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Section 1: 8-K (8-K)

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

FORM 8-K
 

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 1, 2018
 
393740770_flagstara09a01a03.jpg 
(Exact Name of Registrant as Specified in Charter)
  
 
Michigan
 
1-16577
 
38-3150651
(State or Other Jurisdiction
of Incorporation
 
(Commission File Number)
 
(IRS Employer
Identification No.)
 
5151 Corporate Drive, Troy, Michigan
 
48098
(Address of Principal Executive Offices)
 
(Zip Code)
(248) 312-2000
(Registrant's telephone number, including area code)
  
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):  
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act (17 CFR 230.405) or Rule 12b-2 of the Exchange Act (17 CFR 240.12b-2).
Emerging growth company
o
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. o





Item 8.01 Other Events.

Flagstar Bancorp, Inc. ("Flagstar" or the "Company") is filing this Current Report on Form 8-K to recast financial statement and other financial information previously included in its Annual Report on Form 10-K ("2017 Form 10-K") for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 12, 2018.

As previously disclosed in Flagstar's 2017 Form 10-K, effective January 1, 2018, Flagstar implemented the following changes to operating segment reporting: 1) operating leases in the Community Banking segment are reflected as loans by reclassifying rental income and depreciation expense to net interest income and 2) the interest expense on custodial deposits on third party sub-servicing contracts, recognized in the Mortgage Servicing segment as loan administration income, is now reflected as a component of net interest income.

Additionally, at January 1, 2018, the Company adopted the Financial Accounting Standards Board's Accounting Standard Update No. 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash". This ASU requires the changes to restricted cash and restricted cash equivalents to be presented in the statement of cash flows for all periods presented. Prior to the adoption of ASU 2016-18, accounting guidance required the statement of cash flows to include only changes to cash and cash equivalents.

Exhibit 99.1 to this Report recasts "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part IV, Item 8. Financial Statements and Supplementary Data" (collectively, "Selected Items") from Flagstar's 2017 Form 10-K to reflect the changes described above only and does not reflect events occurring after the date of the filing of the 2017 Form 10-K. The recast historical information has no impact on Flagstar's previously reported consolidated results.

This Form 8-K, including the attached Exhibit 99.1, is being furnished pursuant to the Securities Exchange Act of 1934, as amended (Act), and thus shall not be deemed to be filed for purposes of Section 18 of the Act or incorporated by reference into any filings under the Securities Act of 1933, as amended.

Item 9.01 Financial Statements and Exhibits
 Exhibits
 
 
 
 
23.1
 
99.1
  
101
 
Financial statements for the year ended December 31, 2017, included in Exhibit 99.1 filed with this Report on Form 8-K, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.







 SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
 
 
 
 
 
 
 
 
 
 
FLAGSTAR BANCORP, INC.
 
 
 
 
Dated: June 1, 2018
 
 
 
By:
 
/s/    James K. Ciroli
 
 
 
 
 
 
James K. Ciroli
 
 
 
 
 
 
Executive Vice President and Chief Financial Officer






Exhibit Index
 
Exhibit No.
  
Description
 
 
 
 
23.1
 
99.1
  

101
 
Financial statements for the year ended December 31, 2017, included in Exhibit 99.1 filed with this Report on Form 8-K, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.




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Section 2: EX-23.1 (EXHIBIT 23.1)

Exhibit


EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-218207, No. 333‑26157, No. 333‑68682, No. 333‑77501, No. 333‑89420, No. 333‑134554, No. 333‑160197, No. 333-174572, No. 333-198320, and No. 333-211558) of Flagstar Bancorp, Inc. of our report dated March 12, 2018, except with respect to our opinion on the financial statements insofar as it relates to the effect of changes in reportable segments discussed in Note 23, and to the effect of changes in the presentation of restricted cash within the Consolidated Statements of Cash Flows as a result of the adoption of FASB Accounting Standards Update 2016-18 “Statement of Cash Flows (Topic 230) - Restricted Cash,” which is as of June 1, 2018, relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 8-K.

/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
June 1, 2018



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Section 3: EX-99.1 (EXHIBIT 99.1)

Exhibit


EXHIBIT 99.1

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 

1



The following is an analysis of our financial condition and results of operations. This should be read in conjunction with our Consolidated Financial Statements and related notes filed with this report in Part II, Item 8. Financial Statements and Supplementary Data.

Overview    

We are a leading savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. We provide a range of commercial, small business, and consumer banking services and we are the 5th largest mortgage originator in the nation. We distinguish ourselves by crafting specialized solutions for our customers, local delivery, high quality customer service and competitive product pricing. For additional details and information on each of our lines of business, see MD&A - Operating Segments and Note 23 - Segment Information.

Executive Overview

The year ended 2017 resulted in net income of $63 million, or $1.09 per diluted share, and adjusted net income of $143 million or $2.47 per diluted share, after adjusting for a non-cash charge of $80 million, or $1.37 per diluted share due to the revaluation of our net deferred tax asset under the new Tax Cuts and Jobs Act. The durability of our earnings was proven in 2017 as the continued growth of our community bank and mortgage servicing businesses, combined with the strength of our mortgage origination business, produced more predictable and consistent results. The transformation of the community bank into a strong commercial bank and our 2017 strategic mortgage acquisitions provide more levers to respond to market opportunities and maximize earnings.

The community bank added $1 billion of commercial real estate and commercial and industrial loans to the balance sheet. These higher yielding loans helped drive net interest income up 21 percent or $67 million for the full year 2017 compared to the full year 2016. Total deposits increased 2 percent to $8.9 billion and costs remained well managed in a rising interest rate environment. In addition, the pending acquisition of eight branches of Desert Community Bank, expected to close in the first quarter of 2018, will provide approximately $600 million in low cost deposits to fund loan growth and expand our banking footprint.

Mortgage originations totaled $34 billion, representing a 6 percent increase in closings, despite a softer origination market in 2017. Additionally, fallout adjusted locks increased 11 percent or $3 billion during the year. The two mortgage acquisitions occurring in 2017 strengthened our delegated correspondent and distributed retail channels, providing us more flexibility in responding to challenges in the mortgage market. Our two jumbo mortgage securitizations demonstrate our capability to execute mortgage loan sales through another market mechanism which will continue to allow us to respond more dynamically to market opportunities.

Our mortgage servicing business continued to gain scale and ended the year servicing over 442,000 accounts. During 2017, we had over $33 billion in MSR sales making us one of the largest sellers of MSRs in the country. Of those sales, we retained subservicing on 84 percent solidifying our national position as the 8th largest subservicer. This high retention rate validated the quality of our servicing platform.

Noninterest expense increased 15 percent to $643 million in 2017 as we made investments in future growth. We remain focused on improving efficiency through increasing revenues while maintaining cost discipline across the organization.

We ended the year with $16.9 billion in assets, up $2.9 billion, or 20 percent, from year end 2016. Our credit quality is solid with only $8 million in net charge-offs and sustained low levels of delinquencies in 2017. Our robust capital position remains a hallmark with Tier 1 leverage at 8.5 percent at December 31, 2017, well above the amount needed to be considered "well capitalized". The proposed simplification of the Basel III rules, if enacted as proposed, as well as the decrease in the corporate tax rate will accelerate capital formation to support further balance sheet growth and improve our capital flexibility. We believe we are well-positioned, supported by the capital and liquidity to prudently grow the Bank, to drive increased earnings and deliver greater shareholder value.

2



Earnings Performance

 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
(Dollars in millions)
Net interest income
$
390

 
$
323

 
$
287

Provision (benefit) for loan losses
6

 
(8
)
 
(19
)
Total noninterest income
470

 
487

 
470

Total noninterest expense
643

 
560

 
536

Provision for income taxes
148

 
87

 
82

Net income
$
63

 
$
171

 
$
158

Adjusted net income (1)
$
143

 
$
155

 
$
158

Income per share:
 
 
 
 
 
Basic
$1.11
 
$2.71
 
$2.27
Diluted
$1.09
 
$2.66
 
$2.24
Adjusted diluted (1)
$2.47
 
$2.38
 
$2.24
(1)
For further information, see MD&A - Use of Non-GAAP Financial Measures.
    
