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Section 1: 10-Q (10-Q)

Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o  
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
 397894644_flagstara09a01a14.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
ý
Accelerated filer
o  
Non-accelerated filer
o  
Smaller reporting company
o  
 
 
Emerging growth company
o  
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 13(a) of the Exchange Act  ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý.
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Common stock
 
FBC
 
New York Stock Exchange
As of May 8, 2019, 56,480,946 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.




FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019
TABLE OF CONTENTS
 
 
 
 
 
 
 
Item 1.
 
 
Consolidated Statements of Financial Condition – March 31, 2019 (unaudited) and December 31, 2018 (unaudited)
 
Consolidated Statements of Operations – For the three months ended March 31, 2019 and 2018 (unaudited)
 
Consolidated Statements of Comprehensive Income – For the three months ended March 31, 2019 and 2018 (unaudited)
 
Consolidated Statements of Stockholders’ Equity – For the three months ended March 31, 2019 and 2018 (unaudited)
 
Consolidated Statements of Cash Flows – For the three months ended March 31, 2019 and 2018 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 

2



GLOSSARY OF ABBREVIATIONS AND ACRONYMS

The following list of abbreviations and acronyms are provided as a tool for the reader and may be used throughout this Report, including the Consolidated Financial Statements and Notes:
Term
 
Definition
 
Term
 
Definition
AFS
 
Available for Sale
 
HELOAN
 
Home Equity Loan
Agencies
 
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association, Collectively
 
HOLA
 
Home Owners Loan Act
ALCO
 
Asset Liability Committee
 
Home equity
 
Second Mortgages, HELOANs, HELOCs
ALLL
 
Allowance for Loan & Lease Losses
 
HTM
 
Held to Maturity
AOCI
 
Accumulated Other Comprehensive Income (Loss)
 
LIBOR
 
London Interbank Offered Rate
ASU
 
Accounting Standards Update
 
LHFI
 
Loans Held-for-Investment
Basel III
 
Basel Committee on Banking Supervision Third Basel Accord
 
LHFS
 
Loans Held-for-Sale
C&I
 
Commercial and Industrial
 
LTV
 
Loan-to-Value Ratio
CDARS
 
Certificates of Deposit Account Registry Service
 
Management
 
Flagstar Bancorp’s Management
CET1
 
Common Equity Tier 1
 
MBIA
 
MBIA Insurance Corporation
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
Deposit Beta
 
The change in the annualized cost of our deposits, compared to the change in the Federal Reserve discount rate
 
NYSE
 
New York Stock Exchange
DOJ
 
United States Department of Justice
 
OCC
 
Office of the Comptroller of the Currency
DTA
 
Deferred Tax Asset
 
OCI
 
Other Comprehensive Income (Loss)
EVE
 
Economic Value of Equity
 
OTTI
 
Other-Than-Temporary-Impairment
Fannie Mae
 
Federal National Mortgage Association
 
QTL
 
Qualified Thrift Lending
FASB
 
Financial Accounting Standards Board
 
Regulatory Agencies
 
Board of Governors of the Federal Reserve, Office of the Comptroller of the Currency, U.S. Department of the Treasury, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Securities and Exchange Commission
FDIC
 
Federal Deposit Insurance Corporation
 
REO
 
Real estate owned and other nonperforming assets, net
Federal Reserve
 
Board of Governors of the Federal Reserve System
 
RMBS
 
Residential Mortgage-Backed Securities
FHA
 
Federal Housing Administration
 
RWA
 
Risk Weighted Assets
FHLB
 
Federal Home Loan Bank
 
SEC
 
Securities and Exchange Commission
FICO
 
Fair Isaac Corporation
 
SOFR
 
Secured Oversight Financing Rate
FRB
 
Federal Reserve Bank
 
TARP Preferred
 
Troubled Asset Relief Program Fixed Rate Cumulative Perpetual Preferred Stock, Series C
Freddie Mac
 
Federal Home Loan Mortgage Corporation
 
TDR
 
Trouble Debt Restructuring
FTE
 
Full Time Equivalent Employees
 
UPB
 
Unpaid Principal Balance
GAAP
 
United States Generally Accepted Accounting Principles
 
U.S. Treasury
 
United States Department of Treasury
GNMA
 
Government National Mortgage Association
 
VIE
 
Variable Interest Entities
HELOC
 
Home Equity Lines of Credit
 
XBRL
 
eXtensible Business Reporting Language


3


PART I. FINANCIAL INFORMATION
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is Management's Discussion and Analysis of the financial condition and results of operations of Flagstar Bancorp, Inc. for the first quarter of 2019, which should be read in conjunction with the financial statements and related notes set forth in Part I, Item 1 of this Form 10-Q and Part II, Item 8 of Flagstar Bancorp, Inc.'s 2018 Annual Report on Form 10-K for the year ended December 31, 2018.

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 32 of this Form 10-Q and Part I, Item 1A, Risk Factors of Flagstar Bancorp, Inc.'s 2018 Annual Report on Form 10-K for the year ended December 31, 2018. 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 and the 5th largest subservicer of mortgage loans nationwide. At March 31, 2019, we had 3,996 full-time equivalent employees. Our common stock is listed on the NYSE under the symbol "FBC."

Our relationship-based business model leverages our full-service bank’s capabilities and our national mortgage platform to create and build financial solutions for our customers. At March 31, 2019, we operated 160 full-service banking branches that offer a full set of banking products to consumer, commercial, and government customers. Our banking footprint spans Michigan, Indiana, California, Wisconsin, Ohio and contiguous states.

We originate mortgages through a wholesale network of brokers and correspondents in all 50 states, our own loan officers from 72 retail locations in 22 states and two call centers, which includes our direct lending team. We are also a leading national servicer of mortgage loans and provide complementary ancillary offerings including MSR lending, servicing advance lending and recapture services.

Recent Acquisitions

In the fourth quarter of 2018, we closed on the purchase of 52 branches from Wells Fargo located in Indiana, Michigan, Wisconsin and Ohio. In the first quarter of 2018, we closed on the purchase of the mortgage loan warehouse business from Santander Bank and completed the acquisition of eight Desert Community Bank branches located in San Bernardino County, California. For further information, see Note 2 - Acquisitions.
    
