UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
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
(Exact name of registrant as specified in its charter).
Michigan | 38-3150651 | |
(State or other jurisdiction of | (I.R.S. Employer | |
Incorporation or organization) | Identification No.) | |
5151 Corporate Drive, Troy, Michigan | 48098-2639 | |
(Address of principal executive offices) | (Zip code) | |
(248) 312-2000
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ý |
Non-accelerated filer | o (Do not check if smaller reporting company) | Smaller reporting company | ¨ |
Emerging growth company | ¨ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý.
As of August 3, 2017, 57,161,639 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 JUNE 30, 2017
TABLE OF CONTENTS
Item 1. | ||
Consolidated Statements of Financial Condition – June 30, 2017 (unaudited) and December 31, 2016 (unaudited) | ||
Consolidated Statements of Operations – For the three and six months ended June 30, 2017 and 2016 (unaudited) | ||
Consolidated Statements of Comprehensive Income – For the three and six months ended June 30, 2017 and 2016 (unaudited) | ||
Consolidated Statements of Stockholders’ Equity – For the six months ended June 30, 2017 and 2016 (unaudited) | ||
Consolidated Statements of Cash Flows – For the six months ended June 30, 2017 and 2016 (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 | GAAP | United States Generally Accepted Accounting Principles | |||
Agencies | Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association, Collectively | HELOC | Home Equity Lines of Credit | |||
ALCO | Asset Liability Committee | HELOAN | Home Equity Loan | |||
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 | |||
CFPB | Consumer Financial Protection Bureau | Management | Flagstar Bancorp’s Management | |||
CLTV | Combined Loan to Value | MBIA | MBIA Insurance Corporation | |||
Common Stock | Common Shares | MBS | Mortgage-Backed Securities | |||
CRE | Commercial Real Estate | MD&A | Management's Discussion and Analysis | |||
DFAST | Dodd-Frank Stress Test | MSR | Mortgage Servicing Rights | |||
DOJ | United States Department of Justice | N/A | Not Applicable | |||
DTA | Deferred Tax Asset | NYSE | New York Stock Exchange | |||
EVE | Economic Value of Equity | OCC | Office of the Comptroller of the Currency | |||
Fannie Mae/FNMA | Federal National Mortgage Association | OTTI | Other-Than-Temporary-Impairment | |||
FASB | Financial Accounting Standards Board | QTL | Qualified Thrift Lending | |||
FDIC | Federal Deposit Insurance Corporation | RWA | Risk Weighted Assets | |||
FHA | Federal Housing Administration | SEC | Securities and Exchange Commission | |||
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 | VIE | Variable Interest Entities | |||
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 second quarter of 2017, which should be read in conjunction with the financial statements and related notes set forth in Item 1 of this Form 10-Q and Flagstar Bancorp, Inc.'s 2016 Annual Report on Form 10-K for the year ended December 31, 2016.
Certain statements in this Form 10-Q, including but not limited to statements included within the Management’s Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements are based on the current beliefs and expectations of our management. Actual results may differ from those set forth in forward-looking statements. See Forward-Looking Statements on page 38 of this Form 10-Q and Part I, Item 1A, Risk Factors of Flagstar Bancorp, Inc.'s 2016 Annual Report or Form 10-K for the year ended December 31, 2016. Additional information about Flagstar can be found on our website at www.flagstar.com.
Where we say "we," "us," "our," the "Company," "Bancorp" or "Flagstar," we usually mean Flagstar Bancorp, Inc. However, in some cases, a reference to "we," "us," "our," the "Company" or "Flagstar" will include our wholly-owned subsidiary Flagstar Bank, FSB (the "Bank"). See the Glossary of Abbreviations and Acronyms on page 3 for definitions used throughout this Form 10-Q.
Introduction
We are a Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. Based on our assets at June 30, 2017, we are one of the largest banks headquartered in Michigan, providing commercial, small business, and consumer banking services. At June 30, 2017, we had 3,432 full-time equivalent employees inclusive of account executives and loan officers. Our common stock is listed on the NYSE under the symbol "FBC." We are considered a controlled company for NYSE purposes, because MP Thrift Investments, L.P. held approximately 62.3 percent of our common stock as of June 30, 2017.
Our banking network emphasizes the delivery of a complete set of banking and mortgage products and services and we distinguish ourselves by crafting specialized solutions for our customers, local delivery, customer service and competitive product pricing. At June 30, 2017, we operated 99 full service banking branches throughout Michigan's major markets where we offer a full set of banking products to consumer, commercial, and government customers.
We have a unique, relationship-based business model of a leading Michigan-based bank leveraging a national mortgage business. We believe our strong position and focus on service creates a significant competitive advantage in the markets in which we compete. The disciplined management team we have assembled is focused on developing substantial and attractive growth opportunities that generate profitable results from operations. We believe our lower risk profile and strong capital level position us to better exploit the opportunities that our business model yields and deliver attractive shareholder returns over the long term.
Nationally, we are the 5th largest bank mortgage originator and we utilize multiple origination channels including correspondent, broker, distributed retail, and direct to consumer. We also service and subservice mortgage loans for others on a fee for service basis and may also collect ancillary fees, such as late fees and earn income through the use of noninterest-bearing escrow deposits. These escrow deposit accounts and amounts received from servicing loans generate company controlled deposits which offer a stable, low cost, long-term source of funding.
Operating Segments
Our operations are conducted through three operating segments: Community Banking, Mortgage Originations, and Mortgage Servicing. Additionally, our Other segment includes the remaining reported activities. For additional information, please see MD&A - Operating Segments and Note 18 - Segment Information.
