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TO OUR SHAREHOLDERS
Flagstar turned in another successful year in 2017 as all three of our business
lines—community banking, mortgage, and mortgage servicing—strengthened
during the year. Community banking took center stage with a strong showing
in every quarter. Mortgage lending thrived in a challenging year for originations,
and our servicing business flourished.
$2.1
Billion in Market
Capitalization
3rd
Largest Savings
Bank Nationwide
$16.9
Billion
in Assets
5th
Largest Bank Mortgage
Originator Nationwide
We were very pleased with our net income for the year. Net income, which was $63 million for GAAP purposes, totaled
an adjusted $143 million before a one-time charge we took due to the Tax Reform and New Jobs Act (“Tax Reform”).
While Tax Reform reduced the value of our deferred assets by $80 million, we expect to recoup this charge relatively
quickly and benefit greatly from the lower tax rate over the long term.
During 2017, community banking was a standout, adding $1 billion of commercial real estate and commercial and
industrial loans to the balance sheet. This contributed to an increase in net interest income of $67 million, or 21 percent,
over 2016. These relationship-based loans produce earnings that smooth out the volatility of our mortgage revenue and
advance our transition to a strong community bank.
Our mortgage servicing business—and especially our subservicing business—continued to gain scale, and we closed 2017
with a servicing portfolio of 442,000 accounts. We believe we now have reached a critical mass in the business, thanks to
our unique offering that has helped us attract meaningful opportunities for subservicing non-Flagstar originated loans.
We kept capital strong and credit quality pristine, ending the year with an allowance coverage well above the level of any
mid-size banking peer. We believe no one is better positioned on loan quality than Flagstar should the economy worsen.
In 2017, we executed on strategies both to solidify our leadership position in the mortgage business and acquire low-cost
deposits to fund loan growth. Early in the year, we added the delegated correspondent team of Stearns Lending to boost
our capabilities in this specialized third-party origination channel. The performance of this team and this business has
been outstanding.
We followed Stearns quickly with the acquisition of Opes Advisors, a retail home lender headquartered in California,
which is Flagstar’s largest state for mortgage originations.
Next we announced our agreement to acquire eight branches of Desert Community Bank in San Bernardino County,
California. These branches will provide approximately $600 million of attractive, well-priced deposits to fund loan growth
and expand our banking footprint to California.
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Finally, early in 2018, we announced a definitive agreement to purchase a mortgage warehouse loan portfolio from
Santander Bank. We expect that this acquisition will strengthen and diversify our mortgage warehouse business.
With these acquisitions and the addition of successful lending teams, we have transformed Flagstar from a mostly
wholesale mortgage lender originating conventional loans for mostly smaller third-party lenders to a strong national
lender that has depth and strength across multiple channels and multiple products. This helps protect our mortgage
revenue and thus, the durability of our earnings.
During 2017, we went directly to the capital markets to securitize our own pool of jumbo prime mortgage loans and high-
balance conforming loans, making us only the third bank since the housing crisis to execute such a transaction. This was
a cost-effective way of accessing the market, and it gives us a nice competitive advantage.
To build awareness of Flagstar’s name and brand, we entered into a multi-year partnership as the Detroit Pistons’
first-ever jersey partner and official banking and mortgage sponsor. We’re excited about this partnership and all the
opportunities to expose the Flagstar brand and messaging in local as well as national markets.
Here are some other highlights of the year:
• We became a bigger bank, ending 2017 with assets of $16.9 billion versus $14.1 billion at the close of 2016.
• Our stock showed the highest percentage increase in shareholder value—39 percent—among all mid-size banks in
2017, according to SNL.
• We made impressive progress in our diversity and inclusion initiative, not just in making a public commitment and
establishing pillars, measurements, and employee resource groups, but also in practice on our own board and
executive team.
• We won three Best Places to Work awards, a Diversity & Inclusion award from the Mortgage Bankers Association,
and a Fannie Mae STAR Performer award for Servicing for the second year running.
We expect the benefits of a lower tax rate and proposed capital simplification regulations to accelerate capital formation
and balance sheet growth, helping to position us to prudently grow Flagstar and deliver higher value to our shareholders.
My deep and abiding appreciation to the entire Flagstar team for their extraordinary efforts to craft solutions for our
customers in 2017. The success of the year is their handiwork.
A very special thank-you to our board of directors for their continued diligence and hard work on Flagstar’s behalf,
and my profound thanks to you, our shareholders, for your support and your confidence in our business plan.
Alessandro DiNello
President and Chief Executive Officer
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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, 2017
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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities 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
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
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):
No
No
Large Accelerated Filer
Non-Accelerated Filer
Accelerated Filer
Emerging growth company
Smaller Reporting Company
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 ($30.82 per share) as reported on the New York Stock Exchange on June 30, 2017, was approximately $665 million.
The registrant does not have any non-voting common equity shares.
.
As of March 8, 2018, 57,363,798 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 2018 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART I
PART II
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
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
CONTROLS AND PROCEDURES
OTHER INFORMATION
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
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15.
ITEM 16.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
PART IV
5
10
18
18
18
18
19
21
23
63
64
123
123
124
125
125
125
125
125
126
128
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
Agencies
ALLL
AOCI
ASU
Definition
Available for Sale
Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation, and Government National Mortgage
Association, Collectively
Term
Definition
Home Equity
Second Mortgages, HELOANs, HELOCs
HOLA
Home Owners Loan Act
Allowance for Loan & Lease Losses
Accumulated Other Comprehensive Income (Loss)
Accounting Standards Update
HPI
H.R.1.
HTM
Housing Price Index
House of Representatives 1 - Tax Cuts and Jobs Act
Held-to-Maturity
Basel III
Basel Committee on Banking Supervision Third Basel Accord
LIBOR
London Interbank Offered Rate
BSA
C&I
CAMELS
Bank Secrecy Act
Commercial and Industrial
Capital, Asset Quality, Management, Earnings, Liquidity and
Sensitivity
LHFI
LHFS
LTV
Loans Held-for-Investment
Loans Held-for-Sale
Loan-to-Value
CD
Certificates of Deposit
Management
Flagstar Bancorp’s Management
CDARS
Certificates of Deposit Account Registry Service
Common Equity Tier 1
Consumer Financial Protection Bureau
Combined Loan to Value
Common Shares
Commercial Real Estate
Depositors Insurance Fund
United States Department of Justice
Deferred Tax Asset
Economic Value of Equity
Executive Long-Term Incentive Program
Fair Credit Reporting Act and the Fair and Accurate Credit
Transactions Act
Federal National Mortgage Association
Financial Accounting Standards Board
Flagstar Bancorp
Federal Deposit Insurance Corporation
MBIA
MBS
MD&A
MBIA Insurance Corporation
Mortgage-Backed Securities
Management's Discussion and Analysis
MP Thrift
MP Thrift Investments, L.P.
MSR
N/A
Mortgage Servicing Rights
Not Applicable
NASDAQ
National Association of Securities Dealers Automated Quotations
NBV
NYSE
OCC
OCI
Net Book Value
New York Stock Exchange
Office of the Comptroller of the Currency
Other Comprehensive Income (Loss)
OFHEO
Office of Federal Housing Enterprise Oversight
OTS
OTTI
QTL
Regulatory
Agencies
Office of Thrift Supervision
Other-Than-Temporary-Impairment
Qualified Thrift Lending
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
Board of Governors of the Federal Reserve System
RESPA
Real Estate Settlement Procedures Act
CET1
CFPB
CLTV
Common
Stock
CRE
DIF
DOJ
DTA
EVE
ExLTIP
FACT Act
Fannie Mae/
FNMA
FASB
FBC
FDIC
Federal
Reserve
FHA
FHLB
FICO
FRB
Freddie Mac/
FHLMC
FTE
GAAP
Ginnie Mae/
GNMA
Federal Housing Administration
Federal Home Loan Bank
Fair Isaac Corporation
Federal Reserve Bank
Federal Home Loan Mortgage Corporation
Full Time Equivalent
Generally Accepted Accounting Principles
Government National Mortgage Association
GLBA
Gramm-Leach Bliley Act
HELOAN
Home Equity Loans
HELOC
Home Equity Lines of Credit
HFI
Held for Investment
RMBS
RWA
SEC
SFR
TARP
TDR
TILA
UPB
U.S.
Treasury
VIE
XBRL
Residential Mortgage-Backed Securities
Risk Weighted Assets
Securities and Exchange Commission
Single Family Residence
Troubled Asset Relief Program
Trouble Debt Restructuring
Truth in Lending Act
Unpaid Principal Balance
United States Department of Treasury
Variable Interest Entities
eXtensible Business Reporting Language
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 without limitation the precautionary statements included within each individual
business’ discussion and analysis of our results of operations and the risk factors listed and described in Part I, Item 1A. Risk
Factors.
Other than as required under United States securities laws, Flagstar Bancorp does not undertake to update the forward-
looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking
statements.
4
ITEM 1.
BUSINESS
PART I
Where we say "we," "us," "our," the "Company," "Bancorp" or "Flagstar," we usually mean Flagstar Bancorp, Inc.
However, in some cases, a reference to "we," "us," or "our," the "Company," or "Flagstar," will include our wholly-owned
subsidiary Flagstar Bank, FSB (the "Bank"). See the Glossary of Abbreviations and Acronyms on page 3 for definitions used
throughout this Form 10-K.
Introduction
We are a leading savings and loan holding company founded in 1993. Our business is primarily conducted through our
principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. Based on our assets at December 31,
2017, we are one of the largest banks headquartered in Michigan, providing commercial, small business, and consumer banking
services, and the 5th largest bank mortgage originator in the nation. At December 31, 2017, we had 3,525 full-time equivalent
employees inclusive of account executives and loan officers. Our common stock is listed on the NYSE under the symbol
"FBC." As of December 31, 2017, we are considered a controlled company for NYSE purposes, because approximately 62.1
percent of our common stock is owned by MP Thrift Investments, L.P., which is managed by MatlinPatterson, a global asset
manager.
We have a unique, relationship-based business model which leverages our full-service bank’s capabilities with our
national mortgage customer base to create and build enduring commercial relationships. Our banking network emphasizes the
delivery of a complete set of banking and mortgage products and services. We distinguish ourselves by crafting specialized
solutions for our customers, local delivery, high quality customer service and competitive product pricing. Our community bank
growth model has focused on attracting seasoned bankers with larger bank lending experience who can attract their existing
long-term customer relationships to Flagstar. At December 31, 2017, we operated 99 full service banking branches throughout
Michigan's major markets where we offer a full set of banking products to consumer, commercial, and government customers.
We originate mortgages through a wholesale network of correspondents and brokers in all 50 states, as well as through
our own loan officers from 89 retail locations in 29 states, representing the combined retail branches of Flagstar Bank, our
direct-to-consumer lending team and the Opes Advisors mortgage division. The Bank has the opportunity to expand
correspondent relationships by providing warehouse lending, mortgage servicing and other services. Servicing and subservicing
of loans provides fee income and generates a stable long-term source of funding through company controlled deposits.
We believe our transformation into a strong commercial bank, our flexible mortgage servicing platform, and focus on
service creates a significant competitive advantage in the markets in which we compete. The management team we have
assembled is focused on developing substantial and attractive growth opportunities that generate profitable results from
operations. We believe our lower risk profile and strong capital level position us to take advantage of opportunities to deliver
attractive shareholder returns over the long term.
Operating Segments
Our operations are conducted through our three operating segments: Community Banking, Mortgage Originations and
Mortgage Servicing. Additionally, our Other segment includes the remaining reported activities. For further information, see
MD&A - Operating Segments and Note 23 - Segment Information.
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 competitive interest rates and a broad
range of high quality customized banking services at a large number of convenient locations. From a lending perspective, there
are many institutions including commercial banks, national mortgage lenders, local savings banks, credit unions, and
commercial lenders offering mortgage loans, consumer loans, commercial loans and warehouse loans. With respect to those
products that we offer, we compete by offering competitive interest rates, fees, and other loan terms through efficient and
customized service.
5
Subsidiaries
At December 31, 2017, our corporate structure consisted of the Bank subsidiary and its wholly-owned subsidiaries
along with our wholly-owned non-bank subsidiaries through which we conduct other non-material business or which are
inactive. The Bank and its wholly owned subsidiaries comprised 99.7 percent of our total assets at December 31, 2017. For
further information, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting
Standards, Note 7 - Variable Interest Entities and Note 24 - Holding Company Only Financial Statements.
Regulation and Supervision
We 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.
As a result of 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. 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 allowing a consumer or class of consumers to seek 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 and the CFPB may have the authority to take regulatory enforcement
actions against us or the Bank.
Compliance obligations have exposed us, and will continue to expose us, to additional compliance risks 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. 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.
Consent Orders and Supervisory Agreements
Supervisory Agreement. On January 28, 2010, we became subject to a supervisory agreement with the Federal Reserve
("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 2016 Form 10-K for the year ended December 31, 2016.
Consent Order with CFPB. On September 29, 2014, the Bank entered into a Consent Order with the CFPB ("the
Consent Order") which will remain in effect for five years unless extended by 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 paid $28 million for
borrower remediation and $10 million in civil money penalties. The settlement did not include an 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
6
the terms of the Consent Order, please refer to the copy of the Consent Order filed with the SEC as an exhibit to our Current
Report on Form 8-K filed on September 29, 2014.
Holding Company Regulation
The Company is a savings and loan holding company regulated by 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 Home
Owners' Loan 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 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, a savings
and loan 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, or repurchase
or redeem its equity.
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 referred to as 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 Flagstar 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 Flagstar have been subject to the capital requirements of the Basel III rules since January 1, 2015. On
October 27, 2017, the agencies published a proposed rule to simplify certain aspects of the capital rules, which includes
proposed simplifications to the capital treatment for items covered by this final rule. The agencies expect that the capital
treatment and transition provisions for items covered by Basel III rules will change once the simplification proposal is finalized
and effective. On November 21, 2017, in preparation for forthcoming rules that would simplify regulatory capital requirements
to reduce regulatory burden, federal banking regulators approved the extension of the existing transitional capital treatment for
certain regulatory capital deductions and risk weights. For additional information, see Note 20 - Regulatory Capital.
Stress Testing Requirements. The Dodd-Frank Act issued by U.S. federal banking agencies, including the OCC and the
Federal Reserve, 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 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.
7
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.
Durbin Amendment. The Durbin Amendment to the Dodd-Frank Act altered the competitive structure of the debit card
payment processing industry and limited 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 plus 5
basis points multiplied by the value of the transaction. The impact of this amendment was a reduction in fee revenue of
approximately $4 million the year ended December 31, 2017.
Collins Amendment. The Collins Amendment to Dodd-Frank established 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 that had 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 classified as long term
debt on our balance sheet will be included as Tier 1 capital while they are outstanding, unless we complete an acquisition of a
depository institution holding company. At our present size, with total assets of $16.9 billion at December 31, 2017, an
acquisition with a depository holding company would cause our trust preferred securities totaling $247 million at December 31,
2017 to no longer be included in Tier 1 capital.
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 Federal Reserve, the Office of the Comptroller of the
Currency of the U.S. Department of the Treasury, the Consumer Financial Protection Bureau, and the Federal Deposit Insurance
Corporation.
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. All FDIC-insured financial
institutions must pay an annual assessment based on asset size 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.
8
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 in excess of 15 percent of Tier 1 and Tier 2 capital plus any portion of the
allowance for loan losses not included in Tier 2 capital, which was $251 million as of December 31, 2017. For further
information, see MD&A - Risk Management.
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 GLBA regarding customer privacy and data security.
The Bank is subject to supervision by the CFPB, which has responsibility for enforcing federal consumer protection
laws. 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.
As a result of bank regulator’s focus on consumer compliance, portions of our lending operations which most directly
deal with consumers, including mortgage and consumer lending, may pose particular challenges. While we are not aware of any
material compliance issues related to our mortgage and consumer lending practices, the focus of regulators may increase our
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.
Additionally, the Equal Credit Opportunity Act and the Fair Housing Act prohibit financial institutions from engaging
in discriminatory lending practices. 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
or limit certain revenue channels.
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 safety and soundness 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 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.
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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, we believe 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 economic and market conditions, political uncertainty and social
conditions, factors impacting 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, 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.
Domestic and international fiscal and monetary policy also affects our business. 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.
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. Seasonal trends have historically reflected the general patterns of residential and
commercial real estate sales, which typically peak in the spring and summer seasons. 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
and the economic condition of those areas. If we are unable to respond to the cyclicality of our industry by appropriately
adjusting our operations or relying on the strength of our other product offerings during cyclical downturns, our business,
financial condition and results of operations could be adversely affected.
Changes in interest rates could adversely affect our financial condition and results of operations including our net interest
margin, mortgage origination volume and mortgage related assets, and our 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, resulting in a decrease in our net interest income. We seek to manage our balance sheet
to be interest rate neutral. In response to changes in the interest rate environment, we make adjustments to match the duration of
our assets with the duration of our liabilities.
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In 2017, approximately 49 percent of our revenue was derived from the origination of residential mortgages and
changes in interest rates may affect origination volume as 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. Historically, mortgage origination volume 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. During 2017, average 10 year U.S. Treasury rates,
on which we base our pricing of our 30 year mortgages, were 2.33 percent, 49 basis points higher than average rates
experienced throughout 2016. The sustained higher rates experienced throughout 2017 negatively impacted the mortgage
market including loan origination volume and refinancing activity.
Changes in interest rates may affect the average life of our mortgage loans and mortgage related securities and, to a
lesser extent, our commercial loans. Decreases in interest rates can trigger an increase in unscheduled prepayments of our
loans and mortgage-related securities as borrowers refinance to reduce their own borrowing costs. Conversely, increases in
interest rates may decrease loan refinance activity.
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 and
decreases in the fair value have an adverse effect on our stockholders’ equity or our earnings.
Additionally, 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 market expectation for higher
levels of repayments in the future which have a negative impact on MSR fair value. We utilize derivatives and other fair value
assets to manage the impact of changes in the fair value of the MSRs. Our risk management strategies, which rely on
assumptions or projections, may not adequately mitigate the impact of changes in interest rates, interest rate volatility or
prepayment speeds, and as a result, the change in the fair value of MSRs may negatively impact earnings.
We may be unable to effectively manage our MSR concentration risk which could impact our Common Equity Tier 1 ratio
(CET1) under Basel III.
As of December 31, 2017, we had $291 million in MSRs and a MSR to Common Equity Tier 1 Capital ratio of 24
percent. We produced, on average, approximately $73 million new MSRs per quarter in 2017. We manage our MSR
concentration through sales of these assets and in 2017, we sold $361 million in MSRs. In addition, as of December 31, 2017,
we had pending MSR sales of $98 million which closed during the first quarter of 2018. While our established plan to manage
our MSR concentration incorporates our production volumes and required sales, no assurance 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.
We are subject to rules relating to capital standards requirements, including requirements contemplated by 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 qualifying criteria for regulatory capital, including limitations on the
amount of DTAs and MSRs that may be held without triggering higher capital requirements. Basel III limits the amount of
MSRs and DTAs to 10 percent of CET1, individually, and 15 percent of CET1, in the aggregate.
On October 27, 2017, the agencies issued a notice of proposed rulemaking (“NPR”) which would simplify certain
aspects of the Basel III capital rules. The agencies expect that the capital treatment and transition provisions for items covered
by this final rule will change once the simplification proposal is finalized and effective. Specifically, the proposal would
increase the limit on MSRs to 25 percent of CET1 and eliminate the aggregate 15 percent CET1 deduction threshold for MSRs
and temporary difference DTAs. In response to comments received from bankers and trade associations, the regulators may
change these proposed rules prior to issuing them in their final form.
In preparation for the NPR, the Basel III implementation phase-in has been halted for the treatment of MSRs and
certain DTAs. The agencies issued a final rule that will maintain the capital rules’ 2017 transition provisions for several
regulatory capital deductions and certain other requirements that are subject to multi-year phase-in schedules in the regulatory
capital rules. Specifically, the final rule will maintain the capital rules’ 2017 transition provisions at 80 percent for the
regulatory capital treatment of the following items: (i) MSRs, (ii) DTAs arising from temporary differences that could not be
realized through net operating loss carrybacks, (iii) investments in the capital of unconsolidated financial institutions, and (iv)
minority interests. As of December 31, 2017, we had $291 million on MSRs, $57 million in DTAs arising from temporary
differences and no investments in unconsolidated financial institutions or minority interest. This final rule will maintain the
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2017 transition provisions for certain items for non-advanced approach banks. For further information, see Note 20 -
Regulatory Capital.
As of December 31, 2017, our ALLL was $140 million, covering 1.8 percent of total loans held-for-investment. Our estimate
of the inherent losses is imperfect and based on management judgment.
Our allowance for loan and lease losses, which reflects our estimate of such losses inherent in the loan portfolio at
December 31, 2017, may not be adequate to cover actual credit losses. If this allowance is insufficient, future provisions for
credit losses could adversely affect our financial condition and results of operations. We attempt to limit the risk that borrowers
will fail to repay loans by carefully underwriting our loans, but losses nevertheless occur in the ordinary course of business
operations. Our ALLL is based on historical experience as well as our evaluation of the risks inherent in the loan portfolio at
December 31, 2017. The determination of an appropriate level of loan loss allowance is a subjective process that requires
significant management judgment, including estimates of loss and the loss emergence period, 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 may have access to broader industry data than we do,
may recommend or require us to increase the amount of our ALLL, based on their judgment, which may be different from that
of our management. 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 residential mortgage loan portfolio is geographically concentrated in certain states, including California,
Michigan, and Florida, which comprise approximately 58 percent in the aggregate of the portfolio. In addition, our commercial
loan portfolio has a concentration of Michigan lending relationships. Approximately 48 percent of our CRE loans are
collateralized by properties in Michigan and 29 percent of our C&I borrowers are located in Michigan. These concentrations
have made, and will continue to make, our loan portfolio particularly susceptible to downturns in the local economies and the
real estate and mortgage markets in these areas. Adverse conditions that are beyond our control may affect these areas,
including unemployment, inflation, recession, natural disasters, declining property values, municipal bankruptcies and other
factors which could increase default rates in our loan portfolio, reduce our ability to generate new loans and negatively affect
our financial results.
In 2017, we continued to grow our commercial portfolio to $4.3 billion at December 31, 2017. CRE and C&I loans
grew to $3.1 billion and comprised 41 percent of our total LHFI portfolio at December 31, 2017. As a part of that growth, our
home builder finance program reached $601 million at December 31, 2017. The home builder lending portfolio contains
secured and unsecured loans and our lending platform originates loans throughout the U.S. with main offices in Houston and
Denver.
Commercial loans, including home builder loans, generally expose us to a greater risk of nonpayment and loss than
residential real estate loans due to the more complex nature of underwriting. Such loans typically involve larger loan balances
to single borrowers or groups of related borrowers compared to residential real estate loans. At December 31, 2017, our largest
CRE and C&I borrowers had loans of $81 million UPB and $68 million UPB, respectively and our average commercial loan
balance was $1.4 million. Secured loans, including residential and commercial real estate, may experience changes in the
underlying collateral value due to adverse market conditions which could result in increased charge-offs in the event of a loan
default.
At December 31, 2017, our committed amount of adjustable-rate warehouse lines of credit granted to other mortgage
lenders was $2.8 billion, of which $1.1 billion was outstanding. There may be risks associated with the mortgage lenders that
borrow from the Bank, including credit risk, inadequate underwriting, and potential external fraud. A default from one of our
borrowers could result in a large loss. Additionally, adverse changes to industry competition, mortgage demand and the interest
rate environment may have a negative impact on warehouse lending. Fluctuations in outstanding warehouse lines of credit,
which are contingent on residential mortgage production, can impact the Bank’s liquidity and earnings. Failure to mitigate these
risks could negatively impact our financial results.
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Liquidity risk may affect our ability to meet obligations and impact our ability to grow our business.
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
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. A number of factors could make funding more difficult, more expensive or unavailable on any terms. These
factors include, 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,
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. A 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 meet loan demand, accommodate outflows in deposits, take advantage of market opportunity, and
execute on our plans to grow the balance sheet depends largely on our ability to secure funds on acceptable terms. Our primary
sources of funds to meet our financing needs include deposits, including custodial accounts from our servicing portfolio, loan
sales, public funds, and capital-raising activities. Our company controlled deposits are considered stable sources of funding. If
we are unable to maintain and grow certain of these financing arrangements, are restricted from accessing certain funding
sources by our regulators, are unable to arrange for new financing on terms, or if we default on any of the covenants imposed
upon us by our borrowing facilities, then we may have to limit our growth, reduce the number of loans we are able to originate
or take 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 and financial condition.
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 the cash on hand, 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 trust preferred securities depends upon available cash on hand and the receipt of dividends from the
Bank. The holding company had cash and cash equivalents of $196 million at December 31, 2017or approximately 3.8 years of
expense, which includes compensation and benefits, legal and professional expense and general and administrative expenses.
These expenses for the holding company totaled $34 million for the year ended December 31, 2017. 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.
Regulatory Risk
The Holding Company remains subject to the restrictions and conditions of the Supervisory Agreement with the Federal
Reserve. Failure to comply with the Supervisory Agreement could result in further enforcement action against us and limit
our ability to execute on business plans.
The Supervisory Agreement requires that we take certain actions to address issues as specified in the agreement. The
Supervisory Agreement is enforced by the Federal Reserve 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
13
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, particularly non-banks, may not be subject to similar actions, which could impact our ability to compete
effectively. For further information, see Item 1. Business - Regulation and Supervision.
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.
During the year ended December 31, 2017, we sold approximately 57 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 could materially and adversely affect our business, financial condition and results of
operations.
Changes in the servicing, origination, or underwriting guidelines or criteria required by the Agencies could adversely affect
our business, financial condition and results of operations.
We are required to follow specific guidelines or criteria that impact the way that we originate, underwrite, or service.
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 which decreases 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 our 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 various 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. For the years ended December 31, 2017, 2016 and 2015, our FDIC insurance
expense premiums totaled $16 million, $11 million and $23 million, respectively.
14
Operational Risk
We may experience risks associated with the successful integration of mergers and acquisitions.
Related to the pending acquisition of eight Desert Community Bank branches, we may experience challenges related
to the integration of their operations which may result in additional cost. This includes the transition of data, integration of
product offerings and the standardization of business practices. Complications associated with this process could result in
delays or an inability to close the transaction, additional cost, loss of customers, damage to our reputation or other operational
risks.
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 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
business partners may suffer, which could have a further, long-term impact on our financial results.
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. Any cybersecurity attack or other
compromise to the security of that information could adversely impact our business and financial condition.
Cybersecurity related attacks are attempted on an ongoing basis which pose a risk of data breaches relative to the
processing of consumer transactions that contain customers’ personally identifiable information. As a part of conducting
business, we receive, transmit and store a large volume of personally identifiable information and other user data either on our
network or in the cloud.
Cybersecurity risks for banking institutions have increased significantly in recent years due to new technologies, the
reliance on technology to conduct financial transactions and the increased sophistication of organized crime and hackers. A
cybersecurity attack or information security breach could adversely impact our ability to conduct business due to the potential
costs for remediation, protection and litigation and reputational damage with customers, business partners and investors.
There are myriad federal, state, local 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 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 or subject to a cybersecurity
attack while in the custody and control of those third parties.