Full year 2017 net income was $63 million, or $1.09 per diluted share, as compared to full year 2016 net income of $171 million, or $2.66 per diluted share. The 2017 full year results included a charge of $80 million to the provision for income taxes, or $1.37 per diluted share, due to the revaluation of DTAs at a lower statutory rate resulting from the Tax Cuts and Jobs Act. Excluding this charge, the Company had adjusted 2017 net income of $143 million, or $2.47 per diluted share.

The $12 million decrease in adjusted net income for the year ended December 31, 2017 as compared to the year ended December 31, 2016, was primarily driven by higher expenses resulting from growth initiatives, including our 2017 acquisitions, as well as expenses related to increased mortgage volume. This was partially offset by a $67 million increase in net interest income due to interest earning asset growth of $2.0 billion led by higher average LHFS due to extending turn times and accumulation of loans in support of residential mortgage backed securitization and continued commercial lending growth. Our transition to a commercial bank resulted in a 57 percent increase in average commercial loans for the year ended December 31, 2017, compared to the year ended December 31, 2016.

Full year 2016 net income was $171 million, or $2.66 per diluted share, as compared to full year 2015 net income of $158 million, or $2.24 per diluted share. The 2016 full year results included a $24 million benefit related to a decrease in the fair value of the DOJ settlement liability. Excluding this benefit, the Company had adjusted 2016 net income of $155 million, or $2.38 per diluted share.

The $3 million decrease in adjusted net income for the year ended December 31, 2016 as compared to the year ended December 31, 2015, was primarily driven by higher performance driven expenses and a lower benefit for loan losses partially offset by a $36 million increase in net interest income. Net interest income increased as a result of growth in our interest earning assets as we executed on our strategic initiative to deploy capital and replace lower credit quality assets with higher quality residential and commercial loans. As a result of this initiative, we grew average interest earning assets by 17 percent from $10.4 billion during the year ended December 31, 2015 to $12.2 billion during the year ended December 31, 2016.

For a reconciliation and discussion of non-GAAP financial measures discussed above, see MD&A - Use of Non-GAAP Financial Measures. Additional details of each key driver have been further explained in Management’s discussion below.



3



Net Interest Income

The following table presents on a consolidated basis interest income from average assets and liabilities, expressed in dollars and yields:
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
Average
Balance
Interest
Average
Yield/
Rate
 
Average
Balance
Interest
Average
Yield/
Rate
 
Average
Balance
Interest
Average
Yield/
Rate
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
 
 
 
 
 
 
Loans held-for-sale
$
4,146

$
165

3.99
%
 
$
3,134

$
113

3.62
%
 
$
2,188

$
85

3.90
%
Loans held-for-investment
 
 
 
 
 
 
 
 
 
 
 
Residential first mortgage
2,549

85

3.35
%
 
2,328

74

3.16
%
 
2,562

85

3.33
%
Home Equity
471

24

5.06
%
 
475

24

5.17
%
 
491

27

5.40
%
Other
26

1

4.51
%
 
29

1

4.73
%
 
30

2

5.30
%
Total Consumer loans
3,046

110

3.62
%
 
2,832

99

3.52
%
 
3,083

114

3.68
%
Commercial Real Estate
1,579

68

4.25
%
 
1,004

35

3.46
%
 
678

22

3.21
%
Commercial and Industrial
981

47

4.73
%
 
631

27

4.22
%
 
438

17

3.86
%
Warehouse Lending
890

43

4.73
%
 
1,346

58

4.22
%
 
877

39

4.41
%
Total Commercial loans
3,450

158

4.51
%
 
2,981

120

3.97
%
 
1,993

78

3.88
%
Total loans held-for-investment (1)
6,496

268

4.09
%
 
5,813

219

3.75
%
 
5,076

192

3.76
%
Loans with government guarantees
290

13

4.30
%
 
435

16

3.59
%
 
633

18

2.86
%
Investment securities
3,121

80

2.57
%
 
2,653

68

2.56
%
 
2,305

59

2.55
%
Interest-bearing deposits
77

1

1.15
%
 
129

1

0.50
%
 
234

1

0.50
%
Total interest-earning assets
14,130

$
527

3.71
%
 
12,164

$
417

3.42
%
 
10,436

$
355

3.38
%
Other assets
1,716

 
 
 
1,743

 
 
 
1,520

 
 
Total assets
$
15,846

 
 
 
$
13,907

 
 
 
$
11,956

 
 
Interest-Bearing Liabilities
 
 
 
 
 
 
 
 
 
 
 
Retail deposits
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
$
514

$
1

0.19
%
 
$
489

$
1

0.18
%
 
$
429

$
1

0.14
%
Savings deposits
3,829

29

0.76
%
 
3,751

29

0.78
%
 
3,693

30

0.82
%
Money market deposits
255

1

0.50
%
 
278

1

0.44
%
 
258

1

0.31
%
Certificate of deposits
1,187

14

1.18
%
 
990

10

1.05
%
 
787

6

0.77
%
Total retail deposits
5,785

45

0.78
%
 
5,508

41

0.76
%
 
5,167

38

0.73
%
Government deposits
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
222

1

0.45
%
 
228

1

0.39
%
 
257

1

0.39
%
Savings deposits
406

3

0.68
%
 
442

2

0.52
%
 
405

2

0.52
%
Certificate of deposits
329

3

0.82
%
 
382

2

0.40
%
 
358

1

0.39
%
Total government deposits
957

7

0.67
%
 
1,052

5

0.45
%
 
1,020

4

0.44
%
Wholesale deposits and other
23


1.35
%
 


%
 


%
Total interest-bearing deposits
6,765

52

0.77
%
 
6,560

46

0.71
%
 
6,187

42

0.68
%
Short-term Federal Home Loan Bank advances and other
3,356

36

1.09
%
 
1,249

5

0.44
%
 
311

1

0.30
%
Long-term Federal Home Loan Bank advances
1,234

24

1.92
%
 
1,584

27

1.72
%
 
1,500

18

1.17
%
Other long-term debt
493

25

5.08
%
 
364

16

4.34
%
 
307

7

2.42
%
Total interest-bearing liabilities
11,848

137

1.15
%
 
9,757

94

0.97
%
 
8,305

68

0.82
%
Noninterest-bearing deposits (2)
2,142

 
 
 
2,202

 
 
 
1,690

 
 
Other liabilities
423

 
 
 
484

 
 
 
475

 
 
Stockholders’ equity
1,433

 
 
 
1,464

 
 
 
1,486

 
 
Total liabilities and stockholders' equity
$
15,846

 
 
 
$
13,907

 
 
 
$
11,956

 
 
Net interest-earning assets
$
2,282

 
 
 
$
2,407

 
 
 
$
2,131

 
 
Net interest income
 
$
390

 
 
 
$
323

 
 
 
$
287

 
Interest rate spread (3)
 
 
2.56
%
 
 
 
2.45
%
 
 
 
2.58
%
Net interest margin (4)
 
 
2.75
%
 
 
 
2.64
%
 
 
 
2.74
%
Ratio of average interest-earning assets to interest-bearing liabilities
 
 
119.3
%
 
 
 
124.7
%
 
 
 
125.7
%
(1)
Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies.
(2)
Includes noninterest-bearing company controlled deposits that arise due to the servicing of loans for others.
(3)
Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.
(4)
Net interest margin is net interest income divided by average interest-earning assets.

4



Rate/Volume Analysis

The following tables present the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). The rate/volume variances are allocated to rate.
 