4
Selected Financial Ratios
(Dollars in millions, except share data)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 (1) | 2017 | 2016 (1) | ||||||||||||
Selected Ratios: | |||||||||||||||
Interest rate spread | 2.59 | % | 2.43 | % | 2.55 | % | 2.46 | % | |||||||
Net interest margin | 2.77 | % | 2.63 | % | 2.72 | % | 2.64 | % | |||||||
Return on average assets | 1.04 | % | 1.38 | % | 0.91 | % | 1.27 | % | |||||||
Return on average equity | 11.57 | % | 11.53 | % | 9.77 | % | 10.81 | % | |||||||
Return on average common equity | 11.57 | % | 13.83 | % | 9.77 | % | 13.00 | % | |||||||
Equity/assets ratio (average for the period) | 9.02 | % | 11.95 | % | 9.29 | % | 11.73 | % | |||||||
Efficiency ratio | 72.0 | % | 68.2 | % | 74.2 | % | 71.2 | % | |||||||
Average Balances: | |||||||||||||||
Average common shares outstanding | 57,101,816 | 56,574,796 | 57,012,208 | 56,544,256 | |||||||||||
Average fully diluted shares outstanding | 58,138,938 | 57,751,230 | 58,106,070 | 57,623,081 | |||||||||||
Average interest-earning assets | $ | 14,020 | $ | 11,639 | $ | 13,187 | $ | 11,755 | |||||||
Average interest paying liabilities | $ | 11,804 | $ | 9,205 | $ | 11,066 | $ | 9,514 | |||||||
Average stockholders' equity | $ | 1,418 | $ | 1,606 | $ | 1,382 | $ | 1,583 | |||||||
June 30, 2017 | December 31, 2016 | June 30, 2016 (1) | |||||||||
Selected Statistics: | |||||||||||
Book value per common share | $ | 24.64 | $ | 23.50 | $ | 23.54 | |||||
Tangible book value per share (2) | $ | 24.29 | $ | 23.50 | $ | 23.54 | |||||
Number of common shares outstanding | 57,161,431 | 56,824,802 | 56,575,779 | ||||||||
Equity-to-assets ratio | 8.82 | % | 9.50 | % | 11.65 | % | |||||
Common equity-to-assets ratio | 8.82 | % | 9.50 | % | 9.70 | % | |||||
Capitalized value of MSRs | 1.14 | % | 1.07 | % | 0.99 | % | |||||
Bancorp Tier 1 leverage (to adjusted avg. total assets) (3) | 9.10 | % | 8.88 | % | 11.59 | % | |||||
Bank Tier 1 leverage (to adjusted avg. total assets) | 10.26 | % | 10.52 | % | 12.03 | % | |||||
Mortgage rate lock commitments (fallout-adjusted) (4) | $ | 9,002 | $ | 6,091 | $ | 8,127 | |||||
Mortgage loans sold and securitized | $ | 8,989 | $ | 8,422 | $ | 14,888 | |||||
Number of banking centers | 99 | 99 | 99 | ||||||||
Number of FTE | 3,432 | 2,886 | 2,894 | ||||||||
(1) | Includes TARP Preferred which was redeemed in the third quarter 2016. |
(2) | Excludes goodwill and intangibles of $20 million, zero, and zero at June 30, 2017, December 31, 2016, and June 30, 2016, respectively, included in Other Assets on the Consolidated Statement of Financial Condition. See Non-GAAP Financial Measures for further information. |
(3) | Basel III transitional. |
(4) | Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on previous historical experience and the level of interest rates. |
5
Executive Overview
The second quarter 2017 resulted in solid earnings of $41 million, or $0.71 per diluted share. Our community bank results continued to be outstanding. Average warehouse loans increased from the first quarter, growing 23 percent, and we saw a 15 percent increase in average commercial and industrial and commercial real estate loans. We also posted a 10 basis point increase in net interest margin, maintaining a stable deposit cost despite recent Federal Reserve rate increases. The maturation of our community bank has generated a more balanced, more sustainable earnings stream for our Company.
Our mortgage origination segment also had an outstanding quarter. In the first half of 2017, fallout-adjusted locks rose 48 percent to $9.0 billion, driven primarily by the impact of the acquisitions of Opes Advisors (Opes) this quarter, as well as the delegated correspondent business from Stearns Lending (Stearns) last quarter. With the addition of Opes, we have more than tripled our distributed retail origination volume and believe we are now in a strong position for the move to a purchase mortgage market.
In second quarter 2017, we closed on the previously reported bulk sales of $191 million of MSRs, successfully executing our MSR reduction strategy and releasing capital to support balance sheet growth. We are the subservicer on approximately 85 percent of the MSRs we sold, providing a boost to our subservicing business and helping us to exceed over 400,000 accounts serviced or subserviced. Our MSRs now stand at 15 percent of our tier 1 common equity, positioning us well for the full phase-in of Basel III.
We have a formidable banking business, an industry-leading mortgage origination platform and a blossoming subservicing business, all of which are supported by strong capital and liquidity. Nationally, we are the 5th largest bank mortgage originator and a top 10 subservicer. This combination positions us to grow our balance sheet with higher quality, relationship-focused assets and continues to create value for our shareholders.
Earnings Performance
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
(Dollars in millions, except share data) | |||||||||||||||||||||||
Net interest income | $ | 97 | $ | 77 | $ | 20 | $ | 180 | $ | 156 | $ | 24 | |||||||||||
Provision (benefit) for loan losses | (1 | ) | (3 | ) | 2 | 2 | (16 | ) | 18 | ||||||||||||||
Total noninterest income | 116 | 128 | (12 | ) | 216 | 233 | (17 | ) | |||||||||||||||
Total noninterest expense | 154 | 139 | 15 | 294 | 276 | 18 | |||||||||||||||||
Provision for income taxes | 19 | 22 | (3 | ) | 32 | 43 | (11 | ) | |||||||||||||||
Net income | $ | 41 | $ | 47 | $ | (6 | ) | $ | 68 | $ | 86 | $ | (18 | ) | |||||||||
Income per share | |||||||||||||||||||||||
Basic | $ | 0.72 | $ | 0.67 | $ | 0.05 | $ | 1.18 | $ | 1.23 | $ | (0.05 | ) | ||||||||||
Diluted | $ | 0.71 | $ | 0.66 | $ | 0.05 | $ | 1.16 | $ | 1.21 | $ | (0.05 | ) | ||||||||||
Net income decreased $6 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016. Net interest income increased $20 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016. This increase was primarily driven by a $2.4 billion increase in interest-earning assets led by strong commercial loan growth and an increase in LHFS. The improvement in net interest income was more than offset by a $12 million decrease in noninterest income resulting from a decrease in net gain on loan sales and a $15 million increase in noninterest expense due to increases in compensation and benefits from increased headcount due to recent acquisitions. Diluted income per share increased to $0.71 for the three months ended June 30, 2017, compared to $0.66 for the three months ended June 30, 2016, partially due to the payoff of our TARP Preferred which occurred in the third quarter of 2016.
Net income decreased $18 million for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. Net interest income increased $24 million for the six months ended June 30, 2017, compared to the six months ended June 30, 2016, primarily driven by growth in interest-earning assets. This was more than offset by a decrease in noninterest income of $17 million, primarily due to lower net gain on loan sales and an increase in noninterest expense of $18 million, primarily driven by higher compensation and benefits driven by increased headcount resulting from acquisitions, as well as an increase in the provision for loan losses. In the six months ended June 30, 2017, our provision of $2 million reflects the strong credit quality of our loan portfolios and a low level of net losses. The $16 million benefit for the six months ended June 30, 2016 resulted primarily from the sale of $1.2 billion UPB of performing and $110 million UPB of nonperforming loans.
