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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 September 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
 
 
 395642608_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  
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 November 1, 2018, 57,627,630 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 SEPTEMBER 30, 2018
TABLE OF CONTENTS
 
 
 
 
 
 
 
Item 1.
 
 
Consolidated Statements of Financial Condition – September 30, 2018 (unaudited) and December 31, 2017 (unaudited)
 
Consolidated Statements of Operations – For the three and nine months ended September 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Comprehensive Income – For the three and nine months ended September 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Stockholders’ Equity – For the nine months ended September 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Cash Flows – For the nine months ended September 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
 
Loan Beta
 
The change in the annualized yield of our LHFI portfolio, compared to the change in the Federal Reserve discount rate
CFPB
 
Consumer Financial Protection Bureau
 
Management
 
Flagstar Bancorp’s Management
CLTV
 
Combined Loan to Value Ratio
 
MBIA
 
MBIA Insurance Corporation
Common Stock
 
Common Shares
 
MBS
 
Mortgage-Backed Securities
CRE
 
Commercial Real Estate
 
MD&A
 
Management's Discussion and Analysis
DCB
 
Desert Community Bank
 
MSR
 
Mortgage Servicing Rights
Deposit Beta
 
The change in the annualized cost of our deposits, compared to the change in the Federal Reserve discount rate
 
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 third 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 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 34 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 and the 7th largest sub-servicer of mortgage loans nationwide. At September 30, 2018, we had 3,496 full-time equivalent employees. Our common stock is listed on the NYSE under the symbol "FBC."

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 September 30, 2018, we operated 108 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.

In the first quarter of 2018, we closed the purchase of the mortgage loan warehouse business from Santander Bank, which added $499 million in outstanding warehouse loans and we completed the acquisition of eight Desert Community Bank branches in San Bernardino County, California, with $614 million in deposits and $59 million in loans.

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 at the beginning of December 2018.

We originate mortgages through a wholesale network of brokers and correspondents in all 50 states, and our own loan officers from 81 retail locations in 27 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.
    
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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions and percentages)
Selected Mortgage Statistics:
 
 
 
 
 
 
 
Mortgage rate lock commitments (fallout-adjusted) (1)
$
8,290

 
$
8,898

 
$
25,024

 
$
23,896

Mortgage loans originated 
9,199

 
9,572

 
26,125

 
24,659

Mortgage loans sold and securitized
8,423

 
8,924

 
24,930

 
22,397

Selected Ratios:
 
 
 
 
 
 
 
Interest rate spread (2)
2.57
%
 
2.58
%
 
2.57
%
 
2.56
%
Net interest margin
2.93
%
 
2.78
%
 
2.85
%
 
2.74
%
Return on average assets
1.04
%
 
0.99
%
 
1.00
%
 
0.94
%
Return on average equity
12.80
%
 
11.10
%
 
12.10
%
 
10.23
%
Equity-to-assets ratio (average for the period)
8.13
%
 
8.95
%
 
8.23
%
 
9.16
%
Efficiency ratio
74.6
%
 
73.5
%
 
76.2
%
 
73.9
%
Effective tax provision rate
20.0
%
 
32.4
%
 
20.1
%
 
32.3
%
Average Balances:
 
 
 
 
 
 
 
Average interest-earning assets
$
16,786

 
$
14,737

 
$
16,050

 
$
13,709

Average interest-paying liabilities
13,308

 
12,297

 
13,150

 
11,481

Average stockholders' equity
1,514

 
1,471

 
1,468

 
1,412

 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
 
(In millions, except per share data and percentages)
Selected Statistics:
 
 
 
 
 
Book value per common share
$
26.34

 
$
24.40

 
$
25.38

Tangible book value per share (3)
$
25.13

 
$
24.04

 
$
25.01

Number of common shares outstanding
57,625,439

 
57,321,228

 
57,181,536

Common equity-to-assets ratio
8.12
%
 
8.27
%
 
8.60
%
Tangible common equity to assets ratio (3)
7.74
%
 
8.15
%
 
8.47
%
Capitalized value of mortgage servicing rights
1.43
%
 
1.16
%
 
1.15
%
Bancorp Tier 1 leverage (to adjusted avg. total assets) (4)
8.36
%
 
8.51
%
 
8.80
%
Bank Tier 1 leverage (to adjusted avg. total assets) (4)
8.77
%
 
9.04
%
 
9.38
%
Number of bank branches
108

 
99

 
99

Number of FTE employees
3,496

 
3,525

 
3,495

(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 impact of changes in interest rates.
(2)
Interest rate spread is the difference between the annualized yield earned on average interest-earning assets for the period and the annualized rate of interest paid on average interest-bearing liabilities for the period.
(3)
Excludes goodwill and intangibles of $70 million, $21 million, and $21 million at September 30, 2018, December 31, 2017, and September 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 September 30, 2017.




