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, 20172020
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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
Flagstar Bancorp, Inc.(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 | 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)13(a) of the SecuritiesExchange 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☒.
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading symbol | Name of each exchange on which registered |
Common stock | FBC | New York Stock Exchange |
As of November 2, 2017, 57,181,536August 9, 2020, 56,943,985 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, 20172020
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Item 1. | | |
| Consolidated Statements of Financial Condition – SeptemberJune 30, 20172020 (unaudited) and December 31, 2016 (unaudited)2019 | |
| Consolidated Statements of Operations – For the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited) | |
| Consolidated Statements of Comprehensive Income – For the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited) | |
| Consolidated Statements of Stockholders’ Equity – For the ninethree and six months ended SeptemberJune 30, 20172020 and 20162019 (unaudited) | |
| Consolidated Statements of Cash Flows – For the ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited) | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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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 |
AFSACL | | Allowance for Credit Losses | | HOLA | | Home Owners Loan Act |
AFS | | Available for Sale | | HELOCHome equity | | Home Equity Lines of CreditSecond Mortgages, HELOANs, HELOCs |
Agencies | | Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association, Collectively | | HELOANHTM | | Home Equity LoanHeld to Maturity |
ALCO | | Asset Liability Committee | | Home equityHPI | | second mortgages, HELOANs, HELOCsHousing Price Index |
ALLL | | Allowance for Loan & Lease Losses | | HTMLIBOR | | Held to MaturityLondon Interbank Offered Rate |
AOCI | | Accumulated Other Comprehensive Income (Loss) | | LIBORLHFI | | London Interbank Offered RateLoans Held-for-Investment |
ASU | | Accounting Standards Update | | LHFILHFS | | Loans Held-for-InvestmentHeld-for-Sale |
Basel III | | Basel Committee on Banking Supervision Third Basel Accord | | LHFSLTV | | Loans Held-for-SaleLoan-to-Value Ratio |
C&I | | Commercial and Industrial | | LTVManagement | | Loan-to-ValueFlagstar Bancorp’s Management |
CDARS | | Certificates of Deposit Account Registry Service | | ManagementMBS | | Flagstar Bancorp’s ManagementMortgage-Backed Securities |
CFPBCECL | | Consumer Financial Protection BureauCurrent Expected Credit Losses | | MBIAMD&A | | MBIA Insurance CorporationManagement's Discussion and Analysis |
CLTVCET1 | | Common Equity Tier 1 | | MSR | | Mortgage Servicing Rights |
CLTV | | Combined Loan to Value Ratio | | MBSN/A | | Mortgage-Backed SecuritiesNot Applicable |
Common Stock | | Common Shares | | MD&AN/M | | Management's Discussion and AnalysisNot Meaningful |
CRE | | Commercial Real Estate | | MSRNBV | | Mortgage Servicing RightsNet Book Value |
DFASTDeposit Beta | | Dodd-Frank Stress TestThe change in the annualized cost of our deposits, compared to the change in the Federal Reserve discount rate | | N/ANYSE | | Not ApplicableNew York Stock Exchange |
DOJ | | United States Department of Justice | | NYSEOCC | | New York Stock Exchange |
DTA | | Deferred Tax Asset | | OCC | | Office of the Comptroller of the Currency |
EVEDOJ Liability | | 2012 Settlement Agreement with the Department of Justice | | OCI | | Other Comprehensive Income (Loss) |
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 | | QTLRegulatory Agencies | | Qualified Thrift LendingBoard of Governors of the Federal Reserve, Office of the Comptroller of the Currency, U.S. Department of the Treasury, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Securities and Exchange Commission |
FASB | | Financial Accounting Standards Board | | RWA | | Risk Weighted Assets |
FDIC | | Federal Deposit Insurance Corporation | | SECREO | | Real estate owned and other nonperforming assets, net |
Federal Reserve | | Board of Governors of the Federal Reserve System | | RMBS | | Residential Mortgage-Backed Securities |
FHA | | Federal Housing Administration | | RWA | | Risk Weighted Assets |
FHLB | | Federal Home Loan Bank | | SEC | | Securities and Exchange Commission |
FEMAFICO | | Federal Emergency Management Agency | | SFR | | Single Family Residence |
FHA | | Federal Housing Administration | | TARP Preferred | | Troubled Asset Relief Program Fixed Rate Cumulative Perpetual Preferred Stock, Series C |
FHLB | | Federal Home Loan Bank | | TDR | | Trouble Debt Restructuring |
FICO | | Fair Isaac Corporation | | UPBSNC | | Unpaid Principal BalanceShared National Credit |
FRB | | Federal Reserve Bank | | U.S. TreasurySOFR | | United States Department of TreasurySecured Oversight Financing Rate |
Freddie Mac | | Federal Home Loan Mortgage Corporation | | VIETDR | | Variable Interest EntitiesTroubled Debt Restructuring |
FTE | | Full Time Equivalent Employees | | XBRLTPO | | eXtensible Business Reporting LanguageThird Party Originator |
GAAP | | United States Generally Accepted Accounting Principles | | UPB | | Unpaid Principal Balance |
GNMA | | Government National Mortgage Association | | U.S. Treasury | | United States Department of Treasury |
HELOC | | Home Equity Lines of Credit | | VIE | | Variable Interest Entities |
HELOAN | | Home Equity Loan | | 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 2017,2020, 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 20162019 Annual Report on Form 10-K for the year ended December 31, 2016.2019.
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 3842 of this Form 10-Q, Part II, Item 1A, Risk Factors of this Form 10-Q and Part I, Item 1A, Risk Factors of Flagstar Bancorp, Inc.'s 20162019 Annual Report oron Form 10-K for the year ended December 31, 2016.2019. 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 5th6th largest bank mortgage originator in the nation.nation and the 6th largest subservicer of mortgage loans nationwide. At SeptemberJune 30, 2017,2020, we had 3,4954,641 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 September 30, 2017, we are considered a controlled company for NYSE purposes, because approximately 62.3 percent of our common stock is owned by MP Thrift Investments, L.P. which is managed by MatlinPatterson, a leading global alternative asset manager."FBC".
We have a unique, Our relationship-based business model which leverages our full-service bank’s capabilities withand our national mortgage customer baseplatform to create and build enduring commercial 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 specializedfinancial 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, 2017,2020, we operated 99 full service160 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 Michigan, Indiana, California, Wisconsin, Ohio and contiguous states.
We originate mortgages through a wholesale network of brokers and correspondents in all 50 states as well as 95and our own loan officers, which includes our direct lending team, from 89 retail locations in 2728 states representing the combined retail branchesand 3 call centers. We are also a leading national servicer of Flagstarmortgage loans and Opes Advisors' mortgage division. The Bank has the opportunity to expand these relationships by providing warehouseprovide complementary ancillary offerings including MSR lending, mortgage servicing advance lending and other services to our third party originators. Servicing and subservicing of loans provides fee income and generates a stable long-term source of funding through company controlled deposits.MSR recapture services.
We believe our transformation into a strong commercial bank, our flexible mortgage servicing platform, and focus on service creates a significant competitive advantage 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 advantage of opportunities to deliver attractive shareholder returns over the long term.
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 additionalfurther information, please see MD&A - Operating Segments and Note 1917 - Segment Information.
Selected Financial Ratios
(Dollars | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | Six Months Ended, | |
| June 30, 2020 | March 31, 2020 | | June 30, 2020 | June 30, 2019 |
| (In millions and percentages) | | | | |
Selected Mortgage Statistics: (5) | | | | | |
Mortgage rate lock commitments (fallout-adjusted) (1) | $ | 13,800 | | $ | 11,200 | | | $ | 25,000 | | $ | 14,900 | |
Mortgage loans originated | $ | 12,200 | | $ | 8,600 | | | $ | 20,700 | | $ | 14,200 | |
Mortgage loans sold and securitized | $ | 12,900 | | $ | 7,500 | | | $ | 20,400 | | $ | 14,000 | |
Selected Ratios: | | | | | |
Interest rate spread (2) | 2.52 | % | 2.31 | % | | 2.41 | % | 2.63 | % |
Net interest margin | 2.86 | % | 2.81 | % | | 2.83 | % | 3.08 | % |
Return on average assets | 1.77 | % | 0.78 | % | | 1.30 | % | 1.01 | % |
Return on average common equity | 23.47 | % | 9.82 | % | | 16.86 | % | 11.94 | % |
Return on average tangible common equity (3) | 26.16 | % | 11.46 | % | | 19.07 | % | 14.33 | % |
Efficiency ratio | 54.3 | % | 77.1 | % | | 62.5 | % | 74.8 | % |
Effective tax provision rate | 21.5 | % | 18.5 | % | | 20.6 | % | 18.7 | % |
Average Balances: | | | | | |
Average interest-earning assets | $ | 23,692 | | $ | 21,150 | | | $ | 22,421 | | $ | 17,030 | |
Average interest-paying liabilities | $ | 15,119 | | $ | 14,480 | | | $ | 14,800 | | $ | 12,702 | |
Average stockholders' equity | $ | 1,977 | | $ | 1,854 | | | $ | 1,915 | | $ | 1,626 | |
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| June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | June 30, 2019 |
| (In millions, except per share data and percentages) | | | | | | | | |
Selected Statistics: | | | | | | | | | |
Book value per common share | $ | 34.62 | | | $ | 32.46 | | | $ | 31.57 | | | $ | 30.69 | | | $ | 29.31 | |
Tangible book value per share (4) | $ | 31.74 | | | $ | 29.52 | | | $ | 28.57 | | | $ | 27.62 | | | $ | 26.16 | |
Number of common shares outstanding | 56,943,979 | | | 56,729,789 | | | 56,631,236 | | | 56,510,341 | | | 56,483,937 | |
Common equity-to-assets ratio | 7.18 | % | | 6.87 | % | | 7.68 | % | | 7.88 | % | | 8.19 | % |
Tangible common equity to assets ratio (4) | 6.58 | % | | 6.25 | % | | 6.95 | % | | 7.08 | % | | 7.31 | % |
Capitalized value of mortgage servicing rights | 0.87 | % | | 0.95 | % | | 1.21 | % | | 1.14 | % | | 1.23 | % |
Bancorp total capital (to adjusted risk weighted assets) | 11.32 | % | | 11.18 | % | | 11.52 | % | | 11.54 | % | | 11.51 | % |
Bank total capital (to adjusted risk weighted assets) | 11.05 | % | | 11.30 | % | | 11.73 | % | | 12.06 | % | | 12.00 | % |
Number of bank branches | 160 | | | 160 | | | 160 | | | 160 | | | 160 | |
Number of FTE employees | 4,641 | | | 4,415 | | | 4,453 | | | 4,171 | | | 4,026 | |
(1)Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in millions, except share data)the pipeline that are not expected to close based on previous historical experience and the impact of changes in interest rates.
(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.
(3)Excludes goodwill and intangibles of $164 million, $167 million, $170 million, $174 million and $178 million at June 30, 2020, March 31, 2020, December 31, 2019, September 30, 2019 and June 30, 2019, respectively. See Non-GAAP Financial Measures for further information.
(4)Excludes goodwill, intangible assets and the associated amortization, net of tax. See Non-GAAP Financial Measures for further information.
(5)Rounded to nearest hundred million.
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 (1) | | 2017 | | 2016 (1) |
Selected Mortgage Statistics: | | | | | | | |
Mortgage rate lock commitments (fallout-adjusted) (2) | $ | 8,898 |
| | $ | 8,291 |
| | $ | 23,896 |
| | $ | 23,281 |
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Mortgage loans sold and securitized | 8,924 |
| | 8,723 |
| | 22,397 |
| | 23,611 |
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Selected Ratios: | | | | | | | |
Interest rate spread | 2.58 | % | | 2.36 | % | | 2.56 | % | | 2.43 | % |
Net interest margin | 2.78 | % | | 2.58 | % | | 2.74 | % | | 2.62 | % |
Return on average assets | 0.99 | % | | 1.61 | % | | 0.94 | % | | 1.40 | % |
Return on average equity | 11.10 | % | | 16.53 | % | | 10.23 | % | | 12.59 | % |
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 | % |
Efficiency ratio | 73.5 | % | | 59.9 | % | | 73.9 | % | | 66.9 | % |
Effective tax provision rate | 32.4 | % | | 34.3 | % | | 32.3 | % | | 33.8 | % |
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 |
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Average interest paying liabilities | $ | 12,297 |
| | $ | 9,773 |
| | $ | 11,481 |
| | $ | 9,600 |
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Average stockholders' equity | $ | 1,471 |
| | $ | 1,379 |
| | $ | 1,412 |
| | $ | 1,515 |
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| September 30, 2017 | | December 31, 2016 | | September 30, 2016 (1) |
Selected Statistics: | | | | | |
Book value per common share | $ | 25.38 |
| | $ | 23.50 |
| | $ | 22.72 |
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Tangible book value per share (3)
| $ | 25.01 |
| | $ | 23.50 |
| | $ | 22.72 |
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Number of common shares outstanding | 57,181,536 |
| | 56,824,802 |
| | 56,597,271 |
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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 | % |
Capitalized value of MSRs | 1.15 | % | | 1.07 | % | | 0.96 | % |
Bancorp Tier 1 leverage (to adjusted avg. total assets) (4) | 8.80 | % | | 8.88 | % | | 8.88 | % |
Bank Tier 1 leverage (to adjusted avg. total assets) | 9.38 | % | | 10.52 | % | | 10.55 | % |
Number of banking centers | 99 |
| | 99 |
| | 99 |
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Number of FTE | 3,495 |
| | 2,886 |
| | 2,881 |
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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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(3) | Excludes goodwill and intangibles of $21 million, zero, and zero at September 30, 2017, December 31, 2016, and September 30, 2016, respectively, included in Other Assets on the Consolidated Statement of Financial Condition. See Non-GAAP Financial Measures for further information. |
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(4) | Basel III transitional. |
Results of Operations
Executive Overview
The third quarter 2017 resulted in solid earningsfollowing table summarizes our results of $40operations for the periods indicated:
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| Three Months Ended, | | | | Six Months Ended, | | |
| June 30, 2020 | March 31, 2020 | Change | | June 30, 2020 | June 30, 2019 | Change |
| (Dollars in millions, except per share data) | | | | | | |
Net interest income | $ | 168 | | $ | 148 | | $ | 20 | | | $ | 316 | | $ | 264 | | $ | 52 | |
Provision for credit losses | 102 | | 14 | | 88 | | | 116 | | 17 | | 99 | |
Total noninterest income | 378 | | 157 | | 221 | | | 535 | | 277 | | 258 | |
Total noninterest expense | 296 | | 235 | | 61 | | | 532 | | 405 | | 127 | |
Provision for income taxes | 32 | | 10 | | 22 | | | 42 | | 22 | | 20 | |
Net income | $ | 116 | | $ | 46 | | $ | 70 | | | $ | 161 | | $ | 97 | | $ | 64 | |
Income per share | | | | | | | |
Basic | $ | 2.04 | | $ | 0.80 | | $ | 1.24 | | | $ | 2.85 | | $ | 1.71 | | $ | 1.14 | |
Diluted | $ | 2.03 | | $ | 0.80 | | $ | 1.23 | | | $ | 2.83 | | $ | 1.69 | | $ | 1.14 | |
Overview
Net income was $116 million, or $0.70$2.03 per diluted share for the quarter ended June 30, 2020 compared
to first quarter 2020 net income of $46 million, or $0.80 per diluted share. Our transformation into a strong commercial bank continued this quarter. InFor the ninesix months ended SeptemberJune 30, 2017,2020, net interest income was $47 million on average earning asset growth of $1.8 billion, or 15 percent led by increases in our commercial loan portfolio. The expansion of our commercial loan portfolio has generated net interest income growth and provides earnings stability in a challenging mortgage environment. We also continued to maintain solid liquidity and disciplined deposit growth, which saw total average deposits increase $244$161 million, or 3 percent in the first nine months$2.83 per diluted share as compared to net income of 2017 driven by higher retail deposits.$97 million, or $1.69 per diluted share for same period a year ago.
Even in the currently challenging mortgage market, our mortgage closings increased 3 percent in the nine months ended September 30, 2017 comparedCompared to the first nine months ended September 30, 2016 driven by our 2017 acquisitions of Opes Advisors (Opes) and 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.
Ourquarter 2020, noninterest income increased $221 million while noninterest expense only increased $47 million 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$61 million. These increases 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.
Earnings Performance
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| (Dollars in millions, except share data) |
Net interest income | $ | 103 |
| | $ | 80 |
| | $ | 23 |
| | $ | 283 |
| | $ | 236 |
| | $ | 47 |
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Provision (benefit) for loan losses | 2 |
| | 7 |
| | (5 | ) | | 4 |
| | (9 | ) | | 13 |
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Total noninterest income (1) | 130 |
| | 156 |
| | (26 | ) | | 346 |
| | 389 |
| | (43 | ) |
Total noninterest expense | 171 |
| | 142 |
| | 29 |
| | 465 |
| | 418 |
| | 47 |
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Provision for income taxes | 20 |
| | 30 |
| | (10 | ) | | 52 |
| | 73 |
| | (21 | ) |
Net income | $ | 40 |
| | $ | 57 |
| | $ | (17 | ) | | $ | 108 |
| | $ | 143 |
| | $ | (35 | ) |
Income per share | | | | | | | | | | | |
Basic | $ | 0.71 |
| | $ | 0.98 |
| | $ | (0.27 | ) | | $ | 1.90 |
| | $ | 2.21 |
| | $ | (0.31 | ) |
Diluted | $ | 0.70 |
| | $ | 0.96 |
| | $ | (0.26 | ) | | $ | 1.86 |
| | $ | 2.16 |
| | $ | (0.30 | ) |
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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 $17 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. Net interest income increased $23 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016 primarily driven by a $2.4 billion increase in 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 million 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 resulting 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 lowerhigher net gain on loan sales and the related costs. Gain on sale margin increased 139 basis points, to 2.19 percent as compared to 0.80 percent for the first quarter 2020 driven by historically low interest rates fueling a $24very strong market environment and we managed our volume levels within our channels and products to fit our fulfillment capacity.
Net interest income increased $20 million driven by a $2.5 billion increase in average earnings assets lead by our warehouse business. Net interest margin in the second quarter of 2020 was 2.86 percent, a 5 basis point increase from the prior quarter primarily driven by a decrease in deposit rates, which benefited from higher custodial balances, the fair valuematurity of higher cost CDs and the DOJ settlement liability recognizedexpiration of promotional rates on savings accounts, and the relative maintenance of yields on interest earning assets due to rate floors in our warehouse business.
Partially offsetting the favorable results discussed above was a $102 million provision for credit losses to increase our ACL as a result of our forecasts of economic conditions. These forecasts reflect our view that the economy will continue to be challenged by the response to the COVID-19 pandemic, especially in the third quartercommercial real estate sector, for an extended period 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.time.
Net Interest Income
The following tables present details on our net interest margin and net interest income on a consolidated basis,basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | | | |
| June 30, 2020 | | | | March 31, 2020 | | |
| Average Balance | Interest | Annualized Yield/ Rate | | Average Balance | Interest | Annualized Yield/ Rate |
| (Dollars in millions) | | | | | | |
Interest-Earning Assets | | | | | | | |
Loans held-for-sale | $ | 5,645 | | $ | 48 | | 3.42 | % | | $ | 5,248 | | $ | 49 | | 3.72 | % |
Loans held-for-investment | | | | | | | |
Residential first mortgage | 2,822 | | 24 | | 3.41 | % | | 3,062 | | 27 | | 3.51 | % |
Home equity | 1,001 | | 9 | | 3.78 | % | | 1,019 | | 12 | | 4.73 | % |
Other | 881 | | 12 | | 5.42 | % | | 816 | | 12 | | 5.77 | % |
Total consumer loans | 4,704 | | 45 | | 3.87 | % | | 4,897 | | 51 | | 4.14 | % |
Commercial real estate | 3,101 | | 28 | | 3.64 | % | | 2,949 | | 34 | | 4.61 | % |
Commercial and industrial | 2,006 | | 17 | | 3.34 | % | | 1,667 | | 19 | | 4.52 | % |
Warehouse lending | 3,785 | | 38 | | 3.88 | % | | 2,310 | | 25 | | 4.30 | % |
Total commercial loans | 8,892 | | 83 | | 3.67 | % | | 6,926 | | 78 | | 4.48 | % |
Total loans held-for-investment (1) | 13,596 | | 128 | | 3.74 | % | | 11,823 | | 129 | | 4.34 | % |
Loans with government guarantees | 858 | | 4 | | 1.97 | % | | 811 | | 3 | | 1.38 | % |
Investment securities | 3,417 | | 21 | | 2.42 | % | | 3,060 | | 19 | | 2.47 | % |
Interest-earning deposits | 176 | | — | | 0.11 | % | | 208 | | 1 | | 1.75 | % |
Total interest-earning assets | 23,692 | | 201 | | 3.38 | % | | 21,150 | | 201 | | 3.78 | % |
Other assets | 2,569 | | | | | 2,263 | | | |
Total assets | $ | 26,261 | | | | | $ | 23,413 | | | |
Interest-Bearing Liabilities | | | | | | | |
Retail deposits | | | | | | | |
Demand deposits | $ | 1,800 | | $ | 1 | | 0.22 | % | | $ | 1,587 | | $ | 3 | | 0.75 | % |
Savings deposits | 3,476 | | 4 | | 0.52 | % | | 3,384 | | 9 | | 1.07 | % |
Money market deposits | 716 | | — | | 0.12 | % | | 687 | | 1 | | 0.32 | % |
Certificates of deposit | 1,987 | | 10 | | 2.00 | % | | 2,254 | | 12 | | 2.24 | % |
Total retail deposits | 7,979 | | 15 | | 0.78 | % | | 7,912 | | 25 | | 1.28 | % |
Government deposits | 1,088 | | 2 | | 0.63 | % | | 1,131 | | 3 | | 1.15 | % |
Wholesale deposits and other | 738 | | 4 | | 2.07 | % | | 581 | | 4 | | 2.39 | % |
Total interest-bearing deposits | 9,805 | | 21 | | 0.86 | % | | 9,624 | | 32 | | 1.33 | % |
Short-term FHLB advances and other | 3,753 | | 2 | | 0.26 | % | | 3,566 | | 12 | | 1.35 | % |
Long-term FHLB advances | 1,068 | | 3 | | 1.13 | % | | 794 | | 3 | | 1.29 | % |
Other long-term debt | 493 | | 7 | | 4.99 | % | | 496 | | 6 | | 5.33 | % |
Total interest-bearing liabilities | 15,119 | | 33 | | 0.86 | % | | 14,480 | | 53 | | 1.46 | % |
Noninterest-bearing deposits | | | | | | | |
Retail deposits and other | 1,687 | | | | | 1,395 | | | |
Custodial deposits (2) | 6,223 | | | | | 4,776 | | | |
Total non-interest bearing deposits | 7,910 | | | | | 6,171 | | | |
Other liabilities | 1,255 | | | | | 908 | | | |
Stockholders’ equity | 1,977 | | | | | 1,854 | | | |
Total liabilities and stockholders' equity | $ | 26,261 | | | | | $ | 23,413 | | | |
Net interest-earning assets | 8,573 | | | | | 6,671 | | | |
Net interest income | | $ | 168 | | | | | $ | 148 | | |
Interest rate spread (3) | | | 2.52 | % | | | | 2.31 | % |
Net interest margin (4) | | | 2.86 | % | | | | 2.81 | % |
Ratio of average interest-earning assets to interest-bearing liabilities | | | 156.7 | % | | | | 146.1 | % |
Total average deposits | 17,715 | | | | | 15,795 | | | |
(1)Includes nonaccrual loans. For further information on nonaccrual loans, see Note 4 - Loans Held-for-Investment.
(2)Includes noninterest-bearing custodial 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 fromdivided by average interest-earning assets.
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended, | | | | | | |
| June 30, 2020 | | | | June 30, 2019 | | |
| Average Balance | Interest | Annualized Yield/ Rate | | Average Balance | Interest | Annualized Yield/ Rate |
| (Dollars in millions) | | | | | | |
Interest-Earning Assets | | | | | | | |
Loans held-for-sale | $ | 5,447 | | $ | 97 | | 3.56 | % | | $ | 3,403 | | $ | 79 | | 4.63 | % |
Loans held-for-investment | | | | | | | |
Residential first mortgage | 2,942 | | 51 | | 3.46 | % | | 3,095 | | 56 | | 3.63 | % |
Home equity | 1,010 | | 21 | | 4.26 | % | | 780 | | 22 | | 5.58 | % |
Other | 848 | | 24 | | 5.59 | % | | 438 | | 15 | | 6.91 | % |
Total consumer loans | 4,800 | | 96 | | 4.01 | % | | 4,313 | | 93 | | 4.32 | % |
Commercial real estate | 3,025 | | 63 | | 4.11 | % | | 2,322 | | 66 | | 5.66 | % |
Commercial and industrial | 1,836 | | 36 | | 3.88 | % | | 1,669 | | 45 | | 5.32 | % |
Warehouse lending | 3,048 | | 62 | | 4.04 | % | | 1,589 | | 42 | | 5.30 | % |
Total commercial loans | 7,909 | | 161 | | 4.03 | % | | 5,580 | | 153 | | 5.46 | % |
Total loans held-for-investment (1) | 12,709 | | 257 | | 4.02 | % | | 9,893 | | 246 | | 4.96 | % |
Loans with government guarantees | 834 | | 7 | | 1.68 | % | | 478 | | 7 | | 2.95 | % |
Investment securities | 3,239 | | 40 | | 2.45 | % | | 3,081 | | 44 | | 2.83 | % |
Interest-earning deposits | 192 | | 1 | | 1.00 | % | | 175 | | 2 | | 2.47 | % |
Total interest-earning assets | 22,421 | | 402 | | 3.57 | % | | 17,030 | | 378 | | 4.43 | % |
Other assets | 2,416 | | | | | 2,176 | | | |
Total assets | $ | 24,837 | | | | | $ | 19,206 | | | |
Interest-Bearing Liabilities | | | | | | | |
Retail deposits | | | | | | | |
Demand deposits | $ | 1,693 | | $ | 4 | | 0.47 | % | | $ | 1,271 | | $ | 5 | | 0.76 | % |
Savings deposits | 3,433 | | 14 | | 0.79 | % | | 3,140 | | 17 | | 1.06 | % |
Money market deposits | 701 | | 1 | | 0.22 | % | | 762 | | 1 | | 0.30 | % |
Certificates of deposit | 2,120 | | 22 | | 2.13 | % | | 2,550 | | 28 | | 2.24 | % |
Total retail deposits | 7,947 | | 41 | | 1.03 | % | | 7,723 | | 51 | | 1.32 | % |
Government deposits | 1,110 | | 5 | | 0.89 | % | | 1,149 | | 9 | | 1.51 | % |
Wholesale deposits and other | 659 | | 7 | | 2.21 | % | | 402 | | 4 | | 2.30 | % |
Total interest-bearing deposits | 9,716 | | 53 | | 1.09 | % | | 9,274 | | 64 | | 1.39 | % |
Short-term FHLB advances and other | 3,659 | | 14 | | 0.79 | % | | 2,679 | | 34 | | 2.53 | % |
Long-term FHLB advances | 931 | | 6 | | 1.20 | % | | 254 | | 2 | | 1.67 | % |
Other long-term debt | 494 | | 13 | | 5.16 | % | | 495 | | 14 | | 5.84 | % |
Total interest-bearing liabilities | 14,800 | | 86 | | 1.16 | % | | 12,702 | | 114 | | 1.80 | % |
Noninterest-bearing deposits | | | | | | | |
Retail deposits and other | 1,541 | | | | | 1,258 | | | |
Custodial deposits (2) | 5,499 | | | | | 3,004 | | | |
Total non-interest bearing deposits | 7,040 | | | | | 4,262 | | | |
Other liabilities | 1,082 | | | | | 616 | | | |
Stockholders’ equity | 1,915 | | | | | 1,626 | | | |
Total liabilities and stockholders' equity | $ | 24,837 | | | | | $ | 19,206 | | | |
Net interest-earning assets | 7,622 | | | | | 4,328 | | | |
Net interest income | | $ | 316 | | | | | $ | 264 | | |
Interest rate spread (3) | | | 2.41 | % | | | | 2.63 | % |
Net interest margin (4) | | | 2.83 | % | | | | 3.08 | % |
Ratio of average interest-earning assets to interest-bearing liabilities | | | 145.9 | % | | | | 134.1 | % |
Total average deposits | 16,755 | | | | | 13,536 | | | |
(1)Includes nonaccrual loans. For further information on nonaccrual loans, see Note 4 - Loans Held-for-Investment.
(2)Includes noninterest-bearing custodial 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 liabilities, expressed in dollars and yields:rates of interest paid on interest-bearing liabilities.
(4)Net interest margin is net interest income divided by average interest-earning assets.
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
| Average Balance | Interest | Annualized Yield/ Rate | | Average Balance | Interest | Annualized Yield/ Rate |
| (Dollars in millions) |
Interest-Earning Assets | | | | | | | |
Loans held-for-sale | $ | 4,476 |
| $ | 45 |
| 3.99 | % | | $ | 3,416 |
| $ | 30 |
| 3.51 | % |
Loans held-for-investment | | | | | | | |
Residential first mortgage | 2,594 |
| 22 |
| 3.32 | % | | 2,090 |
| 17 |
| 3.17 | % |
Home equity | 486 |
| 6 |
| 5.11 | % | | 460 |
| 6 |
| 5.03 | % |
Other | 26 |
| — |
| 4.52 | % | | 30 |
| — |
| 4.59 | % |
Total Consumer loans | 3,106 |
| 28 |
| 3.61 | % | | 2,580 |
| 23 |
| 3.52 | % |
Commercial Real Estate | 1,646 |
| 19 |
| 4.43 | % | | 1,082 |
| 9 |
| 3.43 | % |
Commercial and Industrial | 1,073 |
| 13 |
| 4.77 | % | | 633 |
| 7 |
| 4.27 | % |
Warehouse Lending | 978 |
| 12 |
| 4.82 | % | | 1,553 |
| 17 |
| 4.21 | % |
Total Commercial loans | 3,697 |
| 44 |
| 4.63 | % | | 3,268 |
| 33 |
| 3.96 | % |
Total loans held-for-investment (1) | 6,803 |
| 72 |
| 4.16 | % | | 5,848 |
| 56 |
| 3.77 | % |
Loans with government guarantees | 264 |
| 3 |
| 4.58 | % | | 432 |
| 4 |
| 3.88 | % |
Investment securities | 3,101 |
| 20 |
| 2.58 | % | | 2,516 |
| 16 |
| 2.55 | % |
Interest-earning deposits | 93 |
| — |
| 1.23 | % | | 106 |
| — |
| 0.48 | % |
Total interest-earning assets | 14,737 |
| 140 |
| 3.77 | % | | 12,318 |
| 106 |
| 3.42 | % |
Other assets | 1,702 |
| | | | 1,830 |
| | |
Total assets | $ | 16,439 |
| | | | $ | 14,148 |
| | |
Interest-Bearing Liabilities | | | | | | | |
Retail deposits | | | | | | | |
Demand deposits | $ | 489 |
| $ | — |
| 0.14 | % | | $ | 509 |
| $ | — |
| 0.20 | % |
Savings deposits | 3,838 |
| 7 |
| 0.76 | % | | 3,751 |
| 8 |
| 0.77 | % |
Money market deposits | 276 |
| — |
| 0.57 | % | | 250 |
| — |
| 0.41 | % |
Certificates of deposit | 1,182 |
| 4 |
| 1.19 | % | | 1,071 |
| 3 |
| 1.05 | % |
Total retail deposits | 5,785 |
| 11 |
| 0.78 | % | | 5,581 |
| 11 |
| 0.75 | % |
Government deposits | | | | | | | |
Demand deposits | 250 |
| — |
| 0.43 | % | | 243 |
| — |
| 0.39 | % |
Savings deposits | 362 |
| 1 |
| 0.71 | % | | 478 |
| 1 |
| 0.52 | % |
Certificates of deposit | 329 |
| 1 |
| 0.89 | % | | 355 |
| — |
| 0.52 | % |
Total government deposits | 941 |
| 2 |
| 0.70 | % | | 1,076 |
| 1 |
| 0.49 | % |
Wholesale deposits and other | 35 |
| — |
| 1.49 | % | | — |
| — |
| —% |
|
Total interest-bearing deposits | 6,761 |
| 13 |
| 0.78 | % | | 6,657 |
| 12 |
| 0.71 | % |
Short-term Federal Home Loan Bank advances and other | 3,809 |
| 11 |
| 1.17 | % | | 1,073 |
| 1 |
| 0.44 | % |
Long-term Federal Home Loan Bank advances | 1,234 |
| 6 |
| 1.99 | % | | 1,576 |
| 7 |
| 1.81 | % |
Other long-term debt | 493 |
| 7 |
| 5.09 | % | | 467 |
| 6 |
| 4.86 | % |
Total interest-bearing liabilities | 12,297 |
| 37 |
| 1.19 | % | | 9,773 |
| 26 |
| 1.06 | % |
Noninterest-bearing deposits (2) | 2,244 |
| | | | 2,469 |
| | |
Other liabilities | 427 |
| | | | 527 |
| | |
Stockholders’ equity | 1,471 |
| | | | 1,379 |
| | |
Total liabilities and stockholders' equity | $ | 16,439 |
| | | | $ | 14,148 |
| | |
Net interest-earning assets | $ | 2,440 |
| | | | $ | 2,545 |
| | |
Net interest income | | $ | 103 |
| | | | $ | 80 |
| |
Interest rate spread (3) | | | 2.58 | % | | | | 2.36 | % |
Net interest margin (4) | | | 2.78 | % | | | | 2.58 | % |
Ratio of average interest-earning assets to interest-bearing liabilities | | | 119.9 | % | | | | 126.0 | % |
| |
(1) | Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 4 - Loans Held-for-Investment. |
| |
(2) | Includes noninterest-bearing company controlled 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, |
| 2017 | | 2016 |
| Average Balance | Interest | Annualized Yield/ Rate | | Average Balance | Interest | Annualized Yield/ Rate |
| (Dollars in millions) |
Interest-Earning Assets | | | | | | | |
Loans held-for-sale | $ | 4,014 |
| $ | 119 |
| 3.96 | % | | $ | 3,071 |
| $ | 83 |
| 3.64 | % |
Loans held-for-investment | | | | |
| | |
Residential first mortgage | 2,497 |
| 62 |
| 3.34 | % | | 2,365 |
| 56 |
| 3.14 | % |
Home equity | 453 |
| 17 |
| 5.04 | % | | 485 |
| 19 |
| 5.23 | % |
Other | 26 |
| 1 |
| 4.52 | % | | 29 |
| 1 |
| 4.82 | % |
Total Consumer loans | 2,976 |
| 80 |
| 3.61 | % | | 2,879 |
| 76 |
| 3.51 | % |
Commercial Real Estate | 1,482 |
| 47 |
| 4.15 | % | | 936 |
| 24 |
| 3.40 | % |
Commercial and Industrial | 929 |
| 33 |
| 4.71 | % | | 601 |
| 19 |
| 4.12 | % |
Warehouse Lending | 840 |
| 30 |
| 4.70 | % | | 1,279 |
| 41 |
| 4.25 | % |
Total Commercial loans | 3,251 |
| 110 |
| 4.45 | % | | 2,816 |
| 84 |
| 3.94 | % |
Total loans held-for-investment (1) | 6,227 |
| 190 |
| 4.05 | % | | 5,695 |
| 160 |
| 3.72 | % |
Loans with government guarantees | 300 |
| 10 |
| 4.41 | % | | 450 |
| 12 |
| 3.40 | % |
Investment securities | 3,093 |
| 59 |
| 2.55 | % | | 2,589 |
| 50 |
| 2.58 | % |
Interest-earning deposits | 75 |
| 1 |
| 1.08 | % | | 139 |
| 1 |
| 0.50 | % |
Total interest-earning assets | 13,709 |
| 379 |
| 3.68 | % | | 11,944 |
| 306 |
| 3.40 | % |
Other assets | 1,697 |
| | | | 1,767 |
| | |
Total assets | $ | 15,406 |
| | | | $ | 13,711 |
| | |
Interest-Bearing Liabilities | | | | | | | |
Retail deposits | | | | | | | |
Demand deposits | $ | 502 |
| $ | 1 |
| 0.16 | % | | $ | 479 |
| $ | 1 |
| 0.17 | % |
Savings deposits | 3,899 |
| 22 |
| 0.76 | % | | 3,720 |
| 21 |
| 0.78 | % |
Money market deposits | 264 |
| 1 |
| 0.49 | % | | 285 |
| 1 |
| 0.44 | % |
Certificates of deposit | 1,116 |
| 9 |
| 1.12 | % | | 789 |
| 7 |
| 1.21 | % |
Total retail deposits | 5,781 |
| 33 |
| 0.76 | % | | 5,273 |
| 30 |
| 0.77 | % |
Government deposits | | | | | | | |
Demand deposits | 228 |
| 1 |
| 0.41 | % | | 234 |
| 1 |
| 0.39 | % |
Savings deposits | 410 |
| 2 |
| 0.59 | % | | 432 |
| 2 |
| 0.52 | % |
Certificates of deposit | 314 |
| 1 |
| 0.73 | % | | 563 |
| 1 |
| 0.35 | % |
Total government deposits | 952 |
| 4 |
| 0.59 | % | | 1,229 |
| 4 |
| 0.42 | % |
Wholesale deposits and other | 16 |
| — |
| 1.21 | % | | — |
| — |
| — | % |
Total interest-bearing deposits | 6,749 |
| 37 |
| 0.74 | % | | 6,502 |
| 34 |
| 0.70 | % |
Short-term Federal Home Loan Bank advances and other | 3,028 |
| 23 |
| 1.01 | % | | 1,190 |
| 4 |
| 0.41 | % |
Long-term Federal Home Loan Bank advances | 1,211 |
| 17 |
| 1.92 | % | | 1,587 |
| 22 |
| 1.88 | % |
Other long-term debt | 493 |
| 19 |
| 5.06 | % | | 321 |
| 10 |
| 4.05 | % |
Total interest-bearing liabilities | 11,481 |
| 96 |
| 1.12 | % | | 9,600 |
| 70 |
| 0.97 | % |
Noninterest-bearing deposits (2) | 2,098 |
| | | | 2,101 |
| | |
Other liabilities | 415 |
| | | | 495 |
| | |
Stockholders’ equity | 1,412 |
| | | | 1,515 |
| | |
Total liabilities and stockholders' equity | $ | 15,406 |
| | | | $ | 13,711 |
| | |
Net interest-earning assets | $ | 2,228 |
| | | | $ | 2,344 |
| | |
Net interest income | | $ | 283 |
| | | | $ | 236 |
| |
Interest rate spread (3) | | | 2.56 | % | | | | 2.43 | % |
Net interest margin (4) | | | 2.74 | % | | | | 2.62 | % |
Ratio of average interest-earning assets to interest-bearing liabilities | | | 119.4 | % | | | | 124.4 | % |
| |
(1) | Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 4 - Loans Held-for-Investment. |
| |
(2) | Includes noninterest-bearing company controlled 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 presenttable presents 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 mix variances are allocated to rate.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | Six Months Ended, | | |
| June 30, 2020 versus March 31, 2020 Increase (Decrease) Due to: | | | | June 30, 2020 versus June 30, 2019 Increase (Decrease) Due to: | | |
| Rate | Volume | Total | | Rate | Volume | Total |
| (Dollars in millions) | | | | | | |
Interest-Earning Assets | | | | | | | |
Loans held-for-sale | $ | (5) | | $ | 4 | | $ | (1) | | | $ | (29) | | $ | 47 | | $ | 18 | |
Loans held-for-investment | | | | | | | |
Residential first mortgage | (1) | | (2) | | (3) | | | (2) | | (3) | | (5) | |
Home equity | (3) | | — | | (3) | | | (7) | | 6 | | (1) | |
Other | (1) | | 1 | | — | | | (5) | | 14 | | 9 | |
Total consumer loans | (5) | | (1) | | (6) | | | (14) | | 17 | | 3 | |
Commercial real estate | (8) | | 2 | | (6) | | | (23) | | 20 | | (3) | |
Commercial and industrial | (6) | | 4 | | (2) | | | (13) | | 4 | | (9) | |
Warehouse lending | (3) | | 16 | | 13 | | | (19) | | 39 | | 20 | |
Total commercial loans | (17) | | 22 | | 5 | | | (55) | | 63 | | 8 | |
Total loans held-for-investment | (22) | | 21 | | (1) | | | (69) | | 80 | | 11 | |
Loans with government guarantees | 1 | | — | | 1 | | | (5) | | 5 | | — | |
Investment securities | — | | 2 | | 2 | | | (6) | | 2 | | (4) | |
Interest-earning deposits and other | (1) | | — | | (1) | | | (1) | | — | | (1) | |
Total interest-earning assets | $ | (27) | | $ | 27 | | $ | — | | | $ | (110) | | $ | 134 | | $ | 24 | |
Interest-Bearing Liabilities | | | | | | | |
Interest-bearing deposits | $ | (12) | | $ | 1 | | $ | (11) | | | $ | (14) | | $ | 3 | | $ | (11) | |
Short-term FHLB advances and other borrowings | (11) | | 1 | | (10) | | | (32) | | 12 | | (20) | |
Long-term FHLB advances | (1) | | 1 | | — | | | (2) | | 6 | | 4 | |
Other long-term debt | 1 | | — | | 1 | | | (1) | | — | | (1) | |
Total interest-bearing liabilities | (23) | | 3 | | (20) | | | (49) | | 21 | | (28) | |
Change in net interest income | $ | (4) | | $ | 24 | | $ | 20 | | | $ | (61) | | $ | 113 | | $ | 52 | |
|
| | | | | | | | | | | |
| 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, |
| 2017 Versus 2016 Increase (Decrease) Due to: |
| Rate | | Volume | | Total |
| (Dollars in millions) |
Interest-Earning Assets | | | | | |
Loans held-for-sale | $ | 10 |
| | $ | 26 |
| | $ | 36 |
|
Loans held-for-investment | | | | | |
Residential first mortgage | 3 |
| | 3 |
| | 6 |
|
Home equity | — |
| | (2 | ) | | (2 | ) |
Total Consumer loans | 3 |
| | 1 |
| | 4 |
|
Commercial Real Estate | 9 |
| | 14 |
| | 23 |
|
Commercial and Industrial | 4 |
| | 10 |
| | 14 |
|
Warehouse Lending | 3 |
| | (14 | ) | | (11 | ) |
Total Commercial loans | 16 |
| | 10 |
| | 26 |
|
Total loans held-for-investment | 19 |
| | 11 |
| | 30 |
|
Loans with government guarantees | 2 |
| | (4 | ) | | (2 | ) |
Investment securities | (1 | ) | | 10 |
| | 9 |
|
Total interest-earning assets | $ | 30 |
| | $ | 43 |
| | $ | 73 |
|
Interest-Bearing Liabilities | | | | | |
Interest-bearing deposits | $ | 1 |
| | $ | 2 |
| | $ | 3 |
|
Short-term Federal Home Loan Bank advances and other | 14 |
| | 5 |
| | 19 |
|
Long-term Federal Home Loan Bank advances | — |
| | (5 | ) | | (5 | ) |
Other long-term debt | 4 |
| | 5 |
| | 9 |
|
Total interest-bearing liabilities | 19 |
| | 7 |
| | 26 |
|
Change in net interest income | $ | 11 |
| | $ | 36 |
| | $ | 47 |
|
Comparison to Prior Year Quarter
Net interest income increased $23$20 million, or 2914 percent, to $168 million for the three months ended September 30, 2017, compared to the same period in 2016. This increase was primarily driven by growth in interest-earning assets and an increase in average rates within the LHFI and LHFS portfolios. This was partially offset by an increase in average rates and average balance on short-term FHLB advances.
Our net interest margin for the three months ended September 30, 2017 was 2.78 percent, compared to 2.58 percent for the three months ended September 30, 2016. The net 20 basis point increase was driven by an increase in higher yielding commercial loans and higher interest income on LHFS. This increase was partially offset by higher average rates on short-term FHLB advances.
For the three months ended September 30, 2017second quarter 2020 as compared to the three months ended September 30, 2016, total interest-earning assets increased $2.4 billion to $14.7 billion, led by growth in LHFS primarily due to accumulation of loans in support of residential mortgage backed securitizations. Additionally, the $955 million increase in LHFI average balance was primarily driven by 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 to higher yielding loans.
Average interest-bearing liabilities increased $2.5 billion for the three months ended September 30, 2017, compared to the three months ended September 30, 2016.first quarter 2020. The increase was primarily driven by warehouse loan growth, the impact of lower interest rates on cost of funds primarily attributed to core deposits, partially offset by lower yields on earnings assets. Average earnings assets increased $2.5 billion, reflecting increases of $2.2 billion in average total loans and $0.4 billion in average investment securities.