Operating Segments

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

4



Selected Financial Ratios
(Dollars in millions, except share data)
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions and percentages)
Selected Mortgage Statistics:
 
 
 
Mortgage rate lock commitments (fallout-adjusted) (1)
$
6,602

 
$
7,722

Mortgage loans originated 
$
5,513

 
$
7,886

Mortgage loans sold and securitized
$
5,170

 
$
7,247

Selected Ratios:
 
 
 
Interest rate spread (2)
2.69
%
 
2.54
%
Net interest margin
3.09
%
 
2.76
%
Return on average assets
0.79
%
 
0.82
%
Return on average common equity
9.16
%
 
9.94
%
Return on average tangible common equity (3)
11.33
%
 
10.21
%
Common equity-to-assets ratio (average for the period)
8.59
%
 
8.27
%
Efficiency ratio
81.3
%
 
79.7
%
Effective tax provision rate
18.4
%
 
20.1
%
Average Balances:
 
 
 
Average interest-earning assets
$
16,294

 
$
15,354

Average interest-paying liabilities
$
12,505

 
$
12,974

Average stockholders' equity
$
1,583

 
$
1,414

 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
(In millions, except per share data and percentages)
Selected Statistics:
 
 
 
 
 
Book value per common share
$
27.86

 
$
27.19

 
$
24.87

Tangible book value per share (4)
$
24.65

 
$
23.90

 
$
23.62

Number of common shares outstanding
56,480,086

 
57,749,464

 
57,399,993

Common equity-to-assets ratio
8.09
%
 
8.47
%
 
8.05
%
Tangible common equity to assets ratio (4)
7.16
%
 
7.45
%
 
7.65
%
Capitalized value of mortgage servicing rights
1.27
%
 
1.35
%
 
1.27
%
Bancorp Tier 1 leverage (to adjusted avg. total assets)
8.37
%
 
8.29
%
 
8.72
%
Bank Tier 1 leverage (to adjusted avg. total assets)
9.04
%
 
8.67
%
 
9.08
%
Number of bank branches
160

 
160

 
107

Number of FTE employees
3,996

 
3,938

 
3,659

(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, intangible assets and the associated amortization. See Non-GAAP Financial Measures for further information.
(4)
Excludes goodwill and intangibles of $182 million, $190 million, and $72 million at March 31, 2019, December 31, 2018, and March 31, 2018, respectively. See Non-GAAP Financial Measures for further information.






5



Overview

We earned net income of $36 million, or $0.63 per diluted share, in the first quarter of 2019, up $1 million compared to the first quarter of 2018. Diluted earnings per share was up $0.03 over the same period, partially driven by the $50 million share repurchase initiated during the first quarter of 2019. The increase in net income was primarily due to $20 million higher net interest income in the first quarter of 2019 compared to the same period a year ago, driven by growth in interest-earning assets and net interest margin expansion, offset by higher noninterest expense to support our strategic growth initiatives.

The Community Banking segment continued to add high-quality loans to the balance sheet with broad-based growth in our loan portfolios, which increased $1.7 billion in the first quarter of 2019 as compared to the first quarter of 2018. The low-cost deposits acquired through our 2018 banking acquisitions drove a $1.8 billion increase in retail and government deposits over the same period. The increase in earning assets, along with a 33 basis point expansion in net interest margin, reflecting higher yielding loans and low-cost deposits, drove up net interest income 19 percent, accounting for 54 percent of total revenue in the first quarter of 2019, compared to 49 percent in the first quarter of 2018.

We continued to build the Mortgage Servicing segment, more than doubling the number of loans serviced or subserviced over the last 12 months, ending the first quarter of 2019 servicing 962,000 accounts. We are positioned to continue to add scale to our servicing business which provides both deposits and a reliable source of fee income.

The mortgage market remained challenging through the first two months of the quarter with improvements in March and we continued to exercise price and expense discipline in the competitive market. Net gain on loan sales decreased $11 million, driven by a 15 percent decrease in fallout-adjusted lock volume and a 5 basis point decrease in net gain on loan sale margin during the three months ended March 31, 2019, compared to the same period in 2018.

Earnings Performance Highlights
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Change
 
(Dollars in millions, except share data)
Net interest income
$
126

 
$
106

 
$
20

Provision for loan losses

 

 

Total noninterest income
109

 
111

 
(2
)
Total noninterest expense
191

 
173

 
18

Provision for income taxes
8

 
9

 
(1
)
Net income
$
36

 
$
35

 
$
1

Income per share
 
 
 
 
 
Basic
$
0.64

 
$
0.61

 
$
0.03

Diluted
$
0.63

 
$
0.60

 
$
0.03


Comparison to Prior Year Quarter

Net income increased $1 million, or $0.03 per diluted share, to $36 million, or $0.63 per diluted share for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to the following:

Net interest income increased $20 million, primarily driven by 22 percent higher average LHFI, along with a 33 basis point increase in the net interest margin.
Noninterest income decreased $2 million, primarily due to an $11 million decrease in net gain on loan sales, partially offset by a $6 million increase in loan administration income, resulting from an increase in the number of loans serviced and subserviced.
Noninterest expense increased $18 million, primarily to support growth in our community banking business as a result of our 2018 banking acquisitions and organic growth in our servicing business, partially offset by a decrease in mortgage volume related expenses.

