Restricted Stock Units
The following table summarizes restricted stock and restricted stock units activity:
| | | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| | Shares | | Weighted — Average Grant-Date Fair Value per Share | | Shares | | Weighted — Average Grant-Date Fair Value per Share | Shares | | Weighted — Average Grant-Date Fair Value per Share | | Shares | | Weighted — Average Grant-Date Fair Value per Share |
| Restricted Stock | | | | | | | | |
| Restricted Stock and Restricted Stock Units | | | | | | | | |
| Non-vested balance at beginning of period | 1,455,327 |
| | $ | 19.88 |
| | 1,461,910 |
| | $ | 17.68 |
| 1,830,132 |
| | $ | 24.87 |
| | 1,290,450 |
| | $ | 20.52 |
|
| Granted | 28,750 |
| | 23.57 |
| | 355,088 |
| | 28.02 |
| 254,068 |
| | 34.70 |
| | 863,342 |
| | 34.36 |
|
| Vested | (298 | ) | | 16.77 |
| | (214,239 | ) | | 18.95 |
| (185,405 | ) | | 17.76 |
| | (234,787 | ) | | 19.53 |
|
| Canceled and forfeited | (15,952 | ) | | 23.31 |
| | (134,932 | ) | | 18.57 |
| (102,167 | ) | | 18.99 |
| | (122,377 | ) | | 20.01 |
|
| Non-vested balance at end of period | 1,467,827 |
| | $ | 19.92 |
| | 1,467,827 |
| | $ | 19.92 |
| 1,796,628 |
| | $ | 27.33 |
| | 1,796,628 |
| | $ | 27.33 |
|
2017 Employee Stock Purchase Plan
The Employee Stock Purchase Plan ("2017 ESPP") was approved on March 20, 2017 by our Board of Directors ("the Board") and on May 23, 2017 by our shareholders. The 2017 ESPP became effective July 1, 2017 and will remain effective until terminated by the Board. A total of 800,000 shares of the Company’s common stock are reserved and authorized for issuance for purchase under the 2017 ESPP. During the three months ended September 30, 2017, 19,897There were 28,748 and 64,943 shares were issued under the 2017 ESPP during the three and oursix months ended June 30, 2018, respectively, and the associated compensation expense was de minimis.
minimis for both periods.
Note 1514 - Income Taxes
The provision for income taxes in interim periods requires us to make a best estimate of the effective tax rate expected to be applicable for the full year, adjusted for any discreet items for the applicable period. This estimated effective tax rate is then applied to interim consolidated pre-tax operating income to determine the interim provision for income taxes. The 2018 effective tax rate includes our assessment of the impact of the Tax Cuts and Jobs Act.
The following table presents our provision for income tax and effective tax provision rate:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Provision for income taxes | $ | 20 |
| | $ | 30 |
| | $ | 52 |
| | $ | 73 |
| $ | 12 |
| | $ | 19 |
| | $ | 21 |
| | $ | 32 |
|
| Effective tax provision rate | 32.4 | % | | 34.3 | % | | 32.3 | % | | 33.8 | % | 20.4 | % | | 31.8 | % | | 20.2 | % | | 32.3 | % |
We believe that it is unlikely that our unrecognized tax benefits will change by a material amount during the next 12 months. We recognize interest and penalties related to unrecognized tax benefits in provision for income taxes.
Note 1615 - Regulatory Matters
Regulatory Capital
We, along with the Bank, must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that could have a material effect on the Consolidated Financial Statements. On January 1, 2015, the Basel III rules became effective and includeincluded transition provisions through 2018. In preparation for the expected capital simplification rules, the Basel III implementation phase-in has been halted, as the agencies issued a final rule that will maintain the capital rules’ 2017 transition provisions for several regulatory capital deductions and certain other requirements that are subject to multi-year phase-in schedules in the regulatory capital rules.
To be categorized as "well-capitalized," the Company and the Bank must maintain minimum tangible capital, Tier 1 capital, common equity Tier 1, and total capital ratios as set forth in the table below. We, along with the Bank, are considered "well-capitalized" at both SeptemberJune 30, 20172018 and December 31, 2016.
2017.
The following tables present the regulatory capital ratios as of the dates indicated:
|
| | | | | | | | | | | | | | | | | |
| Bancorp | Actual | | For Capital Adequacy Purposes | | Well Capitalized Under Prompt��Corrective Action Provisions |
| | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| | (Dollars in millions) |
| September 30, 2017 | | | | | | | | |
| Tangible capital (to adjusted avg. total assets) | $ | 1,423 |
| 8.80 | % | |
| N/A |
| N/A |
| |
| N/A |
| N/A |
|
| Tier 1 leverage (to adjusted avg. total assets) | 1,423 |
| 8.80 | % | | $ | 647 |
| 4.00 | % | | $ | 808 |
| 5.00 | % |
| Common equity Tier 1 capital (to RWA) | 1,208 |
| 11.65 | % | | 467 |
| 4.50 | % | | 674 |
| 6.50 | % |
| Tier 1 capital (to RWA) | 1,423 |
| 13.72 | % | | 622 |
| 6.00 | % | | 830 |
| 8.00 | % |
| Total capital (to RWA) | 1,554 |
| 14.99 | % | | 830 |
| 8.00 | % | | 1,037 |
| 10.00 | % |
| December 31, 2016 | | | | | | | | |
| Tangible capital (to adjusted avg. total assets) | $ | 1,256 |
| 8.88 | % | | N/A |
| N/A |
| | N/A |
| N/A |
|
| Tier 1 leverage (to adjusted avg. total assets) | 1,256 |
| 8.88 | % | | $ | 566 |
| 4.0 | % | | $ | 707 |
| 5.0 | % |
| Common equity Tier 1 capital (to RWA) | 1,084 |
| 13.06 | % | | 374 |
| 4.5 | % | | 540 |
| 6.5 | % |
| Tier 1 capital (to RWA) | 1,256 |
| 15.12 | % | | 498 |
| 6.0 | % | | 664 |
| 8.0 | % |
| Total capital (to RWA) | 1,363 |
| 16.41 | % | | 664 |
| 8.0 | % | | 830 |
| 10.0 | % |
N/A - Not applicable
| | | Bank | Actual | | For Capital Adequacy Purposes | | Well Capitalized Under Prompt Corrective Action Provisions | |
| Flagstar Bancorp | | Actual | | For Capital Adequacy Purposes | | Well Capitalized Under Prompt Corrective Action Provisions |
| | Amount | Ratio | | Amount | Ratio | | Amount | Ratio | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | | | | | | | | |
| June 30, 2018 | | | | | | | | | |
| Tangible capital (to adjusted avg. total assets) | $ | 1,519 |
| 9.38 | % | |
| N/A |
| N/A |
| |
| N/A |
| N/A |
| $ | 1,525 |
| 8.65 | % | | N/A |
| N/A |
| | N/A |
| N/A |
|
| Tier 1 leverage (to adjusted avg. total assets) | 1,519 |
| 9.38 | % | | $ | 648 |
| 4.00 | % | | $ | 810 |
| 5.00 | % | 1,525 |
| 8.65 | % | | $ | 705 |
| 4.00 | % | | $ | 881 |
| 5.00 | % |
| Common equity tier 1 capital (to RWA) | 1,519 |
| 14.61 | % | | 468 |
| 4.50 | % | | 676 |
| 6.50 | % | |
| Common equity Tier 1 capital (to RWA) | | 1,285 |
| 10.84 | % | | 533 |
| 4.50 | % | | 771 |
| 6.50 | % |
| Tier 1 capital (to RWA) | 1,519 |
| 14.61 | % | | 624 |
| 6.00 | % | | 832 |
| 8.00 | % | 1,525 |
| 12.86 | % | | 711 |
| 6.00 | % | | 948 |
| 8.00 | % |
| Total capital (to RWA) | 1,651 |
| 15.88 | % | | 832 |
| 8.00 | % | | 1,040 |
| 10.00 | % | 1,665 |
| 14.04 | % | | 948 |
| 8.00 | % | | 1,185 |
| 10.00 | % |
| December 31, 2016 | | | | | | | | | |
| December 31, 2017 | | | | | | | | | |
| Tangible capital (to adjusted avg. total assets) | $ | 1,491 |
| 10.52 | % | | N/A |
| N/A |
| | N/A |
| N/A |
| $ | 1,442 |
| 8.51 | % | | N/A |
| N/A |
| | N/A |
| N/A |
|
| Tier 1 leverage (to adjusted avg. total assets) | 1,491 |
| 10.52 | % | | $ | 567 |
| 4.0 | % | | $ | 709 |
| 5.0 | % | 1,442 |
| 8.51 | % | | $ | 678 |
| 4.0 | % | | $ | 848 |
| 5.0 | % |
| Common equity tier 1 capital (to RWA) | 1,491 |
| 17.90 | % | | 375 |
| 4.5 | % | | 542 |
| 6.5 | % | |
| Common equity Tier 1 capital (to RWA) | | 1,216 |
| 11.50 | % | | 476 |
| 4.5 | % | | 688 |
| 6.5 | % |
| Tier 1 capital (to RWA) | 1,491 |
| 17.90 | % | | 500 |
| 6.0 | % | | 667 |
| 8.0 | % | 1,442 |
| 13.63 | % | | 635 |
| 6.0 | % | | 846 |
| 8.0 | % |
| Total capital (to RWA) | 1,598 |
| 19.18 | % | | 667 |
| 8.0 | % | | 833 |
| 10.0 | % | 1,576 |
| 14.90 | % | | 846 |
| 8.0 | % | | 1,058 |
| 10.0 | % |
N/A - Not applicable
|
| | | | | | | | | | | | | | | | | |
| Flagstar Bank | Actual | | For Capital Adequacy Purposes | | Well Capitalized Under Prompt Corrective Action Provisions |
| | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| | (Dollars in millions) |
| June 30, 2018 | | | | | | | | |
| Tangible capital (to adjusted avg. total assets) | $ | 1,594 |
| 9.04 | % | | N/A |
| N/A |
| | N/A |
| N/A |
|
| Tier 1 leverage (to adjusted avg. total assets) | 1,594 |
| 9.04 | % | | $ | 705 |
| 4.00 | % | | $ | 882 |
| 5.00 | % |
| Common equity tier 1 capital (to RWA) | 1,594 |
| 13.44 | % | | 534 |
| 4.50 | % | | 771 |
| 6.50 | % |
| Tier 1 capital (to RWA) | 1,594 |
| 13.44 | % | | 712 |
| 6.00 | % | | 949 |
| 8.00 | % |
| Total capital (to RWA) | 1,734 |
| 14.62 | % | | 949 |
| 8.00 | % | | 1,186 |
| 10.00 | % |
| December 31, 2017 | | | | | | | | |
| Tangible capital (to adjusted avg. total assets) | $ | 1,531 |
| 9.04 | % | | N/A |
| N/A |
| | N/A |
| N/A |
|
| Tier 1 leverage (to adjusted avg. total assets) | 1,531 |
| 9.04 | % | | $ | 677 |
| 4.0 | % | | $ | 847 |
| 5.0 | % |
| Common equity tier 1 capital (to RWA) | 1,531 |
| 14.46 | % | | 476 |
| 4.5 | % | | 688 |
| 6.5 | % |
| Tier 1 capital (to RWA) | 1,531 |
| 14.46 | % | | 635 |
| 6.0 | % | | 847 |
| 8.0 | % |
| Total capital (to RWA) | 1,664 |
| 15.72 | % | | 847 |
| 8.0 | % | | 1,059 |
| 10.0 | % |
N/A - Not applicable
Note 1716 - Legal Proceedings, Contingencies and Commitments
Legal Proceedings
We and our subsidiaries are subject to various pending or threatened legal proceedings arising out of the normal course of business operations. In addition, the Bank is routinely named in civil actions throughout the country by borrowers and former borrowers relating to the origination, purchase, sale, and servicing of mortgage loans. From time to time, governmental agencies also conduct investigations or examinations of various practices of the Bank. In the course of such investigations or examinations, the Bank cooperates with such agencies and provides information as requested.
We assess the liabilities and loss contingencies in connection with pending or threatened legal and regulatory proceedings on at least a quarterly basis and establish accruals when we believe it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, litigation accruals are adjusted, as appropriate, in light of additional information.
At SeptemberJune 30, 2017,2018, we do not believe that the amount of any reasonably possible losses in excess of any amounts accrued with respect to ongoing proceedings or any other known claims will be material to our financial statements, or that the ultimate outcome of these actions will have a material adverse effect on our financial condition, results of operations or cash flows.
DOJ litigation settlement
In 2012, the Bank entered into a Settlement Agreement with the DOJ which meets the definition of a financial liability (the "DOJ Liability").