5

Table of Contents

Overview

The third quarter of 2018 resulted in net income of $48 million, or $0.83 per diluted share, up $8 million or $0.13 per diluted share compared to the third quarter of 2017. The increase in net income was primarily due to $21 million, or 20 percent, higher net interest income in the third quarter of 2018 compared to the same period a year ago, driven by growth in interest earning assets and net interest margin expansion.

Through the nine months ended September 30, 2018, consistent earnings performance demonstrated the strength of our Community Banking segment. When comparing the nine months ended September 30, 2018 to the same period in 2017, average commercial loans have increased $1.4 billion, or 42 percent, with broad based growth across all portfolios and average retail and government deposits have grown $955 million, or 13 percent. Additionally, the pending acquisition of 52 branches from Wells Fargo will provide us with over $2 billion of additional high quality, low cost deposits which we will use to fund balance sheet growth.

We continue to build the Mortgage Servicing segment, increasing the number of loans serviced 49 percent over the last 12 months and ending the third quarter of 2018 servicing nearly 620,000 accounts. We are positioned to continue to add scale to our servicing business which provides both stable deposits and a reliable source of fee income.

The mortgage market continued to be challenging through the third quarter 2018. Net gain on loan sales decreased $32 million, primarily driven by a 33 basis point decrease in net gain on loan sale margin in the three months ended September 30, 2018, compared to the same period in 2017. This loss was partially offset by stronger valuations and lower prepayments on our mortgage servicing assets, which improved $7 million.    

Earnings Performance Highlights
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions, except share data)
Net interest income
$
124

 
$
103

 
$
21

 
$
345

 
$
283

 
$
62

Provision (benefit) for loan losses
(2
)
 
2

 
(4
)
 
(3
)
 
4

 
(7
)
Total noninterest income
107

 
130

 
(23
)
 
341

 
346

 
(5
)
Total noninterest expense
173

 
171

 
2

 
523

 
465

 
58

Provision for income taxes
12

 
20

 
(8
)
 
33

 
52

 
(19
)
Net income
$
48

 
$
40

 
$
8

 
$
133

 
$
108

 
$
25

Income per share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.84

 
$
0.71

 
$
0.13

 
$
2.32

 
$
1.90

 
$
0.42

Diluted
$
0.83

 
$
0.70

 
$
0.13

 
$
2.28

 
$
1.86

 
$
0.42


Comparison to Prior Year Quarter

Net income increased $8 million, or $0.13 per diluted share, to $48 million, or $0.83 per diluted share.
Net interest income increased $21 million, primarily driven by $2.0 billion higher average interest-earnings assets and a 15 basis point increase in net interest margin.
Noninterest income decreased $23 million, primarily due to lower gains on loan sales, partially offset by higher returns on MSRs.
Noninterest expense increased $2 million, primarily a result of organic growth and acquisitions, partially offset by a decrease in volume related expenses.

Comparison to Prior Year to Date

Net income increased $25 million, or $0.42 per diluted share, to $133 million, or $2.28 per diluted share.
Net interest income increased $62 million, primarily driven by 17 percent higher average interest-earning assets and net interest margin expansion of 11 basis points.
The $7 million change in the provision for loan losses was driven by continued minimal net charge-offs and low levels of delinquencies.
Noninterest expense increased $58 million, primarily resulting from growth initiatives and volume driven expenses.


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 September 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
$
4,393

$
52

4.69
%
 
$
4,476

$
45

3.99
%
Loans held-for-investment
 
 
 
 
 
 
 
Residential first mortgage
3,027

27

3.63
%
 
2,594

22

3.32
%
Home equity
695

9

5.12
%
 
486

6

5.11
%
Other
128

2

5.54
%
 
26


4.52
%
Total consumer loans
3,850

38

3.96
%
 
3,106

28

3.61
%
Commercial real estate
2,106

29

5.37
%
 
1,646

19

4.43
%
Commercial and industrial
1,330

18

5.28
%
 
1,073

13

4.77
%
Warehouse lending
1,586

21

5.10
%
 
978

12

4.82
%
Total commercial loans
5,022

68

5.26
%
 
3,697

44

4.63
%
Total loans held-for-investment (1)
8,872

106

4.70
%
 
6,803

72

4.16
%
Loans with government guarantees
292

3

4.20
%
 
264

3

4.58
%
Investment securities
3,100

21

2.81
%
 
3,101

20

2.58
%
Interest-earning deposits
129

1

2.38
%
 
93


1.23
%
Total interest-earning assets
16,786

183

4.32
%
 
14,737

140

3.77
%
Other assets
1,825

 
 
 
1,702

 
 
Total assets
$
18,611

 
 
 
$
16,439

 
 
