Annual Report Two Thousand Nineteen5151 Corporate Drive, Troy, MI 48098 (800) 945-7700 flagstar.comFLAGSTAR BANCORP Annual Report 2019Annual Report Two Thousand Nineteen5151 Corporate Drive, Troy, MI 48098 (800) 945-7700 flagstar.comFLAGSTAR BANCORP Annual Report 2019 To Our Shareholders
2019 was a banner year for Flagstar.
We made $199 million, or $3.46
adjusted earnings per share.
Unadjusted, earnings came in at $218 million or $3.80 per share. Our performance made 2019
one of the most successful years in our company’s history with all three of our business lines—
banking, mortgage, and servicing—delivering earnings growth that surpassed results from 2018.
Our shareholders saw the benefit with a 45 percent increase in our stock price, the best stock
performance of any bank in the mid-size category in 2019.
$2.2
Billion in Market
Capitalization
3rd
Largest Savings
Bank Nationwide
$23.3
Billion
in Assets
5th
Largest Bank
Mortgage Originator
Our banking segment excelled throughout the year with warehouse lending, commercial real estate, and consumer
lending alternately taking center stage. In total, we added $4.7 billion in high-quality earning assets to our balance
sheet and closed 2019 as a $23.3 billion-dollar bank.
These assets, and the interest income they generate, have transformed Flagstar from a bank historically dependent
on cyclical fee income from the mortgage business, to one where fee income and interest income are almost evenly
matched—49 percent interest income versus 51 percent fee income in the fourth quarter 2019. This is a testament to
our concerted efforts to build profitable, sustainable, diversified sources of revenue.
Deposit growth was strong in 2019, with average balances increasing $3.9 billion year over year, largely due to the full-year
benefit of the 52 branches we acquired at the end of 2018 and the deposits generated by our subservicing business.
In mortgage, we saw our disciplined approach pay off as mortgage revenues climbed to $341 million in 2019 compared to
$236 million in 2018. The investments we made in people and technology, together with acquisitions and strategic
team lift-outs to grow our retail mortgage business, continue to reap benefits.
In servicing, we hit and surpassed the one-million mark in the number of loans we service, and we’re off and running
to the next million. This is a business that keeps growing—delivering steady fee income and providing low-cost deposits
to support our growth. At the end of the year, we strengthened our standing in default servicing by bringing this
important operation in-house, thus giving us full control over the life cycle of every loan.
In 2019 we saw a steady rise in noninterest expenses. Acquisition costs, investments in growing businesses, balance
sheet clean-up, and discretionary expenses all played a role in the increase. We know we can do better and are
committed to improving our efficiency ratio over time.
We closed 2019 with low delinquencies and ample capital to fund our growth and return some of our good fortune to
our shareholders. Early in the year, we initiated a dividend program and announced a $50 million share repurchase
program. A year later, we rewarded our shareholders with an increase in the dividend. This speaks volumes about the
strength of our company, the diversity of our earnings, and the success of our business model.
Our Communities
In 2019, we continued our tradition of involvement and investment in our communities, contributing $2.5 million to
nonprofits through the Flagstar Foundation, with a special focus on our new Midwest banking markets. To welcome
them to the Flagstar family and signal our commitment to our new communities, we donated over $500,000 to
support the good work of almost 100 nonprofits in these markets.
Our community reinvestment team had a productive year as it continued to dedicate resources to homeownership,
small business development, neighborhood revitalization, down payment assistance, financial literacy, homebuyer
education, and myriad other initiatives to help develop and stabilize communities. Besides our investment in dollars,
our employees donated almost 12,900 hours of their time and talents in community service in 2019.
Top Workplaces Award
2017-2019 National and Local
Best and Brightest Company
to Work For
BISA Diversity &
Inclusion Award 2019
Fannie Mae Star
Performer Servicing Award
Fourth Consecutive Year
Diversity and Inclusion
We built on the successes of 2018 to further embed diversity and inclusion into our corporate culture. Specifically,
we refined our metrics for D&I activities, expanded the number of awareness sessions, held our first D&I symposium,
added new employee resource groups, and took other steps to make D&I part of daily life at Flagstar. In 2019, the
Bank Insurance & Securities Association recognized Flagstar for its “outstanding leadership, innovation, and results
in diversity management.”
Our financial results in 2019 again demonstrated the strength of our business model to perform in any interest rate
environment. The interest rate cuts in 2019 that put pressure on margins in banking created a favorable market
for mortgages. Other years, the strength of our banking and servicing segments carried us through challenges in
mortgage originations. Whatever the economic scenario, we have the levers to pull to deliver strong, consistent
results to our shareholders.
In fact, with a stock repurchase, a dividend announcement, a dividend increase, and a 45 percent increase in our
stock price, 2019 was in many ways the year of the shareholder at Flagstar. We thank our board of directors whose
invaluable guidance and counsel has contributed so much to our success. We thank our shareholders for their
patience and support as we built the new Flagstar. And we thank our employees who do the heavy lifting every day
to make our successes possible.
As we go to print, the world around us is changing with COVID-19 bringing once unthinkable events to our doorsteps.
Our employees, our customers, our shareholders, and yes, our country, all have needs and expectations. As we seek
to balance those, we will look to the bedrock of all our values at Flagstar—we will do the right thing.
Alessandro P. DiNello
President and Chief Executive Officer
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, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-16577
Flagstar Bancorp, Inc.
(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
Trading Symbol
FBC
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on which
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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 every Interactive Data File required to be submitted 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 such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,"
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
No
No
No
Accelerated Filer
Emerging growth company
Large Accelerated Filer
Non-Accelerated Filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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 ($33.14 per share) as reported on the New York Stock Exchange on June 30, 2019, was approximately $2 billion. The
registrant does not have any non-voting common equity shares.
Smaller Reporting Company
No
.
As of February 27, 2020, 56,657,508 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 2020 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
8
18
18
19
19
20
22
24
63
64
125
125
126
127
127
127
127
127
128
130
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
ALCO
ALLL
AOCI
ASR
ASU
Basel III
BSA
C&I
CAMELS
CDARS
CD
CECL
CET1
CLTV
Common
Stock
CRE
CFPB
DCB
Deposit Beta
DIF
DOJ
DOJ
Liability
DTA
EVE
ExLTIP
Definition
Available for Sale
Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation, and Government National Mortgage
Association, Collectively
Asset Liability Committee
Allowance for Loan & Lease Losses
Accumulated Other Comprehensive Income (Loss)
Accelerated Share Repurchase
Accounting Standards Update
Basel Committee on Banking Supervision Third Basel
Accord
Bank Secrecy Act
Commercial and Industrial
Capital, Asset Quality, Management, Earnings, Liquidity
and Sensitivity
Certificates of Deposit Account Registry Service
Certificates of Deposit
Current Expected Credit Losses
Common Equity Tier 1
Combined Loan to Value
Common Shares
Commercial Real Estate
Consumer Financial Protection Bureau
Desert Community Bank
The change in the annualized cost of our deposits, divided
by the change in the Federal Reserve discount rate
Deposit Insurance Fund
United States Department of Justice
2012 settlement Agreement with the Department of Justice
Deferred Tax Asset
Economic Value of Equity
Executive Long-Term Incentive Program
Fannie Mae
Federal National Mortgage Association
FASB
FBC
FDIC
Federal
Reserve
FHA
FHFA
FHLB
FICO
FOAL
FRB
Financial Accounting Standards Board
Flagstar Bancorp
Federal Deposit Insurance Corporation
Board of Governors of the Federal Reserve System
Federal Housing Administration
Federal Housing Finance Agency
Federal Home Loan Bank
Fair Isaac Corporation
Fall Out Adjusted Locks
Federal Reserve Bank
Freddie Mac
Federal Home Loan Mortgage Corporation
FTE
GAAP
Full Time Equivalent
Generally Accepted Accounting Principles
Ginnie Mae
Government National Mortgage Association
GLBA
Gramm-Leach Bliley Act
Term
GNMA
Definition
Government National Mortgage Association
HELOAN
Home Equity Loans
HELOC
HFI
HOLA
Home Equity Lines of Credit
Held for Investment
Home Owners Loan Act
Home Equity
Second Mortgages, HELOANs, HELOCs
HPI
H.R.1.
HTM
LHFI
LHFS
LIBOR
LTV
Housing Price Index
House of Representatives 1 - Tax Cuts and Jobs Act
Held to Maturity
Loans Held-for-Investment
Loans Held-for-Sale
London Interbank Offered Rate
Loan-to-Value Ratio
Management
MBIA
Flagstar Bancorp’s Management
MBIA Insurance Corporation
Mortgage-Backed Securities
Management's Discussion and Analysis
MP Thrift Investments, L.P.
Mortgage Servicing Rights
Not Applicable
National Association of Securities Dealers Automated
Quotations
New York Stock Exchange
Office of the Comptroller of the Currency
Other Comprehensive Income (Loss)
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
Real estate owned and other nonperforming assets, net
Residential Mortgage-Backed Securities
Restricted Stock Unit
Risk Weighted Assets
Securities and Exchange Commission
Secured Overnight Financing Rate
Single Family Residence
Troubled Asset Relief Program
TARP Fixed Rate Cumulative Perpetual Preferred Stock,
Series C
Trouble Debt Restructuring
Truth in Lending Act
Unpaid Principal Balance
United States Department of Treasury
Variable Interest Entity
eXtensible Business Reporting Language
MBS
MD&A
MP Thrift
MSR
N/A
NASDAQ
NYSE
OCC
OCI
OTTI
QTL
Regulatory
Agencies
REO
RMBS
RSU
RWA
SEC
SOFR
SFR
TARP
TARP
preferred
TDR
TILA
UPB
U.S.
Treasury
VIE
XBRL
3
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, including but not limited to statements included within the Management’s
Discussion and Analysis of Financial Condition and Results of Operations, are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended. In addition, we may make forward-looking
statements in our other documents filed with or furnished to the Securities and Exchange Commission (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 current
beliefs and expectations regarding future events and are subject to significant risks and uncertainties. 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. Our actual results and capital and other
financial conditions may differ materially from those described in the forward-looking statements depending upon 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 Item 1A. to Part I, Risk Factors.
Other than as required under United States securities laws, we do 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 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 savings and loan holding company founded in 1993. Our business is primarily conducted through our
principal subsidiary, the Bank, a federally chartered savings bank founded in 1987. We provide commercial and consumer
banking services and we are the 5th largest bank mortgage originator in the nation and the 6th largest sub-servicer of mortgage
loans nationwide. At December 31, 2019, we had 4,453 full-time equivalent employees. Our common stock is listed on the
NYSE under the symbol "FBC."
Our relationship-based business model leverages the capabilities of our full service bank and our national mortgage
platform to create and build financial solutions for our customers. At December 31, 2019, we operated 160 full service banking
branches that offer a full set of banking products to consumer, commercial, and government customers. Our banking footprint
spans throughout Michigan, Indiana, California, Wisconsin, Ohio and contiguous states.
We originate mortgages through a wholesale network of brokers and correspondents in all 50 states, and our own loan
officers from 88 retail locations in 27 states and two call centers, which include our direct-to-consumer mortgage lending team.
Flagstar is also a leading national servicer of mortgage loans and provides complementary ancillary offerings including MSR
lending, servicing advance lending and recapture services.
Operating Segments
Our operations are conducted through our three operating segments: Community Banking, Mortgage Originations and
Mortgage Servicing. For further information, see MD&A - Operating Segments and Note 21 - Segment Information.
Competition
We face substantial competition in attracting deposits and generating loans. Our most direct competition for deposits
has historically come from other savings banks, commercial banks and credit unions in our banking footprint. Money market
funds, full-service securities brokerage firms, and financial technology companies also compete with us for these funds. We
compete for deposits by offering a broad range of high quality customized banking services at competitive rates. From a
lending perspective, there are many institutions including commercial banks, national mortgage lenders, local savings banks,
credit unions, and commercial lenders offering consumer and commercial loans. We compete by offering competitive interest
rates, fees, and other loan terms through efficient and customized service.
Subsidiaries
We conduct business primarily through our wholly-owned bank subsidiary. In addition, the Bank has wholly-owned
subsidiaries through which we conduct non-bank business or which are inactive. The Bank and its wholly owned subsidiaries
comprised nearly all of our total assets at December 31, 2019. 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 22 -
Holding Company Only Financial Statements.
Regulation and Supervision
The Bank is a federally chartered savings bank, subject to federal regulation and oversight by the OCC. We are also
subject to regulation and examination by the FDIC, which insures the deposits of the Bank to the extent permitted by law and
the requirements established by the Federal Reserve. The Bank is also subject to the supervision of the CFPB which regulates
the offering and provision of consumer financial products or services under the federal consumer financial laws. The OCC,
FDIC and the CFPB may take regulatory enforcement actions if we do not operate in accordance with applicable regulations,
policies and directives. Proceedings may be instituted against us, or any "institution-affiliated party," such as a director, officer,
5
employee, agent or controlling person, who engages in unsafe and unsound practices, including violations of applicable laws
and regulations. The FDIC has additional authority to terminate insurance of accounts, if after notice and hearing, we are found
to have engaged in unsafe and unsound practices, including violations of applicable laws and regulations. The federal system of
regulation and supervision establishes a comprehensive framework of activities in which to operate and is intended primarily
for the protection of depositors and the FDIC's Deposit Insurance Fund rather than our shareholders.
As a savings and loan holding company, we are required to comply with the rules and regulations of the Federal
Reserve. We are required to file certain reports and we are subject to examination by, and the enforcement authority of, the
Federal Reserve. Under the federal securities laws, we are also subject to the rules and regulations of the Securities and
Exchange Commission.
Any change to laws and regulations, whether by the FDIC, OCC, CFPB, SEC, the Federal Reserve, or Congress, could
have a material adverse impact on our operations.
Holding Company Regulation
Acquisition, Activities and Change in Control. Flagstar Bancorp, Inc. is a unitary savings and loan holding company.
We may only conduct, or acquire control of companies engaged in, activities permissible for a unitary savings and loan holding
company pursuant to the relevant provisions of the HOLA and relevant regulations. Further, we generally are required to obtain
Federal Reserve approval before acquiring direct or indirect ownership or control of any voting shares of another bank, bank
holding company, savings associations or savings and loan holding company if, we would own or control more than 5 percent
of the outstanding shares of any class of voting securities of that entity. Additionally, we are prohibited from acquiring control
of a depository institution that is not federally insured or retaining control for more than one year after the date that institution
becomes uninsured.
We may not be acquired unless the transaction is approved by the Federal Reserve. 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.
Volcker Rule. Section 619 of the Dodd-Frank Act required the federal financial regulatory agencies to adopt rules that
prohibit banking entities, including federal savings associations and their and affiliates, from engaging in proprietary trading
and investing in and/or sponsoring certain "covered funds." In 2013, the agencies adopted rules to implement section 619.
These rules, collectively with section 619, are commonly referred to as the "Volcker Rule." Compliance with the Volcker Rule
generally has been required since July 21, 2015. Pursuant to the requirements of the Volcker Rule, we have established a
standard compliance program based on the size and complexity of our operations and we believe we are in compliance with the
requirements.
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.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary
actions by regulators that could have a material effect on the Consolidated Financial Statements. On January 1, 2015, the Basel
III rules became effective and included transition provisions through 2018. In preparation for the new capital simplification
rules, the Basel III implementation phase-in has been halted, as the agencies issued a final rule that will maintain the capital
rules’ 2017 transition provisions for several regulatory capital deductions and certain other requirements that are subject to
multi-year phase-in schedules in the regulatory capital rules. For additional information, see Note 18 - Regulatory Capital.
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 savings and loan holding companies, such as us, to serve as a source of financial strength for
any depository institution subsidiary by maintaining the ability to provide financial assistance in the event that it suffers
financial distress.
Collins Amendment. The Collins Amendment to the Dodd Frank Act 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
6
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 are included as Tier 1 capital while they are outstanding, unless we complete an acquisition of a
depository institution holding company and we report total assets greater than $15 billion at the end of the quarter in which the
acquisition occurs. At our present size, with total assets of $23.3 billion at December 31, 2019, an acquisition of a depository
holding company would likely cause our trust preferred securities totaling $247 million at December 31, 2019 to no longer be
included in Tier 1 capital and therefore to be included in Tier 2 capital.
Banking Regulation
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.
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 and FRB regulate all capital distributions made by the Bank, directly or
indirectly, to the holding company, including dividend payments. An application to the OCC by the Bank may be required
based on a number of factors including whether the institution qualifies as an eligible association under the OCC rules and
regulations, if the institution would not be at least adequately capitalized following the distribution 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, a 30-day notice from the Bank must be provided to the FRB prior to declaring or paying any dividend to the holding
company. Additional restrictions on dividends apply if the Bank fails the QTL test. As of December 31, 2019, the bank is in
compliance with the QTL test.
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 the U.S. Treasury’s Office of Foreign Assets Control imposed economic sanctions that
affect transactions with designated foreign countries, nationals, individuals, entities and others.
The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018
The Economic Growth, Regulatory Relief, and Consumer Protection Act (“Economic Growth Act”) repealed or
modified several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”).
Certain key aspects of the Economic Growth Act that have the potential to affect the Company’s business and results of
operations include:
• Raising the total asset threshold from $50 billion to $250 billion at which bank holding companies are required to
conduct periodic company-run stress tests mandated by the Dodd-Frank Act.
• Clarifying the definition of high volatility commercial real estate loans to ease the regulatory burden associated with
the identification of loans that meet qualifying criteria.
•
Providing that certain reciprocal deposits shall not be considered brokered deposits, subject to certain limitations.
• Entitling federal savings associations, such as the Bank, with less than $20 billion in total assets as of December 31,
2017, an option to elect to operate as covered savings associations (similar to a national bank) without changing their
charter.
7
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 Service members 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 and California Consumer Protection Act regarding customer privacy and data security.
The Bank is subject to supervision by the CFPB, which has responsibility for enforcing federal consumer financial
laws. The CFPB has broad rule-making 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 abusive acts or 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 Bank is subject to the CFPB’s supervisory, examination and enforcement authority. 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.
Due to regulatory focus on compliance with consumer protection laws and regulations, portions of our lending
operations which most directly deal with consumers, including mortgage and consumer lending, may pose particular
challenges. Further, the CFPB continues to propose new rules and to amend existing rules. While we are not aware of any
material compliance issues related to our mortgage and consumer lending practices, the focus of regulators and the changes to
regulations 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 DOJ, 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.
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 or
furnish 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 are set forth below.
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Market, Interest Rate, Credit and Liquidity Risk
Economic and general conditions in the markets in which we operate 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, risks associated with an outbreak of a widespread epidemic or pandemic of
disease (or widespread fear thereof), 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, liquidity,
and our results of operations.
Domestic and international fiscal and monetary policies also affect our business. Central bank actions, particularly
those of the Federal Reserve, 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 cost of running our business.
We are asset sensitive, which means changes in interest rates could adversely affect our financial condition and results of
operations including our net interest margin, mortgage related assets, and our investment portfolio.
Our results of operations and financial condition could be significantly affected by changes in interest rates and the
yield curve. 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. Net interest
income represented 47 percent of our total revenue for the full year ended December 31, 2019.
Changes in interest rates may affect the expected average life of our mortgage LHFI and mortgage backed securities
and, to a lesser extent, our commercial loans. Decreases in interest rates can trigger an increase in prepayments of our loans and
mortgage backed securities as borrowers refinance to reduce their own borrowing costs. Conversely, increases in interest rates
may decrease loan refinance activity which can negatively impact our mortgage business.
The fair value of our fixed-rate financial instruments, including certain LHFI, LHFS, and investment securities is
affected by changes in interest rates. If interest rates increase, the fair value of our fixed-rate financial instruments will
generally decline and, therefore, have a negative effect on our financial results. We use derivatives to provide a level of
protection against certain interest rate risks, but no hedging strategy will offset this risk completely.
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. Conversely, higher rates typically drive
lower repayments which result in an increase in the MSR fair value. We utilize derivatives 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, credit spreads or prepayment speeds, and as a result, the
change in the fair value of MSRs may negatively impact earnings.
Rising mortgage rates and adverse changes in mortgage market conditions could reduce mortgage revenue.
In 2019, approximately 45 percent of our revenue was derived from our Mortgage Origination segment which includes
activities related to the origination and sale of residential mortgages. The residential real estate mortgage lending business is
sensitive to changes in interest rates. Lower interest rates generally increase the volume of mortgage originations, while higher
interest rates generally cause that volume to decrease. Therefore, our mortgage performance is typically correlated to
fluctuations in interest rates. Historically, mortgage origination 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 and/or a decrease in our
mortgage production volume could have a material adverse effect on our operating results. During 2019, average 10 year U.S.
Treasury rates, on which we base our pricing of our 30 year mortgages, was 2.14 percent, 77 basis points lower than average
rates experienced during 2018. The sustained lower rates experienced throughout 2019 positively impacted the mortgage
market including loan origination volume and refinancing activity, which may not persist.
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In addition to being affected by interest rates, the secondary mortgage markets are also subject to investor demand for
residential mortgage loans and investor yield requirements for these loans. These conditions may fluctuate or worsen in the
future. Adverse market conditions, including increased volatility and reduced market demand, could result in greater risk in
retaining mortgage loans pending their sale to investors. A prolonged period of secondary market illiquidity may result in a
reduction of our loan mortgage production volume and could have a material adverse effect on our financial condition and
results of operations.
Our mortgage origination business is also subject to the cyclical and seasonal trends of the real estate market. The
cyclical nature of 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, which is affected by prevailing interest rates,
housing supply and demand, residential construction trends, and overall economic conditions. If we are unable to respond to the
cyclical nature 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.
We are highly dependent on the Agencies to buy mortgage loans that we originate. Changes in these entities, changes in the
manor or volume of loans they purchase or their current roles could adversely affect our business, financial condition and
results of operations.
We generate mortgage revenues primarily from gains on the sale of single-family residential loans pursuant to
programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and other investors. These entities account for a
substantial portion of the secondary market in residential mortgage loans. During the year ended December 31, 2019, we sold
approximately 63 percent of our mortgage loans to Fannie Mae and Freddie Mac. Any future changes in these programs, our
eligibility to participate in such programs, their concentration limits with respect to loans purchased from us, the criteria for
loans to be accepted or laws that significantly affect the activity of such entities could, in turn, result in a lower volume of
corresponding loan originations or other administrative costs which may materially adversely affect our results of operations or
could cause us to take other actions that would be materially detrimental.
Fannie Mae and Freddie Mac remain in conservatorship and a path forward for them to emerge from conservatorship
is unclear. Their roles could be reduced, modified or eliminated as a result of regulatory actions 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 create additional competition in the market and significantly 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.
Guidelines include credit standards for mortgage loans, our staffing levels and other servicing practices, the servicing and
ancillary fees that we may charge, 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.
Uncertainty about the future of LIBOR may adversely affect our business.
On July 27, 2017, the United Kingdom Financial Conduct Authority, which oversees LIBOR, formally announced that
it could not assure the continued existence of LIBOR in its current form beyond the end of 2021, and that an orderly transition
process to one or more alternative benchmarks should begin. In June 2017, the Alternative Reference Rates Committee, a
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steering committee comprised of large U.S. financial institutions organized by the Federal Reserve, announced that it had
selected a modified version of the unpublished Broad Treasuries Financing Rate as the preferred alternative reference rate for
U.S. dollar obligations. This rate, now referred to as the Secured Overnight Financing Rate (SOFR), is based on actual
transactions in certain portions of overnight repurchase agreement markets for certain U.S. Treasury obligations, and was first
published during the first half of 2018.
It is unclear whether, or in what form, LIBOR will continue to exist after 2021. If LIBOR ceases to exist or if the
methods of calculating LIBOR change from current methods for any reason, revenue and expenses associated with interest rates
and underlying valuation assumptions on our loans, deposits, obligations, derivatives, and other financial instruments tied to
LIBOR rates and models that utilize LIBOR curves may be adversely affected. Additionally, whether or not SOFR attains
market traction as a replacement to LIBOR remains in question and it remains uncertain at this time what the impact of a
possible transition to SOFR or other alternative reference rates may have on our business, financial result and operations.
To effectively manage our MSR concentration risk we may have to sell our MSRs when market conditions are not optimal or
hold MSRs at a level which is punitive to our Common Equity Tier 1 capital (CET1) under Basel III.
We are subject to capital standards requirements, including requirements of the Dodd-Frank Act and those developed
by the Bank's regulators based on the Basel Committee on Banking Supervision, 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. Effective January 1, 2020, Basel III (post regulatory simplification) limits the
amount of MSRs and DTAs each to 25 percent of CET1. These limitations could cause a reduction in our capital levels and
have a negative impact on our overall business and ability to lend.
As of December 31, 2019, we had $291 million in MSRs and a MSR to Common Equity Tier 1 Capital ratio of 19.7
percent. We produced, on average, approximately $56 million of new MSRs per quarter in 2019 and we expect to continue to
generate MSRs going forward. Considering the volume of MSRs that we generate, we must continually sell MSRs to manage
the concentration of this asset. In 2019, we sold $57 million in MSRs and as of December 31, 2019, we had pending MSR sales
with a fair value of $35 million which closed during the first quarter of 2020. In 2019, we sold $12.4 billion of outstanding
principal via flow sale arrangements, in which Flagstar assigns the servicing right to a third party investor at the time of sale
and the rights, risks, and rewards of holding the MSR asset are never titled in the name of Flagstar. 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. Additionally, to manage our MSR concentration, we may have to sell our MSRs at a price less than their
fair value due to market constraints present at the time of sale which could have an adverse effect on our financial condition and
results of operations.
Refer to MD&A - Regulatory Capital Simplification and Note 18 for more detail.
Our ALLL could be too low to sufficiently cover future credit losses. As of December 31, 2019, our ALLL was $107 million,
covering 0.9 percent of total loans held-for-investment. Our estimate of the inherent losses is imperfect and based on
management judgment.
Our ALLL, which reflects our estimate of losses inherent in the HFI loan portfolio at December 31, 2019, may not be
sufficient 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. Our ALLL is based on
historical experience as well as our evaluation of the risks inherent in the loan portfolio at December 31, 2019. 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 and 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.
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The FASB accounting standard update to the measurement of Credit Losses on Financial Instruments will result in a significant
change in how we estimate credit losses and may have a material impact on our business, financial condition and results of
operations.
In June 2016, the FASB issued an accounting standard update, "Financial Instruments-Credit Losses (Topic 326)", which
replaces the current "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the Current
Expected Credit Loss ("CECL") model for periods beginning after December 15, 2019. Under the CECL standard, we will be
required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt
securities, at the net amount expected to be collected over the life of the loan. The measurement of expected credit losses is based
on information about past events, including credit quality, our historical experience, current conditions, and reasonable and
supportable macroeconomic forecasts that may affect the collectability of the reported amount. This measurement will take place
at the time the financial asset is first added to the balance sheet and at least quarterly thereafter. This differs significantly from the
current "incurred loss" model, which delays recognition of estimated losses until it is probable a loss has been incurred and measures
those losses over the estimated life of the loan rather than the loss emergence period. Certain CECL factors are outside of our
control and may be procyclical and/or create more volatility in the level of our ALL which could impact our results of operations.
Based on our current results and economic forecasts as of December 31, 2019, the estimated impact of CECL on our
ALLL, including our reserve for unfunded loan commitments is expected to be a pre-tax increase of approximately 25 to 35 percent.
The impact upon adoption of the CECL standard will be recorded in equity and adverse effects will be phased into regulatory
capital over a three year transition period based on the December 21, 2018 Final Rule approved by the regulatory agencies modifying
regulatory capital rules. Any future changes to our allowance for credit losses and the reserve for unfunded commitments after
January 1, 2020 will be recorded in our provision for credit losses.
CECL requires management judgment that is supported by new models and more data elements, including macroeconomic
forecasts, than the previous allowance standard. This is expected to increase the complexity and associated risk, particularly in
times of economic uncertainty or other unforeseen circumstances, which could impact our results of operations and may place
stress on our internal controls over financial reporting.
Concentration of loans held-for-investment in certain geographic locations and markets may increase the magnitude of
potential losses should defaults occur.
Our residential mortgage loan portfolio is geographically concentrated in certain states, including California and
Michigan, which comprise approximately 52 percent of the portfolio. In addition, our commercial loan portfolio has a
concentration of Michigan lending relationships. Approximately 39 percent of our CRE loans are collateralized by properties in
Michigan and 33 percent of our C&I borrowers are located in Michigan. These concentrations have made, and will continue to
make, our loan portfolio susceptible to downturns in these 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 both the probability
and severity of defaults in our loan portfolio, reduce our ability to generate new loans and negatively affect our financial results.
Commercial loans, excluding our warehouse 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, 2019, our largest
CRE and C&I borrowers had outstanding loans of $70 million and $72 million, respectively. Further, we have commitments up
to $100 million in our CRE and C&I portfolios. As such, a default by one of our larger borrowers could result in a significant
loss relative to our ALLL. Additionally, 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.
Our home builder finance portfolio reached $989 million in outstanding loans at December 31, 2019. The home
builder lending portfolio contains secured and unsecured loans, within our CRE and C&I portfolios, and our lending platform
originates loans throughout the U.S. with regional offices in Houston, Phoenix and Denver. Our home builder lending business
may be impacted by overall economic conditions in the areas builders operate as well as new home construction rates and
trends.