6


Net Interest Income

The following table presents details on our net interest margin and net interest income on a consolidated basis:
 
Three Months Ended March 31,
 
2019
 
2018
 
Average
Balance
Interest
Annualized
Yield/
Rate
 
Average
Balance
Interest
Annualized
Yield/
Rate
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
 
 
Loans held-for-sale
$
3,266

$
38

4.72
%
 
$
4,231

$
44

4.12
%
Loans held-for-investment
 
 
 
 
 
 
 
Residential first mortgage
3,044

28

3.64
%
 
2,773

23

3.41
%
Home equity
745

10

5.63
%
 
668

9

5.21
%
Other
356

6

7.11
%
 
27


4.56
%
Total consumer loans
4,145

44

4.30
%
 
3,468

32

3.76
%
Commercial real estate
2,250

33

5.66
%
 
1,954

24

4.87
%
Commercial and industrial
1,594

21

5.39
%
 
1,217

16

5.21
%
Warehouse lending
1,175

16

5.47
%
 
848

11

5.14
%
Total commercial loans
5,019

70

5.53
%
 
4,019

51

5.03
%
Total loans held-for-investment (1)
9,164

114

4.97
%
 
7,487

83

4.44
%
Loans with government guarantees
455

3

2.96
%
 
291

3

3.72
%
Investment securities
3,258

24

2.91
%
 
3,233

22

2.69
%
Interest-earning deposits
151

1

2.77
%
 
112


1.67
%
Total interest-earning assets
16,294

180

4.43
%
 
15,354

152

3.95
%
Other assets
2,144

 
 
 
1,736

 
 
Total assets
$
18,438

 
 
 
$
17,090

 
 
Interest-Bearing Liabilities
 
 
 
 
 
 
 
Retail deposits
 
 
 
 
 
 
 
Demand deposits
$
1,220

$
2

0.68
%
 
$
548

$

0.26
%
Savings deposits
3,089

7

0.95
%
 
3,490

7

0.81
%
Money market deposits
778

1

0.27
%
 
205


0.44
%
Certificates of deposit
2,488

13

2.13
%
 
1,619

6

1.45
%
Total retail deposits
7,575

23

1.22
%
 
5,862

13

0.92
%
Government deposits
 
 
 
 
 
 
 
Demand deposits
305


0.63
%
 
241


0.55
%
Savings deposits
568

3

1.75
%
 
483

2

1.11
%
Certificates of deposit
297

1

1.94
%
 
401

1

1.19
%
Total government deposits
1,170

4

1.51
%
 
1,125

3

1.02
%
Wholesale deposits and other
387

2

2.23
%
 
171

1

1.91
%
Total interest-bearing deposits
9,132

29

1.30
%
 
7,158

17

0.96
%
Short-term Federal Home Loan Bank advances and other borrowings
2,725

17

2.54
%
 
4,032

15

1.53
%
Long-term Federal Home Loan Bank advances
153

1

1.54
%
 
1,290

7

2.10
%
Other long-term debt
495

7

5.90
%
 
494

7

5.37
%
Total interest-bearing liabilities
12,505

54

1.75
%
 
12,974

46

1.41
%
Noninterest-bearing deposits (2)
3,774

 
 
 
2,213

 
 
Other liabilities
576

 
 
 
489

 
 
Stockholders’ equity
1,583

 
 
 
1,414

 
 
Total liabilities and stockholders' equity
$
18,438

 
 
 
$
17,090

 
 
Net interest income
 
$
126

 
 
 
$
106

 
Interest rate spread (3)
 
 
2.69
%
 
 
 
2.54
%
Net interest margin (4)
 
 
3.09
%
 
 
 
2.76
%
Ratio of average interest-earning assets to interest-bearing liabilities
 
 
130.3
%
 
 
 
118.3
%
(1)
Includes nonaccrual loans. For further information on nonaccrual loans, see Note 5 - Loans Held-for-Investment.
(2)
Includes noninterest-bearing custodial deposits that arise due to the servicing of loans for others.
(3)
Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.
(4)
Net interest margin is net interest income divided by average interest-earning assets.


7


Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). The rate/volume mix variances are allocated to rate.
 
Three Months Ended March 31,
 
2019 Versus 2018 Increase (Decrease)
Due to:
 
Rate
 
Volume
 
Total
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
Loans held-for-sale
$
5

 
$
(11
)
 
$
(6
)
Loans held-for-investment
 
 
 
 
 
Residential first mortgage
2

 
3

 
5

Home equity
1

 

 
1

Other
2

 
4

 
6

Total consumer loans
5

 
7

 
12

Commercial real estate
5

 
4

 
9

Commercial and industrial

 
5

 
5

Warehouse lending
1

 
4

 
5

Total commercial loans
6

 
13

 
19

Total loans held-for-investment
11

 
20

 
31

Investment securities
2

 

 
2

Interest-earning deposits and other
1

 

 
1

Total interest-earning assets
$
18

 
$
10

 
$
28

Interest-Bearing Liabilities
 
 
 
 
 
Interest-bearing deposits
$
8

 
$
4

 
$
12

Short-term Federal Home Loan Bank advances and other borrowings
7

 
(5
)
 
2

Long-term Federal Home Loan Bank advances

 
(6
)
 
(6
)
Total interest-bearing liabilities
15

 
(7
)
 
8

Change in net interest income
$
3

 
$
17

 
$
20


Comparison to Prior Year Quarter

Net interest income increased $20 million, or 19 percent, for the three months ended March 31, 2019, compared to the same period in 2018. The increase was primarily driven by growth in average interest earning assets, led by continued growth in the loans held-for-investment portfolio.

Net interest margin expanded 33 basis points to 3.09 percent, as compared to 2.76 percent, primarily due to growth in our commercial loan portfolio partially offset by higher average rates on deposits. Loans held-for-investment saw a 53 basis point increase in average yield, primarily due to higher yields on our commercial loans, driven by increases in rates during 2018. In comparison, our deposit costs, benefiting from the low-cost deposits acquired from our 2018 branch acquisitions, increased only 20 basis points. Excluding the acquired deposits, our deposit costs increased 31 basis points representing a deposit beta of 31 percent. As a result, our net interest margin benefited as our loan yields increased more quickly than our deposit costs in a rising rate environment. Additionally, net interest margin benefited from a $2.4 billion decrease in FHLB advances, which were significantly reduced with proceeds from the Wells Fargo branch acquisition.
Average interest-earning assets increased $940 million primarily due to growth in LHFI average balances partially offset by a decrease in LHFS average balances. Average commercial loans increased $1.0 billion with broad-based growth across the CRE, C&I, and warehouse loan portfolios. The warehouse lending acquisition in the first quarter of 2018 further contributed to the commercial loan growth. Our consumer loan portfolio increased $677 million, primarily due to the addition of residential first mortgages to the LHFI portfolio combined with continued growth in our non-auto indirect lending business. The LHFS portfolio decreased $965 million primarily due to 30 percent lower mortgage originations driven primarily by the decline in overall market volume.
Average interest-bearing liabilities decreased $469 million. This was primarily due to a $2.4 billion reduction in FHLB advances partially offset by a $2.0 billion increase in average interest-bearing deposits primarily led by the deposits acquired from the Wells Fargo and DCB branch acquisitions in 2018. The decline in average interest-bearing liabilities

8


was more than offset by growth in noninterest-bearing deposits, which increased $1.6 billion, primarily driven by higher custodial deposits.