Interest-Bearing Liabilities
 
 
 
 
 
 
 
Retail deposits
 
 
 
 
 
 
 
Demand deposits
$
727

$
3

1.62
%
 
$
489

$

0.14
%
Savings deposits
3,229

7

0.90
%
 
3,838

7

0.76
%
Money market deposits
252


0.62
%
 
276


0.57
%
Certificates of deposit
2,150

10

1.78
%
 
1,182

4

1.19
%
Total retail deposits
6,358

20

1.27
%
 
5,785

11

0.78
%
Government deposits
 
 
 
 
 
 
 
Demand deposits
283

1

0.59
%
 
250


0.43
%
Savings deposits
564

2

1.48
%
 
362

1

0.71
%
Certificates of deposit
327

1

1.52
%
 
329

1

0.89
%
Total government deposits
1,174

4

1.28
%
 
941

2

0.70
%
Wholesale deposits and other
537

3

2.03
%
 
35


1.49
%
Total interest-bearing deposits
8,069

27

1.32
%
 
6,761

13

0.78
%
Short-term Federal Home Loan Bank advances and other
3,465

18

2.10
%
 
3,809

11

1.17
%
Long-term Federal Home Loan Bank advances
1,280

7

2.11
%
 
1,234

6

1.99
%
Other long-term debt
494

7

5.62
%
 
493

7

5.09
%
Total interest-bearing liabilities
13,308

59

1.75
%
 
12,297

37

1.19
%
Noninterest-bearing deposits (2)
3,267

 
 
 
2,244

 
 
Other liabilities
522

 
 
 
427

 
 
Stockholders’ equity
1,514

 
 
 
1,471

 
 
Total liabilities and stockholders' equity
$
18,611

 
 
 
$
16,439

 
 
Net interest income
 
$
124

 
 
 
$
103

 
Interest rate spread (3)
 
 
2.57
%
 
 
 
2.58
%
Net interest margin (4)
 
 
2.93
%
 
 
 
2.78
%
Ratio of average interest-earning assets to interest-bearing liabilities
 
 
126.1
%
 
 
 
119.9
%
(1)
Includes nonaccrual loans. For further information on nonaccrual loans, see Note 4 - Loans Held-for-Investment.
(2)
Includes noninterest-bearing custodial deposits that arise due to the servicing of loans for others.
(3)
Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.
(4)
Net interest margin is net interest income divided by average interest-earning assets.

7


 
Nine Months Ended September 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
$
4,265

$
142

4.44
%
 
$
4,014

$
119

3.96
%
Loans held-for-investment
 
 
 
 

 
 
Residential first mortgage
2,893

76

3.52
%
 
2,497

62

3.34
%
Home equity
681

26

5.13
%
 
453

17

5.04
%
Other
71

3

5.37
%
 
26

1

4.52
%
Total consumer loans
3,645

105

3.86
%
 
2,976

80

3.61
%
Commercial real estate
2,026

79

5.12
%
 
1,482

47

4.15
%
Commercial and industrial
1,269

51

5.26
%
 
929

33

4.71
%
Warehouse lending
1,312

51

5.08
%
 
840

30

4.70
%
Total commercial loans
4,607

181

5.15
%
 
3,251

110

4.45
%
Total loans held-for-investment (1)
8,252

286

4.58
%
 
6,227

190

4.05
%
Loans with government guarantees
288

8

3.86
%
 
300

10

4.41
%
Investment securities
3,127

64

2.74
%
 
3,093

59

2.55
%
Interest-earning deposits
118

2

1.95
%
 
75

1

1.08
%
Total interest-earning assets
16,050

502

4.15
%
 
13,709

379

3.68
%
Other assets
1,784

 
 
 
1,697

 
 
Total assets
$
17,834

 
 
 
$
15,406

 
 
Interest-Bearing Liabilities
 
 
 
 
 
 
 
Retail deposits
 
 
 
 
 
 
 
Demand deposits
$
660

$
4

0.89
%
 
$
502

$
1

0.16
%
Savings deposits
3,376

21

0.85
%
 
3,899

22

0.76
%
Money market deposits
235

1

0.54
%
 
264

1

0.49
%
Certificates of deposit
1,927

24

1.64
%
 
1,116

9

1.12
%
Total retail deposits
6,198

50

1.09
%
 
5,781

33

0.76
%
Government deposits
 
 
 
 
 
 
 