6
Net Interest Income
The following tables present, on a consolidated basis, interest income from average assets and liabilities, expressed in dollars and yields:
Three Months Ended June 30, | |||||||||||||||||
2017 | 2016 | ||||||||||||||||
Average Balance | Interest | Annualized Yield/ Rate | Average Balance | Interest | Annualized Yield/ Rate | ||||||||||||
(Dollars in millions) | |||||||||||||||||
Interest-Earning Assets | |||||||||||||||||
Loans held-for-sale | $ | 4,269 | $ | 42 | 4.00 | % | $ | 2,884 | $ | 26 | 3.64 | % | |||||
Loans held-for-investment | |||||||||||||||||
Residential first mortgage | 2,495 | 21 | 3.38 | % | 2,232 | 18 | 3.15 | % | |||||||||
Home equity | 439 | 6 | 4.91 | % | 485 | 6 | 4.91 | % | |||||||||
Other | 27 | — | 4.54 | % | 29 | — | 4.92 | % | |||||||||
Total Consumer loans | 2,961 | 27 | 3.61 | % | 2,746 | 24 | 3.48 | % | |||||||||
Commercial Real Estate | 1,477 | 16 | 4.16 | % | 899 | 8 | 3.41 | % | |||||||||
Commercial and Industrial | 936 | 11 | 4.77 | % | 607 | 6 | 3.97 | % | |||||||||
Warehouse Lending | 850 | 10 | 4.71 | % | 1,317 | 14 | 4.28 | % | |||||||||
Total Commercial loans | 3,263 | 37 | 4.48 | % | 2,823 | 28 | 3.94 | % | |||||||||
Total loans held-for-investment (1) | 6,224 | 64 | 4.07 | % | 5,569 | 52 | 3.71 | % | |||||||||
Loans with government guarantees | 295 | 3 | 4.02 | % | 444 | 4 | 3.33 | % | |||||||||
Investment securities | 3,166 | 20 | 2.57 | % | 2,558 | 17 | 2.66 | % | |||||||||
Interest-earning deposits | 66 | — | 1.07 | % | 184 | — | 0.50 | % | |||||||||
Total interest-earning assets | 14,020 | 129 | 3.69 | % | 11,639 | 99 | 3.40 | % | |||||||||
Other assets | 1,690 | 1,799 | |||||||||||||||
Total assets | $ | 15,710 | $ | 13,438 | |||||||||||||
Interest-Bearing Liabilities | |||||||||||||||||
Retail deposits | |||||||||||||||||
Demand deposits | $ | 510 | $ | — | 0.15 | % | $ | 482 | $ | — | 0.17 | % | |||||
Savings deposits | 3,933 | 8 | 0.75 | % | 3,691 | 7 | 0.79 | % | |||||||||
Money market deposits | 239 | — | 0.42 | % | 363 | 1 | 0.52 | % | |||||||||
Certificates of deposit | 1,094 | 3 | 1.08 | % | 951 | 2 | 1.00 | % | |||||||||
Total retail deposits | 5,776 | 11 | 0.75 | % | 5,487 | 10 | 0.75 | % | |||||||||
Government deposits | |||||||||||||||||
Demand deposits | 200 | — | 0.39 | % | 203 | — | 0.39 | % | |||||||||
Savings deposits | 411 | 1 | 0.56 | % | 398 | — | 0.52 | % | |||||||||
Certificates of deposit | 291 | — | 0.68 | % | 410 | 1 | 0.50 | % | |||||||||
Total government deposits | 902 | 1 | 0.56 | % | 1,011 | 1 | 0.49 | % | |||||||||
Wholesale deposits and other | 4 | — | 0.48 | % | — | — | —% | ||||||||||
Total interest-bearing deposits | 6,682 | 12 | 0.72 | % | 6,498 | 11 | 0.71 | % | |||||||||
Short-term Federal Home Loan Bank advances and other | 3,429 | 8 | 0.98 | % | 835 | 1 | 0.41 | % | |||||||||
Long-term Federal Home Loan Bank advances | 1,200 | 6 | 1.91 | % | 1,625 | 8 | 1.93 | % | |||||||||
Other long-term debt | 493 | 6 | 5.06 | % | 247 | 2 | 3.31 | % | |||||||||
Total interest-bearing liabilities | 11,804 | 32 | 1.10 | % | 9,205 | 22 | 0.97 | % | |||||||||
Noninterest-bearing deposits (2) | 2,057 | 2,133 | |||||||||||||||
Other liabilities | 431 | 494 | |||||||||||||||
Stockholders’ equity | 1,418 | 1,606 | |||||||||||||||
Total liabilities and stockholders' equity | $ | 15,710 | $ | 13,438 | |||||||||||||
Net interest-earning assets | $ | 2,216 | $ | 2,434 | |||||||||||||
Net interest income | $ | 97 | $ | 77 | |||||||||||||
Interest rate spread (3) | 2.59 | % | 2.43 | % | |||||||||||||
Net interest margin (4) | 2.77 | % | 2.63 | % | |||||||||||||
Ratio of average interest-earning assets to interest-bearing liabilities | 118.8 | % | 126.4 | % | |||||||||||||
(1) | Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 4 - Loans Held-for-Investment. |
(2) | Includes noninterest-bearing company controlled deposits that arise due to the servicing of loans for others. |
(3) | Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities. |
(4) | Net interest margin is net interest income divided by average interest-earning assets. |
7
Six Months Ended June 30, | |||||||||||||||||
2017 | 2016 | ||||||||||||||||
Average Balance | Interest | Annualized Yield/ Rate | Average Balance | Interest | Annualized Yield/ Rate | ||||||||||||
(Dollars in millions) | |||||||||||||||||
Interest-Earning Assets | |||||||||||||||||
Loans held-for-sale | $ | 3,780 | $ | 74 | 3.94 | % | $ | 2,897 | $ | 54 | 3.72 | % | |||||
Loans held-for-investment | |||||||||||||||||
Residential first mortgage | 2,447 | 41 | 3.35 | % | 2,504 | 39 | 3.12 | % | |||||||||
Home equity | 436 | 11 | 5.01 | % | 497 | 13 | 5.36 | % | |||||||||
Other | 26 | — | 4.52 | % | 29 | 1 | 4.94 | % | |||||||||
Total Consumer loans | 2,909 | 52 | 3.61 | % | 3,030 | 53 | 3.50 | % | |||||||||
Commercial Real Estate | 1,399 | 28 | 3.99 | % | 862 | 15 | 3.38 | % | |||||||||
Commercial and Industrial | 855 | 20 | 4.67 | % | 585 | 12 | 4.03 | % | |||||||||
Warehouse Lending | 770 | 18 | 4.62 | % | 1,141 | 25 | 4.29 | % | |||||||||
Total Commercial loans | 3,024 | 66 | 4.34 | % | 2,588 | 52 | 3.93 | % | |||||||||
Total loans held-for-investment (1) | 5,933 | 118 | 3.98 | % | 5,618 | 105 | 3.70 | % | |||||||||
Loans with government guarantees | 318 | 7 | 4.34 | % | 460 | 7 | 3.18 | % | |||||||||
Investment securities | 3,090 | 39 | 2.54 | % | 2,625 | 34 | 2.59 | % | |||||||||
Interest-earning deposits | 66 | 1 | 0.97 | % | 155 | — | 0.50 | % | |||||||||
Total interest-earning assets | 13,187 | 239 | 3.63 | % | 11,755 | 200 | 3.39 | % | |||||||||
Other assets | 1,694 | 1,736 | |||||||||||||||
Total assets | $ | 14,881 | $ | 13,491 | |||||||||||||
Interest-Bearing Liabilities | |||||||||||||||||
Retail deposits | |||||||||||||||||
Demand deposits | $ | 509 | $ | — | 0.17 | % | $ | 463 | $ | — | 0.15 | % | |||||
Savings deposits | 3,930 | 15 | 0.76 | % | 3,706 | 15 | 0.79 | % | |||||||||
Money market deposits | 258 | 1 | 0.44 | % | 303 | 1 | 0.45 | % | |||||||||
Certificates of deposit | 1,083 | 6 | 1.07 | % | 904 | 4 | 0.96 | % | |||||||||
Total retail deposits | 5,780 | 22 | 0.75 | % | 5,376 | 20 | 0.74 | % | |||||||||
Government deposits | |||||||||||||||||
Demand deposits | 217 | — | 0.39 | % | 230 | — | 0.39 | % | |||||||||