For the Years Ended December 31,
 
2017 Versus 2016 Increase
(Decrease) Due to:
 
2016 Versus 2015 Increase
(Decrease) Due to:
 
Rate
 
Volume
 
Total
 
Rate
 
Volume
 
Total
 
(Dollars in millions)
Interest-Earning Assets
 
 
 
 
 
 
 
 
 
 
 
Loans held-for-sale
$
15

 
$
37

 
$
52

 
$
(9
)
 
$
37

 
$
28

Loans held-for-investment
 
 
 
 
 
 
 
 
 
 
 
Residential first mortgage
5

 
6

 
11

 
(4
)
 
(7
)
 
(11
)
Home equity

 

 

 
(1
)
 
(2
)
 
(3
)
Other

 

 

 

 
(1
)
 
(1
)
Total Consumer loans
5

 
6

 
11

 
(5
)
 
(10
)
 
(15
)
Commercial Real Estate
13

 
20

 
33

 
3

 
10

 
13

Commercial and Industrial
5

 
15

 
20

 
2

 
8

 
10

Warehouse Lending
4

 
(19
)
 
(15
)
 
(2
)
 
21

 
19

Total Commercial loans
22

 
16

 
38

 
3

 
39

 
42

Total loans held-for-investment
27

 
22

 
49

 
(2
)
 
29

 
27

Loans with government guarantees
2

 
(5
)
 
(3
)
 
3

 
(5
)
 
(2
)
Investment securities

 
12

 
12

 
2

 
7

 
9

Total interest-earning assets
$
44

 
$
66

 
$
110

 
$
(6
)
 
$
68

 
$
62

Interest-Bearing Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
3

 
3

 
6

 
(1
)
 
5

 
4

Short-term Federal Home Loan Bank advances and other
22

 
9

 
31

 
2

 
2

 
4

Long-term Federal Home Loan Bank advances
2

 
(5
)
 
(3
)
 
8

 
1

 
9

Other long-term debt
4

 
5

 
9

 
7

 
2

 
9

Total interest-bearing liabilities
31

 
12

 
43

 
16

 
10

 
26

Change in net interest income
$
13

 
$
54

 
$
67

 
$
(22
)
 
$
58

 
$
36


2017 Compared to 2016

Net interest income increased $67 million for the year ended December 31, 2017, compared to the same period in 2016. The increase was primarily driven by growth in average interest-earning assets of 16 percent, led by higher average LHFS balances and growth of our higher yielding commercial LHFI portfolios.

Our net interest margin for the year ended December 31, 2017 was 2.75 percent, as compared to 2.64 percent for the year ended December 31, 2016. The increase in net interest margin was driven by a higher average yield on interest earning assets due to the growth in our commercial loan portfolio. This was partially offset by an increase in interest expense resulting from a full year of interest on our long-term senior debt which was issued in July 2016.

Average interest-earnings assets increased $2.0 billion for the year ended December 31, 2017, compared to the same period in 2016. The increase was due to a $1.0 billion increase in LHFS due to extending turn times and accumulation of loans in support of residential mortgage backed securitization. The CRE and C&I portfolios increased $925 million, or 57 percent as we continue to focus our efforts on building a broad-based, higher yielding commercial loan portfolio as we execute on our transformation into a commercial bank.


5



Average interest-bearing liabilities increased $2.1 billion for the year ended December 31, 2017, compared to the full year in 2016, primarily due to an increase in FHLB advances used to fund balance sheet growth in excess of deposit growth. Average interest-bearing deposits increased $205 million, or 3 percent for the year ended December 31, 2017, compared to the same period in 2016, driven by higher average retail deposits, partially offset by lower average government deposits. Our costs remained well managed in a rising interest rate environment, despite a slight extension of duration due to a higher percentage of certificates of deposit.

2016 Compared to 2015

Net interest income increased $36 million for the year ended December 31, 2016, compared to the same period in 2015. The increase for the year was primarily driven by growth in average interest earning assets of 16 percent, partially offset by a decrease in the net interest margin driven by a competitive interest rate environment and issuance of 6.125 percent senior debt used to fund the TARP redemption.

Our net interest margin for the year ended December 31, 2016 was 2.64 percent, as compared to 2.74 percent for the year ended December 31, 2015. The decrease in net interest margin from 2015 was primarily driven by higher interest rates from longer term fixed rate debt taken to match-fund our longer duration asset growth, interest expense on senior debt issued to fund the TARP redemption and lower average interest rates on LHFS due to a more competitive interest rate environment. This decrease was partially offset by higher average yield on interest earning assets as we shifted from lower spread residential mortgage loans into higher spread commercial loans.

Average LHFS increased $946 million for the year ended December 31, 2016, compared to the same period in 2015, due to an increase in mortgage production resulting from a low interest rate market which drove increased refinance activity. Average LHFI increased $737 million for the year ended December 31, 2016, compared to the same period in 2015, primarily due to growth in warehouse and commercial loans where we have increased our market share and begun to grow our new product portfolios.

Provision (Benefit) for Loan Losses

2017 Compared to 2016

The provision for loan losses increased $14 million to $6 million for the year ended December 31, 2017, as compared to a benefit of $8 million for the year ended December 31, 2016. This increase is primarily due to loan growth of $1.6 billion in our commercial and consumer portfolios. The 2016 benefit resulted primarily from the sale of consumer loans with a UPB of $1.3 billion, of which $110 million were nonperforming.

2016 Compared to 2015

The provision for loan losses decreased $11 million for the year ended December 31, 2016, as compared to the year ended December 31, 2015. In 2016, the benefit resulted primarily from the sale of performing and nonperforming consumer loans with a UPB of $1.3 billion, of which $110 million were nonperforming, partially offset by commercial loan growth. In 2015, the provision (benefit) for loan losses included a net reduction in the allowance for loan losses relating to several loan sales, including a net reduction in the allowance relating to interest-only residential first mortgage loans, partially offset by an increase related to the growth in our LHFI portfolio.     

For further information, see MD&A - Credit Risk.


6



Noninterest Income

The following tables provide information on our noninterest income along with additional details related to our net gain on loan sales and activity that occurred within the period:
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
(Dollars in millions)
Net gain on loan sales
$
268

 
$
316

 
$
288

Loan fees and charges
82

 
76

 
67

Deposit fees and charges
18

 
22

 
25

Loan administration income
21

 
18

 
26

Net (loss) return on mortgage servicing rights
22

 
(26
)
 
28

Representation and warranty benefit
13

 
19

 
19

Other noninterest income
46

 
62

 
17

Total noninterest income
$
470

 
$
487

 
$
470

 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
(Dollars in millions)
Mortgage rate lock commitments (fallout-adjusted) (1)
$
32,527

 
$
29,372

 
$
25,511

Net margin on mortgage rate lock commitments (fallout-adjusted) (1) (2)
0.82
%
 
1.02
%
 
1.13
%
Gain on loan sales + net return (loss) on the MSR (2)
$
290

 
$
290

 
$
316

Capitalized value of mortgage servicing rights
1.16
%
 
1.07
%
 
1.13
%
Mortgage loans sold and securitized
$
32,493

 
32,033

 
26,307

Net margin on loans sold and securitized
0.82
%
 
0.94
%
 
1.09
%
(1)
Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on previous historical experience and the level of interest rates.
(2)
Gain on sale margin is based on net gain on loan sales (excludes net gain on loan sales of $1 million, $15 million and zero from loans transferred from HFI for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively) to fallout-adjusted mortgage rate lock commitments.

2017 Compared to 2016

Total noninterest income was $470 million during the year ended December 31, 2017, which was a $17 million decrease from $487 million during the year ended December 31, 2016.