Privacy laws are continually evolving and many state and local jurisdictions have laws that differ from federal law or
privacy policies, further some of those policies or laws may conflict. 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 and financial condition.
15
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 or subservicer for mortgage loans owned by third parties, which is approximately 9 percent of our
revenue and results in approximately $1.5 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 an 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. We also face further risk
that the originating broker or correspondent, if any, may not have the financial capacity to perform remedies that 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, which is based on an estimate of probable future losses, was $15 million at
December 31, 2017. 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 $3 million UPB at
December 31, 2017.
Our regulators, as part of their supervisory function, periodically review our representation and warranty reserve for
losses. Our regulators may recommend or require us to increase our reserve, based on their judgment, which may differ from
that of our management. 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.
In 2017, approximately 90 percent of our residential first mortgage volume depended 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 results of operations.
16
We rely on third party mortgage originators to originate and document the mortgage loans we purchase or originate.
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 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 to be 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 ongoing
administrative burden and the system requirements associated with complying with these rules or potential changes to these
rules could impact our mortgage volume and an increase in costs. In addition, these arrangements with third party mortgage
originators and the fees payable by us to such third parties could be subject to regulatory scrutiny and restrictions in the future.
The Equal Credit Opportunity Act and the Fair Housing Act, prohibit discriminatory lending practices by lenders,
including financial institutions. These regulations apply 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 laws regulations imposed by federal regulatory agencies, and the relatively independent and diverse
operating channels in which loans are originated. As we originate loans through various channels, we, and our third party
mortgage originators, are especially impacted by these laws and regulations and are required to implement appropriate policies
and procedures to help ensure compliance with fair lending laws and regulations and to avoid lending practices that result in the
disparate treatment of or disparate impact to borrowers across our various locations under multiple channels. Failure to comply
with these laws and regulations, by us or our third party mortgage originators, could result in the Bank being liable for damages
to individual borrowers or other imposed penalties.
General Risk Factors
MP Thrift, an entity managed and controlled by MatlinPatterson, owns 62.1 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.
We are subject to various legal or regulatory investigations and proceedings.
At any given time, we are involved with a number of legal and regulatory investigations and proceedings as a part of
the routine reviews conducted by regulators and other parties which may involve consumer protection, employment, tort, and
numerous other laws and regulations. Proceedings or actions brought against us may result in judgments, settlements, fines,
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 business. 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 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.
17
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, see Note 21 - Legal Proceedings, Contingencies and
Commitments.
Our assessment of the accounting impact of tax reform is subject to further clarification and guidance yet to be issued.
The Tax Cuts and Jobs Act was enacted into law on December 22, 2017 and as of December 31, 2017, we calculated
its accounting impact based on the new legislation as written. Upon completion of our 2017 U.S. income tax return in 2018, we
may identify additional remeasurement adjustments to our recorded deferred tax assets as further clarification and guidance is
issued. We will continue to assess our provision for income taxes and deferred tax assets with new guidance but do not
currently anticipate that significant revisions or adjustments will be necessary. Any required revisions will be made within the
measurement period, defined by Staff Accounting Bulletin No. 118 as within one year of the enactment date.
Loss of certain personnel, including key members of the Corporation's management team, could adversely affect the
Corporation.
We are and will continue to be dependent upon our management team and other key personnel. Losing the services of
one or more key members of our management team or other key personnel could adversely affect our operations.
In addition, we are subject to regulations that allow us to make severance payments only in limited circumstances. Our
named executive officers may be entitled to certain severance and change in control benefits. Although we follow certain
leading practices with respect to executive compensation including eliminating supplemental executive retirement plans
(SERPs) or other nonqualified plans for executives and avoiding severance payments for "cause" terminations or voluntary
resignations, we may be subject to certain legal or regulatory risks associated with previous employment agreements or
retirement plans which could impact our liabilities related to these matters and results of operations.
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.
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, 2017, we operated 99 branches in
Michigan, of which 75 were owned and 24 were leased. Our Michigan branches consist of 88 free-standing office buildings,
one in-store banking center and 10 branches in buildings in which there are other tenants. We also have 89 retail mortgage
locations that are primarily leased, as well as 4 wholesale lending offices and 5 commercial lending offices, located in 29 states.
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.
18
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, 2017, there were 57,321,228
shares of our common stock outstanding held by 20,627 stockholders of record. The following table shows the high and low
sale prices for our common stock during each calendar quarter during 2017 and 2016.
Quarter Ending
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
Dividends
Highest Sale Price
Lowest Sale Price
$
$
38.48
$
35.48
31.36
29.10
29.08
$
28.09
24.47
23.13
34.82
29.89
27.59
25.42
26.35
24.40
20.68
17.49
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. For additional information regarding dividends, see MD&A - Liquidity Risk and MD&A - Capital.
Sale of Unregistered Securities
We made no unregistered sales of our equity securities during the fiscal year ended December 31, 2017.
Issuer Purchases of Equity Securities
We made no purchases of equity securities during the fiscal year ended December 31, 2017.
Equity Compensation Plan Information
For information with respect to securities to be issued under our equity compensation plans, see Part III, Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, which information is
hereby incorporated by reference.
19
Performance Graph
CUMULATIVE TOTAL STOCKHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDICES
DECEMBER 31, 2012 THROUGH DECEMBER 31, 2017
December 31, 2012
December 31, 2013
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
Flagstar Bancorp
100
Nasdaq Financial
100
Nasdaq Bank
100
S&P Small Cap 600
100
Russell 2000
100
101
81
119
139
193
138
142
146
180
203
139
143
152
206
213
140
146
141
176
196
137
142
134
160
181
20
ITEM 6. SELECTED FINANCIAL DATA
Summary of Consolidated Statements of Operations
Net interest income
Provision (benefit) for loan losses
Noninterest income
Noninterest expense
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,
2017
2016
2015
2014
2013
(In millions, except share data and percentages)
$
390
$
323
$
6
470
643
148
63
—
63
1.11
1.09
$
$
$
(8)
487
560
87
171
—
171
2.71
2.66
$
$
$
287
$
(19)
470
536
82
158
—
158
2.27
2.24
$
$
$
$
247
132
372
590
(34)
(69)
(1)
(70) $
(1.72) $
(1.72) $
186
70
653
918
(416)
267
(6)
261
4.40
4.37
Basic
Diluted
57,093,868
56,569,307
56,426,977
56,246,528
56,063,282
58,178,343
57,597,667
57,164,523
56,246,528
56,518,181
December 31,
2017
2016
2015
2014
2013
(In millions, except per share data and percentages)
Summary of Consolidated Statements of Financial
Condition
Total assets
Loans receivable, net
Total deposits
Total short-term and long-term Federal Home Loan Bank
advances
Long-term debt
Stockholders' equity (1)
Book value per common share
Tangible book value per share
$
16,912
$
14,053
$
13,715
$
12,165
8,934
5,665
494
1,399
24.40
24.04
9,465
8,800
2,980
493
1,336
23.50
23.50
9,226
7,935
3,541
247
1,529
22.33
22.33
$
9,840
6,523
7,069
514
331
1,373
19.64
19.64
9,407
6,637
6,140
988
353
1,426
20.66
20.66
Number of common shares outstanding
57,321,228
56,824,802
56,483,258
56,332,307
56,138,074
(1)
Includes preferred stock totaling $0 million, $0 million, $267 million, $267 million, and $266 million for the years ended December 31, 2017, 2016,
2015, 2014 and 2013, respectively.
21
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 (loss) 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 avg. total assets) (1)(2)
Bank Tier 1 leverage (to adjusted avg. total assets)
Effective tax provision rate (3)
Selected Statistics:
Mortgage rate lock commitments (fallout-adjusted) (4)
Mortgage loans sold and securitized
Number of banking centers
Number of FTE employees
At or For the Years Ended December 31,
2017
2016
2015
2014
2013
(In millions, except share data and percentages)
$
14,130
$
12,164
$
10,436
$
11,848
1,433
2.56%
2.75%
0.40%
4.41%
4.4%
8.27%
8.27%
9.05%
74.8%
8.51%
9.04%
70.1%
9,757
1,464
2.45%
2.64%
1.23%
11.69%
13.0%
9.50%
9.50%
10.52%
69.2%
8.88%
10.52%
33.7%
8,305
1,486
2.58%
2.74%
1.32%
10.63%
10.5%
11.14%
9.20%
12.43%
70.9%
11.51%
11.79%
34.2%
8,440
6,780
1,406
2.80 %
2.91 %
(0.71)%
(4.97)%
(6.1)%
13.95 %
11.24 %
14.22 %
95.4 %
N/A
12.43 %
32.9 %
$
10,882
9,338
1,239
1.50%
1.72%
2.08%
21.09%
26.8%
15.16%
12.33%
9.87%
109.4%
N/A
13.97%
29.7%
$
$
32,527
32,493
99
3,525
$
$
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
(1) Applicable to Bancorp for the years ended December 31, 2017, 2016, and 2015.
(2) Basel III transitional.
(3) The year ended December 31, 2017 includes an $80 million one-time, non-cash charge to the provision for income taxes resulting from the
revaluation of the Company's net deferred tax asset (DTA) at a lower statutory rate as a result of the Tax Cuts and Jobs Act.
(4) Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not
expected to close based on previous historical experience and the level of interest rates.
22
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Executive Overview
Earnings Performance
Results of Operations
Operating Segments
Risk Management
Credit Risk
Market Risk
Liquidity Risk
Operational Risk
Capital
Use of Non-GAAP Financial Measures
Critical Accounting Estimates
24
25
26
34
39
39
49
51
55
57
58
61
23
The following is an analysis of our financial condition and results of operations. This should be read in conjunction
with our Consolidated Financial Statements and related notes filed with this report in Part II, Item 8. Financial Statements and
Supplementary Data.
Overview
We are a leading savings and loan holding company founded in 1993. Our business is primarily conducted through our
principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. We provide a range of commercial,
small business, and consumer banking services and we are the 5th largest mortgage originator in the nation. We distinguish
ourselves by crafting specialized solutions for our customers, local delivery, high quality customer service and competitive
product pricing. For additional details and information on each of our lines of business, see MD&A - Operating Segments and
Note 23 - Segment Information.
Executive Overview
The year ended 2017 resulted in net income of $63 million, or $1.09 per diluted share, and adjusted net income of
$143 million or $2.47 per diluted share, after adjusting for a non-cash charge of $80 million, or $1.37 per diluted share due to
the revaluation of our net deferred tax asset under the new Tax Cuts and Jobs Act. The durability of our earnings was proven in
2017 as the continued growth of our community bank and mortgage servicing businesses, combined with the strength of our
mortgage origination business, produced more predictable and consistent results. The transformation of the community bank
into a strong commercial bank and our 2017 strategic mortgage acquisitions provide more levers to respond to market
opportunities and maximize earnings.
The community bank added $1 billion of commercial real estate and commercial and industrial loans to the balance
sheet. These higher yielding loans helped drive net interest income up 21 percent or $67 million for the full year 2017 compared
to the full year 2016. Total deposits increased 2 percent to $8.9 billion and costs remained well managed in a rising interest rate
environment. In addition, the pending acquisition of eight branches of Desert Community Bank, expected to close in the first
quarter of 2018, will provide approximately $600 million in low cost deposits to fund loan growth and expand our banking
footprint.
Mortgage originations totaled $34 billion, representing a 6 percent increase in closings, despite a softer origination
market in 2017. Additionally, fallout adjusted locks increased 11 percent or $3 billion during the year. The two mortgage
acquisitions occurring in 2017 strengthened our delegated correspondent and distributed retail channels, providing us more
flexibility in responding to challenges in the mortgage market. Our two jumbo mortgage securitizations demonstrate our
capability to execute mortgage loan sales through another market mechanism which will continue to allow us to respond more
dynamically to market opportunities.
Our mortgage servicing business continued to gain scale and ended the year servicing over 442,000 accounts. During
2017, we had over $33 billion in MSR sales making us one of the largest sellers of MSRs in the country. Of those sales, we
retained subservicing on 84 percent solidifying our national position as the 8th largest subservicer. This high retention rate
validated the quality of our servicing platform.
Noninterest expense increased 15 percent to $643 million in 2017 as we made investments in future growth. We
remain focused on improving efficiency through increasing revenues while maintaining cost discipline across the organization.
We ended the year with $16.9 billion in assets, up $2.9 billion, or 20 percent, from year end 2016. Our credit quality is
solid with only $8 million in net charge-offs and sustained low levels of delinquencies in 2017. Our robust capital position
remains a hallmark with Tier 1 leverage at 8.5 percent at December 31, 2017, well above the amount needed to be considered
"well capitalized". The proposed simplification of the Basel III rules, if enacted as proposed, as well as the decrease in the
corporate tax rate will accelerate capital formation to support further balance sheet growth and improve our capital flexibility.
We believe we are well-positioned, supported by the capital and liquidity to prudently grow the Bank, to drive increased
earnings and deliver greater shareholder value.
24
Earnings Performance
Net interest income
Provision (benefit) for loan losses
Total noninterest income
Total noninterest expense
Provision for income taxes
Net income
Adjusted net income (1)
Income per share:
Basic
Diluted
Adjusted diluted (1)
$
$
$
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
390
$
6
470
643
148
63
143
$1.11
$1.09
$2.47
$
$
323
(8)
487
560
87
171
155
$
$
$
$2.71
$2.66
$2.38
287
(19)
470
536
82
158
158
$2.27
$2.24
$2.24
(1) For further information, see MD&A - Use of Non-GAAP Financial Measures.
Full year 2017 net income was $63 million, or $1.09 per diluted share, as compared to full year 2016 net income of
$171 million, or $2.66 per diluted share. The 2017 full year results included a charge of $80 million to the provision for income
taxes, or $1.37 per diluted share, due to the revaluation of DTAs at a lower statutory rate resulting from the Tax Cuts and Jobs
Act. Excluding this charge, the Company had adjusted 2017 net income of $143 million, or $2.47 per diluted share.
The $12 million decrease in adjusted net income for the year ended December 31, 2017 as compared to the year ended
December 31, 2016, was primarily driven by higher expenses resulting from growth initiatives, including our 2017 acquisitions,
as well as expenses related to increased mortgage volume. This was partially offset by a $67 million increase in net interest
income due to interest earning asset growth of $2.0 billion led by higher average LHFS due to extending turn times and
accumulation of loans in support of residential mortgage backed securitization and continued commercial lending growth. Our
transition to a commercial bank resulted in a 57 percent increase in average commercial loans for the year ended December 31,
2017, compared to the year ended December 31, 2016.
Full year 2016 net income was $171 million, or $2.66 per diluted share, as compared to full year 2015 net income of
$158 million, or $2.24 per diluted share. The 2016 full year results included a $24 million benefit related to a decrease in the
fair value of the DOJ settlement liability. Excluding this benefit, the Company had adjusted 2016 net income of $155 million, or
$2.38 per diluted share.
The $3 million decrease in adjusted net income for the year ended December 31, 2016 as compared to the year ended
December 31, 2015, was primarily driven by higher performance driven expenses and a lower benefit for loan losses partially
offset by a $36 million increase in net interest income. Net interest income increased as a result of growth in our interest
earning assets as we executed on our strategic initiative to deploy capital and replace lower credit quality assets with higher
quality residential and commercial loans. As a result of this initiative, we grew average interest earning assets by 17 percent
from $10.4 billion during the year ended December 31, 2015 to $12.2 billion during the year ended December 31, 2016.
For a reconciliation and discussion of non-GAAP financial measures discussed above, see MD&A - Use of Non-
GAAP Financial Measures. Additional details of each key driver have been further explained in Management’s discussion
below.
25
Net Interest Income
The following table presents on a consolidated basis interest income from average assets and liabilities, expressed in
dollars and yields:
2017
For the Years Ended December 31,
2016
2015
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
(Dollars in millions)
$
4,146 $
165
3.99 % $
3,134 $
113
3.62 % $
2,188 $
85
3.90 %
85
24
1
110
68
47
43
158
268
13
80
1
527
1
29
1
14
45
1
3
3
7
—
52
36
24
25
137
2,549
471
26
3,046
1,579
981
890
3,450
6,496
290
3,121
77
14,130 $
1,716
$ 15,846
$
514 $
3,829
255
1,187
5,785
222
406
329
957
23
6,765
3,356
1,234
493
11,848
2,142
423
1,433
74
24
1
99
35
27
58
120
219
16
68
1
417
1
29
1
10
41
1
2
2
5
—
46
5
27
16
94
3.35 %
5.06 %
4.51 %
3.62 %
4.25 %
4.73 %
4.73 %
4.51 %
4.09 %
4.30 %
2.57 %
1.15 %
3.71 %
2,328
475
29
2,832
1,004
631
1,346
2,981
5,813
435
2,653
129
12,164 $
1,743
$ 13,907
0.19 % $
0.76 %
0.50 %
1.18 %
0.78 %
0.45 %
0.68 %
0.82 %
0.67 %
1.35 %
0.77 %
1.09 %
1.92 %
5.08 %
1.15 %
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
85
27
2
114
22
17
39
78
192
18
59
1
355
1
30
1
6
38
1
2
1
4
—
42
1
18
7
68
3.16 %
5.17 %
4.73 %
3.52 %
3.46 %
4.22 %
4.22 %
3.97 %
3.75 %
3.59 %
2.56 %
0.50 %
3.42 %
2,562
491
30
3,083
678
438
877
1,993
5,076
633
2,305
234
10,436 $
1,520
$ 11,956
0.18 % $
0.78 %
0.44 %
1.05 %
0.76 %
0.39 %
0.52 %
0.40 %
0.45 %
— %
0.71 %
0.44 %
1.72 %
4.34 %
0.97 %
429 $
3,693
258
787
5,167
257
405
358
1,020
—
6,187
311
1,500
307
8,305
1,690
475
1,486
$ 15,846
$
2,282
$ 13,907
$
2,407
$ 11,956
$
2,131
$
390
$
323
$
287
2.56 %
2.75 %
119.3 %
2.45 %
2.64 %
124.7 %
3.33 %
5.40 %
5.30 %
3.68 %
3.21 %
3.86 %
4.41 %
3.88 %
3.76 %
2.86 %
2.55 %
0.50 %
3.38 %
0.14 %
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 %
2.58 %
2.74 %
125.7 %
Interest-Earning Assets
Loans held-for-sale
Loans held-for-investment
Residential first mortgage
Home Equity
Other
Total Consumer loans
Commercial Real Estate
Commercial and Industrial
Warehouse Lending
Total Commercial loans
Total loans held-for-investment (1)
Loans with government guarantees
Investment securities
Interest-bearing deposits
Total interest-earning assets
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
Wholesale deposits and other
Total interest-bearing 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
Total liabilities and stockholders'
equity
Net interest-earning assets
Net interest income
Interest rate spread (3)
Net interest margin (4)
Ratio of average interest-earning assets
to interest-bearing liabilities
(1)
Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 1 - Description of Business, Basis of Presentation, and
Summary of Significant Accounting Policies.
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.
26
Rate/Volume Analysis
The following tables present the dollar amount of changes in interest income and interest expense for the components
of interest-earning assets and interest-bearing liabilities. The table distinguishes between the changes related to average
outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates
(changes in average rates while holding the initial balance constant). The rate/volume variances are allocated to rate.
For the Years Ended December 31,
2017 Versus 2016 Increase
(Decrease) Due to:
2016 Versus 2015 Increase
(Decrease) Due to:
Rate
Volume
Total
Rate
Volume
Total
(Dollars in millions)
$
15
$
37
$
52
$
(9) $
37
$
28
5
—
—
5
13
5
4
22
27
2
—
44
3
22
2
4
31
13
$
$
6
—
—
6
20
15
(19)
16
22
(5)
12
66
3
9
(5)
5
12
54
11
—
—
11
33
20
(15)
38
49
(3)
12
(4)
(1)
—
(5)
3
2
(2)
3
(2)
3
2
(7)
(2)
(1)
(10)
10
8
21
39
29
(5)
7
$
110
$
(6) $
68
$
6
31
(3)
9
43
67
$
(1)
2
8
7
16
$
(22) $
5
2
1
2
10
58
$
(11)
(3)
(1)
(15)
13
10
19
42
27
(2)
9
62
4
4
9
9
26
36
Interest-Earning Assets
Loans held-for-sale
Loans held-for-investment
Residential first mortgage
Home equity
Other
Total Consumer loans
Commercial Real Estate
Commercial and Industrial
Warehouse Lending
Total Commercial loans
Total loans held-for-investment
Loans with government guarantees
Investment securities
Total interest-earning assets
$
Interest-Bearing Liabilities
Interest-bearing 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
Change in net interest income
$
2017 Compared to 2016
Net interest income increased $67 million for the year ended December 31, 2017, compared to the same period in
2016. The increase was primarily driven by growth in average interest-earning assets of 16 percent, led by higher average
LHFS balances and growth of our higher yielding commercial LHFI portfolios.
Our net interest margin for the year ended December 31, 2017 was 2.75 percent, as compared to 2.64 percent for the
year ended December 31, 2016. The increase in net interest margin was driven by a higher average yield on interest earning
assets due to the growth in our commercial loan portfolio. This was partially offset by an increase in interest expense resulting
from a full year of interest on our long-term senior debt which was issued in July 2016.
Average interest-earnings assets increased $2.0 billion for the year ended December 31, 2017, compared to the same
period in 2016. The increase was due to a $1.0 billion increase in LHFS due to extending turn times and accumulation of loans
in support of residential mortgage backed securitization. The CRE and C&I portfolios increased $925 million, or 57 percent as
we continue to focus our efforts on building a broad-based, higher yielding commercial loan portfolio as we execute on our
transformation into a commercial bank.
27
Average interest-bearing liabilities increased $2.1 billion for the year ended December 31, 2017, compared to the full
year in 2016, primarily due to an increase in FHLB advances used to fund balance sheet growth in excess of deposit growth.
Average interest-bearing deposits increased $205 million, or 3 percent for the year ended December 31, 2017, compared to the
same period in 2016, driven by higher average retail deposits, partially offset by lower average government deposits. Our costs
remained well managed in a rising interest rate environment, despite a slight extension of duration due to a higher percentage of
certificates of deposit.
2016 Compared to 2015
Net interest income increased $36 million for the year ended December 31, 2016, compared to the same period in
2015. The increase for the year was primarily driven by growth in average interest earning assets of 16 percent, partially offset
by a decrease in the net interest margin driven by a competitive interest rate environment and issuance of 6.125 percent senior
debt used to fund the TARP redemption.
Our net interest margin for the year ended December 31, 2016 was 2.64 percent, as compared to 2.74 percent for the
year ended December 31, 2015. The decrease in net interest margin from 2015 was primarily driven by higher interest rates
from longer term fixed rate debt taken to match-fund our longer duration asset growth, interest expense on senior debt issued to
fund the TARP redemption and lower average interest rates on LHFS due to a more competitive interest rate environment. This
decrease was partially offset by higher average yield on interest earning assets as we shifted from lower spread residential
mortgage loans into higher spread commercial loans.
Average LHFS increased $946 million for the year ended December 31, 2016, compared to the same period in 2015,
due to an increase in mortgage production resulting from a low interest rate market which drove increased refinance activity.
Average LHFI increased $737 million for the year ended December 31, 2016, compared to the same period in 2015, primarily
due to growth in warehouse and commercial loans where we have increased our market share and begun to grow our new
product portfolios.
Provision (Benefit) for Loan Losses
2017 Compared to 2016
The provision for loan losses increased $14 million to $6 million for the year ended December 31, 2017, as compared
to a benefit of $8 million for the year ended December 31, 2016. This increase is primarily due to loan growth of $1.6 billion in
our commercial and consumer portfolios. The 2016 benefit resulted primarily from the sale of consumer loans with a UPB of
$1.3 billion, of which $110 million were nonperforming.
2016 Compared to 2015
The provision for loan losses decreased $11 million for the year ended December 31, 2016, as compared to the year
ended December 31, 2015. In 2016, the benefit resulted primarily from the sale of performing and nonperforming consumer
loans with a UPB of $1.3 billion, of which $110 million were nonperforming, partially offset by commercial loan growth. In
2015, the provision (benefit) for loan losses included a net reduction in the allowance for loan losses relating to several loan
sales, including a net reduction in the allowance relating to interest-only residential first mortgage loans, partially offset by an
increase related to the growth in our LHFI portfolio.
For further information, see MD&A - Credit Risk.
28
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
Representation and warranty 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)
Gain on loan sales + net return (loss) on the MSR (2)
Capitalized value of mortgage servicing rights
Mortgage loans sold and securitized
Net margin on loans sold and securitized
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
316
$
76
22
18
(26)
19
62
487
$
$
$
268
82
18
21
22
13
46
470
288
67
25
26
28
19
17
470
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
$
$
32,527
0.82%
290
1.16%
32,493
0.82%
$
$
29,372
1.02%
290
1.07%
32,033
0.94%
25,511
1.13%
316
1.13%
26,307
1.09%
$
$
$
$
$
(1) Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not
expected to close based on previous historical experience and the level of interest rates.
(2) Gain on sale margin is based on net gain on loan sales (excludes net gain on loan sales of $1 million, $15 million and zero from loans transferred
from HFI for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively) to fallout-adjusted mortgage rate lock
commitments.
2017 Compared to 2016
Total noninterest income was $470 million during the year ended December 31, 2017, which was a $17 million
decrease from $487 million during the year ended December 31, 2016.
Net gain on loan sales decreased $48 million for the year ended December 31, 2017, compared to the same period in
2016. Market conditions impacted the net gain on loan sales margin which decreased 12 basis points with fallout adjusted lock
yields decreasing 20 basis points to 0.82 percent. As a result of our 2017 mortgage acquisitions, the decrease in margin was
partially offset by a 10.7 percent increase in fallout adjusted mortgage rate lock volume despite the 14 percent decline in the
overall mortgage origination market experienced this year. In addition, the decrease in net gain on loan sales was partially
attributable to extending turn times on sales of certain LHFS, when in our estimation extensions provide favorable economics,
which shifts earnings from net gain on loan sales to net interest income as well as the sale of nonperforming LHFI that occurred
in 2016 which resulted in a $14 million gain.
Total loan fees and charges increased $6 million, or 7.9 percent, for the year ended December 31, 2017, compared to
the same period in 2016, primarily due to a corresponding 8.0 percent increase in loan originations.
Deposit fees and charges decreased $4 million for the year ended December 31, 2017, compared to the same period in
2016, primarily due to lower exchange fee income resulting from limitations set by the Durbin amendment, which became
applicable to the Bank on July 1, 2016.
Loan administration income increased $3 million for the year ended December 31, 2017, compared to the same period
in 2016. The increase was primarily driven by higher fee revenue due to an increase in the number of loans subserviced for
others. This increased as a result of growth in our servicing business.
29
Net return on MSRs, including the impact of hedges, increased $48 million for the year ended December 31, 2017,
compared to the same period in 2016. The increase was primarily driven by a more stable prepayment environment as a result
of higher market interest rates, partially offset by a decrease in servicing fee income resulting from a lower MSR balance and
higher transaction costs due to MSR sales that occurred in 2017.
