Notes to the Consolidated Financial Statements (Unaudited)
Note
1
- Basis of Presentation
The accompanying financial statements of Flagstar Bancorp, Inc. ("Flagstar," or the "Company"), including its wholly owned principal subsidiary, Flagstar Bank, FSB (the "Bank"), have been prepared using U.S. GAAP for interim financial statements. 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 the Bank.
These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the SEC. These interim financial statements are unaudited and include, in our opinion, all adjustments necessary for a fair statement of the results for the periods indicated, which are not necessarily indicative of results which may be expected for the full year. These consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2018
, which is available on our website, flagstar.com, and on the SEC website, at sec.gov. Certain prior period amounts have been reclassified to conform to the current period presentation.
Note
2
- Acquisitions
Wells Fargo Branch Acquisition
On November 30, 2018 we closed on the purchase of
52
Wells Fargo branches located in Indiana, Michigan, Wisconsin and Ohio. These branches provide us with high-quality, low-cost deposits, allowing for balance sheet growth and further expansion of our banking footprint.
The following table summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of the acquisition date. We deem the initial valuation of the assets and liabilities to be provisional and have left the measurement period open. These fair values may be adjusted in a future period, not to exceed one year after the acquisition date, to reflect new facts and circumstances which existed as of the acquisition date.
|
|
|
|
|
|
November 30, 2018
|
|
(Dollars in millions)
|
Assets acquired:
|
|
Cash
|
$
|
9
|
|
Loans
|
107
|
|
Core deposit intangible (CDI)
|
60
|
|
Other assets
|
26
|
|
Total assets
|
202
|
|
Liabilities assumed:
|
|
Deposits
|
1,761
|
|
Total liabilities
|
1,761
|
|
Fair value of net assets acquired
|
(1,559
|
)
|
Cash consideration received
|
(1,501
|
)
|
Goodwill
|
$
|
58
|
|
As a result of the transaction, we recognized
$58 million
of goodwill, which was calculated as the excess of the consideration exchanged and the liabilities assumed as compared to the fair value of the identifiable net assets acquired. The goodwill was assigned to our Community Banking segment and is expected to be deductible for tax purposes.
The CDI represents the value of the relationships with deposit customers and was measured using the income method using a discounted cash flow methodology which gave consideration to the attrition rates, alternative cost of funds, net maintenance cost, and other costs associated with the deposit base. The CDI will be amortized over its estimated useful life of approximately
10
years utilizing an accelerated method.
Acquisition costs related to the Wells Fargo branch acquisition were expensed as incurred and amounted to
$1 million
and
$15 million
during the three months ended
March 31, 2019
and year ended
December 31, 2018
, respectively. These costs were recorded in noninterest expense in the Consolidated Statement of Operations and primarily included, integration costs, marketing, legal and consulting fees.
The following table presents unaudited pro forma information as if the acquisition of the Wells Fargo branches had occurred on January 1, 2017. This pro forma information includes certain adjustments and assumptions, including but not limited to, reclassifications from 2018 net income to 2017 net income related to the acquisition-related expenses of
$16 million
and hedging gains of
$29 million
. The pro forma information is not necessarily indicative of the results of operations that would have occurred had the transaction been completed on the assumed date.
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Net interest income
|
$
|
540
|
|
|
$
|
482
|
|
Net income
|
$
|
196
|
|
|
$
|
82
|
|
Other 2018 Acquisitions
On March 12, 2018, the Company closed on the purchase of the mortgage loan warehouse business from Santander Bank, adding
$499 million
in outstanding warehouse draws and
$1.7 billion
in commitments. On March 19, 2018, the Company closed on the Desert Community Bank branch acquisition, adding
$614 million
in deposits and
$59 million
in loans. Together, these acquisitions increased goodwill and intangible assets by
$51 million
.
Note
3
- Investment Securities
The following table presents our investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair Value
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Agency - Commercial
|
$
|
1,404
|
|
|
$
|
6
|
|
|
$
|
(34
|
)
|
|
$
|
1,376
|
|
Agency - Residential
|
664
|
|
|
—
|
|
|
(15
|
)
|
|
649
|
|
Corporate debt obligations
|
53
|
|
|
—
|
|
|
—
|
|
|
53
|
|
Municipal obligations
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
Other MBS
|
31
|
|
|
—
|
|
|
—
|
|
|
31
|
|
Certificate of deposits
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total available-for-sale securities
(1)
|
$
|
2,185
|
|
|
$
|
6
|
|
|
$
|
(49
|
)
|
|
$
|
2,142
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
Agency - Commercial
|
$
|
339
|
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
|
$
|
326
|
|
Agency - Residential
|
344
|
|
|
—
|
|
|
(4
|
)
|
|
340
|
|
Total held-to-maturity securities
(1)
|
$
|
683
|
|
|
$
|
—
|
|
|
$
|
(17
|
)
|
|
$
|
666
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Agency - Commercial
|
$
|
1,413
|
|
|
$
|
4
|
|
|
$
|
(43
|
)
|
|
$
|
1,374
|
|
Agency - Residential
|
686
|
|
|
—
|
|
|
(24
|
)
|
|
662
|
|
Corporate debt obligations
|
41
|
|
|
—
|
|
|
—
|
|
|
41
|
|
Municipal obligations
|
33
|
|
|
—
|
|
|
(1
|
)
|
|
32
|
|
Other MBS
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
Certificate of Deposits
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total available-for-sale securities
(1)
|
$
|
2,206
|
|
|
$
|
4
|
|
|
$
|
(68
|
)
|
|
$
|
2,142
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
Agency - Commercial
|
$
|
349
|
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
|
$
|
336
|
|
Agency - Residential
|
354
|
|
|
—
|
|
|
(9
|
)
|
|
345
|
|
Total held-to-maturity securities
(1)
|
$
|
703
|
|
|
$
|
—
|
|
|
$
|
(22
|
)
|
|
$
|
681
|
|
|
|
(1)
|
There were
no
securities of a single issuer, which are not governmental or government-sponsored, that exceeded
10 percent
of stockholders’ equity at
March 31, 2019
or
December 31, 2018
.
|
We evaluate AFS and HTM investment securities for OTTI on a quarterly basis. An OTTI is considered to have occurred when the fair value of a debt security is below its amortized costs and we (1) have the intent to sell the security, (2) will more likely than not be required to sell the security before recovery of its amortized cost, or (3) do not expect to recover the entire amortized cost basis of the security. Investments that have an OTTI are written down through a charge to earnings for the amount representing the credit loss on the security. Gains and losses related to all other factors are recognized in other comprehensive income (loss). Agency securities, which are either explicitly or implicitly backed by the federal government, comprised
96 percent
of our total securities at
March 31, 2019
. This factor is considered when evaluating our investment securities for OTTI. During the
three
months ended
March 31, 2019
and
March 31, 2018
, we had
no
OTTI.
Available-for-sale securities
Securities available-for-sale are carried at fair value. Unrealized gains and losses on AFS securities, to the extent they are temporary in nature, are reported as a component of other comprehensive income
We purchased
$16 million
of AFS securities, which were comprised of U.S. government sponsored agency MBS, certificate of deposits, and corporate debt obligations during the
three
months ended
March 31, 2019
. We purchased
$4 million
of AFS securities, which included U.S. government sponsored agency MBS, corporate debt obligations, and municipal obligations during the
three
months ended
March 31, 2018
.
There were less than
$1 million
in sales of AFS securities during the
three
months ended
March 31, 2019
, which did not include those related to mortgage loans that had been securitized for sale in the normal course of business. We had
no
realized gains as a result of these sales.
Held-to-maturity securities
Investment securities HTM are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method. Unrealized losses are not recorded to the extent they are temporary in nature.
There were
no
purchases or sales of HTM securities during both the
three
months ended
March 31, 2019
and
March 31, 2018
.
The following table summarizes, by duration, the unrealized loss positions on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss Position with
Duration 12 Months and Over
|
|
Unrealized Loss Position with
Duration Under 12 Months
|
|
Fair Value
|
|
Number of Securities
|
|
Unrealized Loss
|
|
Fair
Value
|
|
Number of
Securities
|
|
Unrealized
Loss
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
Agency - Commercial
|
$
|
1,011
|
|
|
73
|
|
|
$
|
(34
|
)
|
|
$
|
21
|
|
|
3
|
|
|
$
|
—
|
|
Agency - Residential
|
624
|
|
|
78
|
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Municipal obligations
|
27
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate debt obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
3
|
|
|
—
|
|
Other MBS
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
2
|
|
|
—
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
Agency - Commercial
|
$
|
326
|
|
|
26
|
|
|
$
|
(13
|
)
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Agency - Residential
|
306
|
|
|
55
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
Agency - Commercial
|
$
|
1,025
|
|
|
74
|
|
|
$
|
(43
|
)
|
|
$
|
1
|
|
|
1
|
|
|
$
|
—
|
|
Agency - Residential
|
647
|
|
|
79
|
|
|
(24
|
)
|
|
14
|
|
|
5
|
|
|
—
|
|
Municipal obligations
|
28
|
|
|
16
|
|
|
(1
|
)
|
|
1
|
|
|
2
|
|
|
—
|
|
Corporate debt obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
2
|
|
|
—
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
Agency - Commercial
|
$
|
336
|
|
|
26
|
|
|
$
|
(13
|
)
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Agency - Residential
|
345
|
|
|
60
|
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
The following table shows the amortized cost and estimated fair value of securities by contractual maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available-for-Sale
|
|
Investment Securities Held-to-maturity
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Weighted Average
Yield
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Weighted Average
Yield
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
$
|
1
|
|
|
$
|
1
|
|
|
1.50
|
%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
%
|
Due after one year through five years
|
60
|
|
|
60
|
|
|
2.51
|
%
|
|
10
|
|
|
10
|
|
|
2.45
|
%
|
Due after five years through 10 years
|
74
|
|
|
74
|
|
|
4.44
|
%
|
|
10
|
|
|
10
|
|
|
2.24
|
%
|
Due after 10 years
|
2,050
|
|
|
2,007
|
|
|
2.68
|
%
|
|
663
|
|
|
646
|
|
|
2.46
|
%
|
Total
|
$
|
2,185
|
|
|
$
|
2,142
|
|
|
|
|
$
|
683
|
|
|
$
|
666
|
|
|
|
We pledge investment securities, primarily agency collateralized and municipal taxable mortgage obligations, to collateralize lines of credit and/or borrowings. At both
March 31, 2019
and
December 31, 2018
, we had pledged investment securities of
$1.9 billion
.
Note
4
- Loans Held-for-Sale
The majority of our mortgage loans originated as LHFS are ultimately sold into the secondary market on a whole loan basis or by securitizing the loans into agency, government, or private label mortgage-backed securities. LHFS totaled
$3.9 billion
at both
March 31, 2019
and
December 31, 2018
. For the
three
months ended
March 31, 2019
we had net gain on loan sales associated with LHFS of
$47 million
, as compared to
$60 million
for the
three
months ended
March 31, 2018
.
At
March 31, 2019
and
December 31, 2018
,
$28 million
and
$137 million
, respectively, of LHFS were recorded at lower of cost or fair value. We elected the fair value option for the remainder of the loans in the portfolio.
Note
5
- Loans Held-for-Investment
The following table presents our loans held-for-investment:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(Dollars in millions)
|
Consumer loans
|
|
|
|
Residential first mortgage
|
$
|
3,100
|
|
|
$
|
2,999
|
|
Home equity
|
796
|
|
|
731
|
|
Other
|
433
|
|
|
314
|
|
Total consumer loans
|
4,329
|
|
|
4,044
|
|
Commercial loans
|
|
|
|
Commercial real estate
|
2,324
|
|
|
2,152
|
|
Commercial and industrial
|
1,651
|
|
|
1,433
|
|
Warehouse lending
|
1,632
|
|
|
1,459
|
|
Total commercial loans
|
5,607
|
|
|
5,044
|
|
Total loans held-for-investment
|
$
|
9,936
|
|
|
$
|
9,088
|
|
The following table presents the UPB of our loan sales and purchases in the loans held-for-investment portfolio:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Loans Sold
(1)
|
|
|
|
Performing loans
(2)
|
$
|
102
|
|
|
$
|
—
|
|
Total loans sold
|
$
|
102
|
|
|
$
|
—
|
|
Net gain associated with loan sales
(3)
|
$
|
2
|
|
|
$
|
—
|
|
Loans Purchased
|
|
|
|
Home equity
|
$
|
49
|
|
|
$
|
—
|
|
Other consumer
|
51
|
|
|
—
|
|
Total loans purchased
|
$
|
100
|
|
|
$
|
—
|
|
Premium associated with loans purchased
|
$
|
3
|
|
|
$
|
—
|
|
|
|
(1)
|
Upon a change in our intent, the loans were transferred to LHFS and subsequently sold.
|
|
|
(2)
|
During the three months ended December 31, 2018, we entered into an agreement to sell these loans, which we subsequently settled on during the
three
months ended
March 31, 2019
.
|
|
|
(3)
|
Recorded in net gain on loan sales on Consolidated Statements of Operations.
|
We have pledged certain LHFI, LHFS, and loans with government guarantees to collateralize lines of credit and/or borrowings with the FHLB of Indianapolis and the FRB of Chicago. At
March 31, 2019
we had pledged loans of
$6.5 billion
, compared to
$6.8 billion
of pledged loans at
December 31, 2018
.
