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Section 1: 10-Q (10-Q)

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Table of Contents

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 June 30, 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
 
 
 394525342_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 August 2, 2018, 57,599,907 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 JUNE 30, 2018
TABLE OF CONTENTS
 
 
 
 
 
 
 
Item 1.
 
 
Consolidated Statements of Financial Condition – June 30, 2018 (unaudited) and December 31, 2017 (unaudited)
 
Consolidated Statements of Operations – For the three and six months ended June 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Comprehensive Income – For the three and six months ended June 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Stockholders’ Equity – For the six months ended June 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Cash Flows – For the six months ended June 30, 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
 
HELOC
 
Home Equity Lines of Credit
Agencies
 
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association, Collectively
 
HELOAN
 
Home Equity Loan
ALCO
 
Asset Liability Committee
 
HOLA
 
Home Owners Loan Act
ALLL
 
Allowance for Loan & Lease Losses
 
Home equity
 
Second Mortgages, HELOANs, HELOCs
AOCI
 
Accumulated Other Comprehensive Income (Loss)
 
HTM
 
Held to Maturity
ASU
 
Accounting Standards Update
 
LIBOR
 
London Interbank Offered Rate
Basel III
 
Basel Committee on Banking Supervision Third Basel Accord
 
LHFI
 
Loans Held-for-Investment
C&I
 
Commercial and Industrial
 
LHFS
 
Loans Held-for-Sale
CDARS
 
Certificates of Deposit Account Registry Service
 
LTV
 
Loan-to-Value Ratio
CET1
 
Common Equity Tier 1
 
Management
 
Flagstar Bancorp’s Management
CFPB
 
Consumer Financial Protection Bureau
 
MBIA
 
MBIA Insurance Corporation
CLTV
 
Combined Loan to Value Ratio
 
MBS
 
Mortgage-Backed Securities
Common Stock
 
Common Shares
 
MD&A
 
Management's Discussion and Analysis
CRE
 
Commercial Real Estate
 
MSR
 
Mortgage Servicing Rights
DCB
 
Desert Community Bank
 
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
 
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


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 second 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 Exhibit 99.1 to our June 1, 2018 Form 8-K Report.

Certain statements in this Form 10-Q, including but not limited to statements included within the Management’s Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements are based on the current beliefs and expectations of our management. Actual results may differ from those set forth in forward-looking statements. See Forward-Looking Statements on page 35 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 June 30, 2018, we had 3,682 full-time equivalent employees. Our common stock is listed on the NYSE under the symbol "FBC." At June 30, 2018, we were no longer considered a "controlled company" for NYSE purposes, as on June 14, 2018, our former majority shareholder, MP Thrift Investments L.P., completed a secondary offering of eight million shares of common stock, reducing their common stock ownership from approximately 62 percent to 48 percent.

We have a relationship-based business model which leverages our full-service bank’s capabilities with our national mortgage platform to create and build financial relationships with our customers. At June 30, 2018, we operated 107 full service banking branches that offer a full set of banking products to consumer, commercial, and government customers. Our banking footprint spans throughout Michigan and contiguous states as well as the high desert region of California.

We originate mortgages through a wholesale network of brokers and correspondents in all 50 states, and our own loan officers from 88 retail locations in 31 states and two call centers, which includes our direct-to-consumer lending team. Flagstar is also a leading national servicer of mortgage loans and provides complementary ancillary offerings including, MSR lending, servicing advance lending and recapture services. Servicing and subservicing of loans provides fee income and generates a stable long-term source of funding through custodial deposits.

In the second quarter 2018, we signed a definitive agreement to acquire 52 Wells Fargo branches in Indiana, Michigan, Wisconsin and Ohio. We expect to close this transaction late in the fourth quarter of 2018.

Operating Segments

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

4

Table of Contents

Selected Financial Ratios
(Dollars in millions, except share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions, except per share data and percentages)
Selected Mortgage Statistics:
 
 
 
 
 
 
 
Mortgage rate lock commitments (fallout-adjusted) (1)
$
9,011

 
$
9,002

 
$
16,734

 
$
14,998

Mortgage loans sold and securitized
9,260

 
8,989

 
16,506

 
13,473

Selected Ratios:
 
 
 
 
 
 
 
Interest rate spread (2)
2.58
%
 
2.59
%
 
2.56
%
 
2.55
%
Net interest margin
2.86
%
 
2.77
%
 
2.81
%
 
2.72
%
Return on average assets
1.12
%
 
1.04
%
 
0.97
%
 
0.91
%
Return on average equity
13.45
%
 
11.57
%
 
11.73
%
 
9.77
%
Equity-to-assets ratio (average for the period)
8.29
%
 
9.02
%
 
8.28
%
 
9.29
%
Efficiency ratio
74.4
%
 
72.0
%
 
76.9
%
 
74.2
%
Effective tax provision rate
20.4
%
 
31.8
%
 
20.2
%
 
32.3
%
Average Balances:
 