Savings deposits | 435 | 1 | 0.54 | % | 409 | 1 | 0.52 | % | |||||||||
Certificates of deposit | 305 | 1 | 0.65 | % | 411 | 1 | 0.71 | % | |||||||||
Total government deposits | 957 | 2 | 0.54 | % | 1,050 | 2 | 0.57 | % | |||||||||
Wholesale deposits and other | 6 | — | 0.42 | % | — | — | — | % | |||||||||
Total interest-bearing deposits | 6,743 | 24 | 0.72 | % | 6,426 | 22 | 0.70 | % | |||||||||
Short-term Federal Home Loan Bank advances and other | 2,630 | 12 | 0.89 | % | 1,249 | 3 | 0.40 | % | |||||||||
Long-term Federal Home Loan Bank advances | 1,200 | 11 | 1.89 | % | 1,592 | 15 | 1.91 | % | |||||||||
Other long-term debt | 493 | 12 | 5.05 | % | 247 | 4 | 3.27 | % | |||||||||
Total interest-bearing liabilities | 11,066 | 59 | 1.08 | % | 9,514 | 44 | 0.93 | % | |||||||||
Noninterest-bearing deposits (2) | 2,024 | 1,915 | |||||||||||||||
Other liabilities | 409 | 479 | |||||||||||||||
Stockholders’ equity | 1,382 | 1,583 | |||||||||||||||
Total liabilities and stockholders' equity | $ | 14,881 | $ | 13,491 | |||||||||||||
Net interest-earning assets | $ | 2,121 | $ | 2,241 | |||||||||||||
Net interest income | $ | 180 | $ | 156 | |||||||||||||
Interest rate spread (3) | 2.55 | % | 2.46 | % | |||||||||||||
Net interest margin (4) | 2.72 | % | 2.64 | % | |||||||||||||
Ratio of average interest-earning assets to interest-bearing liabilities | 119.2 | % | 123.6 | % | |||||||||||||
(1) | Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 4 - Loans Held-for-Investment. |
(2) | Includes noninterest-bearing company controlled deposits that arise due to the servicing of loans for others. |
(3) | Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities. |
(4) | Net interest margin is net interest income divided by average interest-earning assets. |
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 that are presented in the preceding table. The tables below distinguish 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 variances due to rate.
Three Months Ended June 30, | |||||||||||
2017 Versus 2016 Increase (Decrease) Due to: | |||||||||||
Rate | Volume | Total | |||||||||
(Dollars in millions) | |||||||||||
Interest-Earning Assets | |||||||||||
Loans held-for-sale | $ | 4 | $ | 12 | $ | 16 | |||||
Loans held-for-investment | |||||||||||
Total Consumer loans | 1 | 2 | 3 | ||||||||
Commercial Real Estate | 3 | 5 | 8 | ||||||||
Commercial and Industrial | 2 | 3 | 5 | ||||||||
Warehouse Lending | 1 | (5 | ) | (4 | ) | ||||||
Total Commercial loans | 6 | 3 | 9 | ||||||||
Total loans held-for-investment | 7 | 5 | 12 | ||||||||
Loans with government guarantees | — | (1 | ) | (1 | ) | ||||||
Investment securities | (1 | ) | 4 | 3 | |||||||
Total interest-earning assets | $ | 10 | $ | 20 | $ | 30 | |||||
Interest-Bearing Liabilities | |||||||||||
Retail deposits | $ | — | $ | 1 | $ | 1 | |||||
Government deposits | 1 | (1 | ) | — | |||||||
Short-term Federal Home Loan Bank advances and other | 5 | 2 | 7 | ||||||||
Long-term Federal Home Loan Bank advances | — | (2 | ) | (2 | ) | ||||||
Other long-term debt | 2 | 2 | 4 | ||||||||
Total interest-bearing liabilities | 8 | 2 | 10 | ||||||||
Change in net interest income | $ | 2 | $ | 18 | $ | 20 | |||||
9
Six Months Ended June 30, | |||||||||||
2017 Versus 2016 Increase (Decrease) Due to: | |||||||||||
Rate | Volume | Total | |||||||||
(Dollars in millions) | |||||||||||
Interest-Earning Assets | |||||||||||
Loans held-for-sale | $ | 4 | $ | 16 | $ | 20 | |||||
Loans held-for-investment | |||||||||||
Residential first mortgage | 3 | (1 | ) | 2 | |||||||
Home equity | — | (2 | ) | (2 | ) | ||||||
Other | (1 | ) | — | (1 | ) | ||||||
Total Consumer loans | 2 | (3 | ) | (1 | ) | ||||||
Commercial Real Estate | 4 | 9 | 13 | ||||||||
Commercial and Industrial | 3 | 5 | 8 | ||||||||
Warehouse Lending | 1 | (8 | ) | (7 | ) | ||||||
Total Commercial loans | 8 | 6 | 14 | ||||||||
Total loans held-for-investment | 10 | 3 | 13 | ||||||||
Loans with government guarantees | 2 | (2 | ) | — | |||||||
Investment securities | (1 | ) | 6 | 5 | |||||||
Interest-earning deposits | 1 | — | 1 | ||||||||
Total interest-earning assets | $ | 16 | $ | 23 | $ | 39 | |||||
Interest-Bearing Liabilities | |||||||||||
Retail deposits | $ | (1 | ) | $ | 3 | $ | 2 | ||||
Short-term Federal Home Loan Bank advances and other | 6 | 3 | 9 | ||||||||
Long-term Federal Home Loan Bank advances | — | (4 | ) | (4 | ) | ||||||
Other long-term debt | 4 | 4 | 8 | ||||||||
Total interest-bearing liabilities | 9 | 6 | 15 | ||||||||
Change in net interest income | $ | 7 | $ | 17 | $ | 24 | |||||
Comparison to Prior Year Quarter
Net interest income increased $20 million or 26 percent for the three months ended June 30, 2017, compared to the same period in 2016. This increase was primarily driven by an increase in average rates and growth in interest-earning assets. This was partially offset by an increase in average rates and the average balance of borrowings, resulting from an increase in the Federal Reserve rates and the third quarter 2016 issuance of $250 million of 6.125 percent senior notes ("2021 Senior Notes") which were issued to fund the redemption of our TARP Preferred.
Our net interest margin for the three months ended June 30, 2017 was 2.77 percent, compared to 2.63 percent for the three months ended June 30, 2016. The net 14 basis point increase was driven by higher interest income on LHFS due to increases in market rates and an increase in higher yielding commercial loans within the LHFI portfolio. This increase was partially offset by higher average rates on short-term FHLB advances and the third quarter 2016 debt issuances.
For the three months ended June 30, 2017 as compared to the three months ended June 30, 2016, total interest earning assets increased $2.4 billion to $14.0 billion led by growth in LHFS primarily due to extending turn times and the accumulation of loans in support of a residential mortgage backed securitization that closed in the third quarter 2017, as well as higher mortgage originations. Additionally, the $440 million increase in average commercial loans was consistent with our strategy to grow the community bank and enhance the yield on our interest-earning assets.