Allowance for Loan Losses
We determine the estimate of the ALLL on at least a quarterly basis. Refer to Note 1- Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards to the consolidated financial statements in the Annual Report on Form 10-K for the year ended
December 31, 2018
for a description of the methodology. The ALLL, other than for loans that have been identified for individual evaluation for impairment, is determined on a loan pool basis by grouping loan types with common risk characteristics to determine our best estimate of incurred losses.
The following table presents changes in ALLL, by class of loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
First
Mortgage (1)
|
|
Home Equity
|
|
Other
Consumer
|
|
Commercial
Real Estate
|
|
Commercial
and Industrial
|
|
Warehouse
Lending
|
|
Total
|
|
(Dollars in millions)
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance ALLL
|
$
|
38
|
|
|
$
|
15
|
|
|
$
|
3
|
|
|
$
|
48
|
|
|
$
|
18
|
|
|
$
|
6
|
|
|
$
|
128
|
|
Charge-offs
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Recoveries
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Provision (benefit)
|
(2
|
)
|
|
—
|
|
|
2
|
|
|
(12
|
)
|
|
12
|
|
|
—
|
|
|
—
|
|
Ending balance ALLL
|
$
|
35
|
|
|
$
|
16
|
|
|
$
|
4
|
|
|
$
|
36
|
|
|
$
|
30
|
|
|
$
|
6
|
|
|
$
|
127
|
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance ALLL
|
$
|
47
|
|
|
$
|
22
|
|
|
$
|
1
|
|
|
$
|
45
|
|
|
$
|
19
|
|
|
$
|
6
|
|
|
$
|
140
|
|
Charge-offs
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Recoveries
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Provision (benefit)
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
Ending balance ALLL
|
$
|
47
|
|
|
$
|
21
|
|
|
$
|
1
|
|
|
$
|
44
|
|
|
$
|
20
|
|
|
$
|
6
|
|
|
$
|
139
|
|
|
|
(1)
|
Includes loans with government guarantees.
|
The following table sets forth the method of evaluation, by class of loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
First
Mortgage (1)
|
|
Home Equity
|
|
Other
Consumer
|
|
Commercial
Real Estate
|
|
Commercial
and Industrial
|
|
Warehouse
Lending
|
|
Total
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-investment
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
|
$
|
33
|
|
|
$
|
23
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
57
|
|
Collectively evaluated
|
3,059
|
|
|
771
|
|
|
432
|
|
|
2,324
|
|
|
1,651
|
|
|
1,632
|
|
|
9,869
|
|
Total loans
|
$
|
3,092
|
|
|
$
|
794
|
|
|
$
|
433
|
|
|
$
|
2,324
|
|
|
$
|
1,651
|
|
|
$
|
1,632
|
|
|
$
|
9,926
|
|
Allowance for loan losses
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
Collectively evaluated
|
31
|
|
|
9
|
|
|
4
|
|
|
36
|
|
|
30
|
|
|
6
|
|
|
116
|
|
Total allowance for loan losses
|
$
|
35
|
|
|
$
|
16
|
|
|
$
|
4
|
|
|
$
|
36
|
|
|
$
|
30
|
|
|
$
|
6
|
|
|
$
|
127
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-investment
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
|
$
|
32
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55
|
|
Collectively evaluated
|
2,959
|
|
|
706
|
|
|
314
|
|
|
2,152
|
|
|
1,433
|
|
|
1,459
|
|
|
9,023
|
|
Total loans
|
$
|
2,991
|
|
|
$
|
729
|
|
|
$
|
314
|
|
|
$
|
2,152
|
|
|
$
|
1,433
|
|
|
$
|
1,459
|
|
|
$
|
9,078
|
|
Allowance for loan losses
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
Collectively evaluated
|
34
|
|
|
8
|
|
|
3
|
|
|
48
|
|
|
18
|
|
|
6
|
|
|
117
|
|
Total allowance for loan losses
|
$
|
38
|
|
|
$
|
15
|
|
|
$
|
3
|
|
|
$
|
48
|
|
|
$
|
18
|
|
|
$
|
6
|
|
|
$
|
128
|
|
|
|
(1)
|
Includes allowance related to loans with government guarantees.
|
|
|
(2)
|
Excludes loans carried under the fair value option.
|
Loans are considered to be past due when any payment of principal or interest is 30 days past the scheduled payment date. 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.
We cease the accrual of interest on all classes of consumer and commercial loans upon the earlier of, becoming 90 days past due, or when doubt exists as to the ultimate collection of principal or interest (classified as nonaccrual or nonperforming loans). When a loan is placed on nonaccrual status, the accrued interest income is reversed and the loan may only return to accrual status when principal and interest become current and are anticipated to be fully collectible.
The following table sets forth the LHFI aging analysis of past due and current loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
90 Days or
Greater Past
Due (1)
|
|
Total
Past Due
|
|
Current
|
|
Total LHFI
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
Residential first mortgage
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
20
|
|
|
$
|
24
|
|
|
$
|
3,076
|
|
|
$
|
3,100
|
|
Home equity
|
1
|
|
|
—
|
|
|
3
|
|
|
4
|
|
|
792
|
|
|
796
|
|
Other
|
2
|
|
|
1
|
|
|
1
|
|
|
4
|
|
|
429
|
|
|
433
|
|
Total consumer loans
|
6
|
|
|
2
|
|
|
24
|
|
|
32
|
|
|
4,297
|
|
|
4,329
|
|
Commercial loans
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,324
|
|
|
2,324
|
|
Commercial and industrial
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1,650
|
|
|
1,651
|
|
Warehouse lending
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,632
|
|
|
1,632
|
|
Total commercial loans
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
5,606
|
|
|
5,607
|
|
Total loans
(2)
|
$
|
6
|
|
|
$
|
3
|
|
|
$
|
24
|
|
|
$
|
33
|
|
|
$
|
9,903
|
|
|
$
|
9,936
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
Residential first mortgage
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
19
|
|
|
$
|
25
|
|
|
$
|
2,974
|
|
|
$
|
2,999
|
|
Home Equity
|
1
|
|
|
—
|
|
|
3
|
|
|
4
|
|
|
727
|
|
|
731
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
314
|
|
|
314
|
|
Total consumer loans
|
5
|
|
|
2
|
|
|
22
|
|
|
29
|
|
|
4,015
|
|
|
4,044
|
|
Commercial loans
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,152
|
|
|
2,152
|
|
Commercial and industrial
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,433
|
|
|
1,433
|
|
Warehouse lending
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,459
|
|
|
1,459
|
|
Total commercial loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,044
|
|
|
5,044
|
|
Total loans
(2)
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
22
|
|
|
$
|
29
|
|
|
$
|
9,059
|
|
|
$
|
9,088
|
|
|
|
(1)
|
Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.
|
|
|
(2)
|
Includes
$3 million
of loans accounted for under the fair value option at both
March 31, 2019
and
December 31, 2018
.
|
Interest income is recognized on nonaccrual loans using a cash basis method. Interest that would have been accrued on impaired loans was less than
$1 million
at both the
three
months ended
March 31, 2019
and the
three
months ended
March 31, 2018
. At
March 31, 2019
and
December 31, 2018
, we had
no
loans 90 days past due and still accruing interest.
Troubled Debt Restructurings
We may modify certain loans in both our consumer and commercial loan portfolios to retain customers or to maximize collection of the outstanding loan balance. Troubled debt restructurings ("TDRs") are modified loans in which a borrower demonstrates financial difficulties and for which a concession has been granted as a result. Nonperforming TDRs are included in nonaccrual loans. TDRs remain in nonperforming status until a borrower has made payments and is current for at least six consecutive months. Performing TDRs are not considered to be nonaccrual so long as we believe that all contractual principal and interest due under the restructured terms will be collected. Performing and nonperforming TDRs remain impaired as interest and principal will not be received in accordance with the original contractual terms of the loan agreement. Refer to Note 1- Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards to the consolidated financial statements in the Annual Report on Form 10-K for the year ended
December 31, 2018
for a description of the methodology used to determine TDRs.
Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, but may give rise to potential incremental losses. We measure impairments using a discounted cash flow method for performing TDRs and measure impairment based on collateral values for nonperforming TDRs.
The following table provides a summary of TDRs by type and performing status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDRs
|
|
Performing
|
|
Nonperforming
|
|
Total
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
Residential first mortgage
|
$
|
22
|
|
|
$
|
8
|
|
|
$
|
30
|
|
Home equity
|
21
|
|
|
2
|
|
|
23
|
|
Total TDRs
(1)(2)
|
$
|
43
|
|
|
$
|
10
|
|
|
$
|
53
|
|
December 31, 2018
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
Residential first mortgage
|
$
|
22
|
|
|
$
|
8
|
|
|
$
|
30
|
|
Home Equity
|
22
|
|
|
2
|
|
|
24
|
|
Total TDRs
(1)(2)
|
$
|
44
|
|
|
$
|
10
|
|
|
$
|
54
|
|
|
|
(1)
|
The ALLL on TDR loans totaled
$10 million
at both
March 31, 2019
and
December 31, 2018
.
|
|
|
(2)
|
Includes
$3 million
of TDR loans accounted for under the fair value option at both
March 31, 2019
and
December 31, 2018
.
|
The following table provides a summary of newly modified TDRs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New TDRs
|
|
Number of Accounts
|
|
Pre-Modification Unpaid Principal Balance
|
|
Post-Modification Unpaid Principal Balance (1)
|
|
Increase in Allowance at Modification
|
|
|
|
(Dollars in millions)
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
Residential first mortgages
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Home equity
(2)(3)
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total TDR loans
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Three Months Ended March 31, 2018
|
|
|
|
Residential first mortgages
|
6
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Home equity
(2)(3)
|
5
|
|
|
1
|
|
|
1
|
|
|
—
|
|
Commercial and industrial
|
1
|
|
|
5
|
|
|
5
|
|
|
1
|
|
Total TDR loans
|
12
|
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
1
|
|
|
|
(1)
|
Post-modification balances include past due amounts that are capitalized at modification date.
|
|
|
(2)
|
Home equity post-modification UPB reflects write downs.
|
|
|
(3)
|
Includes loans carried at the fair value option.
|
There were
no
residential first mortgage loans modified in the previous
12
months that subsequently defaulted during the
three
months ended
March 31, 2019
, compared to
two
residential first mortgage loans with UPB of
$1 million
modified in the previous 12 months that subsequently defaulted during the
three
months ended March 31, 2018. There was
no
change in the allowance associated with these TDRs at subsequent default. All TDR classes within the consumer and commercial portfolios are considered subsequently defaulted when greater than
90
days past due within
12
months of the restructuring date.
Impaired Loans
The following table presents individually evaluated impaired loans and the associated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Recorded
Investment
|
|
Net Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Recorded
Investment
|
|
Net Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
(Dollars in millions)
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
Residential first mortgage
|
$
|
16
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
16
|
|
|
$
|
—
|
|
Home equity
|
—
|
|
|
3
|
|
|
—
|
|
|
1
|
|
|
4
|
|
|
—
|
|
Other consumer
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total loans with no related allowance recorded
|
$
|
17
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
20
|
|
|
$
|
—
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
Residential first mortgage
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
4
|
|
|
$
|
19
|
|
|
$
|
20
|
|
|
$
|
4
|
|
Home equity
|
22
|
|
|
23
|
|
|
7
|
|
|
22
|
|
|
23
|
|
|
7
|
|
Total loans with an allowance recorded
|
$
|
40
|
|
|
$
|
41
|
|
|
$
|
11
|
|
|
$
|
41
|
|
|
$
|
43
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
|
|
|
|
|
|
|
|
|
Residential first mortgage
|
$
|
34
|
|
|
$
|
38
|
|
|
$
|
4
|
|
|
$
|
32
|
|
|
$
|
36
|
|
|
$
|
4
|
|
Home equity
|
22
|
|
|
26
|
|
|
7
|
|
|
23
|
|
|
27
|
|
|
7
|
|
Other consumer
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total impaired loans
|
$
|
57
|
|
|
$
|
65
|
|
|
$
|
11
|
|
|
$
|
55
|
|
|
$
|
63
|
|
|
$
|
11
|
|
The following table presents average impaired loans and the interest income recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
(Dollars in millions)
|
Consumer loans
|
|
|
|
|
|
|
|
Residential first mortgage
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
—
|
|
Home equity
|
22
|
|
|
—
|
|
|
27
|
|
|
1
|
|
Other consumer
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial loans
|
|
|
|
|
|
|
|
Commercial and industrial
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Total impaired loans
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
63
|
|
|
$
|
1
|
|
Credit Quality
We utilize an internal risk rating system which is applied to all consumer and commercial loans. Descriptions of our internal risk ratings as they relate to credit quality follow the ratings used by the U.S. bank regulatory agencies as listed below.