In accordance with the Settlement Agreement, we made an initial payment of $15 million and agreed to make future annual payments totaling $118 million in annual increments of up to $25 million upon meeting all conditions, which are evaluated quarterly and include: (a) the reversal of the DTA valuation allowance, which occurred at the end of 2013; (b) the repayment of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "TARP Preferred"), which occurred in the third quarter of 2016; and (c) the Bank’s Tier 1 Leverage Capital Ratio equals 11 percent or greater as filed in the Call Report with the OCC.
No payment would be required until six months after the Bank files its Call Report with the OCC first reporting that its Tier 1 Leverage Capital Ratio was 11 percent or greater. If all other conditions were then satisfied, an initial annual payment would be due at that time. The next annual payment is only made if such other conditions continue to be satisfied, otherwise payments are delayed until all such conditions are met. Further, making such a payment must not violate any material banking regulatory requirement, and the OCC must not object in writing.
Consistent with our business and regulatory requirements, Flagstar shall seek in good faith to fulfill the conditions, and will not undertake any conduct or fail to take any action the purpose of which is to frustrate or delay our ability to fulfill any of the above conditions.
Additionally, if the Bank and Bancorp become party to a business combination in which the Bank or Bancorp represent less than 33.3 percent of the resulting company’s assets. Annualassets, annual payments must commence twelve months after the date of that business combination.
We elected to account for the DOJ Liability under the fair value option. To determine the fair value, we utilize a discounted cash flow model. Key assumptions for the discounted cash flow model include using a discount rate as of SeptemberJune 30, 20172018 of 9.49.8 percent; probability weightings of multiple cash flow scenarios and possible outcomes which contemplate the above conditions and estimates of forecasted net income, size of the balance sheet, capital levels, dividends and their impact on the timing of cash payments and the assumptions we believe a market participant would make to transfer the liability. The fair value of the DOJ Liability was $60 million at both SeptemberJune 30, 20172018 and December 31, 2016.2017.
Other litigation accruals
At Septemberboth June 30, 20172018 and December 31, 2016,2017, excluding the fair value liability relating to the DOJ litigation settlement, our total accrual for contingent liabilities and settled litigation and regulatory matters was $2 million and $3 million, respectively.
$1 million.
Commitments
The following table is a summary of the contractual amount of significant commitments:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Commitments to extend credit | | | | | | |
| Mortgage loans interest-rate lock commitments | $ | 4,804 |
| | $ | 4,115 |
| $ | 4,439 |
| | $ | 3,667 |
|
| Warehouse loan commitments | 1,560 |
| | 1,670 |
| 2,347 |
| | 1,618 |
|
| Commercial and industrial commitments | 692 |
| | 424 |
| 790 |
| | 695 |
|
| Other commercial commitments | 955 |
| | 651 |
| 1,010 |
| | 1,021 |
|
| HELOC commitments | 241 |
| | 179 |
| 360 |
| | 283 |
|
| Other consumer commitments | 51 |
| | 57 |
| 96 |
| | 15 |
|
| Standby and commercial letters of credit | 46 |
| | 30 |
| 59 |
| | 50 |
|
Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. Commitments generally have fixed expiration dates or other termination clauses. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us, upon extension of credit is based on management's credit evaluation of the counterparties.
These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the Consolidated Statements of Financial Condition. Our exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We utilize the same credit policies in making commitments and conditional obligations as we do for balance sheet instruments. The types of credit we extend are as follows:
Mortgage loan interest-rate lock commitments. We enter into mortgage interest-rate lock commitments with our customers. These commitments are considered to be derivative instruments and the fair value of these commitments is recorded in the Consolidated Statements of Financial Condition in other assets. For further information, see Note 8 - Derivative Financial Instruments.
Warehouse loan commitments. Lines of credit provided to mortgage originators to fund loans they originate and then sell. The proceeds of the sale of the loans are used to repay the draw on the line used to fund the loans. See Note 1 - Basis for Presentation, for further information on our mortgage loan warehouse business acquisition.
Commercial and industrial and other commercial commitments. Conditional commitments issued under various terms to lend funds to business and other entities. These commitments include revolving credit agreements, term loan commitments
and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.
HELOC commitments. Commitments to extend, originate or purchase credit are primarily lines of credit to consumers and have specified rates and maturity dates. Many of these commitments also have adverse change clauses, which allow us to cancel the commitment due to deterioration in the borrowers’ creditworthiness or a decline in the collateral value.
Other consumer commitments. Conditional commitments issued to accommodate the financial needs of customers. The commitments are under various terms to lend funds to consumers, which include revolving credit agreements, term loan commitments and short-term borrowing agreements.
Standby and commercial letters of credit. Conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. Financial standby letters of credit irrevocably obligate the bank to pay a third party beneficiary when a customer fails to repay an outstanding loan or debt instrument.
We maintain a reserve for the estimate of probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unfunded loans with available balances, new commitments to lend that are not
yet funded, and standby and commercial letters of credit. A reserve balance of $3 million at both SeptemberJune 30, 20172018 and December 31, 20162017, is reflected in other liabilities on the Consolidated Statements of Financial Condition.
Note 1817 - Fair Value Measurements
We utilize fair value measurements to record or disclose the fair value on certain assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability through an orderly transaction between market participants at the measurement date. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves or credit spreads. Unobservable inputs may be based on management's judgment, assumptions and estimates related to credit quality, our future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Refer to Note 22 -For further information see the Fair Value Measurements section of Item 7 of Exhibit 99.1 to the consolidated financial statements of the Annual Report onour June 1, 2018 Form 10-K for the year ended December 31, 2016 for a description of our valuation methodologies and information about the fair value hierarchy.8-K Report.
Valuation Hierarchy
U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active markets and the lowest priority to unobservable inputs where no active market exists, as discussed below.
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which we can participate as of the measurement date;
Level 2 - Quoted prices for similar instruments in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3 - Unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.
Assets and Liabilities Measured at Fair Value on a Recurring Basis.Basis
The following tables present the financial instruments carried at fair value by caption on the Consolidated Statement of Financial Condition and by level in the valuation hierarchy.
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
| | (Dollars in millions) |
| Investment securities available-for-sale | | | | | | | |
| Agency - Commercial | $ | — |
| | $ | 750 |
| | $ | — |
| | $ | 750 |
|
| Agency - Residential | — |
| | 809 |
| | — |
| | 809 |
|
| Municipal obligations | — |
| | 44 |
| | — |
| | 44 |
|
| Corporate debt obligations | — |
| | 34 |
| | — |
| | 34 |
|
| Loans held-for-sale | | | | | | | |
| Residential first mortgage loans | — |
| | 4,907 |
| | — |
| | 4,907 |
|
| Loans held-for-investment | | | | | | | |
| Residential first mortgage loans | — |
| | 9 |
| | — |
| | 9 |
|
| Home equity | — |
| | — |
| | 4 |
| | 4 |
|
| Mortgage servicing rights | — |
| | — |
| | 246 |
| | 246 |
|
| Derivative assets | | | | | | | |
| Rate lock commitments (fallout-adjusted) | — |
| | — |
| | 33 |
| | 33 |
|
| Mortgage-backed securities forwards | — |
| | 12 |
| | — |
| | 12 |
|
| Interest rate swaps and swaptions | — |
| | 14 |
| | — |
| | 14 |
|
| Interest rate swap on FHLB advances (net) | — |
| | 1 |
| | — |
| | 1 |
|
| Total assets at fair value | $ | — |
| | $ | 6,580 |
| | $ | 283 |
| | $ | 6,863 |
|
| Derivative liabilities | | | | | | | |
| Rate lock commitments (fallout-adjusted) | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | (1 | ) |
| Futures | (3 | ) | | — |
| | — |
| | (3 | ) |
| Mortgage backed securities forwards | — |
| | (4 | ) | | — |
| | (4 | ) |
| Interest rate swaps | — |
| | (2 | ) | | — |
| | (2 | ) |
| DOJ litigation settlement | — |
| | — |
| | (60 | ) | | (60 | ) |
| Contingent consideration | — |
| | — |
| | (26 | ) | | (26 | ) |
| Total liabilities at fair value | $ | (3 | ) | | $ | (6 | ) | | $ | (87 | ) | | $ | (96 | ) |
On May 15, 2017, the Company closed on the acquisition of certain assets of Opes Advisors (“Opes”), a California based retail mortgage originator and wealth management service provider. Although the acquired assets of Opes were not significant, the addition of Opes positions us to increase our distributed retail lending channel. Consideration in the acquisition of Opes consisted of upfront cash and contingent cash in the form of an earn-out. The earn-out is based on future target production volumes and profitability of the division which were significant inputs to the preliminary fair value. We deem the initial valuation of the assets and liabilities to be provisional and have left the measurement period open. These fair values may be adjusted in a future period, not to exceed one year after the acquisition date, to reflect new facts and circumstances which existed as of the acquisition date. During the third quarter of 2017, an adjustment was made to the initial fair value of the acquisition earn-out that was the result of facts and circumstances in existence at the acquisition date.
|
| | | | | | | | | | | | | | | |
| | June 30, 2018 |
| | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
| | (Dollars in millions) |
| Investment securities available-for-sale | | | | | | | |
| Agency - Commercial | $ | — |
| | $ | 1,051 |
| | $ | — |
| | $ | 1,051 |
|
| Agency - Residential | — |
| | 729 |
| | — |
| | 729 |
|
| Municipal obligations | — |
| | 33 |
| | — |
| | 33 |
|
| Corporate debt obligations | — |
| | 42 |
| | — |
| | 42 |
|
| Other MBS | — |
| | 16 |
| | — |
| | 16 |
|
| Loans held-for-sale | | | | | | | |
| Residential first mortgage loans | — |
| | 4,272 |
| | — |
| | 4,272 |
|
| Loans held-for-investment | | | | | | | |
| Residential first mortgage loans | — |
| | 8 |
| | — |
| | 8 |
|
| Home equity | — |
| | — |
| | 3 |
| | 3 |
|
| Mortgage servicing rights | — |
| | — |
| | 257 |
| | 257 |
|
| Derivative assets | | | | | | | |
| Rate lock commitments (fallout-adjusted) | — |
| | — |
| | 33 |
| | 33 |
|
| Futures | — |
| | 1 |
| | — |
| | 1 |
|
| Mortgage-backed securities forwards | — |
| | 1 |
| | — |
| | 1 |
|
| Interest rate swaps and swaptions | — |
| | 14 |
| | — |
| | 14 |
|
| Total assets at fair value | $ | — |
| | $ | 6,167 |
| | $ | 293 |
| | $ | 6,460 |
|
| Derivative liabilities | | | | | | | |
| Rate lock commitments (fallout-adjusted) | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | (1 | ) |
| Mortgage backed securities forwards | — |
| | (21 | ) | | — |
| | (21 | ) |
| Interest rate swaps | — |
| | (11 | ) | | — |
| | (11 | ) |
| DOJ litigation settlement | — |
| | — |
| | (60 | ) | | (60 | ) |
| Contingent consideration | — |
| | — |
| | (18 | ) | | (18 | ) |
| Total liabilities at fair value | $ | — |
| | $ | (32 | ) | | $ | (79 | ) | | $ | (111 | ) |
| | | | December 31, 2016 | December 31, 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total Fair
Value | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
| | (Dollars in millions) | (Dollars in millions) |
| Investment securities available-for-sale | | | | | | | | | | | | | | |
| Agency - Commercial | $ | — |
| | $ | 548 |
| | $ | — |
| | $ | 548 |
| $ | — |
| | $ | 987 |
| | $ | — |
| | $ | 987 |
|
| Agency - Residential | — |
| | 898 |
| | — |
| | 898 |
| — |
| | 794 |
| | — |
| | 794 |
|
| Municipal obligations | — |
| | 34 |
| | — |
| | 34 |
| — |
| | 34 |
| | — |
| | 34 |
|
| Corporate debt obligations | | — |
| | 38 |
| | — |
| | 38 |
|
| Loans held-for-sale | | | | | | | | | | | | | | |
| Residential first mortgage loans | — |
| | 3,145 |
| | — |
| | 3,145 |
| — |
| | 4,300 |
| | — |
| | 4,300 |
|
| Loans held-for-investment | | | | | | | | | | | | | | |
| Residential first mortgage loans | — |
| | 7 |
| | — |
| | 7 |
| — |
| | 8 |
| | — |
| | 8 |
|
| Home equity | — |
| | — |
| | 65 |
| | 65 |
| — |
| | — |
| | 4 |
| | 4 |
|
| Mortgage servicing rights | — |
| | — |
| | 335 |
| | 335 |
| — |
| | — |
| | 291 |
| | 291 |
|
| Derivative assets | | | | | | | | | | | | | | |
| Rate lock commitments (fallout-adjusted) | — |
| | — |
| | 24 |
| | 24 |
| — |
| | — |
| | 24 |
| | 24 |
|
| Futures | 2 |
| | — |
| | — |
| | 2 |
| |
| Mortgage backed securities forwards | — |
| | 43 |
| | — |
| | 43 |
| |
| Mortgage-backed securities forwards | | — |
| | 4 |
| | — |
| | 4 |
|
| Interest rate swaps and swaptions | — |
| | 35 |
| | — |
| | 35 |
| — |
| | 11 |
| | — |
| | 11 |
|
| Interest rate swaps on FHLB advances (net) | — |
| | 19 |
| | — |
| | 19 |
| |
| Total assets at fair value | $ | 2 |
| | $ | 4,729 |
| | $ | 424 |
| | $ | 5,155 |
| $ | — |
| | $ | 6,176 |
| | $ | 319 |
| | $ | 6,495 |
|
| Derivative liabilities | | | | | | | | | | | | | | |
| Rate lock commitments (fallout-adjusted) | $ | — |
| | $ | — |
| | $ | (6 | ) | | $ | (6 | ) | |
| Mortgage backed securities forwards | — |
| | (11 | ) | | — |
| | (11 | ) | |
| Interest rate swap on FHLB advances | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) |
| Mortgage-backed securities forwards | | — |
| | (6 | ) | | — |
| | (6 | ) |
| Interest rate swaps | — |
| | (37 | ) | | — |
| | (37 | ) | — |
| | (4 | ) | | — |
| | (4 | ) |
| Warrant liabilities | — |
| | (4 | ) | | — |
| | (4 | ) | |
| DOJ litigation settlement | — |
| | — |
| | (60 | ) | | (60 | ) | — |
| | — |
| | (60 | ) | | (60 | ) |
| Contingent consideration | | — |
| | — |
| | (25 | ) | | (25 | ) |
| Total liabilities at fair value | $ | — |
| | $ | (52 | ) | | $ | (66 | ) | | $ | (118 | ) | $ | — |
| | $ | (11 | ) | | $ | (85 | ) | | $ | (96 | ) |
There were no transfers between Level 1 and Level 2 during the ninesix months ended SeptemberJune 30, 2017.2018.