Demand deposits
256

1

0.54
%
 
228

1

0.41
%
Savings deposits
512

5

1.29
%
 
410

2

0.59
%
Certificates of deposit
369

4

1.34
%
 
314

1

0.73
%
Total government deposits
1,137

10

1.14
%
 
952

4

0.59
%
Wholesale deposits and other
325

5

1.99
%
 
16


1.21
%
Total interest-bearing deposits
7,660

65

1.13
%
 
6,749

37

0.74
%
Short-term Federal Home Loan Bank advances and other
3,713

50

1.81
%
 
3,028

23

1.01
%
Long-term Federal Home Loan Bank advances
1,283

21

2.15
%
 
1,211

17

1.92
%
Other long-term debt
494

21

5.53
%
 
493

19

5.06
%
Total interest-bearing liabilities
13,150

157

1.58
%
 
11,481

96

1.12
%
Noninterest-bearing deposits (2)
2,721

 
 
 
2,098

 
 
Other liabilities
495

 
 
 
415

 
 
Stockholders’ equity
1,468

 
 
 
1,412

 
 
Total liabilities and stockholders' equity
$
17,834

 
 
 
$
15,406

 
 
Net interest income
 
$
345

 
 
 
$
283

 
Interest rate spread (3)
 
 
2.57
%
 
 
 
2.56
%
Net interest margin (4)
 
 
2.85
%
 
 
 
2.74
%
Ratio of average interest-earning assets to interest-bearing liabilities
 
 
122.1
%
 
 
 
119.4
%
(1)
Includes nonaccrual loans. For further information on nonaccrual loans, see Note 4 - Loans Held-for-Investment.
(2)
Includes noninterest-bearing custodial deposits that arise due to the servicing of loans for others.
(3)
Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.
(4)
Net interest margin is net interest income 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 September 30,
 
2018 Versus 2017 Increase (Decrease)
Due to:
 
Rate
 
Volume
 
Total
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
Loans held-for-sale
$
8

 
$
(1
)
 
$
7

Loans held-for-investment
 
 
 
 
 
Residential first mortgage
2

 
3

 
5

Home equity

 
3

 
3

Other
1

 
1

 
2

Total consumer loans
3

 
7

 
10

Commercial real estate
5

 
5

 
10

Commercial and industrial
2

 
3

 
5

Warehouse lending
1

 
8

 
9

Total commercial loans
8

 
16

 
24

Total loans held-for-investment
11

 
23

 
34

Investment securities
1

 

 
1

Interest-earning deposits and other
1

 

 
1

Total interest-earning assets
$
21

 
$
22

 
$
43

Interest-Bearing Liabilities
 
 
 
 
 
Interest-bearing deposits
$
11

 
$
3

 
$
14

Short-term Federal Home Loan Bank advances and other
8

 
(1
)
 
7

Long-term Federal Home Loan Bank advances
1

 

 
1

Total interest-bearing liabilities
20

 
2

 
22

Change in net interest income
$
1

 
$
20

 
$
21


9


 
Nine Months Ended September 30,
 
2018 Versus 2017 Increase (Decrease)
Due to:
 
Rate
 
Volume
 
Total
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
Loans held-for-sale
$
15

 
$
8

 
$
23

Loans held-for-investment
 
 
 
 
 
Residential first mortgage
4

 
10

 
14

Home equity
1

 
8

 
9

Other

 
2

 
2

Total consumer loans
5

 
20

 
25

Commercial real estate
15

 
17

 
32

Commercial and industrial
6

 
12

 
18

Warehouse lending
4

 
17

 
21

Total commercial loans
25

 
46

 
71

Total loans held-for-investment
30

 
66

 
96

Loans with government guarantees
(1
)
 
(1
)
 
(2
)
Investment securities
5

 

 
5

Interest-earning deposits and other
1

 

 
1

Total interest-earning assets
$
50

 
$
73

 
$
123

Interest-Bearing Liabilities
 
 
 
 
 
Interest-bearing deposits
$
22

 
$
6

 
$
28

Short-term Federal Home Loan Bank advances and other
22

 
5

 
27

Long-term Federal Home Loan Bank advances
3

 
1

 
4

Other long-term debt
2

 

 
2

Total interest-bearing liabilities
49

 
12

 
61

Change in net interest income
$
1

 
$
61

 
$
62


Comparison to Prior Year Quarter

Net interest income increased $21 million, or 20 percent, for the three months ended September 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 loan portfolio.

Net interest margin for the three months ended September 30, 2018 was 2.93 percent, as compared to 2.78 percent for the three months ended September 30, 2017. The increase in net interest margin was primarily due to growth in our commercial loan portfolio, partially offset by higher average rates on deposits. Loans held-for-investment, driven by higher yielding commercial loans, saw a 54 basis point increase in average rates. This change in rates represents a loan beta of 54 percent, which is the change in the annualized yield of our LHFI portfolio, compared to the change in the Federal Reserve discount rate. Our deposit costs increased 36 basis points, representing a deposit beta of only 36 percent, primarily driven by holding a higher percentage of certificates of deposits, offset by lower cost deposits acquired from the DCB branch acquisition. The higher loan beta when compared to our deposit beta indicates that the yield on our LHFI portfolio is more responsive to changes in market rates than our deposit costs, driving a higher interest rate spread. In addition, average deposit growth of $2.3 billion allowed us to reduce higher cost FHLB borrowings, further benefiting margin expansion.