At December 31, 2019, our adjustable-rate warehouse lines of credit granted to other mortgage lenders was $4.8
billion, of which $2.8 billion was outstanding. There may be risks associated with the mortgage lenders that borrow from the
Bank, including credit risk, inadequate underwriting, and potential fraud against the Bank. At December 31, 2019, our largest
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borrower had an outstanding balance of $100 million. A default by one of our larger warehouse borrowers could result in a large
loss relative to our size. Additionally, adverse changes to industry competition, mortgage demand and the interest rate
environment may have a negative impact on warehouse lending.
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 demand, meet borrowing obligations, and
fund our operations under both normal and unforeseen circumstances which may cause liquidity stress. Our liquidity could be
impaired by our inability to access the capital markets, or unforeseen outflows of deposits. Our access to and cost of liquidity, is
dependent on various factors including, but not limited to, declining financial results, balance sheet and financial leverage,
disruptions in the capital markets, counterparty availability, interest rate fluctuations, general economic conditions, and legal,
regulatory, accounting and tax environments governing funding transactions. A material deterioration in these factors could
result in a downgrade of our credit or servicer standing with counterparties, resulting in higher cash outflows which could
require us to raise capital or obtain additional access to liquidity. If we are restricted from accessing certain funding sources by
our regulators, are unable to arrange for new financing on acceptable 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.
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 cash on hand, our ability
to service our debt, including interest payments on our senior notes and trust preferred securities, pay dividends, repurchase
shares of our common stock, pay for certain services we purchase from the Bank and cover operating expenses, depend upon
available cash on hand and the receipt of dividends from the Bank. The holding company had cash and cash equivalents of $233
million at December 31, 2019, or approximately 4.5 years of future anticipated cash outflows, dividend payments, share
repurchases and debt service coverage when excluding the redemption of $250 million of senior notes which mature on July 15,
2021. Operating expenses, which include costs paid to the Bank, totaled $28 million for the year ended December 31, 2019.
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, or cannot, make sufficient dividend
payments to us, we may not be able to service or repay our debt when it comes due, which could have a material adverse effect
on our financial condition and results of operations or could cause us to take other actions which could be materially
detrimental to our shareholders.
Regulatory Risk
We depend upon having FDIC insurance to raise deposit funding at reasonable rates. Future changes in deposit insurance
premiums and special FDIC assessments could 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. Consequently, 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 Tier 1 Capital.
Our assessment rate is determined by use of a scorecard that combines our CAMELS ratings with certain other financial
information. Changes in the level and mix of these financial components in the scorecard may result in a higher assessment
rate. 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, 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.
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Non-compliance with laws and regulations could result in fines, sanctions and/or operating restrictions.
We are subject to government legislation and regulation, including but not limited to the USA PATRIOT and Bank
Secrecy Acts, which require financial institutions to develop programs to detect money laundering, terrorist financing, and other
financial crimes. If detected, financial institutions are obligated to report such activity to the Financial Crimes Enforcement
Network, a bureau of the United States Department of the Treasury. These regulations require financial institutions to establish
procedures for identifying and verifying the identity of customers seeking to establish and maintain a relationship with a
financial institution. Failure to comply with these regulations could result in fines, sanctions or restrictions that could have a
material adverse effect on our strategic initiatives and operating results, and could require us to make changes to our operations
and the customers that we serve.
Current laws and applicable regulations are subject to frequent change and, in certain instances, state and federal law
may conflict. Any new laws and regulations could make compliance more difficult or expensive or otherwise adversely affect
our business. If our risk management and compliance programs prove to be ineffective, incomplete or inaccurate, we could
suffer unexpected losses, which could materially adversely affect our results of operations, our financial condition and/or our
reputation. As part of our federal regulators' enforcement authority, significant civil or criminal monetary penalties, consent
orders, or other regulatory actions can be assessed against the Bank. Such actions could require us to make changes to our
operations, including the customers that we serve, and may have an adverse impact on our operating results.
Operational Risk
A failure of our information technology systems could cause operational losses and damage to our reputation.
Our businesses are increasingly dependent on our ability to process, record and monitor a large number of complex
transactions and data efficiently and accurately. 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.
Our reliance on third parties to provide key components of our business infrastructure could cause operational losses or
business interruptions.
We rely on third-party service providers to leverage subject matter expertise and industry best practice, provide
enhanced products and services, and reduce costs. Although there are benefits in entering into third-party relationships with
vendors and others, there are risks associated with such activities. The risks associated with the vendor activity are not passed to
the third-party but remain our responsibility. Our Vendor Management department provides oversight related to the overall risk
management process associated with third-party relationships. Management is accountable for the review and evaluation of all
new and existing third-party relationships and is responsible for ensuring that adequate controls are in place to protect us and
our customers from the risks associated with vendor relationships.
Increased risk could occur based on poor planning, oversight, control, and inferior performance or service on the part
of the third-party, and may result in legal costs, regulatory fines or loss of business. While we have implemented a vendor
management program to actively manage the risks associated with the use of third-party service providers, any problems caused
by third-party service providers could result in regulatory noncompliance, adversely affect our ability to deliver products and
services to our customers and to conduct our business. Replacing a third-party service provider could also take a long period of
time and result in increased costs.
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, despite our monitoring and contingency plans, we may be unable to
conduct business or provide certain services, and we may face financial and reputational losses as a result.
We face operational risks due to the high volume and the high dollar value of transactions we process.
We rely on the ability of our employees and systems to process a wide variety of transactions. Many of the transactions
we process may be of high dollar value, such as those related to mortgage lending and warehouse advances. In 2019, we
originated a total of $32.7 billion in residential mortgage loans and processed $55 billion of warehouse lending advances. We
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face operational risk from, but not limited to, the risk of fraud by employees or persons outside our company, the execution of
unauthorized transactions, errors relating to transaction processing and technology, breaches of our internal control systems or
failures of those of our suppliers or counterparties, compliance failures, cyber-attacks, technology failures, system failures,
vendor failures, or unforeseen problems related to system implementations or upgrades, business continuation and disaster
recovery issues, and other external events. This risk of loss also includes the potential legal actions that could arise as a result of
an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or
their implementation, and customer attrition due to potential negative publicity. The occurrence of any of these events could
result in a financial loss, regulatory action or damage to our reputation.
We may lose market share to our competitors if we are not able to respond to technological change and introduce new
products and services.
Financial products and services have become increasingly technologically depended. We may not be able to respond to
technological innovations as quickly as our competitors do. Certain of our competitors are making significantly greater
investments and allocating significantly more in financial resources toward technological innovations and digital offerings than
we historically have. Our ability to meet the needs of our customers and introduce competitive products in a cost-efficient
manner depends on our responsiveness to technological advances, investment in new technology as it becomes available, and
obtaining and maintaining related essential personnel. Furthermore, the introduction of new technologies and products by
financial technology companies and platforms may adversely affect our ability to maintain our customer base, obtain new
customers or successfully grow our business. The failure to respond to the product demands of our customers, due to cost,
proficiency or otherwise, could have a material adverse impact on our business and therefore on our financial condition and
results of operations.
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 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, information security breach, phishing or other social engineering 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. For example, California’s Consumer Privacy Act (CCPA),
which went into effect in January 2020, provides consumers with the right to know what personal data is being collected, know
whether their personal data is sold or disclosed and to whom and opt out of the sale of their personal data, among other rights.
If we fail to comply with applicable privacy policies or federal, state, local or international laws and regulations or experience
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, insurance may not cover 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.
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.
Servicing revenue makes up approximately 15 percent of our total revenue and contributed approximately $3.8 billion
in average custodial deposits during 2019. At December 31, 2019, we had relationships with 7 owners of MSRs, excluding
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ourselves, three for which we act as servicer and four for which we act as subservicer for the mortgage loans they own. Due to
the limited number of relationships, discontinuation of existing agreements with those third parties or adverse changes in
contractual terms could have a significant negative impact to our mortgage servicing revenue. The terms and conditions in
which a master servicer may terminate subservicing contracts are broad and could be exercised at the discretion of the master
servicer without requiring cause. Additionally, the master servicer directs the oversight of custodial deposits associated with
serviced loans and, to the extent allowable, could choose to transfer the oversight of the Bank's custodial deposits to another
depository institution. Further, as servicer or subservicer of 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.
We may be required to repurchase mortgage loans, pay fees or indemnify buyers against losses.
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. Whole loan sale
agreements may 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 may also be subject to litigation relating to these
representations and warranties which may result in significant costs. 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, our liquidity, results of operations and financial condition may also be adversely affected.
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. Any of these actions may harm our reputation or negatively affect our servicing
business and, as a result, our profitability.
Our representation and warranty reserve, which is based on an estimate of probable future losses, was $5 million at
December 31, 2019 with a pipeline of $8 million. The pipeline represents the UPB for loans the Agencies identified as
potentially needing to be repurchased and the estimated probable loss associated with these loans is included in the R&W
reserve. While we believe the level of the reserve to be appropriate, the reserve may not be adequate to cover losses for loans
that we have sold or securitized for 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 and the pipeline could increase
substantially without warning. Our regulators, as part of their supervisory function, may 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.
We utilize third party mortgage originators which subjects us to strategic, reputation, compliance and operational risk.
In 2019, approximately 79 percent of our residential first mortgage volume dependent 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 or 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.
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.
16
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 increase 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. Mortgage and consumer lending practices raise compliance risks resulting from the detailed and
complex nature of mortgage and consumer lending laws and 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.
New lines of business, products or services may subject us to unknown risks.
From time to time, we may seek to implement new lines of business or offer new products and services within existing
lines of business. There may be substantial risks and uncertainties associated with these efforts, particularly in instances where
the markets are not fully developed or where there is a conflict between state and federal law. In developing and marketing new
lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the
introduction and development of new lines of business and/or new products or services may not be achieved, and price and
profitability targets may not prove feasible, which could in turn have a material negative effect on our operating results. New
lines of business and/or new products or services also could subject us to additional or conflicting legal or regulatory
requirements, increased scrutiny by our regulators and other legal risks.
General Risk Factors
MP Thrift, an entity managed and controlled by MatlinPatterson, owns 36.4 percent (20,600,352 shares) of our common
stock. Future issuance of Flagstar’s common stock in the public market, or as a result of actions taken by MP Thrift, could
adversely affect the trading price of Flagstar’s common stock.
As of December 31, 2019, MP Thrift owned 36.4 percent of the Company’s common stock. MP Thrift itself is
indirectly owned by investment funds that are affiliates of MatlinPatterson Global Opportunities Partners III LP, a fund that was
initially formed in 2007. Sales of a substantial number of shares of our common stock by existing shareholders, or the
perception that sales may occur, could cause the market price of our common stock to decline. Further, a large quantity of our
shares introduced into the market, either at once or over time, could increase the supply of our common stock, thereby putting
pressure on our stock price. Pricing pressure could be further exacerbated by low trading volumes and market conditions, both
of which may impact the time it may take for pricing to rationalize. Pursuant to the Investment Agreement between Flagstar
and MP Thrift, we have granted MP Thrift registration rights for the resale of the shares of our common stock and have filed a
shelf registration statement to facilitate potential future sales of shares by them. Sales of a substantial number of shares of our
common stock, or the perception that such sales may occur, also may make it more difficult for us to raise additional capital by
selling equity securities in the future, at a time and price that we deem appropriate.
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 examinations 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
17
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 class and 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 relating to our business and operations.
Although we establish accruals for legal proceedings when information related to the loss contingencies represented by
those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have
accruals for all legal proceedings where we face a risk of loss. Due to the inherent subjectivity of the assessments and
unpredictability of the outcome of legal and regulatory proceedings, amounts accrued may not represent the ultimate loss to us
from the legal and regulatory proceedings in question. As a result, our ultimate losses may be significantly higher than the
amounts accrued for legal loss contingencies. For further information, see Note 19 - Legal Proceedings, Contingencies and
Commitments.
We may be required to pay interest on escrow in accordance with certain state laws in spite of the Federal preemption under
the National Bank Act
In 2018, the Ninth Circuit Federal Court of Appeals held that California state law requiring mortgage servicers to pay
interest on certain mortgage escrow accounts was not, as a matter of law, preempted by the National Bank Act (Lusnak v. Bank
of America). This ruling goes against the position that regulators, national banks and other federally-chartered financial
institutions have taken regarding the preemption of state-law mortgage escrow interest requirements. The opinion issued by the
Ninth Circuit Federal Court of Appeals is legal precedent only in certain parts of the western United States. We are currently
defending similar litigation in California Federal Court, arguing that the Lusnak case was wrongly decided, our situation can be
distinguished from Lusnak as a matter of law, and California’s interest on escrow law should be preempted as a matter of fact.
If the Ninth’s Circuit’s holding is more broadly adopted by other Federal Circuits, including those covering states that currently
have or in the future may enact statutes requiring the payment of interest on escrow balances or if we would be required to
retroactively credit interest on escrow funds, the Company’s earnings could be adversely affected.
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.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
18
ITEM 2. PROPERTIES
Flagstar's headquarters is located in Troy, Michigan at 5151 Corporate Drive and we operate a regional office in
Jackson, Michigan. We own both the headquarters and regional office buildings.
At December 31, 2019, we operated 160 bank branches in the following states:
Owned
Leased
Total
Free-
Standing
Office
Building
In-Store
Banking
Center
Buildings
with Other
Tenants
Total
87
27
8
3
1
126
27
6
—
1
—
34
114
33
8
4
1
160
90
31
8
3
1
133
2
—
—
—
—
2
22
2
—
1
—
25
114
33
8
4
1
160
Michigan
Indiana
California
Wisconsin
Ohio
Total
We also have 88 retail mortgage locations, 4 wholesale lending offices, and 12 commercial lending offices. These
locations are primarily leased and located in 27 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 19 - Legal Proceedings, Contingencies and Commitments.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
19
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, 2019, there were 56,631,236
shares of our common stock outstanding held by 17,194 stockholders of record.
Dividends
On January 28, 2020, the Company announced that its Board increased the quarterly common stock dividend from
$0.04 to $0.05, effective with the dividend to be paid March 16, 2020. The Company's dividends are subject to the Boards'
approval on a quarterly basis.
Sale of Unregistered Securities
The Company made no unregistered sales of our equity securities during the quarter ended December 31, 2019.
Issuer Purchases of Equity Securities
The Company made no purchases of unregistered securities during the quarter ended December 31, 2019.
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.
20
Performance Graph
CUMULATIVE TOTAL STOCKHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDICES
DECEMBER 31, 2014 THROUGH DECEMBER 31, 2019
Flagstar Bancorp
Nasdaq Financial
Nasdaq Bank
S&P Small Cap 600
Russell 2000
100
107
144
149
122
148
100
97
121
135
122
147
100
94
113
127
112
138
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
December 31, 2018
December 31, 2019
100
147
171
238
168
243
100
103
127
144
129
162
21
ITEM 6. SELECTED FINANCIAL DATA
2019 (1)
2018 (2)
2017 (3)
2016 (4)
2015
December 31,
Summary of Consolidated Statements of Operations
Net interest income
Provision (benefit) for loan losses
Noninterest income
Noninterest expense
Provision for income taxes
Net income from continuing operations
Income per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
$
$
$
$
562 $
18
610
888
48
497 $
(8)
439
712
45
390 $
6
470
643
148
323 $
(8)
487
560
87
218 $
187 $
63 $
171 $
3.85 $
3.80 $
3.26 $
3.21 $
1.11 $
1.09 $
2.71 $
2.66 $
287
(19)
470
536
82
158
2.27
2.24
56,584,238
57,520,289
57,093,868
56,569,307
56,426,977
57,238,978
58,322,950
58,178,343
57,597,667
57,164,523
(1) Noninterest income includes $25 million ($0.35 per diluted share) of pre-tax benefit due to the reduction of the DOJ liability.
(2) Net interest income includes $29 million ($0.41 per diluted share) of pre-tax hedging gains reclassified from AOCI. Noninterest expense includes $15
million ($0.22 per diluted share) of pre-tax acquisition-related expenses related to the Wells Fargo branch acquisition.
(3) Provision for income taxes includes $80 million ($1.38 per diluted share) non-cash charge 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) Noninterest income includes $24 million ($0.28 per diluted share) of pre-tax benefit due to the reduction of the DOJ settlement liability.
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 (2)
December 31,
2019
2018
2017
2016
2015
(In millions, except per share data and percentages)
$
23,266 $
18,531 $
16,912 $
14,053 $
13,715
18,016
15,146
4,815
496
1,788
31.57
28.57
13,221
12,380
3,394
495
1,570
27.19
23.90
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
Number of common shares outstanding
56,631,236
57,749,464
57,321,228
56,824,802
56,483,258
Includes preferred stock totaling $267 million for the year ended December 31, 2015.
(1)
(2) Excludes goodwill and intangibles of $170 million, $190 million, and $21 million for the years ended December 31, 2019, December 31, 2018, and
December 31, 2017 respectively. See Non-GAAP Financial Measures for further information.
22
Average Balances:
Average interest-earning assets
Average interest paying liabilities
Average stockholders’ equity
Selected Ratios:
Interest rate spread (1)
Adjusted interest rate spread (1)(2)
Net interest margin
Adjusted net interest margin (2)
Return on average assets
Adjusted return on average assets (2)(3)
Return on average equity
Return on average common equity
Return on average tangible common equity (3)
Adjusted return on average tangible common equity (2) (3)
Common equity-to-assets ratio
Equity/assets ratio (average for the period)
Efficiency ratio
Bancorp Tier 1 leverage (to adjusted avg. total assets) (4)
Bank Tier 1 leverage (to adjusted avg. total assets) (4)
Effective tax provision rate (5)
Dividend payout ratio
At or For the Years Ended December 31,
2019
2018
2017
2016
2015
(In millions, except share data and percentages)
$
$
$
18,453
13,130
1,695
$
$
$
16,136
13,124
1,488
$
$
$
14,130
11,848
1,433
$
$
$
12,164
9,757
1,464
$
$
$
10,436
8,305
1,486
2.52%
2.52%
3.05%
3.05%
1.05%
0.96%
12.84%
12.84%
15.15%
13.87%
7.68%
8.20%
75.8%
7.57%
7.71%
18.1%
4.2%
2.81%
2.58%
3.07%
2.89%
1.04%
0.98%
12.58%
12.58%
13.46%
12.67%
8.47%
8.28%
76.0%
8.29%
8.67%
19.4%
—%
2.56%
2.56%
2.75%
2.75%
0.40%
0.90%
4.40%
4.40%
4.44%
10.07%
8.27%
9.05%
74.8%
8.51%
9.04%
70.1%
—%
2.45%
2.45%
2.64%
2.64%
1.23%
1.11%
11.69%
13.00%
11.68%
10.59%
9.50%
10.52%
69.2%
8.88%
10.52%
33.7%
—%
2.58%
2.58%
2.74%
2.74%
1.32%
1.32%
10.63%
10.49%
10.63%
10.63%
9.20%
12.43%
70.9%
11.51%
11.79%
34.2%
—%
(1)
Interest rate spread is the difference between the yield earned on average interest-earning assets for the period and the rate of interest paid on
average interest-bearing liabilities.
Includes $29 million of pre-tax hedging gains reclassified from AOCI.
(2)
(3) Excludes goodwill, intangible assets net of amortization and Non-GAAP adjustments for DOJ, hedge gain reclassified from AOCI and acquisition
costs. See Non-GAAP Reconciliation for further information.
(4) Basel III transitional.
(5) The year ended December 31, 2017 includes an $80 million, 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.
Selected Statistics:
Mortgage rate lock commitments (fallout-adjusted) (1)
Mortgage loans originated
Mortgage loans sold and securitized
Number of bank branches
Number of FTE employees
At or For the Years Ended December 31,
2019
2018
2017
2016
2015
(In millions, except share data and percentages)
$
$
$
32,322 $
30,308 $
32,527 $
29,372 $
32,720 $
32,465 $
34,408 $
32,417 $
30,330 $
32,076 $
32,493 $
32,033 $
160
4,453
160
3,938
99
3,525
99
2,886
25,511
29,368
26,307
99
2,713
(1) Fallout-adjusted mortgage rate lock commitments are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based
on previous historical experience, the level of interest rates and other factors.
23
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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
25
25
33
40
40
50
52
56
58
60
62
24
The following is Management's Discussion and Analysis of the financial condition and results of operations of Flagstar
Bancorp, Inc. for the year ended December 31, 2019. 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.
Results of Operations
The following table summarizes our results of operations for the periods indicated:
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,
2019
2018
2017
Change
2019 vs. 2018
Change
2018 vs. 2017
(Dollars in millions)
562 $
18
610
888
48
218 $
199 $
3.85 $
3.80 $
3.46 $
497 $
(8)
439
712
45
187 $
176 $
3.26 $
3.21 $
3.02 $
390 $
65 $
6
470
643
148
63 $
143 $
1.11 $
1.09 $
2.47 $
26
171
176
3
31 $
23 $
0.59 $
0.59 $
0.44 $
107
(14)
(31)
69
(103)
124
33
2.15
2.12
0.55
$
$
$
$
$
$
(1)
For further information, see MD&A - Use of Non-GAAP Financial Measures.
Overview
The year ended December 31, 2019 resulted in net income of $218 million, or $3.80 per diluted share, and adjusted net
income of $199 million or $3.46 per diluted share when excluding the DOJ benefit. These results compare to 2018 net income
of $187 million, or $3.21 per diluted share, and adjusted net income of $176 million, or $3.02 per diluted share, when excluding
acquisition expenses of $13 million and the related hedging gains of $24 million, both net of taxes. All three of our operating
segments reported improved results in 2019 with well-balanced revenue streams driving 47 percent of our revenues in net
interest income and 53 percent in non-interest income.
On an adjusted basis, 2019 annual net income grew 13 percent compared to the prior year driven by an increase in gain
on sale of $135 million as a result of a $2 billion increase in fall out adjusted locks along with a 37 basis point increase in
margin which was supported by our continued focus on price discipline, combined with efforts to optimize channel mix,
volume and margin. We also grew our interest earning assets by $2.3 billion, or 14 percent, in 2019 with growth in our
commercial held for investment portfolio of $2.2 billion or 43 percent and growth in our consumer and loans held-for-sale
portfolio of $2.3 billion. This loan growth was supported by the low cost deposits acquired through our 2018 branch
acquisitions which drove a $1.5 billion increase in average total retail deposits. This growth resulted in 13 percent higher net
interest income despite margin compression caused by the Federal Reserve three rate cuts during the year ended December 31,
2019 impacting our asset sensitive position as a result of 2018 branch acquisitions. We also continued to grow our subservicing
business, increasing the number of loans serviced or sub-serviced by 239,673 or 28 percent during the 12 months ended
December 31, 2019, ending the fourth quarter of 2019 at 1.1 million accounts. This growth drove a 70 percent increase in the
mortgage servicing segment revenue which resulted in 2019 being profitable with segment net income of $25 million as
compared to a loss of $6 million in 2018. The servicing business also generates custodial deposits which are used to support
loan growth or as an alternative funding source, which have increased $2.4 billion for the twelve months ended December 31,
2019 compared to the twelve months ended December 31, 2018.
25
Net Interest Income
The following table presents details on our net interest margin and net interest income on a consolidated basis:
2019
2018
2017
For the Years Ended December 31,
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
(Dollars in millions)
$
3,952 $
170
4.30% $
4,196 $
190
4.52 % $
4,146 $
165
3.99%
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-earning deposits
Total interest-earning assets
Other assets
Total assets
Interest-Bearing Liabilities
Retail deposits
Demand deposits
Savings deposits
Money market deposits
Certificates of deposit
Total retail deposits
Government deposits
Wholesale deposits and other
Total interest-bearing deposits
Short-term FHLB advances and other
Long-term FHLB advances
Less: Swap gain reclassified out of OCI (5)
Adjusted long-term FHLB advances (5)
Other long-term debt
3,173
871
566
4,610
2,502
1,708
2,112
6,322
10,932
553
2,845
171
$
$
$
18,453 $
2,221
20,674
1,345 $
3,220
736
2,536
7,837
1,186
554
9,577
2,633
425
—
495
115
46
36
197
136
88
107
331
528
15
77
4
794
11
36
2
59
108
17
13
138
59
7
—
7
28
3.61%
5.31%
6.33%
4.26%
5.38%
5.10%
4.99%
5.17%
4.79%
2.66%
2.71%
2.35%
2,949
690
111
3,750
2,063
1,288
1,318
4,669
8,419
303
3,094
124
4.28% $
16,136 $
1,844
$
17,980
0.77% $
764 $
1.13%
0.32%
2.31%
1.37%
1.46%
2.36%
1.44%
2.23%
1.59%
1.59%
5.65%
3,300
288
2,015
6,367
1,149
401
7,917
3,521
1,192
—
494
105
36
6
147
109
69
69
247
394
11
86
2
683
7
29
2
34
72
14
8
94
68
(4)
29
25
28
3.56 %
5.21 %
5.73 %
3.93 %
5.23 %
5.32 %
5.14 %
5.23 %
4.65 %
3.53 %
2.76 %
1.83 %
2,549
471
26
3,046
1,579
981
890
3,450
6,496
290
3,121
77
4.21 % $
14,130 $
1,716
$
15,846
0.93 % $
514 $
0.87 %
0.49 %
1.70 %
1.12 %
1.23 %
2.02 %
1.18 %
1.93 %
(0.32)%
2.12 %
5.56 %
3,829
255
1,187
5,785
957
23
6,765
3,356
1,234
—
493
85
24
1
110
68
47
43
158
268
13
80
1
527
1
29
1
14
45
6
—
51
37
24
—
24
25
Adjusted total interest-bearing liabilities (5)
$
13,130 $
232
1.76% $
13,124 $
215
1.63 % $
11,848 $
137
Noninterest-bearing deposits
Retail deposits and other
Custodial deposits
Total non-interest bearing deposits (2)
Other liabilities
Stockholders’ equity
1,291
3,839
5,130
719
1,695
Total liabilities and stockholders' equity
Net interest-earning assets
$
$
20,674
5,323
1,066
1,792
2,858
510
1,488
$
$
17,980
3,012
698
1,444
2,142
423
1,433
$
$
15,846
2,282
Adjusted net interest income (5)
$
562
$
468
$
390
Adjusted interest rate spread (3)(5)
Adjusted net interest margin (4)(5)
Ratio of average interest-earning assets to
interest-bearing liabilities
2.52%
3.05%
140.5%
2.58 %
2.89 %
122.9 %
Total average deposits
$
14,708
$
10,775
$
8,907
(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 custodial 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.
(5) The year ended December 31, 2018, excludes $29 million of hedging gains reclassified from AOCI in conjunction with the payment of long-term FHLB advances. See
Non-GAAP Financial Measures for further information.
26
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%
0.19%
0.76%
0.50%
1.18%
0.78%
0.67%
1.35%
0.77%
1.09%
1.92%
1.92%
5.08%
1.15%
2.56%
2.75%
119.3%
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,
2019 Versus 2018 Increase (Decrease) Due to:
2018 Versus 2017 Increase (Decrease) Due to:
Rate
Volume
Total
Rate
Volume
Total
(Dollars in millions)
(Dollars in millions)
$
(9) $
(11) $
(20) $
23 $
2 $
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
Interest-earning deposits
Total interest-earning assets
Interest-Bearing Liabilities
Interest-bearing deposits
$
$
Short-term FHLB advances and other
Long-term FHLB advances (1)
Other long-term debt
Total interest-bearing liabilities (1)
2
1
4
7
4
(3)
(3)
(2)
5
(5)
(2)
1
8
9
26
43
23
22
41
86
129
9
(7)
1
10
10
30
50
27
19
38
84
134
4
(9)
2
8
2
2
12
24
9
8
41
53
(4)
7
—
(10) $
121 $
111
$
79 $
12
10
3
25
17
13
18
48
73
2
(1)
1
77 $
24 $
20 $
44
$
39 $
4 $
8
(2)
—
30
(17)
(16)
—
(13)
(9)
(18)
—
17
94
31
3
2
75
—
(2)
1
3
$
4 $
74 $
25
20
12
5
37
41
22
26
89
126
(2)
6
1
156
43
31
1
3
78
78
Change in net interest income (1) $
(40) $
134 $
(1) The year ended December 31, 2018, excludes $29 million of hedging gains reclassified from AOCI in conjunction with the payment of long-term
FHLB advances. See Non-GAAP Financial Measures for further information.
2019 Compared to 2018
• Net interest income increased $65 million, or $94 million, for the year ended December 31, 2019 when excluding the
$29 million hedging gain that occurred in 2018. The increase of 20.1 percent compared to adjusted 2018, was driven
by well balanced growth in average interest-earning assets. This growth was supported by a $1.7 billion increase in
interest and noninterest-bearing retail deposits which resulted in 35 percent lower FHLB advances.
• Net interest margin expanded 16 basis points to 3.05 percent, as compared to an adjusted rate of 2.89 percent in 2018,
despite three rate cuts in the second half of the year. This margin expansion was primarily attributable to a reduction in
funding costs driven by growth in retail deposits resulting from the branch acquisition executed in late 2018 and higher
custodial balances from the growth in serviced and subserviced loans.
• Average interest-earnings assets increased $2.3 billion due to growth in the LHFI portfolio, partially offset by a
decrease in LHFS average balances. Average commercial loans increased $1.7 billion driven by balanced growth
across the CRE, C&I and warehouse portfolios. The consumer loan portfolio increased $0.9 billion, as we continue to
add high-quality non-auto indirect loans and HELOCs to the portfolio. The LHFS portfolio decreased $0.2 billion as
we managed the LHFS portfolio lower in the first half of the year to facilitate higher returning asset growth.
27
• Average interest-bearing liabilities were flat, due to a $1.7 billion increase in average interest-bearing deposits driven
by deposits acquired in branch acquisitions that closed in 2018, partially offset by $1.7 billion reduction in FHLB
advances. Asset growth was further supported by $2.0 billion higher custodial average balances as we continue to
successfully grow our subservicing business.