Fair Value Measurements Using Significant Unobservable Inputs
The following tables include a roll forward of the Consolidated Statements of Financial Condition amounts (including the change in fair value) for financial instruments classified by us within levelLevel 3 of the valuation hierarchy:
| | | | | Recorded in Earnings | | Recorded in OCI | | Balance at Beginning of Period | | Total Gains (Losses) Recorded in Earnings (1) | | Purchases / Originations | | Sales | | Settlements | | Transfers In (Out) | | Balance at End of Period |
| | Balance at Beginning of Period | Total Unrealized Gains / (Losses) | Total Realized Gains / (Losses) | | Total Unrealized Gains / (Losses) | Purchases / Originations | Sales | Settlements | Transfers In (Out) | Balance at End of Period | (Dollars in millions) |
| | (Dollars in millions) | |
| Three Months Ended September 30, 2017 | | | | |
| Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2018 | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | |
| Loans held-for-investment | | | | | | | | | | | | | | | | |
| Home equity | $ | 5 |
| $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | (1 | ) | $ | — |
| $ | 4 |
| $ | 4 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Mortgage servicing rights | 184 |
| (9 | ) | — |
| | — |
| 75 |
| (4 | ) | — |
| — |
| 246 |
| |
| Rate lock commitments (net) (1) | 26 |
| 21 |
| — |
| | — |
| 82 |
| — |
| — |
| (97 | ) | 32 |
| |
| Mortgage servicing rights (2) | | 239 |
| | — |
| | 99 |
| | (81 | ) | | — |
| | — |
| | 257 |
|
| Rate lock commitments (net) (2)(3) | | 30 |
| | 2 |
| | 69 |
| | — |
| | — |
| | (69 | ) | | 32 |
|
| Totals | $ | 215 |
| $ | 12 |
| $ | — |
| | $ | — |
| $ | 157 |
| $ | (4 | ) | $ | (1 | ) | $ | (97 | ) | $ | 282 |
| $ | 273 |
| | $ | 1 |
| | $ | 168 |
| | $ | (81 | ) | | $ | — |
| | $ | (69 | ) | | $ | 292 |
|
| Liabilities | | | | | | | | | | | | | | | | |
| DOJ litigation settlement | $ | (60 | ) | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (60 | ) | $ | (60 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (60 | ) |
| Contingent consideration | (23 | ) | (1 | ) | — |
| | — |
| (2 | ) | — |
| — |
| — |
| (26 | ) | (21 | ) | | 3 |
| | — |
| | — |
| | — |
| | — |
| | (18 | ) |
| Totals | $ | (83 | ) | $ | (1 | ) | $ | — |
| | $ | — |
| $ | (2 | ) | $ | — |
| $ | — |
| $ | — |
| $ | (86 | ) | $ | (81 | ) | | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (78 | ) |
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 | | | | |
| Three Months Ended June 30, 2017 | | Three Months Ended June 30, 2017 | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | |
| Loans held-for-sale | | | | | | | | | | | | | | |
| Home equity | | $ | 53 |
| | $ | — |
| | $ | — |
| | $ | (52 | ) | | $ | (1 | ) | | $ | — |
| | — |
|
| Loans held-for-investment | | | | | | | | | | | | | | | | |
| Home equity | $ | 82 |
| $ | 4 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | (14 | ) | $ | — |
| $ | 72 |
| 5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
| Mortgage servicing rights | 301 |
| (33 | ) | — |
| | — |
| 51 |
| (17 | ) | — |
| — |
| 302 |
| |
| Rate lock commitments (net) (1) | 82 |
| 33 |
| — |
| | — |
| 116 |
| (150 | ) | (18 | ) | — |
| 63 |
| |
| Mortgage servicing rights (2) | | 295 |
| | (2 | ) | | 82 |
| | (191 | ) | | — |
| | — |
| | 184 |
|
| Rate lock commitments (net) (2)(3) | | 41 |
| | 18 |
| | 64 |
| | — |
| | — |
| | (97 | ) | | 26 |
|
| Totals | $ | 465 |
| $ | 4 |
| $ | — |
| | $ | — |
| $ | 167 |
| $ | (167 | ) | $ | (32 | ) | $ | — |
| $ | 437 |
| $ | 394 |
| | $ | 16 |
| | $ | 146 |
| | $ | (243 | ) | | $ | (1 | ) | | $ | (97 | ) | | $ | 215 |
|
| Liabilities | | | | | | | | | | | | | | | | |
| DOJ litigation settlement | $ | (84 | ) | $ | 24 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (60 | ) | $ | (60 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (60 | ) |
| Contingent consideration | | — |
| | — |
| | (23 | ) | | — |
| | — |
| | — |
| | (23 | ) |
| Totals | | $ | (60 | ) | | $ | — |
| | $ | (23 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (83 | ) |
| |
| (1) | There were no unrealized gains (losses) recorded in OCI during the three months ended June 30, 2018 and 2017. |
| |
| (2) | We utilized swaptions, futures, forward agency and loan sales and interest rate swaps to manage the risk associated with mortgage servicing rights and rate lock commitments. Gains and losses for individual lines do not reflect the effect of our risk management activities related to such Level 3 instruments. |
| |
| (3) | Rate lock commitments are reported on a fallout adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are transferred to LHFS, which are classified as Level 2 assets. |
| | | | | Recorded in Earnings | | Recorded in OCI | | Balance at
Beginning of
Period | | Total Gains /
(Losses) Recorded in Earnings (1) | | Purchases / Originations | | Sales | | Settlements | | Transfers In (Out) | | Balance at
End of
Period |
| | Balance at
Beginning of
Period | Total Unrealized Gains / (Losses) | Total Realized Gains / (Losses) | | Total Unrealized Gains / (Losses) | Purchases / Originations | Sales | Settlements | Transfers In (Out) | Balance at
End of
Period | (Dollars in millions) |
| | (Dollars in millions) | |
| Nine Months Ended September 30, 2017 | | | | |
| Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | |
| Loans held-for-sale | | | | |
| Home equity | $ | — |
| $ | 1 |
| $ | — |
| | $ | — |
| $ | — |
| $ | (52 | ) | $ | (1 | ) | $ | 52 |
| $ | — |
| |
| Loans held-for-investment | | | | | | | | | | | | | | | | |
| Home equity | 65 |
| 1 |
| — |
| — |
| — |
| — |
| — |
| (7 | ) | (55 | ) | 4 |
| $ | 4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 3 |
|
| Mortgage servicing rights | 335 |
| (7 | ) | — |
| | — |
| 178 |
| (260 | ) | — |
| — |
| 246 |
| |
| Rate lock commitments (net) (1) | 18 |
| 55 |
| — |
| | — |
| 199 |
| — |
| — |
| (240 | ) | 32 |
| |
| Mortgage servicing rights (2) | | 291 |
| | 5 |
| | 183 |
| | (222 | ) | | — |
| | — |
| | 257 |
|
| Rate lock commitments (net) (2)(3) | | 24 |
| | (32 | ) | | 131 |
| | — |
| | — |
| | (91 | ) | | 32 |
|
| Totals | $ | 418 |
| $ | 50 |
| $ | — |
| | $ | — |
| $ | 377 |
| $ | (312 | ) | $ | (8 | ) | $ | (243 | ) | $ | 282 |
| $ | 319 |
| | $ | (27 | ) | | $ | 314 |
| | $ | (222 | ) | | $ | (1 | ) | | $ | (91 | ) | | $ | 292 |
|
| Liabilities | | | | | | | | | | | | | | | | |
| DOJ litigation settlement | $ | (60 | ) | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (60 | ) | $ | (60 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (60 | ) |
| Contingent consideration | — |
| (1 | ) | — |
| | — |
| (25 | ) | — |
| — |
| — |
| (26 | ) | (25 | ) | | 5 |
| | — |
| | — |
| | 2 |
| | — |
| | (18 | ) |
| Totals | $ | (60 | ) | $ | (1 | ) | $ | — |
| | $ | — |
| $ | (25 | ) | $ | — |
| $ | — |
| $ | — |
| $ | (86 | ) | $ | (85 | ) | | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | (78 | ) |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 | | | | |
| Six Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | |
| Loans held-for-sale | | | | | | | | | | | | | | |
| Home equity | | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | (52 | ) | | $ | (1 | ) | | $ | 52 |
| | $ | — |
|
| Loans held-for-investment | | | | | | | | | | | | | | | | |
| Home equity | $ | 106 |
| $ | 2 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | (36 | ) | $ | — |
| $ | 72 |
| 65 |
| | 1 |
| | — |
| | — |
| | (6 | ) | | (55 | ) | | 5 |
|
| Mortgage servicing rights | 296 |
| (126 | ) | — |
| | — |
| 173 |
| (41 | ) | — |
| — |
| 302 |
| |
| Rate lock commitments (net) (1) | 26 |
| 153 |
| — |
| | — |
| 303 |
| (371 | ) | (48 | ) | — |
| 63 |
| |
| Mortgage servicing rights (2) | | 335 |
| | 2 |
| | 103 |
| | (256 | ) | | — |
| | — |
| | 184 |
|
| Rate lock commitments (net) (2)(3) | | 18 |
| | 34 |
| | 117 |
| | — |
| | — |
| | (143 | ) | | 26 |
|
| Totals | $ | 428 |
| $ | 29 |
| $ | — |
| | $ | — |
| $ | 476 |
| $ | (412 | ) | $ | (84 | ) | $ | — |
| $ | 437 |
| $ | 418 |
| | $ | 38 |
| | $ | 220 |
| | $ | (308 | ) | | $ | (7 | ) | | $ | (146 | ) | | $ | 215 |
|
| Liabilities | | | | | | | | | | | | | | | | |
| DOJ litigation settlement | $ | (84 | ) | $ | 24 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (60 | ) | $ | (60 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (60 | ) |
| Contingent consideration | | — |
| | — |
| | (23 | ) | | — |
| | — |
| | — |
| | (23 | ) |
| Totals | | $ | (60 | ) | | $ | — |
| | $ | (23 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (83 | ) |
| |
| (1) | There were no unrealized gains (losses) recorded in OCI during the six months ended June 30, 2018 and 2017. |
| |
| (2) | We utilized swaptions, futures, forward agency and loan sales and interest rate swaps to manage the risk associated with mortgage servicing rights and rate lock commitments. Gains and losses for individual lines do not reflect the effect of our risk management activities related to such Level 3 instruments. |
| |
| (3) | Rate lock commitments are reported on a fallout adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are transferred to LHFS, which are classified as Level 2 assets. |
We utilized swaptions futures, forward agency and loan sales and interest rate swaps to manage the risk associated with MSRs and rate lock commitments. Gains and losses for individual lines in the tables do not reflect the effect of our risk management activities related to such level 3 instruments.