Provision for Loan Losses

The provision for loan losses was zero for both the three months ended March 31, 2019 and the three months ended March 31, 2018. The lack of provision reflects our continued strong asset quality with consistently low-levels of charge-offs and delinquencies, no nonperforming commercial loans, and 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 March 31,
 
 
 
2019
 
2018
 
Change
 
(Dollars in millions)
Net gain on loan sales
$
49

 
$
60

 
$
(11
)
Loan fees and charges
17

 
20

 
(3
)
Net return on mortgage servicing rights
6

 
4

 
2

Loan administration income
11

 
5

 
6

Deposit fees and charges
8

 
5

 
3

Other noninterest income
18

 
17

 
1

Total noninterest income
$
109

 
$
111

 
$
(2
)
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Change
 
(Dollars in millions)
Mortgage rate lock commitments (fallout-adjusted) (1)
$
6,602

 
$
7,722

 
$
(1,120
)
Net margin on mortgage rate lock commitments (fallout-adjusted) (1)(2)
0.72
%
 
0.77
%
 
(0.05
)%
Mortgage loans sold and securitized
$
5,170

 
$
7,247

 
$
(2,077
)
(1)
Fallout-adjusted refers to mortgage rate lock commitments which are adjusted by estimates of the percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and impact of changes in interest rates.
(2)
Gain on sale margin is based on net gain on loan sales (excludes net gain on loan sales of $2 million from loans transferred from LHFI during the three months ended March 31, 2019) to fallout-adjusted mortgage rate lock commitments.

Comparison to Prior Year Quarter

Noninterest income decreased $2 million for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to the following:

Net gain on loan sales decreased $11 million, primarily due to a $1.1 billion decrease in fallout-adjusted rate locks and a 5 basis point decrease in net gain on loan sale margin. The decrease in gain on sale margin was primarily driven by a shift in channel mix toward the lower margin, but lower cost, delegated correspondent channel and the decrease in volume was primarily driven by overall lower mortgage market volume.
Loan administration income increased $6 million, primarily due to higher subservicing income driven by a 450,000 increase in the number of loans subserviced.
Deposit fees and charges increased $3 million, driven by growth in our customer and deposit base as a result of our 2018 branch acquisitions.
Net return on MSRs, including the impact of hedges, increased $2 million, primarily due to increased service fee income as a result of a higher average MSR balance.


9



Noninterest Expense

The following table sets forth the components of our noninterest expense:
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Change
 
(Dollars in millions)
Compensation and benefits
$
87

 
$
80

 
$
7

Occupancy and equipment
38

 
30

 
8

Commissions
13

 
18

 
(5
)
Loan processing expense
17

 
14

 
3

Legal and professional expense
6

 
6

 

Federal insurance premiums
4

 
6

 
(2
)
Intangible asset amortization
4

 

 
4

Other noninterest expense
22

 
19

 
3

Total noninterest expense
$
191

 
$
173

 
$
18

Efficiency ratio
81.3
%
 
79.7
%
 
1.6
%
Average number of FTE
3,956

 
3,617

 
339


Comparison to Prior Year Quarter

Noninterest expense increased $18 million for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The increase in expense was primarily driven by growth in our community banking business as a result of our 2018 banking acquisitions and organic growth in our servicing business. Compared to the first quarter of 2019, retail demand deposit accounts increased 63 percent, our depreciable asset base grew as we added 52 branches, and the number of loans we service or subservice increased by 485,000 loans, or 102 percent. To support this growth, we also made enhancements and improvements to our information technology platforms over the past year which has resulted in higher amortization. The following provides further information related to the increase in noninterest expense:

Compensation and benefits increased $7 million, or 9 percent, primarily due to 9 percent higher average FTE driven by our 2018 banking acquisitions.
Occupancy and equipment and other noninterest expense increased $8 million and $3 million, respectively, primarily driven by growth in our banking and servicing businesses as discussed above.
Intangible asset amortization increased $4 million, due to the amortization of the intangible assets associated with our 2018 banking acquisitions.
Commissions decreased $5 million, or 28 percent, primarily due to a 30 percent decline in loan origination volume driven by lower mortgage market volume.
Loan processing expense increased $3 million, primarily due to higher loan subservicing expenses resulting from growth in our subservicing business.

Provision for Income Taxes

Our provision for income taxes for the three months ended March 31, 2019 was $8 million, compared to a provision of $9 million for the three months ended March 31, 2018.

Our effective tax rate for the three months ended March 31, 2019 was 18.4 percent compared to 20.1 percent for the three months ended March 31, 2018. Our effective tax 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

10



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, Indiana, California, Wisconsin, Ohio and contiguous states. We also serve home builders, correspondents, and commercial customers on a national basis. The Community Banking segment originates loans, and provides deposit and fee based services to consumer, business, and mortgage lending customers.

Our commercial customers are comprised of a diversified range of industries including financial, insurance, service, manufacturing, and distribution. We offer financial products to these customers for use in their normal business operations, as well as providing financing of working capital, capital investments, and equipment. Additionally, our commercial real estate business supports income producing real estate and home builders. The Community Banking segment also offers warehouse lines of credit to non-bank mortgage lenders.