Representation and warranty benefit decreased $6 million for the year ended December 31, 2017, compared to the
same period in 2016. The decrease was primarily due to lower recoveries and a greater reduction of the reserve in 2016
compared to 2017. The reserve has continued to decrease as a result of sustained strong underwriting, low levels of repurchases
and a low repurchase pipeline of $3 million UPB at December 31, 2017.
Other noninterest income decreased $16 million for the year ended December 31, 2017, compared to the same period
in 2016. The decrease was primarily due to a $24 million reduction in the DOJ settlement liability that occurred in the third
quarter of 2016. This decrease was partially offset by increased rental income attributable to growth in equipment financing,
and higher investment, insurance, and commercial loan fee income.
2016 Compared to 2015
Total noninterest income increased $17 million during the year ended December 31, 2016 from the year ended
December 31, 2015.
Net gain on loan sales increased $28 million for the year ended December 31, 2016, compared to the year ended
December 31, 2015. The increase in gain on loan sales was primarily due to $3.9 million higher fallout-adjusted lock volume
driven by an increase in refinance activity and a $14 million gain from the sale of performing LHFI. The increase was partially
offset by lower loan sale margins driven by pricing competition.
Total loan fees and charges increased $9 million for the year ended December 31, 2016, compared to the year ended
December 31, 2015, primarily due to higher mortgage loan closings.
Loan administration income decreased $8 million for the year December 31, 2016 to $18 million, compared to $26
million for the same period in 2015. The decrease was equally driven by lower fee revenue from loans subserviced for others
and higher interest expense on average company controlled deposits which increased due primarily to higher refinance activity.
Our net loss on MSRs was $26 million for the year ended December 31, 2016, compared to a return of $28 million for
the same period in 2015. The $54 million decrease was primarily due to a decline in fair value driven by higher prepayments,
increased market implied interest rate volatility, and a $7 million charge related to MSR sales that closed during the year. These
declines were partially offset by higher servicing fees and ancillary income received due to a higher average outstanding MSR
balance carried throughout the year.
Other noninterest income increased $46 million for the year ended December 31, 2016, compared to the same period
in 2015. The increase was primarily due to a $24 million benefit related to the reduction in the fair value of the DOJ settlement
liability and an $11 million net improvement in fair value adjustments. Higher income earned on our bank owned life insurance
and gains on the sale of AFS investment securities about equally drove the remaining improvement.
30
Noninterest Expense
The following table sets forth the components of our noninterest expense:
Compensation and benefits
Occupancy and equipment
Commissions
Loan processing expense
Legal and professional expense
Other noninterest expense
Total noninterest expense
Efficiency ratio
Number of FTE
2017 Compared to 2016
For the Years Ended December 31,
2017
2016
2015
$
$
(Dollars in millions)
$
269
$
85
55
55
29
67
299
103
72
57
30
82
643
$
560
$
74.8%
3,525
69.2%
2,886
237
81
39
52
36
91
536
70.9%
2,713
Total noninterest expense increased $83 million during the year ended December 31, 2017 from the year ended
December 31, 2016.
The $30 million increase in compensation and benefits expense for the year ended December 31, 2017, compared to
the same period in 2016. This increase was driven by recent acquisitions and additions in our Community Banking segment to
support growth in both our C&I and CRE portfolios. Our full-time equivalent employees increased by 22 percent from
December 31, 2016 to a total of 3,525 full-time equivalent employees at December 31, 2017, of which 465 were Opes full-time
equivalent employees.
The $18 million increase in occupancy and equipment expense for the year ended December 31, 2017, compared to
the same period in 2016, was primarily due to a higher average depreciable asset base and increased utilization of vendor
services to support the needs of our growing business.
Commission expense increased $17 million for the year ended December 31, 2017, compared to the same period in
2016, primarily due to higher loan originations and a shift in mix to delegated retail channels with higher commission rates
resulting from our mortgage acquisitions.
Other noninterest expense increased $15 million for the year ended December 31, 2017, compared to the same period
in 2016, primarily due to an increase in advertising expenses due to direct mail and brand awareness campaigns that were
launched to drive deposit growth. The remaining increase is equally attributable to an increase in our FDIC assessment driven
by growth in our commercial portfolios, higher business development costs related to acquisitions and an increase in charitable
activities.
2016 Compared to 2015
Total noninterest expense increased $24 million during the year ended December 31, 2016 from the year ended
December 31, 2015.
The $32 million increase in compensation and benefits expense for the year ended December 31, 2016, compared to
the same period in 2015, was primarily due to an increase in overall headcount in support of our new strategic initiatives along
with an increase in performance-related compensation including the ExLTIP plan, for further information relating to ExLTIP
plan, see Note 18 - Stock-Based Compensation. Our full-time equivalent employees increased overall by 173 from
December 31, 2015 to a total of 2,886 full-time equivalent employees at December 31, 2016.
Commission expense increased $16 million for the year ended December 31, 2016, compared to the same period in
2015. Higher loan production and unfavorable product mix about equally drove a $9 million increase with the remaining
increase being driven by our investment in new strategic initiatives.
31
Occupancy and equipment expense increased $4 million for the year ended December 31, 2016, compared to the same
period in 2015, primarily due to an increase in maintenance costs related to software that was implemented in the fourth quarter
2015 along with a higher average depreciable asset base.
Legal and professional expense decreased $7 million for the year ended December 31, 2016 compared to the same
period in 2015, primarily due to implementation of company-wide cost savings initiatives resulting in decreased utilization of
third party service providers.
Other noninterest expense decreased $24 million for the year ended December 31, 2016, compared to the same period
in 2015 primarily due to a decrease in federal insurance premium expenses driven by an improvement to our risk profile,
combined with decreases in default servicing costs, foreclosure costs and an improvement in house prices, offset with higher
litigation and regulatory related expenses that occurred in 2015.
Provision (Benefit) for Income Taxes
On December 22, 2017, the President of the United States signed into law H.R.1, originally known as the Tax Cuts and
Jobs Act. The legislation includes various changes to the U.S. tax code which will have an impact on us, including, but not
limited to, a reduction in the statutory corporation tax rate from a maximum rate of 35 percent to a flat rate of 21 percent
effective January 1, 2018, repeal of the corporate alternative minimum tax (“AMT”), immediate expensing of capital
investments, modifications to the provisions of future generated net operating losses, and additional limitations on the
deductibility of performance-based compensation for named executive officers. We have analyzed and recorded the effects of
the law’s impact in the financial statements for the period ended December 31, 2017.
2017 Compared to 2016
Our provision for income taxes for the year ended December 31, 2017 was $148 million, compared to a provision of
$87 million for the year ended December 31, 2016. The increase in the provision for income taxes is primarily due to the charge
to the provision for income taxes of approximately $80 million. This resulted from the revaluation of our DTAs as a result of
the new tax legislation. Excluding this charge, the Company’s adjusted effective tax rate was 32.1 percent. This adjusted
effective tax rate differs from the combined federal and state statutory rate primarily due to benefits from tax-exempt earnings
and stock-based compensation.
2016 Compared to 2015
Our provision for income taxes for the year ended December 31, 2016 was $87 million, compared to a provision of
$82 million for the year ended December 31, 2015 and our effective tax provision rate decreased to 33.7 percent as compared to
34.2 percent for the same periods, respectively. The decrease in the effective tax rate is primarily due to the impact of the bank
owned life insurance and state taxes in relation to pre-tax income.
For further information, see Note 19 - Income Taxes.
32
Fourth Quarter Results
The following table sets forth selected quarterly data:
Net interest income
Provision for loan losses
Total noninterest income
Total noninterest expense
Provision for income taxes
Net income
Adjusted net income (1)
Income per share:
Basic
Diluted
Adjusted diluted (1)
Efficiency ratio
December 31,
2017
(Unaudited)
Three Months Ended
September 30,
2017
(Unaudited)
(Dollars in millions)
107
$
103
$
2
124
178
96
(45)
$
35
$
$
$
(0.79)
(0.79)
0.60
77.1%
2
130
171
20
40
40
0.71
0.70
0.70
73.5%
$
$
$
$
$
$
$
$
$
December 31,
2016
(Unaudited)
87
1
98
142
14
28
28
0.50
0.49
0.49
76.7%
(1) For further information, see MD&A - Use of Non-GAAP Financial Measures.
Fourth Quarter 2017 compared to Third Quarter 2017
Net loss for the three months ended December 31, 2017 was $45 million, or $0.79 per diluted share, as compared to a
net gain of $40 million, or $0.70 per diluted share, for the three months ended September 30, 2017. The fourth quarter 2017
results included a one-time charge of $80 million to the provision for income taxes, or $1.37 per diluted share, due to the
revaluation of our net deferred tax asset under the new Tax Cuts and Jobs Act. Excluding this charge, the Company had adjusted
net income of $35 million, or $0.60 per diluted share, for the three months ended December 31, 2017
Adjusted net income decreased $5 million for the three months ended December 31, 2017 as compared to the three
months ended September 31, 2017. The decrease was due to a $7 million increase in noninterest expense, primarily resulting
from higher performance driven compensation and increased expenses to support the investment in our growth initiatives. In
addition, noninterest income decreased $6 million, primarily due to a net loss on the MSRs based on a decrease in fair value
and charges associated with a pending MSR sale. This decrease was offset by an increase in gain on loan sales, which
experienced a 7 basis point increase in margins, due to favorable pricing experienced in the fourth quarter, offset by a modest 3
percent decline in fallout adjusted locks despite seasonal factors, reflecting the strength of our bulk and retail channels. These
declines were partially offset by a $4 million increase in net interest income, driven by a 4 percent increase in average earning
assets, led by continued growth in our commercial loan portfolio, which experienced an increase in average balances of $344
million, or 9 percent, for the fourth quarter 2017 as compared to the third quarter of 2017.
Fourth Quarter 2017 compared to Fourth Quarter 2016
Net loss for the three months ended December 31, 2017 was $45 million, or $0.79 per diluted share, as compared to a
net gain of $28 million, or $0.49 per diluted share, for the three months ended December 31, 2016. The fourth quarter 2017
results included a one-time charge of $80 million to the provision for income taxes, or $1.37 per diluted share, due to the
revaluation of our net deferred tax asset under the new Tax Cuts and Jobs Act. Excluding this charge, the Company had adjusted
net income of $35 million, or $0.60 per diluted share, for the three months ended December 31, 2017.
Adjusted net income increased $7 million for the three months ended December 31, 2017 as compared to the three
months ended December 31, 2016. The increase was driven by a $22 million increase in net gain on loan sales, primarily due to
a 42 percent higher fallout adjusted lock volume as a result of our strategic acquisitions and investments made in 2017. In
addition, net interest income increased $20 million, driven by a $2.6 billion, or 20 percent, increase in average earning assets,
led by a $1.1 billion increase in the CRE and C&I portfolios. The increase in net interest income was further the result of a 9
basis point increase in net interest margin for the three months ended December 31, 2017, compared to the three months ended
33
December 31, 2016, primarily due to an increase in market rates, a higher yielding commercial loan portfolio, and continued
deposit price discipline. These increases were partially offset by a $36 million increase in noninterest expense, driven by higher
compensation and benefits due to increased headcount driven by the strategic acquisitions and investments in future revenue
growth made in 2017.
Operating Segments
For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 23 -
Operating Segments, and other sections for a full understanding of our consolidated financial performance.
Community Banking
Our Community Banking segment services consumer, governmental and commercial customers. We also serve home
builders, correspondents, and commercial customers in Michigan. We are focused on using capital and liquidity generated from
the mortgage business to expand our community banking relationships and build net interest margin revenue and fee income.
Our commercial customers are from a diversified range of industries including financial, insurance, service,
manufacturing, and distribution. We offer financial products to these customers for use in their normal business operations and
financing of working capital needs, equipment purchases and other capital investments. Additionally, our commercial real estate
division supports income producing real estate and residential properties. These loans are made to finance properties such as
owner-occupied, retail, office, multi-family apartment buildings, industrial buildings, and residential developments which are
repaid through cash flows related to the operation, sale, or refinance of the property.
Our Community Banking segment has seen continued growth throughout the year and our transformation into a
community bank continues to be of importance to our overall business model. Our commercial loan portfolio has grown to $4.3
billion as of December 31, 2017, representing a 30.7 percent increase from December 31, 2016.
On November 13, 2017, we announced the signing of a definitive agreement to acquire eight Desert Community Bank
branches in San Bernardino County, California, with approximately $600 million in deposits and $70 million in loans. The
pending acquisition has received regulatory approval and is expected to close during the first quarter of 2018. This acquisition
will provide us with low cost, stable deposits to fund balance sheet growth. Additionally, this acquisition will combine Desert
Community Bank's successful deposit franchise with a significant Flagstar presence already on the West Coast, which includes
our Opes Advisors division, warehouse lending and home builder finance activities.
Mortgage Originations
We are a leading national originator of residential first mortgage loans. Our Mortgage Origination segment originates,
acquires and sells one-to-four family residential mortgage loans. We utilize multiple distribution channels to originate or
acquire mortgage loans on a national scale. Our Mortgage Origination segment helps grow the servicing business which
generates a stable, low cost funding source through company controlled deposits for the community bank. Additionally, the
Mortgage Originations segment provides us with a large number of customer relationships which, along with our banking
customer relationships, provide us an opportunity to prudently cross-sell a full line of consumer financial products which
include mortgage refinancing, HELOC, and other consumer loans.
Correspondent. In the correspondent channels, an unaffiliated bank or mortgage company completes the loan
paperwork and also funds the loan at closing. After the bank or mortgage company has funded the transaction, we purchase
the loan at an agreed upon price. We perform a full review of each loan, whether purchased in bulk or not, purchasing only
those loans that were originated in accordance with our underwriting guidelines. Correspondents apply to the Bank and may
be approved for delegated underwriting authority. Delegated correspondents assume the risks associated with the
underwriting of the loan and earn more on loans sold compared to non-delegated correspondents. Non-delegated
correspondents earn commissions and administrative fees for closing and funding loans which are then underwritten by the
Bank. We have active relationships with 479 delegated correspondents and 553 non-delegated correspondents servicing
borrowers in all 50 states.
Broker. In a broker transaction, an unaffiliated mortgage broker completes several steps of the loan origination
process including the loan paperwork, but the loans are underwritten by us on a loan-level basis to our underwriting standards
and we fund and close the loan in the Bank's name, thereby becoming the lender of record. Currently, we have active broker
relationships with 745 mortgage brokers servicing borrowers in all 50 states.
34
Retail. In our distributed retail channel, loans are originated through our nationwide network of stand-alone home
loan centers. At December 31, 2017, we maintained 89 retail locations in 29 states representing the combined retail branches
of Flagstar Bank and its Opes Advisors mortgage division. In a direct-to-consumer lending transaction, loans are originated
through our direct-to-consumer team or from one of our two national call centers, both of which may leverage our existing
customer relationships. When loans are originated on a retail basis, most aspects of the lending process are completed
internally, including the origination documentation (inclusive of customer disclosures), as well as the funding of the
transactions.
The following tables disclose residential first mortgage loan originations by channel, type and mix:
Correspondent
Broker
Retail
Total
Purchase originations
Refinance originations
Total
Conventional
Government
Jumbo
Total
2017
2016
2015
2014
2013
At December 31,
25,769
$
24,488
$
20,543
$
18,052
$
(Dollars in millions)
5,025
3,614
34,408
19,357
15,051
34,408
16,962
8,635
8,811
$
$
$
$
5,890
2,039
32,417
13,672
18,745
32,417
18,156
7,859
6,402
$
$
$
$
7,335
1,490
29,368
13,696
15,672
29,368
17,571
6,385
5,412
$
$
$
$
5,339
1,194
24,585
14,654
9,931
24,585
15,158
6,134
3,293
$
$
$
$
34,408
$
32,417
$
29,368
$
24,585
$
$
$
$
$
$
$
25,885
9,612
1,980
37,477
12,840
24,637
37,477
25,653
8,825
2,999
37,477
We continue to leverage technology to streamline the mortgage origination process, thereby bringing service and
convenience to borrowers and correspondents. We also offer our customers web-based tools that facilitate the mortgage loan
process through each of our production channels. We will continue to seek new ways to expand our relationships with
borrowers and correspondents to provide the necessary capital and liquidity to grow the Community Bank and Mortgage
Servicing segments.
The majority of our loan originations during the year ended December 31, 2017 were eligible for sale to the
Agencies. In addition, during 2017, we closed on two securitizations of residential mortgage-backed securities (RMBS)
totaling $1.0 billion, which were comprised of loans Flagstar originated through our retail, broker and correspondent channels
with collateral consisting of high-quality 15 to 30 year, fully amortizing conforming and jumbo fixed rate loans. On February
23, 2018, we closed an additional RMBS securitization totaling $488 million, comprised of loans similar to those included in
the securitizations that occurred during 2017. We have demonstrated our ability to execute securitizations in the market and
expect to continue securitization activity throughout 2018. This is an important differentiator for our mortgage business by
providing an additional means in which to sell our residential mortgage loans.
Mortgage Servicing
The Mortgage Servicing segment services and subservices mortgage loans for others through a scalable servicing
platform on a fee for service basis and may also collect ancillary fees and earn income through the use of noninterest bearing
escrows. The loans we service generate escrow deposits which provide a stable low cost funding source to the Bank. Revenue
for those serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities
and the status of the underlying loans. The Mortgage Servicing segment services residential mortgages for our LHFI portfolio
in the Community Banking segment and our MSR portfolio in the Mortgage Originations segment for which it earns segment
revenue via an intercompany service fee allocation.
35
The following table presents residential loans serviced and the number of accounts associated with those loans.
December 31, 2017
December 31, 2016
December 31, 2015
Unpaid
Principal
Balance (1)
Number of
accounts
Unpaid
Principal
Balance (1)
Number of
accounts
Unpaid
Principal
Balance (1)
Number of
accounts
(Dollars in millions)
Residential loan servicing
Serviced for own loan portfolio (2) $
Serviced for others
Subserviced for others (3)
Total residential loans serviced
$
7,013
25,073
65,864
97,950
29,493
$
103,137
309,814
442,444
$
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) UPB, net of write downs, does not include premiums or discounts.
(2)
Includes LHFI (residential first mortgage and home equity), LHFS (residential first mortgage), loans with government guarantees (residential first
mortgage), and repossessed assets.
Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.
(3)
At December 31, 2017, the number of residential loans serviced and the UPB of those loans increased by 59,855 and
$17.8 billion, respectively, compared to December 31, 2016. Loans subserviced for others drove the increase in total residential
loans serviced by increasing 89,739 loans and $22.7 billion UPB, offset by a decrease of loans serviced for others of 30,133
loans and $6.1 billion UPB, over the same period.
The shift in loan servicing categories was primarily due to large bulk sales of MSRs that occurred during 2017 of
which we retained subservicing. Consistent with our strategy to grow our subservicing business, of the $33.2 billion UPB of
MSRs sold during 2017, we retained subservicing on 84 percent of these sales. Our continued growth in our subservicing
business has made us the 8th largest subservicer in the nation with capacity for further growth as we continue to subservice
loans originated by Flagstar as well as those originated by others. Our platform and capabilities make us an attractive and
comprehensive option to owners of MSRs as our service offerings also include MSR lending, servicing advanced lending and
recapture services.
Loans Serviced for Others
The following table presents the characteristics of the mortgage loans serviced for others.
Average UPB per loan
Weighted average service fee (basis points)
Weighted average coupon
Weighted average original maturity (months)
Weighted average age (months)
Average current FICO score (1)
Average original LTV ratio
Housing Price Index LTV, as recalculated (2)
Delinquencies:
30-59 days past due
60-89 days past due
90 days or greater past due
Total past due
At December 31,
2017
2016
2015
(Dollars in millions)
$
243
28.8
4.05%
330
11
728
77.7%
73.3%
250
71
125
446
$
$
$
234
26.6
3.88%
325
15
746
71.9%
65.6%
155
26
102
283
$
$
220
27.4
4.12%
337
15
733
77.9%
71.7%
198
45
80
323
$
$
$
(1) Current FICO scores obtained at various times during the life of the loan.
(2) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2017.
36
Loans Subserviced for Others
The following table presents the characteristics of the mortgage loans subserviced for others.
Average UPB 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 (1)
Average original LTV ratio
Housing Price Index LTV, as recalculated (2)
Delinquencies:
30-59 days past due
60-89 days past due
90 days or greater past due
Total past due
At December 31,
2017
2016
2015
(Dollars in millions)
$
213
28.3
3.85%
307
36
734
71.1%
62.4%
$
954
276
692
$
196
31.0
3.83%
337
39
728
81.1%
65.3%
$
614
164
441
1,922
$
1,219
$
190
29.7
3.97%
334
40
737
78.4%
62.1%
567
197
529
1,293
$
$
$
(1) Current FICO scores obtained at various times during the life of the loan.
(2) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2017.
Other
The Other segment includes the treasury functions, funding revenue associated with stockholders' equity, the impact of
interest rate risk management, the impact of balance sheet funding activities, and miscellaneous other expenses of a corporate
nature. Treasury functions include administering the investment securities portfolios, balance sheet funding, and interest rate
risk management. In addition, the Other segment includes revenue and expenses related to treasury and corporate assets and
liabilities and equity not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage
Servicing segments.
Operating Segments' Performance
The net income (loss) by operating segment is presented in the following table:
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
$
$
39
$
110
(15)
(71)
63
$
46
$
119
(13)
19
171
$
26
149
(28)
11
158
Community Banking
Mortgage Originations
Mortgage Servicing
Other
Total net income (loss)
Community Banking
2017 compared to 2016
During the year ended December 31, 2017, the Community Banking segment reported net income of $39 million,
compared to net income of $46 million for the year ended December 31, 2016. The $7 million decrease was primarily due to a
$15 million increase in other noninterest expense primarily driven by higher compensation and benefits expense to support
strategic growth initiatives and increased FDIC premiums due to higher balances. In addition, the provision for loan losses
increased $14 million and noninterest income decreased $11 million, driven by a decrease in net gain on loan sales, primarily
37
due to the sale of performing residential loans out of the LHFI portfolio during 2016. These decreases were partially offset by
an increase in net interest income of $32 million, primarily due to loan growth as our CRE and C&I portfolios increased by
$671 million and $427 million, respectively, during the year ended December 31, 2017.
2016 compared to 2015
During the year ended December 31, 2016, the Community Banking segment had net income of $46 million,
compared to net income of $26 million for the year ended December 31, 2015, primarily due to a $35 million increase in net
interest income resulting from growth in our warehouse, commercial, and home builder finance loan balances along with an
increase in net gain on loan sales of $21 million, primarily driven by the sale of performing residential first mortgage loans out
of the LHFI portfolio during the year ended December 31, 2016. These increases were partially offset by a $19 million increase
in other noninterest expense driven by personnel related expenses and higher advertising expenses which have supported our
strategic growth initiatives. In addition, the benefit for loan losses decreased $9 million due to higher sales of nonperforming
and interest-only loans in 2015 which drove a provision benefit of $19 million.
Mortgage Originations
2017 compared to 2016
The Mortgage Originations segment net income decreased $9 million to $110 million during the year ended
December 31, 2017, compared to $119 million during the year ended December 31, 2016. The decrease was primarily due to a
$65 million increase in other noninterest expense driven by expenses associated with growth initiatives, which included an
increase in compensation and benefits and higher commissions resulting from the acquisition of Opes Advisors and an increase
in mortgage volume. In addition, net gain on loan sales decreased $32 million driven by a 21 basis point decrease in margin
resulting from competitive factors and a shift in product mix with higher correspondent volume resulting from acquisitions.
These decreases were partially offset by a $48 million increase in net return on MSRs. Additionally, net interest income
increased $39 million resulting from increased mortgage volume and longer turn times to take advantage of attractive spreads.
2016 compared to 2015
The Mortgage Originations segment net income decreased $30 million to $119 million during the year ended
December 31, 2016, compared to $149 million during the year ended December 31, 2015. The decrease was primarily due to a
$43 million decrease in noninterest income primarily attributable to lower net return on MSRs resulting from higher
prepayments and an increased probability of prepayment assumption driven by the low interest rate environment experienced
throughout the year. This was offset by an increase of $10 million in net interest income primarily resulting from higher average
LHFS balances in 2016.
Mortgage Servicing
2017 compared to 2016
The Mortgage Servicing segment reported a net loss of $15 million for the year ended December 31, 2017, compared
to a net loss of $13 million for the year ended December 31, 2016. The decrease was primarily due to lower loan administration
income resulting from higher amounts paid to subservice clients for custodial balances which is driven by higher market rates
and increased volume. Additionally, lower company controlled deposits drove a decrease in net interest income. These
decreases were partially offset by higher noninterest income primarily due an increase in the number of loans subserviced for
others, which grew by nearly 90,000 loans, or 40.8 percent, for the year ended December 31, 2017 as compared to the year
ended December 31, 2016.
2016 compared to 2015
The Mortgage Servicing segment reported a net loss of $13 million for the year ended December 31, 2016, compared
to a net loss of $28 million for the year ended December 31, 2015. The improvement was primarily due to a $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. This increase was partially offset by a decrease in
noninterest income due to a lower overall volume of performing and default loans serviced.
38
Other
2017 compared to 2016
For the year ended December 31, 2017, the Other segment reported net loss of $71 million for the year ended
December 31, 2017, compared to net income of $19 million for the year ended December 31, 2016. The decrease in net income
is primarily due to the charge to the provision for income taxes of approximately $80 million, resulting from the new tax
legislation that required revaluation of our DTAs at a lower corporate statutory rate. In addition, the prior year saw an increase
in noninterest income primarily due to the $24 million decrease in the fair value of the DOJ settlement liability.
2016 compared to 2015
For the year ended December 31, 2016, the Other segment reported net income of $19 million, as compared to net
income of $11 million for the year ended December 31, 2015. The improvement was primarily due to an increase in noninterest
income due to a $24 million decrease in the fair value of the DOJ settlement liability, and an increase from the improved cash
surrender value of bank owned life insurance. These increases were primarily offset by an increase in interest expense due to
higher average outstanding FHLB advances and senior debt issued for TARP redemption.
RISK MANAGEMENT
Like all financial services companies, we engage in business activities and assume the related risks. The risks we are
subject to in the normal course of business, include, but are not limited to, credit, regulatory compliance, legal, reputation,
liquidity, market, operational and strategic. We have made significant investments in our risk management activities which are
focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and
soundness and maximize profitability. We hold capital to protect from unexpected loss arising from these risks.
A comprehensive discussion of risks affecting us can be found in the Risk Factors section included in Item 1A. of this
Form 10-K. Some of the more significant processes used to manage and control credit, market, liquidity and operational risks
are described in the following paragraphs.
Credit Risk
Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or
performance terms. We provide loans, extend credit, and enter into financial derivative contracts, all of which have related
credit risk.
We maintain a strict credit limit, in compliance with regulatory requirements, in order to maintain a diversified loan
portfolio and manage its credit exposure to any one borrower or obligor. Under the Home Owners Loan Act ("HOLA"), savings
associations are generally subject to national bank limits on loans to one borrower. Generally, per HOLA, the Bank may not
make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 and Tier 2 capital plus
any portion of the allowance for loan losses not included in the Tier 2 capital, which was $251 million as of December 31,
2017. We maintain a maximum internal Bank limit of $100 million (commitment level) to any one borrower/obligor
relationship, which is more conservative than the limit required by HOLA. Additionally, we have a tracking and reporting
process to monitor lending concentration levels and all credit exposures to one borrower that exceed $50 million must be
approved by the Board of Directors.