 
 
 
 
 
 
Average interest-earning assets
$
15,993

 
$
14,020

 
$
15,675

 
$
13,187

Average interest-paying liabilities
13,164

 
11,804

 
13,069

 
11,066

Average stockholders' equity
1,475

 
1,418

 
1,445

 
1,382

 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
 
(In millions, except per share data and percentages)
Selected Statistics:
 
 
 
 
 
Book value per common share
$
25.61

 
$
24.40

 
$
24.64

Tangible book value per share (3)
$
24.37

 
$
24.04

 
$
24.29

Number of common shares outstanding
57,598,406

 
57,321,228

 
57,161,431

Common equity-to-assets ratio
8.14
%
 
8.27
%
 
8.82
%
Capitalized value of mortgage servicing rights
1.34
%
 
1.16
%
 
1.14
%
Bancorp Tier 1 leverage (to adjusted avg. total assets) (4)
8.65
%
 
8.51
%
 
9.10
%
Bank Tier 1 leverage (to adjusted avg. total assets) (4)
9.04
%
 
9.04
%
 
10.26
%
Number of bank branches
107

 
99

 
99

Number of FTE employees
3,682

 
3,525

 
3,432

(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 $71 million, $21 million, and $20 million at June 30, 2018, December 31, 2017, and June 30, 2017, respectively. See Non-GAAP Financial Measures for further information.
(4)
The Basel III transitional phase-in rules were applicable to December 31, 2017 and June 30, 2017.




5

Table of Contents

Overview

The second quarter of 2018 resulted in net income of $50 million, or $0.85 per diluted share, up $9 million or $0.14 per diluted share compared to the second quarter of 2017. For the six months ended June 30, 2018 compared to the same period in 2017, net interest income increased $41 million, or 23 percent, led by growth in average earning assets of $2.5 billion and a 9 basis point increase in net interest margin.

The Community Banking segment continued to perform well, boosted by the acquisitions of the Desert Community Bank ("DCB") branches and the Santander warehouse business late in the first quarter. When comparing the six months ended June 30, 2018 to the same period last year, average commercial loans have increased $1.4 billion, or 45 percent with growth across all portfolios and average deposits have increased $1.1 billion, or 13 percent.

During the first half of 2018, we sold $18.4 billion UPB of mortgage servicing rights with 100 percent of the sub-servicing retained, increasing the profitability of our servicing business. Since the beginning of 2018, we have increased the number of loans serviced by 93,000 or 21 percent and are well positioned to add more scale later this year.

Our fallout-adjusted lock volume for the first half of 2018 compared to the first half of 2017, increased 12 percent, or $1.7 billion, while the gain on sale margin fell 2 basis points to 0.74 percent. This was driven by a challenging mortgage environment resulting in significant pricing competition.    

Earnings Performance
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions, except share data)
Net interest income
$
115

 
$
97

 
$
18

 
$
221

 
$
180

 
$
41

Provision (benefit) for loan losses
(1
)
 
(1
)
 

 
(1
)
 
2

 
(3
)
Total noninterest income
123

 
116

 
7

 
234

 
216

 
18

Total noninterest expense
177

 
154

 
23

 
350

 
294

 
56

Provision for income taxes
12

 
19

 
(7
)
 
21

 
32

 
(11
)
Net income
$
50

 
$
41

 
$
9

 
$
85

 
$
68

 
$
17

Income per share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.86

 
$
0.72

 
$
0.14

 
$
1.47

 
$
1.18

 
$
0.29

Diluted
$
0.85

 
$
0.71

 
$
0.14

 
$
1.45

 
$
1.16

 
$
0.29


Net income increased to $50 million or $0.85 per diluted share for the three months ended June 30, 2018, compared to $41 million or $0.71 per diluted share for the three months ended June 30, 2017. Net interest income increased $18 million for the three months ended June 30, 2018, compared to the same period in 2017, primarily driven by a higher net interest margin and a $2.0 billion increase in average interest-earnings assets, led by commercial loan growth. The $7 million increase in noninterest income primarily resulted from higher loan fees and charges and returns on MSRs, partially offset by lower gains on loan sales. Growth from acquisitions resulted in higher compensation and benefits, commissions and occupancy and equipment expenses.

Net income increased to $85 million or $1.45 per diluted share for the six months ended June 30, 2018 as compared to $68 million or $1.16 per diluted share for the six months ended June 30, 2017. Net interest income increased $41 million for the six months ended June 30, 2018, compared to the same period in 2017, primarily driven by a 19 percent increase in average interest-earning assets and an increase in net interest margin. The increase in noninterest income primarily resulted from higher gain on loan sales and loan fees and charges, partially offset by a lower return on MSRs. Our 2017 mortgage acquisitions drove an increase in originations resulting in higher volume driven expenses as well as an increase in compensation and benefits and occupancy and equipment expenses.

