EDGAR 10-K Filing

Company CIK: 1033012
Filing Year: 2022
Filename: 1033012_10-K_2022_0001033012-22-000025.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
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 stock savings bank founded in 1987. We provide commercial and consumer banking services, and we are the 6th largest bank mortgage originator in the nation and the 6th largest subservicer of mortgage loans nationwide. At December 31, 2021, we had 5,395 full-time equivalent employees. Our common stock is listed on the NYSE under the symbol "FBC".
Our relationship-based business model leverages our full-service bank's capabilities and our national mortgage platform to create and build financial solutions for our customers. At December 31, 2021, we operated 158 full service banking branches that offer a full set of banking products to consumer, commercial and government customers. Our banking footprint spans Michigan, Indiana, California, Wisconsin, Ohio and contiguous states.
We originate mortgages through a network of brokers and correspondents in all 50 states and our own loan officers, which includes our direct lending team, from 83 retail locations in 28 states and 3 call centers. We are also a leading national servicer of mortgage loans and provide complementary ancillary offerings including MSR lending, servicing advance lending and MSR recapture services.
Strategic Merger with New York Community Bancorp, Inc.
On April 26, 2021, it was announced that New York Community Bancorp, Inc. ("NYCB") and Flagstar had entered into a definitive merger agreement (the "Merger Agreement") under which the two companies will combine in an all stock merger. Under the terms of the Merger Agreement, Flagstar shareholders will receive 4.0151 shares of NYCB common stock for each Flagstar share they own. The combined company expects to have over $85 billion in assets and operate nearly 400 traditional branches in nine states and over 80 loan production offices across a 28 state footprint. On August 4, 2021, Flagstar's and NYCB's shareholders each voted in their respective special meetings of shareholders to approve the proposed business combination. The transaction is subject to customary closing conditions, including regulatory approvals.
Human Capital Management
Our culture is defined by our corporate values: Service, Trust, Accountability and Results ("STAR"). To continue to deliver on these values, we attract and retain talent by creating an inclusive, equitable, safe and healthy workplace. We strive to build and maintain high-performing teams and provide opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, and health and welfare programs. As of December 31, 2021, we had 5,395 FTE employees, compared to 5,214 FTE employees as of December 31, 2020.
Employee benefits and well-being. We provide a competitive, market-based compensation and benefits program to help meet the needs of our employees. In addition to salaries, these programs include annual bonuses or incentives based on individual and company performance metrics, equity-based incentives, a 401(k) Plan with employer matching contribution, numerous healthcare options, company-paid life insurance and disability benefits, the opportunity to receive an annual company contribution into a health savings account, flexible spending accounts, numerous voluntary plan offerings, paid time off (including self-selected time off for community involvement and wellness), and company-paid Employee Assistance Plan and financial counseling programs.
Talent development and retention. Our associates are the driving force behind our success, underpinning every aspect of our strategy and helping us deliver value to our customers, shareholders and communities. We strive to enhance the skills of our workforce by offering collaborative and effective training programs, including eLearning opportunities. We offer a Leading Like a STAR management development program, as well as a STAR Values development program for all team members, which is a suite of workshops focused on our Company's core values.
Diversity, equity and inclusion. A diverse workforce is critical to our long-term success. We strive to build and leverage a diverse, inclusive and engaged workforce that inspires all individuals to work together towards a common goal of superior business results by embracing the unique needs and objectives of our customers and community. We strive to achieve this by hiring great people who represent the talents, experiences, background and diversity of the communities we serve. Our commitment is reflected in the policies that govern our workforce, such as our Diversity Pledge and our Diversity, Equity and Inclusion Policy, and is evidenced in our recruiting strategies, diversity and inclusion training and ERGs, which are key to our efforts. Our ERGs provide our associates access to coaching, mentoring and professional development. As of December 31, 2021, our efforts have been focused on the following nine ERG groups within Flagstar: African American, Asian-Indian, Hispanic/Latino, LGBTQ, Military Veterans, Native American, People with Disabilities, Women and Young Professionals.
Employee engagement. We regularly conduct employee surveys to assess the job satisfaction of our employees and use information from the surveys to improve our ability to attract, develop and retain talented employees and ensure we are successful over the long-term.
COVID-19 response and workplace safety. The health and well-being of our team members is our top priority. In response to COVID-19, we implemented additional safety protocols designed to protect the health and safety of our employees and customers. These protocols comply with applicable government regulations and guidance and include broad-based work from home requirements (where practical), redeployment of employees (where practical), travel restrictions, social distancing, mandatory use of facial coverings, daily health screenings for onsite workers, safety incident reporting and deep cleaning protocols at all our facilities, including our customer-facing locations. In addition, all training has been moved to a virtual environment, remote workers have been provided with additional equipment and resources as needed, and the Company has enhanced communications with employees through video messages, emails and the intranet to further connect and engage its team members.
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 along with originating and servicing 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, we compete with many institutions including commercial banks, national mortgage lenders, local savings banks, financial technology companies, 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.
In servicing, we compete primarily against non-bank servicers. The subservicing market in which we operate is also highly competitive and we face competition related to subservicing pricing and service delivery. We compete by offering quality servicing, a robust risk and compliance infrastructure and a model where our mortgage business allows for recapture services to replenish loans for subservicing clients.
Subsidiaries
We conduct business primarily through our wholly-owned bank subsidiary. In addition, the Bank has wholly-owned subsidiaries through which we conduct business or which are inactive. The Bank and its wholly-owned subsidiaries comprised nearly all our total assets at December 31, 2021. 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 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, 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 primarily intended for the protection of depositors and the FDIC's DIF 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 SEC.
Any change to laws and regulations, whether by the Regulatory Agencies or Congress, could have a materially 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.
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. For additional information, see the Capital section of the MD&A and Note 18 - Regulatory Capital.
Holding Company Limitations on Capital Distributions. Our ability to make any capital distributions to our stockholders, including dividends and share repurchases, is subject to the oversight of the Federal Reserve and contingent upon their non-objection to such planned distributions which typically considers our capital adequacy, comprehensiveness and effectiveness of capital planning and the prudence of the proposed capital action.
Volcker Rule. Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) required the federal financial regulatory agencies to adopt rules that prohibit banking entities, including federal savings associations and their 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.
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 the depository institution subsidiary 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 under the prompt corrective action regulations. The Collins 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 had total assets below $15 billion 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 $25.5 billion as of December 31, 2021, an acquisition of a depository holding company would likely cause our trust preferred securities totaling $247 million as of December 31, 2021 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 its 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 principal stockholders, directors and executive officers.
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 Bank qualifies as an eligible savings association under the OCC rules and regulations, if the Bank 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. To pass the QTL test, the Bank must hold more than 65 percent qualified thrift assets as a percent of its total portfolio assets in at least nine of the last twelve rolling months. As of December 31, 2021, the Bank has passed the QTL test in twelve of the last twelve months and remains in compliance.
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 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.
•Allowing the Bank, as a federal savings association with less than $20 billion in total assets as of December 31, 2017, the option to elect to operate as a covered savings association (similar to a national bank) without changing its charter.
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 risk. 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.
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 Securities Exchange Act of 1934 ("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.

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ITEM 1A. RISK FACTORS
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, including the current pandemic resulting from COVID-19. In addition to the factors identified elsewhere in this Report, we believe the most significant risk factors affecting our business are set forth below.
The below 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.
Pending Merger Risk Factors
Failure to complete the proposed merger with NYCB could negatively affect our stock price, our future business or our financial results.
If our pending merger with NYCB is not completed for any reason, our business may be adversely affected and, without realizing any of the benefits of having completed the merger, we would be subject to a number of risks, including the following:
•We may experience negative reactions from the financial markets, including a lower stock price.
•We may experience negative reactions from vendors, customers or employees.
•We have incurred substantial expenses and may be required to pay certain costs relating to the merger, including legal, accounting, and other fees, whether or not the merger is completed.
•Our management team will have devoted substantial time and resources to matters relating to the merger and would otherwise have devoted their time and resources to other opportunities that may have been beneficial to us.
We will be subject to uncertainties while our merger with NYCB is pending, which could adversely affect our business.
Uncertainty about the effect of the merger on our employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers to seek to change their existing business relationships with us. Employee retention may be particularly challenging during this period, as employees may experience uncertainty about their roles with the surviving corporation following the merger. In addition, subject to certain exceptions, we have agreed to operate our business in
the ordinary course and to refrain from taking certain actions without NYCB’s consent. These restrictions may prevent us from pursuing business opportunities that may arise prior to the completion of the merger.
The Merger Agreement may be terminated and our merger with NYCB may not be completed.
The Merger Agreement is subject to a number of customary closing conditions, including the receipt of regulatory approvals. Conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and, accordingly, the merger may be delayed or may not be completed. In addition, we and/or NYCB may elect to terminate the Merger Agreement under certain circumstances. Furthermore, if the Merger Agreement is terminated by us under certain circumstances prior to April 24, 2022, as specified by the Merger Agreement, we will be required to pay a termination fee of $90 million to NYCB.
In addition, if the Merger Agreement is terminated and we seek another merger or business combination, the market price of our common stock could decline, which could make it more difficult to find a party willing to offer equivalent or more attractive consideration than the consideration NYCB has agreed to provide in the merger.
Our ability to complete our pending merger with NYCB is subject to various regulatory approvals, which may impose conditions that could adversely affect us.
Before our pending merger with NYCB may be completed, NYCB must obtain certain federal and state regulatory approvals, including approval of the FRB, the FDIC, the New York Department of Financial Services or other applicable banking regulators and certain mortgage agencies. These regulators may impose conditions or place restrictions on the completion of the merger, and any such conditions or restrictions could have the effect of delaying completion of the merger or causing a termination of the Merger Agreement. There can be no assurance as to whether regulatory approvals will be received, the timing of those approval, or whether any conditions will be imposed.
Shareholder litigation could prevent or delay the closing of our pending merger with NYCB or otherwise negatively affect our business and operations.
We have incurred costs to date, and may continue to incur in connection with the defense or settlement of any shareholder lawsuits filed in connection with our pending merger with NYCB. The continued incurrence of such litigation costs could have an adverse effect on our financial condition and results of operations and could prevent or delay the consummation of the merger.
Because the market price of NYCB’s common stock may fluctuate, our shareholders cannot be certain of the precise value of the merger consideration they may receive in our proposed merger with NYCB.
At the time our pending merger with NYCB is completed, each issued and outstanding share of our common stock will be converted into the right to receive 4.0151 shares of NYCB’s common stock. There was or will be a time lapse between each of the date of the joint proxy statement/prospectus for the shareholders’ meeting to approve the merger and the date on which our shareholders entitled to receive shares of NYCB’s common stock will actually receive such shares. The market value of NYCB’s common stock may fluctuate during these periods as a result of a variety of factors, including general market and economic conditions, changes in NYCB’s and our businesses, operations and prospects, the recent volatility in the prices of securities in global financial markets, the effects of the COVID-19 pandemic and regulatory considerations. Many of these factors are outside of our and NYCB’s control. Consequently, at the time that our shareholders decided to approve the merger, they did not know the actual market value of the shares of NYCB’s common stock they will receive when the merger is completed. The actual value of the shares of NYCB’s common stock received by our shareholders will depend on the market value of shares of NYCB’s common stock at the time the merger is completed.
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, housing supply 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. Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including the ongoing invasion of Ukraine by Russia, terrorism or other geopolitical events.
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; 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.
Our banking business is concentrated in the Michigan market which represents 80% of our retail deposits. The economy in Michigan is largely impacted by the automotive industry. Conditions that negatively impact the automotive business including global shipping disruptions, challenges in the acquisition of raw materials, component parts and computer chips, labor shortages, and other supply chain disruptions could have a negative impact on our banking business.
Uncertainty and the changing circumstances caused by the COVID-19 pandemic are having varying effects on us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects are uncertain. The pandemic resulted in temporary or permanent closures of many businesses as well as the institution of social distancing and sheltering in place requirements in many states and communities. Although many restrictions have currently been lifted, additional virus variants and their potential impact remain uncertain and there is risk that restrictions could return in the future. As a result, the demand for our products and services may be negatively impacted. Our ongoing response to COVID-19 and our long-term effectiveness while working remotely could have a significant, lasting impact on our operations, financial condition and reputation. The extent to which COVID-19 impacts our business, results of operations and financial condition, as well as our regulatory capital and
liquidity ratios will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, changes to the economic landscape and competitive factors that may become permanent and actions taken by governmental authorities and other third parties in response to the pandemic.
The government response to the pandemic to support the economy has been significant including the CARES Act and subsequent government stimulus and COVID relief bills in late 2020 and throughout 2021. Although government intervention is intended to mitigate economic uncertainties, these programs may not be broad or specific enough to mitigate the economic risks of COVID-19 or may cause other economic impacts and uncertainty such as inflation, which may lead to adverse results.
We are subject to interest rate risk, which means changes in interest rates could adversely affect our profitability.
Our financial condition and results of operations could be significantly affected by changes in interest rates and the yield curve. Our financial results depend substantially on net interest income. Net interest income and mortgage related non-interest income represented 82 percent of our total revenue for the full year-ended December 31, 2021. As a result, changes in interest rates can have a material effect on many areas of our business, including net interest income, loan origination volume, and the value of our mortgage servicing rights.
Interest rates are sensitive to many factors that are beyond our control, including different economic conditions and policies of governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and the amount of interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits and the fair value of our financial assets and liabilities.
We are asset sensitive at December 31, 2021, meaning that if interest rates increase, our net interest income may generally increase and therefore have a positive effect on our financial results. However, our mortgage business, and therefore noninterest income, is likely to decrease with higher interest rates. Furthermore, asymmetrical changes in interest rates, such as if short-term rates increase at a slower rate than long-term rates, could add to the adverse effect on our profitability as the anticipated increase in net interest income will not be realized as quickly as the decrease in mortgage-related revenue. Any substantial or unexpected changes in market interest rates could have an adverse impact on our business and the financial condition and results of operations.
See MD&A - Market Risk for our net interest income sensitivity testing.
Rising mortgage rates and adverse changes in mortgage market conditions could reduce mortgage revenue.
In 2021, approximately 69 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, especially long-term 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, primarily the 10-year U.S. Treasury rate. 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 materially adverse effect on our operating results. The 10-year U.S. Treasury rate was 1.52 percent at December 31, 2021, and averaged 1.44 percent during 2021, 55 basis points higher than average rates experienced during 2020. The sustained lower rates experienced throughout 2021 positively impacted the mortgage market including our loan origination volume and refinancing activity, which may not persist.
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, changes in interest rates and mortgage spreads 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 materially 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 growth in the mortgage and real estate markets followed by periods of 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.
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 results in an increase in the MSR fair value. We utilize derivatives to manage the impact of changes in the fair value of the MSRs. We may have basis risk and our risk management strategies, which rely on assumptions or projections, may not adequately mitigate the impact of changes in interest rates, interest rate volatility, convexity, credit spreads, or prepayment speeds, and, as a result, the change in the fair value of MSRs may negatively impact earnings.
In addition, the Federal Reserve continues to use quantitative easing programs, including buying longer duration securities, resulting in disruptions to the mortgage-backed securities market. There is a risk that the Federal Reserve may take additional actions in the future or elect to stop their current actions, or reduce their balance sheet through sales, which could disrupt the market and have an adverse impact on our mortgage gain on sale or other financial results. Further, the impact of these actions has caused the financial instruments we use to manage our interest rate and market risks to be less effective at times, which could have a materially adverse impact on our operations and financial condition.
Mortgage forbearance levels and delayed foreclosures due to federal legislation could result in a decrease in service fee income and an increase in service costs.
We have provided mortgage forbearance in accordance with federal legislation for single-family, federally backed mortgages, such as those that we service which underlie our mortgage servicing rights, and have chosen to provide additional forbearance we believe are in the best interests of borrowers. In addition, we waived fees for an extended time period in the early portion of the pandemic as customers dealt with the crisis, which we may again do in the future. Additionally, as many borrowers exit forbearance, strain may be placed on our operations. These factors individually or in combination could result in a reduction in servicing fee income and a higher cost to service. Our actions could result in financial, operational, credit, enforcement and compliance risk as we navigate government requirements and our ability to modify our systems to account for these changes while maintaining an adequate internal control structure.
We are not aging receivables for customers who have been granted a payment holiday, payment deferral, or forbearance. Therefore, there is a risk that after the forbearance period is complete, customers may still be unable to make their payments, resulting in delinquencies at a higher rate than what is typical and a higher percentage of loans in nonaccrual status. Additionally, for consumer loans, current payments typically provide the primary evidence of a borrower’s ability and intent to repay the loan. Therefore, during the forbearance, deferral, or payment holiday period we may not be able to discern which loans can be repaid and which require timely action to manage the potential for loss to a lower level. Consequently, when a borrower is unable to repay the loan, our losses could be higher than we have experienced in the past or that are contemplated in our ACL.
See MD&A - Payment Deferrals for details on borrowers currently participating in a forbearance program.
We are highly dependent on the Agencies to buy mortgage loans that we originate. Changes in these entities and changes in the manner 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, 2021, we sold approximately 67 percent of our mortgage loans originated to Fannie Mae and Freddie Mac and 11 percent to Ginnie Mae. 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 have a materially adverse effect on 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.
We originate non-conforming and other nonqualifying residential mortgage loans, including "jumbo" and non-owner-occupied residential mortgage loans for sale into the private loan securitization market through a 144A offering and through whole loan sales. Demand for these loans or securities can change based on economic conditions which may adversely impact our ability to sell them.
Jumbo residential mortgage loans have principal balances that exceed the applicable conforming loan limits, as specified by the FHFA, known as the National Conforming Loan Limit ("Jumbo Loans"). We originate Jumbo Loans and hold these loans in our HFS portfolio prior to sale. Jumbo Loans, non-owner occupied loans, and other nonqualifying residential mortgage loans tend to be less liquid than conforming loans, which may make it more difficult for us to sell these loans if investor demand decreases. If we are unable to sell these loans, they remain in our HFS portfolio and we retain the pricing and credit risk. Further, these loans remain on the balance sheet utilizing capital which could impact our overall balance sheet management strategy.
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 we originate, underwrite or service loans. 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, which are subject to change at any time, with the Agencies. 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, adversely affecting 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 ("FCA"), 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 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 "SOFR", which was first published during the beginning of 2018, is based on actual transactions in certain portions of overnight repurchase agreement markets for certain U.S. Treasury obligations.
In November 2020, the FCA announced that it would continue to publish LIBOR rates through June 30, 2023. It is unclear whether, or in what form, LIBOR will continue to exist after that date. 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, there continues to be substantial uncertainty as to the ultimate effects of the LIBOR transition, including with respect to the acceptance and use of SOFR or other alternative benchmark rates. The characteristics of these new rates are not identical to the benchmarks they seek to replace, will not produce the exact economic equivalent as those benchmarks, and may perform differently in a variety of market conditions compared to those benchmarks. We could also become subject to litigation and other types of disputes as a consequence of the transition from LIBOR to SOFR or another alternative reference rate, which could subject us to increased legal expenses, payment of monetary damages and reputational harm.
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. Volatility of interest rates, market disruption or the financial weakness of some traditional buyers of mortgage servicing rights could cause uncertainty with respect to our ability to sell mortgage servicing rights. Should the level of mortgage servicing rights exceed 25 percent of common equity tier one capital, we are required to deduct the excess in determining our regulatory capital levels. If we are unable to sell mortgage servicing rights on a timely basis, there could be negative impacts to our regulatory capital or an impact on our pricing for mortgage loans which could negatively impact our mortgage origination business and our financial condition.
As of December 31, 2021, we had $392 million in MSRs and an MSR to Common Equity Tier 1 Capital ratio of 15.3 percent. We produced, on average, approximately $67.25 million of new MSRs per quarter in 2021 and we expect to continue to generate MSRs going forward. Considering the volume of MSRs that we generate, we sell MSRs from time to time to manage the concentration of this asset. In 2021, we sold $164 million in MSRs to third-parties and also delivered $9 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 at times and prices that we believe appropriate. 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 ACL could be too low to sufficiently cover future credit losses. Our estimate of expected lifetime credit losses is imperfect and requires significant management judgment.
Our ACL, which reflects our estimate of expected lifetime losses in the HFI loan portfolio and our reserve for unfunded commitments, at December 31, 2021, may not be sufficient to cover actual future 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. We establish an allowance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The determination of an appropriate level of allowance is a subjective process that requires significant management judgment, including determination of the reasonable and supportable forecast period, forecasting economic conditions and the qualitative assessment of how the forecasted economic conditions impacts each loan portfolio. 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 ACL. Moreover, our regulators, as part of their supervisory function, periodically review our ACL and may recommend we increase the amount of our ACL based upon their judgment, which may be different from that of Management.
Our ACL calculations include a reasonable and supportable two year forecast period which reverts to the long-term historical average over one year. Inaccuracies in our forecast or future changes in economic conditions could cause actual results to differ materially from the forecast used in our calculations and our credit loss provision may increase or our ACL may not be sufficient to cover losses sustained, particularly for the impacted industries.