Average interest-earning assets increased $2.0 billion for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, primarily due to an increase in both commercial and consumer LHFI average balances. The commercial loan portfolio increased $1.3 billion from broad based growth in warehouse, commercial real estate and C&I loans driven by organic growth and the acquisition of the Santander warehouse business from the first quarter of 2018. Additionally, we experienced growth of $744 million in our consumer loan portfolio as we continued to portfolio mortgage loan production and grow our indirect lending business.

Average interest-bearing liabilities increased $1.0 billion for the three months ended September 30, 2018, compared to the three months ended September 30, 2017. This increase was primarily due to the DCB branch acquisition as well as organic growth in retail certificates of deposit partially offset by a decline in retail savings deposits. Additionally, we experienced an increase in wholesale deposits to bridge funding needs to December when these funds will be replaced with lower cost, more

10


stable branch deposits from the Wells Fargo acquisition. As a result of deposit growth, average short term FHLB borrowings were reduced $344 million.

Comparison to Prior Year to Date

Net interest income increased $62 million, or 22 percent, for the nine months ended September 30, 2018, compared to the same period in 2017. This increase was primarily driven by growth in average interest-earnings assets, led by continued growth in the commercial loan portfolio.

Our net interest margin for the nine months ended September 30, 2018 was 2.85 percent, as compared to 2.74 percent for the nine months ended September 30, 2017. Margin expansion was primarily a driven by a 53 basis point increase in yields on our LHFI portfolios, which outweighed a 27 basis point increase in average costs of deposits. The increase in deposit costs was driven by a shift in mix to longer duration certificates of deposits, partially offset by the low cost deposits acquired from the DCB branch acquisition.

Average interest-earning assets increased $2.3 billion for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, primarily due to broad based growth in the commercial loan portfolio of $1.4 billion, partially driven by the Santander warehouse business acquisition, and increases in residential mortgage loans and HELOCs of $669 million.

Average interest-bearing liabilities increased $1.7 billion for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. Interest-bearing deposits increased $911 million, primarily driven by the DCB branch acquisition along with higher retail and wholesale deposits. Additionally, to fund balance sheet growth, average short term FHLB advances increased $685 million.

Provision for Loan Losses

The provision for loan losses was a benefit of $2 million and $3 million for the three and nine months ended September 30, 2018, respectively, compared to a provision of $2 million and $4 million for the three and nine months ended September 30, 2017, respectively. The improvement in the provision reflects our continued strong credit quality with continued low levels of charge-offs, offset by 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 other mortgage metrics:
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
Net gain on loan sales
$
43

 
$
75

 
$
(32
)
 
$
166

 
$
189

 
$
(23
)
Loan fees and charges
23

 
23

 

 
67

 
58

 
9

Deposit fees and charges
5

 
5

 

 
15

 
14

 
1

Loan administration income
5

 
5

 

 
15

 
16

 
(1
)
Net return on mortgage servicing rights
13

 
6

 
7

 
26

 
26

 

Other noninterest income
18

 
16

 
2

 
52

 
43

 
9

Total noninterest income
$
107

 
$
130

 
$
(23
)
 
$
341

 
$
346

 
$
(5
)

11

Table of Contents

 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
 
 
Mortgage rate lock commitments (fallout-adjusted) (1)
$
8,290

 
$
8,898

 
$
(608
)
 
$
25,024

 
$
23,896

 
$
1,128

Net margin on mortgage rate lock commitments (fallout-adjusted) (1)(2)
0.51
%
 
0.84
%
 
(0.33
)%
 
0.66
%
 
0.79
%
 
(0.13
)%
Mortgage loans sold and securitized
8,423
 
8,924
 
(501
)
 
24,930
 
22,397
 
2,533
(1)
Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the impact of changes in interest rates.
(2)
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 decreased $23 million during the three months ended September 30, 2018, compared to the same period in 2017.

Net gain on loan sales decreased $32 million during the three months ended September 30, 2018, compared to the three months ended September 30, 2017, primarily due to a 33 basis point decrease in net gain on loan sale margin and $608 million decrease in fallout-adjusted rate lock volume. The mortgage market has seen a decrease in production and continued over capacity during the third quarter of 2018 compared to the same quarter a year ago. The decrease in gain on sale margin was primarily due to secondary margin compression and a shift in the channel mix toward lower margin, but lower cost delegated correspondent channel.

Net return on MSRs, including the impact of hedges, increased $7 million during the three months ended September 30, 2018, compared to the three months ended September 30, 2017. The increase was primarily due to higher net return from the MSR asset resulting from lower prepayments and stronger valuations, along with a higher average MSR balance.