The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is
central to profitable lending. We manage our credit risk by establishing sound credit policies for underwriting and adhering to
well controlled processes. We utilize various credit risk management and monitoring activities to mitigate risks associated with
loans that we hold, acquire, and originate.
39
Loan Originations
The following table presents loan originations by portfolio:
Consumer loans
Residential first mortgage
Home equity (1)
Total consumer loans
Commercial loans (2)
Total loan originations
(1)
(2)
Includes second mortgage loans, HELOC loans, and other consumer loans.
Includes commercial real estate and commercial and industrial loans.
Loans held-for-investment
The following table summarizes loans held-for-investment by category:
For the Years Ended December 31,
2017
2016
(Dollars in millions)
$
$
34,408
$
336
34,744
1,215
35,959
$
32,417
195
32,612
687
33,299
Consumer loans
Residential first mortgage
$
2,754
$
2,327
$
3,100
$
2,193
$
2,509
At December 31,
2017
2016
2015
2014
2013
(Dollars in millions)
Home equity
Other
Total consumer loans
Commercial loans
Commercial real estate (1)
Commercial and industrial
Warehouse lending
Total commercial loans
664
25
3,443
1,932
1,196
1,142
4,270
443
28
2,798
1,261
769
1,237
3,267
519
31
3,650
814
552
1,336
2,702
406
31
2,630
620
429
769
1,818
Total loans held-for-investment
$
7,713
$
6,065
$
6,352
$
4,448
$
(1)
Includes NBV of $307 million, $244 million, $188 million, $142 million, and $82 million of owner occupied commercial real estate loans at
December 31, 2017, December 31, 2016, December 31, 2015, December 31, 2014, and December 31, 2013, respectively.
460
37
3,006
409
217
424
1,050
4,056
Loans held-for-investment increased $1.6 billion at December 31, 2017, from December 31, 2016. The increase was
primarily due to our continued effort to grow both the consumer and commercial loan portfolios.
The commercial loan portfolio growth strengthens our Community Banking segment by improving margins through the
additions of higher yielding loans. The commercial loan portfolio has grown $1.0 billion, or 31 percent, since December 31, 2016.
During the year ended December 31, 2017, our CRE portfolio grew $671 million and C&I $427 million.
40
The following table provides a comparison of activity in our LHFI portfolio:
Balance, beginning of year
Loans originated and purchased
Change in lines of credit
Loans transferred from loans held-for-sale
Loans transferred to loans held-for-sale
Loan amortization / prepayments
Loans transferred to repossessed assets
For the Years Ended December 31,
2017
2016
2015
2014
2013
(Dollars in millions)
$
6,065
$
6,352
$
4,448
$
4,056
$
5,438
2,170
2,982
1
(130)
(3,373)
(2)
1,771
957
2
(1,309)
(1,700)
(8)
2,975
678
32
(1,198)
(569)
(14)
894
424
56
(509)
(451)
(22)
868
380
64
(832)
(1,687)
(175)
4,056
Balance, end of year
$
7,713
$
6,065
$
6,352
$
4,448
$
For further information, see Note 4 - Loans Held-for-Investment.
Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and
adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing
owner occupied and second home properties. The LTV requirements vary depending on occupancy, property type, loan amount,
and FICO scores. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. We hold for investment,
higher yielding loans and loans that will diversify or enhance the interest rate characteristics of our balance sheet.
The following table presents our total residential first mortgage LHFI by major category:
Current estimated LTV ratios
Less than 80% and refreshed FICO scores (1):
Equal to or greater than 660
Less than 660
80% and greater and refreshed FICO scores (1):
Equal to or greater than 660
Less than 660
U.S. government guaranteed
Total
Geographic region
California
Michigan
Florida
Texas
Washington
Illinois
Arizona
Colorado
Maryland
New York
Others
Total
(1) FICO scores are updated at least on a quarterly basis or more frequently if available.
41
At December 31,
2017
2016
(Dollars in millions)
$
2,441
73
168
12
60
2,754
1,127
275
201
182
169
101
76
69
65
62
427
2,754
$
$
$
2,077
95
78
9
68
2,327
858
236
193
138
136
84
65
60
59
68
430
2,327
$
$
$
$
Home equity. Our home equity portfolio includes first and second lien positions for HELOANs and HELOCs. These
loans require full documentation and are underwritten and priced in an effort to ensure high credit quality and loan profitability.
Our debt-to-income ratio on HELOANS is capped at 43 percent and for HELOCs is capped at 45 percent. We currently limit
the maximum CLTV to 89.99 percent and FICO scores to a minimum of 660. Current second mortgage loans/HELOANS are
fixed rate loans and are available with terms up to 15 years. HELOC loans are variable-rate loans that contain a 10-year draw
period followed by a 20-year amortizing period.
Commercial and industrial loans. Commercial and industrial LHFI facilities typically include lines of credit and term
loans and leases to businesses for use in normal business operations to finance working capital, equipment and capital
purchases, acquisitions and expansion projects. We lend to customers with a history of profitability and a long-term business
model. Generally, leverage conforms to industry standards and the minimum debt service coverage is 1.20 times. Most of our
C&I loans earn interest at a variable rate.
In 2016, we launched an equipment finance and leasing program to complement our existing commercial and
industrial lending channel and in 2017, we saw solid, consistent growth in this business. During the year ended December 31,
2017, we had $4 million in earnings related to this business as compared to less than $1 million for the year end December 31,
2016.
The following table presents our total C&I LHFI by borrower's geographic location and industry type:
Michigan
Texas
Virginia
California
Tennessee
Other
Total
% by industry
(Dollars in millions)
December 31, 2017
Industry Type
Financial & Insurance
Services (1)
Manufacturing
Healthcare
Distribution
Servicing advances
Rental & leasing
Government & education
Commodities
Total
Percent by state
$
$
$
$
15
78
64
26
81
31
49
5
—
349
29.2%
$
$
9
74
5
7
—
—
—
—
—
95
7.9%
$
$
70
—
—
—
—
—
—
—
—
70
5.9%
— $
34
23
1
10
—
—
—
—
68
5.7%
$
14
—
—
43
—
—
—
—
—
57
4.8%
$ 222
118
97
29
—
50
26
6
9
$ 557
46.6%
$
$
330
304
189
106
91
81
75
11
9
1,196
100.0%
27.6%
25.4%
15.8%
8.9%
7.6%
6.8%
6.3%
0.9%
0.8%
100.0%
(1)
Includes unsecured home builder loans of $104 million.
Commercial real estate loans. Flagstar has a well-diversified commercial real estate portfolio, largely based in
Michigan. The portfolio has limited exposure to big box retail centers and contains only one mall. The majority of our retail
exposure is to high-quality, single tenant locations, including many drug stores, all of which are underwritten on strong credit
metrics. Generally, the maximum LTV is 80 percent, or 85 percent for owner-occupied real estate, and debt service coverage of
1.20 to 1.35 times. This portfolio also includes owner occupied real estate loans and secured home builder loans.
In 2016, we launched a national home builder finance program to grow our balance sheet, increase commercial
deposits and develop incremental revenue through our retail purchase mortgage channel. We finance and have active
relationships with homebuilders nationwide. At December 31, 2017, loans committed to home builders totaled $1.1 billion, of
which $601 million was drawn or used. Of that, $104 million was unsecured and included in our C&I portfolio and $497
million is collateralized and included in either the single family residence or land-residential categories of our CRE portfolio.
42
The following table presents our total CRE LHFI by collateral location and collateral type:
Michigan
Texas
Colorado
Florida
California
Other
Total (1)
(Dollars in millions)
$
December 31, 2017
Collateral Type
Single family residence (2)
Multi family
Retail (3)
Industrial
Office
Land - Residential (4)
Hotel/motel
Senior living facility
Parking garage/Lot
Non Profit
Shopping Mall (5)
All other (6)
$
$
$
70
120
171
123
176
9
86
27
72
38
—
45
936
48.5%
72
35
4
4
—
22
17
—
—
—
—
1
155
8.0%
91
11
6
—
—
41
—
—
—
—
—
—
149
7.7%
$
$
78
13
2
2
3
25
—
—
—
3
—
12
138
7.1%
$
$
52
—
—
11
16
34
—
—
—
2
—
—
115
6.0%
$
$
48
82
65
75
3
37
19
62
—
4
27
16
439
22.7%
411
261
248
215
198
168
122
89
72
47
27
74
1,932
100.0%
$
$
$
Total
Percent by state
(1)
(2)
(3)
(4)
(5) Comprised of one shopping mall.
(6) All other primarily includes: marina, movie theater, condominium, data centers etc.
Includes $307 million of commercial owner occupied real estate loans at December 31, 2017.
Includes home builder loans secured by SFR 1-4 properties whether under construction or completed.
Includes multipurpose retail space, neighborhood centers, strip centers and single-use retail space
Includes home builder loans secured by land. Land residential includes development and unimproved vacant land.
$
% by
collateral
type
21.3%
13.5%
12.8%
11.1%
10.2%
8.7%
6.3%
4.6%
3.7%
2.4%
1.4%
3.8%
100.0%
Warehouse lending. We offer warehouse lines of credit to other mortgage lenders which allow the lender to fund the
closing of residential mortgage loans. Each extension, advance, or draw-down on the line is fully collateralized by residential
mortgage loans and is paid off when the lender sells the loan to an outside investor or, in some instances, to the Bank. For the
year ended December 31, 2017, the warehouse advance amount of loans sold to the Bank totaled $10.8 billion or 37.4 percent.
For the year ended December 31, 2016, the warehouse advance amount of loans sold to the Bank totaled $14.4 billion or 40.9
percent. In addition, on February 20, 2018 we announced the pending acquisition of a mortgage warehouse loan portfolio from
Santander Bank which will strengthen our national relationship-based lending platform, bring on a seasoned sales and
operations team, and offer strong growth potential with a scalable platform. The acquisition is expected to close during the first
quarter of 2018.
Underlying mortgage loans are predominantly originated using the Agencies' underwriting standards. The guideline for
debt to tangible net worth is 15 to 1. We have a national platform with relationship managers across the country. The aggregate
committed amount of adjustable-rate warehouse lines of credit granted to other mortgage lenders at December 31, 2017 was
$2.8 billion, of which $1.1 billion was outstanding, compared to $2.9 billion at December 31, 2016, of which $1.2 billion was
outstanding.
43
Loan Principal Payments
The following tables set forth the expected repayment of our LHFI, both as fixed rate and adjustable-rate loans:
Fixed Rate Loans
Residential first mortgage
Home Equity
Other consumer
Commercial real estate
Commercial and industrial
Total fixed rate loans
Adjustable Rate Loans
Residential first mortgage
Home Equity
Commercial real estate
Commercial and industrial
Warehouse lending
Total adjustable rate loans
Within 1 Year
1 Year to 5 Years
Over 5 Years
Totals (1)
(Dollars in millions)
December 31, 2017
$
$
$
$
$
$
$
8
6
6
17
36
73
56
9
615
335
1,172
2,187
$
35
30
13
38
141
257
$
$
198
$
62
6
—
90
356
$
244
$
2,192
$
42
1,277
598
—
502
—
—
—
2,161
$
2,694
$
241
98
25
55
267
686
2,492
553
1,892
933
1,172
7,042
(1) UPB, net of write downs, does not include premiums or discounts.
Credit Quality
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 effectively managing credit risks and sales of legacy
portfolios that included nonperforming and TDR loans which have been replaced by new loans with strong credit
characteristics. The credit quality of our loan portfolios is demonstrated by low delinquency levels, minimal charge-offs and
low levels of nonperforming loans.
For all loan categories within the consumer and commercial loan portfolio, loans are placed on nonaccrual status when
any portion of principal or interest is 90 days past due (or nonperforming), or earlier when we become aware of information
indicating that collection of principal and interest is in doubt. While it is the goal of management to collect on loans, we attempt
to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure
proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist
borrowers in meeting their contractual obligations and minimize losses incurred by the Bank. When a loan is placed on
nonaccrual status, the accrued interest income is reversed. Loans return to accrual status when principal and interest become
current and are anticipated to be fully collectible.
44
The following table sets forth certain information about our nonperforming assets:
At December 31,
2017
2016
2015
2014
2013
(Dollars in millions)
LHFI
Consumer Loans
Residential first mortgages
$
Home equity
Commercial
Commercial real estate
Commercial and industrial
Total nonperforming LHFI
TDRS
Consumer Loans
Residential first mortgages
Home equity
Total nonperforming TDRs
Total nonperforming LHFI and TDRs (1)
Real estate and other nonperforming assets, net
LHFS
$
12
1
—
—
13
12
4
16
29
8
9
Total nonperforming assets
$
46
$
18
4
—
—
22
11
7
18
40
14
6
60
$
$
27
2
—
2
31
27
8
35
66
17
12
95
$
$
72
2
—
—
74
43
3
46
120
19
15
$
154
$
92
6
1
—
99
43
4
47
146
36
1
183
Nonperforming assets to total assets (2)
Nonperforming LHFI and TDRs to LHFI
Net charge-offs to average LHFI (annualized) (1)
Nonperforming assets to LHFI and repossessed assets (2)
Nonperforming assets to Tier 1 capital (to adjusted total
assets) + ALLL (2)(3)
0.22%
0.38%
0.12%
0.48%
0.39%
0.67%
0.52%
0.90%
0.61%
1.05%
1.85%
1.32%
1.41%
2.71%
1.07%
3.12%
1.94%
3.59%
4.00%
4.46%
2.36%
3.93%
5.12%
9.50%
12.45%
Includes less than 90 days past due performing loans placed on nonaccrual. Interest is not being accrued on these loans.
(1)
(2) Ratio excludes LHFS.
(3) Refer to MD&A - Use of Non-GAAP Financial Measures for calculation of ratio.
At December 31, 2017, we had $46 million of nonperforming assets compared to $60 million of nonperforming assets
at December 31, 2016. This decrease was primarily due to a $9 million decrease in nonperforming LHFI at December 31, 2017
compared to December 31, 2016. As reflected in the table above, our nonperforming loans have decreased substantially and we
have experienced continued improvements in our credit quality ratios since December 31, 2013. The overall improvement in
our nonperforming assets credit quality ratios is due to our continued effort to grow our loan portfolio with strong credit quality
loans, combined with a slowing emergence of nonperforming loans driven by decreased levels of delinquencies.
In addition to our focus of improving our loan portfolio with strong credit quality loans, we strove to de-risk our
balance sheet by selling nonperforming loans. During the year ended December 31, 2017, we sold $25 million UPB of
nonperforming consumer loans which included $11 million UPB of TDRs, as compared to $110 million UPB of nonperforming
consumer loans during the year ended December 31, 2016. During the years ended December 31, 2015, 2014, and 2013, we
sold $436 million UPB of nonperforming loans which included $327 million UPB of TDRs, $92 million UPB of nonperforming
loans which included $30 million UPB of TDRs, and $508 million UPB of nonperforming loans which included $318 million
UPB of TDRs, respectively.
45
Delinquencies
The following table sets forth our performing LHFI which are past due 30-89 days:
Performing loans past due 30-89:
Consumer loans
Residential first mortgage
Home equity
Other
Total performing loans past due 30-89 days
For the Years Ended December 31,
2017
2016
2015
2014
2013
(Dollars in millions)
$
$
4
1
—
5
$
$
6
3
1
10
$
$
10
3
1
14
$
$
37
7
—
44
$
$
56
5
—
61
Early stage delinquencies remained low with the 30 to 89 days past due loans decreasing to $5 million at
December 31, 2017, compared to $10 million at December 31, 2016, due to our continued focus on growing our loan portfolio
with stronger credit quality loans. There were no past due commercial loans at December 31, 2017 and December 31, 2016.
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 as a result. 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.
The following table sets forth a summary of TDRs by performing status:
Performing TDRs
Residential first mortgage
Home equity
Total performing TDRs
Nonperforming TDRs
Nonperforming TDRs
Nonperforming TDRs at inception but performing for less than six
months
Total nonperforming TDRs
Total TDRs (1)
For the Years Ended December 31,
2017
2016
2015
2014
2013
(Dollars in millions)
$
$
19
24
43
5
11
16
59
$
$
22
45
67
8
10
18
85
$
49
52
101
7
28
35
$
306
$
56
362
29
17
46
332
51
383
26
21
47
$
136
$
408
$
430
(1) The ALLL on consumer TDR loans totaled $13 million, $9 million, $15 million, $81 million, and $82 million at December 31, 2017, December 31,
2016, December 31, 2015, December 31, 2014, and December 31, 2013, respectively.
At December 31, 2017 our total TDR loans decreased to $59 million compared to $85 million at December 31, 2016,
primarily due to our efforts to de-risk our balance sheet by selling nonperforming loans which has resulted in lower
delinquency rates and fewer modified loans. Of our total TDR loans, 73.7 percent were in performing status at December 31,
2017. For further information, see Note 4 - Loans Held-for-Investment.
46
Allowance for Loan Losses
The ALLL represents management's estimate of probable losses that are inherent in our LHFI portfolio but which have
not yet been realized. 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 ALLL was $140 million and $142 million at December 31, 2017 and 2016, respectively. The decrease from
December 31, 2016 was primarily driven by continued strong credit quality, including lower levels of net charge-offs,
delinquencies, and nonperforming assets, offset by growth in the LHFI portfolio of $1.6 billion UPB.
The ALLL as a percentage of LHFI decreased to 1.8 percent as of December 31, 2017 from 2.4 percent as of
December 31, 2016, attributable to growth of $1.6 billion consisting of high credit quality assets in both the consumer and
commercial loan portfolios. At December 31, 2017, we had a 2.0 percent allowance coverage of our consumer loan portfolio
and a 1.6 percent allowance coverage of our commercial loan portfolio, reflecting continued low levels of delinquencies and net
charge-offs in the LHFI portfolio.
The following table sets forth certain information regarding the allocation of our ALLL to each loan category:
December 31, 2017
Investment
Loan
Portfolio
Percent
of
Portfolio
Allowance
Amount
Allowance as a
Percentage of
Loan Portfolio
(Dollars in millions)
35.7% $
8.6%
0.3%
44.6%
25.1%
15.5%
14.8%
55.4%
47
22
1
70
45
19
6
70
100.0% $
140
1.7%
3.3%
4.0%
2.0%
2.3%
1.6%
0.5%
1.6%
1.8%
Consumer loans
Residential first mortgage
Home equity
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans held-for-investment (1)
(1) Excludes loans carried under the fair value option.
$
$
2,746
660
25
3,431
1,932
1,196
1,142
4,270
7,701
47
The following tables set forth certain information regarding our ALLL and the allocation of the ALLL over the past five
years:
At December 31,
2017
2016
2015
2014
2013
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
$
Home equity
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans held-for-
investment (1)
47
22
1
70
45
19
6
70
0.6% $
0.3%
—%
0.9%
0.6%
0.2%
0.1%
0.9%
65
24
1
90
28
17
7
52
1.1% $
116
1.9% $
234
5.6% $
162
0.4%
—%
1.5%
0.5%
0.3%
0.1%
0.9%
32
2
150
18
13
6
37
0.5%
—%
2.4%
0.3%
0.2%
0.1%
0.6%
31
1
266
17
11
3
31
0.7%
—%
6.3%
0.4%
0.2%
0.1%
0.7%
20
2
184
19
3
1
23
4.2%
0.5%
0.1%
4.8%
0.5%
0.1%
—%
0.6%
$
140
1.8% $
142
2.4% $
187
3.0% $
297
7.0% $
207
5.4%
(1) Excludes loans carried under the fair value option.
Beginning balance
Provision (benefit) for loan losses (1)
$
$
142
6
$
187
(15)
$
297
(19)
$
207
132
305
70
For the Years Ended December 31,
2017
2016
2015
2014
2013
(Dollars in millions)
Charge-offs
Consumer loans
Residential first mortgage
Home equity
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
Home equity
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Total commercial loans
Total recoveries
Charge-offs, net of recoveries
Ending balance
$
(8)
(3)
(2)
(13)
(1)
—
(1)
(14)
1
2
1
4
1
1
2
6
(8)
140
$
(29)
(4)
(3)
(36)
—
—
—
(36)
2
—
3
5
1
—
1
6
(30)
142
$
(87)
(7)
(4)
(98)
—
(3)
(3)
(101)
3
2
3
8
2
—
2
10
(91)
187
$
(38)
(9)
(2)
(49)
(3)
—
(3)
(52)
3
1
3
7
3
—
3
10
(42)
297
$
(133)
(11)
(4)
(148)
(47)
(2)
(49)
(197)
15
2
2
19
10
—
10
29
(168)
207
(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, 2017, December 31, 2015, December 31, 2014, and December 31, 2013, respectively.
48
The following table provides information on our charge-offs and credit quality ratios:
For the Years Ended December 31,
2017
2016
2015
2014
2013
Charge-offs, net of recoveries
Charge-offs associated with loans with government guarantees
Charge-offs associated with the sale or transfer of nonperforming loans and TDRs
Charge-offs, net of recoveries, adjusted (1)
Net charge-offs to LHFI ratio (annualized) (2)
Net charge-off ratio, adjusted (annualized) (1)(2)
$
$
$
$
8
4
1
3
0.12%
0.05%
(Dollars in millions)
$
$
91
3
30
14
$
8
8
0.52%
0.15%
69
19
1.85%
0.40%
$
$
$
42
—
15
27
1.07%
0.69%
168
—
69
99
4.00%
2.36%
(1) Excludes charge-offs associated with loans with government guarantees and charge-offs associated with the sale or transfer of nonperforming loans
and TDRs.
(2) Excludes loans carried under the fair value option.
Net Charge-offs for the year ended December 31, 2017 decreased to $8 million compared to $30 million for the year
ended December 31, 2016. As a percentage of average LHFI, net charge-offs for the year ended December 31, 2017 decreased
to 0.12 percent from 0.52 percent for the year ended December 31, 2016. The continued improvement in net charge-offs is a
result of our strong underwriting and loan quality combined with sales of nonperforming loans. During the year ended
December 31, 2017 and 2016, the annualized net charge-offs as a percentage of the average LHFI on an adjusted basis, were
0.05 percent and 0.15 percent, respectively.
Market Risk
Market risk is the risk of reduced earnings and/or declines in the net market value of the balance sheet due to changes
in market prices. Our primary market risk is interest rate risk which impacts our net interest income, fee income related to
interest sensitive activities such as mortgage origination and servicing income, and loan and deposit demand.
We are subject to interest rate risk due to:
• The maturity or repricing of assets and liabilities at different times or for different amounts
• Differences in short-term and long-term market interest rate changes
• The remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change
The Asset/Liability Committee ("ALCO"), which is composed of our executive officers and certain members of
management, monitors interest rate risk on an on-going basis in accordance with policies approved by our board of directors.
The ALCO reviews interest rate positions and considers the impact projected interest rate scenarios have on earnings, capital,
liquidity, business strategies, and other factors. However, management has the latitude to change interest rate positions within
certain limits if, in management's judgment, the change will enhance profitability.
To assess 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.
Net interest income sensitivity
Management uses a simulation model to analyze the sensitivity of net interest income to changes in interest rates
across various interest rate scenarios which demonstrates the level of interest rate risk inherent in the existing balance sheet.
The analysis holds the current balance sheet values constant and does not take into account management intervention. In
addition, we assume certain correlation rates, often referred to as a “deposit beta,” of interest-bearing deposits, wherein the rates
paid to customers change at a different pace when compared to changes in benchmark interest rates. The effect on net interest
income over a 12 month time horizon due to hypothetical changes in market interest rates is presented in the table below. In this
interest rate shock test, as of the periods presented, interest rates have been adjusted by instantaneous parallel changes rather
than in a ramp test which applies interest rate changes over time. All rates, short-term and long-term, are changed by the same
amount (plus or minus 200 basis points) resulting in the shape of the yield curve remaining unchanged. The minus 200 basis
point shock scenario is effectively a flattener scenario as rates are floored at zero given the current interest rate levels.
49
Scenario
200
Constant
(200)
Scenario
200
Constant
(200)
December 31, 2017
Net interest Income
$ Change
% Change
(Dollars in millions)
$449
433
397
December 31, 2016
$16
—
(37)
Net interest Income
$ Change
% Change
(Dollars in millions)
$321
301
245
$19
—
(57)
3.6 %
— %
(8.5)%
6.3 %
— %
(18.9)%
In the net interest income simulation, our balance sheet exhibits slight asset sensitivity. When interest rates rise our net
interest income increases. Conversely, when interest rates fall our net interest income decreases. At December 31, 2017, the
$132 million increase in the net interest income in the constant scenario as compared to December 31, 2016, was primarily
driven by the increased size of the balance sheet.
As of December 31, 2017 we have also projected the potential impact to net interest income in a hypothetical "bear
flattener" interest rate scenario, in which short-term interest rates have been instantaneously increased by 100 basis points while
holding the longer term interest rates constant. Over a 12-month and 24-month period, based on our existing balance sheet, the
simulation resulted in a loss of $40 million and $53 million, respectively.
The net interest income sensitivity analysis has certain limitations and makes various assumptions. Key elements of
this interest rate risk exposure assessment include maintaining a static balance sheet and parallel rate shocks. The direction of
future interest rates not moving in a parallel manner across the yield curve, how the balance sheet will respond and shift based
on a change in future interest rates and how the Company will respond are not included in this analysis and limit the predictive
value of these scenarios.
Economic value of equity
Management also utilizes (EVE), a point in time analysis of the economic value of our current balance sheet position,
which measures interest rate risk over a longer term. The EVE calculation represents a hypothetical valuation of equity, and is
defined as the market value of assets, less the market value of liabilities, adjusted for the market value of off-balance sheet
instruments. The assessment of both short-term earnings (Net Interest Income Sensitivity) and long-term valuation (EVE)
approaches provide a more comprehensive analysis of interest rate risk exposure than Net Interest Income Sensitivity alone.
There are assumptions and inherent limitations in any methodology used to estimate the exposure to changes in market
interest rates and as such, sensitivity calculations used in this analysis are hypothetical and should not be considered to be
predictive of future results. This analysis evaluates risks to the current balance sheet only and does not incorporate future
growth assumptions. Additionally, the analysis assumes interest rate changes are instantaneous and the new rate environment is
constant but does not include actions management may undertake to manage risk in response to interest rate changes. Each rate
scenario reflects unique prepayment and repricing assumptions. Management derives these assumptions by considering
published market prepayment expectations, repricing characteristics, our historical experience, and our asset and liability
management strategy. This analysis assumes that changes in interest rates may not affect or could partially affect certain
instruments based on their characteristics.
50
The following table is a summary of the changes in our EVE that are projected to result from hypothetical changes in
market interest rates. The interest rates, as of the dates presented, are adjusted by an instantaneous parallel rate increases and
decreases as indicated in the scenarios shown in the table below.