The current pandemic has resulted in the environment changing rapidly resulting in the increased risk of inaccurate forecasts because they depend upon significant judgments and estimates, which can be even more challenging in an environment of uncertainty. Furthermore, the significance of government stimulus and related programs may make forecasting economic conditions more challenging and potentially less consistent with historical data. The calculation for ACL is complex and the associated risk could negatively 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 HFI residential mortgage loan portfolio is geographically concentrated in certain states, including California and Michigan which comprise approximately 55 percent of the portfolio. In addition, our commercial loan portfolio has a concentration of Michigan-lending relationships. Approximately 41 percent of our CRE loans are collateralized by properties in Michigan, and 30 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.
Our home builder finance portfolio had $1.0 billion in outstanding loan commitments at December 31, 2021. The home builder lending portfolio contains secured and unsecured loans within our CRE and C&I portfolios. 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.
Concentration of loans held-for-investment to specific borrowers may increase the magnitude of potential losses should defaults occur.
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, 2021, our largest CRE and C&I borrowers had outstanding loans of $175 million and $107 million, respectively. Further, we have commitments up to $185 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 ACL. 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.
At December 31, 2021, our adjustable-rate warehouse lines of credit granted to other mortgage lenders was $12 billion of which $5 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, 2021, our largest borrower had an outstanding balance of $274 million. A default by one of our larger warehouse borrowers could result in a significant loss relative to our ACL. 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 or collateral advance rates, 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 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 other 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 $213.2 million at December 31, 2021, to meet future cash needs, dividend payments, share repurchases, and debt service coverage. Operating expenses, which include costs paid to the Bank, totaled $24 million for the year-ended December 31, 2021. The declaration and payment of dividends by the Bank on all classes of its capital stock are 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 materially 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 through the 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.
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 materially 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.
The Company and other large financial institutions may become subject to increased scrutiny and more extensive or intense legal, regulatory and supervisory requirements than under the previous presidential and congressional administration. In addition, changes in key personnel at the agencies that regulate the Company, including the federal banking regulators, may result in differing interpretations of existing rules and guidelines and potentially more stringent enforcement and more severe penalties.
Additionally, the CARES Act was passed quickly and regulators rapidly issued clarifying guidance and operationalized programs, such as the PPP. As a result, there is risk that subsequent interpretations of guidance or aggressive assertions of wrongdoing in regards to laws, regulations, or applications of guidance could cause an adverse impact to our
financial results or our internal controls. We also may face an increased risk of client disputes, litigation and governmental as well as regulatory scrutiny as a result of the effects of COVID-19 on economic and market conditions.
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 any of 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 practices, 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, including IT, 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 2021, we originated a total of $50 billion in residential mortgage loans and processed $131 billion of warehouse lending advances. We 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, 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 if we are not able to respond to technological change and introduce new products and services.
Financial products and services have become increasingly dependent on technology. 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, technology, the way we conduct business or otherwise could have a materially adverse impact on our business and, therefore, on our financial condition and results of operations.
We collect, store and transfer our customers’ and employees' personally identifiable information and other sensitive information. Any cybersecurity attack or other compromise to the security of that information, our computer systems or networks, or the systems or networks of third-party providers upon which we rely, could adversely impact our business and financial condition.
As a part of conducting our business, we receive, transmit and store a large volume of personally identifiable information and other sensitive data either on our network, in the cloud, or on third party networks and systems. We, and our third-party providers, have been in the past and may in the future be subject to cybersecurity attacks. We, and our third-party providers, are regularly the subject of attempted attacks and the ability of the attackers continues to grow in sophistication. Further, we may not know that an attack occurred until well after the event. Even after discovering an attempt or breach occurred, we may not know the extent of the impact of the attack for some period of time. Such attacks may interrupt our business or compromise the sensitive data of our customers and employees. There can be no assurance that a cybersecurity incident will not have a material impact on our business in the future. As a result, we could suffer material financial and reputational losses in the future from any of these or other types of attacks or the public perception that such an attack on our systems or those of our vendors has been successful, whether or not this perception is correct.
Cybersecurity risks for banking institutions have increased significantly due to opportunistic threats related to COVID-19, supply chain attacks, foreign actors, 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 incident could adversely impact our ability to conduct business due to the potential costs for remediation, protection and litigation as well as 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 sensitive data. We have policies, processes, and systems in place that are intended to meet the requirements of those laws, including security systems to prevent unauthorized access. Nevertheless, those processes and systems may be inadequate. Also, since we rely upon vendors or other third parties to handle some 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 vendors or third parties.
The COVID-19 pandemic has resulted in the Bank instituting a work-from-home policy for all staff that are able to work remotely, exposing us to increased cybersecurity risk. Many of our employees are likely to continue working remotely on a full-time or part-time basis in the future. Increased levels of remote access may create additional opportunities for cyber criminals to exploit vulnerabilities. We have observed an increase in attempted malicious activity from third parties directed at the Bank and employees may be more susceptible to phishing and social engineering attempts due to increased stress caused by the crisis and from balancing family as well as work responsibilities at home, such as attempts to obtain personally identifiable information. Cybercriminals may be opportunistic about fears about COVID-19 and the higher number of people accessing the network remotely by including malware in emails that appear to include documents providing legitimate information for protecting oneself from COVID-19. The Bank may also be exposed to this risk if the operations of any of its vendors that provide critical services to the Bank are adversely impacted by cyberattacks. Furthermore, with the increased use of virtual private network (“VPN”) servers, there is a risk of security misconfiguration in VPNs resulting in exposing sensitive information on the internet. A significant and sustained malware or other cybersecurity attack targeted at the Bank or any of its vendors that provide critical services to the Bank could have a materially adverse impact on our financial condition and our ability to conduct our overall operations.
Privacy laws are continually evolving and many state and local jurisdictions have laws that differ from federal law or privacy policies, and some of those policies or laws may conflict. For example, California’s Consumer Privacy Act, 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, or a third-party provider upon which we rely, 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 sensitive 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 or responding to and mitigating a cybersecurity incident, and we 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.
COVID-19 has exposed our customers and employees to health risks that has caused changes in our workplace, place of business and how our customers behave. As we have and continue to return to in-person activities we may be exposed to additional risks that could have a materially adverse impact on our operations and financial condition.
The Bank has instituted a work-from-home policy for all staff that are able to work remotely until the risks related to the pandemic sufficiently abate. Working remotely creates new challenges and the pace of change required to address government programs and forbearance increases the risk of internal control failure. In addition, consumers affected by the changed economic and market conditions as a result of a pandemic may continue to demonstrate changed behavior even after the crisis is over, including decreases in discretionary spending on a permanent or long-term basis. Almost all of our branch lobbies have re-opened, but at times we may have to limit these branches to drive through service only or temporarily close them to customers due to the health crisis. This change in business could also result in changes in consumer behavior for which we may not be prepared.
As employees return to work and business is conducted in-person with customers, employees and customers could be exposed to COVID-19. Although the Bank believes it has taken the appropriate precautionary measures against the spread of COVID-19 to keep our employees and customers safe, the actions we have taken may not be adequate and may expose us to additional liability.
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 23 percent of our total revenue and the business contributed approximately $6 billion in average custodial deposits during 2021. At December 31, 2021, we had relationships with ten owners of MSRs, excluding ourselves, 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 $4 million at December 31, 2021. 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 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. Additionally, the pipeline could increase substantially without warning. Our regulators, as part of their supervisory function, may review our representation and warranty reserve for losses and may recommend or require us to increase our reserve, based upon their judgment, which may differ from that of Management.
We utilize third-party mortgage originators which subjects us to strategic, reputation, compliance, and operational risk.
In 2021, approximately 66 percent of our residential first mortgage volume depended upon the use of third-party mortgage originators, i.e. mortgage brokers and correspondent lenders, who are not our employees. These third parties originate mortgages 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 as well as review the loan files and loan documents we purchase to attempt to detect any irregularities or legal noncompliance, we have less control over these originators than employees of the Bank.
Due to regulatory scrutiny, our third-party mortgage originators could choose or be required to either reduce the scope of their business or exit the mortgage origination business altogether. The TILA-RESPA Integrated Disclosure Rule issued by the CFPB establishes comprehensive mortgage disclosure requirements for lenders and settlement agents in connection with most closed-end consumer credit transactions secured by real property. The rule requires certain disclosures to be provided to consumers in connection with applying for and closing on a mortgage loan. The rule also mandates the use of specific disclosure forms, timing of communicating information to borrowers, and certain record keeping requirements. The ongoing administrative burden and the system requirements associated with complying with these rules or potential changes to these rules could impact our mortgage volume and 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, The Consumer Protection Act and the Fair Housing Act prohibit discriminatory and other 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 as well as the relatively independent and diverse operating channels in which loans are originated. As we originate loans through various channels, we, and our third-party 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 originators, could result in the Bank being liable for damages to individual borrowers, changes in business practices, 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 result in a materially 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.
Other Risk Factors
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, penalties, injunctions, business improvement orders, consent orders, supervisory agreements, restrictions on our business activities, or other results adverse to us, which could materially and negatively affect our business. If such claims and other matters are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services as well as impact customer demand for those products and services. Some of the laws and regulations to which we are subject may provide a private right of action that a consumer or class of consumers may pursue to enforce these laws and regulations. We have been, and may be in the future, subject to stockholder class and derivative actions, which could seek significant damages or other relief. Any financial liability or reputational damage could have a materially adverse effect on our business, which could have a materially 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 or regulatory 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 or regulatory 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 certain mortgage escrow accounts in accordance with certain state laws despite 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 defending similar litigation in California, and are currently appealing a federal district court judgment against us in that case to the Ninth Circuit. We are arguing that the Lusnak case was wrongly decided; we believe 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 Circuit’s holding is more broadly adopted by other Federal Circuits, including those covering states that currently have enacted, 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 Company's management team, and increasing competition for talent could adversely affect the Company.
We are, and will continue to be, dependent upon our management team and other key personnel. Losing the services of one or more key members of our management team or other key personnel could adversely affect our operations. In addition, COVID-19 increases the risk that certain senior executive officers or a member of the Board of Directors could become ill, causing them to be incapacitated or otherwise unable to perform their duties for an extended absence. Furthermore, because of the nature of the disease, multiple people working in close proximity could also become ill, potentially resulting in the same department having extended absences simultaneously; a scenario which could negatively impact the efficiency and effectiveness of processes and internal controls throughout the Bank.
The ability to attract and retain talented and diverse employees is an increasingly competitive factor in our industry. This factor presents greater risk when we are expanding into new markets, developing new product lines, or significantly enhancing staffing in certain areas, particularly technology. This competition leads to increased expenses in affected business areas. In addition, the transition to increased work-from-home, which is likely to survive the COVID-19 pandemic for many
companies, may exacerbate the challenges of attracting and retaining talented and diverse employees as job markets may be less constrained by physical geography. Limitations on the manner in which regulated financial institutions can compensate their officers and employees, including those contained in pending rule proposals implementing requirements of Dodd-Frank, may make it more difficult for regulated financial institutions, including us, to compete with unregulated companies for talent.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Flagstar's headquarters is located in Troy, Michigan at 5151 Corporate Drive, and we have a regional operations office in Jackson, Michigan. We own both our headquarters and our regional operations office.
As of December 31, 2021, we operated 158 bank branches in the following states:
Owned Leased Total Free-Standing Office Building In-Store Banking Center Buildings with Other Tenants Total
Michigan 86 28 114 89 2 23 114
Indiana 27 5 32 31 - 1 32
California 7 1 8 8 - - 8
Wisconsin 3 - 3 3 - - 3
Ohio 1 - 1 1 - - 1
Total 124 34 158 132 2 24 158
We also have 117 retail mortgage locations, 3 wholesale lending offices and 13 commercial lending offices located throughout 28 states. These locations are primarily leased.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
See Legal Proceedings in Note 19 - Legal Proceedings, Contingencies and Commitments to the Consolidated Financial Statements, which is incorporated herein by reference.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES
Our common stock trades on the NYSE under the trading symbol "FBC". At December 31, 2021, there were 53,197,650 shares of our common stock outstanding held by 22,274 stockholders of record.
Dividends
On January 19, 2022, the Company announced that its Board declared a quarterly common stock dividend of $0.06, to be paid February 17, 2022. The Company's dividends are subject to the Board's approval on a quarterly basis.
Sale of Unregistered Securities
The Company made no unregistered sales of its equity securities during the quarter ended December 31, 2021.
Issuer Purchases of Equity Securities
The Company made no purchases of unregistered securities during the quarter ended December 31, 2021.
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, of which certain information is hereby incorporated by reference.
Performance Graph
CUMULATIVE TOTAL STOCKHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDICES
DECEMBER 31, 2016 THROUGH DECEMBER 31, 2021
Flagstar Bancorp Nasdaq Financial Nasdaq Bank S&P Small Cap 600 Russell 2000
12/31/2016 100 100 100 100 100
12/31/2017 139 113 104 112 113
12/31/2018 98 101 85 101 99
12/31/2019 142 128 103 122 123
12/31/2020 151 129 92 134 146
12/31/2021 178 161 129 167 165

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. RESERVED

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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, 2021. 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.
We have omitted discussion of 2020 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2020 Annual Report on Form 10-K.
Results of Operations
The following table summarizes our results of operations for the periods indicated:
For the Years Ended December 31,
2021 2020 Change
2021 vs. 2020
(Dollars in millions except share data)
Net interest income $ 747 $ 685 $ 62
(Benefit) provision for loan losses (112) 149 (261)
Total noninterest income 1,044 1,310 (266)
Total noninterest expense 1,213 1,142 71
Provision for income taxes 157 166 (9)
Net income $ 533 $ 538 $ (5)
Income per share:
Basic $ 10.10 $ 9.59 $ 0.51
Diluted $ 9.96 $ 9.52 $ 0.44
Weighted average shares outstanding:
Basic 52,792,931 56,094,542 (3,301,611)
Diluted 53,519,086 56,505,813 (2,986,727)
The following table summarizes our adjusted results of operations(1):
For the Years Ended December 31,
2021 2020 Change
2021 vs. 2020
(Dollars in millions except share data)
Net interest income $ 747 $ 685 $ 62
(Benefit) provision for loan losses (112) 149 (261)
Total noninterest income 1,044 1,310 (266)
Total noninterest expense 1,168 1,142 26
Provision for income taxes 167 166 1
Net income $ 568 $ 538 $ 30
Income per share:
Basic $ 10.75 $ 9.59 $ 1.16
Diluted $ 10.60 $ 9.52 $ 1.08
Weighted average shares outstanding:
Basic 52,792,931 56,094,542 (3,301,611)
Diluted 53,519,086 56,505,813 (2,986,727)
(1) For further information, see Use of Non-GAAP Financial Measures.
The following table summarizes certain selected ratios and statistics for the periods indicated:
For the Years Ended/As of December 31,
2021 2020 Change
2021 vs. 2020
Selected Ratios:
Interest rate spread (1) 2.72 % 2.40 % 0.32 %
Net interest margin 2.92 % 2.80 % 0.12 %
Adjusted net interest margin (2) 3.03 % 2.91 % 0.12 %
Return on average assets 1.89 % 2.00 % (0.11) %
Adjusted return on average assets (2) 2.01 % 2.00 % 0.01 %
Return on average common equity 21.21 % 26.21 % (5.00) %
Return on average tangible common equity (3) 22.94 % 29.00 % (6.06) %
Adjusted return on average tangible common equity (3) 25.25 % 29.00 % (3.75) %
Common equity-to-assets ratio 10.67 % 7.09 % 3.58 %
Common equity-to-assets ratio (average for the period) 8.92 % 7.63 % 1.29 %
Efficiency ratio 67.7 % 57.2 % 10.5 %
Adjusted efficiency ratio (2) 65.8 % 56.9 % 8.9 %
Selected Statistics:
Book value per common share 51.09 41.79 9.30
Tangible book value per share (3) 48.33 38.80 9.53
Number of common shares outstanding 53,197,650 52,656,067 541,583
(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.
(2)See Use of Non-GAAP Financial Measures for further information.
(3) Excludes goodwill, intangible assets and associated amortization. See Non-GAAP Reconciliation for further information.
The year-ended December 31, 2021 resulted in net income of $533 million, or $9.96 per diluted share compared to 2020 net income of $538 million, or $9.52 per diluted share. Adjusted 2021 net income was $568 million, or $10.60 per diluted share, when adjusting for the pre-tax impact of the $35 million DOJ settlement expense and $20 million of merger related expenses, partially offset by a $10 million reduction of our former CEO SERP liability.
On an adjusted basis, 2021 annual net income grew 5 percent, driven by favorable net interest income and the provision for loan loss benefit, as a result of decreasing the ACL compared to 2020 when we increased the ACL.
Net interest income grew $62 million, or 9 percent compared to the prior year, driven by growth in average interest-earning assets of $1.2 billion, or 5 percent, and the net interest margin improvement of 12 basis points. Asset growth was led by our warehouse lending portfolio, which increased $0.9 billion, or 19 percent, and growth in our loans held-for-sale portfolio of $1.6 billion, or 29 percent. This loan growth was driven by the continued strong mortgage market and growth in our warehouse market share as compared to 2020. This growth was supported by a $1.1 billion, or 6 percent increase in average total deposits, led primarily by a $1.0 billion, or 14 percent, increase in low cost DDA and savings deposits.
Our benefit for credit losses for the year-ended December 31, 2021 was $112 million, compared to a provision for credit losses of $149 million in the same period of 2020. Our 2021 benefit was driven by improved economic forecasts and a reduction in qualitative reserves, reflecting the performance of our portfolio as our borrowers recovered from the impacts of the pandemic, resulting in low levels of loans in forbearance, low amounts of nonaccrual loans and no delinquent performing commercial loans at December 31, 2021. We had increased our ACL in 2020 as a result of our forecast of economic conditions brought on by the COVID-19 pandemic, especially as it related to CRE and C&I loans expected to be most impacted by the pandemic.
Net gain on sales decreased $316 million, or 33 percent as a result of a $7.1 billion, or 14 percent decrease in FOAL along with a 40 basis point decrease in margin. The reduction in FOAL reflects a reduction in the mortgage market in the second half of 2021, which elevated competitive factors that also drove lower gain on sales margins.
We subserviced 1.0 million accounts as of December 31, 2021, 0.2 million, or 19 percent higher compared to the prior year. This growth was driven by expanding our existing subservicing relationships along with adding new customers. Loan administration income increased $37 million, driven primarily by a decline in LIBOR-based fees paid to subservicing customers on custodial deposits along with $14 million higher subservice fee income due to an increase in the average number
of loans being subserviced and an increase in the number of loans past due as a result of forbearance which are charged a higher servicing rate. The servicing business generates custodial deposits which are used as a low-cost funding source to support loan growth. Custodial deposits decreased $0.3 billion for the year-ended December 31, 2021 compared to the year-ended December 31, 2020 driven by lower loan prepayment activity.
Net Interest Income
The table below presents the daily average balances of deposits by type and weighted-average rates paid thereon during the years presented:
For the Years Ended December 31,
2021 2020
Average
Balance Interest Average
Yield/
Rate Average
Balance Interest Average
Yield/
Rate
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ 7,146 $ 218 3.05 % $ 5,542 $ 184 3.33 %
Loans held-for-investment
Residential first mortgage 1,822 59 3.21 % 2,704 92 3.36 %
Home equity 722 26 3.66 % 965 39 4.01 %
Indirect-lending and other unsecured 1,137 55 4.79 % 912 49 5.38 %
Total consumer loans 3,681 140 3.79 % 4,581 180 3.90 %
Commercial real estate 3,159 109 3.40 % 3,030 116 3.77 %
Commercial and industrial 1,437 53 3.63 % 1,692 63 3.65 %
Warehouse lending 5,583 216 3.82 % 4,694 190 3.98 %
Total commercial loans 10,179 378 3.66 % 9,416 369 3.86 %
Total loans held-for-investment (1) 13,860 518 3.70 % 13,997 549 3.87 %
Loans with government guarantees 2,156 28 1.29 % 1,571 15 1.04 %
Investment securities 2,123 46 2.16 % 2,943 70 2.37 %
Interest-earning deposits 306 - 0.15 % 378 1 0.33 %
Total interest-earning assets $ 25,591 $ 810 3.14 % $ 24,431 $ 819 3.33 %
Other assets 2,605 2,477
Total assets $ 28,196 $ 26,908
Interest-Bearing Liabilities
Retail deposits
Demand deposits $ 1,707 $ 1 0.06 % $ 1,763 $ 6 0.27 %
Savings deposits 4,097 6 0.14 % 3,597 19 0.52 %
Money market deposits 804 1 0.08 % 707 1 0.15 %
Certificates of deposit 1,107 6 0.65 % 1,831 32 1.83 %
Total retail deposits 7,715 14 0.19 % 7,898 58 0.73 %
Government deposits 1,930 4 0.19 % 1,301 7 0.56 %
Wholesale deposits and other 1,196 14 1.18 % 821 16 1.94 %
Total interest-bearing deposits 10,841 32 0.30 % 10,020 81 0.81 %
Short-term FHLB advances and other 2,296 4 0.18 % 2,807 16 0.58 %
Long-term FHLB advances 1,287 13 0.96 % 1,066 12 1.10 %
Other long-term debt 410 14 3.41 % 520 25 4.80 %
Total interest-bearing liabilities $ 14,834 $ 63 0.42 % $ 14,413 $ 134 0.93 %
Noninterest-bearing deposits
Retail deposits and other 2,347 1,799
Custodial deposits 6,465 6,725
Total noninterest-bearing deposits (2) 8,812 8,524
Other liabilities 2,036 1,919
Stockholders’ equity 2,514 2,052
Total liabilities and stockholders' equity $ 28,196 $ 26,908
Net interest-earning assets $ 10,757 $ 10,018
Net interest income $ 747 $ 685
Interest rate spread (3) 2.72 % 2.40 %
Net interest margin (4) 2.92 % 2.80 %
Ratio of average interest-earning assets to interest-bearing liabilities 172.5 % 169.5 %
Total average deposits $ 19,653 $ 18,544
(1)Includes nonaccrual loans, which are described further in Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies.