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 June 30,
 
2018
 
2017
 
Average
Balance
Interest
Annualized
Yield/
Rate
 
Average
Balance
Interest
Annualized
Yield/
Rate
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
 
 
Loans held-for-sale
$
4,170

$
47

4.50
%
 
$
4,269

$
42

4.00
%
Loans held-for-investment
 
 
 
 
 
 
 
Residential first mortgage
2,875

25

3.53
%
 
2,495

21

3.38
%
Home equity
679

8

5.05
%
 
439

6

4.91
%
Other
57

1

5.39
%
 
27


4.54
%
Total Consumer loans
3,611

34

3.85
%
 
2,961

27

3.61
%
Commercial Real Estate
2,017

26

5.09
%
 
1,477

16

4.16
%
Commercial and Industrial
1,257

17

5.30
%
 
936

11

4.77
%
Warehouse Lending
1,495

19

5.03
%
 
850

10

4.71
%
Total Commercial loans
4,769

62

5.13
%
 
3,263

37

4.48
%
Total loans held-for-investment (1)
8,380

96

4.58
%
 
6,224

64

4.07
%
Loans with government guarantees
280

2

3.66
%
 
295

3

4.02
%
Investment securities
3,049

21

2.72
%
 
3,166

20

2.57
%
Interest-earning deposits
114

1

1.72
%
 
66


1.07
%
Total interest-earning assets
15,993

167

4.17
%
 
14,020

129

3.69
%
Other assets
1,791

 
 
 
1,690

 
 
Total assets
$
17,784

 
 
 
$
15,710

 
 
Interest-Bearing Liabilities
 
 
 
 
 
 
 
Retail deposits
 
 
 
 
 
 
 
Demand deposits
$
704

$
1

0.60
%
 
$
510

$

0.15
%
Savings deposits
3,412

8

0.86
%
 
3,933

8

0.75
%
Money market deposits
247


0.54
%
 
239


0.42
%
Certificates of deposit
2,006

8

1.63
%
 
1,094

3

1.08
%
Total retail deposits
6,369

17

1.06
%
 
5,776

11

0.75
%
Government deposits
 
 
 
 
 
 
 
Demand deposits
243


0.47
%
 
200


0.39
%
Savings deposits
488

2

1.26
%
 
411

1

0.56
%
Certificates of deposit
380

1

1.35
%
 
291


0.68
%
Total government deposits
1,111

3

1.12
%
 
902

1

0.56
%
Wholesale deposits and other
264

1

1.96
%
 
4


0.48
%
Total interest-bearing deposits
7,744

21

1.10
%
 
6,682

12

0.72
%
Short-term Federal Home Loan Bank advances
3,646

17

1.85
%
 
3,429

8

0.98
%
Long-term Federal Home Loan Bank advances
1,280

7

2.25
%
 
1,200

6

1.91
%
Other long-term debt
494

7

5.60
%
 
493

6

5.06
%
Total interest-bearing liabilities
13,164

52

1.58
%
 
11,804

32

1.10
%
Noninterest-bearing deposits (2)
2,670

 
 
 
2,057

 
 
Other liabilities
475

 
 
 
431

 
 
Stockholders’ equity
1,475

 
 
 
1,418

 
 
Total liabilities and stockholders' equity
$
17,784

 
 
 
$
15,710

 
 
Net interest income
 
$
115

 
 
 
$
97

 
Interest rate spread (3)
 
 
2.58
%
 
 
 
2.59
%
Net interest margin (4)
 
 
2.86
%
 
 
 
2.77
%
Ratio of average interest-earning assets to interest-bearing liabilities
 
 
121.5
%
 
 
 
118.8
%
(1)
Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 4 - Loans Held-for-Investment.
(2)
Includes noninterest-bearing 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


 
Six Months Ended June 30,
 
2018
 
2017
 
Average
Balance
Interest
Annualized
Yield/
Rate
 
Average
Balance
Interest
Annualized
Yield/
Rate
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
 
 
Loans held-for-sale
$
4,201

$
90

4.31
%
 
$
3,780

$
74

3.94
%
Loans held-for-investment
 
 
 
 

 
 