Scenario
EVE
EVE%
$ Change
% Change
Scenario
EVE
EVE%
$ Change
% Change
December 31, 2017
December 31, 2016
300
200
100
Current
(100)
$
1,941
2,020
2,089
2,113
2,082
11.6% $
12.0%
12.4%
12.6%
12.4%
(172)
(93)
(24)
—
(31)
(Dollars in millions)
300
200
100
(8.1)%
(4.4)%
(1.2)%
— % Current
(100)
(1.5)%
$
1,927
2,005
2,073
2,100
2,067
13.9% $
14.4%
14.9%
15.1%
14.9%
(173)
(95)
(28)
—
(33)
(8.2)%
(4.5)%
(1.3)%
— %
(1.6)%
Our balance sheet exhibits liability 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
+200 scenario. The December 31, 2016 and December 31, 2017 (100) is effectively 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.
Derivative financial instruments
As a part of our risk management strategy, we use derivative financial instruments to minimize fluctuation in earnings
caused by interest rate risk. We use interest rate swaps, swaptions and forward sales commitments to hedge our mortgage
origination pipeline, funded mortgage LHFS and MSRs. All of our derivatives and mortgage loan production originated for sale
are accounted for at fair market value. Changes to mortgage commitments are based on changes in fair value of the underlying
loan, which is impacted most significantly by changes in interest rates and changes in the probability that the loan will not fund
within the terms of the commitment, referred to as a fallout factor or pull through rate. Market risk on interest rate lock
commitments and mortgage LHFS is managed using corresponding forward sale commitments. The adequacy of these hedging
strategies, the ability to fully or partially hedge market risk, rely on various assumptions or projections, including a fallout
factor. For further information, see Note 11 - Derivative Financial Instruments and Note 22 - Fair Value Measurements.
Mortgage Servicing Rights (MSRs)
Our MSRs are sensitive to interest rate volatility and are highly susceptible to prepayment risk, basis risk, market
volatility and changes in the shape of the yield curve. 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, however these risk management strategies do
not completely eliminate repricing risk. Our hedging strategies rely on assumptions and projections regarding assets and general
market factors, many of which are outside of our control. If one or more of these assumptions or projections proves to be
incorrect our hedging strategies may not adequately mitigate the impact of changes in interest rates or prepayment speeds, and
as a result may negatively impact earnings. For further information, see Note 10 - Mortgage Servicing Rights and Note 11 -
Derivative Financial Instruments.
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.
Parent Company Liquidity
The Company obtains its liquidity primarily from dividends from the Bank. The primary uses of the Company's
liquidity are debt service and operating expenses, which includes compensation and benefits, legal and professional expense
and general and administrative expenses. At December 31, 2017, the Company held $196 million of cash at the Bank, or 3.8
years of expense and debt service coverage.
51
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 external dividends.
Additional restrictions on dividends apply if the Bank fails the QTL test.
For the year ended December 31, 2017, we paid dividends of $157 million from the Bank to the Bancorp. 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.
For further information and restrictions related to the Bank's payment of dividends, see MD&A - Regulatory Risks and
MD&A - Capital.
Bank Liquidity
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 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 the 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 also 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. At
December 31, 2017 and December 31, 2016, we had no borrowings outstanding against this line of credit.
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.
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 LHFI or investment 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 LHFI portfolio is
funded with stable core deposits whereas our warehouse and LHFS may be funded with FHLB borrowings and company
controlled deposits.
Management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity.
52
Liquidity Table
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificates of deposit/CDARS
Total retail deposits
Government deposits
Wholesale deposits
Company controlled deposits
Total deposits
Federal Home Loan Bank advances
Other long-term debt
Total borrowed funds
Deposits
December 31, 2017
December 31, 2016
Change
(Dollars in millions)
$
$
$
$
1,219
3,553
193
1,493
6,458
1,073
45
1,358
8,934
5,665
494
6,159
$
$
$
$
1,134
3,887
247
1,056
6,324
1,030
—
1,446
8,800
2,980
493
3,473
$
$
$
$
85
(334)
(54)
437
134
43
45
(88)
134
2,685
1
2,686
The following table sets forth the composition of our deposits:
At December 31,
2017
2016
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 retail deposits
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificate of deposit/CDARS (1)
Total commercial retail deposits
Total retail deposits
Government deposits
Demand deposit accounts
Savings accounts
Certificate of deposit/CDARS (1)
Total government deposits (2)
Wholesale deposits
Company controlled deposits (3)
Total deposits (4)
$
$
$
$
931
3,482
124
1,491
6,028
288
71
69
2
430
6,458
251
446
376
1,073
45
1,358
8,934
0.05%
0.79%
0.16%
1.39%
0.81%
0.28%
0.68%
0.85%
1.65%
0.44%
0.78%
0.56%
1.08%
1.53%
1.11%
1.53%
—%
0.70%
10.4% $
39.0%
1.4%
16.7%
67.5%
3.2%
0.8%
0.8%
—%
4.8%
72.3% $
2.8% $
5.0%
4.2%
12.0%
0.5%
15.2%
100.0% $
852
3,824
138
1,055
5,869
282
63
109
1
455
6,324
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%
71.9%
2.8%
5.1%
3.7%
11.7%
—%
16.4%
100.0%
(1) The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.4 billion and $1.0 billion at
December 31, 2017 and December 31, 2016, 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 $4.2 billion and $4.0 billion at December 31, 2017 and
December 31, 2016, respectively.
53
Total deposits increased $134 million, or 2 percent at December 31, 2017, compared to December 31, 2016, primarily
due to growth in branch retail deposits. We have experienced growth through retail customers and our commercial
relationships. Our deposit strategy includes organic growth with our existing branches, expanding our subserving business,
external growth through the pending acquisition of Desert Community Bank branches and by investing in technology to support
online banking. Branch retail deposits increased $159 million at December 31, 2017 compared to December 31, 2016, primarily
due to an increase in retail certificates of deposit/CDARS, largely due to competitive pricing in response to increased market
rates.
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 government entities as
they are covered by the Michigan Business and Growth Fund. Government deposit accounts included $376 million of
certificates of deposit with maturities typically less than one year and $697 million in checking and savings accounts at
December 31, 2017.
Company controlled deposits arise due to our servicing or subservicing 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. Company controlled deposits are used to fund our
most liquid assets including LHFS and warehouse loans. As not all asset categories require the same level of liquidity, our loan-
to-deposit ratio shows how we manage our liquidity position, how much liquidity we have and the agility of our balance sheet.
The Company's HFI loan-to-deposit ratio, which excludes warehouse loans and company controlled deposits, was 83 percent at
December 31, 2017, which provides substantial liquidity for continued growth.
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, 2017, we had $190 million of total CDs enrolled in the CDARS program, a decrease of $41 million from
December 31, 2016.
Our total exposure related to uninsured deposits over $250,000 was approximately $2.6 billion as of December 31,
2017. These balances could experience a higher propensity to reprice should rates rise or the Bank's financial condition
deteriorate.
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, 2017:
Twelve months or less
One to two years
Two to three years
Three to four years
Four to five years
Thereafter
Total
FHLB Advances
Retail Deposits
Government Deposits
Total
(Dollars in millions)
$
$
547
388
50
8
4
21
1,018
$
$
360
7
1
—
1
—
369
$
$
907
395
51
8
5
21
1,387
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.
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, which includes residential first mortgage loans, home equity lines of
credit, and commercial real estate loans. At December 31, 2017, we had the authority and approval from the FHLB to utilize a
54
line of credit of up to $7.0 billion and we may access that line to the extent that collateral is provided. At December 31, 2017,
we had $5.7 billion of advances outstanding and an additional $763 million of collateralized borrowing capacity available at the
FHLB. At December 31, 2017, we pledged collateral to the Federal Reserve Discount Window amounting to $467 million with
a lendable value of $433 million. At December 31, 2016, we pledged collateral to the Federal Reserve Discount Window
amounting to $496 million with a lendable value of $474 million. At December 31, 2017 and December 31, 2016, we had no
borrowings outstanding against this line of credit.
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 Tier 1 qualifying 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. At December 31, 2017, we had no deferred interest payments.
On July 11, 2016, we issued $250 million of Senior Notes which mature on July 15, 2021. The proceeds from these
notes were used to bring current and redeem our then outstanding TARP Preferred Stock.
For further information, see Note 13 - Borrowings.
Contractual Obligations
We have various financial obligations, including contractual obligations, which require future cash payments. For
further information on each item, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant
Accounting Standards, Note 9 - Premises and Equipment, Note 12 - Deposit Accounts and Note 13 - Borrowings.
The following table summarizes contractual obligations at December 31, 2017, 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
Other
Total
$
$
$
5,663
1,191
4,260
125
—
—
8
—
4
11,251
$
— $
665
—
50
—
—
12
—
6
733
$
$
$
$
— $
29
—
—
247
—
4
—
— $
$
280
— $
29
—
1,230
—
247
2
118
— $
$
1,626
5,663
1,914
4,260
1,405
247
247
26
118
10
13,890
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 adapt 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.
Natural disasters or other catastrophic events may cause damage or disruption to our operations. We have a nationwide
mortgage lending presence through a network of brokers, correspondents and retail locations, as well as employees, customers
and loans collateralized by properties across the country. As such, events that occurred in 2017 like Hurricanes Harvey and
Irma, as well as the California wildfires have the potential to impact our business. Based on our assessment of the impact from
these events, the damages and any credit impact from the hurricanes and wildfires was not significant and we believe our
55
allowance coverage levels established at December 31, 2017 were adequate to cover any exposure we might have to further
credit risk.
Loans with government guarantees
Substantially all of our loans with government guarantees 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.
During the year ended December 31, 2017, we experienced net charge-offs of $4 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 in
excess of all, or part of, the guarantee.
Our loans with government guarantees portfolio totaled $271 million at December 31, 2017, as compared to $365
million at December 31, 2016. The decrease is primarily due to loans transferred to LHFS and resold to Ginnie Mae out-pacing
new purchases.
For further information, 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).
The representation and warranty benefit of $13 million during the year ended December 31, 2017 was consistent with
our sustained low levels of repurchase experience, low repurchase pipeline and the clear framework provided by the Agencies.
During the year ended December 31, 2017, we had $15 million in Fannie Mae new repurchase demands and $7 million
in Freddie Mac new repurchase demands. 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. The total UPB of 2009 and later vintage loans
sold to Fannie Mae and Freddie Mac was $202 million and $183 million at December 31, 2017 and December 31, 2016,
respectively.
For further information, see Note 14 - Representation and Warranty Reserve.
Regulatory Risks
Consent Orders
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 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 our 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 and included as an exhibit to this filing.
56
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 DTA valuation
allowance, which occurred at the end of 2013; (b) the repayment of the Fixed Rate Cumulative Perpetual Preferred Stock,
Series C (the "TARP Preferred"), which occurred in July 2016; and (c) the Bank having a Tier 1 Leverage Capital Ratio of 11
percent or greater as filed in the Call Report with the OCC.
No payment would be required until six months after the Bank files its Call Report first reporting that its Tier 1
Leverage Capital Ratio was 11 percent or greater. If all other conditions were then satisfied, an initial annual payment of $25
million would be due at that time. The next annual payment is only made if all conditions continue to be satisfied otherwise
payments are delayed until all such conditions are met. Further, making such a payment must not violate any material banking
regulatory requirement, and the OCC must not object in writing.
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 Capital Ratio, which could have an impact
on the timing of expected cash flows under the Settlement Agreement.
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.
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.
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 Leverage Capital
Ratio. 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.
Capital
Management actively reviews and manages our capital position and strategy. We make adjustments to our balance
sheet composition taking into consideration potential business risks, regulatory requirements and the flexibility to support
future growth. We prudently manage our capital position and work with our regulators to ensure that our capital levels are
appropriate considering our risk profile.
The capital standards we are subject to include requirements contemplated by the Dodd-Frank Act as well as
guidelines reached by Basel III. These risk-based capital adequacy guidelines are 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. Our capital ratios are maintained at levels in excess of those
considered to be "well-capitalized" by regulators. Tier 1 leverage was 8.5 percent at December 31, 2017 providing a 351 basis
point stress buffer above the minimum level needed to be considered “well-capitalized.”
For additional information on our capital requirements and risks associated with maintaining them, see Item 1.
Business, Item 1A. Risk Factors and Note 20 - Regulatory Capital.
In addition, banks with assets greater than $10 billion are required to submit a 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 under all three scenarios. Our most recent DFAST results demonstrated a robust capital position that
supports our business and also provides a significant opportunity for continued growth. For additional information on our
DFAST requirements, see Item 1. Business.
57
Capital rules also limit capital distributions if certain capital ratios are not maintained. The OCC regulates all capital
distributions made by the Bank, directly or indirectly, to the holding company, including dividend payments. Capital
distributions must be approved by the OCC prior to the declaration of a dividend or the approval by the board of directors of the
proposed capital distribution. Per Federal Reserve requirements, the Bank must provide a 30-day notice to the Federal Reserve
prior to declaring or paying dividends and under the Supervisory Agreement, the Company agreed to request prior non-
objection of the Federal Reserve to pay dividends or other capital distributions. For further information related to the Bank's
payment of dividends, see Item 1. Business and MD&A - Liquidity Risk.
We believe our capital and liquidity supports our strategy to continue to grow our balance sheet and create additional
shareholder value. The strengthening of our balance sheet demonstrates our ability to grow diversified earning assets that are
high quality with few nonperforming loans and a low level of delinquencies. In addition, our outsized capital generation and
robust capital structure, which includes significant trapped capital, allows for continued growth and under the proposed Capital
Simplification rules, we expect to release trapped capital which will add to our already strong capital levels. Our balance sheet
provides ample liquidity as we have highly liquid assets in our government-backed securities, loans held for sale from our
mortgage business, and warehouse loans. Finally, there are abundant sources of additional liquidity, and we believe that our
recent branch acquisition and continued growth in our subservicing business provides ample opportunities to generate deposit
funding for additional loan growth.
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, tangible book value per share, adjusted net income, and
adjusted net income per share. 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.
Nonperforming assets / Tier 1 + Allowance for Loan Losses. The ratio of nonperforming assets to Tier 1 and ALLL
divides the total level of nonperforming LHFI assets 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 (to adjusted total assets)
Allowance for loan losses
Tier 1 capital + ALLL
Nonperforming assets / Tier 1 capital + ALLL
At December 31,
2017
2016
2015
2014
2013
$
$
37
1,442
(140)
1,582
$
$
(Dollars in millions)
54
1,256
(142)
1,398
$
$
83
1,435
(187)
1,622
$
$
139
1,184
(297)
1,481
$
$
2.4%
3.9%
5.1%
9.5%
182
1,281
(207)
1,488
12.5%
58
Tangible book value per share. The Company believes that tangible book value per share provides a meaningful
representation of its operating performance on an ongoing basis. Management uses this measure to assess performance of the
Company against its peers and evaluate overall performance. The Company believes this non-GAAP financial measure
provides useful information for investors, securities analysts and others because it provides a tool to evaluate the Company’s
performance on an ongoing basis and compared to its peers.
Total stock holders' equity
Preferred stock
Goodwill and intangibles
Tangible book value
Number of common shares outstanding
Tangible book value per share
2017
2016
2015
2014
2013
At December 31,
(Dollars in millions)
1,399
$
1,336
$
1,529
$
1,373
$
1,426
—
21
—
—
267
—
267
—
266
—
1,378
$
1,336
$
1,262
$
1,106
$
1,160
57,321,228
56,824,802
56,483,258
56,332,307
56,138,074
24.04
$
23.50
$
22.33
$
19.64
$
20.66
$
$
$
Adjusted earnings and adjusted diluted earnings per share. The Company believes that adjusted earnings and
adjusted earnings per share provides a meaningful representation of its operating performance. Management uses this measure
to assess performance of the Company against its peers and evaluate overall performance. The Company believes this non-
GAAP financial measure provides useful information for investors, securities analysts and others because it provides a tool to
evaluate the Company’s performance on an ongoing basis and compared to its peers.
Net income (loss)
Adjustment to remove DOJ adjustment
Tax impact of DOJ adjustment
Adjustment to remove tax reform impact
Adjusted net income
Deferred cumulative preferred stock dividends (1)
Adjusted net income applicable to common
stockholders
Weighted average diluted common shares
Adjusted diluted earnings per share
Diluted earnings (loss) per share
$
$
$
$
$
Three Months Ended
Year Ended
December 31,
2017
September 30,
2017
December 31,
2016
December 31,
2017
December 31,
2016
(Dollars in millions)
(45) $
—
—
80
35
—
$
$
$
40
—
—
—
40
—
$
$
28
—
—
—
28
—
$
63
—
—
80
143
$
—
35
$
40
$
28
$
143
$
171
(24)
8
—
155
(18)
137
58,311,881
58,186,593
57,824,854
58,178,343
57,597,667
0.60
$
(0.79) $
0.70
0.70
$
$
0.49
0.49
$
$
2.47
1.09
$
$
2.38
2.66
(1) Under the terms of the Series C Preferred Stock, we elected to defer dividends beginning with the February 2012 dividend. In July 2016, we ended
the deferral and brought current our previously deferred dividends and redeemed the stock.
59
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. 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 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 will not be fully phased-in until January 1, 2019. The federal banking regulators have issued a
series of new proposals regarding regulatory capital which may freeze or eliminate most of the transitional rules. 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.
Flagstar Bancorp
December 31, 2017
Common Equity
Tier 1 (to Risk
Weighted
Assets)
Tier 1 Leverage
(to Adjusted
Tangible Assets)
Tier 1 Capital
(to Risk
Weighted
Assets)
(Dollars in millions)
Total Risk-
Based Capital
(to Risk-
Weighted
Assets)
Regulatory capital – Basel III (transitional) to Basel III (fully
phased-in)
Basel III (transitional)
Increased deductions related to DTAs, 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)
$
$
$
$
$
$
$
$
1,216
(16)
1,200
10,579
(2)
10,577
11.50%
11.35%
$
$
$
$
1,442
(1)
1,441
16,951
(1)
16,950
8.51%
8.50%
1,442
(1)
1,441
10,579
(2)
10,577
13.63%
13.62%
Flagstar Bank
December 31, 2017
Regulatory capital – Basel III (transitional) to Basel III (fully
phased-in)
Basel III (transitional)
Increased deductions related to DTAs, 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)
(Dollars in millions)
$
$
$
$
1,531
(1)
1,530
10,589
(1)
10,588
14.46%
14.45%
$
$
$
$
1,531
(1)
1,530
16,934
(1)
16,933
9.04%
9.04%
1,531
(1)
1,530
10,589
(1)
10,588
14.46%
14.45%
$
$
$
$
60
$
$
$
$
$
$
$
$
1,576
(2)
1,574
10,579
(2)
10,577
14.90%
14.88%
Total Risk-
Based Capital
(to Risk-
Weighted
Assets)
1,664
—
1,664
10,589
(1)
10,588
15.72%
15.71%
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.
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 - Description of Business, Basis of Presentation,
and Summary of Significant Accounting Standards. 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 LHFI 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 discussion 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 LHFI 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.
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 future 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,
61
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 our 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.
The following table presents the summary of the fair value of financial instruments recorded at fair value on a
recurring basis, and the amounts classified within Level 3 of the fair value hierarchy, which primarily include MSRs, the DOJ
settlement liability, and contingent consideration on acquisitions:
December 31, 2017
Total Balance
Level 3
Assets carried at fair value
As a percentage of total assets
Liabilities carried at fair value
As a percentage of total liabilities
$
$
$
(Dollars in millions)
6,495
38.4%
96
0.6%
$
319
1.9%
85
0.5%
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 our judgment and may vary across businesses and portfolios.
For further information, see Note 22 - Fair Value Measurements.
MSRs. 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
62
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.
On an ongoing basis, we compare our fair value estimates based on both unobservable inputs and market inputs, to an
MSR benchmark assumption survey. On a quarterly basis, our MSR valuation is compared to two independent valuations
performed by third parties.
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,
based on our judgment, and consider the view of an independent market participant to estimate the most likely fair value of the
liability. For further information, 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.
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.
63
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, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017,
2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and
2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
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
65
67
68
69
69
70
71
71
79
81
81
88
88
89
89
89
90
92
95
96
97
98
98
99
100
102
104
105
107
116
119
122
64
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Flagstar Bancorp, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial condition of Flagstar Bancorp, Inc. and its subsidiaries
(the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive
income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including
the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2017 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, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated 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 appearing under Item 9A. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
65
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 12, 2018
We have served as the Company’s auditor since 2015.
66
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 ($4,300 and $3,145 measured at fair value, respectively)
Loans held-for-investment ($12 and $72 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 $60 measured at fair value, respectively)
Total liabilities
Stockholders’ Equity
December 31,
2017
2016
$
122
$
82
204
1,853
939
4,321
7,713
271
(140)
7,844
291
136
303
330
691
16,912
2,049
6,885
8,934
4,260
1,405
494
15
405
$
$
$
$
84
74
158
1,480
1,093
3,177
6,065
365
(142)
6,288
335
286
180
275
781
14,053
2,077
6,723
8,800
1,780
1,200
493
27
417
15,513
12,717
Common stock $0.01 par value, 80,000,000 and 70,000,000 shares authorized; 57,321,228 and
56,824,802 shares issued and outstanding, respectively
Additional paid in capital
Accumulated other comprehensive (loss) income
Accumulated deficit
Total stockholders’ equity
1
1,512
(16)
(98)
1,399
Total liabilities and stockholders’ equity
$
16,912
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
1
1,503
(7)
(161)
1,336
14,053
67
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 return (loss) on mortgage servicing rights
Representation and warranty benefit
Other noninterest income
Total noninterest income
Noninterest Expense
Compensation and benefits
Commissions
Occupancy and equipment
Loan processing expense
Legal and professional expense
Other noninterest expense
Total noninterest expense
Income before income taxes
Provision for income taxes
Net income
Net income per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
For the Years Ended December 31,
2017
2016
2015
$
446
$
348
$
80
1
527
52
36
24
25
137
390
6
384
268
82
18
21
22
13
46
470
299
72
103
57
30
82
643
211
148
63
1.11
1.09
$
$
$
68
1
417
46
5
27
16
94
323
(8)
331
316
76
22
18
(26)
19
62
487
269
55
85
55
29
67
560
258
87
171
2.71
2.66
$
$
$
$
$
$
295
59
1
355
42
1
18
7
68
287
(19)
306
288
67
25
26
28
19
17
470
237
39
81
52
36
91
536
240
82
158
2.27
2.24
57,093,868
58,178,343
56,569,307
57,597,667
56,426,977
57,164,523
The accompanying notes are an integral part of these Consolidated Financial Statements.
68
Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
Net income
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,
2017
2016
2015
63
$
(10)
1
(9)
54
$
171
$
(13)
4
(9)
162
$
158
(3)
(3)
(6)
152
$
$
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
Balance at December 31, 2014
266,657 $
Net income
Total other comprehensive
income (loss)
Accretion of preferred stock
Stock-based compensation
Balance at December 31, 2015
Net income
Total other comprehensive
income (loss)
Preferred stock redemption
Dividends on preferred stock
Warrant exercise
Stock-based compensation
Balance at December 31, 2016
Net income
Total other comprehensive
income (loss)
Shares issued from Employee
Stock Purchase Plan
Warrant exercise
Stock-based compensation
Balance at December 31, 2017
—
—
—
—
266,657 $
— $
—
(266,657)
—
—
—
— $
— $
—
—
—
—
— $
56,332,307 $
1 $
267
—
—
—
—
267
—
—
(267)
—
—
—
—
150,951
—
56,483,258 $
— $
—
—
—
—
341,544
1,482 $
—
—
3
1
—
—
—
—
1 $
— $
1,486 $
— $
—
—
—
—
—
—
—
—
6
11
— 56,824,802 $
— $
—
1 $
— $
1,503 $
— $
—
—
—
—
48,032
154,313
294,081
—
— 57,321,228 $
—
—
—
—
1 $
—
—
4
8 $
—
(6)
—
—
2 $
— $
(9)
—
—
—
—
(7) $
— $
(9)
—
—
(385) $
158
1,373
158
—
—
—
(227) $
171 $
—
—
(105)
—
—
(161) $
63 $
—
—
—
(6)
3
1
1,529
171
(9)
(267)
(105)
6
11
1,336
63
(9)
—
4
5
1,512 $
—
(16) $
—
(98) $
5
1,399
The accompanying notes are an integral part of these Consolidated Financial Statements.
69
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In millions)
For the Years Ended December 31,
2016
2015
2017
$
63
$
171
$
Operating Activities
Net income (loss)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization
Representation and warranty (benefit)
Provision (benefit) for loan losses
Changes in valuation allowance on DTAs
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 and other
Proceeds received from the sale of LHFI
Net origination, purchase, and principal repayments of LHFI
Purchase of bank owned life insurance
Net purchase of FHLB stock
Acquisition of premises and equipment, net of proceeds
Proceeds from the sale of MSRs
Other, net
Net cash provided by investing activities
Financing Activities
Net change in deposit accounts
Net change in short term FHLB borrowings and other short-term debt
Proceeds from increases in FHLB long-term advances and other debt
Repayment of long-term FHLB advances
Repayment of trust preferred securities and long-term debt
Net receipt of payments of loans serviced for others
Preferred stock dividends
Redemption of preferred stock
Net receipt (disbursement) of escrow payments
Other
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Supplemental disclosure of cash flow information
$
$
$
$
$
$
$
40
(13)
6
—
(268)
9,245
(34,235)
(280)
(11)
150
54
(42)
(25,291) $
$
24,646
218
(904)
154
—
104
(1,760)
(50)
(123)
(97)
309
(3) $
$
22,494
134
2,480
255
(50)
—
22
—
—
3
(1)
2,843
46
158
204
$
$
$
32
(19)
(8)
2
(314)
16,168
(32,295)
(168)
(1)
76
(59)
55
(16,360) $
$
17,422
187
(680)
190
(15)
229
(1,054)
(85)
(10)
(52)
69
— $
$
16,201
866
(336)
445
(425)
—
(64)
(105)
(267)
(5)
—
109
(50)
208
158
$
$
$
Interest paid on deposits and other borrowings
Income tax payments
Non-cash reclassification of investment securities AFS to HTM
Non-cash reclassification of LHFI to LHFS
Non-cash reclassification of mortgage loans 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
$
$
— $
$
$
$
— $
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
$
$
— $
$
131
$
1
$
24,345
— $
$
1,331
2
17,130
$
$
$
$
$
$
$
$
112
7
136
5
288
228
70
158
24
(19)
(19)
11
(288)
18,467
(28,008)
(132)
(8)
67
211
(11)
(9,547)
9,098
218
(1,148)
85
(217)
946
(3,106)
(175)
(15)
(46)
245
—
5,885
866
1,902
1,500
(375)
(88)
(76)
—
—
5
—
3,734
72
136
208
58
6
1,112
1,140
30
8,853
373
260
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 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 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, or discounted cash flow
methods. 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 OTTI on a quarterly basis. An OTTI is considered to have
occurred when the fair value of a debt security is below its amortized costs and we (1) have the intent to sell the security, (2)
will more likely than not be required to sell the security before recovery of its amortized cost, or (3) 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 recognized in other
71
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
comprehensive income (loss). For the years ended December 31, 2015 through December 31, 2017, 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 LHFS 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 LHFS portfolio from the LHFI 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 LHFI. 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 LHFS, for which we have elected the fair value option, and subsequently transferred to
LHFI 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 further information, see Note 22 - Fair Value Measurements.