Other noninterest income increased $2 million during the three months ended September 30, 2018, compared to the three months ended September 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 operating lease portfolio.

Comparison to Prior Year to Date

Total noninterest income decreased $5 million during the nine months ended September 30, 2018, compared to the same period in 2017.

Net gain on loan sales decreased $23 million during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, primarily due to a 13 basis point decrease in net gain on loan sale margin driven by secondary margin compression and a mix shift toward the lower margin, but lower cost delegated correspondent channel, partially offset by securitizations. Margin compression was partially offset by a 5 percent increase in fallout-adjusted rate locks, boosted by our 2017 mortgage acquisitions.

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

Other noninterest income increased $9 million during the nine months ended September 30, 2018, compared to the nine months ended September 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 from the FHLB received in the first quarter of 2018, higher rental income driven by growth within the equipment finance operating lease 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 September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
Compensation and benefits
$
76

 
$
76

 
$

 
$
236

 
$
219

 
$
17

Occupancy and equipment
31

 
28

 
3

 
91

 
75

 
16

Commissions
21

 
23

 
(2
)
 
64

 
49

 
15

Federal insurance premiums
6

 
5

 
1

 
18

 
12

 
6

Loan processing expense
14

 
15

 
(1
)
 
43

 
41

 
2

Legal and professional expense
7

 
7

 

 
19

 
22

 
(3
)
Other noninterest expense
18

 
17

 
1

 
52

 
47

 
5

Total noninterest expense
$
173

 
$
171

 
$
2

 
$
523

 
$
465

 
$
58

Efficiency ratio
74.6
%
 
73.5
%
 
1.1
%
 
76.2
%
 
73.9
%
 
2.3
%
Average number of FTE
3,570

 
3,500

 
70

 
3,617

 
3,233

 
384


Comparison to Prior Year Quarter

Noninterest expense increased $2 million during the three months ended September 30, 2018, compared to the three months ended September 30, 2017.

Occupancy and equipment increased $3 million during the three months ended September 30, 2018, compared to the three months ended September 30, 2017. The increase was primarily due to a higher average depreciable asset base resulting from technology upgrades and software.

Commissions decreased $2 million and loan processing expense decreased $1 million, during the three months ended September 30, 2018, compared to the three months ended September 30, 2017, primarily due to a decrease in loan originations.

Comparison to Prior Year to Date

Noninterest expense increased $58 million during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017.

Compensation and benefits increased $17 million during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, primarily due to 12 percent higher average FTE, driven by acquisitions and growth in our overall business, partially offset by cost reduction initiatives and lower incentive compensation.
    
Occupancy and equipment increased $16 million during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. The increase was primarily due to a higher average depreciable asset base and an increase in vendor services supporting business growth.

Commissions increased $15 million during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. The increase is primarily due to the acquisition of Opes in May of 2017, which has increased our retail mortgage originations versus our predominately third party origination model, and $1.4 billion higher loan originations in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017.
    
FDIC insurance premiums increased $6 million during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, primarily due to growth in our total assets.    

Other noninterest expense increased $5 million during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, primarily due to advertising expense to raise brand awareness.


13

Table of Contents

Provision for Income Taxes

Our provision for income taxes for the three and nine months ended September 30, 2018 was $12 million and $33 million, respectively, compared to a provision of $20 million and $52 million for the three and nine months ended September 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 nine months ended September 30, 2018 was 20.0 percent and 20.1 percent, respectively, compared to 32.4 percent and 32.3 percent for the three and nine months ended September 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

Our operations are conducted through three operating segments: Community Banking, Mortgage Originations, and Mortgage Servicing. The Other segment includes the remaining reported activities. The operating segments have been determined based on the products and services offered and reflect the manner in which financial information is currently evaluated by management. Each of the operating segments is complementary to each other and because of the interrelationships of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

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 commercial, governmental and consumer 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. The Community Banking segment originates loans, and provides deposit and fee based services to consumer, business, and mortgage lending customers.

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, capital investments, and equipment purchases and leases. Additionally, our commercial real estate business supports income producing real estate and home builders. The Community Bank also offers warehouse lines of credit to other mortgage lenders.

Our Community Banking segment has seen continued growth, both organically and through strategic acquisitions, and our transformation into a commercial bank continues to be a key component in our overall business model. Our commercial loan portfolio has grown 25 percent in the last twelve months, to $5.0 billion, at September 30, 2018, boosted by the Santander warehouse business acquisition. Additionally, the DCB branch acquisition expanded our banking footprint and drove an increase in deposits in the Community Banking segment. Average deposits, for the nine month ended September 30, 2018, have increased to $8.6 billion, compared to $7.4 billion, for the same period in 2017.