Net gain on loan sales decreased $48 million for the year ended December 31, 2017, compared to the same period in 2016. Market conditions impacted the net gain on loan sales margin which decreased 12 basis points with fallout adjusted lock yields decreasing 20 basis points to 0.82 percent. As a result of our 2017 mortgage acquisitions, the decrease in margin was partially offset by a 10.7 percent increase in fallout adjusted mortgage rate lock volume despite the 14 percent decline in the overall mortgage origination market experienced this year. In addition, the decrease in net gain on loan sales was partially attributable to extending turn times on sales of certain LHFS, when in our estimation extensions provide favorable economics, which shifts earnings from net gain on loan sales to net interest income as well as the sale of nonperforming LHFI that occurred in 2016 which resulted in a $14 million gain.

Total loan fees and charges increased $6 million, or 7.9 percent, for the year ended December 31, 2017, compared to the same period in 2016, primarily due to a corresponding 8.0 percent increase in loan originations.

Deposit fees and charges decreased $4 million for the year ended December 31, 2017, compared to the same period in 2016, primarily due to lower exchange fee income resulting from limitations set by the Durbin amendment, which became applicable to the Bank on July 1, 2016.

Loan administration income increased $3 million for the year ended December 31, 2017, compared to the same period in 2016. The increase was primarily driven by higher fee revenue due to an increase in the number of loans subserviced for others. This increased as a result of growth in our servicing business.


7



Net return on MSRs, including the impact of hedges, increased $48 million for the year ended December 31, 2017, compared to the same period in 2016. The increase was primarily driven by a more stable prepayment environment as a result of higher market interest rates, partially offset by a decrease in servicing fee income resulting from a lower MSR balance and higher transaction costs due to MSR sales that occurred in 2017.
 
Representation and warranty benefit decreased $6 million for the year ended December 31, 2017, compared to the same period in 2016. The decrease was primarily due to lower recoveries and a greater reduction of the reserve in 2016 compared to 2017. The reserve has continued to decrease as a result of sustained strong underwriting, low levels of repurchases and a low repurchase pipeline of $3 million UPB at December 31, 2017.

Other noninterest income decreased $16 million for the year ended December 31, 2017, compared to the same period in 2016. The decrease was primarily due to a $24 million reduction in the DOJ settlement liability that occurred in the third quarter of 2016. This decrease was partially offset by increased rental income attributable to growth in equipment financing, and higher investment, insurance, and commercial loan fee income.

2016 Compared to 2015

Total noninterest income increased $17 million during the year ended December 31, 2016 from the year ended December 31, 2015.

Net gain on loan sales increased $28 million for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in gain on loan sales was primarily due to $3.9 million higher fallout-adjusted lock volume driven by an increase in refinance activity and a $14 million gain from the sale of performing LHFI. The increase was partially offset by lower loan sale margins driven by pricing competition.

Total loan fees and charges increased $9 million for the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily due to higher mortgage loan closings.

Loan administration income decreased $8 million for the year December 31, 2016 to $18 million, compared to $26 million for the same period in 2015. The decrease was equally driven by lower fee revenue from loans subserviced for others and higher interest expense on average company controlled deposits which increased due primarily to higher refinance activity.

Our net loss on MSRs was $26 million for the year ended December 31, 2016, compared to a return of $28 million for the same period in 2015. The $54 million decrease was primarily due to a decline in fair value driven by higher prepayments, increased market implied interest rate volatility, and a $7 million charge related to MSR sales that closed during the year. These declines were partially offset by higher servicing fees and ancillary income received due to a higher average outstanding MSR balance carried throughout the year.
 
Other noninterest income increased $46 million for the year ended December 31, 2016, compared to the same period in 2015. The increase was primarily due to a $24 million benefit related to the reduction in the fair value of the DOJ settlement liability and an $11 million net improvement in fair value adjustments. Higher income earned on our bank owned life insurance and gains on the sale of AFS investment securities about equally drove the remaining improvement.


8



Noninterest Expense

The following table sets forth the components of our noninterest expense:
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
(Dollars in millions)
Compensation and benefits
$
299

 
$
269

 
$
237

Occupancy and equipment
103

 
85

 
81

Commissions
72

 
55

 
39

Loan processing expense
57

 
55

 
52

Legal and professional expense
30

 
29

 
36

Other noninterest expense
82

 
67

 
91

Total noninterest expense
$
643

 
$
560

 
$
536

Efficiency ratio
74.8
%
 
69.2
%
 
70.9
%
Number of FTE
3,525

 
2,886

 
2,713


2017 Compared to 2016

Total noninterest expense increased $83 million during the year ended December 31, 2017 from the year ended December 31, 2016.

The $30 million increase in compensation and benefits expense for the year ended December 31, 2017, compared to the same period in 2016. This increase was driven by recent acquisitions and additions in our Community Banking segment to support growth in both our C&I and CRE portfolios. Our full-time equivalent employees increased by 22 percent from December 31, 2016 to a total of 3,525 full-time equivalent employees at December 31, 2017, of which 465 were Opes full-time equivalent employees.

The $18 million increase in occupancy and equipment expense for the year ended December 31, 2017, compared to the same period in 2016, was primarily due to a higher average depreciable asset base and increased utilization of vendor services to support the needs of our growing business.

Commission expense increased $17 million for the year ended December 31, 2017, compared to the same period in 2016, primarily due to higher loan originations and a shift in mix to delegated retail channels with higher commission rates resulting from our mortgage acquisitions.

Other noninterest expense increased $15 million for the year ended December 31, 2017, compared to the same period in 2016, primarily due to an increase in advertising expenses due to direct mail and brand awareness campaigns that were launched to drive deposit growth. The remaining increase is equally attributable to an increase in our FDIC assessment driven by growth in our commercial portfolios, higher business development costs related to acquisitions and an increase in charitable activities.

2016 Compared to 2015    

Total noninterest expense increased $24 million during the year ended December 31, 2016 from the year ended December 31, 2015.

The $32 million increase in compensation and benefits expense for the year ended December 31, 2016, compared to the same period in 2015, was primarily due to an increase in overall headcount in support of our new strategic initiatives along with an increase in performance-related compensation including the ExLTIP plan, for further information relating to ExLTIP plan, see Note 18 - Stock-Based Compensation. Our full-time equivalent employees increased overall by 173 from December 31, 2015 to a total of 2,886 full-time equivalent employees at December 31, 2016.

Commission expense increased $16 million for the year ended December 31, 2016, compared to the same period in 2015. Higher loan production and unfavorable product mix about equally drove a $9 million increase with the remaining increase being driven by our investment in new strategic initiatives.

9




Occupancy and equipment expense increased $4 million for the year ended December 31, 2016, compared to the same period in 2015, primarily due to an increase in maintenance costs related to software that was implemented in the fourth quarter 2015 along with a higher average depreciable asset base.
    
Legal and professional expense decreased $7 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to implementation of company-wide cost savings initiatives resulting in decreased utilization of third party service providers.
    
Other noninterest expense decreased $24 million for the year ended December 31, 2016, compared to the same period in 2015 primarily due to a decrease in federal insurance premium expenses driven by an improvement to our risk profile, combined with decreases in default servicing costs, foreclosure costs and an improvement in house prices, offset with higher litigation and regulatory related expenses that occurred in 2015.

Provision (Benefit) for Income Taxes

On December 22, 2017, the President of the United States signed into law H.R.1, originally known as the Tax Cuts and Jobs Act. The legislation includes various changes to the U.S. tax code which will have an impact on us, including, but not limited to, a reduction in the statutory corporation tax rate from a maximum rate of 35 percent to a flat rate of 21 percent effective January 1, 2018, repeal of the corporate alternative minimum tax (“AMT”), immediate expensing of capital investments, modifications to the provisions of future generated net operating losses, and additional limitations on the deductibility of performance-based compensation for named executive officers. We have analyzed and recorded the effects of the law’s impact in the financial statements for the period ended December 31, 2017.
  