Pass.
Pass assets are not impaired nor do they have any known deficiencies that could impact the quality of the asset.
Watch.
Watch assets are defined as pass rated assets that exhibit elevated risk characteristics or other factors that deserve management’s close attention and increased monitoring. However, the asset does not exhibit a potential or well-defined weakness that would warrant a downgrade to criticized or adverse classification.
Special mention.
Assets identified as special mention possess credit deficiencies or potential weaknesses deserving management's close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk that, if
not corrected, could weaken the assets and increase risk in the future. Special mention assets are criticized, but do not expose an institution to sufficient risk to warrant adverse classification.
Substandard
. Assets identified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the full collection or liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. For home equity loans and other consumer loans, we evaluate credit quality based on the aging and status of payment activity and any other known credit characteristics that call into question full repayment of the asset. Substandard loans may be placed on either accrual or non-accrual status.
Doubtful
. An asset classified as doubtful has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. A doubtful asset has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Due to the high probability of loss, doubtful assets are placed on non-accrual.
Loss.
An asset classified as loss is considered uncollectible and of such little value that the continuance as a bankable asset is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather that it is not practical or desirable to defer writing off the asset even though partial recovery may be affected in the future.
Consumer Loans
Consumer loans consist of open and closed end loans extended to individuals for household, family, and other personal expenditures, and includes consumer loans, and loans to individuals secured by their personal residence, including first mortgage, home equity, and home improvement loans. Because consumer loans are usually relatively small-balance, homogeneous exposures, consumer loans are rated primarily on payment performance. Payment performance is a proxy for the strength of repayment capacity and loans are generally classified based on their payment status rather than by an individual review of each loan.
In accordance with regulatory guidance, we assign risk ratings to consumer loans in the following manner:
•
Consumer loans are classified as Watch once the loan becomes 60 days past due.
•
Open and closed-end consumer loans 90 days or more past due are classified Substandard.
Commercial Loans
Management conducts periodic examinations which serve as an independent verification of the accuracy of the ratings assigned. Loan grades are based on different factors within the borrowing relationship: entity sales, debt service coverage, debt/total net worth, liquidity, balance sheet and income statement trends, management experience, business stability, financing structure, and financial reporting requirements. The underlying collateral is also rated based on the specific type of collateral and corresponding LTV. The combination of the borrower and collateral risk ratings results in the final rating for the borrowing relationship.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Pass
|
|
Watch
|
|
Special Mention
|
|
Substandard
|
|
Total Loans
|
|
(Dollars in millions)
|
Consumer Loans
|
|
|
|
|
|
|
|
|
|
Residential first mortgage
|
$
|
3,053
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
3,100
|
|
Home equity
|
771
|
|
|
22
|
|
|
—
|
|
|
3
|
|
|
796
|
|
Other consumer
|
431
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
433
|
|
Total consumer loans
|
$
|
4,255
|
|
|
$
|
48
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
4,329
|
|
Commercial Loans
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
2,297
|
|
|
$
|
20
|
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
2,324
|
|
Commercial and industrial
|
1,568
|
|
|
19
|
|
|
32
|
|
|
32
|
|
|
1,651
|
|
Warehouse
|
1,385
|
|
|
232
|
|
|
15
|
|
|
—
|
|
|
1,632
|
|
Total commercial loans
|
$
|
5,250
|
|
|
$
|
271
|
|
|
$
|
52
|
|
|
$
|
34
|
|
|
$
|
5,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Pass
|
|
Watch
|
|
Special Mention
|
|
Substandard
|
|
Total Loans
|
|
(Dollars in millions)
|
Consumer Loans
|
|
|
|
|
|
|
|
|
|
Residential first mortgage
|
$
|
2,952
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
2,999
|
|
Home equity
|
705
|
|
|
23
|
|
|
—
|
|
|
3
|
|
|
731
|
|
Other consumer
|
314
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
314
|
|
Total consumer loans
|
$
|
3,971
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
4,044
|
|
Commercial Loans
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
2,132
|
|
|
$
|
14
|
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
2,152
|
|
Commercial and industrial
|
1,351
|
|
|
53
|
|
|
29
|
|
|
—
|
|
|
1,433
|
|
Warehouse
|
1,324
|
|
|
120
|
|
|
15
|
|
|
—
|
|
|
1,459
|
|
Total commercial loans
|
$
|
4,807
|
|
|
$
|
187
|
|
|
$
|
49
|
|
|
$
|
1
|
|
|
$
|
5,044
|
|
Note
6
- Loans with Government Guarantees
Substantially all loans with government guarantees are insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs. FHA loans earn interest at a rate based upon the
10
-year U.S. Treasury note rate at the time the underlying loan becomes delinquent, which is not paid by the FHA or the U.S. Department of Veterans Affairs until claimed. Certain loans within our portfolio may be subject to indemnifications and insurance limits which expose us to limited credit risk. We have reserved for these risks within other assets and as a component of our ALLL on residential first mortgages.
At
March 31, 2019
and
December 31, 2018
, loans with government guarantees totaled
$470 million
and
$392 million
, respectively.
Repossessed assets and the associated claims related to government guaranteed loans are recorded in other assets and totaled
$53 million
and
$50 million
, at
March 31, 2019
and
December 31, 2018
, respectively.
Note
7
- Variable Interest Entities
We have
no
consolidated VIEs as of
March 31, 2019
and
December 31, 2018
.
In connection with our securitization activities, we have retained a
five
percent interest in the investment securities of certain trusts ("other MBS") and are contracted as the subservicer of the underlying loans, compensated based on market rates, which constitutes a continuing involvement in these trusts. Although we have a variable interest in these securitization trusts, we are not their primary beneficiary due to the relative size of our investment in comparison to the total amount of securities issued by the VIE and our inability to direct activities that most significantly impact the VIE’s economic performance. As a result, we have not consolidated the assets and liabilities of the VIE in our Statements of Financial Condition. The Bank’s maximum exposure to loss is limited to our investment in the VIE, as well as the standard representations and warranties made
in conjunction with the loan transfer. See Note
3
- Investment Securities and Note
17
- Fair Value Measurements, for additional information.
In addition, we have a continuing involvement, but are not the primary beneficiary for an unconsolidated VIE related to the FSTAR 2007-1 mortgage securitization trust. In accordance with the settlement agreement with MBIA, there is no further recourse to us related to FSTAR 2007-1, unless MBIA fails to meet their obligations. At
March 31, 2019
and
December 31, 2018
, the FSTAR 2007-1 mortgage securitization trust included
1,427
loans and
1,513
loans, respectively, with an aggregate principal balance of
$46 million
and
$49 million
, respectively.
Note
8
- Mortgage Servicing Rights
We have investments in MSRs that result from the sale of loans to the secondary market for which we retain the servicing. We account for MSRs at their fair value. A primary risk associated with MSRs is the potential reduction in fair value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates or government intervention. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. We utilize derivatives as economic hedges to offset changes in the fair value of the MSRs resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments. There is also a risk of valuation decline due to higher than expected increases in default rates, which we do not believe can be effectively managed using derivatives. For further information regarding the derivative instruments utilized to manage our MSR risks, see Note
9
- Derivative Financial Instruments.
Changes in the fair value of residential first mortgage MSRs were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Balance at beginning of period
|
$
|
290
|
|
|
$
|
291
|
|
Additions from loans sold with servicing retained
|
67
|
|
|
84
|
|
Reductions from sales
|
(45
|
)
|
|
(141
|
)
|
Changes in fair value due to
(1):
|
|
|
|
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other
|
(11
|
)
|
|
(5
|
)
|
Changes in estimates of fair value due to interest rate risk
(2)
|
(23
|
)
|
|
10
|
|
Fair value of MSRs at end of period
|
$
|
278
|
|
|
$
|
239
|
|
|
|
(1)
|
Changes in fair value are included within net return on mortgage servicing rights on the Consolidated Statements of Operations.
|
|
|
(2)
|
Represents estimated MSR value change resulting primarily from market-driven changes which we manage through the use of derivatives.
|
The following table summarizes the hypothetical effect on the fair value of servicing rights using adverse changes of
10 percent
and
20 percent
to the weighted average of certain significant assumptions used in valuing these assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
|
Fair value impact due to
|
|
|
|
Fair value impact due to
|
|
Actual
|
|
10% adverse change
|
|
20% adverse change
|
|
Actual
|
|
10% adverse change
|
|
20% adverse change
|
|
|
|
(Dollars in millions)
|
|
|
|
(Dollars in millions)
|
Option adjusted spread
|
5.51
|
%
|
|
$
|
270
|
|
|
$
|
266
|
|
|
5.42
|
%
|
|
$
|
284
|
|
|
$
|
280
|
|
Constant prepayment rate
|
10.17
|
%
|
|
260
|
|
|
247
|
|
|
9.57
|
%
|
|
278
|
|
|
268
|
|
Weighted average cost to service per loan
|
$
|
86.11
|
|
|
272
|
|
|
269
|
|
|
$
|
85.57
|
|
|
286
|
|
|
283
|
|
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. To isolate the effect of the specified change, the fair value shock analysis is consistent with the identified adverse change, while holding all other assumptions constant. In practice, a change in one assumption generally impacts other assumptions, which may either magnify or counteract the effect of the change. For further information on the fair value of MSRs, see Note
17
- Fair Value Measurements.
Contractual servicing and subservicing fees
. Contractual servicing and subservicing fees, including late fees and other ancillary income are presented below. Contractual servicing fees are included within net return on mortgage servicing rights on the Consolidated Statements of Operations. Contractual subservicing fees including late fees and other ancillary income are
included within loan administration income on the Consolidated Statements of Operations. Subservicing fee income is recorded for fees earned on subserviced loans, net of third party subservicing costs.
The following table summarizes income and fees associated with owned mortgage servicing rights:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Net return on mortgage servicing rights
|
|
|
|
Servicing fees, ancillary income and late fees
(1)
|
$
|
19
|
|
|
$
|
14
|
|
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other
|
(11
|
)
|
|
$
|
(5
|
)
|
Changes in estimates of fair value due to interest rate risk
|
(23
|
)
|
|
10
|
|
Gain (loss) on MSR derivatives
(2)
|
22
|
|
|
(11
|
)
|
Net transaction costs on sale of MSR assets
|
(1
|
)
|
|
(4
|
)
|
Total return included in net return on mortgage servicing rights
|
$
|
6
|
|
|
$
|
4
|
|
|
|
(1)
|
Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on a cash basis.
|
|
|
(2)
|
Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs.
|
The following table summarizes income and fees associated with our mortgage loans subserviced for others:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Loan administration income on mortgage loans subserviced
|
|
|
|
Servicing fees, ancillary income and late fees
(1)
|
$
|
24
|
|
|
$
|
10
|
|
Charges on subserviced escrow balances
|
(12
|
)
|
|
(5
|
)
|
Other servicing charges
|
(1
|
)
|
|
—
|
|
Total income on mortgage loans subserviced, included in loan administration
|
$
|
11
|
|
|
$
|
5
|
|
|
|
(1)
|
Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on cash basis.
|
Note
9
- Derivative Financial Instruments
Derivative financial instruments are recorded at fair value in other assets and other liabilities on the Consolidated Statements of Financial Condition. Our policy is to present its derivative assets and derivative liabilities on the Consolidated Statement of Financial Condition on a gross basis, even when provisions allowing for set-off are in place. However, for derivative contracts cleared through certain central clearing parties, variation margin payments are recognized as settlements. We are exposed to non-performance risk by the counterparties to our various derivative financial instruments. A majority of our derivatives are centrally cleared through a Central Counterparty Clearing House or consist of residential mortgage interest rate lock commitments further limiting our exposure to non-performance risk. We believe that the non-performance risk inherent in our remaining derivative contracts is minimal based on credit standards and the collateral provisions of the derivative agreements.
Derivatives not designated as hedging instruments:
We maintain a derivative portfolio of interest rate swaps, futures and forward commitments used to manage exposure to changes in interest rates, MSR asset values and to meet the needs of customers. We also enter into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Market risk on interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments. Changes in fair value of derivatives not designated as hedging instruments are recognized in the Consolidated Statements of Income.
