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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
¨
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
 
 
 393371315_flagstara09a01a01a07a01a14.jpg
(Exact name of registrant as specified in its charter).
 
 
Michigan
  
38-3150651
(State or other jurisdiction of
  
(I.R.S. Employer
Incorporation or organization)
  
Identification No.)
 
 
5151 Corporate Drive, Troy, Michigan
  
48098-2639
(Address of principal executive offices)
  
(Zip code)
(248) 312-2000
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and formal fiscal year, if changed since last report)
 
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
o  (Do not check if smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act  ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý.
As of May 3, 2018, 57,433,671 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.


Table of Contents

FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2018
TABLE OF CONTENTS
 
 
 
 
 
 
 
Item 1.
 
 
Consolidated Statements of Financial Condition – March 31, 2018 (unaudited) and December 31, 2017 (unaudited)
 
Consolidated Statements of Operations – For the three months ended March 31, 2018 and 2017 (unaudited)
 
Consolidated Statements of Comprehensive Income – For the three months ended March 31, 2018 and 2017 (unaudited)
 
Consolidated Statements of Stockholders’ Equity – For the three months ended March 31, 2018 and 2017 (unaudited)
 
Consolidated Statements of Cash Flows – For the three months ended March 31, 2018 and 2017 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2

Table of Contents

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:
Term
 
Definition
 
Term
 
Definition
AFS
 
Available for Sale
 
HELOAN
 
Home Equity Loan
Agencies
 
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association, Collectively
 
HOLA
 
Home Owners Loan Act
ALCO
 
Asset Liability Committee
 
Home equity
 
Second Mortgages, HELOANs, HELOCs
ALLL
 
Allowance for Loan & Lease Losses
 
HTM
 
Held to Maturity
AOCI
 
Accumulated Other Comprehensive Income (Loss)
 
LIBOR
 
London Interbank Offered Rate
ASU
 
Accounting Standards Update
 
LHFI
 
Loans Held-for-Investment
Basel III
 
Basel Committee on Banking Supervision Third Basel Accord
 
LHFS
 
Loans Held-for-Sale
C&I
 
Commercial and Industrial
 
LTV
 
Loan-to-Value Ratio
CDARS
 
Certificates of Deposit Account Registry Service
 
Management
 
Flagstar Bancorp’s Management
CET1
 
Common Equity Tier 1
 
MBIA
 
MBIA Insurance Corporation
CFPB
 
Consumer Financial Protection Bureau
 
MBS
 
Mortgage-Backed Securities
CLTV
 
Combined Loan to Value Ratio
 
MD&A
 
Management's Discussion and Analysis
Common Stock
 
Common Shares
 
MSR
 
Mortgage Servicing Rights
CRE
 
Commercial Real Estate
 
N/A
 
Not Applicable
DFAST
 
Dodd-Frank Stress Test
 
NYSE
 
New York Stock Exchange
DOJ
 
United States Department of Justice
 
OCC
 
Office of the Comptroller of the Currency
DTA
 
Deferred Tax Asset
 
OTTI
 
Other-Than-Temporary-Impairment
EVE
 
Economic Value of Equity
 
QTL
 
Qualified Thrift Lending
Fannie Mae/FNMA
 
Federal National Mortgage Association
 
REO
 
Real estate and other nonperforming assets, net
FASB
 
Financial Accounting Standards Board
 
RWA
 
Risk Weighted Assets
FDIC
 
Federal Deposit Insurance Corporation
 
SEC
 
Securities and Exchange Commission
FHA
 
Federal Housing Administration
 
SFR
 
Single Family Residence
FHLB
 
Federal Home Loan Bank
 
TARP Preferred
 
Troubled Asset Relief Program Fixed Rate Cumulative Perpetual Preferred Stock, Series C
FICO
 
Fair Isaac Corporation
 
TDR
 
Trouble Debt Restructuring
FRB
 
Federal Reserve Bank
 
UPB
 
Unpaid Principal Balance
Freddie Mac
 
Federal Home Loan Mortgage Corporation
 
U.S. Treasury
 
United States Department of Treasury
FTE
 
Full Time Equivalent Employees
 
VIE
 
Variable Interest Entities
GAAP
 
United States Generally Accepted Accounting Principles
 
XBRL
 
eXtensible Business Reporting Language
HELOC
 
Home Equity Lines of Credit
 
 
 
 


3

Table of Contents

PART I. FINANCIAL INFORMATION
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 first quarter of 2018, which should be read in conjunction with the financial statements and related notes set forth in Part I, Item 1 of this Form 10-Q and Part II, Item 8 of Flagstar Bancorp, Inc.'s 2017 Annual Report on Form 10-K for the year ended December 31, 2017.

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 30 of this Form 10-Q and Part I, Item 1A, Risk Factors of Flagstar Bancorp, Inc.'s 2017 Annual Report on Form 10-K for the year ended December 31, 2017. Additional information about Flagstar can be found on our website at www.flagstar.com.

Where we say "we," "us," "our," the "Company," "Bancorp" or "Flagstar," we usually mean Flagstar Bancorp, Inc. However, in some cases, a reference 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 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. We provide commercial and consumer banking services and we are the 5th largest bank mortgage originator in the nation. At March 31, 2018, we had 3,659 full-time equivalent employees. Our common stock is listed on the NYSE under the symbol "FBC." We are considered a controlled company for NYSE purposes, because approximately 62.0 percent of our common stock is owned by MP Thrift Investments, L.P. which is managed by MatlinPatterson, a global asset manager.

We have a relationship-based business model which leverages our full-service bank’s capabilities with our national mortgage scale to create and build financial relationships with our customers. Our banking network emphasizes the delivery of a complete set of banking and mortgage products and services. We distinguish ourselves by crafting specialized solutions for our customers, local delivery, high quality customer service and competitive product pricing. Our community bank growth model has focused on attracting seasoned bankers with larger bank lending experience who can attract their preexisting long-term customer relationships to Flagstar. At March 31, 2018, we operated 107 full service banking branches, including 99 throughout Michigan's major markets and eight Desert Community Bank branches in San Bernardino County, California, which we acquired on March 19, 2018. Our branches offer a full set of banking products to consumer, commercial, and government customers.

We originate mortgages through a wholesale network of brokers and correspondents in all 50 states, and our own loan officers from 92 retail locations in 31 states and two call centers, which includes our direct-to-consumer lending team. The Bank has the opportunity to expand correspondent relationships by providing warehouse lending, mortgage servicing and other services. Servicing and subservicing of loans provides fee income and generates a stable long-term source of funding through custodial deposits.