The net interest margin in the second quarter of 2020 was 2.86 percent, a $2.7 billion5 basis point increase from the prior quarter. The increase in the net interest margin was primarily driven by the continued repricing of deposits into the new curve environment and the full quarter impact of pricing changes made in March when short-term rates were dropped by the FRB. This was combined with lower short-term FHLB advances usedborrowing costs which led to fundan interest-bearing cost of funds of 86 basis points in the second quarter of 2020, a decline of 60 basis points from the prior quarter. This more than offset the impact declining interest rates and a lower yield curve had on the loans held-for-investment portfolio primarily due to rate floors on our most liquid assets including LHFS.variable rate loans.
Loans held-for-investment averaged $13.6 billion for the second quarter of 2020, increasing $1.8 billion (15 percent) from the prior quarter, primarily driven by $1.5 billion (64 percent) higher average warehouse loan balances as we grew our business and took advantage of the strong mortgage market.
Average total deposits were $17.7 billion in the second quarter 2020, increasing $1.9 billion (12 percent) from the first quarter 2020. Average custodial deposits increased $1.4 billion (30 percent) due to higher prepayments from refinancing and average retail deposits increased $0.4 billion (4 percent) largely due to the COVID-19 pandemic impact on the behavior and spending patterns for consumers and commercial depositors carrying higher cash balances.
Comparison to Prior Year to Date
Net interest income increased $47$52 million, for the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016,2019. The 20 percent increase was driven by growth in average interest-earning assets led by the loans held-for-sale portfolio and warehouse and CRE commercial loan portfolio. Net interest margin declined 25 basis points to 2.83 percent for the six months ended June 30, 2020, as compared to 3.08 percent for the six months ended June 30, 2019 primarily attributable to the interest rate cuts occurring in late 2019 and in March 2020.
Average interest-earnings assets increased $5.4 billion due primarily to growth in the LHFS and warehouse portfolios which have benefited from the favorable mortgage environment due to lower market rates. The non-warehouse commercial portfolios increased $870 million driven by growth across CRE and C&I in the first quarter of 2020, and the consumer loan portfolio increased $487 million primarily driven by growth in interest-earning assets, led by an increase in LHFS,indirect lending 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 Noteshome equity in the thirdfirst quarter 2016.of 2020.
Our net interest margin for the nine months ended September 30, 2017 was 2.74 percent, compared to 2.62 percent for the nine months ended September 30, 2016. The net 12 basis point increase was positively impacted by an increase in market rates, a higher yielding commercial loan portfolio and stable core deposits. This improvement was partially offset by higher rates on short-term FHLB advances driven by an increase in market rates and the issuance 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 all of which more than offset the decrease in warehouse lending.
Average interest-bearing liabilities increased $1.9$2.1 billion, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase was primarily driven by a net $1.5 billion increase$820 million and $677 million increases in short-term and long-term FHLB advances used to fund balance sheet growth, $247 million increase inborrowings, respectively. Average total deposits increased $3.2 billion driven by higher custodial deposits which resulted from growth in subservicing and the issuance of our Senior Noteshigher refinance activity, and growth in the third quarter 2016.retail deposits.
Provision (Benefit) for LoanCredit Losses
Comparison to Prior Year Quarter
The provision (benefit) for loancredit losses and unfunded commitments was a provision of $2$102 million duringfor the three months ended SeptemberJune 30, 2017,2020, compared to a provision of $7$14 million duringfor the three months ended September 30, 2016. DuringMarch 31, 2020. The increase in the three months ended September 30, 2017,provision is primarily driven by our forecast of economic conditions. Our forecast reflects our belief that the $2 million provision reflects continued low leveleconomy will continue to be challenged by the response to the COVID-19 pandemic, especially in the commercial real estate sector, for an extended period of net charge-offs and the strong credit quality of our loan portfolios. The $7 million provision during the three months ended September 30, 2016 was largely to reserve for loans with government guarantees.time.
Comparison to Prior Year to Date
The provision (benefit) for loancredit losses and unfunded commitments was a provision of $4$116 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to a benefit of $9$17 million duringfor the ninesix months ended SeptemberJune 30, 2016.2019. The $4 million provision for the nine months ended September 30, 2017 reflects continued low level of net charge-offs and the strong credit qualityincrease is reflective of the loan portfolio. The $9 million benefit foradoption of CECL in 2020 and an increase due to changes in the nine months ended September 30, 2016 resulted primarily fromeconomic forecast used in the saleACL models and judgment we applied related to those forecasts as a result of $1.2 billion UPB of performing residential first mortgage loans and $110 million UPB of nonperforming, TDR and non-agency loans.the ongoing COVID-19 pandemic.
For further information on the provision for loancredit 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 relatedand other mortgage metrics:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | Six Months Ended, | | |
| June 30, 2020 | March 31, 2020 | Change | | June 30, 2020 | June 30, 2019 | Change |
| (Dollars in millions) | | | | | | |
Net gain on loan sales | $ | 303 | | $ | 90 | | $ | 213 | | | $ | 393 | | $ | 124 | | $ | 269 | |
Loan fees and charges | 41 | | 26 | | 15 | | | 67 | | 41 | | 26 | |
Net return (loss) on mortgage servicing rights | (8) | | 6 | | (14) | | | (2) | | 11 | | (13) | |
Loan administration income | 21 | | 12 | | 9 | | | 33 | | 17 | | 16 | |
Deposit fees and charges | 7 | | 9 | | (2) | | | 16 | | 18 | | (2) | |
Other noninterest income | 14 | | 14 | | — | | | 28 | | 66 | | (38) | |
Total noninterest income | $ | 378 | | $ | 157 | | $ | 221 | | | $ | 535 | | $ | 277 | | $ | 258 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | Six Months Ended, | | |
| June 30, 2020 | March 31, 2020 | Change | | June 30, 2020 | June 30, 2019 | Change |
| (Dollars in millions) | | | | | | |
Mortgage rate lock commitments (fallout-adjusted) (1)(3) | $ | 13,800 | | $ | 11,200 | | $ | 2,600 | | | $ | 25,000 | | $ | 14,900 | | $ | 10,100 | |
Mortgage loans originated (3) | $ | 12,200 | | $ | 8,600 | | $ | 3,600 | | | $ | 20,700 | | $ | 14,200 | | $ | 6,500 | |
Net margin on mortgage rate lock commitments (fallout-adjusted) (1)(2) | 2.19 | % | 0.80 | % | 1.39 | % | | 1.57 | % | 0.81 | % | 0.76 | % |
Mortgage loans sold and securitized (3) | $ | 12,900 | | $ | 7,500 | | $ | 5,400 | | | $ | 20,400 | | $ | 14,000 | | $ | 6,400 | |
(1)Fallout-adjusted refers to mortgage rate lock commitments which are adjusted by estimates of the percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and impact of changes in interest rates.
(2)Gain on sale margin is based on net gain on loan sales and other(Excludes net gain on loan sales of $2 million from loans transferred from LHFI during the six months ended June 30, 2019) to fallout-adjusted mortgage metrics:rate lock commitments.
(3)Rounded to nearest hundred million. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| (Dollars in millions) |
Net gain on loan sales | $ | 75 |
| | $ | 94 |
| | $ | (19 | ) | | $ | 189 |
| | $ | 259 |
| | $ | (70 | ) |
Loan fees and charges | 23 |
| | 22 |
| | 1 |
| | 58 |
| | 56 |
| | 2 |
|
Deposit fees and charges | 5 |
| | 5 |
| | — |
| | 14 |
| | 17 |
| | (3 | ) |
Loan administration income | 5 |
| | 4 |
| | 1 |
| | 16 |
| | 14 |
| | 2 |
|
Net return (loss)on mortgage servicing rights | 6 |
| | (11 | ) | | 17 |
| | 26 |
| | (21 | ) | | 47 |
|
Representation and warranty benefit | 4 |
| | 6 |
| | (2 | ) | | 11 |
| | 12 |
| | (1 | ) |
Other noninterest income | 12 |
| | 36 |
| | (24 | ) | | 32 |
| | 52 |
| | (20 | ) |
Total noninterest income | $ | 130 |
| | $ | 156 |
| | $ | (26 | ) | | $ | 346 |
| | $ | 389 |
| | $ | (43 | ) |
|
| | | | | | | | | | | | | | | |
| 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 | % |
| |
(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 sale margin 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 Noninterest income decreased $26increased $221 million duringfor the three months ended SeptemberJune 30, 2017, compared to the same period in 2016.
Net gain on loan sales decreased $19 million during the three months ended September 30, 2017,2020, compared to the three months ended September 30, 2016.March 31, 2020, primarily due to the following:
•Net gain on loan sales increased $213 million to $303 million, as compared to $90 million in the first quarter 2020. The net gain on loan salessale margin decreased 24 basis points with fallout adjusted lock yields decreasing 0.29increased 139 basis points, to 0.842.19 percent primarilyfor the second quarter 2020, as compared to 0.80 percent for the first quarter 2020. The gain on sale margin increase was driven by managing our volume level within our channels and products to fit our fulfillment capacity driven by demand due to more competitive pricing. Lower margins were partially offsetmarket conditions, the return of the purchase market late in the quarter and higher originations in our retail channel. In addition, the first quarter of 2020 included $45 million of hedge ineffectiveness caused by the Federal Reserve's purchase of agency mortgage-backed securities, which impacted margin by 40 basis points. Fallout-adjusted locks increased $2.6 billion, or 24 percent, to $13.8 billion, as historically low interest rates fueled a 7.3strong refinance and purchase market.
•Loan fees and charges increased $15 million, to $41 million for the second quarter of 2020, compared to $26 million for the first quarter 2020, resulting from a 41 percent increase in fallout adjusted mortgage locks driven primarily by the Opes and Stearns acquisitions that occurred in 2017.closings.
•Net return (loss) on MSRs (includingmortgage servicing rights decreased $14 million, to an $8 million net loss for the impactsecond quarter of economic hedges) increased $17 million during the three months ended September 30, 2017,2020, compared to a $6 million net gain for the three months ended September 30, 2016. The increase wasfirst quarter 2020, primarily driven by improvements in fair value due to a more stable prepayment environmentforecast changes and improvements in our hedging program, partially offsethigher prepayments.
•Loan administration income increased $9 million largely driven by a decrease in service fee income resulting from lower MSR balance due to sales that occurred throughout 2017.
Other noninterest income decreased $24 million during the three months ended September 30, 2017, compared to the three months ended September 30, 2016 due to a $24 million reductiondecline in the DOJ settlement liability that occurred inLIBOR-based fees paid to sub-servicing customers for the third quarter of 2016.custodial deposits they control.
Comparison to Prior Year to Date
Total noninterest Noninterest income decreased $43increased $258 million duringfor the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016.six months ended June 30, 2019, primarily due to the following:
•Net gain on loan sales decreased $70increased $269 million, duringprimarily due to $10.1 billion higher fallout adjusted locks driven by the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The netfavorable mortgage environment fueled by historically low interest rates and a 0.76 percent increase in gain on loan salessale margin decreased 19 basis pointsdriven by managing our volume level within our channels and products to fit our fulfillment capacity made possible by demand due to market conditions and the return of the purchase market late in the quarter and higher originations in our retail channel.
•Loan fees and charges increased $26 million primarily driven by more competitive pricing and our decision to extend turn times on saleshigher subservicing ancillary fees as total loans being serviced increased by 59 thousand along with higher mortgage fee income as a result 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. The decrease in net gain on loan sales was also attributed to the sale of performing LHFI that occurred during the nine months ended September 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 includes an increase in distributedoriginations and higher retail mix.
•Other noninterest income declined $38 million primarily due to the integrationDOJ Liability fair value adjustment at June 30, 2019 (see Note 15 - Legal Proceedings, Contingencies and Commitments for additional information). The first half of Opes.2019 also included $7 million of AFS investment security gains which did not reoccur in 2020.
•Loan administration income increased $16 million, driven by an increase in the average number of loans being subserviced and an increase in the number of loans in default servicing which are charged a higher servicing rate. In addition, the increase was driven by a decline in LIBOR-based fees paid to sub-servicing customers on custodial deposits.
Deposit fees and charges•Net return (loss) on mortgage servicing rights decreased $3$13 million, duringto a $2 million net loss for the ninesix months ended SeptemberJune 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.
Net return on MSRs was $26 million for the nine months ended September 30, 2017, compared to a loss of $21 million during the nine months ended September 30, 2016. The $47 million increase was2020, primarily driven by higher prepayments and a more stable prepayment environment and improvementsreduction in our hedging program, partially offset by lower servicing fee income resulting from a lower 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.
Other noninterest income decreased $20 million during the nine months ended September 30, 2017, comparedvaluation due to the nine months ended September 30, 2016. The decrease was primarily due to a $24 million reduction in the DOJ settlement liability that occurred in the third quarter of 2016.current market.
Noninterest Expense
The following table sets forth the components of our noninterest expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | Six Months Ended, | | |
| June 30, 2020 | March 31, 2020 | Change | | June 30, 2020 | June 30, 2019 | Change |
| (Dollars in millions) | | | | | | |
Compensation and benefits | $ | 116 | | $ | 102 | | $ | 14 | | | $ | 218 | | $ | 177 | | $ | 41 | |
Occupancy and equipment | 44 | | 41 | | 3 | | | 85 | | 78 | | 7 | |
Commissions | 61 | | 29 | | 32 | | | 90 | | 38 | | 52 | |
Loan processing expense | 25 | | 20 | | 5 | | | 45 | | 38 | | 7 | |
Legal and professional expense | 5 | | 6 | | (1) | | | 11 | | 12 | | (1) | |
Federal insurance premiums | 7 | | 6 | | 1 | | | 13 | | 9 | | 4 | |
Intangible asset amortization | 4 | | 3 | | 1 | | | 7 | | 8 | | (1) | |
Other noninterest expense | 34 | | 28 | | 6 | | | 63 | | 45 | | 18 | |
Total noninterest expense | $ | 296 | | $ | 235 | | $ | 61 | | | $ | 532 | | $ | 405 | | $ | 127 | |
Efficiency ratio | 54.3 | % | 77.1 | % | (22.8) | % | | 62.5 | % | 74.8 | % | (12.3) | % |
Average number of FTE | 4,451 | | 4,427 | | 24 | | | 4,489 | | 4,026 | | 463 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| (Dollars in millions) |
Compensation and benefits | $ | 76 |
| | $ | 69 |
| | $ | 7 |
| | $ | 219 |
| | $ | 203 |
| | $ | 16 |
|
Commissions | 23 |
| | 16 |
| | 7 |
| | 49 |
| | 40 |
| | 9 |
|
Occupancy and equipment | 28 |
| | 21 |
| | 7 |
| | 75 |
| | 64 |
| | 11 |
|
Loan processing expense | 15 |
| | 13 |
| | 2 |
| | 41 |
| | 40 |
| | 1 |
|
Legal and professional expense | 7 |
| | 5 |
| | 2 |
| | 22 |
| | 20 |
| | 2 |
|
Other noninterest expense | 22 |
| | 18 |
| | 4 |
| | 59 |
| | 51 |
| | 8 |
|
Total noninterest expense | $ | 171 |
| | $ | 142 |
| | $ | 29 |
| | $ | 465 |
| | $ | 418 |
| | $ | 47 |
|
Efficiency ratio | 73.5 | % | | 59.9 | % | | 13.6 | % | | 73.9 | % | | 66.9 | % | | 7.0 | % |
| | | | | | | | | | | |
| 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 |
|
Comparison to Prior Year Quarter
Noninterest expense increased $29$61 million to $171 million duringfor the three months ended SeptemberJune 30, 2017,2020, compared to $142 million during the three months ended September 30, 2016. The increase is driven by growth initiativesMarch 31, 2020 primarily due to the following:
•Commissions 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 compensationloan processing increased $32 million and benefits$5 million, respectively, due to higher headcount, an increase in commissions attributablemortgage volumes.
•Compensation and benefits expense increased $14 million from the prior quarter, primarily driven by higher variable compensation attributed to increased loan production, and an increase in occupancy and equipment costs to support the capital needs of our expanded business.stronger financial results.
Comparison to Prior Year to Date
Noninterest expense increased $47$127 million to $465 million duringfor the ninesix months ended SeptemberJune 30, 2017,2020, compared to $418 million during the ninesix months ended SeptemberJune 30, 2016. The increase was2019 primarily driven by higher operating expenses associated with growth initiativesdue to the following:
•Compensation and our 2017 acquisitions of Opes and Stearns, including an increase in compensation and benefits increased $41 million, primarily due to an increase in headcountincentive compensation attributed to stronger financial results, higher average FTE driven by bringing default servicing in house and adding variable mortgage origination capacity in response to the robust mortgage environment.
•Commissions and loan processing increased $52 million and $7 million, respectively, primarily driven by higher commissions. Additionally,originations along with a shift in channel mix from TPO to retail which supports a higher gain on sale but also has higher commission rates and costs.
•Other noninterest expense increased as a result of$18 million primarily driven by higher occupancymortgage related expenses due to higher closings resulting from the favorable mortgage environment.
•Occupancy and equipment increased $7 million primarily due to support the capital needs of our expanded businessincreases in IT software expenses and an increase in advertising related to a direct mail and brand awareness campaign.depreciation expense.
Provision (benefit) for Income Taxes
Our provision for income taxes for the three and ninesix months ended SeptemberJune 30, 20172020, was $20$32 million and $52$42 million, respectively, compared to a provision of $30 million and $73 million during the three and nine months ended September 30, 2016, respectively.
Our effective tax provision rate for the three and nine months ended September 30, 2017 was 32.4 percent and 32.3 percent, respectively, compared to 34.3 percent and 33.821.5 percent for the three and nine months ended SeptemberJune 30, 2016, respectively.
Our2020, compared to an effective tax provision rate of 18.5 percent for the three and nine months ended September 30, 2017 differs from the combined federal and state statutory taxfirst quarter 2020. The higher rate primarily due to a benefit from tax-exempt earnings, partially offset by nondeductible expenses.
For further information, see Note 15 - Income Taxes.
Loan Originations, Sales and Servicing
The majority of our total loan originations during the nine months ended September 30, 2017 represented mortgage loans that were collateralized by residential first mortgages on single-family residences 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 primarily residential mortgage loans. The $1.7 billion increase iswas the result of seasonallyour higher level of income in the second quarter, which is taxed at higher marginal tax rates. Also contributing to the higher rate is a greater percentage of earnings in higher state tax jurisdictions, lower tax benefits for stock-based compensation and higher FDIC expenses, which are not deductible.
Operating Segments
Our operations are conducted through three operating segments: Community Banking, Mortgage Originations, and Mortgage Servicing. The Other segment includes the remaining reported activities. 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 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.
As a result of management's evaluation of our segments, effective January 1, 2020, certain departments have been re-aligned between the Community Banking and Mortgage Originations segments. Specifically, a majority of the residential mortgage activityHFI portfolio is now part of the Mortgage Originations segment. The income and expenses relating to these changes are reflected in our financial statements and all prior period segment financial information has been recast to conform to the current presentation.
Before the adoption of CECL on January 1, 2020, we charged the lines of business for the net charge-offs that occurred during the period. The difference between total net charge-offs and the accumulationconsolidated provision for credit losses was assigned to the “Other” segment. This amount assigned to the “Other” segment was then allocated back to the lines of loans in supportbusiness through other noninterest expense.
This year, with the adoption of our next residential mortgage backed securitization.
On October 31, 2017,CECL, we still charge the Company closed on a securitizationlines of $576 million of residential mortgage-backed certificates (RMBS) issued by Flagstar Mortgage Trust 2017-2 (FSMT 2017-2). On July 31, 2017,business for 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.
net charge-offs that occur. In addition to this amount, we originate or purchase residential first mortgage loans, other consumer loans,charge them for the change in loan balances during the period, applied at the budgeted credit loss factor. The difference between the consolidated provision for credit losses and commercial loans for our LHFI portfolios. Our revenues include noninterest income from salesthe sum of residential first mortgagestotal net charge-offs and the change in loan balances is still assigned to the Agencies, net interest income,“Other” segment, although now that amount includes the changes related to the economic forecasts, model changes, qualitative adjustments and revenue from servicingcredit downgrades. As in the prior methodology, the amount assigned to the “Other” segment continues to be allocated back to the lines of loans for others.business through other noninterest expense.
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. 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, our Mortgage Servicing segment provides servicing of residential mortgages for our own LHFI portfolio and may service or subservice loans which we have sold or securitized. Mortgage loans are serviced and subserviced for others on a fee for service basis and we 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 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 |
| Amount | | Number of accounts | | Amount | | Number of accounts |
| (Dollars in millions) |
Residential loan servicing | | | | | | | |
Serviced for own loan portfolio (1) | $ | 7,376 |
| | 31,135 |
| | $ | 5,816 |
| | 29,244 |
|
Serviced for others | 21,342 |
| | 87,215 |
| | 31,207 |
| | 133,270 |
|
Subserviced for others (2) | 62,351 |
| | 296,913 |
| | 43,127 |
| | 220,075 |
|
Total residential loans serviced | $ | 91,069 |
| | 415,263 |
| | $ | 80,150 |
| | 382,589 |
|
| |
(1) | Includes LHFI (residential first mortgage and home equity), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets. |
| |
(2) | Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets. |
OPERATING SEGMENTS
Overview
For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 1917 - Segment Information, and other sections of this report for a full understanding of our consolidated financial performance.Information.
The following table presents net income (loss) by operating segment:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | ) |
Community Banking
Our Community Banking segment serves commercial, governmental and consumer customers in our banking footprint which spans throughout Michigan, Indiana, California, Wisconsin, Ohio and contiguous states. We also serve home builders, correspondents, and commercial customers on a national basis. The Community Banking segment originates and purchases loans, while also providing deposit and fee based services to consumer, business, and mortgage lending customers.
Our commercial customers operate in 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, as well as provide financing of working capital, capital investments, and equipment. Additionally, our commercial real estate business supports income producing real estate and home builders. The Community Banking segment also offers warehouse lines of credit to non-bank mortgage lenders.
Our Community Banking segment has seen continued growth. In the last 12 months, our commercial loan portfolio has grown 48 percent to $10.2 billion while our consumer loan portfolio has decreased 3 percent to $4.6 billion. Average deposits for the six months ended June 30, 2020 increased to $10.6 billion, compared to $10.1 billion for the same period in 2019 driven primarily by higher customer balances.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | Six Months Ended, | | |
Community Banking | June 30, 2020 | March 31, 2020 | Change | | June 30, 2020 | June 30, 2019 | Change |
| (Dollars in millions) | | | | | | |
Summary of Operations | | | | | | | |
Net interest income | $ | 133 | | $ | 104 | | $ | 29 | | | $ | 237 | | $ | 191 | | $ | 46 | |
Provision (benefit) for credit losses | (3) | | 8 | | (11) | | | 5 | | 16 | | (11) | |
Net interest income after provision for credit losses | 136 | | 96 | | 40 | | | 232 | | 175 | | 57 | |
Net loss on loan sales | — | | — | | — | | | — | | (6) | | 6 | |
Loan fees and charges | — | | — | | — | | | — | | 1 | | (1) | |
Loan administration expense | (1) | | (1) | | — | | | (2) | | (2) | | — | |
Other noninterest income | 12 | | 16 | | (4) | | | 28 | | 28 | | — | |
Total noninterest income | 11 | | 15 | | (4) | | | 26 | | 21 | | 5 | |
Compensation and benefits | 24 | | 27 | | (3) | | | 51 | | 50 | | 1 | |
Commissions | — | | 1 | | (1) | | | 1 | | — | | 1 | |
Loan processing expense | 1 | | 2 | | (1) | | | 3 | | 4 | | (1) | |
Other noninterest expense | 124 | | 44 | | 80 | | | 168 | | 83 | | 85 | |
Total noninterest expense | 149 | | 74 | | 75 | | | 223 | | 137 | | 86 | |
Income before indirect overhead allocations and income taxes | (2) | | 37 | | (39) | | | 35 | | 59 | | (24) | |
Indirect overhead allocation | (11) | | (9) | | (2) | | | (20) | | (20) | | — | |
Provision (benefit) for income taxes | (3) | | 6 | | (9) | | | 3 | | 8 | | (5) | |
Net income | $ | (10) | | $ | 22 | | $ | (32) | | | $ | 12 | | $ | 31 | | $ | (19) | |
| | | | | | | |
Key Metrics | | | | | | | |
Average number of FTE employees | 1,266 | | 1,274 | | (8) | | | 1,282 | | 1,353 | | (71) | |
Comparison to Prior Quarter
The Community Banking segment reported net loss of $10 million for the three months ended June 30, 2020, compared to net income of $22 million for the three months ended March 31, 2020. The $32 million decrease was driven by the following:
•Net interest income increased $29 million primarily driven by warehouse loan growth and the impact of lower interest rates on borrowing costs, especially core deposits, partially offset by lower yields on earning assets.
•Provision (benefit) for credit losses is recorded at the segment level for changes in volume at the budgeted credit loss factor and replenishment of net charge-offs. The $11 million reduction was driven primarily by lower ending loan balances.
•Deposit fees and other noninterest income were lower $4 million driven by COVID-19 impacts including waived deposit fees, higher compensating deposit balances and lower commercial loan syndication fees.
•Other noninterest expense increased $80 million primarily driven by higher intersegment expense allocations related to the impact of the degradation in the economic forecasts and credit downgrades on the provision for credit losses.
Comparison to Prior Year Quarterto Date
During the three months ended September 30, 2017, the The Community Banking segment reported net income of $10 million, compared to $7$12 million for the threesix months ended SeptemberJune 30, 2016.2020, compared to $31 million for the six months ended June 30, 2019. The increase in netdecrease was driven by the following:
•Net interest income increased $46 million driven by higher average loan and deposit balances partially offset by lower margins due to rate cuts that have occurred over the past year.
•Provision (benefit) for credit losses was $11 million lower primarily due to a $9prior year charge-off of the Live Well commercial loan.
•Noninterest income increased $5 million increase in net interest income from higher average loan balances, led by growth in commercial loans and higher average loan yields as well as a $6 million improvement in provision for loan lossesprimarily due to improved credit quality.not purchasing any new residential loans from the Mortgage Originations segment in 2020. These increases were partially offset by a $7purchases resulted in upfront losses in 2019.
•Noninterest expense increased $86 million increase in noninterest expenseprimarily driven by higher volume-driven expensesintersegment expense allocations related to the impact of degradation in the economic forecasts and growth initiatives which will support future revenue growth.
Comparison to Prior Year to Date
Duringcredit downgrades on the nine months ended September 30, 2017, the Community Banking segment reported net income of $26 million, compared to $34 million for the nine months ended September 30, 2016. The $8 million decrease 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 million increase in net interest income due to loan growth, led by an increase in commercial loans and higher average loan yields.credit losses.
Mortgage Originations
We are a leading national originator of residential first mortgages. Our Mortgage Originations segment utilizes multiple distribution channels to originate or acquire one-to-four family residential mortgage loans on a national scale, primarily to sell. We originate and retain certain mortgage loans in our LHFI portfolio which generate interest income in the Mortgage Originations segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | Six Months Ended, | | |
Mortgage Originations | June 30, 2020 | March 31, 2020 | Change | | June 30, 2020 | June 30, 2019 | Change |
| (Dollars in millions) | | | | | | |
Summary of Operations | | | | | | | |
Net interest income | $ | 56 | | $ | 42 | | $ | 14 | | | $ | 98 | | $ | 66 | | $ | 32 | |
Provision (benefit) for credit losses | (2) | | (3) | | 1 | | | (5) | | 1 | | (6) | |
Net interest income after provision for credit losses | 58 | | 45 | | 13 | | | 103 | | 65 | | 38 | |
Net gain on loan sales | 303 | | 90 | | 213 | | | 393 | | 129 | | 264 | |
Loan fees and charges | 22 | | 17 | | 5 | | | 39 | | 27 | | 12 | |
Loan administration expense | (8) | | (7) | | (1) | | | (15) | | (10) | | (5) | |
Net return (loss) on mortgage servicing rights | (8) | | 6 | | (14) | | | (2) | | 11 | | (13) | |
Other noninterest income | 1 | | 1 | | — | | | 2 | | 7 | | (5) | |
Total noninterest income | 310 | | 107 | | 203 | | | 417 | | 164 | | 253 | |
Compensation and benefits | 38 | | 31 | | 7 | | | 69 | | 50 | | 19 | |
Commissions | 61 | | 28 | | 33 | | | 89 | | 38 | | 51 | |
Loan processing expense | 14 | | 10 | | 4 | | | 24 | | 13 | | 11 | |
Other noninterest expense | 56 | | 26 | | 30 | | | 82 | | 38 | | 44 | |
Total noninterest expense | 169 | | 95 | | 74 | | | 264 | | 139 | | 125 | |
Income before indirect overhead allocations and income taxes | 199 | | 57 | | 142 | | | 256 | | 90 | | 166 | |
Indirect overhead allocation | (15) | | (12) | | (3) | | | (27) | | (20) | | (7) | |
Provision for income taxes | 39 | | 9 | | 30 | | | 48 | | 15 | | 33 | |
Net income | $ | 145 | | $ | 36 | | $ | 109 | | | $ | 181 | | $ | 55 | | $ | 126 | |
| | | | | | | |
Key Metrics | | | | | | | |
Mortgage rate lock commitments (fallout-adjusted) (1)(2) | $ | 13,800 | | $ | 11,200 | | $ | 2,600 | | | $ | 25,000 | | $ | 14,900 | | $ | 10,100 | |
Average number of FTE employees | 1,599 | | 1,513 | | 86 | | | 1,570 | | 1,323 | | 247 | |
(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 impact of changes in interest rates.
(2)Rounded to nearest hundred million.
Comparison to Prior Year Quarter
The Mortgage Originations segment'ssegment reported net income decreased $8of $145 million to $31 million duringfor the three months ended SeptemberJune 30, 2017,2020 as compared to $39$36 million infor the three months ended September 30, 2016.March 31, 2020. The decreaseincrease was driven by the following:
•Net interest income increased $14 million primarily due to $397 million higher average LHFS balances resulting from increased mortgage production and a $24139 basis point higher net spread.
•Net return (loss) on mortgage servicing rights decreased $14 million, increase in noninterest expense duringto an $8 million net loss for the three months ended September 30, 2017,second quarter of 2020, compared to a $6 million net gain for the first quarter 2020, primarily driven by higher compensationprepayments and benefits duemodel changes reflecting current economic conditions.
•Net gain on loan sales increased $213 million, to growth initiatives$303 million, as compared to $90 million in the first quarter 2020. Fallout-adjusted locks increased $2.6 billion, or 24 percent, to $13.8 billion, primarily driven by low interest rates that fueled a strong refinance market and higher commissions resulting from higher loan production. Additionally, the return of the purchase market late in the quarter. The net gain on loans sales decreased $16loan sale margin increased 139 basis points, to 2.19 percent for the second quarter 2020, as compared to 0.80 percent for the first quarter 2020 reflecting our management of volume levels to fit our fulfillment capacity, in addition to a higher mix of retail originations.
•Loan fees and charges, commissions and loan processing expense all increased due to $3.6 billion higher closings in the second quarter of 2020.
•Other noninterest expense increased $30 million primarily driven by a 29 basis point decrease in margin resulting from a more competitive market and product mix. These decreases in net income were partially offset by a $17 million increasehigher intersegment expense allocations related to the impact of degradation in the net returneconomic forecasts and credit downgrades on MSRs driven by increases in 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.provision for credit losses.
Comparison to Prior Year to Date
The Mortgage Originations segment'ssegment reported net income of $181 million for the six months ended June 30, 2020 and $55 million for the six months ended June 30, 2019. The increase was driven by the following:
•Net interest income increased $32 million primarily due to $2.0 billion higher average LHFS balances resulting from increased mortgage production.
•Net return (loss) on mortgage service rights decreased $12$13 million, to $87a $2 million duringnet loss for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $99an $11 million net gain for the same period of 2019, primarily driven by higher prepayments.
•Net gain on loan sales increased $264 million, to $393 million, as compared to $129 million in the ninefirst six months ended September 30, 2016.of 2019. Fallout adjusted locks increased $10.0 billion, or 67 percent, to $25 billion, primarily driven by low interest rates that fueled a strong refinance market and the return of the purchase market late in the quarter. The decrease was primarily due to
a $55 million decrease in net gain on loan salessale margin increased 76 basis points to 1.57 percent for the first six months of 2020, as compared to 0.81 percent for the first six months of 2019 reflecting our management of volume level to fit our fulfillment capacity driven by demand due to market conditions, in addition to a 26 basis point decreasehigher mix of retail originations.
•Loan fees and charges, loan administration income, commissions and loan processing expense all increased due to $6.6 billion higher closings and the increasing retail mix in margin resulting from product mix and a more competitive market. the first half of 2020.
•Other noninterest expense increased $39$44 million primarily duedriven by higher intersegment expense allocations related to higher operating expenses associated with growth initiatives, which include an 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 million increase in net return on MSRs primarily due to an increasethe impact of degradation in the interest rate environment ineconomic forecasts and credit downgrades on the first nine months of 2017 which resulted in lower prepayments and favorable fair value adjustments. Net interest income increased $29 million primarily resulting from an increase in mortgage activity and the benefit of extending turn times.provision for credit losses.
Mortgage Servicing
The Mortgage Servicing segment services loans when we hold the MSR asset, and subservices mortgage loans for others through a scalable servicing platform on a fee for service basis. We may also collect ancillary fees and earn income through the use of noninterest bearing escrows. The loans we service generate custodial deposits which provide a stable funding source which supports interest-earning asset generation in the Community Banking and Mortgage Originations segments. Revenue for 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 on a fee per loan basis.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | Six Months Ended, | | |
Mortgage Servicing | June 30, 2020 | March 31, 2020 | Change | | June 30, 2020 | June 30, 2019 | Change |
| (Dollars in millions) | | | | | | |
Summary of Operations | | | | | | | |
Net interest income | $ | 4 | | $ | 4 | | $ | — | | | $ | 8 | | $ | 6 | | $ | 2 | |
| | | | | | | |
Net interest income after provision for credit losses | 4 | | 4 | | — | | | 8 | | 6 | | 2 | |
| | | | | | | |
Loan fees and charges | 19 | | 9 | | 10 | | | 28 | | 14 | | 14 | |
Loan administration income | 36 | | 36 | | — | | | 72 | | 59 | | 13 | |
| | | | | | | |
| | | | | | | |
Total noninterest income | 55 | | 45 | | 10 | | | 100 | | 73 | | 27 | |
Compensation and benefits | 11 | | 10 | | 1 | | | 21 | | 12 | | 9 | |
| | | | | | | |
Loan processing expense | 9 | | 7 | | 2 | | | 16 | | 20 | | (4) | |
Other noninterest expense | 17 | | 19 | | (2) | | | 36 | | 29 | | 7 | |
Total noninterest expense | 37 | | 36 | | 1 | | | 73 | | 61 | | 12 | |
Income before indirect overhead allocations and income taxes | 22 | | 13 | | 9 | | | 35 | | 18 | | 17 | |
Indirect overhead allocation | (6) | | (5) | | (1) | | | (11) | | (9) | | (2) | |
Provision for income taxes | 3 | | 2 | | 1 | | | 5 | | 2 | | 3 | |
Net income | $ | 13 | | $ | 6 | | $ | 7 | | | $ | 19 | | $ | 7 | | $ | 12 | |
| | | | | | | |
Key Metrics | | | | | | | |
Average number of residential loans serviced (1) | 1,062,000 | | 1,087,000 | | (25,000) | | | 1,066,000 | | 917,000 | | 149,000 | |
Average number of FTE employees | 520 | | 478 | | 42 | | | 507 | | 297 | | 210 | |
(1)Rounded to nearest thousand.
The following table presents loans serviced and the number of accounts associated with those loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | March 31, 2020 | | | December 31, 2019 | | | September 31, 2019 | | | June 30, 2019 | |
| Unpaid Principal Balance (1) | Number of accounts | | Unpaid Principal Balance (1) | Number of accounts | | Unpaid Principal Balance (1) | Number of accounts | | Unpaid Principal Balance (1) | Number of accounts | | Unpaid Principal Balance (1) | Number of accounts |
| (Dollars in millions) | | | | | | | | | | | | | |
Loan servicing | | | | | | | | | | | | | | |
Subserviced for others (2) | $ | 174,384 | | 854,216 | | | $ | 193,037 | | 916,989 | | $ | 194,638 | | 918,662 | | | $ | 171,145 | | 826,472 | | $ | 170,139 | | 816,743 | |
Serviced for others | 29,979 | | 123,256 | | | 23,439 | | 102,338 | | 24,003 | | 105,469 | | | 25,039 | | 106,992 | | 25,774 | | 106,334 | |
Serviced for own loan portfolio (3) | 9,211 | | 64,142 | | | 8,539 | | 63,085 | | 9,536 | | 66,526 | | | 8,058 | | 60,088 | | 7,264 | | 59,873 | |
Total loans serviced | $ | 213,574 | | 1,041,614 | | | $ | 225,015 | | 1,082,412 | | | $ | 228,177 | | 1,090,657 | | | $ | 204,242 | | 993,552 | | | $ | 203,177 | | 982,950 | |
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.
(3)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets.
Comparison to Prior Year Quarter
The Mortgage Servicing segment reported a net lossincome of $4$13 million for the three months ended SeptemberJune 30, 2017,2020, compared to a net lossincome of $3$6 million for the three months ended September 30, 2016. TheMarch 31, 2020. A majority of the $7 million increase in net losses is primarily due toincome was a decreaseresult of the increase in loan administration income, partially offset by higher subservicing fees driven byloans entering forbearance stemming from the CARES Act and COVID-19 driving an increase in average portfolio volumeforbearance fee revenue from subservice clients, which only occurs when a loan initially enters forbearance, within loan fees and an improvement in other noninterest expenses.charges.
Comparison to Prior Year to Date
The Mortgage Servicing segment reported net income of $19 million for the six months ended June 30, 2020, compared to net income of $7 million for the six months ended June 30, 2019. The $12 million increase in net income was driven by $2 million higher net interest income from an increase in average custodial balances due to higher average loan count and refinance activity. The higher loan count also drove an increase in servicing and subservicing fees and higher ancillary income, resulting in a $27 million increase in noninterest income. Compensation and benefits expense increased $9 million due to bringing default servicing in-house. Loan processing and other noninterest expense increased due to the increase in loan volume, partially offset by the reduction in loan processing costs due to the corresponding benefit of brining default servicing in-house. Other noninterest expense increased $7 million driven by an increase in loans services and other fees.
Other
The Other segment includes the treasury functions, which include the impact of interest rate risk management, balance sheet funding activities and the investment securities portfolios, as well as other expenses of a corporate nature, including corporate staff, risk management, and legal expenses which are charged to the line of business segments. In addition, the Other segment includes revenue and expenses not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage Servicing segments.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | Six Months Ended, | | |
Other | June 30, 2020 | March 31, 2020 | Change | | June 30, 2020 | June 30, 2019 | Change |
| (Dollars in millions) | | | | | | |
Summary of Operations | | | | | | | |
Net interest income | $ | (25) | | $ | (2) | | $ | (23) | | | $ | (27) | | $ | 1 | | $ | (28) | |
Provision for credit losses | 107 | | 9 | | 98 | | | 116 | | — | | 116 | |
Net interest income after provision for credit losses | (132) | | (11) | | (121) | | | (143) | | 1 | | (144) | |
| | | | | | | |
| | | | | | | |
Loan administration income (expense) | (6) | | (16) | | 10 | | | (22) | | (30) | | 8 | |
| | | | | | | |
Other noninterest income | 8 | | 6 | | 2 | | | 14 | | 49 | | (35) | |
Total noninterest income | 2 | | (10) | | 12 | | | (8) | | 19 | | (27) | |
Compensation and benefits | 43 | | 34 | | 9 | | | 77 | | 65 | | 12 | |
Loan processing expense | 1 | | 1 | | — | | | 2 | | 1 | | 1 | |
Other noninterest expense | (103) | | (5) | | (98) | | | (107) | | 2 | | (109) | |
Total noninterest expense | (59) | | 30 | | (89) | | | (28) | | 68 | | (96) | |
Income before indirect overhead allocations and income taxes | (71) | | (51) | | (20) | | | (123) | | (48) | | (75) | |
Indirect overhead allocation | 32 | | 26 | | 6 | | | 58 | | 49 | | 9 | |
Provision for income taxes | (7) | | (7) | | — | | | (14) | | (3) | | (11) | |
Net income (loss) | $ | (32) | | $ | (18) | | $ | (14) | | | $ | (51) | | $ | 4 | | $ | (55) | |
| | | | | | | |
Key Metrics | | | | | | | |
Average number of FTE employees | 1,142 | | 1,149 | | (7) | | | 1,143 | | 1,150 | | (7) | |
Comparison to Prior Quarter
The Other segment reported a net loss of $12$32 million, for the ninethree months ended SeptemberJune 30, 2017,2020, compared to a net loss of $9 million for the nine months ended September 30, 2016. The increase in net losses is primarily due to a decrease in loan administration income 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.
Other
Comparison to Prior Year Quarter
For the three months ended September 30, 2017, the Other segment's net income was $3 million, compared to net income of $14$18 million for the three months ended September 30, 2016.March 31, 2020. The $11$14 million decrease ishigher loss was primarily due todriven by a $24 million decrease in the fair value of the DOJ settlement liability which was recorded in the third quarter of 2016. This decrease is partially offset by an increase in
net interest income due to higheras a result of the Bank’s overall asset sensitive position and the lower average investment balances duerates throughout the second quarter. The provision for credit losses increased $98 million primarily as a result of the changes in the forecasts of economic conditions and credit downgrades. The $98 million is then directly allocated to the pulling aheadother applicable segments through other noninterest expense. The majority of planned purchases of investmentsall other activity within the Other segment largely offsets and is allocated back to take advantage of a higher market return.the operating segments, recorded as contra other noninterest expense.
Comparison to Prior Year to Date
For The Other segment reported a net loss of $51 million, for the ninesix months ended SeptemberJune 30, 2017, the Other segment's net income was $7 million,2020, compared to net income of $19$4 million for the ninesix months ended SeptemberJune 30, 2016.2019. The $12$55 million decrease was primarily due to a $24$28 million decrease in net interest income as a result of the Bank’s overall asset sensitive position and the lower average rates during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. The six months ended June 30, 2019 also includes a $25 million benefit from the DOJ Liability fair value adjustment. The provision for credit losses increased $116 million primarily as a result of the DOJ settlement liability which was recordedchanges in the third quarterforecasts of 2016, partially offset by decrease ineconomic conditions and credit downgrades. The $116 million is then directly allocated to the other applicable segments through other noninterest expense. The majority of all other activity within the Other segment largely offsets and is allocated back to the operating segments, recorded as contra other noninterest expense.
RISK MANAGEMENT
Risk Management
Like all financial services companies, we engage
Certain risks are inherent in our 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, operational, strategic, credit, regulatory compliance, legal, reputation,reputational, liquidity, market operational, and strategic.cybersecurity. We have made significant investmentscontinuously invest 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 us 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 Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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 manage credit risk using a thorough process designed to ensure we make prudent and consistent credit decisions. The process was developed with a focus on utilizing risk-based limits and credit concentrations while emphasizing diversification on a geographic, industry and customer level. The process utilizes documented underwriting guidelines, comprehensive documentation standards, and ongoing portfolio monitoring including the timely review and resolution of credits experiencing deterioration. These activities, along with the management of credit policies and credit officers’ delegated authority, are centrally managed by our credit risk team.
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 loancredit losses not included in the Tier 2 capital. This lending limit was $249$333 million as of SeptemberJune 30, 2017. Flagstar maintains2020. We maintain a more conservative maximum internal Bank credit 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 thanhave a higher internal Bank limit of $125 million. As of June 30, 2020, the Board approved the extension of short-term “overlines” to certain warehouse borrowers as all advances are fully collateralized by residential mortgage loans and this asset class has had very low levels of historical loss, resulting in a temporary increase of the warehouse borrower limit required by HOLA. Allto $175 million. We have a tracking and reporting process to monitor lending concentration levels, and all credit exposures to a single or related borrower that exceed $50 million must be approved by the Board of Directors.
The Our commercial loan portfolio has been built on our relationship-based lending strategy. We provide financing and banking products to our commercial customers in our core banking footprint and will follow those established customer relationships to meet their financing needs in areas outside of our footprint. We have also formed relationship lending on a national scale through our home builder finance and warehouse lending businesses. At June 30, 2020, we had $10.2 billion in our commercial loan portfolio with our warehouse lending and home builder finance businesses accounting for 61 percent of the total. Of the remaining commercial loans in our portfolio, the majority of CRE and C&I loans were with customers who have established relationships within our creditcore banking footprint.
Credit risk within the commercial loan portfolio is associated with lending activities, asmanaged using concentration limits based on line of business, industry, geography and product type. This is managed through the acceptance and managementuse of credit risk is central to profitable lending. We manage our credit risk by establishing soundstrict underwriting guidelines detailed in credit policies, ongoing loan level reviews, monitoring of the concentration limits and continuous portfolio risk management reporting. The commercial credit policy outlines the risks and underwriting requirements and provides a framework for all credit and lending activities. Our commercial loan credit policies consider maturity and amortization terms, maximum LTVs,
minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pro-forma analysis requirements and thresholds for product specific advance rates.