When loans originally classified as LHFS or as LHFI are reclassified due to a change in intent or ability to hold, cash
flows associated with the loans are 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 upon the earlier of, becoming 90
days past due, or when doubt exists as to the ultimate collection of principal or interest (classified as nonaccrual or
nonperforming loans). When a loan is placed on nonaccrual status, the accrued interest income is reversed and the loan may
only return to accrual status when principal and interest become current and are anticipated to be fully collectible.
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 4 - Loans Held-
for-Investment.
72
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 the earlier of the
confirmation of a loss 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
73
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 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. An entity 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 valuation adjustments to
reflect fair value, as well as gains and losses on disposal of these properties, are charged to other noninterest expense within
noninterest expense in the Consolidated Statements of Operations as incurred. For further information, see Note 6 -
Repossessed Assets and 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
74
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
determine the fair value of MSRs which include 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, discount rate and estimate of ancillary income such as late fees and prepayment fees.
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 the fair value of our mortgage
servicing rights are reported on the Consolidated Statements of Operations in net return on mortgage servicing. For further
information, see Note 10 - Mortgage Servicing Rights and 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 mortgage servicing asset 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 MSRs, interest rate lock commitments and
LHFS 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
mortgage servicing asset. These derivatives 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 LHFS 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.
75
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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
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, we evaluate the likelihood of the transaction occurring based on the current facts and
circumstances each reporting period 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 additional information regarding the accounting for derivatives, see Note 11 - Derivative Financial Instruments
and for additional information on recurring fair value disclosures, see Note 22 - Fair Value Measurements.
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. DTAs 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 DTAs 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 DTAs 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, these representations and warranties generally 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
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 upon 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
76
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 $16 million, $11 million, and $9 million for the years
ended December 31, 2017, 2016 and 2015, 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, and for the year ended December 31, 2017, any forfeitures were recognized as
they occurred. In addition to share-based payments to employees, the discount provided to employees through the Employee
Stock Purchase Plan is also recognized as stock-based compensation. 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 additional information on the valuation of the DOJ litigation settlement, see Note 22 - Fair Value
Measurements.
Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards
We adopted the following accounting standard updates (ASU) during 2017, none of which had a material impact to our
financial statements:
Standard
Description
ASU 2016-17
Consolidation (Topic 810): Interests Held Through Related Parties That are Under Common Control
ASU 2016-09
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
ASU 2016-07
Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of
Accounting
ASU 2016-06 Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
ASU 2016-05 Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Relationships
Effective Date
January 1, 2017
January 1, 2017
January 1, 2017
January 1, 2017
January 1, 2017
Accounting Standards Issued But Not Yet Adopted
The following ASUs have been issued and are expected to result in a significant change to our significant accounting
policies and/or have a significant financial impact:
Derivatives and Hedging - In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815):
Targeted Improvements to Accounting for Hedging Activities. The amendments were designed to more closely align hedge
accounting requirements with users’ risk management strategies. ASU 2017-12 is effective for fiscal years beginning after
December 15, 2018 and early adoption is permitted. The Company has early adopted this ASU during the first quarter of 2018.
The guidance provides a broader range of hedge accounting opportunities and simplifies documentation requirements for our
existing cash flow hedge relationships. In conjunction with adoption of this ASU, the Company elected to transfer $144 million
of investment securities from HTM to AFS during the first quarter of 2018, as permitted by the standard.
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. Currently, an institution uses the incurred loss method, whereas the
new guidance requires financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit
77
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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, and highlight that any impact will be
contingent upon the underlying characteristics of the affected portfolio and macroeconomic and internal forecasts at adoption
date.
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 substantially 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.
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 continued to release new accounting guidance related to the adoption of this standard which was also evaluated
during the implementation process. We will implement the revenue recognition guidance in the first quarter of 2018 utilizing
the cumulative-effect approach at the date of adoption with no restatement of comparative periods presented. Lease contracts
and financial instruments, which include loans and securities, are excluded from the scope of this standard. We have determined
the amount of in scope revenue, which primarily relates to deposit account fees, asset management fees and certain
commissions, to be less than 3 percent of total revenue. The recognition of revenue for in scope items is not anticipated to have
a material impact on the financial statements or the associated disclosures.
78
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following ASUs have been issued and are not expected to have a material impact on our Consolidated Financial
Statements and/or significant accounting policies:
ASU 2017-08
ASU 2017-07
ASU 2017-06
Standard
ASU 2018-02
ASU 2017-11
Description
Income Statement-Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the
Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Non-controlling Interests with a Scope.
ASU 2017-10
Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services (a consensus of
the FASB Emerging Issues Task Force)
ASU 2017-09 Update 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable
Debt Securities
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost
Effective Date
January 1, 2019
January 1, 2019
January 1, 2018
January 1, 2018
January 1, 2019
January 1, 2018
Plan Accounting - Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health
and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting
January 1, 2019
ASU 2017-05 Other Income - Gains and Losses from the De-recognition of Non-financial Assets (Subtopic 610-20): Clarifying the
Scope of Asset De-recognition Guidance and Accounting for Partial Sales of Non-financial Assets
ASU 2017-04
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
ASU 2017-01
Business Combinations (Topic 805): Clarifying the Definition of a Business
ASU 2016-18
Statement of Cash Flows (Topic 230): Restricted Cash
ASU 2016-16
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
ASU 2016-15
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
ASU 2016-04
ASU 2016-01
Liabilities - Extinguishment of Liabilities (Subtopic 504-20): Recognition of Breakage for Certain Prepaid Stored-
Value Products
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities
January 1, 2018
January 1, 2020
January 1, 2018
January 1, 2018
January 1, 2018
January 1, 2018
January 1, 2018
January 1, 2018
Note 2 — Investment Securities
The following table presents our investment securities:
December 31, 2017
Available-for-sale securities
Agency - Commercial
Agency - Residential
Municipal obligations
Corporate debt obligations
Total available-for-sale securities (1)
Held-to-maturity securities
Agency - Commercial
Agency - Residential
Total held-to-maturity securities (1)
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)
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
(Dollars in millions)
$
$
$
$
$
$
$
$
1,004
811
35
37
1,887
526
413
939
551
913
34
1,498
595
498
1,093
$
$
$
$
$
$
$
$
— $
—
—
1
1
$
— $
—
— $
2
1
—
3
$
$
— $
1
1
$
(17) $
(17)
(1)
—
(35) $
(9) $
(6)
(15) $
(5) $
(16)
—
(21) $
(6) $
(4)
(10) $
987
794
34
38
1,853
517
407
924
548
898
34
1,480
589
495
1,084
(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, 2017 or December 31, 2016.
79
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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, 2017, 2016 and 2015, we had no OTTI.
Available-for-sale securities
We purchased $904 million of AFS securities, which included U.S. government sponsored agency MBS, corporate
debt obligations, and municipal obligations, during the year ended December 31, 2017. 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, 2017, we sold $289 million of U.S. government sponsored agency securities,
which resulted in a gain of $3 million. During the year ended December 31, 2016, we sold $291 million of U.S. government
sponsored agency securities, which resulted in a gain of $4 million, compared to $170 million of U.S. government sponsored
agencies, which resulted in a gain of $3 million during the year ended December 31, 2015.
Held-to-maturity securities
There were no purchases of HTM securities during the year ended December 31, 2017. 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. We had no sales of HTM securities during the years ending December 31, 2017, 2016 and 2015,
respectively.
80
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table summarizes, by duration, the unrealized loss positions on investment securities:
December 31, 2017
Available-for-sale securities
Agency - Commercial
Agency - Residential
Municipal obligations
Corporate debt obligations
Held-to-maturity securities
Agency - Commercial
Agency - Residential
December 31, 2016
Available-for-sale securities
Agency - Commercial
Agency - Residential
Municipal obligations
Held-to-maturity securities
Agency - Commercial
Agency - Residential
Unrealized Loss Position with Duration
12 Months and Over
Unrealized Loss Position with Duration
Under 12 Months
Fair
Value
Number of
Securities
Unrealized
Loss
Fair
Value
Number of
Securities
Unrealized
Loss
(Dollars in millions)
$
$
$
$
218
452
6
—
348
111
6
—
—
—
—
$
$
$
20
36
3
—
25
16
1
—
—
— $
—
(7) $
(14)
—
—
(8) $
(3)
— $
—
—
— $
—
744
263
22
3
99
293
345
748
17
528
385
$
$
$
$
41
33
9
1
8
43
29
55
8
34
43
(11)
(3)
—
—
(1)
(3)
(5)
(16)
—
(6)
(4)
The following shows the amortized cost and estimated fair value of securities by contractual maturity:
December 31, 2017
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Total
Investment Securities Available-for-Sale
Investment Securities Held-to-Maturity
Amortized
Cost
Fair
Value
Weighted-
Average
Yield
Amortized
Cost
Fair
Value
Weighted-
Average
Yield
(Dollars in millions)
10
45
1,832
1,887
$
10
46
1,797
1,853
$
2.58%
4.85%
2.40%
$
35
26
878
939
$
35
26
863
924
2.48%
2.52%
2.44%
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 $2.0 billion, $879 million, and $14
million at December 31, 2017, 2016 and 2015, 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
securitizing the loans into agency, government, or private label mortgage-backed securities. At December 31, 2017 and 2016,
LHFS totaled $4.3 billion and $3.2 billion, respectively. For the years ended December 31, 2017, 2016 and 2015, we had net
gains on loan sales associated with LHFS of $267 million, $301 million, and $288 million, respectively.
At December 31, 2017 and 2016, $21 million and $32 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.
81
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 4 — Loans Held-for-Investment
The following table presents our Loans-held-for-investment:
Consumer loans
Residential first mortgage
Home Equity
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, 2017
December 31, 2016
(Dollars in millions)
$
$
2,754
664
25
3,443
1,932
1,196
1,142
4,270
7,713
$
$
2,327
443
28
2,798
1,261
769
1,237
3,267
6,065
(1)
Includes NBV of $307 million and $244 million of owner occupied commercial real estate loans at December 31, 2017 and December 31, 2016,
respectively.
During the year ended December 31, 2017, we sold performing and nonperforming consumer loans, with UPB of $127
million, of which $25 million were nonperforming. Upon a change in our intent, the loans were transferred to LHFS and
subsequently sold resulting in a gain on sale of $2 million which is recorded in net gain on loan sales on the Consolidated
Statements of Operations.
During the year ended December 31, 2016, we sold performing residential first mortgage loans with UPB of $1.2
billion. Upon a change of our intent, the loans were transferred to LHFS and subsequently sold resulting in a net gain of $14
million which is recorded in net gain on loan sales on the Consolidated Statements of Operations.
In addition, during the year ended December 31, 2016, we sold nonperforming, TDR and non-agency loans with a
UPB of $110 million. Upon a change of our intent, the loans were transferred to LHFS and subsequently sold resulting in a loss
of $2 million which is recorded in net gain on sale of assets on the Consolidated Statements of Operations.
During the year ended December 31, 2015, we sold performing and nonperforming residential first mortgage loans
with UPB totaling $1.0 billion, of which $436 million were nonperforming. Upon a change in our intent, the loans were
transferred to LHFS 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.
During the year ended December 31, 2017, we purchased residential first mortgage loans with UPB of $8 million and
HELOC loans with a UPB of $250 million. A premium of $9 million was associated with these loan purchases. During the year
ended December 31, 2016, we purchased jumbo residential first mortgage loans with a UPB 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 the loans were 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, 2017 and 2016, we pledged $7.1 billion
and $5.3 billion, respectively.
82
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents changes in ALLL, by class of loan:
Residential
First
Mortgage (1)
Home Equity
Other
Consumer
Commercial
Real
Estate
Commercial
and
Industrial
Warehouse
Lending
Total
Year Ended December 31, 2017
Beginning balance ALLL
Charge-offs (2)
Recoveries
Provision (benefit)
Ending balance ALLL
Year Ended December 31, 2016
Beginning balance ALLL
Charge-offs (2)
Recoveries
Provision (benefit) (3)
Ending balance ALLL
Year Ended December 31, 2015
Beginning balance ALLL
Charge-offs
Recoveries
Provision (benefit)
Ending balance ALLL
$
$
$
$
$
$
65
$
24
$
(8)
1
(11)
47
116
(29)
2
(24)
65
234
(87)
3
(34)
$
$
$
$
(3)
2
(1)
22
32
(4)
—
(4)
24
31
(7)
2
6
$
$
$
$
116
$
32
$
(Dollars in millions)
1
$
(2)
28
$
(1)
1
1
1
2
(3)
3
(1)
1
1
(4)
3
2
2
$
$
$
$
$
1
17
45
18
—
1
9
28
17
—
2
$
$
$
$
(1)
18
$
17
—
1
1
19
13
—
—
4
17
11
(3)
—
5
13
$
$
$
$
$
$
7
—
—
(1)
6
6
—
—
1
7
3
—
—
3
6
$
$
$
$
$
$
142
(14)
6
6
140
187
(36)
6
(15)
142
297
(101)
10
(19)
187
(1)
(2)
Includes allowance and charge-offs related to loans with government guarantees.
Includes charge-offs of $1 million, $8 million and $69 million related to the transfer and subsequent sale of loans during the years ended
December 31, 2017, December 31, 2016 and December 31, 2015, respectively. Also includes charge-offs related to loans with government
guarantees of $4 million, $14 million, and $3 million during the years ended December 31, 2017, December 31, 2016 and December 31, 2015,
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.
The following table sets forth the method of evaluation, by class of loan:
Residential
First
Mortgage (1)
Home Equity
Other
Consumer
Commercial
Real
Estate
Commercial
and
Industrial
Warehouse
Lending
Total
(Dollars in millions)
December 31, 2017
Loans held-for-investment (2)
Individually evaluated
Collectively evaluated
Total loans
Allowance for loan losses (2)
Individually evaluated
Collectively evaluated
Total allowance for loan losses
December 31, 2016
Loans held-for-investment (2)
Individually evaluated
Collectively evaluated
Total loans
Allowance for loan losses (2)
Individually evaluated
Collectively evaluated
Total allowance for loan losses
$
$
$
$
$
$
$
$
34
2,712
2,746
6
41
47
46
2,274
2,320
5
60
65
$
$
$
$
$
$
$
$
27
633
660
10
12
22
29
349
378
8
16
24
$
$
$
$
$
$
$
$
— $
25
25
$
— $
1
1
$
— $
28
28
$
— $
1
1
$
— $
1,932
1,932
$
— $
1,196
1,196
$
— $
1,142
1,142
$
$
— $
45
45
$
— $
1,261
1,261
$
— $
28
28
$
— $
19
19
$
— $
769
769
$
— $
17
17
$
— $
6
6
$
— $
1,237
1,237
$
$
— $
7
7
$
$
61
7,640
7,701
16
124
140
75
5,918
5,993
13
129
142
Includes allowance related to loans with government guarantees.
(1)
(2) Excludes loans carried under the fair value option.
83
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table sets forth the LHFI aging analysis of past due and current loans (for further information on our
policy past due and impaired loans, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant
Accounting Policies):
December 31, 2017
Consumer loans
Residential first mortgage
Home equity
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans (2)
December 31, 2016
Consumer loans
Residential first mortgage
Home equity
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans (2)
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
Greater Past
Due (1)
Total
Past Due
(Dollars in millions)
Current
Total LHFI
$
$
$
$
2
1
—
3
—
—
—
—
3
6
1
1
8
—
—
—
—
8
$
$
$
$
2
—
—
2
—
—
—
—
2
$
$
— $
2
—
2
—
—
—
—
2
$
23
6
—
29
—
—
—
—
29
29
11
—
40
—
—
—
—
40
$
$
$
$
27
7
—
34
—
—
—
—
34
35
14
1
50
—
—
—
—
50
$
$
$
$
2,727
657
25
3,409
1,932
1,196
1,142
4,270
7,679
2,292
429
27
2,748
1,261
769
1,237
3,267
6,015
$
$
$
$
2,754
664
25
3,443
1,932
1,196
1,142
4,270
7,713
2,327
443
28
2,798
1,261
769
1,237
3,267
6,065
(1)
(2)
Includes less than 90 days past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.
Includes $4 million and $13 million of loans 90 days or greater past due accounted for under the fair value option at December 31, 2017 and 2016,
respectively.
Interest that would have been accrued on impaired loans totaled approximately $1 million, $2 million and $6 million
during the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017 and 2016, we had no loans 90
days or greater past due and still accruing interest.
84
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, 2017
Consumer loans (1)
Residential first mortgage
Home equity
Total TDRs (2)
December 31, 2016
Consumer loans (1)
Residential first mortgage
Home equity
Total TDRs (2)
TDRs
Performing
Nonperforming
Total
(Dollars in millions)
$
$
$
$
19
24
43
22
45
67
$
$
$
$
12
4
16
11
7
18
$
$
$
$
31
28
59
33
52
85
(1) The ALLL on consumer TDR loans totaled $13 million and $9 million at December 31, 2017 and 2016, respectively.
(2)
Includes $3 million and $25 million of TDR loans accounted for under the fair value option at December 31, 2017 and 2016, respectively.
The following table provides a summary of newly modified TDRs:
Year Ended December 31, 2017
Residential first mortgages
Home equity (2)(3)
Total TDR loans
Year Ended December 31, 2016
Residential first mortgages
Home equity (2)(3)
Commercial & Industrial
Total TDR loans
Year Ended December 31, 2015
Residential first mortgages
Home equity (2)(3)
Other consumer
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)
16
82
98
23
143
1
167
325
370
3
698
$
$
$
$
$
$
4
6
10
4
9
2
15
81
21
—
102
$
$
$
$
$
$
4
5
9
5
8
1
14
80
18
—
98
$
$
$
$
$
$
—
(1)
(1)
—
—
—
—
(2)
—
—
(2)
(1) Post-modification balances include past due amounts that are capitalized at modification date.
(2) Home equity post-modification UPB reflects write downs.
(3)
Includes loans carried at fair value option.
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, 2017, 2016 and 2015. The UPB associated with the TDRs in each portfolio and
in the aggregate was less than $1 million for all years presented. There was no increase or decrease in the allowance associated
with these TDRs at subsequent default. All TDRs within consumer and commercial loan portfolios are considered subsequently
defaulted when greater than 90 days past due. Subsequent default is defined as a payment re-defaulted within 12 months of the
restructuring date:
Residential first mortgages
Home equity (1)
Total TDR loans
(1) HELOC post-modification UPB reflects write downs.
85
Years Ended December 31,
2017
2016
2015
Number of Accounts
1
0
1
1
7
8
3
5
8
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Impaired Loans
The following table presents individually evaluated impaired loans and the associated allowance:
With no related allowance recorded
Consumer loans
Residential first mortgage
Total loans with no related allowance recorded
With an allowance recorded
Consumer loans
Residential first mortgage
Home equity
Total loans with an allowance recorded
Total impaired loans
Consumer loans
Residential first mortgage
Home equity
Total impaired loans
December 31, 2017
December 31, 2016
Recorded
Investment
Net
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
(Dollars in millions)
Net
Unpaid
Principal
Balance
Related
Allowance
$
$
$
$
$
$
11
11
22
24
46
33
24
57
$
$
$
$
$
$
12
12
22
27
49
34
27
61
$
$
$
$
$
$
— $
— $
6
10
16
6
10
16
$
$
$
$
6
6
40
29
69
46
29
75
$
$
$
$
$
$
6
6
40
29
69
46
29
75
$
$
$
$
$
$
—
—
5
8
13
5
8
13
The following table presents average impaired loans and the interest income recognized:
For the Years Ended December 31,
2017
2016
2015
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in millions)
$
$
38
28
—
66
$
$
1
1
—
2
$
$
52
30
2
84
$
$
1
2
—
3
$
$
150
39
2
191
$
$
5
—
—
5
Consumer loans
Residential first mortgage
Home equity
Commercial loans
Commercial and industrial
Total impaired loans
Credit Quality
We utilize an internal risk rating system which is applied to all consumer and commercial loans. Descriptions of our
internal risk ratings as they relate to credit quality follow the ratings used by the U.S. bank regulatory agencies as listed below.
Pass. Pass assets are not impaired nor do they have any known deficiencies that could impact the quality of the asset.
Watch. Watch assets are defined as pass rated assets that exhibit elevated risk characteristics or other factors that
deserve management’s close attention and increased monitoring. However, the asset does not exhibit a potential or well-defined
weakness that would warrant a downgrade to criticized or adverse classification.
Special mention. Assets identified as special mention possess credit deficiencies or potential weaknesses deserving
management's close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk that, if
not corrected, could weaken the assets and increase risk in the future. Special mention assets are criticized, but do not expose an
institution to sufficient risk to warrant adverse classification.
86
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Substandard. Assets identified as substandard are inadequately protected by the current net worth and paying capacity
of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that
jeopardize the full collection or liquidation of the debt. They are characterized by the distinct possibility that we will sustain
some loss if the deficiencies are not corrected. For home equity loans and other consumer loans, we evaluate credit quality
based on the aging and status of payment activity and any other known credit characteristics that call into question full
repayment of the asset. Nonperforming loans are classified as either substandard, doubtful or loss.
Doubtful. An asset classified as doubtful has all the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable and improbable. A doubtful asset has a high probability of total or substantial loss, but because of
specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in
default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can
include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of
collateral, and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be
adjusted based on the new information. Due to the high probability of loss, doubtful assets are placed on non-accrual.
Loss. An asset classified as loss is considered uncollectible and of such little value that the continuance as a bankable
asset is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather
that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be
affected in the future.
Consumer Loans
Consumer loans consist of open and closed end loans extended to individuals for household, family, and other personal
expenditures, and includes consumer loans, and loans to individuals secured by their personal residence, including first
mortgage, home equity, and home improvement loans. Because consumer loans are usually relatively small-balance,
homogeneous exposures, consumer loans are rated primarily on payment performance. Payment performance is a proxy for the
strength of repayment capacity and loans are generally classified based on their payment status rather than by an individual
review of each loan.
In accordance with regulatory guidance, we assign risk ratings to consumer loans in the following manner:
• Consumer loans are classified as Watch once the loan becomes 60 days past due.
• Open and closed-end consumer loans 90 days or more past due are classified Substandard.
Commercial Loans
Management conducts periodic examinations which serve as an independent verification of the accuracy of the ratings
assigned. Loan grades are based on different factors within the borrowing relationship: entity sales, debt service coverage, debt/
total net worth, liquidity, balance sheet and income statement trends, management experience, business stability, financing
structure, and financial reporting requirements. The underlying collateral is also rated based on the specific type of collateral
and corresponding LTV. The combination of the borrower and collateral risk ratings results in the final rating for the borrowing
relationship.
87
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Pass
Watch
Special Mention
Substandard
Total Loans
(Dollars in millions)
December 31, 2017
Consumer Loans
Residential First Mortgage
Home equity
Other Consumer
Total Consumer Loans
Commercial Loans
Commercial Real Estate
Commercial and Industrial
Warehouse
Total Commercial Loans
Consumer Loans
Residential First Mortgage
Home equity
Other Consumer
Total Consumer Loans
Commercial Loans
Commercial Real Estate
Commercial and Industrial
Warehouse
Total Commercial Loans
$
$
$
$
$
$
$
$
Pass
2,706
633
25
3,364
1,902
1,135
1,014
4,051
2,273
386
28
2,687
1,225
678
1,168
3,071
$
$
$
$
$
$
$
$
Note 5 — Loans with Government Guarantees
23
25
—
48
23
32
128
183
$
$
$
$
— $
—
—
— $
7
24
—
31
$
$
December 31, 2016
Watch
Special Mention
Substandard
(Dollars in millions)
23
46
—
69
27
59
16
102
$
$
$
$
— $
—
—
— $
3
21
53
77
$
$
25
6
—
31
$
$
— $
5
—
5
31
11
—
42
6
11
—
17
$
$
$
$
$
2,754
664
25
3,443
1,932
1,196
1,142
4,270
Total Loans
2,327
443
28
2,798
1,261
769
1,237
3,267
Substantially all loans with government guarantees are insured or guaranteed by the FHA or U.S. Department of
Veterans Affairs. FHA loans earn interest at a rate based upon the 10-year U.S. Treasury note rate at the time the underlying
loan becomes delinquent, which is not paid by the FHA or the U.S. Department of Veterans Affairs until claimed. Certain loans
within our portfolio may be subject to indemnifications and insurance limits which 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, 2017 and December 31, 2016, respectively, loans with government guarantees totaled $271 million
and $365 million.
At December 31, 2017, repossessed assets and the associated claims recorded in other assets totaled $84 million and at
December 31, 2016 repossessed assets and the associated claims were $135 million.
88
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 6 — Repossessed Assets
Repossessed assets include the following:
One-to-four family properties
Commercial properties
Total repossessed assets
December 31,
2017
2016
(Dollars in millions)
$
$
5
3
8
$
$
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,
2017
2016
2015
(Dollars in millions)
$
$
14
18
(14)
(9)
(1)
8
$
$
17
19
(19)
(2)
(1)
14
$
$
11
3
14
19
29
(24)
—
(7)
17
We have no consolidated VIEs as of December 31, 2017 and December 31, 2016.
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, 2017 and 2016, the
FSTAR 2007-1 mortgage securitization trust included 1,911 loans and 2,453 loans, respectively, with an aggregate principal
balance of $65 million and $89 million, respectively. We have no other significant VIE involvement.
Note 8 — Federal Home Loan Bank Stock
Our investment in FHLB stock was $303 million at December 31, 2017 compared to $180 million at December 31,
2016. 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 UPB of our mortgage loans, home purchase contracts and similar obligations at the beginning of each year or 4.5
percent of our total FHLB advances, whichever is greater. Once purchased, FHLB shares must be held for five years before
they can be redeemed. We had $123 million, $10 million and $57 million in required stock purchases during the year ending
December 31, 2017, 2016 and 2015, respectively. We had no redemptions of FHLB stock during the years ended December 31,
2017, and 2016 and $42 million during the year ended December 31, 2015. Dividends received on the stock equaled $9 million,
$7 million and $6 million for the years ended December 31, 2017, 2016 and 2015, respectively. These dividends were recorded
in the Consolidated Statements of Operations as other noninterest income.
89
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 9 — Premises and Equipment
The following presents our premises and equipment balances and estimated useful lives:
Land
Office buildings and improvements
Computer hardware and software
Furniture, fixtures and equipment
Leased equipment
Total
Less accumulated depreciation
Premises and equipment, net
Estimated
Useful Lives
—
15 — 31.5 years
3 — 7 years
5 — 7 years
3 — 10 years
$
$
December 31,
2017
2016
(Dollars in millions)
61
159
300
63
40
623
(293)
330
$
$
59
153
256
61
4
533
(258)
275
Depreciation expense amounted to approximately $39 million, $31 million and $26 million, for the years ended
December 31, 2017, 2016 and 2015, respectively.
Operating Leases
We conduct a portion of our business from leased facilities. Such leases are considered to be operating leases based on
their terms. Lease rental expense totaled approximately $9 million, $5 million and $7 million for the years ended December 31,
2017, 2016 and 2015, respectively.
The following outlines our minimum contractual lease obligations:
2018
2019
2020
2021
2022
Thereafter
Total
December 31, 2017
(Dollars in millions)
8
7
5
3
1
2
26
$
$
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. We account for MSRs at their fair value. A primary risk associated with MSRs is the potential reduction in fair value
as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates or
government intervention. Conversely, these assets generally increase in value in a rising interest rate environment to the extent
that prepayments are slower than anticipated. We utilize derivatives as economic hedges to offset changes in the fair value of
the MSRs resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments.