2018 Compared to 2017
•
For the year ended December 31, 2018, net interest income increased $107 million, or $78 million when excluding
a $29 million hedging gain, compared to the same period in 2017. The increase was primarily driven by growth in
average interest earning assets, led by increases in our higher yielding commercial loan portfolio, and a 14 basis
point increase in net interest margin.
• Our net interest margin for the year ended December 31, 2018 was 2.89 percent, compared to 2.75 percent for the year
ended December 31, 2017. The increase in net interest margin was primarily due to growth in our commercial loan
portfolio, partially offset by higher average rates on deposits. Loans-held-for-investment saw a 56 basis point increase
in average yield, primarily due to higher yields on our commercial loans, driven by increases in LIBOR rates during
2018. In comparison, our interest bearing deposit costs increased 41 basis points, representing a deposit beta of 41
percent, which is the change in the annualized rate of our deposits divided by the change in the Federal Reserve
discount rate. The average yield on our LHFI portfolio, influenced by our variable rate commercial loan portfolio, was
more responsive to changes in market rates than our deposit costs. Deposit costs increased due to higher rates and an
increase in use of wholesale deposits. Wholesale deposits, which experienced a rate increase of 61 basis points, were
primarily utilized as an additional funding source prior to the acquisition of the deposits from Wells Fargo.
• Average interest-earnings assets increased $2.0 billion for the year ended December 31, 2018, compared to the same
period in 2017, primarily due to growth in the LHFI portfolio. Average commercial loans increased $1.2 billion with
broad based growth across CRE, C&I, and the warehouse loan portfolios. We continued to grow CRE and C&I loans,
and the acquisition of the warehouse lending business in the first quarter of 2018 increased average warehouse loans
$493 million during the year. The consumer loan portfolio increased $704 million, primarily due to the addition of
residential first mortgages and HELOCs to the LHFI portfolio.
• Average interest-bearing liabilities increased $1.3 billion for the year ended December 31, 2018, compared to the full
year in 2017, primarily due to a $1.2 billion increase in interest bearing deposits. The increase in average deposits is
primarily attributable to the California branch acquisition, which impacted the full year average by $478 million, and
one month of deposits from our Q4 2018 branch acquisition, which impacted the full year average by $147 million.
Average wholesale deposits increased $378 million, primarily to provide additional funding prior to the acquisition of
the Wells Fargo deposits.
Provision (Benefit) for Loan Losses
2019 Compared to 2018
The provision for loan losses was $18 million for the year ended December 31, 2019, compared to a benefit of $8
million for the year ended December 31, 2018. The $26 million increase is primarily due to strong credit quality evidenced by
low levels of delinquency and charge-offs which was more than offset by the Live Well loan net charge-off, which was fully
resolved in the third quarter 2019.
2018 Compared to 2017
The provision for loan losses was a benefit of $8 million for the year ended December 31, 2018, compared to a
provision of $6 million for the year ended December 31, 2017. The improvement in the provision reflected our continued strong
credit quality with consistently low levels of charge-offs, low delinquencies, and growth of the portfolio in areas we believed to
pose lower levels of credit risk.
For further information, see MD&A - Credit Risk.
28
Noninterest Income
The following tables provide information on our noninterest income along with other mortgage metrics:
Net gain on loan sales
Loan fees and charges
Net return on mortgage servicing rights
Loan administration income
Deposit fees and charges
Other noninterest income
Total noninterest income
Mortgage rate lock commitments (fallout-adjusted) (1)
Mortgage loans originated
Net margin on mortgage rate lock commitments (fallout-adjusted) (1) (2)
Net margin on loans sold and securitized
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
335 $
100
6
30
38
101
610 $
200 $
87
36
23
21
72
439 $
268
82
22
21
18
59
470
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
32,322
32,720
$
$
1.03%
1.10%
30,308
32,465
$
$
0.65%
0.62%
32,527
34,408
0.82%
0.83%
$
$
$
$
(1) Fallout adjusted refers to mortgage rate lock commitments adjusted by a percentage of mortgage loans in the pipeline that are not expected to close
based on previous historical experience and interest rates.
(2) Gain on sale margin is based on net gain on loan sales (excludes net gain on loan sales of $2 million, $2 million, and $2 million from loans
transferred from HFI for the years ended December 31, 2019, December 31, 2018 and December 31, 2017, respectively) to fallout-adjusted
mortgage rate lock commitments.
2019 Compared to 2018
Total noninterest income increased $171 million during the year ended December 31, 2019 from the year ended
December 31, 2018, primarily due to the following:
• Net gain on loan sales increased $135 million, driven by a 2.0 billion higher fallout-adjusted locks and a 38 basis point
improvement in gain on sale margin. The favorable market conditions drove an estimated increase in the origination
market of approximately 30 percent, which was the catalyst behind a 7 percent increase in fallout-adjusted locks
during the same time period. The gain on sale margin expansion resulted from a focus on price discipline, combined
with efforts to optimize volume and margin coupled with improved mortgage market conditions.
• Other noninterest income increased $29 million, primarily due to the DOJ liability fair value adjustment of $25 million
in the second quarter of 2019, along with higher fee-based income generated on our commercial loan portfolio.
• Deposit fees and charges increased $17 million, driven by growth in our customer and deposit base as a result of our
2018 branch acquisitions.
• Net loan fees and charges increased $13 million, primarily due to higher subservicing ancillary fees driven by an
increase of approximately 425,000 loans being serviced or subserviced and shift in channel mix from correspondent to
retail which generates higher fee income.
• Loan administration income increased $7 million, primarily due to growth in the average number of subserviced loans,
partially offset by higher charges on custodial deposits from an increase in serviced and subserviced accounts and
refinance activity.
• Net return on MSRs, including the impact of hedges, decreased $30 million.
29
2018 Compared to 2017
Total noninterest income decreased $31.0 million during the year ended December 31, 2018 from the year ended
December 31, 2017, primarily due to the following:
• Net gain on loan sales decreased $68 million. Lower mortgage origination volume and pricing competition
experienced in the mortgage market throughout 2018 impacted both net gain on loan sale margin, which decreased 17
basis points, and fall-out adjusted lock volume which decreased $2.2 billion. The full year 2018 saw the benefit of our
2017 delegated correspondent lending and retail lending related acquisitions, which provided a boost to fall-out
adjusted lock volume in those channels. The lower margin was primarily driven by secondary margin compression and
a shift in channel mix toward the lower margin, but lower cost delegated correspondent channel, partially offset by an
improvement in securitization performance. Our total fall-out adjusted lock volume decreased 6.8 percent, despite the
8.3 percent decline in the overall mortgage origination market experienced during 2018.
• Net return on MSRs, including the impact of hedges, increased $14 million, primarily due to higher net return from the
MSR asset resulting from lower prepayments and stronger valuations, along with a higher average MSR balance.
• Other noninterest income increased $13 million, primarily due to higher FHLB stock dividend income attributable to
an increase in FHLB stock holdings and a supplemental dividend from the FHLB received in the first quarter of 2018,
higher rental income within the equipment finance operating lease portfolio, an increase in investment and insurance
income and a gain from the sale of our wealth management business.
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
Federal insurance premiums
Intangible asset amortization
Other noninterest expense
2019
2018
$
377 $
161
111
80
27
20
15
97
For the Years Ended December 31,
Branch
Acquisition
Expenses
(Dollars in millions)
Adjusted 2018 (1)
2017
318 $
127
80
59
28
22
5
73
3 $
3
—
—
3
—
—
6
315 $
124
80
59
25
22
5
67
299
103
72
57
30
16
—
66
Total noninterest expense (1)
$
888 $
712 $
15 $
697 $
643
(1) See Non-GAAP Financial Measures for further information.
Efficiency ratio
Average number FTE
2019 Compared to 2018
For the Years Ended December 31,
2019
2018
2017
75.8%
4,157
76.0%
3,655
74.8%
3,303
Total noninterest expense increased $176 million during the year ended December 31, 2019, compared to the year
ended December 31, 2018. Excluding the $15 million 2018 expenses directly related to the branch acquisitions, adjusted
noninterest expense increased $191 million, primarily due to the following:
• Compensation and benefits expense increased $62 million, primarily due to higher average FTE driven by our 2018
banking acquisitions and integration of default servicing during the fourth quarter of 2019, including an additional 400
and 170 FTE respectively.
30
• Occupancy and equipment and other noninterest expense increased $37 million and $30 million, respectively,
primarily due growth in our community banking business as a result of acquisitions, growth in our servicing business
and a shift toward our retail mortgage origination channel which results in higher commission expense.
• Commission expense increased $31 million, primarily driven from an increase in retail originations supporting higher
gain on sale and the achievement of performance hurdles resulting in higher payout rates.
• Loan processing expense increased $21 million, primarily due to an increase in retail originations supporting higher
fee-based income and higher subservicing expenses resulting from growth in our subservicing business.
Intangible asset amortization increased $10 million, due to intangible assets associated with our 2018 acquisitions.
•
2018 Compared to 2017
Total noninterest expense increased $69 million during the year ended December 31, 2018 from the year ended
December 31, 2017, primarily due to the following:
• Compensation and benefits expense increased $16 million, primarily due to a higher headcount resulting from
acquisitions and growth in our community bank, partially offset by cost management and lower incentive
compensation.
• Occupancy and equipment increased $21 million, primarily due to a higher average depreciable asset base resulting
from technology upgrades and software, along with increases in vendor services to support business growth.
• Commission expense increased $8 million, primarily due to an increase in originations in the higher commission
earning retail channel, driven from the acquisition of Opes in 2017.
• Legal and professional expense decreased $5 million, primarily due to fewer significant legal matters in 2018 and
•
•
higher acquisition related expenses in 2017.
FDIC insurance premiums increased $6 million, primarily driven by growth in our total assets.
Intangible asset amortization increased to $5 million, primarily due to the amortization of the intangible assets
associated with our 2018 banking acquisitions.
• Other noninterest expense increased $1 million, primarily due to increases in advertising expense to raise brand
awareness and charitable contributions, primarily offset by a reduction in the value of a contingent consideration.
Provision for Income Taxes
2019 Compared to 2018
Our provision for income taxes for the year ended December 31, 2019 was $48 million, compared to a provision of
$45 million for the year ended December 31, 2018. The Company's effective tax rate for the year ended December 31, 2019
was 18.1 percent. Our effective tax rate differs from the combined federal and state statutory rate primarily due to a change in
our valuation allowance for net deferred tax assets at the state level, tax exempt earnings, tax credits and benefits from stock
based compensation.
2018 Compared to 2017
Our provision for income taxes for the year ended December 31, 2018 was $45 million, compared to a provision of
$148 million for the year ended December 31, 2017. The increase in the provision for income taxes is primarily due to the
change related to the revaluation of deferred tax assets during the fourth quarter of 2017 due to the passage of new tax
legislation. The Company's effective tax rate for the year ended December 31, 2018 was 19.4 percent. Our effective tax rate
differs from the combined federal and state statutory rate primarily due to the change in our valuation allowance for net
deferred tax assets, tax exempt earnings and stock based compensation.
For further information, see Note 17 - Income Taxes.
31
Fourth Quarter Results
The following table sets forth selected quarterly data:
Net interest income
Provision (benefit) for loan losses
Noninterest income
Noninterest expense
Provision for income taxes
Net income
Adjusted net income (1)
Income per share:
Basic
Diluted
Adjusted diluted (1)
December 31,
2019
(Unaudited)
Three Months Ended
September 30,
2019
(Unaudited)
(Dollars in millions)
152 $
146 $
—
162
245
11
58
1
171
238
15
63
58 $
63 $
1.01 $
1.00 $
1.00 $
1.12 $
1.11 $
1.11 $
$
$
$
$
$
December 31,
2018
(Unaudited)
152
(5)
98
189
12
54
42
0.94
0.93
0.72
(1) For further information, see MD&A - Use of Non-GAAP Financial Measures.
Fourth Quarter 2019 compared to Third Quarter 2019
Net income for the three months ended December 31, 2019 was $58 million, or $1.00 per diluted share, as compared
to $63 million, or $1.11 per diluted share, for the three months ended September 30, 2019. The $5 million decrease in net
income was primarily due to the following:
• Net interest income rose $6 million, or 4 percent, reflecting a 9 percent increase in average earning assets, fueled by
growth in loans held-for-sale, warehouse and commercial real estate loans.
• Noninterest income decreased $9 million, or 5 percent, to $162 million in the fourth quarter 2019, as compared to
$171 million for the third quarter 2019, primarily due to lower net gain on loan sales. In the fourth quarter of 2019
loan sale margin expanded 3 basis points to 1.23 percent, as compared to 1.20 percent for the third quarter 2019
however, fallout-adjusted locks decreased 11 percent to $8.2 billion, reflecting seasonal factors which were partially
offset by the continued strength of the mortgage environment due to the benefit of lower rates or refinancing volume.
• Noninterest expense increased to $245 million for the fourth quarter 2019, as compared to $238 million for the third
quarter 2019, primarily reflecting $5 million of higher balance sheet write-downs and discretionary expenses, such as
fixed asset write downs, costs related to the secondary offering and a donation to the Flagstar Foundation.
Fourth Quarter 2019 compared to Fourth Quarter 2018
Net income for the three months ended December 31, 2019 was $58 million, or $1.00 per diluted share, as compared
to a net income of $42 million, or $0.93 per diluted share, for the three months ended December 31, 2018.
• Net interest income of $152 million in Q4 2019 was consistent with Q4 2018 however, 2018 included the recognition
of $29 million hedging gains in conjunction with the Wells Fargo branch acquisition. Excluding hedging gains, net
interest income grew $29 million driven by growth in interest earning assets across our warehouse, consumer and
commercial loan portfolios.
• Noninterest income increased $64 million, primarily due to higher net gain on loan sales driven by a $2.9 billion
increase in FOALs in Q4 2019 compared to Q4 2018 supported by the favorable mortgage environment. Our 1.23
percent gain on sale margin in the fourth quarter 2019 was also more than double the fourth quarter 2018 rate of 0.60
percent driven by a focus on higher margin sales channels and favorable secondary execution.
32
• Noninterest expense increased $56 million, primarily due to an increase of $20 million in compensation and benefits,
$19 million in commissions and $7 million in occupancy and equipment. The compensation and benefits increase was
primarily driven by higher FTEs while higher volume and commission rates in our retail mortgage channels drove the
commission expense increase. The occupancy and equipment increase was driven by growth in our operations in 2019.
Operating Segments
Our operations are conducted through three operating segments: Community Banking, Mortgage Originations, and
Mortgage Servicing. The Other segment includes the remaining reported activities. 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 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.
This section should be read in conjunction with Note 21 - Segment Information.
Community Banking
Our Community Banking segment services commercial, governmental and consumer customers in our banking
footprint which spans throughout Michigan, Indiana, California, Wisconsin, Ohio and contiguous states. We also serve home
builders, correspondents, and certain other commercial customers on a national basis. The Community Banking segment
originates loans, and provides deposit and fee based services to consumer, business, and mortgage lending customers.
Our commercial customers are from a diversified range of industries including financial, insurance, service,
manufacturing, home builder finance and distribution. We offer financial products to these customers for use in their normal
business operations, as well as providing financing of working capital, capital investments, and equipment. Additionally, our
commercial real estate business supports income producing real estate and home builders. Community banking also offers
warehouse lines of credit to non-bank mortgage lenders.
Our Community Banking segment has seen continued growth that has been further boosted by strategic acquisitions.
Our commercial loan portfolio has grown 43 percent in the last twelve months, to $7 billion, at December 31, 2019, boosted by
growth and strong demand in our warehouse lending business, along with continued growth in our CRE and C&I portfolios.
Average deposits for the year ended December 31, 2019 have increased to $10.3 billion, compared to $8.9 billion, for the year
ended December 31, 2018. This increase was driven by our branch acquisitions in December of 2018.
33
Community Banking
Summary of Operations
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Net (loss) gain on loan sales
Loan fees and charges
Loan administration (expense) income
Other noninterest income
Total noninterest income
Compensation and benefits
Commissions
Loan processing expense
Other noninterest expense
Total noninterest expense
Income before indirect overhead allocations and income taxes
Indirect overhead allocation
Provision for income taxes
Net income
Key Metrics
Efficiency Ratio
Return on average assets
Average number of FTE employees
2019 compared to 2018
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
(cid:7)
$
(cid:23)(cid:23)(cid:28)
20
429
(29)
(1)
(5)
64
29
100
2
7
167
276
182
(41)
30
111
$
$
57.4%
1.0%
1,316
314
2
312
(12)
(1)
(3)
44
28
70
2
5
103
180
160
(39)
25
96
$
$
52.5%
1.1%
861
238
4
234
(10)
—
—
31
21
62
—
5
87
154
101
(41)
21
39
59.5%
0.6%
688
The Community Banking segment reported net income of $111 million for the year ended December 31, 2019,
compared to net income of $96 million for the year ended December 31, 2018. The $15 million increase was primarily due to
$135 million higher net interest income, primarily driven by $2.5 billion higher interest earning assets supported by the low cost
deposits acquired through our 2018 banking acquisitions. Partially offsetting higher net interest income was an $18 million
increase in provision for loan loss primarily due to the $29 million net charge off of the Live Well loan, partially offset by a
reduction in the allowance balance due to continued low levels of delinquency and charge-offs in our consumer portfolio. Other
noninterest income increased $20 million driven by higher deposit fees as result of our expanded customer base partially offset
by unfavorable gain on sale related to purchasing a higher volume of loans from the Mortgage Originations segment. Growth in
our business activities and average FTEs caused our operating costs to increase $96 million, primarily due to increases in
compensation and benefits, occupancy and equipment and core deposit intangibles.
2018 compared to 2017
The Community Banking segment reported net income of $96 million for the year ended December 31, 2018
compared to net income of $39 million for the year ended December 31, 2017. The $57 million increase was primarily due to
$76 million higher net interest income, primarily driven by a $1.2 billion increase in average commercial loans due to organic
growth in our CRE and C&I portfolios and enhanced by the acquisition of the warehouse business acquisition during 2018.
Through this growth the loan portfolios have retained high credit quality, resulting in $2.0 million lower provision year over
year. Noninterest income also increased $7 million, primarily from higher deposit fees driven by the branch acquisition, as well
as the sale of our wealth management business. To support our investments relating to growth, acquisitions, and the
diversification of our product offerings such as non-auto indirect lending, our operating costs increased $26 million, primarily
due to increases in compensation and benefits, occupancy and equipment and FDIC premiums.
34
Mortgage Originations
We are a leading national originator of residential first mortgages. Our Mortgage Origination segment originates and
acquires one-to-four family residential mortgage loans primarily to sell, or in some instances, to hold in our LHFI portfolio in
the Community Banking segment. We may hold certain mortgage loans we originate, including jumbo loans or non-conforming
loans, in our LHFI portfolio which will generate interest income in the Community Banking segment. The Community Banking
segment purchases these loans from the Mortgage Origination segment which results in the recognition of a gain on loan sales
by the Mortgage Origination segment and a loss on loan sales in the Community Banking segment. We utilize multiple
distribution channels to originate or acquire mortgage loans on a national scale.
Mortgage Originations
Summary of Operations
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Net gain on loan sales
Loan fees and charges
Loan administration (expense) income
Net return on mortgage servicing rights
Other noninterest income
Total noninterest income
Compensation and benefits
Commissions
Loan processing expense
Other noninterest expense
Total noninterest expense
Income before indirect overhead allocations and income taxes
Indirect overhead allocation
Provision for income taxes
Net income
Key Metrics
Mortgage rate lock commitments (fallout-adjusted) (1)
Efficiency Ratio
Return on average assets
Average number of FTE employees
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
$
$
$
106
2
104
364
69
(22)
6
10
427
114
109
35
88
346
185
(42)
29
114
30,000
65.2%
2.1%
1,506
$
$
$
128
2
126
212
63
(14)
36
16
313
105
78
25
58
266
173
(68)
22
83
30,308
60.4%
1.5%
1,517
129
4
125
278
67
(18)
22
21
370
100
72
26
65
263
232
(63)
59
110
32,527
52.7%
2.0%
1,440
$
$
$
(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.
2019 compared to 2018
The Mortgage Originations segment reported net income of $114 million for the year ended December 31, 2019,
compared to $83 million for the year ended December 31, 2018. The $31 million increase was primarily due to $2 billion
higher fallout-adjusted rate lock resulting in a $152 million increase in net gain on loan sales and higher gain on loan sale
margin. The volume increase was primarily due to positive overall mortgage market volume and increased refinancing activity
driven by lower interest rates. Net gain on loan sale margin increased primarily due to a higher retail mix and favorable
secondary execution. Higher net gain on loan sales were partially offset by a $22 million decrease in net interest income
resulting from lower average LHFS balances and a $30 million decrease in net return on MSRs primarily due to increased
runoff driven by lower interest rates. Additionally, non-interest expense increased $80 million primarily due to higher variable
expenses related to favorable overall mortgage production and higher retail mix.
35
2018 compared to 2017
The Mortgage Originations segment reported net income of $83 million for the year ended December 31, 2018,
compared to $110 million for the year ended December 31, 2017. The $27 million decrease was primarily due to a $66 million
decrease in net gain on loan sales driven by a 17 basis point decline in net gain on loan sale margin and $2.2 billion lower
fallout-adjusted rate locks. The decrease in volume was primarily driven by overall lower mortgage market volume.
Additionally, continued excess operating capacity across the industry and pricing competition continues to put pressure on our
mortgage business. Lower margin was primarily driven by secondary margin compression and a shift in channel mix toward the
lower margin, but lower cost delegated correspondent channel, partially offset by an improvement in securitization
performance. The decrease in net gain on loan sales was partially offset by a $14 million increase in net return on MSRs
primarily driven by lower prepayments and stronger valuations, along with a higher average MSR balance.
Mortgage origination distribution channels
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. Loans originated through the correspondent lending channel typically result in a lower gain on sale margin but also
have lower costs. At December 31, 2019, we had active relationships with more than 550 delegated correspondents and over
600 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. At December 31, 2019, we had
active broker relationships with nearly 900 mortgage brokers servicing borrowers in all 50 states.
Retail. In our distributed retail channel, loans are originated through our nationwide network of stand-alone home
loan centers. At December 31, 2019, we maintained almost 90 retail locations in 27 states representing the combined retail
branches of Flagstar Bank and its Opes Advisor's 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, which typically results in higher internal costs but also higher gain on sale margins.
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
At December 31,
2019
2018
2017
2016
2015
(Dollars in millions)
21,854 $
24,093 $
25,769 $
24,488 $
20,543
4,066
6,800
32,720 $
17,151 $
15,569
32,720 $
19,408 $
7,210
6,102
3,967
4,405
32,465 $
22,041 $
10,424
32,465 $
15,654 $
9,329
7,482
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
32,720 $
32,465 $
34,408 $
32,417 $
29,368
$
$
$
$
$
$
36
Mortgage Servicing
The Mortgage Servicing segment services loans when we hold the MSR asset, and subservices mortgage loans for
others through a scalable servicing platform on a fee for service basis. We may also collect ancillary fees and earn income
through the use of noninterest bearing escrows. The loans we service generate custodial deposits which provide a stable funding
source which supports interest-earning asset generation in the Community Bank and Mortgage Origination segments. Revenue
for serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and
the delinquency status of the underlying loans. The Mortgage Servicing segment also services residential mortgages for our
LHFI portfolio in the Community Banking segment and our own MSR portfolio in the Mortgage Originations segment for
which it earns intersegment revenue on a fee per loan basis.
Mortgage Servicing
Summary of Operations
Net interest income
Net interest income after provision for loan losses
Loan fees and charges
Loan administration income
Other noninterest income
Total noninterest income
Compensation and benefits
Loan processing expense
Other noninterest expense
Total noninterest expense
Income before indirect overhead allocations and income taxes
Indirect overhead allocation
Provision (benefit) for income taxes
Net income (loss)
Key Metrics
Efficiency Ratio
Return on average assets
Average number of residential loans serviced
Average number of FTE employees
2019 compared to 2018
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
$
$
16
16
32
124
—
156
28
36
59
123
49
(18)
6
25
$
$
$
7
7
25
69
—
94
19
26
44
89
12
11
11
15
39
12
66
16
22
39
77
—
(20)
(2)
(6)
$
(23)
(8)
(15)
72.0%
50.4%
87.7 %
(18.0)%
100.0 %
(41.7)%
975,851
562,419
405,568
480
228
199
The Mortgage Servicing segment reported a net income of $25 million for the year ended December 31, 2019,
compared to a net loss of $6 million for the year ended December 31, 2018. The $31 million increase in net income was
primarily driven by a 70 percent increase in the average number of loans serviced or sub-serviced, for the year ended
December 31, 2019 compared to the year ended December 31, 2018 as we continue to expand our servicing business. This
drove a $62 million increase in noninterest income and a $9 million increase in net interest income after provision for loan
losses as a result of higher average custodial balances, partially offset by $34 million higher noninterest expense to support
business growth.
37
2018 compared to 2017
The Mortgage Servicing segment reported a net loss of $6 million for the year ended December 31, 2018, compared to
a net loss of $15 million for the year ended December 31, 2017. The improvement was primarily due to growth in our
subservicing business, which increased by nearly 400,000 loans or 87 percent, for the year ended December 31, 2018 as
compared to the year ended December 31, 2017. The increase in loan servicing volume drove higher noninterest income,
including a $19 million increase in loan administration income and a $9 million increase in ancillary fees, offset by a decrease
in net interest income, driven by higher interest paid on custodial balances and an increase in noninterest expense to support the
growth in volume.
The following table presents residential loans serviced and the number of accounts associated with those loans.
December 31, 2019
December 31, 2018
December 31, 2017
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
Subserviced for others (2)
Serviced for others
Serviced for own loan portfolio (3)
Total residential loans serviced
$
$
194,638
24,003
9,536
918,662
$
146,040
705,149
$
105,469
66,526
21,592
7,438
88,434
57,401
228,177
1,090,657
$
175,070
850,984
$
65,864
25,073
7,013
97,950
309,814
103,137
29,493
442,444
(1) UPB, net of write downs, does not include premiums or discounts.
(2)
(3)
Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.
Includes LHFI (residential first mortgage and home equity), LHFS (residential first mortgage), loans with government guarantees (residential first
mortgage), and repossessed assets.
At December 31, 2019, the number of residential loans serviced and the UPB of those loans increased by 240,000 and
$53 billion, respectively, compared to December 31, 2018. Loans subserviced for others was the primary driver of the increase
in total residential loans serviced which grew by 214,000 loans and $49 billion UPB. We continue to grow our subservicing
business by onboarding non-Flagstar originated loans and through the sale of MSRs that were originated by Flagstar where we
continue to subservice the underlying loans. We retained subservicing on 93.7 percent of the $16.4 billion UPB of MSRs sold
during 2019. Our continued growth in our subservicing business and the strength of our platform has made us the 6th largest
subservicer in the nation.
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 updated FICO score
Average original LTV ratio
Housing Price Index LTV, as recalculated (1)
Delinquencies (UPB):
30-59 days past due
60-89 days past due
90 days or greater past due
Total past due
At December 31,
2019
2018
2017
(Dollars in millions)
$
$
$
228
$
39.9
4.39%
350
19
701
86.8%
79.1%
$
727
225
134
1,086
$
244
$
36.0
4.38%
352
13
697
88.6%
83.1%
535
153
126
814
$
$
243
28.8
4.05%
330
11
728
77.7%
73.3%
250
71
125
446
(1) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level FHFA data as of December 31, 2019.
38
Loans Subserviced for Others
The following table presents the UPB delinquency characteristics of the mortgage loans subserviced for others.
Delinquency Characteristics (UPB):
Current
30-59 days past due
60-89 days past due
90 days or greater past due
Total past due
Total subserviced for others
Other
At December 31,
2019
2018
2017
(Dollars in millions)
$
$
$
187,937 $
139,809 $
3,752
1,001
1,948
6,701 $
194,638 $
3,745
866
1,620
6,231 $
146,040 $
63,942
954.00
276
692
1,922
65,864
The Other segment includes the treasury functions, which include the impact of interest rate risk management, balance
sheet funding activities and the investment securities portfolios, as well as other expenses of a corporate nature, including
corporate staff, risk management, and legal expenses. In addition, the Other segment includes revenue and expenses not directly
assigned or allocated to the Community Banking, Mortgage Originations or Mortgage Servicing segments.
Other
Summary of Operations
Net interest income
Provision (benefit) for loan losses
Net interest income after provision (benefit) for loan losses
Net gain on loan sales
Loan fees and charges
Loan administration income
Net return on mortgage servicing rights
Other noninterest income
Total noninterest income
Compensation and benefits
Commissions
Loan processing expense
Other noninterest expense
Total noninterest expense
Income before indirect overhead allocations and income taxes
Indirect overhead allocation
Provision (benefit) for income taxes
Net income (loss)
Key Metrics
Average number of FTE employees
2019 compared to 2018
$
$
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
(9) $
(4)
(5)
—
—
(67)
—
65
(2)
135
—
2
6
143
(150)
101
(17)
(32) $
48 $
(12)
60
—
—
(29)
—
33
4
124
—
3
50
177
(113)
127
—
14 $
1,150
1,049
12
(2)
14
—
—
—
—
13
13
121
—
4
24
149
(122)
127
76
(71)
976
The Other segment reported net loss of $32 million for the year ended December 31, 2019, compared to net income of
$14 million for the year ended December 31, 2018. The $46 million decrease in net income was primarily due to a decrease in
net interest income as a result of the Bank’s overall asset sensitive position and the drop in rates in 2019 relative to the rising
rate environment throughout 2018. Additionally, the loan loss benefit for the twelve months ended December 31, 2018 was $8
million driven by ALLL estimate changes not allocated to any other segment.