Operating Segments

Our operations are conducted through our three operating segments: Community Banking, Mortgage Originations, and Mortgage Servicing. Additionally, our Other segment includes the remaining reported activities. For additional information, please see MD&A - Operating Segments and Note 18 - Segment Information.

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Table of Contents

Selected Financial Ratios
(Dollars in millions, except share data)
 
Three Months Ended March 31,
 
2018
 
2017
 
(In millions, except per share data and percentages)
Selected Mortgage Statistics:
 
 
 
Mortgage rate lock commitments (fallout-adjusted) (1)
$
7,722

 
$
5,996

Mortgage loans sold and securitized
7,247

 
4,484

Selected Ratios:
 
 
 
Interest rate spread (2)
2.54
%
 
2.49
%
Net interest margin
2.76
%
 
2.67
%
Return on average assets
0.82
%
 
0.76
%
Return on average equity
9.94
%
 
7.88
%
Equity-to-assets ratio (average for the period)
8.27
%
 
9.59
%
Efficiency ratio
79.7
%
 
76.8
%
Effective tax provision rate
20.1
%
 
33.1
%
Average Balances:
 
 
 
Average interest-earning assets
$
15,354

 
$
12,343

Average interest-paying liabilities
$
12,974

 
$
10,319

Average stockholders' equity
$
1,414

 
$
1,346

 
March 31, 2018
 
December 31, 2017
 
March 31, 2017
 
(In millions, except per share data and percentages)
Selected Statistics:
 
 
 
 
 
Book value per common share
$
24.87

 
$
24.40

 
$
24.03

Tangible book value per share (3)

$
23.62

 
$
24.04

 
$
23.96

Number of common shares outstanding
57,399,993

 
57,321,228

 
57,043,565

Common equity-to-assets ratio
8.05
%
 
8.27
%
 
8.92
%
Bancorp Tier 1 leverage (to adjusted avg. total assets) (4)
8.72
%
 
8.51
%
 
9.31
%
Bank Tier 1 leverage (to adjusted avg. total assets)
9.08
%
 
9.04
%
 
10.74
%
Number of bank branches
107

 
99

 
99

Number of FTE employees
3,659

 
3,525

 
2,948

(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 previous historical experience and the level of 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 $72 million, $21 million, and $4 million at March 31, 2018, December 31, 2017, and March 31, 2017, respectively, included in Other Assets on the Consolidated Statement of Financial Condition. See Non-GAAP Financial Measures for further information.
(4)
The Basel III transitional phase-in rules were applicable to December 31, 2017 and March 31, 2017.




5

Table of Contents

Overview

The first quarter of 2018 resulted in net income of $35 million, or $0.60 per diluted share, up $8 million or $0.14 per diluted share compared to the first quarter of 2017. The results of the quarter demonstrate our efforts to diversify our business through both organic growth and acquisitions.

The Community Bank continued to add high-quality, relationship-based commercial loans. When comparing this quarter to the same quarter last year, average commercial loans increased $1.2 billion with broad-based growth across all portfolios. These higher yielding loans continued to drive increases in net interest income, up $23 million this quarter compared to the first quarter of 2017.
    
Despite the mortgage market volume decline of approximately 10 percent over the last 12 months, our 2017 mortgage acquisitions provided a boost to fall-out adjusted lock volume which was 29 percent higher in the first quarter of 2018 than the same period a year ago. These acquisitions have strengthened our mortgage production channels and enhanced our national presence. As a result of this diversification, we believe we are better positioned to weather a down market and take advantage of dislocation in the industry.

During the first quarter, we closed on two acquisitions. First, we acquired the branches of Desert Community Bank, which added approximately $600 million in low cost deposits and $60 million UPB in loans. We also purchased the mortgage warehouse business from Santander Bank, which brought approximately $500 million of mortgage warehouse loans. The integration of this business with our existing warehouse lending business, positions us as the fourth largest warehouse lender in the country.

With the addition of the warehouse loans acquired, we ended the quarter with $16 billion of earning assets, up $2 billion from March 31, 2017. We continued to focus on growing interest earning assets, along with maintaining strong credit quality and capital, to position our business to deliver shareholder value.

Earnings Performance
 
Three Months Ended March 31,
 
 
 
2018
 
2017
 
Change
 
(Dollars in millions, except share data)
Net interest income
$
106

 
$
83

 
$
23

Provision for loan losses

 
3

 
(3
)
Total noninterest income
111

 
100

 
11

Total noninterest expense
173

 
140

 
33

Provision for income taxes
9

 
13

 
(4
)
Net income
$
35

 
$
27

 
$
8

Income per share
 
 
 
 
 
Basic
$
0.61

 
$
0.47

 
$
0.14

Diluted
$
0.60

 
$
0.46

 
$
0.14


Net income increased to $35 million or $0.60 per diluted share for the three months ended March 31, 2018, compared to $27 million or $0.46 per diluted share for the three months ended March 31, 2017. Net interest income increased $23 million for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017, primarily driven by a $3.0 billion increase in average interest-earning assets, led by strong commercial loan growth. Continued efforts to grow the Community Bank resulted in 44 percent higher average commercial loan balances with increases spread across all portfolios. An increase of $1.7 billion in fallout-adjusted rate locks, partially offset by a decrease in gain on sale margin, resulted in a $12 million increase in gain on loan sales for the first quarter of 2018, compared to the same period a year ago. Our 2017 mortgage acquisitions drove increases in origination volume as well as contributed to an increase in noninterest expense primarily resulting from higher volume driven costs and an increase in compensation and benefits.

Additional details of each key driver have been further explained in Management's discussion below.