The following tables present the quantitative information about recurring levelLevel 3 fair value financial instruments and the fair value measurements as of:
| | | | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | |
| June 30, 2018 | | |
| Assets | | |
| Loans held-for-investment | | | | |
| Home equity | $ | 4 |
| | Discounted cash flows | | Discount rate
Constant prepayment rate
Constant default rate | | 7.2% - 10.8% (9.0%)
5.2% - 7.7% (6.5%)
3.0% - 4.5% (3.4%) | $ | 3 |
| | Discounted cash flows | | Discount rate
Constant prepayment rate
Constant default rate | | 7.2% - 10.8% (9.0%)
22.9% - 34.3% (28.6%)
3.0% - 4.5% (3.1%) |
| Mortgage servicing rights | $ | 246 |
| | Discounted cash flows | | Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan | | 4.7% - 7.0% (5.8%)
7.8% - 11.4% (9.6%)
$57 - $85 ($71) | $ | 257 |
| | Discounted cash flows | | Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan | | 2.8% - 21.4% (5.4%)
0% - 10.7% (9.0%)
$67 - $95 ($80) |
| Rate lock commitments (net) | $ | 32 |
| | Consensus pricing | | Origination pull-through rate | | 63.9% - 95.9% (79.9%) | $ | 32 |
| | Consensus pricing | | Origination pull-through rate | | 78.9% - 87.2% (80.4%) |
| Liabilities | | | | |
| DOJ litigation settlement | $ | 60 |
| | Discounted cash flows | | Discount rate
Asset growth rate | | 7.5% - 11.3% (9.4%)
5.6% - 16.8% (6.5%) | $ | (60 | ) | | Discounted cash flows | | Discount rate
Asset growth rate | | 7.9% - 11.8% (9.8%)
0% - 17.5% (6.0%) |
| Contingent consideration | $ | 26 |
| | Discounted cash flows | | Beta
Equity volatility | | 0.6 - 1.6 (1.1)
26.6% - 58.9% (40.5%) | $ | (18 | ) | | Discounted cash flows | | Beta
Equity volatility | | 0.6 - 1.6 (1.1)
26.6% - 58.9% (40.0%) |
| | | | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
| | (Dollars in millions) | (Dollars in millions) |
| December 31, 2016 | | |
| December 31, 2017 | | |
| Assets | | |
| Loans held-for-investment | | | | |
| Home equity | $ | 65 |
| | Discounted cash flows | | Discount rate
Constant prepayment rate
Constant default rate | | 6.0% - 12.2% (9.3%)
16.3% - 24.4% (20.3%)
2.7% - 4.1% (3.7%) | $ | 4 |
| | Discounted cash flows | | Discount rate
Constant prepayment rate
Constant default rate | | 7.2% - 10.8% (9.0%)
5.1% - 7.7% (6.4%)
3.0% - 4.5% (3.6%) |
| Mortgage servicing rights | $ | 335 |
| | Discounted cash flows | | Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan | | 6.2% - 9.3% (7.8%)
13.9% - 19.2% (16.7%)
$55 - $82 ($68) | $ | 291 |
| | Discounted cash flows | | Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan | | 5.0% - 7.5% (6.3%)
8.0% - 11.8% (9.9%)
$58 - $87 ($73) |
| Rate lock commitments (net) | $ | 18 |
| | Consensus pricing | | Origination pull-through rate | | 66.9% - 100.0% (83.6%) | $ | 24 |
| | Consensus pricing | | Origination pull-through rate | | 64.7% - 97.1% (82.0%) |
| Liabilities | | | | |
| DOJ litigation settlement | $ | 60 |
| | Discounted cash flows | | Discount rate
Asset growth rate | | 6.6% - 9.8% (8.2%)
4.2% - 11.6% (7.9%) | $ | (60 | ) | | Discounted cash flows | | Discount rate
Asset growth rate | | 7.8% - 11.7% (9.7%)
5.6% - 17.4% (6.3%) |
| Contingent consideration | | $ | (25 | ) | | Discounted cash flows | | Beta
Equity volatility | | 0.6 - 1.6 (1.1)
26.6% - 58.9% (40.0%) |
Recurring Significant Unobservable Inputs
Home equity. The significant unobservable inputs used in the fair value measurement of the home equity loans are discount rates, constant prepayment rates, and default rates. The constant prepayment and default rates are based on a 12 month historical average. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases (decreases) in prepayprepayment rates in isolation result in a higher (lower) fair value and increases (decreases) in default rates in isolation result in a lower (higher) fair value. HELOC loans formerly included in the FSTAR 2005-1 and FSTAR 2006-1 securitization trusts, also classified as home equity loans, were valued utilizing a loan-level discounted cash flow model which projects expected cash flows given three potential outcomes: (1) paid-in-full at scheduled maturity, (2) default at scheduled maturity (foreclosure), and (3) modification at scheduled maturity into an amortizing HELOC. Loans are placed into the potential outcome buckets based on their underlying current delinquency, FICO scores and property CLTV all of which are unobservable inputs. These loans were sold in the second quarter of 2017.
MSRs. The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads, prepayment rates, and cost to service. Significant increases (decreases) in all three assumptions in isolation would result in a significantly lower (higher) fair value measurement. Weighted average life (in years) is used to determine the change in fair value of MSRs. For SeptemberJune 30, 20172018 and December 31, 20162017 the weighted average life (in years) for the entire MSRsMSR portfolio was 6.1 and 6.0, and 6.6, respectively.
DOJ litigation settlement. The significant unobservable input used in the fair value measurement of the DOJ litigation settlement isare the discount rate and asset growth rate, in addition to those discussed in Note 1716 - Legal Proceedings, Contingencies and Commitments. Significant increases (decreases) in the discount rate or asset growth rate in isolation would result in a marginally lower (higher) fair value measurement. For further information on the fair value inputs related to the DOJ litigation settlement, see Note 1716 - Legal Proceedings, Contingencies, and Commitments.
Rate lock commitments. The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull throughpull-through rate. The pull throughpull-through rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull throughpull-through rate) are applied accordingly. Significant increases (decreases) in the pull throughpull-through rate in isolation would result in a significantly higher (lower) fair value measurement.
Contingent consideration. The significant unobservable input used in the fair value of the contingent consideration is future forecasted target production volumes and profitability of the division. An increase or decrease to these inputs results in an increase or decrease of the liability. Other unobservable inputs include Beta and volatility which drive the risk adjusted discount rate utilized in a Monte Carlo simulation. An increase or decreaseIncreases (decreases) in these inputs results in a decrease or increaselower (higher) to the liability.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We also have assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis.
The following table presents assets measured at fair value on a nonrecurring basis:
| | | | Total (1) | | Level 2 | | Level 3 | | Gains/(Losses) | Total (1) | | Level 2 | | Level 3 | | Gains (Losses) |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | | | |
Loans held-for-sale (2) | $ | 6 |
| | $ | 6 |
| | $ | — |
| | $ | (1 | ) | |
Impaired loans held-for-investment (2) | | | | | | | | |
| Loans held-for-investment | 23 |
| | — |
| | 23 |
| | (8 | ) | |
Repossessed assets (3) | 9 |
| | — |
| | 9 |
| | — |
| |
| Totals | $ | 38 |
| | $ | 6 |
| | $ | 32 |
| | $ | (9 | ) | |
| December 31, 2016 | | | | | | | | |
| June 30, 2018 | | | | |
Loans held-for-sale (2) | $ | 9 |
| | $ | 9 |
| | $ | — |
| | $ | (2 | ) | $ | 7 |
| | $ | 7 |
| | $ | — |
| | $ | (1 | ) |
Impaired loans held-for-investment (2) | | | | | | | | | | | | | | |
| Residential first mortgage loans | 25 |
| | — |
| | 25 |
| | (28 | ) | 15 |
| | — |
| | 15 |
| | (5 | ) |
Repossessed assets (3) | 14 |
| | — |
| | 14 |
| | (2 | ) | 7 |
| | — |
| | 7 |
| | (2 | ) |
| Totals | $ | 48 |
| | $ | 9 |
| | $ | 39 |
| | $ | (32 | ) | $ | 29 |
| | $ | 7 |
| | $ | 22 |
| | $ | (8 | ) |
| December 31, 2017 | | | | | | | | |
Loans held-for-sale (2) | | $ | 6 |
| | $ | 6 |
| | $ | — |
| | $ | (1 | ) |
Impaired loans held-for-investment (2) | | | | | | | | |
| Residential first mortgage loans | | 21 |
| | — |
| | 21 |
| | (10 | ) |
Repossessed assets (3) | | 8 |
| | — |
| | 8 |
| | (4 | ) |
| Totals | | $ | 35 |
| | $ | 6 |
| | $ | 29 |
| | $ | (15 | ) |
| |
| (1) | The fair values are determined at various dates during the ninethree months ended SeptemberJune 30, 20172018 and the year ended December 31, 2016,2017, respectively. |
| |
| (2) | Gains/Gains (losses) reflect fair value adjustments on assets for which we did not elect the fair value option. |
| |
| (3) | Gains/Gains (losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets. |
The following tables present the quantitative information about nonrecurring levelLevel 3 fair value financial instruments and the fair value measurements:
| | | | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
| | (Dollars in millions) | (Dollars in millions) |
| September 30, 2017 | | | |
| June 30, 2018 | | | |
| Impaired loans held-for-investment | | | | |
| Loans held-for-investment | $ | 23 |
| | Fair value of collateral | | Loss severity discount | | 28% - 31% (29.6%) | $ | 15 |
| | Fair value of collateral | | Loss severity discount | | 25% - 30% (27.6%) |
| Repossessed assets | $ | 9 |
| | Fair value of collateral | | Loss severity discount | | 29% - 100% (75.3%) | $ | 7 |
| | Fair value of collateral | | Loss severity discount | | 0% - 100% (22.0%) |
| December 31, 2016 | | | |
| December 31, 2017 | | | |
| Impaired loans held-for-investment | | | | |
| Residential first mortgage loans | $ | 25 |
| | Fair value of collateral | | Loss severity discount | | 22% - 40% (29.5%) | |
| Loans held-for-investment | | $ | 21 |
| | Fair value of collateral | | Loss severity discount | | 25% - 30% (27.9%) |
| Repossessed assets | $ | 14 |
| | Fair value of collateral | | Loss severity discount | | 22% - 100% (69.5%) | $ | 8 |
| | Fair value of collateral | | Loss severity discount | | 0% - 100% (70.9%) |
Nonrecurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties.
Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair value of financial instruments that are carried either at fair value, cost, or amortized cost:
| | | | September 30, 2017 | June 30, 2018 |
| | | | Estimated Fair Value | | | Estimated Fair Value |
| | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 |
| | (Dollars in millions) | (Dollars in millions) |
| Assets | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 233 |
| | $ | 233 |
| | $ | 233 |
| | $ | — |
| | $ | — |
| $ | 359 |
| | $ | 359 |
| | $ | 359 |
| | $ | — |
| | $ | — |
|
| Investment securities available-for-sale | 1,637 |
| | 1,637 |
| | — |
| | 1,637 |
| | — |
| 1,871 |
| | 1,871 |
| | — |
| | 1,871 |
| | — |
|
| Investment securities held-to-maturity | 977 |
| | 971 |
| | — |
| | 971 |
| | — |
| 748 |
| | 719 |
| | — |
| | 719 |
| | — |
|
| Loans held-for-sale | 4,939 |
| | 4,940 |
| | — |
| | 4,940 |
| | — |
| 4,291 |
| | 4,292 |
| | — |
| | 4,292 |
| | — |
|
| Loans held-for-investment | 7,203 |
| | 7,181 |
| | — |
| | 9 |
| | 7,172 |
| 8,904 |
| | 8,800 |
| | — |
| | 8 |
| | 8,792 |
|
| Loans with government guarantees | 253 |
| | 245 |
| | — |
| | 245 |
| | — |
| 278 |
| | 265 |
| | — |
| | 265 |
| | — |
|
| Mortgage servicing rights | 246 |
| | 246 |
| | — |
| | — |
| | 246 |
| 257 |
| | 257 |
| | — |
| | — |
| | 257 |
|
| Federal Home Loan Bank stock | 264 |
| | 264 |
| | — |
| | 264 |
| | — |
| 303 |
| | 303 |
| | — |
| | 303 |
| | — |
|
| Bank owned life insurance | 328 |
| | 328 |
| | — |
| | 328 |
| | — |
| 335 |
| | 335 |
| | — |
| | 335 |
| | — |
|
| Repossessed assets | 9 |
| | 9 |
| | — |
| | — |
| | 9 |
| 7 |
| | 7 |
| | — |
| | — |
| | 7 |
|
| Other assets, foreclosure claims | 92 |
| | 92 |
| | — |
| | 92 |
| | — |
| 66 |
| | 66 |
| | — |
| | 66 |
| | — |
|
| Derivative financial instruments, assets | 60 |
| | 60 |
| | — |
| | 27 |
| | 33 |
| 49 |
| | 49 |
| | — |
| | 16 |
| | 33 |
|
| Liabilities | | | | | | | | | | | | | | | | | | |
| Retail deposits | | | | | | | | | | | | | | | | | | |
| Demand deposits and savings accounts | $ | (5,243 | ) | | $ | (4,845 | ) | | $ | — |
| | $ | (4,845 | ) | | $ | — |
| $ | (5,293 | ) | | $ | (4,775 | ) | | $ | — |
| | $ | (4,775 | ) | | $ | — |
|
| Certificates of deposit | (1,297 | ) | | (1,304 | ) | | — |
| | (1,304 | ) | | — |
| (2,100 | ) | | (2,092 | ) | | — |
| | (2,092 | ) | | — |
|
| Wholesale deposits | (43 | ) | | (43 | ) | | — |
| | (43 | ) | | — |
| (392 | ) | | (974 | ) | | — |
| | (974 | ) | | — |
|
| Government deposits | (1,068 | ) | | (1,045 | ) | | — |
| | (1,045 | ) | | — |
| (1,102 | ) | | (1,096 | ) | | — |
| | (1,096 | ) | | — |
|
| Company controlled deposits | (1,510 | ) | | (1,473 | ) | | — |
| | (1,473 | ) | | — |
| |
| Custodial deposits | | (1,701 | ) | | (1,631 | ) | | — |
| | (1,631 | ) | | — |
|
| Federal Home Loan Bank advances | (5,365 | ) | | (5,252 | ) | | — |
| | (5,252 | ) | | — |
| (5,120 | ) | | (5,108 | ) | | — |
| | (5,108 | ) | | — |
|
| Long-term debt | (493 | ) | | (382 | ) | | — |
| | (382 | ) | | — |
| (494 | ) | | (458 | ) | | — |
| | (458 | ) | | — |
|
| DOJ litigation settlement | (60 | ) | | (60 | ) | | — |
| | — |
| | (60 | ) | (60 | ) | | (60 | ) | | — |
| | — |
| | (60 | ) |
| Contingent consideration | (26 | ) | | (26 | ) | | — |
| | — |
| | (26 | ) | (18 | ) | | (18 | ) | | — |
| | — |
| | (18 | ) |
| Derivative financial instruments, liabilities | (10 | ) | | (10 | ) | | (3 | ) | | (6 | ) | | (1 | ) | (33 | ) | | (33 | ) | | — |
| | (32 | ) | | (1 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | | | Estimated Fair Value |
| | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 |
| | (Dollars in millions) |
| Assets | | | | | | | | | |
| Cash and cash equivalents | $ | 158 |
| | $ | 158 |
| | $ | 158 |
| | $ | — |
| | $ | — |
|
| Investment securities available-for-sale | 1,480 |
| | 1,480 |
| | — |
| | 1,480 |
| | — |
|
| Investment securities held-to-maturity | 1,093 |
| | 1,084 |
| | — |
| | 1,084 |
| | — |
|
| Loans held-for-sale | 3,177 |
| | 3,178 |
| | — |
| | 3,178 |
| | — |
|
| Loans held-for-investment | 6,065 |
| | 5,998 |
| | — |
| | 7 |
| | 5,991 |
|
| Loans with government guarantees | 365 |
| | 354 |
| | — |
| | 354 |
| | — |
|
| Mortgage servicing rights | 335 |
| | 335 |
| | — |
| | — |
| | 335 |
|
| Federal Home Loan Bank stock | 180 |
| | 180 |
| | — |
| | 180 |
| | — |
|
| Bank owned life insurance | 271 |
| | 271 |
| | — |
| | 271 |
| | — |
|
| Repossessed assets | 14 |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Other assets, foreclosure claims | 135 |
| | 135 |
| | — |
| | 135 |
| | — |
|
| Derivative financial instruments, assets | 123 |
| | 123 |
| | 45 |
| | 54 |
| | 24 |
|
| Liabilities | | | | | | | | | |
| Retail deposits | | | | | | | | | |
| Demand deposits and savings accounts | $ | (5,268 | ) | | $ | (4,956 | ) | | $ | — |
| | $ | (4,956 | ) | | $ | — |
|
| Certificates of deposit | (1,056 | ) | | (1,062 | ) | | — |
| | (1,062 | ) | | — |
|
| Government deposits | (1,030 | ) | | (1,011 | ) | | — |
| | (1,011 | ) | | — |
|
| Company controlled deposits | (1,446 | ) | | (1,371 | ) | | — |
| | (1,371 | ) | | — |
|
| Federal Home Loan Bank advances | (2,980 | ) | | (2,964 | ) | | — |
| | (2,964 | ) | | — |
|
| Long-term debt | (493 | ) | | (277 | ) | | — |
| | (277 | ) | | — |
|
| Warrant liabilities | (4 | ) | | (4 | ) | | — |
| | (4 | ) | | — |
|
| DOJ litigation settlement | (60 | ) | | (60 | ) | | — |
| | — |
| | (60 | ) |
| Derivative financial instruments, liabilities | (54 | ) | | (54 | ) | | (11 | ) | | (37 | ) | | (6 | ) |
The methods and assumptions used by us in estimating fair value of financial instruments which are required for disclosure only, are as follows:
Cash and cash equivalents. Due to their short-term nature, the carrying amount of cash and cash equivalents approximates fair value.
Investment securities held-to-maturity. Fair values are generated using market inputs, where possible, including quoted prices (the closing price in an exchange market), bid prices (the price at which a buyer stands ready to purchase), and other market information.
Loans held-for-investment. The fair value is estimated using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Loans with government guarantees. The fair value is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Federal Home Loan Bank stock. No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. Management believes that the recorded value equals the fair value.
Bank owned life insurance. The fair value of bank owned life insurance policies is based on the cash surrender values of the policies as reported by the insurance companies.
Other assets, foreclosure claims. The fair value of foreclosure claims with government guarantees approximates the carrying amount.
Deposit accounts. The fair value of deposits with no defined maturity is estimated based on a discounted cash flow model that incorporates current market rates for similar products and expected attrition. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for certificates of deposit with similar remaining maturities.
Federal Home Loan Bank advances. Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.
Long-term debt. The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates current borrowing rates for similar types of borrowing arrangements. |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | | | Estimated Fair Value |
| | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 |
| | (Dollars in millions) |
| Assets | | | | | | | | | |
| Cash and cash equivalents | $ | 204 |
| | $ | 204 |
| | $ | 204 |
| | $ | — |
| | $ | — |
|
| Investment securities available-for-sale | 1,853 |
| | 1,853 |
| | — |
| | 1,853 |
| | — |
|
| Investment securities held-to-maturity | 939 |
| | 924 |
| | — |
| | 924 |
| | — |
|
| Loans held-for-sale | 4,321 |
| | 4,322 |
| | — |
| | 4,322 |
| | — |
|
| Loans held-for-investment | 7,713 |
| | 7,667 |
| | — |
| | 8 |
| | 7,659 |
|
| Loans with government guarantees | 271 |
| | 261 |
| | — |
| | 261 |
| | — |
|
| Mortgage servicing rights | 291 |
| | 291 |
| | — |
| | — |
| | 291 |
|
| Federal Home Loan Bank stock | 303 |
| | 303 |
| | — |
| | 303 |
| | — |
|
| Bank owned life insurance | 330 |
| | 330 |
| | — |
| | 330 |
| | — |
|
| Repossessed assets | 8 |
| | 8 |
| | — |
| | — |
| | 8 |
|
| Other assets, foreclosure claims | 84 |
| | 84 |
| | — |
| | 84 |
| | — |
|
| Derivative financial instruments, assets | 39 |
| | 39 |
| | — |
| | 15 |
| | 24 |
|
| Liabilities | | | | | | | | | |
| Retail deposits | | | | | | | | | |
| Demand deposits and savings accounts | $ | (4,965 | ) | | $ | (4,557 | ) | | $ | — |
| | $ | (4,557 | ) | | $ | — |
|
| Certificates of deposit | (1,493 | ) | | (1,498 | ) | | — |
| | (1,498 | ) | | — |
|
| Wholesale deposits | (45 | ) | | (43 | ) | | — |
| | (43 | ) | | — |
|
| Government deposits | (1,073 | ) | | (1,048 | ) | | — |
| | (1,048 | ) | | — |
|
| Custodial deposits | (1,358 | ) | | (1,311 | ) | | — |
| | (1,311 | ) | | — |
|
| Federal Home Loan Bank advances | (5,665 | ) | | (5,662 | ) | | — |
| | (5,662 | ) | | — |
|
| Long-term debt | (494 | ) | | (417 | ) | | — |
| | (417 | ) | | — |
|
| DOJ litigation settlement | (60 | ) | | (60 | ) | | — |
| | — |
| | (60 | ) |
| Contingent consideration | (25 | ) | | (25 | ) | | — |
| | — |
| | (25 | ) |
| Derivative financial instruments, liabilities | (11 | ) | | (11 | ) | | — |
| | (11 | ) | | — |
|
Fair Value Option
We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements to mitigate a divergence betweenmore closely align the accounting losses andmethod with the underlying economic exposure. Interest income on LHFS is accrued on the principal outstanding primarily using the "simple-interest" method.
The following table reflects the change in fair value included in earnings of financial instruments for which the fair value option has been elected:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | (Dollars in millions) | (Dollars in millions) |
| Assets | | | | | | | | | | | | | | |
| Loans held-for-sale | | | | | | | | | | | | | | |
| Net gain on loan sales | $ | 92 |
| | $ | 151 |
| | $ | 260 |
| | $ | 440 |
| $ | 20 |
| | $ | 115 |
| | $ | (68 | ) | | $ | 168 |
|
| Loans held-for-investment | | | | | | | | | | | | | | |
| Other noninterest income | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | (2 | ) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Liabilities | | | | | | | | |
| Other noninterest income | $ | — |
| | $ | 24 |
| | $ | — |
| | $ | 24 |
| |
The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding for assets and liabilities for which the fair value option has been elected:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| Unpaid Principal Balance | | Fair Value | | Fair Value Over / (Under) Unpaid Principal Balance | | Unpaid Principal Balance | | Fair Value | | Fair Value Over / (Under) Unpaid Principal Balance | Unpaid Principal Balance | | Fair Value | | Fair Value Over / (Under) Unpaid Principal Balance | | Unpaid Principal Balance | | Fair Value | | Fair Value Over / (Under) Unpaid Principal Balance |
| | (Dollars in millions) | (Dollars in millions) |
| Assets | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccrual loans | | | | | | | | | | | | | | | | | | | | | | |
| Loans held-for-sale | $ | 4 |
| | $ | 4 |
| | $ | — |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
| $ | 7 |
| | $ | 7 |
| | $ | — |
| | $ | 6 |
| | $ | 5 |
| | $ | (1 | ) |
| Loans held-for-investment | 6 |
| | 4 |
| | (2 | ) | | 19 |
| | 13 |
| | (6 | ) | 5 |
| | 4 |
| | (1 | ) | | 5 |
| | 4 |
| | (1 | ) |
| Total nonaccrual loans | $ | 10 |
| | $ | 8 |
| | $ | (2 | ) | | $ | 21 |
| | $ | 15 |
| | $ | (6 | ) | $ | 12 |
| | $ | 11 |
| | $ | (1 | ) | | $ | 11 |
| | $ | 9 |
| | $ | (2 | ) |
| Other performing loans | | | | | | | | | | | | | | | | | | | | | | |
| Loans held-for-sale | $ | 4,742 |
| | $ | 4,903 |
| | $ | 161 |
| | $ | 3,103 |
| | $ | 3,143 |
| | $ | 40 |
| $ | 4,139 |
| | $ | 4,265 |
| | $ | 126 |
| | $ | 4,167 |
| | $ | 4,295 |
| | $ | 128 |
|
| Loans held-for-investment | 11 |
| | 9 |
| | (2 | ) | | 72 |
| | 59 |
| | (13 | ) | 9 |
| | 7 |
| | (2 | ) | | 10 |
| | 8 |
| | (2 | ) |
| Total other performing loans | $ | 4,753 |
| | $ | 4,912 |
| | $ | 159 |
| | $ | 3,175 |
| | $ | 3,202 |
| | $ | 27 |
| $ | 4,148 |
| | $ | 4,272 |
| | $ | 124 |
| | $ | 4,177 |
| | $ | 4,303 |
| | $ | 126 |
|
| Total loans | | | | | | | | | | | | | | | | | | | | | | |
| Loans held-for-sale | $ | 4,746 |
| | $ | 4,907 |
| | $ | 161 |
| | $ | 3,105 |
| | $ | 3,145 |
| | $ | 40 |
| $ | 4,146 |
| | $ | 4,272 |
| | $ | 126 |
| | $ | 4,173 |
| | $ | 4,300 |
| | $ | 127 |
|
| Loans held-for-investment | 17 |
| | 13 |
| | (4 | ) | | 91 |
| | 72 |
| | (19 | ) | 14 |
| | 11 |
| | (3 | ) | | 15 |
| | 12 |
| | (3 | ) |
| Total loans | $ | 4,763 |
| | $ | 4,920 |
| | $ | 157 |
| | $ | 3,196 |
| | $ | 3,217 |
| | $ | 21 |
| $ | 4,160 |
| | $ | 4,283 |
| | $ | 123 |
| | $ | 4,188 |
| | $ | 4,312 |
| | $ | 124 |
|
| Liabilities | | | | | | | | | | | | | | | | | | | | | | |
Litigation settlement (1) | $ | (118 | ) | | $ | (60 | ) | | $ | 58 |
| | $ | (118 | ) | | $ | (60 | ) | | $ | 58 |
| $ | (118 | ) | | $ | (60 | ) | | $ | 58 |
| | $ | (118 | ) | | $ | (60 | ) | | $ | 58 |
|
| |
| (1) | We are obligated to pay $118 million in installment payments upon meeting certain performance conditions, as described in Note 1716 - Legal Proceedings, Contingencies and Commitments. |
Note 1918 - Segment Information
Our operations are conducted through three operating segments: Community Banking, Mortgage Originations, and
Mortgage Servicing. The Other segment includes the remaining reported activities. Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. The operating segments have been determined based on the products and services offered and reflect the manner in which financial information is currently evaluated by management. Each segment operates under the same banking charter, but is reported on a segmented basis for this report. Each of the operating segments is complementary to each other and because of the interrelationships of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.