Average interest-bearing liabilities increased $2.6 billion for the three months ended June 30, 2017, compared to the three months ended June 30, 2016. The increase was primarily driven by a $2.6 billion increase in short-term FHLB advances to fund balance sheet growth.
10
Comparison to Prior Year to Date
Net interest income increased $24 million for the six months ended June 30, 2017, compared to the same period in 2016, primarily driven by growth in interest-earning assets and an increase in average rates. This was partially offset by an increase in average rates and average balances of our borrowings, resulting from the third quarter 2016 issuance of 2021 Senior Notes which were issued to fund the redemption of our TARP Preferred.
Our net interest margin for the six months ended June 30, 2017 was 2.72 percent, compared to 2.64 percent for the six months ended June 30, 2016. The net 8 basis point increase was positively impacted by an increase in market rates, higher yielding commercial loan portfolio and stable deposit costs. This improvement was partially offset by higher rates on short-term FHLB advances driven by recent Federal Reserve rate increases and the issuance of our 2021 Senior Notes in the third quarter 2016.
For the six months ended June 30, 2017 as compared to the six months ended June 30, 2016, average interest earning assets increased $1.4 billion, led by a $883 million increase in LHFS due to extending turn times and higher mortgage activity. The combined $901 million increase in average commercial loans and average investment securities was consistent with our strategy to grow the community bank and enhance the yield on our interest-earning assets. Commercial loans increased 17 percent due to growth in the commercial real estate and commercial & industrial portfolios.
Average interest-bearing liabilities increased $1.6 billion for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The increase was driven by a $1.4 billion increase in FHLB advances used to fund balance sheet growth and the issuance of our 2021 Senior Notes in the third quarter 2016.
Provision (Benefit) for Loan Losses
Credit Quality Ratios | |||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Charge-offs, net of recoveries | $ | — | $ | 9 | $ | (9 | ) | $ | 4 | $ | 21 | $ | (17 | ) | |||||||||
Charge-offs associated with loans with government guarantees | — | 4 | (4 | ) | 2 | 7 | (5 | ) | |||||||||||||||
Charge-offs associated with the sale or transfer of nonperforming loans and TDRs | — | 2 | (2 | ) | 1 | 8 | (7 | ) | |||||||||||||||
Charge-offs, net of recoveries, adjusted (1) | $ | — | $ | 3 | $ | (3 | ) | $ | 1 | $ | 6 | $ | (5 | ) | |||||||||
Net charge-offs to LHFI ratio (annualized) | 0.04 | % | 0.62 | % | (0.58 | )% | 0.15 | % | 0.74 | % | (0.59 | )% | |||||||||||
Net charge-off ratio, adjusted (annualized)(1) | 0.02 | % | 0.18 | % | (0.16 | )% | 0.02 | % | 0.44 | % | (0.42 | )% | |||||||||||
(1) | Excludes charge-offs associated with loans with government guarantees and charge-offs associated with the sale or transfer of nonperforming loans and TDRs. |
Comparison to Prior Year Quarter
The provision (benefit) for loan losses was a benefit of $1 million during the three months ended June 30, 2017, compared to a benefit of $3 million during the three months ended June 30, 2016. During the three months ended June 30, 2017, the $1 million benefit reflects continued low level of losses and strong credit quality of our loan portfolios. The $3 million benefit during the three months ended June 30, 2016 resulted primarily from reserves that were released in conjunction with the sale of $408 million UPB of performing residential first mortgage loans.
As a result of the strong credit quality throughout our loan portfolios, net charge-offs for the three months ended June 30, 2017 decreased to less than $1 million, compared to $9 million for the three months ended June 30, 2016. As a percentage of the average LHFI, net charge-offs for the three months ended June 30, 2017, decreased to 0.04 percent from 0.62 percent for the three months ended June 30, 2016.
Comparison to Prior Year to Date
The provision (benefit) for loan losses was a provision of $2 million for the six months ended June 30, 2017, compared to a benefit of $16 million during the six months ended June 30, 2016. The $2 million provision for the six months ended June 30, 2017, resulted primarily from $4 million in net charge-offs partially offset by a reduction in reserve, reflective of the continued strong credit quality of our loan portfolios and low level of net losses. The $16 million benefit for the six
11
months ended June 30, 2016 resulted primarily from the sale of $1.2 billion UPB of performing residential first mortgage loans and $110 million UPB of nonperforming, TDR and non-agency loans.
Net charge-offs for the six months ended June 30, 2017 decreased to $4 million, compared to $21 million for the six months ended June 30, 2016. As a percentage of the average LHFI, net charge-offs for the six months ended June 30, 2017 decreased to 0.15 percent from 0.74 percent for the three months ended June 30, 2016, partially driven from loan sales of $110 million UPB of nonperforming loans which occurred in the first half of 2016.
For further information on the provision for loan losses see MD&A - Allowance for Loan Losses.
Noninterest Income
The following tables provide information on our noninterest income along with additional details related to our net gain on loan sales and other mortgage metrics:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Net gain on loan sales | $ | 66 | $ | 90 | $ | (24 | ) | $ | 114 | $ | 165 | $ | (51 | ) | |||||||||
Loan fees and charges | 20 | 19 | 1 | 35 | 34 | 1 | |||||||||||||||||
Deposit fees and charges | 5 | 6 | (1 | ) | 9 | 12 | (3 | ) | |||||||||||||||
Loan administration income | 6 | 4 | 2 | 11 | 10 | 1 | |||||||||||||||||
Net (loss) return on mortgage servicing rights | 6 | (4 | ) | 10 | 20 | (10 | ) | 30 | |||||||||||||||
Representation and warranty benefit | 3 | 4 | (1 | ) | 7 | 6 | 1 | ||||||||||||||||
Other noninterest income | 10 | 9 | 1 | 20 | 16 | 4 | |||||||||||||||||
Total noninterest income | $ | 116 | $ | 128 | $ | (12 | ) | $ | 216 | $ | 233 | $ | (17 | ) | |||||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Mortgage rate lock commitments (fallout-adjusted) (1) | $ | 9,002 | $ | 8,127 | $ | 14,998 | $ | 14,990 | |||||||
Net margin on mortgage rate lock commitments (fallout-adjusted) (1) (2) | 0.73 | % | 1.04 | % | 0.76 | % | 1.00 | % | |||||||
Gain on loan sales LHFS + net (loss) return on the MSR | $ | 72 | $ | 81 | $ | 134 | $ | 141 | |||||||
Mortgage loans sold and securitized | 8,989 | 7,940 | 13,473 | 14,888 | |||||||||||
Net margin on loans sold and securitized | 0.73 | % | 1.07 | % | 0.84 | % | 1.01 | % | |||||||
(1) | Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the level of interest rates. |
(2) | Gain on sale margin is based on net gain on loan sales related to LHFS to fallout-adjusted mortgage rate lock commitments. |
Comparison to Prior Year Quarter
Total noninterest income decreased $12 million during the three months ended June 30, 2017, compared to the same period in 2016.