We typically originate loans on a recourse basis with full or partial guarantees. On a limited basis, we may approve loans without recourse if sufficient consideration is provided in the loan structure. Non-recourse loans primarily have low LTVs, strong cash flow coverage or other mitigating factors supporting the lack of a guaranty. These guidelines also require an appraisal of pledged collateral prior to closing and on an as-needed basis when market conditions justify. We contract with a variety of independent licensed professional firms to conduct appraisals that are in compliance with our internal commercial credit and appraisal policies and regulatory requirements.
Our commercial loan portfolio includes leveraged lending. The Bank defines a transaction as leveraged when two or more of the following conditions exist: 1) proceeds from the loan are used for buyouts, acquisitions, recapitalization or capital distributions, 2) the borrower's total funded debt to EBITDA ratio is greater than four or Senior Funded Debt to EBITDA ratio is greater than three, 3) borrower with a high debt to net worth ratio within its industry or sector as defined by internal limits, and 4) debt leverage significantly exceeds industry norms or historical levels for leverage as defined by internal limits. Leveraged lending transactions typically result in leverage ratios that are significantly above industry norms or historical levels. Our leveraged lending portfolio and other loan portfolios with above-average default probabilities tend to behave similarly during a downturn in the general economy or a downturn within a specific sector. Consequently, we take steps to avoid undue concentrations by setting limits consistent with our appetite for risk and our financial capacity. In addition, there are specific underwriting conditions set for our leveraged loan portfolio and there is additional emphasis on certain items beyond the standard underwriting process including synergies, collateral shortfall and projections.
Our commercial loan portfolio also includes loans that are part of the SNC Program. A SNC is defined as any loan or loan commitment of at least $100 million that is shared by three or more supervised institutions. On an annual basis, a joint regulatory task force performs a risk assessment of all SNCs. When completed, these risk ratings are shared and our risk rating must be no better than the risk rating listed in the SNC assessment. Exposure and credit quality for SNCs are carefully monitored and reported internally.
For our commercial real estate portfolio, including owner and nonowner-occupied properties and home builder finance lending, we obtain independent appraisals as part of our underwriting and adheringmonitoring process. These appraisals are reviewed by an internal appraisal group that is independent from our sales and credit teams.
The home builder finance group is a national relationship-based lending platform that focuses on markets with strong housing fundamentals and higher population growth potential. The team primarily originates construction and development loans. We generally lend in metropolitan areas or counties where verifiable market statistics and data are readily available to well controlled processes.support underwriting and ongoing monitoring. We utilize variousalso evaluate the jurisdictions and laws, demographic trends (age, population and income), housing characteristics and economic indicators (unemployment, economic growth, household income trends) for the geographies where our borrowers primarily operate. We engage independent licensed professionals to supply market studies and feasibility reports, environmental assessments and project site inspections to complement the procedures we perform internally. Further, we perform ongoing monitoring of the projects including periodic inspections of collateral and annual portfolio and individual credit reviews.
The consumer loan portfolio has been built on strong underwriting criteria and within concentration limits intended to diversify our risk management and monitoring activitiesprofile. We have built our consumer loan portfolio by adding high quality first mortgage loans to mitigate risks associated with loans that we hold, acquire, and originate.our balance sheet making up 59 percent of our total consumer loan portfolio at June 30, 2020.
Loans held-for-investment
The following table summarizes amortized cost of our loans held-for-investment by category:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | % of Total | | December 31, 2019 | % of Total | | Change |
| (Dollars in millions) | | | | | | |
Consumer loans | | | | | | | |
Residential first mortgage | $ | 2,716 | | 18.3 | % | | $ | 3,154 | | 26.0 | % | | $ | (438) | |
Home equity (1) | 978 | | 6.6 | % | | 1,024 | | 8.4 | % | | (46) | |
Other | 898 | | 6.1 | % | | 729 | | 6.0 | % | | 169 | |
Total consumer loans | 4,592 | | 31.0 | % | | 4,907 | | 40.5 | % | | (315) | |
Commercial loans | | | | | — | % | | |
Commercial real estate | 3,016 | | 20.4 | % | | 2,828 | | 23.3 | % | | 188 | |
Commercial and industrial | 1,968 | | 13.3 | % | | 1,634 | | 13.5 | % | | 334 | |
Warehouse lending | 5,232 | | 35.3 | % | | 2,760 | | 22.8 | % | | 2,472 | |
Total commercial loans | 10,216 | | 69.0 | % | | 7,222 | | 59.5 | % | | 2,994 | |
Total loans held-for-investment | $ | 14,808 | | 100.0 | % | | $ | 12,129 | | 100.0 | % | | $ | 2,679 | |
|
| | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | Change |
| (Dollars in millions) |
Consumer loans | | | | | |
Residential first mortgage | $ | 2,665 |
| | $ | 2,327 |
| | $ | 338 |
|
Home equity | 496 |
| | 443 |
| | 53 |
|
Other | 26 |
| | 28 |
| | (2 | ) |
Total consumer loans | 3,187 |
| | 2,798 |
| | 389 |
|
Commercial loans | | | | |
|
Commercial real estate (1) | 1,760 |
| | 1,261 |
| | $ | 499 |
|
Commercial and industrial | 1,097 |
| | 769 |
| | 328 |
|
Warehouse lending | 1,159 |
| | 1,237 |
| | (78 | ) |
Total commercial loans | 4,016 |
| | 3,267 |
| | 749 |
|
Total loans held-for-investment | $ | 7,203 |
| | $ | 6,065 |
| | $ | 1,138 |
|
| |
(1) | Includes $270 million and $245 million of owner occupied commercial real estate loans at September 30, 2017 and December 31, 2016, respectively. |
(1)Includes second mortgages, HELOCs and HELOANs.
Loans held-for-investment increased $1.1 billion, at September 30, 2017 from December 31, 2016. This increase was due
Prior to ourCOVID-19 we had continued effort to grow both the consumer loan portfolio and commercial loan portfolio.
The commercial loan portfolio growth strengthensstrengthen our Community Banking segment by improving margins through the additions of higher yielding loans. As a result, thegrowing LHFI. Our commercial loan portfolio has grown $749grew $3.0 billion, or 41 percent, from December 31, 2019 to June 30, 2020, led by growth in our warehouse lending portfolio due to increased refinance activity in the mortgage industry. Our consumer loan portfolio decreased $315 million, or 236 percent, sincefrom December 31, 2016. During2019 to June 30, 2020. A $169 million increase in other consumer loans was more than offset by a $438 million decrease in residential first mortgage loans due to higher refinance activity and lower originations in the nine months ended September 30, 2017,HFI portfolio. Since COVID-19 began, we are focusing on our CRElower-risk, higher return warehouse lending portfolio grew $499 millionwhile shifting to a credit management focus, rather than growth, on our remaining commercial portfolio due to economic conditions. At the present time, new relationships require approval of our CEO, Chief Credit Officer and C&I $328 million.
For further information, see Note 4 - Loans Held-for-Investment.Chief Lending Officer.
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. We typically hold certain mortgage loans in LHFI that do not qualify for sale to the Agencies and that have an acceptable yield and risk profile. The LTV requirements on our residential first mortgage loans 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 yieldingAs of June 30, 2020, loans in this portfolio had an average current FICO score of 743 and loans that will diversify or enhance the interest rate characteristicsan average LTV of our balance sheet. 67 percent.
The following table presents amortized cost of our total residential first mortgage LHFI by major category:
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
| (Dollars in millions) | |
Estimated LTVs (1) | | |
Less than 80% and current FICO scores (2): | | |
Equal to or greater than 660 | $ | 1,493 | | $ | 2,263 | |
Less than 660 | 49 | | 93 | |
80% and greater and current FICO scores (2): | | |
Equal to or greater than 660 | 1,040 | | 687 | |
Less than 660 | 134 | | 111 | |
Total | $ | 2,716 | | $ | 3,154 | |
Geographic region | | |
California | $ | 998 | | $ | 1,205 | |
Michigan | 427 | | 442 | |
Texas | 185 | | 205 | |
Washington | 169 | | 181 | |
Florida | 147 | | 214 | |
Colorado | 77 | | 68 | |
Illinois | 75 | | 95 | |
Arizona | 67 | | 79 | |
New York | 61 | | 84 | |
New Jersey | 41 | | 49 | |
Other | 469 | | 532 | |
Total | $ | 2,716 | | $ | 3,154 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (Dollars in millions) |
Current estimated LTV ratios | | | |
Less than 80% and refreshed FICO scores (1): | | | |
Equal to or greater than 660 | $ | 2,389 |
| | $ | 2,077 |
|
Less than 660 | 76 |
| | 95 |
|
80% and greater and refreshed FICO scores (1): | | | |
Equal to or greater than 660 | 132 |
| | 78 |
|
Less than 660 | 8 |
| | 9 |
|
U.S. government guaranteed | 60 |
| | 68 |
|
Total | $ | 2,665 |
| | $ | 2,327 |
|
Geographic region | | | |
California | $ | 1,059 |
| | $ | 858 |
|
Michigan | 267 |
| | 236 |
|
Florida | 193 |
| | 193 |
|
Texas | 174 |
| | 138 |
|
Washington | 160 |
| | 136 |
|
Illinois | 97 |
| | 84 |
|
Arizona | 73 |
| | 65 |
|
New York | 72 |
| | 68 |
|
Colorado | 66 |
| | 60 |
|
Maryland | 65 |
| | 59 |
|
Others | 439 |
| | 430 |
|
Total | $ | 2,665 |
| | $ | 2,327 |
|
| |
(1) | FICO scores are updated at least on a quarterly basis or sooner if available. |
(1)LTVs reflect loan balance 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 more frequently, if available.
The following table presents amortized cost of our total residential first mortgage LHFI as of June 30, 2020, by year of origination:
| | | | | | | | | | | | | | | | | | | | |
| 2020 | 2019 | 2018 | 2017 | 2016 and Prior | Total |
| (Dollars in millions) | | | | | |
Residential first mortgage loans | $ | 167 | | $ | 754 | | $ | 360 | | $ | 437 | | $ | 998 | | $ | 2,716 | |
Percent of total | 6.1 | % | 27.8 | % | 13.3 | % | 16.1 | % | 36.7 | % | 100.0 | % |
Home equity. Our home equity portfolio includes first andHELOANs, second lien positions for HELOANsmortgage loans, 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 and HELOCs is capped at 43 percent and for HELOCs is capped at 45 percent.percent, respectively. We currently limit the maximum CLTV to 89.99 percent and FICO scores to a minimum of 660. Current660 for primary residences and 680 for second homes. Second mortgage loans/HELOANSloans and HELOANs are fixed rate loans and are available with terms up to 1520 years. HELOC loans are adjustable-ratevariable-rate loans that contain a 10-year interest-onlyinterest only draw period followed by a 20-year amortizing period. At June 30, 2020, HELOCs and HELOANs in a first lien position totaled $195 million. As of June 30, 2020, loans in this portfolio had an average current FICO score of 746 and an average CLTV of 78 percent.
Other consumer loans. Our other consumer loan portfolio consists of secured and unsecured loans originated through our indirect lending business, third party originations and our Community Banking segment.
The following table presents amortized cost of our other consumer loan portfolio by purchase type:
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | December 31, 2019 | |
| Balance | % of Portfolio | | Balance | % of Portfolio |
| (Dollars in millions) | | | | |
Indirect lending | $ | 647 | | 72 | % | | $ | 577 | | 79 | % |
Point of Sale | 181 | | 20 | % | | 63 | | 9 | % |
Other | 70 | | 8 | % | | 89 | | 12 | % |
Total other consumer loans | $ | 898 | | 100 | % | | $ | 729 | | 100 | % |
At June 30, 2020, other consumer loans increased to $898 million compared to $729 million at December 31, 2019. The increase is primarily due to growth in our high quality, dealer relationship based, non-auto indirect lending business of which 67 percent is secured by boats and 33 percent secured by recreational vehicles. As of June 30, 2020, loans in our indirect portfolio had an average current FICO score of 745. Point of sale loans include loans originated in conjunction with third-party financial technology companies.
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 neighborhood centers and single tenant locations, which include pharmacies and hardware stores. Generally, the maximum LTV is 80 percent, or 90 percent for owner-occupied real estate, and the minimum debt service coverage is 1.20. At June 30, 2020, our average LTV and average debt service coverage for our CRE portfolio was 52 percent and 2.39 times, respectively. Our CRE loans primarily earn interest at a variable rate.
We have established a national home builder finance program and at June 30, 2020, our commercial portfolio contained $2.0 billion in commitments with $957 million in outstanding loans. These loans are collateralized and included in our CRE portfolio while the remaining loans are unsecured and included in our C&I portfolio.
As of June 30, 2020, our CRE portfolio included $215 million of SNCs and one leveraged lending loan of $4 million. The SNC portfolio had seventeen borrowers with an average UPB of $13 million and an average commitment of $20 million. There were no nonperforming SNC or leveraged loans as of June 30, 2020, and no SNC or leveraged loans outstanding were rated as special mention or substandard.
The following table presents amortized cost of our total CRE LHFI by collateral location and collateral type:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| MI | TX | CA | CO | FL | Other | Total | % by collateral type |
| (Dollars in millions) | | | | | | | |
June 30, 2020 | | | | | | | | |
Home builder | $ | 27 | | $ | 205 | | $ | 137 | | $ | 166 | | $ | 115 | | $ | 202 | | $ | 852 | | 28.2 | % |
Owner occupied | 333 | | 4 | | 28 | | — | | 10 | | 53 | | 428 | | 14.2 | % |
Multi family | 185 | | 68 | | 28 | | 8 | | 10 | | 133 | | 432 | | 14.3 | % |
Retail (1) | 163 | | — | | 20 | | 4 | | — | | 116 | | 303 | | 10.0 | % |
Office | 178 | | 19 | | — | | — | | 2 | | 60 | | 259 | | 8.6 | % |
Hotel | 125 | | — | | 25 | | — | | — | | 82 | | 232 | | 7.7 | % |
Senior living facility | 70 | | 26 | | — | | — | | 3 | | 57 | | 156 | | 5.2 | % |
Industrial | 51 | | 7 | | 21 | | — | | 4 | | 18 | | 101 | | 3.3 | % |
Parking garage/lot | 26 | | 9 | | 1 | | — | | 1 | | 34 | | 71 | | 2.4 | % |
Land-residential (2) | 3 | | — | | 7 | | — | | 18 | | 6 | | 34 | | 1.1 | % |
Non-profit | 1 | | — | | 2 | | — | | 3 | | 3 | | 9 | | 0.2 | % |
Single family residence | 1 | | — | | — | | — | | — | | 2 | | 3 | | 0.1 | % |
All other (3) | 13 | | 48 | | 19 | | 2 | | 5 | | 49 | | 136 | | 4.6 | % |
Total | $ | 1,176 | | $ | 386 | | $ | 288 | | $ | 180 | | $ | 171 | | $ | 815 | | $ | 3,016 | | 100.0 | % |
Percent by state | 39.0 | % | 12.8 | % | 9.5 | % | 6.0 | % | 5.7 | % | 27.0 | % | 100.0 | % | |
(1)Includes multipurpose retail space, neighborhood centers, shopping centers and single-use retail space.
(2)Includes home builder loans secured by land. Land residential includes development and unimproved vacant land.
(3)All other primarily includes: mini-storage facilities, data centers, movie theaters, 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. Most1.20 times. The majority of our C&I loans earn interest at a variable rate.
As of June 30, 2020, our C&I portfolio included $730 million of SNCs. We are the lead bank on 21 percent of the SNCs. The services sector and the financial and insurance sector comprised the majority of the portfolio's NBV with 30 and 37 percent of the balance, respectively. The SNC portfolio had fifty borrowers with an average UPB of $15 million and an average commitment of $25 million. There were no nonperforming loans or loans rated as special mention as of June 30, 2020, and loans totaling $21 million of NBV were rated as substandard.
As of June 30, 2020, our C&I portfolio included $397 million of leveraged lending, of which $252 million were SNCs. The manufacturing sector comprised 51 percent of the leveraged lending portfolio, and the financial and insurance sector comprised 21 percent. There were no nonperforming loans as of June 30, 2020, and loans totaling $27 million and $15 million were rated as special mention and substandard, respectively. Included in Financial & Insurance within our C&I portfolio, are $105 million in loans outstanding to 3 borrowers that are collateralized by MSR assets. Our amounts outstanding to those borrowers range from $29 million to $46 million and the ratio of the loan outstanding to the fair market value of the collateral ranges from 41 percent to 54 percent.
The following table presents amortized cost of our total C&I LHFI by borrower's geographic location and industry type:type as defined by North American Industry Classification System (NAICS):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MI | CA | OH | IN | WI | TX | NY | NJ | SC | CT | Other | Total | % by industry |
| (Dollars in millions) | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | | | |
Financial & Insurance | $ | 93 | | $ | 51 | | $ | 38 | | $ | 19 | | $ | 62 | | $ | 5 | | $ | 21 | | $ | 20 | | $ | 15 | | $ | 64 | | $ | 93 | | $ | 481 | | 24.4 | % |
Services | 99 | | 31 | | 18 | | — | | — | | 42 | | 2 | | 41 | | 8 | | — | | 92 | | 333 | | 16.9 | % |
Manufacturing | 159 | | 14 | | — | | 8 | | — | | — | | 28 | | 6 | | 1 | | — | | 73 | | 289 | | 14.7 | % |
Home Builder Finance | — | | 69 | | — | | — | | — | | — | | — | | 12 | | — | | — | | 34 | | 115 | | 5.8 | % |
Rental & Leasing | 86 | | — | | 7 | | — | | — | | — | | 15 | | — | | — | | 10 | | 16 | | 134 | | 6.8 | % |
Distribution | 78 | | — | | — | | — | | — | | — | | 1 | | 18 | | 2 | | — | | 15 | | 114 | | 5.8 | % |
Healthcare | 2 | | 8 | | — | | — | | — | | — | | — | | 15 | | — | | — | | 14 | | 39 | | 2.0 | % |
Government & Education | 29 | | — | | — | | — | | — | | 13 | | — | | 6 | | 20 | | — | | — | | 68 | | 3.5 | % |
Servicing Advances | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | 15 | | 15 | | 0.8 | % |
Commodities | 3 | | — | | — | | — | | — | | — | | — | | — | | 1 | | — | | 3 | | 7 | | 0.4 | % |
Paycheck Protection Program (1) | 218 | | 73 | | 11 | | 17 | | 3 | | 3 | | 14 | | 3 | | — | | — | | 31 | | 373 | | 19.0 | % |
Total | $ | 767 | | $ | 246 | | $ | 74 | | $ | 44 | | $ | 65 | | $ | 63 | | $ | 81 | | $ | 121 | | $ | 47 | | $ | 74 | | $ | 386 | | $ | 1,968 | | 100.0 | % |
Percent by state | 39.0 | % | 12.5 | % | 3.8 | % | 2.2 | % | 3.3 | % | 3.2 | % | 4.1 | % | 6.1 | % | 2.4 | % | 3.8 | % | 19.6 | % | 100.0 | % | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Michigan | | Texas | | Florida | | California | | Tennessee | | Other | | Total | | % by industry |
| (Dollars in millions) |
September 30, 2017 | | | | | | | | | | | | | | | |
Industry Type | | | | | | | | | | | | | | | |
Financial & Insurance | $ | 23 |
| | $ | — |
| | $ | 50 |
| | $ | — |
| | $ | 12 |
| | $ | 228 |
| | $ | 313 |
| | 28.5 | % |
Services (1) | 71 |
| | 73 |
| | — |
| | 34 |
| | — |
| | 114 |
| | 292 |
| | 26.6 | % |
Manufacturing | 61 |
| | 5 |
| | — |
| | 23 |
| | — |
| | 87 |
| | 176 |
| | 16.0 | % |
Healthcare | 29 |
| | 7 |
| | 1 |
| | 1 |
| | 44 |
| | 27 |
| | 109 |
| | 9.9 | % |
Distribution | 57 |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | 59 |
| | 5.4 | % |
Servicing advances | — |
| | — |
| | 21 |
| | — |
| | — |
| | 25 |
| | 46 |
| | 4.2 | % |
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 | % |
Percent by state | 27.3 | % | | 7.7 | % | | 6.6 | % | | 5.5 | % | | 5.1 | % | | 47.9 | % | | 100.0 | % | | |
| |
(1) | Includes unsecured home builder loans of $98 million at September 30, 2017. |
(1)Portfolio sold subsequent to quarter-end. See Note 19 - Subsequent Events for further information.
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 Warehouse lending. We have 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 relationshipsplatform 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. relationship managers across the country. 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. ForIn response to COVID-19, we have increased credit requirements for government loans and lowered the three months ended September 30, 2017, the warehouse advance amount ofrate for loans sold to the Bank totaled $2.9 billionthat we believe have higher risk, as well as not accepting jumbo or 36.3 percent. For the nine months ended September 30, 2017, the warehouse advance amount ofnon-qualified mortgage loans sold to the Bank totaled $8.0 billion or 38.5 percent.as collateral.
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. The aggregate committed amount of adjustable-rate warehouse lines of credit granted to other mortgage lenders at SeptemberJune 30, 20172020 was $2.7$8.1 billion, of which $1.2$5.2 billion was outstanding, compared to $2.9$4.2 billion at December 31, 2016,June 30, 2019, of which $1.2$2.6 billion was outstanding.
Credit Quality
Trends Our focus on effectively managing credit risk through our careful underwriting standards and processes has resulted in
strong trends in certain credit quality characteristics such as nonperforming loans and past due statistics remain very strong and continue to show improvement. This is predominantly a result of effectively managing credit risks and sales of legacy portfolios that included nonperforming and TDR loans which have been replaced by new loans with strong credit characteristics.in our loan portfolios. 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:
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
| (Dollars in millions) | |
LHFI | | |
Consumer loans | | |
Residential first mortgage | $ | 19 | | $ | 13 | |
Home equity | 3 | | 2 | |
Other Consumer | 1 | | 1 | |
Total nonperforming LHFI | 23 | | 16 | |
TDRs | | |
Residential first mortgage | 8 | | 8 | |
Home equity | 2 | | 2 | |
Total nonperforming TDRs | 10 | | 10 | |
Total nonperforming LHFI and TDRs (1) | 33 | | 26 | |
Real estate and other nonperforming assets, net | 7 | | 10 | |
LHFS | 7 | | 5 | |
Total nonperforming assets | $ | 47 | | $ | 41 | |
Nonperforming assets to total assets (2) | 0.14 | % | 0.15 | % |
Nonperforming LHFI and TDRs to LHFI | 0.22 | % | 0.21 | % |
Nonperforming assets to LHFI and repossessed assets (2) | 0.27 | % | 0.30 | % |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (Dollars in millions) |
LHFI | | | |
Consumer loans | | | |
Residential first mortgage | $ | 14 |
| | $ | 18 |
|
Home equity | 1 |
| | 4 |
|
Commercial | | | |
CRE | 1 |
| | — |
|
Total nonperforming LHFI | 16 |
| | 22 |
|
TDRs | | | |
Consumer loans | | | |
Residential first mortgage | 11 |
| | 11 |
|
Home equity | 4 |
| | 7 |
|
Total nonperforming TDRs | 15 |
| | 18 |
|
Total nonperforming LHFI and TDRs (1) | 31 |
| | 40 |
|
Real estate and other nonperforming assets, net | 9 |
| | 14 |
|
LHFS | 8 |
| | 6 |
|
Total nonperforming assets | $ | 48 |
| | $ | 60 |
|
Nonperforming assets to total assets (2) | 0.24 | % | | 0.39 | % |
Nonperforming LHFI and TDRs to LHFI | 0.44 | % | | 0.67 | % |
Net charge-offs to LHFI ratio (annualized) (1) | 0.08 | % | | 0.13 | % |
Nonperforming assets to LHFI and repossessed assets (2) | 0.58 | % | | 0.90 | % |
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. |
(1)Includes less than 90 day past due performing loans placed on nonaccrual. Interest is not being accrued on these loans.
At September 30, 2017, we had $48 million of nonperforming assets compared to $60 million of nonperforming assets(2)Ratio excludes LHFS, which are recorded at December 31, 2016. This decrease was primarily due to a $7 million decrease in 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 in our nonperforming assets is due to our continued effort to grow our loan portfolio with strong credit quality loans combined with a slowing emergence of nonperforming loans driven by decreased levels of delinquencies.fair value.
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 total nonperforming LHFI and TDRs:
| | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | Six Months Ended, | |
| June 30, 2020 | March 31, 2020 | | June 30, 2020 | June 30, 2019 |
| (Dollars in millions) | | | | |
Beginning balance | $ | 29 | | $ | 26 | | | $ | 26 | | $ | 22 | |
Additions | 12 | | 10 | | | 22 | | 78 | |
Reductions | | | | | |
Principal payments | (1) | | (6) | | | (7) | | (2) | |
Charge-offs | (1) | | (1) | | | (2) | | (33) | |
Return to Performing Status | (6) | | — | | | (6) | | — | |
Transfers to REO | — | | — | | | — | | (2) | |
Total nonperforming LHFI and TDRs (1) | $ | 33 | | $ | 29 | | | $ | 33 | | $ | 63 | |
(1)Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in millions) |
Beginning balance | $ | 30 |
| | $ | 44 |
| | $ | 40 |
| | $ | 66 |
|
Additions | 5 |
| | 7 |
| | 19 |
| | 30 |
|
Reductions | | | | | | | |
Principal payments and loan sales | (2 | ) | | (2 | ) | | (6 | ) | | (9 | ) |
Charge-offs | — |
| | — |
| | (2 | ) | | (4 | ) |
Returned to performing status | (1 | ) | | (8 | ) | | (1 | ) | | (15 | ) |
Transfers to REO | (1 | ) | | (1 | ) | | (19 | ) | | (28 | ) |
Total nonperforming LHFI and TDRs (1) | $ | 31 |
| | $ | 40 |
| | $ | 31 |
| | $ | 40 |
|
| |
(1) | Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans. |
As of September 30, 2017, nonperforming consumer loans decreased $9 million from December 31, 2016, due to 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 status during both the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016, respectively. During the three months ended September 30, 2017, we had no charge-offs.
Delinquencies
The following table sets forth our performing LHFI which are past dueloans 30-89 days: |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (Dollars in millions) |
Performing loans past due 30-89: | | | |
Consumer loans | | | |
Residential first mortgage | $ | 3 |
| | $ | 6 |
|
Home equity | 2 |
| | 3 |
|
Other | — |
| | 1 |
|
Total performing loans past due 30-89 days | $ | 5 |
| | $ | 10 |
|
Early stage delinquencies remained low with the 30 to 89 days past due in our LHFI portfolio:
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | December 31, 2019 | |
| Amount | % of LHFI | | Amount | % of LHFI |
| (Dollars in millions) | | | | |
Performing loans past due 30-89: | | | | | |
Consumer loans | | | | | |
Residential first mortgage | $ | 11 | | 0.41 | % | | $ | 9 | | 0.29 | % |
Home equity | 1 | | 0.10 | % | | 1 | | 0.10 | % |
Other | 3 | | 0.33 | % | | 4 | | 0.55 | % |
Total consumer loans | 15 | | 0.33 | % | | 14 | | 0.29 | % |
Commercial Real Estate | — | | — | % | | — | | — | % |
Commercial and Industrial | — | | — | % | | — | | — | % |
Total commercial loans | — | | — | % | | — | | — | % |
Total performing loans past due 30-89 days | $ | 15 | | 0.10 | % | | $ | 14 | | 0.12 | % |
For further information, see Note 4 - Loans Held-for-Investment.
Payment Deferrals
Beginning in March 2020, as a response to COVID-19, we offered our consumer customers principal and interest payment deferrals and extensions. Consumer customers were not required to provide proof of hardship to be granted a payment deferral. Typically payment history is the primary tool used to identify consumer borrowers who are experiencing financial difficulty. Forbearance makes this determination more challenging. In addition, consumer customers who have requested payment deferrals are not being aged and remain in the aging category they were in prior to payment deferral.
The table below summarizes borrowers in our consumer loan portfolios that are in forbearance:
| | | | | | | | | | | |
| As of June 30, 2020 | | |
| Number of Borrowers | UPB | Percent of Portfolio |
| (Dollars in millions) | | |
Loans Held-For-Investment | | | |
Consumer loans | | | |
Residential first mortgage | 885 | $ | 292 | | 10.8 | % |
Home equity | 1,015 | 87 | | 9.0 % |
Other consumer | 1,408 | 50 | | 5.8 | % |
Total consumer loan deferrals | 3,308 | $ | 429 | | 9.5 | % |
| | | |
Loans Held-For-Sale | | | |
Residential first mortgage | 302 | $ | 126 | | 4.0 % |
As of June 30, 2020, commercial customers requested and were granted $549 million of payment deferrals, and, of that amount, $333 million are deferrals of both principal and interest payments, $110 million are deferrals of principal only, and $106 million are deferrals of interest only. Commercial customers who have requested payment deferrals are not being aged and remain in the aging category they were in prior to payment deferral. The table below summarizes borrowers in our commercial loan portfolios that have requested and received payment deferral:
| | | | | | | | | | | |
| As of June 30, 2020 | | |
| Number of Borrowers | UPB | Percent of Portfolio |
| (Dollars in millions) | | |
Loans Held-For-Investment | | | |
Automotive | 8 | $ | 44 | | 28.4 | % |
Leisure & entertainment | 13 | 15 | | 12.1 | % |
Healthcare | 14 | 4 | | 9.0 | % |
Other | 70 | 108 | | 6.6 | % |
Total C&I deferrals | 105 | 171 | | 13.3 | % |
Hotel | 12 | 132 | | 56.3 | % |
Retail | 24 | 91 | | 29.1 | % |
Senior housing | 1 | 7 | | 5.0 | % |
Other | 98 | 148 | | 6.4 | % |
Total CRE deferrals | 135 | 378 | | 12.5 | % |
Warehouse deferrals | — | | — | | — | % |
Total commercial loan deferrals (1) | 240 | $ | 549 | | 11.0 | % |
(1)Percent shown excludes warehouse loans.
The table below summarizes the percent of our residential loan servicing portfolio in forbearance as of June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Loans in Forbearance | | | | | | | |
| | | | Borrowers making April, May and June Payments | | | Remaining Borrowers | | | Total Loans in Forbearance | |
| Total Population | | | | | | | | | | |
| Unpaid Principal Balance (1) | Number of accounts | | Unpaid Principal Balance (1) | Number of accounts | | Unpaid Principal Balance (1) | Number of accounts | | Percent of UPB | Percent of Accounts |
| (Dollars in millions) | | | | | | | | | | |
Loan servicing | | | | | | | | | | | |
Subserviced for others (2) | $ | 174,384 | | 854,216 | | | $ | 7,145 | | 32,403 | | | $ | 13,808 | | 59,692 | | | 12.0 | % | 10.8 | % |
Serviced for others (4) | 29,979 | | 123,256 | | | 1,261 | | 5,058 | | | 3,018 | | 11,661 | | | 14.3 | % | 13.6 | % |
Serviced for own loan portfolio (3) | 9,211 | | 64,142 | | | 237 | | 1,895 | | | 473 | | 1,850 | | | 7.7 | % | 5.8 | % |
Total loans serviced | $ | 213,574 | | 1,041,614 | | | $ | 8,643 | | 39,356 | | | $ | 17,299 | | 73,203 | | | 12.1 | % | 10.8 | % |
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.
(3)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), loans decreasingwith government guarantees (residential first mortgage), and repossessed assets.
(4)Remaining borrowers includes $1.1 million of GNMA repurchase obligations
As the MSR owner for loans serviced for others, we are required to $5 million at September 30, 2017, comparedadvance principal and interest for a period of up to $10 million at December 31, 2016. There were no past due commercialfour months and tax and insurance payments until the Agencies make us whole. We anticipate servicing advances for these loans at September 30, 2017in forbearance to increase throughout the remainder of 2020. We believe that we have ample liquidity to handle the increase in servicing advances. We initially provide advances on a short-term basis for loans we subservice and December 31, 2016.are reimbursed by the MSR owner. Our advance receivable for our subserviced loans is therefore insignificant.
Troubled debt restructurings (held-for-investment)
Troubled debt restructurings ("TDRs") TDRs are modified loans in which a borrower demonstrates financial difficulties and for which a concession has been granted as a result. Nonperforming TDRs are included in nonaccrual loans. TDRs remain in nonperforming status until a borrower has made payments and is current for at least six consecutive months of payments under the modified terms.months. Performing TDRs are excluded fromnot considered to be nonaccrual loans because it is reasonably assuredso long as we believe that all contractual principal and interest due under the restructured terms will be collected.
Beginning in March 2020, as a response to COVID-19, we offered our consumer and commercial customers principal and interest payment deferrals and extensions. We considered these programs in the context of whether or not the short-term modifications of these loans would constitute a TDR. We considered the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), interagency guidance and related guidance from the FASB, which provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not required to be accounted for as TDRs. As a result, we have determined that these loans are not TDRs. We believe our application of the referenced guidance and accounting for these programs is appropriate.
The following table sets forth a summary of TDRs by performing status:
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
| (Dollars in millions) | |
Performing TDRs | | |
Consumer Loans | | |
Residential first mortgage | $ | 20 | | $ | 20 | |
Home equity | 15 | | 18 | |
Commercial Real Estate | 5 | | — | |
Total performing TDRs | 40 | | 38 | |
Nonperforming TDRs | | |
Nonperforming TDRs | 4 | | 3 | |
Nonperforming TDRs, performing for less than six months | 6 | | 7 | |
Total nonperforming TDRs | 10 | | 10 | |
Total TDRs | $ | 50 | | $ | 48 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (Dollars in millions) |
Performing TDRs | | | |
Residential first mortgage | $ | 20 |
| | $ | 22 |
|
Home equity | 26 |
| | 45 |
|
Total performing TDRs | 46 |
| | 67 |
|
Nonperforming TDRs | 4 |
| | 8 |
|
Nonperforming TDRs at inception but performing for less than six months | 11 |
| | 10 |
|
Total nonperforming TDRs | 15 |
| | 18 |
|
Total TDRs (1) | $ | 61 |
| | $ | 85 |
|
| |
(1) | The ALLL on consumer TDR loans totaled $12 million and $9 million at September 30, 2017 and December 31, 2016. |
At SeptemberJune 30, 20172020 our total TDR loans decreased $24increased $2 million compared to December 31, 20162019, primarily due to the salean addition of nonperforming loansa commercial real estate loan offset by principal payments and lower delinquency rates during the nine months ended September 30, 2017.payoffs. Of our total TDR loans, 75.580 percent and 79 percent were in performing status at SeptemberJune 30, 2017.
2020 and December 31, 2019. For further information, see Note 4 - Loans Held-for-Investment.
Allowance for LoanCredit Losses
The ALLL represents management's estimatefollowing tables present the changes in the allowance for credit losses balance for the three and six months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | | | | | |
| Residential First Mortgage | Home Equity | Other Consumer | Commercial Real Estate | Commercial and Industrial | Warehouse Lending | Total LHFI Portfolio (1) | Unfunded Commitments | Total ACL |
| (Dollars in millions) | | | | | | | | |
Beginning allowance balance | $ | 46 | | $ | 23 | | $ | 16 | | $ | 28 | | $ | 18 | | $ | 1 | | $ | 132 | | $ | 20 | | $ | 152 | |
Provision (benefit) for credit losses: | | | | | | | | | |
Loan volume | (2) | | (1) | | 4 | | — | | 1 | | — | | 2 | | — | | 2 | |
Economic forecast | 9 | | 3 | | 6 | | 14 | | (2) | | — | | 30 | | 1 | | 31 | |
Credit (2) | 5 | | 2 | | 7 | | 10 | | — | | — | | 24 | | — | | 24 | |
Qualitative factor adjustments | 2 | | — | | — | | 31 | | 6 | | — | | 39 | | — | | 39 | |
Charge-offs | (2) | | (1) | | (2) | | — | | — | | — | | (5) | | — | | (5) | |
Provision for charge-offs | 2 | | 1 | | 2 | | — | | — | | — | | 5 | | — | | 5 | |
Recoveries | — | | 1 | | 1 | | — | | — | | — | | 2 | | — | | 2 | |
Ending allowance balance | $ | 60 | | $ | 28 | | $ | 34 | | $ | 83 | | $ | 23 | | $ | 1 | | $ | 229 | | $ | 21 | | $ | 250 | |
(1) Excludes loans carried under the fair value option (2) Includes changes in the individual evaluated reserve | | | | | | | | | |
| Six Months Ended June 30, 2020 | | | | | | | | |
| Residential First Mortgage | Home Equity | Other Consumer | Commercial Real Estate | Commercial and Industrial | Warehouse Lending | Total LHFI Portfolio (1) | Unfunded Commitments | Total ACL |
| (Dollars in millions) | | | | | | | | |
Beginning Balance ALLL | $ | 22 | | $ | 14 | | $ | 6 | | $ | 38 | | $ | 22 | | $ | 5 | | $ | 107 | | $ | 3 | | $ | 110 | |
Impact of adopting ASC 326 | 25 | | 12 | | 10 | | (14) | | (6) | | (4) | | 23 | | 7 | | 30 | |
Beginning allowance balance | 47 | | 26 | | 16 | | 24 | | 16 | | 1 | | 130 | | 10 | | 140 | |
Provision (benefit) for credit losses: | | | | | | | | | |
Loan volume | (4) | | (1) | | 5 | | 2 | | 3 | | — | | 5 | | — | | 5 | |
Economic forecast | 14 | | 3 | | 6 | | 15 | | (3) | | — | | 35 | | 11 | | 46 | |
Credit (2) | 3 | | (2) | | 6 | | 10 | | — | | — | | 17 | | — | | 17 | |
Qualitative factor adjustments | — | | — | | — | | 32 | | 7 | | — | | 39 | | — | | 39 | |
Charge-offs | (3) | | (2) | | (3) | | — | | — | | — | | (8) | | — | | (8) | |
Provision for charge-offs | 3 | | 2 | | 3 | | — | | — | | — | | 8 | | — | | 8 | |
Recoveries | — | | 2 | | 1 | | — | | — | | — | | 3 | | — | | 3 | |
Ending allowance balance | $ | 60 | | $ | 28 | | $ | 34 | | $ | 83 | | $ | 23 | | $ | 1 | | $ | 229 | | $ | 21 | | $ | 250 | |
(1) Excludes loans carried under the fair value option
(2) Includes changes in the individual evaluated reserve
The allowance for credit losses was $250 millionat June 30, 2020, compared to $152 million at March 31, 2020, The increase in the allowance is primarily reflective of probable losses that are inherentchanges in our LHFI portfolio but which haveeconomic forecast between March 31, 2020 and June 30, 2020. We utilized the Moody’s June scenarios in our forecast: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. The resulting composite forecast for the second quarter 2020 was worse than the scenario used in the first quarter 2020. Unemployment ends the year at 10 percent and recovers only slightly in 2021. GDP recovers only slightly by the end of the year from current levels and does not yet been realized. For further information, see Note 4 - Loans Held-for-Investment.return to the pre-COVID level until mid-2022. HPI decreases 2 percent from early 2020 through 2021.
The ALLLworsening of our economic forecast increased the ACL by $31 million from March 31, 2020. In addition to this increase, we judgmentally increased the qualitative reserves by $39 million primarily in our CRE and C&I portfolios, guided by the model output from Moody's adverse scenario and our judgment relating to industries and borrowers we believe could be more exposed to the stressful conditions in our forecast. In addition, we reviewed our loans in deferral status and proactively downgraded loans totaling approximately $180 million UPB from "pass" status during the quarter, resulting in an increase of $24 million to the ACL. This resulted in an increase to our reserves of approximately $98 million, which includes an increase in our reserves for unfunded commitments of $1 million.
The allowance as a percentage of LHFI decreasedwas 1.7 percent at June 30, 2020 compared to 2.00.9 percent as of September 30, 2017 from 2.4 percent as ofat December 31, 2016. This decrease is attributable to2019. The increase in the continued low levels of delinquencies and net charge-offs in our portfolio. Additionally, our loan growth has been in high credit quality assets across both our consumer and commercial portfolios. At September 30, 2017, our allowance as a percentage of LHFI is reflective of the additional increases to the allowance to reflect the change in economic forecast used between December 31, 2019 and June 30, 2020. At June 30, 2020, we had a 2.7 percent ofand 1.2 percentallowance coverage on our consumer loan portfolio was 2.3 percent and our allowance as percent of our commercial loan portfolio, was 1.7 percent.respectively.
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.
The following tables set forth certain information regarding the allocation of our ALLLallowance to each loan category:category, including the allowance amount as a percentage of amortized cost:
| | | | | | | | | | | | | | |
| June 30, 2020 | | | |
| LHFI Portfolio (2) | Percent of Portfolio | Allowance Amount (1) | Allowance as a Percent of Loan Portfolio |
Consumer loans | | | | |
Residential first mortgage | $ | 2,702 | | 18.3 | % | $ | 60 | | 2.2 | % |
Home equity | 976 | | 6.6 | % | 28 | | 2.9 | % |
Other consumer | 898 | | 6.1 | % | 36 | | 4.0 | % |
Total consumer loans | 4,576 | | 30.9 | % | 124 | | 2.7 | % |
Commercial loans | | | | |
Commercial real estate | $ | 3,016 | | 20.4 | % | $ | 99 | | 3.3 | % |
Commercial and industrial | 1,968 | | 13.3 | % | 26 | | 1.3 | % |
Warehouse lending | 5,232 | | 35.4 | % | 1 | | — | % |
Total commercial loans | 10,216 | | 69.1 | % | 126 | | 1.2 | % |
Total consumer and commercial loans | $ | 14,792 | | 100.0 | % | $ | 250 | | 1.7 | % |
(1) Includes allowance for loan losses and reserve for unfunded commitments
(2) Excludes loans carried under the fair value option
| | | | | | | | | | | | | | |
| December 31, 2019 | | | |
| LHFI Portfolio (2) | Percent of Portfolio | Allowance Amount (1) | Allowance as a Percent of Loan Portfolio |
Consumer loans | | | | |
Residential first mortgage | $ | 3,145 | | 26.0 | % | $ | 22 | | 0.7 | % |
Home equity | 1,021 | | 8.4 | % | 14 | | 1.4 | % |
Other consumer | 729 | | 6.0 | % | 6 | | 0.8 | % |
Total consumer loans | 4,895 | | 40.4 | % | 42 | | 0.9 | % |
Commercial loans | | | | |
Commercial real estate | $ | 2,828 | | 23.3 | % | $ | 40 | | 1.4 | % |
Commercial and industrial | 1,634 | | 13.5 | % | 23 | | 1.4 | % |
Warehouse lending | 2,760 | | 22.8 | % | 5 | | 0.2 | % |
Total commercial loans | 7,222 | | 59.6 | % | 68 | | 0.9 | % |
Total consumer and commercial loans | $ | 12,117 | | 100.0 | % | $ | 110 | | 0.9 | % |
(1) Includes allowance for loan losses and reserve for unfunded commitments
(2) Excludes loans carried under the fair value option
|
| | | | | | | | | | | | | |
| September 30, 2017 |
| Loans Held-for-Investment | | Percent of Portfolio | | Allowance Amount | | Allowance as a Percent of Loan Portfolio |
| (Dollars in millions) |
Consumer loans | | | | | | | |
Residential first mortgage | $ | 2,656 |
| | 36.9 | % | | $ | 52 |
| | 2.0 | % |
Home equity | 492 |
| | 6.8 | % | | 20 |
| | 4.1 | % |
Other | 26 |
| | 0.4 | % | | 1 |
| | 3.8 | % |
Total consumer loans | 3,174 |
| | 44.1 | % | | 73 |
| | 2.3 | % |
Commercial loans | | | | | | | |
Commercial real estate | 1,760 |
| | 24.5 | % | | 42 |
| | 2.4 | % |
Commercial and industrial | 1,097 |
| | 15.3 | % | | 19 |
| | 1.7 | % |
Warehouse lending | 1,159 |
| | 16.1 | % | | 6 |
| | 0.5 | % |
Total commercial loans | 4,016 |
| | 55.9 | % | | 67 |
| | 1.7 | % |
Total consumer and commercial loans (1) | $ | 7,190 |
| | 100.0 | % | | $ | 140 |
| | 1.9 | % |
| |
(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 providespresents additional information on each class of loans in our charge-offsLHFI portfolio, including amortized cost and credit quality ratios:average loan life:
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | December 31, 2019 | |
| LHFI Portfolio | Weighted Average Loan Life | | LHFI Portfolio | Weighted Average Loan Life |
Consumer loans | | | | | |
Residential first mortgage | $ | 2,702 | | 5 | | | $ | 3,145 | | 5 | |
Home equity | 976 | | 3 | | | 1,021 | | 3 | |
Other consumer | 898 | | 3 | | | 729 | | 2 | |
Total consumer loans | 4,576 | | | | 4,895 | | |
Commercial loans | | | | | |
Commercial real estate | 3,016 | | 2 | | | 2,828 | | 2 | |
Commercial and industrial | 1,968 | | 2 | | | 1,634 | | 1 | |
Warehouse lending | 5,232 | | — | | | 2,760 | | — | |
Total commercial loans | 10,216 | | | | 7,222 | | |
Total consumer and commercial loans (1) | $ | 14,792 | | | | $ | 12,117 | | |
(1) Excludes loans carried under the fair value option
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | )% |
| |
(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 the fair value option |
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 nine months ended September 30, 2017 decreased to $6 million, compared to $28 million for the nine months ended September 30, 2016, primarily from the sale of $110 million UPB of nonperforming, TDR and non-agency loans and net charge-offs associated with loans with government guarantees. As a percentage of average LHFI, net charge-offs for 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 by 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.