39
2018 compared to 2017
The Other segment reported net income of $14 million for the year ended December 31, 2018, compared to net loss of
$71 million for the year ended December 31, 2017. The increase in net income was primarily due to the charge to the provision
for income taxes during the fourth quarter of 2017 of approximately $80 million, resulting from the new tax legislation that
required revaluation of our DTAs at a lower corporate statutory rate. In addition, net interest income increased $36 million
primarily due to $29 million of hedging gains reclassified from AOCI. Noninterest income also increased $9 million as the
result of higher dividend income on FHLB stock and a FHLB stock supplemental dividend which we received in the first
quarter of 2018. These increases were partially offset by an increase of $28 million in noninterest expense primarily due to
acquisition related expenses from the Wells Fargo branches and additional expenses to support business growth.
RISK MANAGEMENT
Certain risks are inherent in our business and include, but are not limited to, credit, regulatory compliance, legal,
reputation, liquidity, market, operational, and strategic. We continually invest 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 losses arising from these risks.
A discussion of risks affecting us can be found in the Risk Factors section included in Item 1A. of this Form 10-K.
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 manage credit risk using a thorough process designed to ensure we make prudent and consistent credit decisions.
The process was developed with a focus on utilizing risk-based limits and credit concentrations while emphasizing
diversification on a geographic, industry and customer level. The process utilizes documented underwriting guidelines,
comprehensive documentation standards, and ongoing portfolio monitoring including the timely review and resolution of
credits experiencing deterioration. These activities, along with the management of credit policies and credit officers’ delegated
authority, are centrally managed by our credit risk team.
We maintain credit limits, in compliance with regulatory requirements. Under the Home Owners Loan Act (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. This limit was $274 million as
of December 31, 2019. We maintain a more conservative maximum internal Bank credit limit than required by HOLA, of $100
million to any one borrower/obligor relationship, with the exception of warehouse borrower/obligor relationships; warehouse
borrower/obligor relationships have a higher internal Bank limit of $125 million as all advances are fully collateralized by
residential mortgage loans and we have a history of very low loss levels. We have a tracking and reporting process to monitor
lending concentration levels and all credit exposures to a single or related borrower that exceed $50 million must be approved
by the Board of Directors.
Our commercial loan portfolio has been built on our relationship-based lending strategy. We provide financing and
banking products to our commercial customers in our core banking footprint and will follow those established customer
relationships to meet their financing needs in areas outside of our footprint. We have also formed relationship lending on a
national scale through our home builder finance and warehouse lending businesses. At December 31, 2019, we had $7.2 billion
in our commercial loan portfolio with our home builder finance and warehouse lending businesses accounting for 52 percent of
the total. Of the remaining commercial loans in our portfolio, the majority of CRE and C&I loans were with customers who
have established relationships within our core banking footprint.
Credit risk within the commercial loan portfolio is managed using concentration limits based on line of business,
industry, geography, and product type. This is managed through the use of strict underwriting guidelines detailed in credit
policies, ongoing loan level reviews, monitoring of the concentration limits and continuous portfolio risk management
reporting. The commercial credit policy outlines the risks and underwriting requirements and provides a framework for all
credit and lending activities. Our commercial loan credit policies consider maturity and amortization terms, maximum LTVs,
minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pro-forma analysis
requirements and thresholds for product specific advance rates.
40
We typically originate loans on a recourse basis with full or partial guarantees. On a limited basis, we may approve
loans without recourse if sufficient consideration is provided in the loan structure. Non-recourse loans primarily have low
LTVs, strong cash flow coverage or other mitigating factors supporting the lack of a guaranty. These guidelines also require an
appraisal of pledged collateral prior to closing and on an as-needed basis when market conditions justify. We contract with a
variety of independent licensed professional firms to conduct appraisals that are in compliance with our internal commercial
credit and appraisal policies and regulatory requirements.
For our commercial real estate portfolio, including owner and nonowner-occupied and home builder finance lending,
we obtain independent appraisals as part of our underwriting and monitoring process. These appraisals are reviewed by an
internal appraisal group that is independent from our sales and credit teams.
The home builder finance group is a national relationship-based lending platform that focuses on markets with strong
housing fundamentals and higher population growth potential. The team primarily originates construction and development
loans. We generally lend in metropolitan areas or counties where verifiable market statistics and data are readily available to
support underwriting and ongoing monitoring. We also evaluate the jurisdictions & laws, demographic trends (age, population
and income), housing characteristics and economic indicators (unemployment, economic growth, household income trends) for
the geographies where our borrowers primarily operate. We engage independent licensed professionals to supply market studies
and feasibility reports, environmental assessments and project site inspections to complement the procedures we perform
internally. Further, we perform ongoing monitoring of the projects including periodic inspections of collateral and annual
portfolio and individual credit reviews.
The consumer loan portfolio has been built on strong underwriting criteria and within concentration limits intended to
diversify our risk profile. We have built our consumer loan portfolio by adding high quality first mortgage loans to our balance
sheet making up 64 percent of our total consumer loan portfolio. We have also grown our home equity loans and lines of credit
as well as our other consumer loan portfolio. We have also grown our home equity loans and lines of credit as well as our other
consumer loan portfolio.
Loans held-for-investment
The following table summarizes loans held-for-investment by category:
Consumer loans
Residential first mortgage
Home equity (1)
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
At December 31,
2019
2018
2017
(Dollars in millions)
$
3,154 $
2,999 $
1,024
729
4,907
2,828
1,634
2,760
7,222
731
314
4,044
2,152
1,433
1,459
5,044
Total loans held-for-investment
$
12,129 $
9,088 $
(1)
Includes second mortgages, HELOCs, and HELOANs.
2,754
664
25
3,443
1,932
1,196
1,142
4,270
7,713
We continue to strengthen our Community Banking segment by growing interest earning assets. Our commercial loan
portfolio has grown $2.2 billion, or 43 percent, since December 31, 2018, led by a $1.3 billion increase in our warehouse loans.
Our consumer loan portfolio has increased $863 million, or 21.3 percent, since December 31, 2018, led by a $415 million
increase in other consumer loans primarily driven by our non-auto indirect lending portfolio.
41
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
Loan amortization / prepayments
All other activity
Balance, end of year
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
9,088 $
7,713 $
3,268
6,381
(6,480)
(128)
2,113
3,973
(4,425)
(286)
12,129 $
9,088 $
6,065
2,170
2,982
(3,373)
(131)
7,713
$
$
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. We typically hold certain mortgage loans in LHFI that do not qualify for sale to
the Agencies or that have an attractive yield and risk profile. The LTV requirements on our residential first mortgage loans vary
depending on occupancy, property type, loan amount, and FICO scores. Loans with LTVs exceeding 80 percent are required to
obtain mortgage insurance.
The following table presents our total residential first mortgage LHFI by major category:
At December 31,
2019
2018
(Dollars in millions)
Estimated LTVs (1)
Less than 80% and refreshed FICO scores (2):
Equal to or greater than 660
Less than 660
80% and greater and refreshed FICO scores (2):
Equal to or greater than 660
Less than 660
U.S. government guaranteed
Total
Geographic region
California
Michigan
Texas
Washington
Florida
Illinois
Colorado
Arizona
New York
Maryland
Others
Total
$
$
$
$
2,263 $
93
683
111
4
3,154 $
1,205 $
442
214
205
181
95
84
79
68
49
532
3,154 $
2,462
54
448
29
6
2,999
1,238
314
193
195
195
103
72
72
73
57
487
2,999
(1) LTVs reflect loan balance at the date reported, as a percentage of property values as appraised at loan origination.
(2) FICO scores are updated at least on a quarterly basis or more frequently if available.
42
The following table presents our total residential first mortgage LHFI as of December 31, 2019, by year of origination:
Residential first mortgage loans
Percent of total
2019
2018
2017
2016
(Dollars in millions)
2015 and
prior
Total
$
896
$
457
$
543
$
465
$
793
$ 3,154
28.4%
14.5%
17.2%
14.7%
25.1%
100.0%
Home equity. Our home equity portfolio includes HELOANs, second mortgage loans, and HELOCs. These loans
require full documentation and are underwritten and priced in an effort to ensure 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. Second mortgage loans/HELOANS are fixed rate
loans and are available with terms up to 20 years. HELOC loans are variable-rate loans that contain a 10-year interest only draw
period followed by a 20-year amortizing period. At December 31, 2019, HELOCs and HELOANs in a first lien position
increased to $172 million compared to $129 million at December 31, 2018.
Other consumer loans. Our other consumer loan portfolio consists of secured and unsecured loans originated through
our branches and our indirect lending business. At December 31, 2019, other consumer loans increased to $729 million
compared to $314 million at December 31, 2018. This increase is primarily due to growth in our non-auto, boat and recreational
vehicle indirect lending business.
Commercial real estate loans. The commercial real estate portfolio contains loans collateralized by diversified
property types which are primarily income producing in the normal course of business. The majority of our retail exposure is to
neighborhood strip centers and single tenant locations, which include drug stores. 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. At December 31, 2019, our
average LTV and average debt service coverage for our CRE portfolio was 49 percent and 2.51 times, respectively. Our CRE
loans earn interest at a variable rate.
We have established a national home builder finance program and at December 31, 2019, our commercial portfolio
contained $2 billion in commitments, with $989 million in outstanding home builder loans. The majority of these loans are
collateralized and included in our CRE portfolio while the remaining loans are unsecured and included in our C&I portfolio.
The following table presents our total CRE LHFI by collateral location and collateral type:
December 31, 2019
Home Builder
Owner occupied
Retail (2)
Multi family
Office
Hotel/motel
Senior Living facility
Industrial
Parking Garage/lot
Single family residence (1)
Shopping mall
Non Profit
Land - Residential (3)
All other (4)
Total
MI
TX
CA
CO
FL
Other
Total
(Dollars in millions)
$
26
$
243
$
114
$
166
$
108
$
203
$
328
188
153
166
112
57
51
10
2
3
1
4
12
4
—
51
18
17
26
—
9
—
—
—
—
23
25
6
15
16
24
12
1
14
2
4
10
—
4
4
—
—
—
—
—
—
—
1
—
2
14
—
3
2
—
—
1
1
—
—
3
14
6
54
119
134
54
45
50
12
35
—
—
3
6
37
860
425
317
360
256
198
133
76
56
2
17
10
28
90
% by
collateral
type
30.4%
15.0%
11.2%
12.7%
9.1%
7.0%
4.7%
2.7%
2.0%
0.1%
0.6%
0.3%
1.0%
3.2%
$
1,113
$
391
$
243
$
177
$
152
$
752
$
2,828
100.0%
Percent by state
39.4%
13.8%
8.6%
8.6%
5.4%
26.6%
100.0%
(1)
(2)
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
43
Includes home builder loans secured by land. Land residential includes development and unimproved vacant land.
(3)
(4) All other primarily includes: parking garage, mini-storage facilities, data centers, movie theater, etc.
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 1.2. The majority of our
C&I loans earn interest at a variable rate.
The following table presents our total C&I LHFI by borrower's geographic location and industry type:
% by
industry
24.6%
20.6%
17.5%
9.9%
8.3%
7.9%
4.9%
4.7%
1.2%
0.5%
MI
OH
NY
FL
CT
LA
IN
WI
CA
TX
Other
Total
December 31, 2019
Financial & Insurance
$
32
$
Services
Manufacturing
Distribution
Rental & Leasing
Home Builder Finance
Government & Education
Healthcare
Servicing Advances
Commodities
Total
Percent by state
100
165
131
82
—
32
2
—
3
$ 547
$
22
2
29
2
17
3
—
1
—
—
76
$
$
73
—
—
—
—
2
—
1
—
—
76
$
$
71
2
—
—
—
—
—
1
—
—
74
$
$
5
43
—
—
—
—
21
—
—
—
69
$
$
16
17
—
—
—
27
—
—
—
—
60
$
15
$
9
1
2
—
—
22
1
—
1
51
$
$
5
—
8
—
—
—
—
19
—
—
32
$
20
41
6
11
—
16
6
14
—
—
$
32
28
13
—
—
76
—
8
—
—
$ 110
$ 401
94
65
16
36
4
—
30
19
4
336
287
162
135
128
81
77
19
8
33.5%
4.7%
4.6%
4.6%
4.2%
3.7%
3.2%
2.0%
7.0%
9.5% 23.1% 100.0%
$ 114
$ 157
$ 378
$1,634
100.0%
Warehouse lending. We have a national platform with relationship managers across the country. 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.
Underlying mortgage loans are predominantly originated using the Agencies' underwriting standards. The guideline for
debt to tangible net worth is 15 to 1. The aggregate committed amount of adjustable-rate warehouse lines of credit granted to
other mortgage lenders at December 31, 2019 was $4.8 billion, of which $2.8 billion was outstanding, compared to $3.8 billion
at December 31, 2018, of which $1.5 billion was outstanding.
44
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
December 31, 2019
Within 1 Year
1 Year to 5 Years
Over 5 Years
Totals (1)
(Dollars in millions)
$
$
$
$
11 $
7
31
29
51
129 $
60 $
13
878
445
2,880
4,276 $
50 $
33
137
103
206
529 $
263 $
61
1,826
842
—
2,992 $
334 $
87
539
—
91
1,051 $
2,409 $
800
—
—
—
3,209 $
395
127
707
132
348
1,709
2,732
874
2,704
1,287
2,880
10,477
(1) UPB, net of write downs, does not include premiums or discounts.
Credit Quality
Trends in certain credit quality characteristics in our loan portfolios, remain strong and are a result of our focus on
effectively managing credit risk through our careful underwriting standards and processes. 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.
45
Nonperforming Assets
The following table sets forth certain information about our nonperforming assets:
LHFI
Consumer Loans
Residential first mortgages
Home equity
Other Consumer
Commercial Loans
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
Total nonperforming assets
Nonperforming assets to total assets (2)
Nonperforming LHFI and TDRs to LHFI
Nonperforming assets to LHFI and repossessed
assets (2)
(1)
(2) Ratio excludes LHFS.
At December 31,
2019
2018
2017
2016
2015
(Dollars in millions)
$
$
$
13
$
11 $
12 $
18 $
2
1
—
—
16
8
2
10
26
10
5
41
1
—
—
—
1
—
—
—
4
—
—
—
$
12 $
13 $
22 $
8
2
10
22
7
10
12
4
16
29
8
9
11
7
18
40
14
6
$
39 $
46 $
60 $
27
2
—
—
2
31
27
8
35
66
17
12
95
0.15%
0.21%
0.30%
0.16 %
0.24 %
0.32 %
0.22 %
0.38 %
0.48 %
0.39 %
0.67 %
0.90 %
0.61 %
1.05 %
1.32 %
Includes less than 90 days past due performing loans placed on nonaccrual. Interest is not being accrued on these loans.
At December 31, 2019, we had $41 million of nonperforming assets compared to $39 million of nonperforming assets
at December 31, 2018.
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 consumer loans
Total performing loans past due 30-89 days
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
$
$
9 $
1
4
14
14 $
6 $
1
—
7
7 $
4
1
—
5
5
As a result of our continued focus on growing our loan portfolio with high quality loans, early stage delinquencies
remained low as loans 30 to 89 days past due were $14 million and $7 million at December 31, 2019 and December 31, 2018,
respectively.
46
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. Performing TDRs are not
considered to be nonaccrual so long as we believe that all contractual principal and interest due under the restructured terms
will be collected.
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
ALLL on consumer TDR loans
$
$
$
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
20 $
22 $
18
38
3
7
10
48 $
8 $
22
44
3
7
10
54 $
10 $
19
24
43
5
11
16
59
13
At December 31, 2019, our total TDR loans decreased to $48 million compared to $54 million at December 31, 2018,
primarily due to principal payments and payoffs out-pacing new additions. Of our total TDR loans, 79 percent were in
performing status at December 31, 2019. For further information, see Note 4 - Loans Held-for-Investment.
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 $107 million and $128 million at December 31, 2019 and 2018, respectively. The decrease from
December 31, 2018 was primarily driven by continued strong credit quality, including low levels of net charge-offs and
delinquencies, potentially offset by growth in the LHFI portfolio.
The ALLL as a percentage of LHFI decreased to 0.9 percent as of December 31, 2019 from 1.4 percent as of
December 31, 2018. This decrease is attributable to loan growth of $3.0 billion UPB, consisting of high credit quality assets in
both the consumer and commercial loan portfolios, including growth in our lower risk, fully collateralized warehouse portfolio,
in addition to sustained low level of charge-offs and delinquencies. At December 31, 2019, both our consumer loan portfolio
and our commercial loan portfolio had a 0.9 percent allowance coverage.
47
The following table sets forth certain information regarding the allocation of our ALLL to each loan category:
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.
December 31, 2019
Investment
Loan Portfolio
Percent of
Portfolio
Allowance
Amount
(Dollars in millions)
Allowance as a
Percentage of
Loan Portfolio
$
$
3,145
1,021
729
4,895
2,828
1,634
2,760
7,222
12,117
26.0% $
8.4%
6.0%
40.4%
23.3%
13.5%
22.8%
59.6%
100.0% $
22
14
6
42
38
22
5
65
107
0.7%
1.4%
0.8%
0.9%
1.3%
1.3%
0.2%
0.9%
0.9%
The following tables set forth certain information regarding our ALLL and the ALLL allocation over the past five years:
At December 31,
2019
2018
2017
2016
2015
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)
$
22
14
6
42
38
22
5
65
0.2% $
0.1%
0.1%
0.4%
0.3%
0.2%
—%
0.5%
38
15
3
56
48
18
6
72
0.4% $
0.2%
—%
0.6%
0.5%
0.2%
0.1%
0.8%
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% $
0.4%
—%
1.5%
0.5%
0.3%
0.1%
0.9%
116
32
2
150
18
13
6
37
1.9%
0.5%
—%
2.4%
0.3%
0.2%
0.1%
0.6%
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.
107
$
0.9% $
128
1.4% $
140
1.8% $
142
2.4% $
187
3.0%
48
The following table presents changes in our ALLL:
Beginning balance
Provision (benefit) for loan losses (1)
$
$
128
18
(Dollars in millions)
$
142
6
$
140
(8)
$
187
(15)
For the Years Ended December 31,
2019
2018
2017
2016
2015
Charge-offs
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 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
Net charge-off to LHFI ratio (2)
$
(3)
(2)
(7)
(12)
—
(31)
—
(31)
(43)
1
2
—
3
—
1
1
4
(39)
107
(4)
(2)
(2)
(8)
—
—
—
—
(8)
2
1
1
4
(8)
(3)
(2)
(13)
(1)
—
—
(1)
(14)
1
2
1
4
—
—
—
4
(4)
128
$
1
1
2
6
(8)
140
$
$
(29)
(4)
(3)
(36)
—
—
—
—
(36)
2
—
3
5
1
—
1
6
(30)
142
$
297
(19)
(87)
(7)
(4)
(98)
—
(3)
—
(3)
(101)
3
2
3
8
2
—
2
10
(91)
187
0.32%
0.04%
0.12%
0.52%
1.85%
(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, 2017. There was $1 million provision for loan losses for repossessed loans with government guarantees
recorded during the years ended December 31, 2019, 2018, 2016, and 2015.
(2) Excludes loans carried at fair value.
The following table provides information on our charge-offs, net of recoveries:
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
For the Years Ended December 31,
2019
2018
2017
2016
2015
$
$
39 $
2
—
37 $
(Dollars in millions)
8 $
4 $
4
2
—
2 $
1
3 $
30 $
14
8
8 $
91
3
69
19
Net charge-offs for the year ended December 31, 2019 increased to $39 million compared to $4 million for the year
ended December 31, 2018 due to the charge-off of the Live Well commercial loan in the second quarter 2019. As a percentage
of average LHFI, net charge-offs for the year ended December 31, 2019 increased to 0.32 percent from 0.04 percent for the year
ended December 31, 2018.
49
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
Our Asset/Liability Committee ("ALCO"), which is composed of our executive officers and certain members of other
management, monitors interest rate risk on an on-going basis in accordance with policies approved by our Board. 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 or minimize risk.
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 relative 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
simulation, as of the periods presented, interest rates have been adjusted by instantaneous parallel changes rather than in a ramp
simulation which applies interest rate changes over time. All rates, short-term and long-term, are changed by the same amount
(e.g. plus or minus 100 basis points) resulting in the shape of the yield curve remaining unchanged. For the scenarios simulated,
our established Board policy limit on the change in net interest income, is 7 percent. At December 31, 2019 and December 31,
2018, the results of the simulation were within the Board policy limits.
Scenario
100
Constant
(100)
Scenario
100
Constant
(100)
December 31, 2019
Net interest Income
$ Change
% Change
(Dollars in millions)
$592
559
520
$34
—
(39)
6.0%
—%
(6.9)%
December 31, 2018
Net interest Income
$ Change
% Change
(Dollars in millions)
$491
478
465
$13
—
(13)
2.7%
—%
(2.7)%
In the net interest income simulations, our balance sheet exhibits asset sensitivity. When interest rates rise our net
interest income increases. Conversely, when interest rates fall our net interest income decreases. At December 31, 2019, the $81
million increase in the net interest income in the constant scenario as compared to December 31, 2018, was primarily driven by
growth in our net interest earning assets along with a decrease in our cost of funding.
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
50
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 Economic Value of Equity (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 provides a more comprehensive analysis of interest rate risk exposure than either Net
Interest Income Sensitivity or EVE 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.
The following table is a summary of the changes in our EVE that are projected to result from hypothetical changes in
market interest rates as well as our internal policy limits for changes in our EVE based on the different scenarios. The interest
rates, as of the dates presented, are adjusted by instantaneous parallel rate increases and decreases as indicated in the scenarios
shown in the table below.
December 31, 2019
December 31, 2018
Scenario
EVE
EVE%
$ Change % Change
Scenario
EVE
EVE%
$ Change % Change
Policy
Limits
$
300
200
100
Current
(100)
3,147
3,152
3,103
2,997
2,832
13.6% $
13.7%
13.5%
13.0%
12.3%
(Dollars in millions)
$
5.0 %
5.2 %
3.5 %
— %
300
200
100
Current
150
155
106
—
(165)
(5.5)%
(100)
1,617
1,720
1,794
1,840
1,849
8.8% $
9.4%
9.8%
10.0%
10.1%
(223)
(120)
(46)
—
9
(12.1)%
(6.5)%
(2.5)%
— %
0.5 %
22.5%
15.0%
7.5%
—%
7.5%
Our balance sheet exhibits asset sensitivity in a rising interest rate scenario. The increase in EVE is the result of the
amount of assets that would be expected to reprice exceeding the amount of liabilities repriced in the +200 scenario. At
December 31, 2019 and December 31, 2018, for each scenario shown, the percentage change in our EVE is within our internal
policy limit.
Derivative financial instruments
As a part of our risk management strategy, we use derivative financial instruments to minimize fluctuation in earnings
caused by market risk. We use forward sales commitments to hedge our unclosed mortgage origination pipeline and funded
mortgage LHFS. 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, inversely, a 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, which is
based on a statistical analysis of our actual rate lock fallout history. For further information, see Note 11 - Derivative Financial
Instruments and Note 20 - Fair Value Measurements.
51
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, including interest rate swaps and swaptions, 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. For further information, see Note 10 - Mortgage
Servicing Rights and Note 11 - Derivative Financial Instruments.
Net return (loss) on mortgage servicing rights
Servicing fees, ancillary income and late fees (1)
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model
changes, and other
Changes in fair value
Gain (loss) on MSR derivatives (2)
Net transaction costs
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
$
96 $
65 $
(89)
(76)
76
(1)
(20)
2
(5)
(6)
Total return (loss) included in net return on mortgage servicing rights
$
6 $
36 $
60
(31)
9
(8)
(8)
22
Liquidity Risk
Liquidity risk is the risk that we will not have sufficient funds, at a reasonable cost, to meet current and future cash
flow needs as they become due. The liquidity of a financial institution reflects its ability to, at a reasonable cost, 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 currently obtains its liquidity primarily from dividends from the Bank. The primary uses of the
Company's liquidity are debt service, operating expenses, the repurchase of common stock and the payment of cash dividends,
which have been increased to $0.05 per share in the first quarter of 2020. The Company holds $250 million of senior notes
which are scheduled to mature in approximately 1.5 years on July 15, 2021. At December 31, 2019, the Company held $233
million of cash at the Bank which covers 4.5 years of future operating cash outflows for debt interest payments, dividend
payments and operating expenses.
The OCC and the FRB regulate all capital distributions made by the Bank, directly or indirectly, to the holding
company, including dividend payments. Whether an application or notice 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, or the Bank would not be at least adequately capitalized
following the dividend. Additional restrictions on dividends apply if the Bank fails the QTL test. At December 31, 2019, as
reported to the OCC, we passed the QTL test. For the year ended December 31, 2019, we paid dividends of $100 million from
the Bank to the Bancorp. At December 31, 2019, the Bank is able to pay dividends without regulatory approval up to
approximately $318 million.
Bank Liquidity
Our primary sources of funding are deposits from retail and government customers, custodial deposits related to loans
we service and FHLB borrowings. We use the FHLB of Indianapolis as a significant source for funding our residential
mortgage origination business due to the flexibility in terms which allows us to borrow or repay borrowings as daily cash needs
require. 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.
52
Further, other sources of liquidity include our LHFS portfolio and unencumbered investment securities. We primarily
originate agency-eligible LHFS and therefore the majority of new residential first mortgage loan originations are readily
convertible to cash, either by selling them as part of our monthly agency sales, RMBS, private party whole loan sales, or by
pledging them to the FHLB and borrowing against them. In addition, we have the ability to sell unencumbered investment
securities or use them as collateral. At December 31, 2019, we had $2.5 billion available in unencumbered investment
securities.
Our primary measure of liquidity is a ratio of ready liquidity to volatile funding, the volatile funds coverage
ratio(“VFCR”). The VFCR is a liquidity coverage ratio that is customized to our business and ensures we have adequate
coverage to meet our liquidity needs during times of liquidity stress. Volatile funds are the portion of the Bank’s funding
identified as being at a higher risk of runoff in times of stress. Ready liquidity consists of cash on reserve at the Federal Reserve
and unused borrowing capacity provided by the loan and investments portfolios. The VFCR is calculated, reported, and
forecasted daily as part of our liquidity management framework.
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 loans and LHFS may be funded with FHLB borrowings and custodial
deposits. Warehouse loans are typically more liquid than other loan assets, as loans are paid within a short amount of time,
when the lender sells the loan to an outside investor or, in some instances, to the Bank. 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 was 130.7 percent at December 31, 2019. Excluding
warehouse loans, which have draws that typically pay off within a few weeks, and custodial deposits, which represent mortgage
escrow accounts on deposit with the Bank, the HFI loan-to-deposit ratio was 102.4 percent at December 31, 2019.
As governed and defined by our Board 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 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 believe 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.
Management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity.
The following table presents primary sources of funding as of the dates indicated:
Retail deposits
Government deposits
Wholesale deposits
Custodial deposits
Total deposits
Federal Home Loan Bank advances and other short-term debt
Other long-term debt
Total borrowed funds
Total funding
December 31, 2019
December 31, 2018
(Dollars in millions)
Change
$
9,164 $
8,854 $
1,213
633
4,136
15,146
4,815
496
5,311
1,202
583
1,741
12,380
3,394
495
3,889
$
20,457 $
16,269 $
310
11
50
2,395
2,766
1,421
1
1,422
4,188
53
The following table presents certain liquidity sources and borrowing capacity as of the dates indicated:
Federal Home Loan Bank advances
Outstanding Advances
Borrowing capacity
Line of credit
Collateralized borrowing capacity
Total unused borrowing capacity
FRB discount window
Collateralized borrowing capacity
Unencumbered investment securities
Agency - Commercial
Agency - Residential
Municipal obligations
Corporate debt obligations
Other MBS
December 31, 2019
December 31, 2018
(Dollars in millions)
Change
$
4,345 $
3,143 $
1,202
30
2,345
2,375
30
2,810
2,840
758
409
1,257
1,180
26
77
1
2,541 $
737
475
28
41
—
1,281 $
—
(465)
(465)
349
520
705
(2)
36
1
1,260
Total unencumbered investment securities
$
Deposits
The following table sets forth the composition of our deposits:
Retail deposits
Branch retail deposits
Savings accounts
$
Certificates of deposit/CDARS (1)
Demand deposit accounts
Money market demand accounts
Total branch retail deposits
Commercial deposits (2)
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificates of deposit/CDARS (1)
Total commercial deposits
Total retail deposits
Government deposits
Savings accounts
Demand deposit accounts
Certificates of deposit/CDARS (1)
Total government deposits
Custodial deposits (3)
Wholesale deposits
$
$
2019
At December 31,
2018
2017
Change
Balance
% of
Deposits
Balance
% of
Deposits
Balance
% of
Deposits
2019 vs.
2018
2018 vs.