Net gain on loan sales decreased $24 million during the three months ended June 30, 2017, compared to the three months ended June 30, 2016. The net gain on loan sales margin decreased 34 basis points primarily driven by our decision to extend turn times on LHFS which shifts earnings from gain on sale to net interest income, and a shift in mix and shorter-term market forces. The decrease in net gain on loan sales was also attributed to the sale of performing LHFI that occurred in the second quarter of 2016 which resulted in a $5 million gain. The decreases were partially offset by $875 million in higher fallout-adjusted locks driven by recent acquisitions.
Net return on MSRs (including the impact of economic hedges) was $6 million for the three months ended June 30, 2017, compared to a loss of $4 million during the three months ended June 30, 2016. The $10 million increase was primarily driven by a more stable prepayment environment and improvements in our hedging program, partially offset by higher transaction costs and lower servicing fees resulting from a lower MSR balance driven by MSR sales that occurred in the second quarter 2017.
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Comparison to Prior Year to Date
Total noninterest income decreased $17 million during the six months ended June 30, 2017, compared to the same period in 2016.
Net gain on loan sales decreased $51 million during the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The net gain on loan sales margin decreased 17 basis points primarily driven by our decision to extend turn times on LHFS which shifts earnings from gain on sale to net interest income, and a shift in mix and shorter-term market forces. The decrease in net gain on loan sales was also attributed to the sale of performing LHFI that occurred in the first half of 2016 which resulted in a $14 million gain.
Deposit fees and charges decreased $3 million during the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease was primarily due to lower exchange fee income resulting from limitations set by the Durbin amendment, which became applicable to the Bank on July 1, 2016.
Net return on MSRs was $20 million for the six months ended June 30, 2017, compared to a loss of $10 million during the six months ended June 30, 2016. The $30 million increase was primarily driven by a more stable prepayment environment and improvements in our hedging program, partially offset by lower servicing fee income and higher transaction costs resulting from a lower MSR balance driven by MSR sales that occurred in 2017.
Other noninterest income increased $4 million during the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The increase was primarily due to favorable adjustments related to assets and liabilities held at fair value.
Noninterest Expense
The following table sets forth the components of our noninterest expense:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Compensation and benefits | $ | 71 | $ | 66 | $ | 5 | $ | 143 | $ | 134 | $ | 9 | |||||||||||
Commissions | 16 | 14 | 2 | 26 | 24 | 2 | |||||||||||||||||
Occupancy and equipment | 25 | 21 | 4 | 47 | 43 | 4 | |||||||||||||||||
Loan processing expense | 14 | 15 | (1 | ) | 26 | 27 | (1 | ) | |||||||||||||||
Legal and professional expense | 8 | 6 | 2 | 15 | 15 | — | |||||||||||||||||
Other noninterest expense | 20 | 17 | 3 | 37 | 33 | 4 | |||||||||||||||||
Total noninterest expense | $ | 154 | $ | 139 | $ | 15 | $ | 294 | $ | 276 | $ | 18 | |||||||||||
Efficiency ratio | 72.0 | % | 68.2 | % | 3.8 | % | 74.2 | % | 71.2 | % | 3.0 | % | |||||||||||
Comparison to Prior Year Quarter
Noninterest expense increased $15 million to $154 million during the three months ended June 30, 2017, compared to $139 million during the three months ended June 30, 2016. This is primarily due to an increase in compensation and benefits resulting from an increase in headcount to support growth initiatives. The three months ended June 30, 2017 included $11 million of operating expenses and $1 million of transaction costs related to the recent acquisitions. The increase was further impacted by an increase in occupancy and equipment primarily due to a higher asset base.
Comparison to Prior Year to Date
Noninterest expense increased $18 million to $294 million during the six months ended June 30, 2017, compared to $276 million during the six months ended June 30, 2016. The increase was primarily driven by higher compensation and benefits which was the result of an increase in headcount due to recent growth initiatives. The six months ended June 30, 2017 included $11 million of operating expenses and $2 million of transaction costs related to the recent acquisitions. The remaining increase was primarily driven by higher occupancy and equipment due to a higher asset base and higher other noninterest expenses driven by an increase in advertising related to a direct mail campaign and new branding initiatives.
13
Provision (benefit) for Income Taxes
Our provision for income taxes for the three and six months ended June 30, 2017 was $19 million and $32 million, respectively, compared to a provision of $22 million and $43 million during the three and six months ended June 30, 2016, respectively.
Our effective tax rate for the three and six months ended June 30, 2017 was 31.8 percent and 32.3 percent, respectively, compared to 32.7 percent and 33.4 percent for the three and six months ended June 30, 2016, respectively.
Our effective tax rate for the three and six months ended June 30, 2017 differs from the combined federal and state statutory tax rate primarily due to a benefit from tax-exempt earnings, partially offset by nondeductible expenses.
For further information, see Note 14 - Income Taxes.
OPERATING SEGMENTS
Overview
For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 18 - Segment Information, and other sections of this report for a full understanding of our consolidated financial performance.
The net income (loss) by operating segment is presented in the following table:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Community Banking | $ | 10 | $ | 9 | $ | 1 | $ | 16 | $ | 27 | $ | (11 | ) | ||||||||||
Mortgage Originations | 30 | 38 | (8 | ) | 56 | 60 | (4 | ) | |||||||||||||||
Mortgage Servicing | (3 | ) | (2 | ) | (1 | ) | (8 | ) | (6 | ) | (2 | ) | |||||||||||
Other | 4 | 2 | 2 | 4 | 5 | (1 | ) | ||||||||||||||||
Total net income | $ | 41 | $ | 47 | $ | (6 | ) | $ | 68 | $ | 86 | $ | (18 | ) | |||||||||
Community Banking
Comparison to Prior Year Quarter
During the three months ended June 30, 2017, the Community Banking segment reported net income of $10 million, compared to $9 million for the three months ended June 30, 2016. The increase in net income was primarily due to $8 million higher net interest income from higher average loan balances, led by growth in commercial loans and higher average loan yields. These increases were partially offset by a $3 million increase in the provision for loan losses resulting from loan growth and a decrease of $4 million in gain on loan sales, primarily resulting from second quarter 2016 sale of performing LHFI.
Comparison to Prior Year to Date
During the six months ended June 30, 2017, the Community Banking segment reported net income of $16 million, compared to $27 million for the six months ended June 30, 2016. The $11 million decrease in net income was primarily due to a $12 million decrease in gain on loan sales and an $18 million increase in the provision for loan losses. For the six months ended June 30, 2016, the provision for loan losses was a $16 million benefit primarily resulting from the sale of $1.2 billion of performing LHFI sold from the Community Bank loan portfolio, compared to a provision of $2 million in first six months of 2017. This decrease in net income was partially offset by a $12 million increase in net interest income resulting from loan growth and higher yields.
14
Mortgage Originations
Comparison to Prior Year Quarter
The Mortgage Originations segment net income decreased $8 million to $30 million during the three months ended June 30, 2017, compared to $38 million in the three months ended June 30, 2016. The decrease was primarily due to a $20 million decrease in net gain on loan sales driven by a 31 basis point decrease in margin resulting from a more competitive market and the impact of extending turn times on LHFS which shifts earnings from gain on sale to net interest income. The benefit of extended turn times, as well as higher mortgage originations, resulted in an $11 million increase in interest income. Net return on the MSRs increased $10 million driven by an increase in the interest rate environment experienced in the second quarter of 2017 which resulted in lower prepayments and favorable fair value adjustments. Noninterest expense increased $13 million for the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to increases in compensation and benefits and acquisition costs, along with an increase in commissions due to increased loan production.