(2)Includes noninterest-bearing custodial deposits that arise due to the servicing of loans for others.
(3)Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.
(4)Net interest margin is net interest income divided by average interest-earning assets.
The following table presents 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,
2021 Versus 2020 Increase (Decrease) Due to:
Rate Volume Total
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ (19) $ 53 $ 34
Loans held-for-investment
Residential first mortgage (3) (30) (33)
Home equity (3) (10) (13)
Other (6) 12 6
Total consumer loans (5) (35) (40)
Commercial real estate (12) 5 (7)
Commercial and industrial (1) (9) (10)
Warehouse lending (9) 35 26
Total commercial loans (20) 29 9
Total loans held-for-investment (26) (5) (31)
Loans with government guarantees 7 6 13
Investment securities (5) (19) (24)
Interest-earning deposits and other (1) - (1)
Total interest-earning assets $ (48) $ 39 $ (9)
Interest-Bearing Liabilities
Interest-bearing deposits $ (56) $ 7 $ (49)
Short-term FHLB advances and other (9) (3) (12)
Long-term FHLB advances (1) 2 1
Other long-term debt (6) (5) (11)
Total interest-bearing liabilities (75) 4 (71)
Change in net interest income $ 27 $ 35 $ 62
•Net interest income increased $62 million for the year-ended December 31, 2021. The increase of 5 percent was driven by growth in average interest-earning assets led by the warehouse and LHFS portfolios.
•Net interest margin was 2.92 percent for the year-ended December 31, 2021, a 12 basis point increase compared to 2.80 percent in the prior year. The expansion in net interest margin was largely attributable to lower deposit costs, which more than offset the decrease in our interest-earning asset yields as retail banking deposit rates decreased 54 basis points primarily driven by maturities of higher cost time deposits.
•Average interest-earning assets increased $1.2 billion due primarily to growth in the HFS and warehouse portfolio, driven by higher volumes from the favorable mortgage environment and improved market share of our warehouse business as compared to 2020. Average LGG for the year-ended December 31, 2021 increased $0.6 billion, driven by loans that were repurchased or are eligible to be repurchased from GNMA due to forbearance. These increases were partially offset by lower consumer loans in our HFI portfolio as we did not replace residential mortgage loans that were paid off during the year.
•Average deposits, including noninterest-bearing deposits, increased $1.1 billion primarily driven by an $0.8 billion, or 8 percent, increase in total interest-bearing deposits due to growth in government and wholesale products. Total noninterest-bearing retail deposits also increased $0.5 billion, or 30 percent, primarily due to higher average customer balances. The overall cost of deposits, including noninterest-bearing deposits, declined 27 basis points from 0.44 percent to 0.17 percent, primarily due to a greater mix of noninterest-bearing deposits supported by higher customer balances. Additionally, as CD balances matured, these deposits were converted into lower-cost DDA and savings accounts, which also contributed to the decrease in the cost of total deposits.
(Benefit) Provision for Credit Losses
The benefit for credit losses was $112 million for the year-ended December 31, 2021, compared to a provision of $149 million for the year-ended December 31, 2020. The $261 million decrease in the provision was driven by improved economic forecasts and a reduction in qualitative reserves, reflecting the performance of our portfolio as our borrowers recovered from the impacts of the pandemic, resulting in low levels of loans in forbearance, low amounts of nonaccrual loans and no delinquent performing commercial loans at December 31, 2021. This compares to the forecasted weakening economic conditions caused by the pandemic in the prior year.
For further information, see MD&A - Credit Risk.
Noninterest Income
The following tables provide information on our noninterest income and other mortgage metrics:
For the Years Ended December 31,
2021 2020
(Dollars in millions)
Net gain on loan sales $ 655 $ 971
Loan fees and charges 141 150
Net return on mortgage servicing rights 23 10
Loan administration income 121 84
Deposit fees and charges 34 32
Other noninterest income 70 63
Total noninterest income $ 1,044 $ 1,310
For the Years Ended December 31,
2021 2020
(Dollars in millions)
Mortgage rate lock commitments (fallout-adjusted) (1) (2) $ 44,900 $ 52,000
Mortgage loans closed (1) $ 49,800 $ 48,300
Mortgage loans sold and securitized (1) $ 52,100 $ 46,900
Net margin on mortgage rate lock commitments (fallout-adjusted) (2) (3) 1.46 % 1.86 %
Net margin on loans sold and securitized 1.26 % 2.06 %
(1)Rounded to the nearest hundred million.
(2)Fallout-adjusted refers to mortgage rate lock commitments which are adjusted by estimates of the percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the impact of changes in interest rates.
(3)Gain on sale margin is based on net gain on loan sales (excludes net gain on loan sales of zero and $3 million from loans transferred from LHFI during the years ended December 31, 2021 and December 31, 2020, respectively) to fallout-adjusted mortgage rate lock commitments.
Total noninterest income decreased $266 million during the year-ended December 31, 2021 from the year-ended December 31, 2020, primarily due to the following:
•Net gain on loan sales decreased $316 million, driven by $7.1 billion lower FOAL and a 40 basis point decrease in our gain on sale margin. The reduction in FOAL reflects a reduction in the mortgage market in the second half of 2021, which elevated competitive factors that also drove lower margins.
•Loan fees and charges decreased $9 million, primarily due to lower distributed retail closings and competitive market factors.
•Loan administration income increased $37 million, driven primarily by a $19 million decline in LIBOR-based fees paid to subservicing customers on custodial deposits controlled by them along with higher subservicing fee income due to an increase in the average number of loans being subserviced and an increase in ancillary income and loss mitigation fees.
•Net return on MSRs, including the impact of hedges, increased $13 million, primarily driven by improved valuation and higher service fees during the year. The increase in service fees reflect higher average number of loans being
serviced for others, partially offset by higher runoff, which included MSR write-offs of $17 million related to LGG that were repurchased during the current year.
•Other noninterest income increased $7 million, primarily driven by higher income from SBIC investments.
Noninterest Expense
The following table sets forth the components of our noninterest expense:
For the Years Ended December 31,
2021 2020
(Dollars in millions)
Compensation and benefits $ 533 $ 466
Occupancy and equipment 188 176
Commissions 194 232
Loan processing expense 86 83
Legal and professional expense 45 31
Federal insurance premiums 20 24
Intangible asset amortization 11 13
General, administrative and other 136 117
Total noninterest expense $ 1,213 $ 1,142
For the Years Ended/As of December 31,
2021 2020
Efficiency ratio 67.7 % 57.2 %
Number of FTE employees 5,395 5,214
Total noninterest expense increased $71 million during the year-ended December 31, 2021, compared to the year-ended December 31, 2020, primarily due to the following:
•Compensation and benefits expense increased $67 million, or 14 percent primarily driven by a 16 percent increase in average FTE to support forbearance customers and added mortgage closing capacity in the fourth quarter of 2020 through the second quarter of 2021 to process the volume of closings during that period.
•Commissions expense decreased $38 million primarily driven by lower profit-based commissions driven by a decrease in correspondent revenue.
•Occupancy and equipment increased $12 million, primarily due to continued technology and software development expenses and $4 million in merger related expenses.
•Loan processing expense increased $3 million primarily driven by a $1 billion, or 3 percent, increase in mortgage closings.
•Legal and professional expense increased $14 million primarily driven by $12 million in merger related expenses.
•General, administrative and other noninterest expense increased $19 million, primarily driven by the $35 million DOJ final settlement expense recognized during the year and $3 million in merger related expenses. This expense was partially offset by certain performance-related earn out expenses related to our Opes Advisors acquisition recognized in the year-ended December 31, 2020 which did not reoccur.
Provision for Income Taxes
Our provision for income taxes for the year-ended December 31, 2021 was $157 million, compared to a provision of $166 million for the year-ended December 31, 2020. The Company's effective tax rate for the year-ended December 31, 2021 was 22.7 percent, compared to an effective tax rate of 23.6 percent for the year-ended December 31, 2020. The reduction in rate was primarily due to a reduction in our state deferred tax asset valuation allowance and higher permanent differences resulting in lower taxable income.
For further information, see Note 17 - Income Taxes.
Fourth Quarter Results
The following table sets forth selected quarterly data:
Three Months Ended
December 31,
2021 September 30, 2021 December 31,
(Unaudited)
(Dollars in millions)
Net interest income $ 181 $ 195 $ 189
Provision (benefit) for credit losses (17) (23) 2
Noninterest income 202 266 332
Noninterest expense 291 286 314
Provision for income taxes 24 46 51
Net income $ 85 $ 152 $ 154
Income per share:
Basic $ 1.62 $ 2.87 $ 2.86
Diluted $ 1.60 $ 2.83 $ 2.83
Fourth Quarter 2021 compared to Third Quarter 2021
Net income for the three months ended December 31, 2021 was $85 million, or $1.60 per diluted share, as compared to $152 million, or $2.83 per diluted share, for the three months ended September 30, 2021. The $67 million decrease in net income was primarily due to the following:
Net Interest Income
Net interest income declined $14 million, or 7 percent, reflecting a 5 percent decrease in average earning assets, primarily driven by seasonal declines in loans held-for-sale and warehouse loans.
Net interest margin in the fourth quarter was 2.96 percent, a 4 basis point decrease from the prior quarter. This compression was largely attributable to lower yields on our warehouse loans portfolio.
Average total deposits were $19.8 billion in the fourth quarter, up $0.1 billion, or 1 percent, from the third quarter 2021, largely due to an increase of 3 percent in average retail deposits and an increase of 2 percent in average custodial deposits.
Benefit for Credit Losses
The benefit for credit losses was $17 million for the fourth quarter, as compared to a $23 million benefit for the third quarter 2021, reflecting the performance of our portfolio, the low number of nonaccrual loans which are specifically reserved and no performing commercial delinquencies at December 31, 2021.
Noninterest Income
Noninterest income decreased $64 million, or 24 percent, to $202 million in the fourth quarter of 2021, as compared to $266 million for the third quarter of 2021, primarily due to lower gain on sale, partially offset by higher net return on mortgage servicing rights and loan administration income.
Fourth quarter net gain on loan sales decreased $78 million, to $91 million, as compared to $169 million in the third quarter 2021. Gain on sale margins decreased 48 basis points to 102 basis points for the fourth quarter 2021, compared to 150 basis points for the third quarter 2021, driven by competitive factors. Fallout adjusted lock volume declined 21 percent to $8.9 billion from $11.3 billion for the third quarter 2021, reflecting a reduction in the mortgage origination market and seasonal factors.
Net return on mortgage servicing rights increased $10 million, to $19 million for the fourth quarter 2021, compared to a $9 million net return for the third quarter 2021. The improvement is primarily driven by improved valuations and favorable hedge results.
Loan administration income increased $5 million, to $36 million for the fourth quarter 2021, compared to $31 million for the third quarter 2021, driven by an increase in subserviced loans and higher levels of modification and loss mitigation fees.
Noninterest Expense
Noninterest expense increased to $291 million for the fourth quarter, compared to $286 million for the third quarter 2021. Excluding $6 million of merger costs in the fourth quarter 2021 and $5 million of merger expenses in the third quarter 2021, noninterest expense increased $4 million, or 1 percent.
The increase in noninterest expense primarily reflects an increase of $7 million in salaries and benefits as we experienced higher year-end medical claims and paid a seasonal bonus to team members not covered by the management incentive plan, partially offset by lower commissions as mortgage loan closings decreased 15 percent compared to the prior quarter. Mortgage expenses were $121 million for the fourth quarter, a decrease of $4 million compared to the prior quarter.
Provision for Income Taxes
Provision for income taxes decreased $22 million. This decrease was primarily due to the lower effective tax rate of 22.7 percent for the year-ended December 31, 2021, compared to an effective tax rate of 23.2 percent for the third quarter 2021. The reduction in rate was primarily due to a reduction in our state deferred tax asset and higher permanent differences resulting in lower taxable income.
Fourth Quarter 2021 compared to Fourth Quarter 2020
Net income for the three months ended December 31, 2021 was $85 million, or $1.60 per diluted share, as compared to net income of $154 million, or $2.83 per diluted share, for the three months ended December 31, 2020. The $69 million decrease in net income was primarily due to the following:
Net Interest Income
Net interest income declined $8 million, or 4 percent, for the fourth quarter of 2021, compared to the fourth quarter of 2020, which was largely driven by lower average balances in our warehouse loan portfolio. The net interest margin increased 18 basis points to 2.96% for the fourth quarter of 2021, compared to the fourth quarter of 2020. This was primarily attributable to a reduction in borrowing costs and improved income on our LGG portfolio, the majority of which did not earn interest in 2020 prior to exercising our right to repurchase while borrowers were still in forbearance.
Noninterest Income
Noninterest income decreased $130 million, primarily due to $141 million lower net gain on loan sales driven by a $3 billion, or 26 percent decrease in FOAL in the fourth quarter of 2021 compared to the same quarter in 2020, and gain on sale margin compression of 91 basis points for the same comparable time period. The decrease in FOAL reflects the reduction in the mortgage market through the last half of 2021 which elevated competitive factors that also drove lower margins. Partially offsetting this decline was $11 million higher loan administration income, driven primarily by a decline in LIBOR-based fees
paid to subservicing customers on custodial deposits they control along with $7 million higher subservice fee income due to an increase in the average number of loans being subserviced and an increase in the number of loans past due as a result of forbearance which are charged a higher servicing rate. Additionally, a $19 million increase in the net return on mortgage servicing rights driven by favorable valuation in higher service fee income was offset by a $19 million decline in loan fees and charges driven by a $2.5 billion, or 21 percent decline in origination volume.
Noninterest Expense
Noninterest expense decreased $23 million. This decrease was primarily due to a $32 million decrease in commissions and a $3 million decrease in loan processing expense both as a result of lower origination volume discussed above partially offset by a $12 million increase in compensation and benefits. Compensation and benefit expense primarily increased due to higher average FTEs driven by added mortgage closing capacity in the fourth quarter of 2020 through the second quarter of 2021 to process the large volume of closings during that period.
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.
We charge the lines of business for the net charge-offs that occur. In addition to this amount, we charge them for the change in loan balances during the period, applied at the budgeted credit loss factor. The difference between the consolidated provision (benefit) for credit losses and the sum of total net charge-offs and the change in loan balances is assigned to the “Other” segment, which includes the changes related to the economic forecasts, model changes, qualitative adjustments and credit downgrades. The amount assigned to “Other” is allocated back to the lines of business through general, administrative and other noninterest expense.
For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 21 - Segment Information.
Community Banking
Our Community Banking segment serves 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 commercial customers on a national basis. The Community Banking segment originates and purchases loans, while also providing deposit and fee-based services to consumer, business and mortgage lending customers.
Our commercial customers operate in a diversified range of industries including financial, insurance, service, manufacturing, and distribution. We offer financial products to these customers for use in their normal business operations, as well as provide financing of working capital, capital investments, and equipment. Additionally, our CRE business supports income producing real estate and home builders. The Community Banking segment also offers warehouse lines of credit to non-bank mortgage lenders.
This segment has seen continued growth driven by our warehouse portfolio which has benefited from the strong mortgage market in 2020 and 2021. Our relationship-based approach and speed of execution have enabled us to add new customers as well as increase lines for existing customers during the past two years while gaining market share. In addition, we continue to maintain our disciplined underwriting in this business. Our commercial loan portfolio has grown 8 percent in the last twelve months, to $10.2 billion at December 31, 2021, and our other consumer loan portfolio, which consists primarily of HELOC, indirect lending and unsecured loans, has remained relatively flat. Average deposits for the year-ended December 31, 2021 increased 9 percent to $12.0 billion, compared to $11.0 billion for the year-ended December 31, 2020, driven primarily by higher customer balances.
For the Years Ended December 31,
Community Banking 2021 2020
(Dollars in millions)
Summary of Operations
Net interest income $ 601 $ 570
Provision for credit losses 4 3
Net interest income after provision for credit losses 597 567
Net gain (loss) on loan sales - 2
Loan fees and charges 1 1
Loan administration expense (1) (3)
Other noninterest income 65 61
Total noninterest income 65 61
Compensation and benefits 107 108
Commissions 2 2
Loan processing expense 5 5
General, administrative and other 60 271
Total noninterest expense 174 386
Income before indirect overhead allocations and income taxes 488 242
Indirect overhead allocation (35) (40)
Provision for income taxes 95 42
Net income $ 358 $ 160
Key Metrics
Number of FTE employees 1,123 1,264
Number of bank branches 158 158
The Community Banking segment reported net income of $358 million for the year-ended December 31, 2021, compared to net income of $160 million for the year-ended December 31, 2020. The $198 million increase was primarily driven by the following:
•Net interest income increased $31 million primarily driven by higher average loan balances, led by our warehouse business.
•General, administrative and other noninterest expense decreased $211 million primarily driven by lower intersegment expense allocations which was the result of the $112 million benefit from credit losses in 2021 as economic conditions had improved as of December 31, 2021 coming out of the pandemic, as compared to a provision of $149 million for the year-ended December 31, 2020 going into the pandemic.
Mortgage Originations
We are a leading national originator of residential first mortgages. Our Mortgage Originations segment utilizes multiple distribution channels to originate or acquire one-to-four family residential mortgage loans on a national scale, primarily to sell. Subsequent to sale, we retain certain mortgage servicing rights which are reported at their fair value. The fair value includes service fee revenues, a cost to service which is an intercompany allocation paid to our servicing business, and other financial line impacts. We originate and retain certain mortgage loans in our LHFI portfolio which generate interest income in the Mortgage Originations segment.
For the Years Ended December 31,
Mortgage Originations 2021 2020
(Dollars in millions)
Summary of Operations
Net interest income $ 248 $ 191
(Benefit) provision for credit losses (10) (11)
Net interest income after provision for credit losses 258 202
Net gain on loan sales 655 969
Loan fees and charges 65 83
Loan administration expense (34) (35)
Net return on mortgage servicing rights 23 10
Other noninterest income 14 8
Total noninterest income 723 1,035
Compensation and benefits 200 161
Commissions 192 230
Loan processing expense 45 40
General, administrative and other 88 136
Total noninterest expense 525 567
Income before indirect overhead allocations and income taxes 456 670
Indirect overhead allocation (67) (60)
Provision for income taxes 81 128
Net income $ 308 $ 482
Key Metrics
Mortgage rate lock commitments (fallout-adjusted) (1)(2) $ 44,900 $ 52,000
Noninterest expense to closing volume 0.56 % 1.17 %
Number of FTE employees 2,109 2,001
(1)Fallout-adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on previous historical experience and the level of interest rates.
(2)Rounded to the nearest hundred million.
The Mortgage Originations segment reported net income of $308 million for the year-ended December 31, 2021, compared to $482 million for the year-ended December 31, 2020. The $174 million decrease was primarily driven by the following:
•Net gain on loan sales decreased $314 million to $655 million, as compared to $969 million for the year-ended December 31, 2020. FOAL decreased $7.1 billion, or 14 percent, to $44.9 billion and the net gain on loan sale margin decreased 40 basis points to 1.46 percent for the year-ended December 31, 2021, as compared to 1.86 percent for the year-ended December 31, 2020. The decline in FOAL reflects the continued normalization of the mortgage market through the last half of 2021, which elevated competitive factors that also drove lower margins.
•Net interest income increased $57 million primarily due to $1.6 billion higher average LHFS balances resulting from increased mortgage production, which lags FOAL based on times to close along with changes in holding times prior to selling loans to the Agencies.
•Loan fees and charges decreased $18 million driven primarily by lower distributed retail closings and competitive market factors.
•Compensation and benefits increased $39 million primarily driven by a 23 percent increase in average FTE which added mortgage closing capacity in the fourth quarter of 2020 through the second quarter of 2021 to process the large volume of closings during that period.
•Commissions expense decreased $38 million primarily driven by profit-based commissions being decrease in correspondent revenue.
•Loan processing expense increased $5 million primarily due to a $1.5 billion, or 3 percent increase in mortgage closings, which lag FOAL based on times to close and overall higher contract underwriting costs.
•General, administrative and other noninterest expense decreased $48 million primarily driven by lower intersegment expense allocation related to the benefit from credit losses in 2021 as economic conditions have improved as of December 31, 2021 coming out of the pandemic. In addition, the prior year includes an $11 million nonrecurring earn out expense related to our Opes Advisors acquisition.