Derivatives designated as hedging instruments:
We have designated certain interest rate swaps as fair value hedges of fixed rate certificates of deposit. Derivatives that are designated in hedging relationships are assessed for effectiveness using regression analysis at inception and throughout the hedge period. All designated hedge relationships were and are expected to be highly effective as of
March 31, 2019
. Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged item.
The following table presents the notional amount, estimated fair value and maturity of our derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019 (1)
|
|
Notional Amount
|
|
Fair Value (2)
|
|
Expiration Dates
|
|
(Dollars in millions)
|
Derivatives in fair value hedge relationships:
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Interest rate swap on CDs
|
$
|
10
|
|
|
$
|
—
|
|
|
2019
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Futures
|
$
|
234
|
|
|
$
|
—
|
|
|
2019-2023
|
Mortgage-backed securities forwards
|
2,001
|
|
|
4
|
|
|
2019
|
Rate lock commitments
|
4,102
|
|
|
37
|
|
|
2019
|
Interest rate swaps and swaptions
|
894
|
|
|
16
|
|
|
2019-2029
|
Total derivative assets
|
$
|
7,231
|
|
|
$
|
57
|
|
|
|
Liabilities
|
|
|
|
|
|
Futures
|
$
|
1,295
|
|
|
$
|
1
|
|
|
2019-2023
|
Mortgage-backed securities forwards
|
4,942
|
|
|
41
|
|
|
2019
|
Rate lock commitments
|
143
|
|
|
—
|
|
|
2019
|
Interest rate swaps
|
1,350
|
|
|
4
|
|
|
2019-2049
|
Total derivative liabilities
|
$
|
7,730
|
|
|
$
|
46
|
|
|
|
|
|
(1)
|
Variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day's fair value of open positions, is considered settlement of the derivative position for accounting purposes.
|
|
|
(2)
|
Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 (1)
|
|
Notional Amount
|
|
Fair Value (2)
|
|
Expiration Dates
|
|
(Dollars in millions)
|
Derivatives in fair value hedge relationships:
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Interest rate swaps on CDs
|
$
|
20
|
|
|
$
|
—
|
|
|
2019
|
Liabilities
|
|
|
|
|
|
Interest rate swaps on CDs
|
$
|
10
|
|
|
$
|
—
|
|
|
2019
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Futures
|
$
|
248
|
|
|
$
|
—
|
|
|
2019-2023
|
Mortgage backed securities forwards
|
362
|
|
|
4
|
|
|
2019
|
Rate lock commitments
|
2,221
|
|
|
20
|
|
|
2019
|
Interest rate swaps and swaptions
|
1,662
|
|
|
23
|
|
|
2019-2049
|
Total derivative assets
|
$
|
4,493
|
|
|
$
|
47
|
|
|
|
Liabilities
|
|
|
|
|
|
Futures
|
$
|
1,513
|
|
|
$
|
1
|
|
|
2019-2023
|
Mortgage backed securities forwards
|
4,625
|
|
|
31
|
|
|
2019
|
Rate lock commitments
|
45
|
|
|
—
|
|
|
2019
|
Interest rate swaps
|
755
|
|
|
7
|
|
|
2019-2028
|
Total derivative liabilities
|
$
|
6,938
|
|
|
$
|
39
|
|
|
|
|
|
(1)
|
Variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day's fair value of open positions, is considered settlement of the derivative position for accounting purposes.
|
|
|
(2)
|
Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.
|
The following tables present the derivatives subject to a master netting arrangement, including the cash pledged as collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Netted in the Statement of Financial Position
|
|
Net Amount Presented in the Statement of Financial Position
|
|
Gross Amounts Not Offset in the Statement of Financial Position
|
|
Gross Amount
|
|
|
Financial Instruments
|
|
Cash Collateral
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities forwards
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swaps and swaptions (1)
|
16
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
3
|
|
Total derivative assets
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Futures
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Mortgage backed securities forwards
|
41
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
42
|
|
Interest rate swaps (1)
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
28
|
|
Total derivative liabilities
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities forwards
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swaps and swaptions (1)
|
23
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
14
|
|
Total derivative assets
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
14
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Futures
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Mortgage-backed securities forwards
|
31
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
29
|
|
Interest rate swaps (1)
|
7
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
23
|
|
Total derivative liabilities
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
|
(1)
|
Variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day's fair value of open positions, is considered settlement of the derivative position for accounting purposes.
|
The fair value basis adjustment on our hedged CDs is included in interest bearing deposits on our Consolidated Statements of Operations. The carrying amount of our hedged CDs was
$10 million
at
March 31, 2019
and
$30 million
at
December 31, 2018
and the cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged CDs was
de minimis
at both
March 31, 2019
and
December 31, 2018
, respectively.
At
March 31, 2019
, we pledged a total of
$71 million
related to derivative financial instruments, consisting of
$44 million
of cash collateral on derivative liabilities and
$27 million
of maintenance margin on centrally cleared derivatives and had an obligation to return cash of
$3 million
on derivative assets. We pledged a total of
$53 million
related to derivative financial instruments, consisting of
$30 million
of cash collateral on derivatives and
$23 million
of maintenance margin on centrally cleared derivatives and had an obligation to return cash of
$14 million
on derivative assets at
December 31, 2018
. Within the Consolidated Statements of Financial Condition, the collateral related to derivative activity is included in other assets and other liabilities and the cash pledged as maintenance margin is restricted and included in other assets.
The following table presents the net gain (loss) recognized on designated instruments, net of the impact of offsetting positions:
|
|
|
|
|
|
|
|
|
|
Amount Recorded in Net Interest Income (1)
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Gain (loss) on cash flow hedging relationships in interest contracts:
|
|
|
|
Amount of gain (loss) reclassified from AOCI into income
|
$
|
—
|
|
|
$
|
(1
|
)
|
Total gain (loss) on hedges
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
|
(1)
|
The gain (loss) on fair value hedging relationships in interest contracts was
de minimis
and
zero
for the three months ending
March 31, 2019
and
March 31, 2018
, respectively. During the second quarter of 2018, we de-designated all of our remaining cash flow hedge relationships.
|
The following table presents net gain (loss) recognized in income on derivative instruments, net of the impact of offsetting positions:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
|
|
(Dollars in millions)
|
Derivatives not designated as hedging instruments:
|
Location of Gain (Loss)
|
|
|
|
Futures
|
Net return on mortgage servicing rights
|
$
|
—
|
|
|
$
|
(2
|
)
|
Interest rate swaps and swaptions
|
Net return on mortgage servicing rights
|
13
|
|
|
(5
|
)
|
Mortgage-backed securities forwards
|
Net return on mortgage servicing rights
|
9
|
|
|
(4
|
)
|
Rate lock commitments and forward agency and loan sales
|
Net gain on loan sales
|
8
|
|
|
(8
|
)
|
Forward commitments
|
Other noninterest income
|
1
|
|
|
—
|
|
Interest rate swaps (1)
|
Other noninterest income
|
1
|
|
|
—
|
|
Total derivative gain (loss)
|
|
$
|
32
|
|
|
$
|
(19
|
)
|
|
|
(1)
|
Includes customer-initiated commercial interest rate swaps.
|
Note
10
- Borrowings
Federal Home Loan Bank Advances
The following is a breakdown of our FHLB advances outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
(Dollars in millions)
|
Short-term fixed rate term advances
|
$
|
2,830
|
|
|
2.55
|
%
|
|
$
|
2,993
|
|
|
2.52
|
%
|
Other short-term borrowings
|
271
|
|
|
2.45
|
%
|
|
251
|
|
|
2.87
|
%
|
Total short-term Federal Home Loan Bank advances and other borrowings
|
3,101
|
|
|
|
|
3,244
|
|
|
|
Long-term Federal Home Loan Bank fixed rate advances
(1)
|
250
|
|
|
1.68
|
%
|
|
150
|
|
|
1.53
|
%
|
Total Federal Home Loan Bank advances
|
$
|
3,351
|
|
|
|
|
$
|
3,394
|
|
|
|
|
|
(1)
|
Includes the current portion of fixed rate advances of
$50 million
at both
March 31, 2019
and
December 31, 2018
.
|
The following table contains detailed information on our FHLB advances and other borrowings:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Maximum outstanding at any month end
|
$
|
3,391
|
|
|
$
|
5,740
|
|
Average outstanding balance
|
2,878
|
|
|
5,322
|
|
Average remaining borrowing capacity
|
3,314
|
|
|
1,399
|
|
Weighted average interest rate
|
2.45
|
%
|
|
1.65
|
%
|
The following table outlines the maturity dates of our FHLB advances and other borrowings:
|
|
|
|
|
|
March 31, 2019
|
|
(Dollars in millions)
|
2019
|
$
|
3,151
|
|
2020
|
—
|
|
2021
|
—
|
|
2022
|
—
|
|
Thereafter
|
200
|
|
Total
|
$
|
3,351
|
|
Parent Company Senior Notes and Trust Preferred Securities
The following table presents long-term debt, net of debt issuance costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Amount
|
|
Interest Rate
|
|
Amount
|
|
Interest Rate
|
|
(Dollars in millions)
|
Senior Notes
|
|
|
|
|
|
|
|
Senior notes, matures 2021
|
$
|
248
|
|
|
6.125
|
%
|
|
$
|
248
|
|
|
6.125
|
%
|
Trust Preferred Securities
|
|
|
|
|
|
|
|
Floating Three Month LIBOR Plus:
|
|
|
|
|
|
|
|
3.25%, matures 2032
|
$
|
26
|
|
|
5.86
|
%
|
|
$
|
26
|
|
|
6.07
|
%
|
3.25%, matures 2033
|
26
|
|
|
6.04
|
%
|
|
26
|
|
|
5.69
|
%
|
3.25%, matures 2033
|
26
|
|
|
5.85
|
%
|
|
26
|
|
|
6.05
|
%
|
2.00%, matures 2035
|
26
|
|
|
4.79
|
%
|
|
26
|
|
|
4.44
|
%
|
2.00%, matures 2035
|
26
|
|
|
4.79
|
%
|
|
26
|
|
|
4.44
|
%
|
1.75%, matures 2035
|
51
|
|
|
4.36
|
%
|
|
51
|
|
|
4.54
|
%
|
1.50%, matures 2035
|
25
|
|
|
4.29
|
%
|
|
25
|
|
|
3.94
|
%
|
1.45%, matures 2037
|
25
|
|
|
4.06
|
%
|
|
25
|
|
|
4.24
|
%
|
2.50%, matures 2037
|
16
|
|
|
5.11
|
%
|
|
16
|
|
|
5.29
|
%
|
Total Trust Preferred Securities
|
247
|
|
|
|
|
247
|
|
|
|
Total other long-term debt
|
$
|
495
|
|
|
|
|
$
|
495
|
|
|
|
Senior Notes
On July 11, 2016, we issued
$250 million
of senior notes (“Senior Notes”) which mature on July 15, 2021. Prior to June 15, 2021, we may redeem some or all of the Senior Notes at a redemption price equal to the greater of
100 percent
of the aggregate principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments discounted to the redemption date on a semi-annual basis using a discount rate equal to the Treasury Rate plus
0.50 percent
, plus, in each case accrued and unpaid interest.
Trust Preferred Securities
We sponsor nine trust subsidiaries, which issued preferred stock to third party investors. We issued junior subordinated debt securities to those trusts, which we have included in long-term debt. The junior subordinated debt securities are the sole assets of those trusts. The trust preferred securities are callable by us at any time. Interest is payable quarterly; however, we may defer interest payments for up to 20 quarters without default or penalty. As of
March 31, 2019
, we had
no
deferred interest.
Note
11
- Accumulated Other Comprehensive Income (Loss)
The following table sets forth the components in accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Investment securities
|
|
|
|
Beginning balance
|
$
|
(47
|
)
|
|
$
|
(18
|
)
|
Unrealized gain (loss)
|
21
|
|
|
(32
|
)
|
Less: Tax provision (benefit)
|
5
|
|
|
(8
|
)
|
Net unrealized gain (loss)
|
16
|
|
|
(24
|
)
|
Reclassification of certain income tax effects
(1)
|
—
|
|
|
(5
|
)
|
Other comprehensive income (loss), net of tax
|
16
|
|
|
(29
|
)
|
Ending balance
|
$
|
(31
|
)
|
|
$
|
(47
|
)
|
|
|
|
|
Cash Flow Hedges
|
|
|
|
Beginning balance
|
$
|
—
|
|
|
$
|
2
|
|
Unrealized gain
|
—
|
|
|
19
|
|
Less: Tax provision
|
—
|
|
|
5
|
|
Net unrealized gain
|
—
|
|
|
14
|
|
Reclassifications out of AOCI
(2)
|
—
|
|
|
1
|
|
Net unrealized gain reclassified out of AOCI
|
—
|
|
|
1
|
|
Other comprehensive income, net of tax
|
—
|
|
|
15
|
|
Ending balance
|
$
|
—
|
|
|
$
|
17
|
|
|
|
(1)
|
Income tax effects of the Tax Cuts and Jobs Act are reclassified from AOCI to retained earnings due to early adoption of ASU 2018-02.
|
|
|
(2)
|
Reclassifications are reported in interest expense on the Consolidated Statement of Operations.
|
Note
12
- Earnings Per Share
Basic earnings per share, excluding dilution, is computed by dividing earnings applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that could then share in our earnings.