2017
(Dollars in millions)
3,030
2,353
1,318
495
7,196
1,438
342
188
—
1,968
9,164
495
360
358
1,213
4,136
633
20.0% $
15.5%
8.7%
3.3%
47.5%
9.5 %
2.3 %
1.2%
—%
13.0%
60.5% $
3.3% $
2.4%
2.4%
8.0%
27.3%
4.2%
2,812
2,387
1,297
628
7,124
22.7 % $
19.3%
10.5 %
5.1 %
57.5%
1,243
10.0 %
314
173
—
1,730
8,854
567
326
309
1,202
1,741
583
2.5 %
1.4 %
—%
13.9%
4.6% $
2.6%
2.5%
9.7%
14.1 %
4.7 %
931
3,482
124
1,491
6,028
288
71
69
2
430
16.7% $
(133)
10.4 % $
39.0% $
1.4 % $
67.5%
3.2 %
0.8 %
0.8 %
—%
4.8%
218
$
1,881
(34)
21
72
—
195
28
15
—
238
310
(1,095)
1,173
(863)
1,096
955
243
104
(2)
1,300
2,396
$
251
446
376
1,073
45
1,358
8,934
—%
2.8 % $
(72) $
5.0 %
4.2 %
12.0 %
0.5%
15.2%
34
49
11
2,395
50
316
(120)
(67)
129
1,696
(775)
100.0% $
2,766
$
3,446
71.5% $
6,458
72.3 % $
Total deposits (4)
$
15,146
100.0% $
12,380
100.0% $
(1) The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.7 billion, $1.9 billion, and $1.4 billion at December 31,
2019, December 31, 2018, and December 31, 2017 respectively.
Includes deposits from commercial and business banking customers.
(2)
(3) Represents investor custodial accounts and escrows controlled by us in connection with loans serviced or subserviced for others and that have been placed on deposit with
the Bank.
54
(4) Total exposure to uninsured deposits over $250,000 was approximately $2.8 billion and $2.8 billion at December 31, 2019 and December 31, 2018, respectively.
Total deposits increased $2.8 billion, or 22 percent, at December 31, 2019, compared to December 31, 2018, primarily
due to the rise in custodial deposits increasing $2.4 billion, driven by a 168 percent increase in subserviced accounts.
We utilize local governmental agencies and other public units, as an additional source for deposit funding. We are not
required to hold collateral against our government deposits from Michigan government entities as allowed by the Michigan
Business and Growth Fund. At December 31, 2019, we were required to hold collateral for our government deposits in
California that were in excess of $250,000. In Indiana, Wisconsin and Ohio, we may be required to hold collateral against our
government deposits based on a variety of factors including, but not limited to, the size of individual deposits and external bank
ratings. At December 31, 2019, collateral held on government deposits in these states was de minimis. Government deposit
accounts included $358 million of certificates of deposit with maturities typically less than one year and $855 million in
checking and savings accounts at December 31, 2019.
Custodial deposits arise due to our servicing or subservicing of loans for others and represent the investor custodial
accounts on deposit with the Bank. These deposits require us to credit the MSR owner interest against subservicing income.
This cost is a component of net loan administration income.
We participate in the CDARS program, through which certain customer CDs are exchanged for CDs of similar
amounts from other participating banks and customers may receive FDIC insurance up to $50 million. This program helps the
Bank secure larger deposits and attract and retain customers. At December 31, 2019, we had $133 million of total CDs enrolled
in the CDARS program, a decrease of $44 million from December 31, 2018.
FHLB Advances
The FHLB - Indianapolis provides loans, also referred to as advances, on a fully collateralized basis, to savings banks
and other member financial institutions. We are required to maintain a minimum amount of qualifying collateral securing FHLB
advances. 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.
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 current portfolio includes short-term fixed rate advances and long-term fixed rate advances.
We are currently authorized through a resolution of our Board 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. As of December 31, 2019, our Board has authorized and approved a line of credit with the FHLB of up to $10.0 billion,
which is further limited based on our total assets and qualified collateral, as determined by the FHLB. At December 31, 2019,
we had $4.3 billion of advances outstanding and an additional $2.5 billion of collateralized borrowing capacity available at the
FHLB.
Federal Reserve Discount Window
We have arrangements with the FRB of Chicago to borrow from its discount window. The discount window is a
borrowing facility that we may utilize 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, 2019, we pledged collateral, which included commercial loans, municipal bonds, and agency bonds,
to the Federal Reserve Discount Window amounting to $788 million with a lendable value of $758 million. At December 31,
2018, we pledged collateral to the Federal Reserve Discount Window amounting to $488 million with a lendable value of $409
million. We do not typically utilize this available funding source and at December 31, 2019 and December 31, 2018, we had no
borrowings outstanding against this line of credit.
55
Other Unsecured Borrowings
We have access to overnight federal funds purchased lines with other Federal Reserve member institutions. We utilize
this source of funding for short-term liquidity needs, depending on the availability and cost of our other funding sources. At
December 31, 2019, we had $0.5 billion of borrowings outstanding under this source of funding. Additional borrowing capacity
under this and other sources of funding can vary depending on market conditions.
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, 2019, we are current on all interest
payments.
For further information, see Note 13 - Borrowings.
Contractual Obligations
We have various financial obligations, some of which are 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, 2019, and the future periods in which the
obligations are expected to be settled in cash:
Deposits without stated maturities
Short-term FHLB advances and other borrowings
Certificates of deposits
Long-term FHLB advances
Senior notes
Trust preferred securities
Operating leases
DOJ litigation settlement
Other (1)
Total
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
Total
$
$
7,665 $
3,695
2,312
—
—
—
11
—
20
13,703 $
(Dollars in millions)
— $
—
51
350
—
—
4
—
6
411 $
— $
—
972
—
248
—
12
—
16
1,248 $
— $
—
10
300
—
247
2
118
1
678 $
7,665
3,695
3,345
650
248
247
29
118
43
16,040
(1) Includes contracts with vendors and commitments to various limited partnerships that invest in housing projects qualifying for the low income
housing tax credit.
Operational Risk
Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed
internal processes or systems, human errors or misconduct, or adverse external events 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.
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. In the event of a government guaranteed loan borrower default, Flagstar has a unilateral option
to repurchase loans sold to GNMA that are 90 days past due and recover losses through a claims process from the insurer.
56
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. Additionally, if the Bank cures
the loan, it can be re-sold to GNMA. If not, the Bank can begin the process of collecting the government guarantee by filing a
claim in accordance with established guidelines. Certain loans within our portfolio may be subject to indemnifications and
insurance limits which expose us to limited credit risk.
During the year ended December 31, 2019, we experienced net charge-offs of $2 million related to loans with
government guarantees and have reserved for the remaining risks within other assets and as a component of our ALLL on
residential first mortgages. These additional expenses or charges 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 $736 million at December 31, 2019, as compared to $392
million at December 31, 2018. The increase is primarily due to new purchases out-pacing loans transferred to LHFS and resold
to Ginnie Mae.
For further information, see Note 5 - Loans with Government Guarantees.
Regulatory Risks
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. At December 31, 2019, the Company had a Tier 1 Leverage Capital
Ratio of 7.71 percent and the fair value of this liability was $35 million.
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 again 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 most mid-size banks, we expect our Tier 1 Leverage Capital Ratio to be impacted by (a) future
dividends from the Bank to Bancorp and (b) continued growth in earning assets at the Bank 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. We
consider the assumptions a market participant would make to transfer the liability and evaluate the potential ways we might
satisfy the Settlement Agreement and our estimates of the likelihood of these outcomes, which may change over time. The fair
value of the liability is subject to significant uncertainty and is impacted by forecasted estimates of the timing of potential
payments, which are impacted by 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, the likelihood of the Bank or Bancorp being a party to a
57
business combination resulting in terms which would require payments to commence, or any other means by which a payment
could be made. For further information on the fair value to the liability, see Note 20 - Fair Value Measurements.
Capital
Management actively reviews and manages our capital position and strategy. We conduct quarterly capital stress tests
and capital adequacy assessments which utilize internally defined scenarios. These analyses are designed to help management
and the Board better understand the integrated sensitivity of various risk exposures through quantifying the potential financial
and capital impacts of hypothetical stressful events and scenarios. 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 7.57 percent at December 31, 2019 providing a 257 basis
point stress buffer above the minimum level needed to be considered “well-capitalized.” Additionally, total risk-based capital to
RWA was 11.52 percent at December 31, 2019 providing a 152 basis point stress buffer above the minimum level needed to be
considered "well-capitalized".
Dodd-Frank Act Section 171, commonly known as the Collins Amendment, 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 under the Federal Reserve. Under the amendment, 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, unless we complete an acquisition of a depository
institution holding company or a depository institution, and if our total assets remain greater than $15 billion in the quarter in
which the acquisition occurs. Should that event occur, our trust preferred securities would be included in Tier 2 capital.
Regulatory Capital Simplification
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 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
individual limit on MSRs and temporary difference DTAs 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 and it is uncertain when the rules will be
issued in their final form. We are currently managing our capital in anticipation of the approval of the proposed rule.
58
For the period presented, the following table sets forth our capital ratios under the current rules and proposed capital
simplification rules, as well as our excess capital over well-capitalized minimums under both rules.
Flagstar Bancorp
Actual
Well-Capitalized Under
Prompt Corrective
Action Provisions
Under Proposed Capital
Simplification
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in millions)
Excess Capital Over
Well-Capitalized Minimum
(1)
Current
Rule
Capital
Simplification
Rules
December 31, 2019
Tier 1 leverage capital
(to adjusted avg. total
assets)
Common equity Tier 1
capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
$
1,720
7.57% $
1,136
5.0% $
1,826
8.00% $
584 $
1,480
1,720
1,830
9.32%
10.83%
11.52%
1,033
1,271
1,589
6.5%
8.0%
10.0%
1,586
1,826
1,936
9.62%
11.07%
11.74%
447
449
241
713
565
616
495
(1) Excess capital is the difference between the actual capital ratios under either the current rule or the proposed capital simplification rules and the
well-capitalized minimum ratio, multiplied by the relevant asset base.
As presented in the table above, our constraining capital ratio is our total capital to risk weighted assets at 11.52
percent. It would take a $241 million after-tax loss, with the balance sheet remaining constant, for our total risk-based capital
ratio to fall below the level considered to be "well-capitalized" and an after-tax loss of $495 million, under the proposed capital
simplification rules.
In preparation for the NPR, the Basel III implementation phase-in was 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, 2019, we had $291 million in MSRs, $42 million in DTAs arising from temporary differences and
no material investments in unconsolidated financial institutions or minority interest. This final rule will maintain the 2017
transition provisions for certain items for non-advanced approach banks. For additional information on our capital
requirements, see Note 18 - Regulatory Capital.
59
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures such as
tangible book value per share, tangible common equity to assets ratio, adjusted net income, adjusted diluted earnings per share,
adjusted net interest income, adjusted net interest margin and adjusted interest rate spread. 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.
Tangible book value per share, tangible common equity to assets ratio, adjusted net income, adjusted diluted earnings per
share, adjusted net interest income, adjusted net interest margin, adjusted interest rate spread and adjusted noninterest
expense.
The Company believes that tangible book value per share, tangible common equity to assets ratio, adjusted earnings,
and adjusted diluted earnings per share provides a meaningful representation of its operating performance on an ongoing basis.
Management uses these measures to assess performance of the Company against its peers and evaluate overall performance.
The Company believes these non-GAAP financial measures provide useful information for investors, securities analysts and
others because it provides a tool to evaluate the Company’s performance on an ongoing basis and compared to its peers.
The following tables provide a reconciliation of non-GAAP financial measures.
Total stockholders' equity
Less: Preferred stock
Less: Goodwill and intangibles
Tangible book value
Number of common shares outstanding
Tangible book value per share
Total assets
Tangible common equity to assets ratio
$
$
$
$
2019
2018
2017
2016
2015
At December 31,
(Dollars in millions)
1,788
$
1,570
$
1,399
$
1,336
$
1,529
—
170
—
190
—
21
—
—
267
—
1,618
$
1,380
$
1,378
$
1,336
$
1,262
56,631,236
57,749,464
57,321,228
56,824,802
56,483,258
$
$
28.57
23,266
6.95%
23.90
$
24.04
$
23.50
$
22.33
18,531
$
16,912
$
14,053
$
13,715
7.45%
8.15%
9.50%
9.20%
60
Three Months Ended
Year Ended
December 31,
2019
September
30, 2019
December 31,
2018
December 31,
2019
December 31,
2018
December 31,
2017
December 31,
2016
December 31,
2015
$
58 $
—
—
—
—
—
—
—
(Dollars in millions)
54 $
218
$
187
$
—
—
—
(29)
5
14
(2)
(25)
5
—
—
—
1
—
—
—
(29)
5
15
(2)
63
—
—
—
—
—
—
63
—
—
80
—
—
—
$
171
$
158
(24)
8
—
—
—
—
—
—
—
—
—
—
—
—
58 $
63 $
42 $
199
$
176
$
143
$
155
$
158
—
—
—
—
—
—
(18)
(30)
58 $
63 $
42 $
199
$
176
$
143
$
137
$
128
57,198,734
57,110,796
58,385,354 57,238,978
58,322,950
58,178,343
57,597,667
57,164,523
1.00 $
1.00 $
1.11 $
1.11 $
0.93 $
0.72 $
$
$
$
$
$
$
$
$
$
$
3.80
3.46
562
—
562
18,453
3.05%
3.05%
4.28%
1.76%
—%
1.76%
2.52%
2.52%
$
$
$
$
$
3.21
3.02
497
(29)
468
16,136
3.07%
2.89%
4.21%
1.40%
0.23%
1.63%
2.81%
2.58%
$
$
$
$
$
1.09
2.47
390
—
390
14,130
2.75%
2.75%
3.71%
1.15%
—%
1.15%
2.56%
2.56%
$
$
$
$
$
2.66
2.38
323
—
323
12,164
2.64%
2.64%
3.42%
0.97%
—%
0.97%
2.45%
2.45%
888
—
888
$
$
712
15
697
$
$
643
—
643
$
$
560
—
560
$
$
2.24
2.24
287
—
287
10,436
2.74%
2.74%
3.39%
0.82%
—%
0.82%
2.58%
2.58%
536
—
536
Net income (loss)
DOJ adjustment
Tax impact of DOJ adjustment
Tax reform impact
Recognition of hedging gains
Tax impact of hedging gains
Wells Fargo acquisition costs
Tax impact of Wells Fargo acquisition
costs
Adjusted net income
Deferred cumulative preferred stock
dividends
Adjusted net income applicable to
common stockholders
Weighted average diluted common
shares
Diluted earnings per share
Adjusted diluted earnings per share
$
$
$
$
Net interest income
Hedging gains
Adjusted net interest income
Average interest-earning assets
Net interest margin
Adjusted net interest margin
Average interest-earning asset yield
Average interest-bearing liability cost
Impact from hedging gains
Adjusted average interest-bearing
liability cost
Interest rate spread
Adjusted interest rate spread
Noninterest expense
Wells Fargo acquisition costs
Adjusted noninterest expense
Accounting and Reporting Developments
Adoption of New Accounting Standards - Credit Losses
We will adopt CECL as of January 1, 2020. Our allowance for credit losses under CECL uses relevant available
information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable
forecasts. We will apply judgment and assign 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.
The allowance for expected credit losses on non-impaired loans are determined by segmenting the portfolio based
upon common risk characteristics. Broadly, our consumer loan portfolio is segmented into Residential First Mortgage, Home
61
Equity and Other Consumer, which are impacted by lien position, credit quality, and loan structure. Commercial loans are
segmented into Commercial Real Estate, Commercial and Industrial, and Warehouse Lending, which are impacted by credit
quality and loan structure. The general allowance for all classes is determined through dual risk rating models which use
probability of default, loss given default and exposure at default. We expect longer lived loans to be more significantly
impacted by CECL than those with shorter lives.
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 identify impaired loans (TDR and NPL loans) and a
collectively evaluated 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 (the "General Allowance") is calculated on our non-impaired consumer and
commercial LHFI portfolio by applying average historical loss rates experienced during our identified ten year 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. We apply judgment to determine the
appropriateness of the look back and less emergence periods. 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.
Our ALLL estimate takes other qualitative 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
62
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, 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
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.
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
20 - 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, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019,
2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and
2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
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 - Accumulated Other Comprehensive Income (Loss)
Note 15 - Earnings (Loss) Per Share
Note 16 - Stock-Based Compensation
Note 17 - Income Taxes
Note 18 - Regulatory Matters
Note 19 - Legal Proceedings, Contingencies and Commitments
Note 20 - Fair Value Measurements
Note 21 - Segment Information
Note 22 - Holding Company Only Financial Statements
Note 23 - Quarterly Financial Data
65
68
69
70
70
71
72
72
82
84
84
91
91
92
92
92
93
94
98
98
101
101
102
103
106
106
109
117
120
123
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, 2019 and 2018, and the related consolidated statements of operations, comprehensive
income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2019 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, 2019, 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses - Lookback Period and Estimation of the Loss Emergence Period
As described in Notes 1 and 4 to the consolidated financial statements, management establishes an allowance for loan losses for
probable losses that have been specifically identified (specific allowance) and for probable losses believed to be inherent in the
held-for investment loan portfolio which are collectively evaluated through a model based component (general allowance). The
general allowance totaled $94 million as of December 31, 2019. Management establishes the general allowance by segmenting
the non-impaired loan portfolio based on common risk characteristics and using a historical loss model which utilizes the
Company’s loss history by specific product or industry peer loss data for products that are not sufficiently seasoned. The loss
model utilizes average historical loss rates experienced during an identified look back period applied to the outstanding
principal balances over an estimated loss emergence period. For each reporting period, management evaluates the
appropriateness of the lookback period used to calculate the historical loss rates for each portfolio segment. In making this
determination management considers the recent performance of the portfolio in comparison to both recent historical periods and
the prior ten year period. 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). Management estimates the loss emergence
period using available credit information and trends.
The principal considerations for our determination that performing procedures relating to the allowance for loan losses -
lookback period and estimation of the loss emergence period is a critical audit matter are (i) there was significant judgment by
management in determining the lookback period and estimating the loss emergence period, which in turn led to a high degree of
auditor judgment and subjectivity in performing procedures relating to the estimate, (ii) there was a high degree of auditor
judgment in evaluating audit evidence related to the reasonableness of the lookback period and the loss emergence period, and
(iii) the audit effort involved the use of professionals with specialized skill or knowledge to assist in evaluating audit evidence
from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
Company’s estimation of the allowance for loan losses, including controls over the determination of the lookback period and
estimation of the loss emergence period. These procedures also included, among others, testing management’s process for
estimating the allowance for loan losses. This included evaluating the appropriateness of the historical loss model, evaluating
the reasonableness of the lookback period and loss emergence period, and testing the completeness and accuracy of data
provided by management. The procedures included the involvement of professionals with specialized skill and knowledge to
assist in evaluating the reasonableness of the loss emergence period for each portfolio segment. Evaluating the lookback period
for each portfolio segment involved evaluating whether it was reasonable for each portfolio segment considering current and
historical macroeconomic trends as well as portfolio characteristics and portfolio performance trends.
Valuation of the Department of Justice Liability
As described in Notes 1, 19, and 20 to the consolidated financial statements, the Company has a settlement agreement with the
Department of Justice (DOJ) representing the obligation to make future additional payments establishing a legally enforceable
contract with a stipulated payment plan, which management has determined meets the definition of a financial liability.
Management has elected the fair value option to account for the DOJ liability and determined the estimated fair value to be $35
million as of December 31, 2019. As described in Note 19, the fair value of the liability is subject to significant uncertainty and
is impacted by forecasted estimates of the timing of potential payments, some of which are impacted by inputs including
estimates of equity, earnings, timing and amount of dividends, and growth of the balance sheet and their related impacts on the
forecasted Tier 1 Leverage Capital Ratio, discount rate, the likelihood and types of potential business combinations, or any
other means by which a payment could be made. The significant unobservable inputs used in the fair value measurement of the
66
DOJ liability are the discount rate, asset growth rate, return on assets, dividend rate, and the potential ways the Company might
be required to begin making DOJ liability payments and their estimates of the likelihood of these outcomes.
The principal considerations for our determination that performing procedures relating to the valuation of the DOJ liability is a
critical audit matter are (i) there was significant judgment by management in determining the fair value of the DOJ liability,
which in turn led to a high degree of auditor judgment and subjectivity in performing procedures relating to the estimate and (ii)
there was a high degree of auditor judgment in evaluating audit evidence related to the reasonableness of the discount rate, asset
growth rate, return on assets, dividend rate, and the potential ways the Company might be required to begin making DOJ
liability payments and the estimates of the likelihood of these outcomes used in the fair value estimate.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of the Company’s controls
relating to the valuation of the DOJ liability. These procedures also included, among others, testing management’s process for
determining the valuation of the DOJ liability. This included evaluating the appropriateness of the valuation method, the
reasonableness of the discount rate, asset growth rate, return on assets, dividend rate, the potential ways the Company might be
required to begin making DOJ liability payments and the estimates of the likelihood of these outcomes.
Valuation of Mortgage Servicing Rights
As described in Notes 1, 10, and 20 to the consolidated financial statements, the Company purchases and originates mortgage
loans for sale to the secondary market. If the Company retains the right to service the loan at the time of sale, a mortgage
servicing right (MSR) is recognized and recorded at fair value, where fair value represents the price that would be received to
sell an asset in an orderly transaction between market participants at the measurement date. MSRs represented $291 million or
89% of the Company’s total level 3 assets at fair value as of December 31, 2019. To determine the fair value of MSRs,
management uses a valuation model and significant unobservable inputs, including option adjusted spreads, constant
prepayment rates, and cost to service.
The principal considerations for our determination that performing procedures relating to the valuation of mortgage servicing
rights is a critical audit matter are (i) there was significant judgment by management in determining the fair value of the MSRs,
which in turn led to a high degree of auditor judgment and subjectivity in performing procedures relating to the valuation model
and significant unobservable inputs, including option adjusted spreads, constant prepayment rates and cost to service, used in
the valuation of MSRs, and (ii) there was a high degree of auditor judgment in evaluating audit evidence related to the valuation
of the MSRs.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
valuation of the MSRs valuation, including controls over the aforementioned significant unobservable inputs. These procedures
also included, among others, testing management’s process for determining the fair value of the MSRs. This included
evaluating the appropriateness of the valuation model, testing the completeness and accuracy of the data used in the model, and
evaluating the reasonableness of the valuation, including the significant unobservable inputs considering external market and
industry data.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 28, 2020
We have served as the Company’s auditor since 2015.
67
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 ($5,219 and $3,732 measured at fair value, respectively)
Loans held-for-investment ($12 and $10 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
Federal Home Loan Bank stock
Premises and equipment, net
Goodwill and intangible assets
Other assets
Total assets
Liabilities and Stockholders’ Equity
Noninterest bearing deposits
Interest bearing deposits
Total deposits
Short-term Federal Home Loan Bank advances and other
Long-term Federal Home Loan Bank advances
Other long-term debt
Other liabilities ($35 and $60 measured at fair value, respectively)
Total liabilities
Stockholders’ Equity
Common stock $0.01 par value, 80,000,000 and 80,000,000 shares authorized; 56,631,236 and
57,749,464 shares issued and outstanding, respectively
Additional paid in capital
Accumulated other comprehensive (loss) income
Retained earnings/(accumulated deficit)
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
2018
$
220 $
206
426
2,116
598
5,258
12,129
736
(107)
12,758
291
303
416
170
930
260
148
408
2,142
703
3,869
9,088
392
(128)
9,352
290
303
390
190
884
23,266 $
18,531
$
$
5,467 $
9,679
15,146
4,165
650
496
1,021
21,478
1
1,483
1
303
1,788
2,989
9,391
12,380
3,244
150
495
692
16,961
1
1,522
(47)
94
1,570
18,531
$
23,266 $
The accompanying notes are an integral part of these Consolidated Financial Statements.
68
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
Net return on mortgage servicing rights
Loan administration income
Deposit fees and charges
Other noninterest income
Total noninterest income
Noninterest Expense
Compensation and benefits
Occupancy and equipment
Commissions
Loan processing expense
Legal and professional expense
Federal insurance premiums
Intangible asset amortization
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,
2018
2019
2017
$
713 $
595 $
77
4
794
138
59
7
28
232
562
18
544
335
100
6
30
38
101
610
377
161
111
80
27
20
15
97
888
266
48
86
2
683
94
68
(4)
28
186
497
(8)
505
200
87
36
23
21
72
439
318
127
80
59
28
22
5
73
712
232
45
$
$
$
218 $
3.85 $
3.80 $
187 $
3.26 $
3.21 $
446
80
1
527
52
36
24
25
137
390
6
384
268
82
22
21
18
59
470
299
103
72
57
30
16
—
66
643
211
148
63
1.11
1.09
56,584,238
57,238,978
57,520,289
58,322,950
57,093,868
58,178,343
The accompanying notes are an integral part of these Consolidated Financial Statements.
69
Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(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,
2018
2019
2017
$
$
218 $
48
—
48
266 $
187 $
(29)
(2)
(31)
156 $
63
(10)
1
(9)
54
Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders' Equity
(In millions, except share data)
Common Stock
Balance at December 31, 2016
56,824,802 $
1 $
1,503 $
(7) $
(161) $
1,336
Number of
Shares
Outstanding
Amount of
Common
Stock
Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
Net income
Total other comprehensive loss
Shares issued for Employee Stock Purchase Plan
Warrant exercise
Stock-based compensation
Balance at December 31, 2017
Net income
Total other comprehensive loss
Shares issued for Employee Stock Purchase Plan
Stock-based compensation
Reclassification of certain income tax effects (1)
Repurchase of shares included in treasury stock
—
—
48,032
154,313
294,081 $
57,321,228 $
— $
—
114,385
318,560
—
(4,709)
Balance at December 31, 2018
57,749,464 $
Net income
Total other comprehensive income
Shares issued for Employee Stock Purchase Plan
Dividends declared and paid
Stock-based compensation
Repurchase of common shares
Balance at December 31, 2019
— $
—
106,881
376
292,220
(1,517,705)
56,631,236 $
—
—
—
—
— $
1 $
— $
—
—
—
—
—
—
—
4
5
1,512 $
— $
—
10
—
—
1 $
— $
1,522 $
— $
—
—
—
—
—
—
—
—
11
(50)
—
(9)
—
—
—
(16) $
— $
(26) $
— $
— $
(5) $
— $
(47) $
— $
48
—
—
—
—
63
—
—
—
—
(98) $
187 $
—
—
—
5
—
94
218 $
—
—
(9)
—
—
1 $
1,483 $
1 $
303 $
63
(9)
—
4
5
1,399
187
(26)
10
—
—
—
1,570
218
48
—
(9)
11
(50)
1,788
(1)
Income tax effects of the Tax Cuts and Jobs Act are reclassified from AOCI to retained earnings due to the adoption of ASU 2018-02.
The accompanying notes are an integral part of these Consolidated Financial Statements.
70
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In millions)
Operating Activities
Net income
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization
Provision (benefit) for loan losses
Net gain on loan and asset sales
Proceeds from sales of HFS
Origination, premium paid and purchase of loans, net of principal repayments
Net change in:
Other
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
Proceeds received from the sale of LHFI
Net origination, purchase, and principal repayments of LHFI
Acquisition of premises and equipment, net of proceeds
Purchase of bank owned life insurance
Net purchase of FHLB stock
Proceeds from the sale of MSRs
Assets acquired (liabilities assumed) in business combinations
Other, net
Net cash provided by investing activities
Financing Activities
Net change in deposit accounts
Net change in short term FHLB borrowings and other
Proceeds from increases in FHLB long-term advances and other debt
Repayment of long-term FHLB advances
Net receipt of payments of loans serviced for others
Preferred stock dividends
Stock repurchase
Other
Net cash provided (used) by financing activities
Net increase in cash, cash equivalents and restricted cash (1)
Beginning cash, cash equivalents and restricted cash (1)
Ending cash, cash equivalents and restricted cash (1)
Supplemental disclosure of cash flow information
Interest paid on deposits and other borrowings
Income tax payments
Non-cash reclassification of investment securities HTM to AFS
Non-cash reclassification of loans originated LHFI to LHFS
Non-cash reclassification of mortgage loans HFS to HFI
Non-cash reclassification of LHFS to AFS securities
MSRs resulting from sale or securitization of loans
(1) For further information on restricted cash, see Note 11 - Derivatives.
$
$
$
$
$
$
$
$
$
$
$
For the Years Ended December 31,
2018
2017
2019
218 $
187 $
70
18
(335)
15,866
(32,715)
(205)
(17,083) $
15,873 $
184
(500)
106
219
(3,179)
(61)
—
—
62
—
(16)
12,688 $
2,766 $
923
550
(50)
284
(9)
(50)
5
4,419 $
24
432
456 $
230 $
4 $
— $
120 $
— $
15,458 $
223 $
56
(8)
(200)
8,935
(32,261)
(87)
(23,378) $
23,721 $
199
(340)
92
161
(978)
(71)
—
—
334
1,499
(10)
24,607 $
1,072 $
(1,016)
200
(1,455)
181
—
—
(2)
(1,020) $
209
223
432 $
185 $
— $
144 $
279 $
— $
23,718 $
356 $
63
40
6
(268)
9,245
(34,235)
(173)
(25,322)
24,646
218
(904)
154
104
(1,760)
(97)
(50)
(123)
309
(8)
5
22,494
134
2,480
255
(50)
22
—
—
2
2,843
15
208
223
136
5
—
131
—
24,345
288
The accompanying notes are an integral part of these Consolidated Financial Statements.
71
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 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, Cash Equivalents and Restricted Cash
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. Restricted
cash includes cash that the Bank pledges as maintenance margin on centrally cleared derivatives and is included in other assets
on the Consolidated Statements of Financial Condition.
Investment Securities
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 and recorded in interest income in the Consolidated Statements of Operations.
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 at least a quarterly basis.
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.