Mortgage origination distribution channels
Correspondent. In the correspondent channels, an unaffiliated bank or mortgage company completes the loan paperwork in their name and funds the loan at closing. After the bank or mortgage company has funded the transaction, we purchase the loan at an agreed upon price. 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. When purchasing correspondent loans individually or in bulk, we perform a full review of each loan to ensure we only purchase loans originated in accordance with our underwriting guidelines. At December 31, 2021, we had active relationships with more than 570 delegated correspondents and over 510 non-delegated correspondents serving 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, 2021, we had active broker relationships with nearly 1,400 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, 2021, we maintained 117 retail locations in 28 states. 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. Most aspects of the retail lending process are completed internally, including the origination documentation (inclusive of customer disclosures), and we fund the loan at closing. Loans in the retail channel typically have higher internal costs but also higher gain on sale margins.
The following tables disclose residential first mortgage loan closings by channel, type and mix (rounded to the nearest hundred million):
At December 31,
2021 2020
(Dollars in millions)
Correspondent $ 27,500 $ 27,000
Broker 5,500 6,900
Retail 16,800 14,400
Total $ 49,800 $ 48,300
Purchase closings $ 20,300 $ 17,500
Refinance closings 29,500 30,800
Total $ 49,800 $ 48,300
Conventional $ 36,100 $ 37,900
Government 5,000 3,500
Jumbo 8,700 6,900
Total $ 49,800 $ 48,300
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. The loans we service generate custodial deposits which provide a stable funding source supporting interest-earning asset generation in the Community Banking and Mortgage Originations segments. We earn income from other segments for the use of noninterest-bearing escrows. Revenue for serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the delinquency or payment status of the underlying loans. Along with these contractual fees, we may also collect ancillary fees related to these 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. Our continued growth in our subservicing business and the strength of our platform has made us the 6th largest subservicer in the nation.
For the Years Ended December 31,
Mortgage Servicing 2021 2020
(Dollars in millions)
Summary of Operations
Net interest income $ 15 $ 18
Loan fees and charges 75 66
Loan administration income 165 151
Total noninterest income 240 217
Compensation and benefits 65 46
Loan processing expense 32 36
General, administrative and other 87 79
Total noninterest expense 184 161
Income before indirect overhead allocations and income taxes 71 74
Indirect overhead allocation (19) (19)
Provision for income taxes 11 12
Net income $ 41 $ 43
Key Metrics
Average number of residential loans serviced (1) 1,159,000 1,088,000
Number of FTE employees 729 630
(1) Rounded to the nearest thousand.
The Mortgage Servicing segment reported net income of $41 million for the year-ended December 31, 2021, compared to net income of $43 million for the year-ended December 31, 2020. The $2 million decrease in net income was driven by the following:
•Noninterest income, consisting of loan administration income and loan fees and charges, increased $23 million, primarily driven by a decline in LIBOR-based fees paid to subservicing customers on custodial deposits and higher ancillary income and loss mitigation fees, which were dampened by fee discounts during the active forbearance period.
•Compensation and benefits expense increased $19 million primarily due to a 32 percent increase in average FTE to support business growth and process loan modifications of a large volume of customers as their forbearance plan related to the CARES Act expires.
•General, administrative and other noninterest expense increased $8 million driven by an increase in loan boarding fees and software costs.
The following table presents residential loans serviced and the number of accounts associated with those loans.
December 31, 2021 December 31, 2020
Unpaid Principal Balance (1) Number of Accounts Unpaid Principal Balance (1) Number of Accounts
(Dollars in millions)
Loan Servicing
Subserviced for others (2) $ 246,858 1,032,923 $ 178,606 867,799
Serviced for others (3) 35,074 137,243 38,026 151,081
Serviced for own loan portfolio (4) 8,793 63,426 10,079 66,519
Total residential loans serviced $ 290,725 1,233,592 $ 226,711 1,085,399
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Loans subserviced for a fee for non-Flagstar owned loans or MSRs. Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs.
(3)Loans for which Flagstar owns the MSR.
(4)Includes LHFI (residential first mortgage and home equity), LHFS (residential first mortgage), LGG (residential first mortgage), and repossessed assets.
At December 31, 2021, the total number of residential loans serviced increased by 148 thousand, or 13.7 percent as we retained subservicing on 100 percent of the 24 billion UPB of MSRs sold during 2021 and were able to continue to grow the portfolio.
Loans Serviced for Others
The following table presents the characteristics of the mortgage loans serviced for others.
At December 31,
2021 2020
(Dollars in millions)
Average UPB per loan $ 256 $ 252
Weighted average service fee (basis points) 30.8 33.6
Weighted average coupon 3.31 % 3.66 %
Weighted average original maturity (months) 332 337
Weighted average age (months) 17 16
Average updated FICO score 737 731
Average original LTV ratio 74.7 % 78.4 %
Housing Price Index LTV, as recalculated (1) 63.4 % 72.2 %
Payment Status (UPB) (2):
30-59 days past due $ 470 $ 623
60-89 days past due 123 333
90 days or greater past due 616 2,496
Total past due $ 1,209 $ 3,452
(1)The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level FHFA data as of December 31, 2021.
(2)Includes loans in forbearance that continue to be aged for payment status purposes.
Loans Subserviced for Others
The following table presents the UPB based on payment status of the mortgage loans subserviced for others.
At December 31,
2021 2020
(Dollars in millions)
Payment Status (UPB) (1):
30-59 days past due $ 3,110 $ 3,052
60-89 days past due 878 1,357
90 days or greater past due 6,957 11,530
Total past due $ 10,945 $ 15,939
(1)Includes loans in forbearance that continue to be aged for payment status purposes.
Other
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 which are charged to the line of business segments. The Other segment charges each operating segment a daily funds transfer pricing rate on their average assets which resets more rapidly than the underlying borrowing costs resulting in an asset sensitive position. In addition, the Other segment includes revenue and expenses not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage Servicing segments.
For the Years Ended December 31,
Other 2021 2020
(Dollars in millions)
Summary of Operations
Net interest income $ (117) $ (94)
(Benefit) provision for credit losses (106) 157
Net interest income after provision (benefit) for credit losses (11) (251)
Loan administration income (9) (29)
Other noninterest income 25 26
Total noninterest income 16 (3)
Compensation and benefits 161 151
Loan processing expense 4 2
General, administrative and other 165 (125)
Total noninterest expense 330 28
Income before indirect overhead allocations and income taxes (325) (282)
Indirect overhead allocation 121 119
Benefit for income taxes (30) (16)
Net loss $ (174) $ (147)
Key Metrics
Number of FTE employees 1,484 1,319
The Other segment reported a net loss of $174 million for the year-ended December 31, 2021, compared to a net loss of $147 million for the year-ended December 31, 2020. The $27 million higher loss was primarily driven by a $35 million settlement expense for the DOJ Liability and a $23 million decrease in net interest income as a result of our overall asset sensitive position and the lower average interest rates during the year-ended December 31, 2021 as compared to the year-ended December 31, 2020 partially offset by a $10 million benefit related to the former CEO SERP.
The provision for credit losses decreased $263 million primarily due to changes in the forecasts of economic conditions through the COVID-19 pandemic. The difference between the consolidated provision for credit losses and the sum of total net charge-offs and the change in loan balances continue to be assigned to the Other segment and includes changes related to the economic forecasts, model changes, qualitative adjustments and credit downgrades. The provision for credit losses is then directly allocated to the other applicable segments through general, administrative and other noninterest expense. The majority of all other activity within the Other segment largely offsets and is allocated back to the operating segments, recorded as contra other noninterest expense.
RISK MANAGEMENT
Certain risks are inherent in our business and include, but are not limited to, operational, strategic, credit, regulatory compliance, legal, reputational, liquidity, market and cybersecurity. We continuously 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 us from unexpected loss 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 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 plus Tier 2 capital and any portion of the ACL not included in Tier 2 capital. This limit was $462 million as of December 31, 2021. We maintain a more conservative maximum internal Bank credit limit than required by HOLA, generally not exceeding $100 million to any one borrower/obligor relationship, with the exception of warehouse borrower/obligor relationships, which have a higher internal Bank limit of $200 million. All warehouse advances are fully collateralized by residential mortgage loans and this asset class has had very low levels of historical loss. We have a tracking and reporting process to monitor lending concentration levels, and all new commercial credit exposures to a single or related borrower that exceed $50 million and all new warehouse credit exposures to a single or related borrower that exceed $75 million must be approved by the Board of Directors. Exceptions to these levels are made to strong borrowers on a case by case basis, with the approval of 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, 2021, we had $10.0 billion UPB in our commercial loan portfolio with our warehouse lending and home builder finance businesses accounting for 60 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.
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.
Our commercial loan portfolio includes leveraged lending. The Bank defines a transaction as leveraged when two or more of the following conditions exist: 1) proceeds from the loan are used for buyouts, acquisitions, recapitalization or capital distributions, 2) the borrower's total funded debt to EBITDA ratio is greater than four or Senior Funded Debt to EBITDA ratio is greater than three, 3) the borrower has a high debt to net worth ratio within its industry or sector as defined by internal limits, and 4) debt leverage significantly exceeds industry norms or historical levels for leverage as defined by internal limits. Leveraged lending transactions typically result in leverage ratios that are significantly above industry norms or historical levels. Our leveraged lending portfolio and other loan portfolios with above-average default probabilities tend to behave similarly during a downturn in the general economy or a downturn within a specific sector. Consequently, we take steps to avoid undue concentrations by setting limits consistent with our appetite for risk and our financial capacity. In addition, there are specific underwriting conditions set for our leveraged loan portfolio and there is additional emphasis on certain items beyond the standard underwriting process including synergies, collateral shortfall and projections.
Our commercial loan portfolio also includes loans that are considered to be SNCs. A SNC is defined as any loan or loan commitment totaling at least $100 million that is shared by three or more federally regulated institutions. On an annual basis, a joint regulatory task force performs a risk assessment of all SNCs. When completed, these risk ratings are shared and our risk rating must be no better than the risk rating listed in the SNC assessment. Exposure and credit quality for SNCs are carefully monitored and reported internally.
For our CRE portfolio, including owner and nonowner-occupied properties 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 and 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. Our consumer loan portfolio includes high credit quality residential first and second lien mortgage loans, non-auto boat and recreational vehicle indirect lending loans and other unsecured consumer loans.
Loans held-for-investment
The following table summarizes the amortized cost of our loans held-for-investment by category:
At December 31,
2021 % of Total 2020 % of Total 2019 % of Total
(Dollars in millions)
Consumer loans
Residential first mortgage $ 1,536 11.5 % $ 2,266 14.0 % $ 3,154 26.0 %
Home equity (1) 613 4.5 % 856 5.2 % 1,024 8.4 %
Other 1,236 9.2 % 1,004 6.2 % 729 6.0 %
Total consumer loans 3,385 25.2 % 4,126 25.4 % 4,907 40.4 %
Commercial loans
Commercial real estate 3,223 24.0 % 3,061 18.9 % 2,828 23.3 %
Commercial and industrial 1,826 13.6 % 1,382 8.5 % 1,634 13.5 %
Warehouse lending 4,974 37.1 % 7,658 47.2 % 2,760 22.8 %
Total commercial loans 10,023 74.8 % 12,101 74.6 % 7,222 59.6 %
Total loans held-for-investment $ 13,408 100.0 % $ 16,227 100.0 % $ 12,129 100.0 %
(1)Includes second mortgages, HELOCs, and HELOANs.
Our consumer loan portfolio decreased $742 million, or 18 percent, from December 31, 2020 to December 31, 2021, as a $232 million increase in other consumer loans was more than offset by a $730 million decrease in residential first mortgage loans and $243 million decrease in home equity due to refinance activity and lower new originations and home equity purchases to the HFI portfolio.
The following table provides a comparison of activity in our LHFI portfolio:
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Balance, beginning of year $ 16,227 $ 12,129 $ 9,088
Loans originated and purchased 2,138 1,992 3,268
Change in lines of credit 2,566 9,663 6,381
Loan amortization / prepayments (7,465) (7,001) (6,480)
All other activity (58) (556) (128)
Balance, end of year $ 13,408 $ 16,227 $ 12,129
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 and that have an acceptable 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. As of December 31, 2021, loans in this portfolio had an average current FICO score of 735 and an average LTV of 52 percent.
The following table presents the amortized cost of our total residential first mortgage LHFI by major category:
At December 31,
2021 2020
(Dollars in millions)
Estimated LTVs (1)
Less than 80% and refreshed current FICO scores (2):
Equal to or greater than 660 $ 988 $ 1,408
Less than 660 50 65
80% and greater and refreshed current FICO scores (2):
Equal to or greater than 660 385 685
Less than 660 113 108
Total $ 1,536 $ 2,266
Geographic region
California $ 441 $ 806
Michigan 400 435
Texas 83 150
Florida 68 126
Washington 59 108
New York 38 57
Indiana 34 55
Illinois 31 51
Colorado 30 34
New Jersey 24 20
Other 328 424
Total $ 1,536 $ 2,266
(1)LTVs reflect loan balance at the date reported, as a percentage of property values as appraised at loan closing.
(2)FICO scores are updated at least on a quarterly basis or more frequently, if available.
The following table presents the amortized cost of our total residential first mortgage LHFI as of December 31, 2021, by year of closing:
2021 2020 2019 2018 2017 and Prior Total
(Dollars in millions)
Residential first mortgage loans $ 331 $ 214 $ 280 $ 115 $ 596 $ 1,536
Percent of total 21.5 % 13.9 % 18.2 % 7.5 % 38.8 % 100.0 %
Home equity. Our home equity portfolio includes HELOANs, second mortgage loans, and HELOCs. These loans are underwritten and priced in an effort to ensure credit quality and loan profitability. Our debt-to-income ratio on HELOANs and HELOCs is capped at 43 percent and 45 percent, respectively. We currently limit the maximum CLTV to 89.99 percent and FICO scores to a minimum of 700. Second mortgage loans and HELOANs are fixed rate loans and are available with terms up to 20 years. HELOC loans are primarily variable-rate loans that contain a 10-year interest only draw period followed by a 20-year amortizing period. As of December 31, 2021, loans in this portfolio had an average current FICO score of 752 and an average CLTV of 56 percent and HELOCs and HELOANs in a first lien position totaled $67 million.
Other consumer loans. Our other consumer loan portfolio consists of secured and unsecured loans originated through our indirect lending business, third-party closings and our Community Banking segment.
The following table presents the amortized cost of our other consumer loan portfolio by purchase type:
December 31, 2021 December 31, 2020
Balance % of Portfolio Balance % of Portfolio
(Dollars in millions)
Indirect lending $ 926 75 % $ 744 74 %
Point of sale 272 22 % 211 21 %
Other 38 3 % 49 5 %
Total other consumer loans $ 1,236 100 % $ 1,004 100 %
Other consumer loans totaled $1.2 billion as of December 31, 2021, compared to $1.0 billion at December 31, 2020. The increase in other consumer loans was primarily due to the ongoing growth in our non-auto, boat and recreational vehicle indirect lending business which began in late 2018, of which 66 percent is secured by boats and 34 percent secured by recreational vehicles and growth in our point of sale portfolio. As of December 31, 2021, loans in our indirect portfolio had an average current FICO score of 748. Point of sale loans consist of unsecured consumer installment loans originated primarily for home improvement purposes through a third-party financial technology company who also provides us a level of credit loss protection.
Commercial real estate loans. The CRE 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 centers and single tenant locations, which include pharmacies and hardware stores. Generally, the maximum LTV is 80 percent, or 90 percent for owner-occupied real estate, and the minimum debt service coverage is 1.20. Our CRE loans primarily earn interest at a variable rate.
Our national home builder finance program within our commercial portfolio contained $2.7 billion in commitments with $1.0 billion in outstanding loans as of December 31, 2021. Of these loans $755 million are collateralized and included in our CRE portfolio while $268 million are unsecured and included in our C&I portfolio.
As of December 31, 2021, our CRE portfolio included $186 million of SNCs and no leveraged lending loans compared to $210 million of SNCs and one leveraged lending loan of $4 million as of December 31, 2020. As of December 31, 2021, the SNC portfolio had eleven borrowers with an average amortized cost of $17 million and an average commitment of $19 million. There were no nonperforming SNC loans as of December 31, 2021. One SNC loan of $22 million was rated as substandard and still accruing. There were no special mention SNC loans outstanding as of December 31, 2021.
The following table presents the amortized cost of our total CRE LHFI by collateral location and collateral type:
MI TX CA OH FL Other Total % by collateral type
(Dollars in millions)
December 31, 2021
Home builder $ 26 $ 161 $ 117 $ - $ 91 $ 360 $ 755 23.4 %
Owner occupied 304 4 27 8 2 60 405 12.6 %
Multi family 222 74 72 80 35 80 563 17.5 %
Retail (1) 191 - 2 54 5 33 285 8.8 %
Office 186 - - 4 1 42 233 7.2 %
Hotel 158 - 25 29 35 129 376 11.7 %
Senior living facility 117 25 - 64 12 44 262 8.1 %
Industrial 51 - - 29 16 17 113 3.5 %
Parking garage/lot 47 - - - - 21 68 2.1 %
Land - residential (2) - - 7 - - 5 12 0.4 %
Shopping mall - - 16 - - - 16 0.5 %
Single family residence (3) 2 - - - - 3 5 0.2 %
All other (4) 5 48 19 - 28 30 130 4.0 %
Total $ 1,309 $ 312 $ 285 $ 268 $ 225 $ 824 $ 3,223 100.0 %
Percent by state 40.6 % 9.7 % 8.8 % 8.3 % 7.0 % 25.6 % 100.0 %
(1)Includes multipurpose retail space, neighborhood centers, shopping centers and single-use retail space.
(2)Loans secured by land. Land - residential includes development and unimproved vacant land.
(3)Loans secured by 1-4 single family residence properties.
(4)All other primarily includes: mini-storage facilities, data centers, movie theaters, etc.
Commercial and industrial loans. C&I LHFI facilities typically include lines of credit and term loans and leases to businesses for use in normal business operations to finance working capital, equipment and capital purchases, acquisitions and expansion projects. We lend to customers with a history of profitability and a long-term business model. Generally, leverage conforms to industry standards and the minimum debt service coverage is 1.20 times. The majority of our C&I loans earn interest at a variable rate.
As of December 31, 2021, our C&I portfolio included $881 million of SNCs, compared to $665 million of SNCs as of December 31, 2020. The finance and insurance sector and the services sector comprised the majority of the portfolio's net book value with 37 percent and 27 percent of the balance, respectively. As of December 31, 2021, the SNC portfolio had forty-nine borrowers with an average amortized book value of $18 million and an average commitment of $36 million. There were no SNCs as of December 31, 2021 that were rated as special mention and $23 million of the SNCs that were rated as substandard and still accruing. There were no loans on nonaccrual status in our SNC portfolio as of December 31, 2021.
As of December 31, 2021, our C&I portfolio included $341 million of leveraged lending, of which $213 million were SNCs. The manufacturing sector comprised 55 percent of the leveraged lending portfolio and the financial and insurance sector comprised 17 percent. As of December 31, 2021, NPLs totaled $32 million, $48 million of loans were rated as substandard, and no loans were rated as special mention. Included in the financial and insurance sector within our C&I portfolio are $251 million in loans outstanding to 8 borrowers that are collateralized by MSR assets with an average amortized cost of $31 million and an average commitment of $66 million. The ratio of the loan outstanding to the fair market value of the collateral ranges from 11 percent to 70 percent.
The following table presents the amortized cost of our total C&I LHFI by borrower's geographic location and industry type as defined by North American Industry Classification System:
MI FL TX CA NY OH MN CT IN WI Other Total % by industry
(Dollars in millions)
December 31, 2021
Financial & Insurance $ 22 $ 247 $ 90 $ 22 $ 96 $ 31 $ 28 $ - $ 9 $ - $ 89 $ 634 34.7 %
Services 130 1 15 10 - 1 - 35 - 3 93 288 15.8 %
Manufacturing 237 4 - - - 22 - 10 6 - 33 312 17.1 %
Home Builder Finance - - 136 73 24 - 34 - - - 1 268 14.7 %
Rental & Leasing 117 25 30 - - - - - - 8 29 209 11.4 %
Distribution 35 - - 11 - 1 - 3 - 1 - 51 2.8 %
Healthcare 3 - - 1 - 18 - - - - 10 32 1.8 %
Government & Education 2 - - 2 - - - - - - 12 16 0.9 %
Commodities - - - 5 - - - 7 - 2 2 16 0.8 %
Total $ 546 $ 277 $ 271 $ 124 $ 120 $ 73 $ 62 $ 55 $ 15 $ 14 $ 269 1,826 100.0 %
Percent by state 29.9 % 15.2 % 14.8 % 6.8 % 6.6 % 4.0 % 3.4 % 3.0 % 0.8 % 0.8 % 14.7 % 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 warehouse lines of credit granted to other mortgage lenders at December 31, 2021 was $12.0 billion, of which $5.0 billion was outstanding, compared to a total commitment of $10.5 billion at December 31, 2020, of which $7.7 billion was outstanding.