6


Net Interest Income

The following tables present, on a consolidated basis, interest income from average assets and liabilities, expressed in dollars and yields:
 
Three Months Ended March 31,
 
2018
 
2017
 
Average
Balance
Interest
Annualized
Yield/
Rate
 
Average
Balance
Interest
Annualized
Yield/
Rate
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
 
 
Loans held-for-sale
$
4,231

$
44

4.12
%
 
$
3,286

$
32

3.87
%
Loans held-for-investment
 
 
 
 
 
 
 
Residential first mortgage
2,773

23

3.41
%
 
2,399

20

3.33
%
Home equity
668

9

5.21
%
 
431

6

5.08
%
Other
27


4.56
%
 
27


4.49
%
Total Consumer loans
3,468

32

3.76
%
 
2,857

26

3.60
%
Commercial Real Estate
1,954

24

4.87
%
 
1,318

12

3.80
%
Commercial and Industrial
1,217

16

5.21
%
 
774

9

4.56
%
Warehouse Lending
848

11

5.14
%
 
690

8

4.51
%
Total Commercial loans
4,019

51

5.03
%
 
2,782

29

4.19
%
Total loans held-for-investment (1)
7,487

83

4.44
%
 
5,639

55

3.89
%
Loans with government guarantees
291

3

3.72
%
 
342

4

4.61
%
Investment securities
3,233

22

2.69
%
 
3,012

19

2.51
%
Interest-earning deposits
112


1.67
%
 
64


0.86
%
Total interest-earning assets
15,354

152

3.95
%
 
12,343

110

3.55
%
Other assets
1,736

 
 
 
1,700

 
 
Total assets
$
17,090

 
 
 
$
14,043

 
 
Interest-Bearing Liabilities
 
 
 
 
 
 
 
Retail deposits
 
 
 
 
 
 
 
Demand deposits
$
548

$

0.26
%
 
$
507

$

0.18
%
Savings deposits
3,490

7

0.81
%
 
3,928

7

0.76
%
Money market deposits
205


0.44
%
 
276

1

0.46
%
Certificates of deposit
1,619

6

1.45
%
 
1,073

3

1.06
%
Total retail deposits
5,862

13

0.92
%
 
5,784

11

0.75
%
Government deposits
 
 
 
 
 
 
 
Demand deposits
241


0.55
%
 
235


0.39
%
Savings deposits
483

2

1.11
%
 
459

1

0.52
%
Certificates of deposit
401

1

1.19
%
 
318


0.63
%
Total government deposits
1,125

3

1.02
%
 
1,012

1

0.52
%
Wholesale deposits and other
171

1

1.91
%
 
8


0.39
%
Total interest-bearing deposits
7,158

17

0.96
%
 
6,804

12

0.72
%
Short-term Federal Home Loan Bank advances
4,032

15

1.53
%
 
1,822

3

0.73
%
Long-term Federal Home Loan Bank advances
1,290

7

2.10
%
 
1,200

6

1.87
%
Other long-term debt
494

7

5.37
%
 
493

6

5.04
%
Total interest-bearing liabilities
12,974

46

1.41
%
 
10,319

27

1.06
%
Noninterest-bearing deposits (2)
2,213

 
 
 
1,991

 
 
Other liabilities
489

 
 
 
387

 
 
Stockholders’ equity
1,414

 
 
 
1,346

 
 
Total liabilities and stockholders' equity
$
17,090

 
 
 
$
14,043

 
 
Net interest income
 
$
106

 
 
 
$
83

 
Interest rate spread (3)
 
 
2.54
%
 
 
 
2.49
%
Net interest margin (4)
 
 
2.76
%
 
 
 
2.67
%
Ratio of average interest-earning assets to interest-bearing liabilities
 
 
118.3
%
 
 
 
119.6
%
(1)
Includes nonaccrual loans, for further information relating to 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 divided by average interest-earning assets.
 
 

7


Rate/Volume Analysis

The following tables present the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). The rate/volume variances are allocated to rate.
 
Three Months Ended March 31,
 
2018 Versus 2017 Increase (Decrease)
Due to:
 
Rate
 
Volume
 
Total
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
Loans held-for-sale
$
3

 
$
9

 
$
12

Loans held-for-investment
 
 
 
 
 
Residential first mortgage
1

 
2

 
3

Home equity
1

 
2

 
3

Total Consumer loans
2

 
4

 
6

Commercial Real Estate
6

 
6

 
12

Commercial and Industrial
2

 
5

 
7

Warehouse Lending
1

 
2

 
3

Total Commercial loans
9

 
13

 
22

Total loans held-for-investment
11

 
17

 
28

Loans with government guarantees
(1
)
 

 
(1
)
Investment securities
1

 
2

 
3

Total interest-earning assets
$
14

 
$
28

 
$
42

Interest-Bearing Liabilities
 
 
 
 
 
Interest-bearing deposits
$
4

 
$
1

 
$
5

Short-term Federal Home Loan Bank advances
8

 
4

 
12

Long-term Federal Home Loan Bank advances
1

 

 
1

Other long-term debt
1

 

 
1

Total interest-bearing liabilities
14

 
5

 
19

Change in net interest income
$

 
$
23

 
$
23

 
 
Comparison to Prior Year Quarter

Net interest income increased $23 million, or 28 percent, for the three months ended March 31, 2018, compared to the same period in 2017. This increase was primarily driven by growth in average interest-earning assets of 24 percent, led by continued growth of our higher yielding commercial LHFI portfolio and higher average LHFS balances.

Our net interest margin for the three months ended March 31, 2018 was 2.76 percent, as compared to 2.67 percent for the three months ended March 31, 2017. The increase in net interest margin was driven by the growth in our commercial loan portfolio. This increase was partially offset by higher average rates on deposits. Our deposit costs remained well managed despite the rising rate environment and slight extension of duration driven by holding a higher percentage of certificates of deposits.

Average interest-earning assets increased $3.0 billion for the three months ended March 31, 2018, compared to the three months ended March 31, 2017, primarily due to an increase in LHFI and LHFS average balance. The LHFI portfolio increase was primarily driven by CRE and C&I portfolios increasing $1.1 billion, or 52 percent as we continued to build a diversified, higher yielding commercial loan portfolio. The LHFS portfolio increased $945 million primarily due to higher mortgage originations.

Average interest-bearing liabilities increased $2.7 billion for the three months ended March 31, 2018, compared to the three months ended March 31, 2017, primarily due to an increase in FHLB advances used to fund balance sheet growth. Average interest-bearing deposits increased $354 million led by higher wholesale, government and retail certificates of deposit being partially offset by a decline in retail savings deposits.


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Table of Contents

Provision for Loan Losses

Comparison to Prior Year Quarter

The provision for loan losses decreased to zero during the three months ended March 31, 2018, compared to a provision of $3 million during the three months ended March 31, 2017. The decrease in the provision reflects continued strong credit quality with lower levels of charge-offs coupled with growth in asset classes with lower credit risk.

For further information on the provision for loan losses see MD&A - Credit Quality.