Effective JanuaryJanuary 1, 2017, activity related2018, the following changes were made with offsetting adjustments included in the Other segment to Loans with Government Guarantees, was moved fromreconcile to the Consolidated Statements of Operations: 1) operating leases in Community Banking are reflected as loans by reclassifying rental income and depreciation expense to net interest income, and 2) the interest expense on custodial deposits on third party sub-servicing contracts, recognized in the Mortgage Servicing segment to the Mortgage Originations segment and we began to allocate the tax provision atas loan administration income, is now reflected as a segment level. Prior to this change, the tax provision was reflected in the Other segment. The statutory federal tax rate is used for Community Banking, Mortgage Originations, and Mortgage Servicing segments with the difference between the statutory rate and the effective tax rate held in the Other segment.component of net interest income. Prior period segment financial information, related to boththese changes, has been recast to conform to the current presentation.
The Community Banking segment originates loans, provides deposits and fee based services to consumer, business, and mortgage lending customers through its Branch Banking, Business Banking and Commercial Banking, Government Banking, Warehouse Lending and LHFI Portfolio groups. Products offered through these groups include checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, commercial loans, commercial real estate loans, equipment finance and leasing, home builder finance loans and warehouse lines of credit. Other financial services available include consumer and corporate card services, customized treasury management solutions, merchant services and capital markets services such as loan syndications. In addition,syndications, and wealth management products and services are provided through Opes as of the acquisition date of May 15, 2017.
services.
The Mortgage Originations segment originates acquires and sellsacquires one-to-four family residential mortgage loans. The origination and acquisition of mortgage loans comprisesto sell or hold on our balance sheet. Loans originated-to-sell, comprise the majority of the lending activity. MortgageThese loans are originated through home loan centers, nationalmortgage branches, call centers, the Internet and unaffiliated banks and mortgage banking and brokerage companies, where the net interest income and thethird party counterparties. The resulting gains from sales associated
with these loans are recognized in the Mortgage Originations segment whereas the interest income on LHFI is recognized in the Community Banking segment.
The Mortgage Servicing segment services and subservices mortgage loans for others on a fee for service basis and may also collect ancillary fees and earn income through the use of noninterest-bearing escrows. Revenue for those serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the status of the underlying loans. The Mortgage Servicing segment also provides servicing of residential mortgages for our own LHFI portfolio in the Community Banking segment and our own LHFS portfolio in the Mortgage Originations segment, for which it earns revenue via an intercompany service fee allocation.
The Other segment includes the treasury functions, funding revenue associated with stockholders' equity,which include, the impact of interest rate risk management, the impact of balance sheet funding activities and the administration of the investment securities portfolios, as well as miscellaneous other expenses of a corporate nature. Treasury functions include administering the investment securities portfolios, balance sheet funding, and interest rate risk management. In addition, the Other segment includes revenue and expenses related to treasury and corporate assets and liabilities and equity not directly assigned or allocated to the Mortgage Originations, Mortgage Servicing or Community Banking operating segments.
Revenues are comprised of net interest income (before the provision (benefit)(provision) benefit for loan losses) and noninterest income. Noninterest expenses and provision (benefit) for income taxes are fully allocated to each operating segment. Allocation methodologies may be subject to periodic adjustment as the internal management accounting system is revised and the business or product lines within the segments change.
The following tables present financial information by business segment for the periods indicated:
| | | | Three Months Ended September 30, 2017 | Three Months Ended June 30, 2018 |
| | Community Banking | | Mortgage Originations | | Mortgage Servicing | | Other | | Total | Community Banking | | Mortgage Originations | | Mortgage Servicing | | Other (1) | | Total |
| | (Dollars in millions) | (Dollars in millions) |
| Summary of Operations | | | | | | | | | | | | | | | | | | |
| Net interest income | $ | 63 |
| | $ | 34 |
| | $ | 7 |
| | $ | (1 | ) | | $ | 103 |
| $ | 80 |
| | $ | 33 |
| | $ | 1 |
| | $ | 1 |
| | $ | 115 |
|
| Net gain (loss) on loan sales | (4 | ) | | 79 |
| | — |
| | — |
| | 75 |
| (5 | ) | | 68 |
| | — |
| | — |
| | 63 |
|
| Representation and warranty benefit | — |
| | 4 |
| | — |
| | — |
| | 4 |
| |
| Other noninterest income | 9 |
| | 23 |
| | 11 |
| | 8 |
| | 51 |
| 9 |
| | 27 |
| | 22 |
| | 2 |
| | 60 |
|
| Total net interest income and noninterest income | 68 |
| | 140 |
| | 18 |
| | 7 |
| | 233 |
| 84 |
| | 128 |
| | 23 |
| | 3 |
| | 238 |
|
| (Provision) benefit for loan losses | (1 | ) | | (1 | ) | | — |
| | — |
| | (2 | ) | — |
| | (1 | ) | | — |
| | 2 |
| | 1 |
|
| Depreciation and amortization expense | (2 | ) | | (2 | ) | | (1 | ) | | (5 | ) | | (10 | ) | |
| Other noninterest expense | (49 | ) | | (90 | ) | | (22 | ) | | — |
| | (161 | ) | |
| Compensation and benefits | | (17 | ) | | (28 | ) | | (5 | ) | | (30 | ) | | (80 | ) |
| Other noninterest expense and directly allocated overhead | | (28 | ) | | (47 | ) | | (15 | ) | | (7 | ) | | (97 | ) |
| Total noninterest expense | (51 | ) | | (92 | ) | | (23 | ) | | (5 | ) | | (171 | ) | (45 | ) | | (75 | ) | | (20 | ) | | (37 | ) | | (177 | ) |
| Income (loss) before income taxes | 16 |
| | 47 |
| | (5 | ) | | 2 |
| | 60 |
| |
| Income (loss) before indirect overhead allocations and income taxes | | 39 |
| | 52 |
| | 3 |
| | (32 | ) | | 62 |
|
| Provision (benefit) for income taxes | 6 |
| | 16 |
| | (1 | ) | | (1 | ) | | 20 |
| 7 |
| | 7 |
| | (2 | ) | | — |
| | 12 |
|
| Overhead allocations | | (9 | ) | | (17 | ) | | (5 | ) | | 31 |
| | — |
|
| Net income (loss) | $ | 10 |
| | $ | 31 |
| | $ | (4 | ) | | $ | 3 |
| | $ | 40 |
| $ | 23 |
| | $ | 28 |
| | $ | — |
| | $ | (1 | ) | | $ | 50 |
|
| Intersegment revenue | $ | (4 | ) | | $ | 2 |
| | $ | 5 |
| | $ | (3 | ) | | $ | — |
| |
| Intersegment (expense) revenue | | $ | (1 | ) | | $ | 2 |
| | $ | 4 |
| | $ | (5 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | |
| Average balances | | | | | | | | | | | | | | | | | | |
| Loans held-for-sale | $ | 14 |
| | $ | 4,462 |
| | $ | — |
| | $ | — |
| | $ | 4,476 |
| $ | 12 |
| | $ | 4,158 |
| | $ | — |
| | $ | — |
| | $ | 4,170 |
|
| Loans with government guarantees | — |
| | 264 |
| | — |
| | — |
| | 264 |
| — |
| | 280 |
| | — |
| | — |
| | 280 |
|
Loans held-for-investment | 6,764 |
| | 10 |
| | — |
| | 29 |
| | 6,803 |
| 8,378 |
| | 9 |
| | — |
| | 29 |
| | 8,416 |
|
| Total assets | 6,843 |
| | 5,743 |
| | 30 |
| | 3,823 |
| | 16,439 |
| 8,593 |
| | 5,225 |
| | 26 |
| | 3,940 |
| | 17,784 |
|
| Deposits | 7,498 |
| | — |
| | 1,507 |
| | — |
| | 9,005 |
| 8,632 |
| | — |
| | 1,782 |
| | — |
| | 10,414 |
|
| |
| (1) | Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and CCD income for subservicing clients. |
| |
| (2) | Includes adjustment made to reclassify operating lease assets to loans held-for-investment. |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2017 |
| | Community Banking | | Mortgage Originations | | Mortgage Servicing | | Other (1) | | Total |
| | (Dollars in millions) |
| Summary of Operations | | | | | | | | | |
| Net interest income | $ | 57 |
| | $ | 32 |
| | $ | 2 |
| | $ | 6 |
| | $ | 97 |
|
| Net gain (loss) on loan sales | (1 | ) | | 67 |
| | — |
| | — |
| | 66 |
|
| Other noninterest income | 6 |
| | 24 |
| | 17 |
| | 3 |
| | 50 |
|
| Total net interest income and noninterest income | 62 |
| | 123 |
| | 19 |
| | 9 |
| | 213 |
|
| (Provision) benefit for loan losses | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Compensation and benefits | (15 | ) | | (24 | ) | | (4 | ) | | (28 | ) | | (71 | ) |
| Other noninterest expense and directly allocated overhead | (22 | ) | | (38 | ) | | (16 | ) | | (7 | ) | | (83 | ) |
| Total noninterest expense | (37 | ) | | (62 | ) | | (20 | ) | | (35 | ) | | (154 | ) |
| Income (loss) before indirect overhead allocations and income taxes | 25 |
| | 61 |
| | (1 | ) | | (25 | ) | | 60 |
|
| Provision (benefit) for income taxes | 5 |
| | 17 |
| | (3 | ) | | — |
| | 19 |
|
| Overhead allocations | (10 | ) | | (14 | ) | | (5 | ) | | 29 |
| | — |
|
| Net income (loss) | $ | 10 |
| | $ | 30 |
| | $ | (3 | ) | | $ | 4 |
| | $ | 41 |
|
| Intersegment (expense) revenue | $ | — |
| | $ | 1 |
| | $ | 4 |
| | $ | (5 | ) | | $ | — |
|
| | | | | | | | | | |
| Average balances | | | | | | | | | |
| Loans held-for-sale | $ | 15 |
| | $ | 4,254 |
| | $ | — |
| | $ | — |
| | $ | 4,269 |
|
| Loans with government guarantees | — |
| | 295 |
| | — |
| | — |
| | 295 |
|
| Loans held-for-investment (2) | 6,192 |
| | 7 |
| | — |
| | 29 |
| | 6,228 |
|
| Total assets | 6,255 |
| | 5,562 |
| | 39 |
| | 3,854 |
| | 15,710 |
|
| Deposits | 7,362 |
| | — |
| | 1,377 |
| | — |
| | 8,739 |
|
| |
| (1) | Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and CCD income for subservicing clients. |
| |
| (2) | Includes adjustment made to reclassify operating lease assets to loans held-for-investment. |
|
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | Community Banking | | Mortgage Originations | | Mortgage Servicing | | Other (1) | | Total |
| | (Dollars in millions) |
| Summary of Operations | | | | | | | | | |
| Net interest income | $ | 150 |
| | $ | 64 |
| | $ | 3 |
| | $ | 4 |
| | $ | 221 |
|
| Net gain (loss) on loan sales | (7 | ) | | 130 |
| | — |
| | — |
| | 123 |
|
| Other noninterest income | 17 |
| | 46 |
| | 41 |
| | 7 |
| | 111 |
|
| Total net interest income and noninterest income | 160 |
| | 240 |
| | 44 |
| | 11 |
| | 455 |
|
| (Provision) benefit for loan losses | (1 | ) | | (1 | ) | | — |
| | 3 |
| | 1 |
|