72
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
We evaluate AFS and HTM investment securities for OTTI on a quarterly basis. An OTTI is considered to have
occurred when the fair value of a debt security is below its amortized costs and we (1) have the intent to sell the security, (2)
will more likely than not be required to sell the security before recovery of its amortized cost, or (3) do not expect to recover the
entire amortized cost basis of the security. Investments that have an OTTI are written down through a charge to earnings for the
amount representing the credit loss on the security. Gains and losses related to all other factors are recognized in other
comprehensive income (loss).
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 and recorded in interest income in the Consolidated Statements of Operations.
For further information, see Note 2 - Investment Securities and Note 20 - Fair Value Measurements.
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
20 - 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 loans, are deferred and recognized over the contractual
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 20 - 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, in
accordance with the initial classification of the loans.
Past Due, Impaired and Modified (Troubled Debt Restructuring) 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 against interest
income and the loan may only return to accrual status when principal and interest become current and are anticipated to be fully
collectible.
73
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 may include a reduction of interest rate, extension of amortization period, principal and/or interest
forgiveness or other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral.
Modified loans are classified as nonperforming TDRs if the loan was nonperforming prior to the restructuring, or if the
results of a contemporaneous credit evaluation determines that payment is not reasonably assured. 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.
Loans are considered impaired if it is probable that payment of all 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 TDRs as interest and principal will not be received in
accordance with the original contractual terms of the loan agreement.
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 nonperforming impaired loans is applied entirely against principal until the
loan has been collected in full, after which time any additional cash receipts are recognized as interest income.
For further information, see Note 4 - Loans Held-for-Investment.
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 specifically identified (TDR and NPL loans) and for probable losses believed to be inherent in the loan portfolio
which are collectively evaluated through a model-based component. Management applies judgment and 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.
74
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 costs to sell 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 average historical loss rates experienced during an identified look back period applied to outstanding principal balances
over an estimated loss emergence period that 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). We evaluate the appropriateness of the lookback period
at least quarterly and consider the recent performance of the portfolio compared to both recent historical periods and prior ten
year period. We estimate the loss emergence period using available credit information and trends. In addition to the loss history
or peer data, we also perform a qualitative assessment considering factors noted above and use our judgments to make any
necessary adjustments.
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
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 20 - 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.
75
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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. The stock is redeemable at par and is carried at cost as no market quotes exist for the stock.
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
years to seven years. Software expenditures, repair and maintenance costs that are considered general, administrative, or of a
maintenance nature are expensed as incurred.
Goodwill and Intangible Assets
The excess of the cost of an acquisition over the fair value of the net assets acquired consists primarily of goodwill,
core deposit intangibles and other identifiable intangible assets.
Goodwill is not amortized, but rather tested annually for impairment, or more frequently as events occur or
circumstances change that would indicate the fair value is below the carrying amount. The Company may assess qualitative
factors to determine whether it is more-likely-than-not the fair value is less than its carrying amount. If the Company concludes
based on the qualitative assessment that goodwill may be impaired, a quantitative one-step impairment test would then be
applied. An impairment loss would be recognized for any excess of carrying value over fair value of the goodwill.
Intangible assets subject to amortization are amortized over the estimated life, using a method that approximates the
time the economic benefits are realized by the Company. Intangible assets are reviewed for impairment at least annually and
whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
Amortization expense on intangible assets was $15 million and $5 million for the years ended December 31, 2019 and
December 31, 2018, respectively. The estimated future aggregate amortization expense on intangible assets for the years ended
2020, 2021, 2022, and 2023 is $13 million, $11 million, $9 million, and $7 million, respectively.
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, prepayment speeds, costs to
service and other assumptions to determine the fair value of MSRs.
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 20 - 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.
76
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 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.
Revenue from Contracts with Customers
Revenue from Contracts with Customers (Topic 606), under the 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.
Effective January 1, 2018, we have adopted the requirements of ASU 2014-09, Revenue from Contracts with
Customers (Topic 606) and all related amendments. We have implemented the guidance utilizing the modified retrospective
approach which did not have a material impact on the Company's financial position or results of operations. We undertook a
process to evaluate all of our significant revenue sources under the new standard. As lease contracts and financial instruments,
which include loans and securities, are excluded from the scope of this standard, the majority of our revenue falls outside of the
scope of Topic 606.
The adoption of this guidance does not result in changes to how revenue is recognized or the timing of recognition
from our method prior to adoption. Revenue is recognized when obligations, under the terms of a contract with our customer,
are satisfied, which generally occurs when services are performed. Revenue is measured as the amount of consideration we
expect to receive in exchange for providing services.
The disaggregation of our revenue from contracts with customers is provided below:
Deposit account and other banking income
Interchange fees
Interchange fees
Wealth management
Total
(1) Recognized within the Community Banking segment.
Location of Revenue (1)
Deposit fees and charges
Deposit fees and charges
Other noninterest income
Other noninterest income
For the Years Ended December 31,
2019
2018
(Dollars in millions)
27 $
11
2
6
46 $
16
5
1
9
31
$
$
Deposit account and other banking income - We charge depositors various deposit account service fees including those
for outgoing wires, overdrafts, stop payments, and ATM fees. These fees are generated from a depositor’s option to purchase
services offered under the contract and are only considered a contract when the depositor exercises their option to purchase
these account services. Therefore we deem the term of our contracts with depositors to be day-to-day and do not extend beyond
the services already provided. Deposit account and other banking fees are recorded at the point in time we perform the
requested service.
Interchange income - We collect interchange fee income when debit cards that we have issued to our customers, are
used in merchant transactions. Our performance obligation is satisfied and revenue is recognized at the point we initiate the
payment of funds from a customer’s account to a merchant account.
Merchant fee income - We receive a percentage of merchant fees based upon card transactions processed through point
of sale terminals at referred merchant locations. Our performance obligation is satisfied when our referral of a merchant to a
payment processing vendor results in an executed agreement between the merchant and the vendor. Merchant fee revenue is
recognized as received. Merchant fee income was less than $1 million for the years ended December 31, 2019 and
December 31, 2018.
Wealth management revenue - We earn commission income through a revenue share program based on a tiered
percentage of total gross commissions generated from the sales of investment and insurance services to Flagstar customers.
77
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Commissions are earned and our performance obligation has been satisfied at the point of sale or trade execution. Our portion
of earned commissions is calculated, paid and recognized as revenue on a monthly basis.
We also receive revenue from portfolio management services. We receive payment for portfolio management services
in advance at the beginning of each quarter for services to be performed over the quarter which results an insignificant revenue
liability. We recognize this revenue over the quarter on a straight-line basis, as we believe this is the most appropriate method to
measure progress towards satisfaction of the performance obligation.
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 gain or loss 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. 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 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.
We may 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 the qualitatively throughout the hedge
period unless a change in facts and circumstances is identified. 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. 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, until the point it is determined the underlying transaction is probable to not occur, at
which point it is reclassified immediately into earnings.
We utilize interest rate swaps to manage fair value changes of our fixed-rate FHLB advances and certain AFS
securities in a qualifying fair value hedge accounting relationships. Interest rate swaps are valued based on quoted prices for
similar assets in an active market with inputs that are observable. 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. These hedges are
evaluated for effectiveness using regression analysis at the time they are designated and then qualitatively throughout the hedge
78
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
period unless a change in facts and circumstances is identified. 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 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 20 - Fair Value Measurements.
Income Taxes
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 17 - 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. 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. An estimate of the fair value of the guarantee associated with
the mortgage loans is recorded in other liabilities in the Consolidated Statements of Financial Condition, and was $5 million at
December 31, 2019, as compared to $7 million at December 31, 2018.
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 $25 million, $26 million, and $16 million for the years
ended December 31, 2019, 2018 and 2017, 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 with forfeitures being recognized as they occur. 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 16 - 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 and terms of the DOJ litigation settlement, see Note 19 - Legal
Proceedings, Contingencies and Commitments and Note 20 - Fair Value Measurements.
79
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards
The following ASUs have been adopted which impact our accounting policies and/or have a financial impact:
Leases - Effective January 1, 2019, we adopted the requirements of ASU 2016-02, Leases (Topic 842) and all related
amendments. The Company elected to apply the practical expedient of forgoing the restatement of comparative periods. In
addition, we elected the practical expedients permitted under transition guidance to not reassess leases entered into prior to
adoption. As permitted under ASC 842, the Company made an accounting policy election to exempt leases with an initial term
of twelve months or less from balance sheet recognition. Instead, short-term leases are expensed over the lease term with no
impact to the balance sheet.
At December 31, 2019, our inventory of leases included various bank branches, ATM locations and retail home
lending offices. Many of our leases contain options to extend or terminate early and we consider these options when evaluating
the lease term to determine if they are reasonably certain to be exercised based on all relevant economic and financial factors.
Lease rental expense totaled approximately $12 million, $11 million and $9 million for the years ended December 31, 2019,
2018 and 2017, respectively. All leases are classified as operating leases based on their terms.
The following table reflects information relating to our operating leases:
Operating Leases (1)
Weighted-average remaining lease term (years)
Weighted-average discount rate
Right-of-use asset (2)
Lease liability (3)
December 31, 2019
(Dollars in millions)
$
$
3.7
2.82%
22
23
(1) Lease expense on operating leases includes a de-minimis amount of short-term lease expense and variable lease expense.
(2) Recorded in premises and equipment on the Consolidated Statements of Financial Condition.
(3) Recorded in other liabilities on the Consolidated Statements of Financial Condition
The following table presents our undiscounted cash flows on our operating lease liabilities as of December 31, 2019
and our minimum contractual obligations on our operating leases as of December 31, 2018:
Within one year
After one year and within two years
After two years and within three years
After three years and within four years
After four years and within five years
After five years
Total (1)
December 31, 2019
December 31, 2018
(Dollars in millions)
9 (cid:7)
7
5
3
1
2
27 $
(cid:28)
(cid:25)
(cid:23)
(cid:21)
(cid:20)
(cid:22)
25
$
$
(1) The difference between the total undiscounted cash payments on operating leases and the lease liability is solely the effect of discounting.
80
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
We adopted the following accounting standard updates (ASU) during 2019, none of which had a material impact to our
financial statements:
Standard
Description
ASU 2019-07 SEC Final Rule Releases: Codification Updates
ASU 2019-01 Leases (Topic 842): Codification Improvements
ASU 2018-20 Leases (Topic 842): Narrow-Scope Improvements for Lessors
ASU 2018-16 Derivatives and hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap
(OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
ASU 2018-11 Leases (Topic 842): Targeted Improvements
ASU 2018-10 Codification Improvements to Topic 842, Leases
Effective Date
July 26, 2019
January 1, 2019
January 1, 2019
January 1, 2019
January 1, 2019
January 1, 2019
ASU 2018-07 Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
January 1, 2019
ASU 2017-11 Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815):
January 1, 2019
(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 2017-08 Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt
January 1, 2019
Securities
ASU 2017-06 Plan Accounting - Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health
January 1, 2019
and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting
Accounting Standards Issued But Not Yet Adopted
Credit Losses - In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326),
which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected
credit loss methodology. The new guidance requires financial assets to be presented at the net amount expected to be collected
(i.e. net of expected credit losses). The measurement of expected credit losses will 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 as of January 1, 2020 and will impact our allowance for credit loss held against collectively
evaluated loans held for investment along with our unfunded commitment reserve. We do not have any investment securities
that will be impacted by the new standard. We plan to record the cumulative effect of adoption as of January 1, 2020 through
equity and will elect to phase-in the impact on capital, as allowed by the regulatory agencies. Any future changes to our
allowance for credit losses and the reserve for unfunded commitments after January 1, 2020 will be recorded in our provision
for credit losses.
Our cross-functional implementation team has designed and implemented new credit loss models using an industry
leading vendor which measures the probability of default and loss given default to determine expected losses over the life of
our loans. We plan to use a reasonable and supportable forecast of two years within our models and revert to historical averages
on a straight line basis over 1 year. These assumptions may change over time based on our expectation of future market
conditions.
We have identified, designed, documented, and have begun operating our internal controls over financial reporting
which are primarily focused on our new models, the data utilized by those models including our reasonable and supportable
forecast and the governance process to apply the necessary judgment to determine the allowance for credit losses.
Based on our current results and economic forecasts as of December 31, 2019, the estimated impact including our
reserve for unfunded loan commitments is expected to be a pre-tax increase of approximately 25 to 35 percent. We do not
expect any material allowance on held to maturity securities since the majority of this portfolio consists of agency-backed
securities that have an immaterial risk of credit loss.
81
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 upon implementation:
Standard
ASU 2019-05 Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief
Description
Effective Date
January 1, 2020
ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and
January 1, 2020
Topic 825, Financial Instruments
ASU 2018-19 Codification Improvements to Topic 326, Financial Instruments—Credit Losses
ASU 2018-18 Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606
ASU 2018-17 Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
ASU 2018-15 Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation
Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues
Task Force)
January 1, 2020
January 1, 2020
January 1, 2020
January 1, 2020
ASU 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
January 1, 2020
Note 2 - Investment Securities
The following table presents our investment securities:
December 31, 2019
Available-for-sale securities
Agency - Commercial
Agency - Residential
Corporate debt obligations
Municipal obligations
Other MBS
Certificates of Deposit
Total available-for-sale securities (1)
Held-to-maturity securities
Agency - Commercial
Agency - Residential
Total held-to-maturity securities (1)
December 31, 2018
Available-for-sale securities
Agency - Commercial
Agency - Residential
Corporate debt obligations
Municipal obligations
Other MBS
Certificates of Deposit
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)
$
$
$
$
$
$
$
$
948 $
1,015
76
31
44
1
2,115 $
306 $
292
598 $
1,413 $
686
41
33
32
1
2,206 $
349 $
354
703 $
2 $
4
1
—
1
8 $
— $
3
3 $
4 $
—
—
—
—
—
4 $
— $
—
— $
(3) $
(4)
—
—
—
(7) $
(1) $
(1)
(2) $
(43) $
(24)
—
(1)
—
—
(68) $
(13) $
(9)
(22) $
947
1,015
77
31
45
1
2,116
305
294
599
1,374
662
41
32
32
1
2,142
336
345
681
(1) There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10 percent of stockholders’ equity
at December 31, 2019 or December 31, 2018.
Management evaluates our securities portfolio each quarter to determine if any security is considered to be other than
temporarily impaired. Agency securities, which are either explicitly or implicitly backed by the federal government, comprised
94 percent of our total securities at December 31, 2019. This factor is considered when evaluating our investment securities for
OTTI. During the years ended December 31, 2019, 2018 and 2017, we had no OTTI.
82
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Available-for-sale securities
We purchased $500 million of AFS securities, which were comprised of U.S. government sponsored agency MBS,
certificates of deposit, and corporate debt obligations during the year ended December 31, 2019. In addition, we retained $19
million of passive interests in our own private MBS during the year ended December 31, 2019. We purchased $340 million of
AFS securities, which included U.S. government sponsored agency MBS, certificates of deposit, and corporate debt obligations
during the year ended December 31, 2018.
We had $432 million in sales of AFS securities during the year ended December 31, 2019, which resulted in a gain of
$7 million. We had no sales of AFS securities during the year ended December 31, 2018. 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.
Held-to-maturity securities
In conjunction with adoption of ASU 2017-12 (Targeted Improvements to Accounting for Hedging Activities) 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, which resulted in a de minimis impact to OCI.
There were no purchases or sales of HTM securities during the years ended December 31, 2019, December 31, 2018
and December 31, 2017.
The following table summarizes, by duration, the unrealized loss positions on investment securities:
December 31, 2019
Available-for-sale securities
Agency - Commercial
Agency - Residential
Municipal obligations
Held-to-maturity securities
Agency - Commercial
Agency - Residential
December 31, 2018
Available-for-sale securities
Agency - Commercial
Agency - Residential
Municipal obligations
Corporate debt 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)
$
$
$
$
148
266
8
148
35
1,025
647
28
—
336
345
17 $
26
3
13 $
7
74 $
79
16
—
26 $
60
(3) $
(3)
—
(1) $
(1)
(43) $
(24)
(1)
—
(13) $
(9)
303
148
—
85
38
1
14
1
7
—
—
19 $
14
—
6 $
10
1 $
5
2
2
— $
—
—
(1)
—
—
—
—
—
—
—
—
—
83
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following shows the amortized cost and estimated fair value of securities by contractual maturity:
December 31, 2019
Due in one year or less
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)
$
$
3 $
20
93
1,999
2,115 $
3
20
95
1,998
2,116
2.12% $
4.07%
4.23%
2.41%
$
— $
10
9
579
598 $
—
10
9
580
599
—%
2.48%
2.29%
2.42%
We pledge investment securities, primarily agency collateralized and municipal taxable mortgage obligations, to
collateralize lines of credit and/or borrowings. We had pledged investment securities of $874 million and, $1.9 billion, at
December 31, 2019 and 2018 respectively.
Note 3 - Loans Held-for-Sale
The majority of our mortgage loans originated as LHFS are ultimately sold into the secondary market on a whole loan
basis or by securitizing the loans into agency, government, or private label mortgage-backed securities. At December 31, 2019
and 2018, LHFS totaled $5.3 billion and $3.9 billion, respectively. For the years ended December 31, 2019, 2018 and 2017, we
had net gains on loan sales associated with LHFS of $333 million, $197 million, and $267 million, respectively.
At December 31, 2019 and 2018, $39 million and $137 million, respectively, of LHFS were recorded at lower of cost
or fair value. We elected the fair value option for the remainder of the loans in the portfolio.
Note 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
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans held-for-investment
December 31, 2019 December 31, 2018
(Dollars in millions)
$
$
3,154 $
1,024
729
4,907
2,828
1,634
2,760
7,222
12,129 $
2,999
731
314
4,044
2,152
1,433
1,459
5,044
9,088
84
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents the UPB of our loan sales and purchases in the loans held-for-investment portfolio:
Loans Sold (1)
Performing loans
Nonperforming loans
Total performing and nonperforming loans sold
Net gain associated with loan sales (2)
Loans Purchased
Residential first mortgage loans
HELOC
Other consumer
Total loans purchased
Premium associated with loans purchased
For the Year Ended
2019
2018
2017
(Dollars in millions)
$
$
$
$
$
217 $
—
217 $
2 $
—
249
51
300 $
11 $
158 $
—
158 $
2 $
3
—
34
37 $
— $
102
25
127
2
8
250
—
258
9
(1) Upon a change in our intent, the loans were transferred to LHFS and subsequently sold.
(2) Recorded in net gain on loan sales on Consolidated Statement of Operations.
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, 2019 and 2018, we pledged loans of $9.1
billion and $6.8 billion, respectively.
The following table presents changes in ALLL, by class of loan:
Year Ended December 31, 2019
Beginning balance ALLL
Charge-offs (2)
Recoveries
Provision (benefit)
Ending balance ALLL
Year Ended December 31, 2018
Beginning balance ALLL
Charge-offs (2)
Recoveries
Provision (benefit)
Ending balance ALLL
Year Ended December 31, 2017
Beginning balance ALLL
Charge-offs (2)
Recoveries
Provision (benefit)
Ending balance ALLL
Residential
First
Mortgage (1) Home Equity
Other
Consumer
Commercial
Real
Estate
Commercial
and
Industrial
Warehouse
Lending
Total
(Dollars in millions)
$
$
$
$
$
$
38 $
(3)
1
(14)
22 $
47 $
(4)
2
(7)
38 $
65 $
(8)
1
(11)
47 $
15 $
(2)
2
(1)
14 $
22 $
(2)
1
(6)
15 $
24 $
(3)
2
(1)
22 $
3 $
(7)
—
10
6 $
1 $
(2)
1
3
3 $
1 $
(2)
1
1
1 $
48 $
—
—
(10)
38 $
45 $
—
—
3
48 $
28 $
(1)
1
17
45 $
18 $
(31)
1
34
22 $
19 $
—
—
(1)
18 $
17 $
—
1
1
19 $
6 $
—
—
(1)
5 $
6 $
—
—
—
6 $
7 $
—
—
(1)
6 $
128
(43)
4
18
107
140
(8)
4
(8)
128
142
(14)
6
6
140
(1)
(2)
Includes allowance and charge-offs related to loans with government guarantees.
Includes charge-offs of zero, zero and $1 million related to the transfer and subsequent sale of loans during the years ended December 31, 2019,
2018 and 2017, respectively. Also includes charge-offs related to loans with government guarantees of $2 million, $2 million, and $4 million during
the years ended December 31, 2019, 2018 and 2017, respectively.
85
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table sets forth the method of evaluation, by class of loan:
December 31, 2019
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, 2018
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
Residential
First
Mortgage (1) Home Equity
Other
Consumer
Commercial
Real
Estate
Commercial
and
Industrial
Warehouse
Lending
Total
(Dollars in millions)
$
$
$
$
$
$
$
$
32 $
3,113
3,145 $
20 $
1,001
1,021 $
1 $
728
729 $
— $
2,828
2,828 $
— $
1,634
1,634 $
— $
2,760
2,760 $
53
12,064
12,117
5 $
17
22 $
32 $
2,959
2,991 $
4 $
34
38 $
7 $
7
14 $
23 $
706
729 $
7 $
8
15 $
1 $
5
6 $
— $
38
38 $
— $
22
22 $
— $
5
5 $
— $
314
314 $
— $
3
3 $
— $
2,152
2,152 $
— $
1,433
1,433 $
— $
1,459
1,459 $
— $
48
48 $
— $
18
18 $
— $
6
6 $
13
94
107
55
9,023
9,078
11
117
128
Includes allowance related to loans with government guarantees.
(1)
(2) Excludes loans carried under the fair value option.
86
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 for past due and impaired loans, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant
Accounting Policies):
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
December 31, 2019
Consumer loans
Residential first mortgage
$
5 $
4 $
21 $
30 $
3,124 $
Home equity
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans (2)
December 31, 2018
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)
1
3
9
—
—
—
—
—
1
5
—
—
—
—
4
1
26
—
—
—
—
5
5
40
—
—
—
—
1,019
724
4,867
2,828
1,634
2,760
7,222
3,154
1,024
729
4,907
2,828
1,634
2,760
7,222
$
$
9 $
5 $
26 $
40 $
12,089 $
12,129
4 $
2 $
19 $
25 $
2,974 $
2,999
1
—
5
—
—
—
—
—
—
2
—
—
—
—
3
—
22
—
—
—
—
4
—
29
—
—
—
—
727
314
4,015
2,152
1,433
1,459
5,044
$
5 $
2 $
22 $
29 $
9,059 $
731
314
4,044
2,152
1,433
1,459
5,044
9,088
(1)
(2)
Includes less than 90 days past due performing loans which are placed on non-accrual. Interest revenue is not being recognized on these loans.
Includes $4 million and $3 million of past due loans accounted for under the fair value option at December 31, 2019 and 2018, respectively.
Interest that would have been accrued on impaired loans if such loans were paying in accordance with their original
terms, totaled approximately $1 million, $1 million and $1 million during the years ended December 31, 2019, 2018 and 2017,
respectively. At December 31, 2019 and 2018, we had no loans 90 days or greater past due and still accruing interest.
87
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, 2019
Consumer loans
Residential first mortgage
Home equity
Total TDRs (1)(2)
December 31, 2018
Consumer loans
Residential first mortgage
Home Equity
Total TDRs (1)(2)
TDRs
Performing
Nonperforming
Total
(Dollars in millions)
$
$
$
$
20 $
18
38 $
22 $
22
44 $
8 $
2
10 $
8 $
2
10 $
28
20
48
30
24
54
(1) The ALLL on TDR loans totaled $8 million and $10 million at December 31, 2019 and 2018, respectively.
(2)
Includes $2 million and $3 million of TDR loans accounted for under the fair value option at December 31, 2019 and 2018, respectively.
The following table provides a summary of newly modified TDRs:
Year Ended December 31, 2019
Residential first mortgages
Home equity (2)(3)
Total TDR loans
Year Ended December 31, 2018
Residential first mortgages
Home equity (2)(3)
Total TDR loans
Year Ended December 31, 2017
Residential first mortgages
Home equity (2)(3)
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)
8 $
6
14 $
14 $
17
31 $
16 $
82
98 $
1 $
—
1 $
3 $
1
4 $
4 $
6
10 $
1 $
—
1 $
3 $
1
4 $
4 $
5
9 $
—
—
—
—
—
—
—
(1)
(1)
(1) Post-modification balances include past due amounts that are capitalized at modification date.
(2) Home equity post-modification UPB reflects write downs.
(3)
Includes loans carried at fair value option.
During the years ended December 31, 2019, 2018, and 2017, there were zero, zero, and one, newly modified TDR
loans which had been modified in the preceding 12 months that subsequently defaulted in those periods, respectively. The UPB
associated with those TDR loans was zero in the year ended December 31, 2019, zero and less than $1 million, in the aggregate,
in each of the years ended December 31, 2018 and 2017. 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.
88
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Impaired Loans
The following table presents individually evaluated impaired loans and the associated allowance:
December 31, 2019
December 31, 2018
Recorded
Investment
Net
Unpaid Principal
Balance
Related
Allowance
Recorded
Investment
(Dollars in millions)
Net
Unpaid Principal
Balance
Related
Allowance
With no related allowance recorded
Consumer loans
Residential first mortgage
$
Home equity
Other consumer
Total loans with no related allowance recorded
$
With an allowance recorded
Consumer loans
Residential first mortgage
Home equity
Other consumer
Total loans with an allowance recorded
Total impaired loans
Consumer loans
Residential first mortgage
Home equity
Other consumer
Total impaired loans
$
$
$
$
16 $
1
—
17 $
16 $
19
1
36 $
32 $
20
1
53 $
20 $
4
1
25 $
16 $
19
1
36 $
36 $
23
2
61 $
— $
—
—
— $
3 $
7
1
11 $
3 $
7
1
11 $
13 $
1
—
14 $
19 $
22
—
41 $
32 $
23
—
55 $
16 $
4
—
20 $
20 $
23
—
43 $
36 $
27
—
63 $
—
—
—
—
4
7
—
11
4
7
—
11
The following table presents average impaired loans and the interest income recognized:
For the Years Ended December 31,
2019
2018
2017
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in millions)
$
$
36 $
17
2
15
70 $
— $
—
—
—
— $
33 $
25
—
2
60 $
1 $
2
—
—
3 $
38 $
28
—
—
66 $
1
1
—
—
2
Consumer loans
Residential first mortgage
Home equity
Other consumer
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.
89
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Special mention. Assets identified as special mention possess credit deficiencies or potential weaknesses deserving
management's close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk that, if
not corrected, could weaken the assets and increase risk in the future. Special mention assets are criticized, but do not expose an
institution to sufficient risk to warrant adverse classification.
Substandard. Assets identified as substandard are inadequately protected by the current net worth and paying capacity
of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that
jeopardize the full collection or liquidation of the debt. They are characterized by the distinct possibility that we will sustain
some loss if the deficiencies are not corrected. For home equity loans and other consumer loans, we evaluate credit quality
based on the aging and status of payment activity and any other known credit characteristics that call into question full
repayment of the asset. Substandard loans may be placed on either accrual or non-accrual status.
Doubtful. An asset classified as doubtful has all the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable and improbable. A doubtful asset has a high probability of total or substantial loss, but because of
specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in
default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can
include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of
collateral, and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be
adjusted based on the new information. Due to the high probability of loss, doubtful assets are placed on non-accrual.
Loss. An asset classified as loss is considered uncollectible and of such little value that the continuance as a bankable
asset is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather
that it is not practical or desirable to defer writing off the asset even though partial recovery may be affected in the future.
Consumer Loans
Consumer loans consist of open and closed end loans extended to individuals for household, family, and other personal
expenditures, and includes consumer loans, and loans to individuals secured by their personal residence, including first
mortgage, home equity, and home improvement loans. Because consumer loans are usually relatively small-balance,
homogeneous exposures, consumer loans are rated primarily on payment performance. Payment performance is a proxy for the
strength of repayment capacity and loans are generally classified based on their payment status rather than by an individual
review of each loan.
In accordance with regulatory guidance, we assign risk ratings to consumer loans in the following manner:
• Consumer loans are classified as Watch once the loan becomes 60 days past due.
• Open and closed-end consumer loans 90 days or more past due are classified Substandard.
Commercial Loans
Management conducts periodic examinations which serve as an independent verification of the accuracy of the ratings
assigned. Loan grades are based on different factors within the borrowing relationship: entity sales, debt service coverage, debt/
total net worth, liquidity, balance sheet and income statement trends, management experience, business stability, financing
structure, and financial reporting requirements. The underlying collateral is also rated based on the specific type of collateral
and corresponding LTV. The combination of the borrower and collateral risk ratings results in the final rating for the borrowing
relationship.
90
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2019
Pass
Watch
Special Mention
Substandard
Total Loans
(Dollars in millions)
3,107 $
1,002
727
4,836 $
2,794 $
1,533
2,556
6,883 $
27 $
18
1
46 $
24 $
72
189
285 $
— $
—
—
— $
5 $
24
15
44 $
20 $
4
1
25 $
5 $
5
—
10 $
3,154
1,024
729
4,907
2,828
1,634
2,760
7,222
December 31, 2018
Pass
Watch
Special Mention
Substandard
Total Loans
(Dollars in millions)
2,952 $
705
314
3,971 $
2,132 $
1,351
1,324
4,807 $
28 $
23
—
51 $
14 $
53
120
187 $
— $
—
—
— $
5 $
29
15
49 $
19 $
3
—
22 $
1 $
—
—
1 $
2,999
731
314
4,044
2,152
1,433
1,459
5,044
$
$
$
$
$
$
$
$
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
Note 5 - Loans with Government Guarantees
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, 2019 and December 31, 2018, respectively, loans with government guarantees totaled $736 million
and $392 million.
Repossessed assets and the associated claims related to government guaranteed loans are recorded in other assets and
totaled $45 million and $50 million at December 31, 2019 and December 31, 2018, respectively.