Loan Principal Payments
The following tables set forth the expected repayment of our LHFI, both as fixed rate and adjustable-rate loans:
December 31, 2021
Within 1 Year 1 Year to 5 Years 5 Years to 15 Years Over 15 Years Totals (1)
(Dollars in millions)
Fixed Rate Loans
Other consumer $ 54 $ 255 $ 888 $ - $ 1,197
Residential first mortgage 14 63 194 343 614
Commercial real estate 35 125 - - 160
Commercial and industrial 20 75 - - 95
Home equity 3 13 32 - 48
Total fixed rate loans $ 126 $ 531 $ 1,114 $ 343 $ 343 $ 2,114
Adjustable Rate Loans
Warehouse lending $ 5,120 $ - $ - $ - $ 5,120
Commercial real estate 1,284 1,817 - - 3,101
Commercial and industrial 582 1,154 - - 1,736
Residential first mortgage 25 110 354 422 911
Home equity 10 47 163 334 554
Total adjustable rate loans $ 7,021 $ 3,128 $ 517 $ 756 $ 11,422
(1)UPB, net of write downs, does not include premiums or discounts.
Credit Quality
Our focus on effectively managing credit risk through our careful underwriting standards and processes has resulted in strong trends in certain credit quality characteristics in our loan portfolios. The credit quality of our loan portfolios is demonstrated by low delinquency levels, minimal charge-offs and low levels of NPLs.
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 under their original legal terms, 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.
Nonperforming assets
The following table sets forth our nonperforming assets:
At December 31,
2021 2020 2019
(Dollars in millions)
LHFI
Residential first mortgages $ 38 $ 23 $ 13
C&I 32 15 -
Home equity 7 3 2
Other consumer 4 2 1
CRE - 3 -
Total nonperforming LHFI 81 46 16
TDRs
Residential first mortgages 11 8 8
Home equity 2 2 2
Total nonperforming TDRs 13 10 10
Total nonperforming LHFI and TDRs (1) 94 56 26
LHFS 17 9 5
Real estate and other nonperforming assets, net 6 8 10
Total nonperforming assets $ 117 $ 73 $ 41
Nonperforming assets to total assets (2) 0.39 % 0.21 % 0.15 %
Nonperforming LHFI and TDRs to LHFI 0.70 % 0.34 % 0.21 %
Nonperforming assets to LHFI and repossessed assets (2) 0.74 % 0.40 % 0.30 %
(1)Includes less than 90 day past due performing loans placed on nonaccrual. Interest is not being accrued on these loans.
(2)Ratio excludes LHFS, which are recorded at fair value.
At December 31, 2021, we had $117 million of nonperforming assets compared to $73 million of nonperforming assets at December 31, 2020. The $17 million increase in nonaccrual C&I loans primarily relates to one loan relationship of $22 million that was specifically reserved at 80 percent of its UPB at December 31, 2021.
The following table sets forth activity related to our total nonperforming LHFI and TDRs:
For the Years Ended December 31,
2021 2020
(Dollars in millions)
Beginning balance $ 56 $ 26
Additions 85 54
Reductions - 1
Principal payments (34) (14)
Charge-offs (9) (5)
Return to performing status (3) (6)
Transfers to REO (2) -
Total nonperforming LHFI and TDRs (1) $ 93 $ 56
(1)Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.
Delinquencies
The following table sets forth loans 30-89 days past due in our LHFI portfolio:
As of December 31,
2021 2020 2019
(Dollars in millions)
Performing loans past due 30-89:
Consumer loans
Residential first mortgage $ 48 $ 8 $ 9
Home equity 9 2 1
Other consumer 5 5 4
Total consumer loans 62 15 14
CRE - 20 -
C&I - 2 -
Total commercial loans - 22 -
Total performing loans past due 30-89 days $ 62 $ 37 $ 14
Loans 30 to 89 days past due were $62 million and $37 million at December 31, 2021 and December 31, 2020, respectively. Included in the consumer loan population is $43 million in first residential mortgage loans, or 69 percent, that have recently exited forbearance that are being accounted for based on guidance within the CARES Act. These borrowers have not yet selected a forbearance exit plan and the average LTV of these loans is approximately 75 percent.
For further information see Note 4 - Loans Held-for-Investment.
Payment Deferrals
Beginning in March 2020, as a response to COVID-19, we offered our consumer borrowers principal and interest payment deferrals, forbearance and/or extensions up to a maximum period of 18 months. Consumer borrowers were not required to provide proof of hardship to be granted forbearance or payment deferral. Typically, payment history is the primary tool used to identify consumer borrowers who are experiencing financial difficulty. Forbearance or payment deferrals make this determination more challenging. In addition, consumer borrowers who have requested forbearance or payment deferrals are not being aged and remain in the aging category they were in prior to forbearance or payment deferral while they remain in a forbearance or payment deferral status which is in accordance with the CARES Act and interagency guidance in response to COVID-19.
The table below summarizes borrowers in our consumer loan portfolios that are in active forbearance or were granted a payment deferral:
As of December 31, 2021 As of December 31, 2020
Number of Borrowers UPB Percent of Portfolio Number of Borrowers UPB Percent of Portfolio
(Dollars in millions)
Loans Held-For-Investment
Consumer loans
Residential first mortgage 212 $ 35 2.3 % 697 $ 209 9.3 %
Home equity 48 5 0.8 % 315 28 3.4 %
Other consumer 96 4 0.3 % 418 14 1.4 %
Total consumer loan deferrals/forbearance 356 $ 44 1.3 % 1,430 $ 251 6.2 %
Loans Held-For-Sale
Residential first mortgage 47 $ 13 0.3 % 80 $ 39 6.8 %
There were no commercial borrowers in payment deferral as of December 31, 2021 and as of December 31, 2020 there were five commercial loans with an UPB of $22 million in payment deferral programs.
The table below summarizes the percent of our residential loan servicing portfolio in forbearance as of December 31, 2021:
Total Population Total Loans in Forbearance
Unpaid Principal Balance (1) Number of accounts Unpaid Principal Balance (1) Number of accounts Percent of UPB Percent of Accounts
(Dollars in millions)
Loan Servicing
Subserviced for others (2) $ 247,081 1,033,711 $ 3,946 18,313 1.6 % 1.8 %
Serviced for others (3) 35,097 137,315 514 2,158 1.5 % 1.6 %
Serviced for own loan portfolio (4) 8,645 63,039 220 1,158 2.5 % 1.8 %
Total loans serviced $ 290,823 1,234,065 $ 4,680 21,629 1.6 % 1.8 %
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Loans subserviced for non-Flagstar owned loans or MSRs, in each case subserviced for a fee. Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs.
(3)Loans for which Flagstar owns the MSR.
(4)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), and LGG (residential first mortgage).
The table below summarizes our residential loan servicing portfolio in forbearance as of December 31, 2020:
Total Population Total Loans in Forbearance
Unpaid Principal Balance (1) Number of accounts Unpaid Principal Balance (1) Number of accounts Percent of UPB Percent of Accounts
(Dollars in millions)
Loan Servicing
Subserviced for others (2) $ 178,614 $ 867,825 $ 1,785 $ 8,851 1.0 % 1.0 %
Serviced for others (3) 38,014 151,038 402 1,773 1.1 % 1.2 %
Serviced for own loan portfolio (4) 10,083 66,536 69 574 0.7 % 0.9 %
Total loans serviced $ 226,711 1,085,399 $ 2,256 11,198 1.0 % 1.0 %
(1) UPB, net of write downs, does not include premiums or discounts.
(2) Loans subserviced for a fee for non-Flagstar owned loans or MSRs. Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs.
(3) Loans for which Flagstar owns the MSR.
(4) Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), and LGG (residential first mortgage).
As the MSR owner for loans serviced for others, the Agencies require us to advance payments on past due loans as follows:
Principal and Interest Taxes and Insurance
Fannie Mae and Freddie Mac 4 months No time limit
GNMA No time limit No time limit
We believe that we have ample liquidity to handle servicing advances related to these loans. We initially provide advances on a short-term basis for loans we subservice and are reimbursed by the MSR owner. Our advance receivable for our subserviced loans is therefore insignificant.
Troubled debt restructurings (held-for-investment)
TDRs are modified loans in which a borrower demonstrates financial difficulties and for which a concession has been granted as a result. Nonperforming TDRs are included in nonaccrual loans. TDRs remain in nonperforming status until a borrower has made payments and is current for at least six consecutive months. Performing TDRs are not considered to be nonaccrual so long as we believe that all contractual principal and interest due under the restructured terms will be collected.
Since March 2020, as a response to COVID-19, we have offered our consumer and commercial customers principal and interest payment deferrals and extensions up to a maximum period of 18 months. We considered these programs in the context of whether or not the short-term modifications of these loans would constitute a TDR. We considered the CARES Act, interagency guidance and related guidance from the FASB, which provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not required to be accounted for as TDRs. As a result, we have determined that these loans are not TDRs. We believe our application of the referenced guidance and accounting for these programs is appropriate.
The following table sets forth a summary of TDRs by performing status:
As of December 31,
2021 2020 2019
(Dollars in millions)
Performing TDRs
Consumer Loans
Residential first mortgage $ 14 $ 19 $ 20
Home equity 8 12 18
Total consumer loans 22 31 38
Commercial Loans
Commercial and industrial 2 - -
Commercial real estate - 5 -
Total commercial loans 2 5 -
Total performing TDRs 24 36 38
Nonperforming TDRs
Nonperforming TDRs 8 4 3
Nonperforming TDRs, performing for less than six months 5 6 7
Total nonperforming TDRs 13 10 10
Total TDRs $ 37 $ 46 $ 48
At December 31, 2021, our total TDR loans decreased to $37 million compared to $46 million at December 31, 2020, primarily due to principal payments and payoffs out-pacing new additions. Of our total TDR loans, 65 percent were in performing status at December 31, 2021. For further information, see Note 4 - Loans Held-for-Investment.
Allowance for Credit Losses
The ACL represents Management's estimate of lifetime losses 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 following tables present the changes in the ACL balance for the year-ended December 31, 2021:
For the Year-Ended December 31, 2021
Residential First Mortgage (1) Home Equity Other Consumer Commercial Real Estate Commercial and Industrial Warehouse Lending Total LHFI Portfolio (2) Unfunded Commitments Total ACL
(Dollars in millions)
Beginning balance ACL $ 49 $ 25 $ 39 $ 84 $ 51 $ 4 $ 252 $ 28 $ 280
Provision (benefit) for credit losses:
Loan volume 1 (3) 6 4 4 (1) 11 (12) (1)
Economic forecast (3) (7) (5) 3 (9) (17) - (35) - (35)
Credit (4) 6 4 1 (35) 14 1 (9) - (9)
Qualitative factor adjustments (9) (7) (13) (16) (20) - (65) - (65)
Charge-offs (5) (1) (4) - (9) - (19) - (19)
Recoveries 2 2 2 - 16 - 22 - 22
Provision for charge-offs 3 (1) 2 - (7) - (3) - (3)
Ending allowance balance $ 40 $ 14 $ 36 $ 28 $ 32 $ 4 $ 154 $ 16 $ 170
(1)Includes loans with government guarantees where insurance limits may result in a loss in excess of all or part of the guarantee.
(2)Excludes loans carried under the fair value option.
(3)Includes changes in the lifetime loss rate based on current economic forecasts as compared to forecasts used in the prior quarter.
(4)Includes changes in the probability of default and severity of default based on current borrower and guarantor characteristics, as well as individually evaluated reserves.
For the Year-Ended December 31, 2020
Residential First Mortgage (1) Home Equity Other Consumer Commercial Real Estate Commercial and Industrial Warehouse Lending Total LHFI Portfolio (2) Unfunded Commitments Total ACL
(Dollars in millions)
Beginning balance ACL $ 47 $ 26 $ 16 $ 24 $ 16 $ 1 $ 130 $ 10 $ 140
Provision (benefit) for credit losses:
Loan volume (10) (4) 9 3 (3) 1 (4) 7 3
Economic forecast (3) 5 (6) 3 15 (3) (1) 13 11 24
Credit (4) (5) (3) (2) 23 20 - 33 - 33
Qualitative factor adjustments (5) 12 8 11 19 21 3 74 - 74
Charge-offs (6) (3) (5) - (1) - (15) - (15)
Recoveries - 4 2 - - - 6 - 6
Provision for charge-offs 6 3 5 - 1 - 15 - 15
Ending allowance balance $ 49 $ 25 $ 39 $ 84 $ 51 $ 4 $ 252 $ 28 $ 280
(1)Includes loans with government guarantees where insurance limits may result in a loss in excess of all or part of the guarantee.
(2)Excludes loans carried under the fair value option.
(3)Includes changes in the lifetime loss rate based on current economic forecasts as compared to forecasts used in the prior quarter.
(4)Includes changes in the probability of default and severity of default based on current borrower and guarantor characteristics, as well as individually evaluated reserves.
(5)Includes $7 million of unallocated reserve attributed to various portfolios for presentation purposes.
The ACL was $170 million at December 31, 2021 and $280 million at December 31, 2020. The decrease in the allowance is primarily reflective of changes in our economic forecast and judgment we applied related to those forecasts and underlying borrower credit risks as a result of the ongoing COVID-19 pandemic. We utilized the Moody’s November 2021 economic scenarios in our forecast, which were materially consistent with the December scenarios: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. Within our composite forecast, unemployment ends 2021 at 5 percent and will recover slightly in 2022, ending the year just under 5 percent. GDP continues to recover throughout 2022 and returns to pre-COVID levels in 2023. HPI decreases by just over 1 percent compared to 2021 year-end levels through the second quarter of 2022 before returning to 2021 year-end levels by the third quarter of 2022. In 2021, we judgmentally decreased our qualitative reserves by $65 million which primarily reflected our best estimates of COVID-19’s impact on our portfolios (including the estimated impact of government stimulus, forbearance/payment holidays, and Fed programs). This decline was primarily driven by a decrease in the model output from Moody’s adverse scenario, improvement in credit performance of previously identified industries and borrowers we believed could be more exposed to the stressful conditions in our forecast and decreased loans in forbearance.
The ACL as a percentage of LHFI was 1.3 percent as of December 31, 2021 compared to 1.7 percent as of December 31, 2020. Excluding warehouse, the allowance as a percentage of LHFI was 2.0 percent at December 31, 2021 compared to 3.2 percent at December 31, 2020. The decrease in the allowance, as a percentage of LHFI is reflective of the reductions made to the allowance to reflect the change in economic and credit forecast used during that period. At December 31, 2021, we had a 2.7 percent and 0.8 percent allowance coverage on our consumer loan portfolio and our commercial loan portfolio, respectively.
The following tables set forth certain information regarding the allocation of our allowance to each loan category, including the allowance amount as a percentage of amortized cost and average loan life:
December 31, 2021
LHFI Portfolio (1) Percent of
Portfolio Allowance Amount (2) Allowance as a Percent of LHFI Loan Portfolio Weighted Average Loan Life
Consumer loans
Residential first mortgage $ 1,521 11.4 % $ 40 2.6 % 5
Home equity 611 4.6 % 14 2.3 % 3
Other consumer 1,236 9.2 % 37 3.0 % 3
Total consumer loans 3,368 25.2 % 91 2.7 %
Commercial loans
Commercial real estate 3,223 24.1 % 38 1.2 % 1
Commercial and industrial 1,826 13.6 % 36 2.0 % 2
Warehouse lending 4,974 37.1 % 5 0.1 % -
Total commercial loans 10,023 74.8 % 79 0.8 %
Total consumer and commercial loans $ 13,391 100.0 % $ 170 1.3 %
Total consumer and commercial loans excluding warehouse $ 8,417 62.9 % $ 165 2.0 %
(1) Excludes loans carried under the fair value option.
(2) Includes allowance for loan losses and reserve for unfunded commitments.
December 31, 2020
LHFI Portfolio (1) Percent of
Portfolio Allowance Amount (2) Allowance as a Percent of LHFI Loan Portfolio Weighted Average Loan Life
Consumer loans
Residential first mortgage $ 2,251 13.9 % $ 49 2.2 % 4
Home equity 854 5.3 % 25 2.9 % 3
Other consumer 1,004 6.2 % 40 4.0 % 3
Total consumer loans 4,109 25.4 % 114 2.8 %
Commercial loans
Commercial real estate 3,060 18.9 % 103 3.4 % 2
Commercial and industrial 1,382 8.5 % 57 4.1 % 2
Warehouse lending 7,658 47.2 % 6 0.1 % -
Total commercial loans 12,100 74.6 % 166 1.4 %
Total consumer and commercial loans $ 16,209 100.0 % $ 280 1.7 %
Total consumer and commercial loans excluding warehouse $ 8,551 52.8 % $ 274 3.2 %
(1) Excludes loans carried under the fair value option.
(2) Includes allowance for loan losses and reserve for unfunded commitments.
The following tables set forth certain information regarding nonaccrual loans, including the allowance amount as a percentage of nonaccruals:
December 31, 2021 December 31, 2020
Nonaccrual Loans (2) Nonaccruals as Percent of LHFI Loan Portfolio (1) Nonaccrual Loans (2) Nonaccruals as Percent of LHFI Loan Portfolio (1)
Consumer loans
Residential first mortgage $ 49 3.2 % $ 31 1.4 %
Home equity 9 1.5 % 5 0.6 %
Other consumer 4 0.3 % 2 0.2 %
Total consumer loans 62 1.8 % 38 0.9 %
Commercial loans
Commercial real estate - - % 3 0.1 %
Commercial and industrial 32 1.8 % 15 1.1 %
Total commercial loans 32 0.3 % 18 0.1 %
Total consumer and commercial loans $ 94 0.7 % $ 56 0.3 %
(1) Loan portfolio excludes loans carried under the fair value option.
(2) The delinquency status for loans in forbearance are frozen for loans at inception of the forbearance period and is resumed when the borrower's forbearance period ends.
Nonaccrual loans as a percentage of LHFI was 0.7 percent as of December 31, 2021 compared to 0.3 percent as of December 31, 2020. The increase in nonaccrual loan percentage is consistent with the increase in nonaccrual loans related to worsening economic conditions, offset by growth in the LHFI portfolio.
The following tables set forth certain information regarding net charge-offs and net charge-offs as a percentage of amortized cost:
December 31, 2021 December 31, 2020
Net (charge-offs) recoveries Net charge-offs as a Percent of Average LHFI Loan Portfolio Net (charge-offs) recoveries Net charge-offs as a Percent of Average LHFI Loan Portfolio
Consumer loans
Residential first mortgage $ (3) 0.1 % $ (6) 0.2 %
Home equity 1 0.1 % 1 N/M
Other consumer (2) 0.2 % (3) 0.3 %
Total consumer loans (4) 0.1 % (8) 0.2 %
Commercial loans
Commercial real estate - - % - - %
Commercial and industrial 7 (0.5) % (1) 0.1 %
Total commercial loans 7 0.1 % (1) - %
Total consumer and commercial loans $ 3 - % $ (9) 0.1 %
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 rates. Our primary market risk is interest rate risk which impacts our net interest income, fee income related to interest sensitive activities such as mortgage closing 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 ALCO, which is composed of our executive officers and certain other members of management, monitors interest rate risk on an ongoing basis in accordance with policies approved by our Board of Directors. The ALCO reviews interest rate positions and considers the impact projected interest rate scenarios have on earnings, capital, liquidity, business strategies, and other factors. However, Management has the latitude to change interest rate positions within certain limits if, in Management's judgment, the change will enhance profitability 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”, for non-maturity 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 100 basis points) resulting in the shape of the yield curve remaining unchanged.
December 31, 2021
Scenario Net Interest Income $ Change % Change
(Dollars in millions)
100 $882 $122 16.1%
Constant 760 - -%
(100) 695 (65) (8.5)%
December 31, 2020
Scenario Net Interest Income $ Change % Change
(Dollars in millions)
100 $791 $94 13.5%
Constant 697 - -%
(100) N/M N/M N/M
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.
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. Future interest rates not moving in a parallel manner across the yield curve, how the balance sheet will respond and shift based on a change in future interest rates, the impact of interest rate floors on certain of our commercial loans and how the Company will respond are not included in this analysis and limit the predictive value of these scenarios.
Economic value of equity
Management also utilizes EVE, a point in time analysis of the economic value of our current balance sheet position, which measures interest rate risk over a longer term. The EVE calculation represents a hypothetical valuation of equity, and is defined as the market value of assets, less the market value of liabilities, adjusted for the market value of off-balance sheet instruments. The assessment of both the short-term earnings (Net Interest Income Sensitivity) and long-term valuation (EVE) approaches, rather than Net Interest Income Sensitivity alone provides a more comprehensive analysis of interest rate risk exposure.