The following table sets forth the computation of basic and diluted earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions, except share data)
|
Net income
|
$
|
36
|
|
|
$
|
35
|
|
Weighted Average Shares
|
|
|
|
Weighted average common shares outstanding
|
56,897,799
|
|
|
57,356,654
|
|
Effect of dilutive securities
|
|
|
|
Stock-based awards
|
692,473
|
|
|
957,731
|
|
Weighted average diluted common shares
|
57,590,272
|
|
|
58,314,385
|
|
Earnings per common share
|
|
|
|
Basic earnings per common share
|
$
|
0.64
|
|
|
$
|
0.61
|
|
Effect of dilutive securities
|
|
|
|
Stock-based awards
|
(0.01
|
)
|
|
(0.01
|
)
|
Diluted earnings per common share
|
$
|
0.63
|
|
|
$
|
0.60
|
|
Note
13
- Stock-Based Compensation
We had stock-based compensation expense of
$3 million
and
$2 million
for the
three
months ended
March 31, 2019
and
March 31, 2018
, respectively.
Restricted Stock and Restricted Stock Units
The following table summarizes restricted stock and restricted stock units activity:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Shares
|
|
Weighted — Average Grant-Date Fair Value per Share
|
Restricted Stock and Restricted Stock Units
|
|
|
|
Non-vested balance at beginning of period
|
1,620,568
|
|
|
$
|
27.27
|
|
Granted
|
60,879
|
|
|
30.68
|
|
Vested
|
(31,364
|
)
|
|
34.45
|
|
Canceled and forfeited
|
(17,701
|
)
|
|
32.17
|
|
Non-vested balance at end of period
|
1,632,382
|
|
|
$
|
27.20
|
|
2017 Employee Stock Purchase Plan
A total of
800,000
shares of the Company’s common stock are reserved and authorized for issuance for purchase under the Employee Stock Purchase Plan (ESPP). There were
32,878
shares issued under the ESPP during the
three
months ended
March 31, 2019
and the associated compensation expense was de minimis.
Note
14
- Income Taxes
The provision for income taxes in interim periods requires us to make a best estimate of the effective tax rate expected to be applicable for the full year, adjusted for any discrete items for the applicable period. This estimated effective tax rate is then applied to interim consolidated pre-tax operating income to determine the interim provision for income taxes.
The following table presents our provision for income tax and effective tax provision rate:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Provision for income taxes
|
$
|
8
|
|
|
$
|
9
|
|
Effective tax provision rate
|
18.4
|
%
|
|
20.1
|
%
|
We believe that it is unlikely that our unrecognized tax benefits will change by a material amount during the next
12 months
. We recognize interest and penalties related to unrecognized tax benefits in provision for income taxes.
Note
15
- Regulatory Matters
Regulatory Capital
We, along with the Bank, must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that could have a material effect on the Consolidated Financial Statements. On
January 1, 2015
, the Basel III rules became effective and included transition provisions through 2018. In preparation for the expected capital simplification rules, the Basel III implementation phase-in has been halted, as the agencies issued a final rule that will maintain the capital rules’ 2017 transition provisions for several regulatory capital deductions and certain other requirements that are subject to multi-year phase-in schedules in the regulatory capital rules.
To be categorized as "well-capitalized," the Company and the Bank must maintain minimum tangible capital, Tier 1 capital, common equity Tier 1, and total capital ratios as set forth in the table below. We, along with the Bank, are considered "well-capitalized" at both
March 31, 2019
and
December 31, 2018
.
The following tables present the regulatory capital ratios as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flagstar Bancorp
|
Actual
|
|
For Capital Adequacy Purposes
|
|
Well-Capitalized Under Prompt Corrective Action Provisions
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
|
|
|
|
|
Tangible capital (to adjusted avg. total assets)
|
$
|
1,520
|
|
8.37
|
%
|
|
N/A
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
Tier 1 leverage (to adjusted avg. total assets)
|
1,520
|
|
8.37
|
%
|
|
$
|
727
|
|
4.0
|
%
|
|
$
|
909
|
|
5.0
|
%
|
Common equity Tier 1 capital (to RWA)
|
1,280
|
|
9.69
|
%
|
|
594
|
|
4.5
|
%
|
|
859
|
|
6.5
|
%
|
Tier 1 capital (to RWA)
|
1,520
|
|
11.51
|
%
|
|
793
|
|
6.0
|
%
|
|
1,057
|
|
8.0
|
%
|
Total capital (to RWA)
|
1,650
|
|
12.49
|
%
|
|
1,057
|
|
8.0
|
%
|
|
1,321
|
|
10.0
|
%
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Tangible capital (to adjusted avg. total assets)
|
$
|
1,505
|
|
8.29
|
%
|
|
N/A
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
Tier 1 leverage (to adjusted avg. total assets)
|
1,505
|
|
8.29
|
%
|
|
$
|
726
|
|
4.0
|
%
|
|
$
|
908
|
|
5.0
|
%
|
Common equity Tier 1 capital (to RWA)
|
1,265
|
|
10.54
|
%
|
|
540
|
|
4.5
|
%
|
|
780
|
|
6.5
|
%
|
Tier 1 capital (to RWA)
|
1,505
|
|
12.54
|
%
|
|
720
|
|
6.0
|
%
|
|
960
|
|
8.0
|
%
|
Total capital (to RWA)
|
1,637
|
|
13.63
|
%
|
|
960
|
|
8.0
|
%
|
|
1,201
|
|
10.0
|
%
|
N/A - Not applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flagstar Bank
|
Actual
|
|
For Capital Adequacy Purposes
|
|
Well-Capitalized Under Prompt Corrective Action Provisions
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
|
|
|
|
|
Tangible capital (to adjusted avg. total assets)
|
$
|
1,641
|
|
9.04
|
%
|
|
N/A
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
Tier 1 leverage (to adjusted avg. total assets)
|
1,641
|
|
9.04
|
%
|
|
$
|
726
|
|
4.0
|
%
|
|
$
|
908
|
|
5.0
|
%
|
Common equity tier 1 capital (to RWA)
|
1,641
|
|
12.44
|
%
|
|
594
|
|
4.5
|
%
|
|
858
|
|
6.5
|
%
|
Tier 1 capital (to RWA)
|
1,641
|
|
12.44
|
%
|
|
792
|
|
6.0
|
%
|
|
1,055
|
|
8.0
|
%
|
Total capital (to RWA)
|
1,771
|
|
13.42
|
%
|
|
1,055
|
|
8.0
|
%
|
|
1,319
|
|
10.0
|
%
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Tangible capital (to adjusted avg. total assets)
|
$
|
1,574
|
|
8.67
|
%
|
|
N/A
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
Tier 1 leverage (to adjusted avg. total assets)
|
1,574
|
|
8.67
|
%
|
|
$
|
726
|
|
4.0
|
%
|
|
$
|
908
|
|
5.0
|
%
|
Common equity tier 1 capital (to RWA)
|
1,574
|
|
13.12
|
%
|
|
540
|
|
4.5
|
%
|
|
780
|
|
6.5
|
%
|
Tier 1 capital (to RWA)
|
1,574
|
|
13.12
|
%
|
|
720
|
|
6.0
|
%
|
|
960
|
|
8.0
|
%
|
Total capital (to RWA)
|
1,705
|
|
14.21
|
%
|
|
960
|
|
8.0
|
%
|
|
1,200
|
|
10.0
|
%
|
N/A - Not applicable
Note
16
- Legal Proceedings, Contingencies and Commitments
Legal Proceedings
We and our subsidiaries are subject to various pending or threatened legal proceedings arising out of the normal course of business operations. In addition, the Bank is routinely named in civil actions throughout the country by borrowers and former borrowers relating to the origination, purchase, sale, and servicing of mortgage loans. From time to time, governmental agencies also conduct investigations or examinations of various practices of the Bank. In the course of such investigations or examinations, the Bank cooperates with such agencies and provides information as requested.
We assess the liabilities and loss contingencies in connection with pending or threatened legal and regulatory proceedings on at least a quarterly basis and establish accruals when we believe it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, litigation accruals are adjusted, as appropriate, in light of additional information.
At
March 31, 2019
, we do not believe that the amount of any reasonably possible losses in excess of any amounts accrued with respect to ongoing proceedings or any other known claims will be material to our financial statements, or that the ultimate outcome of these actions will have a material adverse effect on our financial condition, results of operations or cash flows.
DOJ litigation settlement
In 2012, the Bank entered into a Settlement Agreement with the DOJ which meets the definition of a financial liability (the "DOJ Liability").
In accordance with the Settlement Agreement, we made an initial payment of
$15 million
and agreed to make future annual payments totaling
$118 million
in annual increments of up to
$25 million
upon meeting all conditions, which are evaluated quarterly and include: (a) the reversal of the DTA valuation allowance, which occurred at the end of 2013; (b) the repayment of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "TARP Preferred"), which occurred in the third quarter of 2016; and (c) the Bank’s Tier 1 Leverage Capital Ratio equals
11 percent
or greater as filed in the Call Report with the OCC.
No payment would be required until six months after the Bank files its Call Report with the OCC first reporting that its Tier 1 Leverage Capital Ratio was
11 percent
or greater. If all other conditions were then satisfied, an initial annual payment would be due at that time. The next annual payment is only made if such other conditions continue to be satisfied, otherwise payments are delayed until all such conditions are met. Further, making such a payment must not violate any material banking regulatory requirement, and the OCC must not object in writing.
Consistent with our business and regulatory requirements, Flagstar shall seek in good faith to fulfill the conditions, and will not undertake any conduct or fail to take any action the purpose of which is to frustrate or delay our ability to fulfill any of the above conditions.
Additionally, if the Bank and Bancorp become party to a business combination in which the Bank or Bancorp represent less than
33.3 percent
of the resulting company’s assets, annual payments must commence twelve months after the date of that business combination.
The Settlement Agreement meets the definition of a financial instrument for which we elected the fair value option. We consider the assumptions a market participant would make to transfer the liability and evaluate the potential ways we might satisfy the Settlement Agreement and our estimates of the likelihood of these outcomes, which may change over time. The fair value of the liability is subject to significant uncertainty and is impacted by forecasted estimates of the timing of potential payments some of which are impacted by inputs including estimates of equity, earnings, timing and amount of dividends and growth of the balance sheet and their related impacts on forecasted Tier 1 Leverage Capital Ratio. For further information on the fair value of the liability, see Note
17
- Fair Value Measurements.
Other litigation accruals
Excluding the fair value liability relating to the DOJ litigation settlement, our total accrual for contingent liabilities and settled litigation was
$2 million
at
March 31, 2019
and
December 31, 2018
.
Commitments
The following table is a summary of the contractual amount of significant commitments:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(Dollars in millions)
|
Commitments to extend credit
|
|
|
|
Mortgage loans interest-rate lock commitments
|
$
|
4,286
|
|
|
$
|
2,293
|
|
Warehouse loan commitments
|
2,222
|
|
|
2,334
|
|
Commercial and industrial commitments
|
1,007
|
|
|
918
|
|
Other commercial commitments
|
1,529
|
|
|
1,260
|
|
HELOC commitments
|
454
|
|
|
429
|
|
Other consumer commitments
|
189
|
|
|
108
|
|
Standby and commercial letters of credit
|
64
|
|
|
63
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. Commitments generally have fixed expiration dates or other termination clauses. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us, upon extension of credit is based on management's credit evaluation of the counterparties.
These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the Consolidated Statements of Financial Condition. Our exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We utilize the same credit policies in making commitments and conditional obligations as we do for balance sheet instruments. The types of credit we extend are as follows:
Mortgage loan interest-rate lock commitments.
We enter into mortgage interest-rate lock commitments with our customers. These commitments are considered to be derivative instruments and the fair value of these commitments is recorded in the Consolidated Statements of Financial Condition in other assets. For further information, see Note
9
- Derivative Financial Instruments.
Warehouse loan commitments.
Lines of credit provided to mortgage originators to fund loans they originate and then sell. The proceeds of the sale of the loans are used to repay the draw on the line used to fund the loans.
Commercial and industrial and other commercial commitments.
Conditional commitments issued under various terms to lend funds to business and other entities. These commitments include revolving credit agreements, term loan commitments and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.
HELOC commitments.