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"), Our ALCO, which is composed of our executive officers and certain members of other management, monitors interest rate risk on an on-goingongoing 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(e.g. plus or minus 200100 basis points) resulting in the shape of the yield curve remaining unchanged. The minus 200 basis point shock scenario is effectively a flattener scenario as rates are floored at zero given the current interest rate levels.
|
| | | | | | | | | | | |
September 30, 2017 |
Scenario | | Net interest income | | $ Change | | % Change |
| | (Dollars in millions) | | |
200 | | $ | 458 |
| | $ | 25 |
| | 5.9 | % |
Constant | | 433 |
| | — |
| | — | % |
(200) | | 373 |
| | (60 | ) | | (14.0 | )% |
December 31, 2016 |
Scenario | | Net interest income | | $ Change | | % Change |
| | (Dollars in millions) | | |
200 | | $ | 321 |
| | $ | 19 |
| | 6.3 | % |
Constant | | 301 |
| | — |
| | — | % |
(200) | | 245 |
| | (57 | ) | | (18.9 | )% |
| | | | | | | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | |
Scenario | Net interest income | $ Change | % Change | | | | | | | | |
| (Dollars in millions) | | | | | | | | | | |
100 | $ | 640 | | $ | 62 | | 10.6 | % | | | | | | | | |
Constant | $ | 578 | | $ | — | | — | % | | | | | | | | |
(100) | N/M | N/M | N/M | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
Scenario | Net interest income | $ Change | % Change | | | | | | | | |
| (Dollars in millions) | | | | | | | | | | |
100 | $ | 592 | | $ | 34 | | 6.0 | % | | | | | | | | |
Constant | $ | 559 | | $ | — | | — | % | | | | | | | | |
(100) | $ | 520 | | $ | (39) | | (6.9) | % | | | | | | | | |
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, 2017,2020, the $132$19 million increase in the net interest income in the constant scenario as compared to that at December 31, 20162019 was primarily driven by increased size of balance sheet.the growth in our interest earning assets partially offset by lower short term market rates.
As of September 30, 2017, 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 million and $52 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 futureFuture 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 the short-term earnings (Net Interest Income Sensitivity) and long-term valuation (EVE) approaches, rather than Net Interest Income Sensitivity alone provides a more comprehensive analysis of interest rate risk exposure than Net Interest Income Sensitivity alone.exposure.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | | | | | | December 31, 2019 | | | | | | |
Scenario | EVE | EVE% | $ Change | % Change | | Scenario | EVE | EVE% | $ Change | % Change | | Policy Limits |
(Dollars in millions) | | | | | | | | | | | | |
300 | $ | 3,991 | | 14.6 | % | $ | 602 | | 17.7 | % | | 300 | $ | 3,147 | | 13.6 | % | $ | 150 | | 5.0 | % | | 22.5 | % |
200 | $ | 3,851 | | 14.1 | % | $ | 461 | | 13.6 | % | | 200 | $ | 3,152 | | 13.7 | % | $ | 155 | | 5.2 | % | | 15.0 | % |
100 | $ | 3,672 | | 13.5 | % | $ | 282 | | 8.3 | % | | 100 | $ | 3,103 | | 13.5 | % | $ | 106 | | 3.5 | % | | 7.5 | % |
Current | $ | 3,390 | | 12.4 | % | $ | — | | — | % | | Current | $ | 2,997 | | 13.0 | % | $ | — | | — | % | | — | % |
(100) | N/M | N/M | N/M | N/M | | (100) | $ | 2,832 | | 12.3 | % | $ | (165) | | (5.5) | % | | 7.5 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 | | December 31, 2016 |
Scenario | | EVE | | EVE% | | $ Change | | % Change | | Scenario | | EVE | | EVE% | | $ Change | | % Change |
| | (Dollars in millions) | | | | (Dollars in millions) |
300 | | $ | 2,109 |
| | 12.6 | % | | $ | (155 | ) | | (6.9 | )% | | 300 | | $ | 1,927 |
| | 13.9 | % | | $ | (173 | ) | | (8.2 | )% |
200 | | 2,185 |
| | 13.0 | % | | (79 | ) | | (3.5 | )% | | 200 | | 2,005 |
| | 14.4 | % | | (95 | ) | | (4.5 | )% |
100 | | 2,250 |
| | 13.4 | % | | (14 | ) | | (0.6 | )% | | 100 | | 2,073 |
| | 14.9 | % | | (28 | ) | | (1.3 | )% |
Current | | 2,264 |
| | 13.5 | % | | — |
| | — | % | | Current | | 2,100 |
| | 15.1 | % | | — |
| | — | % |
(100) | | 2,233 |
| | 13.3 | % | | (31 | ) | | (1.4 | )% | | (100) | | 2,067 |
| | 14.9 | % | | (33 | ) | | (1.6 | )% |
Our balance sheet exhibits liabilityasset sensitivity in a risingvarious interest rate scenarioscenarios. The increase in EVE as the EVE decreases. The decrease in EVErates raise is the result of the amount of liabilitiesassets that would be expected to reprice exceeding the amount of assets repriced in the +200 scenario. Theliabilities repriced. This increased as of June 30, 2020 compared to December 31, 2016 (100) is effectively a flattener scenario as shorter term rates are unable to decrease 100 basis points2019 due to the absolute level of rates. Therefore,long term fixed rate funding actions discussed above. At June 30, 2020 and December 31, 2019, for each scenario shown, 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 reductionpercentage change in EVE.our EVE is within our Board policy limits.
Derivative financial instruments
As a part of our risk management strategy, we use derivative financial instruments to minimize fluctuation in earnings caused by interest ratemarket 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 our unclosed mortgage commitmentsorigination pipeline 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 throughinversely, a 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, and 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 1816 - 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 16 - Fair Value Measurements.
Liquidity Risk
Liquidity risk is the risk that we will not have sufficient funds, at a reasonable cost, to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects the ability to, at a reasonable cost, 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 and the payment of cash dividends which includes compensation and benefits, legal and professional expense and general and administrative expenses.were increased to $0.05 per share in the first quarter 2020. The Company holds $246 million of senior notes which are scheduled to mature on July 15, 2021. At SeptemberJune 30, 2017,2020, the Company held $200$315 million of cash on deposit at the Bank, or 3.8 yearsfor future cash outflows for an amount sufficient to service the senior notes, repay the senior notes at maturity, pay dividends and cover the operating expenses of expense and debt service coverage.the Company.
The OCC regulatesand the FRB regulate 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, must file a notice or application with the OCC at least 30 days prior to each proposed capital distribution. Whether an application or notice is required is based on a number of factors including whether the institution qualifies for expedited treatment 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,years, or the Bank must receive approval fromwould not be at least adequately capitalized following the FRB before declaring any dividends.dividend. Additional restrictions on dividends apply if the Bank fails the QTL test.
In As of June 30, 2020, the third quarter 2017, we paid dividends of $84 million fromBank is in compliance with the QTL test. At June 30, 2020, the Bank is able to pay dividends to the Bancorp. To support the on-going debt service and 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 Bankholding company of approximately $217 million without submitting an application to the Bancorp for the foreseeable future.OCC and remain well capitalized.
For further information and restrictions related to the Bank's payment of dividends, see MD&A - Capital and Regulatory Risk.
Bank Liquidity
We primarily originate agency-eligible LHFS Our primary sources of funding are deposits from retail and therefore the majority of new residential first mortgage loan originations are readily convertiblegovernment customers, custodial deposits related to cash, either by selling them as part of our monthly agency sales, private party whole loan sales, or by pledging them to theloans we service and FHLB of Indianapolis and borrowing against them.borrowings. We use the FHLB of Indianapolis as a significant source for funding our residential mortgage bankingorigination 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.
Further, other sources of liquidity include our LHFS portfolio and unencumbered investment securities. 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 and borrowing against them. In addition, we have the ability to sell unencumbered investment securities or use them as collateral. At June 30, 2020, we had $2.7 billion available in unencumbered investment securities.
Our Consolidated Statementsprimary measure 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 andliquidity is a reflectionratio of ready liquidity to volatile funding, the volatile funds coverage ratio (“VFCR”), which was 76.88 percent as of June 30, 2020. The VFCR is a liquidity coverage ratio that is customized to our business and ensures we have adequate coverage to meet our liquidity needs during times of liquidity stress. Volatile funds are the portion of the mannerBank’s funding identified as being at a higher risk of runoff in which we execute certaintimes of stress. Ready liquidity consists of cash on reserve at the Federal Reserve and unused borrowing capacity provided by the loan sales for whichand investments portfolios. The VFCR is calculated, reported, and forecasted daily as part of our liquidity management framework.
Our liquidity position is continuously monitored and adjustments are made to the cash outflow is considered an operating activitybalance between sources and uses of funds as deemed appropriate. We balance the corresponding cash inflow is considered an investing activity. For the period ending September 30, 2017, operating cash flows declined primarily dueliquidity of our loan assets to our election to extend theavailable funding sources. Our LHFI portfolio is funded with stable core deposits whereas our warehouse loans and LHFS may be funded with FHLB borrowings and custodial deposits. Warehouse loans are typically more liquid than other loan assets, as loans are paid within a short amount of time, when the lender sells the loan to an outside investor or, in some instances, to the Bank. As not all asset categories require the same level of liquidity, our loan-to-deposit ratio shows how we hold mortgage-backed securities related tomanage our LHFS portfolio.liquidity position, how much liquidity we have and the agility of our balance sheet. The Company's HFI loan-to-deposit ratio, was 77 percent as of June 30, 2020. Excluding warehouse loans, which have draws that typically pay off within a few weeks, and custodial deposits, which represent mortgage escrow accounts on deposit with the Bank, the HFI loan-to-deposit ratio was 85 percent as of June 30, 2020.
As governed and defined by our internalBoard 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 believe 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.
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 |
|
Deposits
The following table presents aprimary sources of funding as of the dates indicated:
| | | | | | | | | | | |
| June 30, 2020 | December 31, 2019 | Change |
| (Dollars in millions) | | |
Retail deposits | $ | 9,770 | | $ | 9,164 | | $ | 606 | |
Government deposits | 1,193 | | 1,213 | | (20) | |
Wholesale deposits | 867 | | 633 | | 234 | |
Custodial deposits | 6,068 | | 4,136 | | 1,932 | |
Total deposits | 17,898 | | 15,146 | | 2,752 | |
FHLB advances and other short-term debt | 4,554 | | 4,815 | | (261) | |
Other long-term debt | 493 | | 496 | | (3) | |
Total borrowed funds | 5,047 | | 5,311 | | (264) | |
Total funding | $ | 22,945 | | $ | 20,457 | | $ | 2,488 | |
The following table presents certain liquidity sources and borrowing capacity as of the dates indicated:
| | | | | | | | | | | |
| June 30, 2020 | December 31, 2019 | Change |
| (Dollars in millions) | | |
Federal Home Loan Bank advances | | | |
Outstanding advances | $ | 3,560 | | $ | 4,345 | | $ | (785) | |
Line of credit | 4 | | — | | 4 | |
Total used borrowing capacity | $ | 3,564 | | $ | 4,345 | | $ | (781) | |
Borrowing capacity: | | | |
Collateralized borrowing capacity | $ | 3,244 | | $ | 2,345 | | $ | 899 | |
Line of credit | 26 | | 30 | | (4) | |
Total unused borrowing capacity | $ | 3,270 | | $ | 2,375 | | $ | 895 | |
| | | |
FRB discount window | | | |
Collateralized borrowing capacity | $ | 1,623 | | $ | 758 | | $ | 865 | |
| | | |
Paycheck Protection Program liquidity facility | | | |
Outstanding advances | $ | 325 | | $ | — | | $ | 325 | |
Borrowing capacity: | | | |
Collateralized borrowing capacity | $ | 55 | | $ | — | | $ | 55 | |
| | | |
Unencumbered investment securities | | | |
Agency - Commercial (1) | $ | 1,512 | | $ | 1,257 | | $ | 255 | |
Agency - Residential (1) | 1,068 | | 1,180 | | (112) | |
Municipal obligations | 26 | | 26 | | — | |
Corporate debt obligations | 76 | | 77 | | (1) | |
Other | 1 | | 1 | | — | |
Total unencumbered investment securities | $ | 2,683 | | $ | 2,541 | | $ | 142 | |
(1) These are not currently pledged to the FHLB but are eligible to be pledged, at our discretion.
Deposits
The following table presents the composition of our deposits:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | December 31, 2019 | | | |
| Balance | % of Deposits | | Balance | % of Deposits | | Change |
| (Dollars in millions) | | | | | | |
Retail deposits | | | | | | | |
Branch retail deposits | | | | | | | |
Savings accounts | $ | 3,166 | | 17.7 | % | | $ | 3,030 | | 20.0 | % | | $ | 136 | |
Certificates of deposit/CDARS (1) | 1,826 | | 10.2 | % | | 2,353 | | 15.5 | % | | (527) | |
Demand deposit accounts | 1,606 | | 9.0 | % | | 1,318 | | 8.7 | % | | 288 | |
Money market demand accounts | 492 | | 2.7 | % | | 495 | | 3.3 | % | | (3) | |
Total branch retail deposits | 7,090 | | 39.6 | % | | 7,196 | | 47.5 | % | | (106) | |
Commercial deposits (2) | | | | | | | |
Demand deposit accounts | 2,013 | | 11.2 | % | | 1,438 | | 9.5 | % | | 575 | |
Savings accounts | 425 | | 2.4 | % | | 342 | | 2.3 | % | | 83 | |
Money market demand accounts | 242 | | 1.4 | % | | 188 | | 1.2 | % | | 54 | |
Total commercial retail deposits | 2,680 | | 15.0 | % | | 1,968 | | 13.0 | % | | 712 | |
Total retail deposits | 9,770 | | 54.6 | % | | $ | 9,164 | | 60.5 | % | | $ | 606 | |
Government deposits | | | | | | | |
Savings accounts | $ | 528 | | 3.0 | % | | $ | 495 | | 3.3 | % | | $ | 33 | |
Demand deposit accounts | 347 | | 1.9 | % | | 360 | | 2.4 | % | | (13) | |
Certificates of deposit/CDARS (1) | 318 | | 1.8 | % | | 358 | | 2.4 | % | | (40) | |
Total government deposits | 1,193 | | 6.7 | % | | 1,213 | | 8.0 | % | | (20) | |
Custodial deposits (3) | 6,068 | | 33.9 | % | | 4,136 | | 27.3 | % | | 1,932 | |
Wholesale deposits | 867 | | 4.8 | % | | 633 | | 4.2 | % | | 234 | |
Total deposits (4) | $ | 17,898 | | 100.0 | % | | $ | 15,146 | | 100.0 | % | | $ | 2,752 | |
|
| | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | |
| Balance | | % of Deposits | | Balance | | % of Deposits | | Change |
| (Dollars in millions) |
Retail deposits | | | | | | | | | |
Branch retail deposits | | | | | | | | | |
Demand deposit accounts | $ | 930 |
| | 10.2 | % | | $ | 852 |
| | 9.7 | % | | $ | 78 |
|
Savings accounts | 3,653 |
| | 39.9 | % | | 3,824 |
| | 43.5 | % | | (171 | ) |
Money market demand accounts | 214 |
| | 2.3 | % | | 138 |
| | 1.6 | % | | 76 |
|
Certificates of deposit/CDARS (1) | 1,295 |
| | 14.1 | % | | 1,055 |
| | 12.0 | % | | 240 |
|
Total branch retail deposits | 6,092 |
| | 66.5 | % | | 5,869 |
| | 66.7 | % | | 223 |
|
Commercial retail deposits | | |
|
| | | |
|
| | |
Demand deposit accounts | 304 |
| | 3.3 | % | | 282 |
| | 3.2 | % | | 22 |
|
Savings accounts | 65 |
| | 0.7 | % | | 63 |
| | 0.7 | % | | 2 |
|
Money market demand accounts | 77 |
| | 0.8 | % | | 109 |
| | 1.2 | % | | (32 | ) |
Certificates of deposit/CDARS (1) | 2 |
| | — | % | | 1 |
| | — | % | | 1 |
|
Total commercial retail deposits | 448 |
| | 4.9 | % | | 455 |
| | 5.2 | % | | (7 | ) |
Total retail deposits | $ | 6,540 |
| | 71.4 | % | | $ | 6,324 |
| | 71.9 | % | | $ | 216 |
|
Government deposits | | |
|
| | | |
|
| | |
Demand deposit accounts | $ | 272 |
| | 3.0 | % | | $ | 250 |
| | 2.8 | % | | $ | 22 |
|
Savings accounts | 414 |
| | 4.5 | % | | 451 |
| | 5.1 | % | | (37 | ) |
Certificates of deposit/CDARS (1) | 382 |
| | 4.2 | % | | 329 |
| | 3.7 | % | | 53 |
|
Total government deposits (2) | 1,068 |
| | 11.7 | % | | 1,030 |
| | 11.7 | % | | 38 |
|
Wholesale deposits | 43 |
| | 0.5 | % | | — |
| | — | % | | — |
|
Company controlled deposits (3) | 1,510 |
| | 16.5 | % | | 1,446 |
| | 16.4 | % | | 64 |
|
Total deposits (4) | $ | 9,161 |
| | 100.0 | % | | $ | 8,800 |
| | 100.0 | % | | $ | 361 |
|
| |
(1) | The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.3 billion and $1.0 billion at September 30, 2017 and December 31, 2016.
|
| |
(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 of deposits with a balance over $250,000 was approximately $4.2 billion and $4.0 billion at September 30, 2017 and December 31, 2016. |
(1)The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.3 billion and $1.7 billion at June 30, 2020 and December 31, 2019, respectively.
(2)Contains deposits from commercial and business banking customers.
(3)Represents investor custodial accounts and escrows controlled by us in connection with loans serviced or subserviced for others that have been placed on deposit with the Bank.
(4)Total exposure related to uninsured deposits over $250,000 was approximately $4.6 billion and $3.6 billion at June 30, 2020 and December 31, 2019, respectively.
Total deposits increased $361 million,$2.8 billion, or 4.118 percent, at SeptemberJune 30, 2017,2020 compared to December 31, 2016,2019, primarily due todriven by growth in branch retail deposits. Branch retail deposits increased $223 million at September 30, 2017 compared to December 31, 2016, primarily due to anour servicing business which resulted in a $1.9 billion increase in retail certificates of deposit/CDARS.custodial deposits.
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 resultsAt June 30, 2020, we were required to hold collateral for our government deposits in higher margins earnedCalifornia that were in excess of $250,000. The total of collateral held for California at June 30, 2020 was $115 million. In Indiana, Wisconsin and Ohio, we may be required to hold collateral against our government deposits based on a variety of factors including, but not limited to, the size of individual deposits and external bank ratings. At June 30, 2020, collateral held on government deposits in these deposits which can be used to fund loans. Governmentstates was $2 million. At June 30, 2020, government deposit accounts include $382included $318 million of certificates of deposit with maturities typically less than one year and $686$876 million inof checking and savings accounts at September 30, 2017.accounts.
Company controlled Custodial deposits arise due to our servicing or sub-servicingsubservicing of loans for others and represent the portion of the investor custodial accounts on deposit with the Bank. CertainFor certain subservice agreements, these deposits require us to reimbursecredit the MSR owner for the spread on these funds.interest against subservicing income. This cost is a component of net loan administration income. During the nine months ended September 30, 2017, these deposits increased $64 million, primarily due to the increase in subservicing and taxes and insurance.
Company controlled deposits 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 controlled deposits, was 78 percent at September 30, 2017, which provides substantial liquidity for continued growth.
We participate in the CDARS program, through which certain customer CDs are exchanged for CDs of similar amounts from other participating banks. This givesbanks and customers the potential tomay receive FDIC insurance up to $50 million. This program helps the Bank secure larger deposits and attract and retain customers. At SeptemberJune 30, 2017,2020, we had $199$124 million of total CDs enrolled in the CDARS program. The total CDARS balances decreased $31program, a decrease of $8 million at September 30, 2017 from December 31, 2016.2019.
FHLBAdvances
FHLBAdvances
The FHLB provides loans, also referred to as advances, on a fully collateralized basis, to savings banks and other member financial institutions. We are required to maintain a minimum amount of qualifying 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.
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.
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 boardBoard of directorsDirectors 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 SeptemberAs of June 30, 2017, we had the authority2020, 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 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, 2017,2020, we had $5.4$3.6 billion of advances outstanding and an additional $1.1$3.2 billion of collateralized borrowing capacity available at the FHLB.
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, 2017,2020, we pledged collateral, which included commercial loans, municipal bonds, and agency bonds, to the FRB of Chicago amounting to $2.9 billion with a lendable value of $1.6 billion. At December 31, 2019, we pledged collateral to the Federal Reserve Discount WindowFRB of Chicago amounting to $435$788 million with a lendable value of $418$758 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 SeptemberWe do not typically utilize this available funding source, and at June 30, 20172020 and December 31, 2016,2019, we had no borrowings outstanding against this line of credit.
Paycheck Protection Program Liquidity Facility
In conjunction with the Paycheck Protection Program administered by the Small Business Administration, the Federal Reserve has extended credit to eligible financial institutions that originate PPP loans. At June 30, 2020, we had $325 million outstanding under the Paycheck Protection Program Liquidity Facility.
Other Unsecured Borrowings
We have access to overnight federal funds purchased lines with other Federal Reserve member institutions. We utilize this source of funding for short-term liquidity needs, depending on the availability and cost of our other funding sources. At June 30, 2020 we had $655 million of borrowings outstanding under this source of funding. Additional borrowing capacity under this and other sources of funding can vary depending on market conditions.
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("trust preferred securities)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, 2017,2020, we had no deferredare current on all interest payments.
On July 11, 2016, Additionally, we issued $250have $246 million of senior debt outstanding at June 30, 2020 (“Senior NotesNotes”) which maturematures 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;current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, and controls; violations of,human errors or noncompliance with, laws, rules and regulations, prescribed practices,misconduct, or ethical standards; andadverse external influences such as market conditions,events which may include vendor failures, 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 Affairs ("VA"). In the event of a government guaranteed loan borrower default, the Bank 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, 2017,2020, we experiencedhad less than $2 million in net charge-offs of $1 million and $3 million, respectively,related to loans with government guarantees and have reserved for the remaining risks within other assets and as a component of our ALLLallowance for loan losses on residential first mortgages. These charge-offsadditional expenses or charges arise due to insurance limits on VA insured loans and FHA property foreclosure and preservation requirements that may result in a loss in excess of all, or in part of, the guarantee.
Our loans with government guarantees portfolio totaled $253 million$1.8 billion at SeptemberJune 30, 2017,2020, as compared to $365 million$0.7 billion at December 31, 2016. The decrease2019. GNMA has granted borrowers with an option to seek forbearances on their mortgage repayments. $3.0 billion of GNMA loans are in forbearance as of June 30, 2020. When a GNMA loan is primarily due, but unpaid, for three consecutive months (typically referred to as 90 days past due) the loan is required to be re-recognized on the balance sheet by the servicer. This resulted in $1.1 billion of repurchase obligations as of June 30, 2020, a $1.0 billion increase from December 31, 2019. These loans transferredare recorded in loans with government guarantees, and the liability to LHFS and resold to Ginnie Mae out-pacing new purchases.repurchase is recorded in other liabilities on the consolidated statements of financial condition.
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, 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 down 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 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.
Regulatory Risks
Consent Orders
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 our Current Report on Form 8-K filed on September 29, 2014.
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 of 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.
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 liabilityguarantee associated with the mortgage loans is subject to significant uncertaintyrecorded in other liabilities in the Consolidated Statements of Financial Condition, which was $7 million and is impacted by forecasted estimates of equity, earnings, timing$5 million at June 30, 2020 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. December 31, 2019, respectively.
Capital
Under the OCC's capital distribution regulations, a savings bank that is a subsidiary of a savings Management actively reviews and loan holding company must either notify or seek approval from the OCC of a capital distribution at least 30 days prior 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. We seek to managemanages our capital levelsposition and overall business in a manner which we consider to be prudent 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 - Transition
The maintenance of appropriate levels of capital is monitored by management on a regular basis.strategy. 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 Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments 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 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 20 percent annual increments, and will be fully recognized as of January 1, 2018. When presented on a fully phased-in 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 conservation buffer above the minimum risk based capital requirements. The 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.
Dodd-Frank Act Section 171, commonly known as the Collins Amendment, grandfathered the regulatory capital treatment of hybrid securities, such as trust preferred securities issued prior to May 9, 2010, for banks or holding companies with less than $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 show the regulatory capital ratios 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 Bancorp Tier 1 leverage ratio decreased at September 30, 2017, compared to December 31, 2016, primarily as 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.
Additionally, we conduct quarterly capital stress tests and capital adequacy assessments. These quarterly capital stress testsassessments which utilize internally defined scenarios thatscenarios. These analyses 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. We make adjustments to our balance sheet composition taking into consideration potential business risks, regulatory requirements and the flexibility to support future growth. We prudently manage our capital position and work with our regulators to ensure that our capital levels are appropriate considering our risk profile.
The following table contains certain regulatorycapital standards we are subject to include requirements contemplated by the Dodd-Frank Act as well as guidelines reached by Basel III. These risk-based capital adequacy guidelines are intended to measure capital adequacy with regard to a banking organization’s balance sheet, including off-balance sheet exposures such as unused portions of loan commitments, letters of credit, and recourse arrangements. Our capital ratios for the Bank and the Company:are maintained at levels in excess of those
|
| | | | | | | | | | | |
| 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. |
The impact under the fully phased in Basel III rulesconsidered to ourbe "well-capitalized" by regulators. Tier 1 leverage ratio is mostly driven bywas 7.76 percent at June 30, 2020 providing a 276 basis point stress buffer above the treatmentminimum level needed to be considered “well-capitalized.” Additionally, total risk-based capital to RWA was 11.32 percent at June 30, 2020 providing a 132 basis point buffer above the minimum level needed to be considered "well-capitalized".
Dodd-Frank Act Section 171, commonly known as the Collins Amendment, established minimum Tier 1 leverage and risk-based capital requirements for insured depository institutions, depository institution holding companies, and non-bank financial companies that MSRs receiveare supervised under Basel III. Once fully phased in, the Basel III capital rules will significantly reduceFederal Reserve. Under the allowable amount of the fair value of MSRsamendment, certain hybrid securities, such as trust preferred securities, may be included in Tier 1 capital. At September 30, 2017,capital for bank holding companies that had total assets below $15 billion as of December 31, 2009. As we had $246 millionwere below $15 billion in assets as of MSRs, representing 17.3 percent of Tier 1 capital. Our ratio of MSRs toDecember 31, 2009, the trust preferred securities classified as long term debt on our balance sheet will be included as Tier 1 capital, was 26.7 percent at December 31, 2016. During the nine months ended September 30, 2017,unless we had $260 million in bulk MSR sales. Over the long term,complete an acquisition of a depository institution holding company or a depository institution and we plan to continue to reduce our MSRs to Tier 1 ratio, taking into consideration market conditions to guide our pace of MSR reduction.
On August 22, 2017, in preparation for a forthcoming proposal that would simplify regulatory capital requirements, the federal banking regulators proposed a rule that would extend the existing transitional capital treatment for certain regulatory capital deductions and risk weights. The Agencies are proposing to extend the existing transition provisions for a targeted set of items: MSRs, certain DTAs, investmentsreport total assets greater than $15 billion in the capital instruments of unconsolidated financial institutions,quarter in which the acquisition occurs. Should that event occur, our trust preferred securities would be included in Tier 2 capital.
Regulatory Capital
The Bank and minority interests. This proposal would postpone the implementation of the fully phased-in requirements for these items by banking organizations that are notFlagstar have been subject to the advanced approaches capital requirements of the Basel III rules prior tosince January 1, 2015. On July 9, 2019, the Agencies issued the Final Capital Simplification Rule (the "New Rule") which simplifies certain requirements in the Agencies’ consideration ofcurrent regulatory capital rules. We implemented capital simplification toon January 1, 2020. The New Rule increased 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 the capital treatment of acquisition, development,individual limit on MSRs 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 loans from 150% to 130%.
In addition, the new proposal would simplify the threshold deduction treatment for MSRs, temporary difference DTAs not realizable through carryback,to 25 percent of CET1 and investments ineliminated 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 ofaggregate 15 percent CET1 deduction threshold for MSRs and temporary difference DTAs, and investmentsDTAs.
On March 27, 2020, U.S. banking regulators issued an interim final rule to delay for two years the initial adoption impact of CECL on regulatory capital in response to COVID-19 followed by a three-year transition period. During the two-year delay we will add back to CET1 capital 100 percent of unconsolidated financial institutions that individually exceedsthe initial adoption impact of CECL plus 25 percent of the common equity tiercumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, capital deduction threshold. Consistent2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital rule,over the three-year period.
For the period presented, the following table sets forth our capital ratios as well as our excess capital over well-capitalized minimums.
| | | | | | | | | | | | | | | | | | | | | | | |
Flagstar Bancorp | Actual | | | Well-Capitalized Under Prompt Corrective Action Provisions | | | Excess Capital Over Well-Capitalized Minimum (1) |
| Amount | Ratio | | Amount | Ratio | | Capital Simplification |
| (Dollars in millions) | | | | | | |
June 30, 2020 | | | | | | | |
Tier 1 leverage capital (to adjusted avg. total assets) | 2,021 | | 7.76 | % | | 1,301 | | 5.0 | % | | $ | 720 | |
Common equity Tier 1 capital (to RWA) | 1,781 | | 9.11 | % | | 1,272 | | 6.5 | % | | 509 | |
Tier 1 capital (to RWA) | 2,021 | | 10.33 | % | | 1,565 | | 8.0 | % | | 456 | |
Total capital (to RWA) | 2,214 | | 11.32 | % | | 1,956 | | 10.0 | % | | 258 | |
(1)Excess capital is the difference between the actual capital ratios under current simplification rules and the proposal,well-capitalized minimum ratio, multiplied by the relevant asset base.
As presented in the table above, our constraining capital ratio is our total capital to risk weighted assets at 11.32 percent. It would take a banking organization would continue$258 million after-tax loss, with the balance sheet remaining constant, for our total risk-based capital ratio to apply a 250 percent risk weightfall below the level considered to anybe "well-capitalized".
As of June 30, 2020, we had $261 million in MSRs, or$98 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 to the exposure category of the investment.
We are currently reviewing the proposed rules and the potential impact they may haveor minority interest which drive differences between our current capital ratios. 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 14 - Regulatory Matters.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes the following non-GAAP financial measures such as the estimated fully implemented Basel III capital levels and ratios andmeasures: tangible book value per share.share, tangible common equity to assets ratio, and return on average tangible common
equity. 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. share, tangible common equity to assets ratio and return on average tangible common equity. The Company believes that tangible book value per share, providestangible common equity to assets ratio, and return on average tangible common equity provide a meaningful representation of its operating performance on an ongoing basis. Management uses this measurethese measures to assess performance of the Company against its peers and evaluate overall performance. The Company believes thisthese non-GAAP financial measure providesmeasures provide useful information for investors, securities analysts and others because it providesthey provide 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 |
| (Dollars in millions, except share data) |
Total stock holders' equity | $ | 1,451 |
| | $ | 1,336 |
| | $ | 1,286 |
|
Preferred stock | — |
| | — |
| | — |
|
Goodwill and intangibles | 21 |
| | — |
| | — |
|
Tangible book value | $ | 1,430 |
| | $ | 1,336 |
| | $ | 1,286 |
|
| | | | | |
Number of common shares outstanding | 57,181,536 |
| | 56,824,802 |
| | 56,597,271 |
|
Tangible book value per share | $ | 25.01 |
| | $ | 23.50 |
| | $ | 22.72 |
|
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. implementationThe following table provides a reconciliation 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.measures.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 31, 2019 | | June 30, 2019 |
| (Dollars in millions) | | | | | | | | |
Total stockholders' equity | $ | 1,971 | | | $ | 1,842 | | | $ | 1,788 | | | $ | 1,734 | | | $ | 1,656 | |
Less: Goodwill and intangible assets | 164 | | | 167 | | | 170 | | | 174 | | | 178 | |
Tangible book value/Tangible common equity | $ | 1,807 | | | $ | 1,675 | | | $ | 1,618 | | | $ | 1,560 | | | $ | 1,478 | |
| | | | | | | | | |
Number of common shares outstanding | 56,943,979 | | | 56,729,789 | | | 56,631,236 | | | 56,510,341 | | | 56,483,937 | |
Tangible book value per share | $ | 31.74 | | | $ | 29.52 | | | $ | 28.57 | | | $ | 27.62 | | | $ | 26.16 | |
| | | | | | | | | |
Total assets | $ | 27,468 | | | $ | 26,805 | | | $ | 23,266 | | | $ | 22,048 | | | $ | 20,206 | |
Tangible common equity to assets ratio | 6.58 | % | | 6.25 | % | | 6.95 | % | | 7.08 | % | | 7.31 | % |
| | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | Six Months Ended, | |
| June 30, 2020 | March 31, 2020 | | June 30, 2020 | June 30, 2019 |
| (Dollars in millions, except share data) | | | | |
Net income | $ | 116 | | $ | 46 | | | $ | 161 | | $ | 97 | |
Plus: Intangible asset amortization, net of tax | 3 | | 2 | | | 6 | | 6 | |
Tangible net income | $ | 119 | | $ | 48 | | | $ | 167 | | $ | 103 | |
| | | | | |
Total average equity | $ | 1,977 | | $ | 1,854 | | | $ | 1,915 | | $ | 1,626 | |
Less: Average goodwill and intangible assets | 165 | | 169 | | | 167 | | 184 | |
Total average tangible equity | $ | 1,812 | | $ | 1,685 | | | $ | 1,748 | | $ | 1,442 | |
| | | | | |
Return on average common equity | 23.47 | % | 9.82 | % | | 16.86 | % | 11.94 | % |
Return on average tangible common equity | 26.16 | % | 11.46 | % | | 19.07 | % | 14.33 | % |
|
| | | | | | | | | | | | | | | |
| 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;ACL 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 our Form 10-K for the year ended December 31, 2016,2019 and our Form 10-Q for the quarter ended March 31, 2020, which isare 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
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.we may make forward-looking statements in our other documents filed with or furnished to the SEC,Security and Exchange Commission (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 current beliefs and expectations regarding future events.events and are subject to significant risks and uncertainties. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other than as required under United States securities laws, Flagstar 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. 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. ActualOur actual results and capital and other financial conditions may differ materially from those includeddescribed in thesethe forward-looking statements due todepending upon 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 1A to Part I, of our Annual Report on Form 10-K for the year ended December 31, 20162019, which are incorporated by reference herein, and Item 1A1A. to Part II, of this Quarterly Report on Form 10-Q which are incorporated by reference herein.for the quarter ended June 30, 2020.