Noninterest Income

The following tables provide information on our noninterest income along with additional details related to our net gain on loan sales and other mortgage metrics:
 
Three Months Ended March 31,
 
 
 
2018
 
2017
 
Change
 
(Dollars in millions)
Net gain on loan sales
$
60

 
$
48

 
$
12

Loan fees and charges
20

 
15

 
5

Deposit fees and charges
5

 
4

 
1

Loan administration income
5

 
5

 

Net return on mortgage servicing rights
4

 
14

 
(10
)
Representation and warranty benefit
2

 
4

 
(2
)
Other noninterest income
15

 
10

 
5

Total noninterest income
$
111

 
$
100

 
$
11

 
Three Months Ended March 31,
 
2018
 
2017
 
(Dollars in millions)
Mortgage rate lock commitments (fallout-adjusted) (1)
$
7,722

 
$
5,996

Net margin on mortgage rate lock commitments (fallout-adjusted) (1)(2)
0.77
%
 
0.80
%
Gain on loan sales + net return on the MSR
$
64

 
$
62

Capitalized value of mortgage servicing rights
1.27
%
 
1.10
%
Mortgage loans sold and securitized
7,247
 
4,484
Net margin on loans sold and securitized
0.82
%
 
1.06
%
(1)
Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the level of interest rates.
(2)
Gain on loan sale volume is based on net gain on loan sales to fallout-adjusted mortgage rate lock commitments.

Comparison to Prior Year Quarter

Total noninterest income increased $11 million during the three months ended March 31, 2018, compared to the same period in 2017.

Net gain on loan sales increased $12 million during the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The increase is due to a 29 percent increase in fallout-adjusted rate locks primarily driven by our 2017 mortgage acquisitions, partially offset by a 3 basis point decrease in net gain on loan sale margin as a result of increased pricing competition driven by a decline in mortgage market volume.

Loan fees and charges increased $5 million during the three months ended March 31, 2018, compared to the three months ended March 31, 2017, primarily due to a corresponding 30 percent increase in loan originations.

Net return on MSRs, including the impact of hedges, decreased $10 million during the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The decrease was primarily the result of a decrease in servicing fee income driven by lower MSR balances and higher transaction costs resulting from MSR sales that occurred in 2018.

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Table of Contents

    
Other noninterest income increased $5 million during the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The increase was primarily due to an increase in FHLB stock dividend income resulting from higher FHLB stock holdings and a supplemental dividend paid in the first quarter of 2018. The remaining increase was driven by higher income earned on our bank owned life insurance balances.

Noninterest Expense

The following table sets forth the components of our noninterest expense:
 
Three Months Ended March 31,
 
 
 
2018
 
2017
 
Change
 
(Dollars in millions)
Compensation and benefits
$
80

 
$
72

 
$
8

Commissions
18

 
10

 
8

Occupancy and equipment
30

 
22

 
8

Federal insurance premiums
6

 
3

 
3

Loan processing expense
14

 
12

 
2

Legal and professional expense
6

 
7

 
(1
)
Other noninterest expense
19

 
14

 
5

Total noninterest expense
$
173

 
$
140

 
$
33

Efficiency ratio
79.7
%
 
76.8
%
 
2.9
%
Number of FTE
3,659

 
2,948

 
711


Comparison to Prior Year Quarter

Noninterest expense increased $33 million to $173 million during the three months ended March 31, 2018, compared to $140 million during the three months ended March 31, 2017.

Compensation and benefits expense increased $8 million during the three months ended March 31, 2018, compared to the same period in 2017, primarily due to higher headcount, driven by acquisitions. Opes employees accounted for 449 of the 711 increase in FTEs.

Commissions increased $8 million during the three months ended March 31, 2018, compared to the same period in 2017, primarily due to higher loan origination volume.

Occupancy and equipment expense increased $8 million during the three months ended March 31, 2018 compared to the same period in 2017, primarily due to a higher average depreciable asset base and an increase in vendor services supporting the growth in our business.

Other noninterest expense increased $5 million during the three months ended March 31, 2018, compared to the same period in 2017, primarily due to an increase in the FDIC assessment driven by higher commercial loan balances and an increase in advertising expenses to support strategic initiatives to raise brand awareness.

Provision (benefit) for Income Taxes

Comparison to Prior Year Quarter

Our provision for income taxes for the three months ended March 31, 2018 was $9 million compared to a provision of $13 million during the three months ended March 31, 2017. This decrease is primarily due to the reduction in the statutory corporate tax rate from 35 percent to 21 percent, as a result of the Tax Cuts and Jobs Act. Our effective tax provision rate for the three months ended March 31, 2018 was 20.1 percent compared to 33.1 percent for the three months ended March 31, 2017. Our effective tax provision rate for the three months ended March 31, 2018 differs from the combined federal and state statutory tax rate primarily due to non-taxable bank owned life insurance and other tax-exempt earnings, partially offset by nondeductible expenses.

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Table of Contents


Operating Segments

For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 18 - Segment Information.    

Community Banking

Our Community Banking segment services consumer, governmental and commercial customers in our banking footprint. We also serve home builders, correspondents, and commercial customers on a national basis.

Our commercial customers are from a diversified range of industries including financial, insurance, service, manufacturing, and distribution. We offer financial products to these customers for use in their normal business operations and financing of working capital needs, equipment purchases and other capital investments. Additionally, our commercial real estate business supports income producing real estate and residential properties. These loans are made to finance properties such as owner-occupied, retail, office, multi-family apartment buildings, industrial buildings, and residential developments.

Our Community Banking segment has seen continued growth and our transformation into a commercial bank continues to be a key component in our overall business model. Our commercial loan portfolio has grown to $4.6 billion as of March 31, 2018, representing a 49 percent increase from March 31, 2017.

On March 12, 2018, we closed the purchase of the mortgage loan warehouse business from Santander Bank, with approximately $500 million outstanding warehouse loans and $1.7 billion in commitments. This acquisition strengthens our mortgage loan warehouse business and brings on a seasoned sales and operations team. With the addition of this acquisition to our existing warehouse lending business, we are the fourth largest warehouse lender in the country.

On March 19, 2018, we completed the acquisition of eight Desert Community Bank branches in San Bernardino County, California, with approximately $600 million in deposits and $60 million in loans. This acquisition provides us with low cost, stable deposits to fund balance sheet growth.

Mortgage Originations

We are a leading national originator of residential first mortgages. Our Mortgage Origination segment originates, acquires and sells one-to-four family residential mortgage loans. We utilize multiple channels to originate or acquire mortgage loans in all 50 states.

We continue to leverage technology to streamline the mortgage origination process, thereby bringing service and convenience to borrowers and correspondents. We also continue to make available to our customers various web-based tools that facilitate the mortgage loan process through each of our production channels.