Our Community Banking segment has seen continued growth, both organically and through strategic acquisitions. In the last 12 months, our commercial and consumer loan portfolios have grown 21 percent and 23 percent to $5.6 billion and $4.3 billion, respectively. Average deposits, for the three months ended March 31, 2019 have increased to $10.0 billion, compared to $7.7 billion, for the same period in 2018. The DCB and Wells Fargo branch acquisitions in 2018 expanded our banking footprint and added $2.1 billion in average deposits to the Community Banking segment for the three months ended March 31, 2019. For further information on our banking acquisitions, see Note 2 - Acquisitions.
 
Three Months Ended March 31,
 
 
Community Banking
2019
 
2018
 
Change
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
Net interest income
$
103

 
$
69

 
$
34

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

Net interest income after (provision) benefit for loan losses
102

 
68

 
34

Net (loss) on loan sales
(6
)
 
(2
)
 
(4
)
Other noninterest income
12

 
8

 
4

Total noninterest income
6

 
6

 

Compensation and benefits
(24
)
 
(17
)
 
(7
)
Other noninterest expense and directly allocated overhead
(41
)
 
(26
)
 
(15
)
Total noninterest expense
(65
)
 
(43
)
 
(22
)
Income before indirect overhead allocations and income taxes
43

 
31

 
12

Overhead allocations
(10
)
 
(11
)
 
1

(Provision) for income taxes
(7
)
 
(4
)
 
(3
)
Net income
$
26

 
$
16

 
$
10

Key Metrics
 
 
 
 
 
Efficiency Ratio
59.9
%
 
57.7
%
 
2.2
%
Return on average assets
1.1
%
 
0.8
%
 
0.3
%
Average number of FTE employees
1,308

 
798

 
510


Comparison to Prior Year Quarter

The Community Banking segment reported net income of $26 million for the three months ended March 31, 2019, compared to $16 million for the three months ended March 31, 2018. The $10 million increase in net income was primarily due to a $34 million increase in net interest income, primarily driven by $1.7 billion higher average LHFI due to organic growth in both our commercial and consumer loan portfolios, enhanced by our 2018 banking acquisitions. To support our investments relating to organic growth, acquisitions, and the diversification of our product offerings, our operating costs increased $22 million, primarily due to increases in compensation and benefits, intangible asset amortization, and occupancy and equipment.


11



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 originate certain mortgage loans, including jumbo and non-conforming loans, for our LHFI portfolio which generates interest income in the Community Banking segment. The Community Banking segment purchases these loans from the Mortgage Origination segment which results in the recognition of a gain on loan sales by the Mortgage Origination segment and a loss on loan sales in the Community Banking segment. We utilize multiple distribution channels to originate or acquire mortgage loans on a national scale.
 
Three Months Ended March 31,
 
 
Mortgage Originations
2019
 
2018
 
Change
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
Net interest income
$
23

 
$
31

 
$
(8
)
(Provision) benefit for loan losses

 

 

Net interest income after (provision) benefit for loan losses
23

 
31

 
(8
)
Net gain on loan sales
55

 
62

 
(7
)
Other noninterest income
16

 
19

 
(3
)
Total noninterest income
71

 
81

 
(10
)
Compensation and benefits
(24
)
 
(29
)
 
5

Other noninterest expense and directly allocated overhead
(36
)
 
(41
)
 
5

Total noninterest expense
(60
)
 
(70
)
 
10

Income before indirect overhead allocations and income taxes
34

 
42

 
(8
)
Overhead allocation
(10
)
 
(18
)
 
8

(Provision) for income taxes
(5
)
 
(5
)
 

Net income
$
19

 
$
19

 
$

Key Metrics
 
 
 
 
 
Mortgage rate lock commitments (fallout-adjusted) (1)
$
6,602

 
$
7,722

 
$
(1,120
)
Efficiency Ratio
64.3
%
 
62.0
%
 
2.3
%
Return on average assets
1.6
%
 
1.4
%
 
0.2
%
Average number of FTE employees
1,285

 
1,653

 
(368
)
(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 $19 million for both the three months ended March 31, 2019 and the three months ended March 31, 2018. Net interest income decreased $8 million primarily due to a decrease of $965 million in average LHFS balances. Net gain on loans sales decreased $7 million driven by $1.1 billion fewer fallout-adjusted locks and a 5 basis point decline in net gain on loan sale margin. The decrease in volume was primarily driven by overall lower mortgage market volume and the lower margin was primarily driven by a shift in channel mix toward the lower margin, but lower cost, delegated correspondent channel. The decrease in net gain on loan sales was partially offset by a $2 million increase in net return on MSRs, primarily due to increased service fee income as a result of a higher average MSR balance. In addition, noninterest expense decreased $10 million primarily due to lower mortgage volume related expenses and a decrease in compensation and benefits resulting from lower average FTE.

Mortgage Servicing
    
The Mortgage Servicing segment services loans when we hold the MSR asset, and subservices mortgage loans for others through a scalable servicing platform on a fee for service basis. We may also collect ancillary fees and earn income through the use of noninterest bearing escrows. The loans we service generate custodial deposits which provide a stable funding source which supports interest-earning asset generation in the Community Bank and Mortgage Origination segments. Revenue for serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the delinquency status of the underlying loans. The Mortgage Servicing segment also services loans for our LHFI portfolio in the Community Banking segment and our own MSR portfolio in the Mortgage Originations segment for which it earns intersegment revenue on a fee per loan basis.