| Compensation and benefits | (34 | ) | | (57 | ) | | (9 | ) | | (60 | ) | | (160 | ) |
| Other noninterest expense and directly allocated overhead | (54 | ) | | (88 | ) | | (31 | ) | | (17 | ) | | (190 | ) |
| Total noninterest expense | (88 | ) | | (145 | ) | | (40 | ) | | (77 | ) | | (350 | ) |
| Income (loss) before indirect overhead allocations and income taxes | 71 |
| | 94 |
| | 4 |
| | (63 | ) | | 106 |
|
| Provision (benefit) for income taxes | 11 |
| | 12 |
| | (2 | ) | | — |
| | 21 |
|
| Overhead allocations | (20 | ) | | (35 | ) | | (10 | ) | | 65 |
| | — |
|
| Net income (loss) | $ | 40 |
| | $ | 47 |
| | $ | (4 | ) | | $ | 2 |
| | $ | 85 |
|
| Intersegment (expense) revenue | $ | (2 | ) | | $ | 2 |
| | $ | 9 |
| | $ | (9 | ) | | $ | — |
|
| | | | | | | | | | |
| Average balances | | | | | | | | | |
| Loans held-for-sale | $ | 12 |
| | $ | 4,189 |
| | $ | — |
| | $ | — |
| | $ | 4,201 |
|
| Loans with government guarantees | — |
| | 285 |
| | — |
| | — |
| | 285 |
|
| Loans held-for-investment (2) | 7,936 |
| | 8 |
| | — |
| | 29 |
| | 7,973 |
|
| Total assets | 8,119 |
| | 5,375 |
| | 31 |
| | 3,914 |
| | 17,439 |
|
| Deposits | 8,233 |
| | — |
| | 1,662 |
| | — |
| | 9,895 |
|
| |
| (1) | Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and CCD income for subservicing clients. |
| |
| (2) | Includes adjustment made to reclassify operating lease assets to loans held-for-investment. |
| | | | Three Months Ended September 30, 2016 | Six Months Ended June 30, 2017 |
| | Community Banking | | Mortgage Originations | | Mortgage Servicing | | Other | | Total | Community Banking | | Mortgage Originations | | Mortgage Servicing | | Other (1) | | Total |
| | (Dollars in millions) | (Dollars in millions) |
| Summary of Operations | | | | | | | | | | | | | | | | | | |
| Net interest income | $ | 54 |
| | $ | 24 |
| | $ | 7 |
| | $ | (5 | ) | | $ | 80 |
| $ | 108 |
| | $ | 62 |
| | $ | 5 |
| | $ | 5 |
| | $ | 180 |
|
| Net gain (loss) on loan sales | (1 | ) | | 95 |
| | — |
| | — |
| | 94 |
| (3 | ) | | 117 |
| | — |
| | — |
| | 114 |
|
| Representation and warranty benefit | — |
| | 6 |
| | — |
| | — |
| | 6 |
| |
| Other noninterest income | 8 |
| | 4 |
| | 13 |
| | 31 |
| | 56 |
| 14 |
| | 50 |
| | 33 |
| | 5 |
| | 102 |
|
| Total net interest income and noninterest income | 61 |
| | 129 |
| | 20 |
| | 26 |
| | 236 |
| 119 |
| | 229 |
| | 38 |
| | 10 |
| | 396 |
|
| (Provision) for loan losses | (7 | ) | | — |
| | — |
| | — |
| | (7 | ) | |
| Depreciation and amortization expense | (1 | ) | | (2 | ) | | — |
| | (5 | ) | | (8 | ) | |
| Other noninterest expense | (43 | ) | | (66 | ) | | (25 | ) | | — |
| | (134 | ) | |
| (Provision) benefit for loan losses | | (2 | ) | | (2 | ) | | — |
| | 2 |
| | (2 | ) |
| Compensation and benefits | | (31 | ) | | (44 | ) | | (8 | ) | | (60 | ) | | (143 | ) |
| Other noninterest expense and directly allocated overhead | | (42 | ) | | (65 | ) | | (32 | ) | | (12 | ) | | (151 | ) |
| Total noninterest expense | (44 | ) | | (68 | ) | | (25 | ) | | (5 | ) | | (142 | ) | (73 | ) | | (109 | ) | | (40 | ) | | (72 | ) | | (294 | ) |
| Income (loss) before income taxes | 10 |
| | 61 |
| | (5 | ) | | 21 |
| | 87 |
| |
| Income (loss) before indirect overhead allocations and income taxes | | 44 |
| | 118 |
| | (2 | ) | | (60 | ) | | 100 |
|
| Provision (benefit) for income taxes | 3 |
| | 22 |
| | (2 | ) | | 7 |
| | 30 |
| 8 |
| | 31 |
| | (5 | ) | | (2 | ) | | 32 |
|
| Overhead allocations | | (20 | ) | | (31 | ) | | (11 | ) | | 62 |
| | — |
|
| Net income (loss) | $ | 7 |
| | $ | 39 |
| | $ | (3 | ) | | $ | 14 |
| | $ | 57 |
| $ | 16 |
| | $ | 56 |
| | $ | (8 | ) | | $ | 4 |
| | $ | 68 |
|
| Intersegment revenue | $ | (1 | ) | | $ | (1 | ) | | $ | 6 |
| | $ | (4 | ) | | $ | — |
| |
| Intersegment (expense) revenue | | $ | (1 | ) | | $ | 1 |
| | $ | 9 |
| | $ | (9 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | |
| Average balances | | | | | | | | | | | | | | | | | | |
| Loans held-for-sale | $ | 16 |
| | $ | 3,400 |
| | $ | — |
| | $ | — |
| | $ | 3,416 |
| $ | 18 |
| | $ | 3,762 |
| | $ | — |
| | $ | — |
| | $ | 3,780 |
|
| Loans with government guarantees | — |
| | 432 |
| | — |
| | — |
| | 432 |
| — |
| | 318 |
| | — |
| | — |
| | 318 |
|
Loans held-for-investment | 5,843 |
| | 5 |
| | — |
| | — |
| | 5,848 |
| 5,902 |
| | 6 |
| | — |
| | 29 |
| | 5,937 |
|
| Total assets | 5,904 |
| | 4,835 |
| | 26 |
| | 3,383 |
| | 14,148 |
| 5,966 |
| | 5,085 |
| | 40 |
| | 3,790 |
| | 14,881 |
|
| Deposits | 7,273 |
| | — |
| | 1,853 |
| | — |
| | 9,126 |
| 7,408 |
| | — |
| | 1,359 |
| | — |
| | 8,767 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
| | Community Banking | | Mortgage Originations | | Mortgage Servicing | | Other | | Total |
| (Dollars in millions) |
| Summary of Operations | | | | | | | | | |
| Net interest income | $ | 171 |
| | $ | 96 |
| | $ | 16 |
| | $ | — |
| | $ | 283 |
|
| Net gain (loss) on loan sales | (7 | ) | | 196 |
| | — |
| | — |
| | 189 |
|
| Representation and warranty benefit | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| Other noninterest income | 23 |
| | 66 |
| | 40 |
| | 17 |
| | 146 |
|
| Total net interest income and noninterest income | 187 |
| | 369 |
| | 56 |
| | 17 |
| | 629 |
|
| (Provision) benefit for loan losses | (3 | ) | | (3 | ) | | — |
| | 2 |
| | (4 | ) |
| Depreciation and amortization expense | (6 | ) | | (5 | ) | | (3 | ) | | (14 | ) | | (28 | ) |
| Other noninterest expense | (138 | ) | | (227 | ) | | (71 | ) | | (1 | ) | | (437 | ) |
| Total noninterest expense | (144 | ) | | (232 | ) | | (74 | ) | | (15 | ) | | (465 | ) |
| Income (loss) before income taxes | 40 |
| | 134 |
| | (18 | ) | | 4 |
| | 160 |
|
| Provision (benefit) for income taxes | 14 |
| | 47 |
| | (6 | ) | | (3 | ) | | 52 |
|
| Net income (loss) | $ | 26 |
| | $ | 87 |
| | $ | (12 | ) | | $ | 7 |
| | $ | 108 |
|
| Intersegment revenue | $ | (5 | ) | | $ | 3 |
| | $ | 14 |
| | $ | (12 | ) | | $ | — |
|
| | | | | | | | | | |
| Average balances | | | | | | | | | |
| Loans held-for-sale | $ | 16 |
| | $ | 3,998 |
| | $ | — |
| | $ | — |
| | $ | 4,014 |
|
| Loans with government guarantees | — |
| | 300 |
| | — |
| | — |
| | 300 |
|
| Loans held-for-investment | 6,191 |
| | 7 |
| | — |
| | 29 |
| | 6,227 |
|
| Total assets | 6,262 |
| | 5,307 |
| | 36 |
| | 3,801 |
| | 15,406 |
|
| Deposits | 7,438 |
| | — |
| | 1,409 |
| | — |
| | 8,847 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2016 |
| | Community Banking | | Mortgage Originations | | Mortgage Servicing | | Other | | Total |
| | (Dollars in millions) |
| Summary of Operations | | | | | | | | | |
| Net interest income | $ | 150 |
| | $ | 67 |
| | $ | 17 |
| | $ | 2 |
| | $ | 236 |
|
| Net gain (loss) on loan sales | 8 |
| | 251 |
| | — |
| | — |
| | 259 |
|
| Representation and warranty benefit | — |
| | 12 |
| | — |
| | — |
| | 12 |
|
| Other noninterest income | 21 |
| | 15 |
| | 41 |
| | 41 |
| | 118 |
|
| Total net interest income and noninterest income | 179 |
| | 345 |
| | 58 |
| | 43 |
| | 625 |
|
| (Provision) benefit for loan losses | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
| Depreciation and amortization expense | (5 | ) | | (4 | ) | | (2 | ) | | (12 | ) | | (23 | ) |
| Other noninterest expense | (131 | ) | | (188 | ) | | (70 | ) | | (6 | ) | | (395 | ) |
| Total noninterest expense | (136 | ) | | (192 | ) | | (72 | ) | | (18 | ) | | (418 | ) |
| Income (loss) before income taxes | 52 |
| | 153 |
| | (14 | ) | | 25 |
| | 216 |
|
| Provision (benefit) for income taxes | 18 |
| | 54 |
| | (5 | ) | | 6 |
| | 73 |
|
| Net income (loss) | $ | 34 |
| | $ | 99 |
| | $ | (9 | ) | | $ | 19 |
| | $ | 143 |
|
| Intersegment revenue | $ | (2 | ) | | $ | (1 | ) | | $ | 18 |
| | $ | (15 | ) | | $ | — |
|
| | | | | | | | | | |
| Average balances | | | | | | | | | |
| Loans held-for-sale | $ | 83 |
| | $ | 2,988 |
| | $ | — |
| | $ | — |
| | $ | 3,071 |
|
| Loans with government guarantees | — |
| | 450 |
| | — |
| | — |
| | 450 |
|
| Loans held-for-investment | 5,689 |
| | 6 |
| | — |
| | — |
| | 5,695 |
|
| Total assets | 5,798 |
| | 4,328 |
| | 36 |
| | 3,549 |
| | 13,711 |
|
| Deposits | 7,080 |
| | — |
| | 1,523 |
| | — |
| | 8,603 |
|
| |
| (1) | Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and CCD income for subservicing clients. |
| |
| (2) | Includes adjustment made to reclassify operating lease assets to loans held-for-investment. |
Note 2019 - Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards
We adopted the following accounting standard updates (ASU) during 2017,2018, none of which had a material impact to our financial statements:
|
| | | | |
| Standard | | Description | | Effective Date |
ASU 2016-172018-03 | | Consolidation (Topic 810): Interests Held Through Related Parties That are Under Common ControlTechnical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10) - Update to 2016-01 | | January 1, 20172018 |
ASU 2016-092018-02 | | Compensation - Income Statement-Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | | January 1, 2019 |
| ASU 2017-09 | | Update 2017-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentScope of Modification Accounting | | January 1, 20172018 |
ASU 2016-072017-05 | | InvestmentsOther Income - Equity MethodGains and Joint Ventures (Topic 323)Losses from the De-recognition of Non-financial Assets (Subtopic 610-20): SimplifyingClarifying the Transition to the Equity MethodScope of Asset De-recognition Guidance and Accounting for Partial Sales of Non-financial Assets | | January 1, 20172018 |
ASU 2016-062017-01 | | Derivatives and HedgingBusiness Combinations (Topic 815)805): Contingent Put and Call Options in Debt InstrumentsClarifying the Definition of a Business | | January 1, 20172018 |
ASU 2016-052016-18 | | Derivatives and HedgingStatement of Cash Flows (Topic 815)230): Effect of Derivative Contract Novations on Existing Hedge RelationshipsRestricted Cash | | January 1, 20172018 |
| ASU 2016-16 | | Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory | | January 1, 2018 |
| ASU 2016-15 | | Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments | | January 1, 2018 |
| ASU 2016-01 | | Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | | January 1, 2018 |
Accounting Standards Issued But Not Yet Adopted which had a Material Impact
The following ASUs have been issued and are expected to result in a significant change toadopted which impact our significant accounting policies and/or have a significant financial impact:
Revenue from Contracts with Customers - In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under the amended guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration in exchange for those goods or services.