2017 Compared to 2016

Our provision for income taxes for the year ended December 31, 2017 was $148 million, compared to a provision of $87 million for the year ended December 31, 2016. The increase in the provision for income taxes is primarily due to the charge to the provision for income taxes of approximately $80 million. This resulted from the revaluation of our DTAs as a result of the new tax legislation. Excluding this charge, the Company’s adjusted effective tax rate was 32.1 percent. This adjusted effective tax rate differs from the combined federal and state statutory rate primarily due to benefits from tax-exempt earnings and stock-based compensation.

2016 Compared to 2015    

Our provision for income taxes for the year ended December 31, 2016 was $87 million, compared to a provision of $82 million for the year ended December 31, 2015 and our effective tax provision rate decreased to 33.7 percent as compared to 34.2 percent for the same periods, respectively. The decrease in the effective tax rate is primarily due to the impact of the bank owned life insurance and state taxes in relation to pre-tax income.

For further information, see Note 19 - Income Taxes.


10



Fourth Quarter Results

The following table sets forth selected quarterly data:
 
Three Months Ended
 
December 31,
2017
 
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Dollars in millions)
Net interest income
$
107

 
$
103

 
$
87

Provision for loan losses
2

 
2

 
1

Total noninterest income
124

 
130

 
98

Total noninterest expense
178

 
171

 
142

Provision for income taxes
96

 
20

 
14

Net income
$
(45
)
 
$
40

 
$
28

Adjusted net income (1)
35

 
40

 
28

Income per share:
 
 
 
 
 
Basic
$
(0.79
)
 
$
0.71

 
$
0.50

Diluted
$
(0.79
)
 
$
0.70

 
$
0.49

Adjusted diluted (1)
$
0.60

 
$
0.70

 
$
0.49

Efficiency ratio
77.1
%
 
73.5
%
 
76.7
%
(1)
For further information, see MD&A - Use of Non-GAAP Financial Measures.

Fourth Quarter 2017 compared to Third Quarter 2017

Net loss for the three months ended December 31, 2017 was $45 million, or $0.79 per diluted share, as compared to a net gain of $40 million, or $0.70 per diluted share, for the three months ended September 30, 2017. The fourth quarter 2017 results included a one-time charge of $80 million to the provision for income taxes, or $1.37 per diluted share, due to the revaluation of our net deferred tax asset under the new Tax Cuts and Jobs Act. Excluding this charge, the Company had adjusted net income of $35 million, or $0.60 per diluted share, for the three months ended December 31, 2017

Adjusted net income decreased $5 million for the three months ended December 31, 2017 as compared to the three months ended September 31, 2017. The decrease was due to a $7 million increase in noninterest expense, primarily resulting from higher performance driven compensation and increased expenses to support the investment in our growth initiatives. In addition, noninterest income decreased $6 million, primarily due to a net loss on the MSRs based on a decrease in fair value and charges associated with a pending MSR sale. This decrease was offset by an increase in gain on loan sales, which experienced a 7 basis point increase in margins, due to favorable pricing experienced in the fourth quarter, offset by a modest 3 percent decline in fallout adjusted locks despite seasonal factors, reflecting the strength of our bulk and retail channels. These declines were partially offset by a $4 million increase in net interest income, driven by a 4 percent increase in average earning assets, led by continued growth in our commercial loan portfolio, which experienced an increase in average balances of $344 million, or 9 percent, for the fourth quarter 2017 as compared to the third quarter of 2017.

Fourth Quarter 2017 compared to Fourth Quarter 2016

Net loss for the three months ended December 31, 2017 was $45 million, or $0.79 per diluted share, as compared to a net gain of $28 million, or $0.49 per diluted share, for the three months ended December 31, 2016. The fourth quarter 2017 results included a one-time charge of $80 million to the provision for income taxes, or $1.37 per diluted share, due to the revaluation of our net deferred tax asset under the new Tax Cuts and Jobs Act. Excluding this charge, the Company had adjusted net income of $35 million, or $0.60 per diluted share, for the three months ended December 31, 2017.

Adjusted net income increased $7 million for the three months ended December 31, 2017 as compared to the three months ended December 31, 2016. The increase was driven by a $22 million increase in net gain on loan sales, primarily due to a 42 percent higher fallout adjusted lock volume as a result of our strategic acquisitions and investments made in 2017. In addition, net interest income increased $20 million, driven by a $2.6 billion, or 20 percent, increase in average earning assets, led by a $1.1 billion increase in the CRE and C&I portfolios. The increase in net interest income was further the result of a 9 basis point increase in net interest margin for the three months ended December 31, 2017, compared to the three months ended

11



December 31, 2016, primarily due to an increase in market rates, a higher yielding commercial loan portfolio, and continued deposit price discipline. These increases were partially offset by a $36 million increase in noninterest expense, driven by higher compensation and benefits due to increased headcount driven by the strategic acquisitions and investments in future revenue growth made in 2017.

Operating Segments

For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 23 - Operating Segments, and other sections for a full understanding of our consolidated financial performance.

Community Banking

Our Community Banking segment services consumer, governmental and commercial customers. We also serve home builders, correspondents, and commercial customers in Michigan. We are focused on using capital and liquidity generated from the mortgage business to expand our community banking relationships and build net interest margin revenue and fee income.

Our commercial customers are from a diversified range of industries including financial, insurance, service, manufacturing, and distribution. We offer financial products to these customers for use in their normal business operations and financing of working capital needs, equipment purchases and other capital investments. Additionally, our commercial real estate division supports income producing real estate and residential properties. These loans are made to finance properties such as owner-occupied, retail, office, multi-family apartment buildings, industrial buildings, and residential developments which are repaid through cash flows related to the operation, sale, or refinance of the property.

Our Community Banking segment has seen continued growth throughout the year and our transformation into a community bank continues to be of importance to our overall business model. Our commercial loan portfolio has grown to $4.3 billion as of December 31, 2017, representing a 30.7 percent increase from December 31, 2016.

On November 13, 2017, we announced the signing of a definitive agreement to acquire eight Desert Community Bank branches in San Bernardino County, California, with approximately $600 million in deposits and $70 million in loans. The pending acquisition has received regulatory approval and is expected to close during the first quarter of 2018. This acquisition will provide us with low cost, stable deposits to fund balance sheet growth. Additionally, this acquisition will combine Desert Community Bank's successful deposit franchise with a significant Flagstar presence already on the West Coast, which includes our Opes Advisors division, warehouse lending and home builder finance activities.

Mortgage Originations

We are a leading national originator of residential first mortgage loans. Our Mortgage Origination segment originates, acquires and sells one-to-four family residential mortgage loans. We utilize multiple distribution channels to originate or acquire mortgage loans on a national scale. Our Mortgage Origination segment helps grow the servicing business which generates a stable, low cost funding source through company controlled deposits for the community bank. Additionally, the Mortgage Originations segment provides us with a large number of customer relationships which, along with our banking customer relationships, provide us an opportunity to prudently cross-sell a full line of consumer financial products which include mortgage refinancing, HELOC, and other consumer loans.

Correspondent. In the correspondent channels, an unaffiliated bank or mortgage company completes the loan paperwork and also funds the loan at closing. After the bank or mortgage company has funded the transaction, we purchase the loan at an agreed upon price. We perform a full review of each loan, whether purchased in bulk or not, purchasing only those loans that were originated in accordance with our underwriting guidelines. Correspondents apply to the Bank and may be approved for delegated underwriting authority. Delegated correspondents assume the risks associated with the underwriting of the loan and earn more on loans sold compared to non-delegated correspondents. Non-delegated correspondents earn commissions and administrative fees for closing and funding loans which are then underwritten by the Bank. We have active relationships with 479 delegated correspondents and 553 non-delegated correspondents servicing borrowers in all 50 states.

Broker. In a broker transaction, an unaffiliated mortgage broker completes several steps of the loan origination process including the loan paperwork, but the loans are underwritten by us on a loan-level basis to our underwriting standards and we fund and close the loan in the Bank's name, thereby becoming the lender of record. Currently, we have active broker relationships with 745 mortgage brokers servicing borrowers in all 50 states.

12



Retail. In our distributed retail channel, loans are originated through our nationwide network of stand-alone home loan centers. At December 31, 2017, we maintained 89 retail locations in 29 states representing the combined retail branches of Flagstar Bank and its Opes Advisors mortgage division. In a direct-to-consumer lending transaction, loans are originated through our direct-to-consumer team or from one of our two national call centers, both of which may leverage our existing customer relationships. When loans are originated on a retail basis, most aspects of the lending process are completed internally, including the origination documentation (inclusive of customer disclosures), as well as the funding of the transactions.
The following tables disclose residential first mortgage loan originations by channel, type and mix:
 
At December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(Dollars in millions)
Correspondent
$
25,769

 
$
24,488

 
$
20,543

 
$
18,052

 
$
25,885

Broker
5,025

 
5,890

 
7,335

 
5,339

 
9,612

Retail
3,614

 
2,039

 
1,490

 
1,194

 
1,980

Total
$
34,408

 
$
32,417

 
$
29,368

 
$
24,585

 
$
37,477

Purchase originations
$
19,357

 
$
13,672

 
$
13,696

 
$
14,654

 
$
12,840

Refinance originations
15,051

 
18,745

 
15,672

 
9,931

 
24,637

Total
$
34,408

 
$
32,417

 
$
29,368

 
$
24,585

 
$
37,477

Conventional
$
16,962

 
$
18,156

 
$
17,571

 
$
15,158

 
$
25,653

Government
8,635

 
7,859

 
6,385

 
6,134

 
8,825

Jumbo
8,811

 
6,402

 
5,412

 
3,293

 
2,999

Total
$
34,408

 
$
32,417

 
$
29,368

 
$
24,585

 
$
37,477


We continue to leverage technology to streamline the mortgage origination process, thereby bringing service and convenience to borrowers and correspondents. We also offer our customers web-based tools that facilitate the mortgage loan process through each of our production channels. We will continue to seek new ways to expand our relationships with borrowers and correspondents to provide the necessary capital and liquidity to grow the Community Bank and Mortgage Servicing segments.

The majority of our loan originations during the year ended December 31, 2017 were eligible for sale to the Agencies. In addition, during 2017, we closed on two securitizations of residential mortgage-backed securities (RMBS) totaling $1.0 billion, which were comprised of loans Flagstar originated through our retail, broker and correspondent channels with collateral consisting of high-quality 15 to 30 year, fully amortizing conforming and jumbo fixed rate loans. On February 23, 2018, we closed an additional RMBS securitization totaling $488 million, comprised of loans similar to those included in the securitizations that occurred during 2017. We have demonstrated our ability to execute securitizations in the market and expect to continue securitization activity throughout 2018. This is an important differentiator for our mortgage business by providing an additional means in which to sell our residential mortgage loans.

Mortgage Servicing

The Mortgage Servicing segment services and subservices mortgage loans for others through a scalable servicing platform on a fee for service basis and may also collect ancillary fees and earn income through the use of noninterest bearing escrows. The loans we service generate escrow deposits which provide a stable low cost funding source to the Bank. 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 services residential mortgages for our LHFI portfolio in the Community Banking segment and our MSR portfolio in the Mortgage Originations segment for which it earns segment revenue via an intercompany service fee allocation.

13




The following table presents residential loans serviced and the number of accounts associated with those loans.
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
 
Unpaid Principal Balance (1)
 
Number of accounts
 
Unpaid Principal Balance (1)
 
Number of accounts
 
Unpaid Principal Balance (1)
 
Number of accounts
 
(Dollars in millions)
Residential loan servicing
 
 
 
 
 
 
 
 
 
 
 
Serviced for own loan portfolio (2)
$
7,013

 
29,493

 
$
5,816

 
29,244

 
$
6,088

 
30,683

Serviced for others
25,073

 
103,137

 
31,207

 
133,270

 
26,145

 
118,662

Subserviced for others (3)
65,864

 
309,814

 
43,127

 
220,075

 
40,287

 
211,937

Total residential loans serviced
$
97,950

 
442,444

 
$
80,150

 
382,589

 
$
72,520

 
361,282

(1)
UPB, net of write downs, does not include premiums or discounts.
(2)
Includes LHFI (residential first mortgage and home equity), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets.
(3)
Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.
    
At December 31, 2017, the number of residential loans serviced and the UPB of those loans increased by 59,855 and $17.8 billion, respectively, compared to December 31, 2016. Loans subserviced for others drove the increase in total residential loans serviced by increasing 89,739 loans and $22.7 billion UPB, offset by a decrease of loans serviced for others of 30,133 loans and $6.1 billion UPB, over the same period.

The shift in loan servicing categories was primarily due to large bulk sales of MSRs that occurred during 2017 of which we retained subservicing. Consistent with our strategy to grow our subservicing business, of the $33.2 billion UPB of MSRs sold during 2017, we retained subservicing on 84 percent of these sales. Our continued growth in our subservicing business has made us the 8th largest subservicer in the nation with capacity for further growth as we continue to subservice loans originated by Flagstar as well as those originated by others. Our platform and capabilities make us an attractive and comprehensive option to owners of MSRs as our service offerings also include MSR lending, servicing advanced lending and recapture services.

Loans Serviced for Others

The following table presents the characteristics of the mortgage loans serviced for others.
 
At December 31,
 
2017
 
2016
 
2015
 
(Dollars in millions)
Average UPB per loan
$
243

 
$
234

 
$
220

Weighted average service fee (basis points)
28.8

 
26.6

 
27.4

Weighted average coupon
4.05
%
 
3.88
%
 
4.12
%
Weighted average original maturity (months)
330

 
325

 
337

Weighted average age (months)
11

 
15

 
15

Average current FICO score (1)
728

 
746

 
733

Average original LTV ratio
77.7
%
 
71.9
%
 
77.9
%
Housing Price Index LTV, as recalculated (2)
73.3
%
 
65.6
%
 
71.7
%
 
 
 
 
 
 
Delinquencies:
 
 
 
 
 
30-59 days past due
$
250

 
$
155

 
$
198

60-89 days past due
71

 
26

 
45

90 days or greater past due
125

 
102

 
80

Total past due
$
446

 
$
283

 
$
323

(1)
Current FICO scores obtained at various times during the life of the loan.
(2)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2017.


14



Loans Subserviced for Others     

The following table presents the characteristics of the mortgage loans subserviced for others.
 
At December 31,
 
2017
 
2016
 
2015
 
(Dollars in millions)
Average UPB per loan (thousands)
$
213

 
$
196

 
$
190

Weighted average service fee (basis points)
28.3

 
31.0

 
29.7

Weighted average coupon
3.85
%
 
3.83
%
 
3.97
%
Weighted average original maturity (months)
307

 
337

 
334

Weighted average age (months)
36

 
39

 
40

Average current FICO score (1)
734

 
728

 
737

Average original LTV ratio
71.1
%
 
81.1
%
 
78.4
%
Housing Price Index LTV, as recalculated (2)
62.4
%
 
65.3
%
 
62.1
%
 
 
 
 
 
 
Delinquencies:
 
 
 
 
 
30-59 days past due
$
954

 
$
614

 
$
567

60-89 days past due
276

 
164

 
197

90 days or greater past due
692

 
441

 
529

Total past due
$
1,922

 
$
1,219

 
$
1,293

(1)
Current FICO scores obtained at various times during the life of the loan.
(2)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2017.

Other

The Other segment includes the treasury functions, funding revenue associated with stockholders' equity, the impact of interest rate risk management, the impact of balance sheet funding activities, and miscellaneous other expenses of a corporate nature. Treasury functions include administering the investment securities portfolios, balance sheet funding, and interest rate risk management. 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 segments.

Operating Segments' Performance

The net income (loss) by operating segment is presented in the following table:
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
(Dollars in millions)
Community Banking
$
39

 
$
46

 
$
26

Mortgage Originations
110

 
119

 
149

Mortgage Servicing
(15
)
 
(13
)
 
(28
)
Other
(71
)
 
19

 
11

Total net income (loss)
$
63

 
$
171

 
$
158


Community Banking

2017 compared to 2016

During the year ended December 31, 2017, the Community Banking segment reported net income of $39 million, compared to net income of $46 million for the year ended December 31, 2016. The $7 million decrease was primarily due to a $15 million increase in noninterest expense primarily driven by higher compensation and benefits expense to support strategic growth initiatives and increased FDIC premiums due to higher balances. In addition, the provision for loan losses increased $14 million and noninterest income decreased $13 million, driven by a decrease in net gain on loan sales, primarily due to the sale

15



of performing residential loans out of the LHFI portfolio during 2016. These decreases were partially offset by an increase in net interest income of $32 million, primarily due to loan growth as our CRE and C&I portfolios increased by $671 million and $427 million, respectively, during the year ended December 31, 2017.

2016 compared to 2015

During the year ended December 31, 2016, the Community Banking segment had net income of $46 million, compared to net income of $26 million for the year ended December 31, 2015, primarily due to a $35 million increase in net interest income resulting from growth in our warehouse, commercial, and home builder finance loan balances along with an increase in net gain on loan sales of $21 million, primarily driven by the sale of performing residential first mortgage loans out of the LHFI portfolio during the year ended December 31, 2016. These increases were partially offset by a $20 million increase in noninterest expense driven by personnel related expenses and higher advertising expenses which have supported our strategic growth initiatives. In addition, the benefit for loan losses decreased $9 million due to higher sales of nonperforming and interest-only loans in 2015 which drove a provision benefit of $19 million.

Mortgage Originations

2017 compared to 2016

The Mortgage Originations segment net income decreased $9 million to $110 million during the year ended December 31, 2017, compared to $119 million during the year ended December 31, 2016. The decrease was primarily due to a $68 million increase in noninterest expense driven by expenses associated with growth initiatives, which included an increase in compensation and benefits and higher commissions resulting from the acquisition of Opes Advisors and an increase in mortgage volume. In addition, net gain on loan sales decreased $32 million driven by a 21 basis point decrease in margin resulting from competitive factors and a shift in product mix with higher correspondent volume resulting from acquisitions. These decreases were partially offset by a $48 million increase in net return on MSRs. Additionally, net interest income increased $39 million resulting from increased mortgage volume and longer turn times to take advantage of attractive spreads.

2016 compared to 2015

The Mortgage Originations segment net income decreased $30 million to $119 million during the year ended December 31, 2016, compared to $149 million during the year ended December 31, 2015. The decrease was primarily due to a $43 million decrease in noninterest income primarily attributable to lower net return on MSRs resulting from higher prepayments and an increased probability of prepayment assumption driven by the low interest rate environment experienced throughout the year. This was offset by an increase of $10 million in net interest income primarily resulting from higher average LHFS balances in 2016.

Mortgage Servicing

2017 compared to 2016

The Mortgage Servicing segment reported a net loss of $15 million for the year ended December 31, 2017, compared to a net loss of $13 million for the year ended December 31, 2016. The decrease was primarily due to lower loan administration income resulting from higher amounts paid to subservice clients for custodial balances which is driven by higher market rates and increased volume. Additionally, lower company controlled deposits drove a decrease in net interest income. These decreases were partially offset by higher noninterest income primarily due an increase in the number of loans subserviced for others, which grew by nearly 90,000 loans, or 40.8 percent, for the year ended December 31, 2017 as compared to the year ended December 31, 2016.

2016 compared to 2015

The Mortgage Servicing segment reported a net loss of $13 million for the year ended December 31, 2016, compared to a net loss of $28 million for the year ended December 31, 2015. The improvement was primarily due to a $17 million increase in net interest income resulting from higher funds transfer pricing earned on company controlled deposits and higher interest recoveries on modified loans with government guarantees. This increase was partially offset by a decrease in noninterest income due to a lower overall volume of performing and default loans serviced.


16



Other

2017 compared to 2016

For the year ended December 31, 2017, the Other segment reported net loss of $71 million for the year ended December 31, 2017, compared to net income of $19 million for the year ended December 31, 2016. The decrease in net income is primarily due to the charge to the provision for income taxes of approximately $80 million, resulting from the new tax legislation that required revaluation of our DTAs at a lower corporate statutory rate. In addition, the prior year saw an increase in noninterest income primarily due to the $24 million decrease in the fair value of the DOJ settlement liability.

2016 compared to 2015

For the year ended December 31, 2016, the Other segment reported net income of $19 million, as compared to net income of $11 million for the year ended December 31, 2015. The improvement was primarily due to an increase in noninterest income due to a $24 million decrease in the fair value of the DOJ settlement liability, and an increase from the improved cash surrender value of bank owned life insurance. These increases were primarily offset by an increase in interest expense due to higher average outstanding FHLB advances and senior debt issued for TARP redemption.

RISK MANAGEMENT

Like all financial services companies, we engage in business activities and assume the related risks. The risks we are subject to in the normal course of business, include, but are not limited to, credit, regulatory compliance, legal, reputation, liquidity, market, operational and strategic. We have made significant investments in our risk management activities which are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. We hold capital to protect from unexpected loss arising from these risks.

A comprehensive discussion of risks affecting us can be found in the Risk Factors section included in Item 1A. of this Form 10-K. Some of the more significant processes used to manage and control credit, market, liquidity and operational risks are described in the following paragraphs.

Credit Risk

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

We maintain a strict credit limit, in compliance with regulatory requirements, in order to maintain a diversified loan portfolio and manage its credit exposure to any one borrower or obligor. Under the Home Owners Loan Act ("HOLA"), savings associations are generally subject to national bank limits on loans to one borrower. Generally, per HOLA, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 and Tier 2 capital plus any portion of the allowance for loan losses not included in the Tier 2 capital, which was $251 million as of December 31, 2017. We maintain a maximum internal Bank limit of $100 million (commitment level) to any one borrower/obligor relationship, which is more conservative than the limit required by HOLA. Additionally, we have a tracking and reporting process to monitor lending concentration levels and all credit exposures to one borrower that exceed $50 million must be approved by the Board of Directors.
    
The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. We manage our credit risk by establishing sound credit policies for underwriting and adhering to well controlled processes. We utilize various credit risk management and monitoring activities to mitigate risks associated with loans that we hold, acquire, and originate.


17



Loan Originations
    
The following table presents loan originations by portfolio:
 
For the Years Ended December 31,
 
2017
 
2016
 
(Dollars in millions)
Consumer loans
 
 
 
Residential first mortgage
$
34,408

 
$
32,417

Home equity (1)
336

 
195

Total consumer loans
34,744

 
32,612

Commercial loans (2)
1,215

 
687

Total loan originations
$
35,959

 
$
33,299

(1)
Includes second mortgage loans, HELOC loans, and other consumer loans.
(2)
Includes commercial real estate and commercial and industrial loans.

Loans held-for-investment    

The following table summarizes loans held-for-investment by category:

 
At December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(Dollars in millions)
Consumer loans
 
 
 
 
 
 
 
 
 
Residential first mortgage
$
2,754

 
$
2,327

 
$
3,100

 
$
2,193

 
$
2,509

Home equity
664

 
443

 
519

 
406

 
460

Other
25

 
28

 
31

 
31

 
37

Total consumer loans
3,443

 
2,798

 
3,650

 
2,630

 
3,006

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate (1)
1,932

 
1,261

 
814

 
620

 
409

Commercial and industrial
1,196

 
769

 
552

 
429

 
217

Warehouse lending
1,142

 
1,237

 
1,336

 
769

 
424

Total commercial loans
4,270

 
3,267

 
2,702

 
1,818

 
1,050

Total loans held-for-investment
$
7,713

 
$
6,065

 
$
6,352

 
$
4,448

 
$
4,056

(1)
Includes NBV of $307 million, $244 million, $188 million, $142 million, and $82 million of owner occupied commercial real estate loans at December 31, 2017, December 31, 2016, December 31, 2015, December 31, 2014, and December 31, 2013, respectively.

Loans held-for-investment increased $1.6 billion at December 31, 2017, from December 31, 2016. The increase was primarily due to our continued effort to grow both the consumer and commercial loan portfolios.

The commercial loan portfolio growth strengthens our Community Banking segment by improving margins through the additions of higher yielding loans. The commercial loan portfolio has grown $1.0 billion, or 31 percent, since December 31, 2016. During the year ended December 31, 2017, our CRE portfolio grew $671 million and C&I $427 million.

18




The following table provides a comparison of activity in our LHFI portfolio:

 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(Dollars in millions)
Balance, beginning of year
$
6,065

 
$
6,352

 
$
4,448

 
$
4,056

 
$
5,438

Loans originated and purchased
2,170

 
1,771

 
2,975

 
894

 
868

Change in lines of credit
2,982

 
957

 
678

 
424

 
380

Loans transferred from loans held-for-sale
1

 
2

 
32

 
56

 
64

Loans transferred to loans held-for-sale
(130
)
 
(1,309
)
 
(1,198
)
 
(509
)
 
(832
)
Loan amortization / prepayments
(3,373
)
 
(1,700
)
 
(569
)
 
(451
)
 
(1,687
)
Loans transferred to repossessed assets
(2
)
 
(8
)
 
(14
)
 
(22
)
 
(175
)
Balance, end of year
$
7,713

 
$
6,065

 
$
6,352

 
$
4,448

 
$
4,056


For further information, see Note 4 - Loans Held-for-Investment.

Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. The LTV requirements vary depending on occupancy, property type, loan amount, and FICO scores. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. We hold for investment, higher yielding loans and loans that will diversify or enhance the interest rate characteristics of our balance sheet.
    
The following table presents our total residential first mortgage LHFI by major category:
 
At December 31,
 
2017
 
2016
 
(Dollars in millions)
Current estimated LTV ratios
 
 
 
Less than 80% and refreshed FICO scores (1):
 
 
 
Equal to or greater than 660
$
2,441

 
$
2,077

Less than 660
73

 
95

80% and greater and refreshed FICO scores (1):
 
 
 
Equal to or greater than 660
168

 
78

Less than 660
12

 
9

U.S. government guaranteed
60

 
68

Total
$
2,754

 
$
2,327

Geographic region
 
 
 
California
$
1,127

 
$
858

Michigan
275

 
236

Florida
201

 
193

Texas
182

 
138

Washington
169

 
136

Illinois
101

 
84

Arizona
76

 
65

Colorado
69

 
60

Maryland
65

 
59

New York
62

 
68

Others
427

 
430

Total
$
2,754

 
$
2,327

(1)
FICO scores are updated at least on a quarterly basis or more frequently if available.

19




Home equity. Our home equity portfolio includes first and second lien positions for HELOANs and HELOCs. These loans require full documentation and are underwritten and priced in an effort to ensure high credit quality and loan profitability. Our debt-to-income ratio on HELOANS is capped at 43 percent and for HELOCs is capped at 45 percent. We currently limit the maximum CLTV to 89.99 percent and FICO scores to a minimum of 660. Current second mortgage loans/HELOANS are fixed rate loans and are available with terms up to 15 years. HELOC loans are variable-rate loans that contain a 10-year draw period followed by a 20-year amortizing period.

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

In 2016, we launched an equipment finance and leasing program to complement our existing commercial and industrial lending channel and in 2017, we saw solid, consistent growth in this business. During the year ended December 31, 2017, we had $4 million in earnings related to this business as compared to less than $1 million for the year end December 31, 2016.

The following table presents our total C&I LHFI by borrower's geographic location and industry type:
 
Michigan
 
Texas
 
Virginia
 
California
 
Tennessee
 
Other
 
Total
 
% by industry
 
(Dollars in millions)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industry Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial & Insurance
$
15

 
$
9

 
$
70

 
$

 
$
14

 
$
222

 
$
330

 
27.6
%
Services (1)
78

 
74

 

 
34

 

 
118

 
304

 
25.4
%
Manufacturing
64

 
5

 

 
23

 

 
97

 
189

 
15.8
%
Healthcare
26

 
7

 

 
1

 
43

 
29

 
106

 
8.9
%
Distribution
81

 

 

 
10

 

 

 
91

 
7.6
%
Servicing advances
31

 

 

 

 

 
50

 
81

 
6.8
%
Rental & leasing
49

 

 

 

 

 
26

 
75

 
6.3
%
Government & education
5

 

 

 

 

 
6

 
11

 
0.9
%
Commodities

 

 

 

 

 
9

 
9

 
0.8
%
Total
$
349

 
$
95

 
$
70

 
$
68

 
$
57

 
$
557

 
$
1,196

 
100.0
%
Percent by state
29.2
%
 
7.9
%
 
5.9
%
 
5.7
%
 
4.8
%
 
46.6
%
 
100.0
%
 
 
(1)
Includes unsecured home builder loans of $104 million.

Commercial real estate loans. Flagstar has a well-diversified commercial real estate portfolio, largely based in Michigan. The portfolio has limited exposure to big box retail centers and contains only one mall. The majority of our retail exposure is to high-quality, single tenant locations, including many drug stores, all of which are underwritten on strong credit metrics. Generally, the maximum LTV is 80 percent, or 85 percent for owner-occupied real estate, and debt service coverage of 1.20 to 1.35 times. This portfolio also includes owner occupied real estate loans and secured home builder loans.

In 2016, we launched a national home builder finance program to grow our balance sheet, increase commercial deposits and develop incremental revenue through our retail purchase mortgage channel. We finance and have active relationships with homebuilders nationwide. At December 31, 2017, loans committed to home builders totaled $1.1 billion, of which $601 million was drawn or used. Of that, $104 million was unsecured and included in our C&I portfolio and $497 million is collateralized and included in either the single family residence or land-residential categories of our CRE portfolio.

20



        
The following table presents our total CRE LHFI by collateral location and collateral type:
 
Michigan
 
Texas
 
Colorado
 
Florida
 
California
 
Other
 
Total (1)
 
% by collateral type
 
(Dollars in millions)
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateral Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family residence (2)
$
70

 
$
72

 
$
91

 
$
78

 
$
52

 
$
48

 
$
411

 
21.3
%
Multi family
120

 
35

 
11

 
13

 

 
82

 
261

 
13.5
%
Retail (3)
171

 
4

 
6

 
2

 

 
65

 
248

 
12.8
%
Industrial
123

 
4

 

 
2

 
11

 
75

 
215

 
11.1
%
Office
176

 

 

 
3

 
16

 
3

 
198

 
10.2
%
Land - Residential (4)
9

 
22

 
41

 
25

 
34

 
37

 
168

 
8.7
%
Hotel/motel
86

 
17

 

 

 

 
19

 
122

 
6.3
%
Senior living facility
27

 

 

 

 

 
62

 
89

 
4.6
%
Parking garage/Lot
72

 

 

 

 

 

 
72

 
3.7
%
Non Profit
38

 

 

 
3

 
2

 
4

 
47