12



 
Three Months Ended March 31,
 
 
Mortgage Servicing
2019
 
2018
 
Change
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
Net interest income
$
3

 
$
2

 
$
1

(Provision) for loan losses

 

 

Net interest income after (provision) for loan losses
3

 
2

 
1

Net gain on loan sales

 

 

Noninterest income
35

 
19

 
16

Total noninterest income
35

 
19

 
16

Compensation and benefits
(6
)
 
(4
)
 
(2
)
Other noninterest expense and directly allocated overhead
(25
)
 
(16
)
 
(9
)
Total noninterest expense
(31
)
 
(20
)
 
(11
)
Income before indirect overhead allocations and income taxes
7

 
1

 
6

Overhead allocations
(5
)
 
(5
)
 

(Provision) for income taxes

 

 

Net income (loss)
$
2

 
$
(4
)
 
$
6

Key Metrics
 
 
 
 
 
Average number of loans serviced
906,271

 
458,917

 
447,354

Efficiency Ratio
81.9
%
 
95.7
 %
 
(13.8
)%
Return on average assets
13.1
%
 
(41.4
)%
 
54.5
 %
Average number of FTE employees
271

 
206

 
65


The following table presents loans serviced and the number of accounts associated with those loans.
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
Unpaid Principal Balance (1)
 
Number of accounts
 
Unpaid Principal Balance (1)
 
Number of accounts
 
Unpaid Principal Balance (1)
 
Number of accounts
 
(Dollars in millions)
Loan servicing
 
 
 
 
 
 
 
 
 
 
 
Subserviced for others (2)
$
170,476

 
814,248

 
$
146,040

 
705,149

 
$
77,748

 
360,396

Serviced for others
21,925

 
90,622

 
21,592

 
88,434

 
18,767

 
77,426

Serviced for own loan portfolio (3)
7,631

 
56,687

 
7,438

 
57,401

 
7,653

 
38,291

Total loans serviced
$
200,032

 
961,557

 
$
175,070

 
850,984

 
$
104,168

 
476,113

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

Comparison to Prior Year Quarter

The Mortgage Servicing segment reported net income of $2 million for the three months ended March 31, 2019, compared to a net loss of $4 million for the three months ended March 31, 2018. The $6 million increase in net income was primarily due to growth in our subservicing business, which increased by over 450,000 loans, or 126 percent, for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The overall increase in loan servicing volume drove higher noninterest income, including a $15 million increase in loan administration income, partially offset by an $11 million increase in noninterest expense to support growth in volume.

13



Other

The Other segment includes the treasury functions, which include the impact of interest rate risk management, balance sheet funding activities and the investment securities portfolios, as well as other expenses of a corporate nature, including corporate staff, risk management, and legal expenses. In addition, the Other segment includes revenue and expenses not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage Servicing segments.
 
Three Months Ended March 31,
 
 
Other
2019
 
2018
 
Change
 
(Dollars in millions)
Summary of Operations
 
 
 
 
 
Net interest income (1)
$
(3
)
 
$
4

 
$
(7
)
(Provision) benefit for loan losses
1

 
1

 

Net interest income (expense) after (provision) benefit for loan losses
(2
)
 
5

 
(7
)
Noninterest income (1)
(3
)
 
5

 
(8
)
Compensation and benefits
(33
)
 
(30
)
 
(3
)
Other noninterest expense and directly allocated overhead (1)
(2
)
 
(10
)
 
8

Total noninterest expense
(35
)
 
(40
)
 
5

Income (loss) before indirect overhead allocations and income taxes
(40
)
 
(30
)
 
(10
)
Overhead allocations
25

 
34

 
(9
)
(Provision) benefit for income taxes
4

 

 
4

Net income (loss)
$
(11
)
 
$
4

 
$
(15
)
Key Metrics
 
 
 
 
 
Average number of FTE employees
1,092

 
960

 
132

(1)
Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.

Comparison to Prior Year Quarter

The Other segment reported net loss of $11 million, for the three months ended March 31, 2019, compared to net income of $4 million for the three months ended March 31, 2018. The $15 million decrease was primarily driven by a $7 million reduction in net interest income resulting from higher short-term interest rates driving an increase in intersegment funding rates and a $3 million increase in compensation and benefits driven by a 14 percent increase in average FTE.

Risk Management

Certain risks are inherent in our business and include, but are not limited to, credit, regulatory compliance, legal, reputation, liquidity, market, operational, and strategic. We continuously invest in our risk management activities which are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. We hold capital to protect from unexpected loss arising from these risks.

A comprehensive discussion of risks affecting us can be found in the Risk Factors section included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018. Some of the more significant processes used to manage and control credit, market, liquidity and operational risks are described in the following paragraphs.

Credit Risk

Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or performance terms. We provide loans, extend credit, and enter into financial derivative contracts, all of which have related credit risk.

We maintain credit limits in compliance with regulatory requirements. Under the Home Owners Loan Act (HOLA), the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 and Tier 2 capital plus any portion of the allowance for loan losses not included in the Tier 2 capital. This limit was $266 million as of March 31, 2019. We maintain a more conservative maximum internal Bank credit limit than required by HOLA of $100 million to any one borrower/obligor relationship, with the exception of warehouse borrower/obligor relationships which have a higher internal Bank limit of $125 million as all advances are fully collateralized by residential mortgage loans. We have a tracking and reporting process to monitor lending concentration levels and all credit exposures to a single borrower that exceed $50 million must be approved by the Board of Directors.

14




Our commercial loan portfolio has been built on our relationship-based lending strategy. We provide financing and banking products to our commercial customers in our core banking footprint and will follow those established customer relationships to meet their financing needs in areas outside of our footprint. We have also formed relationship lending on a national scale through our home builder finance and warehouse lending businesses. At March 31, 2019, we had $5.6 billion in our commercial loan portfolio with our home builder finance and warehouse lending businesses accounting for 43 percent of the total. Of the remaining commercial loans in our portfolio, the majority of CRE and C&I loans were with customers who have established relationships within our core banking footprint. For all of our commercial loans, we use strict underwriting standards and adhere to granular concentration limits to manage the credit risk in our portfolio.

We have built our consumer loan portfolio by adding high quality first mortgage loans to our balance sheet making up 71.6 percent of our total consumer loan portfolio at March 31, 2019. We have also grown our home equity loans and lines of credit as well as our other consumer loan portfolio, led by our non-auto indirect lending business. The consumer loan portfolio has been built on strong underwriting criteria and within concentration limits intended to diversify our risk profile.