Effective January 1, 2018, we have adopted the requirements of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all related amendments. We have implemented the guidance utilizing the modified retrospective approach which did not have a material impact on the Company's financial position or results of operations. As lease contracts and financial instruments, which include loans and securities, are excluded from the scope of this standard, the majority our revenue falls outside of the scope of Topic 606.
The adoption of this guidance does not result in changes to how revenue is recognized or the timing of recognition from our method prior to adoption. Revenue is recognized when obligations, under the terms of a contract with our customer, are satisfied, which generally occurs when services are performed. Revenue is measured as the amount of consideration we expect to receive in exchange for providing services.
The disaggregation of our revenue from contracts with customers is provided below.
|
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | Location of Revenue (1) | | 2018 | | 2017 | | 2018 | | 2017 |
| | | | (Dollars in millions) |
| Deposit account and other banking income | Deposit fees and charges | | $ | 4 |
| | $ | 4 |
| | $ | 8 |
| | $ | 7 |
|
| Interchange fees | Deposit fees and charges | | 1 |
| | 1 |
| | 2 |
| | 2 |
|
| Interchange fees | Other noninterest income | | 1 |
| | — |
| | 1 |
| | — |
|
| Wealth management | Other noninterest income | | 2 |
| | 2 |
| | 4 |
| | 3 |
|
| Total | | | $ | 8 |
| | $ | 7 |
| | $ | 15 |
| | $ | 12 |
|
| |
| (1) | Recognized within the Community Banking segment. |
Deposit account and other banking income - We charge depositors various deposit account service fees including those for outgoing wires, overdrafts, stop payments, and ATM fees. These fees are generated from a depositor’s option to purchase services offered under the contract and are only considered a contract when the depositor exercises their option to purchase these account services. Therefore we deem the term of our contracts with depositors to be day-to-day and do not extend beyond the services already provided. Deposit account and other banking fees are recorded at the point in time we perform the requested service.
Interchange income - We collect interchange fee income when debit cards that we have issued to our customers, are used in merchant transactions. Our performance obligation is satisfied and revenue is recognized at the point we initiate the payment of funds from a customer’s account to a merchant account.
Merchant fee income - We receive a percentage of merchant fees based upon card transactions processed through point of sale terminals at referred merchant locations. Our performance obligation is satisfied when our referral of a merchant to a payment processing vendor results in an executed agreement between the merchant and the vendor. Merchant fee revenue is recognized as received. Merchant fee income was less than $1 million for the three months ended June 30, 2018 and June 30, 2017
Wealth management revenue - We earn commission income through a revenue share program based on a tiered percentage of total gross commissions generated from the sales of investment and insurance services to Flagstar customers. Commissions are earned and our performance obligation has been satisfied at the point of sale or trade execution. Our portion of earned commissions is calculated, paid and recognized as revenue on a monthly basis.
We also receive revenue from portfolio management services. We receive payment for portfolio management services in advance at beginning of each quarter for services to be performed over the quarter which results an insignificant revenue liability. We recognize this revenue over the quarter on a straight-line basis, as we believe this is the most appropriate method to measure progress towards satisfaction of the performance obligation.
Derivatives and Hedging - In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments were designed to more closely align hedge accounting requirements with users’ risk management strategies. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. We do not expect adoptionThe Company has early adopted this ASU during the first quarter of this2018. The guidance to have a material impact on our Consolidated Financial Statements. However, the guidance is expected to provideprovides a broader range of hedge accounting opportunities and simplify the internalsimplifies documentation requirements for our existing cash flow hedge relationships. In conjunction with adoption of this ASU, the Company elected to transfer $144 million of investment securities from HTM to AFS during the first quarter of 2018, as permitted by the standard, which resulted in a de minimis impact to AOCI.
Accounting Standards Issued But Not Yet Adopted
The following ASUs have been issued and are expected to result in a significant change to our significant accounting policies and/or have a significant financial impact:
Credit Losses - In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU alters the current method for recognizing credit losses within the reserve account. Currently, an institution useswe use the incurred loss method, whereas the new guidance requires financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit losses). The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. We have established an internal steering committee to lead the implementation efforts. The steering committee is in the process of evaluating control and process framework, data, model, and resource requirements and areas where modifications will be required. We are currently evaluating the impact the adoption of the guidance will have on our Consolidated Financial Statements, and highlight that any impact will be contingent upon the underlying characteristics of the affected portfolio and macroeconomic and internal forecasts at adoption date.
Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Section A - Leases: Amendments to the FASB Accounting Standards Codification, Section B - Conforming Amendments Related to Leases: Amendment to the FASB Accounting Standards Codification, Section C - Background Information and Basis For Conclusions. Lessees will need which supersedes Topic 840. The guidance requires lessees to recognize substantially all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting. ASU 2016-02 is effective retrospectively for fiscal years beginning after December 15, 2018 and early adoption is permitted. The guidance in ASU 2016-02 supersedes Topic 840, Leases. Upon adoption and implementation, we expect to gross up assets and liabilities due to the recognition of lease liabilities and right of use assets associated with the underlying lease contracts. While we do not expect the adoption of the guidance to have a material impact on our Consolidated Statements of Operations given our current inventory of leases, review is ongoing and we will continue to evaluate the impact to the Consolidated Statements of Financial Condition and to capital.
Revenue from Contracts with Customers - In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under the amended guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration in exchange for those goods or services. The FASB has voted to approve a year deferral of the effective date from January 1, 2017 to January 1, 2018. In April 2016, the FASB clarified the following two aspects: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. In May 2016,2018, the FASB issued ASU 2016-12 Revenue from Contracts with Customers2018-01 Leases (Topic 606): Narrow-Scope Improvements and842), Land Easement Practical Expedients, to provide a limited number of changes to its revenue recognition standard. The amendments clarify the assessment of the likelihood that revenue will be collected from a contract, the guidanceExpedient for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. The amendment also specifies that a contract should be considered complete if all, or substantially all, of its revenue has been collected prior to making the transition to the new standard. In addition, the update clarifies the disclosure requirements for transition to the new standard by adjusting amounts from prior reporting periods. In December 2016, the FASB issued ASU 2016-20 Technical Corrections and ImprovementTransition to Topic 606, Revenue from Contracts with Customers. We will implement the revenue recognition guidance in the first quarter of 2018 utilizing the cumulative-effect approach. Our implementation of the guidance includes creating an inventory of revenue contracts and assessing whether the recognition of revenue associated with each contract will be impacted by the new guidance, particularly related to certain fees. Lease contracts and financial instruments, which include loans and securities, are excluded from the scope of this standard. Therefore,842, as we do not anticipate the implementation of the revenue recognition guidance tocurrently have land easements, this update does not currently have a material impact on our Consolidated Financial Statements. The initial scoping has been completed and the amount of in scope revenue is less than 3% of total revenue. Additionally, the recognition of revenue for in scope items is not anticipated to materially change such that we do not expect implementation of the revenue recognition guidance to have a material impact on our Consolidated Financial Statements or associated disclosures.financial impact.
The following ASUs have been issued and are not expected to have a material impact on our Consolidated Financial Statements and/or significant accounting policies:
|
| | | | |
| Standard | | Description | | Effective Date |
| ASU 2018-07 | | Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting | | January 1, 2019 |
| ASU 2017-11 | | Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope. | | January 1, 2019 |
ASU 2017-10 | | Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force) | | January 1, 2018 |
ASU 2017-09 | | Update 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting | | January 1, 2018 |
ASU 2017-08 | | Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities | | January 1, 2019 |
ASU 2017-07 | | Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost | | January 1, 2018 |
| ASU 2017-06 | | Plan Accounting - Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting | | January 1, 2019 |
ASU 2017-05 | | Other Income - Gains and Losses from the De-recognition of Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset De-recognition Guidance and Accounting for Partial Sales of Non-financial Assets | | January 1, 2018 |
ASU 2017-04 | | Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | | January 1, 2020 |
ASU 2017-01 | | Business Combinations (Topic 805): Clarifying the Definition of a Business | | January 1, 2018 |
ASU 2016-18 | | Statement of Cash Flows (Topic 230): Restricted Cash | | January 1, 2018 |
ASU 2016-16 | | Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory | | January 1, 2018 |
ASU 2016-15 | | Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments | | January 1, 2018 |
ASU 2016-04 | | Liabilities - Extinguishment of Liabilities (Subtopic 504-20): Recognition of Breakage for Certain Prepaid Stored-Value Products | | January 1, 2018 |
ASU 2016-01 | | Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | | January 1, 2018 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A discussion regarding our management of market risk is included in "Market Risk" in this report in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" which is incorporated herein by reference.
Item 4. Controls and Procedures
| |
| (a) | Evaluation of Disclosure Controls and Procedures. As of SeptemberJune 30, 2017,2018, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), an evaluation was performed by the Company’s management, including our principal executive and financial officers, regarding the design and effectiveness of our disclosure controls and procedures. Based upon that evaluation, the principal executive and financial officers have concluded that our current disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms as of SeptemberJune 30, 2017.2018. |
| |
| (b) | Changes in Internal Controls. There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(d) of the Exchange Act) during the three months ended SeptemberJune 30, 2017,2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
PART II
Item 1. Legal Proceedings
From time to time, the Company is party to legal proceedings incidental to its business. For further information, see Note 1716 - Legal Proceedings, Contingencies and Commitments.
Item 1A. Risk Factors
The Company believes that there have been no material changes to the risk factors previously disclosed in response to Item 1A1A. to Part I, of our Annual Report on Form 10-K for the fiscal year ended December 31, 20162017., with the exception of the following:
Our recently announced branch acquisition may fail to close or achieve the benefits currently anticipated.
We recently announced Flagstar Bank's agreement to acquire 52 branches from Well Fargo Bank, which we expect will close late in the fourth quarter of 2018, subject to regulatory approval and closing conditions. If regulatory approval is not obtained or closing conditions are not satisfied or waived, the acquisition will not be completed or may not be completed as planned. In addition, we may fail to realize all or any of the anticipated benefits of the acquisition, or those benefits may take longer to realize than expected. We may experience challenges related to the integration of the operations of the branches, including transition of data, integration of product offerings and the standardization of business practices. Complications associated with the acquisition could result in additional costs, loss of customers, damage to our reputation or other operational risks.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sale of Unregistered Securities
The Company made no sales of unregistered securities during the quarter ended SeptemberJune 30, 2017.2018.
Issuer Purchases of Equity Securities
The Company made no purchases of its equity securities during the quarter ended SeptemberJune 30, 2017.2018.
Item 3. Defaults upon Senior Securities
The Company had no defaults on senior securities.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
|
| | |
| Exhibit No. | | Description |
| | | |
| 2.1 | | |
| | |
| 3.1 | | |
| | | |
| 3.2 | | |
| | |
| 4.1 | | Indenture, dated July 11, 2016, between Flagstar Bancorp, Inc. as Issuers and Wilmington Trust, National Association, as Trustee and Collateral Agent, including the form of 6.125% senior secured note due 2021 (previously filed as Exhibit 4.1 to the Company's Current Report on Form 10-Q,8-K, dated NovemberJuly 11, 2016, and incorporated herein by reference). |
| | |
| 4.2 | | |
| | |
| 4.3 | | |
| | |
| 10.1 | | |
| | | |
| 11 | | |
| | | |
| 31.1 | | |
| | |
| 31.2 | | |
| | |
| 32.1 | | |
| | | |
| 32.2 | | |
| | |
| 101 | | Financial statements from Quarterly Report on Form 10-Q of the Company for the quarter ended SeptemberJune 30, 2017,2018, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | | | |
| | | | FLAGSTAR BANCORP, INC. |
| | | | Registrant |
| | | | |
| Date: | NovemberAugust 6, 20172018 | | /s/ Alessandro DiNello |
| | | | Alessandro DiNello |
| | | | President and Chief Executive Officer |
| | | | (Principal Executive Officer) |
| | | | |
| | | | /s/ James K. Ciroli |
| | | | James K. Ciroli |
| | | | Executive Vice President and Chief Financial Officer |
| | | | (Principal Financial Officer) |
EXHIBIT INDEX
|
| | |
| Exhibit No. | | Description |
| | | |
| 2.1 | | |
| | |
| 3.1 | | |
| | | |
| 3.2 | | |
| | |
| 4.1 | | Indenture, dated July 11, 2016, between Flagstar Bancorp, Inc. as Issuers and Wilmington Trust, National Association, as Trustee and Collateral Agent, including the form of 6.125% senior secured note due 2021 (previously filed as Exhibit 4.1 to the Company's Current Report on Form 10-Q,8-K, dated NovemberJuly 11, 2016, and incorporated herein by reference). |
| | |
| 4.2 | | |
| | |
| 4.3 | | |
| | |
| 10.1 | | |
| | | |
| 11 | | |
| | | |
| 31.1 | | |
| | |
| 31.2 | | |
| | |
| 32.1 | | |
| | | |
| 32.2 | | |
| | |
| 101 | | Financial statements from Quarterly Report on Form 10-Q of the Company for the quarter ended SeptemberJune 30, 2017,2018, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements. |