Residential first mortgage
2,824

49

3.47
%
 
2,447

41

3.35
%
Home equity
674

17

5.13
%
 
436

11

5.01
%
Other
42

1

5.12
%
 
26


4.52
%
Total Consumer loans
3,540

67

3.80
%
 
2,909

52

3.61
%
Commercial Real Estate
1,986

50

4.98
%
 
1,399

28

3.99
%
Commercial and Industrial
1,237

33

5.25
%
 
855

20

4.67
%
Warehouse Lending
1,173

30

5.07
%
 
770

18

4.62
%
Total Commercial loans
4,396

113

5.08
%
 
3,024

66

4.34
%
Total loans held-for-investment (1)
7,936

180

4.51
%
 
5,933

118

3.98
%
Loans with government guarantees
285

5

3.69
%
 
318

7

4.34
%
Investment securities
3,140

43

2.71
%
 
3,090

39

2.54
%
Interest-earning deposits
113

1

1.69
%
 
66

1

0.97
%
Total interest-earning assets
15,675

319

4.06
%
 
13,187

239

3.63
%
Other assets
1,764

 
 
 
1,694

 
 
Total assets
$
17,439

 
 
 
$
14,881

 
 
Interest-Bearing Liabilities
 
 
 
 
 
 
 
Retail deposits
 
 
 
 
 
 
 
Demand deposits
$
626

$
1

0.46
%
 
$
509

$

0.17
%
Savings deposits
3,451

14

0.83
%
 
3,930

15

0.76
%
Money market deposits
226

1

0.49
%
 
258

1

0.44
%
Certificates of deposit
1,814

14

1.55
%
 
1,083

6

1.07
%
Total retail deposits
6,117

30

0.99
%
 
5,780

22

0.75
%
Government deposits
 
 
 
 
 
 
 
Demand deposits
242

1

0.51
%
 
217


0.39
%
Savings deposits
485

3

1.18
%
 
435

1

0.54
%
Certificates of deposit
391

2

1.27
%
 
305

1

0.65
%
Total government deposits
1,118

6

1.07
%
 
957

2

0.54
%
Wholesale deposits and other
217

2

1.94
%
 
6


0.42
%
Total interest-bearing deposits
7,452

38

1.03
%
 
6,743

24

0.72
%
Short-term Federal Home Loan Bank advances
3,838

32

1.68
%
 
2,630

12

0.89
%
Long-term Federal Home Loan Bank advances
1,285

14

2.17
%
 
1,200

11

1.89
%
Other long-term debt
494

14

5.49
%
 
493

12

5.05
%
Total interest-bearing liabilities
13,069

98

1.50
%
 
11,066

59

1.08
%
Noninterest-bearing deposits (2)
2,443

 
 
 
2,024

 
 
Other liabilities
482

 
 
 
409

 
 
Stockholders’ equity
1,445

 
 
 
1,382

 
 
Total liabilities and stockholders' equity
$
17,439

 
 
 
$
14,881

 
 
Net interest income
 
$
221

 
 
 
$
180

 
Interest rate spread (3)
 
 
2.56
%
 
 
 
2.55
%
Net interest margin (4)
 
 
2.81
%
 
 
 
2.72
%
Ratio of average interest-earning assets to interest-bearing liabilities
 
 
119.9
%
 
 
 
119.2
%
(1)
Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 4 - Loans Held-for-Investment.
(2)
Includes noninterest-bearing 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.


8


Rate/Volume Analysis

The following tables present the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). The rate/volume variances are allocated to rate.
 
Three Months Ended June 30,
 
2018 Versus 2017 Increase (Decrease)
Due to:
 
Rate
 
Volume
 
Total
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
Loans held-for-sale
$
5

 
$

 
$
5

Loans held-for-investment
 
 
 
 
 
Residential first mortgage
1

 
3

 
4

Home equity

 
2

 
2

Other
1

 

 
1

Total Consumer loans
2

 
5

 
7

Commercial Real Estate
5

 
5

 
10

Commercial and Industrial
2

 
4

 
6

Warehouse Lending
1

 
8

 
9

Total Commercial loans
8

 
17

 
25

Total loans held-for-investment
10

 
22

 
32

Loans with government guarantees
(1
)
 

 
(1
)
Investment securities
1

 

 
1

Interest-earning deposits and other
1

 

 
$
1

Total interest-earning assets
$
16

 
$
22

 
$
38

Interest-Bearing Liabilities
 
 
 
 
 
Interest-bearing deposits
$
7

 
$
2

 
$
9

Short-term Federal Home Loan Bank advances
8

 
1

 
9

Long-term Federal Home Loan Bank advances
1

 

 
1

Other long-term debt
1

 

 
1

Total interest-bearing liabilities
17

 
3

 
20

Change in net interest income
$
(1
)
 
$
19

 
$
18


9


 
Six Months Ended June 30,
 
2018 Versus 2017 Increase (Decrease)
Due to:
 
Rate
 
Volume
 
Total
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
Loans held-for-sale
$
8

 
$
8

 
$
16

Loans held-for-investment
 
 
 
 
 