Loans held-for-investment

The following table summarizes loans held-for-investment by category:
 
March 31, 2019
 
December 31, 2018
 
Change
 
(Dollars in millions)
Consumer loans
 
 
 
 
 
Residential first mortgage
$
3,100

 
$
2,999

 
$
101

Home equity (1)
796

 
731

 
65

Other
433

 
314

 
119

Total consumer loans
4,329

 
4,044

 
285

Commercial loans
 
 
 
 

Commercial real estate
2,324

 
2,152

 
172

Commercial and industrial
1,651

 
1,433

 
218

Warehouse lending
1,632

 
1,459

 
173

Total commercial loans
5,607

 
5,044

 
563

Total loans held-for-investment
$
9,936

 
$
9,088

 
$
848

(1)
Includes second mortgages, HELOCs and HELOANs.

We continue to strengthen our Community Banking segment by growing interest earning assets. Our commercial loan portfolio has grown $563 million, or 11 percent, from December 31, 2018 to March 31, 2019, driven by broad-based growth in all categories. In addition, our consumer loan portfolio has increased $285 million, or 7 percent, from December 31, 2018 to March 31, 2019, led by a $119 million increase in other consumer loans, primarily due to growth in our indirect lending business, and a $101 million increase in residential first mortgage loans.
    
Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. We typically hold certain mortgage loans in LHFI that do not qualify for sale to the Agencies or that have an acceptable yield and risk profile. The LTV requirements on our residential first mortgage loans vary depending on occupancy, property type, loan amount, and FICO scores. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance.

15



The following table presents our total residential first mortgage LHFI by major category:
 
March 31, 2019
 
December 31, 2018
 
(Dollars in millions)
Estimated LTVs (1)
 
 
 
Less than 80% and refreshed FICO scores (2):
 
 
 
Equal to or greater than 660
$
2,504

 
$
2,462

Less than 660
51

 
54

80% and greater and refreshed FICO scores (2):
 
 
 
Equal to or greater than 660
501

 
448

Less than 660
35

 
29

U.S. government guaranteed
9

 
6

Total
$
3,100

 
$
2,999

Geographic region
 
 
 
California
$
1,275

 
$
1,238

Michigan
328

 
314

Texas
205

 
193

Washington
202

 
195

Florida
196

 
195

Illinois
104

 
103

Arizona
75

 
72

Colorado
74

 
72

New York
73

 
73

Maryland
54

 
57

Others
514

 
487

Total
$
3,100

 
$
2,999

(1)
LTVs reflect loan balance at the date reported, as a percentage of property values as appraised at loan origination.
(2)
FICO scores are updated at least on a quarterly basis or more frequently, if available.
        
The following table presents our total residential first mortgage LHFI as of March 31, 2019, by year of origination:
 
2019
 
2018
 
2017
 
2016
 
2015 and Prior
 
Total
 
(Dollars in millions)
 
 
Residential first mortgage loans
$
236

 
$
635

 
$
701

 
$
556

 
$
972

 
$
3,100

Percent of total
7.6
%
 
20.5
%
 
22.6
%
 
17.9
%
 
31.4
%
 
100.0
%

Home equity. Our home equity portfolio includes HELOANs, second mortgage loans, and HELOCs. These loans require full documentation and are underwritten and priced in an effort to ensure credit quality and loan profitability. Our debt-to-income ratio on HELOANs is capped at 43 percent and for HELOCs is capped at 45 percent. We currently limit the maximum CLTV to 89.99 percent and FICO scores to a minimum of 660. Second mortgage loans/HELOANs are fixed rate loans and are available with terms up to 20 years. HELOC loans are variable-rate loans that contain a 10-year interest only draw period followed by a 20-year amortizing period. At March 31, 2019, HELOCs and HELOANs in a first lien position totaled $131 million.

Other consumer loans. Our other consumer loan portfolio consists of secured and unsecured loans originated through our branches and our indirect lending business. At March 31, 2019, other consumer loans increased to $433 million compared to $314 million at December 31, 2018. The increase is primarily due to growth in our non-auto indirect lending business, driven by our established relationships with dealers for the origination of boat and recreational vehicle consumer loans, combined with the purchase of a $51 million UPB of non-auto loans during the three months ended March 31, 2019.

Commercial real estate loans. The commercial real estate portfolio contains loans collateralized by diversified property types which are primarily income producing in the normal course of business. The majority of our retail exposure is to neighborhood strip centers and single tenant locations, which include drug stores. Generally, the maximum LTV is 80 percent, or 85 percent for owner-occupied real estate, and the debt service coverage is 1.20 to 1.35 times. At March 31, 2019, our

16



average LTV and average debt service coverage for our CRE portfolio was 52 percent and 1.75 times, respectively. Our CRE loans earn interest at a variable rate.

We have an established a national home builder finance program and at March 31, 2019, our commercial portfolio contained $1.6 billion in commitments, with $779 million in outstanding loans. The majority of these loans are collateralized and included in our CRE portfolio while the remaining loans are unsecured and included in our C&I portfolio.

The following table presents our total CRE LHFI by collateral location and collateral type:
 
MI
 
TX
 
CA
 
CO
 
FL
 
Other
 
Total
 
% by collateral type
 
(Dollars in millions)
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home Builder
$
1

 
$
189

 
$
76

 
$
141

 
$
101

 
$
122

 
$
630

 
27.1
%
Owner Occupied
263

 
4

 
26

 

 
5

 
59

 
357

 
15.4
%
Retail (1)
191

 
1

 
6

 
4

 

 
99

 
301

 
13.0
%
Multi family
115

 
54

 
7

 
21

 
15

 
54

 
266

 
11.4
%
Office
178

 

 
16

 

 
3

 
53

 
250

 
10.8
%
Hotel/motel
95

 
17

 
13

 

 

 
39

 
164

 
7.1
%
Senior Living facility
26

 
25

 

 

 

 
69

 
120

 
5.2
%
Industrial
54

 

 
5

 

 

 
21

 
80

 
3.4
%
Parking garage/Lot
24

 

 

 

 

 
16

 
40

 
1.7
%
Land - Residential
4

 

 
13

 

 
8

 
4

 
29

 
1.2
%
Single family residence
26

 

 

 

 

 
1

 
27

 
1.2
%
Shopping Mall (2)
4

 

 
13

 

 

 

 
17

 
0.7
%
Non Profit
1

 

 
2

 
1

 
4

 
3

 
11

 
0.5
%
All Other (3)
8

 
3

 
1

 

 
2

 
18

 
32

 
1.3
%
Total
$
990

 
$
293

 
$
178

 
$
167

 
$
138

 
$
558

 
$
2,324

 
100.0
%
Percent by state
42.6
%
 
12.6
%
 
7.7
%
 
7.2
%
 
5.9
%
 
24.0
%
 
100.0
%
 
 
(1)
Includes multipurpose retail space, neighborhood centers, strip centers and single-use retail space.
(2)
One located in California, two located in Michigan.
(3)
All other primarily includes: mini-storage facilities, data centers, movie theater, etc.