There is also a risk of valuation decline due to higher than expected increases in default rates, which we do not believe can be
effectively managed using derivatives. For further information regarding the derivative instruments utilized to manage our
MSR risks, see Note 11 - Derivative Financial Instruments.
90
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Changes in the fair value of residential first mortgage MSRs 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 run-off
Changes in estimates of fair value (2)
Fair value of MSRs at end of period
$
$
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
296
$
228
(84)
335
288
(310)
(22)
—
291
$
(62)
(43)
335
$
$
258
260
(176)
(43)
(3)
296
(1) Changes in fair value are included within net (loss) return on mortgage servicing rights 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, 2017
December 31, 2016
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
6.29% $
9.93%
73.00
$
$
286
283
288
(Dollars in millions)
282
277
286
$
7.78% $
16.68%
68.18
$
326
322
330
318
311
326
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 mortgage servicing
rights on the Consolidated Statements of Operations. Contractual subservicing fees including late fees and other ancillary
income are included within loan administration income on the Consolidated Statements of Operations. Subservicing fee income
is recorded for fees earned, net of third party subservicing costs, for loans subserviced.
The following table summarizes income and fees associated with contractual servicing rights:
Net return (loss) on mortgage servicing rights
Servicing fees, ancillary income and late fees (1)
Changes in fair value (2)
Gain (loss) on MSR derivatives (3)
Net transaction costs
$
Total (loss) return included in net return on mortgage servicing rights
$
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
60
(22)
(8)
(8)
22
$
$
$
81
(109)
—
2
(26) $
69
(44)
5
(2)
28
(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.
91
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table summarizes income and fees associated with our mortgage loans subserviced:
For the Year Ended December 31,
2017
2016
2015
(Dollars in millions)
Loan administration income on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1)
Other servicing charges
$
$
35
(14)
Total income on mortgage loans subserviced, included in loan
administration
(1) Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on cash basis.
21
$
$
$
29
(11)
18
$
33
(7)
26
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. The Company's policy is to present its derivative assets and derivative liabilities on the
Consolidated Statement of Financial Condition on a gross basis, even when provisions allowing for set-off are in place.
However, for derivative contracts cleared through certain central clearing parties, variation margin payments are recognized as
settlements. We are exposed to non-performance risk by the counterparties to our various derivative financial instruments. A
majority of our derivatives are centrally cleared through a Central Counterparty Clearing House or consist of residential
mortgage interest rate lock commitments further limiting our exposure to non-performance risk. We believe that the non-
performance risk inherent in our remaining derivative contracts is minimal based on credit standards and the collateral
provisions of the derivative agreements.
Derivatives not designated as hedging instruments: We maintain a derivative portfolio of interest rate swaps, futures
and forward commitments used to manage exposure to changes in interest rates, MSR asset values and to meet the needs of
customers. We also enter into interest rate lock commitments, which are commitments to originate mortgage loans whereby the
interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Market risk on
interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments. Changes in
fair value of derivatives not designated as hedging instruments are recognized in the Consolidated Statements of Income.
Derivatives designated as hedging instruments: We have designated certain interest rate swaps as 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, 2017, we had $2 million (net-of-tax) of unrealized gains on
derivatives classified as cash flow hedges recorded in accumulated other comprehensive income (loss), compared to $1 million
of unrealized gains at December 31, 2016. The estimated amount to be reclassified from other comprehensive income into
earnings during the next 12 months represents $2 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, 2017. Cash flows and the profit impact associated with designated hedges are reported in the same category as
the underlying hedged item.
92
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents the notional amount, estimated fair value and maturity of our derivative financial
instruments:
Notional Amount
December 31, 2017 (1)
Fair Value (2)
(Dollars in millions)
Expiration Dates
Derivatives designated as hedging instruments:
Liabilities
Interest rate swaps on FHLB advances
Derivatives not designated as hedging instruments:
Assets
Futures
Mortgage-backed securities forwards
Rate lock commitments
Interest rate swaps and swaptions
Total derivative assets
Liabilities
Futures
Mortgage-backed securities forwards
Rate lock commitments
Interest rate swaps
Total derivative liabilities
Derivatives designated as hedging instruments:
Assets
Interest rate swaps on FHLB advances
Liabilities
Interest rate swaps on FHLB advances
Derivatives not designated as hedging instruments:
Assets
Futures
Mortgage-backed securities forwards
Rate lock commitments
Interest rate swaps and swaptions
Total derivative assets
Liabilities
Futures
Mortgage-backed securities forwards
Rate lock commitments
Interest rate swaps
$
$
$
$
$
$
$
$
$
$
830
$
$
$
$
$
$
$
$
$
$
1,597
2,646
3,629
1,441
9,313
209
3,197
214
617
4,237
Notional Amount
600
230
4,621
3,776
3,517
2,231
14,145
134
1,893
598
1,129
3,754
1
—
4
24
11
39
—
6
—
4
10
2023-2026
2018-2022
2018
2018
2018-2048
2018-2021
2018
2018
2018-2027
December 31, 2016
Fair Value (2)
(Dollars in millions)
Expiration Dates
20
1
2
43
24
35
104
—
11
6
37
54
2023-2026
2025-2026
2017-2020
2017
2017
2017-2033
2017
2017
2017
2017-2047
Total derivative liabilities
(1) At December 31, 2017, variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day’s fair value of
open positions is considered settlement of the derivative position for accounting purposes. At December 31, 2016, variation margin was not
recognized as settlement.
$
$
(2) Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.
93
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:
Gross Amount
Gross Amounts
Netted 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
December 31, 2017
Derivatives designated as hedging instruments:
Liabilities
Interest rate swaps on FHLB advances (1)
Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards
Interest rate swaps and swaptions (1)
Total derivative assets
Liabilities
Futures
Mortgage-backed securities forwards
Interest rate swaps (1)
Total derivative liabilities
December 31, 2016
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 (1)
Total derivative liabilities
$
$
$
$
$
$
$
$
$
$
$
1
$
— $
1
$
— $
17
4
11
15
$
$
— $
6
4
10
20
1
2
43
35
80
$
$
$
$
$
— $
11
37
48
$
— $
—
— $
— $
—
—
— $
1
1
$
$
— $
—
—
— $
— $
—
—
— $
4
11
15
$
$
— $
6
4
10
$
— $
—
— $
— $
—
—
— $
19
$
— $
— $
— $
2
43
35
80
$
$
— $
11
37
48
$
— $
—
—
— $
— $
—
—
— $
8
10
18
2
2
5
9
—
33
—
44
30
74
1
—
20
21
(1) At December 31, 2017, variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day’s fair value of
open positions is considered settlement of the derivative position for accounting purposes. At December 31, 2016, variation margin was not
recognized as settlement and we had an additional $15 million in variation margin in excess of the amounts disclosed above.
At December 31, 2017, we pledged a total of $26 million related to derivative financial instruments, consisting of $7
million of cash collateral on derivative liabilities and $19 million of maintenance margin on centrally clear derivatives and had
an obligation to return cash of $18 million on derivative assets. 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. The net cash
pledged is restricted and is included in other assets on the Consolidated Statements of Financial Condition.
94
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents the net gain (loss) recognized in income on derivative instruments, net of the impact of
offsetting positions:
For the Years Ended
December 31,
2017
2016
2015
(Dollars in millions)
Derivatives not designated as hedging instruments:
Futures
Interest rate swaps and swaptions
Mortgage-backed securities forwards
Rate lock commitments and forward agency and loan sales
Forward commitments
Interest rate swaps (1)
Location of Gain/(Loss)
Net return (loss) on mortgage servicing rights $
Net return (loss) on mortgage servicing rights
Net return (loss) on mortgage servicing rights
Net gain (loss) on loan sales
Other noninterest income
Other noninterest income
Total derivative (loss) gain
(1)
Includes customer-initiated commercial interest rate swaps.
$
Note 12 — Deposit Accounts
The deposit accounts are as follows:
(1) $ — $
(11)
4
(34)
—
2
(40) $
(5)
5
26
(2)
4
28
$
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
Wholesale deposits
Company controlled deposits
Total deposits
December 31,
2017
2016
(Dollars in millions)
931
3,482
124
1,491
6,028
288
71
69
2
430
6,458
251
446
376
1,073
45
1,358
8,934
$
$
$
$
95
6
(2)
1
9
(2)
2
14
852
3,824
138
1,055
5,869
282
63
109
1
455
6,324
250
451
329
1,030
—
1,446
8,800
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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
Note 13 — Borrowings
Federal Home Loan Bank Advances
December 31,
2017
2016
(Dollars in millions)
$
$
159
128
173
167
31
658
$
$
The following is a breakdown of our FHLB advances outstanding:
December 31, 2017
December 31, 2016
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
$
$
4,260
4,260
1,130
275
1,405
5,665
(Dollars in millions)
1.40% $
1.76%
1.41%
$
1,780
1,780
1,025
175
1,200
2,980
126
116
146
34
27
449
0.62%
1.12%
1.12%
(1)
Includes the current portion of fixed rate advances of $125 million and $50 million at December 31, 2017 and December 31, 2016, respectively. We
settled $250 million in long-term fixed rate FHLB advances during the fourth quarter of 2016.
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, 2017, we had the authority and approval from the FHLB to utilize a line of credit of up to $7.0
billion and we may access that line to the extent that collateral is provided. At December 31, 2017, we had $5.7 billion of
advances outstanding and an additional $763 million 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, 2017, $1.1 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,
2017
2016
2015
$
(Dollars in millions)
3,557
2,833
1,137
$
1.16%
5,665
4,590
1,195
1.30%
3,541
1,811
1,611
1.00%
$
96
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table outlines the maturity dates of our FHLB advances and other borrowings:
2018
2019
2020
2021
Thereafter
Total
Parent Company Senior Notes and Trust Preferred Securities
The following table presents long-term debt, net of debt issuance costs:
December 31, 2017
(Dollars in millions)
4,385
50
—
—
1,230
5,665
$
$
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, 2017
December 31, 2016
Amount
Interest Rate
Amount
Interest Rate
$
$
$
247
26
26
26
26
26
51
25
25
16
247
494
(Dollars in millions)
6.125% $
4.92% $
4.61%
4.94%
3.36%
3.36%
3.34%
2.86%
3.04%
4.09%
$
246
26
26
26
26
26
51
25
25
16
247
493
6.125%
4.25%
4.13%
4.25%
2.88%
2.88%
2.71%
2.38%
2.41%
3.46%
On July 11, 2016, we issued $250 million of senior notes ("Senior Notes") which mature on July 15, 2021. 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 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.
The trust preferred securities are callable by us at any time. Interest is payable quarterly; however, we may defer
interest payments for up to 20 quarters without default or penalty. As of December 31, 2017, we had no deferred interest.
97
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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.
The following table shows the activity impacting the representation and warranty reserve:
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
27
$
40
$
4
(13)
(9)
(3)
15
$
5
(19)
(14)
1
27
$
53
7
(19)
(12)
(1)
40
$
$
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.
During the year ended December 31, 2017, a total of 237,627 May Investor Warrants were exercised, resulting in the
net issuance of 154,313 shares of Common Stock. As of December 31, 2017, there are no remaining May Investor Warrants
outstanding and the related liability is reduced to zero. At December 31, 2016, the liability was $4 million. 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 TARP Preferred, 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.
98
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):
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
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
$
$
$
$
(8) $
(19)
(7)
(12)
3
1
2
(10)
(18) $
1
5
1
4
(5)
(2)
(3)
1
2
$
$
$
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)
(1) Reclassifications are reported in other noninterest income on the Consolidated Statement of Operations.
99
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 17 — Earnings Per Share
Basic earnings per share, excluding dilution, is computed by dividing earnings available to common stockholders by
the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into
common stock or resulted in the issuance of common stock that could then share in our earnings.
The following table sets forth the computation of basic and diluted earnings per share of common stock:
For the Years Ended December 31,
2017
2016
2015
Net income
Deferred cumulative preferred stock dividends
Net income 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 per common share
Basic earnings per common share
Effect of dilutive securities
May Investor Warrants
Stock-based awards
Diluted earnings per common share
$
$
$
$
(In millions, except share data)
$
$
171
(18)
153
$
63
—
63
$
158
(30)
128
57,093,868
56,569,307
56,426,977
12,287
1,072,188
58,178,343
138,314
890,046
57,597,667
305,484
432,062
57,164,523
1.11
$
2.71
$
—
(0.02)
1.09
$
(0.01)
(0.04)
2.66
$
2.27
(0.01)
(0.02)
2.24
Under the terms of the TARP Preferred, the Company elected to defer payments of preferred stock dividends
beginning with the February 2012 dividend. Although, while being deferred, the impact was not included in quarterly 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. On July 29, 2016, we completed the $267 million redemption of TARP
Preferred.
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, 2017, 2016 and 2015, compensation expense recognized related to stock-based
compensation totaled $11 million, $11 million and $3 million, respectively.
100
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Stock Options
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
2017 (1)
2016
2015
45,791
(5,073)
40,718
40,718
20,286
53,284
(7,493)
45,791
45,791
23,576
Weighted Average Exercise Price
2017 (1)
2016
2015
$
$
$
$
80.00
80.00
80.00
80.00
80.00
$
$
$
$
80.00
80.00
80.00
80.00
80.00
$
$
$
$
63,598
(10,314)
53,284
53,284
27,197
94.33
168.34
80.00
80.00
80.00
(1)
All outstanding options at December 31, 2017 are vested or expected to vest and have a weighted average remaining contractual life of 2.1 years.
The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015, was zero.
Additionally, there was no aggregate intrinsic value of options outstanding and exercised at December 31, 2017, 2016 and
2015.
Restricted Stock and Restricted Stock Units
We have issued restricted stock units to officers, directors and certain employees. Restricted stock units 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.
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,
2016 annual shareholder meeting. If vested, the restricted stock units would pay out in five installments, subject to a quality
review.
At December 31, 2017, the maximum number of shares of common stock that may be issued were 2,132,452 shares.
The total fair value of awards vested during the years ended December 31, 2017, 2016, 2015 was $7 million, $3 million, and $2
million, respectively. As of December 31, 2017, the total unrecognized compensation cost related to non-vested awards was $12
million with a weighted average expense recognition period of 2.5 years.
The following table summarizes restricted stock activity:
For the Years Ended December 31,
2017
2016
2015
Weighted —
Average Grant-
Date
Fair Value per
Share
Shares
Weighted —
Average Grant-
Date
Fair Value per
Share
Shares
Weighted —
Average Grant-
Date
Fair Value per
Share
Shares
Restricted Stock and Restricted Stock Units
Non-vested balance at beginning of period
Granted
Vested
Canceled and forfeited
Non-vested balance at end of period
1,461,910
357,058
(385,454)
(143,064)
1,290,450
$
$
17.68
28.06
17.36
18.89
20.52
1,299,985
310,209
(134,767)
(13,517)
1,461,910
$
$
16.36
22.97
15.78
17.24
17.68
233,691
1,325,134
(152,220)
(106,620)
1,299,985
$
$
17.21
16.11
15.25
18.46
16.36
101
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
2017 Employee Stock Purchase Plan
The Employee Stock Purchase Plan ("2017 ESPP") was approved on March 20, 2017 by our Board of Directors ("the
Board") and on May 23, 2017 by our shareholders. The 2017 ESPP became effective July 1, 2017 and will remain effective
until terminated by the Board. A total of 800,000 shares of the Company’s common stock are reserved and authorized for
issuance for purchase under the 2017 ESPP. During the year ended December 31, 2017, 48,032 shares were issued under the
2017 ESPP and our associated compensation expense was de minimis.
Incentive Compensation Plans
We had an expense of $33 million, $33 million and $30 million for the years ended December 31, 2017, 2016 and
2015, 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
Total current income tax expense
Deferred
Federal
Federal impact of tax reform
State
Total deferred income tax expense
Total income tax expense
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
$
$
$
2
2
66
80
—
146
148
$
$
4
4
84
—
(1)
83
87
$
2
2
82
—
(2)
80
82
Our effective tax rate differs from the statutory federal tax rate. The following is a summary of such differences:
Provision at statutory federal income tax rate (35%)
Increases (decreases) resulting from:
Tax Reform
Bank Owned Life Insurance
Restricted stock compensation
State income tax (benefit), net of federal income tax effect (includes valuation allowance)
Warrant expense (income)
Non-deductible compensation
Other
Provision for income taxes
Effective tax provision rate
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
$
74
$
90
$
84
80
(3)
(2)
—
—
—
(1)
148
70.1%
$
—
(3)
—
(1)
1
—
—
87
33.7%
$
—
(1)
—
(2)
1
1
(1)
82
34.2%
$
The increase in our income tax provision and effective tax provision rate during the year ended December 31, 2017 as
compared to the year ended December 31, 2016, was primarily due to the new tax legislation which resulted in a charge to the
provision for income taxes of approximately $80 million due to the revaluation of our DTAs at a lower corporate statutory rate.
102
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Temporary differences and carry forwards that give rise to DTAs and liabilities are comprised of the following:
December 31,
2017
2016
(Dollars in millions)
Deferred tax assets
Net operating loss carryforwards (Federal and State)
Allowance for loan losses
Litigation settlement
Alternative Minimum Tax credit carry forwards
Representation and warranty reserves
Accrued compensation
Contingent Consideration
Loan deferred fees and costs
Non-accrual interest revenue
Deferred interest
General business credits
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
$
$
110
43
14
—
3
10
6
2
1
1
3
2
195
(20)
175
(14)
(3)
(10)
(9)
(3)
(39)
136
$
$
195
74
22
18
10
15
—
3
2
2
1
5
347
(20)
327
(12)
(11)
(9)
(5)
(4)
(41)
286
At December 31, 2017, we reclassified $20 million of AMT credits from deferred taxes to other assets as a result of tax
reform.
We have not provided deferred income taxes for the Bank’s pre-1988 tax bad debt reserve at December 31, 2017 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, 2017 and 2016, we had federal net operating loss carry forwards of $381 million
and $480 million, respectively. These carry forwards, if unused, expire in calendar years 2028 through 2037. 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, 2017 we had $120 million of net
operating loss carry forwards subject to certain annual use limitations which expire in calendar years 2028 through 2029.
We regularly evaluate the need for DTA valuation allowances based on a more likely than not standard as defined by
generally accepted accounting principles. The ability to realize DTAs 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.
We had a total state DTA before valuation allowance of $33 million which includes total state net operating loss
carryforwards of $579 million at December 31, 2017. In connection with our ongoing assessment of deferred taxes, we
analyzed each state net operating loss separately and determined the amount of such net operating loss, which is expected to
expire unused, and recorded a valuation allowance to reduce the DTA for state net operating losses to the amount which is more
likely than not to be realized. At December 31, 2017, the net state DTAs which will more likely than not be realized, was $14
million and we have maintained a valuation allowance of $20 million due to state loss carryover limitations.
We will continue to regularly assess the realizability of our DTAs. Changes in earnings performance and future
earnings projections, among other factors, may cause us to adjust our valuation allowance.
103
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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,
2017, 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, 2017, 2016 and 2015, 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 Capital
We, along with the Bank, must meet specific capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts
and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by regulators that could have a material effect on the
Consolidated Financial Statements. On January 1, 2015, the Basel III rules became effective and include transition provisions
through 2018.
At the end of 2017 a final rule was issued that will maintain the transition provisions for certain items deducted from
regulatory capital. For additional information, see Item 1. Business and Item 1A. Risk Factors.
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, 2017 and December 31, 2016.
The following tables present the regulatory capital ratios as of the dates indicated:
Flagstar Bancorp
December 31, 2017
Tangible capital (to adjusted avg. total assets)
Tier 1 capital (to adjusted avg. total assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
December 31, 2016
Tangible capital (to adjusted avg. total assets)
Tier 1 capital (to adjusted avg. total assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
$
$
N/A - Not applicable.
Actual
For Capital
Adequacy Purposes
Well Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in millions)
1,442
1,442
1,216
1,442
1,576
1,256
1,256
1,084
1,256
1,363
8.51%
8.51% $
11.50%
13.63%
14.90%
8.88%
8.88% $
13.06%
15.12%
16.41%
N/A
678
476
635
846
N/A
566
374
498
664
N/A
4.0% $
4.5%
6.0%
8.0%
N/A
4.0% $
4.5%
6.0%
8.0%
N/A
848
688
846
1,058
N/A
707
540
664
830
N/A
5.0%
6.5%
8.0%
10.0%
N/A
5.0%
6.5%
8.0%
10.0%
104
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bank
December 31, 2017
Tangible capital (to adjusted avg. total assets)
Tier 1 capital (to adjusted avg. total assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
December 31, 2016
Tangible capital (to adjusted avg. total assets)
Tier 1 capital (to adjusted avg. total assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
$
$
N/A - Not applicable.
Actual
For Capital
Adequacy Purposes
Well Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in millions)
1,531
1,531
1,531
1,531
1,664
1,491
1,491
1,491
1,491
1,598
9.04%
9.04% $
14.46%
14.46%
15.72%
10.52%
10.52% $
17.90%
17.90%
19.18%
N/A
677
476
635
847
N/A
567
375
500
667
N/A
4.0% $
4.5%
6.0%
8.0%
N/A
4.0% $
4.5%
6.0%
8.0%
N/A
847
688
847
1,059
N/A
709
542
667
833
N/A
5.0%
6.5%
8.0%
10.0%
N/A
5.0%
6.5%
8.0%
10.0%
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 practices of the Bank. In the course of such investigations or
examinations, the Bank cooperates with such agencies and provides information as requested.
We assess the liabilities and loss contingencies in connection with pending or threatened legal and regulatory
proceedings on at least a quarterly basis and establish accruals when we believe it is probable that a loss may be incurred and
that the amount of such loss can be reasonably estimated. Once established, litigation accruals are adjusted, as appropriate, in
light of additional information.
At December 31, 2017, we do not believe that the amount of any reasonably possible losses in excess of any amounts
accrued with respect to ongoing proceedings or any other known claims will be material to our financial statements, or that the
ultimate outcome of these actions will have a material adverse effect on our financial condition, results of operations or cash
flows.
DOJ litigation settlement
In 2012, the Bank entered into a Settlement Agreement with the DOJ which meets the definition of a financial liability
(the "DOJ Liability").
In accordance with the Settlement Agreement, we made an initial payment of $15 million and agreed to make future
annual payments totaling $118 million in annual increments of up to $25 million upon meeting all conditions, which are
evaluated quarterly and include: (a) the reversal of the DTA valuation allowance, which occurred at the end of 2013; (b) the
repayment of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "TARP Preferred"), which occurred in the
third quarter of 2016; and (c) the Bank’s Tier 1 Leverage Capital Ratio equals 11 percent or greater as filed in the Call Report
with the OCC.
No payment would be required until six months after the Bank files its Call Report with the OCC first reporting that its
Tier 1 Leverage Capital Ratio was 11 percent or greater. If all other conditions were then satisfied, an initial annual payment
would be due at that time. The next annual payment is then only made if such other conditions continue to be satisfied,
otherwise payments are delayed until all such conditions are met. Further, making such a payment must not violate any material
banking regulatory requirement, and the OCC must not object in writing.
105
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Consistent with our business and regulatory requirements, Flagstar shall seek in good faith to fulfill the conditions, and
will not undertake any conduct or fail to take any action the purpose of which is to frustrate or delay our ability to fulfill any of
the above conditions.
Additionally, if the Bank and Bancorp become party to a business combination in which the Bank or Bancorp
represent less than 33.3 percent of the resulting company’s assets. Annual payments must commence twelve months after the
date of that business combination.
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, 2017 of 9.7 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 transfer the
liability. The fair value of the DOJ Liability was $60 million at both December 31, 2017 and December 31, 2016, respectively.
Other litigation accruals
At December 31, 2017 and December 31, 2016, excluding the fair value liability relating to the DOJ litigation
settlement, our total accrual for contingent liabilities and settled litigation was $1 million and $3 million, respectively.
Commitments
The following table is a summary of the contractual amount of significant commitments:
Commitments to extend credit
Mortgage loan interest-rate lock commitments
Warehouse loan commitments
Commercial and industrial commitments
Other commercial commitments
HELOC commitments
Other consumer commitments
Standby and commercial letters of credit
December 31,
2017
2016
(Dollars in millions)
$
$
3,667
1,618
695
1,021
283
15
50
4,115
1,670
424
651
179
57
30
Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition
established in the contract. Since many of these commitments expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash flow requirements. Commitments generally have fixed expiration dates or other
termination clauses. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by us, upon extension of credit is based on management's credit evaluation of the counterparties.
These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized
on the Consolidated Statements of Financial Condition. Our exposure to credit losses in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. We utilize the same credit policies in making commitments and conditional
obligations as we do for balance sheet instruments. The types of credit we extend are as follows:
Mortgage loan interest-rate lock commitments. We enter into mortgage interest-rate lock commitments with our
customers. These commitments are considered to be derivative instruments and the fair value of these commitments is recorded
in the Consolidated Statements of Financial Condition in other assets. For further information, see Note 11 - Derivative
Financial Instruments.
Warehouse loan commitments. Lines of credit provided to mortgage originators to fund loans they originate and then
sell. The proceeds of the sale of the loans are used to repay the draw on the line used to fund the loans.
Commercial and industrial and other commercial commitments. Conditional commitments issued under various terms
to lend funds to business and other entities. These commitments include revolving credit agreements, term loan commitments
106
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of these commitments are expected to expire without being funded, the
total commitment amounts do not necessarily represent future liquidity requirements.
HELOC commitments. Commitments to extend, originate or purchase credit are primarily lines of credit to consumers
and have specified rates and maturity dates. Many of these commitments also have adverse change clauses, which allow us to
cancel the commitment due to deterioration in the borrowers’ creditworthiness or a decline in the collateral value.
Other consumer commitments. 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.
Standby and commercial letters of credit. Conditional commitments issued to guarantee the performance of a customer
to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the
terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate
commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the
customer and the third party. These financial standby letters of credit irrevocably obligate the bank to pay a third party
beneficiary when a customer fails to repay an outstanding loan or debt instrument.
We maintain a reserve for the estimate of probable credit losses inherent in unfunded commitments to extend credit.
Unfunded commitments to extend credit include unfunded loans with available balances, new commitments to lend that are not
yet funded, and standby and commercial letters of credit. A reserve balance of $3 million at both December 31, 2017 and 2016,
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.
Valuation Hierarchy
U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based
on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active
markets and the lowest priority to unobservable inputs where no active market exists, as discussed below.
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which we can participate as of the
measurement date;
Level 2 - Quoted prices for similar instruments in active markets, and other inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3 - Unobservable inputs that reflect our own assumptions about the assumptions that market participants would use
in pricing an asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input within the
valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are
recognized at the end of the reporting period.