Note 6 - Repossessed Assets
Repossessed assets include the following:
One-to-four family properties
Commercial properties
Total repossessed assets
December 31,
2019
2018
(Dollars in millions)
6 $
4
10 $
5
2
7
$
$
91
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following schedule provides the activity for repossessed assets:
Beginning balance
Additions, net
Disposals
Net (write down) on disposal
Transfers out
Ending balance
Note 7 - Variable Interest Entities
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
$
$
7 $
12
(4)
(5)
—
10 $
8 $
10
(8)
(3)
—
7 $
14
18
(14)
(9)
(1)
8
We have no consolidated VIEs as of December 31, 2019 and December 31, 2018.
In connection with our securitization activities, we have retained a five percent interest in the investment securities of
certain trusts ("other MBS") and are contracted as the sub-servicer of the underlying loans, compensated based on market rates,
which constitutes a continuing involvement in these trusts. Although we have a variable interest in these securitization trusts,
we are not their primary beneficiary due to the relative size of our investment in comparison to the total amount of securities
issued by the VIE and our inability to direct activities that most significantly impact the VIE’s economic performance. As a
result, we have not consolidated the assets and liabilities of the VIE in our Statements of Financial Condition. The Bank’s
maximum exposure to loss is limited to our investment in the VIE, as well as the standard representations and warranties made
in conjunction with the loan transfer. See Note 2 - Investment Securities and Note 20 - Fair Value Measurements, for additional
information.
Note 8 - Federal Home Loan Bank Stock
Our investment in FHLB stock was $303 million at both December 31, 2019 and December 31, 2018. 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. We had no required purchases or redemptions of FHLB stock during the years ended December
31, 2019 and 2018. Dividends received on the stock equaled $16 million, $15 million and $9 million for the years ended
December 31, 2019, 2018 and 2017, respectively. These dividends were recorded in the Consolidated Statements of Operations
as other noninterest income.
Note 9 - Premises and Equipment
The following presents our premises and equipment balances and estimated useful lives:
Land
Computer hardware and software
Office buildings and improvements
Furniture, fixtures and equipment
Leased equipment
Leasehold improvements
Fixed assets in progress (1)
Right-of-use asset
Total
Less accumulated depreciation
Premises and equipment, net
Estimated
Useful Lives
N/A
3 - 7 years
15 - 31.5 years
5 - 7 years
3 - 10 years
5-10 years
N/A
N/A
December 31,
2019
2018
(Dollars in millions)
73 $
372
191
68
36
9
40
22
811
(395)
416 $
74
329
185
57
40
10
37
—
732
(342)
390
$
$
(1) Consists primarily of internally developed software and software upgrades which have not yet been placed in service.
92
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Depreciation expense was $59 million, $50 million and $39 million, for the years ended December 31, 2019, 2018 and
2017, respectively.
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.
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
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other (1)
Changes in estimates of fair value due to interest rate risk (1) (2)
Fair value of MSRs at end of period
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
291 $
356
(339)
290 $
223
(57)
(89)
(76)
291 $
(20)
2
290 $
335
288
(310)
(31)
9
291
$
$
(1) Changes in fair value are included within net return on mortgage servicing rights on the Consolidated Statements of Operations.
(2) Represents estimated MSR value change resulting primarily from market-driven changes.
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 significant assumptions used in valuing these assets:
December 31, 2019
December 31, 2018
Fair value resulting from
Fair value resulting from
Actual
10%
adverse
change
20%
adverse
change
Actual
10%
adverse
change
20%
adverse
change
(Dollars in millions)
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
5.34% $
10.59%
84.41
$
284 $
271
285
280
257
282 $
5.42% $
9.57%
85.57
284 $
278
286
280
268
283
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future
performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be linear. To isolate the effect of the specified
change, the fair value shock analysis is consistent with the identified adverse change, while holding all other assumptions
constant. In practice, a change in one assumption generally impacts other assumptions, which may either magnify or counteract
the effect of the change. For further information on the fair value of MSRs, see Note 1 - Description of Business, Basis of
Presentation, and Summary of Significant Accounting Standards and Note 20 - 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 on subserviced loans, net of third party subservicing costs.
93
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table summarizes income and fees associated with owned mortgage servicing rights:
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
Net return (loss) on mortgage servicing rights
Servicing fees, ancillary income and late fees (1)
$
96 $
65 $
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model
changes, and other
Changes in fair value
Gain (loss) on MSR derivatives (2)
Net transaction costs
(89)
(76)
76
(1)
(20)
2
(5)
(6)
Total return (loss) included in net return on mortgage servicing rights
$
6 $
36 $
(1) Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on a cash basis.
(2) Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs.
The following table summarizes income and fees associated with our mortgage loans subserviced for others:
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
Loan administration income on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1)
Charges on subserviced custodial balances (2)
Other servicing charges
$
Total income on mortgage loans subserviced, included in loan administration $
106 $
(67)
(9)
30 $
54 $
(29)
(2)
23 $
(1) Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on cash basis.
(2) Charges on subserviced custodial balances represent interest due to MSR owner
Note 11 - Derivative Financial Instruments
60
(31)
9
(8)
(8)
22
35
(11)
(3)
21
Derivative financial instruments are recorded at fair value in other assets and other liabilities on the Consolidated
Statements of Financial Condition. Our policy is to present its derivative assets and derivative liabilities on the Consolidated
Statement of Financial Condition on a gross basis, even when provisions allowing for set-off are in place. However, for
derivative contracts cleared through certain central clearing parties, variation margin payments are recognized as settlements.
We are exposed to non-performance risk by the counterparties to our various derivative financial instruments. A majority of our
derivatives are centrally cleared through a Central Counterparty Clearing House or consist of residential mortgage interest rate
lock commitments further limiting our exposure to non-performance risk. We believe that the non-performance risk inherent in
our remaining derivative contracts is minimal based on credit standards and the collateral provisions of the derivative
agreements.
Derivatives not designated as hedging instruments: We maintain a derivative portfolio of interest rate swaps, futures
and forward commitments used to manage exposure to changes in interest rates, MSR asset values and to meet the needs of
customers. We also enter into interest rate lock commitments, which are commitments to originate mortgage loans whereby the
interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Market risk on
interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments. Changes in
fair value of derivatives not designated as hedging instruments are recognized in the Consolidated Statements of Income.
Derivatives designated as hedging instruments: We have designated certain interest rate swaps as fair value hedges of
fixed-rate FHLB advances and investment securities available for sale using the last-of-layer method. Derivatives that are
designated in hedging relationships are assessed for effectiveness using regression analysis at inception and qualitatively
thereafter, unless regression analysis is deemed necessary. All designated hedge relationships were and are expected to be
highly effective as of December 31, 2019. Cash flows and the profit impact associated with designated hedges are reported in
the same category as the underlying hedged item.
During the fourth quarter of 2018, we completed the Wells Fargo branch acquisition. This acquisition resulted in the
addition of $1.8 billion of deposits and significantly changed the composition of our balance sheet. We settled all of our
94
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
variable LIBOR based long-term FHLB borrowings and determined that our forecasted interest payments were probable not to
occur. As a result, we reclassified $29 million of hedging gains that had been deferred in OCI from de-designated hedging
relationships immediately into income in 2018. We have no gains or losses estimated to be reclassified from other
comprehensive income into earnings during the next 12 months.
The following tables present the notional amount, estimated fair value and maturity of our derivative financial
instruments:
Notional Amount
December 31, 2019 (1)
Fair Value (2)
(Dollars in millions)
Expiration Dates
Derivatives in fair value hedge relationships:
Assets
Interest rate swaps on FHLB advances
Interest rate swaps on AFS securities
Total derivative assets
Derivatives not designated as hedging instruments:
Assets
Futures
Mortgage-backed securities forwards
Rate lock commitments
Interest rate swaps
Total derivative assets
Liabilities
Mortgage-backed securities forwards
Rate lock commitments
Interest rate swaps and swaptions
$
$
$
$
200 $
100
300 $
550 $
1,918
3,870
799
7,137 $
—
—
—
—
2
34
26
62
5,749
229
1,662
7,640 $
9
1
8
18
2020
2022
2020-2023
2020
2020
2020-2029
2020
2020
2020-2050
Total derivative liabilities
(1) Variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior days fair value of open positions, is
$
considered settlement of the derivative position for accounting purposes.
(2) Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.
Derivatives in fair value hedge relationships:
Assets
Interest rate swaps on CDs
Liabilities
Interest rate swaps on CDs
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
Notional Amount
December 31, 2018 (1)
Fair Value (2)
(Dollars in millions)
Expiration Dates
$
$
$
$
$
$
20 $
10 $
248 $
362
2,221
1,662
4,493 $
1,513 $
4,625
45
755
6,938 $
2019
2019
2019-2023
2019
2019
2019-2049
2019-2023
2019
2019
2019-2028
—
—
—
4
20
23
47
1
31
—
7
39
(1) Variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior days fair value of open positions, is
considered settlement of the derivative position for accounting purposes.
(2) Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.
95
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 Amounts
Netted in the
Statement of
Financial
Position
Net Amount
Presented in
the Statement
of Financial
Position
Gross Amounts Not Offset in
the Statement of Financial
Position
Financial
Instruments
Cash
Collateral
Gross Amount
(Dollars in millions)
December 31, 2019
Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards
Interest rate swaps
Total derivative assets
Liabilities
Mortgage-backed securities forwards
Interest rate swaps and swaptions (1)
Total derivative liabilities
December 31, 2018
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
$
$
$
$
$
$
$
2 $
26
28 $
9
8
17 $
4 $
23
27 $
1 $
31
7
39 $
— $
—
— $
—
—
— $
— $
—
— $
— $
—
—
— $
2 $
26
28 $
9
8
17 $
4 $
23
27 $
1 $
31
7
39 $
— $
—
— $
—
—
— $
— $
—
— $
— $
—
—
— $
—
—
—
24
39
63
—
14
14
1
29
23
53
(1) Variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior days fair value of open positions, is
considered settlement of the derivative position for accounting purposes.
The fair value basis adjustment on our hedged AFS securities is included in investment securities available for sale on
our Consolidated Statements of Financial Condition. The carrying amount of our hedged securities was $287 million at
December 31, 2019, of which $1 million was due to the fair value hedge relationship, and zero at December 31, 2018. The
closed portfolio of AFS securities designated in this last layer method hedge was $291 million (amortized cost of $289 million)
at December 31, 2019, of which we have designated $100 million. There were no designated AFS hedges at December 31,
2018.
The carrying amount of hedged FHLB advances was $200 million at December 31, 2019 and zero at December 31,
2018. The fair value hedge relationship had a de minimis impact at December 31, 2019 and zero at December 31, 2018.
At December 31, 2019, we pledged a total of $63 million related to derivative financial instruments, consisting of $34
million of cash collateral on derivative liabilities and $29 million of maintenance margin on centrally cleared derivatives and
had a de minimis obligation to return cash on derivative assets. We pledged a total of $53 million related to derivative financial
instruments, consisting of $30 million of cash collateral on derivative liabilities and $23 million of maintenance margin on
centrally cleared derivatives and had an obligation to return cash of $14 million on derivative assets at December 31, 2018.
Within the Consolidated Statements of Financial Condition, the collateral related to derivative activity is included in other
assets and liabilities and the cash pledged as maintenance is restricted and included in other assets.
96
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents the net gain recognized on designated instruments, net of the impact of offsetting
positions:
Gain on cash flow hedging relationships in interest contracts
Amount of gain reclassified from AOCI into income
Total gain on hedges
Amount Recorded in Net Interest Income (1)
For the Years Ended December 31,
2019
2018 (2)
(Dollars in millions)
$
$
— $
— $
30
30
(1) The income impact from fair value hedging relationships for the years ending December 31, 2019 was de minimis and zero at December 31, 2018.
(2)
Includes $29 million of hedging gains reclassified into net interest income in conjunction with the payoff of long-term FHLB advances.
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,
2019
2018
2017
(Dollars in millions)
Derivatives not designated as hedging instruments:
Location of Gain (Loss)
Futures
Net loss on mortgage servicing rights
$
(2) $
(4) $
Interest rate swaps and swaptions
Net gain (loss) on mortgage servicing rights
Mortgage-backed securities forwards
Net gain (loss) on mortgage servicing rights
Rate lock commitments and forward agency and loan sales
Net gain (loss) on loan sales
Forward commitments
Interest rate swaps (1)
Total derivative (loss) gain
Other noninterest income
Other noninterest income
(1)
Includes customer-initiated commercial interest rate swaps.
57
21
35
2
5
1
(2)
(31)
—
3
$
118 $
(33) $
(1)
(11)
4
(34)
—
2
(40)
97
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 12 - Deposit Accounts
The deposit accounts are as follows:
Retail deposits
Branch retail deposits
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificates of deposit/CDARS
Total branch retail deposits
Commercial deposits (1)
Demand deposit accounts
Savings accounts
Money market demand accounts
Total commercial retail deposits
Total retail deposits
Government deposits
Demand deposit accounts
Savings accounts
Certificates of deposit/CDARS
Total government deposits (2)
Wholesale deposits
Custodial deposits (3)
Total deposits
December 31,
2019
2018
(Dollars in millions)
$
$
1,318 $
3,030
495
2,353
7,196
1,438
342
188
1,968
9,164
360
495
358
1,213
633
4,136
15,146 $
1,297
2,812
628
2,387
7,124
1,243
314
173
1,730
8,854
326
567
309
1,202
583
1,741
12,380
(1)
Includes deposits from commercial and business banking customers.
(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 or subserviced
for others and that have been placed on deposit with the Bank.
The following indicates the scheduled maturities for certificates of deposit with a minimum denomination of $250,000:
Three months or less
Over three months to six months
Over six months to twelve months
One to two years
Thereafter
Total
December 31,
2019
2018
(Dollars in millions)
223 $
238
278
101
35
875 $
251
165
229
139
33
817
$
$
98
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 13 - Borrowings
Federal Home Loan Bank Advances and Other Borrowings
The following is a breakdown of our FHLB advances and other borrowings outstanding:
Short-term fixed rate term advances
Other short-term borrowings
Total short-term Federal Home Loan Bank advances and other borrowings
Long-term fixed rate advances (1)
Total long-term Federal Home Loan Bank advances
December 31, 2019
December 31, 2018
Amount
Rate
Amount
Rate
(Dollars in millions)
$
3,695
470
4,165
650
650
1.61% $
1.64%
1.45%
2,993
251
3,244
150
150
2.52%
2.87%
1.53%
Total Federal Home Loan Bank advances and other borrowings
$
4,815
$
3,394
(1)
Includes the current portion of fixed rate advances of $0 million and $50 million at December 31, 2019 and December 31, 2018, respectively.
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
2019
$
For the Years Ended December 31,
2018
(Dollars in millions)
5,740
$
4,713
2,089
1.96%
5,005
3,064
4,194
1.90%
$
2017
5,665
4,590
1,195
1.30%
The following table outlines the maturity dates of our FHLB advances and other borrowings:
2020
2021
2022
2023
Thereafter
Total
December 31, 2019
(Dollars in millions)
4,165
—
—
250
400
4,815
$
$
99
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Parent Company Senior Notes and Trust Preferred Securities
The following table presents long-term debt, net of debt issuance costs:
Senior Notes
Senior notes, matures 2021
Trust Preferred Securities
Floating Three Month LIBOR Plus:
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 other long-term debt
Senior Notes
December 31, 2019
December 31, 2018
Amount
Interest Rate
Amount
Interest Rate
(Dollars in millions)
249
6.125%
$
248
6.125%
26
26
26
26
26
51
25
25
16
247
496
5.20%
5.24%
5.21%
3.99%
3.99%
3.64%
3.49%
3.34%
4.39%
$
$
$
$
$
$
$
$
$
$
26
26
26
26
26
51
25
25
16
247
495
6.07%
5.69%
6.05%
4.44%
4.44%
4.54%
3.94%
4.24%
5.29%
$
$
$
$
$
$
$
$
$
$
$
On July 11, 2016, we issued $250 million of senior notes ("Senior Notes") which mature on July 15, 2021. Prior to
June 15, 2021, we may redeem some or all of the Senior Notes at a redemption price equal to the greater of 100 percent of the
aggregate principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments
discounted to the redemption date on a semi-annual basis using a discount rate equal to the Treasury Rate plus 0.50 percent, in
addition to accrued and unpaid interest.
Trust Preferred Securities
We sponsor nine trust subsidiaries, which issued preferred stock to third party investors. We issued junior subordinated
debt securities to those trusts, which we have included in long-term debt. The junior subordinated debt securities are the sole
assets of those trusts. The trust preferred securities are callable by us at any time. Interest is payable quarterly; however, we
may defer interest payments for up to 20 quarters without default or penalty. As of December 31, 2019, we had no deferred
interest.
100
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 14 - 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 provision (benefit)
Net unrealized gain (loss)
Reclassifications out of AOCI (1)
Less: Tax provision
Net unrealized gain (loss) reclassified out of AOCI
Reclassification of certain income tax effects (2)
Other comprehensive income (loss), net of tax
Ending balance
Cash Flow Hedges
Beginning balance
Unrealized gain
Less: Tax provision
Net unrealized gain
Reclassifications out of AOCI (3)
Less: Tax benefit
Net unrealized loss reclassified out of AOCI
Other comprehensive income (loss), net of tax
Ending balance
$
$
$
$
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
(47) $
57
14
43
6
1
5
—
48
1 $
— $
—
—
—
—
—
—
—
— $
(18) $
(30)
(7)
(23)
(1)
—
(1)
(5)
(29)
(47) $
2 $
27
7
20
(30)
(8)
(22)
(2)
— $
(8)
(19)
(7)
(12)
3
1
2
—
(10)
(18)
1
5
1
4
(5)
(2)
(3)
1
2
(1) Reclassifications are reported in other noninterest income in the Consolidated Statement of Operations.
(2)
(3) Reclassifications are reported in interest expense on the Consolidated Statement of Operations.
Income tax effects of the Tax Cuts and Jobs Act are reclassified from AOCI to retained earnings due to early adoption of ASU 2018-02.
101
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 15 - 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:
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
Note 16 - Stock-Based Compensation
For the Years Ended December 31,
2019
2018
2017
(In millions, except share data)
187 $
218 $
63
56,584,238
57,520,289
57,093,868
—
654,740
57,238,978
—
802,661
58,322,950
12,287
1,072,188
58,178,343
3.85 $
—
(0.05)
3.80 $
3.26 $
—
(0.05)
3.21 $
1.11
—
(0.02)
1.09
$
$
$
Certain key employees, officers, directors and others are eligible to receive stock awards. Awards that may be granted
under the 2016 Stock Plan include stock options, restricted stock, restricted stock units, performance awards, dividend equivalents
and other awards.
The compensation expense recognized related to stock-based compensation was $13 million, $11 million, and $11
million during each of the years ended December 31, 2019, 2018 and 2017, respectively.
Stock Options
No stock options have been granted by the Company since 2002. There were no stock options exercised during the
years ended December 31, 2019, 2018 and 2017 as all options had negative intrinsic value. The remaining stock options expired
January 22, 2020, and were not exercised.
The following table summarizes stock option activity:
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
For the Years Ended December 31,
2019
2018
2017
Weighted
Average
Exercise
Price
Number of
Shares
Weighted
Average
Exercise
Price
Number of
Shares
Weighted
Average
Exercise
Price
Number of
Shares
36,093 $
(1,894)
34,199 $
34,199 $
16,968 $
80.00
80.00
80.00
80.00
80.00
40,718 $
(4,625)
36,093 $
36,093 $
17,991 $
80.00
80.00
80.00
80.00
80.00
45,791 $
(5,073)
40,718 $
40,718 $
20,286 $
80.00
80.00
80.00
80.00
80.00
(1)
All outstanding options at December 31, 2019 are vested or expected to vest and have a weighted average remaining contractual life of 0.1 years.
102
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Restricted Stock and Restricted Stock Units
We have issued restricted stock units to officers, directors and certain employees under our long term incentive
program (LTIP). Restricted stock units generally will vest in 3 increments on each annual anniversary of the date of grant
beginning with the first anniversary or vest after three years 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 provided for payouts to certain executives only if our stock achieved and sustained a
specified market performance within ten years of the grant date, which occurred. 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. With the achievement of the performance hurdles and satisfactory
quality reviews, installments were paid out in May 2017, 2018, and 2019. The remaining two installments will be made
annually on the vesting date anniversary subject to quality review.
With the achievement of the performance-based ExLTIP, on March 20, 2018, the Board approved the adoption of the
2018 Executive Long Term Incentive Program II ("2018 ExLTIP II"). The 2018 ExLTIP II was provided to certain executives
and is comprised of RSUs which are dependent on stock performance, time-based RSUs for which vesting is based on service
over a four years period and RSUs that are performance and time vested with the same terms as those granted to other
employees under the existing LTIP. As of December 31, 2019 the stock performance hurdles have not been met.
At December 31, 2019, the maximum number of shares of common stock that may be issued were 1,416,986 shares.
The total grant date fair value of awards vested during the years ended December 31, 2019, 2018, 2017 was $10 million, $9
million, and $7 million, respectively. As of December 31, 2019, the total unrecognized compensation cost related to non-vested
awards was $23 million with a weighted average expense recognition period of 1.8 years.
The following table summarizes restricted stock activity:
For the Years Ended December 31,
2019
2018
2017
Weighted
Average Grant
-Date
Fair Value per
Share
Number of
Shares
Weighted
Average Grant
-Date
Fair Value per
Share
Number of
Shares
Weighted
Average Grant
-Date
Fair Value per
Share
Number of
Shares
Restricted Stock and Restricted Stock Units
Non-vested balance at beginning of period
1,620,568 $
Granted
Vested
Canceled and forfeited
338,737
(379,936)
(180,242)
Non-vested balance at end of period
1,399,127 $
2017 Employee Stock Purchase Plan
27.27
32.11
26.98
25.66
28.72
1,290,450 $
875,352
(401,379)
(143,855)
1,620,568 $
20.52
34.32
23.04
21.46
27.27
1,461,910 $
357,058
(385,454)
(143,064)
1,290,450 $
17.68
28.06
17.36
18.89
20.52
The Employee Stock Purchase Plan ("2017 ESPP") was approved on March 20, 2017 by our 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. There were 106,881 and 114,385 shares issued under the 2017 ESPP during the years ended December 31, 2019
and 2018, respectively, and the associated compensation expense was de minimis for both periods.
103
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 17 - Income Taxes
Components of the provision for income taxes consist of the following:
Current
Federal
State
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,
2019
2018
2017
(Dollars in millions)
$
$
17 $
6
23
39
—
(14)
25
48 $
— $
1
1
47
—
(3)
44
45 $
Our effective tax rate differs from the statutory federal tax rate. The following is a summary of such differences:
For the Years Ended December 31,
2019
2018
2017
Provision at statutory federal income tax rate (1)
(Decreases) increases resulting from:
Bank owned life insurance
State income tax (benefit), net of federal income tax effect (net of valuation
allowance release)
Low income housing tax losses
Tax reform
Other
Provision for income taxes
Effective tax provision rate
$
$
56
(2)
(6)
(1)
—
1
48
18.1%
$
(Dollars in millions)
$
49
$
(2)
(2)
(1)
—
1
45
19.4%
$
2
—
2
66
80
—
146
148
74
(3)
—
80
(3)
148
70.1%
(1) The statutory federal income tax rate was 21 percent for the years ended December 31, 2019 and December 31, 2018 and 35 percent for the year
ended December 31, 2017.
The decrease in our income tax provision and effective tax provision rate during the year ended December 31, 2019 as
compared to the year ended December 31, 2018, was primarily due to a change in our valuation allowance for net deferred tax
assets at the state level.
104
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:
Deferred tax assets
Net operating loss carryforwards (Federal and State)
Allowance for loan losses
Accrued compensation
Litigation settlement
Lease liability
Contingent consideration
General business credits
General business reserves
Other
Total
Valuation allowance
Total net
Deferred tax liabilities
Mark-to-market adjustments
Premises and equipment
State and local taxes
Commercial lease financing
Mortgage loan servicing rights
Right of use asset
Total
Net deferred tax asset
December 31,
2019
2018
(Dollars in millions)
43 $
26
12
9
6
4
—
2
11
113 $
(5)
108 $
(12) $
(7)
(7)
(5)
(5)
(6)
(42) $
66 $
58
30
10
14
—
3
7
10
11
143
(14)
129
(11)
(8)
(3)
(4)
—
—
(26)
103
$
$
$
$
$
$
We have not provided deferred income taxes for the Bank’s pre-1988 tax bad debt reserve at December 31, 2019 of
approximately $4.0 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, 2019 and 2018, we had federal net operating loss carry forwards of $68 million
and $154 million, respectively. These carry forwards, if unused, expire in calendar years 2028 through 2029. 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, 2019 we had $68 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 $35 million which includes total state net operating loss
carryforwards of $454 million at December 31, 2019. In connection with our ongoing assessment of deferred taxes, we
analyzed each state net operating loss separately and determined the amount of net operating loss available, estimated the
amount which we 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, 2019, the net state DTAs which will more
likely than not be realized, was $30 million. We have a valuation allowance of $5 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.
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,
105
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
2019, 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, 2019, 2018 and 2017, 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 18 - Regulatory Capital
We, along with the Bank, must meet specific capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts
and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by regulators that could have a material effect on the
Consolidated Financial Statements. On January 1, 2015, the Basel III rules became effective and included transition provisions
through 2018. In preparation for the capital simplification rules, effective January 1, 2020, the Basel III implementation phase-
in has been halted. 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, 2019 and December 31, 2018.
The following tables present the regulatory capital ratios as of the dates indicated:
Flagstar Bancorp
December 31, 2019
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, 2018
Tier 1 capital (to adjusted avg. total assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
Flagstar Bank
December 31, 2019
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, 2018
Tier 1 capital (to adjusted avg. total assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to RWA)
Total capital (to RWA)
$
$
$
$
Actual
For Capital
Adequacy Purposes
Well-Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in millions)
1,720
1,480
1,720
1,830
1,505
1,265
1,505
1,637
7.57% $
9.32%
10.83%
11.52%
8.29% $
10.54%
12.54%
13.63%
909
715
953
1,271
726
540
720
960
4.0 % $
4.5%
6.0%
8.0%
4.0 % $
4.5%
6.0%
8.0%
1,136
1,033
1,271
1,589
908
780
960
1,201
5.0%
6.5%
8.0%
10.0%
5.0%
6.5%
8.0%
10.0%
Actual
For Capital
Adequacy Purposes
Well-Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in millions)
7.71% $
11.04%
11.04%
11.73%
8.67% $
13.12%
13.12%
14.21%
909
714
952
1,270
726
540
720
960
4.0 % $
4.5%
6.0%
8.0%
4.0 % $
4.5%
6.0%
8.0%
1,136
1,032
1,270
1,587
908
780
960
1,200
5.0%
6.5%
8.0%
10.0%
5.0%
6.5%
8.0%
10.0%
1,752
1,752
1,752
1,862
1,574
1,574
1,574
1,705
106
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 19 - 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, 2019, we do not believe that the amount of any reasonably possible losses in excess of any amounts
accrued with respect to ongoing proceedings or any other known claims will be material to our financial statements, or that the
ultimate outcome of these actions will have a material adverse effect on our financial condition, results of operations or cash
flows.
DOJ litigation settlement
In 2012, the Bank entered into a Settlement Agreement with the DOJ which meets the definition of a financial liability
(the "DOJ Liability").
In accordance with the Settlement Agreement, we made an initial payment of $15 million and agreed to make future
annual payments totaling $118 million in annual increments of up to $25 million upon meeting all conditions, which are
evaluated quarterly and include: (a) the reversal of the DTA valuation allowance, which occurred at the end of 2013; (b) the
repayment of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "TARP Preferred"), which occurred in the
third quarter of 2016; and (c) the Bank’s Tier 1 Leverage Capital Ratio equals 11 percent or greater as filed in the Call Report
with the OCC.
No payment would be required until six months after the Bank files its Call Report with the OCC first reporting that its
Tier 1 Leverage Capital Ratio was 11 percent or greater. If all other conditions were then satisfied, an initial annual payment
would be due at that time. The next annual payment is 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.
Consistent with our business and regulatory requirements, Flagstar shall seek in good faith to fulfill the conditions, and
will not undertake any conduct or fail to take any action the purpose of which is to frustrate or delay our ability to fulfill any of
the above conditions.
Additionally, if the Bank and Bancorp become party to a business combination in which the Bank or Bancorp
represent less than 33.3 percent of the resulting company’s assets, annual payments must commence twelve months after the
date of that business combination.
The Settlement Agreement meets the definition of a financial instrument for which we elected the fair value option. We
consider the assumptions a market participant would make to transfer the liability and evaluate the potential ways we might
satisfy the Settlement Agreement and our estimates of the likelihood of these outcomes, which may change over time. The fair
value of the liability is subject to significant uncertainty and is impacted by forecasted estimates of the timing of potential
payments, some of which are impacted by inputs including estimates of equity, earnings, timing and amount of dividends and
growth of the balance sheet and their related impacts on forecasted Tier 1 Leverage Capital Ratio discount rate, and the
likelihood and types of potential business combinations, or any other means by which a payment could be made. For further
information on the fair value to the liability, see Note 20 - Fair Value Measurements.
107
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Other litigation accruals
At December 31, 2019 and December 31, 2018, excluding the fair value liability relating to the DOJ litigation
settlement, our total accrual for contingent liabilities and settled litigation was $3 million and $2 million, respectively.