Mortgage Servicing

The Mortgage Servicing segment services and subservices mortgage loans for others through a scalable servicing platform on a fee for service basis and may also collect ancillary fees and earn income through the use of noninterest bearing escrows. The loans we service generate escrow deposits which provide a stable low cost funding source. Revenue for those serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the status of the underlying loans. The Mortgage Servicing segment also services residential mortgages for our LHFI portfolio in the Community Banking segment and our MSR portfolio in the Mortgage Originations segment for which it earns segment revenue via an intercompany service fee allocation.


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Table of Contents

The following table presents residential loans serviced and the number of accounts associated with those loans.
 
March 31, 2018
 
December 31, 2017
 
Unpaid Principal Balance (1)
 
Number of accounts
 
Unpaid Principal Balance (1)
 
Number of accounts
 
(Dollars in millions)
Residential loan servicing
 
 
 
 
 
 
 
Serviced for own loan portfolio (2)
$
7,629

 
32,185

 
$
7,013

 
29,493

Serviced for others
18,767

 
77,426

 
25,073

 
103,137

Subserviced for others (3)
77,748

 
360,396

 
65,864

 
309,814

Total residential loans serviced
$
104,144

 
470,007

 
$
97,950

 
442,444

(1)
UPB, net of write downs, does not include premiums or discounts.
(2)
Includes LHFI (residential first mortgage and home equity), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets.
(3)
Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.

Other

The Other segment includes the treasury functions, which include, the impact of interest rate risk management, balance sheet funding activities and the administration of the investment securities portfolios, as well as miscellaneous other expenses of a corporate nature. In addition, the Other segment includes revenue and expenses not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage Servicing segments.

OPERATING SEGMENT PERFORMANCE

For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 18 - Segment Information.

The following tables present financial information by business segment for the periods indicated:
 
Three Months Ended March 31, 2018
 
Community Banking
 
Mortgage Originations
 
Mortgage Servicing
 
Other (1)
 
Total
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
Net interest income
$
70

 
$
31

 
$
2

 
$
3

 
$
106

Net gain (loss) on loan sales
(2
)
 
62

 

 

 
60

Other noninterest income
8

 
19

 
19

 
5

 
51

Total net interest income and noninterest income
76

 
112

 
21

 
8

 
217

(Provision) benefit for loan losses
(1
)
 

 

 
1

 

Compensation and benefits
(17
)
 
(29
)
 
(4
)
 
(30
)
 
(80
)
Other noninterest expense
(26
)
 
(41
)
 
(16
)
 
(10
)
 
(93
)
Total noninterest expense
(43
)
 
(70
)
 
(20
)
 
(40
)
 
(173
)
Income (loss) before overhead allocations and income taxes
32

 
42

 
1

 
(31
)
 
44

Overhead allocations
(11
)
 
(18
)
 
(5
)
 
34

 

Provision for income taxes
4

 
5

 

 

 
9

Net income (loss)
$
17

 
$
19

 
$
(4
)
 
$
3

 
$
35

Intersegment revenue
$
(1
)
 
$

 
$
5

 
$
(4
)
 
$

 
 
 
 
 
 
 
 
 
 
Average balances
 
 
 
 
 
 
 
 
 
Loans held-for-sale
$
12

 
$
4,219

 
$

 
$

 
$
4,231

Loans with government guarantees

 
291

 

 

 
291

Loans held-for-investment
7,452

 
6

 

 
29

 
7,487

Total assets
7,639

 
5,527

 
35

 
3,889

 
17,090

Deposits
7,830

 

 
1,541

 

 
9,371

(1) Income and expenses relating to operating leases and the CCD income for subservicing clients, have been reclassified to net interest income.


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Table of Contents

 
Three Months Ended March 31, 2017
 
Community Banking
 
Mortgage Originations
 
Mortgage Servicing
 
Other (1)
 
Total
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
Net interest income
$
51

 
$
30

 
$
3

 
$
(1
)
 
$
83

Net gain (loss) on loan sales
(2
)
 
50

 

 

 
48

Other noninterest income
8

 
26

 
16

 
2

 
52

Total net interest income and noninterest income
57

 
106

 
19

 
1

 
183

(Provision) benefit for loan losses
(2
)
 
(2
)
 

 
1

 
(3
)
Compensation and benefits
(16
)
 
(20
)
 
(4
)
 
(32
)
 
(72
)
Other noninterest expense
(20
)
 
(27
)
 
(16
)
 
(5
)
 
(68
)
Total noninterest expense
(36
)
 
(47
)
 
(20
)
 
(37
)
 
(140
)
Income (loss) before overhead allocations and income taxes
19

 
57

 
(1
)
 
(35
)
 
40

Provision (benefit) for income taxes
3

 
14

 
(2
)
 
(2
)
 
13

Overhead allocation
(10
)
 
(17
)
 
(6
)
 
33

 

Net income (loss)
$
6

 
$
26

 
$
(5
)
 
$

 
$
27

Intersegment revenue
$
(1
)
 
$

 
$
5

 
$
(4
)
 
$

 
 
 
 
 
 
 
 
 
 
Average balances
 
 
 
 
 
 
 
 
 
Loans held-for-sale
$
20

 
$
3,266

 
$

 
$

 
$
3,286

Loans with government guarantees

 
342

 

 

 
342

Loans held-for-investment
5,605

 
5

 

 
29

 
5,639

Total assets
5,675

 
4,602

 
40

 
3,726

 
14,043

Deposits
7,455

 

 
1,340

 

 
8,795

(1) Income and expenses relating to operating leases and the CCD income for subservicing clients, have been reclassified to net interest income.

Community Banking

Comparison to Prior Year Quarter

The Community Banking segment reported net income of $17 million for the three months ended March 31, 2018, compared to $6 million for the three months ended March 31, 2017. The $11 million increase in net income was primarily due to a $19 million increase in net interest income driven by average commercial loan growth of $1.2 billion from March 31, 2017 to March 31, 2018. The increase in net interest income was partially offset by a $7 million increase in noninterest expense primarily driven by higher compensation and benefits expense to support our balance sheet growth initiatives and increased FDIC premiums due primarily to higher commercial balances.

Mortgage Originations

Comparison to Prior Year Quarter

The Mortgage Originations segment reported net income of $19 million for the three months ended March 31, 2018, compared to $26 million for the three months ended March 31, 2017. The decrease was primarily due to a $10 million decrease in net return on MSRs driven by a 22 percent decrease in our average MSR asset as a result of MSR sales. In an effort to grow our subservicing business, we retained the majority of the subservicing on these MSR sales.