Commercial and industrial loans. Commercial and industrial LHFI facilities typically include lines of credit and term loans and leases to businesses for use in normal business operations to finance working capital, equipment and capital purchases, acquisitions and expansion projects. We lend to customers with a history of profitability and a long-term business model. Generally, leverage conforms to industry standards and the minimum debt service coverage is 1.20 times. The majority of our C&I loans earn interest at a variable rate.

The following table presents our total C&I LHFI by borrower's geographic location and industry type:
 
MI
 
CA
 
OH
 
IN
 
WI
 
TX
 
SC
 
VA
 
Other
 
Total
 
% by industry
 
(Dollars in millions)
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial & Insurance
$
26

 
$
3

 
$
16

 
$
12

 
$
26

 
$
62

 
$
74

 
$
72

 
$
126

 
$
417

 
25.2
%
Services
119

 
45

 
3

 
7

 

 
21

 

 

 
130

 
325

 
19.7
%
Manufacturing
123

 
5

 
42

 
1

 
7

 
13

 

 

 
103

 
294

 
17.8
%
Home Builder Finance

 
10

 
11

 

 

 
79

 

 

 
49

 
149

 
9.0
%
Government & Education
65

 
4

 
5

 
22

 

 

 

 

 
33

 
129

 
7.8
%
Distribution
80

 
14

 
2

 
2

 

 

 

 

 
14

 
112

 
6.8
%
Healthcare
2

 
13

 

 
1

 
19

 
9

 
1

 

 
59

 
104

 
6.3
%
Rental & Leasing
76

 

 

 
1

 

 

 

 

 
20

 
97

 
5.9
%
Servicing Advances

 

 

 

 

 

 

 

 
15

 
15

 
0.9
%
Commodities
4

 

 

 
1

 

 

 

 

 
4

 
9

 
0.6
%
Total
$
495

 
$
94

 
$
79

 
$
47

 
$
52

 
$
184

 
$
75

 
$
72

 
$
553

 
$
1,651

 
100.0
%
Percent by state
30.0
%
 
5.7
%
 
4.8
%
 
2.8
%
 
3.1
%
 
11.1
%
 
4.5
%
 
4.4
%
 
33.6
%
 
100.0
%
 
 


17



Warehouse lending. We have a national platform with relationship managers across the country. We offer warehouse lines of credit to other mortgage lenders which allow the lender to fund the closing of residential mortgage loans. Each extension, advance, or draw-down on the line is fully collateralized by residential mortgage loans and is paid off when the lender sells the loan to an outside investor or, in some instances, to the Bank.

Underlying mortgage loans are predominantly originated using the Agencies' underwriting standards. The guideline for debt to tangible net worth is 15 to 1. The aggregate committed amount of adjustable-rate warehouse lines of credit granted to other mortgage lenders at March 31, 2019 was $3.9 billion, of which $1.6 billion was outstanding, compared to $3.8 billion at December 31, 2018, of which $1.5 billion was outstanding.

Credit Quality

Trends in certain credit quality characteristics in our loan portfolios, remain strong and are a result of our focus on effectively managing credit risk through our careful underwriting standards and processes. The credit quality of our loan portfolios is demonstrated by low delinquency levels, minimal charge-offs and low levels of nonperforming loans.

For all loan categories within the consumer and commercial loan portfolio, loans are placed on nonaccrual status when any portion of principal or interest is 90 days past due (or nonperforming), or earlier when we become aware of information indicating that collection of principal and interest is in doubt. While it is the goal of management to collect on loans, we attempt to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations and minimize losses incurred by the Bank. When a loan is placed on nonaccrual status, the unpaid accrued interest income is reversed. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.
Nonperforming assets    

The following table sets forth our nonperforming assets:
 
March 31, 2019
 
December 31, 2018
 
(Dollars in millions)
LHFI
 
 
 
Consumer loans
 
 
 
Residential first mortgage
$
12

 
$
11

Home equity
1

 
1

Other Consumer
1

 

Total nonperforming LHFI
14

 
12

TDRs
 
 
 
Consumer loans
 
 
 
Residential first mortgage
8

 
8

Home equity
2

 
2

Total nonperforming TDRs
10

 
10

Total nonperforming LHFI and TDRs (1)
24

 
22

Real estate and other nonperforming assets, net
8

 
7

LHFS
13

 
10

Total nonperforming assets
$
45

 
$
39

Nonperforming assets to total assets (2)
0.17
%
 
0.16
%
Nonperforming LHFI and TDRs to LHFI
0.24
%
 
0.24
%
Nonperforming assets to LHFI and repossessed assets (2)
0.33
%
 
0.32
%
(1)
Includes less than 90 day past due performing loans placed on nonaccrual. Interest is not being accrued on these loans.
(2)
Ratio excludes LHFS, which are recorded at fair value.


18



The following table sets forth activity related to our nonperforming LHFI and TDRs:
 
Three Months Ended March 31,
 
2019
 
2018
 
(Dollars in millions)
Beginning balance
$
22

 
$
29

Additions
5

 
4

Reductions
 
 
 
Principal payments
(1
)
 
(2
)
Charge-offs
(1
)
 

Returned to performing status

 
(1
)
Transfers to REO
(1
)
 
(1
)
Total nonperforming LHFI and TDRs (1)
$
24

 
$
29

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

During the three months ended March 31, 2019 and March 31, 2018, we did not have any sales of nonperforming loans.