In the second quarter 2018, we signed a definitive agreement to acquire 52 Wells Fargo branches in Indiana, Michigan, Wisconsin and Ohio. These branches will provide us with over $2 billion of high-quality, low-cost deposits, allowing for balance sheet growth and further expansion of our banking footprint. We estimate post-closing deposit run-off of approximately 17 percent and anticipate fourth quarter 2018 integration costs to be approximately $10 million. The acquisition is expected to be moderately accretive to 2019 earnings per share with a payback period of less than five years. We expect to close this transaction at the beginning of December 2018.


14

Table of Contents

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Community Banking
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
81

 
$
63

 
$
18

 
$
231

 
$
171

 
$
60

Provision benefit for loan losses
(1
)
 
(1
)
 

 
(2
)
 
(3
)
 
1

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

 
62

 
18

 
229

 
168

 
61

Net gain (loss) on loan sales
(3
)
 
(4
)
 
1

 
(10
)
 
(7
)
 
(3
)
Other noninterest income
10

 
8

 
2

 
27

 
22

 
5

Total noninterest income
7

 
4

 
3

 
17

 
15

 
2

Compensation and benefits
(17
)
 
(15
)
 
(2
)
 
(51
)
 
(46
)
 
(5
)
Other noninterest expense and directly allocated overhead
(27
)
 
(25
)
 
(2
)
 
(81
)
 
(67
)
 
(14
)
Total noninterest expense
(44
)
 
(40
)
 
(4
)
 
(132
)
 
(113
)
 
(19
)
Income before indirect overhead allocations and income taxes
43

 
26

 
17

 
114

 
70

 
44

Overhead allocations
(9
)
 
(10
)
 
1

 
(29
)
 
(30
)
 
1

Provision for income taxes
7

 
6

 
1

 
18

 
14

 
4

Net income
$
27

 
$
10

 
$
17

 
$
67

 
$
26

 
$
41

Key Metrics
 
 
 
 
 
 
 
 
 
 
 
Efficiency Ratio
51.2
%
 
59.7
%
 
(8.5
)%
 
53.5
%
 
60.8
%
 
(7.3
)%
Return on average assets
1.2
%
 
0.6
%
 
0.6
 %
 
1.1
%
 
0.6
%
 
0.5
 %
Average number of FTE employees
846

 
725

 
121

 
811

 
705

 
106


Comparison to Prior Year Quarter

The Community Banking segment reported net income of $27 million for the three months ended September 30, 2018, compared to $10 million for the three months ended September 30, 2017. The $17 million increase in net income was primarily due to an $18 million increase in net interest income driven by higher average commercial loans. Average commercial loans increased $1.3 billion for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, due to organic growth and our 2018 acquisitions of Desert Community Bank branches and the Santander warehouse business. This increase was partially offset by a $4 million increase in noninterest expense primarily due to higher compensation and benefits driven by an increase in FTE to support growth initiatives 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 $67 million for the nine months ended September 30, 2018, compared to $26 million for the nine months ended September 30, 2017. The $41 million increase in net income was primarily due to a $60 million increase in net interest income driven by average commercial loan growth of $1.4 billion for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. This average commercial loan growth was due to organic growth and our 2018 acquisitions of Desert Community Bank branches and the Santander warehouse business. The increase in net interest income was partially offset by a $19 million increase in noninterest expense driven by growth initiatives, which include higher compensation and benefits, commissions, occupancy and equipment expense, along with an increase in community reinvestment programs and FDIC premiums primarily due to higher total assets.

Mortgage Originations

We are a leading national originator of residential first mortgages. Our Mortgage Origination segment originates and acquires one-to-four family residential mortgage loans primarily to sell or in some instances to hold in our LHFI portfolio in the Community Banking segment. We utilize diversified channels to originate or acquire mortgage loans including more than 1,100 correspondent partners, more than 800 broker relationships and we operate 81 retail lending locations.


15

Table of Contents

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Mortgage Originations
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
36

 
$
34

 
$
2

 
$
100

 
$
96

 
$
4

Provision for loan losses

 
(1
)
 
1

 
(1
)
 
(3
)
 
2

Net interest income after provision benefit for loan losses
36

 
33

 
3

 
99

 
93

 
6

Net gain on loan sales
46

 
79

 
(33
)
 
176

 
196

 
(20
)
Other noninterest income
30

 
27

 
3

 
76

 
77

 
(1
)
Total noninterest income
76

 
106

 
(30
)
 
252

 
273

 
(21
)
Compensation and benefits
(26
)
 
(28
)
 
2

 
(83
)
 
(72
)
 
(11
)
Other noninterest expense and directly allocated overhead
(41
)
 
(49
)
 
8

 
(129
)
 
(114
)
 