Other than as required under United States securities laws, Flagstar Bancorp doeswe do 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, 2020 | December 31, 2019 |
| (Unaudited) | | (Unaudited) | | (Unaudited) | |
Assets | | | | Assets | |
Cash | $ | 88 |
| | $ | 84 |
| Cash | $ | 204 | | $ | 220 | |
Interest-earning deposits | 145 |
| | 74 |
| Interest-earning deposits | 23 | | 206 | |
Total cash and cash equivalents | 233 |
| | 158 |
| Total cash and cash equivalents | 227 | | 426 | |
Investment securities available-for-sale | 1,637 |
| | 1,480 |
| Investment securities available-for-sale | 2,348 | | 2,116 | |
Investment securities held-to-maturity | 977 |
| | 1,093 |
| Investment securities held-to-maturity | 496 | | 598 | |
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 ($5,598 and $5,219 measured at fair value, respectively) | | Loans held-for-sale ($5,598 and $5,219 measured at fair value, respectively) | 5,615 | | 5,258 | |
Loans held-for-investment ($12 and $12 measured at fair value, respectively) | | Loans held-for-investment ($12 and $12 measured at fair value, respectively) | 14,808 | | 12,129 | |
Loans with government guarantees | 253 |
| | 365 |
| Loans with government guarantees | 1,791 | | 736 | |
Less: allowance for loan losses | (140 | ) | | (142 | ) | Less: allowance for loan losses | (229) | | (107) | |
Total loans held-for-investment and loans with government guarantees, net | 7,316 |
| | 6,288 |
| Total loans held-for-investment and loans with government guarantees, net | 16,370 | | 12,758 | |
Mortgage servicing rights | 246 |
| | 335 |
| Mortgage servicing rights | 261 | | 291 | |
Net deferred tax asset | 248 |
| | 286 |
| |
Federal Home Loan Bank stock | 264 |
| | 180 |
| Federal Home Loan Bank stock | 377 | | 303 | |
Premises and equipment, net | 314 |
| | 275 |
| Premises and equipment, net | 410 | | 416 | |
Goodwill and intangible assets | | Goodwill and intangible assets | 164 | | 170 | |
Other assets | 706 |
| | 781 |
| Other assets | 1,200 | | 930 | |
Total assets | $ | 16,880 |
| | $ | 14,053 |
| Total assets | $ | 27,468 | | $ | 23,266 | |
Liabilities and Stockholders’ Equity | | | | Liabilities and Stockholders’ Equity | |
Noninterest bearing deposits | $ | 2,272 |
| | $ | 2,077 |
| Noninterest bearing deposits | $ | 7,921 | | $ | 5,467 | |
Interest bearing deposits | 6,889 |
| | 6,723 |
| Interest bearing deposits | 9,977 | | 9,679 | |
Total deposits | 9,161 |
| | 8,800 |
| Total deposits | 17,898 | | 15,146 | |
Short-term Federal Home Loan Bank advances | 4,065 |
| | 1,780 |
| |
Short-term Federal Home Loan Bank advances and other | | Short-term Federal Home Loan Bank advances and other | 3,354 | | 4,165 | |
Long-term Federal Home Loan Bank advances | 1,300 |
| | 1,200 |
| Long-term Federal Home Loan Bank advances | 1,200 | | 650 | |
Other long-term debt | 493 |
| | 493 |
| Other long-term debt | 493 | | 496 | |
Representation and warranty reserve | 16 |
| | 27 |
| |
Other liabilities ($60 and $60 measured at fair value, respectively) | 394 |
| | 417 |
| |
Other liabilities ($35 and $35 measured at fair value, respectively) | | Other liabilities ($35 and $35 measured at fair value, respectively) | 2,552 | | 1,021 | |
Total liabilities | 15,429 |
| | 12,717 |
| Total liabilities | 25,497 | | 21,478 | |
Stockholders’ Equity | | | | 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; 56,943,979 and 56,631,236 shares issued and outstanding, respectively | | Common stock $0.01 par value, 80,000,000 and 80,000,000 shares authorized; 56,943,979 and 56,631,236 shares issued and outstanding, respectively | 1 | | 1 | |
Additional paid in capital | 1,511 |
| | 1,503 |
| Additional paid in capital | 1,488 | | 1,483 | |
Accumulated other comprehensive loss | (8 | ) | | (7 | ) | |
Accumulated deficit | (53 | ) | | (161 | ) | |
Accumulated other comprehensive income | | Accumulated other comprehensive income | 46 | | 1 | |
Retained earnings | | Retained earnings | 436 | | 303 | |
Total stockholders’ equity | 1,451 |
| | 1,336 |
| Total stockholders’ equity | 1,971 | | 1,788 | |
Total liabilities and stockholders’ equity | $ | 16,880 |
| | $ | 14,053 |
| Total liabilities and stockholders’ equity | $ | 27,468 | | $ | 23,266 | |
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) |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Unaudited) |
Interest Income | |
Loans | $ | 120 |
| | $ | 90 |
| | $ | 319 |
| | $ | 256 |
|
Investment securities | 20 |
| | 16 |
| | 59 |
| | 50 |
|
Interest-earning deposits and other | — |
| | — |
| | 1 |
| | — |
|
Total interest income | 140 |
| | 106 |
| | 379 |
| | 306 |
|
Interest Expense | | | | | | | |
Deposits | 13 |
| | 12 |
| | 37 |
| | 34 |
|
Short-term Federal Home Loan Bank advances and other | 11 |
| | 1 |
| | 23 |
| | 4 |
|
Long-term Federal Home Loan Bank advances | 6 |
| | 7 |
| | 17 |
| | 22 |
|
Other long-term debt | 7 |
| | 6 |
| | 19 |
| | 10 |
|
Total interest expense | 37 |
| | 26 |
| | 96 |
| | 70 |
|
Net interest income | 103 |
| | 80 |
| | 283 |
| | 236 |
|
Provision (benefit) for loan losses | 2 |
| | 7 |
| | 4 |
| | (9 | ) |
Net interest income after provision (benefit) for loan losses | 101 |
| | 73 |
|
| 279 |
| | 245 |
|
Noninterest Income | | | | | | | |
Net gain on loan sales | 75 |
| | 94 |
| | 189 |
| | 259 |
|
Loan fees and charges | 23 |
| | 22 |
| | 58 |
| | 56 |
|
Deposit fees and charges | 5 |
| | 5 |
| | 14 |
| | 17 |
|
Loan administration income | 5 |
| | 4 |
| | 16 |
| | 14 |
|
Net return (loss) on mortgage servicing rights | 6 |
| | (11 | ) | | 26 |
| | (21 | ) |
Representation and warranty benefit | 4 |
| | 6 |
| | 11 |
| | 12 |
|
Other noninterest income | 12 |
| | 36 |
| | 32 |
| | 52 |
|
Total noninterest income | 130 |
| | 156 |
| | 346 |
| | 389 |
|
Noninterest Expense | | | | | | | |
Compensation and benefits | 76 |
| | 69 |
| | 219 |
| | 203 |
|
Commissions | 23 |
| | 16 |
| | 49 |
| | 40 |
|
Occupancy and equipment | 28 |
| | 21 |
| | 75 |
| | 64 |
|
Loan processing expense | 15 |
| | 13 |
| | 41 |
| | 40 |
|
Legal and professional expense | 7 |
| | 5 |
| | 22 |
| | 20 |
|
Other noninterest expense | 22 |
| | 18 |
| | 59 |
| | 51 |
|
Total noninterest expense | 171 |
| | 142 |
| | 465 |
| | 418 |
|
Income before income taxes | 60 |
| | 87 |
| | 160 |
| | 216 |
|
Provision for income taxes | 20 |
| | 30 |
| | 52 |
| | 73 |
|
Net income | $ | 40 |
| | $ | 57 |
| | $ | 108 |
| | $ | 143 |
|
Net income per share | | | | | | | |
Basic | $ | 0.71 |
| | $ | 0.98 |
| | $ | 1.90 |
| | $ | 2.21 |
|
Diluted | $ | 0.70 |
| | $ | 0.96 |
| | $ | 1.86 |
| | $ | 2.16 |
|
Weighted average shares outstanding | | | | | | | |
Basic | 57,162,025 |
| | 56,580,238 |
| | 57,062,696 |
| | 56,556,188 |
|
Diluted | 58,186,593 |
| | 57,933,806 |
| | 58,133,296 |
| | 57,727,262 |
|
Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2020 | 2019 | | 2020 | 2019 |
| (Unaudited) | | | | |
Interest Income | | | | | |
Loans | $ | 180 | | $ | 177 | | | $ | 361 | | $ | 332 | |
Investment securities | 21 | | 20 | | | 40 | | 44 | |
Interest-earning deposits and other | — | | 1 | | | 1 | | 2 | |
Total interest income | 201 | | 198 | | | 402 | | 378 | |
Interest Expense | | | | | |
Deposits | 21 | | 35 | | | 53 | | 64 | |
Short-term Federal Home Loan Bank advances and other | 2 | | 17 | | | 14 | | 34 | |
Long-term Federal Home Loan Bank advances | 3 | | 1 | | | 6 | | 2 | |
Other long-term debt | 7 | | 7 | | | 13 | | 14 | |
Total interest expense | 33 | | 60 | | | 86 | | 114 | |
Net interest income | 168 | | 138 | | | 316 | | 264 | |
Provision for credit losses | 102 | | 17 | | | 116 | | 17 | |
Net interest income after provision for credit losses | 66 | | 121 | | | 200 | | 247 | |
Noninterest Income | | | | | |
Net gain on loan sales | 303 | | 75 | | | 393 | | 124 | |
Loan fees and charges | 41 | | 24 | | | 67 | | 41 | |
Net return on mortgage servicing rights | (8) | | 5 | | | (2) | | 11 | |
Loan administration income | 21 | | 6 | | | 33 | | 17 | |
Deposit fees and charges | 7 | | 10 | | | 16 | | 18 | |
Other noninterest income | 14 | | 48 | | | 28 | | 66 | |
Total noninterest income | 378 | | 168 | | | 535 | | 277 | |
Noninterest Expense | | | | | |
Compensation and benefits | 116 | | 90 | | | 218 | | 177 | |
Occupancy and equipment | 44 | | 40 | | | 85 | | 78 | |
Commissions | 61 | | 25 | | | 90 | | 38 | |
Loan processing expense | 25 | | 21 | | | 45 | | 38 | |
Legal and professional expense | 5 | | 6 | | | 11 | | 12 | |
Federal insurance premiums | 7 | | 5 | | | 13 | | 9 | |
Intangible asset amortization | 4 | | 4 | | | 7 | | 8 | |
Other noninterest expense | 34 | | 23 | | | 63 | | 45 | |
Total noninterest expense | 296 | | 214 | | | 532 | | 405 | |
Income before income taxes | 148 | | 75 | | | 203 | | 119 | |
Provision for income taxes | 32 | | 14 | | | 42 | | 22 | |
Net income | $ | 116 | | $ | 61 | | | $ | 161 | | $ | 97 | |
Net income per share | | | | | |
Basic | $ | 2.04 | | $ | 1.08 | | | $ | 2.85 | | $ | 1.71 | |
Diluted | $ | 2.03 | | $ | 1.06 | | | $ | 2.83 | | $ | 1.69 | |
Weighted average shares outstanding | | | | | |
Basic | 56,790,642 | | 56,446,077 | | | 56,723,254 | | 56,670,690 | |
Diluted | 57,123,706 | | 57,061,822 | | | 57,156,815 | | 57,322,513 | |
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 June 30, | | | Six Months Ended June 30, | |
| 2020 | 2019 | | 2020 | 2019 |
| (Unaudited) | | | | |
Net income | $ | 116 | | $ | 61 | | | $ | 161 | | $ | 97 | |
Other comprehensive income, net of tax | | | | | |
Investment securities | 21 | | 23 | | | 55 | | 39 | |
Derivatives and hedging activities | (6) | | — | | | (10) | | — | |
Other comprehensive income, net of tax | 15 | | 23 | | | 45 | | 39 | |
Comprehensive income | $ | 131 | | $ | 84 | | | $ | 206 | | $ | 136 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Unaudited) |
Net income | $ | 40 |
| | $ | 57 |
| | $ | 108 |
| | $ | 143 |
|
Other comprehensive income (loss), net of tax | | | | | | | |
Investment securities | 1 |
| | (4 | ) | | 3 |
| | 12 |
|
Derivatives and hedging activities | — |
| | 3 |
| | (4 | ) | | (34 | ) |
Other comprehensive income (loss), net of tax | 1 |
| | (1 | ) | | (1 | ) | | (22 | ) |
Comprehensive income | $ | 41 |
| | $ | 56 |
| | $ | 107 |
| | $ | 121 |
|
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)
| | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | |
| Number of Shares | Amount | Additional Paid in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total Stockholders’ Equity |
Balance at December 31, 2019 | 56,631,236 | | $ | 1 | | $ | 1,483 | | $ | 1 | | $ | 303 | | $ | 1,788 | |
(Unaudited) | | | | | | |
Net income | — | | — | | — | | — | | 46 | | 46 | |
Total other comprehensive income | — | | — | | — | | 30 | | — | | 30 | |
Shares issued from Employee Stock Purchase Plan | 59,252 | | — | | — | | — | | — | | — | |
Stock-based compensation | 39,081 | | — | | 4 | | — | | — | | 4 | |
Dividends declared and paid | 220 | | — | | — | | — | | (3) | | (3) | |
CECL ASU Adjustment to RE | — | | — | | — | | — | | (23) | | (23) | |
Balance at March 31, 2020 | 56,729,789 | | 1 | | 1,487 | | 31 | | 323 | | 1,842 | |
(Unaudited) | | | | | | |
Net income | — | | — | | — | | — | | 116 | | 116 | |
Total other comprehensive income | — | | — | | — | | 15 | | — | | 15 | |
Shares issued from Employee Stock Purchase Plan | 46,591 | | — | | — | | — | | — | | — | |
Stock-based compensation | 167,410 | | — | | 1 | | — | | — | | 1 | |
Dividends declared and paid | 189 | | — | | — | | — | | (3) | | (3) | |
Repurchase of shares (1) | — | | — | | — | | — | | — | | — | |
Balance at June 30, 2020 | 56,943,979 | | $ | 1 | | $ | 1,488 | | $ | 46 | | $ | 436 | | $ | 1,971 | |
| | | | | | |
Balance at December 31, 2018 | 57,749,464 | | $ | 1 | | $ | 1,522 | | $ | (47) | | $ | 94 | | $ | 1,570 | |
(Unaudited) | | | | | | |
Net income | — | | — | | — | | — | | 36 | | 36 | |
Total other comprehensive income | — | | — | | — | | 16 | | — | | 16 | |
Shares issued from Employee Stock Purchase Plan | 32,878 | | — | | — | | — | | — | | — | |
Stock-based compensation | 27,401 | | — | | 4 | | — | | — | | 4 | |
Dividends declared and paid | — | | — | | — | | — | | (2) | | (2) | |
Repurchase of shares (1) | (1,329,657) | | — | | (50) | | — | | — | | (50) | |
Balance at March 31, 2019 | 56,480,086 | | 1 | | 1,476 | | (31) | | 128 | | 1,574 | |
(Unaudited) | | | | | | |
Net income | — | | — | | — | | — | | 61 | | 61 | |
Total other comprehensive income | — | | — | | — | | 23 | | — | | 23 | |
Shares issued from Employee Stock Purchase Plan | 26,785 | | — | | — | | — | | — | | — | |
Stock-based compensation | 164,926 | | — | | 1 | | — | | — | | 1 | |
Dividends declared and paid | 188 | | — | | — | | — | | (3) | | (3) | |
Repurchase of shares (1) | (188,048) | | — | | — | | — | | — | | — | |
Balance at June 30, 2019 | 56,483,937 | | $ | 1 | | $ | 1,477 | | $ | (8) | | $ | 186 | | $ | 1,656 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Preferred 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 |
Balance at December 31, 2015 | 266,657 |
| $ | 267 |
| 56,483,258 |
| $ | 1 |
| $ | 1,486 |
| $ | 2 |
| $ | (227 | ) | $ | 1,529 |
|
(Unaudited) | | | | | | | | |
Net income | — |
| — |
| — |
| — |
| — |
| — |
| 143 |
| 143 |
|
Total other comprehensive income (loss) | — |
| — |
| — |
| — |
| — |
| (22 | ) | — |
| (22 | ) |
Preferred stock redemption | (266,657 | ) | (267 | ) | — |
| — |
| — |
| — |
| — |
| (267 | ) |
Dividends on preferred stock | — |
| — |
| — |
| — |
| — |
| — |
| (105 | ) | (105 | ) |
Stock-based compensation | — |
| — |
| 114,013 |
| — |
| 8 |
| — |
| — |
| 8 |
|
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 |
|
(Unaudited) | | | | | | | | |
Net income | — |
| — |
| — |
| — |
| — |
| — |
| 108 |
| 108 |
|
Total other comprehensive income (loss) | — |
| — |
| — |
| — |
| — |
| (1 | ) | — |
| (1 | ) |
Shares issued from Employee Stock Purchase Plan | — |
| — |
| 19,897 |
| — |
| — |
| — |
| — |
| — |
|
Warrant exercise | — |
| — |
| 154,313 |
| — |
| 4 |
| — |
| — |
| 4 |
|
Stock-based compensation | — |
| — |
| 182,524 |
| — |
| 4 |
| — |
| — |
| 4 |
|
Balance at September 30, 2017 | — |
| $ | — |
| 57,181,536 |
| $ | 1 |
| $ | 1,511 |
| $ | (8 | ) | $ | (53 | ) | $ | 1,451 |
|
(1)Includes dividend reinvestment shares
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc. Condensed Consolidated Statements of Cash Flows (In millions) |
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| (Unaudited) |
Operating Activities | | | |
Net cash used in operating activities | $ | (19,239 | ) | | $ | (10,128 | ) |
Investing Activities | | | |
Proceeds from sale of AFS securities including loans that have been securitized | $ | 17,949 |
| | $ | 10,876 |
|
Collection of principal on investment securities AFS | 158 |
| | 116 |
|
Purchase of investment securities AFS and other | (593 | ) | | (203 | ) |
Collection of principal on investment securities HTM | 116 |
| | 126 |
|
Purchase of investment securities HTM and other | — |
| | (15 | ) |
Proceeds received from the sale of LHFI | 78 |
| | 228 |
|
Net Origination, purchase, and principal repayments of LHFI | (1,231 | ) | | (1,297 | ) |
Purchase of bank owned life insurance | (50 | ) | | (85 | ) |
Net purchase of FHLB stock | (84 | ) | | (2 | ) |
Acquisition of premises and equipment, net of proceeds | (74 | ) | | (44 | ) |
Proceeds from the sale of MSRs | 252 |
| | 35 |
|
Other, net | 4 |
| | 14 |
|
Net cash provided by investing activities | $ | 16,525 |
| | $ | 9,749 |
|
Financing Activities | | | |
Net change in deposit accounts | $ | 361 |
| | $ | 1,436 |
|
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 receipt of payments of loans serviced for others | 24 |
| | 91 |
|
Preferred stock dividends | — |
| | (105 | ) |
Redemption of preferred stock | — |
| | (267 | ) |
Net receipt of escrow payments | 19 |
| | 6 |
|
Net cash provided by financing activities | $ | 2,789 |
| | $ | 345 |
|
Net increase (decrease) in cash and cash equivalents | 75 |
| | (34 | ) |
Beginning cash and cash equivalents | 158 |
| | 208 |
|
Ending cash and cash equivalents | $ | 233 |
| | $ | 174 |
|
Supplemental disclosure of cash flow information | | | |
Non-cash reclassification of loans originated LHFI to LHFS | $ | 106 |
| | $ | 1,331 |
|
Non-cash reclassification of LHFS to AFS securities | $ | 17,657 |
| | $ | 10,588 |
|
MSRs resulting from sale or securitization of loans | $ | 178 |
| | $ | 173 |
|
Operating section supplemental disclosures | | | |
Cash proceeds from sales of LHFS | $ | 5,547 |
| | $ | 14,097 |
|
Origination, premium paid and purchase of LHFS, net of principal repayments | $ | (24,518 | ) | | $ | (23,826 | ) |
Flagstar Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
| | | | | | | | |
| Six Months Ended June 30, | |
| 2020 | 2019 |
| (Unaudited) | |
Operating Activities | | |
Net cash used in operating activities | $ | (4,728) | | $ | (10,040) | |
Investing Activities | | |
Proceeds from sale of AFS securities including loans that have been securitized | $ | 4,462 | | $ | 10,778 | |
Collection of principal on investment securities AFS | 214 | | 82 | |
Purchase of investment securities AFS and other | (359) | | (23) | |
Collection of principal on investment securities HTM | 102 | | 42 | |
Proceeds received from the sale of LHFI | 39 | | 140 | |
Net origination, purchase, and principal repayments of LHFI | (2,727) | | (2,632) | |
Acquisition of premises and equipment, net of proceeds | (30) | | (33) | |
Net purchase of FHLB stock | (74) | | — | |
Proceeds from the sale of MSRs | 40 | | 42 | |
Other, net | (1) | | (7) | |
Net cash provided by investing activities | $ | 1,666 | | $ | 8,389 | |
Financing Activities | | |
Net change in deposit accounts | $ | 2,752 | | $ | 2,036 | |
Net change in short-term FHLB borrowings and other short-term debt | (811) | | (692) | |
Proceeds from increases in FHLB long-term advances and other debt | 550 | | 350 | |
Repayment of long-term debt | (3) | | — | |
Net receipt of payments of loans serviced for others | 377 | | (76) | |
Stock repurchase | — | | (50) | |
Dividends declared and paid | (6) | | (5) | |
Other | 12 | | 9 | |
Net cash provided by financing activities | $ | 2,871 | | $ | 1,572 | |
Net change in cash, cash equivalents and restricted cash (1) | (191) | | (79) | |
Beginning cash, cash equivalents and restricted cash (1) | 456 | | 432 | |
Ending cash, cash equivalents and restricted cash (1) | $ | 265 | | $ | 353 | |
Supplemental disclosure of cash flow information | | |
Non-cash reclassification of LHFI to LHFS | $ | 39 | | $ | 43 | |
Non-cash reclassification of LHFS to securitized HFS loans | $ | 4,470 | | $ | 10,346 | |
MSRs resulting from sale or securitization of loans | $ | 124 | | $ | 164 | |
Operating section supplemental disclosures | | |
Proceeds from sales of LHFS | $ | 16,815 | | $ | 4,099 | |
Origination, premium paid and purchase of LHFS, net of principal repayments | $ | (21,060) | | $ | (14,020) | |
(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 our Annual Report on Form 10-K for the year ended December 31, 2016,2019, 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.
Note 2 - Investment Securities
The following table presents our AFS and HTM investment securities:
| | | | | | | | | | | | | | |
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| (Dollars in millions) | | | |
June 30, 2020 | | | | |
Available-for-sale securities | | | | |
Agency - Commercial | $ | 1,208 | | $ | 46 | | $ | — | | $ | 1,254 | |
Agency - Residential | 899 | | 33 | | — | | 932 | |
Municipal obligations | 30 | | 1 | | — | | 31 | |
Corporate debt obligations | 76 | | 1 | | (1) | | 76 | |
Other MBS | 54 | | — | | — | | 54 | |
Certificate of deposits | 1 | | — | | — | | 1 | |
Total available-for-sale securities (1) | $ | 2,268 | | $ | 81 | | $ | (1) | | $ | 2,348 | |
Held-to-maturity securities | | | | |
Agency - Commercial | $ | 244 | | $ | 8 | | $ | — | | $ | 252 | |
Agency - Residential | 252 | | 12 | | — | | 264 | |
Total held-to-maturity securities (1) | $ | 496 | | $ | 20 | | $ | — | | $ | 516 | |
December 31, 2019 | | | | |
Available-for-sale securities | | | | |
Agency - Commercial | $ | 948 | | $ | 2 | | $ | (3) | | $ | 947 | |
Agency - Residential | 1,015 | | 4 | | (4) | | 1,015 | |
Corporate debt obligations | 76 | | 1 | | — | | 77 | |
Municipal obligations | 31 | | — | | — | | 31 | |
Other MBS | 44 | | 1 | | — | | 45 | |
Certificate of Deposits | 1 | | — | | — | | 1 | |
Total available-for-sale securities (1) | $ | 2,115 | | $ | 8 | | $ | (7) | | $ | 2,116 | |
Held-to-maturity securities | | | | |
Agency - Commercial | $ | 306 | | $ | — | | $ | (1) | | $ | 305 | |
Agency - Residential | 292 | | 3 | | (1) | | 294 | |
Total held-to-maturity securities (1) | $ | 598 | | $ | 3 | | $ | (2) | | $ | 599 | |
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (Dollars in millions) |
September 30, 2017 | | | | | | | |
Available-for-sale securities | | | | | | | |
Agency - Commercial | $ | 755 |
| | $ | 1 |
| | $ | (6 | ) | | $ | 750 |
|
Agency - Residential | 818 |
| | 2 |
| | (11 | ) | | 809 |
|
Municipal obligations | 44 |
| | — |
| | — |
| | 44 |
|
Corporate debt obligations | 33 |
| | 1 |
| | — |
| | 34 |
|
Total available-for-sale securities (1) | $ | 1,650 |
| | $ | 4 |
| | $ | (17 | ) | | $ | 1,637 |
|
Held-to-maturity securities | | | | | | | |
Agency - Commercial | $ | 542 |
| | $ | 1 |
| | $ | (5 | ) | | $ | 538 |
|
Agency - Residential | 435 |
| | — |
| | (2 | ) | | 433 |
|
Total held-to-maturity securities (1) | $ | 977 |
| | $ | 1 |
| | $ | (7 | ) | | $ | 971 |
|
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 0 securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10 percent of stockholders’ equity at June 30, 2020 or December 31, 2019. | |
(1) | There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10 percent of stockholders’ equity at September 30, 2017 or December 31, 2016.
|
We evaluate AFS and HTM investmentdebt securities where the value has declined below amortized cost for other than temporary impairment on a quarterly basis. An OTTI is considered to have occurred when the fair value of a debt security is below its amortized costs andimpairment. If we (1) have the intentintend to sell the security, (2) willor believe it is more likely than not that we will be required to sell the debt 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 areit is written down to fair value through earnings. For AFS debt securities we intend to hold, we evaluate the debt securities for expected credit losses, except for debt securities that are guaranteed by the U.S. Treasury, U.S. government agencies or sovereign entities of high credit quality for
which we apply a chargezero credit loss assumptionand which represented 94 percent of our AFS portfolio as of June 30, 2020. For the remaining AFS securities, credit losses are recognized as an increase to earningsthe allowance for the amount representingcredit losses through the credit loss provision. If any of the decline in fair value is related to market factors, that amount is recognized in OCI. We had 0 unrealized credit losses as of June 30, 2020 and December 31, 2019.
We separately evaluate our HTM debt securities for any credit losses. As of June 30, 2020 and December 31, 2019, our entire HTM portfolio qualified for the zero loss assumption as all securities are guaranteed by the U.S. Treasury, U.S. government agencies.
Investment securities transactions are recorded on the security. Gainstrade date for purchases and losses related to all other factorssales. Interest earned on investment securities, including the amortization of premiums and the accretion of discounts, are
recognized determined using the effective interest method over the period of maturity and recorded in interest income in the Consolidated Statements of Operations. Accrued interest receivable on investment securities totaled $6 million at both June 30, 2020 and December 31, 2019, and was reported in other comprehensive income (loss). Duringassets on the three and nine months ended September 30, 2017 and September 30, 2016, we had no OTTI losses.Consolidated Statements of Financial Condition.
Available-for-sale securities
Securities available-for-sale are carried at fair value, with unrealizedvalue. Unrealized gains and losses to the extent they are temporary in nature, andon AFS securities are reported as a component of other comprehensive income.
We purchased $300$9 million and $600$359 million of AFS securities, which includedwere comprised of U.S. government sponsored agency MBS, certificate of deposits, and corporate debt obligations, and municipal obligations during the three and ninesix months ended SeptemberJune 30, 2017, respectively.2020. We purchased $136$7 million and $203$23 million of AFS securities, which includedwere comprised of U.S. government sponsored agencies comprisedagency MBS, certificate of MBSdeposits, and municipalcorporate debt obligations during the three and ninesix months ended SeptemberJune 30, 2016,2019, respectively. In addition, we retained $18 million of passive interests in our own private MBS during the six months ended June 30, 2020. We did 0t retain any interest in our own private MBS during the three months ended June 30, 2020 or both the three and six months ended June 30, 2019.
Gains on There were 0 sales of AFS securities areduring both the three and six months ended June 30, 2020. There were $432 million in sales of AFS securities during the three and six months ended June 30, 2019, respectively. These sales resulted in a gain of $7 million, reported in other noninterest income in the Consolidated Statements of Operations. We sold $227 million and $289 million of AFS securities during the three and nine months ended September 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 million and $3 million during the three and nine months ended September 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.
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.
There were no0 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, 20172020 and SeptemberJune 30, 2016.2019.
The following table summarizes by duration, the unrealized loss positions on available-for-sale and held-to-maturity investment securities:securities, by duration of the unrealized loss:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| (Dollars in millions) | | | | | | |
June 30, 2020 | | | | | | | |
Available-for-sale securities | | | | | | | |
Agency - Commercial | $ | 4 | | 1 | | $ | — | | | $ | 8 | | 1 | | $ | — | |
Municipal obligations | $ | — | | 1 | | $ | — | | | $ | — | | — | | $ | — | |
Corporate debt obligations | $ | — | | — | | $ | — | | | $ | 23 | | 7 | | $ | (1) | |
Other mortgage-backed securities | $ | — | | — | | $ | — | | | $ | — | | 1 | | $ | — | |
Held-to-maturity securities | | | | | | | |
Agency - Residential | $ | — | | — | | $ | — | | | $ | 9 | | 2 | | $ | — | |
December 31, 2019 | | | | | | | |
Available-for-sale securities | | | | | | | |
Agency - Commercial | $ | 148 | | 17 | | $ | (3) | | | $ | 303 | | 19 | | $ | — | |
Agency - Residential | $ | 266 | | 26 | | $ | (3) | | | $ | 148 | | 14 | | $ | (1) | |
Municipal obligations | $ | 8 | | 3 | | $ | — | | | $ | — | | — | | $ | — | |
Held-to-maturity securities | | | | | | | |
Agency - Commercial | $ | 148 | | 13 | | $ | (1) | | | $ | 85 | | 6 | | $ | — | |
Agency - Residential | $ | 35 | | 7 | | $ | (1) | | | $ | 38 | | 10 | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | |
| 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 |
| (Dollars in millions) |
September 30, 2017 | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | |
Agency - Commercial | $ | 34 |
| | 3 |
| | $ | (1 | ) | | $ | 582 |
| | 40 |
| | $ | (5 | ) |
Agency - Residential | 98 |
| | 10 |
| | (3 | ) | | 501 |
| | 40 |
| | (8 | ) |
Municipal obligations | 1 |
| | 1 |
| | — |
| | 21 |
| | 8 |
| | — |
|
Corporate debt obligations | — |
| | — |
| | — |
| | 3 |
| | 1 |
| | — |
|
Held-to-maturity securities | | | | | | | | | | | |
Agency - Commercial | $ | 16 |
| | 2 |
| | $ | — |
| | $ | 395 |
| | 26 |
| | $ | (5 | ) |
Agency - Residential | 16 |
| | 2 |
| | — |
| | 319 |
| | 40 |
| | (2 | ) |
December 31, 2016 | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | |
Agency - Commercial | $ | 6 |
| | 1 |
| | $ | — |
| | $ | 345 |
| | 29 |
| | $ | (5 | ) |
Agency - Residential | — |
| | — |
| | — |
| | 748 |
| | 55 |
| | (16 | ) |
Municipal obligations | — |
| | — |
| | — |
| | 17 |
| | 8 |
| | — |
|
Held-to-maturity securities | | | | | | | | | | | |
Agency - Commercial | $ | — |
| | — |
| | $ | — |
| | $ | 528 |
| | 34 |
| | $ | (6 | ) |
Agency - Residential | — |
| | — |
| | — |
| | 385 |
| | 43 |
| | (4 | ) |
Unrealized losses on available-for-sale securities have not been recognized into income because almost all of the portfolio held by us are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. The remaining unrealized losses on available-for-sale securities are municipal securities and corporate debt obligations, all of which are considered investment grade or are de minimis. The fair value is expected to recover as the bonds approach maturity.
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 | | |
| Amortized Cost | Fair Value | Weighted Average Yield | | Amortized Cost | Fair Value | Weighted Average Yield |
| (Dollars in millions) | | | | | | |
June 30, 2020 | | | | | | | |
Due in one year or less | $ | 4 | | $ | 4 | | 2.07 | % | | $ | — | | $ | — | | — | % |
Due after one year through five years | 10 | | 10 | | 2.73 | % | | 8 | | 9 | | 2.51 | % |
Due after five years through 10 years | 110 | | 112 | | 4.19 | % | | 8 | | 8 | | 2.30 | % |
Due after 10 years | 2,144 | | 2,222 | | 2.38 | % | | 480 | | 499 | | 2.38 | % |
Total | $ | 2,268 | | $ | 2,348 | | | | $ | 496 | | $ | 516 | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Investment Securities Available-for-Sale | | Investment Securities Held-to-maturity |
| Amortized Cost | | Fair Value | | Weighted Average Yield | | Amortized Cost | | Fair Value | | Weighted Average Yield |
| (Dollars in millions) |
September 30, 2017 | | | | | | | | | | | |
Due after one year through five years | $ | 17 |
| | $ | 17 |
| | 3.37 | % | | $ | — |
| | $ | — |
| | — | % |
Due after five years through 10 years | 44 |
| | 45 |
| | 4.83 | % | | 61 |
| | 61 |
| | 2.50 | % |
Due after 10 years | 1,589 |
| | 1,575 |
| | 2.34 | % | | 916 |
| | 910 |
| | 2.43 | % |
Total | $ | 1,650 |
| | $ | 1,637 |
| | | | $ | 977 |
| | $ | 971 |
| | |
We pledge investment securities, primarily agency collateralized and municipal taxable mortgage obligations, to collateralize lines of credit and/or borrowings. At SeptemberJune 30, 2017,2020 and December 31, 2019, we had pledged investment securities of $1.3 billion compared to $879$179 million at December 31, 2016.and $874 million, respectively.
Note 3 - Loans Held-for-Sale
The majority of our mortgage loans originated as LHFS are ultimately 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 $5.6 billion and $5.3 billion at June 30, 20172020 and December 31, 2016, LHFS totaled $4.9 billion and $3.2 billion,2019, respectively. For the three and ninesix months ended SeptemberJune 30, 2017,2020 we had net gainsgain on loan sales associated with LHFS of $303 million and $392 million as compared to $75 million and $189$122 million respectively. Duringfor 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.2019.
At both SeptemberJune 30, 20172020 and December 31, 2016, $322019, $17 million and $39 million, respectively, of LHFS were recorded at lower of cost or fair value. TheWe elected the fair value option for the remainder of the loans in the portfolio are recorded at fair value as we have elected the fair value option for such loans.portfolio.
Note 4 - Loans Held-for-Investment
We classify loans that we have the intent and ability to hold for the foreseeable future or until maturity as LHFI. We report LHFI at their amortized cost, which includes the outstanding principal balance adjusted for any unamortized premiums, discounts, deferred fees and costs. The accrued interest receivable on loans held-for-investment totaled $38.8 million at June 30, 2020 and $36.9 million at December 31, 2019 and was reported in other assets on the Consolidated Statements of Financial Condition.
The following table presents our loans held-for-investment:
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
| (Dollars in millions) | |
Consumer loans | | |
Residential first mortgage | $ | 2,716 | | $ | 3,154 | |
Home equity | 978 | | 1,024 | |
Other | 898 | | 729 | |
Total consumer loans | 4,592 | | 4,907 | |
Commercial loans | | |
Commercial real estate | 3,016 | | 2,828 | |
Commercial and industrial | 1,968 | | 1,634 | |
Warehouse lending | 5,232 | | 2,760 | |
Total commercial loans | 10,216 | | 7,222 | |
Total loans held-for-investment | $ | 14,808 | | $ | 12,129 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (Dollars in millions) |
Consumer loans | | | |
Residential first mortgage | $ | 2,665 |
| | $ | 2,327 |
|
Home equity | 496 |
| | 443 |
|
Other | 26 |
| | 28 |
|
Total consumer loans | 3,187 |
| | 2,798 |
|
Commercial loans | | | |
Commercial real estate (1) | 1,760 |
| | 1,261 |
|
Commercial and industrial | 1,097 |
| | 769 |
|
Warehouse lending | 1,159 |
| | 1,237 |
|
Total commercial loans | 4,016 |
| | 3,267 |
|
Total loans held-for-investment | $ | 7,203 |
| | $ | 6,065 |
|
| |
(1) | Includes $270 million and $245 million of owner occupied commercial real estate loans at September 30, 2017 and December 31, 2016, respectively. |
During The following table presents the nine months ended September 30, 2017, we sold performing and nonperforming consumer loans with UPB of $103 million, of which $25 million were nonperforming. our loan sales and purchases in the loans held-for-investment portfolio:
| | | | | | | | |
| Six Months Ended June 30, | |
| 2020 | 2019 |
| (Dollars in millions) | |
Loans Sold (1) | | |
Performing loans | $ | 38 | | $ | 139 | |
Total loans sold | $ | 38 | | $ | 139 | |
Net gain associated with loan sales (2) | $ | — | | $ | 2 | |
Loans Purchased | | |
Home equity | $ | — | | $ | 149 | |
Other consumer | 63 | | 51 | |
Total loans purchased | $ | 63 | | $ | 200 | |
Premium associated with loans purchased | $ | — | | $ | 7 | |
(1)Upon a change in our intent, the loans were transferred to LHFS and subsequently sold resulting in a gain of $1 million during the nine months ended September 30, 2017, which is recordedsold.
(2)Recorded in net gain on loan sales on the Consolidated Statements of Operations.
During the nine 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 September 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 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 SeptemberJune 30, 2017 and December 31, 2016,2020 we had pledged loans of $7.7$11.6 billion, and $5.3compared to $9.1 billion respectively.at December 31, 2019.
Allowance for Loan Losses
We determine the estimate of the ALLLallowance for loan losses on at least a quarterly basis. ReferThe allowance for loan losses represents management's estimate of lifetime losses in our LHFI portfolio, excluding loans carried under the fair value option. We establish an allowance using relevant available information, from internal and external sources, relating to Note 1 - Descriptionpast events, current conditions, and reasonable and supportable forecasts. The allowance uses a loan-level, model-based approach, to estimate the expected lifetime credit losses. For non-performing loans, we've elected to use the collateral dependent practical expedient. The reserve for collateral dependent loans is established as the difference between fair value of Business, Basisthe collateral less cost to sell and the amortized cost of Presentation,the loan. Management applies judgment and Summaryassigns qualitative factors to each loan portfolio segment or the portfolio as a whole based upon the consideration of Significant Accounting Policiesthe following factors: levels of and trends in
delinquencies and performance of loans, levels of and trends in write-offs and recoveries collected, changes in the nature and volume of the portfolio, changes in reasonable and supportable economic forecasts, changes in lending policies and procedures, changes in economic and business conditions, changes in lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes in prepayment expectations or other factors affecting assessments of loan contractual term, changes in concentrations of credit, industry conditions and other internal or external factor changes.
A specific allowance is established on impaired loans when it is probable all amounts due will not be collected pursuant to the consolidated financial statementsoriginal contractual terms of the loan and the recorded investment in the Annual Reportloan exceeds its fair value. The required allowance is measured using either the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.
A general allowance is established for lifetime losses inherent on Form 10-Knon-impaired loans by segmenting the portfolio based upon common risk characteristics. Our consumer loan portfolio is segmented into Residential First Mortgage, Home Equity and Other Consumer. Loan characteristics impacting these segments include lien position, credit quality, and loan structure. At a high-level our commercial loans are segmented into Commercial Real Estate, Commercial and Industrial, and Warehouse Lending. Loan characteristics impacting these segments include credit quality and loan structure.
We measure the allowance using the applicable dual risk rating model which measures probability of default, loss given default and exposure at default. As of June 30, 2020, we estimated losses over a two-year reasonable and supportable forecast period using macroeconomic scenarios before reverting economic variables over a one-year period to their long-term historical averages on a straight-line basis. As of June 30, 2020, we utilized the Moody’s June scenarios in our forecast: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. The resulting composite forecast for the second quarter of 2020 was worse than the scenario used in the first quarter 2020. Unemployment ends the year ended December 31, 2016 for a descriptionat 10 percent and recovers only slightly in 2021. GDP recovers only slightly by the end of the methodology. year from current levels and does not return to the pre-COVID level until mid-2022. HPI decreases 2 percent from early 2020 through 2021.
The ALLL, other thanworsening of our economic forecast increased the ACL by $31 million from March 31, 2020. In addition to this increase, we judgmentally increased the qualitative reserves by $39 million primarily in our CRE and C&I portfolios, guided by the model output from Moody's adverse scenario and our judgment relating to industries and borrowers we believe could be more exposed to the stressful conditions in our forecast. In addition, we reviewed our loans in deferral status and proactively downgraded loans totaling approximately $180 million UPB from "pass" status during the quarter, resulting in an increase of $24 million to the ACL. This resulted in an increase to our reserves of approximately $98 million during the second quarter, which includes an increase in our reserves 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 estimateunfunded commitments of incurred losses.$1 million.
The following table presents changes in ALLL,the allowance for loan losses, by class of loan:
| | | | | | | | | | | | | | | | | | | | | | | |
| Residential First Mortgage (1) | Home Equity | Other Consumer | Commercial Real Estate | Commercial and Industrial | Warehouse Lending | Total |
| (Dollars in millions) | | | | | | |
Three Months Ended June 30, 2020 | | | | | | | |
Beginning balance | $ | 46 | | $ | 23 | | $ | 16 | | $ | 28 | | $ | 18 | | $ | 1 | | $ | 132 | |
Provision | 16 | | 5 | | 19 | | 55 | | 5 | | — | | 100 | |
Charge-offs | (2) | | (1) | | (2) | | — | | — | | — | | (5) | |
Recoveries | — | | 1 | | 1 | | — | | — | | — | | 2 | |
Ending allowance balance | $ | 60 | | $ | 28 | | $ | 34 | | $ | 83 | | $ | 23 | | $ | 1 | | $ | 229 | |
Three Months Ended June 30, 2019 | | | | | | | |
Beginning balance | $ | 35 | | $ | 16 | | $ | 4 | | $ | 36 | | $ | 30 | | $ | 6 | | $ | 127 | |
Provision (benefit) | (8) | | — | | 3 | | (1) | | 24 | | (1) | | 17 | |
Charge-offs | (1) | | — | | (3) | | — | | (31) | | — | | (35) | |
Recoveries | — | | — | | 1 | | — | | — | | — | | 1 | |
Ending allowance balance | $ | 26 | | $ | 16 | | $ | 5 | | $ | 35 | | $ | 23 | | $ | 5 | | $ | 110 | |
| | | | | | | |
Six Months Ended June 30, 2020 | | | | | | | |
Beginning balance, prior to adoption of ASC 326 | $ | 22 | | $ | 14 | | $ | 6 | | $ | 38 | | $ | 22 | | $ | 5 | | $ | 107 | |
Impact of adopting ASC 326 | 25 | | 12 | | 10 | | (14) | | (6) | | (4) | | 23 | |
Provision | 16 | | 2 | | 20 | | 59 | | 7 | | — | | 104 | |
Charge-offs | (3) | | (2) | | (3) | | — | | — | | — | | (8) | |
Recoveries | — | | 2 | | 1 | | — | | — | | — | | 3 | |
Ending allowance balance | $ | 60 | | $ | 28 | | $ | 34 | | $ | 83 | | $ | 23 | | $ | 1 | | $ | 229 | |
Six Months Ended June 30, 2019 | | | | | | | |
Beginning balance | $ | 38 | | $ | 15 | | $ | 3 | | $ | 48 | | $ | 18 | | $ | 6 | | $ | 128 | |
Provision (benefit) | (10) | | — | | 5 | | (13) | | 36 | | (1) | | 17 | |
Charge-offs | (2) | | — | | (4) | | — | | (31) | | — | | (37) | |
Recoveries | — | | 1 | | 1 | | — | | — | | — | | 2 | |
Ending allowance balance | $ | 26 | | $ | 16 | | $ | 5 | | $ | 35 | | $ | 23 | | $ | 5 | | $ | 110 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential First Mortgage (1) | | Home Equity | | Other Consumer | | Commercial Real Estate | | Commercial and Industrial | | Warehouse Lending | | Total |
| (Dollars in millions) |
Three Months Ended September 30, 2017 | | | | | | | | | | | | | |
Beginning balance ALLL | $ | 56 |
| | $ | 19 |
| | $ | 1 |
| | $ | 37 |
| | $ | 21 |
| | $ | 6 |
| | $ | 140 |
|
Charge-offs (2) | (1 | ) | | (2 | ) | | — |
| | — |
| | — |
| | — |
| | (3 | ) |
Recoveries | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Provision (benefit) | (3 | ) | | 2 |
| | — |
| | 5 |
| | (2 | ) | | — |
| | 2 |
|
Ending balance ALLL | $ | 52 |
| | $ | 20 |
| | $ | 1 |
| | $ | 42 |
| | $ | 19 |
| | $ | 6 |
| | $ | 140 |
|
Three Months Ended September 30, 2016 | | | | | | | | | | | | | |
Beginning balance ALLL | $ | 81 |
| | $ | 30 |
| | $ | 1 |
| | $ | 19 |
| | $ | 11 |
| | $ | 8 |
| | $ | 150 |
|
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 | ) |
Recoveries | 1 |
| | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | 4 |
|
Provision (benefit) | (8 | ) | | (3 | ) | | — |
| | 14 |
| | 2 |
| | (1 | ) | | 4 |
|
Ending balance ALLL | $ | 52 |
| | $ | 20 |
| | $ | 1 |
| | $ | 42 |
| | $ | 19 |
| | $ | 6 |
| | $ | 140 |
|
Nine Months Ended September 30, 2016 | | | | | | | | | | | | | |
Beginning balance ALLL | $ | 116 |
| | $ | 32 |
| | $ | 2 |
| | $ | 18 |
| | $ | 13 |
| | $ | 6 |
| | $ | 187 |
|
Charge-offs (2) | (26 | ) | | (4 | ) | | (3 | ) | | — |
| | — |
| | — |
| | (33 | ) |
Recoveries | 1 |
| | 2 |
| | 2 |
| | — |
| | — |
| | — |
| | 5 |
|
Provision (benefit)(3) | (21 | ) | | (5 | ) | | — |
| | 7 |
| | 1 |
| | 2 |
| | (16 | ) |
Ending balance ALLL | $ | 70 |
| | $ | 25 |
| | $ | 1 |
| | $ | 25 |
| | $ | 14 |
| | $ | 8 |
| | $ | 143 |
|
| |
(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.
|
(1)Includes loans with government guarantees.
The following table sets forthallowance for loan losses was $229 million at June 30, 2020 and $110 million at June 30, 2019. The increase in the methodallowance is reflective of evaluation, by classthe adoption of loan:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential First Mortgage (1) | | Home Equity | | Other Consumer | | Commercial Real Estate | | Commercial and Industrial | | Warehouse Lending | | Total |
| (Dollars in millions) |
September 30, 2017 | | | | | | | | | | | | | |
Loans held-for-investment (2) | | | | | | | | | | | | | |
Individually evaluated | $ | 35 |
| | $ | 29 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 65 |
|
Collectively evaluated | 2,621 |
| | 463 |
| | 26 |
| | 1,759 |
| | 1,097 |
| | 1,159 |
| | 7,125 |
|
Total loans | $ | 2,656 |
| | $ | 492 |
| | $ | 26 |
|
| $ | 1,760 |
|
| $ | 1,097 |
|
| $ | 1,159 |
|
| $ | 7,190 |
|
Allowance for loan losses (2) | | | | | | | | | | | | | |
Individually evaluated | $ | 6 |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15 |
|
Collectively evaluated | 46 |
| | 11 |
| | 1 |
| | 42 |
| | 19 |
| | 6 |
| | 125 |
|
Total allowance for loan losses | $ | 52 |
| | $ | 20 |
| | $ | 1 |
|
| $ | 42 |
|
| $ | 19 |
|
| $ | 6 |
|
| $ | 140 |
|
| | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | |
Loans held-for-investment (2) | | | | | | | | | | | | | |
Individually evaluated | $ | 46 |
| | $ | 29 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 75 |
|
Collectively evaluated | 2,274 |
| | 349 |
| | 28 |
| | 1,261 |
| | 769 |
| | 1,237 |
| | 5,918 |
|
Total loans | $ | 2,320 |
| | $ | 378 |
| | $ | 28 |
| | $ | 1,261 |
| | $ | 769 |
| | $ | 1,237 |
| | $ | 5,993 |
|
Allowance for loan losses (2) | | | | | | | | | | | | | |
Individually evaluated | $ | 5 |
| | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13 |
|
Collectively evaluated | 60 |
| | 16 |
| | 1 |
| | 28 |
| | 17 |
| | 7 |
| | 129 |
|
Total allowance for loan losses | $ | 65 |
| | $ | 24 |
| | $ | 1 |
| | $ | 28 |
| | $ | 17 |
| | $ | 7 |
| | $ | 142 |
|
| |
(1) | Includes allowance related to loans with government guarantees. |
| |
(2) | Excludes loans carried under the fair value option. |
CECL and changes in the economic forecast used in the ACL models as a result of the ongoing COVID-19 pandemic.
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.
Beginning in March 2020, as a response to COVID-19, customers facing COVID-19 related difficulties were offered forbearance in an effort to help our borrowers get to the other side of the health crisis when we believe they will be able to fulfill all of their contractual commitments.
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 We do not measure an allowance for credit losses for accrued interest receivables as accrued interest is recognized on nonaccrual loans usingwritten off in a cash basis method. Interest that wouldtimely manner. We are not aging receivables for customers who have been accruedgranted a payment deferral in response to COVID-19 which remain in the aging category they were in at the time of payment deferral. We continue to accrue interest on impairedthese 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.consistent with our forbearance programs.
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 (3) (4) |
| (Dollars in millions) | | | | | |
June 30, 2020 | | | | | | |
Consumer loans | | | | | | |
Residential first mortgage | $ | 6 | | $ | 5 | | $ | 27 | | $ | 38 | | $ | 2,678 | | $ | 2,716 | |
Home equity | 1 | | — | | 5 | | 6 | | 972 | | 978 | |
Other | 2 | | 1 | | 1 | | 4 | | 894 | | 898 | |
Total consumer loans | 9 | | 6 | | 33 | | 48 | | 4,544 | | 4,592 | |
Commercial loans | | | | | | |
Commercial real estate | — | | — | | — | | — | | 3,016 | | 3,016 | |
Commercial and industrial (1) | — | | — | | — | | — | | 1,968 | | 1,968 | |
Warehouse lending | — | | — | | — | | — | | 5,232 | | 5,232 | |
Total commercial loans | — | | — | | — | | — | | 10,216 | | 10,216 | |
Total loans (2) | $ | 9 | | $ | 6 | | $ | 33 | | $ | 48 | | $ | 14,760 | | $ | 14,808 | |
December 31, 2019 | | | | | | |
Consumer loans | | | | | | |
Residential first mortgage | $ | 5 | | $ | 4 | | $ | 21 | | $ | 30 | | $ | 3,124 | | $ | 3,154 | |
Home Equity | 1 | | — | | 4 | | 5 | | 1,019 | | 1,024 | |
Other | 3 | | 1 | | 1 | | 5 | | 724 | | 729 | |
Total consumer loans | 9 | | 5 | | 26 | | 40 | | 4,867 | | 4,907 | |
Commercial loans | | | | | | |
Commercial real estate | — | | — | | — | | — | | 2,828 | | 2,828 | |
Commercial and industrial | — | | — | | — | | — | | 1,634 | | 1,634 | |
Warehouse lending | — | | — | | — | | — | | 2,760 | | 2,760 | |
Total commercial loans | — | | — | | — | | — | | 7,222 | | 7,222 | |
Total loans (2) | $ | 9 | | $ | 5 | | $ | 26 | | $ | 40 | | $ | 12,089 | | $ | 12,129 | |
(1)Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.
(2)Includes $5 million and $4 million of past due loans accounted for under the fair value option as of June 30, 2020 and December 31, 2019, respectively.
(3)Collateral dependent loans totaled $63 million at June 30, 2020 and $54 million at December 31, 2019, respectively. The majority of these loans are secured by real estate.
(4)The interest income recognized on impaired loans was $1 million and less than $1 million at June 30, 2020 and December 31, 2019, respectively.
Interest income is recognized on nonaccrual loans using a cash basis method. The interest income recognized on impaired loans was $1 million and less than $1 million at June 30, 2020 and December 31, 2019, respectively. At June 30, 2020 and December 31, 2019, we had 0 loans 90 days past due and still accruing interest.
Reserve for Unfunded Commitments
We estimated expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The reserve for unfunded commitments is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
The reserve for unfunded commitments is reflected in other liabilities on the Consolidated Statements of Financial Condition and was $21 million as of June 30, 2020, compared to $3 million as of June 30, 2019. The increase in the reserve is reflective of the adoption of CECL which required us to record an allowance for our estimate of lifetime losses and an increase due to changes in the economic forecast used in the ACL models as a result of the ongoing COVID-19 pandemic.