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, 2021 December 31, 2020
Scenario EVE EVE% $ Change % Change Scenario EVE EVE% $ Change % Change Policy Limits
(Dollars in millions)
300 $ 4,579 18.2 % $ 1,042 29.5 % 300 $ 3,948 12.7 % $ 890 29.1 % (22.5) %
200 4,232 16.8 % 695 19.6 % 200 3,755 12.1 % 697 22.8 % (15.0) %
100 3,939 15.6 % 402 11.4 % 100 3,474 11.2 % 416 13.6 % (7.5) %
Current 3,537 14.0 % - - % Current 3,058 9.9 % - - % - %
(100) N/M N/M N/M N/M (100) N/M N/M N/M N/M 7.5 %
Our balance sheet exhibits asset sensitivity in various interest rate scenarios. The increase in EVE as rates raise is the result of the amount of assets that would be expected to reprice exceeding the amount of liabilities repriced. This increased as of December 31, 2021 compared to December 31, 2020 due to the addition of pay fixed interest rate swaps. At December 31, 2021 and December 31, 2020, for each scenario shown, the percentage change in our EVE is within our Board policy limits.
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 closing 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 our unclosed mortgage closing pipeline 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, and 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.
Mortgage Servicing Rights (MSRs)
Our MSRs are sensitive to changes in interest rates 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 all 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.
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Net return on mortgage servicing rights
Servicing fees, ancillary income and late fees (1) $ 115 $ 107 $ 96
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other (99) (109) (89)
Changes in fair value 57 (50) (76)
Gain (loss) on MSR derivatives (2) (37) 65 76
Net transaction costs from sales (13) (3) (1)
Total return included from net return on mortgage servicing rights $ 23 $ 10 $ 6
(1)Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on a cash basis.
(2)Changes in the derivatives used to hedge the fair value of the MSRs.
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 the ability to, at a reasonable cost, meet loan demand, 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 and the payment of cash dividends to shareholders. The Company holds $150 million of subordinated debt which is scheduled to mature on November 1, 2030. During 2021, the Bank remitted a total of $225 million in dividend payments to the Company and at December 31, 2021, the Company held $213.2 million of cash on deposit at the Bank, which is sufficient to cover cash outflows needed to service the subordinated debt, pay dividends and cover the operating expense of the Company.
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 for more than three out of the prior twelve months. As of December 31, 2021, the Bank is in compliance with the QTL test, having qualified assets above the 65 percent requirement in each of the twelve prior months. As of December 31, 2021, the Bank is able to pay dividends to the holding company of approximately $387 million without submitting an application to the OCC and remain well capitalized.
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.
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 closings 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, 2021, we had $0.3 billion of advances outstanding and an additional $3.8 billion of collateralized borrowing capacity available at the FHLB.
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 and as of December 31, 2021 was 145.1 percent and in compliance with our board policy limit of 90 percent.
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 average HFI loan-to-deposit ratio was 70.5 percent for the twelve months ended December 31, 2021. 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 average adjusted HFI loan-to-deposit ratio was 62.8 percent for the twelve months ended December 31, 2021.
As governed and defined by our 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 closings, making changes to warehouse funding facilities, or borrowing from the discount window.
The following table presents primary sources of funding as of the dates indicated:
December 31, 2021 December 31, 2020 Change
(Dollars in millions)
Retail deposits $ 10,264 $ 9,971 $ 293
Government deposits 2,000 1,765 235
Wholesale deposits 1,141 1,031 110
Custodial deposits 4,604 7,206 (2,602)
Total deposits 18,009 19,973 (1,964)
FHLB advances and other short-term debt
3,280 5,100 (1,820)
Other long-term debt 396 641 (245)
Total borrowed funds 3,676 5,741 (2,065)
Total funding $ 21,685 $ 25,714 $ (4,029)
The following table presents our borrowing capacity as of the dates indicated:
December 31, 2021 December 31, 2020 Change
(Dollars in millions)
Federal Home Loan Bank
Line of credit
$ 30 $ 30 $ -
Collateralized borrowing capacity
3,792 2,360 1,432
Total unused borrowing capacity
3,822 2,390 1,432
FRB discount window
Collateralized borrowing capacity 1,666 1,374 292
Unencumbered investment securities
Agency - Commercial (1) 123 1,263 (1,140)
Agency - Residential (1) 55 815 (760)
Municipal obligations 18 23 (5)
Corporate debt obligations 54 62 (8)
Other 1 1 -
Total unencumbered investment securities 251 2,164 (1,913)
Total borrowing capacity $ 5,739 $ 5,928 $ (189)
(1) These are not currently pledged to the FHLB but are eligible to be pledged, at our discretion.
Deposits
The following table presents the composition of our deposits:
At December 31,
2021 2020 2019 Change
Balance % of Deposits Balance % of Deposits Balance % of Deposits 2021 vs. 2020 2020 vs. 2019
(Dollars in millions)
Retail deposits
Branch retail deposits
Savings accounts $ 3,751 20.8 % $ 3,437 17.2 % $ 3,030 20.0 % $ 314 $ 407
Demand deposit accounts 1,946 10.8 % 1,726 8.6 % 1,318 8.7 % $ 220 408
Certificates of deposit/CDARS (1) 951 5.3 % 1,355 6.8 % 2,353 15.5 % $ (404) (998)
Money market demand accounts 494 2.7 % 490 2.5 % 495 3.3 % $ 4 (5)
Total branch retail deposits 7,142 39.7 % 7,008 35.1 % 7,196 47.5 % 134 (188)
Commercial deposits (2)
Demand deposit accounts 2,194 12.2 % 2,294 11.5 % 1,438 9.5 % (100) 856
Savings accounts 520 2.9 % 461 2.3 % 342 2.3 % 59 119
Money market demand accounts 408 2.2 % 208 1.0 % 188 1.2 % 200 20
Total commercial deposits 3,122 17.3 % 2,963 14.8 % 1,968 13.0 % 159 995
Total retail deposits $ 10,264 57.0 % $ 9,971 49.9 % $ 9,164 60.5 % $ 293 $ 807
Government deposits
Savings accounts $ 721 4.0 % $ 778 3.9 % $ 495 3.3 % $ (57) $ 283
Demand deposit accounts 664 3.7 % 529 2.6 % 360 2.4 % 135 169
Certificates of deposit/CDARS (1) 609 3.4 % 458 2.3 % 358 2.4 % 151 100
Money market demand accounts 6 - % - - % - - % 6 -
Total government deposits 2,000 11.1 % 1,765 8.8 % 1,213 8.0 % 235 552
Custodial deposits (3) 4,604 25.6 % 7,206 36.1 % 4,136 27.3 % (2,602) 3,070
Wholesale deposits 1,141 6.3 % 1,031 5.2 % 633 4.2 % 110 398
Total deposits (4) $ 18,009 100.0 % $ 19,973 100.0 % $ 15,146 100.0 % $ (1,964) $ 4,827
(1)The aggregate amount of CD with a minimum denomination of $100,000 was approximately $1.2 billion, $1.3 billion, and $1.7 billion at December 31, 2021, December 31, 2020, and December 31, 2019 respectively.
(2)Contains deposits from commercial and business banking customers.
(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.
(4)Total exposure related to uninsured deposits over $250,000 was approximately $5.6 billion and $5.9 billion at December 31, 2021 and December 31, 2020, respectively. For further information, see Note 12 - Deposit Accounts.
Total deposits decreased $2.0 billion, or 9.8 percent, at December 31, 2021, compared to December 31, 2020, primarily driven by a decrease in custodial deposits of $2.6 billion primarily driven by a reduction in mortgage refinance activity partially offset by higher retail and government deposits supported by higher average customer balances.
We utilize local governmental agencies and other public units as an additional source for deposit funding. At December 31, 2021, we were required to hold collateral for certain Michigan, California, Indiana, Wisconsin and Ohio government deposits based on a variety of factors including, but not limited to, the size of individual deposits and FDIC limits. At December 31, 2021, required collateral held on government deposits was $0.2 billion. At December 31, 2021, government deposit accounts included $0.6 billion of certificates of deposit with maturities typically less than one year and $1.4 billion of checking and savings accounts.
Custodial deposits arise due to our servicing or subservicing of loans for others and represent the portion of the investor custodial accounts on deposit with the Bank. For certain subservice agreements, we give a LIBOR-based fee credit to the MSR owner who controls the custodial deposit 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, 2021, we had $115 million of total CDs enrolled in the CDARS program, a decrease of $9 million from December 31, 2020.
FHLB Advances
The FHLB 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 closing or purchase of loans for sale in the secondary market and for providing duration specific short-term and long-term financing. The outstanding balance of FHLB advances fluctuates from time to time depending on our current inventory of mortgage LHFS and the availability of lower cost funding sources. Our portfolio includes short-term fixed rate advances and long-term fixed rate advances.
We are currently authorized through a resolution of our Board of Directors to apply for advances from the FHLB using approved loan types as collateral, which includes residential first mortgage loans, HELOC, CRE loans and investment securities. As of December 31, 2021, our Board of Directors 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, 2021, we had $3.0 billion of advances outstanding and an additional $3.8 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, 2021, we pledged collateral, which included commercial loans, municipal bonds, and agency bonds, to the FRB of Chicago amounting to $2.3 billion with a lendable value of $1.7 billion. At December 31, 2020, we pledged collateral to the FRB of Chicago amounting to $1.9 billion with a lendable value of $1.4 billion. We do not typically utilize this available funding source, and at December 31, 2021 and December 31, 2020, we had no borrowings outstanding against this line of credit.
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, 2021, we had $280 million 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, 2021, we are current on all interest payments. Additionally, we have $150 million of subordinated debt (the "Notes"), which matures on November 1, 2030.
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, 2021, and the future periods in which the obligations are expected to be settled in cash:
Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total
(Dollars in millions)
Deposits without stated maturities $ 10,704 $ - $ - $ - $ 10,704
Short-term FHLB advances and other borrowings 1,717 795 181 8 2,701
Certificates of deposits 1,800 - - - 1,800
Long-term FHLB advances 200 600 - 600 1,400
Subordinated debt - - - 247 247
Trust preferred securities - - - 148 148
Operating leases 9 13 6 2 30
Other (1) 23 25 3 2 53
Total $ 14,453 $ 1,433 $ 190 $ 1,007 $ 17,083
(1) Includes contracts with vendors and commitments to various limited partnerships including those 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 which may include vendor failures, 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 identify potential vulnerabilities and mitigate potential loss from cyber-attacks. 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 our LGG continue to be insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs ("VA"). In the event of a government guaranteed loan borrower default, the Bank has a unilateral option to repurchase loans sold to GNMA if the loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) and can recover losses through a claims process from the guarantor. 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 60 days delinquent until the loan is conveyed to HUD (if foreclosure timelines are met), which is not paid by the FHA until claimed. Additionally, if the Bank cures the loan, it can be resold to GNMA, usually at a gain. 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.
Additional expenses or charges may arise on LGG due to VA loan insurance limits and FHA property foreclosure and preservation requirements that may result in a loss in excess of all, or part of, the guarantee. During the year-ended December 31, 2021, we had less than $2.7 million in net charge-offs related to LGG and have reserved for the remaining risks within other assets and as a component of our ALLL on residential first mortgages.
Our LGG portfolio totaled $1.7 billion at December 31, 2021, as compared to $2.5 billion at December 31, 2020. GNMA has granted borrowers with an option to seek forbearances on their mortgage repayments. $0.2 billion of GNMA loans are in forbearance as of December 31, 2021. When a GNMA loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) the loan is required to be re-recognized on the balance sheet by the MSR owner. These loans are recorded in LGG, and the liability to repurchase the loans is recorded in loans with government guarantees repurchase liability on the Consolidated Statements of Financial Condition. This resulted in $0.2 billion of repurchase liability as of December 31, 2021, a $1.7 billion decrease from December 31, 2020 due to a lower amount of loans being in active forbearance.
For further information, see Note 5 - Loans with Government Guarantees and the Credit Risk - Payment Deferrals section of the MD&A.
Regulatory Risks
Department of Justice Settlement Agreement
On February 24, 2012, the Bank entered into a Settlement Agreement with the DOJ (the "Settlement Agreement") under which we agreed to make future payments totaling $118 million in annual increments of up to $25 million upon meeting certain conditions. On March 30, 2021, the Bank signed a Settlement and Dismissal Amendment (the "Amendment") with the DOJ. Under the Amendment we agreed to make a $70 million one-time restitution cash payment and removed any further obligations related to the original Settlement Agreement. We recorded a $35 million expense to adjust the fair value of the DOJ Liability through other noninterest expense in the first quarter of 2021 which brought the fair value of the DOJ Liability to $70 million as of March 31, 2021, consistent with the Amendment. The final payment was made on April 8, 2021. For further information on the fair value of the liability, see Note 20 - Fair Value Measurements.
Representation and Warranty Reserve
When we sell mortgage loans, we make customary representations and warranties to the purchasers, including sponsored securitization trusts and their insurers (primarily Fannie Mae and Freddie Mac). 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, which was $4 million and $7 million at December 31, 2021 and December 31, 2020, respectively.
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 10.54 percent at December 31, 2021, providing a 554 basis point stress buffer above the minimum level needed to be considered “well-capitalized.” Additionally, total risk-based capital to RWA was 15.88 percent at December 31, 2021, providing a 588 basis point 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 we report total assets 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
The Bank and Flagstar are subject to the Basel III-based U.S. rules, including capital simplification in 2020.
On March 27, 2020, in response to COVID-19, U.S. banking regulators issued an interim final rule that allows banking organizations the option to delay the initial adoption impact of CECL on regulatory capital for two years followed by a three-year transition period. During the two-year delay we added back to CET1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the ACL (i.e., quarterly transitional amounts). After two years, starting on January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period.
For the period presented, the following table sets forth our capital ratios, as well as our excess capital over well-capitalized minimums.
Flagstar Bancorp Actual Well-Capitalized Under Prompt Corrective Action Provisions Excess Capital Over Well-Capitalized Minimum
Amount Ratio Amount Ratio Amount Ratio
(Dollars in millions)
December 31, 2021
Tier 1 leverage capital
(to adjusted avg. total assets) $ 2,798 10.54 % $ 1,327 5.0 % $ 1,471 5.5 %
Common equity Tier 1 capital (to RWA) 2,558 13.19 % 1,261 6.5 % 1,297 6.7 %
Tier 1 capital (to RWA) 2,798 14.43 % 1,552 8.0 % 1,246 6.4 %
Total capital (to RWA) 3,080 15.88 % 1,940 10.0 % 1,140 5.9 %
As presented in the table above, our constraining capital ratio is our total capital to risk weighted assets at 15.88 percent. It would take $1.1 billion after-tax losses, with the balance sheet remaining constant, for our total risk-based capital ratio to fall below the level considered to be "well-capitalized".
For additional information on our capital requirements, see Note 18 - Regulatory Capital.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes certain non-GAAP financial measures. 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, return on average tangible common equity, adjusted return on average tangible common equity, adjusted return on average assets, adjusted noninterest expense, adjusted provision for income taxes, adjusted net income, adjusted basic earnings per share, adjusted diluted earnings per share, adjusted net interest margin and adjusted efficiency ratio.
The Company believes that these non-GAAP financial measures provide a meaningful representation of its operating performance on an ongoing basis for investors, securities analysts, and others. Management uses these measures to assess performance of the Company against its peers and evaluate overall performance.
The following tables provide a reconciliation of non-GAAP financial measures.
At December 31,
2021 2020 2019
(Dollars in millions)
Total stockholders' equity $ 2,718 $ 2,201 $ 1,788
Less: Goodwill and intangible assets 147 157 170
Tangible book value/Tangible common equity $ 2,571 $ 2,044 $ 1,618
Number of common shares outstanding 53,197,650 52,656,067 56,631,236
Tangible book value per share $ 48.33 $ 38.80 $ 28.57
Total Assets $ 25,483 $ 31,038 $ 23,266
Tangible common equity to asset ratio 10.09 % 6.58 % 6.95 %
At December 31,
2021 2020 2019
(Dollars in millions, except share data)
Net income $ 533 $ 538 $ 218
Plus: Intangible asset amortization, net of tax 8 10 12
Tangible net income 541 548 230
Total average equity 2,514 2,052 1,695
Less: Average goodwill and intangible assets 152 164 179
Total average tangible equity 2,666 2,216 1,874
Return on average tangible common equity 22.94 % 29.00 % 15.15 %
Adjustment for merger / acquisition costs 1.01 % - % 0.06 %
Adjustment to remove DOJ settlement expense 1.82 % - % (1.34) %
Adjustment for former CEO SERP agreement (0.52) % - % - %
Adjusted return on average tangible common equity 25.25 % 29.00 % 13.87 %
Return on average assets 1.89 % 2.00 % 1.05 %
Adjustment to remove DOJ 0.10 % - % (0.09) %
Adjustment for former CEO SERP settlement agreement (0.03) % - % - %
Adjustment for merger costs 0.05 % - % - %
Adjusted return on average assets 2.01 % 2.00 % 0.96 %
Adjusted HFI loan-to-deposit ratio.
December 31, 2021 December 31, 2020 December 31, 2019
(Dollars in millions)
Average LHFI $ 13,860 $ 13,997 $ 10,932
Less: Average warehouse loans 5,583 4,694 2,112
Adjusted average LHFI $ 8,277 $ 9,303 $ 8,820
Average deposits $ 19,653 $ 18,544 $ 14,708
Less: Average custodial deposits 6,465 6,725 3,839
Adjusted average deposits $ 13,188 $ 11,819 $ 10,869
HFI loan-to-deposit ratio 70.5 % 75.5 % 74.3 %
Adjusted HFI loan-to-deposit ratio 62.8 % 78.7 % 81.1 %
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Noninterest expense $ 1,213 $ 1,142 $ 888
Adjustment for merger / acquisition costs 20 - 1
Adjustment to remove DOJ settlement expense 35 - -
Adjustment for former CEO SERP agreement (10) - -
Adjusted noninterest expense $ 1,168 $ 1,142 $ 887
Income before income taxes $ 690 $ 704 $ 266
Adjustment to remove DOJ settlement expense 35 - (25)
Adjustment for former CEO SERP agreement (10) - -
Adjustment for merger costs 20 - -
Adjusted income before income taxes $ 735 $ 704 $ 241
Provision for income taxes $ 157 $ 166 $ 48
Adjustment to remove DOJ settlement expense (8) - (5)
Adjustment for former CEO SERP agreement 2 - -
Adjustment for merger costs (4) - -
Adjusted provision for income taxes $ 167 $ 166 $ 53
Net income $ 533 $ 538 $ 218
Adjusted net income $ 568 $ 538 $ 199
Weighted average common shares outstanding 52,792,931 56,094,542 56,584,238
Weighted average diluted common shares 53,519,086 56,505,813 57,238,978
Adjusted basic earnings per share $ 10.75 $ 9.59 $ 3.50
Adjusted diluted earnings per share $ 10.60 $ 9.52 $ 3.46
Average interest-earning assets $ 25,591 $ 24,431 $ 18,453
Net interest margin 2.92 % 2.80 % 3.05 %
Adjustment to LGG loans available for repurchase 0.11 % 0.11 % - %
Adjusted net interest margin 3.03 % 2.91 % 3.05 %
Efficiency Ratio 67.7 % 57.2 % 75.8 %
Adjustment for early extinguishment loss - % (0.3) % - %
Adjustment to remove DOJ settlement expense (1.4) % - % 1.6 %
Adjustment for former CEO SERP agreement 0.6 % - % - %
Adjustment for merger costs (1.1) % - % - %
Adjusted efficiency ratio 65.8 % 56.9 % 77.4 %
Accounting and Reporting Developments
Adoption of New Accounting Standards
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
Various elements of our accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain accounting policies that, due to the judgment, estimates and assumptions are critical to an understanding of our Consolidated Financial Statements and the Notes, are described in Item 1. These policies relate to: (a) the determination of our ACL and (b) fair value measurements. We believe the judgment, estimates and assumptions used in the preparation of our Consolidated Financial Statements and the Notes are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements and the Notes to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations and/or financial condition.
Allowance for Credit Losses
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), requires financial assets to be presented at the net amount expected to be collected (i.e. net of expected lifetime credit losses). In addition, the standard requires a reserve to be recorded for expected lifetime credit losses on our unfunded commitments. Therefore, we record ALLL on relevant financial assets and a reserve for unfunded commitments on our Consolidated Statements of Financial Condition, collectively referred to as the ACL.
The ACL is impacted by changes in asset quality of the portfolio, including but not limited to increases in risk rating changes in our commercial portfolio, borrower delinquencies, changes in FICO scores or changes in LTVs in our consumer portfolio. In addition, while we have incorporated our forecasted impact of COVID-19 into our ACL, the ultimate impact of COVID-19 is still uncertain, including how long economic activity will be impacted and what effect the unprecedented levels of government fiscal and monetary actions will have on the economy and our credit losses.
Specifically identified component
The specifically identified component of the ACL 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 ACL (the "General Allowance") is calculated on our non-impaired consumer and commercial LHFI portfolio by segmenting the portfolio based upon common risk characteristics. The general allowance is determined using dual risk rating models which use probability of default, loss given default and exposure at default. These models incorporate macroeconomic forecast scenarios applied over a reasonable and supportable forecast period. After this forecast period, we revert on a straight-line basis over a 1-year period to historical averages which are utilized for the remaining contractual life, adjusted for expected prepayments and borrower controlled extension options. The macroeconomic scenarios include variables that, based on historical analysis, have been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, unemployment rates, real estate prices, and gross domestic product levels. The scenarios that are chosen each quarter and the amount of weighting given to each scenario may be adjusted based on our judgment when considering a variety of factors including the stability of the current economy and recent economic events.