(15
)
Total noninterest expense
(67
)
 
(77
)
 
10

 
(212
)
 
(186
)
 
(26
)
Income before indirect overhead allocations and income taxes
45

 
62

 
(17
)
 
139

 
180

 
(41
)
Overhead allocation
(16
)
 
(15
)
 
(1
)
 
(51
)
 
(46
)
 
(5
)
Provision for income taxes
6

 
16

 
(10
)
 
18

 
47

 
(29
)
Net income
$
23

 
$
31

 
$
(8
)
 
$
70

 
$
87

 
$
(17
)
Key Metrics
 
 
 
 
 
 
 
 
 
 
 
Efficiency Ratio
59.1
%
 
55.0
%
 
4.1
 %
 
60.1
%
 
50.4
%
 
9.7
 %
Return on average assets
1.6
%
 
2.2
%
 
(0.6
)%
 
1.7
%
 
2.2
%
 
(0.5
)%
Mortgage rate lock commitments (fallout-adjusted) (1)
$
8,290

 
$
8,898

 
$
(608
)
 
$
25,024

 
$
23,896

 
$
1,128

Average number of FTE employees
1,464

 
1,618

 
(154
)
 
1,575

 
1,381

 
194

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

Comparison to Prior Year Quarter

The Mortgage Originations segment reported net income of $23 million for the three months ended September 30, 2018, compared to $31 million for the three months ended September 30, 2017. The decrease in net income, was primarily due to a $33 million lower net gain on loan sales driven by a 33 basis point decrease in net gain on loan sale margin and $608 million lower fallout adjusted locks. Secondary margin compression and a mix shift toward lower margin, but lower cost delegated correspondent channel, drove margin compression. The decrease in net interest income was partially offset by a $10 million decrease in noninterest expense due to lower volume related expenses and a decrease in compensation and benefits resulting from lower headcount, in addition to a $7 million increase in net return on MSRs primarily driven by lower prepayments and stronger valuations, along with a higher average UPB MSR balance.

Comparison to Prior Year to Date

The Mortgage Originations segment reported net income of $70 million for the nine months ended September 30, 2018, compared to $87 million for the nine months ended September 30, 2017. The decrease was primarily due to $20 million decrease in net gain on loan sales driven by a 13 basis point decrease in net gain on loan sale margins, partially offset by $1.1 billion higher fallout adjusted locks driven by 2017 acquisitions. The increase in mortgage volumes drove a $13 million increase in commission expense and a partially offsetting $2 million favorable impact on loan fees and charges. Additionally, an increase in headcount, primarily driven by acquisitions, resulted in $11 million higher compensation and benefits.

Mortgage Servicing

The Mortgage Servicing segment services loans, in which we hold the MSR asset, and subservices mortgage loans for others through a scalable servicing platform on a fee for service basis. We may also collect ancillary fees and earn income through the use of noninterest bearing escrows. The loans we service generate custodial deposits which provide a stable funding source. 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.



16

Table of Contents

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Mortgage Servicing
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
 
 
Net interest income (1)
$
2

 
$
4

 
$
(2
)
 
$
5

 
$
9

 
$
(4
)
Provision for loan losses

 

 

 

 

 

Net interest income after provision for loan losses
2

 
4

 
(2
)
 
5

 
9

 
(4
)
Total noninterest income
24

 
14

 
10

 
65

 
47

 
18

Compensation and benefits
(4
)
 
(4
)
 

 
(13
)
 
(12
)
 
(1
)
Other noninterest expense and directly allocated overhead
(18
)
 
(13
)
 
(5
)
 
(49
)
 
(45
)
 
(4
)
Total noninterest expense
(22
)
 
(17
)
 
(5
)
 
(62
)
 
(57
)
 
(5
)
Income (loss) before indirect overhead allocations and income taxes
4

 
1

 
3

 
8

 
(1
)
 
9

Overhead allocations
(5
)
 
(6
)
 
1

 
(15
)
 
(17
)
 
2

Provision (benefit) for income taxes

 
(1
)
 
1

 
(2
)
 
(6
)
 
4

Net income (loss)
$
(1
)
 
$
(4
)
 
$
3

 
$
(5
)
 
$
(12
)
 
$
7

Key Metrics
 
 
 
 
 
 
 
 
 
 
 
Efficiency Ratio
86.9
 %
 
94.4
 %
 
(7.5
)%
 
88.6
 %
 
101.8
 %
 
(13.2
)%
Return on average assets
(14.5
)%
 
(53.3
)%
 
38.8
 %
 
(24.5
)%
 
(44.4
)%
 
19.9
 %
Average number of residential loans serviced
591,769
 
401,792
 
189,977
 
515,292
 
397,558
 
117,734
Average number of FTE employees
238
 
197
 
41
 
221