107
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables present the financial instruments carried at fair value by caption on the Consolidated Statements of
Financial Condition and by level in the valuation hierarchy:
Investment securities available-for-sale
Agency - Commercial
Agency - Residential
Municipal obligations
Corporate debt obligations
Loans held-for-sale
Residential first mortgage loans
Loans held-for-investment
Residential first mortgage loans
Home equity
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
Interest rate swap on FHLB advances
Mortgage-backed securities forwards
Interest rate swaps
DOJ litigation settlement
Contingent consideration
Total liabilities at fair value
December 31, 2017
Level 1
Level 2
Level 3
Total Fair Value
(Dollars in millions)
$
$
$
— $
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
— $
$
987
794
34
38
4,300
8
—
—
—
4
11
6,176
$
(1)
(6)
(4)
—
—
(11) $
— $
—
—
—
—
—
4
291
24
—
—
319
$
—
—
—
(60)
(25)
(85) $
987
794
34
38
4,300
8
4
291
24
4
11
6,495
(1)
(6)
(4)
(60)
(25)
(96)
On May 15, 2017, the Company closed on the acquisition of certain assets of Opes Advisors (“Opes”), a California based
retail mortgage originator and wealth management service provider. Although the acquired assets of Opes were not significant, the
addition of Opes positions us to increase our distributed retail lending channel. Consideration in the acquisition of Opes consisted of
upfront cash and contingent cash in the form of an earn-out. The earn-out is based on future target production volumes and
profitability of the division which were significant inputs to the preliminary fair value.
108
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2016
Level 1
Level 2
Level 3
Total Fair Value
(Dollars in millions)
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
Home equity
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
$
$
$
$
— $
—
—
$
548
898
34
— $
—
—
—
—
—
—
—
2
—
—
—
2
$
— $
—
—
—
—
— $
3,145
7
—
—
—
—
43
35
19
4,729
$
— $
(11)
(37)
(4)
—
(52) $
—
—
65
335
24
—
—
—
—
424
$
(6) $
—
—
—
(60)
(66) $
548
898
34
3,145
7
65
335
24
2
43
35
19
5,155
(6)
(11)
(37)
(4)
(60)
(118)
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2017 and 2016, and 2015.
109
Fair Value Measurements Using Significant Unobservable Inputs
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables include a roll forward of the Consolidated Statements of Financial Condition amounts (including the
change in fair value) for financial instruments classified by us within Level 3 of the valuation hierarchy:
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)
For the Years Ended December 31, 2017
Assets
Loans held-for-sale
Home equity
Loans held-for-investment
Home equity
Mortgage servicing rights
Rate lock commitments (net) (1)
Totals
Liabilities
DOJ litigation settlement
Contingent consideration
Totals
For the Years Ended December 31, 2016
Assets
Loans held-for-investment
Home equity
Mortgage servicing rights
Rate lock commitments (net) (1)
Totals
Liabilities
DOJ litigation settlement
Year Ended December 31, 2015
Assets
Investment securities available-for-sale
Municipal obligation
Loans held-for-investment
Home equity
Mortgage servicing rights
Other investments
Rate lock commitments (net) (1)
Totals
Liabilities
Long-term debt
DOJ litigation settlement
Totals
$
— $
1 $
— $
— $
— $
(52) $
(1) $
52 $
—
65
335
18
2
(22)
54
—
—
—
—
—
—
—
288
267
—
(310)
—
(8)
—
—
(55)
—
(315)
418 $
35 $
— $
— $
555 $
(362) $
(9) $
(318) $
(60) $
—
(60) $
— $
(1)
(1) $
— $
—
— $
— $
—
— $
— $
(25)
(25) $
— $
—
— $
— $
1
1 $
— $
—
— $
106 $
5 $
— $
— $
— $
— $
(46) $
— $
296
26
(105)
25
—
—
—
—
228
325
(84)
—
—
—
—
(358)
428 $
(75) $
— $
— $
553 $
(84) $
(46) $
(358) $
4
291
24
319
(60)
(25)
(85)
65
335
18
418
(84) $
24 $
— $
— $
— $
— $
— $
— $
(60)
2 $
— $
— $
— $
— $
— $
(2) $
— $
—
185 $
(2) $
— $
— $
— $
— $
(77) $
258
100
31
576 $
(84) $
(82)
(166) $
(46)
60
12 $
— $
(2)
(2) $
— $
—
(342)
—
—
—
—
260
(176)
277
—
—
(100)
—
— $
— $
537 $
(176) $
(179) $
(342) $
(3) $
—
(3) $
— $
—
— $
— $
—
— $
52 $
—
52 $
35 $
—
35 $
— $
—
— $
106
296
—
26
428
—
(84)
(84)
$
$
$
$
$
$
$
$
$
$
$
(1) Rate lock commitments are reported on a fallout adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are
transferred to LHFS, which are classified as Level 2 assets.
We utilized swaptions futures, forward agency and loan sales and interest rate swaps to manage the risk associated with
mortgage servicing rights and rate lock commitments. Gains and losses for individual lines in the tables do not reflect the effect of
our risk management activities related to such Level 3 instruments.
110
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:
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
(Dollars in millions)
December 31, 2017
Assets
Loans held-for-investment
Home equity
Mortgage servicing rights
Rate lock commitments (net)
Liabilities
DOJ litigation settlement
Contingent consideration
$
$
$
$
$
4
Discounted cash flows
291
24
Discounted cash flows
Consensus pricing
Discount rate
Constant prepayment rate
Constant default rate
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
Origination pull-through rate
7.2% - 10.8% (9.0%)
5.1% - 7.7% (6.4%)
3.0% - 4.5% (3.6%)
5.0% - 7.5% (6.3%)
8.0% - 11.8% (9.9%)
$58 - $87 ($73)
64.7% - 97.1% (82.0%)
(60)
Discounted cash flows
(25)
Discounted cash flows
Discount rate
Asset growth rate
Beta
Equity volatility
7.8% - 11.7% (9.7%)
5.6% - 17.4% (6.3%)
0.6 - 1.6 (1.1)
26.6% - 58.9% (40.0%)
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
(Dollars in millions)
December 31, 2016
Assets
Loans held-for-investment
Home equity
Mortgage servicing rights
Rate lock commitments (net)
Liabilities
DOJ litigation settlement
$
$
$
$
65
Discounted cash flows
335
18
Discounted cash flows
Consensus pricing
Discount rate
Constant prepayment rate
Constant default rate
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
Origination pull-through rate
6.0% - 12.2% (9.3%)
16.3% - 24.4% (20.3%)
2.7% - 4.1% (3.7%)
6.2% - 9.3% (7.8%)
13.9% - 19.2% (16.7%)
$55 - $82 ($68)
66.9% - 100.0% (83.6%)
(60)
Discounted cash flows
Discount rate
Asset growth rate
6.6% - 9.8% (8.2%)
4.2% - 11.6% (7.9%)
Recurring Significant Unobservable Inputs
Home equity. The most significant unobservable inputs used in the fair value measurement of the home equity loans are
discount rates, constant prepayment rates, and default rates. The constant prepayment and default rates are based on a 12 month
historical average. Significant increases (decreases) in the discount rate in isolation 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. HELOC loans formerly included in the FSTAR 2005-1
and FSTAR 2006-1 securitization trusts, also classified as home equity loans, were 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. These loans were sold in the second quarter of 2017.
MSRs. The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads,
prepayment rates, and cost to service. Significant increases (decreases) in all three assumptions in isolation would result in a
significantly lower (higher) fair value measurement. Weighted average life (in years) is used to determine the change in fair value of
MSRs. For December 31, 2017 and December 31, 2016 the weighted average life (in years) for the entire MSRs portfolio was 6.0
and 6.6, respectively.
DOJ litigation settlement. The significant unobservable inputs used in the fair value measurement of the DOJ litigation
settlement are the discount rate and asset growth rate, in addition to those discussed in Note 21 - Legal Proceedings, Contingencies
and Commitments. Significant increases (decreases) in the discount rate or asset growth rate in isolation would result in a
111
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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.
Rate lock commitments. The significant unobservable input used in the fair value measurement of the rate lock
commitments is the pull through rate. The pull through rate is a statistical analysis of our actual rate lock fallout history to determine
the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New
market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are
applied accordingly. Significant increases (decreases) in the pull through rate in isolation would result in a significantly higher
(lower) fair value measurement.
Contingent consideration. The significant unobservable input used in the fair value of the contingent consideration is
future forecasted target production volumes and profitability of the division. An increase or decrease to these inputs results in an
increase or decrease of the liability. Other unobservable inputs include Beta and volatility which drive the risk adjusted discount rate
utilized in a Monte Carlo simulation. An increase or decrease in these inputs results in a decrease or increase to the liability.
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.
The following table presents assets measured at fair value on a nonrecurring basis:
Total (1)
Level 2
Level 3
Gains/(Losses)
December 31, 2017
Loans held-for-sale (2)
Impaired loans held-for-investment (2)
Residential first mortgage loans
Repossessed assets (3)
Totals
December 31, 2016
Loans held-for-sale (2)
Impaired loans held-for-investment (2)
Residential first mortgage loans
Repossessed assets (3)
Totals
$
$
$
$
(Dollars in millions)
6
$
6
$
21
8
35
9
25
14
48
$
$
$
—
—
6
9
—
—
9
$
$
$
— $
21
8
29
$
— $
25
14
39
$
(1)
(10)
—
(11)
(2)
(28)
(2)
(32)
(1) The fair values are determined at various dates during the years ended December 31, 2017 and 2016, respectively.
(2) Gains/(losses) reflect fair value adjustments on assets for which we did not elect the fair value option.
(3) Gains/(losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets.
The following tables present the quantitative information about nonrecurring Level 3 fair value financial instruments and
the fair value measurements:
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
(Dollars in millions)
December 31, 2017
Impaired loans held-for-investment
Loans held-for-investment
Repossessed assets
December 31, 2016
Impaired loans held-for-investment
Residential first mortgage loans
Repossessed assets
$
$
$
$
21
8
25
14
Nonrecurring Significant Unobservable Inputs
Fair value of collateral
Fair value of collateral
Loss severity discount
Loss severity discount
25% - 30% (27.9%)
0% - 100% (70.9%)
Fair value of collateral
Fair value of collateral
Loss severity discount
Loss severity discount
22% - 40% (29.5%)
22% - 100% (69.5%)
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.
112
Fair Value of Financial Instruments
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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, 2017
Estimated Fair Value
Carrying Value
Total
Level 1
Level 2
Level 3
(Dollars in millions)
$
— $
204
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
1,853
924
4,322
8
261
—
303
330
—
84
15
(4,557) $
(1,498)
(43)
(1,048)
(1,311)
(5,662)
(417)
—
—
(11)
—
—
—
—
7,659
—
291
—
—
8
—
24
—
—
—
—
—
—
—
(60)
(25)
—
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
Mortgage servicing rights
Federal Home Loan Bank stock
Bank owned life insurance
Repossessed assets
Other assets, foreclosure claims
Derivative financial instruments, assets
Liabilities
Retail deposits
Demand deposits and savings accounts
Certificates of deposit
Wholesale deposits
Government deposits
Company controlled deposits
Federal Home Loan Bank advances
Long-term debt
DOJ litigation settlement
Contingent consideration
Derivative financial instruments, liabilities
$
$
$
204
1,853
939
4,321
7,713
271
291
303
330
8
84
39
(4,965) $
(1,493)
(45)
(1,073)
(1,358)
(5,665)
(494)
(60)
(25)
(11)
$
204
1,853
924
4,322
7,667
261
291
303
330
8
84
39
(4,557) $
(1,498)
(43)
(1,048)
(1,311)
(5,662)
(417)
(60)
(25)
(11)
113
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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
Mortgage servicing rights
Federal Home Loan Bank stock
Bank owned life insurance
Repossessed assets
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
1,093
3,177
6,065
365
335
180
271
14
135
123
$
(5,268) $
(1,056)
(1,030)
(1,446)
(2,980)
(493)
(4)
(60)
(54)
$
158
1,480
1,084
3,178
5,998
354
335
180
271
14
135
123
(4,956) $
(1,062)
(1,011)
(1,371)
(2,964)
(277)
(4)
(60)
(54)
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
—
335
—
—
14
—
24
—
—
—
—
—
—
—
(60)
(6)
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 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.
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.
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.
114
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
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,
2017
2016
2015
(Dollars in millions)
$
$
283
$
269
$
1
1
— $
— $
—
—
24
—
321
40
29
—
(2)
115
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, 2017
December 31, 2016
Unpaid
Principal
Balance
Fair Value
Fair Value
Over / (Under)
Unpaid
Principal
Balance
Unpaid
Principal
Balance
Fair Value
Fair Value
Over / (Under)
Unpaid
Principal
Balance
(Dollars in millions)
$
$
$
$
$
$
$
6
5
11
4,167
10
4,177
4,173
15
4,188
$
$
$
$
$
$
5
4
9
4,295
8
4,303
4,300
12
4,312
$
$
$
$
$
$
(118) $
(60) $
(1) $
(1)
(2) $
128
(2)
126
127
(3)
124
58
$
$
$
$
$
2
19
21
3,103
72
3,175
3,105
91
3,196
$
$
$
$
$
$
2
13
15
3,143
59
3,202
3,145
72
3,217
$
$
$
$
$
$
(118) $
(60) $
—
(6)
(6)
40
(13)
27
40
(19)
21
58
Assets
Nonaccrual loans
Loans held-for-sale
Loans held-for-investment
Total nonaccrual loans
Other performing loans
Loans held-for-sale
Loans held-for-investment
Total other performing loans
Total loans
Loans held-for-sale
Loans held-for-investment
Total loans
Liabilities
Litigation settlement (1)
(1) We are obligated to pay $118 million in installment payments upon meeting certain performance conditions, as described in Note 21 - Legal Proceedings,
Contingencies and Commitments.
Note 23 — Segment Information
Our operations are conducted through three operating segments: Community Banking, Mortgage Originations, and
Mortgage Servicing. The Other segment includes the remaining reported activities. Operating segments are defined as
components of an enterprise that engage in business activity from which revenues are earned and expenses 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, 2017, activity related to Loans with Government Guarantees, was moved from the Mortgage
Servicing segment to the Mortgage Originations segment. In addition, we began to allocate the tax provision at a segment level
whereas previously, the tax provision was reflected in the Other segment. To allocate the tax provision, the statutory federal tax
rate is used for Community Banking, Mortgage Originations, and Mortgage Servicing segments with the difference between the
statutory rate and the effective tax rate held in the Other segment. Prior period segment financial information, related to both
changes, has been recast to conform to the current presentation.
The Community Banking segment originates loans, provides deposits and fee based services to consumer, business,
and mortgage lending customers through its Branch Banking, Business Banking and Commercial Banking, Government
Banking, Warehouse Lending and LHFI Portfolio groups. Products offered through these groups include checking accounts,
savings accounts, money market accounts, certificates of deposit, consumer loans, commercial loans, commercial real estate
loans, equipment finance and leasing, home builder finance loans and warehouse lines of credit. Other financial services
available include consumer and corporate card services, customized treasury management solutions, merchant services and
capital markets services such as loan syndications. In addition, wealth management products and services are provided through
Opes as of the acquisition date of May 15, 2017.
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
through home loan centers, national call centers, the Internet and unaffiliated banks and mortgage banking and brokerage
116
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 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 provides servicing of residential mortgages for our own LHFI portfolio in
the Community Banking segment for which it earns revenue via an intersegment service fee allocation.
The Other segment includes the treasury functions, funding revenue associated with stockholders' equity, the impact of
interest rate risk management, the impact of balance sheet funding activities, and miscellaneous other expenses of a corporate
nature. Treasury functions include administering the investment securities portfolios, balance sheet funding, and interest rate
risk management. In addition, the Other segment includes revenue and expenses related to treasury and corporate assets and
liabilities and equity not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage
Servicing segments.
Revenues are comprised of net interest income (before the provision (benefit) for loan losses) and noninterest income.
Noninterest expenses and provision (benefit) for income taxes, are fully allocated to each operating segment. Allocation
methodologies may be subject to periodic adjustment as the internal management accounting system is revised and the business
or product lines within the segments change.
117
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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
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
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
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, 2017
Community
Banking
Mortgage
Originations
Mortgage
Servicing
Other
Total
(Dollars in millions)
$
$
$
$
$
$
$
$
$
238
(10)
—
33
261
(4)
(9)
(188)
(197)
60
21
39
$
(6) $
129
278
13
79
499
(4)
(8)
(318)
(326)
169
59
110
4
$
16
—
6,460
6,544
7,454
4,130
290
7
5,414
—
$
22
—
—
55
77
—
(4)
(96)
(100)
(23)
(8)
(15) $
$
19
$
1
—
—
22
23
2
(19)
(1)
(20)
5
76
(71) $
(17) $
390
268
13
189
860
(6)
(40)
(603)
(643)
211
148
63
—
— $
—
—
36
1,453
— $
—
29
3,852
—
4,146
290
6,496
15,846
8,907
Year Ended December 31, 2016
Community
Banking
Mortgage
Originations
Mortgage
Servicing
Other
Total
(Dollars in millions)
$
206
6
—
28
240
10
(7)
(173)
(180)
70
24
46
$
(3) $
$
90
310
19
24
443
(2)
(5)
(253)
(258)
183
64
119
$
(1) $
$
25
—
—
56
81
—
(4)
(97)
(101)
(20)
(7)
(13) $
$
23
$
2
—
—
44
46
—
(16)
(5)
(21)
25
6
19
$
(19) $
323
316
19
152
810
8
(32)
(528)
(560)
258
87
171
—
$
66
—
5,807
5,906
7,151
$
3,068
435
6
4,435
—
— $
—
—
28
1,611
— $
—
—
3,538
—
3,134
435
5,813
13,907
8,762
$
$
$
$
118
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
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, 2015
Community
Banking
Mortgage
Originations
Mortgage
Servicing
Other
Total
(Dollars in millions)
$
$
$
$
$
$
$
$
$
171
(15)
—
25
181
19
(6)
(154)
(160)
40
14
$
26
(15) $
80
303
19
74
476
—
(3)
(244)
(247)
229
80
149
7
$
40
—
4,986
4,972
6,674
2,148
633
4
3,553
—
$
5
—
—
60
65
—
(3)
(105)
(108)
(43)
(15)
(28) $
$
20
$
31
—
—
4
35
—
(12)
(9)
(21)
14
3
$
11
(12) $
287
288
19
163
757
19
(24)
(512)
(536)
240
82
158
—
— $
—
—
52
1,203
— $
—
86
3,379
—
2,188
633
5,076
11,956
7,877
119
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. 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,
2017
2016
(Dollars in millions)
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
Common stock
Additional paid in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
196
1,676
44
1,916
494
23
517
1
1,512
(17)
(97)
1,399
1,916
$
$
$
$
(1)
Includes unconsolidated trusts of $7 million for December 31, 2017 and 2016.
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Operations
(Dollars in millions)
Expenses
Interest
General and administrative
Total
Loss before undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Income before income taxes
Provision (benefit) for income taxes
Net income
Other comprehensive income (1)
Comprehensive income
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
$
$
25
9
34
(34)
110
76
13
63
(9)
54
$
$
16
9
25
(25)
188
163
(8)
171
(9)
162
$
$
(1) See Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail.
70
1,728
57
1,855
493
26
519
1
1,503
(7)
(161)
1,336
1,855
7
13
20
(20)
172
152
(6)
158
(6)
152
120
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Cash Flows
(Dollars in millions)
Net income (loss)
Adjustments to reconcile net loss to net cash provided by operating activities
$
For the Years Ended December 31,
2017
2016
2015
(Dollars in millions)
171
$
$
63
Equity in (income) loss of subsidiaries
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
47
5
18
—
(2)
(5)
126
—
—
—
—
—
—
126
70
196
$
12
10
(8)
—
(22)
(4)
159
—
—
245
(267)
(104)
(126)
33
37
70
$
$
158
(172)
3
(6)
1
9
—
(7)
(2)
(2)
—
—
—
—
(9)
46
37
121
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 2017, 2016 and 2015:
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
Deposit fees and charges
Loan administration income
Net return (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 (loss) from continuing operations
Basic income (loss) per share
Diluted income (loss) per share
Interest income
Interest expense
Net interest income
(Benefit) provision 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
2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in millions, except per share data)
$
110
$
129
$
140
$
27
83
3
80
48
15
4
5
14
4
10
140
40
13
27
0.47
0.46
$
$
$
32
97
(1)
98
66
20
5
6
6
3
10
154
60
19
41
0.72
0.71
$
$
$
2016
37
103
2
101
75
23
5
5
6
4
12
171
60
20
40
0.71
0.70
$
$
$
148
41
107
2
105
79
24
4
5
(4)
2
14
178
51
96
(45)
(0.79)
(0.79)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in millions, except per share data)
$
106
$
111
99
22
77
(3)
80
90
19
4
(4)
4
15
139
69
22
47
0.67
0.66
$
$
$
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
$
$
$
$
$
$
$
101
$
22
79
(13)
92
75
15
6
(6)
2
13
137
60
21
39
0.56
0.54
$
$
$
122
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 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
Basis income per share
Diluted income per share
2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in millions, except per share data)
79
14
65
(4)
69
91
17
4
(2)
2
7
138
50
18
32
0.43
0.43
$
$
$
$
$
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
$
$
$
$
95
19
76
(1)
77
46
14
7
9
6
15
129
45
12
33
0.45
0.44
$
$
$
$
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, 2017 to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms.
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:
123
(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 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, 2017, 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, 2017 we assert that we maintained effective internal control over
financial reporting.
The effectiveness of Management's internal control over financial reporting as of December 31, 2017, 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, 2017 that have materially affected, or are reasonably likely to materially affect, such internal control over
financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
124
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 2018 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 2018 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 2018 Annual Meeting
of Stockholders and is hereby incorporated by reference.
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, 2017.
Plan Category
Equity compensation plans approved by security holders -
Restricted Stock Units (2)
Equity compensation plans not approved by security holders
Total
Number of
Securities to Be
Issued Upon
Exercise
Weighted Average
Exercise Price (1)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
1,290,450
—
1,290,450
$
$
—
—
—
2,132,452
—
2,132,452
(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.
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 2018 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 2018 Annual Meeting
of Stockholders and is hereby incorporated by reference.
125
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(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.
3.1*
Description
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-Q, for the period ended June 30, 2017, and incorporated
herein by reference).
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*
Sixth Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the Company’s
Quarterly Report on Form 10-Q, for the period ended September 30, 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 7, 2016, and incorporated herein by reference).
Flagstar Bancorp, Inc. 2006 Equity Incentive Plan (previously filed as Exhibit 10.1 to the Company’s Annual
Report on Form 10-K for the period ended December 31, 2016, and incorporated herein by reference).
Investment Agreement, dated as of December 17, 2008, between the Company and MP Thrift Investments
L.P. (previously filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the period ended
December 31, 2016, and incorporated herein by reference).
Closing Agreement, dated as of January 30, 2009, between the Company and MP Thrift Investments L.P.
(previously filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the period ended
December 31, 2016, and incorporated herein by reference).
Form of Warrant to purchase up to 645,137.9 shares of the Company’s common stock. (previously filed as
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the period ended December 31, 2015, and
incorporated herein by reference).
Purchase Agreement, dated as of February 17, 2009, between the Company and MP Thrift Investments L.P.
(previously filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the period ended
December 31, 2016, and incorporated herein by reference).
Second Purchase Agreement, dated as of February 27, 2009, between the Company and MP Thrift
Investments L.P. (previously filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the
period ended December 31, 2016, and incorporated herein by reference).
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.
Supervisory Agreement, dated as of January 27, 2010, by and between the Company and the Federal Reserve
(as successor to the OTS) (previously filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K
for the period ended December 31, 2016, and incorporated herein by reference).
Stipulation and Order of Settlement and Dismissal, dated February 24, 2012, by and among the Company, the
Bank and the United States of America (previously filed as Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the period ended December 31, 2016, and incorporated herein by reference).
10.10*+
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 for the period ended June 30, 2013, and incorporated herein by reference).
126
Exhibit No.
10.11*+
10.12*+
10.13*+
10.14*+
10.15*+
10.16*+
10.17*+
11
12
21
23
31.1
31.2
32.1
32.2
101
Description
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 for the period ended 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
for the period ended 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 for the period ended 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 for the period ended 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 for the period ended 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 10-Q, dated as of
August 7, 2017, 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
for the period ended 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 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,
2017, 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.
[Remainder of page intentionally left blank.]
127
ITEM 16. FORM 10-K SUMMARY
Not applicable.
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 12, 2018.
SIGNATURES
FLAGSTAR BANCORP, INC.
By:
/s/ James K. Ciroli
James K. Ciroli
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
128
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 12, 2018.
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
/S/ BRYAN L. MARX
Bryan L. Marx
/S/ JOHN D. LEWIS
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President and Chief Accounting
Officer (Principal Accounting Officer)
John D. Lewis
Chairman
/S/ DAVID J. MATLIN
David J. Matlin
Director
/S/ PETER SCHOELS
Peter Schoels
Director
/S/ DAVID L. TREADWELL
David L. Treadwell
Director
/S/ JAY J. HANSEN
Jay J. Hansen
Director
/S/ JAMES A. OVENDEN
James A. Ovenden
Director
/S/ BRUCE E. NYBERG
Bruce E. Nyberg
Director
/S/ JENNIFER WHIP
Jennifer Whip
Director
129
EXHIBIT INDEX
The following documents are filed as a part of, or incorporated by reference into, this report:
Exhibit No.
3.1*
Description
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-Q, for the period ended June 30, 2017, and incorporated
herein by reference).
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*+
Sixth Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the Company’s
Quarterly Report on Form 10-Q, for the period ended September 30, 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 7, 2016, and incorporated herein by reference).
Flagstar Bancorp, Inc. 2006 Equity Incentive Plan (previously filed as Exhibit 10.1 to the Company’s Annual
Report on Form 10-K for the period ended December 31, 2016, and incorporated herein by reference).
Investment Agreement, dated as of December 17, 2008, between the Company and MP Thrift Investments
L.P. (previously filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the period ended
December 31, 2016, and incorporated herein by reference).
Closing Agreement, dated as of January 30, 2009, between the Company and MP Thrift Investments L.P.
(previously filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the period ended
December 31, 2016, and incorporated herein by reference).
Form of Warrant to purchase up to 645,137.9 shares of the Company’s common stock. (previously filed as
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the period ended December 31, 2015, and
incorporated herein by reference).
Purchase Agreement, dated as of February 17, 2009, between the Company and MP Thrift Investments L.P.
(previously filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the period ended
December 31, 2016, and incorporated herein by reference).
Second Purchase Agreement, dated as of February 27, 2009, between the Company and MP Thrift
Investments L.P. (previously filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the
period ended December 31, 2016, and incorporated herein by reference).
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.
Supervisory Agreement, dated as of January 27, 2010, by and between the Company and the Federal Reserve
(as successor to the OTS) (previously filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K
for the period ended December 31, 2016, and incorporated herein by reference).
Stipulation and Order of Settlement and Dismissal, dated February 24, 2012, by and among the Company, the
Bank and the United States of America (previously filed as Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the period ended December 31, 2016, and incorporated herein by reference).
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 for the period ended 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 for the period ended 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
for the period ended 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 for the period ended 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 for the period ended September 30, 2015, and incorporated herein by
reference).
130
Exhibit No.
10.15*+
10.16*+
10.17*+
11
12
21
23
31.1
31.2
32.1
32.2
101
Description
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 for the period ended 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 10-Q, dated as of
August 7, 2017, 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
for the period ended 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 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,
2017, 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
131
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