Qualitative adjustments
The specifically identified component analysis and the output of the model provide a reasonable starting point for our analysis, but do not, by themselves, form a sufficient basis to determine the appropriate level for the ACL. We therefore consider the qualitative factors that are likely to cause the ACL associated with our existing portfolio to differ from the output of the model. The most significant qualitative factors considered include changes in economic and business conditions, changes in nature and volume of portfolio and changes in the volume and severity of past due loans. 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 credit losses that differ from the originally estimated amounts.
As described above, the process to determine the ACL requires numerous estimates and assumptions, some of which require a high degree of judgment and are often interrelated. Changes in the estimates and assumptions can result in significant changes in the ACL. Our process for determining the ACL is further discussed in the Credit Risk section of the MD&A and Note 4 - Loans Held for Investment.
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 the Notes to the Consolidated Financial Statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firms (PCAOB ID 238)
Consolidated Statements of Financial Condition as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
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
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
Note 15 - Earnings 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
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, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses in 2020.
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.
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 Credit Losses on Loans - General Allowance for Credit Losses for the Residential First Mortgage, Home Equity and Commercial Portfolios
As described in Notes 1 and 4 to the consolidated financial statements, the allowance for credit losses represents management's estimate of expected lifetime losses in the Loans Held-for-Investment (LHFI) portfolio, excluding loans carried under the fair value option. The allowance for credit losses totaled $170 million as of December 31, 2021, which consists of $154 million related to the allowance for credit losses on funded loans in the LHFI portfolio and $16 million related to the reserve for unfunded commitments. The allowance for credit losses on loans for the residential first mortgage, home equity and commercial portfolios totaled $40 million, $14 million, and $60 million, respectively. Management establishes the general allowance for expected lifetime losses on non-impaired loans by segmenting the portfolio based upon common risk characteristics. The general allowance is determined through a model-based estimate by applying probability of default and loss given default assumptions to the expected exposure at default. Management considers the qualitative factors that are likely to cause the allowance associated with their existing portfolio to differ from the output of the models. The most significant qualitative factors include changes in economic and business conditions, changes in nature and volume of the portfolio and changes in the volume and severity of past due loans.
The principal considerations for our determination that performing procedures relating to the general allowance for credit losses for the residential first mortgage, home equity and commercial portfolios is a critical audit matter are (i) the significant judgment by management in determining the estimate of the general allowance for credit losses for the residential first mortgage, home equity and commercial portfolios which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the probability of default and loss given default assumptions and management's judgment regarding qualitative factors related to changes in economic and business conditions, and (ii) the audit effort involved the use of professionals with specialized skill or knowledge.
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 general allowance for credit losses for the residential first mortgage, home equity and commercial portfolios. These procedures also included, among others, testing management’s process for estimating the general allowance for credit losses for the residential first mortgage, home equity and commercial portfolios. This included (i) evaluating the appropriateness of the models used to estimate the allowance, (ii) evaluating the reasonableness of the probability of default and loss given default assumptions, (iii) testing the completeness and accuracy of data used in the models, and (iv) evaluating the reasonableness of management's judgments regarding qualitative factors related to changes in economic and business conditions. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the models and the reasonableness of management judgments regarding qualitative factors related to changes in economic and business conditions.
Valuation of Mortgage Servicing Rights
As described in Notes 1 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 created and recorded at fair value, where fair value represents the price that would be received to sell an asset through an orderly transaction between market participants at the measurement date. MSRs represented $392 million or 88% of the Company’s total level 3 assets at fair value as of December 31, 2021. Management uses an internal valuation model that utilizes an option-adjusted spread, constant prepayment rates, 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 the internal valuation model.
The principal considerations for our determination that performing procedures relating to the valuation of mortgage servicing rights is a critical audit matter are (i) the significant judgment by management in determining the fair value of the MSRs, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the valuation model and significant unobservable inputs, related to option adjusted spreads, constant prepayment rates and cost to service used in the valuation of MSRs, and (ii) the audit effort involved the use of professionals with specialized skill or knowledge.
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, 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 (i) evaluating the appropriateness of the valuation model, (ii) testing the completeness and accuracy of the data used in the model, and (iii) evaluating the reasonableness of the aforementioned significant unobservable inputs by considering the consistency with external market and industry data. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the valuations provided by third party valuation services used by management.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
March 1, 2022
We have served as the Company’s auditor since 2015.
Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In millions, except share data)
December 31,
2021 2020
Assets
Cash $ 277 $ 251
Interest-earning deposits 774 372
Total cash and cash equivalents 1,051 623
Investment securities available-for-sale 1,804 1,944
Investment securities held-to-maturity 205 377
Loans held-for-sale ($4,920 and $7,009 measured at fair value, respectively)
5,054 7,098
Loans held-for-investment ($16 and $13 measured at fair value, respectively)
13,408 16,227
Loans with government guarantees 1,650 2,516
Less: allowance for loan losses (154) (252)
Total loans held-for-investment and loans with government guarantees, net 14,904 18,491
Mortgage servicing rights 392 329
Federal Home Loan Bank stock 377 377
Premises and equipment, net 360 392
Goodwill and intangible assets 147 157
Bank-owned life insurance 365 358
Other assets 824 892
Total assets $ 25,483 $ 31,038
Liabilities and Stockholders’ Equity
Noninterest-bearing deposits $ 7,088 $ 9,458
Interest-bearing deposits 10,921 10,515
Total deposits 18,009 19,973
Short-term Federal Home Loan Bank advances and other 1,880 3,900
Long-term Federal Home Loan Bank advances 1,400 1,200
Other long-term debt 396 641
Loans with government guarantees repurchase liability 200 1,851
Other liabilities ($0 and $35 measured at fair value, respectively)
880 1,272
Total liabilities 22,765 28,837
Stockholders’ Equity
Common stock $0.01 par value, 80,000,000 and 80,000,000 shares authorized; 53,197,650 and 52,656,067 shares issued and outstanding, respectively
1 1
Additional paid in capital 1,355 1,346
Accumulated other comprehensive income 35 47
Retained earnings 1,327 807
Total stockholders’ equity 2,718 2,201
Total liabilities and stockholders’ equity $ 25,483 $ 31,038
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
For the Years Ended December 31,
2021 2020 2019
Interest Income
Loans $ 764 $ 748 $ 713
Investment securities 46 70 77
Interest-earning deposits and other - 1 4
Total interest income 810 819 794
Interest Expense
Deposits 32 81 138
Short-term Federal Home Loan Bank advances and other 4 16 59
Long-term Federal Home Loan Bank advances 13 12 7
Other long-term debt 14 25 28
Total interest expense 63 134 232
Net interest income 747 685 562
(Benefit) provision for credit losses (112) 149 18
Net interest income after provision (benefit) for credit losses 859 536 544
Noninterest Income
Net gain on loan sales 655 971 335
Loan fees and charges 141 150 100
Net return on mortgage servicing rights 23 10 6
Loan administration income 121 84 30
Deposit fees and charges 34 32 38
Other noninterest income 70 63 101
Total noninterest income 1,044 1,310 610
Noninterest Expense
Compensation and benefits 533 466 377
Commissions 194 232 111
Occupancy and equipment 188 176 161
Loan processing expense 86 83 80
Legal and professional expense 45 31 27
Federal insurance premiums 20 24 20
Intangible asset amortization 11 13 15
General, administrative and other 136 117 97
Total noninterest expense 1,213 1,142 888
Income before income taxes 690 704 266
Provision for income taxes 157 166 48
Net income $ 533 $ 538 $ 218
Net income per share
Basic $ 10.10 $ 9.59 $ 3.85
Diluted $ 9.96 $ 9.52 $ 3.80
Weighted average shares outstanding
Basic 52,792,931 56,094,542 56,584,238
Diluted 53,519,086 56,505,813 57,238,978
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
For the Years Ended December 31,
2021 2020 2019
Net income $ 533 $ 538 $ 218
Other comprehensive income (loss), net of tax
Investment securities (37) 51 48
Derivatives and hedging activities 25 (5) -
Other comprehensive income (loss), net of tax (12) 46 48
Comprehensive income $ 521 $ 584 $ 266
Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders' Equity
(In millions, except share data)
Common Stock
Number of Shares Outstanding Amount of Common
Stock Additional
Paid in
Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Accumulated
Deficit) Total
Stockholders’
Equity
Balance at December 31, 2018 57,749,464 $ 1 $ 1,522 $ (47) $ 94 $ 1,570
Net income - - - - 218 218
Total other comprehensive income - - - 48 - 48
Shares issued from the Employee Stock Purchase Plan 106,881 - - - - -
Dividends declared and paid 376 - - - (9) (9)
Stock-based compensation 292,220 - 11 - - 11
Repurchase of common shares (1) (1,517,705) - (50) - - (50)
Balance at December 31, 2019 56,631,236 $ 1 $ 1,483 $ 1 $ 303 $ 1,788
Net income - - - - 538 538
Total other comprehensive income - - - 46 - 46
Shares issued from the Employee Stock Purchase Plan 181,875 - - - - -
Dividends declared and paid 729 - - - (11) (11)
Stock-based compensation 429,874 - 13 - - 13
CECL adjustment to retained earnings - - - - (23) (23)
Repurchase of common shares (1) (4,587,647) - (150) - - (150)
Balance at December 31, 2020 52,656,067 $ 1 $ 1,346 $ 47 $ 807 $ 2,201
Net income - - - - 533 533
Total other comprehensive income - - - (12) - (12)
Shares issued from the Employee Stock Purchase Plan 106,707 - - - - -
Dividends declared and paid 485 - - - (13) (13)
Stock-based compensation 434,391 - 9 - - 9
Balance at December 31, 2021 53,197,650 $ 1 $ 1,355 $ 35 $ 1,327 $ 2,718
(1)Includes dividend reinvestment shares.
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In millions)
For the Years Ended December 31,
2021 2020 2019
Operating Activities
Net income $ 533 $ 538 $ 218
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 84 76 70
Provision (benefit) for credit losses (112) 149 18
Net gain on loan and asset sales (655) (971) (335)
Proceeds from sales of HFS 51,036 41,799 15,866
Origination, premium paid and purchase of loans, net of principal repayments (51,703) (48,857) (32,715)
Net change in:
Other (361) (763) (205)
Net cash used in operating activities $ (1,178) $ (8,029) $ (17,083)
Investing Activities
Proceeds from sale of AFS securities including loans that have been securitized $ 2,541 $ 6,756 $ 15,873
Collection of principal on investment securities AFS 732 610 184
Purchase of investment securities AFS and other (408) (360) (500)
Collection of principal on investment securities HTM 172 221 106
Proceeds received from the sale of LHFI 79 488 219
Net origination, purchase, and principal repayments of LHFI 2,771 (4,650) (3,179)
Acquisition of premises and equipment, net of proceeds (33) (54) (61)
Net purchase of FHLB stock - (74) -
Proceeds from the sale of MSRs 147 65 62
Other, net (21) (16) (16)
Net cash provided by investing activities $ 5,980 $ 2,986 $ 12,688
Financing Activities
Net change in deposit accounts $ (1,964) $ 4,826 $ 2,766
Net change in short-term FHLB borrowings and other short-term debt (2,020) (265) 923
Proceeds from increases in FHLB long-term advances and other debt 200 550 550
Repayment of long-term FHLB advances - - (50)
Repayment of long-term debt (246) (3) -
Proceeds from issuance of subordinated debt - 150 -
Subordinated debt issuance costs - (2) -
Net receipt of payments of loans serviced for others (319) 165 284
Dividends declared and paid (13) (11) (9)
Stock repurchase - (150) (50)
Other (2) (19) 5
Net cash provided by (used in) by financing activities $ (4,364) $ 5,241 $ 4,419
Net increase in cash, cash equivalents and restricted cash (1) 438 198 24
Beginning cash, cash equivalents and restricted cash (1) 654 456 432
Ending cash, cash equivalents and restricted cash (1) $ 1,092 $ 654 $ 456
Supplemental disclosure of cash flow information
Interest paid on deposits and other borrowings $ 70 $ 133 $ 230
Income tax payments $ 185 $ 161 $ 4
Non-cash reclassification of investment securities HTM to AFS $ - $ - $ -
Non-cash reclassification of loans originated LHFI to LHFS $ 55 $ 549 $ 120
Non-cash reclassification of LHFS to AFS securities $ 2,795 $ 6,761 $ 15,458
MSRs resulting from sale or securitization of loans $ 269 $ 268 $ 223
(1)For further information on restricted cash, see Note 11 - Derivatives.
The accompanying notes are an integral part of these Consolidated Financial Statements.
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
Our accounting and financial reporting policies 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.
On April 26, 2021, it was announced that New York Community Bancorp, Inc. ("NYCB") and Flagstar had entered into a definitive merger agreement (the "Merger Agreement") under which the two companies will combine in an all stock merger. Under the terms of the Merger Agreement, Flagstar shareholders will receive 4.0151 shares of NYCB common stock for each Flagstar share they own. The combined company expects to have over $85 billion in assets and operate nearly 400 traditional branches in nine states and over 80 loan production offices across a 28 state footprint. On August 4, 2021, Flagstar's and NYCB's shareholders each voted in their respective special meetings of shareholders to approve the proposed business combination. The transaction is subject to customary closing conditions, including regulatory approvals.
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
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. Fair values are obtained through an independent third party utilizing a pricing service and are compared to independent pricing sources on a quarterly basis. For further information, see Note 2 - Investment Securities and Note 20 - Fair Value Measurements.
Investment securities HTM are carried at amortized cost and are adjusted for the amortization of premiums and accretion of discounts using the interest method. Transfers of investment securities into the HTM category from the AFS category are accounted for at fair value at the date of transfer. Any related unrealized holding gain (loss), net of tax, that was included in the transfer is retained in other comprehensive income (loss) and is amortized as an adjustment to interest income over the remaining life of the securities.
We separately evaluate our HTM debt securities for any credit losses. For each of the years in the three-year period ended December 31, 2021, all of our investment securities HTM were issued by U.S. government entities and agencies. These
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses; therefore, we apply a zero credit loss assumption to this portfolio and did not record any credit allowance for each of the three years ended December 31, 2021.
We evaluate AFS debt securities where the value has declined below amortized cost for impairment. If we intend to sell or believe it is more likely than not that we will be required to sell the debt security, it is written down to fair value through earnings. For AFS debt securities we intend to hold, we evaluate the debt securities for expected credit losses, except for debt securities that are guaranteed by the U.S. Treasury, U.S. government agencies or sovereign entities of high credit quality for which we apply a zero loss assumption and comprised 82 percent of our AFS portfolio at December 31, 2021. For the remaining AFS securities, any decline in fair value that is related to market factors is recognized in OCI and credit losses are recognized as an increase to the ACL through the credit loss provision. For each of the years in the three-year period ended December 31, 2021, we had no unrealized credit losses.
Investment securities transactions are recorded on the trade date for purchases and sales. Interest earned on investment securities, including the amortization of premiums and the accretion of discounts, are determined using the effective interest method over the period of maturity and recorded in interest income in the Consolidated Statements of Operations. Accrued interest receivable on investment securities totaled $4 million at December 31, 2021 and was reported in Other assets on the Consolidated Statements of Financial Condition.
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. Changes in fair value are recorded to other noninterest income on the Consolidated Statements of Operations. 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. Accrued interest receivable on loans held-for-for investment totaled $35 million at December 31, 2021 and was reported in Other assets on the Consolidated Statements of Financial Condition. Premiums and discounts on purchased loans and non-refundable loan origination and commitment fees, net of direct costs of originating or acquiring loans, are deferred and recognized over the life 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.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 NPLs). 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. We do not measure an ACL for accrued interest receivables as accrued interest is written off in a timely manner.
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 modified loans. For further information, see Note 4 - Loans Held-for-Investment.
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.
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, including reductions of interest rates, extensions of amortization periods, 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 will 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 collateral-dependent nonperforming TDRs.
Beginning in March 2020, as a response to COVID-19, we offered our consumer borrowers principal and interest payment deferrals, forbearance and/or extensions up to a maximum period of 18 months. We considered these programs in the context of whether or not the short-term modifications of these loans would constitute a TDR. We considered the CARES Act, interagency guidance and related guidance from the FASB, which provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not required to be accounted for as TDRs. As a result, we have determined that loan forbearance, modifications, deferrals and extensions made under these COVID-19 programs are not TDRs.
Allowance for Credit Losses on Loans
We determine the estimate of the ACL on at least a quarterly basis. The ACL represents Management's estimate of expected lifetime losses in our LHFI portfolio, excluding loans carried under the fair value option. In addition, we record a reserve for expected lifetime losses on our unfunded commitments - see Reserve for Unfunded Commitments section below. Therefore, we record ALLL on relevant financial assets and a reserve for unfunded commitments on our Consolidated Statements of Financial Condition, collectively referred to as the ACL.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual terms exclude expected extensions, renewals, and modifications unless the following applies: Management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by us.
The ACL is impacted by changes in asset quality of the portfolio, including but not limited to increases in risk rating changes in our commercial portfolio, borrower delinquencies, changes in FICO scores or changes in LTVs in our consumer portfolio. In addition, while we have incorporated our forecasted impact of COVID-19 into our ACL, the ultimate impact of COVID-19 is still uncertain, including how long economic activity will be impacted by the pandemic and what effect the unprecedented levels of government fiscal and monetary actions will have on the economy and our credit losses.
Specifically identified component. The specifically identified component of ACL 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. A general allowance is established for lifetime losses inherent on non-impaired loans by segmenting the portfolio based upon common risk characteristics. Our consumer loan portfolio is segmented into Residential First Mortgage, Home Equity and Other Consumer. Loan characteristics impacting these segments include lien position, credit quality, and loan structure. At a high-level, our commercial loans are segmented into Commercial Real Estate, Commercial and Industrial, and Warehouse Lending. Loan characteristics impacting these segments include credit quality and loan structure.
We measure the allowance using the applicable dual risk rating model which measures probability of default, loss given default and exposure at default. As of December 31, 2021, we utilized the Moody’s November 2021 economic scenarios in our forecast, which were materially consistent with the December scenarios: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. Within our composite forecast, unemployment ends 2021 at 5 percent and will recover slightly in 2022, ending the year just under 5 percent. GDP continues to recover throughout 2022 and returns to pre-COVID levels in 2023. HPI decreases by just over 1 percent compared to 2021 year-end levels through the second quarter of 2022 before returning to 2021 year-end levels by the third quarter of 2022. In 2021, we judgmentally decreased our qualitative reserves by $65 million which primarily reflected our best estimates of COVID-19’s impact on our portfolios (including the estimated impact of government stimulus, forbearance/payment holidays, and Fed programs. This decline was primarily driven by a decrease in the model output from Moody’s adverse scenario, improvement in credit performance of previously identified industries and borrowers we believed could be more exposed to the stressful conditions in our forecast and decreased loans in forbearance.
Qualitative adjustments. The specifically identified component analysis and the output of the model provide a reasonable starting point for our analysis, but do not, by themselves, form a sufficient basis to determine the appropriate level for the ACL. We therefore consider the qualitative factors that are likely to cause the ACL associated with our existing portfolio to differ from the output of the model. The most significant qualitative factors considered include changes in economic and business conditions, changes in nature and volume of portfolio and changes in the volume and severity of past due loans. 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 credit losses that differ from the originally estimated amounts.
Reserve for Unfunded Commitments
We estimate expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The ACL on unfunded commitments is adjusted as a provision for credit loss expense within the provision (benefit) for credit losses on the Consolidated Statements of
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Operations and is recorded in other liabilities on the Consolidated Statements of Financial Condition. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The reserve for unfunded commitments is included in other liabilities on the Consolidated Statements of Financial Condition.
These credit exposures include unfunded loans with available balances, new commitments to lend that are not yet funded, and standby and commercial letters of credit. For further information, see Note 19 - Legal Proceedings, Contingencies and Commitments.
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 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 allowance for loan losses 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 general, administrative and other 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 securitized in Ginnie Mae pools that are due, but unpaid, for three consecutive months. 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 loans with government guarantees repurchase options, 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 work to cure the outstanding loans such that they are re-eligible for sale or may begin foreclosure and recover 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.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Land is carried at 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 and 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 the 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 only when there is a trigger event or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
Amortization expense on intangible assets was $11 million and $13 million for the years ended December 31, 2021 and December 31, 2020, respectively. The estimated future aggregate amortization expense on intangible assets for the years ended 2022, 2023, and 2024 is $9 million, $7 million, and $6 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, constant 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 MSRs 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.
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.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 $15 million, $13 million, and $12 million for the years ended December 31, 2021, 2020 and 2019, respectively. All leases are classified as operating leases based on their terms.
The following table reflects information relating to our operating leases:
December 31, 2021
(Dollars in millions)
Operating Leases (1)
Weighted-average remaining lease term (years) 3.66
Weighted-average discount rate 1.3 %
Right-of-use asset (2) $ 18
Lease liability (3) $ 21
(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, 2021
and our minimum contractual obligations on our operating leases as of December 31, 2020:
December 31, 2021 December 31, 2020
(Dollars in millions)
Within one year $ 9 $ 9
After one year and within two years 8 8
After two years and within three years 5 5
After three years and within four years 4 3
After four years and within five years 2 2
After five years 1 1
Total (1) $ 29 $ 28
(1)The difference between the total undiscounted cash payments on operating leases and the lease liability is solely the effect of discounting.