Commitments to extend, originate or purchase credit are primarily lines of credit to consumers and have specified rates and maturity dates. Many of these commitments also have adverse change clauses, which allow us to cancel the commitment due to deterioration in the borrowers’ creditworthiness or a decline in the collateral value.
Other consumer commitments. C
onditional commitments issued to accommodate the financial needs of customers. The commitments are made under various terms to lend funds to consumers, which include revolving credit agreements, term loan commitments and short-term borrowing agreements.
Standby and commercial letters of credit.
Conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. These financial standby letters of credit irrevocably obligate the bank to pay a third party beneficiary when a customer fails to repay an outstanding loan or debt instrument.
We maintain a reserve for the estimate of probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unfunded loans with available balances, new commitments to lend that are not yet funded, and standby and commercial letters of credit. A reserve balance of
$3 million
at both
March 31, 2019
and
December 31, 2018
, is reflected in other liabilities on the Consolidated Statements of Financial Condition.
Note
17
- Fair Value Measurements
We utilize fair value measurements to record or disclose the fair value on certain assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability through an orderly transaction between market participants at the measurement date. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves or credit spreads. Unobservable inputs may be based on management's judgment, assumptions and estimates related to credit quality, our future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.
Valuation Hierarchy
U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active markets and the lowest priority to unobservable inputs where no active market exists, as discussed below.
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which we can participate as of the measurement date;
Level 2 - Quoted prices for similar instruments in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3 - Unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the financial instruments carried at fair value by caption on the Consolidated Statement of Financial Condition and by level in the valuation hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
|
(Dollars in millions)
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
Agency - Commercial
|
$
|
—
|
|
|
$
|
1,376
|
|
|
$
|
—
|
|
|
$
|
1,376
|
|
Agency - Residential
|
—
|
|
|
649
|
|
|
—
|
|
|
649
|
|
Municipal obligations
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
Corporate debt obligations
|
—
|
|
|
53
|
|
|
—
|
|
|
53
|
|
Other MBS
|
—
|
|
|
31
|
|
|
—
|
|
|
31
|
|
Certificate of Deposit
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Loans held-for-sale
|
|
|
|
|
|
|
|
Residential first mortgage loans
|
—
|
|
|
3,846
|
|
|
—
|
|
|
3,846
|
|
Loans held-for-investment
|
|
|
|
|
|
|
|
Residential first mortgage loans
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Home equity
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Mortgage servicing rights
|
—
|
|
|
—
|
|
|
278
|
|
|
278
|
|
Derivative assets
|
|
|
|
|
|
|
|
Rate lock commitments (fallout-adjusted)
|
—
|
|
|
—
|
|
|
37
|
|
|
37
|
|
Mortgage-backed securities forwards
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Interest rate swaps and swaptions
|
—
|
|
|
16
|
|
|
—
|
|
|
16
|
|
Total assets at fair value
|
$
|
—
|
|
|
$
|
6,016
|
|
|
$
|
317
|
|
|
$
|
6,333
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
Futures
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
Mortgage backed securities forwards
|
—
|
|
|
(41
|
)
|
|
—
|
|
|
(41
|
)
|
Interest rate swaps
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
DOJ litigation settlement
|
—
|
|
|
—
|
|
|
(60
|
)
|
|
(60
|
)
|
Contingent consideration
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
(46
|
)
|
|
$
|
(66
|
)
|
|
$
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
|
(Dollars in millions)
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
Agency - Commercial
|
$
|
—
|
|
|
$
|
1,374
|
|
|
$
|
—
|
|
|
$
|
1,374
|
|
Agency - Residential
|
—
|
|
|
662
|
|
|
—
|
|
|
662
|
|
Municipal obligations
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
Corporate debt obligations
|
—
|
|
|
41
|
|
|
—
|
|
|
41
|
|
Other MBS
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
Loans held-for-sale
|
|
|
|
|
|
|
|
Residential first mortgage loans
|
—
|
|
|
3,732
|
|
|
—
|
|
|
3,732
|
|
Loans held-for-investment
|
|
|
|
|
|
|
|
Residential first mortgage loans
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Home equity
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Mortgage servicing rights
|
—
|
|
|
—
|
|
|
290
|
|
|
290
|
|
Derivative assets
|
|
|
|
|
|
|
|
Rate lock commitments (fallout-adjusted)
|
—
|
|
|
—
|
|
|
20
|
|
|
20
|
|
Mortgage-backed securities forwards
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Interest rate swaps and swaptions
|
—
|
|
|
23
|
|
|
—
|
|
|
23
|
|
Total assets at fair value
|
$
|
—
|
|
|
$
|
5,908
|
|
|
$
|
312
|
|
|
$
|
6,220
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
Futures
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
Mortgage-backed securities forwards
|
—
|
|
|
(31
|
)
|
|
—
|
|
|
(31
|
)
|
Interest rate swaps
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
(7
|
)
|
DOJ litigation settlement
|
—
|
|
|
—
|
|
|
(60
|
)
|
|
(60
|
)
|
Contingent consideration
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
(39
|
)
|
|
$
|
(66
|
)
|
|
$
|
(105
|
)
|
Fair Value Measurements Using Significant Unobservable Inputs
The following tables include a roll forward of the Consolidated Statements of Financial Condition amounts (including the change in fair value) for financial instruments classified by us within Level 3 of the valuation hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning of
Period
|
|
Total Gains (Losses) Recorded in Earnings (1)
|
|
Purchases / Originations
|
|
Sales
|
|
Settlement
|
|
Transfers In (Out)
|
|
Balance at
End of
Period
|
|
(Dollars in millions)
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Mortgage servicing rights (2)
|
290
|
|
|
(34
|
)
|
|
67
|
|
|
(45
|
)
|
|
—
|
|
|
—
|
|
|
278
|
|
Rate lock commitments (net) (2)(3)
|
20
|
|
|
25
|
|
|
50
|
|
|
—
|
|
|
—
|
|
|
(58
|
)
|
|
37
|
|
Totals
|
$
|
312
|
|
|
$
|
(9
|
)
|
|
$
|
117
|
|
|
$
|
(45
|
)
|
|
$
|
—
|
|
|
$
|
(58
|
)
|
|
$
|
317
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOJ litigation settlement
|
$
|
(60
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(60
|
)
|
Contingent consideration
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
Totals
|
$
|
(66
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
4
|
|
Mortgage servicing rights (2)
|
291
|
|
|
5
|
|
|
84
|
|
|
(141
|
)
|
|
—
|
|
|
—
|
|
|
239
|
|
Rate lock commitments (net) (2)(3)
|
24
|
|
|
(34
|
)
|
|
62
|
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
|
30
|
|
Totals
|
$
|
319
|
|
|
$
|
(28
|
)
|
|
$
|
146
|
|
|
$
|
(141
|
)
|
|
$
|
(1
|
)
|
|
$
|
(22
|
)
|
|
$
|
273
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOJ litigation settlement
|
$
|
(60
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(60
|
)
|
Contingent consideration
|
(25
|
)
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
(21
|
)
|
Totals
|
$
|
(85
|
)
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(81
|
)
|
|
|
(1)
|
There were
no
unrealized gains (losses) recorded in OCI during the
three
months ended
March 31, 2019
and
2018
.
|
|
|
(2)
|
We utilized swaptions, futures, forward agency and loan sales and interest rate swaps to manage the risk associated with mortgage servicing rights and rate lock commitments. Gains and losses for individual lines do not reflect the effect of our risk management activities related to such Level 3 instruments.
|
|
|
(3)
|
Rate lock commitments are reported on a fallout-adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are transferred to LHFS, which are classified as Level 2 assets.
|
The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the fair value measurements as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
|
|
(Dollars in millions)
|
|
March 31, 2019
|
|
|
Assets
|
|
|
Loans held-for-investment
|
|
|
|
|
|
|
|
|
Home equity
|
$
|
2
|
|
|
Discounted cash flows
|
|
Discount rate
Constant prepayment rate
Constant default rate
|
|
7.2% -10.8% (9.0%)
12.5% - 18.8% (15.6%)
3.0%-4.5% (3.7%)
|
(1)
|
Mortgage servicing rights
|
$
|
278
|
|
|
Discounted cash flows
|
|
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
|
|
2.3% - 25.9% (5.5%)
0% - 11.4% (10.2%)
$67 - $95 ($86)
|
(1)
|
Rate lock commitments (net)
|
$
|
37
|
|
|
Consensus pricing
|
|
Origination pull-through rate
|
|
78.9% - 87.2% (80.4%)
|
(1)
|
Liabilities
|
|
|
|
|
|
|
|
|
DOJ litigation settlement
|
$
|
(60
|
)
|
|
Discounted cash flows
|
|
See description below
|
|
See description below
|
|
Contingent consideration
|
$
|
(6
|
)
|
|
Discounted cash flows
|
|
Beta
Equity volatility
|
|
0.6 - 1.6 (1.1)
26.6% - 58.9% (40.0%)
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
|
|
(Dollars in millions)
|
|
December 31, 2018
|
|
|
Assets
|
|
|
Loans held-for-investment
|
|
|
|
|
|
|
|
|
Home equity
|
$
|
2
|
|
|
Discounted cash flows
|
|
Discount rate
Constant prepayment rate
Constant default rate
|
|
7.2% - 10.8% (9.0%)
13.6% - 20.3% (16.9%)
3.0% - 4.6% (3.8%)
|
(1)
|
Mortgage servicing rights
|
$
|
290
|
|
|
Discounted cash flows
|
|
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
|
|
2.1% - 25.9% (5.4%)
0% - 10.7% (9.6%)
$67 - $95 ($86)
|
(1)
|
Rate lock commitments (net)
|
$
|
20
|
|
|
Consensus pricing
|
|
Origination pull-through rate
|
|
75.0% - 87.2% (76.8%)
|
(1)
|
Liabilities
|
|
|
|
|
|
|
|
|
DOJ litigation settlement
|
$
|
(60
|
)
|
|
Discounted cash flows
|
|
See description below
|
|
See description below
|
|
Contingent consideration
|
$
|
(6
|
)
|
|
Discounted cash flows
|
|
Beta
Equity volatility
|
|
0.6 - 1.6 (1.1)
26.6% - 58.9% (40.0%)
|
(2)
|
|
|
(1)
|
Unobservable inputs were weighted by their relative fair value of the instruments.
|
|
|
(2)
|
Unobservable inputs were not weighted as only one instrument exists.
|
Recurring Significant Unobservable Inputs
Home equity.
The most significant unobservable inputs used in the fair value measurement of the home equity loans are discount rates, constant prepayment rates, and default rates. The constant prepayment and default rates are based on a 12 month historical average. Significant increases (decreases) in the discount rate in isolation result in a significantly lower (higher) fair value measurement. Increases (decreases) in prepay rates in isolation result in a higher (lower) fair value and increases (decreases) in default rates in isolation result in a lower (higher) fair value.
MSRs.
The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads, prepayment rates, and cost to service. Significant increases (decreases) in all three assumptions in isolation result in a significantly lower (higher) fair value measurement. Weighted average life (in years) is used to determine the change in fair value of MSRs. For
March 31, 2019
and
December 31, 2018
, the weighted average life (in years) for the entire MSR portfolio was
4.5
and
5.2
, respectively.
DOJ litigation settlement. The significant unobservable input used in the fair value measurement of the DOJ litigation settlement are the discount rate and asset growth rate, in addition to those assumptions discussed in Note 16 - Legal Proceedings, Contingencies and Commitments. Significant increases (decreases) in the discount rate or asset growth rate in isolation may result in a marginally lower (higher) fair value measurement. For further information on the fair value inputs related to the DOJ litigation settlement, see Note
16
- Legal Proceedings, Contingencies, and Commitments.
Rate lock commitments.
The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull through rate. The pull through rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation result in a significantly higher (lower) fair value measurement.
Contingent consideration.