The following categories of off-balance sheet credit exposures have been identified: unfunded loans with available balances, new commitments to lend that are not yet funded, and standby and commercial letters of credit. For further information, see Note 15 - Legal Proceedings, Contingencies and Commitments.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
September 30, 2017 | | | | | | | | | | | |
Consumer loans | | | | | | | | | | | |
Residential first mortgage | $ | 3 |
| | $ | 1 |
| | $ | 24 |
| | $ | 28 |
| | $ | 2,637 |
| | $ | 2,665 |
|
Home equity | 1 |
| | — |
| | 6 |
| | 7 |
| | 489 |
| | 496 |
|
Other | — |
| | — |
| | — |
| | — |
| | 26 |
| | 26 |
|
Total consumer loans | 4 |
| | 1 |
| | 30 |
| | 35 |
| | 3,152 |
| | 3,187 |
|
Commercial loans | | | | | | | | | | | |
Commercial real estate | — |
| | — |
| | 1 |
| | 1 |
| | 1,759 |
| | 1,760 |
|
Commercial and industrial | — |
| | — |
| | — |
| | — |
| | 1,097 |
| | 1,097 |
|
Warehouse lending | — |
| | — |
| | — |
| | — |
| | 1,159 |
| | 1,159 |
|
Total commercial loans | — |
| | — |
| | 1 |
| | 1 |
| | 4,015 |
| | 4,016 |
|
Total loans (2) | $ | 4 |
| | $ | 1 |
| | $ | 31 |
| | $ | 36 |
| | $ | 7,167 |
| | $ | 7,203 |
|
December 31, 2016 | | | | | | | | | | | |
Consumer loans | | | | | | | | | | | |
Residential first mortgage | $ | 6 |
| | $ | — |
| | $ | 29 |
| | $ | 35 |
| | $ | 2,292 |
| | $ | 2,327 |
|
Home equity | 1 |
| | 2 |
| | 11 |
| | 14 |
| | 429 |
| | 443 |
|
Other | 1 |
| | — |
| | — |
| | 1 |
| | 27 |
| | 28 |
|
Total consumer loans | 8 |
| | 2 |
| | 40 |
| | 50 |
| | 2,748 |
| | 2,798 |
|
Commercial loans | | | | | | | | | | | |
Commercial real estate | — |
| | — |
| | — |
| | — |
| | 1,261 |
| | 1,261 |
|
Commercial and industrial | — |
| | — |
| | — |
| | — |
| | 769 |
| | 769 |
|
Warehouse lending | — |
| | — |
| | — |
| | — |
| | 1,237 |
| | 1,237 |
|
Total commercial loans | — |
| | — |
| | — |
| | — |
| | 3,267 |
| | 3,267 |
|
Total loans (2) | $ | 8 |
| | $ | 2 |
| | $ | 40 |
| | $ | 50 |
| | $ | 6,015 |
| | $ | 6,065 |
|
| |
(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 September 30, 2017 and December 31, 2016, respectively. |
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 modificationsTDRs 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 instancesmodified loans in which a borrower demonstrates financial difficultydifficulties 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 loansas a result. Nonperforming TDRs are classified asincluded in nonaccrual loans. TDRs remain in 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 thea borrower has established a willingnessmade payments and ability to make the restructured paymentsis current for at least six months, after which theyconsecutive months. Performing TDRs are not considered to be nonaccrual so long as we believe that all contractual principal and interest due under the restructured terms will be classified as performing TDRs and begin to accrue interest.collected. 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. Refer to Note 1- Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2019 for a description of the methodology used to determine TDRs.
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.
Beginning in March 2020, as a response to COVID-19, we offered our consumer and commercial customers principal and interest payment deferrals and extensions. We considered these programs in the context of whether or not the short-term modifications of these loans would constitute a TDR. We considered the CARES Act, interagency guidance and related guidance from the FASB, which provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not required to be accounted for as TDRs. As a result, we have determined that these loans are not TDRs.
The following table provides a summary of TDRs by type and performing status:
| | | | | | | | | | | |
| TDRs | | |
| Performing | Nonperforming | Total |
| (Dollars in millions) | | |
June 30, 2020 | | | |
Consumer loans | | | |
Residential first mortgage | $ | 20 | | $ | 8 | | $ | 28 | |
Home equity | 15 | | 2 | | 17 | |
Commercial Real Estate | 5 | | — | | 5 | |
Total TDRs (1)(2) | $ | 40 | | $ | 10 | | $ | 50 | |
December 31, 2019 | | | |
Consumer loans | | | |
Residential first mortgage | $ | 20 | | $ | 8 | | $ | 28 | |
Home Equity | 18 | | 2 | | 20 | |
Total TDRs (1)(2) | $ | 38 | | $ | 10 | | $ | 48 | |
(1)Allowance for loan losses on TDR loans totaled $4 million and $8 million at June 30, 2020 and December 31, 2019, respectively.
(2)Includes $2 million of TDR loans accounted for under the fair value option at June 30, 2020 and December 31, 2019.
|
| | | | | | | | | | | |
| TDRs |
| Performing | | Nonperforming | | Total |
| (Dollars in millions) |
September 30, 2017 | | | | | |
Consumer loans (1) | | | | | |
Residential first mortgage | $ | 20 |
| | $ | 11 |
| | $ | 31 |
|
Home equity | 26 |
| | 4 |
| | 30 |
|
Total TDRs (2) | $ | 46 |
| | $ | 15 |
| | $ | 61 |
|
December 31, 2016 | | | | | |
Consumer loans (1) | | | | | |
Residential first mortgage | $ | 22 |
| | $ | 11 |
| | $ | 33 |
|
Home equity | 45 |
| | 7 |
| | 52 |
|
Total TDRs (2) | $ | 67 |
| | $ | 18 |
| | $ | 85 |
|
| |
(1) | The ALLL on consumer TDR loans totaled $12 million and $9 million at September 30, 2017 and December 31, 2016, respectively. |
| |
(2) | Includes $3 million and $25 million of TDR loans accounted for under the fair value option at September 30, 2017 and December 31, 2016, respectively. |
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) |
| Number of Accounts | | Pre-Modification Unpaid Principal Balance | | Post-Modification Unpaid Principal Balance (1) | | Increase in Allowance at Modification | | (Dollars in millions) | |
Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2020 | |
| | | (Dollars in millions) | |
Three Months Ended September 30, 2017 | | | | | | | | |
Residential first mortgages | 9 |
| | $ | 3 |
| | $ | 3 |
| | $ | — |
| |
Home equity (2) | 37 |
| | 2 |
| | 2 |
| | 1 |
| |
Other consumer | — |
| | — |
| | — |
| | — |
| |
| Commercial Real Estate | | Commercial Real Estate | 1 | | $ | 5 | | $ | 5 | |
Total TDR loans | | Total TDR loans | 1 | | $ | 5 | | $ | 5 | |
Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2019 | | | |
Home equity (2)(3) | | Home equity (2)(3) | 2 | | — | | — | |
Total TDR loans | 46 |
| | $ | 5 |
|
| $ | 5 |
| | $ | 1 |
| Total TDR loans | 2 | | $ | — | | $ | — | |
| | | | | | | | | |
Three Months Ended September 30, 2016 | | | | |
Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 | | |
Residential first mortgages | | Residential first mortgages | 5 | | $ | 1 | | $ | 1 | |
Home equity (2)(3) | | Home equity (2)(3) | 2 | | — | | — | |
Consumer | | Consumer | 1 | | — | | — | |
Commercial Real Estate | | Commercial Real Estate | 1 | | $ | 5 | | $ | 5 | |
Total TDR loans | | Total TDR loans | 9 | | 6 | | 6 | |
Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | |
Residential first mortgages | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| Residential first mortgages | 2 | | $ | — | | $ | — | |
Home equity (2)(3) | 17 |
| | 1 |
| | 1 |
| | — |
| Home equity (2)(3) | 4 | | 1 | | 1 | |
Total TDR loans | 18 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| Total TDR loans | 6 | | $ | 1 | | $ | 1 | |
| | | | | | | | |
Nine Months Ended September 30, 2017 |
| | | | | | | |
Residential first mortgages | 17 |
| | $ | 4 |
| | $ | 4 |
| | $ | — |
| |
Home equity (2) | 71 |
| | 5 |
| | 5 |
| | 2 |
| |
Other consumer | 1 |
| | — |
| | — |
| | — |
| |
Total TDR loans | 89 |
| | $ | 9 |
| | $ | 9 |
| | $ | 2 |
| |
| | | | | | | | |
Nine Months Ended September 30, 2016 |
| | | | | | | |
Residential first mortgages | 17 |
| | $ | 3 |
| | $ | 4 |
| | $ | — |
| |
Home equity (2)(3) | 128 |
| | 8 |
| | 7 |
| | — |
| |
Commercial and industrial | 1 |
| | 2 |
| | 1 |
| | — |
| |
Total TDR loans | 146 |
| | $ | 13 |
| | $ | 12 |
| | $ | — |
| |
(1)Post-modification balances include past due amounts that are capitalized at modification date.
| |
(1) | Post-modification balances include past due amounts that are capitalized at modification date. |
| |
(2) | Home equity post-modification unpaid principal balance reflects write downs. |
| |
(3) | Includes loans carried at the fair value option. |
(2)Home equity post-modification UPB reflects write downs.
(3)Includes loans carried at the fair value option.
There was one1 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 as compared to2020. There were 0 residential first mortgage loans modified in the previous 12 months that subsequently defaulted during the three home equity loans with a UPB ofand six months ended June 30, 2019. The increase in allowance at modification was less than $1 million for each class which subsequently defaulted during the three months ended SeptemberJune 30, 20162020 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 SeptemberJune 30, 2016. There was no increase or decrease in the allowance associated with these TDRs at subsequent default.2019. All TDR classes within the consumer and commercial portfolios are considered subsequently defaulted when they are 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 |
| Recorded Investment | | Net Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Net Unpaid Principal Balance | | Related Allowance |
| (Dollars in millions) |
With no related allowance recorded | | | | | | | | | | | |
Consumer loans | | | | | | | | | | | |
Residential first mortgage | $ | 15 |
| | $ | 15 |
| | $ | — |
| | $ | 6 |
| | $ | 6 |
| | $ | — |
|
Total consumer loans with no related allowance recorded | $ | 15 |
| | $ | 15 |
| | $ | — |
| | $ | 6 |
| | $ | 6 |
| | $ | — |
|
With an allowance recorded | | | | | | | | | | | |
Consumer loans | | | | | | | | | | | |
Residential first mortgage | $ | 20 |
| | $ | 20 |
| | $ | 6 |
| | $ | 40 |
| | $ | 40 |
| | $ | 5 |
|
Home equity | 28 |
| | 29 |
| | 9 |
| | 29 |
| | 29 |
| | 8 |
|
Commercial loans | | | | | | | | | | | |
Commercial real estate | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Total consumer loans with an allowance recorded | $ | 49 |
| | $ | 50 |
| | $ | 15 |
| | $ | 69 |
| | $ | 69 |
| | $ | 13 |
|
| | | | | | | | | | | |
Total Impaired loans | | | | | | | | | | | |
Residential first mortgage | $ | 35 |
| | $ | 35 |
| | $ | 6 |
| | $ | 46 |
| | $ | 46 |
| | $ | 5 |
|
Home equity | 28 |
| | 29 |
| | 9 |
| | 29 |
| | 29 |
| | 8 |
|
Commercial real estate | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Total impaired loans | $ | 64 |
| | $ | 65 |
| | $ | 15 |
| | $ | 75 |
| | $ | 75 |
| | $ | 13 |
|
The following table presents average impaired loans and the interest income recognized:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| 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) |
Consumer loans | | | | | | | | | | | | | | | |
Residential first mortgage | $ | 37 |
| | $ | 1 |
| | $ | 43 |
| | $ | — |
| | $ | 39 |
| | $ | 1 |
| | $ | 55 |
| | $ | 1 |
|
Home equity | 28 |
| | — |
| | 30 |
| | — |
| | 28 |
| | 1 |
| | 31 |
| | 1 |
|
Commercial loans | | | | | | | | | | | | | | | |
Commercial real estate | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial and industrial | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
|
Total impaired loans | $ | 66 |
| | $ | 1 |
| | $ | 74 |
| | $ | — |
| | $ | 67 |
| | $ | 2 |
| | $ | 88 |
| | $ | 2 |
|
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. NonperformingSubstandard loans are classified asmay be placed on either substandard, doubtfulaccrual or loss.non-accrual status.
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 affected in the future.
Consumer Loans
Consumer loans consist of open and closed-end loans extended to individuals for household, family, and other personal expenditures, and includes 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 based 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.
Payment activity, credit rating and loan-to-value ratios have the most significant impact on the ACL for consumer loans. The following table presents the amortized cost in residential and consumer loans based on payment activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Revolving Loans Converted to Term Loans Amortized Cost Basis | | |
| | | | | | | Revolving Loans Amortized Cost Basis | | Total | December 31, 2019 |
| Term Loans | | | | | | | | | |
| Amortized Cost Basis by Origination Year | | | | | | | | | |
As of June 30, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | | | | |
Consumer Loans | (Dollars in millions) | | | | | | | | | |
Residential First Mortgage | | | | | | | | | | |
Pass | $ | 152 | | $ | 709 | | $ | 325 | | $ | 418 | | $ | 367 | | $ | 568 | | $ | 105 | | $ | 11 | | $ | 2,655 | | $ | 3,107 | |
Watch | — | | 1 | | 2 | | 1 | | 1 | | 19 | | 1 | | — | | 25 | | 23 | |
Substandard | — | | 1 | | 6 | | 2 | | — | | 13 | | — | | — | | 22 | | 15 | |
Home Equity | | | | | | | | | | |
Pass | 6 | | 42 | | 19 | | 9 | | 3 | | 15 | | 827 | | 38 | | 959 | | 1,002 | |
Watch | — | | — | | — | | — | | — | | 13 | | 1 | | — | | 14 | | 16 | |
Substandard | — | | — | | — | | — | | — | | 1 | | 1 | | 1 | | 3 | | 3 | |
Other Consumer | | | | | | | | | | |
Pass | 126 | | 368 | | 183 | | 4 | | 2 | | 11 | | 202 | | — | | 896 | | 727 | |
Watch | — | | — | | 1 | | — | | — | | — | | — | | — | | 1 | | 1 | |
Substandard | — | | — | | 1 | | — | | — | | — | | — | | — | | 1 | | 1 | |
Total Consumer Loans (1) | $ | 284 | | $ | 1,121 | | $ | 537 | | $ | 434 | | $ | 373 | | $ | 640 | | $ | 1,137 | | $ | 50 | | $ | 4,576 | | $ | 4,895 | |
(1)Excludes loans carried under the fair value option
The following table presents the amortized cost in residential and consumer loans based on credit scores:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Revolving Loans Converted to Term Loans Amortized Cost Basis | |
| FICO Band | | | | | | Revolving Loans Amortized Cost Basis | | Total |
| Amortized Cost Basis by Origination Year | | | | | | | | |
As of June 30, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | | | |
Consumer Loans | (Dollars in millions) | | | | | | | | |
Residential First Mortgage | | | | | | | | | |
>750 | $ | 87 | | $ | 372 | | $ | 172 | | $ | 293 | | $ | 278 | | $ | 333 | | $ | 61 | | $ | 4 | | $ | 1,600 | |
700-750 | 45 | | 234 | | 128 | | 112 | | 83 | | 165 | | 31 | | 4 | | 802 | |
<700 | 20 | | 105 | | 33 | | 16 | | 7 | | 102 | | 14 | | 3 | | 300 | |
Home Equity | | | | | | | | | |
>750 | 2 | | 13 | | 6 | | 3 | | 1 | | 9 | | 366 | | 12 | | 412 | |
700-750 | 2 | | 16 | | 7 | | 4 | | 1 | | 11 | | 331 | | 16 | | 388 | |
<700 | 2 | | 13 | | 6 | | 2 | | 1 | | 9 | | 132 | | 11 | | 176 | |
Other Consumer | | | | | | | | | |
>750 | 86 | | 235 | | 99 | | 2 | | 1 | | 9 | | 109 | | — | | 541 | |
700-750 | 36 | | 121 | | 68 | | 1 | | — | | 1 | | 65 | | — | | 292 | |
<700 | 4 | | 12 | | 18 | | 1 | | 1 | | 1 | | 28 | | — | | 65 | |
Total Consumer Loans (1) | $ | 284 | | $ | 1,121 | | $ | 537 | | $ | 434 | | $ | 373 | | $ | 640 | | $ | 1,137 | | $ | 50 | | $ | 4,576 | |
(1)Excludes loans carried under the fair value option
Loan-to-value ratios primarily impact the allowance on mortgages within the consumer loan portfolio. The following table presents the amortized cost in residential first mortgages and home equity based on loan-to-value ratios:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Revolving Loans Converted to Term Loans Amortized Cost Basis | |
| LTV Band | | | | | | Revolving Loans Amortized Cost Basis | | Total |
| Amortized Cost Basis by Origination Year | | | | | | | | |
As of June 30, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | | | |
Consumer Loans | (Dollars in millions) | | | | | | | | |
Residential first mortgage | | | | | | | | | |
>90 | $ | 45 | | $ | 303 | | $ | 167 | | $ | 45 | | $ | 3 | | $ | 23 | | $ | — | | $ | — | | $ | 586 | |
71-90 | 68 | | 243 | | 96 | | 141 | | 96 | | 298 | | — | | — | | 942 | |
55-70 | 27 | | 95 | | 33 | | 119 | | 139 | | 167 | | — | | — | | 580 | |
<55 | 12 | | 70 | | 37 | | 116 | | 130 | | 112 | | 106 | | 11 | | 594 | |
Home Equity | | | | | | | | | |
>90 | — | | — | | — | | 1 | | 2 | | 14 | | 1 | | — | | 18 | |
71-90 | 4 | | 32 | | 14 | | 6 | | 1 | | 11 | | 648 | | 25 | | 741 | |
<=70 | 2 | | 10 | | 5 | | 2 | | — | | 4 | | 180 | | 14 | | 217 | |
Total (1) | $ | 158 | | $ | 753 | | $ | 352 | | $ | 430 | | $ | 371 | | $ | 629 | | $ | 935 | | $ | 50 | | $ | 3,678 | |
(1)Excludes loans carried under the fair value option
Commercial Loans
ManagementRisk rating and average loan duration have the most significant impact on the ACL for commercial loans. Additional factors which impact the ACL are debt-service-coverage ratio, loan-to-value ratio, interest-coverage ratio and leverage ratio.
Internal audit conducts periodic examinations which serve as an independent verification of the accuracy of the ratings assigned. All loans are examined on an at least annual basis. 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 includes 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 |
|
Based on the most recent analysis performed, the amortized cost basis, by risk category for each class of loans within the commercial portfolio is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Revolving Loans Converted to Term Loans Amortized Cost Basis | | |
| Term Loans | | | | | | Revolving Loans Amortized Cost Basis | | Total | December 31, 2019 |
| Amortized Cost Basis by Origination Year | | | | | | | | | |
As of June 30, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | | | | |
Commercial Loans | (Dollars in million) | | | | | | | | | |
Commercial real estate | | | | | | | | | | |
Pass | $ | 184 | | $ | 950 | | $ | 477 | | $ | 486 | | $ | 353 | | $ | 286 | | $ | (1) | | $ | — | | $ | 2,735 | | $ | 2,794 | |
Watch | 23 | | 32 | | 88 | | 33 | | 38 | | 36 | | — | | — | | 250 | | 24 | |
Special mention | — | | — | | 3 | | 20 | | — | | — | | — | | — | | 23 | | 5 | |
Substandard | — | | — | | 3 | | 5 | | — | | — | | — | | — | | 8 | | 5 | |
Commercial and industrial | | | | | | | | | | |
Pass | 119 | | 580 | | 248 | | 317 | | 113 | | 110 | | 22 | | — | | 1,509 | | 1,533 | |
Watch | 1 | | 2 | | 10 | | — | | — | | — | | 1 | | — | | 14 | | 72 | |
Special mention | 1 | | 12 | | 4 | | 14 | | — | | 6 | | — | | — | | 37 | | 24 | |
Substandard | 21 | | — | | 10 | | 4 | | — | | — | | — | | — | | 35 | | 5 | |
Payroll protection program | | | | | | | | | | |
Pass | 373 | | — | | — | | — | | — | | — | | — | | — | | 373 | | — | |
Warehouse | | | | | | | | | | |
Pass | — | | — | | — | | — | | — | | — | | 4,942 | | — | | 4,942 | | 2,556 | |
Watch | — | | — | | — | | — | | — | | — | | 255 | | — | | 255 | | 189 | |
Special mention | — | | — | | — | | — | | — | | — | | 35 | | — | | 35 | | 15 | |
Substandard | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial loans | $ | 722 | | $ | 1,576 | | $ | 843 | | $ | 879 | | $ | 504 | | $ | 438 | | $ | 5,254 | | $ | — | | $ | 10,216 | | $ | 7,222 | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Pass | | Watch | | Special Mention | | Substandard | | Total Loans |
| (Dollars in millions) |
Consumer Loans | | | | | | | | | |
Residential First Mortgage | $ | 2,273 |
| | $ | 23 |
| | $ | — |
| | $ | 31 |
| | $ | 2,327 |
|
Home equity | 386 |
| | 46 |
| | — |
| | 11 |
| | 443 |
|
Other Consumer | 28 |
| | — |
| | — |
| | — |
| | 28 |
|
Total Consumer Loans | $ | 2,687 |
| | $ | 69 |
| | $ | — |
| | $ | 42 |
| | $ | 2,798 |
|
| | | |
Commercial Loans | | | | | | | | | |
Commercial Real Estate | $ | 1,225 |
| | $ | 27 |
| | $ | 3 |
| | $ | 6 |
| | $ | 1,261 |
|
Commercial and Industrial | 678 |
| | 59 |
| | 21 |
| | 11 |
| | 769 |
|
Warehouse | 1,168 |
| | 16 |
| | 53 |
| | — |
| | 1,237 |
|
Total Commercial Loans | $ | 3,071 |
| | $ | 102 |
| | $ | 77 |
| | $ | 17 |
| | $ | 3,267 |
|
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 ALLLallowance for loan losses on residential first mortgages.
At September 30, 2017 and December 31, 2016, respectively, loans with government guarantees totaled $253 million and $365 million.
At September 30, 2017 and December 31, 2016, respectively, repossessedRepossessed assets and the associated claims related to government guaranteed loans are recorded in other assets and totaled $92$30 million and $135 million.$45 million, at June 30, 2020 and December 31, 2019, respectively.
Note 6 - Variable Interest Entities
We have no0 consolidated VIEs as of SeptemberJune 30, 20172020 and December 31, 2016.2019.
WeIn connection with our securitization activities, we have retained a 5 percent interest in the investment securities of certain trusts ("other MBS") and are contracted as the subservicer of the underlying loans, compensated based on market rates, which constitutes a continuing involvement butin these trusts. Although we have a variable interest in these securitization trusts, we are not thetheir primary beneficiary for one unconsolidated VIE relateddue to the FSTAR 2007-1 mortgage securitization trust. In accordancerelative 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 Consolidated 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 settlement agreement with MBIA, there is no further recourse to us related to FSTAR 2007-1, unless MBIA fails to meet their obligations. At September 30, 2017loan transfer. See Note 2 - Investment Securities and December 31, 2016, the FSTAR 2007-1 mortgage securitization trust included 2,035 loans and 2,453 loans, respectively, with an aggregate principal balance of $70 million and $89 million, respectively.Note 16 - Fair Value Measurements, for additional information.
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 changes Changes in the carryingfair value of residential first mortgage MSRs accounted for atwere as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2020 | 2019 | | 2020 | 2019 |
| (Dollars in millions) | | | | |
Balance at beginning of period | $ | 223 | | $ | 278 | | | $ | 291 | | $ | 290 | |
Additions from loans sold with servicing retained | 84 | | 97 | | | 124 | | 164 | |
Reductions from sales | (10) | | — | | | (46) | | (45) | |
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other (1) | (27) | | (19) | | | (49) | | (30) | |
Changes in estimates of fair value due to interest rate risk (1) (2) | (9) | | (40) | | | (59) | | (63) | |
Fair value of MSRs at end of period | $ | 261 | | $ | 316 | | | $ | 261 | | $ | 316 | |
(1)Changes in fair value:value are included within net return on mortgage servicing rights on the Consolidated Statements of Operations.
(2)Represents estimated MSR value change resulting primarily from market-driven changes which we manage through the use of derivatives. |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in millions) |
Balance at beginning of period | $ | 184 |
| | $ | 301 |
| | $ | 335 |
| | $ | 296 |
|
Additions from loans sold with servicing retained | 75 |
| | 51 |
| | 178 |
| | 173 |
|
Reductions from sales | (4 | ) | | (17 | ) | | (260 | ) | | (41 | ) |
Changes in fair value due to (1) | | | | | | | |
Decrease in MSR due to payoffs, pay-downs and run-off | (5 | ) | | (19 | ) | | (15 | ) | | (45 | ) |
Changes in estimates of fair value (2) | (4 | ) | | (14 | ) | | 8 |
| | (81 | ) |
Balance at end of period | $ | 246 |
| | $ | 302 |
| | $ | 246 |
| | $ | 302 |
|
| |
(1) | Changes in fair value are included within net return (loss) on MSRs 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 assumptions used in the fair value measurement of the MSRs are option adjusted spread and prepayment rate. Significant increases (decreases) in both of these assumptions in isolation would result in a significantly lower (higher) fair value measurement.assets:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
| | Fair value | | | | Fair value | |
| Actual | 10% adverse change | 20% adverse change | | Actual | 10% adverse change | 20% adverse change |
| (Dollars in millions) | | | | | | |
Option adjusted spread | 6.73 | % | $ | 256 | | $ | 251 | | | 5.34 | % | $ | 284 | | $ | 280 | |
Constant prepayment rate | 11.78 | % | $ | 239 | | $ | 220 | | | 10.59 | % | $ | 271 | | $ | 257 | |
Weighted average cost to service per loan | $ | 83.08 | | $ | 258 | | $ | 255 | | | $ | 84.41 | | $ | 285 | | $ | 282 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| | | Fair value after | | | | Fair value after |
| Actual | | 10% adverse change | | 20% adverse change | | Actual | | 10% adverse change | | 20% adverse change |
| (Dollars in millions) |
Option adjusted spread | 5.81 | % | | $ | 242 |
| | $ | 238 |
| | 7.78 | % | | $ | 326 |
| | $ | 318 |
|
Constant prepayment rate | 9.64 | % | | 238 |
| | 231 |
| | 16.68 | % | | 322 |
| | 311 |
|
Weighted average annual cost to service per loan | $ | 71.00 |
| | 244 |
| | 241 |
| | $ | 68.18 |
| | 330 |
| | 326 |
|
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 1816 - 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 June 30, | | | Six Months Ended June 30, | |
| 2020 | 2019 | | 2020 | 2019 |
| (Dollars in millions) | | | | |
Net return (loss) on mortgage servicing rights | | | | | |
Servicing fees, ancillary income and late fees (1) | $ | 24 | | $ | 26 | | | $ | 45 | | $ | 45 | |
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other | (27) | | (19) | | | (49) | | (30) | |
Changes in fair value due to interest rate risk | (9) | | (40) | | | (59) | | (63) | |
Gain on MSR derivatives (2) | 6 | | 39 | | | 64 | | 61 | |
Net transaction costs | (2) | | (1) | | | (3) | | (2) | |
Total return (loss) included in net return on mortgage servicing rights | $ | (8) | | $ | 5 | | | $ | (2) | | $ | 11 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in millions) |
Net return (loss) on mortgage servicing rights | | | | | | | |
Servicing fees, ancillary income and late fees (1) | $ | 14 |
| | $ | 22 |
| | $ | 43 |
| | $ | 60 |
|
Changes in fair value | (9 | ) | | (33 | ) | | (7 | ) | | (126 | ) |
Net return (loss) on MSR derivatives (2) | — |
| | (1 | ) | | (3 | ) | | 44 |
|
Net transaction costs | 1 |
| | 1 |
| | (7 | ) | | 1 |
|
Total net return (loss) on mortgage servicing rights | $ | 6 |
| | $ | (11 | ) | | $ | 26 |
| | $ | (21 | ) |
(1)Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on a cash basis. | |
(1) | Servicing fees are recorded on the 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. |
(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 June 30, | | | Six Months Ended June 30, | |
| 2020 | 2019 | | 2020 | 2019 |
| (Dollars in millions) | | | | |
Loan administration income on mortgage loans subserviced | | | | | |
Servicing fees, ancillary income and late fees (1) | $ | 30 | | $ | 26 | | | $ | 61 | | $ | 50 | |
Charges on subserviced custodial balances (2) | (7) | | (18) | | | (23) | | (30) | |
Other servicing charges | (2) | | (2) | | | (5) | | (3) | |
Total income on mortgage loans subserviced, included in loan administration | $ | 21 | | $ | 6 | | | $ | 33 | | $ | 17 | |
(1)Servicing fees are recorded on an accrual basis. Late fees are recorded on cash basis.
(2)Charges on subserviced custodial balances represent interest due to MSR owner.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in millions) |
Loan administration income on mortgage loans subserviced | | | | | | | |
Servicing fees, ancillary income and late fees (1) | $ | 9 |
| | $ | 7 |
| | $ | 26 |
| | $ | 21 |
|
Other servicing charges | (4 | ) | | (3 | ) | | (10 | ) | | (7 | ) |
Total income on mortgage loans subserviced, included in loan administration | $ | 5 |
| | $ | 4 |
| | $ | 16 |
| | $ | 14 |
|
| |
(1) | Servicing fees are recorded on the 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'sOur policy is to present itsour 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.Operations.
Derivatives designated as hedging instruments: We have designated certain interest rate swaps as fair value hedges of investment securities available for sale and residential first mortgage loans held for investment using the last-of-layer method. Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged item.
We have also designated certain interest rate swaps as cash flow hedges ofon LIBOR based variable interest payments on certain interest rate payments of our variable-rate FHLB advances.
custodial deposits. 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 hedge transaction is recognized in earnings. At SeptemberJune 30, 2017,2020, we had $3$10 million (net-of-tax) of unrealized
losses on derivatives designatedclassified as cash flow hedges recorded in accumulated other comprehensive income (loss), compared to $1 million of unrealized gainsincome. We had 0 designated cash flow hedges at December 31, 2016.2019. The estimated amount to be reclassified from other comprehensive income into earnings during the next 12 months represents $3 million of losses (net-of-tax).
Derivatives that are designated in hedging relationships are assessed for effectiveness using regression analysis at inception and throughout the hedge period.qualitatively thereafter, unless regression analysis is deemed necessary. All designated hedge relationships were and are expected to be highly effective as of SeptemberJune 30, 2017. Cash flows and the profit impact associated with designated hedges are reported in the same line item as the underlying hedged item.2020.
The following table presentstables present the notional amount, estimated fair value and maturity of our derivative financial instruments:
| | | | | | | | | | | |
| June 30, 2020 (1) | | |
| Notional Amount | Fair Value (2) | Expiration Dates |
| (Dollars in millions) | | |
Derivatives in cash flow hedge relationships: | | | |
Assets | | | |
Interest rate swaps on custodial deposits | $ | 800 | | $ | — | | 2026-2027 |
Derivatives in fair value hedge relationships: | | | |
Assets | | | |
Interest rate swaps on AFS securities | $ | 350 | | $ | — | | 2024-2025 |
Interest rate swaps on HFI residential first mortgages | 100 | | — | | 2024 |
Total derivative assets | $ | 450 | | $ | — | | |
Liabilities | | | |
Interest rate swaps on AFS securities | $ | 100 | | $ | — | | 2022 |
Total derivative liabilities | $ | 100 | | $ | — | | |
Derivatives not designated as hedging instruments: | | | |
Assets | | | |
Futures | $ | 2,220 | | $ | 1 | | 2020-2023 |
Mortgage-backed securities forwards | 758 | | 7 | | 2020 |
Rate lock commitments | 11,270 | | 205 | | 2020 |
Interest rate swaps | 756 | | 68 | | 2020-2030 |
Total derivative assets | $ | 15,004 | | $ | 281 | | |
Liabilities | | | |
Mortgage-backed securities forwards | $ | 9,528 | | $ | 57 | | 2020 |
Rate lock commitments | 91 | | — | | 2020 |
Interest rate swaps and swaptions | 1,851 | | 11 | | 2020-2050 |
Total derivative liabilities | $ | 11,470 | | $ | 68 | | |
(1)Variation margin pledged to or received from a Central Counterparty Clearing House is considered settlement of the derivative position for accounting purposes.
(2)Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.
| | | | | | | | | December 31, 2019 (1) | |
| September 30, 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: | | | | | |
Derivatives in fair value hedge relationships: | | Derivatives in fair value hedge relationships: | |
Assets | | | | | Assets | |
Interest rate swaps on FHLB advances | $ | 830 |
| | $ | 1 |
| | 2023-2026 | Interest rate swaps on FHLB advances | $ | 200 | | $ | — | | 2020 |
Interest rate swaps on AFS securities | | Interest rate swaps on AFS securities | 100 | | — | | 2022 |
Total derivative assets | | Total derivative assets | $ | 300 | | $ | — | | |
Derivatives not designated as hedging instruments: | | | | | Derivatives not designated as hedging instruments: | | |
Assets | | | | | Assets | |
Futures | $ | 1,091 |
| | $ | — |
| | 2017-2022 | Futures | $ | 550 | | $ | — | | 2020-2023 |
Mortgage backed securities forwards | 4,740 |
| | 12 |
| | 2017 | |
Mortgage-backed securities forwards | | Mortgage-backed securities forwards | 1,918 | | 2 | | 2020 |
Rate lock commitments | | Rate lock commitments | 3,870 | | 34 | | 2020 |
Interest rate swaps | | Interest rate swaps | 799 | | 26 | | 2020-2029 |
Total derivative assets | | Total derivative assets | $ | 7,137 | | $ | 62 | | |
Liabilities | | Liabilities | | |
Mortgage-backed securities forwards | | Mortgage-backed securities forwards | $ | 5,749 | | $ | 9 | | 2020 |
Rate lock commitments | 4,478 |
| | 33 |
| | 2017 | Rate lock commitments | 229 | | 1 | | 2020 |
Interest rate swaps and swaptions | 1,331 |
| | 14 |
| | 2017-2047 | Interest rate swaps and swaptions | 1,662 | | 8 | | 2020-2050 |
Total derivative assets | $ | 11,640 |
| | $ | 59 |
| | |
Liabilities | | | | | |
Futures | $ | 671 |
| | $ | 3 |
| | 2017-2022 | |
Mortgage backed securities forwards | 2,089 |
| | 4 |
| | 2017 | |
Rate lock commitments | 326 |
| | 1 |
| | 2017 | |
Interest rate swaps | 920 |
| | 2 |
| | 2017-2032 | |
Total derivative liabilities | $ | 4,006 |
| | $ | 10 |
| | Total derivative liabilities | $ | 7,640 | | $ | 18 | | |
(1)Variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day's fair value of open positions, is considered settlement of the derivative position for accounting purposes.
(2)Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.
|
| | | | | | | | | |
| December 31, 2016 |
| Notional Amount | | Fair Value (2) | | Expiration Dates |
| (Dollars in millions) |
Derivatives designated as hedging instruments: | | | | | |
Assets | | | | | |
Interest rate swaps on FHLB advances | $ | 600 |
| | $ | 20 |
| | 2023-2026 |
Liabilities | | | | | |
Interest rate swaps on FHLB advances | $ | 230 |
| | $ | 1 |
| | 2025-2026 |
Derivatives not designated as hedging instruments: | | | | | |
Assets | | | | | |
Futures | $ | 4,621 |
| | $ | 2 |
| | 2017-2020 |
Mortgage backed securities forwards | 3,776 |
| | 43 |
| | 2017 |
Rate lock commitments | 3,517 |
| | 24 |
| | 2017 |
Interest rate swaps and swaptions | 2,231 |
| | 35 |
| | 2017-2033 |
Total derivative assets | $ | 14,145 |
| | $ | 104 |
| | |
Liabilities | | | | | |
Futures | $ | 134 |
| | $ | — |
| | 2017 |
Mortgage backed securities forwards | 1,893 |
| | 11 |
| | 2017 |
Rate lock commitments | 598 |
| | 6 |
| | 2017 |
Interest rate swaps | 1,129 |
| | 37 |
| | 2017-2047 |
Total derivative liabilities | $ | 3,754 |
| | $ | 54 |
| | |
| |
(1) | At September 30, 2017, variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day’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 Statements of Financial Condition | Net Amount Presented in the Statements of Financial Condition | Gross Amounts Not Offset in the Statements of Financial Condition | |
| Gross Amount | | | Financial Instruments | Cash Collateral |
| (Dollars in millions) | | | | |
June 30, 2020 | | | | | |
Derivatives designated as hedging instruments: | | | | | |
Assets | | | | | |
Interest rate swaps on AFS securities | $ | — | | $ | — | | $ | — | | $ | — | | $ | 5 | |
Interest rate swaps on custodial deposits | — | | — | | — | | — | | 11 | |
Interest rate swaps on HFI residential first mortgages | — | | — | | — | | — | | 1 | |
Total derivative assets | $ | — | | $ | — | | $ | — | | $ | — | | $ | 17 | |
Liabilities | | | | | |
Interest rate swaps on AFS securities | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1 | |
Total derivative liabilities | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1 | |
| | | | | |
Derivatives not designated as hedging instruments: | | | | | |
Assets | | | | | |
Mortgage-backed securities forwards | $ | 7 | | $ | — | | $ | 7 | | $ | — | | $ | — | |
Interest rate swaps | 68 | — | | 68 | | — | | 1 | |
Futures | 1 | — | | 1 | | — | | — | |
Total derivative assets | $ | 76 | | $ | — | | $ | 76 | | $ | — | | $ | 1 | |
Liabilities | | | | | |
Mortgage-backed securities forwards | $ | 57 | | $ | — | | $ | 57 | | $ | — | | $ | 53 | |
Interest rate swaps and swaptions (1) | 11 | — | | 11 | | — | | 34 |
Total derivative liabilities | $ | 68 | | $ | — | | $ | 68 | | $ | — | | $ | 87 | |
| | | | | |
December 31, 2019 | | | | | |
Derivatives not designated as hedging instruments: | | | | | |
Assets | | | | | |
Mortgage-backed securities forwards | $ | 2 | | $ | — | | $ | 2 | | $ | — | | $ | — | |
Interest rate swaps | 26 | | — | | 26 | | — | | — | |
Total derivative assets | $ | 28 | | $ | — | | $ | 28 | | $ | — | | $ | — | |
Liabilities | | | | | |
Mortgage-backed securities forwards | 9 | | — | | 9 | | — | | 24 | |
Interest rate swaps (1) | 8 | | — | | 8 | | — | | 39 | |
Total derivative liabilities | $ | 17 | | $ | — | | $ | 17 | | $ | — | | $ | 63 | |
(1)Variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day's fair value of open positions, is considered settlement of the derivative position for accounting purposes.
Losses of $1 million on cash flow hedging relationships of custodial deposits were reclassified from AOCI into loan administration income during the three and six months ended June 30, 2020.
The gains and losses on fair value hedging relationships of both AFS securities and HFI residential first mortgages for the three and six months ended June 30, 2020 were de-minimis.
The fair value basis adjustment on our hedged AFS securities is included in investment securities available for sale on our Consolidated Statements of Financial Condition. The carrying amount of our hedged securities was $2,039 million at June 30, 2020 and $287 million at December 31, 2019 of which $8 million and $1 million, respectively, were due to the fair value hedge relationship. The closed portfolio of AFS securities designated in this last layer method hedge was $1,968 million
|
| | | | | | | | | | | | | | | | | | | |
| | | 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 |
| (Dollars in millions) |
September 30, 2017 | | | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | |
Assets | | | | | | | | | |
Interest rate swaps on FHLB advances (1) | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 23 |
|
| | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | |
Assets | | | | | | | | | |
Mortgage backed securities forwards | $ | 12 |
| | $ | — |
| | $ | 12 |
| | $ | — |
| | $ | 2 |
|
Interest rate swaps and swaptions (1) | 14 |
| | — |
| | 14 |
| | — |
| | 11 |
|
Total derivative assets | $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | — |
| | $ | 13 |
|
| | | | | | | | |
|
Liabilities | | | | | | | | | |
Futures | $ | 3 |
| | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 4 |
|
Mortgage backed securities forwards | 4 |
| | — |
| | 4 |
| | — |
| | 10 |
|
Interest rate swaps (1) | 2 |
| | — |
| | 2 |
| | — |
| | 9 |
|
Total derivative liabilities | $ | 9 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 23 |
|
| | | | | | | | | |
December 31, 2016 | | | | | | | | | |
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 |
|
| | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | |
Assets | | | | | | | | | |
Futures | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
Mortgage-backed securities forwards | 43 |
| | — |
| | 43 |
| | — |
| | 44 |
|
Interest rate swaps and swaptions (1) | 35 |
| | — |
| | 35 |
| | — |
| | 30 |
|
Total derivative assets | $ | 80 |
| | $ | — |
| | $ | 80 |
| | $ | — |
| | $ | 74 |
|
| | | | | | | | | |
Liabilities | | | | | | | | | |
Futures | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Mortgage-backed securities forwards | 11 |
| | — |
| | 11 |
| | — |
| | — |
|
Interest rate swaps (1) | 37 |
| | — |
| | 37 |
| | — |
| | 20 |
|
Total derivative liabilities | $ | 48 |
| | $ | — |
| | $ | 48 |
| | $ | — |
| | $ | 21 |
|
| |
(1) | At September 30, 2017, variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day’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. |
par (amortized cost of $1,965 million) at June 30, 2020 and $291 million par (amortized cost of $289 million) at December 31, 2019 of which we have designated $450 million and $100 million at June 30, 2020 and December 31, 2019, respectively.
The fair value basis adjustment on our hedged fair HFI residential first mortgages is included in loans held-for-investment on our Consolidated Statements of Financial Condition. The carrying amount of our hedged loans was $267 million at June 30, 2020 of which $1 million was due to the fair value hedge relationship. There were 0 hedged HFI residential first mortgages at December 31, 2019. We have designated $100 million of this closed portfolio of loans in a hedging relationship as of June 30, 2020.
At June 30, 2020, we pledged a total of $23$107 million related to derivative financial instruments, consisting of $71 million of cash collateral on derivative liabilities and $23$36 million of maintenance margin on derivative assets to counterpartiescentrally cleared derivatives and had ana de-minimis obligation to return cash of $13 million on derivative assets at September 30, 2017.assets. We pledged a total of $54$63 million related to derivative financial instruments, consisting of $34 million of cash collateral to counterpartieson derivatives and $29 million of maintenance margin on centrally cleared derivatives and had ana de-minimis obligation to return cash of $74 millionon derivative assets at December 31, 2016 for2019. 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 other assets.
The following table presents net gain (loss) recognized in income on derivative instruments, net of the impact of offsetting positions:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2020 | 2019 | | 2020 | 2019 |
| | (Dollars in millions) | | | | |
Derivatives not designated as hedging instruments: | Location of Gain (Loss) | | | | | |
Futures | Net loss on mortgage servicing rights | $ | 1 | | $ | (2) | | | $ | 1 | | $ | (2) | |
Interest rate swaps and swaptions | Net gain (loss) on mortgage servicing rights | 3 | | 30 | | | 41 | | 43 | |
Mortgage-backed securities forwards | Net gain (loss) on mortgage servicing rights | 4 | | 11 | | | 23 | | 20 | |
Rate lock commitments and forward agency and loan sales | Net gain (loss) on loan sales | 219 | | 22 | | | 120 | | 30 | |
Forward commitments | Other noninterest income | — | | 1 | | | — | | 2 | |
Interest rate swaps (1) | Other noninterest income | — | | — | | | — | | 1 | |
Total derivative (loss) gain | | $ | 227 | | $ | 62 | | | $ | 185 | | $ | 94 | |
(1)Includes customer-initiated commercial interest rate swaps.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in millions) |
Derivatives not designated as hedging instruments: | Location of Gain/(Loss) | | | | | | | |
Futures | Net return (loss) on mortgage servicing rights | $ | (1 | ) | | $ | 4 |
| | $ | (1 | ) | | $ | 8 |
|
Interest rate swaps and swaptions | Net return (loss) on mortgage servicing rights | (2 | ) | | (7 | ) | | (7 | ) | | 21 |
|
Mortgage-backed securities forwards | Net return (loss) on mortgage servicing rights | 2 |
| | 2 |
| | 5 |
| | 15 |
|
Rate lock commitments and forward agency and loan sales | Net gain (loss) on loan sales | (8 | ) | | 15 |
| | (16 | ) | | 14 |
|
Rate lock commitments | Other noninterest income | — |
| | — |
| | — |
| | 1 |
|
Interest rate swaps (1) | Other noninterest income | — |
| | 2 |
| | 1 |
| | 3 |
|
Total derivative gain (loss) | | $ | (9 | ) | | $ | 16 |
| | $ | (18 | ) | | $ | 62 |
|
| |
(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:
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | December 31, 2019 | |
| Amount | Rate | | Amount | Rate |
| (Dollars in millions) | | | | |
Short-term fixed rate term advances | $ | 2,360 | | 0.21 | % | | $ | 3,695 | | 1.61 | % |
Other short-term borrowings (1) | 994 | 0.17 | % | | 470 | | 1.64 | % |
Total short-term Federal Home Loan Bank advances and other borrowings | 3,354 | | | | 4,165 | | |
Long-term fixed rate advances (2) | 1,200 | | 1.03 | % | | 650 | | 1.45 | % |
Total long-term Federal Home Loan Bank advances | 1,200 | | | | 650 | | |
Total Federal Home Loan Bank advances and other borrowings | $ | 4,554 | | | | $ | 4,815 | | |
|
| | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Amount | | Rate | | Amount | | Rate |
| (Dollars in millions) |
Short-term fixed rate term advances | $ | 4,065 |
| | 1.14 | % | | $ | 1,780 |
| | 0.62 | % |
Total Short-term Federal Home Loan Bank advances | 4,065 |
| | | | 1,780 |
| | |
Long-term LIBOR adjustable advances | 1,025 |
| | 1.49 | % | | 1,025 |
| | 1.12 | % |
Long-term fixed rate advances (1) | 275 |
| | 1.41 | % | | 175 |
| | 1.12 | % |
Total Long-term Federal Home Loan Bank advances | 1,300 |
| | | | 1,200 |
| | |
Total Federal Home Loan Bank advances | $ | 5,365 |
| | | | $ | 2,980 |
| | |
| |
(1) | Includes the current portion of fixed rate advances of $125 million and $50 millionat September 30, 2017 and December 31, 2016, respectively.
|
We are required to maintain a minimum amount of qualifying collateral. In the event of default,(1)Includes $4 million outstanding under 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 September 30, 2017, we had the authority and approval from the FHLB to utilize a line of credit and $325 million outstanding under the paycheck protection program liquidity facility.