Comparison to Prior Year to Date
The Mortgage Originations segment net income decreased $4 million to $56 million during the six months ended June 30, 2017, compared to $60 million in the six months ended June 30, 2016. The decrease was primarily due to a $39 million decrease in net gain on loan sales driven by a 22 basis point decrease in margin, resulting from a more competitive market and the impact of extending turn times on LHFS which shifts earnings from gain on sale to net interest income. The decrease was partially offset by a $30 million increase in net return on the MSR resulting from an increase in the interest rate environment in 2017 which resulted in lower prepayments and favorable fair value adjustments. Net interest income increased $19 million resulting from an increase in mortgage activity and the impact of extending turn times on LHFS. Noninterest expense increased $16 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to increases in compensation and benefits and acquisition costs, along with an increase in commissions due to increased loan production.
Mortgage Servicing
Comparison to Prior Year Quarter
The Mortgage Servicing segment reported a net loss of $3 million for the three months ended June 30, 2017, compared to a net loss of $2 million for the three months ended June 30, 2016. The increase on net losses is primarily due to an increase in compensation and benefits driven by an increase in headcount.
Comparison to Prior Year to Date
The Mortgage Servicing segment reported a net loss of $8 million for the six months ended June 30, 2017, compared to a net loss of $6 million for the six months ended June 30, 2016. The increase in net losses is primarily due to an increase in compensation and benefits driven by an increase in headcount.
Other
Comparison to Prior Year Quarter
For the three months ended June 30, 2017, the Other segment net income was $4 million, compared to net income of $2 million for the three months ended June 30, 2016. The $2 million improvement was primarily due to an increase in net interest income resulting from higher average investment balances, due to pulling ahead planned purchases of investments to take advantage of a higher return market.
Comparison to Prior Year to Date
For the six months ended June 30, 2017, the Other segment net income was $4 million, compared to net income of $5 million for the six months ended June 30, 2016. The $1 million decrease was primarily due to a reduction in net interest income, as a result of higher interest expense due to our issuance of our 2021 Senior Notes, which occurred in the third quarter of 2016.
15
Condensed Consolidated Balance Sheet Review
June 30, 2017 | December 31, 2016 | Change | |||||||||
(Dollars in millions) | |||||||||||
Assets | |||||||||||
Total cash and cash equivalents | $ | 183 | $ | 158 | $ | 25 | |||||
Investment Securities | 2,628 | 2,573 | 55 | ||||||||
Loans held-for-sale | 4,506 | 3,177 | 1,329 | ||||||||
Loans held-for-investment | 6,776 | 6,065 | 711 | ||||||||
Loans with government guarantees | 278 | 365 | (87 | ) | |||||||
Less: allowance for loan losses | (140 | ) | (142 | ) | 2 | ||||||
Total loans held-for-investment and loans with government guarantees, net | 6,914 | 6,288 | 626 | ||||||||
Mortgage servicing rights | 184 | 335 | (151 | ) | |||||||
Other assets | 1,550 | 1,522 | 28 | ||||||||
Total assets | $ | 15,965 | $ | 14,053 | $ | 1,912 | |||||
Liabilities and Stockholders’ Equity | |||||||||||
Total deposits | $ | 8,695 | $ | 8,800 | $ | (105 | ) | ||||
Federal Home Loan Bank advances | 4,870 | 2,980 | 1,890 | ||||||||
Other long-term debt | 493 | 493 | — | ||||||||
Other Liabilities | 499 | 444 | 55 | ||||||||
Total liabilities | 14,557 | 12,717 | 1,840 | ||||||||
Total stockholders’ equity | 1,408 | 1,336 | 72 | ||||||||
Total liabilities and stockholders’ equity | $ | 15,965 | $ | 14,053 | $ | 1,912 | |||||
At June 30, 2017 our assets totaled $16.0 billion, up $1.9 billion from December 31, 2016. Asset growth was attributable to an increase in our LHFS as a result of higher mortgage volumes as well as growth in our commercial and consumer LHFI portfolios. Total liabilities increased to $14.6 billion at June 30, 2017 due to an increase in FHLB advances to primarily support the growth of our LHFS.
Loans held-for-sale
The majority of our mortgage loans originated as LHFS are sold into the secondary market by securitizing the loans into agency mortgage backed securities or on a whole loan basis. Sales of loans totaled $9.0 billion, or 97.7 percent of originations during the three months ended June 30, 2017, compared to $7.9 billion, or 95.3 percent of originations during the three months ended June 30, 2016. The increase in sales volume and percentage of originations during the three months ended June 30, 2017, as compared to the three months ended June 30, 2016, was primarily due to recent acquisitions. During the three months ended June 30, 2017, turn times on sales of LHFS were an average of 44 days compared to an average of 30 days during the three months ended June 30, 2016 which benefits net interest income.
As of June 30, 2017, we had outstanding commitments to sell $6.7 billion of mortgage loans. Generally, these commitments are funded within 120 days. At June 30, 2017 and December 31, 2016, consumer LHFS totaled $4.5 billion and $3.2 billion, respectively, which are primarily residential mortgage loans. The $1.3 billion increase is the result of higher mortgage activity and the accumulation of loans in support of a residential mortgage backed securitization that closed in the third quarter 2017.
On July 31, 2017, the Company closed on a securitization of $444 million of residential mortgage-backed certificates (RMBS) issued by Flagstar Mortgage Trust 2017-1 (FSMT 2017-1). The pool comprises loans Flagstar originated through its retail, broker and correspondent channels. The collateral pool consists of high-quality 30- and 15-year, fully amortizing high balance conforming and jumbo fixed-rate Safe Harbor Qualified Mortgage loans to borrowers with strong credit profiles and low leverage.
For further information, see Note 3 - Loans Held-for-Sale.
16
Loans held-for-investment
Loans held-for-investment are summarized as follows:
June 30, 2017 | December 31, 2016 | Change | |||||||||
(Dollars in millions) | |||||||||||
Consumer loans | |||||||||||
Residential first mortgage | $ | 2,538 | $ | 2,327 | $ | 211 | |||||
Home equity | 459 | 443 | 16 | ||||||||
Other | 27 | 28 | (1 | ) | |||||||
Total consumer loans | 3,024 | 2,798 | 226 | ||||||||
Commercial loans | |||||||||||
Commercial real estate (1) | 1,557 | 1,261 | 296 | ||||||||
Commercial and industrial | 1,040 | 769 | 271 | ||||||||
Warehouse lending | 1,155 | 1,237 | (82 | ) | |||||||
Total commercial loans | 3,752 | 3,267 | 485 | ||||||||
Total loans held-for-investment | $ | 6,776 | $ | 6,065 | $ | 711 | |||||
(1) | Includes $253 million and $245 million of owner occupied commercial real estate loans at June 30, 2017 and December 31, 2016, respectively. |
Loans held-for-investment increased $711 million, at June 30, 2017 from December 31, 2016. This increase was due to growth in both our consumer loan portfolio and commercial loan portfolio.