In addition, our 2017 mortgage acquisitions drove increased mortgage volume resulting in $1.7 billion higher fallout-adjusted locks during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. Consequently, net gain on loan sales and loan fees and charges increased $12 million and $3 million, respectively, offset by an increase in variable expenses as commissions rose by $7 million. Additionally, these acquisitions led to higher headcount, resulting in a $9 million increase in compensation and benefits.


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Table of Contents

Mortgage Servicing

Comparison to Prior Year Quarter

The Mortgage Servicing segment reported a net loss of $4 million for the three months ended March 31, 2018, compared to a net loss of $5 million for the three months ended March 31, 2017, primarily due to a $3 million increase in loan administration income. This increase was led by an increase in loans subserviced for others which grew to over 360,000 accounts at March 31, 2018, driven by MSR sales for which we retained the majority of the subservicing. Portfolio mix and higher interest rates paid to subservicing clients for custodial balances drove a partially offsetting decrease in net interest income.

Other

Comparison to Prior Year Quarter

The Other segment reported net income of $3 million for the three months ended March 31, 2018, compared to net income of less than $1 million for the three months ended March 31, 2017. The $3 million increase was primarily due to a FHLB stock supplemental dividend received in the first quarter of 2018.

RISK MANAGEMENT

Like all financial services companies, we engage in business activities and assume the related risks. The risks we are subject to in the normal course of business include, but are not limited to, credit, regulatory compliance, legal, reputation, liquidity, market, operational, and strategic. We have made significant investments in our risk management activities which are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. We hold capital to protect from unexpected loss arising from these risks.

A comprehensive discussion of risks affecting us can be found in the Risk Factors section included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017. Some of the more significant processes used to manage and control credit, market, liquidity 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, and enter into financial derivative contracts, all of which have related credit risk.

We maintain a strict credit limit, in compliance with regulatory requirements, in order to maintain a diversified loan portfolio and manage credit exposure to any one borrower or obligor. Under the Home Owners Loan Act ("HOLA"), savings associations are generally subject to national bank limits on loans to one borrower. Generally, per HOLA, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 and Tier 2 capital plus any portion of the allowance for loan losses not included in the Tier 2 capital. This limit was $251 million as of March 31, 2018.

We maintain a more conservative maximum internal Bank limit than required by HOLA, of $100 million (commitment level) to any one borrower/obligor relationship, with the exception of warehouse borrower/obligor relationships which have an internal Bank limit of $125 million. We have a tracking and reporting process to monitor lending concentration levels and all credit exposures to a single borrower that exceed $50 million must be approved by the Board of Directors. As part of the Santander warehouse acquisition, the Board of Directors approved a short term exception to the limit on loans to an individual borrower/obligor for three warehouse borrowers while Flagstar completes a syndication process to reduce exposure down to the $125 million limit.
    
The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We manage our credit risk by establishing sound credit policies for underwriting and adhering to well controlled processes. We utilize various credit risk management and monitoring activities to mitigate risks associated with loans that we hold, acquire, and originate.
    

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Table of Contents

Loan Originations

The following table presents loan originations by portfolio:
 
Three Months Ended March 31,
 
2018
 
2017
 
(Dollars in millions)
Consumer loans
 
 
 
Residential first mortgage
$
7,886

 
$
5,903

Home equity (1)
65

 
56

Total consumer loans
7,951

 
5,959

Commercial loans (2)
169

 
271

Total loan originations
$
8,120

 
$
6,230

(1)
Includes second mortgage loans, HELOC loans, and other consumer loans.
(2)
Includes newly committed CRE and C&I loans that were net funded within the period.

Loans held-for-investment

The following table summarizes loans held-for-investment by category:
 
March 31, 2018
 
December 31, 2017
 
Change
 
(Dollars in millions)
Consumer loans
 
 
 
 
 
Residential first mortgage
$
2,818

 
$
2,754

 
$
64

Home equity
671

 
664

 
7

Other
25

 
25

 

Total consumer loans
3,514

 
3,443

 
71

Commercial loans
 
 
 
 

Commercial real estate (1)
1,985

 
1,932

 
$
53

Commercial and industrial
1,228

 
1,196

 
32

Warehouse lending
1,407

 
1,142

 
265

Total commercial loans
4,620

 
4,270

 
350

Total loans held-for-investment
$
8,134

 
$
7,713

 
$
421

(1)
Includes NBV of $325 million and $307 million of owner occupied commercial real estate loans at March 31, 2018 and December 31, 2017, respectively.

Loans held-for-investment increased $421 million from December 31, 2017 to March 31, 2018. This increase was due to our continued effort to grow both the consumer and commercial loan portfolios, combined with our acquisitions of Santander Bank's warehouse loans and Desert Community Bank loans.

We continue to strengthen our Community Banking segment by improving margins through the additions of higher yielding loans. The commercial loan portfolio grew $350 million, or 8 percent, from December 31, 2017 to March 31, 2018, led by a $265 million increase in warehouse loans.

For further information, see Note 4 - Loans Held-for-Investment.
    
Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. The LTV requirements vary depending on occupancy, property type, loan amount, and FICO scores. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. We hold for investment, higher yielding loans and loans that will diversify or enhance the interest rate characteristics of our balance sheet.


    

15

Table of Contents

The following table presents our total residential first mortgage LHFI by major category:
 
March 31, 2018
 
December 31, 2017
 
(Dollars in millions)
Estimated LTVs (1)
 
 
 
Less than 80% and refreshed FICO scores (2):
 
 
 
Equal to or greater than 660
$
2,452

 
$
2,441

Less than 660
82

 
73

80% and greater and refreshed FICO scores (2):
 
 
 
Equal to or greater than 660
212

 
168

Less than 660
23

 
12

U.S. government guaranteed
49

 
60

Total
$
2,818

 
$
2,754

Geographic region
 
 
 
California
$
1,175

 
$
1,127

Michigan
279

 
275

Florida
203

 
201

Texas
191

 
182

Washington
173

 
169

Illinois
104

 
101

Arizona
76

 
76

Colorado
65

 
69

Maryland
63

 
65

New York
61

 
62

Others
428

 
427

Total
$
2,818

 
$
2,754

(1)
LTVs reflect UPB, at the date reported, as a percentage of property values as appraised at loan origination.
(2)
FICO scores are updated at least on a quarterly basis or more frequently if available.
        