(2)Includes the current portion of up to $7.0 billionfixed rate advances of $0 million at both June 30, 2020 and we may access that line to the extent that collateral is provided. At September 30, 2017, we had $5.4 billion of advances outstanding and an additional $1.1 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 September 30, 2017, $1.0 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.
December 31, 2019.
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 | | 2020 | 2019 | | 2020 | 2019 |
| (Dollars in millions) | | (Dollars in millions) | |
Maximum outstanding at any month end | $ | 5,365 |
| | $ | 3,182 |
| | $ | 5,365 |
| | $ | 3,557 |
| Maximum outstanding at any month end | $ | 5,660 | | $ | 3,230 | | | $ | 6,841 | | $ | 3,391 | |
Average outstanding balance | 5,043 |
| | 2,649 |
| | 4,239 |
| | 2,777 |
| Average outstanding balance | $ | 4,821 | | $ | 2,987 | | | $ | 4,590 | | $ | 2,933 | |
Average remaining borrowing capacity | 1,182 |
| | 1,626 |
| | 1,297 |
| | 1,106 |
| Average remaining borrowing capacity | $ | 5,272 | | $ | 3,776 | | | $ | 5,124 | | $ | 3,506 | |
Weighted average interest rate | 1.36 | % | | 1.26 | % | | 1.26 | % | | 1.25 | % | Weighted average interest rate | 0.45 | % | 2.40 | % | | 0.86 | % | 2.43 | % |
The following table outlines the maturity dates of our FHLB advances and other borrowings:
| | | | | |
| June 30, 2020 |
| (Dollars in millions) |
2020 | $ | 3,029 | |
2021 | — | |
2022 | 525 | |
2023 | 500 | |
Thereafter | 500 | |
Total | $ | 4,554 | |
|
| | | |
| September 30, 2017 |
| (Dollars in millions) |
2017 | $ | 4,065 |
|
2018 | 125 |
|
2019 | 50 |
|
2020 | — |
|
Thereafter | 1,125 |
|
Total | $ | 5,365 |
|
Parent Company Senior Notes and Trust Preferred Securities
The following table presents long-term debt, net of debt issuance costs:
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | December 31, 2019 | |
| Amount | Interest Rate | | Amount | Interest Rate |
| (Dollars in millions) | | | | |
Senior Notes | | | | | |
Senior notes, matures 2021 | $ | 246 | | 6.125 | % | | $ | 249 | | 6.125 | % |
Trust Preferred Securities | | | | | |
Floating Three Month LIBOR Plus: | | | | | |
3.25%, matures 2032 | 26 | 3.53 | % | | 26 | | 5.20 | % |
3.25%, matures 2033 | 26 | 4.47 | % | | 26 | | 5.24 | % |
3.25%, matures 2033 | 26 | 3.56 | % | | 26 | | 5.21 | % |
2.00%, matures 2035 | 26 | 3.22 | % | | 26 | | 3.99 | % |
2.00%, matures 2035 | 26 | 3.22 | % | | 26 | | 3.99 | % |
1.75%, matures 2035 | 51 | 2.06 | % | | 51 | | 3.64 | % |
1.50%, matures 2035 | 25 | 2.72 | % | | 25 | | 3.49 | % |
1.45%, matures 2037 | 25 | 1.76 | % | | 25 | | 3.34 | % |
2.50%, matures 2037 | 16 | | 2.81 | % | | 16 | | 4.39 | % |
Total Trust Preferred Securities | 247 | | | | 247 | | |
Total other long-term debt | $ | 493 | | | | $ | 496 | | |
|
| | | | | | | | | | | | | |
| 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 |
| | |
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 caseaddition to accrued and unpaid interest.
Trust Preferred Securities
We sponsor nine9 trust subsidiaries, which issued preferred stock to third party investors. We issued trust preferredjunior subordinated debt securities to those trusts, which we have included in long-term debt. The trust preferredjunior subordinated debt 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, 2017,2020, we had no0 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 nine months ended September 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 September 30, 2017, there are no remaining May Investor Warrants outstanding and the related liability is 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 12 - Accumulated Other Comprehensive Income (Loss)
The following table sets forth the components in accumulated other comprehensive income:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2020 | 2019 | | 2020 | 2019 |
| (Dollars in millions) | | | | |
Investment Securities | | | | | |
Beginning balance | $ | 35 | | $ | (31) | | | $ | 1 | | $ | (47) | |
Unrealized gain | 27 | 22 | | | 72 | 43 | |
Less: Tax provision | 6 | 5 | | | 17 | 10 | |
Net unrealized gain | 21 | | 17 | | | 55 | | 33 | |
Reclassifications out of AOCI (1) | — | | 7 | | | — | | 7 | |
Less: Tax provision | — | | 1 | | | — | | 1 | |
Net unrealized gain reclassified out of AOCI | — | | 6 | | | — | | 6 | |
Other comprehensive income, net of tax | 21 | | 23 | | | 55 | | 39 | |
Ending balance | $ | 56 | | $ | (8) | | | $ | 56 | | $ | (8) | |
| | | | | |
Cash Flow Hedges | | | | | |
Beginning balance | $ | (4) | | $ | — | | | $ | — | | $ | — | |
Unrealized loss | (10) | | — | | | (15) | | — | |
Less: Tax benefit | (3) | | — | | | (4) | | — | |
Net unrealized loss | (7) | | — | | | (11) | | — | |
Reclassifications out of AOCI (1) | 1 | | — | | | 1 | | — | |
Other comprehensive loss, net of tax | (6) | | — | | | (10) | | — | |
Ending balance | $ | (10) | | $ | — | | | $ | (10) | | $ | — | |
(1)Reclassifications are reported in noninterest income (loss):on the Consolidated Statements of Operations.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in millions) |
Investment securities | | | | | | | |
Beginning balance | $ | (6 | ) | | $ | 21 |
| | $ | (8 | ) | | $ | 5 |
|
Unrealized gain | — |
| | 1 |
| | 2 |
| | 27 |
|
Less: Tax provision | — |
| | — |
| | 1 |
| | 10 |
|
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 |
|
Ending balance | $ | (5 | ) | | $ | 17 |
| | $ | (5 | ) | | $ | 17 |
|
| | | | | | | |
Cash Flow Hedges | | | | | | | |
Beginning balance | $ | (3 | ) | | $ | (40 | ) | | $ | 1 |
| | $ | (3 | ) |
Unrealized gain (loss) | — |
| | 2 |
| | (2 | ) | | (61 | ) |
Less: Tax (benefit) provision | — |
| | 2 |
| | (1 | ) | | (17 | ) |
Net unrealized (loss) | — |
| | — |
| | (1 | ) | | (44 | ) |
Reclassifications out of AOCI (1) | — |
| | 3 |
| | (5 | ) | | 10 |
|
Less: Tax (benefit) | — |
| | — |
| | (2 | ) | | — |
|
Net unrealized gain (loss) reclassified out of AOCI | — |
| | 3 |
| | (3 | ) | | 10 |
|
Other comprehensive income/(loss), net of tax | — |
| | 3 |
| | (4 | ) | | (34 | ) |
Ending balance | $ | (3 | ) | | $ | (37 | ) | | $ | (3 | ) | | $ | (37 | ) |
| |
(1) | Reclassifications are reported in other noninterest income on the Consolidated Statement of Operations. |
Note 1311 - 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 June 30, | | | Six Months Ended June 30, | |
| 2020 | 2019 | | 2020 | 2019 |
| (Dollars in millions, except share data) | | | | |
Net income applicable to common stockholders | $ | 116 | | $ | 61 | | | $ | 161 | | $ | 97 | |
Weighted Average Shares | | | | | |
Weighted average common shares outstanding | 56,790,642 | | 56,446,077 | | | 56,723,254 | | 56,670,690 | |
Effect of dilutive securities | | | | | |
Stock-based awards | 333,064 | | 615,745 | | | 433,561 | | 651,823 | |
Weighted average diluted common shares | $ | 57,123,706 | | $ | 57,061,822 | | | $ | 57,156,815 | | $ | 57,322,513 | |
Earnings per common share | | | | | |
Basic earnings per common share | $ | 2.04 | | $ | 1.08 | | | $ | 2.85 | | $ | 1.71 | |
Effect of dilutive securities | | | | | |
Stock-based awards | (0.01) | | (0.02) | | | (0.02) | | (0.02) | |
Diluted earnings per common share | $ | 2.03 | | $ | 1.06 | | | $ | 2.83 | | $ | 1.69 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in millions, except share data) |
Net income | $ | 40 |
| | $ | 57 |
| | $ | 108 |
| | $ | 143 |
|
Deferred cumulative preferred stock dividends | — |
| | (2 | ) | | — |
| | (18 | ) |
Net income applicable to common stockholders | $ | 40 |
| | $ | 55 |
| | $ | 108 |
| | $ | 125 |
|
Weighted average shares | | | | | | | |
Weighted average common shares outstanding | 57,162,025 |
| | 56,580,238 |
| | 57,062,696 |
| | 56,556,188 |
|
Effect of dilutive securities | | | | | | | |
May Investor Warrants | — |
| | 364,791 |
| | 16,383 |
| | 339,893 |
|
Stock-based awards | 1,024,568 |
| | 988,777 |
| | 1,054,217 |
| | 831,181 |
|
Weighted average diluted common shares | 58,186,593 |
| | 57,933,806 |
| | 58,133,296 |
| | 57,727,262 |
|
Earnings per common share | | | | | | | |
Basic earnings per common share | $ | 0.71 |
| | $ | 0.98 |
| | $ | 1.90 |
| | $ | 2.21 |
|
Effect of dilutive securities | | | | | | | |
May Investor Warrants | — |
| | — |
| | — |
| | (0.02 | ) |
Stock-based awards | (0.01 | ) | | (0.02 | ) | | (0.04 | ) | | (0.03 | ) |
Diluted earnings per common share | $ | 0.70 |
| | $ | 0.96 |
| | $ | 1.86 |
| | $ | 2.16 |
|
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 1412 - Stock-Based Compensation
We had stock-based compensation expense of $2$4 million and $8 million for the three and ninesix months ended SeptemberJune 30, 2017.2020, and $3 million and $6 million for the three and six months ended June 30, 2019.
Restricted Stock and Restricted Stock Units
The following table summarizes restricted stock and restricted stock units activity:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | Six Months Ended June 30, 2020 | |
| Shares | Weighted — Average Grant-Date Fair Value per Share | | Shares | Weighted — Average Grant-Date Fair Value per Share |
Restricted Stock and Restricted Stock Units | | | | | |
Non-vested balance at beginning of period | 1,381,922 | | $ | 28.47 | | | 1,399,127 | | $ | 28.72 | |
Granted | 312,636 | | 28.25 | | | 371,524 | | 27.90 | |
Vested | (195,502) | | 23.53 | | | (241,406) | | 24.66 | |
Canceled and forfeited | (86,172) | | 18.48 | | | (116,361) | | 22.47 | |
Non-vested balance at end of period | 1,412,884 | | $ | 29.72 | | | 1,412,884 | | $ | 29.72 | |
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| Shares | | Weighted — Average Grant-Date Fair Value per Share | | Shares | | Weighted — Average Grant-Date Fair Value per Share |
Restricted Stock | | | | | | | |
Non-vested balance at beginning of period | 1,455,327 |
| | $ | 19.88 |
| | 1,461,910 |
| | $ | 17.68 |
|
Granted | 28,750 |
| | 23.57 |
| | 355,088 |
| | 28.02 |
|
Vested | (298 | ) | | 16.77 |
| | (214,239 | ) | | 18.95 |
|
Canceled and forfeited | (15,952 | ) | | 23.31 |
| | (134,932 | ) | | 18.57 |
|
Non-vested balance at end of period | 1,467,827 |
| | $ | 19.92 |
| | 1,467,827 |
| | $ | 19.92 |
|
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 arewere reserved and authorized for issuance for purchase under the 2017 ESPP. During the three months ended SeptemberEmployee Stock Purchase Plan (ESPP) of which 426,086 remain as of June 30, 2017, 19,8972020. There were 46,591 and 105,843 shares were issued under the 2017 ESPP during the three and oursix months ended June 30, 2020 and the associated compensation expense was de minimis.
Note 15Note 13 - 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 discreetdiscrete 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 following table presents our provision for income tax and effective tax provision rate:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, 2020 | |
| 2020 | 2019 | | 2020 | 2019 |
| (Dollars in millions) | | | | |
Provision for income taxes | $ | 32 | | $ | 14 | | | $ | 42 | | $ | 22 | |
Effective tax provision rate | 21.5 | % | 18.9 | % | | 20.6 | % | 18.7 | % |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in millions) |
Provision for income taxes | $ | 20 |
| | $ | 30 |
| | $ | 52 |
| | $ | 73 |
|
Effective tax provision rate | 32.4 | % | | 34.3 | % | | 32.3 | % | | 33.8 | % |
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 1614 - 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 include transition provisions through 2018.
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, 20172020 and December 31, 2016.
2019.
The following tables present the regulatory capital ratios as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Flagstar Bancorp | Actual | | | For Capital Adequacy Purposes | | | Well-Capitalized Under Prompt Corrective Action Provisions | |
| Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| (Dollars in millions) | | | | | | | |
June 30, 2020 | | | | | | | | |
Tier 1 capital (to adjusted avg. total assets) | $ | 2,021 | | 7.8 | % | | $ | 1,042 | | 4.0 | % | | $ | 1,301 | | 5.0 | % |
Common equity Tier 1 capital (to RWA) | $ | 1,781 | | 9.1 | % | | $ | 880 | | 4.5 | % | | $ | 1,272 | | 6.5 | % |
Tier 1 capital (to RWA) | $ | 2,021 | | 10.3 | % | | $ | 1,174 | | 6.0 | % | | $ | 1,565 | | 8.0 | % |
Total capital (to RWA) | $ | 2,214 | | 11.3 | % | | $ | 1,565 | | 8.0 | % | | $ | 1,956 | | 10.0 | % |
December 31, 2019 | | | | | | | | |
Tier 1 capital (to adjusted avg. total assets) | $ | 1,720 | | 7.6 | % | | $ | 909 | | 4.0 | % | | $ | 1,136 | | 5.0 | % |
Common equity Tier 1 capital (to RWA) | $ | 1,480 | | 9.3 | % | | $ | 715 | | 4.5 | % | | $ | 1,033 | | 6.5 | % |
Tier 1 capital (to RWA) | $ | 1,720 | | 10.8 | % | | $ | 953 | | 6.0 | % | | $ | 1,271 | | 8.0 | % |
Total capital (to RWA) | $ | 1,830 | | 11.5 | % | | $ | 1271 | | 8.0 | % | | $ | 1,589 | | 10.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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, 2020 | | | | | | | | |
Tier 1 capital (to adjusted avg. total assets) | $ | 1,969 | | 7.6 | % | | $ | 1,041 | | 4.0 | % | | $ | 1,301 | | 5.0 | % |
Common equity Tier 1 capital (to RWA) | $ | 1,969 | | 10.1 | % | | $ | 880 | | 4.5 | % | | $ | 1,271 | | 6.5 | % |
Tier 1 capital (to RWA) | $ | 1,969 | | 10.1 | % | | $ | 1,174 | | 6.0 | % | | $ | 1,565 | | 8.0 | % |
Total capital (to RWA) | $ | 2,161 | | 11.0 | % | | $ | 1,565 | | 8.0 | % | | $ | 1,956 | | 10.0 | % |
December 31, 2019 | | | | | | | | |
Tier 1 capital (to adjusted avg. total assets) | $ | 1,752 | | 7.7 | % | | $ | 909 | | 4.0 | % | | $ | 1,136 | | 5.0 | % |
Common equity Tier 1 capital (to RWA) | $ | 1,752 | | 11.0 | % | | $ | 714 | | 4.5 | % | | $ | 1,032 | | 6.5 | % |
Tier 1 capital (to RWA) | $ | 1,752 | | 11.0 | % | | $ | 952 | | 6.0 | % | | $ | 1,270 | | 8.0 | % |
Total capital (to RWA) | $ | 1,862 | | 11.7 | % | | $ | 1,270 | | 8.0 | % | | $ | 1,587 | | 10.0 | % |
|
| | | | | | | | | | | | | | | | | |
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 |
| Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| (Dollars in millions) |
September 30, 2017 | | | | | | | | |
Tangible capital (to adjusted avg. total assets) | $ | 1,519 |
| 9.38 | % | |
| 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 | % |
Common equity tier 1 capital (to RWA) | 1,519 |
| 14.61 | % | | 468 |
| 4.50 | % | | 676 |
| 6.50 | % |
Tier 1 capital (to RWA) | 1,519 |
| 14.61 | % | | 624 |
| 6.00 | % | | 832 |
| 8.00 | % |
Total capital (to RWA) | 1,651 |
| 15.88 | % | | 832 |
| 8.00 | % | | 1,040 |
| 10.00 | % |
December 31, 2016 | | | | | | | | |
Tangible capital (to adjusted avg. total assets) | $ | 1,491 |
| 10.52 | % | | 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 | % |
Common equity tier 1 capital (to RWA) | 1,491 |
| 17.90 | % | | 375 |
| 4.5 | % | | 542 |
| 6.5 | % |
Tier 1 capital (to RWA) | 1,491 |
| 17.90 | % | | 500 |
| 6.0 | % | | 667 |
| 8.0 | % |
Total capital (to RWA) | 1,598 |
| 19.18 | % | | 667 |
| 8.0 | % | | 833 |
| 10.0 | % |
N/A - Not applicable
Note 1715 - 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, 2017,2020, 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 settlementLiability
In On February 24, 2012, the Bank entered into a Settlement Agreement with the DOJ under 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 of the following 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 ofJuly 2016; and (c) the Bank’sBank having a Tier 1 Leverage Capital Ratio equalsof 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 The Settlement Agreement meets the definition of a financial instrument for which we elected to account for the DOJ Liability under the fair value option. To determineWe consider 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 September 30, 2017 of 9.4 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.liability and evaluate the potential ways we might satisfy the Settlement Agreement and our estimates of the likelihood of these outcomes, which may change over time. The fair value of the DOJ Liability was $60 million at both September 30, 2017liability is subject to significant uncertainty and December 31, 2016.
is impacted by forecasted estimates of the timing of potential payments, some of which are impacted by inputs including 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 discount rate, and the likelihood and types of potential business combinations, or any other means by which a payment could be made. For further information on the fair value of the liability, see Note 16 - Fair Value Measurements.
Other litigation accruals
At SeptemberJune 30, 20172020 and December 31, 2016,2019, excluding the fair value liability relating to the DOJ litigation settlement,Liability, our total accrual for contingent liabilities and settled litigation and regulatory matters was $2$6 million and $3 million, respectively.
Commitments
The following table is a summary of the contractual amount of significant commitments:
| | | | | | | | |
| June 30, 2020 | December 31, 2019 |
| (Dollars in millions) | |
Commitments to extend credit | | |
Mortgage loan commitments including interest-rate locks | $ | 11,362 | | $ | 4,099 | |
Warehouse loan commitments | 2,718 | 1,944 | |
Commercial and industrial commitments | 960 | 1,107 | |
Other commercial commitments | 1,736 | 2,015 | |
HELOC commitments | 557 | 558 | |
Other consumer commitments | 478 | 175 | |
Standby and commercial letters of credit | 100 | 82 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (Dollars in millions) |
Commitments to extend credit | | | |
Mortgage loans interest-rate lock commitments | $ | 4,804 |
| | $ | 4,115 |
|
Warehouse loan commitments | 1,560 |
| | 1,670 |
|
Commercial and industrial commitments | 692 |
| | 424 |
|
Other commercial commitments | 955 |
| | 651 |
|
HELOC commitments | 241 |
| | 179 |
|
Other consumer commitments | 51 |
| | 57 |
|
Standby and commercial letters of credit | 46 |
| | 30 |
|
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. SinceBecause 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 commitments including interest-rate lock commitments.locks. We enter into mortgage loan commitments, including interest-rate lock commitmentslocks with our customers. These interest-rate lock 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.
Commercial and industrial and other commercial commitments. Conditional commitments issued under various terms to lend funds to businessbusinesses 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. SinceBecause 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. ConditionalConditional commitments issued to accommodate the financial needs of customers. The commitments are made 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. These 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 balanceSee Note 4 - Loans Held-for-Investment for additional information.
Supplemental executive retirement plan with former CEO.The Company entered into a supplemental executive retirement plan (“SERP”) with a former CEO in 2009. Under the plan, the former CEO was to receive a $16 million payment in August 2018. The Company fully accrued for the SERP liability during that time period and no SERP payments have been made to the former CEO. Due to the condition of $3the Company at the time the former CEO’s employment ended, we believe that any payment under the SERP would be deemed to be a “Golden Parachute” payment and, therefore, is subject to certain banking regulations. As a result, we would need to make an application to the regulators to make a payment and certify to certain criteria. The Company does not believe that it can make such a certification. The former CEO has filed a lawsuit to compel us to make that certification and ultimately pay the liability. Final dispensation of the "SERP" is not within our control and the liability of $16 million at both SeptemberJune 30, 2017 and December 31, 20162020 may be adjusted as more information is reflected in other liabilities on the Consolidated Statements of Financial Condition.known.
Note 1816 - 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 - Fair Value Measurements to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of our valuation methodologies and information about the fair value hierarchy.
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.
| | | | | | | | | | | | | | |
| June 30, 2020 | | | |
| Level 1 | Level 2 | Level 3 | Total Fair Value |
| (Dollars in millions) | | | |
Investment securities available-for-sale | | | | |
Agency - Commercial | $ | — | | $ | 1,254 | | $ | — | | $ | 1,254 | |
Agency - Residential | — | | 932 | | — | | 932 | |
Municipal obligations | — | | 31 | | — | | 31 | |
Corporate debt obligations | — | | 76 | | — | | 76 | |
Other MBS | — | | 54 | | — | | 54 | |
Certificate of deposits | — | | 1 | | — | | 1 | |
Loans held-for-sale | | | | |
Residential first mortgage loans | — | | 5,598 | | — | | 5,598 | |
Commercial Loan | — | | — | | — | | — | |
Loans held-for-investment | | | | |
Residential first mortgage loans | — | | 10 | | — | | 10 | |
Home equity | — | | — | | 2 | | 2 | |
Mortgage servicing rights | — | | — | | 261 | | 261 | |
Derivative assets | | | | |
Rate lock commitments (fallout-adjusted) | — | | — | | 205 | | 205 | |
Futures | — | | 1 | | — | | 1 | |
Mortgage-backed securities forwards | — | | 7 | | — | | 7 | |
Interest rate swaps and swaptions | — | | 68 | | — | | 68 | |
Total assets at fair value | $ | — | | $ | 8,032 | | $ | 468 | | $ | 8,500 | |
Derivative liabilities | | | | |
Mortgage backed securities forwards | — | | (57) | | — | | (57) | |
Interest rate swaps | — | | (11) | | — | | (11) | |
DOJ Liability | — | | — | | (35) | | (35) | |
Contingent consideration | — | | — | | (27) | | (27) | |
Total liabilities at fair value | $ | — | | $ | (68) | | $ | (62) | | $ | (130) | |
| | | September 30, 2017 | | December 31, 2019 | |
| 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 | | | | | | | | Investment securities available-for-sale | |
Agency - Commercial | $ | — |
| | $ | 750 |
| | $ | — |
| | $ | 750 |
| Agency - Commercial | $ | — | | $ | 947 | | $ | — | | $ | 947 | |
Agency - Residential | — |
| | 809 |
| | — |
| | 809 |
| Agency - Residential | — | | 1,015 | | — | | 1,015 | |
Municipal obligations | — |
| | 44 |
| | — |
| | 44 |
| Municipal obligations | — | | 31 | | — | | 31 | |
Corporate debt obligations | — |
| | 34 |
| | — |
| | 34 |
| Corporate debt obligations | — | | 77 | | — | | 77 | |
Other MBS | | Other MBS | — | | 45 | | — | | 45 | |
Certificate of Deposit | | Certificate of Deposit | — | | 1 | | — | | 1 | |
Loans held-for-sale | | | | | | | | Loans held-for-sale | |
Residential first mortgage loans | — |
| | 4,907 |
| | — |
| | 4,907 |
| Residential first mortgage loans | — | | 5,219 | | — | | 5,219 | |
Loans held-for-investment | | | | | | | | Loans held-for-investment | |
Residential first mortgage loans | — |
| | 9 |
| | — |
| | 9 |
| Residential first mortgage loans | — | | 10 | | — | | 10 | |
Home equity | — |
| | — |
| | 4 |
| | 4 |
| Home equity | — | | — | | 2 | | 2 | |
Mortgage servicing rights | — |
| | — |
| | 246 |
| | 246 |
| Mortgage servicing rights | — | | — | | 291 | | 291 | |
Derivative assets | | | | | | | | Derivative assets | |
Rate lock commitments (fallout-adjusted) | — |
| | — |
| | 33 |
| | 33 |
| Rate lock commitments (fallout-adjusted) | — | | — | | 34 | | 34 | |
Mortgage-backed securities forwards | — |
| | 12 |
| | — |
| | 12 |
| Mortgage-backed securities forwards | — | | 2 | | — | | 2 | |
Interest rate swaps and swaptions | — |
| | 14 |
| | — |
| | 14 |
| Interest rate swaps and swaptions | — | | 26 | | — | | 26 | |
Interest rate swap on FHLB advances (net) | — |
| | 1 |
| | — |
| | 1 |
| |
Total assets at fair value | $ | — |
| | $ | 6,580 |
| | $ | 283 |
| | $ | 6,863 |
| Total assets at fair value | $ | — | | $ | 7,373 | | $ | 327 | | $ | 7,700 | |
Derivative liabilities | | | | | | | | Derivative liabilities | |
Rate lock commitments (fallout-adjusted) | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | (1 | ) | Rate lock commitments (fallout-adjusted) | $ | — | | $ | — | | $ | (1) | | $ | (1) | |
Futures | (3 | ) | | — |
| | — |
| | (3 | ) | |
Mortgage backed securities forwards | — |
| | (4 | ) | | — |
| | (4 | ) | |
Mortgage-backed securities forwards | | Mortgage-backed securities forwards | — | | (9) | | — | | (9) | |
Interest rate swaps | — |
| | (2 | ) | | — |
| | (2 | ) | Interest rate swaps | — | | (8) | | — | | (8) | |
DOJ litigation settlement | — |
| | — |
| | (60 | ) | | (60 | ) | |
DOJ Liability | | DOJ Liability | — | | — | | (35) | | (35) | |
Contingent consideration | — |
| | — |
| | (26 | ) | | (26 | ) | Contingent consideration | — | | — | | (10) | | (10) | |
Total liabilities at fair value | $ | (3 | ) | | $ | (6 | ) | | $ | (87 | ) | | $ | (96 | ) | Total liabilities at fair value | $ | — | | $ | (17) | | $ | (46) | | $ | (63) | |
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.
|
| | | | | | | | | | | | | | | |
| December 31, 2016 |
| Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
| (Dollars in millions) |
Investment securities available-for-sale | | | | | | | |
Agency - Commercial | $ | — |
| | $ | 548 |
| | $ | — |
| | $ | 548 |
|
Agency - Residential | — |
| | 898 |
| | — |
| | 898 |
|
Municipal obligations | — |
| | 34 |
| | — |
| | 34 |
|
Loans held-for-sale | | | | | | | |
Residential first mortgage loans | — |
| | 3,145 |
| | — |
| | 3,145 |
|
Loans held-for-investment | | | | | | | |
Residential first mortgage loans | — |
| | 7 |
| | — |
| | 7 |
|
Home equity | — |
| | — |
| | 65 |
| | 65 |
|
Mortgage servicing rights | — |
| | — |
| | 335 |
| | 335 |
|
Derivative assets | | | | | | | |
Rate lock commitments (fallout-adjusted) | — |
| | — |
| | 24 |
| | 24 |
|
Futures | 2 |
| | — |
| | — |
| | 2 |
|
Mortgage backed securities forwards | — |
| | 43 |
| | — |
| | 43 |
|
Interest rate swaps and swaptions | — |
| | 35 |
| | — |
| | 35 |
|
Interest rate swaps on FHLB advances (net) | — |
| | 19 |
| | — |
| | 19 |
|
Total assets at fair value | $ | 2 |
| | $ | 4,729 |
| | $ | 424 |
| | $ | 5,155 |
|
Derivative liabilities | | | | | | | |
Rate lock commitments (fallout-adjusted) | $ | — |
| | $ | — |
| | $ | (6 | ) | | $ | (6 | ) |
Mortgage backed securities forwards | — |
| | (11 | ) | | — |
| | (11 | ) |
Interest rate swaps | — |
| | (37 | ) | | — |
| | (37 | ) |
Warrant liabilities | — |
| | (4 | ) | | — |
| | (4 | ) |
DOJ litigation settlement | — |
| | — |
| | (60 | ) | | (60 | ) |
Total liabilities at fair value | $ | — |
| | $ | (52 | ) | | $ | (66 | ) | | $ | (118 | ) |
There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2017.
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Period | Total Gains (Losses) Recorded in Earnings (1) | Purchases / Originations | Sales | Settlement | Transfers Out | Balance at End of Period |
| (Dollars in millions) | | | | | | |
Three Months Ended June 30, 2020 | | | | | | | |
Assets | | | | | | | |
Loans held-for-investment | | | | | | | |
Home equity | $ | 2 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2 | |
Mortgage servicing rights (2) | 223 | | (36) | | 84 | | (10) | | — | | — | | 261 | |
Rate lock commitments (net) (2)(3) | 169 | | 79 | | 309 | | — | | — | | (352) | | 205 | |
Totals | $ | 394 | | $ | 43 | | $ | 393 | | $ | (10) | | $ | — | | $ | (352) | | $ | 468 | |
Liabilities | | | | | | | |
DOJ Liability | $ | (35) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (35) | |
Contingent consideration | (16) | | (11) | | — | | — | | — | | — | | (27) | |
Totals | $ | (51) | | $ | (11) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (62) | |
| | | | | | | |
Three Months Ended June 30, 2019 | | | | | | | |
Assets | | | | | | | |
Loans held-for-investment | | | | | | | |
Home equity | $ | 2 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2 | |
Mortgage servicing rights (2) | 278 | | (59) | | 97 | | — | | — | | — | | 316 | |
Rate lock commitments (net) (2)(3) | 37 | | 30 | | 82 | | — | | — | | (99) | | 50 | |
Totals | $ | 317 | | $ | (29) | | $ | 179 | | $ | — | | $ | — | | $ | (99) | | $ | 368 | |
Liabilities | | | | | | | |
DOJ Liability | $ | (60) | | $ | 25 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (35) | |
Contingent consideration | (6) | | (1) | | — | | — | | — | | — | | (7) | |
Totals | $ | (66) | | $ | 24 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (42) | |
(1)There were 0 unrealized gains (losses) recorded in OCI during the three months ended June 30, 2020 and 2019. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Recorded in Earnings | | Recorded in OCI | | | | | |
| 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) |
Three Months Ended September 30, 2017 | | | | | | | | | |
Assets | | | | | | | | | | |
Loans held-for-investment | | | | | | | | | | |
Home equity | $ | 5 |
| $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | (1 | ) | $ | — |
| $ | 4 |
|
Mortgage servicing rights | 184 |
| (9 | ) | — |
| | — |
| 75 |
| (4 | ) | — |
| — |
| 246 |
|
Rate lock commitments (net) (1) | 26 |
| 21 |
| — |
| | — |
| 82 |
| — |
| — |
| (97 | ) | 32 |
|
Totals | $ | 215 |
| $ | 12 |
| $ | — |
| | $ | — |
| $ | 157 |
| $ | (4 | ) | $ | (1 | ) | $ | (97 | ) | $ | 282 |
|
Liabilities | | | | | | | | | | |
DOJ litigation settlement | $ | (60 | ) | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (60 | ) |
Contingent consideration | (23 | ) | (1 | ) | — |
| | — |
| (2 | ) | — |
| — |
| — |
| (26 | ) |
Totals | $ | (83 | ) | $ | (1 | ) | $ | — |
| | $ | — |
| $ | (2 | ) | $ | — |
| $ | — |
| $ | — |
| $ | (86 | ) |
| | | | | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | | | |
Assets | | | | | | | | | | |
Loans held-for-investment | | | | | | | | | | |
Home equity | $ | 82 |
| $ | 4 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | (14 | ) | $ | — |
| $ | 72 |
|
Mortgage servicing rights | 301 |
| (33 | ) | — |
| | — |
| 51 |
| (17 | ) | — |
| — |
| 302 |
|
Rate lock commitments (net) (1) | 82 |
| 33 |
| — |
| | — |
| 116 |
| (150 | ) | (18 | ) | — |
| 63 |
|
Totals | $ | 465 |
| $ | 4 |
| $ | — |
| | $ | — |
| $ | 167 |
| $ | (167 | ) | $ | (32 | ) | $ | — |
| $ | 437 |
|
Liabilities | | | | | | | | | | |
DOJ litigation settlement | $ | (84 | ) | $ | 24 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (60 | ) |
| |
(1) | 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 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) |
Nine Months Ended September 30, 2017 | | | | | | | | | |
Assets | | | | | | | | | | |
Loans held-for-sale | | | | | | | | | | |
Home equity | $ | — |
| $ | 1 |
| $ | — |
| | $ | — |
| $ | — |
| $ | (52 | ) | $ | (1 | ) | $ | 52 |
| $ | — |
|
Loans held-for-investment | | | | | | | | | | |
Home equity | 65 |
| 1 |
| — |
| — |
| — |
| — |
| — |
| (7 | ) | (55 | ) | 4 |
|
Mortgage servicing rights | 335 |
| (7 | ) | — |
| | — |
| 178 |
| (260 | ) | — |
| — |
| 246 |
|
Rate lock commitments (net) (1) | 18 |
| 55 |
| — |
| | — |
| 199 |
| — |
| — |
| (240 | ) | 32 |
|
Totals | $ | 418 |
| $ | 50 |
| $ | — |
| | $ | — |
| $ | 377 |
| $ | (312 | ) | $ | (8 | ) | $ | (243 | ) | $ | 282 |
|
Liabilities | | | | | | | | | | |
DOJ litigation settlement | $ | (60 | ) | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (60 | ) |
Contingent consideration | — |
| (1 | ) | — |
| | — |
| (25 | ) | — |
| — |
| — |
| (26 | ) |
Totals | $ | (60 | ) | $ | (1 | ) | $ | — |
| | $ | — |
| $ | (25 | ) | $ | — |
| $ | — |
| $ | — |
| $ | (86 | ) |
| | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | |
Assets | | | | | | | | | | |
Loans held-for-investment | | | | | | | | | | |
Home equity | $ | 106 |
| $ | 2 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | (36 | ) | $ | — |
| $ | 72 |
|
Mortgage servicing rights | 296 |
| (126 | ) | — |
| | — |
| 173 |
| (41 | ) | — |
| — |
| 302 |
|
Rate lock commitments (net) (1) | 26 |
| 153 |
| — |
| | — |
| 303 |
| (371 | ) | (48 | ) | — |
| 63 |
|
Totals | $ | 428 |
| $ | 29 |
| $ | — |
| | $ | — |
| $ | 476 |
| $ | (412 | ) | $ | (84 | ) | $ | — |
| $ | 437 |
|
Liabilities | | | | | | | | | | |
DOJ litigation settlement | $ | (84 | ) | $ | 24 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (60 | ) |
| |
(1) | 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. |
(2)We utilized swaptions, futures, forward agency and loan sales and interest rate swaps to manage the risk associated with MSRsmortgage servicing rights 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 levelLevel 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Period | Total Gains (Losses) Recorded in Earnings (1) | Purchases / Originations | Sales | Settlement | Transfers Out | Balance at End of Period |
| (Dollars in millions) | | | | | | |
Six Months Ended June 30, 2020 | | | | | | | |
Assets | | | | | | | |
Loans held-for-investment | | | | | | | |
Home equity | $ | 2 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2 | |
Mortgage servicing rights (2) | 291 | | (108) | | 124 | | (46) | | — | | — | | 261 | |
Rate lock commitments (net) (2)(3) | 34 | | 184 | | 472 | | — | | — | | (485) | | 205 | |
Totals | $ | 327 | | $ | 76 | | $ | 596 | | $ | (46) | | $ | — | | $ | (485) | | $ | 468 | |
Liabilities | | | | | | | |
DOJ Liability | $ | (35) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (35) | |
Contingent consideration | (10) | | (17) | | — | | — | | — | | — | | (27) | |
Totals | $ | (45) | | $ | (17) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (62) | |
| | | | | | | |
Six Months Ended June 30, 2019 | | | | | | | |
Assets | | | | | | | |
Loans held-for-investment | | | | | | | |
Home equity | $ | 2 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2 | |
Mortgage servicing rights (2) | 290 | | (93) | | 164 | | (45) | | — | | — | | 316 | |
Rate lock commitments (net) (2)(3) | 20 | | 55 | | 132 | | — | | — | | (157) | | 50 | |
Totals | $ | 312 | | $ | (38) | | $ | 296 | | $ | (45) | | $ | — | | $ | (157) | | $ | 368 | |
Liabilities | | | | | | | |
DOJ Liability | $ | (60) | | $ | 25 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (35) | |
Contingent consideration | (6) | | (1) | | — | | — | | — | | — | | (7) | |
Totals | $ | (66) | | $ | 24 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (42) | |
(1)There were no unrealized gains (losses) recorded in OCI during the six months ended June 30, 2020 and 2019.
(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.
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) | |
| (Dollars in millions) | | | | |
June 30, 2020 | | | | | |
Assets | | | | | |
Loans held-for-investment | | | | | |
Home equity | $ | 2 | | Discounted cash flows | Discount rate Constant prepayment rate Constant default rate | 7.2% -10.8% (9.0%) 17.3% - 25.9% (21.6%) 2.0%-3.0% (2.5%) | (1) |
Mortgage servicing rights | $ | 261 | | Discounted cash flows | Option adjusted spread Constant prepayment rate Weighted average cost to service per loan | 3.6% - 20.1% (6.7%) 0% - 14.8% (11.8%) $67 - $95 ($83) | (1) |
Rate lock commitments (net) | $ | 205 | | Consensus pricing | Origination pull-through rate | 80.0% - 87.2% (81.4%) | (1) |
Liabilities | | | | | |
DOJ Liability | $ | (35) | | Discounted cash flows | See description below | See description below | |
Contingent consideration | $ | (27) | | Discounted cash flows | See description below | See description below | (2) |
|
| | | | | | | | | |
| Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
| (Dollars in millions) |
September 30, 2017 | |
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%) |
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) |
Rate lock commitments (net) | $ | 32 |
| | Consensus pricing | | Origination pull-through rate | | 63.9% - 95.9% (79.9%) |
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%) |
Contingent consideration | $ | 26 |
| | Discounted cash flows | | Beta Equity volatility | | 0.6 - 1.6 (1.1) 26.6% - 58.9% (40.5%) |
| | | | | | | | | | | | | | | | | |
| Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | |
| (Dollars in millions) | | | | |
December 31, 2019 | | | | | |
Assets | | | | | |
Loans held-for-investment | | | | | |
Home equity | $ | 2 | | Discounted cash flows | Discount rate Constant prepayment rate Constant default rate | 7.2% -10.8% (9.0%) 13.0% - 19.5% (16.2%) 2.7%-4.0% (3.3%) | (1) |
Mortgage servicing rights | $ | 291 | | Discounted cash flows | Option adjusted spread Constant prepayment rate Weighted average cost to service per loan | 2.4% - 20.4% (5.3%) 0% - 12.3% (10.6%) $67 - $95 ($84) | (1) |
Rate lock commitments (net) | $ | 34 | | Consensus pricing | Origination pull-through rate | 80.0% - 87.2% (81.5%) | (1) |
Liabilities | | | | | |
DOJ Liability | $ | (35) | | Discounted cash flows | See description below | See description below | |
Contingent consideration | $ | (10) | | Discounted cash flows | See description below | See description below | (2) |
|
| | | | | | | | | |
| Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
| (Dollars in millions) |
December 31, 2016 | |
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%) |
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) |
Rate lock commitments (net) | $ | 18 |
| | Consensus pricing | | Origination pull-through rate | | 66.9% - 100.0% (83.6%) |
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%) |
(1)Unobservable inputs were weighted by their relative fair value of the instruments.
(2)Unobservable inputs were not weighted as only one instrument exists.
Recurring Significant Unobservable Inputs
Home equity. The most 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 prepay 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, 20172020 and December 31, 20162019, the weighted average life (in years) for the entire MSRsMSR portfolio was 6.03.6 and 6.6,4.1, respectively.
DOJ litigation settlement. Liability.The significant unobservable inputinputs used in the fair value measurement of the DOJ litigation settlement isLiability are the discount rate, and asset growth rate, in additionreturn on assets, dividend rate and the potential ways we might be required to thosebegin making DOJ Liability payments and our estimates of the likelihood of these outcomes, as further discussed in Note 1715 - Legal Proceedings, Contingencies and Commitments. Significant increases (decreases)The DOJ Liability had a fair value adjustment of $25 million during the year ended December 31, 2019. This reduced the liability to $35 million based on changes in the discount rate or asset growth rate in isolation would result inprobability of potential ways we might be required to begin making DOJ Liability payments and our estimates of the likelihood of these outcomes. Our assessment of these outcomes reflect a marginally lower (higher) fair value measurement. For further information on the fair value inputs related to the DOJ litigation, see Note 17 - Legal Proceedings, Contingencies,reduced likelihood, and Commitments.longer timing, for potential future payments.
Rate lock commitments. The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull through rate. The pull 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 through rate) are applied accordingly. Significant increases (decreases) in the pull 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 forecasted 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 decrease in these inputs results in a decrease or increase 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.
basis under certain conditions. The following table presents assets measured at fair value on a nonrecurring basis:
| | | | | | | | | | | | | | |
| Total (1) | Level 2 | Level 3 | Losses |
| (Dollars in millions) | | | |
June 30, 2020 | | | | |
Loans held-for-sale (2) | $ | 6 | | $ | 6 | | $ | — | | $ | (1) | |
Impaired loans held-for-investment (2) | | | | |
Residential first mortgage loans | 21 | | — | | 21 | | (3) | |
Repossessed assets (3) | 7 | | — | | 7 | | (4) | |
Totals | $ | 34 | | $ | 6 | | $ | 28 | | $ | (8) | |
December 31, 2019 | | | | |
Loans held-for-sale (2) | $ | 6 | | $ | 6 | | $ | — | | $ | (1) | |
Impaired loans held-for-investment (2) | | | | |
Residential first mortgage loans | 14 | | — | | 14 | | (5) | |
Repossessed assets (3) | 10 | | — | | 10 | | (3) | |
Totals | $ | 30 | | $ | 6 | | $ | 24 | | $ | (9) | |
|
| | | | | | | | | | | | | | | |
| Total (1) | | Level 2 | | Level 3 | | Gains/(Losses) |
| (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 | | | | | | | |
Loans held-for-sale (2) | $ | 9 |
| | $ | 9 |
| | $ | — |
| | $ | (2 | ) |
Impaired loans held-for-investment (2) | | | | | | | |
Residential first mortgage loans | 25 |
| | — |
| | 25 |
| | (28 | ) |
Repossessed assets (3) | 14 |
| | — |
| | 14 |
| | (2 | ) |
Totals | $ | 48 |
| | $ | 9 |
| | $ | 39 |
| | $ | (32 | ) |
(1)The fair values are determined at various dates dependent upon when certain conditions were met requiring fair value measurement. | |
(1) | The fair values are determined at various dates during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. |
| |
(2) | Gains/(losses) reflect fair value adjustments on assets for which we did not elect the fair value option. |
| |
(3) | Gains/(losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets. |
(2)Gains (losses) reflect fair value adjustments on assets for which we did not elect the fair value option.
(3)Gains (losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets.
The following tables presenttable presents 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) | |
| (Dollars in millions) | | | | |
June 30, 2020 | | | | | |
Impaired loans held-for-investment | | | | | |
Loans held-for-investment | $ | 21 | | Fair value of collateral | Loss severity discount | 0% - 100% (13.2%) | (1) |
Repossessed assets | $ | 7 | | Fair value of collateral | Loss severity discount | 0% - 96.3% (27.1%) | (1) |
December 31, 2019 | | | | | |
Impaired loans held-for-investment | | | | | |
Loans held-for-investment | $ | 14 | | Fair value of collateral | Loss severity discount | 25% - 30% (25.9%) | (1) |
Repossessed assets | $ | 10 | | Fair value of collateral | Loss severity discount | 0% - 100% (17.1%) | (1) |
|
| | | | | | | | | |
| Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
| (Dollars in millions) |
September 30, 2017 | | | | | | | |
Impaired loans held-for-investment | | | | | | | |
Loans held-for-investment | $ | 23 |
| | Fair value of collateral | | Loss severity discount | | 28% - 31% (29.6%) |
Repossessed assets | $ | 9 |
| | Fair value of collateral | | Loss severity discount | | 29% - 100% (75.3%) |
December 31, 2016 | | | | | | | |
Impaired loans held-for-investment | | | | | | | |
Residential first mortgage loans | $ | 25 |
| | Fair value of collateral | | Loss severity discount | | 22% - 40% (29.5%) |
Repossessed assets | $ | 14 |
| | Fair value of collateral | | Loss severity discount | | 22% - 100% (69.5%) |
(1)Unobservable inputs were weighted by their relative fair value of the instruments.