The significant unobservable input used in the fair value of the contingent consideration is future forecasted target production volumes and profitability of the division. An increase or decrease to these inputs results in an increase or decrease of the liability. Other unobservable inputs include Beta and volatility which drive the risk adjusted discount rate utilized in a Monte Carlo simulation. Increases (decreases) in these inputs results in a lower (higher) to the liability.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We also have assets that are subject to measurement at fair value on a nonrecurring basis under certain conditions. The following table presents assets measured at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
Level 2
|
|
Level 3
|
|
Gains (Losses)
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
Loans held-for-sale
(2)
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
Impaired loans held-for-investment
(2)
|
|
|
|
|
|
|
|
Residential first mortgage loans
|
13
|
|
|
—
|
|
|
13
|
|
|
(5
|
)
|
Repossessed assets
(3)
|
8
|
|
|
|
|
8
|
|
|
(3
|
)
|
Totals
|
$
|
28
|
|
|
$
|
7
|
|
|
$
|
21
|
|
|
$
|
(9
|
)
|
December 31, 2018
|
|
|
|
|
|
|
|
Loans held-for-sale
(2)
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
Impaired loans held-for-investment
(2)
|
|
|
|
|
|
|
|
Residential first mortgage loans
|
12
|
|
|
—
|
|
|
12
|
|
|
(4
|
)
|
Repossessed assets
(3)
|
7
|
|
|
—
|
|
|
7
|
|
|
(3
|
)
|
Totals
|
$
|
24
|
|
|
$
|
5
|
|
|
$
|
19
|
|
|
$
|
(8
|
)
|
|
|
(1)
|
The fair values are determined at various dates during the three months ended
March 31, 2019
and the year ended
December 31, 2018
, respectively.
|
|
|
(2)
|
Gains (losses) reflect fair value adjustments on assets for which we did not elect the fair value option.
|
|
|
(3)
|
Gains (losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets.
|
The following table presents the quantitative information about nonrecurring Level 3 fair value financial instruments and the fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
|
|
(Dollars in millions)
|
March 31, 2019
|
|
|
|
|
|
|
|
|
Impaired loans held-for-investment
|
|
|
|
|
|
|
|
|
Loans held-for-investment
|
$
|
13
|
|
|
Fair value of collateral
|
|
Loss severity discount
|
|
25% - 30% (26.7%)
|
(1)
|
Repossessed assets
|
$
|
8
|
|
|
Fair value of collateral
|
|
Loss severity discount
|
|
0% - 100% (23.3%)
|
(1)
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Impaired loans held-for-investment
|
|
|
|
|
|
|
|
|
Loans held-for-investment
|
$
|
12
|
|
|
Fair value of collateral
|
|
Loss severity discount
|
|
25% - 30% (28.3%)
|
(1)
|
Repossessed assets
|
$
|
7
|
|
|
Fair value of collateral
|
|
Loss severity discount
|
|
0% - 100% (25.8%)
|
(1)
|
|
|
(1)
|
Unobservable inputs were weighted by their relative fair value of the instruments.
|
Nonrecurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties.
Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair value of financial instruments that are carried either at fair value, cost, or amortized cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(Dollars in millions)
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
390
|
|
|
$
|
390
|
|
|
$
|
390
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities available-for-sale
|
2,142
|
|
|
2,142
|
|
|
—
|
|
|
2,142
|
|
|
—
|
|
Investment securities held-to-maturity
|
683
|
|
|
666
|
|
|
—
|
|
|
666
|
|
|
—
|
|
Loans held-for-sale
|
3,874
|
|
|
3,874
|
|
|
—
|
|
|
3,874
|
|
|
—
|
|
Loans held-for-investment
|
9,936
|
|
|
10,093
|
|
|
—
|
|
|
8
|
|
|
10,085
|
|
Loans with government guarantees
|
470
|
|
|
451
|
|
|
—
|
|
|
451
|
|
|
—
|
|
Mortgage servicing rights
|
278
|
|
|
278
|
|
|
—
|
|
|
—
|
|
|
278
|
|
Federal Home Loan Bank stock
|
303
|
|
|
303
|
|
|
—
|
|
|
303
|
|
|
—
|
|
Bank owned life insurance
|
342
|
|
|
342
|
|
|
—
|
|
|
342
|
|
|
—
|
|
Repossessed assets
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Other assets, foreclosure claims
|
53
|
|
|
53
|
|
|
—
|
|
|
53
|
|
|
—
|
|
Derivative financial instruments, assets
|
57
|
|
|
57
|
|
|
—
|
|
|
20
|
|
|
37
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Retail deposits
|
|
|
|
|
|
|
|
|
|
Demand deposits and savings accounts
|
$
|
(6,431
|
)
|
|
$
|
(5,529
|
)
|
|
$
|
—
|
|
|
$
|
(5,529
|
)
|
|
$
|
—
|
|
Certificates of deposit
|
(2,584
|
)
|
|
(2,590
|
)
|
|
—
|
|
|
(2,590
|
)
|
|
—
|
|
Wholesale deposits
|
(467
|
)
|
|
(468
|
)
|
|
—
|
|
|
(468
|
)
|
|
—
|
|
Government deposits
|
(1,187
|
)
|
|
(1,116
|
)
|
|
—
|
|
|
(1,116
|
)
|
|
—
|
|
Custodial deposits
|
(2,784
|
)
|
|
(2,738
|
)
|
|
—
|
|
|
(2,738
|
)
|
|
—
|
|
Federal Home Loan Bank advances
|
(3,351
|
)
|
|
(3,343
|
)
|
|
—
|
|
|
(3,343
|
)
|
|
—
|
|
Long-term debt
|
(495
|
)
|
|
(459
|
)
|
|
—
|
|
|
(459
|
)
|
|
—
|
|
DOJ litigation settlement
|
(60
|
)
|
|
(60
|
)
|
|
—
|
|
|
—
|
|
|
(60
|
)
|
Contingent consideration
|
(6
|
)
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
Derivative financial instruments, liabilities
|
(46
|
)
|
|
(46
|
)
|
|
—
|
|
|
(46
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(Dollars in millions)
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
408
|
|
|
$
|
408
|
|
|
$
|
408
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities available-for-sale
|
2,142
|
|
|
2,142
|
|
|
—
|
|
|
2,142
|
|
|
—
|
|
Investment securities held-to-maturity
|
703
|
|
|
681
|
|
|
—
|
|
|
681
|
|
|
—
|
|
Loans held-for-sale
|
3,869
|
|
|
3,870
|
|
|
—
|
|
|
3,870
|
|
|
—
|
|
Loans held-for-investment
|
9,088
|
|
|
8,966
|
|
|
—
|
|
|
8
|
|
|
8,958
|
|
Loans with government guarantees
|
392
|
|
|
374
|
|
|
—
|
|
|
374
|
|
|
—
|
|
Mortgage servicing rights
|
290
|
|
|
290
|
|
|
—
|
|
|
—
|
|
|
290
|
|
Federal Home Loan Bank stock
|
303
|
|
|
303
|
|
|
—
|
|
|
303
|
|
|
—
|
|
Bank owned life insurance
|
340
|
|
|
340
|
|
|
—
|
|
|
340
|
|
|
—
|
|
Repossessed assets
|
7
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Other assets, foreclosure claims
|
50
|
|
|
50
|
|
|
—
|
|
|
50
|
|
|
—
|
|
Derivative financial instruments, assets
|
57
|
|
|
47
|
|
|
—
|
|
|
27
|
|
|
20
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Retail deposits
|
|
|
|
|
|
|
|
|
|
Demand deposits and savings accounts
|
$
|
(6,431
|
)
|
|
$
|
(5,475
|
)
|
|
$
|
—
|
|
|
$
|
(5,475
|
)
|
|
$
|
—
|
|
Certificates of deposit
|
(2,584
|
)
|
|
(2,379
|
)
|
|
—
|
|
|
(2,379
|
)
|
|
—
|
|
Wholesale deposits
|
(583
|
)
|
|
(585
|
)
|
|
—
|
|
|
(585
|
)
|
|
—
|
|
Government deposits
|
(1,187
|
)
|
|
(1,145
|
)
|
|
—
|
|
|
(1,145
|
)
|
|
—
|
|
Custodial deposits
|
(2,784
|
)
|
|
(1,664
|
)
|
|
—
|
|
|
(1,664
|
)
|
|
—
|
|
Federal Home Loan Bank advances
|
(3,351
|
)
|
|
(3,383
|
)
|
|
—
|
|
|
(3,383
|
)
|
|
—
|
|
Long-term debt
|
(495
|
)
|
|
(463
|
)
|
|
—
|
|
|
(463
|
)
|
|
—
|
|
DOJ litigation settlement
|
(60
|
)
|
|
(60
|
)
|
|
—
|
|
|
—
|
|
|
(60
|
)
|
Contingent consideration
|
(6
|
)
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
Derivative financial instruments, liabilities
|
(46
|
)
|
|
(39
|
)
|
|
—
|
|
|
(39
|
)
|
|
—
|
|
Fair Value Option
We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements to more closely align the accounting method with the underlying economic exposure. Interest income on LHFS is accrued on the principal outstanding primarily using the "simple-interest" method.
The following table reflects the change in fair value included in earnings of financial instruments for which the fair value option has been elected:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Assets
|
|
|
|
Loans held-for-sale
|
|
|
|
Net gain (loss) on loan sales
|
$
|
79
|
|
|
$
|
(88
|
)
|
The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding for assets and liabilities for which the fair value option has been elected:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Unpaid Principal Balance
|
|
Fair Value
|
|
Fair Value Over / (Under) Unpaid Principal Balance
|
|
Unpaid Principal Balance
|
|
Fair Value
|
|
Fair Value Over / (Under) Unpaid Principal Balance
|
|
(Dollars in millions)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
—
|
|
Loans held-for-investment
|
4
|
|
|
3
|
|
|
(1
|
)
|
|
4
|
|
|
3
|
|
|
(1
|
)
|
Total nonaccrual loans
|
$
|
12
|
|
|
$
|
11
|
|
|
$
|
(1
|
)
|
|
$
|
10
|
|
|
$
|
9
|
|
|
$
|
(1
|
)
|
Other performing loans
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale
|
$
|
3,698
|
|
|
$
|
3,838
|
|
|
$
|
140
|
|
|
$
|
3,601
|
|
|
$
|
3,726
|
|
|
$
|
125
|
|
Loans held-for-investment
|
8
|
|
|
7
|
|
|
(1
|
)
|
|
8
|
|
|
7
|
|
|
(1
|
)
|
Total other performing loans
|
$
|
3,706
|
|
|
$
|
3,845
|
|
|
$
|
139
|
|
|
$
|
3,609
|
|
|
$
|
3,733
|
|
|
$
|
124
|
|
Total loans
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale
|
$
|
3,706
|
|
|
$
|
3,846
|
|
|
$
|
140
|
|
|
$
|
3,607
|
|
|
$
|
3,732
|
|
|
$
|
125
|
|
Loans held-for-investment
|
12
|
|
|
10
|
|
|
(2
|
)
|
|
12
|
|
|
10
|
|
|
(2
|
)
|
Total loans
|
$
|
3,718
|
|
|
$
|
3,856
|
|
|
$
|
138
|
|
|
$
|
3,619
|
|
|
$
|
3,742
|
|
|
$
|
123
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Litigation settlement
(1)
|
$
|
(118
|
)
|
|
$
|
(60
|
)
|
|
$
|
58
|
|
|
$
|
(118
|
)
|
|
$
|
(60
|
)
|
|
$
|
58
|
|
|
|
(1)
|
We are obligated to pay
$118 million
in installment payments upon meeting certain performance conditions, as described in Note
16
- Legal Proceedings, Contingencies and Commitments.
|
Note
18
- Segment Information
Our operations are conducted through
three
operating segments: Community Banking, Mortgage Originations, and
Mortgage Servicing. The Other segment includes the remaining reported activities. Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses are incurred for which discrete financial information is available that is evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. 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 segment operates under the same banking charter, but is reported on a segmented basis for this report. Each of the operating segments is complementary to each other and because of the interrelationships of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.
As a result of Management's evaluation of our segments, effective January 1, 2019, certain departments have been re-aligned between the Community Banking and Other segment. The income and expenses relating to these changes are reflected in our financial statements and all prior period segment financial information has been recast to conform to the current presentation.
The Community Banking segment originates loans, provides deposits and fee based services to consumer, business, and mortgage lending customers through its Branch Banking, Business Banking and Commercial Banking, Government Banking, Warehouse Lending and LHFI Portfolio groups. Products offered through these groups include checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, commercial loans, commercial real estate loans, equipment finance and leasing, home builder finance loans and warehouse lines of credit. Other financial services available include consumer and corporate card services, customized treasury management solutions, merchant services and capital markets services such as loan syndications, and investment and insurance products and services.
Within the Community Banking segment, revenue from contracts with customers includes deposit account and other banking income, interchange fees and investment and insurance income. During the three months ended
March 31, 2019
, deposit account and other banking income, which includes fees for outgoing wires, overdrafts, stop payments and ATM fees totaled
$6 million
, interchange fees totaled
$3 million
, and investment and insurance income totaled
$1 million
. These fees are recognized when obligations, under the terms of the contract with our customer, are satisfied, which generally occurs when
services are performed. Revenue is measured as the amount of consideration we expect to receive in exchange for providing services. At
March 31, 2019
and
December 31, 2018
, we had no significant revenue related receivables or contract liabilities.
The Mortgage Originations segment originates and acquires one-to-four family residential mortgage loans to sell or hold on our balance sheet. Loans originated-to-sell, comprise the majority of the lending activity. These loans are originated through mortgage branches, call centers, the Internet and third party counterparties. The Mortgage Origination segment recognizes interest income on loans that are held for sale and the gains from sales associated with these loans, whereas the interest income on LHFI and a loss on sales for the purchase of these loans is recognized in the Community Banking segment.