The following table presents our total residential first mortgage LHFI by year of origination:
 
2018
 
2017
 
2016
 
2015
 
2014 and Prior
 
Total
 
(Dollars in millions)
 
 
Residential first mortgage loans (UPB)
$
174

 
$
846

 
$
632

 
$
718

 
$
448

 
$
2,818

Percent of total
6.2
%
 
30.0
%
 
22.4
%
 
25.5
%
 
15.9
%
 
100.0
%

Home equity. Our home equity portfolio includes first and second lien positions for HELOANs and HELOCs. These loans require full documentation and are underwritten and priced in an effort to ensure credit quality and loan profitability. Our debt-to-income ratio on HELOANS is capped at 43 percent and for HELOCs is capped at 45 percent. We currently limit the maximum CLTV to 89.99 percent and FICO scores to a minimum of 660. Current second mortgage loans/HELOANS are fixed rate loans and are available with terms up to 15 years. HELOC loans are variable-rate loans that contain a 10-year draw period followed by a 20-year amortizing period.

Commercial real estate loans. The commercial real estate portfolio is largely based in Michigan and has limited exposure to big box retail centers and malls. The majority of our retail exposure is to high-quality, single tenant locations, including many drug stores, all of which are underwritten on strong credit metrics. Generally, the maximum LTV is 80 percent, or 85 percent for owner-occupied real estate, and debt service coverage of 1.20 to 1.35 times. At March 31, 2018, our average LTV and average debt service coverage for our CRE portfolio was 53 percent and 2.00 times, respectively. This portfolio also includes owner occupied real estate loans and secured home builder loans.

We have built a national home builder finance program which has helped grow our balance sheet, increase commercial deposits and generate incremental revenue through our retail purchase mortgage channel. Through this program, we now finance and have active relationships with homebuilders nationwide. At March 31, 2018, loans committed to home builders totaled $1.1 billion, of which $614 million UPB was drawn or used. Of that, $110 million UPB is unsecured which is included

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Table of Contents

in our C&I portfolio and $504 million UPB is collateralized and included in either the single family residence or land-residential categories of our CRE portfolio.
    
The following table presents our total CRE LHFI by collateral location and collateral type:
 
Michigan
 
Texas
 
Colorado
 
Florida
 
California
 
Other
 
Total
 
% by collateral type
 
(Dollars in millions)
 
 
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family residence (1)
$
17

 
$
80

 
$
109

 
$
85

 
$
31

 
$
59

 
$
381

 
19.2
%
Owner occupied
232

 
4

 

 
2

 
28

 
59

 
325

 
16.4
%
Multi family
128

 
39

 
14

 
22

 
8

 
81

 
292

 
14.7
%
Retail (2)
180

 
3

 
6

 
4

 
7

 
71

 
271

 
13.7
%
Office
171

 

 

 
3

 
16

 
9

 
199

 
10.0
%
Land - Residential (3)
7

 
27

 
32

 
25

 
35

 
38

 
164

 
8.3
%
Hotel/motel
86

 
17

 

 

 

 
23

 
126

 
6.3
%
Senior Living facility
29

 

 

 

 

 
63

 
92

 
4.6
%
Industrial
38

 

 

 

 

 
28

 
66

 
3.3
%
Parking garage/Lot
20

 

 

 

 

 

 
20

 
1.0
%
Non Profit
1

 

 
1

 
3

 
2

 
3

 
10

 
0.5
%
Shopping Mall (4)

 

 

 

 

 
26

 
26

 
1.3
%
All other (5)
5

 
2

 

 

 
1

 
5

 
13

 
0.7
%
Total
$
914

 
$
172

 
$
162

 
$
144

 
$
128

 
$
465

 
$
1,985

 
100.0
%
Percent by state
46.0
%
 
8.7
%
 
8.2
%
 
7.3
%
 
6.4
%
 
23.4
%
 
100.0
%
 
 
(1)
Includes home builder loans secured by SFR 1-4 properties whether under construction or completed.
(2)
Includes multipurpose retail space, neighborhood centers, strip centers and single-use retail space.
(3)
Includes home builder loans secured by land. Land residential includes development and unimproved vacant land.
(4)
Comprised of one shopping mall
(5)
All other primarily includes: marina, movie theater, data centers 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 times. Most of our C&I loans earn interest at a variable rate.

The following table presents our total C&I LHFI by borrower's geographic location and industry type:
 
Michigan
 
Texas
 
California
 
Virginia
 
Louisiana
 
Other
 
Total
 
% by industry
 
(Dollars in millions)
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industry Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial & Insurance
$
16

 
$
5

 
$

 
$
72

 
$
13

 
$
222

 
$
328

 
26.7
%
Services
91

 

 
37

 

 
25

 
60

 
213

 
17.3
%
Manufacturing
67

 
5

 
26

 

 

 
99

 
197

 
16.0
%
Home builder finance

 
82

 

 

 
25

 
2

 
109

 
8.9
%
Healthcare
25

 
7

 
1

 

 

 
73

 
106

 
8.6
%
Distribution
78

 

 
19

 

 

 

 
97

 
7.9
%
Rental & leasing
55

 

 

 

 

 
27

 
82

 
6.7
%
Government & education
29

 

 

 

 

 
47

 
76

 
6.2
%
Commodities
5

 

 

 

 

 
6

 
11

 
0.9
%
Servicing advances

 

 

 

 

 
9

 
9

 
0.7
%
Total
$
366

 
$
99

 
$
83

 
$
72

 
$
63

 
$
545

 
$
1,228

 
100.0
%
Percent by state
29.8
%
 
8.1
%
 
6.8
%
 
5.9
%
 
5.1
%
 
44.4
%
 
100.0
%
 
 

    

17

Table of Contents

Warehouse lending. We offer warehouse lines of credit to other mortgage lenders which allow the lender to fund the closing of residential mortgage loans. Each extension, advance, or draw-down on the line is fully collateralized by residential mortgage loans and is paid off when the lender sells the loan to an outside investor or, in some instances, to the Bank. For the three months ended March 31, 2018, the warehouse advance amount of loans sold to the Bank totaled $2.3 billion, or 32 percent of total loans, as compared to $2.3 billion, or 39 percent of total loans for the three months ended March 31, 2017.

Underlying mortgage loans are predominantly originated using the Agencies' underwriting standards. The guideline for debt to tangible net worth is 15 to 1. We have a national platform with relationship managers across the country. The aggregate committed amount of adjustable-rate warehouse lines of credit granted to other mortgage lenders at March 31, 2018 was $4.3 billion, of which $1.4 billion was outstanding, compared to $2.8 billion at December 31, 2017, of which $1.1 billion was outstanding. This increase is primarily due to our acquisition of the warehouse loan portfolio from Santander Bank.