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:
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | |
| | Estimated Fair Value | | | |
| Carrying Value | Total | Level 1 | Level 2 | Level 3 |
| (Dollars in millions) | | | | |
Assets | | | | | |
Cash and cash equivalents | $ | 227 | | $ | 227 | | $ | 227 | | $ | — | | $ | — | |
Investment securities available-for-sale | 2,348 | | 2,348 | | — | | 2,348 | | — | |
Investment securities held-to-maturity | 496 | | 516 | | — | | 516 | | — | |
Loans held-for-sale | 5,615 | | 5,615 | | — | | 5,615 | | — | |
Loans held-for-investment | 14,808 | | 14,757 | | — | | 10 | | 14,747 | |
Loans with government guarantees | 1,791 | | 1,739 | | — | | 1,739 | | — | |
Mortgage servicing rights | 261 | | 261 | | — | | — | | 261 | |
Federal Home Loan Bank stock | 377 | | 377 | | — | | 377 | | — | |
Bank owned life insurance | 353 | | 353 | | — | | 353 | | — | |
Repossessed assets | 7 | | 7 | | — | | — | | 7 | |
Other assets, foreclosure claims | 30 | | 30 | | — | | 30 | | — | |
Derivative financial instruments, assets | 281 | | 281 | | — | | 76 | | 205 | |
Liabilities | | | | | |
Retail deposits | | | | | |
Demand deposits and savings accounts | $ | (7,943) | | $ | (7,445) | | $ | — | | $ | (7,445) | | $ | — | |
Certificates of deposit | (1,826) | | (1,847) | | — | | (1,847) | | — | |
Wholesale deposits | (867) | | (889) | | — | | (889) | | — | |
Government deposits | (1,193) | | (1,170) | | — | | (1,170) | | — | |
Custodial deposits | (6,068) | | (6,050) | | — | | (6,050) | | — | |
Federal Home Loan Bank advances | (4,554) | | (4,586) | | — | | (4,586) | | — | |
Long-term debt | (493) | | (454) | | — | | (454) | | — | |
DOJ Liability | (35) | | (35) | | — | | — | | (35) | |
Contingent consideration | (27) | | (27) | | — | | — | | (27) | |
Derivative financial instruments, liabilities | (68) | | (68) | | — | | (68) | | — | |
| | | September 30, 2017 | | December 31, 2019 | |
| | | 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 | | | | | | | | | | Assets | |
Cash and cash equivalents | $ | 233 |
| | $ | 233 |
| | $ | 233 |
| | $ | — |
| | $ | — |
| Cash and cash equivalents | $ | 426 | | $ | 426 | | $ | 426 | | $ | — | | $ | — | |
Investment securities available-for-sale | 1,637 |
| | 1,637 |
| | — |
| | 1,637 |
| | — |
| Investment securities available-for-sale | 2,116 | | 2,116 | | — | | 2,116 | | — | |
Investment securities held-to-maturity | 977 |
| | 971 |
| | — |
| | 971 |
| | — |
| Investment securities held-to-maturity | 598 | | 599 | | — | | 599 | | — | |
Loans held-for-sale | 4,939 |
| | 4,940 |
| | — |
| | 4,940 |
| | — |
| Loans held-for-sale | 5,258 | | 5,258 | | — | | 5,258 | | — | |
Loans held-for-investment | 7,203 |
| | 7,181 |
| | — |
| | 9 |
| | 7,172 |
| Loans held-for-investment | 12,129 | | 12,031 | | — | | 10 | | 12,021 | |
Loans with government guarantees | 253 |
| | 245 |
| | — |
| | 245 |
| | — |
| Loans with government guarantees | 736 | | 707 | | — | | 707 | | — | |
Mortgage servicing rights | 246 |
| | 246 |
| | — |
| | — |
| | 246 |
| Mortgage servicing rights | 291 | | 291 | | — | | — | | 291 | |
Federal Home Loan Bank stock | 264 |
| | 264 |
| | — |
| | 264 |
| | — |
| Federal Home Loan Bank stock | 303 | | 303 | | — | | 303 | | — | |
Bank owned life insurance | 328 |
| | 328 |
| | — |
| | 328 |
| | — |
| Bank owned life insurance | 349 | | 349 | | — | | 349 | | — | |
Repossessed assets | 9 |
| | 9 |
| | — |
| | — |
| | 9 |
| Repossessed assets | 10 | | 10 | | — | | — | | 10 | |
Other assets, foreclosure claims | 92 |
| | 92 |
| | — |
| | 92 |
| | — |
| Other assets, foreclosure claims | 45 | | 45 | | — | | 45 | | — | |
Derivative financial instruments, assets | 60 |
| | 60 |
| | — |
| | 27 |
| | 33 |
| Derivative financial instruments, assets | 62 | | 88 | | — | | 54 | | 34 | |
Liabilities | | | | | | | | | | Liabilities | |
Retail deposits | | | | | | | | | | Retail deposits | |
Demand deposits and savings accounts | $ | (5,243 | ) | | $ | (4,845 | ) | | $ | — |
| | $ | (4,845 | ) | | $ | — |
| Demand deposits and savings accounts | $ | (6,811) | | $ | (6,050) | | $ | — | | $ | (6,050) | | $ | — | |
Certificates of deposit | (1,297 | ) | | (1,304 | ) | | — |
| | (1,304 | ) | | — |
| Certificates of deposit | (2,353) | | (2,368) | | — | | (2,368) | | — | |
Wholesale deposits | (43 | ) | | (43 | ) | | — |
| | (43 | ) | | — |
| Wholesale deposits | (633) | | (640) | | — | | (640) | | — | |
Government deposits | (1,068 | ) | | (1,045 | ) | | — |
| | (1,045 | ) | | — |
| Government deposits | (1,213) | | (1,156) | | — | | (1,156) | | — | |
Company controlled deposits | (1,510 | ) | | (1,473 | ) | | — |
| | (1,473 | ) | | — |
| |
Custodial deposits | | Custodial deposits | (4,136) | | (4,066) | | — | | (4,066) | | — | |
Federal Home Loan Bank advances | (5,365 | ) | | (5,252 | ) | | — |
| | (5,252 | ) | | — |
| Federal Home Loan Bank advances | (4,815) | | (4,816) | | — | | (4,816) | | — | |
Long-term debt | (493 | ) | | (382 | ) | | — |
| | (382 | ) | | — |
| Long-term debt | (496) | | (462) | | — | | (462) | | — | |
DOJ litigation settlement | (60 | ) | | (60 | ) | | — |
| | — |
| | (60 | ) | |
DOJ Liability | | DOJ Liability | (35) | | (35) | | — | | — | | (35) | |
Contingent consideration | (26 | ) | | (26 | ) | | — |
| | — |
| | (26 | ) | Contingent consideration | (10) | | (10) | | — | | — | | (10) | |
Derivative financial instruments, liabilities | (10 | ) | | (10 | ) | | (3 | ) | | (6 | ) | | (1 | ) | Derivative financial instruments, liabilities | (18) | | (44) | | — | | (43) | | (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.
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 June 30, | | | Six Months Ended June 30, | |
| 2020 | 2019 | | 2020 | 2019 |
| (Dollars in millions) | | | | |
Assets | | | | | |
Loans held-for-sale | | | | | |
Net gain on loan sales | $ | 325 | | $ | 96 | | | $ | 559 | | $ | 175 | |
Liabilities | | | | | |
DOJ Liability | | | | | |
Other noninterest income | $ | — | | $ | 25 | | | $ | — | | $ | 25 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in millions) |
Assets | | | | | | | |
Loans held-for-sale | | | | | | | |
Net gain on loan sales | $ | 92 |
| | $ | 151 |
| | $ | 260 |
| | $ | 440 |
|
Loans held-for-investment | | | | | | | |
Other noninterest income | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | (2 | ) |
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
| UPB | Fair Value | Fair Value Over / (Under) UPB | | UPB | Fair Value | Fair Value Over / (Under) UPB |
| (Dollars in millions) | | | | | | |
Assets | | | | | | | |
Nonaccrual loans | | | | | | | |
Loans held-for-sale | $ | 6 | | $ | 6 | | $ | — | | | $ | 3 | | $ | 3 | | $ | — | |
Loans held-for-investment | 6 | | 6 | | — | | | 5 | | 4 | | (1) | |
Total nonaccrual loans | $ | 12 | | $ | 12 | | $ | — | | | $ | 8 | | $ | 7 | | $ | (1) | |
Other performing loans | | | | | | | |
Loans held-for-sale | $ | 5,357 | | $ | 5,592 | | $ | 235 | | | $ | 5,057 | | $ | 5,216 | | $ | 159 | |
Loans held-for-investment | 7 | | 6 | | (1) | | | 8 | | 8 | | — | |
Total other performing loans | $ | 5,364 | | $ | 5,598 | | $ | 234 | | | $ | 5,065 | | $ | 5,224 | | $ | 159 | |
Total loans | | | | | | | |
Loans held-for-sale | $ | 5,363 | | $ | 5,598 | | $ | 235 | | | $ | 5,060 | | $ | 5,219 | | $ | 159 | |
Loans held-for-investment | 13 | | 12 | | (1) | | | 13 | | 12 | | (1) | |
Total loans | $ | 5,376 | | $ | 5,610 | | $ | 234 | | | $ | 5,073 | | $ | 5,231 | | $ | 158 | |
Liabilities | | | | | | | |
DOJ Liability (1) | $ | (118) | | $ | (35) | | $ | 83 | | | $ | (118) | | $ | (35) | | $ | 83 | |
(1)We are obligated to pay $118 million in installment payments upon meeting certain performance conditions, as described in Note 15 - Legal Proceedings, Contingencies and Commitments.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| 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) |
Assets | | | | | | | | | | | |
Nonaccrual loans | | | | | | | | | | | |
Loans held-for-sale | $ | 4 |
| | $ | 4 |
| | $ | — |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
|
Loans held-for-investment | 6 |
| | 4 |
| | (2 | ) | | 19 |
| | 13 |
| | (6 | ) |
Total nonaccrual loans | $ | 10 |
| | $ | 8 |
| | $ | (2 | ) | | $ | 21 |
| | $ | 15 |
| | $ | (6 | ) |
Other performing loans | | | | | | | | | | | |
Loans held-for-sale | $ | 4,742 |
| | $ | 4,903 |
| | $ | 161 |
| | $ | 3,103 |
| | $ | 3,143 |
| | $ | 40 |
|
Loans held-for-investment | 11 |
| | 9 |
| | (2 | ) | | 72 |
| | 59 |
| | (13 | ) |
Total other performing loans | $ | 4,753 |
| | $ | 4,912 |
| | $ | 159 |
| | $ | 3,175 |
| | $ | 3,202 |
| | $ | 27 |
|
Total loans | | | | | | | | | | | |
Loans held-for-sale | $ | 4,746 |
| | $ | 4,907 |
| | $ | 161 |
| | $ | 3,105 |
| | $ | 3,145 |
| | $ | 40 |
|
Loans held-for-investment | 17 |
| | 13 |
| | (4 | ) | | 91 |
| | 72 |
| | (19 | ) |
Total loans | $ | 4,763 |
| | $ | 4,920 |
| | $ | 157 |
| | $ | 3,196 |
| | $ | 3,217 |
| | $ | 21 |
|
Liabilities | | | | | | | | | | | |
Litigation settlement (1) | $ | (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 17 - Legal Proceedings, Contingencies and Commitments. |
Note 1917 - Segment Information
Our operations are conducted through three3 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 are 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.
EffectiveAs a result of Management's evaluation of our segments, effective January 1, 2017, activity related to Loans with Government Guarantees, was moved from2020, certain departments have been re-aligned between the Community Banking and Mortgage Servicing segment toOriginations. Specifically, a majority of the residential mortgage HFI portfolio is now part of the Mortgage Originations segmentsegment. The income and we beganexpenses relating to allocate the tax provision at a segment level. Prior to this change, the tax provision wasthese changes are reflected in the Other segment. The statutory federal tax rate is used for Community Banking, Mortgage Originations,our financial statements and Mortgage Servicing segments with the difference between the statutory rate and the effective tax rate held in the Other segment. Priorall prior period segment financial information related to both 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 and Warehouse Lending and LHFI Portfolio groups.Lending. 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, wealth managementsyndications, and investment and insurance products and services are provided through Opes as ofservices. The interest income on LHFI is recognized in the acquisition date of May 15, 2017.Community Banking segment, excluding residential first mortgages and newly originated home equity products within the Mortgage Originations segment.
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 netthird party counterparties. The Mortgage Originations segment
recognizes interest income on loans that are held for sale and the gains from sales associated with these loans, are recognized inalong with the Mortgage Originations segment.interest income on residential mortgages and newly originated home equity products within LHFI.
The Mortgage Servicing segment services and subservices mortgage and other consumer 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 provides servicing of residential mortgagesalso services loans for our LHFI portfolio and our own LHFILHFS portfolio in the Community BankingMortgage 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 Community Banking, Mortgage Originations or Mortgage Servicing or Community Banking operating segments.
Revenues are comprised of net interest income (before the provision (benefit) for loancredit losses) and noninterest income. Noninterest expenses and a majority of provision (benefit) for income taxes, are fully allocated to each operating segment. Provision for credit losses is allocated to segments based on net charge offs and changes in outstanding balances. In contrast, the level of the consolidated provision for credit losses is determined based on an allowance model using the methodologies described in Item 2 – MD&A. The net effect of the credit provision is recorded in the Other 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 June 30, 2020 | | | | |
| Community Banking | Mortgage Originations | Mortgage Servicing | Other (1) | Total |
| (Dollars in millions) | | | | |
Summary of Operations | | | | | |
Net interest income | $ | 133 | | $ | 56 | | $ | 4 | | $ | (25) | | $ | 168 | |
Provision (benefit) for credit losses | (3) | | (2) | | — | | 107 | | 102 | |
Net interest income after provision (benefit) for credit losses | 136 | | 58 | | 4 | | (132) | | 66 | |
Net gain on loan sales | — | | 303 | | — | | — | | 303 | |
Loan fees and charges | — | | 22 | | 19 | | — | | 41 | |
Loan administration (expense) income | (1) | | (8) | | 36 | | (6) | | 21 | |
Net return on mortgage servicing rights | — | | (8) | | — | | — | | (8) | |
Other noninterest income | 12 | | 1 | | — | | 8 | | 21 | |
Total noninterest income | 11 | | 310 | | 55 | | 2 | | 378 | |
Compensation and benefits | 24 | | 38 | | 11 | | 43 | | 116 | |
Commissions | — | | 61 | | — | | — | | 61 | |
Loan processing expense | 1 | | 14 | | 9 | | 1 | | 25 | |
Other noninterest expense | 124 | | 56 | | 17 | | (103) | | 94 | |
Total noninterest expense | 149 | | 169 | | 37 | | (59) | | 296 | |
Income (loss) before indirect overhead allocations and income taxes | (2) | | 199 | | 22 | | (71) | | 148 | |
Indirect overhead allocation income (expense) | (11) | | (15) | | (6) | | 32 | | — | |
Provision (benefit) for income taxes | (3) | | 39 | | 3 | | (7) | | 32 | |
Net income (loss) | $ | (10) | | $ | 145 | | $ | 13 | | $ | (32) | | $ | 116 | |
| | | | | |
Intersegment (expense) revenue | $ | (69) | | $ | (34) | | $ | 9 | | $ | 94 | | $ | — | |
| | | | | |
Average balances | | | | | |
Loans held-for-sale | — | | 5,645 | | — | | — | | 5,645 | |
Loans with government guarantees | — | | 858 | | — | | — | | 858 | |
Loans held-for-investment (2) | 10,878 | | 2,688 | | — | | 30 | | 13,596 | |
Total assets | 11,292 | | 10,598 | | 69 | | 4,302 | | 26,261 | |
Deposits | 10,747 | | — | | 6,222 | | 746 | | 17,715 | |
(1)Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
(2) Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
| | | Three Months Ended September 30, 2017 | | Three Months Ended June 30, 2019 | |
| 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 | | | | | | | | | | Summary of Operations | |
Net interest income | $ | 63 |
| | $ | 34 |
| | $ | 7 |
| | $ | (1 | ) | | $ | 103 |
| Net interest income | $ | 98 | | $ | 33 | | $ | 3 | | $ | 4 | | $ | 138 | |
Provision for credit losses | | Provision for credit losses | 15 | | 1 | | — | | 1 | | 17 | |
Net interest income after provision for credit losses | | Net interest income after provision for credit losses | 83 | | 32 | | 3 | | 3 | | 121 | |
Net gain (loss) on loan sales | (4 | ) | | 79 |
| | — |
| | — |
| | 75 |
| Net gain (loss) on loan sales | (2) | | 78 | | — | | (1) | | 75 | |
Representation and warranty benefit | — |
| | 4 |
| | — |
| | — |
| | 4 |
| |
Loan fees and charges | | Loan fees and charges | — | | 17 | | 8 | | (1) | | 24 | |
Loan administration (expense) income | | Loan administration (expense) income | — | | (5) | | 30 | | (19) | | 6 | |
Net return on mortgage servicing rights | | Net return on mortgage servicing rights | — | | 4 | | — | | 1 | | 5 | |
Other noninterest income | 9 |
| | 23 |
| | 11 |
| | 8 |
| | 51 |
| Other noninterest income | 15 | | 3 | | — | | 40 | | 58 | |
Total net interest income and noninterest income | 68 |
| | 140 |
| | 18 |
| | 7 |
| | 233 |
| |
(Provision) benefit for loan losses | (1 | ) | | (1 | ) | | — |
| | — |
| | (2 | ) | |
Depreciation and amortization expense | (2 | ) | | (2 | ) | | (1 | ) | | (5 | ) | | (10 | ) | |
Total noninterest income | | Total noninterest income | 13 | | 97 | | 38 | | 20 | | 168 | |
Compensation and benefits | | Compensation and benefits | 25 | | 27 | | 6 | | 32 | | 90 | |
Commissions | | Commissions | — | | 25 | | — | | — | | 25 | |
Loan processing expense | | Loan processing expense | 2 | | 8 | | 10 | | 1 | | 21 | |
Other noninterest expense | (49 | ) | | (90 | ) | | (22 | ) | | — |
| | (161 | ) | Other noninterest expense | 44 | | 20 | | 14 | | — | | 78 | |
Total noninterest expense | (51 | ) | | (92 | ) | | (23 | ) | | (5 | ) | | (171 | ) | Total noninterest expense | 71 | | 80 | | 30 | | 33 | | 214 | |
Income (loss) before income taxes | 16 |
| | 47 |
| | (5 | ) | | 2 |
| | 60 |
| |
Provision (benefit) for income taxes | 6 |
| | 16 |
| | (1 | ) | | (1 | ) | | 20 |
| |
Net income (loss) | $ | 10 |
| | $ | 31 |
| | $ | (4 | ) | | $ | 3 |
| | $ | 40 |
| |
Intersegment revenue | $ | (4 | ) | | $ | 2 |
| | $ | 5 |
| | $ | (3 | ) | | $ | — |
| |
Income (loss) before indirect overhead allocations and income taxes | | Income (loss) before indirect overhead allocations and income taxes | 25 | | 49 | | 11 | | (10) | | 75 | |
Indirect overhead allocation income (expense) | | Indirect overhead allocation income (expense) | (10) | | (10) | | (4) | | 24 | | — | |
Provision for income taxes | | Provision for income taxes | 3 | | 8 | | 2 | | 1 | | 14 | |
Net income | | Net income | $ | 12 | | $ | 31 | | $ | 5 | | $ | 13 | | $ | 61 | |
| Intersegment (expense) revenue | | Intersegment (expense) revenue | $ | (8) | | $ | 9 | | $ | 6 | | $ | (7) | | $ | — | |
| | | | | | | | | | | |
Average balances | | | | | | | | | | Average balances | |
Loans held-for-sale | $ | 14 |
| | $ | 4,462 |
| | $ | — |
| | $ | — |
| | $ | 4,476 |
| Loans held-for-sale | $ | 19 | | $ | 3,520 | | $ | — | | $ | — | | $ | 3,539 | |
Loans with government guarantees | — |
| | 264 |
| | — |
| | — |
| | 264 |
| Loans with government guarantees | — | | 502 | | — | | — | | 502 | |
Loans held-for-investment | 6,764 |
| | 10 |
| | — |
| | 29 |
| | 6,803 |
| |
Loans held-for-investment (2) | | Loans held-for-investment (2) | 10,563 | | 21 | | — | | 29 | | 10,613 | |
Total assets | 6,843 |
| | 5,743 |
| | 30 |
| | 3,823 |
| | 16,439 |
| Total assets | 11,061 | | 5,045 | | 48 | | 3,812 | | 19,966 | |
Deposits | 7,498 |
| | — |
| | 1,507 |
| | — |
| | 9,005 |
| Deposits | 10,238 | | — | | 3,501 | | 420 | | 14,159 | |
(1)Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits 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, 2020 | |
| 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 | | | | | | | | | | Summary of Operations | | |
Net interest income | $ | 54 |
| | $ | 24 |
| | $ | 7 |
| | $ | (5 | ) | | $ | 80 |
| Net interest income | $ | 237 | | $ | 98 | | $ | 8 | | $ | (27) | | $ | 316 | |
Net gain (loss) on loan sales | (1 | ) | | 95 |
| | — |
| | — |
| | 94 |
| |
Representation and warranty benefit | — |
| | 6 |
| | — |
| | — |
| | 6 |
| |
Provision (benefit) for credit losses | | Provision (benefit) for credit losses | 5 | | (5) | | — | | 116 | | 116 | |
Net interest income after provision (benefit) for credit losses | | Net interest income after provision (benefit) for credit losses | 232 | | 103 | | 8 | | (143) | | 200 | |
Net gain on loan sales | | Net gain on loan sales | — | | 393 | | — | | — | | 393 | |
Loan fees and charges | | Loan fees and charges | — | | 39 | | 28 | | — | | 67 | |
Loan administration (expense) income | | Loan administration (expense) income | (2) | | (15) | | 72 | | (22) | | 33 | |
Net loss on mortgage servicing rights | | Net loss on mortgage servicing rights | — | | (2) | | — | | — | | (2) | |
Other noninterest income | 8 |
| | 4 |
| | 13 |
| | 31 |
| | 56 |
| Other noninterest income | 28 | | 2 | | — | | 14 | | 44 | |
Total net interest income and noninterest income | 61 |
| | 129 |
| | 20 |
| | 26 |
| | 236 |
| |
(Provision) for loan losses | (7 | ) | | — |
| | — |
| | — |
| | (7 | ) | |
Depreciation and amortization expense | (1 | ) | | (2 | ) | | — |
| | (5 | ) | | (8 | ) | |
Total noninterest income | | Total noninterest income | 26 | | 417 | | 100 | | (8) | | 535 | |
Compensation and benefits | | Compensation and benefits | 51 | | 69 | | 21 | | 77 | | 218 | |
Commissions | | Commissions | 1 | | 89 | | — | | — | | 90 | |
Loan processing expense | | Loan processing expense | 3 | | 24 | | 16 | | 2 | | 45 | |
Other noninterest expense | (43 | ) | | (66 | ) | | (25 | ) | | — |
| | (134 | ) | Other noninterest expense | 168 | | 82 | | 36 | | (107) | | 179 | |
Total noninterest expense | (44 | ) | | (68 | ) | | (25 | ) | | (5 | ) | | (142 | ) | Total noninterest expense | 223 | | 264 | | 73 | | (28) | | 532 | |
Income (loss) before income taxes | 10 |
| | 61 |
| | (5 | ) | | 21 |
| | 87 |
| |
Income (loss) before indirect overhead allocations and income taxes | | Income (loss) before indirect overhead allocations and income taxes | 35 | | 256 | | 35 | | (123) | | 203 | |
Indirect overhead allocation income (expense) | | Indirect overhead allocation income (expense) | (20) | | (27) | | (11) | | 58 | | — | |
Provision (benefit) for income taxes | 3 |
| | 22 |
| | (2 | ) | | 7 |
| | 30 |
| Provision (benefit) for income taxes | 3 | | 48 | | 5 | | (14) | | 42 | |
Net income (loss) | $ | 7 |
| | $ | 39 |
| | $ | (3 | ) | | $ | 14 |
| | $ | 57 |
| Net income (loss) | $ | 12 | | $ | 181 | | $ | 19 | | $ | (51) | | $ | 161 | |
Intersegment revenue | $ | (1 | ) | | $ | (1 | ) | | $ | 6 |
| | $ | (4 | ) | | $ | — |
| |
| Intersegment (expense) revenue | | Intersegment (expense) revenue | $ | (75) | | $ | (34) | | $ | 17 | | $ | 92 | | $ | — | |
| | | | | | | | | | | |
Average balances | | | | | | | | | | Average balances | |
Loans held-for-sale | $ | 16 |
| | $ | 3,400 |
| | $ | — |
| | $ | — |
| | $ | 3,416 |
| Loans held-for-sale | $ | — | | $ | 5,447 | | $ | — | | $ | — | | $ | 5,447 | |
Loans with government guarantees | — |
| | 432 |
| | — |
| | — |
| | 432 |
| Loans with government guarantees | — | | 834 | | — | | — | | 834 | |
Loans held-for-investment | 5,843 |
| | 5 |
| | — |
| | — |
| | 5,848 |
| |
Loans held-for-investment (2) | | Loans held-for-investment (2) | 9,888 | | 2,792 | | — | | 29 | | 12,709 | |
Total assets | 5,904 |
| | 4,835 |
| | 26 |
| | 3,383 |
| | 14,148 |
| Total assets | 10,340 | | 10,207 | | 59 | | 4,231 | | 24,837 | |
Deposits | 7,273 |
| | — |
| | 1,853 |
| | — |
| | 9,126 |
| Deposits | 10,590 | | — | | 5,499 | | 666 | | 16,755 | |
(1)Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
(2) Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
| | | Nine Months Ended September 30, 2017 | | Six Months Ended June 30, 2019 | |
| 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 | | | | | | | | | | Summary of Operations | |
Net interest income | $ | 171 |
| | $ | 96 |
| | $ | 16 |
| | $ | — |
| | $ | 283 |
| Net interest income | $ | 191 | | $ | 66 | | $ | 6 | | $ | 1 | | $ | 264 | |
Provision for credit losses | | Provision for credit losses | 16 | | 1 | | — | | — | | 17 | |
Net interest income after provision for credit losses | | Net interest income after provision for credit losses | 175 | | 65 | | 6 | | 1 | | 247 | |
Net gain (loss) on loan sales | (7 | ) | | 196 |
| | — |
| | — |
| | 189 |
| Net gain (loss) on loan sales | (6) | | 129 | | — | | 1 | | 124 | |
Representation and warranty benefit | — |
| | 11 |
| | — |
| | — |
| | 11 |
| |
Loan fees and charges | | Loan fees and charges | 1 | | 27 | | 14 | | (1) | | 41 | |
Loan administration (expense) income | | Loan administration (expense) income | (2) | | (10) | | 59 | | (30) | | 17 | |
Net return on mortgage servicing rights | | Net return on mortgage servicing rights | — | | 11 | | — | | — | | 11 | |
Other noninterest income | 23 |
| | 66 |
| | 40 |
| | 17 |
| | 146 |
| Other noninterest income | 28 | | 7 | | — | | 49 | | 84 | |
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 | ) | |
Total noninterest income | | Total noninterest income | 21 | | 164 | | 73 | | 19 | | 277 | |
Compensation and benefits | | Compensation and benefits | 50 | | 50 | | 12 | | 65 | | 177 | |
Commissions | | Commissions | — | | 38 | | — | | — | | 38 | |
Loan processing expense | | Loan processing expense | 4 | | 13 | | 20 | | 1 | | 38 | |
Other noninterest expense | (138 | ) | | (227 | ) | | (71 | ) | | (1 | ) | | (437 | ) | Other noninterest expense | 83 | | 38 | | 29 | | 2 | | 152 | |
Total noninterest expense | (144 | ) | | (232 | ) | | (74 | ) | | (15 | ) | | (465 | ) | Total noninterest expense | 137 | | 139 | | 61 | | 68 | | 405 | |
Income (loss) before income taxes | 40 |
| | 134 |
| | (18 | ) | | 4 |
| | 160 |
| |
Income (loss) before indirect overhead allocations and income taxes | | Income (loss) before indirect overhead allocations and income taxes | 59 | | 90 | | 18 | | (48) | | 119 | |
Indirect overhead allocation income (expense) | | Indirect overhead allocation income (expense) | (20) | | (20) | | (9) | | 49 | | — | |
Provision (benefit) for income taxes | 14 |
| | 47 |
| | (6 | ) | | (3 | ) | | 52 |
| Provision (benefit) for income taxes | 8 | | 15 | | 2 | | (3) | | 22 | |
Net income (loss) | $ | 26 |
| | $ | 87 |
| | $ | (12 | ) | | $ | 7 |
| | $ | 108 |
| |
Intersegment revenue | $ | (5 | ) | | $ | 3 |
| | $ | 14 |
| | $ | (12 | ) | | $ | — |
| |
Net income | | Net income | $ | 31 | | $ | 55 | | $ | 7 | | $ | 4 | | $ | 97 | |
| Intersegment (expense) revenue | | Intersegment (expense) revenue | $ | (8) | | $ | 12 | | $ | 12 | | $ | (16) | | $ | — | |
| | | | | | | | | | | |
Average balances | | | | | | | | | | Average balances | |
Loans held-for-sale | $ | 16 |
| | $ | 3,998 |
| | $ | — |
| | $ | — |
| | $ | 4,014 |
| Loans held-for-sale | $ | 45 | | $ | 3,358 | | $ | — | | $ | — | | $ | 3,403 | |
Loans with government guarantees | — |
| | 300 |
| | — |
| | — |
| | 300 |
| Loans with government guarantees | — | | 478 | | — | | — | | 478 | |
Loans held-for-investment | 6,191 |
| | 7 |
| | — |
| | 29 |
| | 6,227 |
| |
Loans held-for-investment (2) | | Loans held-for-investment (2) | 9,847 | | 16 | | — | | 30 | | 9,893 | |
Total assets | 6,262 |
| | 5,307 |
| | 36 |
| | 3,801 |
| | 15,406 |
| Total assets | 10,323 | | 4,836 | | 52 | | 3,995 | | 19,206 | |
Deposits | 7,438 |
| | — |
| | 1,409 |
| | — |
| | 8,847 |
| Deposits | 10,111 | | — | | 3,017 | | 408 | | 13,536 | |
(1)Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
(2) Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
|
| | | | | | | | | | | | | | | | | | | |
| 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 |
|
Note 2018 - Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards
We adopteddid not adopt any ASUs during the following accounting standard updates (ASU) during 2017, none of which had a material impact to our financial statements:quarter ended June 30, 2020.
|
| | | | |
Standard | | Description | | Effective Date |
ASU 2016-17 | | Consolidation (Topic 810): Interests Held Through Related Parties That are Under Common Control | | January 1, 2017 |
ASU 2016-09 | | Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting | | January 1, 2017 |
ASU 2016-07 | | Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting | | January 1, 2017 |
ASU 2016-06 | | Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments | | January 1, 2017 |
ASU 2016-05 | | Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Relationships | | January 1, 2017 |
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:Note 19 - Subsequent Events
Derivatives and Hedging - In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements Subsequent to AccountingJune 30, 2020, we entered into an agreement to sell $369 million of Paycheck Protection Program loans from LHFI 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 adoption of this guidance to have a material impactsmall gain, which was completed on our Consolidated Financial Statements. However, the guidance is expected to provide a broader range of hedge accounting opportunities and simplify the internal documentation requirements for our existing cash flow hedge relationships.
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 uses 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 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 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, the FASB issued ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and 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 guidance 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 Improvement 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, we do not anticipate the implementation of the revenue recognition guidance to 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.
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:July 24, 2020.
|
| | | | |
Standard | | Description | | Effective Date |
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
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(a) | Evaluation of Disclosure Controls and Procedures. As of September 30, 2017, 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 September 30, 2017.(a)Evaluation of Disclosure Controls and Procedures. As of June 30, 2020, 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 June 30, 2020. (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 June 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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(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 September 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 1715 - Legal Proceedings, Contingencies and Commitments.
Item 1A. Risk Factors
The Company believes that there have been no We are reviewing and updating our risk factors to contemplate the current pandemic resulting from COVID-19, including the following material changes tofrom the risk factors previously disclosedreported in response to Item 1A to Part I of ourthe Company's Annual Report on Form 10-K for the fiscal yearperiod ended December 31, 2016.2019:
Adverse Economic Conditions
We are currently in the midst of a health crisis as a result of COVID-19. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. In addition, the pandemic has resulted in temporary or permanent closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. Some states and communities have re-opened and may be at risk of restrictions again in the future. As a result, the demand for our products and services may be significantly negatively impacted. Our ongoing response to COVID-19, including standing up new programs specified in the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), such as the Paycheck Protection Program (“PPP”), and our long-term effectiveness while working remotely, could have a significant, lasting impact on our operations, financial condition and reputation. The extent to which COVID-19 impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
The Bank has instituted a work-from-home policy for all staff that are able to work remotely. Working remotely creates new challenges and the pace of change required to address government programs and forbearance increases the risk of internal control failure. In addition, consumers affected by the changed economic and market conditions as a result of a pandemic may continue to demonstrate changed behavior even after the crisis is over, including decreases in discretionary spending on a permanent or long-term basis. While almost all of our lobbies have re-opened, we have enhanced our cleaning protocols, installed plexiglass shields, and we require that our employees wear face protection. This change in business could also result in changes in consumer behavior for which we may not be prepared.
The response to the pandemic resulted in a strong contraction in our economy, increased market volatility and uncertainty in our capital markets, most notably impacting workers and small businesses. The economic health of these businesses may depend upon the fiscal assistance provided by the CARES Act or future acts taken by Congress. The CARES Act is the largest deployment of capital ever authorized by Congress with several provisions designed to ensure banks are able to provide assistance and relief to consumers and businesses. Although government intervention is intended to mitigate economic uncertainties, these programs may not be broad or specific enough to mitigate the economic risks of COVID-19, which may lead to adverse results.
Additionally, the CARES Act was passed quickly and regulators rapidly issued clarifying guidance and operationalized certain programs, such as the PPP. As a result, there is risk that there are subsequent interpretations of guidance or aggressive assertions of wrongdoing in regards to laws, regulations or applications of guidance which could cause an adverse impact to our financial results or our internal controls. We also face an increased risk of client disputes, litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19 on economic and market conditions.
The adverse economic conditions will have an impact on our customers. Many of these customers have and may continue to experience unemployment and a loss of revenue, leading to a lack of cash flows. As a result of these lower cash flows, our customers are drawing on the lines of credit we have extended to them and withdrawing their deposits from the Bank. Both of these actions could have an adverse impact on our liquidity position. Additionally, the ability of our borrowers to make payments timely on outstanding loans, the value of collateral securing those loans, and demand for loans and other products and services that we offer have and may continue to be adversely impacted by COVID-19. Until the effects of the pandemic subside, we expect continued draws on lines of credit, reduced revenues in our businesses, and increased loan defaults and losses.
Even after the pandemic subsides, the U.S. economy may continue to experience a recession, and we anticipate our business would be materially and adversely affected by a prolonged recession in the U.S.
Interest Rates
In response to COVID-19, the Federal Reserve reduced the Federal Funds Rate to zero percent in March 2020. The outlook for the remainder of 2020 is uncertain, and there is a possibility that the Federal Reserve keeps interest rates low or even uses negative interest rates if economic conditions warrant. Although many of our commercial loans have floors, approximately half of our revenue is tied to interest rates, and an extended period of operations in a zero- or negative-rate environment could negatively impact profitability.
In addition, the Federal Reserve initiated new quantitative easing programs, buying securities at various points in time, resulting in disruptions to the mortgage-backed securities market. There is a risk that the Federal Reserve may take additional actions in the future or elect to stop their current actions which could disrupt the market and have an adverse impact on our mortgage gain on sale or other financial results. Further, the impact of these actions has caused the financial instruments we use to manage our interest rate and market risks to be less effective at times, which, in turn, could have a material, adverse impact on our operations and financial condition.
There has also been disruption in the market for mortgage backed securities resulting from overall low level of rates across the yield curve, the high level of volatility of interest rates, and the financial weakness of some traditional buyers of mortgage servicing rights. This has caused uncertainty with respect to our ability to sell mortgage servicing rights. At June 30, 2020, we had $261 million of mortgage servicing rights which equated to 14.6 percent of common equity tier one capital. Should the level of mortgage servicing rights exceed 25 percent of common equity tier one capital, we are required to deduct the excess in determining our regulatory capital levels. If we have the inability to sell mortgage servicing rights on a timely basis, there could be negative impacts to our regulatory capital or an impact on our pricing for mortgage loans which could negatively impact our mortgage origination business and our financial condition.
Customer and Lending Relief Actions
As a result of recent federal legislation, we are required to provide mortgage forbearances to individuals with single-family, federally backed mortgages, such as those that we service which underlie our mortgage servicing rights, due to COVID-19 related difficulties. In addition, we waived fees for an extended time period as customers deal with the crisis, which we may continue to do in the future. This could result in a reduction in servicing fee income and a higher cost to service as customers do not pay their mortgages and we cover their payments for a temporary time period until the investors make us whole. Additionally, MSR transactions customarily contain early payment default provisions. If a customer requests forbearance on the residential mortgage loans underlying the MSRs we have sold, generally within 90 days following the sale, we may be contractually obligated to refund the purchase price of the MSR or pay a fee to the purchaser. Furthermore, we have provided forbearance to certain of our commercial customers. The result of these actions could result in financial, operational, credit and compliance risk as we navigate government requirements and our ability to modify our systems to account for these changes while maintaining an adequate internal control structure.
The following table details borrowers currently participating in a forbearance program:
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| | | | Forbearance Requested | | | | | | | |
| | | | Borrowers making April, May and June Payments | | | Remaining Borrowers | | | | |
| Total Population | | | | | | | | | Percent of UPB | Percent of Accounts |
| Unpaid Principal Balance (1) | Number of accounts | | Unpaid Principal Balance (1) | Number of accounts | | Unpaid Principal Balance (1) | Number of accounts | | | |
| (Dollars in millions) | | | | | | | | | | |
Loan servicing | | | | | | | | | | | |
Subserviced for others (2) | $ | 174,384 | | 854,216 | | | $ | 7,145 | | 32,403 | | | $ | 13,808 | | 59,692 | | | 12.0 | % | 10.8 | % |
Serviced for others | 29,979 | | 123,256 | | | 1,261 | | 5,058 | | | 3,018 | | 11,661 | | | 14.3 | % | 13.6 | % |
Serviced for own loan portfolio (3) | 9,211 | | 64,142 | | | 237 | | 1,895 | | | 473 | | 1,850 | | | 7.7 | % | 5.8 | % |
Total loans serviced | $ | 213,574 | | 1,041,614 | | | $ | 8,643 | | 39,356 | | | $ | 17,299 | | 73,203 | | | 12.1 | % | 10.8 | % |
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.
(3)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets.
Our application of forbearance, any loan payment deferrals that we grant, the servicing advances we are required to make and any escrow advances we are required to make while a loan is in forbearance could result in us carrying significant asset balances.This could result in a reduction in our liquidity and cause a reduction in our capital ratios. The combination of these impacts along with other impacts, could cause us to not have sufficient liquidity or capital.
We also have a concentration of customers in the mortgage finance business.We make warehouse and MSR loans to these customers, and often originate through them in the correspondent channel of our mortgage originations business.The implications of federally mandated forbearance is expected to have a detrimental impact on the liquidity position of these companies that may have already been experiencing financial stress.It is not clear what, if any, programs will be available to these customers to provide liquidity.As a consequence, some of these companies could fail.A failure of one of our customers could be a loss of mortgage origination volume and could also lead to credit losses, should the collateral underlying their loans prove insufficient to repay the amount of the loan outstanding.
Furthermore, we are not aging receivables for customers who have been granted a payment holiday, payment deferral or forbearance.Therefore, there is a risk that subsequently, customers may still be unable to make their payments, resulting in delinquencies at a higher rate than what is typical and a higher percentage of loans in nonaccrual status. Additionally, for consumer loans, current payments typically provide the primary evidence of a borrower’s ability and intent to repay the loan.Therefore, during the forbearance, deferral or payment holiday period, we may not be able to discern which loans can be repaid and which require timely action to manage the potential for loss to a lower level.Consequently, when a borrower is unable to repay the loan, our losses could be higher than we have experienced in the past.In addition, newly originated or acquired mortgage loans could potentially request forbearance prior to us selling the loan, resulting in a higher carrying cost for us as we may not be able to sell them into the market at all or at prices we would accept.
Allowance for Credit Losses
Our allowance for credit losses (“ACL”), which reflects our estimate of lifetime losses inherent in the loans held-for-investment portfolio and our reserve for unfunded commitment, may not be sufficient to cover actual credit losses. We have loan exposures to industries that have been impacted more severely by COVID-19 including:
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| As of June 30, 2020 |
| Loan Exposure |
| (Dollars in millions) |
Automotive | $ | 155 | |
Leisure & Entertainment | $ | 121 | |
Healthcare | $ | 40 | |
Retail | $ | 311 | |
Hotel | $ | 234 | |
Senior Housing | $ | 146 | |
Our ACL calculations include a forecast for a reasonable and supportable time period. We utilized the Moody’s June scenarios in our forecast: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. The resulting composite forecast for the second quarter 2020 was worse than the scenario used in the first quarter of 2020. Unemployment ends the year at 10 percent and recovers only slightly in 2021. GDP recovers only slightly by the end of the year from current levels and does not return to the pre-COVID level until mid-2022. HPI decreases 2 percent from early 2020 through 2021. Changing economic conditions could cause a material difference in future forecasts used in our calculations.If actual results differ materially from the forecast used in our calculations, our credit loss provision may increase and our ACL may not be sufficient to cover losses sustained, particularly for the impacted industries. The current pandemic has resulted in the environment changing rapidly which increases the risk of inaccurate forecasts because they depend upon significant judgments and estimates, which can be even more challenging in an environment of uncertainty.The calculation for ACL is complex and the associated risk, could impact our results of operations and may place stress on our internal controls over financial reporting.
Cybersecurity Risk
The COVID-19 pandemic has resulted in the Bank instituting a work-from-home policy for all staff that are able to work remotely. This exposes us to increased cybersecurity risk. Increased levels of remote access may create additional opportunities for cyber criminals to exploit vulnerabilities. We have observed an increase in attempted malicious activity from third parties directed at the Bank and employees may be more susceptible to phishing and social engineering attempts due to increased stress caused by the crisis and from balancing family and work responsibilities at home, such as attempts to obtain personally identifiable information. Cybercriminals may be opportunistic about fears about COVID-19 and the higher number of people accessing the network remotely, by including malware in emails that appear to include documents providing legitimate information for protecting oneself from COVID-19. The Bank may also be exposed to this risk if the operations of any of its vendors that provide critical services to the Bank are adversely impacted by cyberattacks. Furthermore, with the increased use of virtual private network (“VPN”) servers, there is a risk of security misconfiguration in VPNs resulting in exposing sensitive information to the internet. A significant and sustained malware or other cybersecurity attack targeted at the Bank or any of its vendors that provide critical services to the Bank could have a material adverse impact on our ability to conduct our overall operations and on our financial condition.
Loss or Extended Absence of Key Personnel
We are and will continue to be dependent upon our management team and other key personnel. Losing the services of one or more key members of our management team or other key personnel could adversely affect our operations. In addition, COVID-19 increases the risk that certain senior executive officers or a member of the board of directors could become ill, causing them to be incapacitated or otherwise unable to perform their duties for an extended absence. Furthermore, because of the nature of the disease, multiple people working in close proximity could also become ill simultaneously which could result in the same department having extended absences. This could negatively impact the efficiency and effectiveness of processes and internal controls throughout the Bank.
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, 2017.2020.
Issuer Purchases of Equity Securities
The Company made no purchases of its equity securities during the quarter ended SeptemberJune 30, 2017.2020.
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
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Exhibit No. | | Description |
3.1* | | |
3.1 | | |
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3.23.2* | | |
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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). |
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4.2* | | |
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1131.1 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101 | | Financial statements from Quarterly Report on Form 10-Q of the Company for the quarter ended SeptemberJune 30, 2017,2020, 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. |
* Incorporated herein by reference
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.
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| | | FLAGSTAR BANCORP, INC. |
| | | Registrant |
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Date: | November 6, 2017August 10, 2020 | | /s/ Alessandro DiNello |
| | | Alessandro DiNello |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
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| | | /s/ James K. Ciroli |
| | | James K. Ciroli |
| | | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
EXHIBIT INDEX
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Exhibit No. | | Description |
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3.1 | | |
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3.2 | | |
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11 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101 | | Financial statements from Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2017, 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.Officer) |