We have continued strong commercial loan growth as a result of our strategic initiative to grow the Community Bank and improve margins by adding higher yielding loans. The commercial loan portfolio has increased $485 million, or 15 percent, since December 31, 2016. During the six months ended June 30, 2017, our CRE LHFI portfolio grew $296 million and C&I $271 million.
For further information, see Note 4 - Loans Held-for-Investment.
Loans with government guarantees
Our loans with government guarantees portfolio totaled $278 million at June 30, 2017, as compared to $365 million at December 31, 2016. The decrease is primarily due to loans transferred to HFS and resold to Ginnie Mae out-pacing new repurchases.
For further information, see Note 5 - Loans with Government Guarantees.
Allowance for loan losses
The ALLL decreased $2 million to $140 million at June 30, 2017, compared to $142 million at December 31, 2016. The decrease from December 31, 2016 was driven by continued low charge-off levels along with the strong credit quality of the loans within our LHFI portfolios.
For further information, see MD&A Risk Management - Allowance for Loan Losses.
Mortgage servicing rights
At June 30, 2017, MSRs decreased $151 million to $184 million, compared to $335 million at December 31, 2016, primarily due to MSR bulk sales of $22.9 billion in underlying loans, partially offset by additions from loan sales where we retained servicing. In the first half of 2017, we sold MSRs with a fair value of $256 million, successfully executing our MSR reduction strategy to release capital and support balance sheet growth.
The principal balance of the loans underlying our total MSRs was $16.1 billion at June 30, 2017, compared to $31.2 billion at December 31, 2016 with the decrease primarily attributable to MSR bulk sales in the first six months of 2017, partially offset by loan sales where we retained servicing.
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For further information, see MD&A Risk Management - Capital and Note 7 - Mortgage Servicing Rights.
Deposits
The composition of our deposits was as follows:
June 30, 2017 | December 31, 2016 | ||||||||||||||||
Balance | % of Deposits | Balance | % of Deposits | Change | |||||||||||||
(Dollars in millions) | |||||||||||||||||
Retail deposits | |||||||||||||||||
Branch retail deposits | |||||||||||||||||
Demand deposit accounts | $ | 899 | 10.3 | % | $ | 852 | 9.7 | % | $ | 47 | |||||||
Savings accounts | 3,836 | 44.1 | % | 3,824 | 43.5 | % | 12 | ||||||||||
Money market demand accounts | 131 | 1.5 | % | 138 | 1.6 | % | (7 | ) | |||||||||
Certificates of deposit/CDARS (1) | 1,102 | 12.7 | % | 1,055 | 12.0 | % | 47 | ||||||||||
Total branch retail deposits | 5,968 | 68.6 | % | 5,869 | 66.7 | % | 99 | ||||||||||
Commercial retail deposits | |||||||||||||||||
Demand deposit accounts | 331 | 3.8 | % | 282 | 3.2 | % | 49 | ||||||||||
Savings accounts | 80 | 0.9 | % | 63 | 0.7 | % | 17 | ||||||||||
Money market demand accounts | 117 | 1.3 | % | 109 | 1.2 | % | 8 | ||||||||||
Certificates of deposit/CDARS (1) | 51 | 0.6 | % | 1 | — | % | 50 | ||||||||||
Total commercial retail deposits | 579 | 6.7 | % | 455 | 5.2 | % | 124 | ||||||||||
Total retail deposits | $ | 6,547 | 75.3 | % | $ | 6,324 | 71.9 | % | $ | 223 | |||||||
Government deposits | |||||||||||||||||
Demand deposit accounts | $ | 204 | 2.3 | % | $ | 250 | 2.8 | % | $ | (46 | ) | ||||||
Savings accounts | 361 | 4.2 | % | 451 | 5.1 | % | (90 | ) | |||||||||
Certificates of deposit/CDARS (1) | 286 | 3.3 | % | 329 | 3.7 | % | (43 | ) | |||||||||
Total government deposits (2) | 851 | 9.8 | % | 1,030 | 11.7 | % | (179 | ) | |||||||||
Company controlled deposits (3) | 1,297 | 14.9 | % | 1,446 | 16.4 | % | (149 | ) | |||||||||
Total deposits (4) | $ | 8,695 | 100.0 | % | $ | 8,800 | 100.0 | % | $ | (105 | ) | ||||||
(1) | The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.1 billion and $1.0 billion at June 30, 2017 and December 31, 2016. |
(2) | Government deposits include funds from municipalities and schools. |
(3) | These accounts represent a portion of the investor custodial accounts and escrows controlled by us in connection with loans serviced for others and that have been placed on deposit with the Bank. |
(4) | The aggregate amount of deposits with a balance over $250,000 was approximately $4.0 billion at both June 30, 2017 and December 31, 2016. |
Total deposits decreased $105 million, or 1.2 percent at June 30, 2017, compared to December 31, 2016, primarily due to a decline of $179 million in government deposits and $149 million in company controlled deposits. This decline was partially offset by a $223 million, or 3.5 percent increase in retail deposits led by increases in demand deposits and certificates of deposit. The increase in retail deposits demonstrates our strategic initiatives to drive deposit growth by bringing in deposits from commercial customers.
Federal Home Loan Bank advances
Federal Home Loan Bank advances. FHLB advances increased $1.9 billion to $4.9 billion at June 30, 2017 from $3.0 billion at December 31, 2016, due to short term advances funding loan growth, primarily in the LHFS portfolio.
For further information, see MD&A Risk Management - Liquidity Risk and Note 9 - Borrowings.
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RISK MANAGEMENT
Like all financial services companies, we engage in business activities and assume the related risks. The risks we are subject to in the normal course of business include, but are not limited to, credit, regulatory compliance, legal, reputation, liquidity, market, operational, and strategic. We have made significant investments in our risk management activities which are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. We hold capital to protect from the risk of unexpected loss.
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, 2016. Some of the more significant processes used to manage and control credit, liquidity, market, and operational risks are described in the following paragraphs.
Credit Risk
Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or performance terms. Like other financial services institutions, we provide loans, extend credit, purchase securities, and enter into financial derivative contracts, all of which have related credit risk. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending.
Flagstar maintains a strict credit limit, in compliance with regulatory requirements, in order to maintain a diversified loan portfolio and manage its credit exposure to any one borrower or obligor. Under the Home Owners Loan Act ("HOLA"), savings associations are generally subject to national bank limits on loans to one borrower. Generally, per HOLA, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 and Tier 2 capital plus any portion of the allowance for loan losses not included in the Tier 2 capital, which was $260 million as of June 30, 2017. Flagstar maintains a maximum internal Bank limit of $100 million (commitment level) to any one borrower/obligor relationship, which is more conservative than the limit required by HOLA. All credit exposures that exceed $50 million must be approved by the Board of Directors.
We manage our credit risk by establishing sound credit policies for underwriting and adhering to well controlled processes. We utilize various credit risk management and monitoring activities to mitigate risks associated with loans that we hold, acquire, and originate.
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Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. The LTV requirements vary depending on occupancy, property type, loan amount, and FICO. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance.
The following table presents our total residential first mortgage LHFI by major category: