5151 Corporate Drive, Troy, MI 48098 (800) 945-7700 flagstar.comANNUAL REPORT TWO THOUSAND SIXTEENFLAGSTAR BANCORP ANNUAL REPORT 20167378_Cover.indd 13/17/17 4:14 PM 7378_Cover.indd 23/21/17 7:58 PM Alessandro DiNello President and Chief Executive Officer In 2016, we continued our run of profitable quarters, saw our community bank come into its own as a solid contributor of diversified earnings, and put to rest significant holdovers from the housing crisis that had constrained our company.TO OUR SHAREHOLDERS$1.55th$14.15thBillion in Market CapitalizationLargest Savings Bank Billion in AssetsLargest Bank Mortgage Originator For the year, we earned $171 million, up from $158 million in 2015. Quarter after quarter we turned in a solid credit performance with negligible losses, low provisions, and strong loan loss coverage. In 2016, we maintained our lowest level of nonperforming loans in over 15 years. We closed 2016 a bigger bank, adding $1.7 billion in average interest-earning assets and producing the highest level of net interest income in our history. Results from community banking were a standout, with net income increasing 75 percent. Commercial loan balances grew to $3.3 billion, and the growth was highly diversified. For the first time, commercial loans in our portfolio exceeded consumer loans, demonstrating our progress in balancing the earnings contribution between our mortgage and community banking businesses. Throughout 2016, we continued to manage our balance sheet to maximize interest income by rotating lower-spread consumer loans into higher-spread commercial loans. To further diversify earnings, we established new commercial lending initiatives in 2016, including builder financing, equipment financing, and lending against mortgage servicing rights. Early in 2017, we formed a syndications group to add more depth and diversity to our commercial lending offerings.Mortgage production for 2016 reached $32.4 billion versus $29.4 billion in 2015, with retail mortgage posting a 37 percent year-over-year increase. We achieved these results despite a challenging fourth quarter marked by the combination of an unexpected spike in interest rates and normal seasonal softness. In 2016, our business model worked as planned, enabling us to be profitable even as mortgage production fell off. 7378_Letter.indd 13/17/17 3:55 PM Alessandro DiNello President and Chief Executive Officer Our 99 bank branches in Michigan continued to provide low-cost deposits to help fund our businesses, and together with other sources, helped us increase deposits by approximately $900 million in 2016.We settled two major outstanding issues in 2016—repayment of the TARP securities issued by the U.S. Treasury Department at the height of the housing crisis and the lifting of the consent order entered into with the Office of the Comptroller of the Currency in 2012. We replaced TARP securities with lower-cost senior notes that solidified our capital position. Resolution of the consent order not only swept away a major curb on our activities, it also affirmed our success in building a first-class risk management organization and creating a culture of compliance. With the consent order behind us, we have more control over our destiny and more freedom to execute our business plan. Our capital remained strong throughout 2016, with more than enough available to fund our growth initiatives. It is notable that we maintained a tier 1 leverage ratio of 8.9 percent despite the redemption of the TARP securities. We also held the line on expenses even while bringing new commercial businesses online.We were pleased during the year to win recognition as a Servicing STAR Performer from Fannie Mae, our biggest customer for mortgage loan sales. This award validates our commitment to continuous improvement in loan servicing, which is a key line of business targeted for growth.Also of note in 2016 is the refresh of the Flagstar brand we undertook during the year. We wanted to communicate Flagstar’s unique persona—the qualities that make us different from our competitors. The story that emerged is that of a company that strives to make everyone it touches successful. We do this by the care and attention to detail we pay in crafting solutions for our customers. We took our new craft brand to market and are seeing positive results in both name recognition and deposit growth. Early in 2017, we named Jennifer Whip to our board of directors. She is a principal with Cambridge One, LLC, a banking and mortgage lending consulting firm, who spent 26 years at Fannie Mae in a number of lead positions. She brings to Flagstar an exceptionally strong background in the mortgage business, as well as a solid record of supporting diversity, community engagement, and volunteerism. We are especially happy to have her on our board at a time when we have made diversity and inclusion a strategic focus.I would like to thank our employees, our most important asset, for their extraordinary contribution to the successes chronicled here, and our board of directors for their invaluable judgment, insight, and expertise. I deeply appreciate the support of our shareholders as we built a stronger and more diversified Flagstar, better positioned to deliver industry-leading results. 7378_Letter.indd 23/21/17 8:09 PM UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-16577
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction of incorporation or organization)
5151 Corporate Drive, Troy, Michigan
(Address of principal executive offices)
38-3150651
(I.R.S. Employer Identification No.)
48098-2639
(Zip Code)
Registrant’s telephone number, including area code: (248) 312-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Securities registered pursuant to Section 12(g) of the Act: None
Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in
Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The estimated aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by
reference to the closing sale price ($24.41 per share) as reported on the New York Stock Exchange on June 30, 2016, was approximately
$512 million. The registrant does not have any non-voting common equity shares.
As of March 9, 2017, 57,043,565 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.
Portions of the registrant’s Proxy Statement relating to the 2017 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
5
10
20
20
20
20
21
23
25
66
67
128
128
129
130
130
130
130
130
131
133
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART I
PART II
ITEM 5.
ITEM 6.
ITEM 7.
MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART III
DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15.
ITEM 16.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
PART IV
2
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The following list of abbreviations and acronyms are provided as a tool for the reader and may be used throughout this
Report, including the Consolidated Financial Statements and Notes:
Term
AFS
Definition
Available for Sale
Term
Ginnie Mae
Definition
Government National Mortgage Association
Agencies
ALCO
ALLL
AOCI
ARM
ASU
Basel I
Basel III
BSA
C&I
CAMELS
CD
CET1
CFPB
CLTV
Common
Stock
CPR
CRE
DIF
DOJ
DTA
EVE
FASB
FBC
FDIC
FHA
FHLB
FICO
Federal National Mortgage Association, Federal
Home Loan Mortgage Corporation, and Government
National Mortgage Association, Collectively
Asset Liability Committee
Allowance for Loan & Lease Losses
GLBA
HELOC
HFI
Gramm-Leach Bliley Act
Home Equity Lines of Credit
Held-for-Investment
Accumulated Other Comprehensive Income (Loss)
HOLA
Home Owners Loan Act
Adjustable Rate Mortgage
Accounting Standards Update
HPI
HTM
Housing Price Index
Held-to-Maturity
Basel Committee’s 1988 Capital Accord
LIBOR
London Interbank Offered Rate
Basel Committee on Banking Supervision Third
Basel Accord
Bank Secrecy Act
Commercial and Industrial
Capital, Asset Quality, Management, Earnings,
Liquidity and Sensitivity
Certificate of Deposit
CDARS
Certificates of Deposit Account Registry Service
Common Equity Tier 1
Combined Loan to Value
Common Shares
Common Prepayment Rate
Commercial Real Estate
DFAST
Dodd-Frank Stress Test
Depositors Insurance Fund
LHFI
LHFS
LTV
Loans Held-for-Investment
Loans Held-for-Sale
Loan-to-Value
Management
Flagstar Bancorp’s Management
MBIA
MBS
MD&A
MBIA Insurance Corporation
Mortgage-Backed Securities
Management's Discussion and Analysis
MSR
N/A
Mortgage Servicing Rights
Not Applicable
NASDAQ
National Association of Securities Dealers
Automated Quotations
NYSE
OCC
OCI
New York Stock Exchange
Office of the Comptroller of the Currency
Other Comprehensive Income (Loss)
Consumer Financial Protection Bureau
MP Thrift
MP Thrift Investments, L.P.
United States Department of Justice
OFHEO
Office of Federal Housing Enterprise Oversight
Deferred Tax Asset
Economic Value of Equity
ExLTIP
Executive Long-Term Incentive Program
OTS
OTTI
QTL
Office of Thrift Supervision
Other-Than-Temporary-Impairment
Qualified Thrift Lending
Fannie Mae/
FNMA
Federal National Mortgage Association
Regulatory
Agencies
Board of Governors of the Federal Reserve, Office
of the Comptroller of the Currency, U.S. Department
of the Treasury, Consumer Financial Protection
Bureau, Federal Deposit Insurance Corporation,
Securities and Exchange Commission
Financial Accounting Standards Board
RESPA
Real Estate Settlement Procedures Act
Flagstar Bancorp
Federal Deposit Insurance Corporation
Federal Housing Administration
Federal Home Loan Bank
Fair Isaac Corporation
FRB
Federal Reserve Bank
Freddie Mac
Federal Home Loan Mortgage Corporation
FTE
Full Time Employees
GAAP
United States Generally Accepted Accounting
Principles
Risk Weighted Assets
Securities and Exchange Commission
Troubled Asset Relief Program
Trouble Debt Restructuring
Unpaid Principal Balance
United States Department of Treasury
Variable Interest Entities
eXtensible Business Reporting Language
RWA
SEC
TARP
TDR
UPB
U.S.
Treasury
VIE
XBRL
3
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, including but not limited to statements included within the Management’s
Discussion and Analysis of Financial Condition and Results of Operations, are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended. In addition, Flagstar Bancorp, Inc. may make
forward-looking statements in our other documents filed with or furnished to the SEC, and our management may make
forward-looking statements orally to analysts, investors, representatives of the media, and others.
Generally, forward-looking statements are not based on historical facts but instead represent management’s beliefs
regarding future events. Such statements may be identified by words such as believe, expect, anticipate, intend, plan, estimate,
may increase, may fluctuate, and similar expressions or future or conditional verbs such as will, should, would, and could. Such
statements are based on management’s current expectations and are subject to risks, uncertainties, and changes in
circumstances. Actual results and capital and other financial conditions may differ materially from those included in these
statements due to a variety of factors, including and without limitation the precautionary statements included within each
individual business’ discussion and analysis of its results of operations and the factors listed and described under "Risk Factors"
below.
Any forward-looking statements made by or on behalf of Flagstar Bancorp, Inc. speak only as to the date they are
made and do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after
the date the forward-looking statements were made.
4
ITEM 1.
BUSINESS
PART I
Where we say "we," "us," "our," the "Company" or "Flagstar," we usually mean Flagstar Bancorp, Inc. However, in
some cases, a reference to "we," "us," "our," the "Company" or "Flagstar" will include our wholly-owned subsidiary Flagstar
Bank, FSB (the "Bank").
General
We are a Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted
through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. Based on our assets at
December 31, 2016, we are one of the largest banks headquartered in Michigan, providing commercial, small business, and
consumer banking services. At December 31, 2016, we had 2,886 full-time equivalent employees inclusive of account
executives and loan officers. Our common stock is listed on the NYSE under the symbol "FBC." We are considered a controlled
company for NYSE purposes, because MP Thrift Investments, L.P. held approximately 62.6 percent of our common stock as of
December 31, 2016.
Our banking network emphasizes the delivery of a complete set of banking and mortgage products and services and
we distinguish ourselves by crafting specialized solutions for our customers, local delivery, customer service and product
pricing. At December 31, 2016, we operated 99 full services banking branches throughout Michigan's major markets where we
offer full set of banking products to consumer, commercial, and government customers within those markets.
We have a unique, relationship-based business model of a leading Michigan-based bank leveraging a national
mortgage business which, itself, leverages the bank. We believe our strong position and focus on service creates a significant
competitive advantage in the markets in which we compete. The disciplined management team we have assembled is focused
on developing substantial and attractive growth opportunities that generate profitable operations with significant operating
leverage. We believe our lower risk profile and strong capital level positions us to better exploit the opportunities that our
business model yields and deliver attractive shareholder returns over the long term.
We are a national mortgage originator and utilize multiple origination channels including correspondent, broker,
distributed retail, and direct to consumer. We also service and subservice mortgage loans for others on a fee for service basis
and may also collect ancillary fees, such as late fees and earn income through the use of noninterest bearing escrow deposits.
These escrow deposit accounts and amounts received from servicing loans generate company controlled deposits which offer a
stable, low cost, long-term source of funding.
Operating Segments
Our operations are conducted through four operating segments: Community Banking, Mortgage Originations,
Mortgage Servicing, and Other. For financial information and additional details regarding each of these operating segments,
please see MD&A – Operating Segments and Note 23 - Segment Information, which are incorporated herein by reference.
Community Banking
Our Community Banking segment, services consumer, governmental and commercial customers in the major Michigan
markets we serve. We also serve home builders, correspondents, and commercial customers on a national level. We are focused
on using capital and liquidity generated from the mortgage business to expand our community banking relationships and build
enduring net interest margin revenue and fee income.
Our commercial customers are from a broad 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 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.
5
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 and we expanded our product offerings by
entering the equipment finance and leasing market.
Mortgage Origination
We utilize multiple production channels to originate or acquire mortgage loans on a national scale to generate high
returns on equity capital. This helps grow the servicing business and provides stable, low cost funding for the community bank.
We continue to leverage technology to streamline the mortgage origination process, thereby bringing service and convenience
to borrowers and correspondents. We also continue to make available to our customers various 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 mortgage servicing and the community
bank.
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. Delegate 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 correspondent
relationships with 739 companies located 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 615 mortgage brokers located in all 50 states.
Retail. In our retail channel, loans are originated through our nationwide network of stand-alone home loan centers. At
December 31, 2016, we maintained 41 retail locations in 21 states. In a direct-to-consumer lending transaction, loans are originated
through our Community Banking segment banking centers and from a national direct-to-consumer call center, 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. Our centralized loan processing provides efficiencies and allows lending sales staff to focus on business
development.
The majority of our total loan originations during the year ended December 31, 2016 represented mortgage loans that
were collateralized by residential first mortgages on single-family residences and were eligible for sale to the Agencies. In
addition, we originate or purchase residential first mortgage loans, other consumer loans, and commercial loans for our HFI
loan portfolios. Our revenues include noninterest income from sales of residential first mortgages to the Agencies, net interest
income, and revenue from servicing of loans for others.
Our mortgage origination segment provides us with a large number of customer relationships through our servicing of
loans sold to the Agencies and those loans we retain. These relationships, along with our banking customer relationships, provide
us an opportunity to cross-sell a full line of consumer financial products which include mortgage refinancing, HELOC, and
other consumer loans.
We primarily utilize borrowings from the FHLB to fund our mortgage loans held for sale and our warehouse lending
portfolio. The FHLB provides funding on a fully collateralized basis to us. Our borrowing capacity with the FHLB is a function
of the amount of eligible collateral pledged, which includes residential first mortgage loans, home equity lines of credit,
commercial real estate loans.
Competition
We face substantial competition in attracting deposits and making loans. Our most direct competition for deposits has
historically come from other savings banks, commercial banks and credit unions in our local market areas. Money market funds
and full-service securities brokerage firms also compete with us for these funds and, in recent years, many financial institutions
have competed for deposits through the Internet. We compete for deposits by offering a broad range of high quality customized
6
banking services at a large number of convenient locations where our customers are served at a desk rather than in a teller line.
We also compete by offering competitive interest rates on our deposit products.
From a lending perspective, there are a large number of institutions offering mortgage loans, consumer loans and
commercial loans, including many mortgage lenders that operate on a national scale, as well as local savings banks, commercial
banks, and other lenders. With respect to those products that we offer, we compete by offering competitive interest rates, fees,
and other loan terms, banking products and services and by offering efficient and rapid service.
Subsidiaries
At December 31, 2016, our corporate legal structure consisted of the Bank and its wholly-owned subsidiaries along
with our wholly-owned non-bank subsidiaries and captive insurance company through which we conduct other non-material
business or which are inactive. The Bank and its wholly owned subsidiaries comprised 99.5 percent of our total assets at
December 31, 2016. Currently, we also own nine statutory trusts that are not consolidated with our operations. For additional
information, see Notes 1, 7 and 24 to the Consolidated Financial Statements.
Regulation and Supervision
We, the Bank and the products and services we offer, are subject to regulation under state and federal laws. Regulatory
reform and enhanced supervisory requirements have had and could continue to have an impact on how we conduct business. As
a result, we continually assess the impact of regulatory changes and implement policies, processes and controls required to
comply with new regulations.
Changes in applicable laws or regulations, and in their interpretation and application by regulatory agencies, cannot be
predicted and may have a material effect on our business and results. For more information, refer to Item 1A. Risk Factors,
herein.
Consent Orders and Supervisory Agreements
Consent Order with OCC. On December 19, 2016, the OCC terminated its Consent Order with the Bank which had
been in effect since October 23, 2012. Since entering into the Consent Order, the Bank implemented and adopted, what we
believe are, industry best practices related to, among other things, regulatory compliance, enterprise risk management, capital
and liquidity.
Supervisory Agreement. We are also subject to a Supervisory Agreement with the Board of Governors of the Federal
Reserve (the "Supervisory Agreement"), dated January 27, 2010. A failure to comply with the Supervisory Agreement could
result in the initiation of further enforcement action by the Federal Reserve, including the imposition of further operating
restrictions, and could result in additional enforcement actions against the Company. The Company has taken actions which it
believes are appropriate to comply with and intends to maintain compliance with all of the requirements of the Supervisory
Agreement. For further information and a complete description of all of the terms of the Supervisory Agreement, please refer to
the copy of the Supervisory Agreement filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on
January 28, 2010 and included as an exhibit to this filing.
Consent Order with CFPB. On September 29, 2014, the Bank entered into a Consent Order with the CFPB. The
Consent Order relates to alleged violations of federal consumer financial laws arising from the Bank’s residential first mortgage
loan loss mitigation practices and default servicing operations dating back to 2011. Under the terms of the Consent Order, the
Bank has paid $28 million for borrower remediation and $10 million in civil money penalties. The settlement does not involve
any admission of wrongdoing on the part of the Bank or its employees, directors, officers, or agents.
Holding Company Regulation
The Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve (the
"Federal Reserve") and the SEC.
Acquisition, Activities and Change in Control. We are a unitary savings and loan holding company, as defined by
federal banking law, as is our controlling stockholder, MP Thrift. We may only conduct, or acquire control of companies
engaged in, activities permissible for a savings and loan holding company pursuant to the relevant provisions of the Savings
and Loan Holding Company Act and relevant regulations. Without prior written approval of the Federal Reserve, neither we,
nor MP Thrift may: (i) acquire control of another savings association or holding company thereof, or acquire all or substantially
7
all of the assets thereof; or (ii) acquire or retain, with certain exceptions, more than 5 percent of the voting shares of a non-
subsidiary savings association or a non-subsidiary savings and loan holding company. We are prohibited from acquiring control
of a depository institution that is not federally insured or retaining control of a savings association subsidiary for more than one
year after the date that such subsidiary becomes uninsured. Similarly, we may not be acquired by a bank holding company, or
any company, unless the Federal Reserve approves such transaction. In addition, the GLBA generally restricts a company from
acquiring us if that company is engaged directly or indirectly in activities that are not permissible for a savings and loan holding
company or financial holding company.
Limitation on Capital Distributions. Under the Supervisory Agreement, we may not declare or pay any cash dividends
or other capital distributions or purchase, repurchase, or redeem, or commit to purchase, repurchase, or redeem any equity stock
without the prior written non-objection of the Federal Reserve. The Company does not currently pay dividends on capital stock.
Volcker Rule. The Dodd-Frank Act requires the federal financial regulatory agencies to adopt rules that prohibit banks
and affiliates from engaging in proprietary trading and investing in and/or sponsoring certain "covered funds," including hedge
funds and private equity funds. The statutory provision is commonly called the "Volcker Rule." Pursuant to the requirements of
the Volcker Rule, we have established a standard compliance program based on the size and complexity of our operations.
Basel III Capital Requirements. The Bank and the holding company are currently subject to the regulatory capital
framework and guidelines reached by Basel III as adopted by the OCC and Federal Reserve. The OCC and Federal Reserve
have risk-based capital adequacy guidelines intended to measure capital adequacy with regard to a banking organization’s
balance sheet, including off-balance sheet exposures such as unused portions of loan commitments, letters of credit, and
recourse arrangements.
The Bank and Bank Holding Company have been subject to the capital requirements of the Basel III rules since
January 1, 2015. Basel III replaces the framework established by the 1988 capital accord ("Basel I") of the Basel Committee on
Banking Supervision. For additional information, see Note 20 - Regulatory Matters.
Stress Testing Requirements. The U.S. federal banking agencies, including the OCC and the Federal Reserve, issued
final rules implementing provisions of the Dodd-Frank Act that require banking organizations, including savings associations
and savings and loan holding companies, with total consolidated assets of more than $10 billion but less than $50 billion to
conduct annual company-run stress tests, report the results to their primary federal regulator and the Federal Reserve and
publish a summary of the results. Each Dodd-Frank Act Stress Test ("DFAST") must be conducted using certain scenarios
(baseline, adverse and severely adverse), which the OCC and Federal Reserve will publish by February 15 of each year.
Banking organizations are required to use the scenarios to calculate, for each quarter-end within a nine-quarter planning
horizon, the impact of such scenarios on revenues, losses, loan loss reserves and regulatory capital levels and ratios, taking into
account all relevant exposures and activities. The rules also require each banking organization to establish and maintain a
system of controls, oversight and documentation, including policies and procedures, designed to ensure that the DFAST
procedures used by the banking organization are effective in meeting the requirements of the rules.
Durbin Amendment. The Durbin Amendment to the Dodd-Frank Act alters the competitive structure of the debit card
payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. The final rule
establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and
proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible
interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5
basis points multiplied by the value of the transaction. The impact of this amendment was approximately $2 million in for year
ended December 31, 2016 and is estimated to be $4 million on an annual basis.
Source of Strength. The Dodd-Frank Act codified the Federal Reserve’s "source of strength" doctrine and extended it
to savings and loan holding companies. Under the Dodd-Frank Act, the prudential regulatory agencies are required to
promulgate joint rules requiring bank holding companies and savings and loan holding companies to serve as a source of
financial strength for any depository institution subsidiary by maintaining the ability to provide financial assistance to such
insured depository institution in the event that it suffers financial distress.
Banking Regulation
We must comply with a wide variety of banking, consumer protection and securities laws, regulations and supervisory
expectations and are regulated by multiple regulators, including the Office of the Comptroller of the Currency of the U.S.
Department of the Treasury, Consumer Financial Protection Bureau, and the Federal Deposit Insurance Corporation.
8
FDIC Insurance and Assessment. The FDIC insures the deposits of the Bank and such insurance is backed by the full
faith and credit of the U.S. government through the DIF. The FDIC maintains the DIF by assessing each financial institution an
insurance premium. The FDIC defined deposit insurance assessment base for an insured depository institution is equal to the
average consolidated total assets during the assessment period, minus average tangible equity.
Effective July 1, 2016, the FDIC implemented a new surcharge on large bank participants with more than $10 billion
in assets and simultaneously reduced the base assessment rates. The new surcharge and lower assessment are not expected to
have a material impact on our earnings.
All FDIC-insured financial institutions must pay an annual assessment to provide funds for the payment of interest on
bonds issued by the Financing Corporation ("FICO bonds"), a federal corporation chartered under the authority of the Federal
Housing Finance Board.
Affiliate Transaction Restrictions. The Bank is subject to the affiliate and insider transaction rules applicable to
member banks of the Federal Reserve as well as additional limitations imposed by the OCC. These provisions prohibit or limit
the Bank from extending credit to, or entering into certain transactions with principal stockholders, directors and executive
officers of the banking institution and certain of its affiliates. The Dodd-Frank Act imposed further restrictions on transactions
with certain affiliates and extension of credit to executive officers, directors and principal stockholders.
Limitation on Capital Distributions. The OCC regulates all capital distributions made by the Bank, directly or
indirectly, to the holding company, including dividend payments. As a subsidiary of a savings and loan holding company, the
Bank must file a notice and receive approval from the OCC at least 30 days prior to each proposed capital distribution before
declaring any dividends. Additionally, the Bank may not pay dividends to the Bancorp if, after paying those dividends, the Bank
would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible
capital ratio requirements. Payment of dividends by the Bank also may be restricted at any time at the discretion of the OCC if
it deems the payment to constitute an unsafe and unsound banking practice.
Loans to One Borrower. Under the Home Owners Loan Act ("HOLA"), savings associations are generally subject to
the national bank limits on loans to one borrower. Generally, savings associations may not make a loan or extend credit to a
single or related group of borrowers in excess of 15 percent of the institution’s unimpaired capital and surplus (as defined by
HOLA). Additional amounts may be loaned if such loans or extensions of credit are secured by readily-marketable collateral,
but in no case may they be in excess of an additional 10 percent of unimpaired capital and surplus. The Bank has established an
internal lending threshold that is more conservative than the limits required by HOLA and has a defined tracking and reporting
process to monitor lending levels of concentration.
CFPB and Consumer Protection Laws and Regulations
The Bank is subject to a number of federal consumer protection laws and regulations. These include, among others, the
Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit
Reporting Act, the Servicemembers Civil Relief Act, the Expedited Funds Availability Act, the Community Reinvestment Act,
the Real Estate Settlement Procedures Act, electronic funds transfer laws, redlining laws, predatory lending laws, laws
prohibiting unfair, deceptive or abusive acts or practices in connection with the offer, or sale of consumer financial products or
services, and the Gramm Leach Bliley Act regarding customer privacy and data security.
In addition to supervision by the OCC, the Bank is also subject to supervision by the CFPB, which has responsibility
for enforcing the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity
Act, and Real Estate Settlement Procedures Act, and the Truth in Savings Act, among others, for institutions that have assets in
excess of $10 billion. Much of the CFPB’s regulatory efforts have addressed mortgage standards, mortgage servicing standards,
and appraisal and escrow standards. These laws include the Homeowners Protection Act, the Home Mortgage Disclosure Act,
the Home Ownership and Equity Protection Act, the Secure and Fair Enforcement for Mortgage Licensing Act, and the Real
Estate Settlement Procedures Act.
Incentive Compensation
The U.S. bank regulatory agencies issued comprehensive guidance on incentive compensation policies intended to
ensure that the incentive compensation policies of U.S. banks do not undermine the safety and soundness of such banks by
encouraging excessive risk-taking. The U.S. bank regulatory agencies review, as part of the regular, risk-focused examination
process, the incentive compensation arrangements of U.S. banks that are not "large, complex banking organizations." These
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reviews are tailored to each bank based on the scope and complexity of the bank’s activities and the prevalence of incentive
compensation arrangements.
Bank Secrecy Act and Anti-Money Laundering
The Bank is subject to the BSA and other anti-money laundering laws and regulations, including the USA PATRIOT
Act. The BSA requires all financial institutions to, among other things, establish a risk-based system of internal controls
reasonably designed to prevent money laundering and the financing of terrorism. The BSA includes various record keeping and
reporting requirements such as cash transaction and suspicious activity reporting as well as due diligence requirements. The
Bank is also required to comply with U.S. Treasury’s Office of Foreign Assets Control imposed economic sanctions that affect
transactions with designated foreign countries, nationals, individuals, entities and others.
Additional Information
Our executive offices are located at 5151 Corporate Drive, Troy, Michigan 48098, and our telephone number is
(248) 312-2000. Our stock is traded on the NYSE under the symbol "FBC."
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge
on our website at www.flagstar.com, under "Investor Relations," as soon as reasonably practicable after we electronically file
such material with the SEC. These reports are also available without charge on the SEC website at www.sec.gov.
ITEM 1A. RISK FACTORS
Our financial condition and results of operations may be adversely affected by various factors, many of which are
beyond our control. In addition to the factors identified elsewhere in this Report, the most significant risk factors affecting our
business include those set forth below. The below description of risk factors is not exhaustive, and readers should not consider
the description of such risk factors to be a complete set of all potential risks that could affect us.
Market, Interest Rate, Credit and Liquidity Risk
Economic and general market conditions may adversely affect our business.
Our business and results of operations are affected by the financial markets and general economic market, political
uncertainty and social conditions, including factors such as the level and volatility of short-term and long-term interest rates,
inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending,
fluctuations in both debt and equity capital markets and currencies, liquidity of the financial markets, the availability and cost of
capital and credit, investor sentiment and confidence in the financial markets, political risks and the sustainability of economic
growth. Deterioration of any of these conditions could adversely affect our business segments, the level of credit risk we have
assumed, our capital levels and liquidity, and our results of operations.
Our business and results of operations are also affected by domestic and international fiscal and monetary policy.
Central bank actions can affect the value of financial instruments and other assets, such as investment securities and MSRs, and
their policies can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in fiscal
and monetary policies are beyond our control and difficult to predict but could have an adverse impact on our capital
requirements and the costs of running our business.
Further, any deterioration in the mortgage market may also reduce the number of new mortgages that we originate,
increase the costs of servicing mortgages without a corresponding increase in servicing fees or adversely affect our ability to
sell mortgage loans originated by us. Any such event could adversely affect our business, financial condition and results of
operations.
Our mortgage origination business is subject to the cyclical and seasonal trends of the real estate market. Cyclicality in
our industry could lead to periods of strong growth in the mortgage and real estate markets followed by periods of sharp
declines and losses in such markets. One of the primary influences on our mortgage business is the aggregate demand for
mortgage loans in our market areas, which is affected by prevailing interest rates. If we are unable to respond to the cyclicality
of our industry by appropriately adjusting our operations, headcount and overhead, our business, financial condition and results
of operations could be adversely affected.
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In addition, seasonal trends have historically reflected the general patterns of residential and commercial real estate
sales, which typically peak in the spring and summer seasons. Furthermore, Basel III provides for a countercyclical capital
buffer to induce banking organizations to hold capital in excess of regulatory minimums.
Increases in interest rates could lead to lower mortgage origination volume, which could adversely affect our business,
financial condition and results of operations.
In 2016, approximately 55 percent of our revenue was derived from the origination of residential mortgages. The
residential real estate mortgage lending business is sensitive to interest rates. Lower interest rates generally increase the volume
of mortgage originations, while higher interest rates generally cause that volume to decrease. Therefore, our mortgage
performance is typically correlated to fluctuations in interest rates. Historically, mortgage origination volumes and sales for the
Bank and for other financial institutions have risen and fallen in response to these and other factors. An increase in interest rates
would change these conditions and could have a material adverse effect on our operating results. From January through October
2016, average 10 year treasury rates, on which we base our pricing of our 30 year mortgages, remained low at 1.74 percent, 40
basis points lower than average rates experienced throughout 2015 which drove favorable mortgage loan originations,
particularly refinancing activity. From November through December 2016, average 10 year treasury rates increased 58 basis
points to 2.32 percent which had a negative impact on our fallout adjusted mortgage origination rate lock volume in the fourth
quarter.
Changes in interest rates could adversely affect our financial condition and results of operations including our net interest
margin, mortgage related assets, and investment portfolio.
Our results of operations and financial condition could be significantly affected by changes in interest rates. Our
financial results depend substantially on net interest income, which is the difference between the interest income that we earn
on interest-earning assets and the interest expense we pay on interest-bearing liabilities. While we have modeled rising interest
rate scenarios and such scenarios result in an increase in our net interest income, our deposits and interest-bearing liabilities
may reprice more quickly than modeled, thus resulting in a decrease in our net interest income.
Changes in interest rates may affect the average life of our mortgage loans and mortgage related securities. Decreases
in interest rates can trigger an increase in unscheduled prepayments of our mortgage loans and mortgage-related securities, as
borrowers refinance to reduce their own borrowing costs. As prepayment speeds on mortgage-related securities increase, any
premium amortization would increase on a prospective basis. Any immediate adjustments required under the application of the
interest method of income recognition may also result in lower net interest income. On the other hand, increases in interest
rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate mortgage loans.
Changes in interest rates also affect the fair value of our LHFS, LHFI and investment securities. Generally, the value
of our investment securities, which are predominantly fixed-rate, fluctuates inversely with changes in interest rates. Decreases
in the fair value of our investment securities, therefore, could have an adverse effect on our stockholders’ equity or our
earnings if the decrease in fair value is deemed to be other than temporary.
The fair value of our MSRs is highly sensitive to changes in interest rates and changes in market implied interest rate
volatility. Decreases in interest rates can trigger an increase in actual repayments and the probability of repayments which have
a negative impact on MSR fair value. An increase in market implied interest rate volatility has a negative impact on our MSR
assets and also lowers their fair value.
We manage MSRs using certain derivative strategies which may be ineffective.
We invest in MSRs to support mortgage strategies and to deploy capital at acceptable returns. Our MSRs are sensitive
to market implied interest rate volatility and are highly susceptible to prepayment risk, basis risk, and changes in the shape of
the yield curve, among other factors. We utilize derivatives and other fair value assets as part of our overall hedging strategy to
manage the impact of changes in the fair value of the MSRs, but these risk management strategies do not completely eliminate
risk. In addition, our hedging strategies rely on assumptions and projections regarding assets and general market factors, many
of which are outside of our control. One or more of these assumptions or projections may prove to be incorrect or our hedging
strategies may not adequately mitigate the impact of changes in interest rates or prepayment speeds, and as a result we may
incur losses that would adversely impact earnings.
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At December 31, 2016, our MSR was $335 million of Common Equity Tier 1 Capital. We may be unable to effectively
manage our MSR concentration risk which could impact our Common Equity Tier 1(CET1) under Basel III, which when
fully phased-in will require any MSR balance exceeding 10 percent of our CET1 to be deducted from capital.
As of January 1, 2015, we are subject to new rules relating to capital standards requirements, including requirements
contemplated by Section 171 of the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on
Banking Supervision, which standards are commonly referred to as Basel III. Basel III established a new qualifying criteria for
regulatory capital, including new limitations on the amount of deferred tax assets and MSRs that may be held without
significantly higher capital requirements. Basel III limits that amount of MSRs and deferred tax assets to 10 percent of CET1,
individually, and 15 percent of CET1, in the aggregate. While we have established a plan to reduce these assets before the Basel
III full implementation date of March 31, 2018 and are taking other actions to reduce our book balance by that date, no
assurances can be given that we will be able to do so, or that we will be successful in selling these assets at their current fair
value. If implemented today, we would experience another 201 basis points reduction in Tier 1 Capital (to risk weighted assets)
and 105 basis points reduction in the leverage ratio (Tier 1 Capital to adjusted average assets) from those levels at
December 31, 2016. For further information, see Note 20 - Regulatory Matters.
At December 31, 2016 our ALLL was $142 million, covering 2.4 percent of total loans held-for-investment. Our estimate of
the inherent losses is imperfect, the portfolio is relatively new and we are using underwriting standards which have not been
in place for a long period of time.
Our estimate of the allowance for loan and lease losses may not be adequate to cover actual credit losses inherent in
the loan portfolio at December 31, 2016. If this level were insufficient, future provisions for credit losses could adversely affect
our business, financial condition, results of operations, cash flows and prospects. Our ALLL is based on prior experience as
well as an evaluation of the risks incurred in the current portfolio. The determination of an appropriate level of loan loss
allowance is an inherently subjective process that requires significant management judgment, including estimates of loss and
the loss emergence period. We make various assumptions, estimates and judgments about the collectability of our loan portfolio
including but not limited to the creditworthiness of our borrowers and the value of real estate or other collateral backing the
repayment of loans. New information regarding existing loans, identification of additional problem loans, failure of borrowers
and guarantors to perform in accordance with the terms of their loans, and other factors, both within and outside of our control,
may require an increase in the ALLL. Moreover, our regulators, as part of their supervisory function, periodically review our
ALLL. Our regulators, who have access to broader industry data that we do not have, may recommend or require us to change
our ALLL, based on their judgment, which may be different from that of our management or other regulators. Any increase in
our loan losses would have an adverse effect on our earnings and financial condition.
Concentration of loans held-for-investment in certain geographic locations and portfolios may increase risk.
Our mortgage loan portfolio is geographically concentrated in certain states, including California, Michigan, Florida,
Washington and Texas, which is approximately 65 percent of the portfolio. In addition, approximately 75 percent of our
commercial real estate loans are in Michigan or are repayable by borrowers who have significant operations in Michigan. This
concentration has made, and will continue to make, our loan portfolio particularly susceptible to downturns in the general
economy and the real estate and mortgage markets. Adverse conditions beyond our control, including unemployment, inflation,
recession, natural disasters, declining property values, municipal bankruptcies and other factors in these markets could increase
default rates in our loan portfolio and could reduce our ability to generate new loans and otherwise negatively affect our
financial results.
In 2016, we continued to grow our portfolio of commercial real estate and commercial and industrial loans, which
generally expose us to a greater risk of nonpayment and loss than residential real estate loans due to the more complex nature of
underwriting associated with commercial loans. Such loans typically involve larger loan balances to single borrowers or groups
of related borrowers compared to residential real estate loans and collateral may not offset the principal balance at default. Also,
many of our borrowers have more than one commercial loan outstanding. Consequently, an adverse development with respect
to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development
with respect to a residential real estate loan.
Liquidity is essential to our business and liquidity risk is inherent in our operations, which could adversely affect our
financial results and condition.
We require substantial liquidity to repay our customers' deposits, fulfill loan demands, meet debt obligations as they
come due, and fund our operations under both normal operating environments and unforeseen circumstances causing liquidity
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stress. Our access to liquidity could be impaired by our inability to access the capital markets or unforeseen outflows of
deposits. Our access to external sources of financing, including deposits, as well as the cost of that financing, is dependent on
various factors including regulatory restrictions. A number of factors could make funding more difficult, more expensive or
unavailable on any terms, including, but not limited to, declining financial results and losses, material changes to operating
margins, financial leverage on an absolute basis or relative to peers, changes within the organization, specific events that impact
our financial condition or reputation, disruptions in the capital markets, specific events that adversely impact the financial
services industry, counterparty availability, changes affecting assets, the corporate and regulatory structure, balance sheet and
capital structure, geographic and business diversification, interest rate fluctuations, market share and competitive position,
general economic conditions and the legal, regulatory, accounting and tax environments governing funding transactions. Many
of these factors are beyond our control. The material deterioration in any one or a combination of these factors could result in a
downgrade of our credit or servicer standing with counterparties or a decline in our reputation within the marketplace, and
could result in higher cash outflows requiring additional access to liquidity, having a limited ability to borrow funds, maintain
or increase deposits (including custodial deposits for our agency servicing portfolio) or to raise capital on commercially
reasonable terms or at all.
Our ability to make mortgage loans and fund our investments and operations depends largely on our ability to secure
funds on terms acceptable to us. Our primary sources of funds to meet our financing needs include loan sales, deposits, which
include custodial accounts from our servicing portfolio, public funds, and capital-raising activities. Our company controlled
deposits are considered stable sources of funding in our stress testing model. If we are unable to maintain any of these financing
arrangements, are restricted from accessing certain funding sources by our regulators, are unable to arrange for new financing
on terms acceptable to us or at all, or if we default on any of the covenants imposed upon us by our borrowing facilities, then
we may have to reduce the number of mortgage loans we are able to originate for sale in the secondary market or for our own
investment or take other actions that could have other negative effects on our operations. A prolonged significant reduction in
loan originations that occurs as a result could adversely impact our earnings, financial condition, results of operations and
future prospects. There is no guarantee that we will be able to renew or maintain our financing arrangements or deposits or that
we will be able to adequately access capital markets when or if a need for additional capital arises.
We use assumptions and estimates in determining the fair value of certain of our financial assets and financial liabilities.
Different assumptions and estimates could result in significant declines or increases in valuation.
A total of $5.2 billion of assets and $118 million of liabilities are carried on our Consolidated Statements of Financial
Condition at fair value, including our LHFS, AFS investment securities, MSRs, derivatives, certain LHFI, and the DOJ
settlement liability. Generally, for assets that are reported at fair value, we use quoted market prices when available. In certain
cases, observable market prices and data may not be readily available or their availability may be diminished due to market
conditions. In such cases, we use internally developed financial models that utilize observable market data inputs as well as
asset specific collateral data included in market observable data to estimate the fair value of certain of these assets and
liabilities. These valuation models rely to some degree on management's assumptions, estimates and judgment, which are
inherently uncertain. We cannot be certain that the models or the underlying assumptions will prove to be predictive and remain
so over time, and therefore, actual results may differ from our models and assumptions. Different assumptions could result in
significant differences in valuation, which in turn could result in significant changes in the dollar amount of assets or liabilities
we report on our Consolidated Statements of Financial Condition. In addition, sudden illiquidity in markets or declines in prices
of certain loans or securities may make it more difficult to value certain balance sheet items, which may lead to the possibility
that such valuations will be subject to further change or adjustment. If assumptions or estimates underlying our Consolidated
Statements of Financial Condition are inaccurate, we may experience material losses.
We are a holding company and are, therefore, dependent on the Bank for funding of obligations.
As a holding company with no significant assets other than the capital stock of the Bank and a limited amount of cash,
our ability to make payments for certain services we purchase from the Bank and to service our debt, including interest
payments on our senior notes and junior subordinated debentures depends upon available cash on hand and the receipt of
dividends from the Bank on such capital stock. The holding company had cash and cash equivalents of $70 million at
December 31, 2016. The declaration and payment of dividends by the Bank on all classes of its capital stock is subject to the
discretion of the Bank's board of directors and to applicable regulatory and legal limitations. If the Bank does not make
dividend payments to us, we may not be able to service our debt which could have a material adverse effect on our financial
condition and results of operations.
13
Regulatory Risk
The Holding Company and the Bank remain subject to the restrictions and conditions of the Supervisory Agreement with
the Federal Reserve and the Consent Order with the CFPB, respectively. Failure to comply with the Supervisory Agreement
could result in further enforcement action against us.
There is no guarantee that the Bank will be able to fully comply with the Consent Order. In the event that we are in
material non-compliance with the terms of the Consent Order, the CFPB has the authority to subject the Bank to additional
corrective actions. Moreover, they could initiate further enforcement actions against the Bank, seek an injunction requiring the
Bank and its officers and directors to comply with the Consent Order and seek civil money penalties against us and our officers
and directors. Any failure by the Bank to comply with the terms of the Consent Order or additional actions could adversely
affect our business, financial condition and results of operations. In addition, the Bank’s competitors may not be subject to
similar actions, which could limit our ability to compete effectively. These corrective actions could negatively impact the
Bank's operations and financial performance. For further information on Consent Order see Item 1. Business - Regulation and
Supervision.
The Supervisory Agreement, requires that we take certain actions to address issues identified by the OTS. The
Supervisory Agreement is enforced by the Federal Reserve as the successor regulator to the OTS with respect to savings and
loan holding companies. Under the terms of the agreement, we are required to submit a capital plan; receive written non-
objection before declaring or paying any dividend or other capital distribution from the Holding Company, incurring or
renewing any debt at the Holding Company and engaging in affiliate transactions (with limited exceptions); comply with
applicable regulatory requirements before making certain severance and indemnification payments; and provide notice prior to
changes in directors and certain executive officers or entering into, renewing, extending or revising compensation or benefits
agreements of such directors or executive officers, with such changes being subject to Federal Reserve approval. While we
believe that we have taken all action necessary to comply with the requirements of the Supervisory Agreement, failure to
comply with the Supervisory Agreement in the time frames provided, or at all, could result in additional enforcement orders or
penalties, which could include further restrictions on us, assessment of civil money penalties on us, as well as our directors,
officers and other affiliated parties and removal of one or more officers and/or directors. Any failure by us to comply with the
terms of the Supervisory Agreement or additional actions by the Federal Reserve could adversely affect our business, financial
condition and results of operations. Moreover, our competitors may not be subject to similar actions, which could limit our
ability to compete effectively. For further information on Supervisory Agreement see Item 1. Business - Regulation and
Supervision.
Expanded regulatory oversight over our business could significantly increase our risks and costs associated with complying
with current and future regulations, which could adversely affect our financial condition and results of operations.
As noted in Item 1 - Business - Regulation and Supervision, we are subject to a wide variety of banking, consumer
protection and securities laws, regulations and supervisory expectations and numerous regulatory and enforcement authorities.
As a result of and in addition to new legislation aimed at regulatory reform, such as the Dodd-Frank Act, and the increased
capital requirements introduced by the Basel III final rules, the regulatory agencies generally are taking a more stringent
approach to supervising and regulating financial institutions and financial products and services over which they exercise their
respective supervisory authorities. We, the Bank, and our products and services all remain subject to greater supervisory
scrutiny and enhanced supervisory requirements and expectations. We may face greater supervisory scrutiny and enhanced
supervisory requirements in the foreseeable future.
The Collins Amendment to Dodd-Frank Act establishes minimum Tier 1 leverage and risk-based capital requirements
for insured depository institutions, depository institution holding companies, and non-bank financial companies that are
supervised by the Federal Reserve. The minimum Tier 1 leverage and risk-based capital requirements are determined by the
minimum ratios established by the federal banking agencies that apply to insured depository institutions under the prompt
corrective action regulations. The amendment states that certain hybrid securities, such as trust preferred securities, may be
included in Tier 1 capital for bank holding companies with total assets below $15 billion as of December 31, 2009. As we were
below $15 billion in assets as of December 31, 2009, the trust preferred securities will be included as Tier 1 capital while they
are outstanding, subject to certain future limitations. If a depository institution holding company under $15 billion acquires a
depository institution holding company and the resulting organization has total consolidated assets of $15 billion or more at the
end of the quarter in which the transaction occurred, the resulting organization may no longer include such certain hybrid
securities in Tier 1 capital.
14
As a result of increasing scrutiny and regulation of the banking industry and consumer practices, we may face a greater
number or wider scope of examinations, investigations, enforcement actions and litigation, thereby increasing our costs
associated with responding to or defending such actions, as well as potentially resulting in costs associated with fines, penalties,
settlements or judgments. In addition, increased regulatory inquiries and investigations, as well as any additional legislative or
regulatory developments affecting our businesses, and any required changes resulting from these developments, could reduce
our revenue, limit the products or services that we offer or increase the costs thereof, impose additional compliance costs, harm
our reputation or otherwise adversely affect our businesses. Some of these laws may provide a private right of action that a
consumer or class of consumers may seek to pursue to enforce these laws and regulations.
Both the OCC and the FDIC may take regulatory enforcement actions against any of their regulated institutions that do
not operate in accordance with applicable regulations, policies and directives. Proceedings may be instituted against any
banking institution, or any "institution-affiliated party," such as a director, officer, employee, agent or controlling person, who
engages in unsafe and unsound practices, including violations of applicable laws and regulations. The OCC has authority under
various circumstances to appoint a receiver or conservator for an insured institution that it regulates, to issue cease and desist
orders, to obtain injunctions restraining or prohibiting unsafe or unsound practices, to revalue assets and to require the
establishment of reserves. The FDIC has additional authority to terminate insurance of accounts, after notice and hearing, upon
a finding that the insured institution is or has engaged in any unsafe or unsound practice that has not been corrected, is
operating in an unsafe or unsound condition or has violated any applicable law, regulation, rule, or order of, or condition
imposed by, the FDIC. In addition, the Federal Reserve may take regulatory enforcement actions against us, and the CFPB may
also have the authority to take regulatory enforcement actions against us or the Bank.
Financial services reform legislation has resulted in, among other things, numerous restrictions and requirements which
could negatively impact our business and increase our costs of operations.
The Dodd-Frank Act has significantly changed the bank regulatory structure and affected the lending, deposit,
investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act and its'
implemented regulations have increased and may continue to increase our operating and compliance costs and our interest
expense.
The CFPB has broad and unique rulemaking authority to administer and carry out the provisions of the Dodd-Frank
Act with respect to financial institutions that offer covered financial products and services to consumers, including prohibitions
against unfair, deceptive or abusive practices in connection with any transaction with a consumer for a consumer financial
product or service, or the offering of a consumer financial product or service including regulations related to the origination and
servicing of residential mortgages. The CFPB has finalized significant rules and guidance that impact nearly every aspect of the
life cycle of a residential mortgage and continues to revise these rules and propose new rules. The Bank is subject to the
CFPB’s supervisory, examination and enforcement authority with respect to consumer protection laws and regulations. As a
result, we could incur increased costs, potential litigation or be materially limited or restricted in our business, product offerings
or services in the future.
The Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending practices on financial
institutions. The Department of Justice, CFPB, and other agencies are responsible for enforcing these laws and regulations.
Private parties may also have the ability to challenge an institution's performance under fair lending laws in class action
litigation. A successful challenge to the Bank's performance under the fair lending laws and regulations could adversely impact
the Bank's rating under the Community Reinvestment Act and result in a wide variety of sanctions or penalties, which could
negatively impact the Bank's reputation, financial condition and results of operations.
Bank regulators have increased their focus on consumer compliance and, as a result, those portions of our lending
operations which most directly deal with consumers, in particular our mortgage operations and consumer lending, pose
particular challenges. While we are not aware of any material issues with our compliance, mortgage and consumer lending
practices raise compliance risks. Despite the supervision and oversight we exercise in these areas, failure to comply with these
regulations could result in the Bank being liable for damages to individual borrowers or other imposed penalties.
Compliance obligations have exposed us and will continue to expose us to additional noncompliance risk and could
divert management’s focus from our business operations. Furthermore, the combined effect of numerous rulemakings by
multiple governmental agencies and regulators, and the potential conflicts or inconsistencies among such rules, present
challenges and risks to our business and operations.
15
We are highly dependent on the Agencies to sell mortgage loans and any changes in these entities or their current roles
could adversely affect our business, financial condition and results of operations.
We sell approximately 70 percent of our mortgage loans to Fannie Mae and Freddie Mac. Fannie Mae and Freddie
Mac remain in conservatorship and a path forward to emerge from conservatorship is unclear. These roles could be reduced,
modified or eliminated and the nature of their guarantees could be limited or eliminated relative to historical measurements.
The elimination or modification of the traditional roles of Fannie Mae or Freddie Mac could significantly and
adversely affect our business, financial condition and results of operations. Furthermore, any discontinuation of, or significant
reduction in, the operation of these agencies, any significant adverse change in the level of activity of these agencies in the
primary or secondary mortgage markets or in the underwriting criteria of these agencies could materially and adversely affect
our business, financial condition and results of operations.
Changes in the servicing or origination guidelines required by the Agencies could adversely affect our business, financial
condition and results of operations.
We are required to follow specific guidelines that impact the way that we service and originate Agency loans,
including guidelines with respect to credit standards for mortgage loans, our staffing levels and other servicing practices, the
servicing and ancillary fees that we may charge, our modification standards and procedures and the amount of non-
reimbursable advances.
We cannot negotiate these terms with the Agencies and they are subject to change at any time. A significant change in
these guidelines that has the effect of decreasing the fees we charge or requires us to expend additional resources in providing
mortgage services could decrease our revenues or increase our costs, which would adversely affect our business, financial
condition and results of operations.
In addition, changes in the nature or extent of the guarantees provided by Fannie Mae and Freddie Mac or the
insurance provided by the FHA could also have broad adverse market implications. The fees that we are required to pay to the
Agencies for these guarantees have changed significantly over time and any future increases in these fees would adversely
affect our business, financial condition and results of operations.
We depend upon having FDIC insurance to raise deposit funding at reasonable rates. Increases in deposit insurance
premiums and special FDIC assessments will adversely affect our earnings.
The Dodd-Frank Act required the FDIC to substantially revise its regulations for determining the amount of an
institution's deposit insurance premiums. The FDIC has defined the deposit insurance assessment base for an insured depository
institution as average consolidated total assets during the assessment period, minus average tangible equity. Our assessment rate
is determined by use of a scorecard that combines a financial institution's CAMELS ratings with certain other financial
information. The FDIC may determine that we present a higher risk to the DIF than other banks due to certain factors. These
factors include significant risks relating to interest rates, loan portfolio and geographic concentration, concentration of high
credit risk loans, increased loan losses, regulatory compliance (including under existing Supervisory Agreement), existing and
future litigation and other factors. As a result, we could be subject to higher deposit insurance premiums and special
assessments in the future that could adversely affect our earnings. The Bank’s deposit insurance premiums and special
assessments in the future also may be higher than competing banks may be required to pay. Our total exposure related to
uninsured deposits over $250,000 was approximately $2 billion as of December 31, 2016. These balances could experience a
higher propensity to reprice should rates rise or the Bank's financial condition deteriorate.
Operational Risk
A failure of our information technology systems, or those of our key third party vendors or service providers, could cause
operational losses and damage our reputation.
Our businesses are increasingly dependent on our ability to process, record and monitor a large number of complex
transactions and data. If our internal financial, accounting, or other information technology systems fail, we may be unable to
conduct business for a period of time, which may impact our financial results if that interruption is sustained. In addition, our
reputation with our customers or counterparties may suffer, which could have a further, long-term impact on our financial
results.
16
Also, because we conduct part of our business over the Internet and outsource a significant number of our critical
functions to third parties, our operations depend on our third-party service providers to maintain and operate their own
technology systems. To the extent these third parties’ systems fail, we may be unable to conduct business or provide certain
services, and we may face financial and reputational losses as a result.
We collect, store and transfer our customers’ personally identifiable information, and any compromise to the security of that
information may have meaningful consequences for us.
Data breaches are of a particular concern relative to the processing of consumer transactions, such as the servicing or
subservicing of loans. Our businesses receive, transmit and store a large volume of personally identifiable information and other
user data. There are myriad federal, state and international laws regarding privacy and the storing, sharing, use, disclosure and
protection of personally identifiable information and user data.
We have policies and processes in place that are intended to meet the requirements of those laws, including security
systems in place to prevent unauthorized access to that information. Nevertheless, those processes and systems may be
inadequate. Also, to the extent we rely upon third parties to handle personally identifiable data on our behalf, we may be
responsible if such data is compromised while in the custody and control of those third parties.
Privacy laws are still evolving and many state and local jurisdictions have laws that differ from federal law. At times,
we may also be governed by privacy laws outside of the U.S., with which we are less familiar. If we fail to comply with
applicable privacy policies or federal, state, local or international laws and regulations or any compromise of security that
results in the unauthorized release of personally identifiable information or other user data, those events could damage the
reputation of our business, and discourage potential users from utilizing our products and services. In addition, we may have to
bear the cost of mitigating identity theft concerns, and may be subject to fines or legal proceedings by governmental agencies or
consumers. Any of these events could adversely affect our business, financial condition and results of operations.
We may be terminated as a servicer or subservicer or incur costs, liabilities, fines and other sanctions if we fail to satisfy our
servicing obligations, including our obligations with respect to mortgage loan foreclosure actions.
We act as servicer and subservicer for mortgage loans owned by third parties, which is approximately 10 percent of
our revenue and results in approximately $1.6 billion of our average company controlled deposits. In such capacities for those
loans, we have certain contractual obligations, including foreclosing on defaulted mortgage loans or, to the extent applicable,
considering alternatives to foreclosure. If we commit a material breach of our obligations as servicer, we may be subject to
termination if the breach is not cured within a specified period of time following notice, causing us to lose servicing income.
For certain investors and/or certain transactions, we may be contractually obligated to repurchase a mortgage loan or
reimburse the investor for credit or other losses incurred on the loan as a remedy for servicing errors with respect to the loan. If
we have increased repurchase obligations because of claims for which we did not satisfy our obligations, or increased loss
severity on such repurchases, we may have a significant reduction to noninterest income or increase to noninterest expense. We
may incur significant costs if we are required to, or if we elect to, re-execute or re-file documents or take other action in our
capacity as a servicer in connection with pending or completed foreclosures. We may incur litigation costs if the validity of a
foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the
foreclosure process, we may have liability to the borrower and/or to any title insurer of the property sold in foreclosure if the
required process was not followed. These costs and liabilities may not be legally or otherwise reimbursable to us.
We may be required to repurchase mortgage loans, pay fees or indemnify buyers against losses in some circumstances,
which could harm liquidity, results of operations and financial condition.
When mortgage loans are sold by us, we make customary representations and warranties to purchasers, guarantors and
insurers, including the Agencies, about the mortgage loans, and the manner in which they were originated. We have made, and
will continue to make, such representations and warranties in connection with the sale of loans. Whole loan sale agreements
require us to repurchase or substitute mortgage loans, or indemnify buyers against losses, in the event we breach these
representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of early payment default
of the borrower or we may be required to pay fees. We also are subject to litigation relating to these representations and
warranties and the costs of such litigation may be significant. With respect to loans that are originated through our broker or
correspondent channels, the remedies we have available against the originating broker or correspondent, if any, may not be as
broad as the remedies available to purchasers, guarantors and insurers of mortgage loans against us. In addition, we also face
further risk that the originating broker or correspondent, if any, may not have the financial capacity to perform remedies that
17
otherwise may be available. Therefore, if a purchaser, guarantor or insurer enforces its remedies against us, we may not be able
to recover losses from the originating broker or correspondent. If repurchase and indemnity demands increase and such
demands are valid claims, the liquidity, results of operations and financial condition may also be adversely affected.
Our representation and warranty reserve for losses at December 31, 2016 is $27 million. This may not be adequate to
cover losses for loans that we have sold or securitized into the secondary market which we may be subsequently required to
repurchase, pay fines or fees, or indemnify purchasers and insurers because of violations of customary representations and
warranties. The repurchase demand pipeline was $6 million at December 31, 2016. The original unpaid principal balance of
2009 and later vintage loans sold to the Agencies through December 31, 2016 was $183 million.
In addition, our regulators, as part of their supervisory function, periodically review our representation and warranty
reserve for losses. Our regulators, based on their judgment, may recommend or require us to increase our reserve. Any increase
in our loan losses could have an adverse effect on our earnings and financial condition.
We utilize third party mortgage originators which subjects us to strategic, reputation, compliance and operational risk.
Approximately 94 percent of our residential first mortgage volume depends upon the use of third party mortgage
originators, i.e. mortgage brokers and correspondent lenders, who are not our employees. These third parties originate
mortgages and provide services to many different banks and other entities. Accordingly, they may have relationships with or
loyalties to such banks and other parties that are different from those they have with or to us. Failure to maintain good relations
with such third party mortgage originators could have a negative impact on our market share which would negatively impact
our net income.
We rely on third party mortgage originators to originate and document the mortgage loans we purchase. While we
perform due diligence on the mortgage companies with whom we do business and review the loan files and loan documents we
purchase to attempt to detect any irregularities or legal noncompliance, we have less control over these originators than
employees of the Bank.
Due to increasing regulatory scrutiny, our third party mortgage originators could choose or be required to either reduce
the scope of their business or exit the mortgage origination business altogether. The TILA-RESPA Integrated Disclosure Rule
issued by the CFPB establishes comprehensive mortgage disclosure requirements for lenders and settlement agents in
connection with most closed-end consumer credit transactions secured by real property. The rule requires certain disclosures are
provided to consumers in connection with applying for and closing on a mortgage loan. The rule also mandates the use of
specific disclosure forms, timing of communicating information to borrowers and certain record keeping requirements. The
increased administrative burden and the system requirements associated with complying with these rules could lead to a
decrease in our mortgage volume.
The Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending practices on financial
institutions. This regulation applies to lending operations which deal directly with consumer lending. Mortgage and consumer
lending practices raise compliance risks resulting from the detailed and complex nature of mortgage and consumer lending
regulations imposed by federal regulatory agencies, and the relatively independent and diverse operating channels in which
loans are originated. We, and our brokers, are required to apply fair lending and ensure lending practices do not result in a
disparate impact to borrowers across various locations. Failure to comply with these regulations, by us or our brokers, could
result in the Bank being liable for damages to individual borrowers or other imposed penalties.
Our ability to control the third party mortgage originators could have an adverse impact on our business. In addition,
these arrangements with third party mortgage originators and the fees payable by us to such third parties could be subject to
additional regulatory scrutiny and restrictions in the future.
We may be subject to corporate tax reform which could impact our net income and effective tax rate.
Congress is evaluating Tax Reform and certain proposals, such as a reduction in the corporate tax rate, which could
have a material impact on the Company. If a reduction in rate is enacted we would expect to record a significant charge to
expense through our tax provision for the revaluation of our net deferred tax asset. Going forward the reduction in rate may
have a favorable impact on our effective tax rate.
18
General Risk Factors
MP Thrift, an entity managed and controlled by MatlinPatterson, owns 62.6 percent of our common stock and has
significant influence over us, including control over decisions that require the approval of stockholders, whether or not such
decisions are in the best interests of other stockholders.
MP Thrift owns a substantial majority of our outstanding common stock and as a result, has control over our decisions
to enter into any corporate transaction and also the ability to prevent any transaction that requires the approval of our board of
directors or the stockholders regardless of whether or not other members of our board of directors or stockholders believe that
any such transactions are in their own best interests. So long as MP Thrift continues to hold a majority of our outstanding
common stock, it will have the ability to control the vote in any election of directors and other matters being voted on, and
continue to exert significant influence over us. Furthermore, MP Thrift may have interests that could diverge from the interests
of other stockholders, and may use its control to make decisions that adversely affect the interest of other common stockholders
and other holders of our debt or other equity instruments.
Additionally, our ability to use our deferred tax assets to offset future taxable income may be significantly limited if
we experience an "ownership change" as defined for U.S. federal income tax purposes. An ownership change occurs if,
immediately after any owner shift involving a 5 percent shareholder or any equity structure shift (1) the percentage of the stock
of the loss corporation, owned by one or more 5 percent shareholders has increased by more than 50 percentage points, over (2)
the lowest percentage of stock of the loss corporation owned by such shareholders. Section 382 of the Internal Revenue Code
imposes restrictions on the use of a corporation’s net operating losses, certain recognized built-in losses, and other carryovers
after an ownership change occurs. As we have a controlling stockholder, any stock offering in isolation or when combined with
other ownership changes, could cause us to experience an ownership change and trigger these restrictions.
We are subject to various legal or regulatory investigations and proceedings.
At any given time, we are defending ourselves against a number of legal and regulatory investigations and
proceedings. Proceedings or actions brought against us may result in judgments, settlements, fines, penalties, injunctions,
business improvement orders, consent orders, supervisory agreements, restrictions on our business activities or other results
adverse to us, which could materially and negatively affect our businesses. If such claims and other matters are not resolved in a
manner favorable to us, they may result in significant financial liability and/or adversely affect the market perception of us and
our products and services, as well as impact customer demand for those products and services. Some of the laws and
regulations to which we are subject may provide a private right of action that a consumer or class of consumers may pursue to
enforce these laws and regulations. We have been, and may continue to be in the future, subject to stockholder derivative
actions, which could seek significant damages or other relief. Any financial liability or reputational damage could have a
material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and
results of operations. Claims asserted against us can be highly complicated and slow to develop, making the outcome of such
proceedings difficult to predict or estimate early in the process. As a participant in the financial services industry, it is likely that
we will be exposed to a high level of litigation and regulatory scrutiny and investigations relating to our business and
operations.
Although we establish accruals for legal proceedings when information related to the loss contingencies represented by
those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have
accruals for all legal proceedings where we face a risk of loss. Due to the inherent subjectivity of the assessments and
unpredictability of the outcome of legal and regulatory proceedings, amounts accrued may not represent the ultimate loss to us
from the legal and regulatory proceedings in question. As a result, our ultimate losses may be significantly higher than the
amounts accrued for legal loss contingencies.
For further information regarding the unpredictability of legal proceedings and description regarding our pending legal
proceedings see, Note 21 - Legal Proceedings, Contingencies and Commitments.
Other Risk Factors
The above description of risk factors is not exhaustive. Other risk factors are described elsewhere herein as well as in
other reports and documents that we file with or furnish to the SEC. Other factors that could also cause results to differ from
our expectations may not be described herein or in any such report or document. Each of these factors could by itself, or
together with one or more other factors, adversely affect our business, results of operations and/or financial condition.
19
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Flagstar's headquarters is located in Troy, Michigan at 5151 Corporate Drive. We operate a regional office in Jackson,
Michigan. We own both the headquarters and regional office buildings. At December 31, 2016, we operated 99 branches in
Michigan, of which 73 were owned and 26 were leased. Our Michigan branches consist of 76 free-standing office buildings,
two in-store banking centers and 21 branches in buildings in which there are other tenants. In addition, we lease 31 retail offices
located in 19 states. We also lease four wholesale lending offices and three commercial lending offices.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to legal proceedings incident to its business. For further information, see
Note 21 - Legal Proceedings, Contingencies and Commitments.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
20
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PART II
Our common stock trades on the NYSE under the trading symbol FBC. At December 31, 2016, there were 56,824,802
shares of our common stock outstanding held by approximately 14,761 stockholders of record. The following table shows the
high and low sale prices for our common stock during each calendar quarter during 2016 and 2015:
Quarter Ending
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
Dividends
$
$
Highest Sale
Price
Lowest Sale
Price
29.08
$
28.09
24.47
23.13
24.95
$
21.01
19.44
16.50
26.35
24.40
20.68
17.49
20.60
17.83
14.61
14.10
We have not paid dividends on our common stock since the fourth quarter 2007. The amount and nature of any
dividends declared on our common stock in the future will be determined by our board of directors. We are generally prohibited
from making any dividend payments on stock except pursuant to the prior non-objection of the Federal Reserve as set forth in
the Supervisory Agreement.
Beginning with the February 2012 payment of dividends on preferred stock, we exercised our right to defer regularly
scheduled quarterly payments of dividends on preferred stock issued and outstanding. On July 14, 2016, we ended the deferral
and made a payment to bring current all outstanding dividends as of that date and subsequently repurchased the outstanding
preferred stock.
In addition, our principal sources of funds are cash dividends paid by the Bank to us and other subsidiaries, investment
income and borrowings. Federal laws and regulations limit the amount of dividends or other capital distributions that the Bank
may pay us. The Bank has an internal practice to remain "well-capitalized" under OCC capital adequacy regulations as
discussed above. The Bank must seek prior approval from the OCC at least 30 days before it may make a dividend payment or
other capital distribution to us.
Equity Compensation Plan Information
The following table sets forth certain information with respect to securities to be issued under our equity compensation
plans as of December 31, 2016:
Plan Category
Equity compensation plans approved by security holders (2)
Equity compensation plans not approved by security holders
Total
Number of
Securities to Be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights (1)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
1,507,701
—
1,507,701
$
$
17.68
—
17.68
2,634,462
—
2,634,462
(1) Weighted average exercise price is calculated including RSUs, which for this purpose are treated as having an exercise price of zero.
(2) For further information regarding the 2006 Equity Incentive Plan (the "2006 Plan") and 2016 Equity Incentive Plan (the "2016 Plan"), see Note 18 -
Stock-Based Compensation.
21
Sale of Unregistered Securities
We made no unregistered sales of our equity securities during the fiscal year ended December 31, 2016.
Issuer Purchases of Equity Securities
We made no purchases of equity securities during the fiscal year ended December 31, 2016.
Performance Graph
CUMULATIVE TOTAL STOCKHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDICES
DECEMBER 31, 2011 THROUGH DECEMBER 31, 2016
Nasdaq Financial
Nasdaq Bank
S&P Small Cap 600
Russell 2000
Flagstar Bancorp
December 31, 2011
December 31, 2012
December 31, 2013
December 31, 2014
December 31, 2015
December 31, 2016
100
114
157
161
166
205
100
115
160
167
162
202
100
115
157
163
153
183
100
384
389
311
458
533
100
116
161
165
176
238
22
ITEM 6. SELECTED FINANCIAL DATA
Summary of Consolidated
Statements of Operations
Interest income
Interest expense
Net interest income
Provision (benefit) for loan losses
Net interest income after provision for loan
losses
Noninterest income
Noninterest expense
Income before income taxes
Provision (benefit) for income taxes
Net income (loss)
Preferred stock dividends/accretion
Net income (loss) from continuing operations
Income (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
$
$
$
For the Years Ended December 31,
2016
2015
2014
2013
2012
(In millions, except share data and percentages)
$
417
$
355
$
286
$
94
323
(8)
331
487
560
258
87
171
—
171
2.71
2.66
$
$
$
68
287
(19)
306
470
536
240
82
158
—
158
2.27
2.24
$
$
$
39
247
132
115
372
590
(103)
(34)
(69)
(1)
(70) $
(1.72) $
(1.72) $
330
144
186
70
116
653
918
(149)
(416)
267
(6)
261
4.40
4.37
$
$
$
$
481
184
297
276
21
1,021
989
53
(16)
69
(6)
63
0.88
0.87
Basic
Diluted
56,569,307
57,597,667
56,426,977
57,164,523
56,246,528
56,246,528
56,063,282
56,518,181
55,762,196
56,193,515
December 31,
2016
2015
2014
2013
2012
(In millions, except per share data and percentages)
Summary of Consolidated
Statements of Financial Condition
Total assets
Loans receivable, net
Mortgage servicing rights
Total deposits
Short-term Federal Home Loan Bank advances
Long-term Federal Home Loan Bank advances
Long-term debt
Stockholders' equity (1)
Book value per common share
$
14,053
9,465
$
13,715
9,226
$
335
8,800
1,780
1,200
493
1,336
23.50
296
7,935
2,116
1,425
247
1,529
22.33
$
9,840
6,523
258
7,069
214
300
331
1,373
19.64
9,407
6,637
285
6,140
—
988
353
1,426
20.66
$
14,082
10,914
711
8,294
—
3,180
247
1,159
16.12
Number of common shares outstanding
56,824,802
56,483,258
56,332,307
56,138,074
55,863,053
(1)
Includes preferred stock totaling $0 million, $267 million, $267 million, $266 million, and $260 million for the years ended December 31, 2016, 2015,
2014, 2013 and 2012, respectively.
23
Average Balances:
Average interest earning assets
Average interest paying liabilities
Average stockholders’ equity
Selected Ratios:
Interest rate spread
Net interest margin
Return (loss) on average assets
Return (loss) on average equity
Return on average common equity
Equity-to-assets ratio
Common equity-to-assets ratio
Equity/assets ratio (average for the period)
Efficiency ratio
Bancorp Tier 1 leverage (to adjusted tangible assets) (1)(2)
Bank Tier 1 leverage (to adjusted tangible assets)
Selected Statistics:
At or For the Years Ended December 31,
2016
2015
2014
2013
2012
(In millions, except share data and percentages)
$ 12,164
$ 10,436
$ 8,440
$ 10,882
$ 13,104
$
$
9,757
1,464
$
$
8,305
1,486
$ 6,780
$ 1,406
$
$
9,338
1,239
$ 10,786
$
1,192
2.45%
2.64%
1.23%
11.69%
13.0%
9.50%
9.50%
10.52%
69.2%
8.88%
10.52%
2.58%
2.74%
1.32%
10.63%
10.5%
11.14%
9.20%
12.43%
70.9%
11.51%
11.79%
2.80 %
2.91 %
(0.71)%
(4.97)%
(6.1)%
13.95 %
11.24 %
14.22 %
95.4 %
N/A
12.43 %
1.50%
1.72%
2.08%
21.09%
26.8%
15.16%
12.33%
9.87%
109.4%
N/A
13.97%
1.96%
2.26%
0.43%
5.26%
6.7%
8.53%
6.38%
8.10%
75.1%
N/A
10.41%
Mortgage rate lock commitments (fallout-adjusted) (3)
Mortgage loans sold and securitized
Number of banking centers
Number of FTE employees
$ 29,372
$ 32,033
99
2,886
$ 25,511
$ 26,307
99
2,713
$ 24,007
$ 24,407
107
2,739
$ 31,590
$ 39,075
111
3,253
$ 50,633
$ 53,094
111
3,662
(1) Applicable to Bancorp for the years ended December 31, 2016 and 2015.
(2) Basel III transitional
(3) 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.
24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
26
26
26
27
29
29
29
32
33
35
36
37
38
41
41
41
45
45
47
48
50
52
53
53
55
56
56
57
59
60
60
60
60
61
61
64
Overview
Critical Accounting Estimates
Allowance for Loan Losses
Fair Value Measurements
Accounting and Reporting Developments
Summary of Operation
Net Interest Income and Rate/Volume Analysis
Provision for Loan Losses
Noninterest Income
Noninterest Expense
Provision (Benefit) for Income Taxes
Fourth Quarter Results
Operating Segments
Risk Management
Credit Risk
Loans Held-For-Investment
Loan Principal Payments
Credit Quality
Troubled Debt Restructuring
Allowance For Loan Losses
Market Risk
Loans Held-For-Sale
Mortgage Originations
Mortgage Servicing
Mortgage Servicing Rights
Investment Securities
Liquidity Risk
Deposits
Borrowings
Federal Home Loan Bank Stock
Contractual Obligations
Operational Risk
Loans with Government Guarantees
Representation and Warranty Reserve
Capital
Use of Non-GAAP Financial Measurements
25
The following is an analysis of our financial condition and results of operations. See the Glossary of Abbreviations and
Acronyms on page 3 for definitions of terms used throughout this report. You should read this item 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 Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted
through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. We provide a range of
commercial, small business, and consumer banking services and a complete set of mortgage and banking products and services
distinguished by local delivery, customer service and competitive product pricing. For additional details and information on
each of our lines of business, refer to Part 1, Item 1, Business, of this report.
Critical Accounting Estimates
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP and reflect general practices
within our industry. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Some
of our significant accounting policies require complex judgments and estimates to determine values of assets and liabilities. The
more judgmental, uncertain and complex estimates are further discussed below. These estimates are based on information
available to management as of the date of the Consolidated Financial Statements. Accordingly, as this information changes,
future financial statements could reflect different estimates or judgments.
Allowance for Loan Losses
The ALLL represents management’s estimate of probable credit losses inherent in our HFI loan portfolio. The ALLL is
sensitive to a variety of internal factors, such as the mix and level of loan balances outstanding, TDR volume, net charge-off
experience, as well as external factors, such as, property values, the general health of the economy, unemployment rates,
bankruptcy filings, peer data, etc. Management considers these variables and all other available information when establishing
the final level of the allowance. These variables and others have the ability to result in actual loan losses that differ from the
originally estimated amounts.
The ALLL includes a component related to specifically identified TDR and NPL loans and a model based component.
For further information on the methodologies used in determining our allowance, see Note 1 - Description of Business, Basis of
Presentation, and Summary of Significant Accounting Standards.
Specifically identified component
The specifically identified component of the ALLL related to performing TDR loans is generally measured as the
difference between the recorded investment in the specific loan and the present value of the cash flows expected to be collected,
discounted at the loan’s original effective interest rate. Estimating the timing and amounts of future cash flow projections is
highly judgmental and based upon assumptions including default rates, prepayment probability and loss severities. All of these
estimates and assumptions require significant management judgment and certain assumptions are highly subjective.
Specifically identified collateral dependent NPL loans are generally measured as the difference between the recorded
investment in the impaired loan and the underlying collateral value less estimated costs to sell. These estimates are dependent
on third party property valuations which may be influenced by factors such as the current and future level of home prices, the
duration of current overall economic conditions, and other macroeconomic and portfolio-specific factors.
Model based component
The model-based component of the ALLL is calculated on our consumer and commercial HFI loan portfolio by
applying average historical loss rates experienced during an identified look back period to outstanding principal balances over
an estimated loss emergence period. For portfolios that do not have adequate loss experience and purchased portfolios, we
utilize peer loss data in determining the ALLL. The loss emergence period represents the time period between the date at which
the loss is estimated to have been incurred and the ultimate realization of that loss (by a charge-off). Estimated loss emergence
periods may vary by product and may change over time; management applies judgment in estimating loss emergence periods,
using available credit information and trends.
26
The historical loss model calculation is then adjusted by taking factors into consideration, such as current economic
events that have occurred but may not yet be reflected in the historical loss estimates and model imprecision. These adjustments
are determined by analyzing the historical loss experience for each major product segment and its underlying credit
characteristics. It is difficult to predict whether historical loss experience is indicative of current incurred loss levels, therefore,
management applies judgment in making adjustments deemed necessary based on the following factors: changes in lending
policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio,
changes in lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes
in the value of underlying collateral for collateral-dependent loans, the potential impact of payment recasts, changes in
concentrations of credit, and other internal or external factor changes. The application of different inputs into the model
calculation and the assumptions used by management to adjust the model calculation, are subject to significant management
judgment and may result in actual loan losses that differ from the originally estimated amounts.
Fair Value Measurements
Certain assets and liabilities are carried at fair value on the Consolidated Statements of Financial Condition.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value is based on quoted market prices in an active
market, or if market prices are not available, is estimated using models employing techniques such as matrix pricing or
discounting expected cash flows.
The significant assumptions used in the models are independently verified against observable market data where
possible. Where observable market data is not available, the estimate of fair value becomes more subjective and involves a high
degree of judgment. In this circumstance, fair value is estimated based on management’s judgment regarding the value that
market participants would assign to the asset or liability. Therefore, the results cannot be determined with precision and may not
be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent limitations to any
valuation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash
flows, could significantly affect the results of current or future values.
A portion of our assets and liabilities are carried at fair value on the Consolidated Statements of Financial Condition.
The majority of these assets and liabilities are measured at fair value on a recurring basis, however, certain assets are measured
at fair value on a nonrecurring basis based on the fair value of the underlying collateral.
Level 3 Assets and Liabilities measured at fair value
Estimating fair value requires the application of judgment which is largely dependent on the amount of observable
market information available to perform the valuation. Instruments classified within level 3 of the fair value hierarchy indicate
that valuations are determined using internally developed methods and models that utilize significant unobservable inputs.
Judgments used in these valuations are more significant than those required when estimating the fair value of instruments
classified within levels 1 and 2.
Imprecision in estimating unobservable market inputs or other factors can affect the amount of gain or loss recorded.
Furthermore, while we believe that our valuation methods are appropriate and consistent with those of other market
participants, the methods and assumptions used reflect management judgment and may vary across businesses and portfolios.
27
The following table includes the fair value of our assets and liabilities classified within level 3 of the fair value
hierarchy:
Level 3 Fair Value Assets
MSRs
Second mortgage loans
HELOC loans
Rate lock commitments, net
Total recurring
Total nonrecurring
Total level 3 fair value assets
Total fair value assets
Total assets
Level 3 assets as a percentage of:
Total assets
Fair value assets
Level 3 Fair Value Liabilities
DOJ litigation settlement
December 31, 2016
(Dollars in millions)
$
$
$
$
335
41
24
18
418
39
457
5,155
14,053
3.3%
8.9%
60
Mortgage Servicing Rights. When we sell mortgage loans in the secondary market, we frequently retain the right to
continue to service these loans and earn a servicing fee. At the time the loan is sold on a servicing retained basis, we record the
MSR as an asset at its fair value. Determining the fair value of MSRs involves a calculation of the present value of a set of
market driven and MSR specific cash flows. MSRs do not trade in an active market with readily observable market prices.
However, the market price of MSRs is generally a function of demand and interest rates. When mortgage interest rates decline,
mortgage loan prepayments are expected to increase due to increased refinances. If this happens, the income stream from a
MSR portfolio is expected to decline and the fair value of the portfolio will decline. Similarly, when mortgage interest rates
increase, mortgage loan prepayments tend to slow and therefore the value of the MSR tends to increase. The fair value of the
MSR is also sensitive to market implied interest rate volatility for which an increase has a negative impact on the value of the
MSR and a decline has a positive impact on the value of the MSR. Accordingly, we must make assumptions about future
interest rates, market implied interest rate volatility and other market conditions in order to estimate the current fair value of our
MSR portfolio. In certain circumstances, based on the probability of the completion of a sale of MSRs pursuant to a bona-fide
purchase offer, we consider the bid price of that offer and identifiable transaction costs in comparison to the calculated fair
value and may adjust the estimate of fair value to reflect the terms of the pending transaction. For further information and a
sensitivity analysis of our MSR fair values, see Note 1 - Description of Business, Basis of Presentation, and Summary of
Significant Accounting Standards, Note 10 - Mortgage Servicing Rights, and Note 22 - Fair Value Measurements. On an
ongoing basis, we compare our fair value estimates based on both unobservable inputs and market inputs, where available, to
report the various assumptions. On a quarterly basis, our MSR valuation is compared to two independent valuations performed
by third parties. For further information regarding interest rate sensitivity analysis on the MSRs, see Note 22 - Fair Value
Measurements.
DOJ litigation settlement. We elected the fair value option to account for the liability representing the remaining future
payments. We use a discounted cash flow model to determine the current fair value. The model utilizes our forecast and
considers multiple scenarios and possible outcomes that impact the timing of the additional payments, which are discounted
using a risk free rate adjusted for non-performance risk that represents our credit risk. These scenarios are probability weighted
and consider the view of an independent market participant to estimate the most likely fair value of the liability. For further
information on the DOJ liability, see Note 21 - Legal Proceedings, Contingencies and Commitments.
For further information regarding the valuation of our financial instruments, including those that utilize unobservable
inputs see, Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards and Note
22 - Fair Value Measurements. For further information and sensitivities related to the valuation of our MSR asset see, Note 10 -
Mortgage Servicing Rights and Note 22 - Fair Value Measurements. For further information regarding the valuation of our DOJ
liability see, Note 21 - Legal Proceedings, Contingencies and Commitments and Note 22 - Fair Value Measurements.
28
Accounting and Reporting Developments
For further information of recently issued accounting pronouncements and their expected impact on our Consolidated
Financial Statements, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting
Standards.
Summary of Operations
Net interest income
Provision (benefit) for loan losses
Total noninterest income
Total noninterest expense
Provision (benefit) for income taxes
Preferred stock accretion
Net income (loss)
Income (loss) per share:
Basic
Diluted
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
$
$
$
$
323
(8)
487
560
87
—
171
2.71
2.66
$
$
$
$
287
(19)
470
536
82
—
158
2.27
2.24
$
$
$
$
247
132
372
590
(34)
(1)
(70)
(1.72)
(1.72)
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 Department of Justice ("DOJ") settlement liability. Excluding this benefit, the Company had adjusted non-
GAAP 2016 net income of $155 million, or $2.38 per diluted share. For a reconciliation and discussion of this non-GAAP
financial measure, see MD&A - Use of Non-GAAP Financial Measures. The $13 million increase was primarily driven by a
$36 million increase in net interest income and a $17 million increase in noninterest income partially offset by higher
performance driven expenses and a lower benefit for loan losses. Net interest income increased as a result of growth in our
interest earning assets as we execute 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.
Additional details of each key driver have been further explained in Management’s discussion below.
Net Interest Income
Net interest income is the amount we earn on the average balances of our interest-earning assets, less the amount the
average balances of our interest-bearing liabilities cost us. Interest income recorded on loans is reduced by the amortization of
net premiums and net deferred loan origination costs.
29
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,
2016
2015
2014
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
$
3,134 $
113
3.62 % $
2,188 $
85
3.90 % $
1,534 $
65
4.24 %
Loans held-for-investment
Consumer loans (1)
Commercial loans (1)
Loans held-for-investment
Loans with government guarantees
Investment securities
Interest-bearing deposits
2,832
2,981
5,813
435
2,653
129
99
120
219
16
68
1
Total interest-earning assets
12,164 $
417
3.52 %
3.97 %
3.75 %
3.59 %
2.56 %
0.50 %
3.42 %
3,083
1,993
5,076
633
2,305
234
114
78
192
18
59
1
10,436 $
355
1,520
$
11,956
3.68 %
3.88 %
3.76 %
2.86 %
2.55 %
0.50 %
3.38 %
2,681
1,294
3,975
1,216
1,496
219
103
49
152
29
39
1
8,440 $
286
1,446
9,886
$
Other assets
Total assets
Interest-Bearing Liabilities
Retail deposits
Demand deposits
Savings deposits
Money market deposits
Certificate of deposits
Total retail deposits
Government deposits
Demand deposits
Savings deposits
Certificate of deposits
Total government deposits
Total deposits
Short-term Federal Home Loan
Bank advances and other
Long-term Federal Home Loan
Bank advances
Other long-term debt
Total interest-bearing liabilities
Noninterest-bearing deposits (2)
Other liabilities
Stockholders’ equity
1,743
$
13,907
$
489 $
3,751
278
990
5,508
228
442
382
1,052
6,560
1,249
1,584
364
9,757
2,202
484
1,464
Total liabilities and stockholders'
equity
Net interest-earning assets
$
$
13,907
2,407
Net interest income
Interest rate spread (3)
Net interest margin (4)
Ratio of average interest-earning
assets to interest-bearing liabilities
1
29
1
10
41
1
2
2
5
46
5
27
16
94
1
30
1
6
38
1
2
1
4
42
1
18
7
68
0.18 % $
429 $
0.78 %
0.44 %
1.05 %
0.76 %
0.39 %
0.52 %
0.40 %
0.45 %
0.71 %
3,693
258
787
5,167
257
405
358
1,020
6,187
0.44 %
311
1.72 %
4.34 %
0.97 %
1,500
307
8,305
1,690
475
1,486
$
$
11,956
2,131
0.14 % $
422 $
0.82 %
0.31 %
0.77 %
0.73 %
0.39 %
0.52 %
0.39 %
0.44 %
0.68 %
0.30 %
1.17 %
2.42 %
0.82 %
3,139
266
915
4,742
182
320
349
851
5,593
893
46
248
6,780
1,141
559
1,406
9,886
1,660
$
$
1
18
1
6
26
1
2
1
4
30
2
—
7
39
$
323
$
287
$
247
2.45 %
2.64 %
124.7 %
2.58 %
2.74 %
125.7 %
3.85 %
3.70 %
3.80 %
2.39 %
2.61 %
0.25 %
3.38 %
0.14 %
0.61 %
0.20 %
0.73 %
0.57 %
0.38 %
0.51 %
0.33 %
0.41 %
0.54 %
0.22 %
0.01 %
2.72 %
0.58 %
2.80 %
2.91 %
124.5 %
(1) Consumer loans include: residential first mortgage, second mortgage, HELOC and other consumer loans. Commercial loans include: commercial
real estate, commercial and industrial, and warehouse lines. 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.
Includes noninterest-bearing company controlled deposits that arise due to the servicing of loans for others.
Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.
(2)
(3)
(4) Net interest margin is net interest income divided by average interest-earning assets.
30
Rate/Volume Analysis
The following tables present the dollar amount of changes in interest income and interest expense for the components
of interest-earning assets and interest-bearing liabilities that are presented in the preceding table. The table below 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 variances due to rate.
For the Years Ended December 31,
2016 Versus 2015 Increase
(Decrease) Due to:
2015 Versus 2014 Increase
(Decrease) Due to:
Rate
Volume
Total
Rate
Volume
Total
(Dollars in millions)
$
(9) $
37
$
28
$
(8) $
28
$
(5)
3
(2)
3
2
(6) $
(1)
—
(1)
—
—
(1)
2
8
7
16
$
(22) $
(10)
39
29
(5)
7
68
—
4
4
1
1
5
2
1
2
10
58
$
$
$
(15)
42
27
(2)
9
62
(1)
4
3
1
1
4
4
9
9
26
36
$
$
$
(5)
3
(2)
3
(1)
(8) $
8
—
8
—
—
8
—
15
—
23
$
(31) $
16
26
42
(14)
21
77
4
—
4
—
—
4
—
2
—
6
71
$
$
$
$
$
$
20
11
29
40
(11)
20
69
12
—
12
—
—
12
—
17
—
29
40
Interest-Earning Assets
Loans held-for-sale
Loans held-for-investment
Consumer loans (1)
Commercial loans (2)
Total loans held-for-investment
Loans with government guarantees
Investment securities
Total interest-earning assets
Interest-Bearing Liabilities
Retail deposits
Savings deposits
Certificate of deposits
Total retail deposits
Government deposits
Certificate of deposits
Total government deposits
Total deposits
Short-term debt
Long-term debt
Other
Total interest-bearing liabilities
Change in net interest income
(1) Consumer loans include: residential first mortgage, second mortgage, HELOC and other consumer loans.
(2) Commercial loans include: commercial real estate, commercial and industrial, and warehouse lending.
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 16.3 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. 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 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.
31
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.
2015 Compared to 2014
Net interest income increased $40 million for the year ended December 31, 2015, compared to the same period in
2015, primarily due to strong growth in interest-earning assets, partially offset by a decrease in the net interest margin.
Our net interest margin for the year ended December 31, 2015 was 2.74 percent, as compared to 2.91 percent for the
year ended December 31, 2014. The decrease from 2014 was primarily driven by a significant portion of the interest earning
asset growth being in relatively lower spread mortgage loans which were funded with higher cost, longer tenured liabilities.
Interest income increased $69 million for the year ended December 31, 2015, compared to the same period in 2014,
primarily driven by higher average LHFS, LHFI and investment securities, partially offset by a decrease in loans with
government guarantees. Average warehouse loans increased $431 million for the year ended December 31, 2015 to $877
million, compared to $446 million for the year ended December 31, 2014, primarily due to higher line utilization and new
accounts. Average HELOC loans increased $225 million for the year ended December 31, 2015 to $347 million, compared to
$122 million for the year ended December 31, 2014, resulting from the acquisitions of loan portfolios in 2015. Average
residential first mortgage loans increased $195 million for the year ended December 31, 2015 to $2.6 billion, compared to $2.4
billion for the year ended December 31, 2014, primarily due to retained loan production from our mortgage origination
business. Average CRE loans increased $153 million for the year ended December 31, 2015 to $679 million, compared to $526
million for the year ended December 31, 2014. Average C&I loans increased $116 million for the year ended December 31,
2015 to $438 million, compared to $322 million for the year ended December 31, 2014, in line with our strategy to grow
interest-earning assets.
Interest expense increased $29 million for the year ended December 31, 2015, compared to the same period in 2014,
primarily due to increased FHLB advances and interest-bearing deposits. Average interest-bearing deposits were $6.2 billion
during the year ended December 31, 2015, increasing $0.6 billion or 10.6 percent, compared to the year ended December 31,
2014. Retail deposits increased $0.4 billion, led by growth in savings deposits. Average FHLB advances were $1.8 billion for
the year ended December 31, 2015, an increase of $0.9 billion compared to the year ended December 31, 2014. Throughout
2015, we replaced certain short-term advances with longer term advances primarily to match- fund our longer duration asset
growth which resulted in slightly higher cost debt.
Provision for Loan Losses
2016 Compared to 2015
The provision (benefit) 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 $1.2 billion unpaid principal balance
of performing residential first mortgage loans and $110 million of unpaid principal balance of nonperforming, TDR and non-
agency loans, 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 HFI loan portfolio
In 2016, we continued to experience strong credit quality. Our net charge-offs for the year ended December 31, 2016
totaled $30 million, compared to $91 million for the year ended December 31, 2015. The decrease was primarily due to charge-
offs taken in 2015 related to our interest only and lower performing loans sold or transferred to HFS. As a percentage of the
average LHFI, annualized net charge-offs for the year ended December 31, 2016 decreased to 0.52 percent from 1.85 percent
for the year ended December 31, 2015. During the year ended December 31, 2016 and 2015, the annualized net charge-offs as a
percentage of the average LHFI, on a non-GAAP adjusted basis, were 0.15 percent and 0.40 percent, respectively, excluding the
charge-offs related to the loan sales or transfers of $8 million and $69 million, respectively.
2015 Compared to 2014
The provision for loan losses decreased $151 million for the year ended December 31, 2015, as compared to the year
ended December 31, 2014. In 2014, we recorded a $132 million provision that was primarily driven by two changes in
estimates: the evaluation of current data related to the loss emergence period on our residential mortgage loan portfolio and the
32
evaluation of the enhanced risk associated with payment resets relating to interest-only loans. In 2015, we sold 90 percent of
our interest-only loans at prices that were favorable as compared to the continuing reset risk associated with us continuing to
hold these loans in our portfolio when they were recorded consistent with our incurred loss methodology. This action along with
the sale of $444 million TDR, nonperforming and jumbo loans resulted in a $69 million reduction to the ALLL which, along
with an overall improvement in portfolio quality was the primary driver of the $19 million net benefit reported in 2015 being
partially offset by a $1.9 billion increase in volume of average LHFI due to the origination of residential first mortgages and
increased commercial lending.
Net charge-offs for the year ended December 31, 2015 totaled $91 million, compared to $42 million for the year ended
December 31, 2014. The increase was primarily due to charge-offs relating to loans sold or transferred to HFS during the year
ended December 31, 2015. We sought to de-risk the balance sheet by selling lower performing and interest-only loans. As a
percentage of the average LHFI, annualized net charge-offs for the year ended December 31, 2015 increased to 1.85 percent
from 1.07 percent for the year ended December 31, 2014. During the year ended December 31, 2015 and 2014, the annualized
net charge-offs as a percentage of the average LHFI, on a non-GAAP adjusted basis, were 0.40 percent and 0.69 percent,
respectively, excluding the charge-offs related to the loan sales or transfers of $69 million and $15 million, respectively.
For further information on the provision for loan losses see MD&A - Allowance for Loan Losses.
Noninterest Income
The following tables provide information on our noninterest income along with additional details related to our net gain
on loan sales and activity that occurred within the period:
Net gain on loan sales
Loan fees and charges
Deposit fees and charges
Loan administration income
Net (loss) return on mortgage servicing rights
Net (loss) gain on sale of assets
Representation and warranty (provision) benefit
Other noninterest income
Total noninterest income
Mortgage rate lock commitments (fallout-adjusted) (1)
Net margin on mortgage rate lock commitments (fallout-adjusted) (1) (2)
Net gain on loan sales on HFS
Net (loss) return on the mortgage servicing rights
Gain on loan sales HFS + net (loss) return on the MSR
Residential loans serviced (number of accounts - 000's) (3)
Capitalized value of MSRs
Mortgage loans sold and securitized
Net margin on loan sales
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
316
76
22
18
(26)
(2)
19
64
487
$
$
288
67
25
26
28
(1)
19
18
470
$
$
206
73
22
24
24
12
(10)
21
372
For the Years Ended December 31,
2016
2015
2014
$
$
$
$
$
29,372
1.02%
301
(26)
275
383
1.07%
32,033
0.94%
$
$
$
$
$
25,511
1.13%
288
28
316
361
1.13%
26,307
1.09%
24,007
0.86%
206
24
230
383
1.01%
24,407
0.84%
$
$
$
$
$
$
$
(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 related to HFS loans to fallout-adjusted mortgage rate lock commitments.
(3)
Includes serviced for own loan portfolio, serviced for others and subserviced for others loans.
33
2016 Compared to 2015
Total noninterest income was $487 million during the year ended December 31, 2016, which was a $17 million
increase from $470 million during the year ended December 31, 2015.
Net gain on loan sales increased $28 million for the year ended December 31, 2016, compared to the same period in
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 same period
in 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, 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.
2015 Compared to 2014
Total noninterest income increased $109 million during the year ended December 31, 2015 from the year ended
December 31, 2014. The increase was led by higher net gain on loan sales and lower representation and warranty provision,
partially offset by a decrease in net gain on sale of assets and loan fees and charges.
Net gain on loan sales increased $82 million for the year ended December 31, 2015, compared to the year ended
December 31, 2014. The increase in gain on loan sales was primarily due to higher fallout-adjusted lock volume and improved
gain on loan sale margins. Loans sold and securitized increased to $26.3 billion during the year ended December 31, 2015,
compared to $24.4 billion sold and securitized in the year ended December 31, 2014. For the year ended December 31, 2015,
the mortgage rate lock commitments increased to $31.7 billion, compared to $29.5 billion in the year ended December 31,
2014.
Total loan fees and charges decreased $6 million for the year ended December 31, 2015, compared to the year ended
December 31, 2014, primarily reflecting a decrease in deferred commercial and mortgage loan fees related to payoffs.
Net return on the MSR asset increased $4 million for the year ended December 31, 2015, compared to the year ended
December 31, 2014. The increase was primarily due to elevated collections of contingent reserves, originally held back by the
purchaser on prior MSR sales, partially offset by a decrease related to the net impact of market-driven changes. Also driving the
increase was a benefit from slower prepayments and positive economic hedging results.
Net (loss) gain on sale of assets decreased $13 million to a loss of $1 million during the year ended December 31,
2015, compared to a gain of $12 million for the year ended December 31, 2014. The decrease was primarily due to a gain from
loan sales during the year ended December 31, 2014 and a write down of land assets during the year ended December 31, 2015.
Our provision for representation and warranty reserve was $29 million lower for the year ended December 31, 2015,
compared to the same period in 2014. An ongoing trend of lower charge-offs and volume of repurchase demands has been the
primary driver of the decrease partially offset by an increase related to indemnification agreements on loans with government
guarantees.
34
Other noninterest income decreased $3 million, compared to the same period in 2014. The decrease was primarily due
to a $11 million benefit related to the reduction in the fair value of the DOJ settlement liability which was initially recorded in
2014, partially offset by an increase in the fair value adjustment on residential first mortgages for the year ended December 31,
2015.
Noninterest Expense
The following table sets forth the components of our noninterest expense:
Compensation and benefits
Commissions
Occupancy and equipment
Loan processing expense
Federal insurance premiums
Asset resolution
Legal and professional expense
Other noninterest expense
Total noninterest expense
Efficiency ratio
2016 Compared to 2015
For the Years Ended December 31,
2016
2015
2014
$
269
$
237
$
(Dollars in millions)
55
85
55
11
7
29
49
560
69.2%
$
39
81
52
23
15
36
53
536
70.9%
$
$
233
35
80
37
23
57
51
74
590
95.4%
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.
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.
Federal insurance premium expense decreased $12 million for the year ended December 31, 2016, compared to the
same period in 2015, primarily due to an improvement in our risk profile. During 2016, our FDIC rates declined due to
improvements in our composition and level of capital, asset quality, and management of risk. The reduction in expense from
this improved risk profile was partially offset by additional expense on our higher asset base.
Asset resolution expense decreased $8 million for the year ended December 31, 2016, compared to the same period in
2015, primarily due to a decrease in default servicing costs, foreclosure costs and an improvement in house prices.
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 $4 million for the year ended December 31, 2016, compared to the same period
in 2015 primarily due to higher litigation and regulatory related expenses that occurred in 2015.
35
2015 Compared to 2014
Total noninterest expense decreased $43 million during the year ended December 31, 2015 from the year ended
December 31, 2014. The decrease during the year ended December 31, 2015, was primarily due to decreases in asset resolution
expense, legal and professional expenses and a CFPB penalty in 2014, which is included in other noninterest expense. These
decreases were partially offset by increases in other noninterest expense, including higher general and administrative costs, an
increase in fair value changes related to the DOJ settlement liability and an increase in the outstanding warrant.
The $4 million increase in compensation and benefits expense for the year ended December 31, 2015, compared to the
same period in 2014, was primarily due to an increase in performance-related compensation, partially offset by lower overall
headcount. Our full-time equivalent employees decreased overall by 26 from December 31, 2014 to a total of 2,713 full-time
equivalent employees at December 31, 2015.
Commission expense increased $4 million for the year ended December 31, 2015, compared to the same period in
2014, primarily due to an increase in the volume of loan originations. Loan originations increased to $29.9 billion for the year
ended December 31, 2015 from $25.1 billion in the year ended December 31, 2014.
Asset resolution expenses decreased $42 million for the year ended December 31, 2015, compared to the same period
in 2014, primarily due to fewer repurchases related to servicer errors, lower compensatory fees resulting from our success rate
on claim rebuttals and improved realization of claims and lower balances of FHA loans. In addition, there was a favorable
variance in the repossessed asset portfolio driven by lower foreclosure expenses and higher gains on the sale of repossessed
assets.
Loan processing expense increased $15 million for the year ended December 31, 2015, compared to the same period in
2014, primarily due to higher volume of loan closings.
Legal and professional expense decreased $15 million during the year ended December 31, 2015, compared to the year
ended December 31, 2014, primarily due to a decrease in legal fees resulting from fewer litigation expenses and a reduction in
consulting expenses resulting from cost saving initiatives.
Other noninterest expense decreased $21 million for the year ended December 31, 2015, compared to the same period
in 2014, primarily due to a decrease of $38 million in expenses related to the CFPB settlement and penalties that occurred in
2014, partially offset by an $8 million increase in the value of the warrants as a result of an increase in the Bank's stock price.
Provision (benefit) for Income Taxes
Our provision for income taxes for the year ended December 31, 2016 was $87 million, compared to a provision of
$82 million in 2015 and a benefit of $34 million in 2014.
Our effective tax rate was 33.7 percent for 2016 and 34.2 percent in 2015. The difference between the effective tax rate
and the statutory tax rate of 35 percent is primarily due to the impact of the bank owned life insurance and state taxes in relation
to pre-tax income.
Our effective tax rate for 2014 was (32.9 percent). The difference between the effective tax rate and the statutory tax
rate of 35 percent is primarily due to the exclusion of the non-deductible penalty paid to the CFPB and the non-taxable impact
of changes related to our warrants.
For further information, see Note 19 - Income Taxes.
36
Fourth Quarter Results
The following table sets forth selected quarterly data:
Net interest income
Provision (benefit) for loan losses
Net interest income after provision (benefit) for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Provision for income taxes
Net income
Income per share
Basic
Diluted
Efficiency ratio
December 31,
2016
(Unaudited)
Three Months Ended
September 30,
2016
(Unaudited)
(Dollars in millions)
December 31,
2015
(Unaudited)
$
$
$
$
$
$
$
$
87
1
86
98
142
42
14
28
0.50
0.49
76.7%
$
$
$
$
80
7
73
156
142
87
30
57
0.98
0.96
59.9%
76
(1)
77
97
129
45
12
33
0.45
0.44
75.2%
Fourth Quarter 2016 compared to Third Quarter 2016
Net income for the three months ended December 31, 2016 was $28 million, or $0.49 per diluted share, as compared
to $57 million, or $0.96 per diluted share, for the three months ended September 30, 2016.
Net interest income increased to $87 million for the three months ended December 31, 2016, as compared to $80
million during the three months ended September 30, 2016. The increase was primarily due to average earning asset increase of
4 percent, led by growth in investment securities, commercial loans and mortgage loans, and net interest margin expansion of 9
basis points. The increase from the prior quarter was primarily driven by terminating certain fixed rate FHLB advances
resulting in a $2 million benefit to interest expense, which accounted for 6 basis points of the increase.
Average LHFI totaled $6.2 billion for the fourth quarter 2016, increasing $315 million, or 5.4 percent, compared to
the third quarter 2016. The increase was driven by higher CRE loans, consumer loans and C&I loans. Average CRE loans
grew $127 million, or 11.7 percent, average consumer loans rose $111 million, or 4.3 percent and average C&I loans rose $88
million, or 13.9 percent.
Average total deposits were $9.2 billion in the fourth quarter 2016, increasing $107 million, or 1.2 percent, from the
prior quarter. The increase was led by higher retail deposits, partially offset by lower government deposits. Average retail
deposits increased $132 million, or 2.1 percent, primarily due to an $89 million increase in savings deposits and $28 million
rise in demand deposits.
The provision for loan losses totaled $1 million for the fourth quarter 2016, as compared to $7 million for the third
quarter 2016. The fourth quarter 2016 lower level of provision expense reflects strong asset quality and largely matched net
charge-offs. Net charge-offs in the fourth quarter 2016 were $2 million, or 0.13 percent of applicable loans, compared to $7
million, or 0.51 percent of applicable loans in the prior quarter. The fourth quarter 2016 amount included $1 million of net
charge-offs associated with loans with government guarantees compared to $5 million in the third quarter of 2016.
Fourth quarter 2016 noninterest income was $98 million, as compared to $156 million for the third quarter 2016. The
decrease was primarily due to a $37 million decrease in net gain on loan sales and a $24 million benefit that was recognized in
the third quarter 2016 from the reduction in fair value of the DOJ settlement liability.
Fourth quarter 2016 net gain on loan sales decreased to $57 million, as compared to $94 million for the third quarter
2016, primarily due to lower fallout-adjusted locks and a decrease in the gain on sale margin. Fallout-adjusted locks were $6.1
billion for the fourth quarter 2016, as compared to $8.3 billion for the third quarter 2016. The decrease was primarily due to
37
seasonality and lower refinance activity from significantly higher interest rates. The net gain on loan sale margin decreased to
0.93 percent for the fourth quarter 2016, as compared to 1.13 percent for the third quarter 2016 driven by price competition.
Net return on the MSRs increased to a net loss of $5 million for the fourth quarter 2016, as compared to a net loss of
$11 million for the third quarter 2016. The increase was primarily due to lower prepayments and a $7 million charge recognized
in the third quarter 2016 related to MSR sales that closed in the fourth quarter 2016, partially offset by unfavorable changes in
fair value driven by an increase in market implied interest rate volatility experienced in the fourth quarter 2016.
Loan fees and charges decreased to $20 million for the fourth quarter 2016, as compared to $22 million in the third
quarter 2016. The decrease primarily reflected lower mortgage loan closings.
Noninterest expense was unchanged at $142 million for the fourth quarter 2016, as compared to the third quarter 2016,
primarily due to an increase in legal and professional fees, partially offset by a decrease in compensation and benefits.
Fourth Quarter 2016 compared to Fourth Quarter 2015
Our net income from continuing operations for the three months ended December 31, 2016 was $28 million, or $0.49
per diluted share, as compared to income of $33 million, or $0.44 per diluted share, for the three months ended December 31,
2015. The decrease was primarily driven by higher noninterest expense partially offset by higher net interest income.
Net interest income increased $11 million for the three months ended December 31, 2016, compared to the same
period in 2015 primarily due to growth in interest earning assets.
Net interest margin for the three months ended December 31, 2016 was 2.67 percent, compared to 2.69 percent for the
three months ended December 31, 2015. The decrease from fourth quarter 2015 was primarily driven by higher interest rates on
fixed rate long-term debt used to match-fund our longer duration asset growth and increased interest expense on senior debt
issued in conjunction with the TARP redemption, both of which were mostly offset by higher yield on our commercial loan
portfolio.
Average LHFS for the three months ended December 31, 2016, increased $837 million or 33.7 percent compared to
the same period in 2015, primarily due to slower deliveries of saleable mortgage loans to the Agencies. Average LHFI for the
three months ended December 31, 2016, increased $521 million or 9.2 percent, compared to the same period in 2015, due
primarily to continued growth in our commercial loan portfolio.
Average total deposits were $9.2 billion in the fourth quarter 2016, increasing $1.1 billion, or 13.5 percent, compared
to the same quarter in 2015. The increase was led by higher retail deposits, partially offset by lower government deposits.
Average retail deposits increased $557 million, or 9.7 percent, in the fourth quarter December 31, 2016 compared to the same
quarter in 2015, primarily due to an $89 million increase in savings deposits and $28 million rise in demand deposits.
Noninterest income increased $1 million to $98 million for the three months ended December 31, 2016, compared to
$97 million during the same period in 2015 as higher gain on loan sale activity was mostly offset by a decrease in the net return
on the MSR. Noninterest expense increased $13 million to $142 million for the three months ended December 31, 2016,
compared to $129 million during the same period in 2015. The increase was primarily driven by a $15 million increase in
compensation related expenses which have supported higher loan production through the year and supported our new strategic
initiatives. This increase was partially offset by a $3 million decrease in federal insurance premiums due to an improvement in
our risk profile.
Operating Segments
Overview
For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Item 1:
Business section and Note 23 - Segment Information, and other sections for a full understanding of our consolidated financial
performance.
38
The net income (loss) by operating segment is presented in the following table:
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
$
$
70
$
185
(22)
(62)
171
$
40
$
240
(54)
(68)
158
$
(130)
115
(101)
47
(69)
Community Banking
Mortgage Originations
Mortgage Servicing
Other
Total net income (loss)
Community Banking
2016 compared to 2015
During the year ended December 31, 2016, the Community Banking segment net income increased $30 million to $70
million, compared to a net income of $40 million for the year ended December 31, 2015. The increase was 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 a net gain on loan sales of $21 million primarily driven by the sale of performing residential first mortgage
loans out of the HFI 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.
2015 compared to 2014
During the year ended December 31, 2015, the Community Banking segment had net income of $40 million,
compared to a net loss of $130 million for the year ended December 31, 2014, primarily due to a decrease in provision for loan
losses. In 2014, we recorded a $132 million provision that was primarily driven by two changes in estimates that occurred in the
first quarter: the evaluation of current data related to the loss emergence period on our residential mortgage loan portfolio and
the evaluation of the enhanced risk associated with payment resets relating to interest-only loans. In 2015, we sold 90 percent of
our interest-only loans at prices that were favorable as compared to the continuing reset risk associated with us continuing to
hold these loans which was recorded consistent with the incurred loss methodology. This action along with the sale of $444
million nonperforming loans resulted in a $69 million reduction to the ALLL which along with an overall improvement in
portfolio quality was the primary driver of the $19 million net benefit reported in 2015. This was partially offset by a $1.9
billion increase in volume of average LHFI due to the origination of residential first mortgages and increased commercial
lending. Net interest income increased during the year ended December 31, 2015, compared to the year ended December 31,
2014, primarily due to growth in the LHFI loan portfolios; including HELOC, residential first mortgage and total commercial
loans.
Mortgage Originations
2016 compared to 2015
The Mortgage Originations segment net income decreased $55 million during the year ended December 31, 2016,
compared to the same period in 2015, primarily due to $54 million 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. A $15 million increase in commissions, related primarily to higher mortgage originations, was mostly
offset by an increase in net interest income resulting from higher average HFS loan balances in 2016.
2015 compared to 2014
The Mortgage Originations segment net income increased $125 million during the year ended December 31, 2015,
compared to the same period in 2014, primarily due to an increase in net gain on loan sales, partially offset by increases in
commissions and loan processing expense. The increase in net gain on loan sales during the year ended December 31, 2015, as
compared to the year ended December 31, 2014 was primarily driven by increased margin and higher fallout adjusted rate
locks. During the year ended December 31, 2015, total noninterest expense increased as compared to the year ended
December 31, 2014, primarily due to higher mortgage origination volume.
39
Mortgage Servicing
2016 compared to 2015
The Mortgage Servicing segment reported a net loss of $22 million for the year ended December 31, 2016, compared
to a net loss of $54 million for the year ended December 31, 2015. The $32 million improvement is primarily due to a $20
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. A decline in asset resolution expenses and loan
processing expenses about equally drove the remaining improvement in results primarily due to a lower overall volume of
performing and default loans serviced.
2015 compared to 2014
The Mortgage Servicing segment reported a net loss of $54 million for the year ended December 31, 2015, compared
to a net loss of $101 million for the year ended December 31, 2014, primarily due to decreases in asset resolution expense,
representation and warranty provision and the 2014 CFPB settlement, partially offset by an increase in loan processing expense
and a decrease in net interest income due to lower average balances of loans with government guarantees. Total noninterest
income decreased during the year ended December 31, 2015, as compared to the year ended December 31, 2014, which was
primarily due to a benefit from a contract renegotiation achieved in 2014. Noninterest expense decreased for the year ended
December 31, 2015, as compared to the year ended December 31, 2014, primarily due to the 2014 CFPB settlement and the
benefit relating to the DOJ liability estimate that was recorded in 2014.
Other
2016 compared to 2015
For the year ended December 31, 2016, the Other segment reported a net loss of $62 million for the year ended
December 31, 2016, compared to a net loss of $68 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.
2015 compared to 2014
For the year ended December 31, 2015, the Other segment net loss increased by $115 million, as compared to the year
ended December 31, 2014. The increase was primarily due to an increase in provision for income taxes due to higher pre-tax
book income. Net interest income increased due to higher average balances of investment securities, partially offset by higher
FHLB advances to match-fund our long-duration asset growth. Other noninterest income decreased for the year ended
December 31, 2015, as compared to the year ended December 31, 2014, primarily due to an adjustment in HELOC valuation
and FHLB dividend due to stock redemptions, partially offset by an increase in the return on MSRs resulting from higher
service fee income driven by an increase in assets and a gain from the early settlement of FHLB debt.
40
RISK MANAGEMENT
Like all financial services companies, we engage in business activities and assume the related risks. The risks we are
subject to in the normal course of business, include, but are not limited to, credit, regulatory compliance, legal, reputation,
liquidity, market, operational, and strategic. We have made significant investments in our risk management activities which are
focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and
soundness and maximize profitability. We hold capital to protect from the risk of unexpected loss.
A comprehensive discussion of risks affecting us can be found in the Risk Factors section included in Item 1A of this
Form 10-K. Some of the more significant processes used to manage and control credit, liquidity, market, and operational risks
are described in the following paragraphs.
Credit Risk
Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or
performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities, and enter into
financial derivative contracts, all of which have related credit risk. The majority of our credit risk is associated with lending
activities, as the acceptance and management of credit risk is central to profitable lending.
Loans held-for-investment
Loans held-for-investment decreased $287 million at December 31, 2016, from December 31, 2015. The decrease was
primarily due to a decrease in performing residential first mortgage loans from loan sales in the first half of 2016 of $1.2 billion
unpaid principal balance, partially offset by growth in our higher spread, relationship-based commercial loan portfolio.
For further information relating to the LHFI, see Note 4 - Loans Held-for-Investment.
The following table sets forth a breakdown of our LHFI portfolio (unpaid principal balance) at December 31, 2016:
LOANS HELD-FOR-INVESTMENT, BY RATE TYPE
Fixed
Rate
Adjustable
Rate
(Dollars in millions)
Total
$
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total consumer and commercial loans held-for-investment (1)
$
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
253
137
—
28
418
54
142
—
196
614
$
$
2,060
—
317
—
2,377
1,212
633
1,267
3,112
$
5,489
$
2,313
137
317
28
2,795
1,266
775
1,267
3,308
6,103
41
The following two tables below provide a comparison of the breakdown of LHFI and the detail for the activity in our
LHFI portfolio for each of the past five years:
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
LOANS HELD-FOR-INVESTMENT
At December 31,
2016
2015
2014
2013
2012
(Dollars in millions)
$
2,327
$
3,100
$
2,193
$
2,509
$
3,009
126
317
28
135
384
31
149
257
31
170
290
37
115
179
50
2,798
3,650
2,630
3,006
3,353
1,261
769
1,237
3,267
814
552
1,336
2,702
620
429
769
1,818
409
217
424
1,050
640
97
1,348
2,085
5,438
(305)
5,133
Total consumer and commercial loans held-
for-investment
Allowance for loan losses
Total loans held-for-investment, net
$
6,065
(142)
5,923
$
6,352
(187)
6,165
$
4,448
(297)
4,151
$
4,056
(207)
3,849
$
LOANS HELD-FOR-INVESTMENT PORTFOLIO ACTIVITY SCHEDULE
Balance, beginning of year
Loans originated and purchased (1)
Change in lines of credit (2)
Loans transferred from loans held-for-sale
Loans transferred to loans held-for-sale
Loan amortization / prepayments
Loans transferred to repossessed assets
Balance, end of year
For the Years Ended December 31,
2016
2015
2014
2013
2012
(Dollars in millions)
$
$
6,352
1,771
957
2
(1,309)
(1,700)
(8)
6,065
$
$
4,447
2,975
678
32
(1,198)
(569)
(13)
6,352
$
$
4,056
894
424
56
(509)
(451)
(23)
4,447
$
$
5,438
868
380
64
(832)
(1,687)
(175)
4,056
$
$
7,039
901
139
62
(1,221)
(1,113)
(369)
5,438
(1) During the year ended December 31, 2013, there were $171 million of HELOC loans and $73 million of second mortgage loans that were
reconsolidated at fair value as a result of the settlement agreements with Assured and MBIA.
(2) A reclassification of warehouse loans is included in the schedule in 2014.
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 debt-to-income ratio guidelines and documentation typically followed the
automated underwriting system guidelines. The LTV requirements vary depending on occupancy, property type, loan amount,
and FICO. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. As of December 31, 2016, the
amounts of the ARM loans in our HFI loan portfolio with interest rate reset dates totaled $2 billion. These loans may reset more
than once over a three-year period and nonperforming loans do not reset while in the nonperforming status. At December 31,
2016, the amount of ARM loans in our HFI loan portfolio with interest rate reset dates average approximately $100 million per
quarter over the next three-year period.
42
At December 31, 2016, the largest geographic concentrations of our residential first mortgage loans in our held-for
investment portfolio were in California, Michigan, and Florida, which together represented 55.4 percent of such loans
outstanding.
The following table details the geographic distribution of properties collateralizing residential first mortgage LHFI
throughout the United States (measured by unpaid principal balance and expressed as a percent of the total):
State
California
Michigan
Florida
Texas
Washington
Illinois
New York
All other states (1)
Total
December 31,
2016
2015
36.8%
10.3%
8.3%
5.9%
5.8%
3.6%
3.0%
26.3%
100.0%
35.9%
9.0%
7.9%
6.2%
5.4%
3.7%
2.1%
29.8%
100.0%
(1) No other state contains more than 3.0 percent of the total.
The following table identifies our residential first HFI mortgages by major category, at December 31, 2016 and
December 31, 2015:
Unpaid
Principal
Balance (1)
Average
Note Rate
Average
Original
FICO Score
Average
Current
FICO Score
(2)
Weighted
Average
Maturity in
Months (3)
Average
Original
LTV Ratio
Housing
Price
Index LTV,
as
recalculated
(4)
December 31, 2016
Residential first mortgage loans
Amortizing (5)
Interest only (5)(6)
$
2,244
69
Total residential first mortgage loans $
2,313
December 31, 2015
Residential first mortgage loans
Amortizing (5)
Interest only (5)(6)
3,012
64
Total residential first mortgage loans $
3,076
(Dollars in millions)
3.45%
3.65%
3.45%
3.52%
3.48%
3.52%
756
762
756
752
753
752
757
761
757
752
755
752
321
326
321
304
320
304
65.5%
58.6%
65.3%
68.3%
62.0%
68.2%
56.1%
47.5%
55.8%
62.5%
55.1%
62.4%
In months, measured at origination.
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2) Current FICO scores obtained at various times during the year ended December 31, 2016.
(3)
(4) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2016.
(5)
(6)
Includes 3,5, and 7 year adjustable rate mortgages along with fixed rate mortgages.
Includes only those loans that are currently in the interest-only phase of repayment. Loans originated as interest-only that are now amortizing are
included in amortizing loans.
Second mortgage loans. The majority of second mortgages we currently originate are closed in conjunction with the
closing of the residential first mortgages originated by us. We generally require the same levels of documentation and ratios as
with our residential first mortgages. Our current allowable debt-to-income ratio for approval of second mortgages is capped at
43 percent. We generally limit the maximum CLTV to 80 percent and FICO scores to a minimum of 680. Current fixed rate
loans are available with terms up to 15 years. The second mortgage loans require full documentation and are underwritten and
priced to ensure high credit quality and loan profitability.
Home Equity Line of Credit loans. Underwriting guidelines for our HELOC originations have been established to
attract higher credit quality loans with long-term profitability. HELOCs are adjustable-rate loans that generally contain a 10-
43
year interest-only draw period followed by a 20-year amortizing period. We also offer HELOC loans for a term period of 5 to
15 years to repay. Generally, the minimum FICO is 680, maximum CLTV up to 89 percent, and the maximum debt-to-income
ratio is 43 percent. Included in HELOC loans are interest-only loans. At December 31, 2016, the unpaid principal balance of
our interest-only mortgage loans was $69 million.
Commercial loans held-for-investment. During the year ended December 31, 2016, we have continued to grow our
commercial loan portfolio. Our Business Banking and Commercial Banking group includes relationships with relationship
managers throughout Michigan's major markets. Our commercial LHFI totaled $3.3 billion at December 31, 2016 and $2.7
billion at December 31, 2015. The portfolio consists of three loan types: commercial and industrial (includes direct finance
leases), CRE, and warehouse, each of which is discussed in more detail below.
Commercial and industrial loans. Commercial and industrial HFI loan facilities typically include lines of credit and
term loans to middle market businesses for use in normal business operations to finance working capital, equipment and capital
purchases, acquisition and expansion projects. We lend to customers with a history of profitability and a long-term business
model. Generally, the maximum leverage is 3 times and the minimum debt service coverage is 1.20. Most of our C&I loans
earn interest at a variable rate and we offer our customers the ability to enter into interest rate swaps.
Commercial real estate loans. Our commercial real estate HFI loan portfolio is comprised of loans that are
collateralized by diversified real estate properties intended to be income-producing in the normal course of business. Our
commercial real estate lending relationships are primarily based in the Midwest. 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 percent. During the year ended
December 31, 2016, our commercial real estate HFI loan portfolio grew $447 million to a balance of $1.3 billion. This portfolio
also includes owner occupied real estate loans, in addition to 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 had $181 million of outstanding home builder loans at December 31, 2016.
The following table presents our total unpaid principal balance (net of write downs) of CRE HFI loans by borrower
geographic concentration and collateral type at December 31, 2016:
State
Collateral Type
Michigan
Florida
California
Other
Total (1)
(Dollars in millions)
Retail
Office
Apartments
Industrial
Single family residence, which includes land
Hotel/motel
Parking garage/Lot
Senior living facility
Shopping center
Non profit
Marina
Land - residential development
Special Purpose and all other (2)
Total
Percent
$
$
$
$
141
187
128
122
42
69
58
49
36
31
24
12
32
931
73.5%
$
$
35
—
1
—
27
—
—
—
—
—
—
8
1
72
5.7%
$
$
9
7
—
25
—
—
—
—
—
—
—
—
13
54
4.3%
$
$
28
—
38
5
81
30
—
—
5
—
—
1
21
209
16.5%
213
194
167
152
150
99
58
49
41
31
24
21
67
1,266
100.0%
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts. Includes $245 million of commercial owner occupied real
estate loans at December 31, 2016.
(2) Special purpose and other includes: condominium, land, nursing home, and movie theater.
Warehouse lending. We also offer warehouse lines of credit to other mortgage lenders. These allow the lender to fund
the closing of residential first mortgage loans. Each extension or draw-down on the line is collateralized by mortgage loans
being funded and is paid off once the loan is sold to an outside investor or retained within the Bank. Underlying mortgage loans
are predominately originated using the agencies' underwriting standards. The guideline for debt to tangible net worth does not
44
exceed 15 to 1. We believe we are increasing market share in the warehouse lending market through our strategic initiative to
increase lending to customers who originate loans they then sell to outside third party investors. We have a national platform
with relationship managers covering both coasts and a large Michigan based sales team. The aggregate committed amount of
adjustable-rate warehouse lines of credit granted to other mortgage lenders at December 31, 2016 was $2.9 billion, of which
$1.2 billion was outstanding, compared to $2.2 billion committed at December 31, 2015, of which $1.3 billion was outstanding.
Loan Principal Payments
The following tables set forth the expected repayment of our LHFI, both as fixed rate and adjustable-rate loans at
December 31, 2016:
LOAN PRINCIPAL REPAYMENT SCHEDULE
FIXED RATE LOANS
December 31, 2016
Within
1 Year
1 Year to
2 Years
2 Years to
3 Years
3 Years to
5 Years
5 Years to
10 Years
10 Years to
15 Years
Over
15 Years
Totals (1)
Residential first mortgage
Second mortgage
Other consumer
Commercial real estate
Commercial and industrial
Total loans
$
$
7 $
10
6
20
15
58 $
8 $
11
5
21
16
61 $
(Dollars in millions)
18 $
25
5
—
34
82 $
52 $
79
7
—
61
199 $
8 $
12
5
13
16
54 $
66 $
—
—
—
—
66 $
94 $
—
—
—
—
94 $
253
137
28
54
142
614
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
LOAN PRINCIPAL REPAYMENT SCHEDULE
ADJUSTABLE RATE LOANS
December 31, 2016
Within
1 Year
1 Year to
2 Years
2 Years to
3 Years
3 Years to
5 Years
5 Years to
10 Years
10 Years to
15 Years
Over
15 Years
Totals (1)
(Dollars in millions)
Residential first mortgage
HELOC
Commercial real estate
Commercial and industrial
Warehouse lending
Total loans
$
$
48 $
8
347
203
1,267
1,873 $
49 $
8
359
211
—
627 $
51 $
9
371
218
—
649 $
107 $
19
135
1
—
262 $
300 $
56
—
—
—
356 $
354 $
71
—
—
—
425 $
1,151 $
146
—
—
—
1,297 $
2,060
317
1,212
633
1,267
5,489
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
Credit Quality
Management considers a number of qualitative and quantitative factors in assessing the level of its ALLL. For further
information see MD&A - Allowance for Loan Losses. As illustrated in the following tables, trends in certain credit quality
characteristics such as nonperforming loans and past due statistics remain very strong and continue to show improvement. This
is predominantly a result of the nonperforming and TDR loan sales, as well as run off of the legacy portfolios and the addition
of new loans with strong credit characteristics to the HFI portfolio.
45
The following table sets forth certain information about our nonperforming assets as of the end of each of the last five
years:
NONPERFORMING LOANS AND ASSETS
Loans Held-for-Investment
Nonperforming loans
Nonperforming TDRs
$
Nonperforming TDRs at inception but performing
for less than six months
Total nonperforming loans held-for investment (1)
Real estate and other nonperforming assets, net
Nonperforming assets held-for-investment, net
$
Ratio of nonperforming assets to total assets
Ratio of nonperforming LHFI to LHFI
Ratio of ALLL to LHFI (2)
Ratio of ALLL to LHFI and loans with
government guarantees (2)
Ratio of net charge-offs to average LHFI
(annualized) (2)
Ratio of nonperforming assets to LHFI and
repossessed assets
Ratio of nonperforming assets to Tier 1 capital (to
adjusted total assets) + ALLL (3)
At December 31,
2016
2015
2014
2013
2012
(Dollars in millions)
22
8
10
40
14
54
$
$
31
7
28
66
17
83
$
$
0.39%
0.67%
2.37%
0.61%
1.05%
3.00%
$
$
74
29
17
120
19
139
1.41%
2.71%
7.01%
$
$
99
26
21
146
36
182
1.94%
3.59%
5.42%
254
61
85
400
121
521
3.70%
7.35%
5.61%
2.23%
2.78%
5.54%
4.07%
4.20%
0.52%
1.85%
1.07%
4.00%
4.43%
0.90%
1.32%
3.12%
4.46%
9.36%
3.93%
5.12%
9.50%
12.45%
32.52%
(1) Does not include nonperforming LHFS of $6 million, $12 million, $15 million, $1 million and $2 million at December 31, 2016, 2015, 2014, 2013,
and 2012, respectively.
(2) Excludes loans carried under the fair value option.
(3) Refer to MD&A - Use of Non-GAAP Financial Measures for calculation of ratio.
Past due loans held-for-investment
For all portfolios within the consumer and commercial loan portfolio, loans are placed on nonaccrual status when any
portion of principal or interest is 90 days past due (nonperforming), or earlier when we become aware of information indicating
that collection of principal and interest is in doubt. While it is the goal of management to collect on loans, we attempt to work
out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure proceedings if the
delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist borrowers in
meeting their contractual obligations and minimize losses incurred by the bank. When a loan is placed on nonaccrual status, the
accrued interest income is reversed. Loans return to accrual status when principal and interest become current and are
anticipated to be fully collectible. At December 31, 2016, we had $50 million of past due (payment of principal or interest is 30
days past the scheduled payment date) LHFI. Of those past due loans, $40 million loans were nonperforming. At December 31,
2015, we had $80 million of past due LHFI. Of those past due loans, $66 million loans were nonperforming. The decrease from
December 31, 2016 as compared to December 31, 2015 was primarily due to improved asset quality and the sale of
nonperforming residential first mortgage loans.
Consumer loans. As of December 31, 2016, nonperforming consumer loans totaled $40 million, a decrease from $64
million at December 31, 2015, primarily due to the sale of nonperforming residential first mortgage loans and improvement in
our overall credit quality. Net charge-offs in consumer loans totaled $31 million for the year ended December 31, 2016,
compared to $90 million for the year ended December 31, 2015, primarily due to charge-offs related to the sale of
nonperforming residential first mortgage loans.
Commercial loans. As of December 31, 2016, there were no nonperforming commercial loans. There were $2 million
nonperforming commercial loans as of December 31, 2015. Net charge-offs in commercial loans totaled zero for the year ended
December 31, 2016, which was a decrease from net charge-offs of $1 million for the year ended December 31, 2015, primarily
due to nonperforming commercial loans and recoveries during the year ended December 31, 2016.
46
The following table sets forth information regarding past due loans at the dates listed:
PAST DUE LOANS HELD-FOR-INVESTMENT
$
Days Past Due
30 – 59 days
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Commercial loans
Commercial real estate
Total 30 – 59 days past due
60 – 89 days
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Commercial loans
Commercial real estate
Total 60 – 89 days past due
90 days or greater
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Commercial loans
Commercial real estate
Commercial and industrial
Total 90 days or greater past due (1)
Total past due loans
$
December 31,
2016
2015
2014
2013
2012
(Dollars in millions)
6
—
1
1
—
8
—
1
1
—
2
29
4
7
—
—
40
50
$
$
7
—
2
1
—
10
3
—
1
—
4
53
2
9
—
2
66
80
$
$
29
1
4
—
—
34
8
1
1
—
10
115
2
3
—
—
120
164
$
$
37
2
2
—
—
41
19
—
1
—
20
134
3
7
2
—
146
207
$
$
63
1
2
1
7
74
17
1
1
7
26
306
4
3
86
—
399
499
(1)
Includes performing nonaccrual loans that are less than 90 days delinquent for which interest cannot be accrued.
The $30 million decrease in total past due loans at December 31, 2016, compared to December 31, 2015 was primarily
driven by improved asset quality coupled with the sale of $20 million of nonperforming residential first mortgage loans during
the year ended December 31, 2016. The 30 to 59 days past due loans decreased to $8 million at December 31, 2016, compared to
$10 million at December 31, 2015, primarily driven by improved asset quality growth.
Troubled debt restructurings (held-for-investment)
Troubled debt restructurings ("TDRs") are modified loans in which a borrower demonstrates financial difficulties and
for which a concession has been granted. The decrease of $51 million in our total TDR loans at December 31, 2016, compared
to December 31, 2015 was primarily due to the sale of $30 million UPB of TDR loans during the year ended December 31,
2016. Nonperforming TDRs were 44.2 percent and 53.4 percent of total nonperforming loans at December 31, 2016 and
December 31, 2015, respectively.
Consumer loan modifications. For consumer loan programs (e.g., residential first mortgages, second mortgages,
HELOC, and other consumer), we enter into a modification when the borrower has indicated a hardship, including illness or
death in the family or a loss of employment. Other modifications occur when it is confirmed that the borrower does not possess
the financial resources necessary to continue making loan payments at the current amount, but our expectation is that payments
at lower amounts can be made. The primary concession given to consumer loan borrowers includes a reduced interest rate and/
or an extension of the amortization period or maturity date.
47
Commercial loan modifications. Modifications of terms for commercial loans are based on individual facts and
circumstances. Commercial loan modifications may involve a reduction of the interest rate and/or an extension of the term of
the loan. We also engage in other loss mitigation activities with troubled borrowers, which include repayment plans,
forbearance arrangements, and the capitalization of past due amounts.
Nonperforming TDRs are included in nonaccrual loans. TDRs remain in nonperforming status until a borrower has
made at least six consecutive months of payments under the modified terms. Performing TDRs are excluded from nonaccrual
loans because it is reasonably assured that all contractual principal and interest due under the restructured terms will be
collected. Within consumer nonperforming loans, residential first mortgage TDRs were 37.4 percent of residential first
mortgage nonperforming loans at December 31, 2016, compared to 50.5 percent at December 31, 2015.
The following table sets forth a summary of TDRs by performing status and activity during each of the years presented
with respect to performing:
Performing
Beginning balance
Additions
Transfer to nonperforming TDR
Transfer from nonperforming TDR
Principal repayments
Reductions (1)
Ending balance (2)(3)
Nonperforming
Beginning balance
Additions
Transfer to nonperforming TDR
Transfer from nonperforming TDR
Principal repayments
Reductions (1)
Ending balance (2)
TDRs
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
$
$
$
$
101
8
(9)
11
(4)
(40)
67
35
7
9
(11)
(1)
(21)
18
$
$
$
$
362
75
(16)
5
(3)
(322)
101
46
23
16
(5)
—
(45)
35
$
$
$
$
383
44
(34)
7
(7)
(31)
362
47
14
34
(7)
(1)
(41)
46
Includes loans paid in full or otherwise settled, sold or charged off.
(1)
(2) Consumer loans include: residential first mortgage, second mortgage, HELOC and other consumer loans. The ALLL on consumer TDR loans
totaled $9 million and $15 million at December 31, 2016 and 2015, respectively.
(3) There were no commercial TDRs at December 31, 2016 and 2015. At December 31, 2014, there was $1 million in performing TDR loans.
Commercial loans include: commercial real estate, commercial and industrial, and warehouse loans.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of probable losses that are inherent in our loans held-
for-investment portfolio but which have not yet been realized. The consumer loan portfolio includes residential first mortgages,
second mortgages, HELOC, and other consumer loans. The commercial loan portfolio includes CRE, C&I and warehouse
lending. For further information, see Note 4 - Loans Held-for-Investment.
The ALLL was $142 million and $187 million at December 31, 2016 and 2015, respectively. The decrease from
December 31, 2015 was primarily driven by sales of residential first mortgage loans, nonperforming, TDR, and non-agency
loans, in addition to a change in mix from consumer to commercial loans and a sustained period of strong credit quality during
which we have experienced low net charge-offs. These factors reducing the reserve were partially offset by an increase in the
volume of HFI loans.
The ALLL as a percentage of LHFI decreased to 2.4 percent as of December 31, 2016 from 3.0 percent as of
December 31, 2015. At December 31, 2016, we had a 3.3 percent allowance coverage of our consumer loan portfolio,
consistent with the continued low levels of consumer past due loans as well as sale of lower quality assets. The commercial
48
loan ALLL coverage ratio was 1.6 percent at December 31, 2016, reflecting the strong credit quality of this portfolio and
growth in CRE and C&I loans during the year ended December 31, 2016.
For further information, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant
Accounting Standards and Note 4 - Loans Held-for-Investment.
The following table set forth certain information regarding the allocation of our ALLL to each loan category:
ALLOWANCE FOR LOAN LOSSES
December 31, 2016
Investment
Loan
Portfolio
Percent
of
Portfolio
Allowance
Amount
Allowance as a
Percentage of
Loan Portfolio
(Dollars in millions)
$
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total consumer and commercial loans (1)
$
(1) Excludes loans carried under the fair value option.
2,320
85
293
28
2,726
1,261
769
1,237
3,267
5,993
38.7% $
1.4%
4.9%
0.5%
45.5%
21.0%
12.8%
20.6%
54.5%
100.0% $
65
8
16
1
90
28
17
7
52
142
2.8%
9.4%
5.5%
3.6%
3.3%
2.2%
2.2%
0.6%
1.6%
2.4%
The following tables set forth certain information regarding our ALLL and the allocation of the ALLL over the past five
years:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
At December 31,
2016
2015
2014
2013
2012
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
(Dollars in millions)
Consumer loans
Residential first mortgage $
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and
industrial
Warehouse lending
Total commercial loans
Total consumer and
commercial loans (1)
65
8
16
1
90
28
17
7
52
1.1% $
116
1.9% $
234
5.6% $
0.1%
0.3%
—%
1.5%
0.5%
0.3%
0.1%
0.9%
11
21
2
150
18
13
6
37
0.2%
0.3%
—%
2.4%
0.3%
0.2%
0.1%
0.6%
12
19
1
266
17
11
3
31
0.3%
0.4%
—%
6.3%
0.4%
0.2%
0.1%
0.7%
162
12
8
2
184
19
3
1
23
4.2% $
220
0.3%
0.2%
0.1%
4.8%
0.5%
0.1%
—%
0.6%
20
18
2
260
41
3
1
45
4.0%
0.4%
0.3%
0.1%
4.8%
0.7%
0.1%
—%
0.8%
$
142
2.4% $
187
3.0% $
297
7.0% $
207
5.4% $
305
5.6%
(1) Excludes loans carried under the fair value option.
49
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
For the Years Ended December 31,
2016
2015
2014
2013
2012
(Dollars in millions)
Beginning balance
Provision (benefit) for loan losses (1)
$
$
187
(15)
$
297
(19)
$
207
132
$
305
70
318
276
Charge-offs
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Total commercial loans
Total charge offs
Recoveries
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Total commercial loans
Total recoveries
Charge-offs, net of recoveries
Ending balance
Net charge-off ratio to LHFI (2)
Net charge-off ratio, adjusted (2) (3)
(29)
(2)
(2)
(3)
(36)
—
—
—
(36)
2
—
—
3
5
(87)
(4)
(3)
(4)
(98)
—
(3)
(3)
(101)
3
2
—
3
8
(38)
(3)
(6)
(2)
(49)
(3)
—
(3)
(52)
3
1
—
3
7
(133)
(6)
(5)
(4)
(148)
(47)
(2)
(49)
(197)
15
1
1
2
19
1
1
6
(30)
142
0.52%
0.15%
$
2
2
10
(91)
187
1.85%
0.40%
$
3
3
10
(42)
297
1.07%
0.69%
$
10
10
29
(168)
207
4.00%
2.36%
$
$
(176)
(19)
(17)
(4)
(216)
(105)
(6)
(111)
(327)
19
2
—
2
23
15
15
38
(289)
305
4.43%
4.43%
(1) Does not include $7 million provision expense recorded in the Consolidated Statements of Operations to reserve for repossessed loans with
government guarantees at December 31, 2016. There was no provision for loan losses for repossessed loans with government guarantees recorded
during the years ended December 31, 2015, December 31, 2014, December 31, 2013, and December 31, 2012, respectively.
(2) Excludes loans carried under the fair value option.
(3) Excludes charge-offs of $8 million, $69 million, $15 million, $69 million, and zero related to the transfer and subsequent sale of loans at
December 31, 2016, 2015, 2014, 2013, and 2012, respectively. Also excludes charge-offs related to loans with government guarantees of $14 million
and $3 million, during the years ended December 31, 2016 and 2015, respectively. There were no charge-offs relating to loans with government
guarantees during the years ended December 31, 2014, December 31, 2013, and December 31, 2012, respectively.
Market Risk
Market risk is the risk of reduced earnings and or declines in the net market value of the balance sheet primarily due to
changes in interest rates, currency exchange rates, or equity prices. We do not have any material foreign currency exchange risk
or equity price risk. The primary market risk is interest rate risk and results from timing differences in the repricing of our
assets and liabilities, changes in the relationships between rate indices, and the potential exercise of explicit or embedded
options.
Interest rate risk is monitored by the ALCO, which is composed of our executive officers and other members of
management, in accordance with policies approved by our board of directors. In determining the appropriate level of interest
50
rate risk, the ALCO considers the impact projected interest rate scenarios have on earnings and capital, liquidity, business
strategies, and other factors. The ALCO meets monthly or as deemed necessary to review, among other things, the sensitivity of
assets and liabilities to interest rate changes, the book and fair values of assets and liabilities, unrealized gains and losses,
purchase and sale activity, LHFS and commitments to originate loans, and the maturities of investments, borrowings and time
deposits.
Financial instruments used to manage interest rate risk include derivative financial instruments such as interest rate
swaps and forward sales commitments. For further information, see Note 11 - Derivative Financial Instruments and Note 22 -
Fair Value Measurements. All of our derivatives are accounted for at fair market value. All mortgage loan production originated
for sale is accounted for on a fair value basis.
To effectively measure and manage interest rate risk, sensitivity analysis is used to determine the impact on earnings
and the net market value of the balance sheet across various interest rate scenarios, balance sheet trends, and strategies. From
these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. Additionally,
duration and net interest income sensitivity measures are utilized when they provide added value to the overall interest rate risk
management process. The overall interest rate risk position and strategies are reviewed by executive management and the board
of directors on an ongoing basis. However, management has the latitude to increase interest rate sensitivity within certain limits
if, in management's judgment, the increase will enhance profitability.
Net interest income simulation analysis provides estimated net interest income of the current balance sheet across
alternative interest rate scenarios. The net interest income analysis measures the sensitivity of interest sensitive earnings over a
12 month time horizon. The analysis holds the current balance sheet values constant and does not take into account
management intervention. The net interest income simulation demonstrates the level of interest rate risk inherent in the existing
balance sheet.
The following table is a summary of the changes in our net interest income that are projected to result from
hypothetical changes in market interest rates. The interest rate scenarios presented in the table include interest rates as of
December 31, 2016 and December 31, 2015 and rates in those periods adjusted by instantaneous parallel rate changes plus or
minus 200 basis points. The minus 200 basis point shock scenario is a flattener scenario as rates are floored at zero given the
current interest rate levels.
Scenario
200
Constant
(200)
Scenario
200
Constant
(200)
$
$
December 31, 2016
Net interest Income
$ Change
% Change
(Dollars in millions)
$
321
301
245
December 31, 2015
19
—
(57)
Net interest Income
$ Change
% Change
(Dollars in millions)
$
312
306
258
6
—
(48)
6.3 %
— %
(18.9)%
2.0 %
— %
(16.0)%
At December 31, 2016, the $5 million decline in the net interest margin in the constant scenario as compared to
December 31, 2015, was primarily driven by a decreased yield on other investments and consumer loans.
We have also projected the potential impact to net interest income in a hypothetical interest rate scenario as of
December 31, 2016. When increasing short-term interest rates instantaneously by 100 basis points and holding the longer term
interest rates unchanged, the decrease to net interest income over a 12-month and 24-month period based on our forecasted
balance sheet is a loss of $25 million and $32 million, respectively.
In the net interest income simulation, our balance sheet exhibits slight asset sensitivity. When interest rates rise our
interest income increases. Conversely when interest rates fall our interest income decreases. The net interest income simulation
measures the interest rate risk of the balance sheet over a short period of time, typically 12 months. An additional analysis is
completed that measures the interest rate risk over an extended period of time. The EVE analysis provides a fair value of the
51
balance sheet in alternative interest rate scenarios. The EVE analysis does not take into account management intervention and
assumes the new rate environment is constant and the change is instantaneous.
The table below is a summary of the changes in our EVE that are projected to result from hypothetical changes in
market interest rates. EVE is the market value of assets, less the market value of liabilities, adjusted for the market value of off-
balance sheet instruments. The interest rate scenarios presented in the table include interest rates at December 31, 2016 and
December 31, 2015, and as adjusted by instantaneous parallel rate changes upward to 300 basis points and downward to
100 basis points. The scenarios are not comparable due to differences in the interest rate environments, including the absolute
level of rates and the shape of the yield curve. Each rate scenario reflects unique prepayment, repricing, and reinvestment
assumptions. Management derives these assumptions by considering published market prepayment expectations, the repricing
characteristics of individual instruments or groups of similar instruments, our historical experience, and our asset and liability
management strategy. Further, this analysis assumes that certain instruments would not be affected by the changes in interest
rates or would be partially affected due to the characteristics of the instruments.
Further, as this framework evaluates risks to the current statement of financial condition only, changes to the volumes
and pricing of new business opportunities that can be expected in the different interest rate outcomes are not incorporated in this
analytical framework. For instance, analysis of our history suggests that declining interest rate levels are associated with higher
loan production volumes at higher levels of profitability. While this "natural business hedge" historically offset most, if not all,
of the identified risks associated with declining interest rate scenarios, these factors fall outside of the EVE framework. Further,
there can be no assurance that this natural business hedge would positively affect the EVE in the same manner and to the same
extent as in the past.
There are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates. It
is not possible to fully model the market risk in instruments with leverage, option, or prepayment risks. Also, we are affected by
basis risk, which is the difference in repricing characteristics of similar term rate indices. As such, this analysis is not intended
to be a precise forecast of the effect a change in market interest rates would have on us.
If EVE increases in any interest rate scenario, that would indicate an increasing direction for the margin in that
hypothetical rate scenario. A perfectly matched balance sheet would possess no change in the EVE, no matter what the rate
scenario. The following table presents the EVE in the stated interest rate scenarios:
Scenario
EVE
EVE%
$ Change
% Change
Scenario
EVE
EVE%
$ Change
% Change
December 31, 2016
December 31, 2015
300
200
100
Current
(100)
$
1,927
2,005
2,073
2,100
2,067
13.9% $
(173)
14.4%
14.9%
15.1%
14.9%
(95)
(28)
—
(33)
(Dollars in millions)
(8.2)%
(4.5)%
(1.3)%
300
200
100
— % Current
(1.6)%
(100)
$
1,788
1,889
1,978
2,035
2,001
14.6% $
14.9%
15.1%
15.0%
14.7%
(247)
(146)
(57)
—
(34)
(12.1)%
(7.2)%
(2.8)%
— %
(1.7)%
Our balance sheet exhibits sensitivity in a rising interest rate scenario as the EVE decreases. The decrease in EVE is
the result of the amount of liabilities that would be expected to reprice exceeding the amount of assets repriced in the up to 200
scenario. The (100) is a flattener scenario as shorter term rates are unable to decrease 100 basis points due to the absolute level
of rates. Therefore, the yields of the longer term variable rate assets decrease by the full 100 basis points, but the liabilities
repricing to shorter term rates decrease to less than 100 basis points, leading to a reduction in EVE.
Loans held-for-sale
Most of our mortgage loans originated are sold into the secondary market on a whole loan basis. Sales of loans totaled
$32 billion, or 98.7 percent of originations during the year ended December 31, 2016, compared to $26.3 billion, or 89.5
percent of originations during the year ended December 31, 2015. The increase in the dollar volume of sales during the year
ended December 31, 2016 was primarily due to the increase in origination volumes, as compared to the year ended
December 31, 2015. The increase in our percentage of originations sold during the year ended December 31, 2016 as compared
to the year ended December 31, 2015, was the result of us deliberately slowing our deliveries to the Agencies to better optimize
profitability in 2015. During the year ended December 31, 2016, LHFS were held an average of 28 days compared to an
average of 38 days during the year ended December 31, 2015. Under certain conditions, we intentionally hold HFS loans for
longer periods, prior to sale, in order to benefit from advantageous interest rates. As of December 31, 2016, we had outstanding
52
commitments to sell $5.4 billion of mortgage loans. Generally, these commitments are funded within 120 days. At
December 31, 2016 and 2015, consumer HFS, which are primarily residential mortgage loans, loans totaled $3.2 billion and
$2.6 billion, respectively. For further information on LHFS, see Note 3 - Loans Held-for-Sale.
We are a leading national originator of mortgage loans based on our residential first mortgage loan originations. The
following tables disclose residential first mortgage loan originations by channel, type and mix for each respective period:
Correspondent
Broker
Retail
Total
Purchase originations
Refinance originations
Total
Conventional
Government
Jumbo
Total
Mortgage Servicing
At December 31,
2016
2015
2014
24,488
$
20,543
$
5,890
2,039
32,417
13,672
18,745
32,417
18,156
7,859
6,402
32,417
$
$
$
$
$
7,335
1,490
29,368
13,696
15,672
29,368
17,571
6,385
5,412
29,368
$
$
$
$
$
18,052
5,339
1,194
24,585
14,654
9,931
24,585
15,158
6,134
3,293
24,585
$
$
$
$
$
$
The Mortgage Servicing segment services and subservices mortgage 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 services residential mortgages for our own HFI loan portfolio in the
Community Banking segment for which it earns revenue via an intercompany service fee allocation.
We are a top 25 mortgage servicer in the nation. The following table presents the unpaid principal balance (net of write
downs) of residential loans serviced and the number of accounts associated with those loans:
Residential loan servicing
Serviced for own loan portfolio (1)
Serviced for others
Subserviced for others (2)
Total residential loans serviced
December 31, 2016
December 31, 2015
Amount
Number of
accounts
Amount
Number of
accounts
(Dollars in millions)
$
$
5,816
31,207
43,127
80,150
29,244
133,270
220,075
382,589
$
$
6,088
26,145
40,287
72,520
30,683
118,662
211,937
361,282
(1)
(2)
Includes LHFI (residential first mortgage, second mortgage and HELOC), LHFS (residential first mortgage), loans with government guarantees and
repossessed assets.
Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.
53
The following table describes the characteristics of the mortgage loans serviced for others at December 31, 2016, by
year of origination:
Year of Origination
2012 and
Prior
2013
2014
2015
2016
(Dollars in millions)
Unpaid principal balance (1)
Average unpaid principal balance per
loan (thousands)
Weighted average service fee (basis
points)
Weighted average coupon
Weighted average original maturity
(months)
Weighted average age (months)
Average current FICO score (2)
Average original LTV ratio
Housing Price Index LTV, as
recalculated (3)
Loan count
$
$
1,037
149
$
$
386
143
$
$
2,738
168
$
$
9,565
233
$
$
28.4
4.42%
355
86
719
26.6
4.44%
324
38
733
25.7
4.23%
326
29
736
26.2
4.01%
329
18
744
$
$
17,481
264
26.9
3.71%
321
6
751
78.8%
81.4%
75.9%
72.2%
70.5%
71.9%
58.1%
6,943
61.8%
2,701
61.6%
63.5%
68.0%
65.6%
16,349
40,982
66,294
133,269
Total /
Weighted
Average
31,207
234
26.6
3.88%
325
15
746
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2) Current FICO scores obtained at various times during the life of the loan.
(3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2016.
The following table presents past due trends in mortgage loans serviced for others at December 31, 2016, by year of
origination:
Year of Origination
30-59 days past due
60-89 days past due
90 days or greater past due
Total past due
Current
Unpaid principal balance (1)
2012 and
Prior
$
$
39
10
41
90
947
1,037
$
$
2013
2014
2015
2016
Total
(Dollars in millions)
5
1
7
13
373
386
$
$
38
6
31
75
2,663
2,738
$
$
47
6
20
73
9,492
9,565
$
$
26
3
3
32
17,449
17,481
$
$
155
26
102
283
30,924
31,207
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
At December 31, 2016, the unpaid balance relating to originations within the past two years has decreased to 86.7
percent of the total unpaid balance, compared to 91.4 percent at December 31, 2015. The loan count for the same two year
period has also decreased as a percentage of the total loan count, from 87.9 percent at December 31, 2015 to 80.5 percent at
December 31, 2016.
The unpaid balance of loans originated four years ago and prior has improved to 3.3 percent of the total unpaid
balance, compared to 4.2 percent at December 31, 2015. The loan count for this category has also improved from 7,407 at
December 31, 2015 to 6,943 at December 31, 2016, representing an improvement as a percentage of the total loan count, from
6.2 percent to 5.2 percent, respectively.
Mortgage loans originated four years ago and prior continue to represent the highest percentage of loans past due
within the respective buckets, with 91.3 percent being current within that category at December 31, 2016. This represents an
improvement from December 31, 2015 which exhibited a current rate of 89.1 percent within the same category.
By year of origination, the current bucket has improved in most categories and has improved in totality from 98.8
percent at December 31, 2015 to 99.1 percent at December 31, 2016. We continue to focus on collections and keeping
customers current in order to limit the number of loans in default.
54
The following table describes the characteristics of the residential mortgage loans subserviced for others at
December 31, 2016, by year of origination:
Year of Origination
Unpaid principal balance (1)
Average unpaid principal balance per
loan (thousands)
Weighted average service fee (basis
points)
$
$
Weighted average coupon
Weighted average original maturity
(months)
Weighted average age (months)
Average current FICO score (2)
Average original LTV ratio
Housing Price Index LTV, as
recalculated (3)
Loan count
2012 and
Prior
17,285
168
29.2
4.04%
329
64
742
2013
2014
2015
2016
(Dollars in millions)
$
$
7,009
203
$
$
2,065
202
$
$
7,837
222
$
$
8,931
240
$
$
27.3
3.59%
328
44
752
29.4
4.08%
354
28
721
33.1
3.84%
349
17
710
36.2
3.54%
347
6
702
Total /
Weighted
Average
43,127
196
31.0
3.83%
337
39
728
75.4%
74.8%
85.7%
88.0%
89.9%
81.1%
51.4%
52.7%
71.9%
79.5%
87.9%
65.3%
102,691
34,552
10,214
35,347
37,271
220,075
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2) Current FICO scores obtained at various times during the life of the loan.
(3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2016.
The following table presents the past due trends in residential mortgage loans subserviced for others at December 31,
2016, by year of origination:
Year of Origination
30-59 days past due
60-89 days past due
90 days or greater past due
Total past due
Current
Unpaid principal balance (1)
2012 and
Prior
$
$
332
107
331
770
16,515
17,285
$
$
2013
2014
2015
2016
Total
(Dollars in millions)
44
7
40
91
6,918
7,009
$
$
40
8
7
55
2,010
2,065
$
$
128
30
51
209
7,628
7,837
$
$
70
12
12
94
8,837
8,931
$
$
614
164
441
1,219
41,908
43,127
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
Mortgage servicing rights
At December 31, 2016, MSRs at fair value increased $39 million to $335 million, compared to $296 million at
December 31, 2015, primarily due to additions from loan sales where we retained servicing, partially offset by actual and
pending MSR sales and higher prepayments.
Once fully phased in, the Basel III capital rules will significantly reduce the allowable amount of the fair value of
MSRs included in Tier 1 capital. Our ratio of MSRs to Tier 1 capital was 26.7 percent and 20.6 percent at December 31, 2016
and December 31, 2015, respectively. During the year ended December 31, 2016, we had MSR sales with a fair value of $84
million. These sales represent nearly all of the Company's remaining Ginnie Mae MSRs.
The principal balance of the loans underlying our total MSRs was $31.2 billion at December 31, 2016, compared to
$26.1 billion at December 31, 2015, with the increase primarily attributable to an increase in servicing loan volume, partially
offset by loan payoffs and MSR sales of $8.9 billion in underlying loans.
The recorded amount of the MSR portfolio at December 31, 2016 and 2015 as a percentage of the unpaid principal
balance of the loans we are servicing was 1.1 percent. When we sell mortgage loans in the secondary market, we usually retain
the right to continue to service the mortgage loans for a fee. The weighted average service fee on loans serviced for others is
55
currently 26.7 basis points of the unpaid principal balance. The amount of MSRs initially recorded is based on the fair value of
the MSRs determined on the date when the underlying loan is sold. Our determination of fair value, and the amount we record
(i.e., the capitalization amount) is based on internal valuations and available market pricing. Estimates of fair value reflect the
anticipated prepayment speeds (also known as the constant prepayment rate, product type (i.e., conventional, government,
balloon)), fixed or adjustable rate of interest, interest rate, term (i.e., 15 or 30 years), servicing costs per loan, discounted yield
rate and estimate of ancillary income such as late fees and prepayment fees.
At December 31, 2016, the fair value of the MSR was based upon the following weighted-average assumptions: (1) an
option adjusted spread (OAS) of 7.8 percent; (2) an anticipated loan prepayment rate of 16.7 CPR; and (3) annual servicing
costs of $67 per conventional loan, $88 for each government loan and $85 for each adjustable-rate loan, respectively. At
December 31, 2015, the fair value of the MSR was based upon the following weighted-average assumptions: (1) an option
adjusted spread (OAS) of 8.2 percent; (2) an anticipated loan prepayment rate of 12.6 CPR; and (3) servicing costs of $67 per
conventional loan, $88 for each government loan, and $85 for each adjustable-rate loan, respectively.
The following table sets forth activity in loans serviced for others during the past five years:
LOANS SERVICED FOR OTHERS
Balance, beginning of year
Loans serviced additions
Loan amortization/prepayments
Servicing sales
Balance, end of year
Investment securities
For the Years Ended December 31,
2016
2015
2014
2013
2012
(Dollars in millions)
$
$
26,145
31,645
(17,680)
(8,903)
31,207
$
$
25,427
26,306
(6,612)
(18,976)
26,145
$
$
25,743
24,407
(3,919)
(20,804)
25,427
$
$
76,821
35,827
(9,896)
(77,009)
25,743
$
$
63,771
53,094
(22,097)
(17,947)
76,821
Investment securities AFS, increased from $1.3 billion at December 31, 2015, to $1.5 billion at December 31, 2016.
The increase was primarily due to purchases of $680 million of agency securities, which included U.S. government sponsored
agency MBS and municipal obligations, partially offset by sales and principal payments of $477 million.
Investment securities HTM decreased from $1.3 billion at December 31, 2015 to $1.1 billion at December 31, 2016,
primarily due to principal payments of $190 million.
For further information on Investment Securities, see Note 2 - Investment Securities.
Liquidity Risk
Liquidity risk is the risk that we will not have sufficient funds to meet current and future cash flow needs as they
become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows
in deposits and to take advantage of interest rate and market opportunities. The ability of a financial institution to meet current
financial obligations is a function of the balance sheet structure, the ability to liquidate assets, and access to various sources of
funds.
We primarily originate agency-eligible LHFS and therefore the majority of new residential first mortgage loan
originations are readily convertible to cash, either by selling them as part of our monthly agency sales, private party whole loan
sales, or by pledging them to the FHLB of Indianapolis and borrowing against them. We use the FHLB of Indianapolis as a
significant source for funding our residential mortgage banking business due to its flexibility in terms of being able to borrow
or repay borrowings as daily cash needs require.
We have arrangements with the FRB of Chicago to borrow as appropriate from its discount window. The discount
window is a borrowing facility that is intended to be used only for short-term liquidity needs arising from special or unusual
circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we provide. To
collateralize the line, we pledge investment securities and loans that are eligible based on FRB of Chicago guidelines.
56
The amount we can borrow, or the value we receive for the assets pledged to our liquidity providers, varies based on
the amount and type of pledged collateral as well as the perceived market value of the assets and the "haircut" of the market
value of the assets. That value is sensitive to the pricing and policies of our liquidity providers and can change with little or no
notice.
Our Consolidated Statements of Cash Flows shows cash used in operating activities of $16.4 billion, $9.5 billion, and
$8.1 billion for the years ended December 31, 2016, 2015 and 2014, respectively. This primarily reflects our mortgage
operations and is a reflection of the manner in which we execute certain loan sales for which the cash outflow is included in
operating activities and the corresponding cash inflow is included in the investing section.
As governed and defined by our internal liquidity policy, we maintain adequate excess liquidity levels appropriate to
cover unanticipated liquidity needs. In addition to this liquidity, we also maintain targeted minimum levels of unused
collateralized borrowing capacity as another cushion against unexpected liquidity needs. Each business day, we forecast 90
days of daily cash needs. This allows us to determine our projected near term daily cash fluctuations and also to plan and adjust,
if necessary, future activities. As a result, in an adverse environment, we would be able to make adjustments to operations as
required to meet the liquidity needs of our business, including adjusting deposit rates to increase deposits, planning for
additional FHLB borrowings, accelerating sales of LHFS (agencies and/or private), selling loans held-for-investment or
securities, borrowing through the use of repurchase agreements, reducing originations, making changes to warehouse funding
facilities, or borrowing from the discount window.
Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of
funds as deemed appropriate. We balance the liquidity of our loan assets to our available funding sources. Our HFI portfolio is
funded with stable core deposits whereas our warehouse and HFS loans are funded with FHLB borrowings.
Management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity,
capital resources or operations.
Parent Company Liquidity
The Company obtains its liquidity from multiple sources, including dividends from the Bank and the issuance of debt
and equity securities. The primary uses of the Company's liquidity are debt service on our senior notes, dividends to common
stockholders, capital contributions to the Bank and operating expenses. The Company's most liquid assets are cash it holds at
the Bank and interest-bearing demand accounts at correspondent banks, all of which totaled $70 million at December 31, 2016.
The OCC regulates all capital distributions made by the Bank, directly or indirectly, to the holding company, including
dividend payments. A subsidiary of a savings and loan holding company, such as the Bank, must file a notice or application
with the OCC at least 30 days prior to each proposed capital distribution. Whether an application is required is based on a
number of factors including whether the institution qualifies for expedited treatment under the OCC rules and regulations or if
the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year
exceeds net income for that year to date plus the retained net income for the preceding two years. In addition, as a subsidiary of
a savings and loan holding company, the Bank must receive approval from the FRB before declaring any dividends. Additional
restrictions on dividends apply if the Bank fails the QTL test.
For further information and restrictions related to the Bank’s payment of dividends, see MD&A - Capital.
Deposits
Our deposits consist of three primary categories: retail deposits, government deposits, and company controlled
deposits. Total deposits increased $865 million, or 10.9 percent at December 31, 2016, compared to December 31, 2015,
primarily due to an increase in retail deposits and company controlled deposits.
We have continued to focus on increasing our core deposit accounts such as branch and commercial demand deposits,
savings and money market accounts. These core deposits provide a lower cost funding source to the Bank. During the year
ended December 31, 2016 our core deposits increased $259 million, primarily driven by growth in commercial demand
deposits, partially offset by a decline in retail money market demand accounts.
We utilize local governmental agencies, and other public units, as an additional source for deposit funding. As a
Michigan bank, we are not required to hold collateral against our government deposits from Michigan municipalities as they are
57
covered by the Michigan Business and Growth Fund. This results in higher margins earned on these deposits which can be used
to fund higher yielding commercial loans. Government deposit accounts include $329 million of certificates of deposit with
maturities typically less than one year and $701 million in checking and savings accounts at December 31, 2016.
Company controlled deposits arise due to our servicing or sub-servicing of loans for others and represent the portion of
the investor custodial accounts on deposit with the Bank. Certain deposits require us to reimburse the owner for the spread on
these funds. This cost is a component of net loan administration income. During the year ended December 31, 2016, these
deposits increased $407 million. These balances increase or decrease based upon the volume of loans serviced and sub-serviced
for others, borrower payment behaviors and the timing of withdrawals. The total UPB of loans serviced and sub-serviced for
others increased $8 billion from $72.5 billion at December 31, 2015 to $80.1 billion at December 31, 2016.
We participate in the CDARS program, through which certain customer CDs are exchanged for CDs of similar
amounts from other participating banks. This gives customers the potential to receive FDIC insurance up to $50 million. At
December 31, 2016, we had $231 million of total CDs enrolled in the CDARS program. The total CDARS balances decreased
$79 million at December 31, 2016, from December 31, 2015.
The following table sets forth the composition of our deposits:
December 31,
2016
2015
Balance
Yield/Rate
% of Deposits
Balance
Yield/Rate
% of Deposits
(Dollars in millions)
Retail deposits
Branch retail deposits
Demand deposit accounts
$
Savings accounts
Money market demand accounts
Certificates of deposit/CDARS (1)
Total branch retail deposits
Commercial deposits
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificate of deposit/CDARS (1)
Total commercial deposits
852
3,824
138
1,055
5,869
282
63
109
1
455
Total retail deposits subtotal
$
6,324
Government deposits
Demand deposit accounts
Savings accounts
Certificate of deposit/CDARS
Total government deposits (2)
Company controlled deposits (3)
Total deposits (4)
$
250
451
329
1,030
1,446
8,800
0.05%
0.77%
0.14%
1.04%
0.70%
0.16%
0.62%
0.77%
1.58%
0.37%
0.67%
0.39%
0.52%
0.74%
0.56%
—%
0.55%
9.7% $
43.5%
1.6%
12.0%
66.7%
3.2%
0.7%
1.2%
—%
5.1%
797
3,717
163
811
5,488
194
34
104
14
346
71.9% $
5,834
2.8%
5.1%
3.7%
11.7%
16.4%
100.0% $
302
363
397
1,062
1,039
7,935
0.07%
0.79%
0.15%
0.86%
0.68%
0.41%
0.56%
0.76%
1.03%
0.55%
0.67%
0.39%
0.51%
0.55%
0.49%
—%
0.56%
10.0%
46.8%
2.1%
10.2%
69.2%
2.4%
0.4%
1.3%
0.2%
4.3%
73.5%
3.8%
4.6%
5.0%
13.4%
13.1%
100.0%
(1) The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1 billion and $0.9 billion at
December 31, 2016 and December 31, 2015, respectively.
(2) Government deposits include funds from municipalities and schools.
(3) These accounts represent a portion of the investor custodial accounts and escrows controlled by us in connection with loans serviced for others and
that have been placed on deposit with the Bank.
(4) The aggregate amount of deposits with a balance over $250,000 was approximately $4.0 billion and $3.4 billion at December 31, 2016 and
December 31, 2015, respectively.
58
The following table indicates the scheduled maturities of our certificates of deposit with a minimum denomination of
$100,000 by acquisition channel as of December 31, 2016:
Twelve months or less
One to two years
Two to three years
Three to four years
Four to five years
Thereafter
Total
Retail
Deposits
Government
Deposits
(Dollars in millions)
Total
539
$
312
$
76
13
27
7
22
10
—
1
—
—
851
86
13
28
7
22
684
$
323
$
1,007
$
$
The following table sets forth information relating to our total deposit flows for each of the years indicated:
Beginning deposits
Interest credited
Net deposit increase (decrease)
Total deposits, end of the year
Borrowings
For the Years Ended December 31,
2016
2015
2014
2013
2012
(Dollars in millions)
$
$
7,935
42
823
8,800
$
$
7,068
42
825
7,935
$
$
6,140
30
898
7,068
$
$
8,294
42
(2,196)
6,140
$
$
7,690
70
534
8,294
The FHLB provides loans, also referred to as advances, on a fully collateralized basis, to savings banks and other
member financial institutions. We are currently authorized through a resolution of our board of directors to apply for advances
from the FHLB using approved loan types as collateral. At December 31, 2016, we had the authority and approval from the
FHLB to utilize a line of credit of up to $7 billion and we may access that line to the extent that collateral is provided. At
December 31, 2016, we had $3 billion of advances outstanding and an additional $1.1 billion of collateralized borrowing
capacity available at FHLB. At December 31, 2016, we pledged collateral amounting to $496 million with a lendable value of
$474 million. At December 31, 2015, we pledged collateral amounting to $75 million with a lendable value of $45 million. At
December 31, 2016 and 2015, we had no borrowings outstanding against this line of credit.
Federal Home Loan Bank advances. FHLB advances decreased $561 million at December 31, 2016 from
December 31, 2015. We rely upon advances from the FHLB as a source of funding for the origination or purchase of loans for
sale in the secondary market and for providing duration specific short-term and long-term financing. The outstanding balance of
FHLB advances fluctuates from time to time depending on our current inventory of mortgage LHFS and the availability of
lower cost funding sources. Our portfolio includes short-term fixed rate advances, long-term LIBOR adjustable advances, and
long-term fixed rate advances. Interest rates on the LIBOR index advances reset every three-months and the advances may be
prepaid without penalty, with notification, at scheduled three-month intervals after an initial 12-month lockout period.
For further information relating to FHLB advances, see Note 13 - Borrowings.
Debt. As part of our overall capital strategy, we previously raised capital through the issuance of junior subordinated
notes to our special purpose trusts formed for the offerings, which issued preferred stock (trust preferred securities). The trust
preferred securities are callable by us at any time. Interest is payable on a quarterly basis; however, we may defer interest
payments for up to 20 quarters without default or penalty. In January, 2012, we exercised our contractual right to defer regularly
scheduled quarterly payments of interest. In July 2016, we made $34 million of payments to bring current our previously
deferred interest as of that date.
On July 11, 2016, we issued $250 million of senior notes ("2021 Senior Notes") which mature on July 15, 2021. The
proceeds from these notes were used to bring current and redeem our outstanding Series C Preferred Stock.
59
Prior to June 15, 2021, we may redeem some or all of the 2021 Senior Notes at a redemption price equal to the greater
of 100 percent of the aggregate principal amount of the 2021 Senior Notes to be redeemed or the sum of the present values of
the remaining scheduled payments plus, in each case, accrued and unpaid interest.
For further information relating to long-term debt, see Note 13 - Borrowings.
Federal Home Loan Bank stock
As a member of the FHLB, we are required to hold shares of FHLB stock in an amount equal to at least one percent of
aggregate unpaid principal balance of our mortgage loans, home purchase contracts and similar obligations at the beginning of
each year, or 4.5 percent of our FHLB advances, whichever is greater. Once purchased, FHLB shares must be held for five
years before they can be redeemed. At December 31, 2016, holdings of FHLB stock increased to $180 million from $170
million at December 31, 2015, due to a FHLB stock purchase which was required due to our higher borrowing levels.
Contractual Obligations
We have various financial obligations, including contractual obligations, which require future cash payments. For
further information, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting
Standards, Note 12 - Deposit Accounts and Note 13 - Borrowings. The following table summarizes contractual obligations at
December 31, 2016, and the future periods in which the obligations are expected to be settled in cash:
Less than
1 Year
1-3 Years
3-5 Years
(Dollars in millions)
More than
5 Years
Total
Deposits without stated maturities
Certificates of deposits
Short-term Federal Home Loan Bank advances and other
Long-term Federal Home Loan Bank advances
Senior notes
Trust preferred securities
Operating leases
DOJ litigation settlement
Total
$
$
5,970
1,105
1,780
50
—
—
4
—
8,909
$
$
— $
183
—
125
—
—
5
—
313
$
— $
65
—
—
246
—
3
—
314
$
— $
31
—
1,025
—
247
—
118
1,421
$
5,970
1,384
1,780
1,200
246
247
12
118
10,957
Operational Risk
Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls; violations of,
or noncompliance with, laws, rules and regulations, prescribed practices, or ethical standards; and external influences such as
market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal
controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk. We
evaluate internal systems, processes, and controls to mitigate loss from cyber-attacks and, to date, have not experienced any
material losses. The goal of this framework is to implement effective operational risk techniques and strategies, minimize
operational and fraud losses, and enhance our overall performance.
Loans with government guarantees
As of December 31, 2016 our loans with government guarantees portfolio totaled $365 million. Repossessed assets
and the associated claims related to loans with government guarantees recorded in other assets totaled $135 million. In the prior
year, loans with government guarantees totaled $485 million and repossessed assets and the associated claims related to loans
with government guarantees recorded in other assets totaled $210 million. The decline in the loans with government guarantees
portfolio was primarily due to loans transferred to HFS and resold to Ginnie Mae outpacing new repurchases. The decline in the
amount reported in other assets was primarily due to loan liquidations and the receipt of claims outpacing new foreclosures. In
the fourth quarter of 2016, we sold the vast majority of our outstanding Ginnie Mae MSRs and as of December 31, 2016 had
$603 million UPB outstanding as compared to $5.1 billion as of December 31, 2015
60
Substantially all of these loans continue to be insured or guaranteed by the FHA or the U.S. Department of Veterans
Affairs and management believes that the reimbursement process is proceeding appropriately. Nonperforming repurchased
loans in this portfolio earn interest at a rate based upon the 10-year U.S. Treasury note rate from the time the underlying loan
becomes delinquent, which is not paid by the FHA until claimed. Certain loans within our portfolio may be subject to
indemnifications and insurance limits which exposes us to limited credit risk. In 2016, we experienced net charge-offs of $14
million and have reserved for the remaining risks within other assets and as a component of our ALLL on residential first
mortgages. These charge-offs arise due to insurance limits on VA insured loans and FHA property foreclosure and preservation
requirements that may result in a loss of the guarantee.
For further information on loans with government guarantees, see Note 5 - Loans with Government Guarantees.
Representation and warranty reserve
When we sell mortgage loans, we make customary representations and warranties to the purchasers, including
sponsored securitization trusts and their insurers (primarily Fannie Mae and Freddie Mac).
REPRESENTATION AND WARRANTY RESERVE
For the Years Ended December 31,
2016
2015
2014
2013
2012
Beginning balance
Charge to gain on sale for current loan sales
Provision (benefit) representation and warranty
reserve - change in estimate
(Charge-offs), Recoveries, net
Ending balance
$
$
40
5
(19)
1
27
$
$
(Dollars in millions)
53
7
(19)
(1)
40
$
$
54
7
10
(18)
53
$
$
193
18
36
(193)
54
$
$
120
24
256
(207)
193
Note: In the fourth quarter 2013, we settled substantially all of the repurchase requests and obligations associated with loans
originated between January 1, 2000 and December 31, 2008 and sold to Fannie Mae and Freddie Mac which has resulted in lower
charge offs subsequent to 2013.
The benefit from the provision adjustment charged to representation and warranty reserve expense during the year
ended December 31, 2016, was primarily due to lower net charge-offs coupled with our ongoing efforts to continue to refine
our estimates as more data becomes available reflecting the trend under the revised representation and warranty reserve
framework as published by the Federal Housing Finance Agency. Under the new framework, subject to certain conditions, the
duration of the put-back uncertainty associated with new loans delivered has been significantly reduced. A shorter duration of
put-back uncertainty, all else being equal, results in lower reserve estimates.
During the year ended December 31, 2016, we had $19 million in Fannie Mae new repurchase demands and $13
million in Freddie Mac new repurchase demands. During the year ended December 31, 2015, we had $81 million in Fannie
Mae new repurchase demands and $30 million in Freddie Mac new repurchase demands. The total UPB of 2009 and later
vintage loans sold to Fannie Mae and Freddie Mac was $183 million and $162 million at December 31, 2016 and December 31,
2015, respectively.
For further information on the Representation and Warranty Reserve, see Note 14 - Representation and Warranty Reserve.
Capital
Under the OCC's capital distribution regulations, a savings bank that is a subsidiary of a savings and loan holding
company may need to notify or seek approval from the OCC at least 30 days prior to the declaration of a dividend or the
approval by the board of directors of the proposed capital distribution. The 30-day period allows the OCC to determine whether
the distribution would not be advisable. Also, under Federal Reserve requirements, the Bank may need to provide a 30-day
notice to the Federal Reserve prior to declaring or paying dividends. In addition, under the Supervisory Agreement, the
Company agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital distributions. We seek
to manage our capital levels and overall business in a manner which we consider to be prudent and work with our regulators to
ensure that our capital levels are appropriate considering our risk profile and evaluation of the capital levels maintained by peer
institutions.
61
Consent Orders
On December 19, 2016, the OCC terminated its Consent Order with the Bank. In response to the Consent Order, the
Bank implemented and adopted enhanced practices related to, among other things, regulatory compliance, enterprise risk
management, capital and liquidity. The lifting of the Consent Order signifies that the OCC has determined that the Bank has
met all of the Consent Order requirements.
On September 29, 2014, the Bank entered into a Consent Order with the CFPB. The Consent Order relates to alleged
violations of federal consumer financial laws arising from the Bank’s residential first mortgage loan loss mitigation practices
and default servicing operations dating back to 2011. Under the terms of the Consent Order, the Bank has paid $28 million for
borrower remediation and $10 million in civil money penalties. The settlement does not involve any admission of wrongdoing
on the part of the Bank or its employees, directors, officers, or agents. For further information and a complete description of all
of the terms of the Consent Order, please refer to our Current Report on Form 8-K filed on September 29, 2014.
Supervisory Agreement
On January 28, 2010, we became subject to the Supervisory Agreement, which will remain in effect until terminated,
modified, or suspended in writing by the Federal Reserve. The failure to comply with the Supervisory Agreement could result
in the initiation of further enforcement action by the Federal Reserve, including the imposition of further operating restrictions,
and could result in additional enforcement actions against us. We have taken actions which we believe are appropriate to
comply with, and intend to maintain compliance with, all of the requirements of the Supervisory Agreement. For further
information and a complete description of all of the terms of the Supervisory Agreement, please refer to the copy of the
Supervisory Agreement filed with the SEC as an exhibit to our Current Report on Form 8-K filed on January 28, 2010.
Department of Justice Settlement Agreement
On February 24, 2012, the Bank entered into a Settlement Agreement with the DOJ under which we made an initial
payment of $15 million and agreed to make future payments totaling $118 million in annual increments of up to $25 million
upon meeting all of the following conditions which are evaluated quarterly and include: (a) the reversal of the deferred tax asset
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 July 2016; and (c) our Bank has a Tier 1 Leverage Capital Ratio of
11 percent or greater. Additionally, if the Bank or Bancorp become party to a business combination in which the Bank and
Bancorp represent less than 33.3 percent of the resulting company’s assets, annual payments would commence twelve months
after the date of that business combination. Further, should all conditions for payment be satisfied, an annual payment under the
settlement agreement would be made, and any further payments would be made only so long as such conditions are satisfied at
the time required for such further payments.
Within six months of satisfying the conditions specified above, the Bank would make an additional payment, to occur
no more frequently than annually, provided that doing so would not violate any material banking regulatory requirement or the
OCC does 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 conditions.
In July 2016, we paid a $200 million dividend from the Bank to the Bancorp and issued $250 million in Senior Notes
to a) bring current the interest payments on our trust preferred securities, b) become current on our deferred interest and
dividends related to our TARP Preferred and c) repay our TARP Preferred. To support the on-going debt service and other
Bancorp expenses, we also intend to reduce our Bancorp double leverage and debt to equity ratios to be more consistent with
such ratios at other mid-sized banks, which would likely require further dividend payments from the Bank to the Bancorp for
the foreseeable future.
Future annual payments of $25 million or the final payment of the remaining balance under the Settlement Agreement
could be required if the Tier 1 Leverage Ratio of the Bank meets or exceeds 11 percent after adjusting for any outstanding
TARP Preferred. Following the TARP Preferred redemption, which included a $200 million dividend from the Bank to
Bancorp, the Bank’s Tier 1 Leverage Ratio is less than 11 percent. The combination of (a) future dividends from the Bank to
Bancorp and (b) continued growth in earning assets at the Bank are expected to continue to limit the growth rate of the Bank’s
Tier 1 Leverage Ratio, which could have an impact on the timing of expected cash flows under the Settlement Agreement.
62
The Settlement Agreement meets the definition of a financial instrument for which we elected the fair value option.
The fair value of the liability is subject to significant uncertainty and is impacted by forecasted estimates of equity, earnings,
timing and amount of dividends and growth of the balance sheet and their related impacts on forecasted Tier 1 Capital. We
consider the assumptions a market participant would make to transfer the liability and evaluate multiple possible outcomes and
our estimates of the likelihood of these outcomes, which may change over time.
Regulatory Capital Composition - Transition
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific
capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors. We are currently subject to regulatory capital rules issued by
U.S. banking regulators.
Effective January 1, 2015, we became subject to the Basel III rules, which include certain transition provisions. Capital
deductions related to the Company's MSRs and deferred tax assets are recognized in 20 percent annual increments, and will be
fully recognized as of January 1, 2018. When presented on a fully phased-in basis, capital, risk-weighted assets, and the capital
ratios assume all regulatory capital adjustments and deductions are fully recognized. As of December 31, 2016, the Company
and the Bank were subject to the transitional phase-in limitation on deductions related to MSRs and certain deferred tax assets.
The annual incremental change in the deductions due to the increase in the transitional phase-in from 40 percent in 2015 to 60
percent in 2016 reduced our regulatory capital ratios. These transitional phase in amounts increase to 80 percent in 2017 and
100 percent in 2018.
Effective January 1, 2016, we became subject to the capital conservation buffer under the Basel III rules, subjecting a
banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the
organization does not maintain a capital conservation buffer above the minimum risk based capital requirements. The capital
conservation buffer for 2016 must be greater than 0.625 percent in order to not be subject to limitations. The Company and the
Bank had a capital conservation buffer of 8.5 percent and 11.3 percent, respectively as of December 31, 2016. When fully
phased-in on January 1, 2019, the capital conservation buffer must be greater than 2.5 percent.
Dodd-Frank Act Section 171, commonly known as the Collins Amendment, grandfathered the regulatory capital
treatment of hybrid debt and equity securities, such as trust preferred securities issued prior to May 19, 2010, for banks or
holding companies with less than $15 billion in total consolidated assets as of December 31, 2009.
At December 31, 2016, we were considered "well-capitalized" for regulatory purposes. The following table shows the
regulatory capital ratios as of the dates indicated:
Bancorp
Tier 1 leverage (to adjusted tangible assets)
Total adjusted tangible asset base (1)
Tier 1 capital (to RWA)
Common equity Tier 1 (to RWA)
Total risk-based capital (to RWA)
Risk weighted asset base (1)
Bank
Tier 1 leverage (to adjusted tangible assets)
Total adjusted tangible asset base (1)
Tier 1 capital (to RWA)
Common equity Tier 1 (to RWA)
Total risk-based capital (to RWA)
Risk weighted asset base (1)
December 31, 2016
December 31, 2015
Amount
Ratio
Amount
Ratio
1,256
14,149
1,256
1,084
1,363
8,305
8.88% $
$
15.12% $
13.06% $
16.41% $
$
1,435
12,474
1,435
1,065
1,534
7,561
11.51%
18.98%
14.09%
20.28%
December 31, 2016
December 31, 2015
Amount
Ratio
Amount
Ratio
1,491
14,177
1,491
1,491
1,598
8,332
10.52% $
$
17.90% $
17.90% $
19.18% $
$
1,472
12,491
1,472
1,472
1,570
7,582
11.79%
19.42%
19.42%
20.71%
$
$
$
$
$
$
$
$
$
$
$
$
(1) Based on adjusted total assets for purposes of Tier 1 leverage capital and risk-weighted assets for purposes Tier1, common equity Tier 1, and total
risk-based capital.
63
Our Tier 1 leverage ratio decreased at December 31, 2016, as compared to December 31, 2015, primarily as a result of
transactions related to the payoff of TARP, the payment of TARP dividends in arrears, along with an increase in the deductions
related to DTAs and MSRs due to the change in the transitional phase-in limitation from 40 percent at December 31, 2015 to 60
percent at December 31, 2016.
Banks with assets greater than $10 billion are required to submit a Dodd-Frank Act Stress Test ("DFAST") under the
final rules established by their primary regulator. DFAST requires banks to project results over a nine-quarter planning horizon
under three scenarios (baseline, adverse, and severely adverse) published by the Federal Reserve and to show that the bank
would exceed regulatory minimum capital standards for the Tier 1 leverage ratio, Tier 1 common ratio, Tier 1 risk-based capital
ratio, and the Total risk-based capital ratio under all of these scenarios. We are not subject to the Federal Reserve’s
Comprehensive Capital Analysis and Review program.
Certain regulatory capital ratios for the Bank and the Company as of December 31, 2016 are shown in the following
table:
December 31, 2016
Basel III Ratios (transitional)
Common equity Tier I capital ratio
Tier I leverage ratio
Basel III Ratios (fully phased-in) (1)
Common equity Tier I capital ratio
Tier I leverage ratio
Regulatory
Minimums
Regulatory
Minimums to be
Well-Capitalized
Bank
Bancorp
4.50%
4.00%
4.50%
4.00%
6.50%
5.00%
6.50%
5.00%
17.90%
10.52%
16.09%
9.76%
13.06%
8.88%
10.25%
7.82%
(1) Refer to MD&A - Use of Non-GAAP Financial Measures.
The impact under the fully phased in Basel III rules to our Tier 1 leverage ratio is mostly driven by the treatment that
MSRs receive under Basel III. Over the long term, we plan to continue to reduce our MSRs to Tier 1 ratio, taking into
consideration market conditions to guide our pace of MSR reduction. At December 31, 2016 we had $335 million of MSRs,
representing 26.6 percent of Tier 1 capital. We will continue to look for opportunities to reduce our MSRs exposure over time.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures such as
the estimated fully implemented Basel III capital levels and ratios. We believe these non-GAAP financial measures provide
additional information that is useful to investors in helping to understand the underlying performance and trends of the
Company.
Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and are not
audited. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To
mitigate these limitations, we have practices in place to ensure that these measures are calculated using the appropriate GAAP
or regulatory components in their entirety and to ensure that our performance is properly reflected to facilitate consistent
period-to-period comparisons. Our method of calculating these non-GAAP measures may differ from methods used by other
companies. Although we believe the non-GAAP financial measures disclosed in this report enhance investors' understanding of
our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for those
financial measures prepared in accordance with GAAP. Where non-GAAP financial measures are used, the most directly
comparable GAAP or regulatory financial measure, as well as the reconciliation to the most directly comparable GAAP or
regulatory financial measure, can be found in this report.
64
Nonperforming assets / Tier 1 + Allowance for Loan Losses. The ratio of nonperforming assets to Tier 1 and ALLL
divides the total level of nonperforming assets HFI by Tier 1 capital (to adjusted total assets), as defined by bank regulations,
plus ALLL. We believe these measurements are meaningful measures of capital adequacy used by investors, regulators,
management and others to evaluate the adequacy of capital in comparison to other companies within the industry.
Nonperforming assets / Tier 1 capital + ALLL
Nonperforming assets
Tier 1 capital (to adjusted total assets) (1)
Allowance for loan losses
Tier 1 capital + ALLL
Nonperforming assets / Tier 1 capital + ALLL
(1) Represents Tier 1 capital for the Bank prior to 2013.
December 31,
2016
2015
2014
2013
2012
(Dollars in millions)
$
$
54
$
83
$
139
$
182
$
1,256
(142)
1,398
$
1,435
(187)
1,622
$
1,184
(297)
1,481
$
1,281
(207)
1,488
$
521
1,296
(305)
1,601
3.9%
5.1%
9.5%
12.5%
32.5%
Basel III (transitional) to Basel III (fully phased-in) reconciliation. On January 1, 2015, the Basel III rules became
effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity
Tier 1 capital and Tier 1 capital. When fully phased-in, Basel III, will increase capital requirements through higher minimum
capital levels as well as through increases in risk-weights for certain exposures. Additionally, the final Basel III rules place
greater emphasis on common equity. In October 2013, the OCC and Federal Reserve released final rules detailing the U.S.
implementation of Basel III and the application of the risk-based and leverage capital rules to top-tier savings and loan holding
companies. We have transitioned to the Basel III framework beginning in January 2015 and are subject to a phase-in period
extending through 2018. Accordingly, the calculations provided below and on the previous page, are estimates. These measures
are considered to be non-GAAP financial measures because they are not formally defined by GAAP and the Basel III
implementation regulations. The Common Equity Tier 1, Tier 1, Total Capital and Leverage ratios will not be fully phased-in
until January 1, 2018 and the Capital Conservation buffer will not be fully phased-in until January 1, 2019. The regulations are
subject to change as clarifying guidance becomes available and the calculations currently include our interpretations of the
requirements including informal feedback received through the regulatory process. Other entities may calculate the Basel III
ratios differently from ours based on their interpretation of the guidelines. Since analysts and banking regulators may assess our
capital adequacy using the Basel III framework, we believe that it is useful to provide investors information enabling them to
assess our capital adequacy on the same basis.
December 31, 2016
Flagstar Bancorp
Regulatory capital – Basel III (transitional) to Basel III (fully
phased-in)
Basel III (transitional)
Increased deductions related to deferred tax assets, MSRs, and
other capital components
Basel III (fully phased-in) capital
Risk-weighted assets – Basel III (transitional) to Basel III (fully
phased-in)
Basel III assets (transitional)
Net change in assets
Basel III (fully phased-in) assets
Capital ratios
Basel III (transitional)
Basel III (fully phased-in)
Common Equity
Tier 1 (to Risk
Weighted Assets)
Tier 1 Leverage
(to Adjusted
Tangible Assets)
Tier 1 Capital (to
Risk Weighted
Assets)
Total Risk-Based
Capital (to Risk-
Weighted Assets)
(Dollars in millions)
$
$
$
$
1,084
(230)
854
8,305
35
8,340
13.06%
10.25%
1,256
(162)
1,094
14,149
(161)
13,988
$
$
$
$
1,256
(162)
1,094
8,305
35
8,340
$
$
$
$
1,363
(160)
1,203
8,305
35
8,340
8.88%
7.82%
15.12%
13.12%
16.41%
14.43%
$
$
$
$
65
December 31, 2016
Flagstar Bank
Common Equity
Tier 1 (to Risk
Weighted Assets)
Tier 1 Leverage
(to Adjusted
Tangible Assets)
Tier 1 Capital (to
Risk Weighted
Assets)
Total Risk-Based
Capital (to Risk-
Weighted Assets)
(Dollars in millions)
Regulatory capital – Basel III (transitional) to Basel III (fully
phased-in)
Basel III (transitional)
Increased deductions related to deferred tax assets, MSRs, and
other capital components
Basel III (fully phased-in) capital
Risk-weighted assets – Basel III (transitional) to Basel III (fully
phased-in)
Basel III assets (transitional)
Net change in assets
Basel III (fully phased-in) assets
Capital ratios
Basel III (transitional)
Basel III (fully phased-in)
$
$
$
$
$
$
$
$
1,491
(119)
1,372
8,332
196
8,528
17.90%
16.09%
$
$
$
$
1,491
(119)
1,372
14,177
(119)
14,058
10.52%
9.76%
1,491
(119)
1,372
8,332
196
8,528
$
$
$
$
1,598
(116)
1,482
8,332
196
8,528
17.90%
16.09%
19.18%
17.38%
Adjusted Net Income, Diluted Income per Share and Adjusted Return on Average Assets. In addition to analyzing
the Company's results on a reported basis, management reviews the Company's results and the results on an adjusted basis.
These non-GAAP measures reflect the adjustment of the reported U.S.GAAP results for significant items that management does
not believe are reflective of the Company's current and ongoing operations. These are measures that management uses to assess
performance of the Company against its peers and evaluate overall performance. The Company believes these non-GAAP
financial measures provide useful information for investors, securities analysts and others because they provide a tool to
evaluate the Company’s performance on an ongoing basis and compared to its peers.
The following table provides a reconciliation of non-GAAP financial measures:
Net income
Adjustment to remove DOJ adjustment
Tax impact of adjusting item
Adjusted net income
Diluted income per share
Adjustment to remove DOJ adjustment
Tax impact of adjusting item
Diluted adjusted income per share
Return on average assets
Adjustment to remove DOJ adjustment including tax impact
Adjusted return on average assets
Year Ended
December 31, 2016
(Dollars in millions)
$
$
$
$
171
(24)
8
155
2.66
(0.42)
0.14
2.38
1.23 %
(0.12)%
1.11 %
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion regarding our management of market risk is included in "Market Risk" in this report in Part II, Item 7,
"Management’s Discussion and Analysis of Financial Condition and Results of Operations."
66
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firms
Consolidated Statements of Financial Condition as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016,
2015 and 2014
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and
2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting
Standards
Note 2 - Investment Securities
Note 3 - Loans Held-for-Sale
Note 4 - Loans Held-for-Investment
Note 5 - Loans with Government Guarantees
Note 6 - Repossessed Assets
Note 7 - Variable Interest Entities ("VIEs")
Note 8 - Federal Home Loan Bank Stock
Note 9 - Premises and Equipment
Note 10 - Mortgage Servicing Rights
Note 11 - Derivative Financial Instruments
Note 12 - Deposit Accounts
Note 13 - Borrowings
Note 14 - Representation and Warranty Reserve
Note 15 - Warrants
Note 16 - Accumulated Other Comprehensive Income (Loss)
Note 17 - Earnings (Loss) Per Share
Note 18 - Stock-Based Compensation
Note 19 - Income Taxes
Note 20 - Regulatory Matters
Note 21 - Legal Proceedings, Contingencies and Commitments
Note 22 - Fair Value Measurements
Note 23 - Segment Information
Note 24 - Holding Company Only Financial Statements
Note 25 - Quarterly Financial Data
67
68
70
71
72
72
73
74
74
82
85
85
93
93
94
94
94
95
96
100
101
103
103
104
105
105
107
109
111
113
122
125
127
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Flagstar Bancorp, Inc.
In our opinion, the accompanying consolidated statements of financial condition as of December 31, 2016 and 2015, and the
related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the years
then ended present fairly, in all material respects, the financial position of Flagstar Bancorp, Inc. and its subsidiaries at
December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on
these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
March 13, 2017
68
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Flagstar Bancorp, Inc.
We have audited the accompanying related consolidated statements of operations, comprehensive income (loss), stockholders'
equity, and cash flows for the year in the period ended December 31, 2014 of Flagstar Bancorp, Inc. and subsidiaries (the
"Company"). The Company's management is responsible for these financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. Our audits of the financial statements include examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Flagstar Bancorp Inc. and subsidiaries as of December 31, 2014, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended December 31, 2014, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Baker Tilly Virchow Krause, LLP
Southfield, Michigan
March 16, 2015, except for Note 23, as to which the date is October 7, 2016
69
Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In millions, except share data)
Assets
Cash
Interest-earning deposits
Total cash and cash equivalents
Investment securities available-for-sale
Investment securities held-to-maturity
Loans held-for-sale ($3,145 and $2,541 measured at fair value, respectively)
Loans held-for-investment ($72 and $111 measured at fair value, respectively)
Loans with government guarantees
Less: allowance for loan losses
Total loans held-for-investment and loans with government guarantees, net
Mortgage servicing rights
Net deferred tax asset
Federal Home Loan Bank stock
Premises and equipment, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Noninterest bearing deposits
Interest bearing deposits
Total deposits
Short-term Federal Home Loan Bank advances
Long-term Federal Home Loan Bank advances
Other long-term debt
Representation and warranty reserve
Other liabilities ($60 and $84 measured at fair value, respectively)
Total liabilities
Stockholders’ Equity
Preferred stock $0.01 par value, liquidation value $1,000 per share, 25,000,000 shares
authorized; 0 and 266,657 issued and outstanding, respectively
Common stock $0.01 par value, 70,000,000 shares authorized; 56,824,802
and 56,483,258 shares issued and outstanding, respectively
Additional paid in capital
Accumulated other comprehensive (loss) income
Accumulated deficit
Total stockholders’ equity
$
$
$
December 31,
2016
2015
$
84
74
158
1,480
1,093
3,177
6,065
365
(142)
6,288
335
286
180
275
781
54
154
208
1,294
1,268
2,576
6,352
485
(187)
6,650
296
364
170
250
639
14,053
$
13,715
2,077
$
6,723
8,800
1,780
1,200
493
27
417
1,574
6,361
7,935
2,116
1,425
247
40
423
12,717
12,186
—
1
1,503
(7)
(161)
1,336
267
1
1,486
2
(227)
1,529
13,715
Total liabilities and stockholders’ equity
$
14,053
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
70
Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
Interest Income
Loans
Investment securities
Interest-earning deposits and other
Total interest income
Interest Expense
Deposits
Short-term Federal Home Loan Bank advances and other
Long-term Federal Home Loan Bank advances
Other long-term debt
Total interest expense
Net interest income
Provision (benefit) for loan losses
Net interest income after provision (benefit) for loan losses
Noninterest Income
Net gain on loan sales
Loan fees and charges
Deposit fees and charges
Loan administration income
Net (loss) return on mortgage servicing rights
Net (loss) gain on sale of assets
Representation and warranty (provision) benefit
Other noninterest income
Total noninterest income
Noninterest Expense
Compensation and benefits
Commissions
Occupancy and equipment
Asset resolution
Federal insurance premiums
Loan processing expense
Legal and professional expense
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Preferred stock dividend/accretion
Net income (loss) from continuing operations
Income (loss) per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
For the Years Ended December 31,
2016
2015
2014
$
348
$
295
$
68
1
417
46
5
27
16
94
323
(8)
331
316
76
22
18
(26)
(2)
19
64
487
269
55
85
7
11
55
29
49
560
258
87
171
—
171
2.71
2.66
$
$
$
$
$
$
$
$
$
59
1
355
42
1
18
7
68
287
(19)
306
288
67
25
26
28
(1)
19
18
$
$
470
237
$
$
39
81
15
23
52
36
53
536
240
82
158
—
158
2.27
2.24
$
$
$
$
$
$
$
$
$
$
$
$
$
$
246
39
1
286
30
—
2
7
39
247
132
115
206
73
22
24
24
12
(10)
21
372
233
35
80
57
23
37
51
74
590
(103)
(34)
(69)
(1)
(70)
(1.72)
(1.72)
56,569,307
57,597,667
56,426,977
57,164,523
56,246,528
56,246,528
The accompanying notes are an integral part of these Consolidated Financial Statements.
71
Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
Net income (loss)
Other comprehensive income (loss), net of tax
Investment securities
Derivatives and hedging activities
Other comprehensive income (loss), net of tax
Comprehensive income
$
$
For the Years Ended December 31,
2016
2015
2014
171
$
158
$
(13)
4
(9)
162
$
(3)
(3)
(6)
152
$
(69)
13
—
13
(56)
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders' Equity
(In millions, except share data)
Preferred Stock
Common Stock
Number of
Shares
Outstanding
Amount of
Preferred
Stock
Number of
Shares
Outstanding
Amount of
Common
Stock
Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
266,657 $
266 56,138,074 $
1 $
1,479 $
(5) $
(315) $
1,426
—
—
—
—
—
—
1
—
194,233
266,657 $
267 56,332,307 $
— $
—
—
—
—
—
—
—
— $
150,951
—
— $
—
—
—
(266,657)
(267)
—
—
—
—
—
—
— $
—
—
—
—
341,544
—
—
—
—
—
—
—
3
1 $
— $
1,482 $
— $
—
—
—
—
3
1
1 $
— $
1,486 $
— $
—
—
—
—
—
—
—
—
6
11
—
13
—
—
8 $
— $
(6)
—
—
2 $
— $
(9)
—
—
—
—
(69)
(69)
—
(1)
—
13
—
3
(385) $
158 $
1,373
158
—
—
—
(6)
3
1
(227) $
171 $
1,529
171
—
—
(105)
—
— $
(9)
(267)
(105)
6
11
Balance at December 31,
2013
Net loss
Total other
comprehensive income
Accretion of preferred
stock
Stock-based
compensation
Balance at December 31,
2014
Net income
Total other
comprehensive loss
Stock-based
compensation
Warrant exercise
Net income
Total other
comprehensive loss
Preferred stock
redemption
Dividends on preferred
stock
Warrant exercise
Stock-based
compensation
Balance at December 31,
2016
Balance at December 31,
2015
266,657 $
267 56,483,258 $
— $
— 56,824,802 $
1 $
1,503 $
(7) $
(161) $
1,336
The accompanying notes are an integral part of these Consolidated Financial Statements.
72
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In millions)
For the Years Ended December 31,
2016
2015
2014
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
$
171
$
158
$
Depreciation and amortization
Representation and warranty provision (benefit)
Provision (benefit) for loan losses
Changes in valuation allowance on deferred tax assets
Net gain on loan and asset sales
Proceeds from sales of HFS
Origination, premium paid and purchase of loans, net of principal repayments
Change in fair value and other non-cash changes
Net change in:
Accrued interest receivable
Deferred income taxes
Other assets, excludes purchase of other investments
Other liabilities
Net cash used in operating activities
Investing Activities
Proceeds from sale of AFS securities including loans that have been securitized
Collection of principal on investment securities AFS
Purchase of investment securities AFS and other
Collection of principal on investment securities HTM
Purchase of investment securities HTM
Proceeds received from the sale of LHFI
Origination and purchase of LHFI, net of principal repayments
Purchase of bank owned life insurance
Proceeds from the disposition of repossessed assets
Net (purchase) redemption of FHLB stock
Acquisition of premises and equipment, net of proceeds
Proceeds from the sale of MSRs
Net cash provided by investing activities
Financing Activities
Net increase in deposit accounts
Net change in short term FHLB borrowings and other short term debt
Proceeds from increases in long term FHLB Advances
Repayment of long term FHLB advances
Repayment of trust preferred securities and long-term debt
Net (disbursement) receipt of payments of loans serviced for others
Preferred stock dividends
Redemption of preferred stock
Net (disbursement) receipt of escrow payments
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Supplemental disclosure of cash flow information
Interest paid on deposits and other borrowings
Income tax payments (refund)
Non-cash reclassification of investment securities AFS to HTM
Non-cash reclassification of loans originated HFI to LHFS
Non-cash reclassification of mortgage loans originated HFS to HFI
Non-cash reclassification of mortgage LHFS to AFS securities
Non-cash reclassification of loans with government guarantees to other assets
MSRs resulting from sale or securitization of loans
$
$
$
$
$
$
$
$
$
$
$
$
$
$
32
(19)
(8)
2
(314)
16,168
(32,295)
(168)
(1)
76
(59)
55
(16,360) $
24
(19)
(19)
11
(288)
18,467
(28,008)
(132)
(8)
67
211
(11)
(9,547) $
17,422
$
9,098
$
187
(680)
190
(15)
229
(1,073)
(85)
19
(10)
(52)
69
16,201
866
(336)
445
(425)
—
(64)
(105)
(267)
(5)
$
$
218
(1,148)
85
(217)
946
(3,130)
(175)
24
(15)
(46)
245
5,885
866
1,902
1,500
(375)
(88)
(76)
—
—
5
$
$
109
$
3,734
$
(50)
208
158
112
$
$
1,331
2
17,130
7
$
— $
$
$
$
— $
$
228
72
136
208
58
6
1,112
1,140
30
8,853
373
260
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
73
(69)
24
10
132
8
(218)
17,189
(24,899)
(280)
33
(36)
(33)
(6)
(8,145)
9,191
160
(1,278)
—
—
73
(923)
—
39
54
(33)
226
7,509
928
(774)
300
—
(29)
70
—
—
(4)
491
(145)
281
136
32
(1)
—
426
19
8,800
—
271
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 1 — Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies
Description of Business
Flagstar Bancorp, Inc., is a Michigan-based savings and loan holding company founded in 1993. The Company's
business is primarily conducted through its principal subsidiary, Flagstar Bank, FSB (the "Bank"), a Michigan-based federally
chartered stock savings bank founded in 1987. We are one of the largest banks headquartered in Michigan. When we refer to
"Flagstar", "the Company", "we", "our", or "us," we mean Flagstar Bancorp, Inc. and our consolidated subsidiaries.
The Company is subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve
("Federal Reserve"). The Bank is subject to regulation, examination and supervision by the OCC of the U.S. Department of the
Treasury, the CFPB and the FDIC. The Bank is a member of the FHLB of Indianapolis and its deposits are insured by the FDIC
through the Deposit Insurance Fund.
Consolidation and Basis of Presentation
The accounting and financial reporting policies of us and our subsidiaries conform to accounting principles generally
accepted in the United States. Additionally, where applicable the policies conform to the accounting and reporting guidelines
prescribed by regulatory authorities. Certain prior period amounts have been reclassified to conform to the current period
presentation. The preparation of the Consolidated Financial Statements, requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities, revenues and expenses and disclosures of contingent assets
and liabilities. Actual results could be materially different from these estimates.
Subsequent Events
We have evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form
10-K.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from correspondent banks and the FRB, and Short-term
investments that have a maturity at the date of acquisition of three months or less and are readily convertible to cash.
Investment Securities
We measure securities classified as AFS at fair value, with unrealized gains and losses, net of tax, included in "other
comprehensive income (loss)" in stockholders’ equity. We recognize realized gains and losses on AFS securities when securities
are sold. The cost of securities sold is based on the specific identification method. Any gains or losses realized upon the sale of
a security are reported in "other noninterest income" in the Consolidated Statements of Operations. The fair value of investment
securities is based on observable market prices, when available. If observable market prices are not available, our valuations are
based on alternative methods, including: quotes for similar fixed-income securities, matrix pricing, discounted cash flow using
benchmark interest rate curves or other factors. The fair values, obtained through an independent third party utilizing a pricing
service, are compared to independent pricing sources on a quarterly basis. For further information, see Note 2 - Investment
Securities and Note 22 - Fair Value Measurements.
Investment securities HTM are carried at amortized cost and adjusted for amortization of premiums and accretion of
discounts using the interest method. Transfers of investment securities into the HTM category from the AFS category are
accounted for at fair value at the date of transfer. Any related unrealized holding gain (loss), net of tax, that was included in the
transfer is retained in other comprehensive income (loss) and is amortized as an adjustment to interest income over the
remaining life of the securities.
We evaluate AFS and HTM investment securities for other than temporary impairment 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) does
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
74
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
recognized in other comprehensive income (loss). For the years ended December 31, 2014 through December 31, 2016, we did
not recognize any OTTI losses.
Investment securities transactions are recorded on the trade date for purchases and sales. Interest earned on investment
securities, including the amortization of premiums and the accretion of discounts are determined using the effective interest
method over the period of maturity, recorded in interest income in the Consolidated Statements of Operations. For further
information, see Note 2 - Investment Securities.
Loans Held-for-Sale
We classify loans as HFS when we originate or purchase loans that we intend to sell. We have elected the fair value
option for the majority of our LHFS. We estimate the fair value of mortgage loans based on quoted market prices for securities
backed by similar types of loans, where available, or by discounting estimated cash flows using observable inputs inclusive of
interest rates, prepayment speeds and loss assumptions for similar collateral. LHFS that are recorded at lower of cost or fair
value may be carried at fair value on a nonrecurring basis when the fair value is less than cost. For further information, see Note
22 - Fair Value Measurements.
Loans that are transferred into the HFS portfolio from the HFI portfolio, due to a change in intent, are recorded at the
lower of cost or fair value. Gains or losses recognized upon the sale of loans are determined using the specific identification
method.
Loans Held-for-Investment
We classify loans that we have the intent and ability to hold for the foreseeable future or until maturity as HFI. Loans
held-for-investment are reported at their amortized cost, which includes the outstanding principal balance adjusted for any
unamortized premiums, discounts, deferred fees and costs. Premiums and discounts on purchased loans and non-refundable
loan origination and commitment fees, net of direct costs of originating or acquiring loans, are deferred and recognized over the
estimated lives of the related loans as an adjustment to the loans’ effective yield, which is included in interest income on loans
in the Consolidated Statements of Operations.
Loans originally classified as HFS, for which we have elected the fair value option, and subsequently transferred to
HFI continue to be measured and reported at fair value on a recurring basis. Changes in fair value are recorded to "other
noninterest income" on the Consolidated Statements of Operations. The fair value of these loans is determined using the same
methods described above for LHFS. For additional information relating to recurring fair value disclosures, see Note 22 - Fair
Value Measurements.
When loans originally classified as HFS or as HFI are reclassified due to a change in intent or ability to hold, cash
flows associated with the loans will be classified in the Consolidated Statements of Cash Flows as operating or investing, as
appropriate, in accordance with the initial classification of the loans.
Past Due and Impaired Loans
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 once they become 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 may only return to accrual status when
principal and interest become current and are anticipated to be fully collectible.
Loans are considered impaired if it is probable that payment of interest and principal will not be made in accordance
with the original contractual terms of the loan agreement or when any portion of principal or interest is 90 days past due. This
classification includes both performing and nonperforming modified loans. For further information, see Note 22 - Fair Value
Measurements.
75
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
When a loan is considered impaired, the accrual of interest income is discontinued until the receipt of principal and
interest is no longer in doubt. Interest income is recognized on impaired loans using a cost recovery method unless amounts
contractually due are not in doubt. Cash received on impaired loans are applied entirely against principal until the loan has been
collected in full, after which time any additional cash receipts are recognized as interest income.
Loan Modifications (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. We have programs designed to assist borrowers by extending payment dates or
reducing the borrower's contractual payments. All loan modifications are made on a case-by-case basis. Our standards relating
to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral
valuations. TDRs result in those instances in which a borrower demonstrates financial difficulty and for which a concession has
been granted, which includes reductions of interest rate, extensions of amortization period, principal and/or interest forgiveness
and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. These loans are
classified as nonperforming TDRs if the loan was nonperforming prior to the restructuring, or based upon the results of a
contemporaneous credit evaluation. Such loans will continue on nonaccrual status until the borrower has established a
willingness and ability to make the restructured payments for at least six months, after which they will be classified as
performing TDRs and begin to accrue interest. 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.
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.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of probable losses in our LHFI portfolio, excluding
loans carried under the fair value option. We establish an allowance when (a) available information indicates that it is probable
that a loss has occurred and (b) the amount of the loss can be reasonably estimated. The allowance provides for probable losses
that have been identified with specific customer relationships (individually evaluated) and for probable losses believed to be
inherent in the loan portfolio but that have not been specifically identified (collectively evaluated). Management assigns
qualitative factors to each loan portfolio segment based on consideration of the following factors: changes in lending policies
and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in
lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes in the value
of underlying collateral for collateral-dependent loans, changes in concentrations of credit, and other internal or external factor
changes.
A specific allowance is established on impaired loans when it is probable all amounts due will not be collected
pursuant to the original contractual terms of the loan and the recorded investment in the loan exceeds its fair value. The required
allowance is measured using either the present value of the expected future cash flows discounted at the loan's effective interest
rate or the fair value of the collateral less estimated disposal costs if the loan is collateral dependent.
A general allowance is established for losses inherent on non-impaired loans by segmenting the portfolio based upon
common risk characteristics. The general loss is then determined by using a historical loss model which utilizes our loss history
by specific product, or if the product is not sufficiently seasoned, per readily available industry peer loss data. The loss model
utilizes a loss emergence period that represents the average amount of time between when the loss event first occurs and when
the specific loan is charged-off. In addition to the loss history or peer data, we also include a qualitative adjustment that
considers economic risks, industry and geographic concentrations and other factors not adequately captured in our
methodology.
Consumer loans secured by real estate are charged-off to the estimated fair value of the collateral when a loss is
confirmed or at 180 days past due, whichever is sooner. Loss confirming events include, but are not limited to, bankruptcy
(unsecured), continued delinquency, foreclosure or receipt of an asset valuation indicating a collateral deficiency and the asset
is the sole source of repayment. For consumer loans not secured by real estate, the charge-off is taken upon confirmation or 120
days past due.
Commercial loans are evaluated on a loan level basis and either charged-off or written down to net realizable value if a
loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of
repayment.
Transfers of Financial Assets
Our recognition of gain or loss on the sale of loans for which we surrender control is accounted for as a sale to the
extent that 1) the transferred assets are legally isolated from the us or our consolidated affiliates, even in bankruptcy or other
receivership, 2) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and
provide more than a trivial benefit to the Company, and 3) we do not maintain the obligation or unilateral ability to reclaim or
repurchase the assets. If the sale criteria are met, the transferred financial assets are removed from the Consolidated Statements
of Financial Condition and a gain or loss on sale is recognized.
Variable Interest Entities
An entity that has a controlling financial interest in a variable interest entity ("VIE") is referred to as the primary
beneficiary and consolidates the VIE. The Corporation is deemed to have a controlling financial interest and is the primary
beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s
economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to
the VIE. For further information, see Note 7 - Variable Interest Entities.
Repossessed Assets
Repossessed assets include one-to-four family residential property, commercial property and one-to-four family homes
under construction that were acquired through foreclosure or acceptance of a deed-in-lieu of foreclosure. Repossessed assets are
initially recorded in other assets at the estimated fair value of the collateral less estimated costs to sell. Losses arising from the
initial acquisition of such properties are charged against the ALLL at the time of transfer. Subsequent declines in value, as well
as gains and losses on disposal of these properties, are charged to "asset resolution" within noninterest expense in the
Consolidated Statements of Operations as incurred. For Further information, see Note 22 - Fair Value Measurements.
Loans with Government Guarantees
We originate government guaranteed loans which are pooled and sold as Ginnie Mae MBS. Pursuant to Ginnie Mae
servicing guidelines, we have the unilateral right to repurchase loans 90 days or more past due securitized in Ginnie Mae pools.
As a result, once the delinquency criteria have been met, and regardless of whether the repurchase option has been exercised,
we account for the loans as if they had been repurchased. We recognize the loans and corresponding liability as loans with
government guarantees and other liabilities, respectively, in the Consolidated Statements of Financial Condition. If the loan is
repurchased, the liability is cash settled and the loan with government guarantee remains. Once repurchased, we may collect
losses through a claims process with the government agency, as an approved lender.
Federal Home Loan Bank Stock
We own stock in the FHLB of Indianapolis as required to permit us to obtain membership in and to borrow from the
FHLB. No market quotes exist for the stock. The stock is redeemable at par and is carried at cost.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Land is carried at historical cost.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets which generally ranges from three
to thirty years. Capitalized software is amortized on a straight-line basis over its useful life, which generally ranges from three
to seven years. Software expenditures, repair and maintenance costs that are considered general, administrative, or of a
maintenance nature are expensed as incurred.
Mortgage Servicing Rights
We purchase and originate mortgage loans for sale to the secondary market and sell the loans on either a servicing-
retained or servicing-released basis. If we retain the right to service the loan, an MSR is created at the time of sale which is
recorded at fair value. We use an internal valuation model that utilizes an option-adjusted spread and other assumptions to
determine the fair value of MSRs. The key assumptions used in the valuation of MSRs include mortgage prepayment speeds
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
and discount rates. Management obtains third-party valuations of the MSR portfolio on a quarterly basis from independent
valuation services to assess the reasonableness of the fair value calculated by our internal valuation model. Changes in fair
value of our MSRs are reported on the Consolidated Statements of Operations in "net return on mortgage servicing." For
Further information, see Note 22 - Fair Value Measurements.
We periodically enter into agreements to sell certain of our MSRs, which qualify as sales transactions. A transfer of
servicing rights related to loans previously sold qualifies as a sale at the date on which title passes, if substantially all risks and
rewards of ownership have irrevocably passed to the transferee and any protection provisions retained by the transferor are
minor and can be reasonably estimated. In addition, if a sale is recognized and only minor protection provisions exist, a liability
is accrued for the estimated obligation associated with those provisions.
Servicing Fee Income
Servicing fee income, late fees and ancillary fees received on loans for which we own the MSR, are included in the net
return on MSR line of the Consolidated Statements of Operations. The fees are based on a contractual percentage of the
outstanding principal and are recorded as income when earned. Subservicing fees, which are included in loan administration
income on the Consolidated Statements of Operations are based on a contractual monthly amount per loan including late fees
and other ancillary income.
Derivatives
We utilize derivative instruments to manage the fair value changes in our MSR asset, interest rate lock commitments
and loans held for sale portfolio which are exposed to price and interest rate risk, facilitate asset/liability management,
minimize the variability of future cash flows on long-term debt, and to meet the needs of our customers. All derivatives are
recognized on the Consolidated Statements of Financial Condition as other assets and liabilities, as applicable, at their estimated
fair value. For those derivatives designated as qualified cash flow hedges, changes in the fair value of the derivatives, to the
extent effective as a hedge, are recorded in accumulated other comprehensive income, net of income taxes, and reclassified into
earnings concurrently with the earnings of the hedged item. For derivative instruments designated as qualified fair value
hedges, which are used to hedge the exposure of fair value changes of an asset or liability attributable to a particular risk, the
gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk,
are recognized in current earnings during the period of the change in fair values. For all other derivatives, changes in the fair
value of the derivative are recognized immediately in earnings. A majority of these derivatives are subject to master netting
agreements and cleared through a Central Counterparty Clearing House, which mitigates non-performance risk with
counterparties and enables us to settle activity on a net basis.
We use interest rate swaps, swaptions, futures, and forward loan sale commitments to mitigate the impact of
fluctuations in interest rates and interest rate volatility on the fair value of the MSRs. These derivatives are not designated as
qualifying hedges. Accordingly, changes in their fair value are reflected in current period earnings under the "net return on
MSRs." Interest rate swaps, swaptions, futures, and forward loan sale commitments are valued based on quoted prices for
similar assets in an active market with inputs that are observable.
We also enter into various derivative agreements with customers and correspondents in the form of interest-rate lock
commitments and forward purchase contracts which are commitments to originate or purchase mortgage loans whereby the
interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The derivatives are
valued using internal models that utilize market interest rates and other unobservable inputs. Changes in the fair value of these
commitments due to fluctuations in interest rates that are to be originated to our HFS portfolio are economically hedged through
the use of forward loan sale commitments of MBS. The gains and losses arising from this derivative activity are reflected in
current period earnings under the "net gain on loan sales." Interest rate lock commitments are valued using internal models with
significant unobservable market parameters. Forward loan sale commitments are valued based on quoted prices for similar
assets in an active market with inputs that are observable.
At certain times we may also enter into various derivative agreements with correspondents in the form of forward
purchase contracts at the time the correspondent customer enters into an interest-rate lock commitment. The derivatives are
valued using internal models that utilize market interest rates and other unobservable inputs.
We utilize interest rate swaps to hedge the forecasted cash flows from our underlying variable-rate FHLB advances
and forecasted FHLB advances in qualifying cash flow hedge accounting relationships. Changes in the fair value of derivatives
designated as cash flow hedges are recorded in other comprehensive income on the Consolidated Statement of Financial
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Condition and reclassified into interest expense concurrently with the interest expense on the debt. Interest rate swaps are
valued based on quoted prices for similar assets in an active market with inputs that are observable. These hedges are evaluated
for effectiveness using regression analysis at the time they are designated and throughout the hedge period. For forecasted
FHLB advances being hedged, each reporting period we evaluate the likelihood of the transaction occurring based on the
current facts and circumstances to ensure the hedge relationship still qualifies for hedge accounting. If we de-designate a hedge
relationship or determine that an interest rate swap no longer qualifies for hedge accounting changes in fair value are no longer
recorded in other comprehensive income. If the hedged item remains probable to occur, the effective amounts previously
recorded in other comprehensive income are recognized in earnings over the remaining life of the hedged item as an adjustment
to yield.
We also utilize interest rate swaps to manage fair value changes of our fixed-rate FHLB advances in a qualifying fair
value hedge accounting relationship. Changes in the fair value of derivatives designated as fair value hedges, as well as the
change in fair value of the hedged item, are recognized in current period earnings. The corresponding adjustment is recorded as
a basis adjustment to the hedged item and hedging instrument. Interest rate swaps are valued based on quoted prices for similar
assets in an active market with inputs that are observable. These hedges are evaluated for effectiveness using regression
analysis at the time they are designated and throughout the hedge period. If the Company determines an interest rate swap no
longer qualifies for fair value hedge accounting or is de-designated, the hedged item will no longer be adjusted for changes in
fair value and the amounts previously recorded as a basis adjustment are recognized in earnings over the remaining life of the
hedged item as an adjustment to yield.
If a previously hedged item is extinguished or sold, the remaining unamortized balance in other comprehensive income
balance for prior cash flow hedges and the remaining basis adjustment of the hedged item for prior fair value hedges will be
reclassified to current period earnings.
To assist our customers in meeting their needs to manage interest rate risk, we enter into interest rate swap derivative
contracts. To economically hedge this risk, we enter into offsetting derivative contracts to effectively eliminate the interest rate
risk associated with these contracts.
For further information regarding the accounting for derivatives see, Note 11 - Derivative Financial Instruments and
additional recurring fair value disclosures in Note 22 - Fair Value Measurements.
Bank Owned Life Insurance
Our bank owned life insurance policies are recorded at their cash surrender value in Other assets on the Consolidated
Statements of Financial Condition. We recognize tax-exempt income from the periodic increases in the cash surrender value of
these policies and from death benefits in other noninterest income on the Consolidated Statements of Operations. The total cash
surrender value of our bank owned life insurance policies totaled $271 million and $178 million at December 31, 2016 and
2015, respectively.
Income Taxes
We evaluate two components of income tax expense: current and deferred. Current income tax expense represents our
estimated taxes to be paid or refunded for the current period. Deferred taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized as income or expense in the period that includes the enactment date. We evaluate our
deferred tax assets to determine if, based on all available evidence, it is more likely than not that they will be realized. If it is
determined that it is more likely than not that the deferred taxes will not be realized, we establish a valuation allowance. For
further information, see Note 19 - Income Taxes.
Representation and Warranty Reserve
When we sell mortgage loans into the secondary mortgage market, we make customary representations and warranties
to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent of
underwriting standards applied and the types of documentation being provided. For eligible loans sold to the Agencies after
December 31, 2014, certain of these representations and warranties expire after 36 months. Typically, all other representations
and warranties are in place for the life of the loan. If a defect in the origination process is identified, we may be required to
79
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
either repurchase the loan, pay a fee or indemnify the purchaser for losses it sustains on the loan. If there are no such defects,
the Company has no liability to the purchaser for losses it may incur on such loan. Upon the sale of a loan, the Company
recognizes a liability for that guarantee at its fair value as a reduction of our net gain on loan sales. Subsequent to the sale, the
liability is re-measured on an ongoing basis based on an estimate of probable future losses. In each case, these estimates are
based on our most recent data including loss severity on repurchased and indemnified loans, repurchase requests and other
factors. Changes to our previous estimates are recorded in the representation and warranty (provision) benefit in the
Consolidated Statements of Operations.
Advertising Costs
Advertising costs are expensed in the period they are incurred and are included as part of other noninterest expense in
the Consolidated Statements of Operations. Advertising expenses totaled $11 million, $9 million, and $10 million for the years
ended December 31, 2016, 2015 and 2014, respectively.
Stock-Based Compensation
All share-based payments to employees, including grants of employee stock options and restricted stock units, are
classified as equity with expenses being recognized in compensation and benefits in the Consolidated Statements of Operations
based on their fair values. The amount of compensation is measured at the grant date and is expensed over the requisite service
period, which is normally the vesting period. For further information, see Note 18 - Stock-Based Compensation.
Department of Justice Litigation Settlement
The executed settlement agreement with the DOJ representing the obligation to make future additional payments
establishes a legally enforceable contract with a stipulated payment plan that meets the definition of a financial liability. We
have elected the fair value option to account for this financial liability included in "other liabilities" on the Consolidated
Financial Statements. For further information on the valuation of the DOJ litigation settlement, see Note 22 - Fair Value
Measurements.
Recently Issued Accounting Pronouncements
Business Combinations - In January 2017, the FASB issued ASU 2017-1, Business Combinations (Topic 805):
Clarifying the Definition of a Business. Under the current implementation guidance in Topic 805, there are three elements of a
business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a "set") that
is a business usually has outputs, outputs are not required to be present. This amendment provides a screen to determine when a
set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed
of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen
reduces the number of transactions that need to be further evaluated. ASU 2017-1 is effective for fiscal years beginning after
December 15, 2017. We are currently evaluating this guidance.
Statement of Cash Flows - Restricted Cash - In November 2016, the FASB issued ASU 2016-18, Statement of Cash
Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). ASU 2016-18 requires that a
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and
restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The amendment does not provide a definition of restricted
cash or restricted cash equivalents. The amendments in this update apply to all entities that have restricted cash or restricted
cash equivalents and are required to present a statement of cash flows under Topic 230. ASU 2016-18 is effective for fiscal
years beginning after December 15, 2017. We are currently evaluating this guidance.
Consolidation - In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests held through
related parties that are under Common Control. ASU 2016-17 amends the consolidation guidance on how a reporting entity that
is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under
common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments
in this update are effective for fiscal years beginning after December 15, 2016.
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Income Taxes - In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of
Assets Other Than Inventory. ASU 2016-16 improves the accounting for the income tax consequences of intra-entity transfers
of assets other than inventory. The amendments in this update are effective for annual reporting periods beginning after
December 15, 2017. We are currently evaluating this guidance and the impact it will have on our Consolidated Financial
Statements.
Statement of Cash Flows - In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230),
Classification of Certain Cash Receipts and Cash Payments. This amendment addresses eight issues which current GAAP does
not include specific guidance or is unclear, pertaining to: Debt Prepayment or Debt Extinguishment Costs, Settlement of Zero-
Coupon Debt Instruments, Contingent Consideration Payments Made after a Business Combination, Proceeds from the
Settlement of Insurance Claims, Proceeds from the Settlement of Corporate-Owned or Bank-Owned Life Insurance Policies,
Distributions Received from Equity Method Investees, Beneficial Interest in Securitization Transactions, and Separately
Identifiable Cash Flows and Application of the Predominance Principle. ASU 2016-16 is effective for fiscal years beginning
after December 15, 2017 and early adoption is permitted. We are currently evaluating this guidance and the impact it will have
on our Consolidated Financial Statements.
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, an institution uses the
incurred loss method, 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. We have established an
internal steering committee to lead the implementation efforts. The steering committee is in the process of evaluating control
and process framework, data, model, and resource requirements and areas where modifications will be required. We are
currently evaluating the impact adoption of the guidance will have on our Consolidated Financial Statements, but highlight that
any impact will be contingent upon the underlying characteristics of the affected portfolio and macroeconomic and internal
forecasts at adoption date.
Stock Compensation - In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 affect all entities that
issue share-based payment awards to their employees. The areas for simplification in ASU 2016-09 involve several aspects of
the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective retrospectively for fiscal years
beginning after December 15, 2016 and early adoption is permitted. This Update was adopted in the current reporting period
with no significant impact recognized on our Consolidated Financial Statements.
Derivatives and Hedging - In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815) -
Contingent Put and Call Options in Debt Instruments. The amendments in ASU 2016-06 clarify the requirements for assessing
whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely
related to their debt hosts. An entity performing the assessment under the amendments in ASU 2016-06 is required to assess the
embedded call (put) options solely in accordance with the four-step decision sequence. ASU 2016-06 is effective
retrospectively for fiscal years beginning after December 15, 2016 and early adoption is permitted. This guidance is not
expected to have a material impact upon adoption on our Consolidated Financial Statements, but disclosures to the Notes
thereto will be updated per the requirements.
Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Section A - Leases: Amendments to
the FASB Accounting Standards Codification, Section B - Conforming Amendments Related to Leases: Amendment to the
FASB Accounting Standards Codification, Section C - Background Information and Basis For Conclusions. Lessees will need
to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes,
the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on
criteria that are largely similar to those applied in current lease accounting. ASU 2016-02 is effective retrospectively for fiscal
years beginning after December 15, 2018 and early adoption is permitted. The guidance in ASU 2016-02 supersedes Topic 840,
Leases. Upon adoption and implementation, we expect to gross up assets and liabilities due to the recognition of lease liabilities
and right of use assets associated with the underlying lease contracts. While we do not expect the adoption of the guidance to
have a material impact on our Consolidated Statements of Operations given our current inventory of leases, review is ongoing
and we will continue to evaluate the impact to the Consolidated Statements of Financial Condition and to capital.
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Financial Instruments -In January 2016, the FASB issued Update 2016-01, Financial Instruments - Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new standard significantly revises an
entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of
certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements
associated with the fair value of financial instruments. ASU 2016-01 is effective retrospectively for fiscal years beginning after
December 15, 2017 and early adoption is permitted. We are currently evaluating this guidance and does not expect this
guidance to have a material impact on the Company’s Consolidated Financial Statements, if any.
Revenue from Contracts with Customers - In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts
with Customers (Topic 606)." Under the amended guidance, an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration in exchange for those goods or services.
The FASB has voted to approve a year deferral of the effective date from January 1, 2017 to January 1, 2018. In April 2016, the
FASB clarified the following two aspects: identifying performance obligations and the licensing implementation guidance,
while retaining the related principles for those areas. In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts
with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, to provide a limited number of changes to
its revenue recognition standard. The amendments clarify the assessment of the likelihood that revenue will be collected from a
contract, the guidance for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not
in cash. The amendment also specifies that a contract should be considered complete if all, or substantially all, of its revenue
has been collected prior to making the transition to the new standard. In addition, the update clarifies the disclosure
requirements for transition to the new standard by adjusting amounts from prior reporting periods. In December 2016, the
FASB issued ASU 2016-20 Technical Corrections and Improvement to Topic 606, Revenue from Contracts with Customers. We
expect to implement the revenue recognition guidance in the first quarter of 2018 utilizing the cumulative-effect approach. Our
implementation of the guidance will include creation of an inventory of revenue contracts and assessing whether the recognition
of revenue associated with each contract will be impacted by the new guidance, particularly related to certain fees. Lease
contracts and financial instruments, which includes loans and securities, are excluded from the scope of this standard.
Therefore, we do not anticipate the implementation of the revenue recognition guidance to have a material impact on our
Consolidated Statements of Financial Condition.
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 2 — Investment Securities
As of December 31, 2016 and 2015, investment securities were comprised of the following:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in millions)
Fair Value
December 31, 2016
Available-for-sale securities
Agency - Commercial
Agency - Residential
Municipal obligations
Total available-for-sale securities (1)
Held-to-maturity securities
Agency - Commercial
Agency - Residential
Total held-to-maturity securities (1)
December 31, 2015
Available-for-sale securities
Agency - Commercial
Agency - Residential
Municipal obligations
Total available-for-sale securities (1)
Held-to-maturity securities
Agency - Commercial
Agency - Residential
Total held-to-maturity securities (1)
$
$
$
$
$
$
$
$
551
913
34
1,498
595
498
1,093
766
514
14
1,294
634
634
1,268
$
$
$
$
$
$
$
$
2
1
—
3
$
$
— $
1
1
3
2
—
5
$
$
$
— $
—
— $
(5) $
(16)
—
(21) $
(6) $
(4)
(10) $
(3) $
(2)
—
(5) $
(2) $
(4)
(6) $
548
898
34
1,480
589
495
1,084
766
514
14
1,294
632
630
1,262
(1) There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10 percent of stockholders’ equity
at December 31, 2016 or December 31, 2015.
Management evaluates our securities portfolio each quarter to determine if any security is considered to be other than
temporarily impaired. In making this evaluation, management considers our ability and intent to hold securities to recover
current market losses. During the years ended December 31, 2016, 2015 and 2014, we had no OTTI.
Available-for-sale securities
Securities available-for-sale are carried at fair value, with unrealized gains and losses, to the extent they are temporary
in nature, reported as a component of other comprehensive income.
We purchased $680 million of AFS securities, which included U.S. government sponsored agency MBS and municipal
obligations during the year ended December 31, 2016. During the year ended December 31, 2015, we purchased $1.1 billion of
investment securities, all of which were U.S. government sponsored agencies, comprised of MBS and collateralized mortgage
obligations and $14 million of municipal obligations, compared to $1.2 billion of investment securities, all of which were U.S.
government sponsored agencies, comprised of MBS and collateralized mortgage obligations during the year ended
December 31, 2014.
Gains (losses) on the sales of AFS securities are reported in other noninterest income in the Consolidated Statements
of Operations. During the year ended December 31, 2016, there were $291 million in sales of U.S. government sponsored
agency securities, which resulted in a gain of $4 million. During the year ended December 31, 2015, we sold $170 million of
U.S. government sponsored agency securities, which resulted in a gain of $3 million, compared to $414 million of U.S.
government sponsored agencies, which resulted in a gain of $4 million during the year ended December 31, 2014.
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Held-to-maturity securities
Transfers of investment securities into the HTM category from the AFS category are accounted for at fair value at the
date of transfer. During the year ended December 31, 2015, we transferred $1.1 billion of AFS securities to HTM securities
including a premium of $8 million, reflecting our intent and ability to hold those securities to maturity. The related $5 million of
unrealized holding gain, net of tax, that was included in the transfer is retained in other comprehensive income (loss) and is
being amortized as an adjustment to interest income over the remaining life of the securities. There were no gains or losses
recognized as a result of this transfer.
We purchased $15 million of HTM securities, which included U.S. government sponsored agency MBS during the
year ended December 31, 2016. We purchased $217 million of HTM securities, which included agency-collateralized mortgage
obligations during the year ended December 31, 2015. There were no purchases of HTM securities during the year ended
December 31, 2014. We had no sales of HTM securities during the years ending December 31, 2016, 2015 and 2014,
respectively.
The following table summarizes, by duration, the unrealized loss positions on investment securities:
Unrealized Loss Position with Duration
12 Months and Over
Number of
Securities
Fair
Value
Unrealized Loss Position with Duration
Under 12 Months
Number of
Securities
Unrealized
Loss
Fair
Unrealized
Loss
Value
(Dollars in millions)
December 31, 2016
Available-for-sale securities
Agency - Commercial
Agency - Residential
Municipal obligations
Held-to-maturity securities
Agency - Commercial
Agency - Residential
December 31, 2015
Available-for-sale securities
Agency - Commercial
Agency - Residential
Held-to-maturity securities
Agency - Commercial
Agency - Residential
$
$
$
$
6
—
—
—
—
—
8
—
—
1
$
— $
—
—
— $
—
— $
2
— $
—
—
—
— $
—
— $
—
— $
—
345
748
17
528
385
482
224
471
547
$
$
$
$
29
55
8
34
43
27
15
27
50
(5)
(16)
—
(6)
(4)
(3)
(2)
(2)
(4)
The amortized cost and estimated fair value of securities at December 31, 2016, are presented below by contractual
maturity:
Investment Securities
Available-for-Sale
Investment Securities
Held-to-Maturity
Amortized
Cost
Estimated Fair
Value
Weighted-
Average
Yield
Amortized
Cost
Estimated Fair
Value
Weighted-
Average
Yield
(Dollars in millions)
(Dollars in millions)
December 31, 2016
Due after one year through five
years
Due after five years through 10 years
Due after 10 years
Total
$
$
16 $
6
1,476
1,498 $
3.79% $
2.66%
2.29%
$
— $
61
1,032
1,093 $
—
61
1,023
1,084
—%
2.50%
2.39%
16
5
1,459
1,480
84
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
We pledge investment securities, primarily municipal taxable and agency collateralized mortgage obligations, to
collateralize lines of credit and/or borrowings. We had pledged investment securities of $879 million, $14 million, and less than
$1 million at December 31, 2016, 2015 and 2014, respectively.
Note 3 — Loans Held-for-Sale
The majority of our mortgage loans originated as LHFS are sold into the secondary market on a whole loan basis or by
converting the loans to securities or securitizing the loans. At December 31, 2016 and 2015, LHFS totaled $3.2 billion and $2.6
billion, respectively. For the years ended December 31, 2016, 2015 and 2014, we reported net gain on loan sales associated with
LHFS of $301 million, $288 million, and $206 million, respectively.
At December 31, 2016 and 2015, $32 million and $35 million, respectively, of LHFS were recorded at lower of cost or
fair value. The remainder of the loans in the portfolio are recorded at fair value as we have elected the fair value option for such
loans.
Note 4 — Loans Held-for-Investment
Loans held-for-investment are summarized as follows:
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate (1)
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans held-for-investment
December 31, 2016
December 31, 2015
(Dollars in millions)
$
2,327
$
126
317
28
2,798
1,261
769
1,237
3,267
6,065
3,100
135
384
31
3,650
814
552
1,336
2,702
6,352
(1)
Includes $245 million and $188 million of owner occupied commercial real estate loans at December 31, 2016 and December 31,
2015, respectively.
During the year ended December 31, 2016, we sold nonperforming, TDR and non-agency loans with unpaid principal
balances totaling $110 million. Upon a change in our intent, the loans were transferred to HFS and subsequently sold resulting
in a loss on sale of $2 million during the year ended December 31, 2016, which is recorded in net loss on sale of assets on the
Consolidated Statements of Operations. A portion of the general ALLL associated with these loans was reduced, resulting in a
$13 million reduction in allowance.
Also, during the year ended December 31, 2016, we sold performing residential first mortgage loans with unpaid
principal balances of $1.2 billion. Upon a change in our intent, the loans were transferred to HFS and subsequently sold
resulting in a gain of $14 million, which is recorded in net gain on loan sales on the Consolidated Statements of Operations.
During the year ended December 31, 2015, we sold or transferred interest-only residential first mortgage loans with
unpaid principal balances totaling $601 million and residential first mortgage jumbo loans with unpaid principal balances of $9
million. In addition, we sold past due (including nonperforming) and troubled debt restructured first residential mortgage loans
with unpaid principal balances of $427 million and $8 million of other residential first mortgage loans. Upon a change in our
intent, the loans were transferred to HFS and subsequently sold resulting in a gain on sale of $1 million, which is recorded in
net gain on sale of assets on the Consolidated Statements of Operations. A portion of the general ALLL associated with these
loans was reduced, resulting in a $69 million reduction in allowance.
During the year ended December 31, 2014, we sold nonperforming, troubled debt restructured residential first
mortgage and residential first mortgage jumbo loans with unpaid principal balances totaling $632 million and $20 million of
85
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
other residential first mortgage loans. A portion of the ALLL associated with these loans was reduced, resulting in a $9 million
reduction in allowance. Upon a change in our intent, the loans were transferred to HFS and subsequently sold resulting in a gain
on sale of $11 million, which is recorded in net gain on sale of assets on the Consolidated Statements of Operations.
During the year ended December 31, 2016, we purchased jumbo residential first mortgage loans with an unpaid
principal balance of $175 million and a premium of $1 million. During the year ended December 31, 2015, we purchased $197
million of HELOC loans with a premium of $7 million, none of which were credit impaired.
We have pledged certain LHFI, LHFS, and loans with government guarantees to collateralize lines of credit and/or
borrowings with the FRB of Chicago and the FHLB of Indianapolis. At December 31, 2016 and 2015, we had pledged $5.3
billion and $5.8 billion, respectively.
The ALLL by class of loan are summarized in the following tables:
Residential
First
Mortgage
(1)
Second
Mortgage
HELOC
Other
Consumer
Commercial
Real
Estate
Commercial
and
Industrial
Warehouse
Lending
Total
Year Ended December 31, 2016
(Dollars in millions)
Beginning balance ALLL
$
116
$
11
$
21
$
2
$
$
6
$
Charge-offs (2)
Recoveries
Provision (benefit) (3)
Ending balance ALLL
Year Ended December 31, 2015
Beginning balance ALLL
Charge-offs (2)
Recoveries
Provision (benefit)
Ending balance ALLL
Year Ended December 31, 2014
Beginning balance ALLL
Charge-offs
Recoveries
Provision (benefit)
Ending balance ALLL
$
$
$
$
$
$
18
—
1
9
13
—
—
4
17
—
2
(1)
(3)
—
5
(29)
2
(24)
(2)
—
(1)
(2)
—
(3)
(3)
3
(1)
65
$
8
$
16
$
1
$
28
$
17
$
234
$
12
$
19
$
1
$
$
11
$
3
$
(87)
3
(34)
(4)
2
1
(3)
—
5
116
$
11
$
21
$
(4)
3
2
2
$
18
$
13
$
162
$
12
$
8
$
2
$
19
$
3
$
1
$
(38)
3
107
234
(3)
1
2
$
12
$
(6)
—
17
19
(2)
3
(2)
(3)
3
(2)
—
—
8
$
1
$
17
$
11
$
—
—
2
3
$
—
—
1
7
$
—
—
3
6
$
187
(36)
6
(15)
142
297
(101)
10
(19)
187
207
(52)
10
132
297
(1)
(2)
Includes allowance and charge-offs related to loans with government guarantees.
Includes charge-offs of $8 million, $69 million and $15 million related to the transfer and subsequent sale of loans during the year ended
December 31, 2016, December 31, 2015, and December 31, 2014, respectively. Also includes charge-offs related to loans with government
guarantees of $14 million, $3 million, and zero during the year ended December 31, 2016, December 31, 2015, and December 31, 2014,
respectively.
(3) Does not include $7 million for provision expense for loan losses recorded in the Consolidated Statements of Operations to reserve for repossessed
loans with government guarantees at December 31, 2016. There was no provision for loan losses for repossessed loans with government guarantees
recorded at December 31, 2015, and December 31, 2014, respectively.
86
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Residential
First
Mortgage
(1)
Second
Mortgage
HELOC
Other
Consumer
Commercial
Real
Estate
Commercial
and
Industrial
Warehouse
Lending
Total
(Dollars in millions)
December 31, 2016
Loans held-for-investment
Individually evaluated
Collectively evaluated (2)
Total loans
Allowance for loan losses
Individually evaluated
Collectively evaluated (2)
Total allowance for loan losses
December 31, 2015
Loans held-for-investment
Individually evaluated
Collectively evaluated (2)
Total loans
Allowance for loan losses
Individually evaluated
Collectively evaluated (2)
Total allowance for loan losses
$
$
$
$
$
$
$
$
46
$
2,274
2,320
$
5
$
60
65
$
87
$
3,007
3,094
$
12
$
104
116
$
$
$
$
$
$
$
26
59
85
6
2
8
28
65
93
6
5
3
$
— $
— $
— $
— $
75
290
293
$
28
28
1,261
$
1,261
$
769
769
1,237
5,918
$
1,237
$
5,993
2
$
— $
— $
— $
— $
14
16
$
1
1
$
28
28
$
17
17
$
7
7
$
13
129
142
3
$
— $
— $
2
$
— $
120
318
321
$
1
$
20
21
$
31
31
1
1
2
$
$
$
814
814
$
550
552
1,336
6,121
$
1,336
$
6,241
— $
— $
— $
18
18
$
13
13
$
6
6
$
20
167
187
$
11
$
Includes allowance related to loans with government guarantees.
(1)
(2) Excludes loans carried under the fair value option.
87
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table sets forth the LHFI aging analysis as of December 31, 2016 and December 31, 2015, 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
Investment
Loans
(Dollars in millions)
December 31, 2016
Consumer loans
Residential first mortgage
$
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans (2)
December 31, 2015
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans (2)
$
$
$
6
—
1
1
8
—
—
—
—
8
7
—
2
1
10
—
—
—
—
10
$
— $
29
$
35
$
2,292
$
2,327
1
1
—
2
—
—
—
—
2
3
—
1
—
4
—
—
—
—
4
$
$
$
4
7
—
40
—
—
—
—
40
$
53
$
2
9
—
64
—
2
—
2
66
$
5
9
1
50
—
—
—
—
50
63
2
12
1
78
—
2
—
2
80
121
308
27
2,748
1,261
769
1,237
3,267
6,015
$
126
317
28
2,798
1,261
769
1,237
3,267
6,065
3,037
$
3,100
133
372
30
135
384
31
3,572
3,650
$
$
814
550
1,336
2,700
$
6,272
$
814
552
1,336
2,702
6,352
$
$
$
(1)
(2)
Includes loans 90 days or greater past due and performing nonaccrual loans that are less than 90 days past due.
Includes $13 million and $10 million of loans 90 days or greater past due accounted for under the fair value option at December 31, 2016 and 2015,
respectively.
Interest that would have been accrued on impaired loans totaled approximately $2 million, $6 million and $17 million
during the years ended December 31, 2016, 2015 and 2014, respectively. At December 31, 2016 and 2015, we had no loans 90
days or greater past due and still accruing interest.
88
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Troubled Debt Restructurings
The following table provides a summary of TDRs by type and performing status:
December 31, 2016
Consumer loans (1)
Residential first mortgage
Second mortgage
HELOC
Total consumer loans
Total TDRs (2)
December 31, 2015
Consumer loans (1)
Residential first mortgage
Second mortgage
HELOC
Total TDRs (2)
TDRs
Performing
Nonperforming
Total
(Dollars in millions)
$
$
$
$
$
$
$
22
35
10
67
67
49
32
20
11
$
4
3
18
18
$
27
$
1
7
101
$
35
$
33
39
13
85
85
76
33
27
136
(1) The ALLL on consumer TDR loans totaled $9 million and $15 million at December 31, 2016 and 2015, respectively.
(2) Includes $25 million and $32 million of TDR loans accounted for under the fair value option at December 31, 2016 and 2015,
respectively.
The following table provides a summary of newly modified TDRs:
Year Ended December 31, 2016
Residential first mortgages
Second mortgages
HELOC (2)(3)
Commercial & Industrial
Total TDR loans
Year Ended December 31, 2015
Residential first mortgages
Second mortgages
HELOC (2)(3)
Other consumer
Total TDR loans
Year Ended December 31, 2014
Residential first mortgages
Second mortgages
HELOC (2)
Total TDR loans
New TDRs
Number of
Accounts
Pre-
Modification Unpaid
Principal Balance
Post-
Modification Unpaid
Principal Balance (1)
Increase (Decrease)
in Allowance at
Modification
(Dollars in millions)
23
56
87
1
167
325
97
273
3
698
165
325
30
520
$
$
$
$
$
$
$
4
3
6
2
15
81
4
17
—
102
48
11
1
60
$
$
$
$
$
$
$
5
3
5
1
14
80
3
15
—
98
47
10
1
58
$
$
$
$
$
$
$
—
—
—
—
—
(2)
—
—
—
(2)
3
—
—
3
(1) Post-modification balances include past due amounts that are capitalized at modification date.
(2) HELOC post-modification unpaid principal balance reflects write downs.
(3)
Includes loans carried at fair value option.
89
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table provides a summary of newly modified TDRs in the past 12 months that have been subsequently
defaulted during the years ended December 31, 2016, 2015 and 2014. All TDR classes within consumer and commercial loan
portfolios are considered subsequently defaulted when greater than 90 days past due. The UPB associated with the TDR classes
in the table below was less than $1 million for each class and in the aggregate for the years ended December 31, 2016, 2015 and
2014. There was no increase or decrease in the allowance associated with these TDRs at subsequent default. Subsequent default
is defined as a payment re-defaulted within 12 months of the restructuring date:
Residential first mortgages
Second mortgages
HELOC (1)
Total TDR loans
(1) HELOC post-modification unpaid principal balance reflects write downs.
Impaired Loans
Years Ended December 31,
2016
2015
2014
Number of Accounts
3
2
3
8
1
0
7
8
2
18
5
25
The following table presents individually evaluated impaired loans and the associated allowance:
December 31, 2016
December 31, 2015
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
(Dollars in millions)
With no related allowance
recorded
Consumer loans
Residential first mortgage
Commercial loans
Commercial and industrial
With an allowance recorded
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other consumer
Total
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other consumer
Commercial loans
$
$
$
$
$
Commercial and industrial
Total impaired loans
$
6
$
6
$
— $
20
$
20
$
—
— $
$
$
$
5
6
2
—
13
5
6
2
—
—
13
$
$
$
$
5
25
65
28
3
—
96
85
28
3
—
5
$
$
$
$
2
22
67
28
3
—
98
87
28
3
—
2
$
121
$
120
$
—
6
40
26
3
—
69
46
26
3
—
—
75
$
$
$
$
$
—
6
40
26
3
—
69
46
26
3
—
—
75
$
$
$
$
$
90
—
—
—
12
6
1
1
20
12
6
1
1
—
20
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents average impaired loans and the interest income recognized:
For the Years Ended December 31,
2016
2015
2014
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in millions)
$
150
$
29
10
—
2
191
$
$
1
2
—
—
—
3
52
26
4
—
2
84
$
$
5
—
—
—
—
5
$
402
$
28
1
1
—
432
$
$
11
1
—
—
—
12
Consumer loans
Residential first mortgage
$
Second mortgage
HELOC
Commercial loans
Commercial real estate
Commercial and industrial
Total impaired loans
$
Credit Quality
We utilize an internal risk rating system in accordance with the Rating Credit Risk booklet of the Comptroller's
Handbook, April 2011 and the Uniform Retail Credit classification and Account Management Policy issued June 20, 2000 by
the Federal Financial Institution Examination Council 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 liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the
deficiencies are not corrected. For HELOC 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.
Nonperforming loans are classified as either substandard, doubtful or loss.
Doubtful. An asset classified as doubtful has all the weaknesses inherent in one classified as 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. Because of high probability of loss, non-accrual accounting treatment is
required for doubtful assets.
Loss. An asset classified as loss is considered uncollectible and of such little value that the continuance as 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 this basically worthless asset even though partial recovery may be
affected in the future.
91
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 of the deal, 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 result in the final rating for the
borrowing relationship.
Consumer Loans
The same rating principles are used for consumer and commercial loans, but the principles are applied differently for
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, 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 Credit Loans
Commercial Real
Estate
Commercial and
Industrial
Warehouse
Total
Commercial
(Dollars in millions)
December 31, 2016
Grade
Pass
Watch
Special Mention
Substandard
Total loans
$
$
1,225
$
678
$
1,168
$
27
3
6
59
21
11
16
53
—
3,071
102
77
17
1,261
$
769
$
1,237
$
3,267
Consumer Credit Loans
Residential
First Mortgage
Second
Mortgage
December 31, 2016
HELOC
(Dollars in millions)
Other
Consumer
Total
Consumer
Grade
Pass
Watch
Substandard
Total loans
$
$
2,273
$
23
31
87
35
4
$
299
$
11
7
2,327
$
126
$
317
$
28
—
—
28
$
$
2,687
69
42
2,798
92
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2015
Commercial Credit Loans
Commercial Real
Estate
Commercial and
Industrial
Warehouse
Total
Commercial
(Dollars in millions)
Grade
Pass
Watch
Special mention
Substandard
Total loans
$
$
766
$
492
$
1,181
$
42
2
4
814
$
30
21
9
552
$
155
—
—
1,336
$
2,439
227
23
13
2,702
Consumer Credit Loans
Residential First
Mortgage
Second
Mortgage
December 31, 2015
HELOC
(Dollars in millions)
Other
Consumer
Total
Consumer
Grade
Pass
Watch
Substandard
Total loans
$
$
2,993
49
58
3,100
$
$
101
32
2
135
$
$
353
22
9
384
$
$
31
—
—
31
$
$
3,478
103
69
3,650
Note 5 — Loans with Government Guarantees
Substantially all loans with government guarantees are insured or guaranteed by the FHA and 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 until claimed. Certain loans within our portfolio may be subject to
indemnifications and insurance limits which exposes 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 December 31, 2016 and December 31, 2015, respectively, loans with government guarantees totaled $365 million
and $485 million.
At December 31, 2016, repossessed assets and the associated claims recorded in other assets totaled $135 million and
at December 31, 2015 repossessed assets and the associated claims were $210 million.
Note 6 — Repossessed Assets
Repossessed assets include the following:
One-to-four family properties
Commercial properties
Total repossessed assets
December 31,
2016
2015
(Dollars in millions)
$
$
11
3
14
$
$
12
5
17
93
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following schedule provides the activity for repossessed assets:
Beginning balance
Additions, net
Disposals
Net (write down) gain on disposal
Transfers out
Ending balance
Note 7 — Variable Interest Entities
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
$
$
17
19
(19)
(2)
(1)
14
$
$
19
29
(24)
—
(7)
17
$
$
37
18
(39)
5
(2)
19
In 2015, we executed clean-up calls of the FSTAR 2005-1and FSTAR 2006-2 long-term debt associated with the
HELOC securitization trusts. As a result, the FSTAR 2005-1 and FSTAR 2006-2 HELOC securitization trusts were dissolved
and we have no consolidated VIEs as of December 31, 2016 and December 31, 2015.
We have a continuing involvement, but are not the primary beneficiary for one 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 December 31, 2016 and 2015, the
FSTAR 2007-1 mortgage securitization trust included 2,453 loans and 3,061 loans, respectively, with an aggregate principal
balance of $89 million and $117 million, respectively.
Note 8 — Federal Home Loan Bank Stock
Our investment in FHLB stock was $180 million at December 31, 2016 compared to $170 million at December 31,
2015. As a member of the FHLB, we are required to hold shares of FHLB stock in an amount equal to at least one percent of
the aggregate unpaid principal balance of our mortgage loans, home purchase contracts and similar obligations at the beginning
of each year or five percent of our total FHLB advances, whichever is greater. We had $10 million, $57 million and zero in
required stock purchases during the year ending December 31, 2016, 2015 and 2014, respectively. We had zero, $42 million and
$54 million redemptions of FHLB stock during the years ended December 31, 2016, 2015 and 2014, respectively. Dividends
received on the stock equaled $7 million, $6 million and $9 million for the years ended December 31, 2016, 2015, and 2014,
respectively. These dividends were recorded in the Consolidated Statements of Operations as other noninterest income.
Note 9 — Premises and Equipment
Premises and equipment balances and estimated useful lives are as follows:
Land
Office buildings
Computer hardware and software
Furniture, fixtures and equipment
Leased equipment
Total
Less accumulated depreciation
Premises and equipment, net
Estimated
Useful Lives
December 31,
2016
2015
(Dollars in millions)
—
$
59
$
15 — 31.5 years
3 — 7 years
5 — 7 years
3 years
$
153
256
61
4
533
(258)
275
$
58
149
214
61
—
482
(232)
250
Depreciation expense amounted to approximately $31 million, $26 million and $26 million, for the years ended
December 31, 2016, 2015 and 2014, respectively.
94
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Operating Leases
We conduct a portion of our business from leased facilities. Such leases are considered to be operating leases based on
their lease terms. Lease rental expense totaled approximately $5 million, $7 million and $8 million for the years ended
December 31, 2016, 2015 and 2014, respectively. The following outlines our minimum contractual lease obligations:
2017
2018
2019
2020
2021
Thereafter
Total
December 31, 2016
(Dollars in millions)
4
3
2
2
1
—
12
$
$
Note 10 — 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. 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, see Note 11 - Derivative Financial Instruments, regarding the derivative instruments
utilized to manage our MSR risks.
Changes in the carrying value of residential first mortgage MSRs, accounted for at fair value, were as follows:
Balance at beginning of period
Additions from loans sold with servicing retained
Reductions from sales
Changes in fair value due to (1)
Decrease in MSR value due to pay-offs, pay-downs, and runoff
Changes in estimates of fair value (2)
Fair value of MSRs at end of period
$
$
2016
For the Years Ended December 31,
2015
(Dollars in millions)
2014
$
296
228
(84)
(62)
(43)
$
258
260
(176)
(43)
(3)
335
$
296
$
285
272
(232)
(31)
(36)
258
(1) Changes in fair value are included within net (loss) return on MSRs on the Consolidated Statements of Operations.
(2) Represents estimated MSR value change resulting primarily from market-driven changes.
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:
December 31, 2016
December 31, 2015
Fair value impact due to
Fair value impact due to
Actual
10% adverse
change
20% adverse
change
Actual
10% adverse
change
20% adverse
change
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan $
7.78% $
16.68%
68.18
$
326
322
330
(Dollars in millions)
8.24% $
12.63%
71.86
$
318
311
326
$
287
285
292
279
275
288
95
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant
Accounting Standards and Note 22 - 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 (loss) return on MSRs 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, net of third party subservicing costs, for loans subserviced.
The following table summarizes income and fees associated with contractual servicing rights:
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
Income on mortgage servicing asset
Servicing fees, ancillary income and late fees (1)
$
Changes in fair value (2)
Gain (loss) on MSR derivatives (3)
Net transaction costs
$
81
(109)
—
2
$
69
(44)
5
(2)
Total (loss) return included in net return on mortgage
servicing rights
$
(26) $
28
$
69
(69)
26
(2)
24
(1) Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on a cash basis.
(2)
Includes a $4 million loss recorded to a payoff reserve during the year ended December 31, 2016 and $2 million gain related to the sale of MSRs
during the year ended December 31, 2015.
(3) 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 the Year Ended December 31,
2016
2015
2014
(Dollars in millions)
Income (expenses) on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1)
Other servicing charges
Total income on mortgage loans subserviced,
included in loan administration
$
$
$
29
(11)
18
$
$
33
(7)
26
$
28
(4)
24
(1) Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on cash basis.
Note 11 — Derivative Financial Instruments
Derivative financial instruments are recorded at fair value in other assets and other liabilities on the Consolidated
Statements of Financial Condition after taking into account the effects of legally enforceable bilateral collateral and master
netting agreements. 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.
96
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 cash flow hedges of
certain interest rate payments of our variable-rate FHLB advances.
Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income
(loss) on the Consolidated Statement of Financial Condition and reclassified into interest expense in the same period in which
the hedge transaction is recognized in earnings. At December 31, 2016, we had $1 million (net-of-tax) recorded of unrealized
gains on derivatives classified as cash flow hedges recorded in accumulated other comprehensive income (loss), compared to
$3 million of unrealized losses at December 31, 2015. The estimated amount to be reclassified from other comprehensive
income into earnings during the next 12 months represents $4 million of losses (net-of-tax).
Derivatives that are designated in hedging relationships are assessed for effectiveness using regression analysis at
inception and throughout the hedge period. All hedge relationships were and are expected to be highly effective as of
December 31, 2016. Cash flows and the profit impact associated with designated hedges are reported in the same category as
the underlying hedged item.
The net gain (loss) recognized in income on derivative instruments, net of the impact of offsetting positions, were as
follows:
Location of Gain/(Loss)
2016
2015
2014
(Dollars in millions)
For the Year Ended
December 31,
Derivatives not designated as hedging instruments:
Futures
Net (loss) return on mortgage servicing rights $ — $
6
$
Interest rate swaps and swaptions
Net (loss) return on mortgage servicing rights
Mortgage-backed securities forwards
Net (loss) return on mortgage servicing rights
Rate lock commitments and forward agency and loan
sales
Rate lock commitments
Interest rate swaps (1)
Total derivative (loss) gain
(1)
Includes customer-initiated commercial interest rate swaps.
Net gain on loan sales
Other noninterest income
Other noninterest income
(5)
5
26
(2)
4
(2)
1
9
(2)
2
$
28
$
14
$
18
—
8
(12)
—
3
17
97
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables present information on derivative financial instruments:
Derivatives designated as hedging instruments:
Assets
Interest rate swaps on FHLB advances
Liabilities (1)
Interest rate swaps on FHLB advances
Derivatives not designated as hedging instruments:
Assets (1)
Futures
Mortgage-backed securities forwards
Rate lock commitments
Interest rate swaps and swaptions
Total derivative assets
Liabilities (1)
Futures
Mortgage-backed securities forwards
Rate lock commitments
Interest rate swaps
Total derivative liabilities
Derivatives designated as hedging instruments:
Liabilities (1)
Interest rate swaps on FHLB advances
Derivatives not designated as hedging instruments:
Assets (1)
U.S. Treasury and euro dollar futures
Mortgage-backed securities forwards
Rate lock commitments
Interest rate swaps and swaptions
Total derivative assets
Liabilities (1)
U.S. Treasury and euro dollar futures
Mortgage-backed securities forwards
Rate lock commitments
Interest rate swaps
Total derivative liabilities
December 31, 2016
Notional
Amount
Fair
Value
Expiration
Dates
(Dollars in millions)
600
$
20
2023-2026
230
$
1
2025-2026
$
$
$
4,621
3,776
3,517
2,231
14,145
134
1,893
598
1,129
3,754
$
2017-2020
2017
2017
2017-2033
2017
2017
2017
2017-2047
2
43
24
35
104
—
11
6
37
54
December 31, 2015
Notional
Amount
Fair
Value
Expiration
Dates
(Dollars in millions)
825
$
4
2023-2025
1,892
$
1,931
3,593
1,554
8,970
768
2,655
168
422
$
$
4,013
$
2016-2019
2016
2016
2016-2035
2016-2019
2016
2016
2016-2025
—
7
26
25
58
1
6
—
7
14
$
$
$
$
$
$
$
$
$
$
$
(1) Derivatives liabilities and assets are included in other assets and liabilities on the Consolidated Statements of Financial Condition.
98
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables present the derivatives subject to a master netting arrangement, including the cash pledged as
collateral:
December 31, 2016
Gross Amount
Gross Amounts
Offset in the
Statement of
Financial
Position
Net Amount
Presented in
the Statement
of Financial
Position
(Dollars in millions)
Gross Amounts Not Offset in the
Statement of Financial Position
Financial
Instruments
Cash
Collateral
Derivatives designated as hedging instruments:
Assets
Interest Rate Swaps on FHLB advances (1)
Liabilities
Interest Rate Swaps on FHLB advances (1)
Derivatives not designated as hedging instruments:
Assets
Futures
Mortgage-backed securities forwards
Interest rate swaps and swaptions (1)
Total derivative assets
Liabilities
Futures
Mortgage-backed securities forwards
Interest rate swaps and swaptions (1)
Total derivative liabilities
$
$
$
$
$
$
$
20
1
2
43
35
80
$
$
$
$
$
1
1
$
$
— $
— $
—
— $
19
$
— $
— $
— $
2
43
35
80
$
$
$
— $
— $
—
— $
— $
— $
— $
— $
11
37
48
—
—
$
— $
11
37
48
—
—
$
— $
—
33
—
44
30
74
1
—
20
21
(1) Additional funds are pledged to a Central Counterparty Clearing House in the amount of $15 million as of December 31, 2016 to maintain initial
margin requirements. This collateral is in addition to the amount required to be maintained for potential market changes shown in the cash collateral
column above.
December 31, 2015
Gross Amount
Gross Amounts
Offset in the
Statement of
Financial
Position
Net Amount
Presented in
the Statement
of Financial
Position
(Dollars in millions)
Gross Amounts Not Offset in the
Statement of Financial Position
Financial
Instruments
Cash
Collateral
Derivatives designated as hedging instruments:
Liabilities
Interest Rate Swaps on FHLB advances
Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards
Interest rate swaps and swaptions (1)
Total derivative assets
Liabilities
U.S. Treasury and euro dollar futures
Mortgage-backed securities forwards
Interest rate swaps and swaptions (1)
Total derivative liabilities
$
$
$
$
$
4
$
— $
4
$
— $
19
$
$
$
7
25
32
1
6
7
— $
—
— $
— $
—
—
$
$
$
7
25
32
1
6
7
— $
—
— $
— $
—
—
14
$
— $
14
$
— $
4
10
14
2
8
12
22
(1) Additional funds are pledged to a Central Counterparty Clearing House in the amount of $7 million as of December 31, 2015 to maintain initial
margin requirements. This collateral is in addition to the amount required to be maintained for potential market changes shown in the cash collateral
column above.
99
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
We pledged a total of $54 million of cash collateral to counterparties and had an obligation to return cash of $74
million at December 31, 2016 for derivative activities. We pledged a total of $41 million of cash collateral to counterparties and
had an obligation to return cash of $14 million at December 31, 2015 for derivative activities. The net cash pledged is restricted
and is included in other assets on the Consolidated Statements of Financial Condition.
Note 12 — Deposit Accounts
The deposit accounts are as follows:
December 31,
2016
2015
(Dollars in millions)
Retail deposits
Branch retail deposits
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificates of deposit/CDARS
Total branch retail deposits
Commercial deposits
Demand deposit account
Savings account
Money market demand accounts
Certificates of deposit/CDARS
Total commercial deposits
Total retail deposits subtotal
Government deposits
Demand deposit accounts
Savings accounts
Certificates of deposit/CDARS
Total government deposits
Company controlled deposits
Total deposits
$
$
852
3,824
138
1,055
5,869
282
63
109
1
455
6,324
250
451
329
1,030
1,446
$
8,800
$
The following indicates the scheduled maturities for certificates of deposit with a minimum denomination of
$250,000:
Three months or less
Over three months to six months
Over six months to twelve months
One to two years
Thereafter
Total
December 31,
2016
2015
(Dollars in millions)
126
116
146
34
27
449
$
$
$
$
100
797
3,717
163
811
5,488
194
34
104
14
346
5,834
302
363
397
1,062
1,039
7,935
97
72
173
17
37
396
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 13 — Borrowings
Federal Home Loan Bank Advances
The following is a breakdown of our FHLB advances outstanding:
December 31, 2016
December 31, 2015
December 31, 2014
Amount
Rate
Amount
Rate
Amount
Rate
Short-term fixed rate term advances
Total Short-term Federal Home Loan Bank advances
Long-term LIBOR adjustable advances
Long-term fixed rate advances (1)
Total Long-term Federal Home Loan Bank advances
Total Federal Home Loan Bank advances
$
$
$
$
1,780
1,780
1,025
175
1,200
2,980
(Dollars in millions)
0.62% $
1.12%
1.12%
$
$
$
2,116
2,116
825
600
1,425
3,541
0.32% $
0.70%
1.37%
$
$
$
214
214
—
300
300
514
0.26%
—%
1.36%
(1)
Includes the current portion of fixed rate advances of $50 million and $175 million at December 31, 2016 and December 31, 2015, respectively.
We settled $250 million and $375 million in long-term fixed rate FHLB advances during the fourth quarters of 2016
and 2015, respectively. During the year ending December 31, 2015, the settlement resulted in a gain on extinguishment of debt
in the amount of $3 million, included in other noninterest income.
We are required to maintain a minimum amount of qualifying collateral. In the event of default, the FHLB advance is
similar to a secured borrowing, whereby the FHLB has the right to sell the pledged collateral to settle the fair value of the
outstanding advances.
At December 31, 2016, we had the authority and approval from the FHLB to utilize a line of credit of up to $7 billion
and we may access that line to the extent that collateral is provided. At December 31, 2016, we had $3 billion of advances
outstanding and an additional $1.1 billion of collateralized borrowing capacity available at FHLB. The advances can be
collateralized by non-delinquent single-family residential first mortgage loans, loans with government guarantees, certain other
loans and investment securities.
At December 31, 2016, $1 billion of the outstanding advances had an adjustable rate based on the three month LIBOR
index. Interest rates on these advances reset every three months and the advances may be prepaid without penalty, with
notification at scheduled three month intervals after an initial 12 month lockout period. The outstanding advances included
$830 million in a cash flow hedge relationship as discussed in Note 11 - Derivative Financial Instruments.
The following table contains detailed information on our FHLB advances and other borrowings:
Maximum outstanding at any month end
Average outstanding balance
Average remaining borrowing capacity
Weighted-average interest rate
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
$
$
3,557
2,833
1,137
1.16%
$
3,541
1,811
1,611
1.00%
1,300
939
1,947
0.23%
101
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table outlines the maturity dates of our FHLB advances and other borrowings:
2017
2018
2019
2020
Thereafter
Total
Parent Company Senior Notes and Trust Preferred Securities
The following table presents long-term debt:
December 31, 2016
(Dollars in millions)
1,830
125
—
—
1,025
2,980
$
$
Senior Notes
Senior notes, matures 2021
Trust Preferred Securities
Floating Three Month LIBOR
Plus 3.25%, matures 2032
Plus 3.25%, matures 2033
Plus 3.25%, matures 2033
Plus 2.00%, matures 2035
Plus 2.00%, matures 2035
Plus 1.75%, matures 2035
Plus 1.50%, matures 2035
Plus 1.45%, matures 2037
Plus 2.50%, matures 2037
Total Trust Preferred Securities
Total long-term debt
Senior Notes
December 31, 2016
December 31, 2015
(Dollars in millions)
Amount
Interest Rate
Amount
Interest Rate
$
246
6.125% $
$
$
$
26
26
26
26
26
51
25
25
16
247
493
4.25% $
4.13%
4.25%
2.88%
2.88%
2.71%
2.38%
2.41%
3.46%
$
$
—
26
26
26
26
26
51
25
25
16
247
247
—%
3.85%
3.57%
3.85%
2.32%
2.32%
2.26%
1.82%
1.96%
3.01%
On July 11, 2016, we issued $250 million of senior notes ("2021 Senior Notes") which mature on July 15, 2021. The
proceeds from these notes were used to bring dividends current and redeem our outstanding Series C Preferred Stock. The notes
are unsecured and rank equally and ratably with the unsecured senior indebtedness of Flagstar Bancorp, Inc.
Prior to June 15, 2021, we may redeem some or all of the 2021 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 trust preferred
securities to those trusts, which we have included in long-term debt. The trust preferred securities are the sole assets of those
trusts.
102
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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. In January 2012, we exercised our contractual rights to defer
interest payments. On July 14, 2016, we ended the deferral and made a $34 million payment to bring current our previously
deferred interest as of that date.
Note 14 — Representation and Warranty Reserve
At the time a loan is sold, an estimate of the fair value of the guarantee associated with the mortgage loans is recorded
in the representation and warranty reserve in the Consolidated Statements of Financial Condition. This reduces the net gain on
loan sales in the Consolidated Statements of Operations. Subsequent to the sale, the liability is re-measured on an ongoing basis
based on an estimate of probable losses. Changes in the estimate are recorded in the representation and warranty (provision) benefit
on the Consolidated Statements of Operations.
The following table shows the activity in the representation and warranty reserve:
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
40
$
53
$
5
(19)
(14)
1
27
$
7
(19)
(12)
(1)
40
$
54
7
10
17
(18)
53
$
$
Balance, beginning of period
Provision (benefit)
Gain on sale reduction for representation and warranty liability
Representation and warranty provision (benefit)
Total
(Charge-offs) Recoveries, net
Balance, end of period
Note 15— Warrants
May Investor Warrant
We granted warrants (the "May Investor Warrants") on January 30, 2009 under anti-dilution provisions applicable to
certain investors (the "May Investors") in our May 2008 private placement capital raise.
For the year ended December 31, 2016, 378,334 May Investor Warrants were exercised resulting in the issuance of
236,058 shares of Common Stock. The May Investors held warrants to purchase 237,627 shares at an exercise price of $10.00
at December 31, 2016.
The May Investor Warrants do not meet the definition of a contract that is indexed to our own stock under U.S. GAAP.
Therefore, the May Investor Warrants are classified as a liability which is recorded in other liabilities on the Consolidated
Statements of Financial Condition and are measured at fair value. Warrant liabilities are valued using a Black Scholes model
and are classified within Level 2 of the valuation hierarchy. Significant observable inputs include share price, expected
volatility, a risk free rate and an expected life.
At December 31, 2016 and 2015, the liability from May Investors Warrants amounted to $4 million and $8 million,
respectively. For further information, see Note 22 - Fair Value Measurements.
TARP Warrant
On January 30, 2009, in conjunction with the sale of 266,657 shares of Series C fixed rate cumulative non-convertible
perpetual preferred stock ("Series C Preferred Stock") for $267 million, we issued a warrant to purchase up to approximately
645,138 shares of Common Stock at an exercise price of $62.00 per share (the "Warrant").
The Warrant is exercisable through January 30, 2019 and remains outstanding subsequent to the redemption of TARP,
which occurred during the third quarter 2016.
103
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 16 - Accumulated Other Comprehensive Income (Loss)
The following table sets forth the components in accumulated other comprehensive income (loss):
For the Years Ended December 31,
2016
2015
2014
Investment securities
Beginning balance
Unrealized gain (loss)
Less: Tax (benefit) provision
Net unrealized gain (loss)
Reclassifications out of AOCI (1)
Less: Tax (benefit) provision
Net unrealized gain (loss) reclassified out of AOCI
Other comprehensive income/(loss), net of tax
Ending balance
Cash Flow Hedges
Beginning balance
Unrealized gain (loss)
Less: Tax (benefit) provision
Net unrealized gain (loss)
Reclassifications out of AOCI (1)
Less: Tax (benefit) provision
Net unrealized gain (loss) reclassified out of AOCI
Other comprehensive income/(loss), net of tax
Ending balance
$
$
$
$
$
$
5
(10)
(3)
(7)
(9)
(3)
(6)
(13)
(8) $
(3) $
(13)
(5)
(8)
19
7
12
4
1
$
8
(7)
(2)
(5)
3
1
2
(3)
5
$
$
— $
(6)
(1)
(5)
2
—
2
(3)
(3) $
(5)
24
8
16
(4)
(1)
(3)
13
8
—
—
—
—
—
—
—
—
—
(1) Reclassifications are reported in other noninterest income on the Consolidated Statement of Operations.
104
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 17 — Earnings (Loss) Per Share
Basic earnings (loss) per share, excluding dilution, is computed by dividing earnings (loss) available to common
stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss)
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 (loss) per share of common stock:
Net income (loss)
Less: preferred stock dividend/accretion
Net income (loss) from continuing operations
Deferred cumulative preferred stock dividends
Net income (loss) applicable to Common Stockholders
Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities
May Investor Warrants
Stock-based awards
Weighted average diluted common shares
Earnings (loss) per common share
Basic earnings (loss) per common share
Effect of dilutive securities
May Investor Warrants
Stock-based awards
Diluted earnings (loss) per common share
For the Years Ended December 31,
2016
2015
2014
(In millions, except share data)
171
$
158
$
—
171
(18)
153
$
—
158
(30)
128
$
(69)
(1)
(70)
(26)
(96)
56,569,307
56,426,977
56,246,528
138,314
890,046
305,484
432,062
—
—
57,597,667
57,164,523
56,246,528
2.71
$
2.27
$
(0.01)
(0.04)
2.66
$
(0.01)
(0.02)
2.24
$
(1.72)
—
—
(1.72)
$
$
$
$
On July 29, 2016, we completed the previously announced $267 million redemption of our Series C Preferred Stock.
This transaction reduced stockholders equity by approximately $372 million with a $267 million reduction in Preferred Stock
and a $105 million reduction related to the payment of deferred dividends.
Under the terms of the Series C Preferred Stock the Company was able to defer payments of preferred stock dividends.
We elected to defer dividend payments beginning with the February 2012 dividend. Although, while being deferred, the impact
was not included in net income from continuing operations, the deferral did impact net income applicable to common stock for
the purpose of calculating earnings per share, as shown above.
Note 18 — Stock-Based Compensation
Our board of directors participates in various stock option plans and incentive compensation plans. Certain key
employees, officers, directors and others are eligible to receive stock awards. Awards that may be granted under the plan
include stock options, incentive stock options, cash-settled stock appreciation rights, restricted stock units, performance shares
and performance units and other awards. Under the current plan, the exercise price of any award granted must be at least equal
to the fair market value of common stock on the date of grant. Non-qualified stock options granted to directors expire 5 years
from the date of grant. Grants other than non-qualified stock options have term limits set by the board of directors in the
applicable agreement. Stock appreciation rights generally expire 7 years from the date of grant. Awards still outstanding under
any of the prior plans will continue to be governed by their respective terms.
During the years ended December 31, 2016, 2015 and 2014, compensation expense recognized related to stock-based
compensation totaled $11 million, $3 million and $4 million, respectively.
105
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Stock Option Plan
The following tables summarize the activity that occurred in the years ended December 31:
Options outstanding, beginning of year
Options canceled, forfeited and expired
Options outstanding, end of year
Options vested or expected to vest, end of year
Options exercisable, end of year
Options outstanding, beginning of year
Options canceled, forfeited and expired
Options outstanding, end of year
Options vested or expected to vest, end of year
Options exercisable, end of year
Number of Shares
2016
2015
2014
53,284
(7,493)
45,791
45,791
23,576
63,598
(10,314)
53,284
53,284
27,197
82,937
(19,339)
63,598
63,598
32,532
Weighted Average Exercise Price
2016
2015
2014
80.00
80.00
80.00
80.00
80.00
$
$
$
$
94.33
168.34
80.00
80.00
80.00
$
$
$
$
104.26
136.97
94.33
94.33
108.01
$
$
$
$
The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014, was zero.
Additionally, there was no aggregate intrinsic value of options outstanding and exercised at December 31, 2016, 2015 and
2014.
The following information pertains to the stock options issued pursuant to the Prior Plans, but not exercised at
December 31, 2016:
Grant Price
$80.00
Grant Price
$80.00
Number of Options
Outstanding at
December 31, 2016
45,791
45,791
Options Outstanding
Weighted Average
Remaining
Contractual Life
(Years)
Options Exercisable
Weighted
Average
Exercise Price
Number Exercisable
at December 31,
2016
Weighted
Average
Exercise Price
2.94
$
80.00
23,576
$
80.00
23,576
Options Vested or Expected to Vest
Number of Options
Outstanding at
December 31, 2016
Weighted Average
Remaining
Contractual Life
(Years)
Weighted Average
Exercise Price
45,791
45,791
2.94 $
80.00
At December 31, 2016 and 2015, options available for future grants were 250,824 and 243,331, respectively.
Restricted Stock Units
We have issued restricted stock units to officers, directors and certain employees. Time based restricted stock generally
will vest in 3 increments on each annual anniversary of the date of grant beginning with the first anniversary subject to service
and performance conditions. Certain performance based restricted stock will vest in three years from the date of grant subject to
service and performance conditions.
On October 20, 2015, our Board approved and adopted the Flagstar Bancorp, Inc. Executive Long-Term Incentive
Program ("ExLTIP"). The ExLTIP provides for payouts to certain executives only if our stock achieves and sustains a specified
market performance within ten years of the grant date. The ExLTIP awards were made in the form of restricted stock units
under and subject to the terms of the 2016 Flagstar Bancorp, Inc. Stock and Incentive Plan, which was approved at the May 24,
106
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
2016 annual shareholder meeting. If vested, the restricted stock units would pay out in five installments, subject to a quality
review.
At December 31, 2016 and 2015, the maximum number of shares of common stock that may be issued were 2,634,070
shares and 437,402 shares, respectively. We incurred expenses of approximately $11 million, $3 million and $3 million with
respect to restricted stock units during the years ended December 31, 2016, 2015 and 2014, respectively. The total fair value of
awards vested during the years ended December 31, 2016, 2015, 2014 was $3 million, $2 million, and $5 million, respectively.
As of December 31, 2016, the total unrecognized compensation cost related to non-vested awards was $13 million with a
weighted average expense recognition period of 3.5 years.
The following table summarizes restricted stock activity:
Restricted Stock
Non-vested at December 31, 2013
Granted
Vested
Canceled and forfeited
Non-vested at December 31, 2014
Granted
Vested
Canceled and forfeited
Non-vested at December 31, 2015
Granted
Vested
Canceled and forfeited
Non-vested at December 31, 2016
Incentive Compensation Plans
Shares
Weighted — Average Grant-
Date Fair Value per Share
287,926
279,312
(276,548)
(56,999)
233,691
1,325,134
(152,220)
(106,620)
1,299,985
310,209
(134,767)
(13,517)
1,461,910
$
$
$
$
12.01
19.27
14.47
14.37
17.21
16.11
15.25
18.46
16.36
22.97
15.78
17.24
17.68
We had an expense of $33 million, $30 million and $21 million for the years ended December 31, 2016, 2015 and
2014, respectively, for annual employee incentive payments and commission based payments.
Note 19— Income Taxes
Components of the provision (benefit) for income taxes consist of the following:
Current
Federal
State
Total current income tax expense
Deferred
Federal
State
Total deferred income tax expense (benefit)
Total income tax expense (benefit)
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
4
—
4
84
(1)
83
87
$
$
2
—
2
82
(2)
80
82
$
$
2
(1)
1
(35)
—
(35)
(34)
$
$
107
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Our effective tax rate differs from the statutory federal tax rate. The following is a summary of such differences:
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
Provision (benefit) at statutory federal income tax rate (35%)
$
90
$
84
$
(Decreases) increases resulting from:
Bank Owned Life Insurance
State income tax benefit, net of federal income tax effect (net of valuation
allowance release)
Warrant expense (income)
Non-deductible compensation
Litigation settlement
Other
Provision (benefit) for income taxes
$
(3)
(1)
1
—
—
—
87
$
(1)
(2)
1
1
—
(1)
82
$
(37)
—
(1)
(2)
1
4
1
(34)
During the year ended December 31, 2016, the effective tax rate was 33.7 percent, compared to an effective tax rate of
34.2 percent during the year ended December 31, 2015 and a benefit of 32.9 percent for the year ended December 31, 2014.
Temporary differences and carry forwards that give rise to deferred tax assets and liabilities are comprised of the
following:
Deferred tax assets
December 31,
2016
2015
(Dollars in millions)
Net operating loss carry forwards (Federal and State)
$
195
$
258
Allowance for loan losses
Litigation settlement
Alternative Minimum Tax credit carry forward
Representation and warranty reserves
Accrued compensation
Loan deferred fees and costs
Non-accrual interest revenue
Deferred interest
General business credit
Other
Total
Valuation allowance
Total (net)
Deferred tax liabilities
Premises and equipment
Mortgage loan servicing rights
Mark-to-market adjustments
Commercial lease financing
State and local taxes
Total
Net deferred tax asset
74
22
18
10
5
3
2
2
1
15
347
(20)
327
(12)
(11)
(9)
(5)
(4)
(41)
286
$
89
31
15
15
9
—
3
3
1
9
433
(22)
411
(3)
(19)
(17)
(3)
(5)
(47)
364
$
108
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
We have not provided deferred income taxes for the Bank’s pre-1988 tax bad debt reserve at December 31, 2016 of
approximately $4 million because it is not anticipated that this temporary difference will reverse in the foreseeable future. Such
reserves would only be taken into taxable income if the Bank, or a successor institution, liquidates, redeems shares, pays
dividends in excess of earnings, or ceases to qualify as a bank for tax purposes.
During the years ended December 31, 2016 and 2015, we had federal net operating loss carry forwards of $480 million
and $660 million, respectively. These carry forwards, if unused, expire in calendar years 2028 through 2035. As a result of a
change in control occurring on January 30, 2009, Section 382 of the Internal Revenue Code places an annual limitation on the
use of our new operating loss carry forwards that existed at that time. At December 31, 2016 we had $138 million of net
operating loss carry forwards subject to certain annual use limitations which expire in calendar years 2028 through 2029.
We had a total state deferred tax asset before valuation allowance of $32 million and total state net operating loss
carryforwards of $611 million at December 31, 2016. In connection with our ongoing assessment of deferred taxes, we
analyzed each state net operating loss by jurisdiction and determined the amount of such net operating loss, which is expected
to expire unused and recorded a valuation allowance to reduce the deferred tax asset to the amount which is more likely than
not to be realized. At December 31, 2016, the state deferred tax assets which will more likely than not be realized, was $12
million and we have maintained a valuation allowance of $20 million due to state loss carryover limitations.
We regularly evaluate the need for deferred tax asset valuation allowances based on a more likely than not standard as
defined by generally accepted accounting principles. The ability to realize deferred tax assets depends on the ability to generate
sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax
jurisdiction.
Our income tax returns are subject to review and examination by federal, state and local government authorities. On an
ongoing basis, numerous federal, state and local examinations are in progress and cover multiple tax years. At December 31,
2016, the Internal Revenue Service had completed an examination of us through the taxable year ended December 31, 2013.
The years open to examination by state and local government authorities vary by jurisdiction.
We recognize interest and penalties related to uncertain tax positions in income tax expense. For the years ended
December 31, 2016, 2015 and 2014, we did not recognize any interest income, interest expense, or increase or decreases to uncertain
income tax positions of greater than $1 million, individually or in aggregate.
Note 20 — 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. Various aspects of Basel III are
subject to multi-year transition periods through December 31, 2018. Basel III will materially change our Tier 1, Tier 1 common
and total capital calculations.
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 December 31, 2016 and December 31, 2015. An institution is considered well-capitalized if its ratio
of total risk-based capital to risk-weighted assets is 10.0 percent or more, its ratio of Tier 1 capital to risk-weighted assets is 8.0
percent or more, its ratio of common equity tier 1 capital to risk-weighted assets is 6.5 percent or more, and its leverage ratio of
Tier 1 capital to total assets is 5.0 percent or more. There have been no conditions or events that management believes have
changed our or the Bank’s category.
109
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables present the regulatory capital ratios as of the dates indicated:
Bancorp
December 31, 2016
Tangible capital (to tangible assets)
Tier 1 capital (to adjusted tangible assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
December 31, 2015
Tangible capital (to tangible assets)
Tier 1 capital (to adjusted tangible assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
N/A - Not applicable.
Bank
December 31, 2016
Tangible capital (to tangible assets)
Tier 1 capital (to adjusted tangible assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
December 31, 2015
Tangible capital (to tangible assets)
Tier 1 capital (to adjusted tangible assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
N/A - Not applicable.
Consent Orders
Actual
For Capital
Adequacy Purposes
Well Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in millions)
1,256
1,256
1,084
1,256
1,363
1,435
1,435
1,065
1,435
1,534
8.88%
8.88% $
13.06%
15.12%
16.41%
11.51%
11.51% $
14.09%
18.98%
20.28%
N/A
566
374
498
664
N/A
499
340
454
605
N/A
4.0% $
4.5%
6.0%
8.0%
N/A
4.0% $
4.5%
6.0%
8.0%
N/A
707
540
664
830
N/A
624
491
605
756
N/A
5.0%
6.5%
8.0%
10.0%
N/A
5.0%
6.5%
8.0%
10.0%
Actual
For Capital
Adequacy Purposes
Well Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in millions)
1,491
1,491
1,491
1,491
1,598
1,472
1,472
1,472
1,472
1,570
10.52%
10.52% $
17.90%
17.90%
19.18%
11.79%
11.79% $
19.42%
19.42%
20.71%
N/A
567
375
500
667
N/A
500
341
455
607
N/A
4.0% $
4.5%
6.0%
8.0%
N/A
4.0% $
4.5%
6.0%
8.0%
N/A
709
542
667
833
N/A
625
493
607
758
N/A
5.0%
6.5%
8.0%
10.0%
N/A
5.0%
6.5%
8.0%
10.0%
$
$
$
$
On December 19, 2016, the OCC terminated the Consent Order with the Bank which had been in place since October
23, 2012. Since entering into the Consent Order, the Bank implemented and adopted, what we believe are, industry best
practices related to, among other things, regulatory compliance, enterprise risk management, capital and liquidity. The lifting of
the Consent Order signifies that the OCC has determined that the Bank has met all of the Consent Order requirements.
Supervisory Agreement
The Company remains subject to the Supervisory Agreement, which will remain in effect until terminated, modified,
or suspended in writing by the Federal Reserve.
110
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Pursuant to the Supervisory Agreement, the Company submitted a capital plan to the OTS, predecessor in interest to
the Federal Reserve. In addition, the Company agreed to request prior non-objection of the Federal Reserve to pay dividends or
other capital distributions; purchase, repurchase or redeem certain securities; incur, issue, renew, roll over or increase any debt
and enter into certain affiliate transactions; and comply with restrictions on the payment of severance and indemnification
payments, director and management changes and employment contracts and compensation arrangements. A copy of the
Supervisory Agreement was filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on January
28, 2010.
The Company has taken actions which it believes are appropriate to comply with, and intends to maintain compliance
with, all of the requirements of the Supervisory Agreement.
Regulatory Developments
The Bank and Bank Holding Company were subject to the capital requirements of the Basel III rules beginning
January 1, 2015, which replaces the framework established by the 1988 capital accord ("Basel I") of the Basel Committee on
Banking Supervision.
The regulatory capital rules require the Bank and Holding Company to maintain Tier 1 capital of at least
6 percent of risk-weighted assets and off-balance sheet items, total capital (the sum of Tier 1 capital and Tier 2 capital) of at
least 8 percent of risk-weighted assets and off-balance sheet items, Tier 1 capital of at least 4 percent of adjusted quarterly
average assets and common equity Tier 1 capital of at least 4.5 percent of risk-weighted assets.
Effective January 1, 2016, we became subject to the capital conservation buffer under the Basel III rules, subjecting a
banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the
organization does not maintain a capital conservation buffer above the minimum risk based capital requirements. The capital
conservation buffer for 2016 must be greater than 0.625 percent in order to not be subject to limitations. The Company and the
Bank had a capital conservation buffer of 8.4 percent and 11.2 percent, respectively as of December 31, 2016. When fully
phased-in on January 1, 2019, the capital conservation buffer must be greater than 2.5 percent.
Under the increased capital standards established by the Dodd-Frank Act, bank holding companies are prohibited from
including in their regulatory Tier 1 capital hybrid debt and equity securities, such as trust preferred securities, issued on or after
May 19, 2010. The Company continues to include our existing trust preferred securities as Tier 1 capital as they were issued
prior to May, 19, 2010.
Note 21 — 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 mortgage-related 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 such 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.
Management does 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").
111
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
In accordance with the Settlement Agreement, we made an initial payment of $15 million and agreed to make future
annual payments totaling $118 million. The Settlement Agreement provides that the Bank will make annual payments in
increments of up to $25 million towards the $118 million still due upon meeting all conditions which are evaluated quarterly
and include: (a) the reversal of the deferred tax asset 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; (c) our Bank’s Tier 1 Leverage Capital Ratio is 11 percent or more. 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, such annual payments must commence twelve months after the date of that business combination.
Within six months of satisfying the conditions specified above, the Bank would make an additional payment, to occur
no more frequently than annually, provided that doing so would not violate any material banking regulatory requirement or the
OCC does 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.
We elected to account for the DOJ Liability under the fair value option. To determine the fair value, we utilize a
discounted cash flow model. Key assumptions for the discounted cash flow model include using a discount rate as of
December 31, 2016 of 8.2 percent; probability weightings of multiple cash flow scenarios and possible outcomes which
contemplate the above conditions and estimates of forecasted net income, size of the balance sheet, capital levels, dividends and
their impact on the timing of cash payments and the assumptions we believe a market participant would make to assume the
liability. The fair value of the DOJ Liability was $60 million and $84 million at December 31, 2016 and December 31, 2015,
respectively.
The lower value resulted from a change in the expectation as to the timing of payments to the DOJ as a result of a
$200 million dividend from the Bank to the Bancorp and the issuance of $250 million in Senior Notes, both of which occurred
in July 2016, to a) bring current the interest payments on our trust preferred securities, b) become current on our deferred
interest and dividends related to our TARP Preferred and c) repay our TARP Preferred. To support the on-going debt service and
other Bancorp expenses, we also intend to reduce our Bancorp double leverage and debt to equity ratios to be more consistent
with such ratios at other mid-sized banks, which would likely require further dividend payments from the Bank to the Bancorp
for the foreseeable future.
Other litigation accruals
At December 31, 2016 and December 31, 2015, excluding the fair value liability relating to the DOJ litigation
settlement, our total accrual for contingent liabilities and settled litigation was $1 million and $2 million, respectively.
Commitments
A summary of the contractual amount of significant commitments is as follows:
Commitments to extend credit
Mortgage loan interest-rate lock commitments
$
4,115
$
December 31,
2016
2015
(Dollars in millions)
HELOC commitments
Other consumer commitments
Warehouse loan commitments
Standby and commercial letters of credit
Commercial and industrial commitments
Other commercial commitments
179
57
1,670
30
424
651
3,792
150
22
871
13
151
497
Commitments to extend credit are agreements to lend. 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
112
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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. 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. The types of credit we extend is 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 are
recorded in the Consolidated Statements of Financial Condition in other assets. For further information on derivative
instruments, see Note 11 - Derivative Financial Instruments.
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 and due to a decline in the collateral value.
Other consumer commitments. Conditional 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.
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.
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.
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.
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. The balance of $3 million and $2 million for December 31, 2016 and
2015, respectively, is reflected in other liabilities on the Consolidated Statements of Financial Condition.
Note 22 — 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.
113
Valuation Hierarchy
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 as of December 31, 2016 and 2015, by caption
on the Consolidated Statements of Financial Condition and by the valuation hierarchy:
Level 1
Level 2
Level 3
Total Fair Value
(Dollars in millions)
$
— $
December 31, 2016
Investment securities available-for-sale
Agency - Commercial
Agency - Residential
Municipal obligations
Loans held-for-sale
Residential first mortgage loans
Loans held-for-investment
Residential first mortgage loans
Second mortgage loans
HELOC loans
Mortgage servicing rights
Derivative assets
Rate lock commitments (fallout-adjusted)
Futures
Mortgage-backed securities forwards
Interest rate swaps and swaptions
Interest rate swaps on FHLB advances (net)
Total assets at fair value
Derivative liabilities
Rate lock commitments (fallout-adjusted)
Mortgage backed securities forwards
Interest rate swaps
Warrant liabilities
DOJ litigation settlement
Total liabilities at fair value
—
—
—
—
—
—
—
—
2
—
—
—
2
—
—
—
—
—
$
548
898
34
3,145
7
—
—
—
—
—
43
35
19
— $
—
—
—
—
41
24
335
24
—
—
—
—
548
898
34
3,145
7
41
24
335
24
2
43
35
19
$
4,729
$
424
$
5,155
—
(11)
(37)
(4)
—
(6)
—
—
—
(60)
(6)
(11)
(37)
(4)
(60)
(118)
— $
(52) $
(66) $
$
$
114
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2015
Investment securities available-for-sale
Agency - Commercial
Agency - Residential
Municipal obligations
Loans held-for-sale
Residential first mortgage loans
Loans held-for-investment
Residential first mortgage loans
Second mortgage loans
HELOC loans
Mortgage servicing rights
Derivative assets
Rate lock commitments (fallout-adjusted)
Mortgage-backed securities forwards
Interest rate swaps and swaptions
Total assets at fair value
Derivative liabilities
U.S. Treasury, swap and euro dollar futures
Mortgage-backed securities forwards
Interest rate swap on FHLB advances (net)
Interest rate swaps
Warrant liabilities
DOJ litigation settlement
Total liabilities at fair value
Level 1
Level 2
Level 3
(Dollars in millions)
Total Fair
Value
$
— $
—
—
—
—
—
—
—
—
—
—
$
766
514
14
2,541
6
—
—
—
—
7
25
— $
—
—
—
—
42
64
296
26
—
—
766
514
14
2,541
6
42
64
296
26
7
25
$
$
$
— $
3,873
$
428
$
4,301
(1) $
— $
— $
—
—
—
—
—
(6)
(4)
(7)
(8)
—
(1) $
(25) $
—
—
—
—
(84)
(84) $
(1)
(6)
(4)
(7)
(8)
(84)
(110)
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2016 and 2015, and 2014.
We utilized swaptions futures, forward agency and loan sales and interest rate swaps to manage the risk associated with
MSRs and rate lock commitments. Gains and losses for individual lines in the tables do not reflect the effect of our risk
management activities related to such level 3 instruments.
115
Fair Value Measurements Using Significant Unobservable Inputs
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The tables below 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:
Recorded
in Earnings
Balance at
Beginning
of Year
Total
Unrealized
Gains/
(Losses)
Total
Realized
Gains/
(Losses)
Recorded
in OCI
Total
Unrealized
Gains/
(Losses)
Purchases /
Originations
Sales
Settlement
Transfers
In (Out)
Balance at
End of
Year
(Dollars in millions)
Year Ended December 31, 2016
Assets
Loans held-for-investment
Second mortgage loans (1)
HELOC loans (1)
Mortgage servicing rights
Rate lock commitments (net) (2)
Totals
Liabilities
DOJ litigation settlement
Year Ended December 31, 2015
Assets
Investment securities available-for-
sale
Municipal obligation
Loans held-for-investment
Second mortgage loans
HELOC loans
Mortgage servicing rights
Other investments
Rate lock commitments (2)
Totals
Liabilities
Long-term debt
DOJ litigation settlement
Totals
Year Ended December 31, 2014
Assets
Investment securities available-for-
sale
Municipal obligation (3)
Loans held-for-investment
Second mortgage loans
HELOC loans
Mortgage servicing rights
Other investments
Rate lock commitments (net) (2)
Totals
Liabilities
Long-term debt
DOJ litigation settlement
Totals
$
$
$
$
$
$
$
42 $
64
296
26
428 $
(1) $
6
(105)
25
(75) $
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
228
325
553 $
— $
—
(84)
—
(84) $
(12) $
(34)
—
—
(46) $
12 $
(12)
—
(358)
(358) $
41
24
335
18
418
(84) $
24 $
— $
— $
— $
— $
— $
— $
(60)
2 $
— $
— $
— $
— $
— $
(2) $
— $
—
53
132
258
100
31
576 $
(84) $
(82)
(166) $
2
(4)
(46)
—
60
12 $
— $
(2)
(2) $
1
(1)
—
—
—
— $
(3) $
—
(3) $
—
—
—
—
—
— $
— $
—
— $
—
—
260
—
277
537 $
— $
—
— $
—
—
(176)
—
—
(176) $
52 $
—
52 $
(14)
(63)
—
(100)
—
(179) $
35 $
—
35 $
—
—
—
—
(342)
(342) $
— $
—
— $
42
64
296
—
26
428
—
(84)
(84)
$
— $
— $
— $
— $
— $
— $
(2) $
4 $
2
65
155
285
—
10
515 $
(106) $
(93)
(199) $
$
$
$
2
(3)
(67)
—
154
86 $
— $
11
11 $
2
2
—
—
—
4 $
(7) $
—
(7) $
—
—
—
—
—
— $
— $
—
— $
—
1
271
100
220
592 $
— $
—
— $
—
—
(231)
—
—
(231) $
— $
—
— $
(16)
(23)
—
—
—
(41) $
29 $
—
29 $
—
—
—
—
(353)
(349) $
53
132
258
100
31
576
— $
—
— $
(84)
(82)
(166)
(1) As HELOC loans reach their balloon payment, their terms may be modified to those of an amortizing second mortgage.
(2) 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 loans held for sale, which are classified as Level 2 assets.
(3) The municipal obligation was historically priced using Level 2 inputs and was transferred into a Level 3 asset due to the obligation not being a readily
marketable security.
116
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the
fair value measurements as of:
December 31, 2016
Assets
Fair Value Valuation Technique
Unobservable Input
Range (Weighted
Average)
Second mortgage loans
HELOC loans
Mortgage servicing rights
$
$
$
41 Discounted cash flows
24 Discounted cash flows
335 Discounted cash flows
(Dollars in millions)
Discount rate
Constant prepayment rate
Constant default rate
8.10%
Discount rate
6.0% - 9.0% (7.5%)
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
6.2% - 9.3% (7.8%)
13.9% - 19.2% (16.7%)
$55 - $82 ($68)
Rate lock commitments (net) $
18
Consensus pricing
Origination pull-through rate
66.9% - 100.0% (83.6%)
Liabilities
DOJ litigation settlement
$
(60) Discounted cash flows
Discount rate
Asset growth rate
6.6% - 9.8% (8.2%)
4.2% - 11.6% (7.9%)
December 31, 2015
Assets
Fair Value Valuation Technique
Unobservable Input
(Dollars in millions)
Range (Weighted
Average)
Second mortgage loans
HELOC loans
Mortgage servicing rights
Rate lock commitments
Liabilities
DOJ litigation settlement
$
$
$
$
$
42 Discounted cash flows
64 Discounted cash flows
Discount rate
Constant prepayment rate
Constant default rate
Discount rate
7.2% - 10.8% (9.0%)
13.5% - 20.2% (16.9%)
2.6% - 4.0% (3.3%)
6.8% - 10.1% (8.4%)
296 Discounted cash flows
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
6.6% - 9.9% (8.2%)
10.3% - 14.8% (12.6%)
$57 - $86 ($72)
26
Consensus pricing
Origination pull-through rate
67.6% - 100.0% (84.6%)
(84) Discounted cash flows
Discount rate
4.9% - 9.5% (7.2%)
Recurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the second mortgage 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 would 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.
The HELOC loans, formerly included in the FSTAR 2005-1 and FSTAR 2006-1 securitization trusts, are valued utilizing a
loan-level discounted cash flow model which projects expected cash flows given three potential outcomes: (1) paid-in-full at
scheduled maturity, (2) default at scheduled maturity (foreclosure), and (3) modification at scheduled maturity into an amortizing
HELOC. Loans are placed into the potential outcome buckets based on their underlying current delinquency, FICO scores and
property CLTV all of which are unobservable inputs. Estimated cash flows are then discounted back using an unobservable discount
rate. Loans within the loan portfolios contain FICO scores with a minimum of 426, maximum of 805, and a weighted average of
656. For the loans, increases (decreases) in the discount rate, in isolation, would lower (higher) the fair value measurement.
117
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 would result in a
significantly lower (higher) fair value measurement. Additionally, the key economic assumptions used in determining the fair value
of MSRs capitalized were as follows:
Weighted-average life (in years)
Weighted-average constant prepayment rate
Weighted-average option adjusted spread
For the Years Ended December 31,
2016
2015
2014
7.1
13.2%
10.1%
7.9
11.3%
8.8%
The key economic assumptions reflected in the overall fair value of the MSRs were as follows:
Weighted-average life (in years)
Weighted-average constant prepayment rate
Weighted-average option adjusted spread
2016
December 31,
2015
2014
6.6
16.7%
7.8%
7.3
12.6%
8.2%
7.8
12.3%
9.4%
6.6
15.0%
8.9%
The significant unobservable input used in the fair value measurement of the DOJ litigation settlement is the discount rate,
in addition to those discussed in Note 21 - Legal Proceedings, Contingencies and Commitments. Significant increases (decreases) in
the discount rate in isolation could 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 21 - Legal Proceedings, Contingencies and 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 would result in a significantly higher (lower) fair value measurement.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We also have assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These
assets are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below:
Total (1)
Level 2
Level 3
Gains/(Losses)
December 31, 2016
Loans held-for-sale (2)
Impaired loans held-for-investment (2)
Residential first mortgage loans
Repossessed assets (3)
Totals
December 31, 2015
Loans held-for-sale (2)
Impaired loans held-for-investment (2)
Residential first mortgage loans
Commercial real estate loans
Repossessed assets (3)
Totals
$
$
$
$
(Dollars in millions)
9
$
9
$
25
14
48
8
40
2
17
67
$
$
$
—
—
9
8
—
—
—
8
$
$
$
— $
25
14
39
$
— $
40
2
17
59
$
(2)
(28)
(2)
(32)
(2)
(83)
(1)
—
(86)
(1) The fair values are determined at various dates during the years ended December 31, 2016 and 2015, 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.
118
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables present the quantitative information about nonrecurring Level 3 fair value financial instruments and
the fair value measurements:
December 31, 2016
Impaired loans held-for-investment
Residential first mortgage loans
Repossessed assets
December 31, 2015
Impaired loans held-for-investment
Residential first mortgage loans
Commercial real estate loans
Repossessed assets
$
$
$
$
$
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average)
(Dollars in millions)
25
14
Fair value of collateral
Fair value of collateral
Loss severity discount
Loss severity discount
22% - 40% (29.5%)
22% - 100% (69.5%)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average)
(Dollars in millions)
40
2
17
Fair value of collateral
Fair value of collateral
Fair value of collateral
Loss severity discount
Loss severity discount
Loss severity discount
35% - 45% (35.2%)
45% - 55% (50.1%)
16% - 100% (48.7%)
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:
December 31, 2016
Estimated Fair Value
Carrying
Value
Total
Level 1
Level 2
Level 3
(Dollars in millions)
Assets
Cash and cash equivalents
Investment securities available-for-sale
Investment securities held-to-maturity
Loans held-for-sale
Loans held-for-investment
Loans with government guarantees
Repossessed assets
Federal Home Loan Bank stock
Mortgage servicing rights
Bank owned life insurance
Other assets, foreclosure claims
Derivative financial instruments, assets
Liabilities
Retail deposits
Demand deposits and savings accounts
Certificates of deposit
Government deposits
Company controlled deposits
Federal Home Loan Bank advances
Long-term debt
Warrant liabilities
DOJ litigation settlement
Derivative financial instruments, liabilities
$
158
1,480
1,084
3,178
5,998
354
14
180
335
271
135
123
(4,956) $
(1,062)
(1,011)
(1,371)
(2,964)
(277)
(4)
(60)
(54)
$
$
$
158
1,480
1,093
3,177
6,065
365
14
180
335
271
135
123
(5,268) $
(1,056)
(1,030)
(1,446)
(2,980)
(493)
(4)
(60)
(54)
119
158
—
—
—
—
—
—
—
—
—
—
45
$
— $
1,480
1,084
3,178
7
354
—
180
—
271
135
54
— $
—
—
—
—
—
—
—
(11)
(4,956) $
(1,062)
(1,011)
(1,371)
(2,964)
(277)
(4)
—
(37)
—
—
—
—
5,991
—
14
—
335
—
—
24
—
—
—
—
—
—
—
(60)
(6)
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2015
Estimated Fair Value
Carrying
Value
Total
Level 1
Level 2
Level 3
(Dollars in millions)
Assets
Cash and cash equivalents
Investment securities available-for-sale
Investment securities held-to-maturity
Loans held-for-sale
Loans held-for-investment
Loans with government guarantees
Repossessed assets
Federal Home Loan Bank stock
Mortgage servicing rights
Bank owned life insurance
Other assets, foreclosure claims
Derivative financial instruments, assets
Liabilities
Retail deposits
Demand deposits and savings accounts
Certificates of deposit
Government deposits
Company controlled deposits
Federal Home Loan Bank advances
Long-term debt
Warrant liabilities
DOJ litigation settlement
Derivative financial instruments, liabilities
$
$
$
208
1,294
1,268
2,576
6,352
485
17
170
296
178
210
58
(5,008) $
(826)
(1,062)
(1,039)
(3,541)
(247)
(8)
(84)
(18)
$
208
1,294
1,262
2,578
6,308
469
17
170
296
178
210
58
(4,744) $
(833)
(1,045)
(947)
(3,543)
(89)
(8)
(84)
(18)
208
—
—
—
—
—
—
—
—
—
—
7
$
— $
1,294
1,262
2,578
6
469
—
170
—
178
210
25
— $
—
—
—
—
—
—
—
(1)
(4,744) $
(833)
(1,045)
(947)
(3,543)
(89)
(8)
—
(17)
—
—
—
—
6,302
—
17
—
296
—
—
26
—
—
—
—
—
—
—
(84)
—
The methods and assumptions used by us in estimating fair value of financial instruments which are required for disclosure
only, are as follows:
Cash and cash equivalents. Due to their short-term nature, the carrying amount of cash and cash equivalents approximates
fair value.
Investment securities held-to-maturity. Fair values are generated using market inputs, where possible, including quoted
prices (the closing price in an exchange market), bid prices (the price at which a buyer stands ready to purchase), and other market
information.
Loans with government guarantees. The fair value is estimated by using internally developed discounted cash flow models
using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Loans held-for-investment. The fair value is estimated using internally developed discounted cash flow models using
market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Federal Home Loan Bank stock. No secondary market exists for FHLB stock. The stock is bought and sold at par by the
FHLB. Management believes that the recorded value equals the fair value.
Bank owned life insurance. The fair value of bank owned life insurance policies is based on the cash surrender values of the
policies as reported by the insurance companies.
Other assets, foreclosure claims. The fair value of foreclosure claims with government guarantees approximates the carrying
amount.
120
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Deposit accounts. The fair value of deposits with no defined maturity is estimated based on a discounted cash flow model
that incorporates current market rates for similar products and expected attrition. The fair value of fixed-maturity certificates of deposit
is estimated using the rates currently offered for certificates of deposit with similar remaining maturities.
Federal Home Loan Bank advances. Rates currently available for debt with similar terms and remaining maturities are used
to estimate the fair value of the existing debt.
Long-term debt. The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates
current borrowing rates for similar types of borrowing arrangements.
Fair Value Option
We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements
to mitigate a divergence between accounting losses and 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:
Assets
Loans held-for-sale
Net gain on loan sales
Other noninterest income
Loans held-for-investment
Other noninterest income
Liabilities
Long-term debt
Other noninterest income
Litigation settlement
Other noninterest income
Other noninterest (expense)
For the Years Ended December 31,
2016
2015
2014
(Dollars in millions)
269
$
321
$
—
1
— $
$
24
—
—
40
29
$
—
(2)
401
(2)
44
22
11
—
$
$
$
121
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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:
December 31, 2016
December 31, 2015
(Dollars in millions)
December 31, 2014
Unpaid
Principal
Balance
Fair Value
Over/
(Under) UPB
Unpaid
Principal
Balance
Fair Value
Fair Value
Over/
(Under) UPB
Unpaid
Principal
Balance
Fair Value
Over/
(Under) UPB
Fair Value
Fair Value
Assets
Nonaccrual loans
Loans held-for-sale
$
2 $
2 $
— $
1 $
— $
(1) $
— $
— $
Loans held-for-investment
19
13
(6)
21
10
(11)
11
Total nonaccrual loans
$
21 $
15 $
(6) $
22 $
10 $
(12) $
11 $
5
5 $
Other performing loans
Loans held-for-sale
$
3,103 $
3,143 $
40
$
2,451 $
2,541 $
90
$
1,144 $
1,196 $
Loans held-for-investment
72
59
(13)
112
101
(11)
225
206
Total other performing
loans
Total loans
Loans held-for-sale
Loans held-for-investment
Total loans
Liabilities
Long-term debt
$
$
$
$
3,175 $
3,202 $
27
$
2,563 $
2,642 $
79
$
1,369 $
1,402 $
3,105 $
3,145 $
40
$
2,452 $
2,541 $
89
$
1,144 $
1,196 $
91
72
(19)
133
111
(22)
236
211
3,196 $
3,217 $
21
$
2,585 $
2,652 $
67
$
1,380 $
1,407 $
— $
— $
— $
— $
— $
— $
(88) $
(84) $
Litigation settlement (1)
(118)
(60)
58
(118)
(84)
34
(118)
(82)
(1) We are obligated to pay $118 million in installment payments upon meeting certain performance conditions.
—
(6)
(6)
52
(19)
33
52
(25)
27
4
36
Note 23 — Segment Information
Our operations are conducted through four operating segments: Community Banking, Mortgage Originations,
Mortgage Servicing, and Other, which 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 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.
Effective January 1, 2016, we reorganized our reportable segments to align with our new management reporting
structure and to align with our long-term strategy. Prior period segment financial information has been recast to conform to the
current presentation. Prior to the reorganization, representation and warranty reserves were reported in the Mortgage Servicing
segment and the MSR asset and associated costs were reported in the Other segment. As a result of this change, representation
and warranty reserves, as well as the MSR asset and associated costs are now reported in the Mortgage Originations segment.
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 HFI Portfolio groups. Products offered through these groups include checking accounts,
savings accounts, money market accounts, certificates of deposit, consumer loans, commercial loans, home builder finance
loans and warehouse lines of credit. Other financial services available to consumer and commercial customers include lines of
credit, revolving credit, customized treasury management solutions, equipment leasing, inventory, and accounts receivable
lending and capital markets services such as interest rate risk protection products.
The Mortgage Originations segment originates, acquires and sells one-to-four family residential mortgage loans. The
origination and acquisition of mortgage loans comprises the majority of the lending activity. Mortgage loans are originated
122
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
through home loan centers, national call centers, the Internet and unaffiliated banks and mortgage banking and brokerage
companies, where the net interest income and the gains from sales associated with these loans are recognized in the Mortgage
Originations segment.
The Mortgage Servicing segment services and subservices mortgage loans, on a fee basis, for others. Also, the
Mortgage Servicing segment services, on a fee basis, residential mortgages HFI held by the Community Banking segment and
MSRs held by the Mortgage Originations segment. The Mortgage Servicing segment may also collect ancillary fees, such as
late fees, and earns income through the use of noninterest-bearing escrows.
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 Mortgage Originations, Mortgage Servicing or Community
Banking operating segments.
Revenues are comprised of net interest income (before the provision (benefit) for loan losses) and noninterest income.
Noninterest expenses 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:
Summary of Operations
Net interest income
Net gain (loss) on loan sales
Representation and warranty benefit
Other noninterest income
Total net interest income and noninterest income
Benefit (provision) for loan losses
Asset resolution
Depreciation and amortization expense
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Intersegment revenue
Average balances
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment
Total assets
Deposits
Year Ended December 31, 2016
Community
Banking
Mortgage
Origination
Mortgage
Servicing
Other
Total
(Dollars in millions)
$
206
$
82
$
6
—
28
240
10
—
(7)
(173)
(180)
70
—
70
$
(3) $
310
19
26
437
—
(1)
(5)
(246)
(252)
185
—
185
1
33
—
—
54
87
(2)
(6)
(4)
(97)
(107)
(22)
—
$
2
$
— $
— $
$
44
46
—
—
(16)
(5)
(21)
25
87
$
$
(22) $
22
$
(62) $
(20) $
323
316
19
152
810
8
(7)
(32)
(521)
(560)
258
87
171
—
66
—
5,807
5,906
7,151
$
3,068
$
— $
—
6
3,824
—
435
—
639
1,611
—
—
—
3,538
—
3,134
435
5,813
13,907
8,762
$
$
$
123
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Summary of Operations
Net interest income
Net gain (loss) on loan sales
Representation and warranty benefit
Other noninterest income
Total net interest income and noninterest income
Benefit for loan losses
Asset resolution
Depreciation and amortization expense
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Intersegment revenue
Average balances
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment
Total assets
Deposits
Summary of Operations
Net interest income
Net gain (loss) on loan sales
Representation and warranty (provision) benefit
Other noninterest income
Total net interest income and noninterest income
Provision for loan losses
Asset resolution
Depreciation and amortization expense
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Benefit for income taxes
Net income (loss)
Intersegment revenue
Average balances
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment
Total assets
Deposits
$
$
$
Year Ended December 31, 2015
Community
Banking
Mortgage
Origination
Mortgage
Servicing
Other
Total
(Dollars in millions)
$
171
$
72
$
(15)
—
25
181
19
(1)
(6)
(153)
(160)
40
—
40
$
(15) $
303
19
78
472
—
(1)
(3)
(228)
(232)
240
—
240
10
13
—
—
56
69
—
(13)
(3)
(107)
(123)
(54)
—
$
31
$
— $
— $
$
4
35
—
—
(12)
(9)
(21)
14
82
$
$
(54) $
17
$
(68) $
(12) $
287
288
19
163
757
19
(15)
(24)
(497)
(536)
240
82
158
—
40
—
4,986
4,972
6,674
$
2,148
$
— $
—
4
2,661
—
633
—
944
1,203
—
—
86
3,379
—
2,188
633
5,076
11,956
7,877
Year Ended December 31, 2014
Community
Banking
Mortgage
Origination
Mortgage
Servicing
Other
Total
(Dollars in millions)
$
150
$
56
$
(3)
—
22
169
(132)
(4)
(5)
(158)
(167)
(130)
—
209
(10)
70
325
—
(3)
(1)
(206)
(210)
115
—
20
—
—
58
78
—
(50)
(6)
(123)
(179)
(101)
—
$
21
$
— $
— $
$
15
36
—
—
(12)
(11)
(23)
13
(34)
$
$
$
(130) $
(3) $
115
$
(2) $
(101) $
18
$
47
$
(13) $
$
1,472
$
20
$
—
1
1,630
—
1,216
—
1,349
750
—
—
146
2,964
—
62
—
3,975
3,943
5,984
124
247
206
(10)
165
608
(132)
(57)
(24)
(498)
(579)
(103)
(34)
(69)
—
1,554
1,216
4,122
9,886
6,734
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 24 — Holding Company Only Financial Statements
The following are the unconsolidated financial statements for the Holding Company on a stand-alone basis. These
condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
The Holding Company's principal sources of funds are cash dividends paid by the Bank to the Holding Company which are
these and other subsidiaries, investment income and borrowings. Federal laws and regulations limit the amount of dividends or
other capital distributions the Bank may pay the Holding Company.
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Financial Condition
(Dollars in millions)
December 31,
2016
2015
Assets
Cash and cash equivalents
Investment in subsidiaries (1)
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Long term debt
Other liabilities
Total liabilities
Stockholders’ Equity
Preferred Stock
Common stock
Additional paid in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
(1)
Includes unconsolidated trusts of $7 million for December 31, 2016 and 2015.
$
$
$
$
$
70
1,728
57
1,855
$
493
$
26
519
—
1
1,503
(7)
(161)
1,336
1,855
$
37
1,738
50
1,825
247
49
296
267
1
1,486
2
(227)
1,529
1,825
125
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Operations
(Dollars in millions)
Expenses
Interest
General and administrative
Total
Loss before undistributed loss of subsidiaries
Equity in undistributed income (loss) of subsidiaries
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Preferred stock dividends/accretion
Net income (loss) from continuing operations
Other comprehensive (loss) income (1)
Comprehensive income (loss)
For the Years Ended December 31,
2016
2015
2014
$
16
$
7
$
9
25
(25)
188
163
8
171
—
171
(9)
162
$
13
20
(20)
172
152
6
158
—
158
(6)
152
$
$
7
5
12
(12)
(63)
(75)
6
(69)
(1)
(70)
13
(57)
(1) See Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail.
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Cash Flows
(Dollars in millions)
Net income (loss)
$
171
$
158
$
(69)
For the Years Ended December 31,
2016
2015
2014
Adjustments to reconcile net loss to net cash provided by
operating activities
Equity in (income) loss of subsidiaries net of dividends
Stock-based compensation
Change in other assets
Provision for deferred tax benefit
Change in other liabilities
Change in fair value and other non-cash changes
Net cash used in operating activities
Investing Activities
Net change in investment in subsidiaries
Net cash provided by (used in) investment activities
Financing Activities
Proceeds from the issuance of junior subordinated debentures
Redemption of preferred stock
Dividends paid on preferred stock
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
126
12
10
(8)
—
(22)
(4)
159
—
—
245
(267)
(104)
(126)
33
37
70
$
(172)
3
(6)
1
9
—
(7)
(2)
(2)
—
—
—
—
(9)
46
37
$
63
3
(3)
—
4
—
(2)
(2)
(2)
—
—
—
—
(4)
50
46
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 25 — Quarterly Financial Data (Unaudited)
The following table represents summarized data for each of the quarters in 2016, 2015 and 2014:
2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in millions, except per share data)
$
101
$
$
106
$
111
Interest income
Interest expense
Net interest income
Provision (benefit) for loan losses
Net interest income after provision for loan losses
Net gain on loan sales
Loan fees and charges
Loan administration income
Net (loss) on the mortgage servicing rights
Representation and warranty benefit
Other noninterest income
Noninterest expense
Income before income tax
Provision for income taxes
Net income from continuing operations
Basic income per share
Diluted income per share
Interest income
Interest expense
Net interest income
Benefit for loan losses
Net interest income after provision for loan losses
Net gain on loan sales
Loan fees and charges
Loan administration income
Net (loss) return on the mortgage servicing rights
Representation and warranty benefit
Other noninterest income
Noninterest expense
Income before income tax
Provision (benefit) for income taxes
Net income from continuing operations
Basic income per share
Diluted income per share
$
$
$
$
$
$
$
22
79
(13)
92
75
15
6
(6)
2
13
137
60
21
39
0.56
0.54
$
$
$
99
22
77
(3)
80
90
19
4
(4)
4
15
139
69
22
47
0.67
0.66
$
$
$
2015
First
Quarter
Second
Quarter
Third
Quarter
(Dollars in millions, except per share data)
90
17
73
(13)
86
83
19
7
9
5
3
138
74
28
46
0.69
0.68
$
$
$
$
91
18
73
(1)
74
68
17
8
12
6
17
131
71
24
47
0.70
0.69
79
14
65
(4)
69
91
17
4
(2)
2
7
138
50
18
32
0.43
0.43
$
$
$
$
127
26
80
7
73
94
22
4
(11)
6
41
142
87
30
57
0.98
0.96
24
87
1
86
57
20
4
(5)
7
15
142
42
14
28
0.50
0.49
95
19
76
(1)
77
46
14
7
9
6
15
129
45
12
33
0.45
0.44
Fourth
Quarter
$
$
$
$
$
$
$
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
2014
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in millions, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest (expense) income after provision for loan
losses
Net gain on loan sales
Loan administration income
Net return on the mortgage servicing rights
Representation and warranty (provision) benefit
Other noninterest income
Noninterest expense
(Loss) income before income tax
Provision (benefit) for income taxes
Net (loss) income
Preferred stock dividends/accretion
Net (loss) income from continuing operations
Basic (loss) income per share
Diluted (loss) income per share
$
$
$
$
$
66
8
58
112
(54)
45
7
16
2
5
139
(118)
(40)
(78)
(1)
(79) $
(1.51) $
(1.51) $
72
9
63
6
57
55
6
5
(5)
42
122
38
12
26
—
26
0.33
0.33
$
$
$
$
$
75
11
64
8
56
52
6
1
(13)
39
179
(38)
(10)
(28)
—
(28) $
(0.61) $
(0.61) $
72
11
61
5
56
53
5
2
6
32
139
15
4
11
—
11
0.07
0.07
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934
as amended (the Exchange Act), our management, with the participation of the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness and design of our disclosure controls and procedures (as that term is
defined in Rule 13a-15(e) of the Exchange Act). In designing and evaluating our disclosure controls and procedures, we
recognize that any controls and procedures, no matter how well designed and implemented, can provide only reasonable
assurance of achieving the desired control objectives, and that our management’s duties require it to make its best judgment
regarding the design of our disclosure controls and procedures.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of December 31, 2016.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that:
(i) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
128
(ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial
statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may
deteriorate.
With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an
assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016, based on the
framework and criteria established in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on this assessment, as of December 31, 2016 we assert that we have maintained effective internal control over
financial reporting.
The effectiveness of Management's internal control over financial reporting as of December 31, 2016, has been audited
by PricewaterhouseCoopers, LLP, our independent registered public accounting firm, as stated in their report, which is included
herein.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter
ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, such internal control over
financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
129
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
Except as set forth below, the information required by this Item 10 will be contained in our Proxy Statement relating to
the 2017 Annual Meeting of Stockholders and is hereby incorporated by reference.
Our Code of Business Conduct and Ethics, our Corporate Governance Guidelines and charters for our Audit
Committee, Compensation Committee, and Nominating Corporate Governance Committee are available at www.flagstar.com
or upon written request by stockholders to Flagstar Bancorp, Inc., Attn: James Ciroli, CFO, 5151 Corporate Drive, Troy, MI
48098.
None of the information currently posted, or posted in the future, on our website is incorporated by reference into this
Form 10-K.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained in our Proxy Statement relating to the 2017 Annual Meeting
of Stockholders and is hereby incorporated by reference, provided that the Compensation Committee Report shall be deemed to
be furnished and not filed.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 will be contained in our Proxy Statement relating to the 2017 Annual Meeting
of Stockholders and is hereby incorporated by reference. Reference is also made to the information appearing under Item 5 of
this Form 10-K, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be contained in our Proxy Statement relating to the 2017 Annual Meeting
of Stockholders and is hereby incorporated by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be contained in our Proxy Statement relating to the 2017 Annual Meeting
of Stockholders and is hereby incorporated by reference.
130
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) — Financial Statements and Schedules
The information required by these sections of Item 15 are set forth in the Index to Consolidated Financial Statements
under Item 8 of this annual report on Form 10-K.
(3) — Exhibits
The following documents are filed as a part of, or incorporated by reference into, this report:
Exhibit No.
Description
3.1*
3.2*
4.1*
4.2*
4.3*
10.1+
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9*
10.10*
10.11
10.12
Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc. (previously filed
as Exhibit 3.1 to the Company’s Annual Report on Form 10-K, dated March 16, 2015, and
incorporated herein by reference).
Sixth Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the
Company’s Current Report on Form 10-Q, dated November 7, 2016, and incorporated herein by
reference).
Indenture, dated July 11, 2016, between Flagstar Bancorp, Inc. as Issuers and Wilmington Trust,
National Association, as Trustee and Collateral Agent, including the form of 6.125% senior secured
note due 2021 (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated
July 11, 2016, and incorporated herein by reference)
Registration Rights Agreement, dated as of July 11, 2016, among Flagstar Bancorp, Inc., J.P.
Morgan Securities LLC and Sandler O’Neill & Partners, L.P. as representatives of the initial
purchasers (previously filed as Exhibit 4.3 to the Company's Current Report on Form 8-K, dated
July 11, 2016, and incorporated herein by reference)
Form of 6.125% Global Note due 2021 (previously filed as Exhibit 4.3 to the Company's Current
Report on Form S-4, dated October 4, 2016, and incorporated herein by reference)
Flagstar Bancorp, Inc. 2006 Equity Incentive Plan
Form of Purchase Agreement, dated as of May 16, 2008, between the Company and the purchasers
named therein
Form of First Amendment to Purchase Agreement, dated as of December 16, 2008, between the
Company and the purchasers named therein
Form of Warrant
Investment Agreement, dated as of December 17, 2008, between the Company and MP Thrift
Investments L.P.
Closing Agreement, dated as of January 30, 2009, between the Company and MP Thrift
Investments L.P.
Purchase Agreement, dated as of February 17, 2009, between the Company and MP Thrift
Investments L.P.
Second Purchase Agreement, dated as of February 27, 2009, between the Company and MP Thrift
Investments L.P.
Capital Securities Purchase Agreement, dated as of June 30, 2009, by and between the Company,
Flagstar Statutory Trust XI, a Delaware statutory trust and MP Thrift Investments L.P. (previously
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated as of July 1, 2009, and
incorporated herein by reference).
Form of Warrant (previously filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K,
dated March 10, 2016 and incorporated herein by reference)
Supervisory Agreement, dated as of January 27, 2010, by and between the Company and the
Federal Reserve (as successor to the OTS)
Stipulation and Order of Settlement and Dismissal, dated February 24, 2012, by and among the
Company, the Bank and the United States of America
131
Exhibit No.
10.13*+
10.14*+
10.15*+
10.16*+
10.17*+
10.18*+
10.19*+
10.20*+
11
12
21
23.1
23.2
31.1
31.2
32.1
32.2
101
*
+
Description
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.,
Flagstar Bank, FSB and Alessandro P. DiNello (previously filed as Exhibit 10.43 to the Company's
Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated herein by reference).
Amendment to Employment Agreement effective October 22, 2015, by and between Flagstar
Bancorp, Inc., Flagstar Bank, FSB and Alessandro DiNello (previously filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated
herein by reference).
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.,
Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.44 to the Company's
Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated herein by reference).
Amendment to Employment Agreement, dated March 2, 2015, by and between Flagstar Bancorp,
Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by
reference).
Second Amendment to Employment Agreement, effective October 22, 2015, by and between
Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated
herein by reference).
Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (previously filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated
herein by reference).
Form of Senior Executive Officer Award Agreement under Flagstar Bancorp, Inc. 2016 Stock
Award and Incentive Plan (previously filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K, dated as of May 25, 2016, and incorporated herein by reference).
Form of Executive Long-Term Incentive Program Award Agreement under Flagstar Bancorp, Inc.
2016 Stock Award and Incentive Plan (previously filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
Statement regarding computation of per share earnings incorporated by reference to Note 17 of the
Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary
Data, herein.
Statement of Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends.
List of Subsidiaries of the Company.
Consent of Baker Tilly Virchow Krause, LLP
Consent of PricewaterhouseCoopers, LLP
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer
Financial statements from Annual Report on Form 10-K of the Company for the year ended
December 31, 2016, 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.
Incorporated herein by reference
Constitutes a management contract or compensation plan or arrangement
Flagstar Bancorp, Inc. will furnish to any stockholder a copy of any of the exhibits listed above upon written request
and upon payment of a specified reasonable fee, which fee shall be equal to the Company’s reasonable expenses in furnishing
the exhibit to the stockholder. Requests for exhibits and information regarding the applicable fee should be directed to "David
Urban, Director of Investor Relations" at the address of the principal executive offices set forth on the cover of this Annual
Report on Form 10-K.
(b) — Exhibits. See Item 15(a)(3) above.
(c) — Financial Statement Schedules. See Item 15(a)(2) above.
132
ITEM 16. FORM 10-K SUMMARY
Not applicable.
133
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 13, 2017.
SIGNATURES
FLAGSTAR BANCORP, INC.
By:
/s/ James K. Ciroli
James K. Ciroli
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on March 13, 2017.
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
SIGNATURE
TITLE
/S/ ALESSANDRO DINELLO
Alessandro DiNello
President and Chief Executive Officer (Principal
Executive Officer)
/S/ JAMES K. CIROLI
James K. Ciroli
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
/S/ BRYAN L. MARX
Bryan L. Marx
Senior Vice President and Chief Accounting
Officer (Principal Accounting Officer)
/S/ JOHN D. LEWIS
John D. Lewis
Chairman
/S/ DAVID J. MATLIN
David J. Matlin
/S/ PETER SCHOELS
Peter Schoels
/S/ DAVID L. TREADWELL
David L. Treadwell
/S/ JAY J. HANSEN
Jay J. Hansen
/S/ JAMES A. OVENDEN
James A. Ovenden
/S/ BRUCE E. NYBERG
Bruce E. Nyberg
/S/ JENNIFER R. WHIP
Jennifer Whip
Director
Director
Director
Director
Director
Director
Director
134
EXHIBIT INDEX
The following documents are filed as a part of, or incorporated by reference into, this report:
Exhibit No.
Description
3.1*
3.2*
4.1*
4.2*
4.3*
10.1+
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9*
10.10*
10.11
10.12
10.13*+
10.14*+
10.15*+
10.16*+
Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc. (previously filed
as Exhibit 3.1 to the Company’s Annual Report on Form 10-K, dated March 16, 2015, and
incorporated herein by reference).
Sixth Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the
Company’s Current Report on Form 10-Q, dated November 7, 2016, and incorporated herein by
reference).
Indenture, dated July 11, 2016, between Flagstar Bancorp, Inc. as Issuers and Wilmington Trust,
National Association, as Trustee and Collateral Agent, including the form of 6.125% senior secured
note due 2021 (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated
July 11, 2016, and incorporated herein by reference)
Registration Rights Agreement, dated as of July 11, 2016, among Flagstar Bancorp, Inc., J.P.
Morgan Securities LLC and Sandler O’Neill & Partners, L.P. as representatives of the initial
purchasers (previously filed as Exhibit 4.3 to the Company's Current Report on Form 8-K, dated
July 11, 2016, and incorporated herein by reference)
Form of 6.125% Global Note due 2021 (previously filed as Exhibit 4.3 to the Company's Current
Report on Form S-4, dated October 4, 2016, and incorporated herein by reference)
Flagstar Bancorp, Inc. 2006 Equity Incentive Plan
Form of Purchase Agreement, dated as of May 16, 2008, between the Company and the purchasers
named therein
Form of First Amendment to Purchase Agreement, dated as of December 16, 2008, between the
Company and the purchasers named therein
Form of Warrant
Investment Agreement, dated as of December 17, 2008, between the Company and MP Thrift
Investments L.P.
Closing Agreement, dated as of January 30, 2009, between the Company and MP Thrift
Investments L.P.
Purchase Agreement, dated as of February 17, 2009, between the Company and MP Thrift
Investments L.P.
Second Purchase Agreement, dated as of February 27, 2009, between the Company and MP Thrift
Investments L.P.
Capital Securities Purchase Agreement, dated as of June 30, 2009, by and between the Company,
Flagstar Statutory Trust XI, a Delaware statutory trust and MP Thrift Investments L.P. (previously
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated as of July 1, 2009, and
incorporated herein by reference).
Form of Warrant (previously filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K,
dated March 10, 2016 and incorporated herein by reference)
Supervisory Agreement, dated as of January 27, 2010, by and between the Company and the
Federal Reserve (as successor to the OTS)
Stipulation and Order of Settlement and Dismissal, dated February 24, 2012, by and among the
Company, the Bank and the United States of America
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.,
Flagstar Bank, FSB and Alessandro P. DiNello (previously filed as Exhibit 10.43 to the Company's
Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated herein by reference).
Amendment to Employment Agreement effective October 22, 2015, by and between Flagstar
Bancorp, Inc., Flagstar Bank, FSB and Alessandro DiNello (previously filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated
herein by reference).
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.,
Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.44 to the Company's
Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated herein by reference).
Amendment to Employment Agreement, dated March 2, 2015, by and between Flagstar Bancorp,
Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by
reference).
135
Description
Second Amendment to Employment Agreement, effective October 22, 2015, by and between
Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated
herein by reference).
Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (previously filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated
herein by reference).
Form of Senior Executive Officer Award Agreement under Flagstar Bancorp, Inc. 2016 Stock
Award and Incentive Plan (previously filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K, dated as of May 25, 2016, and incorporated herein by reference).
Form of Executive Long-Term Incentive Program Award Agreement under Flagstar Bancorp, Inc.
2016 Stock Award and Incentive Plan (previously filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
Statement regarding computation of per share earnings incorporated by reference to Note 17 of the
Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary
Data, herein.
Statement of Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends.
List of Subsidiaries of the Company.
Consent of Baker Tilly Virchow Krause, LLP
Consent of PricewaterhouseCoopers, LLP
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer
Financial statements from Annual Report on Form 10-K of the Company for the year ended
December 31, 2016, 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.
Exhibit No.
10.17*+
10.18*+
10.19*+
10.20*+
11
12
21
23.1
23.2
31.1
31.2
32.1
32.2
101
*
+
Incorporated herein by reference
Constitutes a management contract or compensation plan or arrangement
136
7378_Cover.indd 23/21/17 7:58 PM 5151 Corporate Drive, Troy, MI 48098 (800) 945-7700 flagstar.comANNUAL REPORT TWO THOUSAND SIXTEENFLAGSTAR BANCORP ANNUAL REPORT 20167378_Cover.indd 13/17/17 4:14 PM