The Mortgage Servicing segment services and subservices mortgage and other consumer loans for others on a fee for service basis and may also collect ancillary fees and earn income through the use of noninterest-bearing escrows. Revenue for those serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the status of the underlying loans. The Mortgage Servicing segment also services loans for our LHFI portfolio in the Community Banking segment and our own LHFS portfolio in the Mortgage Originations segment, for which it earns revenue via an intercompany service fee allocation.
The Other segment includes the treasury functions, which include the impact of interest rate risk management, balance sheet funding activities and the administration of the investment securities portfolios, as well as miscellaneous other expenses of a corporate nature. In addition, the Other segment includes revenue and expenses related to treasury and corporate assets and liabilities and equity not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage Servicing operating segments.
Revenues are comprised of net interest income (before the provision (benefit) for loan losses) and noninterest income. Noninterest expenses and provision (benefit) for income taxes, are fully allocated to each operating segment. Allocation methodologies may be subject to periodic adjustment as the internal management accounting system is revised and the business or product lines within the segments change.
The following tables present financial information by business segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Community Banking
|
|
Mortgage Originations
|
|
Mortgage Servicing
|
|
Other (1)
|
|
Total
|
|
(Dollars in millions)
|
Summary of Operations
|
|
|
|
|
|
|
|
|
|
Net interest income
|
$
|
103
|
|
|
$
|
23
|
|
|
$
|
3
|
|
|
$
|
(3
|
)
|
|
$
|
126
|
|
Net gain (loss) on loan sales
|
(6
|
)
|
|
55
|
|
|
—
|
|
|
—
|
|
|
49
|
|
Other noninterest income (loss)
|
12
|
|
|
16
|
|
|
35
|
|
|
(3
|
)
|
|
60
|
|
Total net interest income and noninterest income (loss)
|
109
|
|
|
94
|
|
|
38
|
|
|
(6
|
)
|
|
235
|
|
(Provision) benefit for loan losses
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Compensation and benefits
|
(24
|
)
|
|
(24
|
)
|
|
(6
|
)
|
|
(33
|
)
|
|
(87
|
)
|
Other noninterest expense and directly allocated overhead
|
(41
|
)
|
|
(36
|
)
|
|
(25
|
)
|
|
(2
|
)
|
|
(104
|
)
|
Total noninterest expense
|
(65
|
)
|
|
(60
|
)
|
|
(31
|
)
|
|
(35
|
)
|
|
(191
|
)
|
Income (loss) before indirect overhead allocations and income taxes
|
43
|
|
|
34
|
|
|
7
|
|
|
(40
|
)
|
|
44
|
|
Overhead allocations
|
(10
|
)
|
|
(10
|
)
|
|
(5
|
)
|
|
25
|
|
|
—
|
|
(Provision) benefit for income taxes
|
(7
|
)
|
|
(5
|
)
|
|
—
|
|
|
4
|
|
|
(8
|
)
|
Net income (loss)
|
$
|
26
|
|
|
$
|
19
|
|
|
$
|
2
|
|
|
$
|
(11
|
)
|
|
$
|
36
|
|
Intersegment (expense) revenue
|
$
|
(4
|
)
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Average balances
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale
|
$
|
71
|
|
|
$
|
3,195
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,266
|
|
Loans with government guarantees
|
—
|
|
|
455
|
|
|
—
|
|
|
—
|
|
|
455
|
|
Loans held-for-investment (2)
|
9,156
|
|
|
12
|
|
|
—
|
|
|
29
|
|
|
9,197
|
|
Total assets
|
9,577
|
|
|
4,624
|
|
|
56
|
|
|
4,181
|
|
|
18,438
|
|
Deposits
|
9,983
|
|
|
—
|
|
|
2,528
|
|
|
395
|
|
|
12,906
|
|
|
|
(1)
|
Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
|
|
|
(2)
|
Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Community Banking
|
|
Mortgage Originations
|
|
Mortgage Servicing
|
|
Other (1)
|
|
Total
|
|
(Dollars in millions)
|
Summary of Operations
|
|
|
|
|
|
|
|
|
|
Net interest income
|
$
|
69
|
|
|
$
|
31
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
106
|
|
Net gain (loss) on loan sales
|
(2
|
)
|
|
62
|
|
|
—
|
|
|
—
|
|
|
60
|
|
Other noninterest income
|
8
|
|
|
19
|
|
|
19
|
|
|
5
|
|
|
51
|
|
Total net interest income and noninterest income
|
75
|
|
|
112
|
|
|
21
|
|
|
9
|
|
|
217
|
|
(Provision) benefit for loan losses
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Compensation and benefits
|
(17
|
)
|
|
(29
|
)
|
|
(4
|
)
|
|
(30
|
)
|
|
(80
|
)
|
Other noninterest expense and directly allocated overhead
|
(26
|
)
|
|
(41
|
)
|
|
(16
|
)
|
|
(10
|
)
|
|
(93
|
)
|
Total noninterest expense
|
(43
|
)
|
|
(70
|
)
|
|
(20
|
)
|
|
(40
|
)
|
|
(173
|
)
|
Income (loss) before indirect overhead allocations and income taxes
|
31
|
|
|
42
|
|
|
1
|
|
|
(30
|
)
|
|
44
|
|
Overhead allocations
|
(11
|
)
|
|
(18
|
)
|
|
(5
|
)
|
|
34
|
|
|
—
|
|
(Provision) benefit for income taxes
|
(4
|
)
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
Net income (loss)
|
$
|
16
|
|
|
$
|
19
|
|
|
$
|
(4
|
)
|
|
$
|
4
|
|
|
$
|
35
|
|
Intersegment (expense) revenue
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Average balances
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale
|
$
|
12
|
|
|
$
|
4,219
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,231
|
|
Loans with government guarantees
|
—
|
|
|
291
|
|
|
—
|
|
|
—
|
|
|
291
|
|
Loans held-for-investment (2)
|
7,489
|
|
|
6
|
|
|
—
|
|
|
29
|
|
|
7,524
|
|
Total assets
|
7,638
|
|
|
5,527
|
|
|
35
|
|
|
3,890
|
|
|
17,090
|
|
Deposits
|
7,739
|
|
|
—
|
|
|
1,541
|
|
|
91
|
|
|
9,371
|
|
|
|
(1)
|
Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
|
|
|
(2)
|
Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
|
Note
19
- Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards
The following ASUs have been adopted which impact our significant accounting policies and/or have a significant financial impact:
Leases
-
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which supersedes Topic 840. The guidance requires lessees to recognize substantially all leases on their balance sheet as a right-of-use asset and a lease liability. Effective January 1, 2019, we have adopted the requirements of ASU 2016-02, Leases (Topic 842) and all related amendments. The Company has elected to apply the practical expedient of forgoing the restatement of comparative periods. In addition, we have elected the practical expedients permitted under transition guidance to not reassess leases entered into prior to adoption. As permitted under ASC 842, the Company has made an accounting policy election to exempt leases with an initial term of twelve months or less from balance sheet recognition. Instead, short-term leases will be expensed over the lease term with no impact to the balance sheet.
At
March 31, 2019
, our inventory of leases included various bank branches, ATM locations and retail home lending offices. Many of our leases contain options to extend or terminate early and we consider these options when evaluating the lease term to determine if they are reasonably certain to exercise based on all relevant economic and financial factors. All leases are classified as operating leases based on their terms.
The following table reflects information relating to our operating leases:
|
|
|
|
|
|
|
|
As of/For the Three Months Ended
|
|
|
March 31, 2019
|
|
|
(Dollars in millions)
|
Operating Leases
|
|
|
Right-of-use asset
(1)
|
|
$
|
20
|
|
Lease liability
(1)
|
|
$
|
20
|
|
Lease expense
(2)
|
|
$
|
3
|
|
Weighted-average remaining lease term (years)
|
|
4.2
|
|
Weighted-average discount rate
|
|
2.95
|
%
|
|
|
(1)
|
Right-of-use asset and lease liability are recorded in premises and equipment and other liabilities, respectively, on the Consolidated Statements of Financial Condition.
|
|
|
(2)
|
Includes de-minimis amount of short-term lease expense and variable lease expense.
|
The following table presents our undiscounted cash flows on our operating lease liabilities as of
March 31, 2019
and our minimum contractual obligations on our operating leases as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
(Dollars in millions)
|
Within one year
|
|
$
|
8
|
|
|
$
|
9
|
|
After one year and within two years
|
|
5
|
|
|
6
|
|
After two years and within three years
|
|
4
|
|
|
4
|
|
After three years and within four years
|
|
2
|
|
|
2
|
|
After four years and within five years
|
|
1
|
|
|
1
|
|
After five years
|
|
2
|
|
|
3
|
|
Total
(1)
|
|
$
|
22
|
|
|
$
|
25
|
|
|
|
(1)
|
The difference between the total undiscounted cash payments on operating leases and the lease liability is solely the effect of discounting.
|
We adopted the following accounting standard updates (ASU) during
2019
, none of which had a material impact to our financial statements:
|
|
|
|
|
|
Standard
|
|
Description
|
|
Effective Date
|
ASU 2019-01
|
|
Leases (Topic 842): Codification Improvements
|
|
January 1, 2019
|
ASU 2018-20
|
|
Leases (Topic 842): Narrow-Scope Improvements for Lessors
|
|
January 1, 2019
|
ASU 2018-16
|
|
Derivatives and hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
|
|
January 1, 2019
|
ASU 2018-11
|
|
Leases (Topic 842): Targeted Improvements
|
|
January 1, 2019
|
ASU 2018-10
|
|
Codification Improvements to Topic 842, Leases
|
|
January 1, 2019
|
ASU 2018-07
|
|
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
|
|
January 1, 2019
|
ASU 2017-11
|
|
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope.
|
|
January 1, 2019
|
ASU 2017-08
|
|
Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
|
|
January 1, 2019
|
ASU 2017-06
|
|
Plan Accounting - Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting
|
|
January 1, 2019
|
Accounting Standards Issued But Not Yet Adopted
The following ASUs have been issued and are expected to result in a significant change to our significant accounting policies and/or have a significant financial impact:
Credit Losses
-
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU alters the current method for recognizing credit losses within the reserve account. Currently, we use the incurred loss method, whereas the new guidance requires financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit losses). The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019.
Our cross-functional implementation team continues to execute on its project plan and has been working with an industry leading vendor to finalize the development of our credit loss models. We expect to be capable of running a CECL parallel production process in the second half of 2019 and will be ready for the adoption of the standard in the first quarter of 2020. During the first quarter of 2019, we began to finalize our portfolio and model segmentation and we plan to prepare data for use by the models, begin model testing, and continue developing accounting internal controls around data, modeling, and CECL governance in the second quarter of 2019. We are currently evaluating the impact the adoption of the guidance will have on our Consolidated Financial Statements, and highlight that any impact will be contingent upon the underlying characteristics of the affected portfolio and macroeconomic and internal forecasts at adoption date. We do not expect any material allowance on held to maturity securities since the majority of this portfolio consists of agency-backed securities that have an immaterial risk of credit loss.
The following ASUs have been issued and are not expected to have a material impact on our Consolidated Financial Statements and/or significant accounting policies:
|
|
|
|
|
|
Standard
|
|
Description
|
|
Effective Date
|
ASU 2018-19
|
|
Codification Improvements to Topic 326, Financial Instruments—Credit Losses
|
|
January 1, 2020
|
ASU 2018-18
|
|
Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606
|
|
January 1, 2020
|
ASU 2018-17
|
|
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
|
|
January 1, 2020
|
ASU 2018-15
|
|
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)
|
|
January 1, 2020
|
ASU 2017-04
|
|
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
|
|
January 1, 2020
|
Note
20
- Subsequent Events
Subsequent to
March 31, 2019
, we became aware that one of our commercial borrowers was unexpectedly ceasing their reverse mortgage origination business. The following table presents our credit exposure to this borrower.
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
May 10, 2019
|
|
(Dollars in millions)
|
Amount outstanding
|
|
Collateralized C&I loan
|
$
|
69
|
|
|
$
|
69
|
|
Outstanding warehouse line, collateralized by agency mortgage loans
|
6
|
|
|
5
|
|
Total
|
$
|
75
|
|
|
$
|
74
|
|
The commercial loan is collateralized by certain interest-only GNMA securities, held by a third party custodian. A recent independent valuation conducted by us indicates that this collateral has a fair value between
$35
and
$40 million
. While it is too early to determine the extent of the loss we may have on this loan, we plan to pursue all available sources of collection including other assets of the company, a personal guarantee and other legal remedies to minimize our credit exposure related to this loan. We will determine and record the appropriate carrying value during the
second quarter of 2019
.
We expect to be fully repaid on the outstanding warehouse line and no further draws on this line can be made.