Commitments
The following table is a summary of the contractual amount of significant commitments:
Commitments to extend credit
Mortgage loan commitments including interest-rate locks
Warehouse loan commitments
Commercial and industrial commitments
Other commercial commitments
HELOC commitments
Other consumer commitments
Standby and commercial letters of credit
$
December 31,
2019
2018
(Dollars in millions)
4,099 $
1,944
1,107
2,015
558
175
82
2,293
2,334
918
1,260
429
108
63
Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition
established in the contract. Since many of these commitments expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash flow requirements. Commitments generally have fixed expiration dates or other
termination clauses. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by us, upon extension of credit is based on management's credit evaluation of the counterparties.
These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized
on the Consolidated Statements of Financial Condition. Our exposure to credit losses in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. We utilize the same credit policies in making commitments and conditional
obligations as we do for balance sheet instruments. The types of credit we extend are as follows:
Mortgage loan commitments including interest-rate locks. We enter into mortgage loan commitments, including
interest-rate locks with our customers. These interest-rate lock 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
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
108
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 December 31, 2019 and
December 31, 2018, respectively, is reflected in other liabilities on the Consolidated Statements of Financial Condition.
Supplemental executive retirement plan with former CEO. The Company entered into a supplemental executive
retirement plan (“SERP”) with a former CEO in 2009. Under the plan, the former CEO was to receive a $16 million payment in
August 2018. The Company fully accrued for the SERP liability during that time period and no SERP payments have been
made to the former CEO. Due to the condition of the Company at the time the former CEO’s employment ended, we believe
that any payment under the SERP would be deemed to be a “Golden Parachute” payment and, therefore, is subject to certain
banking regulations. As a result, we would need to make an application to the regulators to make a payment and certify to
certain criteria. The Company does not believe that it can make such a certification. The former CEO has filed a lawsuit to
compel us to make that certification and ultimately pay the liability. Final dispensation of the "SERP" is not within our control
and the liability of $16 million at December 31, 2019 may be adjusted as more information is known.
Note 20 - 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.
109
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:
Level 1
Level 2
Level 3
Total Fair Value
December 31, 2019
Investment securities available-for-sale
Agency - Commercial
Agency - Residential
Municipal obligations
Corporate debt obligations
Other MBS
Certificate of Deposits
Loans held-for-sale
Residential first mortgage loans
Commercial Loan
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
Rate lock commitments (fallout-adjusted)
Futures
Mortgage-backed securities forwards
Interest rate swaps and swaptions
DOJ litigation settlement
Contingent consideration
Total liabilities at fair value
(Dollars in millions)
947 $
1,015
31
77
45
1
5,219
—
10
—
—
—
2
26
7,373 $
— $
—
(9)
(8)
—
—
(17) $
— $
—
—
—
—
—
—
—
—
2
291
34
—
—
327 $
(1) $
—
—
—
(35)
(10)
(46) $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
947
1,015
31
77
45
1
5,219
—
10
2
291
34
2
26
7,700
(1)
—
(9)
(8)
(35)
(10)
(63)
$
$
$
$
110
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2018
Level 1
Level 2
Level 3
Total Fair Value
(Dollars in millions)
Investment securities available-for-sale
Agency - Commercial
Agency - Residential
Municipal obligations
Corporate debt obligations
Other MBS
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
Futures
Mortgage-backed securities forwards
Interest rate swaps
DOJ litigation settlement
Contingent consideration
Total liabilities at fair value
$
$
$
$
— $
—
—
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
— $
1,374 $
662
32
42
32
3,732
8
—
—
—
4
23
5,909 $
(1) $
(31)
(7)
—
—
(39) $
— $
—
—
—
—
—
—
2
290
20
—
—
312 $
— $
—
—
(60)
(6)
(66) $
1,374
662
32
42
32
3,732
8
2
290
20
4
23
6,221
(1)
(31)
(7)
(60)
(6)
(105)
111
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:
Balance at
Beginning
of Year
Total Gains /
(Losses)
Recorded in
Earnings (1)
Purchases /
Originations
Sales
Settlement
Transfers In
(Out)
Balance at
End of Year
(Dollars in millions)
Year Ended December 31, 2019
Assets
Loans held-for-investment
Home equity
Mortgage servicing rights (1)
Rate lock commitments (net) (1)(2)
Totals
Liabilities
DOJ litigation settlement
Contingent consideration
Totals
Year Ended December 31, 2018
Assets
Loans held-for-investment
Home equity
Mortgage servicing rights (1)
Rate lock commitments (net) (1)(2)
Totals
Liabilities
DOJ litigation settlement
Contingent consideration
Totals
Year Ended December 31, 2017
Assets
Loans held-for-sale
Home Equity
Loans held-for-investment
Home equity
Mortgage servicing rights (1)
Rate lock commitments (net) (1)(2)
Totals
Liabilities
DOJ litigation settlement
Contingent consideration
Totals
$
$
$
$
$
$
$
$
$
$
$
$
$
2 $
— $
— $
290
20
(165)
86
223
326
312 $
(79) $
549 $
— $
(57)
—
(57) $
— $
—
— $
— $
— $
—
—
—
(398)
— $
(398) $
— $
3
3 $
— $
—
— $
— $
—
— $
(60) $
(6)
(66) $
4 $
291
24
319 $
(60) $
(25)
(85) $
25 $
(7)
18 $
— $
(18)
(34)
(52) $
— $
13
13 $
— $
— $
(2) $
— $
356
235
(339)
—
—
—
—
(205)
591 $
(339) $
(2) $
(205) $
— $
—
— $
— $
—
— $
— $
6
6 $
— $
—
— $
— $
1 $
— $
(52) $
(1) $
52 $
65 $
335 $
18
418 $
(60) $
—
(60) $
2
(22)
54 $
35 $
— $
(1)
(1) $
$
— $
(8) $
(55) $
288
267
(310)
—
555 $
(362) $
— $
(25)
(25) $
— $
—
— $
—
(9) $
— $
1
1 $
(315)
(318) $
— $
—
— $
2
291
34
327
(35)
(10)
(45)
2
290
20
312
(60)
(6)
(66)
—
4
291
24
319
(60)
(25)
(85)
(1) We utilized swaptions, futures, forward agency and loan sales and interest rate swaps to manage the risk associated with mortgage servicing rights and
rate lock commitments. Gains and losses for individual lines do not reflect the effect of our risk management activities related to such Level 3
instruments.
(2) Rate lock commitments are reported on a fallout adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are
transferred to LHFS, which are classified as Level 2 assets.
112
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, 2019
Assets
Loans held-for-investment
Home equity
Mortgage servicing rights
Rate lock commitments (net)
Liabilities
DOJ litigation settlement
Contingent consideration
December 31, 2018
Assets
Loans held-for-investment
Home equity
Mortgage servicing rights
Rate lock commitments (net)
Liabilities
DOJ litigation settlement
Contingent consideration
$
$
$
$
$
2
291
34
(35)
(10)
Discounted cash
flows
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
Origination pull-through rate
7.2% -10.8% (9.0%)
13.0% - 19.5% (16.2%)
2.7%-4.0% (3.3%)
2.4% - 20.4% (5.3%)
0% - 12.3% (10.6%)
$67 - $95 ($84)
80.0% - 87.2% (81.5%)
(1)
(1)
(1)
Discounted cash
flows
Discounted cash
flows
See description below
See description below
See description below
See description below (2)
Fair Value Valuation Technique
Unobservable Input
Range (Weighted Average)
(Dollars in millions)
$
$
$
$
$
2
290
20
(60)
(6)
Discounted cash
flows
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
Origination pull-through rate
7.2% - 10.8% (9.0%)
13.6% - 20.3% (16.9%)
3.0% - 4.6% (3.8%)
2.1% - 25.9% (5.4%)
0% - 10.7% (9.6%)
$67 - $95 ($86)
75.0% - 87.2% (76.8%)
(1)
(1)
(1)
Discounted cash
flows
Discounted cash
flows
See description below
See description below
See description below
See description below (2)
(1) Unobservable inputs were weighted by their relative fair value of the instruments.
(2) Unobservable inputs were not weighted as only one instrument exists.
Recurring Significant Unobservable Inputs
Home equity. The most significant unobservable inputs used in the fair value measurement of the home equity loans are
discount rates, constant prepayment rates, and default rates. The constant prepayment and default rates are based on a 12 month
historical average. Significant increases (decreases) in the discount rate in isolation result in a significantly lower (higher) fair value
measurement. Increases (decreases) in prepay rates in isolation result in a higher (lower) fair value and increases (decreases) in
default rates in isolation result in a lower (higher) fair value.
MSRs. The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads,
prepayment rates, and cost to service. Significant increases (decreases) in all three assumptions in isolation result in a significantly
lower (higher) fair value measurement. Weighted average life (in years) is used to determine the change in fair value of MSRs. For
December 31, 2019 and December 31, 2018 the weighted average life (in years) for the entire MSR portfolio was 4.1 and 5.2,
respectively.
DOJ litigation settlement. The significant unobservable input used in the fair value measurement of the DOJ litigation
settlement are the discount rate, asset growth rate, return on assets, dividend rate, and potential ways we might be required to begin
making DOJ liability payments and our estimates of the likelihood of these outcomes, as further discussed in Note 19 - Legal
Proceedings, Contingencies and Commitments. The DOJ liability had a fair value adjustment of $25 million for the year ended
December 31, 2019. This reduced the liability to $35 million based on changes in the probability of potential ways we might be
113
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
required to begin making DOJ liability payments and our estimates of the likelihood of these outcomes. Our assessment of these
outcomes reflect a reduced likelihood, and longer timing, for potential future payments.
Rate lock commitments. The significant unobservable input used in the fair value measurement of the rate lock
commitments is the pull through rate. The pull through rate is a statistical analysis of our actual rate lock fallout history to determine
the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New
market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are
applied accordingly. Significant increases (decreases) in the pull through rate in isolation result in a significantly higher (lower) fair
value measurement.
Contingent consideration. The significant unobservable input used in the fair value of the contingent consideration is
future forecasted target production volumes and profitability of the division. An increase or decrease to these inputs results in an
increase or decrease of the liability.
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:
December 31, 2019
Loans held-for-sale (2)
Impaired loans held-for-investment (2)
Residential first mortgage loans
Repossessed assets (3)
Totals
December 31, 2018
Loans held-for-sale (2)
Impaired loans held-for-investment (2)
Residential first mortgage loans
Repossessed assets (3)
Totals
Total (1)
Level 2
Level 3
Gains/(Losses)
(Dollars in millions)
$
$
$
$
6 $
14
10
30 $
5 $
12
7
24 $
6 $
—
—
6 $
5 $
—
—
5 $
— $
14
10
24 $
— $
12
7
19 $
(1)
(5)
(3)
(9)
(1)
(4)
(3)
(8)
(1) The fair values are determined at various dates during the years ended December 31, 2019 and 2018, respectively.
(2) Gains/(losses) reflect fair value adjustments on assets for which we did not elect the fair value option.
(3) Gains/(losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets.
The following 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, 2019
Impaired loans held-for-investment
Residential first mortgage loans
Repossessed assets
December 31, 2018
Impaired loans held-for-investment
Residential first mortgage loans
Repossessed assets
$
$
$
$
14
10
Fair value of collateral
Fair value of collateral
Loss severity discount
Loss severity discount
25% - 30% (25.9%)
0% - 100% (17.1%)
12
7
Fair value of collateral
Fair value of collateral
Loss severity discount
Loss severity discount
25% - 30% (28.3%)
0% - 100% (25.8%)
(1)
(1)
(1)
(1)
(1) Unobservable inputs were weighted by their relative fair value of the instruments.
Nonrecurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are
appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties.
114
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, 2019
Estimated Fair Value
Carrying Value
Total
Level 1
Level 2
Level 3
(Dollars in millions)
$
426 $
426 $
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
Liabilities
Retail deposits
Demand deposits and savings accounts
Certificates of deposit
$
Wholesale deposits
Government deposits
Custodial deposits
Federal Home Loan Bank advances
Long-term debt
DOJ litigation settlement
Contingent consideration
Derivative financial instruments
426 $
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
— $
2,116
599
5,258
10
707
—
303
349
—
45
54
(6,050) $
(2,368)
(640)
(1,156)
(4,066)
(4,816)
(462)
—
—
(43)
—
—
—
—
12,021
—
291
—
—
10
—
34
—
—
—
—
—
—
—
(35)
(10)
(1)
2,116
598
5,258
12,129
736
291
303
349
10
45
62
(6,811) $
(2,353)
(633)
(1,213)
(4,136)
(4,815)
(496)
(35)
(10)
(18)
2,116
599
5,258
12,031
707
291
303
349
10
45
88
(6,050) $
(2,368)
(640)
(1,156)
(4,066)
(4,816)
(462)
(35)
(10)
(44)
115
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2018
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
Wholesale deposits
Government deposits
Custodial deposits
Federal Home Loan Bank advances
Long-term debt
DOJ litigation settlement
Contingent consideration
Derivative financial instruments, liabilities
Fair Value Option
$
408 $
408 $
2,142
703
3,869
9,088
392
290
303
340
7
50
47
(6,467) $
(2,387)
(583)
(1,202)
(1,741)
(3,394)
(495)
(60)
(6)
(39)
2,142
681
3,870
8,966
374
290
303
340
7
50
47
(5,475) $
(2,379)
(585)
(1,145)
(1,664)
(3,383)
(463)
(60)
(6)
(39)
$
408 $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
— $
2,142
681
3,870
8
374
—
303
340
—
50
27
(5,475) $
(2,379)
(585)
(1,145)
(1,664)
(3,383)
(463)
—
—
(39)
—
—
—
—
8,958
290
—
—
7
—
20
—
—
—
—
—
—
—
(60)
(6)
—
We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements
primarily to more closely align the accounting method with the underlying economic exposure. Interest income on LHFS is accrued
on the principal outstanding primarily using the "simple-interest" method.
The following table reflects the change in fair value included in earnings of financial instruments for which the fair value
option has been elected:
Assets
Loans held-for-sale
Net gain on loan sales
Loans held-for-investment
Other noninterest income
Liabilities
DOJ litigation settlement
Other noninterest income
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
$
348 $
(29) $
283
1
25
—
—
1
—
116
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, 2019
December 31, 2018
Unpaid
Principal
Balance
Fair Value
Fair Value
Over / (Under)
Unpaid
Principal
Balance
Unpaid
Principal
Balance
Fair Value
Fair Value
Over / (Under)
Unpaid
Principal
Balance
(Dollars in millions)
$
$
$
3 $
5
8
5,057
8
5,065
5,060
13
5,073 $
3 $
4
7
5,216
8
5,224
5,219
12
5,231 $
— $
(1)
(1)
159
—
159
159
(1)
158 $
6 $
4
10
3,601
8
3,609
3,607
12
3,619 $
6 $
3
9
3,726
7
3,733
3,732
10
3,742 $
(118) $
(35) $
83 $
(118) $
(60) $
—
(1)
(1)
125
(1)
124
125
(2)
123
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 19 - Legal Proceedings,
Contingencies and Commitments.
Note 21 - 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.
The Community Banking segment originates loans, provides deposits and fee based services to consumer, business,
and mortgage lending customers through its Branch Banking, Business Banking and Commercial Banking, Government
Banking, Warehouse Lending and LHFI Portfolio groups. Products offered through these groups include checking accounts,
savings accounts, money market accounts, certificates of deposit, consumer loans, commercial loans, commercial real estate
loans, equipment finance and leasing, home builder finance loans and warehouse lines of credit. Other financial services
available include consumer and corporate card services, customized treasury management solutions, merchant services and
capital markets services such as loan syndications, and investment and insurance products and services.
The Mortgage Originations segment originates and acquires one-to-four family residential mortgage loans to sell or
hold on our balance sheet. Loans originated-to-sell, comprise the majority of the lending activity. These loans are originated
through mortgage branches, call centers, the Internet and third party counterparties. The Mortgage Origination segment
recognizes interest income on loans that are held for sale and the gains from sales associated with these loans, whereas the
interest income on LHFI and a loss on sales for the purchase of these loans is recognized in the Community Banking segment.
The Mortgage Servicing segment services and subservices mortgage loans for others on a fee for service basis and
may also collect ancillary fees and earn income through the use of noninterest-bearing escrows. Revenue for those serviced and
subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the status of the
underlying loans. The Mortgage Servicing segment also provides servicing of residential mortgages for our own LHFI portfolio
117
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
in the Community Banking segment and our own LHFS portfolio in the Mortgage Originations segment, for which it earns
revenue via an intercompany service fee allocation.
The Other segment includes the treasury functions, which include, the impact of interest rate risk management, balance
sheet funding activities and the administration of the investment securities portfolios, as well as miscellaneous other expenses
of a corporate nature. In addition, the Other segment includes revenue and expenses related to treasury and corporate assets and
liabilities and equity not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage
Servicing operating segments.
Revenues are comprised of net interest income (before the provision (benefit) for loan losses) and noninterest income.
Noninterest expenses and provision (benefit) for income taxes, are fully allocated to each operating segment. Allocation
methodologies may be subject to periodic adjustment as the internal management accounting system is revised and the business
or product lines within the segments change.
The following tables present financial information by business segment for the periods indicated:
Summary of Operations
Net interest income
Provision (benefit) for loan losses
Net interest income after provision (benefit) for loan losses
Net gain on loan sales
Loan fees and charges
Loan administration income
Net return on mortgage servicing rights
Other noninterest income
Total noninterest income
Compensation and benefits
Commissions
Loan processing expense
Other noninterest expense
Total noninterest expense
Income before indirect overhead allocations and income taxes
Indirect overhead allocation Income (expense)
Provision (benefit) for income taxes
Net income (loss)
Intersegment (expense) revenue
Average balances
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment (2)
Total assets
Deposits
Year Ended December 31, 2019
Community
Banking
Mortgage
Originations
Mortgage
Servicing
Other (1)
Total
(Dollars in millions)
$
$
$
$
449 $
20
429
(29)
(1)
(5)
—
64
29
100
2
7
167
276
182
(41)
30
111 $
106 $
2
104
364
69
(22)
6
10
427
114
109
35
88
346
185
(42)
29
114 $
16 $
—
16
—
32
124
—
—
156
28
—
36
59
123
49
(18)
6
25 $
(9) $
(4)
(5)
—
—
(67)
—
65
(2)
135
—
2
6
143
(150)
101
(17)
(32) $
(19) $
29 $
26 $
(36) $
562
18
544
335
100
30
6
139
610
377
111
80
320
888
266
—
48
218
—
32 $
—
10,910
11,378
10,301
3,920 $
553
24
5,408
—
— $
—
—
47
3,850
— $
—
(2)
3,840
556
3,952
553
10,932
20,673
14,707
(1)
(2)
Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
118
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Summary of Operations
Net interest income
Provision (benefit) for loan losses
Net interest income after provision (benefit) for loan losses
Net gain on loan sales
Loan fees and charges
Loan administration income
Net return on mortgage servicing rights
Other noninterest income
Total noninterest income
Compensation and benefits
Commissions
Loan processing expense
Other noninterest expense
Total noninterest expense
Income before indirect overhead allocations and income taxes
Indirect overhead allocation
Provision (benefit) for income taxes
Net income (loss)
Intersegment (expense) revenue
Average balances
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment (2)
Total assets
Deposits
Year Ended December 31, 2018
Community
Banking
Mortgage
Originations
Mortgage
Servicing
Other (1)
Total
(Dollars in millions)
$
$
$
$
314 $
2
312
(12)
(1)
(3)
—
44
28
70
2
5
103
180
160
(39)
25
96 $
128 $
2
126
212
63
(14)
36
16
313
105
78
25
58
266
173
(68)
22
83 $
7 $
—
7
—
25
69
—
—
94
19
—
26
44
89
12
(20)
(2)
(6) $
48 $
(12)
60
—
—
(29)
—
33
4
124
—
3
50
177
(113)
127
—
14 $
1 $
10 $
19 $
(30) $
497
(8)
505
200
87
23
36
93
439
318
80
59
255
712
232
—
45
187
—
24 $
—
8,417
8,615
8,892
4,172 $
303
9
5,406
—
— $
—
—
34
1,883
— $
—
29
3,925
—
4,196
303
8,455
17,980
10,775
(1)
(2)
Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
119
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Summary of Operations
Net interest income
Provision (benefit) for loan losses
Net interest income after provision (benefit) for loan losses
Net gain on loan sales
Loan fees and charges
Loan administration income
Net return on mortgage servicing rights
Other noninterest income
Total noninterest income
Compensation and benefits
Commissions
Loan processing expense
Other noninterest expense
Total noninterest expense
Income before indirect overhead allocations and income taxes
Indirect overhead allocation
Provision (benefit) for income taxes
Net income (loss)
Intersegment (expense) revenue
Average balances
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment (2)
Total assets
Deposits
Year Ended December 31, 2017
Community
Banking
Mortgage
Originations
Mortgage
Servicing
Other (1)
Total
(Dollars in millions)
$
$
$
$
238 $
4
234
(10)
—
—
—
31
21
62
—
5
87
154
101
(41)
21
39 $
129 $
4
125
278
67
(18)
22
21
370
100
72
26
65
263
232
(63)
59
110 $
11 $
—
11
—
15
39
—
12
66
16
—
22
39
77
—
(23)
(8)
(15) $
12 $
(2)
14
—
—
—
—
13
13
121
—
4
24
149
(122)
127
76
(71) $
(6) $
4 $
19 $
(17) $
390
6
384
268
82
21
22
77
470
299
72
57
215
643
211
—
148
63
—
16 $
—
6,475
6,544
7,454
4,130 $
290
7
5,414
—
— $
—
—
36
1,453
— $
—
29
3,852
—
4,146
290
6,511
15,846
8,907
(1)
(2)
Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
Note 22 - 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.
120
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Financial Condition
(Dollars in millions)
December 31,
2019
2018
(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 loss
Retained earnings
Treasury Stock
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
233 $
2,031
47
2,311 $
496 $
27
523
1
1,533
1
303
(50)
1,788
2,311 $
201
1,836
52
2,089
495
24
519
1
1,522
(47)
94
—
1,570
2,089
(1)
Includes unconsolidated trusts of $7 million for December 31, 2019 and 2018.
121
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Operations
(Dollars in millions)
Income
Interest
Cash dividends received from subsidiaries
Total
Expenses
Interest
General and administrative
Total
Net income (loss) before undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income before income taxes
Provision (benefit) for income taxes
Net income
Other comprehensive income loss (1)
Comprehensive income
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
$
$
$
4 $
100
104
28 $
6
34
70
142
212
(6)
218
48
266 $
1 $
—
1
27 $
7
34
(33)
212
179
(8)
187
(31)
156 $
—
—
—
25
9
34
(34)
110
76
13
63
(9)
54
(1) See Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail.
122
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Cash Flows
(Dollars in millions)
Net income
Adjustments to reconcile net loss to net cash provided by operating activities
Equity in undistributed (income) loss of subsidiaries
Dividends received from subsidiaries
Other
Stock-based compensation
Net cash used in operating activities
Investing Activities
Net cash provided by investing activities
Financing Activities
Accelerated share repurchase
Dividends declared and paid
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Note 23 - Quarterly Financial Data (Unaudited)
For the Years Ended December 31,
2019
2018
2017
(Dollars in millions)
$
218 $
187 $
(241)
104
(1)
11
91
—
(50)
(9)
(59)
32
201
233 $
(177)
—
(15)
10
5
—
—
—
—
5
196
201 $
$
63
47
—
11
5
126
—
—
—
—
126
70
196
The following table represents summarized data for each of the quarters in 2019 and 2018:
2019
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income
Interest expense
Net interest income
Provision 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
Other noninterest income
Noninterest expense
Income before income tax
Provision for income taxes
(Dollars in millions, except per share data)
$
213 $
203 $
198 $
61
152
—
152
101
30
10
8
(3)
16
245
69
11
57
146
1
145
110
29
10
5
(2)
19
238
78
15
60
138
17
121
75
24
10
6
5
48
214
75
14
Net income from continuing operations
Basic income per share
Diluted income per share
$
$
$
58 $
1.01 $
1.00 $
63 $
1.12 $
1.11 $
61 $
1.08 $
1.06 $
180
54
126
—
126
49
17
8
11
6
18
191
44
8
36
0.64
0.63
123
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
2018
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income
Interest expense
Net interest income
Benefit from 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 on the mortgage servicing rights
Other noninterest income
Noninterest expense
Income before income tax
Provision for income taxes
(Dollars in millions, except per share data)
$
181 $
183 $
167 $
29
152
(5)
157
34
20
6
8
10
20
189
66
12
59
124
(2)
126
43
23
5
5
13
18
173
60
12
52
115
(1)
116
63
24
5
5
9
17
177
62
12
Net income from continuing operations
Basic income per share
Diluted income per share
$
$
$
54 $
0.94 $
0.93 $
48 $
0.84 $
0.83 $
50 $
0.86 $
0.85 $
152
46
106
—
106
60
20
5
5
4
17
173
44
9
35
0.61
0.60
124
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, 2019 to provide reasonable assurance 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, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that:
(i) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
(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 due to 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, 2019, 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, 2019 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, 2019, has been audited
by PricewaterhouseCoopers, LLP, our independent registered public accounting firm, as stated in their report, included herein.
125
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, 2019 that have materially affected, or are reasonably likely to materially affect, such internal control over
financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
126
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 2020 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: Investor Relations, 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 2020 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
Except as set forth below, the information required by this Item 12 will be contained in our Proxy Statement relating to
the 2020 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, 2019.
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
1,399,127 $
—
1,399,127 $
28.72
—
28.72
1,416,986
—
1,416,986
(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 equity compensation plans under which the RSUs are authorized for issuance, see Note 16 - 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 2020 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 2020 Annual Meeting
of Stockholders and is hereby incorporated by reference.
127
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 Quarterly 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*
4.4
10.1*+
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*+
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).
Description of Rights of Shareholders
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).
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. (previously filed as Exhibit 10.7
to the Company's Annual Report on Form 10-K for the period ended December 31, 2017, 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).
Amended and Restated Employment Agreement, dated as of May 21, 2019, by and between Flagstar
Bancorp, Inc., Flagstar Bank, FSB and Alessandro P. DiNello (previously filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 2019, and incorporated herein by
reference.
128
Exhibit No.
10.9*+
10.10*+
10.11*+
10.12*+
10.13*+
10.14*+
10.15*+
10.16*+
10.17*+
10.18*+
10.19*+
21
23
31.1
31.2
32.1
32.2
101
Description
Amended and Restated Employment Agreement dated as of May 21, 2019, by and between Flagstar Bancorp,
Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2019, 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, for the
period ended June 30, 2018, 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).
2016 Stock Award and Incentive Plan Restricted Stock Unit Senior Executive Officer Award Agreement - 4
year ratable (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated March 26,
2018, and incorporated herein by reference).
2016 Stock Award and Incentive Plan Restricted Stock Unit and Performance Share Unit Senior Executive
Officer Award Agreement - SEO Performance (previously filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K, dated March 26, 2018, and incorporated herein by reference).
Executive Long-Term Incentive Program Award Agreement II ($44 VWAP) (previously filed as Exhibit 10.3
to the Company’s Current Report on Form 8-K, dated March 26, 2018, and incorporated herein by reference).
Executive Long-Term Incentive Program Award Agreement II ($40 VWAP) (previously filed as Exhibit 10.4
to the Company’s Current Report on Form 8-K, dated March 26, 2018, and incorporated herein by reference).
2016 Stock Award and Incentive Plan Restricted Stock Unit Senior Executive Officer Award Agreement -
SEO Time (previously filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, dated March 26,
2018, and incorporated herein by reference).
Change in Control Agreement effective January 18, 2019, by and between Flagstar Bancorp, Inc., Flagstar
Bank, FSB and James K. Ciroli (previously filed as Exhibit 10.19 to the Company's Annual Report on Form
10-K for the period ended December 31, 2018, and incorporated herein by reference).
Change in Control Agreement effective January 18, 2019, by and between Flagstar Bancorp, Inc., Flagstar
Bank, FSB and Stephen Figliuolo (previously filed as Exhibit 10.19 to the Company’s Annual Report on
Form 10-K for the period ended December 31, 2018, and incorporated herein by reference).
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,
2019, 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 "Kenneth
Schellenberg, 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.
129
ITEM 16. FORM 10-K SUMMARY
Not applicable.
130
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 February 28, 2020.
FLAGSTAR BANCORP, INC.
SIGNATURES
By:
By:
/s/ Alessandro P. DiNello
Alessandro P. DiNello
President and Chief Executive Officer (Principal Executive
Officer)
/s/ James K. Ciroli
James K. Ciroli
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, in his or her capacity as director or officer, or
both, as the case may be, of Flagstar Bancorp, Inc., does hereby appoint Alessandro DiNello and James K. Ciroli, and each of
them, his or her attorney or attorneys with full power of substitution to execute in his or her name, in his or her capacity as a
director or officer, or both, as the case may be, of Flagstar Bancorp, Inc., the 2019 Form 10-K Annual Report and any and all
amendments and supplements to such 2019 Form 10-K Annual Report and post-effective amendments and supplements thereto,
and to file the same with all exhibits thereto and all other documents in connection therewith with the Securities and Exchange
Commission.
131
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 February 28, 2020.
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
132
Annual Report Two Thousand Nineteen5151 Corporate Drive, Troy, MI 48098 (800) 945-7700 flagstar.comFLAGSTAR BANCORP Annual Report 2019Annual Report Two Thousand Nineteen5151 Corporate Drive, Troy, MI 48098 (800) 945-7700 flagstar.comFLAGSTAR BANCORP Annual Report 2019