Residential first mortgage
2

 
6

 
8

Home equity
1

 
5

 
6

Other

 
1

 
1

Total Consumer loans
3

 
12

 
15

Commercial Real Estate
10

 
12

 
22

Commercial and Industrial
4

 
9

 
13

Warehouse Lending
3

 
9

 
12

Total Commercial loans
17

 
30

 
47

Total loans held-for-investment
20

 
42

 
62

Loans with government guarantees
(1
)
 
(1
)
 
(2
)
Investment securities
3

 
1

 
4

Total interest-earning assets
$
30

 
$
50

 
$
80

Interest-Bearing Liabilities
 
 
 
 
 
Interest-bearing deposits
$
11

 
$
3

 
$
14

Short-term Federal Home Loan Bank advances
15

 
5

 
20

Long-term Federal Home Loan Bank advances
2

 
1

 
3

Other long-term debt
2

 

 
2

Total interest-bearing liabilities
30

 
9

 
39

Change in net interest income
$

 
$
41

 
$
41


Comparison to Prior Year Quarter

Net interest income increased $18 million, or 19 percent, for the three months ended June 30, 2018, compared to the same period in 2017. This increase was primarily driven by growth in average interest-earning assets, led by continued growth in the commercial LHFI portfolio.

Our net interest margin for the three months ended June 30, 2018 was 2.86 percent, as compared to 2.77 percent for the three months ended June 30, 2017. The increase in net interest margin was primarily driven by the growth in our commercial loan portfolios, partially offset by higher average rates on deposits. Our deposit costs experienced modest growth despite the rising rate environment and slight extension of duration driven by holding a higher percentage of certificates of deposits.

Average interest-earning assets increased $2.0 billion for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, primarily due to an increase in LHFI average balances. The LHFI portfolio increase was primarily driven by growth in the commercial loan portfolios which increased $1.5 billion, or 46 percent, as we executed on the acquisition of the Santander warehouse business and continued to build a diversified, higher yielding commercial loan portfolio.

Average interest-bearing liabilities increased $1.4 billion for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. This increase was primarily due to average interest-bearing deposits increasing $1.1 billion led by the recent DCB branch acquisition as well as organic growth in retail certificates of deposit and wholesale deposits, partially offset by a decline in retail savings deposits.

Comparison to Prior Year to Date

Net interest income increased $41 million, or 23 percent, for the six months ended June 30, 2018, compared to the same period in 2017. This increase was primarily driven by growth in average interest-earning assets, led by continued growth in the commercial LHFI portfolio and higher average LHFS balances.


10


Our net interest margin for the six months ended June 30, 2018 was 2.81 percent, as compared to 2.72 percent for the six months ended June 30, 2017. The increase in net interest margin was primarily driven by rising yields on our LHFI portfolios, which increased 53 basis points, representing a loan beta of 71 percent, more than offsetting the 31 basis point increase in average costs of deposits, representing a deposit beta of 30 percent.

Average interest-earning assets increased $2.5 billion for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to an increase in LHFI and LHFS average balances. The LHFI portfolio increase was primarily driven by $1.4 billion of growth in CRE and C&I loans along with higher average warehouse balances driven by the acquisition of the Santander warehouse business.

Average interest-bearing liabilities increased $2.0 billion for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to an increase in FHLB advances used to fund balance sheet growth. The recent DCB branch acquisition as well as higher retail and wholesale deposits drove a $709 million increase in average interest-bearing deposits.

Provision for Loan Losses

Comparison to Prior Year Quarter

The provision for loan losses was a benefit of $1 million during both the three months ended June 30, 2018 and June 30, 2017, which reflects our continued strong credit quality, including low delinquencies and charge-offs, along with growth of the portfolio in areas we believe to pose lower levels of credit risk.

Comparison to Prior Year to Date

The provision for loan losses was a benefit of $1 million during the six months ended June 30, 2018, compared to a provision of $2 million during the six months ended June 30, 2017. The improvement in the provision reflects our continued strong credit quality with lower levels of charge-offs along with growth of the portfolio in areas we believe to pose lower levels of 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 June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
Net gain on loan sales
$
63

 
$
66

 
$
(3
)
 
$
123

 
$
114

 
$
9

Loan fees and charges
24

 
20

 
4

 
44

 
35

 
9

Deposit fees and charges
5

 
5

 

 
10

 
9

 
1

Loan administration income
5

 
6

 
(1
)
 
10

 
11

 
(1
)
Net return on mortgage servicing rights
9

 
6

 
3

 
13

 
20

 
(7
)
Other noninterest income
17

 
13

 
4

 
34

 
27

 
7

Total noninterest income
$
123

 
$
116

 
$
7

 
$
234

 
$
216

 
$
18


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Table of Contents

 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
 
 
Mortgage rate lock commitments (fallout-adjusted) (1)
$
9,011

 
$
9,002

 
$
9

 
$
16,734

 
$
14,998

 
$
1,736

Net margin on mortgage rate lock commitments (fallout-adjusted) (1)(2)
0.71
%
 
0.73
%
 
(0.02
)%
 
0.74
%
 
0.76
%
 
(0.02
)%
Mortgage loans sold and securitized
9,260
 
8,989
 
271
 
16,506
 
13,473
 
3,033
(1)
Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the level of interest rates.
(2)
Gain on loan sale 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 $7 million during the three months ended June 30, 2018, compared to the same period in 2017.

Net gain on loan sales decreased $3 million during the three months ended June 30, 2018, compared to the three months ended June 30, 2017, primarily due to a 2 basis point decrease in net gain on loan sale margin on relatively flat fallout-adjusted rate lock volume. The decrease in net gain on loan sale margin is being driven by overcapacity in the mortgage industry resulting in increased pricing competition.

Loan fees and charges increased $4 million during the three months ended June 30, 2018, compared to the three months ended June 30, 2017, primarily due to a shift in channel mix from third party to retail originations which more than offset the decrease in total mortgage loan closings.

Net return on MSRs, including the impact of hedges, increased $3 million during the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The increase was primarily due to higher net return from the MSR asset and lower transaction costs related to less sales volume in the three months ended June 30, 2018 than the same period last year.     

Other noninterest income increased $4 million during the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The increase was primarily due to higher FHLB stock dividend income attributable to an increase in FHLB stock holdings and higher rental income driven by growth within the equipment finance portfolio.

Comparison to Prior Year to Date

Total noninterest income increased $18 million during the six months ended June 30, 2018, compared to the same period in 2017.

Net gain on loan sales increased $9 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017. Fallout-adjusted rate locks increased 12 percent, boosted by our 2017 mortgage business acquisitions. This volume increase was partially offset by a 2 basis point decrease in net gain on loan sale margin due to overcapacity in the market and increased pricing competition.

Loan fees and charges increased $9 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to an increase in mortgage loan closings and shift in channel mix from third party originations to retail channels.

Net return on MSRs, including the impact of hedges, decreased $7 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to lower net return from the MSR asset, along with a lower average MSR balance.

Other noninterest income increased $7 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase was primarily due to higher FHLB stock dividend income attributable to an increase in FHLB stock holdings and a supplemental dividend received in the first quarter of 2018, higher rental income driven by growth within the equipment finance portfolio, and higher investment and insurance income.


12

Table of Contents

Noninterest Expense

The following table sets forth the components of our noninterest expense:
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
Compensation and benefits
$
80

 
$
71

 
$
9

 
$
160

 
$
143

 
$
17

Commissions
25

 
16

 
9

 
43

 
26

 
17

Occupancy and equipment
30

 
25

 
5

 
60

 
47

 
13

Federal insurance premiums
6

 
4

 
2

 
12

 
7

 
5

Loan processing expense
15

 
14

 
1

 
29

 
26

 
3

Legal and professional expense
6

 
8

 
(2
)
 
12

 
15

 
(3
)
Other noninterest expense
15

 
16

 
(1
)
 
34

 
30

 
4

Total noninterest expense
$
177

 
$
154

 
$
23

 
$
350

 
$
294

 
$
56

Efficiency ratio
74.4
%
 
72.0
%
 
2.4
%
 
76.9
%
 
74.2
%
 
2.7
%
Average number of FTE
3,664

 
3,263

 
401

 
3,641

 
3,100

 
541


Comparison to Prior Year Quarter

Noninterest expense increased $23 million during the three months ended June 30, 2018, compared to the three months ended June 30, 2017.

Compensation and benefits increased $9 million during the three months ended June 30, 2018, compared to the three months ended June 30, 2017. This increase is primarily due to 12 percent higher average FTE due to acquisitions and growth in our business.

Commissions increased $9 million, during the three months ended June 30, 2018, compared to the three months ended June 30, 2017, primarily due to the acquisition of the Opes in 2017, which has increased our retail mortgage originations versus our predominately third party origination model.

Occupancy and equipment increased $5 million during the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The increase was primarily due to a higher average depreciable asset base and an increase in rent expense relating to acquisitions.

Comparison to Prior Year to Date

Noninterest expense increased $56 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017.

Compensation and benefits increased $17 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to 17 percent higher average FTE, driven by acquisitions and growth in our business.
    
Commissions increased $17 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase is primarily due to the acquisition of Opes in 2017, which has increased our retail mortgage originations versus our predominately third party origination model, and $1.7 billion higher loan originations in the six months ended June 30, 2018 compared to the same period a year ago.

Occupancy and equipment increased $13 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase was primarily due to a higher average depreciable asset base and an increase in vendor services supporting business growth.

FDIC insurance premiums increased $5 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to growth in our total assets.    


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Table of Contents

Other noninterest expense increased $4 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to an increase in advertising expenses to raise brand awareness.

Provision for Income Taxes

Our provision for income taxes for the three and six months ended June 30, 2018 was $12 million and $21 million, respectively, compared to a provision of $19 million and $32 million for the three and six months ended June 30, 2017, respectively. These decreases are primarily due to the reduction in the statutory corporate tax rate from 35 percent to 21 percent as a result of the Tax Cuts and Jobs Act.

Our effective tax provision rate for the three and six months ended June 30, 2018 was 20.4 percent and 20.2 percent, respectively, compared to 31.8 percent and 32.3 percent for the three and six months ended June 30, 2017, respectively. Our effective tax provision rate 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.

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 which spans throughout Michigan and contiguous states as well as the high desert region of California. We also serve home builders, correspondents, and commercial customers on a national basis.

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

Our Community Banking segment has seen continued growth and our transformation into a commercial bank continues to be a key component in our overall business model. Our commercial loan portfolio has grown to $5.1 billion as of June 30, 2018, representing a 37 percent increase from June 30, 2017.

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 our own 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 custodial deposits which provide a stable funding source. Revenue for those serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the delinquency status of the underlying loans. The Mortgage Servicing segment also services residential mortgages for our LHFI portfolio in the Community Banking segment and our own MSR portfolio in the Mortgage Originations segment for which it earns intersegment revenue.


14

Table of Contents

The following table presents residential loans serviced and the number of accounts associated with those loans.
 
June 30, 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)
$
7,303

 
32,012

 
$
7,013

 
29,493

Serviced for others
19,249

 
78,898

 
25,073

 
103,137

Subserviced for others (3)
93,761

 
424,331

 
65,864

 
309,814

Total residential loans serviced
$
120,313

 
535,241

 
$
97,950

 
442,444

(1)
UPB, net of write downs, does not include premiums or discounts.
(2)
Includes LHFI (residential first mortgage and home equity), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets.
(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


 
Three Months Ended June 30,
 
Six Months Ended June 30,
Community Banking
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
80

 
$
57

 
$
23

 
$
150

 
$
108

 
$
42

(Provision) benefit for loan losses

 

 

 
(1
)
 
(2
)
 
1

Net interest income after (provision) benefit for loan losses
80

 
57

 
23

 
149

 
106

 
43

Net gain (loss) on loan sales
(5
)
 
(1
)
 
(4
)
 
(7
)
 
(3
)
 
(4
)
Other noninterest income
9

 
6

 
3

 
17

 
14

 
3

Total noninterest income
4

 
5

 
(1
)
 
10

 
11

 
(1
)
Compensation and benefits
(17
)
 
(15
)
 
(2
)
 
(34
)
 
(31
)
 
(3
)
Other noninterest expense and directly allocated overhead
(28
)
 
(22
)
 
(6
)
 
(54
)
 
(42
)
 
(12
)
Total noninterest expense
(45
)
 
(37
)
 
(8
)
 
(88
)
 
(73
)
 
(15
)
Income before indirect overhead allocations and income taxes
39

 
25

 
14

 
71

 
44

 
27

Overhead allocations
(9
)
 
(10
)
 
1

 
(20
)
 
(20
)
 

Provision for income taxes
7

 
5

 
2

 
11

 
8

 
3

Net income
$
23

 
$
10

 
$
13

 
$
40

 
$
16

 
$
24

Key Metrics
 
 
 
 
 
 
 
 
 
 
 
Efficiency Ratio
53.1
%
 
59.7
%
 
(6.6
)%
 
54.8
%
 
61.3
%
 
(6.5
)%
Return on average assets
1.1
%
 
0.6
%
 
0.5
 %
 
1.0
%
 
0.5
%
 
0.5
 %
Average number of FTE employees
826

 
700

 
126

 
794

 
694

 
100


Community Banking

Comparison to Prior Year Quarter

The Community Banking segment reported net income of $23 million for the three months ended June 30, 2018, compared to $10 million for the three months ended June 30, 2017. The $13 million increase in net income was primarily due to a $23 million increase in net interest income driven by higher average commercial loans. Average commercial loans increased $1.5 billion for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, due to

15

Table of Contents

organic growth and the acquisitions of Desert Community Bank branches and the Santander warehouse business in 2018. The increase in net interest income was partially offset by an $8 million increase in noninterest expense driven by higher compensation and benefits and occupancy and equipment expense primarily due to acquisitions, and an increase in FDIC premiums primarily due to higher total assets.

Comparison to Prior Year to Date

The Community Banking segment reported net income of $40 million for the six months ended June 30, 2018, compared to $16 million for the six months ended June 30, 2017. The $24 million increase in net income was primarily due to a $42 million increase in net interest income driven by average commercial loan growth of $1.4 billion for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. This average commercial loan growth was due to organic growth and the acquisitions of Desert Community Bank branches and Santander warehouse business in 2018. The increase in net interest income was partially offset by a $15 million increase in noninterest expense driven by growth initiatives, which include higher compensation and benefits, occupancy and equipment expense, and advertising costs along with an increase in community reinvestment programs and FDIC premiums primarily due to higher total assets.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
Mortgage Originations
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
33

 
$
32

 
$
1

 
$
64

 
$
62

 
$
2

(Provision) benefit for loan losses
(1
)
 

 
(1
)
 
(1
)
 
(2
)
 
1

Net interest income after (provision) benefit for loan losses
32

 
32

 

 
63

 
60

 
3

Net gain on loan sales
68

 
67

 
1

 
130

 
117

 
13

Other noninterest income
27

 
24

 
3

 
46

 
50

 
(4
)
Total noninterest income
95

 
91

 
4

 
176

 
167

 
9

Compensation and benefits
(28
)
 
(24
)
 
(4
)
 
(57
)
 
(44
)
 
(13
)
Other noninterest expense and directly allocated overhead
(47
)
 
(38
)
 
(9
)
 
(88
)
 
(65
)
 
(23
)
Total noninterest expense
(75
)
 
(62
)
 
(13
)
 
(145
)
 
(109
)
 
(36
)
Income before indirect overhead allocations and income taxes
52

 
61

 
(9
)
 
94

 
118

 
(24
)
Overhead allocation
(17
)
 
(14
)
 
(3
)
 
(35
)
 
(31
)
 
(4
)
Provision for income taxes
7

 
17

 
(10
)
 
12

 
31

 
(19
)
Net income (loss)
$
28

 
$
30

 
$
(2
)
 
$
47

 
$
56

 
$
(9
)
Key Metrics
 
 
 
 
 
 
 
 
 
 
 
Efficiency Ratio
59.3
%
 
50.4
%
 
8.9
 %
 
60.5
%
 
47.6
%
 
12.9
 %
Return on average assets
2.1
%
 
2.2
%
 
(0.1
)%
 
1.7
%
 
2.2
%
 
(0.5
)%
Mortgage rate lock commitments (fallout-adjusted) (1)
$
9,011

 
$
9,002

 
$
9

 
$
16,734

 
$
14,998

 
$
1,736

Average number of FTE employees
1,608

 
1,415

 
193

 
1,630

 
1,263

 
367

(1)
Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the level of interest rates.

Mortgage Originations

Comparison to Prior Year Quarter

The Mortgage Originations segment reported net income of $28 million for the three months ended June 30, 2018, compared to $30 million for the three months ended June 30, 2017. The decrease was primarily due to an increase in noninterest expense driven by an $8 million increase in commissions resulting from an increased mix of retail production and a $4 million increase in compensation and benefits related to increased headcount from acquisitions. These decreases were partially offset by higher noninterest income primarily resulting from higher net return from the MSR asset.

Comparison to Prior Year to Date

The Mortgage Originations segment reported net income of $47 million for the six months ended June 30, 2018, compared to $56 million for the six months ended June 30, 2017. Our 2017 acquisitions drove increased mortgage volumes resulting in $1.7 billion higher fallout adjusted locks during the six months ended June 30, 2018 as compared to the six months

16

Table of Contents

ended June 30, 2017. Consequently, net gain on loan sales and loan fees and charges, increased $13 million and $4 million, respectively. The increased mortgage volume led to higher variable costs, including $15 million higher commissions and $2 million higher loan processing expense. The acquisitions also primarily drove a $13 million increase in compensation and benefits and a $5 million increase in occupancy and equipment expense. The net return on MSR decreased $7 million driven by a decrease in our average MSR asset resulting from MSR sales.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
Mortgage Servicing
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
1

 
$
2

 
$
(1
)
 
$
3

 
$
5

 
$
(2
)
Provision for loan losses

 

 

 

 

 

Net interest income after provision for loan losses
1

 
2

 
(1
)
 
3

 
5

 
(2
)
Net gain on loan sales

 

 

 

 

 

Other noninterest income
22

 
17

 
5

 
41

 
33

 
8

Total noninterest income
22

 
17

 
5

 
41

 
33

 
8

Compensation and benefits
(5
)
 
(4
)
 
(1
)
 
(9
)
 
(8
)
 
(1
)
Other noninterest expense and directly allocated overhead
(15
)
 
(16
)
 
1

 
(31
)
 
(32
)
 
1

Total noninterest expense
(20
)
 
(20
)
 

 
(40
)
 
(40
)
 

Income (loss) before indirect overhead allocations and income taxes
3

 
(1
)
 
4

 
4

 
(2
)
 
6

Overhead allocations
(5
)
 
(5
)
 

 
(10
)
 
(11
)
 
1

Provision (benefit) for income taxes
(2
)
 
(3
)
 
1

 
(2
)