Credit Quality

Trends in certain credit quality characteristics such as nonperforming loans and past due statistics remain very strong and continue to show improvement. This is predominantly a result of our focus on effectively managing credit risk and our sales of legacy portfolios that included greater levels of nonperforming and TDR loans which have been replaced by new loans with strong credit characteristics. The credit quality of our loan portfolios is demonstrated by low delinquency levels, minimal charge-offs and low levels of nonperforming loans.
    
For all loan categories within the consumer and commercial loan portfolio, loans are placed on nonaccrual status when any portion of principal or interest is 90 days past due (or nonperforming), or earlier when we become aware of information indicating that collection of principal and interest is in doubt. While it is the goal of management to collect on loans, we attempt to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations and minimize losses incurred by the Bank. When a loan is placed on nonaccrual status, the accrued interest income is reversed. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Nonperforming assets

The following table sets forth our nonperforming assets:
 
March 31, 2018
 
December 31, 2017
 
(Dollars in millions)
LHFI
 
 
 
Consumer loans
 
 
 
Residential first mortgage
$
13

 
$
12

Home equity
1

 
1

Total nonperforming LHFI
14

 
13

TDRs
 
 
 
Consumer loans
 
 
 
Residential first mortgage
10

 
12

Home equity
5

 
4

Total nonperforming TDRs
15

 
16

Total nonperforming LHFI and TDRs (1)
29

 
29

Real estate and other nonperforming assets, net
5

 
8

LHFS
11

 
9

Total nonperforming assets
$
45

 
$
46

Nonperforming assets to total assets (2)
0.19
%
 
0.22
%
Nonperforming LHFI and TDRs to LHFI
0.35
%
 
0.38
%
Nonperforming assets to LHFI and repossessed assets (2)
0.42
%
 
0.48
%
(1)
Includes less than 90 day past due performing loans placed on nonaccrual. Interest is not being accrued on these loans.
(2)
Ratio excludes LHFS.


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At March 31, 2018, we had $45 million of nonperforming assets compared to $46 million of nonperforming assets at December 31, 2017. The consistent low levels of nonperforming loans reflect our focus on growing our loan portfolios with strong credit quality loans.

The following table sets forth activity related to our nonperforming LHFI and TDRs:
 
Three Months Ended March 31,
 
2018
 
2017
 
(Dollars in millions)
Beginning balance
$
29

 
$
40

Additions
4

 
8

Reductions
 
 
 
Principal payments and loan sales
(2
)
 
(20
)
Charge-offs

 

Returned to performing status
(1
)
 

Transfers to REO
(1
)
 

Total nonperforming LHFI and TDRs (1)
$
29

 
$
28

(1)
Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.

During the three months ended March 31, 2018, we did not sell any nonperforming loans. In an effort to improve the credit quality of our portfolio, during the three months ended March 31, 2017, we sold $34 million UPB of nonperforming consumer loans, which included $2 million of TDRs.

Delinquencies

The following table sets forth our 30-89 days past due performing LHFI:
 
March 31, 2018
 
December 31, 2017
 
(Dollars in millions)
Performing loans past due 30-89:
 
 
 
Consumer loans
 
 
 
Residential first mortgage
$
3

 
$
4

Home equity
2

 
1

Total performing loans past due 30-89 days
$
5

 
$
5


As a result of our continued focus on growing our loan portfolio with high quality loans, early stage delinquencies remained low as loans 30 to 89 days past were $5 million at both March 31, 2018 and December 31, 2017. There were no past due commercial loans at March 31, 2018 or December 31, 2017.

For further information, see Note 4 - Loans Held-for-Investment.

Troubled debt restructurings (held-for-investment)

Troubled debt restructurings ("TDRs") are modified loans in which a borrower demonstrates financial difficulties and for which a concession has been granted as a result. Nonperforming TDRs are included in nonaccrual loans and remain in nonperforming status until a borrower has made at least six consecutive months of payments under the modified terms. Performing TDRs are excluded from nonaccrual loans, because based on our evaluation, it is reasonably assured that all contractual principal and interest due under the restructured terms will be collected.

    

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Table of Contents

The following table sets forth a summary of TDRs by performing status:
 
March 31, 2018
 
December 31, 2017
 
(Dollars in millions)
Performing TDRs
 
 
 
Residential first mortgage
$
20

 
$
19

Home equity
24

 
24

Commercial and industrial
5

 

Total performing TDRs
49

 
43

Nonperforming TDRs
 
 
 
Nonperforming TDRs
5

 
5

Nonperforming TDRs at inception but performing for less than six months
10

 
11

Total nonperforming TDRs
15

 
16

Total TDRs (1)
$
64

 
$
59

(1)
The ALLL on TDR loans totaled $13 million at both March 31, 2018 and December 31, 2017.

At March 31, 2018 our total TDR loans increased $5 million as compared to December 31, 2017 primarily due to the addition of a C&I loan. Of our total TDR loans, 76.5 percent were in performing status at March 31, 2018, as compared to 73.7 percent at December 31, 2017.     

For further information, see Note 4 - Loans Held-for-Investment.

Allowance for Loan Losses

The ALLL represents management's estimate of probable losses that are inherent in our LHFI portfolio but which have not yet been realized. For further information, see Note 4 - Loans Held-for-Investment.

The ALLL was $139 million and $140 million at March 31, 2018 and December 31, 2017, respectively. The decrease was primarily driven by continued strong credit quality, including lower levels of net charge-offs and delinquencies offset by growth in the LHFI portfolio of $421 million UPB.

The ALLL as a percentage of LHFI decreased to 1.7 percent as of March 31, 2018 from 1.8 percent as of December 31, 2017, primarily attributable to growth of $421 million UPB consisting of assets in both the consumer and commercial loan portfolios. At March 31, 2018, we had a 2.0 percent allowance coverage of our consumer loan portfolio and a 1.5 percent allowance coverage of our commercial loan portfolio, reflecting continued low levels of delinquencies and net charge-offs in the LHFI portfolio.

The following table sets forth certain information regarding the allocation of our ALLL to each loan category:
 
March 31, 2018
 
Investment Loan Portfolio
 
Percent of Portfolio
 
Allowance Amount
 
Allowance as a Percent of Loan Portfolio
 
(Dollars in millions)
Consumer loans