Servicing Fee Income
Servicing fee income, late fees and ancillary fees received on loans for which we own the MSR are included in net return on mortgage servicing rights on 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
Under the guidance of the Revenue from Contracts with Customers (Topic 606), an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration received in exchange for those goods or services.
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.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The disaggregation of our revenue from contracts with customers is provided below:
For the Years Ended December 31,
Location of Revenue (1) 2021 2020
(Dollars in millions)
Deposit account and other banking income Deposit fees and charges $ 22 $ 21
Debit card interchange fees Deposit fees and charges 12 11
Credit card interchange fees Other noninterest income 1 1
Wealth management Other noninterest income 8 8
Total $ 43 $ 41
(1)Recognized within the Community Banking segment.
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.
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. 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 earn revenue from portfolio management services. We receive payment in advance for portfolio management services 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. 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
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 then qualitatively throughout the remaining 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 that 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, certain HFI residential first mortgages and certain AFS securities in 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, and changes in value attributable to the benchmark interest rate of the hedged item, are recognized in current period earnings and 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 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.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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, we recognize 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 $4 million at December 31, 2021, as compared to $7 million at December 31, 2020.
Advertising Costs
Advertising costs are expensed in the period they are incurred and are included as part of general, administrative and other noninterest expense in the Consolidated Statements of Operations. Advertising expenses totaled $26 million, $22 million, and $25 million, for the years ended December 31, 2021, 2020 and 2019, respectively.
Stock-Based Compensation
All share-based payments to employees, including 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.
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:
Credit Losses - Effective January 1, 2020, we have adopted the requirements of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) and all related amendments using the modified retrospective method for all financial assets measured at amortized cost, net investments in leases and unfunded commitments. The measurement of current expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. We recorded a net decrease to retained earnings of $23 million as of January 1, 2020 for the cumulative effect of adopting ASC 326.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table illustrates the impact of adopting ASC 326:
January 1, 2020
Pre-ASC 326 Adoption Impact of ASC 326 Adoption As Reported Under ASC 326
(Dollars in millions)
Assets:
Allowance for loan losses $ 107 $ 23 $ 130
Liabilities:
Reserve for unfunded commitments $ 3 $ 7 $ 10
We adopted the following ASUs during 2021, none of which had a material impact to our financial statements:
Standard Description Effective Date
ASU 2021-06 Presentation of Financial Statements (Topic 205), Financial Services-Depository and Lending (Topic 942), and Financial Services-Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update) July 1, 2021
ASU 2021-01 Reference Rate Reform (Topic 848): Scope January 1, 2021
ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes January 1, 2021
Note 2 - Investment Securities
The following table presents our investment securities:
Amortized Cost Gross Unrealized
Gains Gross Unrealized
Losses Fair Value
(Dollars in millions)
December 31, 2021
Available-for-sale securities
Agency - Commercial $ 739 $ 8 $ - $ 747
Agency - Residential 690 9 (3) 696
Corporate debt obligations 70 3 - 73
Municipal obligations 20 - - 20
Other MBS 268 - (1) 267
Certificate of deposit 1 - - 1
Total available-for-sale securities (1) $ 1,788 $ 20 $ (4) $ 1,804
Held-to-maturity securities
Agency - Commercial $ 99 $ 1 $ - $ 100
Agency - Residential 106 3 - 109
Total held-to-maturity securities (1) $ 205 $ 4 $ - $ 209
December 31, 2020
Available-for-sale securities
Agency - Commercial $ 1,018 $ 43 $ - $ 1,061
Agency - Residential 707 28 - 735
Corporate debt obligations 75 2 - 77
Municipal obligations 27 1 - 28
Other MBS 42 - - 42
Certificate of deposit 1 - - 1
Total available-for-sale securities (1) $ 1,870 $ 74 $ - $ 1,944
Held-to-maturity securities
Agency - Commercial $ 193 $ 7 $ - $ 200
Agency - Residential 184 9 - 193
Total held-to-maturity securities (1) $ 377 $ 16 $ - $ 393
(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, 2021 or December 31, 2020.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
We evaluate AFS debt securities where the value has declined below amortized cost for impairment. If we intend to sell or believe it is more likely than not that we will be required to sell the debt security, it is written down to fair value through earnings. For AFS debt securities that we intend to hold, we evaluate the debt securities for expected credit losses, except for debt securities that are guaranteed by the U.S. Treasury, U.S. government agencies or sovereign entities of high credit quality for which we apply a zero loss assumption, and which comprised 82% of our AFS portfolio as of December 31, 2021. For the remaining AFS securities, credit losses are recognized as an increase to the ACL through the credit loss provision. If any of the decline in fair value is related to market factors, that amount is recognized in OCI. We had no unrealized credit losses during the years ended December 31, 2021, 2020 and 2019.
We separately evaluate our HTM debt securities for any credit losses. As of December 31, 2021 and December 31, 2020, our entire HTM portfolio qualified for the zero loss assumption as all securities are guaranteed by the U.S. Treasury or U.S. government agencies.
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, is determined using the effective interest method over the period of maturity and recorded in interest income in the Consolidated Statements of Operations. Accrued interest receivable on investment securities totaled $4 million at December 31, 2021 and $5 million at December 31, 2020, and was reported in other assets on the Consolidated Statements of Financial Condition.
Available-for-sale securities
Securities AFS are carried at fair value. Unrealized gains and losses on AFS securities are reported as a component of other comprehensive income.
We purchased $408 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, 2021. In addition, we retained $254 million in our own private MBS during the twelve months ended December 31, 2021. We retained $18 million of passive interest in our own private MBS during the twelve months ended December 31, 2020.
There were no sales of AFS securities during the twelve months ended December 31, 2021 and 2020, other than those related to mortgage loans that had been securitized for sale in the normal course of business. During the year-ended December 31, 2019, we sold $432 million of AFS securities, which resulted in a gain of $7 million.
Held-to-maturity securities
Investment securities HTM are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method. Unrealized losses are not recorded to the extent they are temporary in nature.
There were no purchases or sales of HTM securities during the years ended December 31, 2021, December 31, 2020 and December 31, 2019.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table summarizes the unrealized loss positions on available-for-sale and held-to-maturity investment securities, by duration of the unrealized loss:
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)
December 31, 2021
Available-for-sale securities
Agency - Commercial $ 4 2 $ - $ 143 9 $ -
Agency - Residential - - - 291 19 (3)
Municipal obligations - - - 3 1 -
Corporate debt obligations - - - - - -
Other mortgage-backed securities - 1 - 147 5 (1)
Held-to-maturity securities
Agency - Commercial $ - - $ - $ - 1 $ -
Agency - Residential - - - - - -
December 31, 2020
Available-for-sale securities
Agency - Commercial $ 3 1 $ - $ 7 2 $ -
Agency - Residential - - - - 1 -
Corporate debt obligations - - - 10 3 -
Other mortgage-backed securities - - - - 1 -
Held-to-maturity securities
Agency - Residential - - - 2 3 -
Unrealized losses on available-for-sale securities have not been recognized into income because almost all of the portfolio held by us are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. The remaining unrealized losses on available-for-sale securities are municipal securities and corporate debt obligations, all of which are considered investment grade or are de minimis. The fair value is expected to recover as the bonds approach maturity.
The following table shows the amortized cost and estimated fair value of securities by contractual maturity:
Investment Securities Available-for-Sale Investment Securities Held-to-Maturity
Amortized
Cost Fair
Value Weighted-Average
Yield (1) Amortized
Cost Fair
Value Weighted-Average
Yield (1)
(Dollars in millions)
December 31, 2021
Due in one year or less $ 6 $ 6 2.15 % $ 6 $ 6 2.29 %
Due after one year through five years 7 7 4.19 % 3 3 2.86 %
Due after five years through 10 years 224 231 2.84 % 3 3 2.07 %
Due after 10 years 1,551 1,560 2.24 % 193 197 2.49 %
Total $ 1,788 $ 1,804 $ 205 $ 209
(1) Weighted-average yields are based on amortized cost weighted for the contractual maturity of each security.
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 $1.5 billion and $0.2 billion at December 31, 2021 and 2020, 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, 2021 and 2020, LHFS totaled $5.1 billion and $7.1 billion, respectively. For the years ended December 31, 2021, 2020 and 2019, we had net gains on loan sales associated with LHFS of $655 million, $969 million, and $333 million, respectively.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
At December 31, 2021 and 2020, residential LHFS of $116 million and $30 million, respectively and commercial LHFS of $18 million and $57 million, respectively, were recorded at the lower of cost or fair value. We elected the fair value option for the remainder of the loans in this portfolio.
Note 4 - 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. We
report LHFI at their amortized cost, which includes the outstanding principal balance adjusted for any unamortized premiums,
discounts, deferred fees and costs. The accrued interest receivable on LHFI totaled $35 million at December 31, 2021 and
$43 million at December 31, 2020 and was reported in other assets on the Consolidated Statements of Financial Condition.
The following table presents our LHFI:
December 31, 2021 December 31, 2020
(Dollars in millions)
Consumer loans
Residential first mortgage $ 1,536 $ 2,266
Home equity 613 856
Other 1,236 1,004
Total consumer loans 3,385 4,126
Commercial loans
Commercial real estate 3,223 3,061
Commercial and industrial 1,826 1,382
Warehouse lending 4,974 7,658
Total commercial loans 10,023 12,101
Total loans held-for-investment $ 13,408 $ 16,227
The following table presents the UPB of our loan sales and purchases in the LHFI portfolio:
For the Year-Ended December 31,
2021 2020 2019
(Dollars in millions)
Loans Sold (1)
Performing loans $ 92 $ 492 $ 217
Total loans sold $ 92 $ 492 $ 217
Net gain associated with loan sales (2) $ - $ 3 $ 2
Loans Purchased
Home equity - - 249
Other consumer (3) - 63 51
Total loans purchased $ - $ 63 $ 300
Premium associated with loans purchased $ - $ - $ 11
(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 the Consolidated Statement of Operations.
(3)Does not include point of sale flow consumer loans.
We have pledged certain LHFI, LHFS, and LGG to collateralize lines of credit and/or borrowings with the FRB of Chicago and the FHLB of Indianapolis. At December 31, 2021 and 2020, we pledged loans of $9.9 billion and $11.6 billion, respectively.
As of December 31, 2021, we utilized the Moody’s November 2021 economic scenarios in our forecast, which were materially consistent with the December scenarios: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. The resulting composite forecast for the fourth quarter of 2021 was improved as compared to the scenario used in the third quarter 2021. Unemployment ends 2021 at 5 percent and will continue to recover in 2022. GDP continues to recover in the last quarter of 2021 and returns to pre-COVID levels in 2023. HPI decreases slightly through 2022, at a lower rate as compared to the scenario used in the third quarter of 2021.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents changes in the ALLL, by class of loan:
Residential
First
Mortgage (1) Home Equity Other
Consumer Commercial
Real
Estate Commercial
and
Industrial Warehouse
Lending Total
(Dollars in millions)
Year-Ended December 31, 2021
Beginning balance $ 49 $ 25 $ 39 $ 84 $ 51 $ 4 $ 252
Provision (benefit) (6) (12) (1) (56) (26) - $ (101)
Charge-offs (5) (1) (4) - (9) - (19)
Recoveries 2 2 2 - 16 - 22
Ending allowance balance $ 40 $ 14 $ 36 $ 28 $ 32 $ 4 $ 154
Year-Ended December 31, 2020
Beginning balance, prior to adoption of ASC 326 $ 22 $ 14 $ 6 $ 38 $ 22 $ 5 $ 107
Impact of adopting ASC 326 25 12 10 (14) (6) (4) $ 23
Provision (benefit) 8 (2) 26 60 36 3 $ 131
Charge-offs (6) (3) (5) - (1) - (15)
Recoveries - 4 2 - - - 6
Ending allowance balance $ 49 $ 25 $ 39 $ 84 $ 51 $ 4 $ 252
Year-Ended December 31, 2019
Beginning balance $ 38 $ 15 $ 3 $ 48 $ 18 $ 6 $ 128
Provision (benefit) (14) (1) 10 (10) 34 (1) $ 18
Charge-offs (3) (2) (7) - (31) - (43)
Recoveries 1 2 - - 1 - 4
Ending allowance balance $ 22 $ 14 $ 6 $ 38 $ 22 $ 5 $ 107
(1)Includes LGG.
The ALLL was $154 million at December 31, 2021 and $252 million at December 31, 2020. The decrease in the allowance is primarily reflective of changes in our economic forecast and judgment we applied related to those forecasts and underlying borrower credit as a result of the ongoing COVID-19 pandemic.
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.
Beginning in March 2020, as a response to COVID-19, customers facing COVID-19 related difficulties were offered forbearance in an effort to help our borrowers get to the other side of the health crisis. As these loans reach the end of their forbearance period, we have been working with each customer to modify or refinance the outstanding loan to fit their new circumstances.
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 NPLs). When a loan is placed on nonaccrual status, the accrued interest income is reversed and the loan may only return to accrual status when principal and interest become current and are anticipated to be fully collectible. We do not consider accrued interest receivable in our measurement of the ACL as accrued interest is written-off in a timely manner when the loan is placed on nonaccrual. We are not aging receivables for customers who have been granted a payment deferral in response to COVID-19 which remain in the aging category they were in at the time of payment deferral. We continue to accrue interest on these loans, consistent with our forbearance programs.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table sets forth the LHFI aging analysis of past due and current loans:
30-59 Days
Past Due 60-89 Days
Past Due 90 Days or
Greater Past
Due (1) Total
Past Due Current Total LHFI (3)(4)(5)
(Dollars in millions)
December 31, 2021
Consumer loans
Residential first mortgage $ 14 $ 34 $ 49 $ 97 $ 1,439 $ 1,536
Home equity 8 1 9 18 595 613
Other 4 1 4 9 1,227 1,236
Total consumer loans 26 36 62 124 3,261 3,385
Commercial loans
Commercial real estate - - - - 3,223 3,223
Commercial and industrial - - 32 32 1,794 1,826
Warehouse lending - - - - 4,974 4,974
Total commercial loans - - 32 32 9,991 10,023
Total loans (2) $ 26 $ 36 $ 94 $ 156 $ 13,252 $ 13,408
December 31, 2020
Consumer loans
Residential first mortgage $ 4 $ 4 $ 31 $ 39 $ 2,227 $ 2,266
Home equity 1 1 5 7 849 856
Other 4 1 2 7 997 1,004
Total consumer loans 9 6 38 53 4,073 4,126
Commercial loans
Commercial real estate 20 - 3 23 3,038 3,061
Commercial and industrial 1 - 15 16 1,366 1,382
Warehouse lending - - - - 7,658 7,658
Total commercial loans 21 - 18 39 12,062 12,101
Total loans (2) $ 30 $ 6 $ 56 $ 92 $ 16,135 $ 16,227
(1)Includes less than 90 days past due performing loans which are placed in nonaccrual. Interest is not being accrued on these loans.
(2)Includes $9 million and $8 million of past due loans accounted for under the fair value option at December 31, 2021 and 2020, respectively.
(3)Collateral dependent loans totaled $108 million and $80 million at December 31, 2021 and 2020, respectively. The majority of these loans are secured by real estate.
(4)The interest income recognized on impaired loans was less than $1 million at December 31, 2021 and $2 million at December 31, 2020.
(5)The delinquency status for loans in forbearance is frozen for loans at inception of the forbearance period and will resume when the borrower's forbearance period ends.
Interest income is recognized on nonaccrual loans using a cash basis method. Interest that would have been accrued was $1 million in each of the years ended December 31, 2021, 2020 and 2019. At December 31, 2021 and 2020, we had no loans 90 days or greater past due and still accruing interest.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is reflected in other liabilities on the Consolidated Statements of Financial Condition and was $16 million as of December 31, 2021, compared to $28 million as of December 31, 2020. The decrease in the reserve is due to improvements in the economic forecasts as a result of the continued vaccine rollout and the lifting of most COVID-19 restrictions.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Troubled Debt Restructurings
We may modify certain loans in both our consumer and commercial loan portfolios to retain customers or to maximize collection of the outstanding loan balance. Troubled debt restructurings ("TDRs") are modified loans in which a borrower demonstrates financial difficulties and for which a concession has been granted as a result. Nonperforming TDRs are included in nonaccrual loans. TDRs remain in nonperforming status until a borrower has made payments and is current for at least six consecutive months. Performing TDRs are not considered to be nonaccrual so long as we believe that all contractual principal and interest due under the restructured terms will be collected. Performing and nonperforming TDRs remain impaired as interest and principal will not be received in accordance with the original contractual terms of the loan agreement. Refer to Note 1- Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards for a description of the methodology used to determine TDRs.
Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, but may give rise to potential incremental losses. We measure impairments using a discounted cash flow method for performing TDRs and measure impairment based on collateral values for nonperforming TDRs.
Beginning in March 2020, as a response to COVID-19, we offered our consumer borrowers principal and interest payment deferrals, forbearance and/or extensions up to a maximum period of 18 months. We considered these programs in the context of whether or not the short-term modifications of these loans would constitute a TDR. We considered the CARES Act, interagency guidance and related guidance from the FASB, which provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not required to be accounted for as TDRs. As a result, we have determined that loan forbearance, modifications, deferrals and extensions made under these COVID-19 programs are not TDRs.
The following table provides a summary of TDRs by type and performing status:
TDRs
Performing Nonperforming Total
(Dollars in millions)
December 31, 2021
Consumer loans
Residential first mortgage $ 14 $ 11 $ 25
Home equity 8 2 10
Total consumer TDRs loans (1)(2) $ 22 $ 13 $ 35
Commercial Loans
Commercial and industrial 2 - 2
Total commercial TDR loans 2 - 2
Total TDRs (1)(2) $ 24 $ 13 $ 37
December 31, 2020
Consumer loans
Residential first mortgage $ 19 $ 8 $ 27
Home equity 12 2 14
Total consumer TDR loans 31 10 41
Commercial Loans
Commercial real estate 5 - 5
Total commercial TDR loans 5 - 5
Total TDRs (1)(2) $ 36 $ 10 $ 46
(1)The ALLL on TDR loans totaled $4 million and $5 million at December 31, 2021 and 2020, respectively.
(2)Includes $5 million and $3 million of TDR loans accounted for under the fair value option at December 31, 2021 and 2020, respectively.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table provides a summary of newly modified TDRs:
New TDRs
Number of Accounts Pre-Modification
Unpaid Principal Balance Post-Modification
Unpaid Principal Balance (1)
(Dollars in millions)
Year-Ended December 31, 2021
Residential first mortgages 9 $ 4 $ 3
Home equity (2)(3) 3 - -
Total TDR loans 12 $ 4 $ 3
Year-Ended December 31, 2020
Residential first mortgages 9 $ 2 $ 2
Home equity (2)(3) 3 - -
Other consumer 1 - -
Commercial real estate 1 5 5
Total TDR loans 14 $ 7 $ 7
Year-Ended December 31, 2019
Residential first mortgages 8 $ 1 $ 1
Home equity (2)(3) 6 - -
Total TDR loans 14 $ 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.
There were no loans modified in the previous 12 months that subsequently defaulted during the years ended December 31, 2021, 2020, and 2019. All TDR classes within the consumer and commercial loan portfolios are considered subsequently defaulted when they are greater than 90 days past due within 12 months of the restructuring date.
Credit Quality
We utilize a combination of internal and external risk rating systems which are applied to all consumer and commercial loans which are used as loan-level inputs to our ACL models. Descriptions of our risk ratings as they relate to credit quality follow the ratings used by the U.S. bank regulatory agencies as listed below.
Pass. Pass assets are not impaired nor do they have any known deficiencies that could impact the quality of the asset.
Watch. Watch assets are defined as pass-rated assets that exhibit elevated risk characteristics or other factors that deserve Management’s close attention and increased monitoring. However, the asset does not exhibit a potential or well-defined weakness that would warrant a downgrade to criticized or adverse classification.
Special mention. Assets identified as special mention possess credit deficiencies or potential weaknesses deserving Management's close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk that, if not corrected, could weaken the assets and increase risk in the future. Special mention assets are criticized, but do not expose an institution to sufficient risk to warrant adverse classification.
Substandard. Assets identified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the full collection or liquidation of the debt. Substandard assets 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 nonaccrual 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
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 nonaccrual.
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, 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. Consumer loans include other consumer product 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 based 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 as Substandard.
Payment activity, credit rating and loan-to-value ratios have the most significant impact on the ACL for consumer loans. The following table presents the amortized cost in residential and consumer loans based on payment activity:
Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis Total December 31, 2020
Term Loans
Amortized Cost Basis by Closing Year
As of December 31, 2021 2021 2020 2019 2018 2017 Prior
Consumer Loans (Dollars in millions)
Residential First Mortgage
Pass $ 318 $ 197 $ 233 $ 89 $ 108 $ 407 $ 82 $ 10 $ 1,444 $ 2,205
Watch - 1 12 3 4 11 - 3 34 21
Substandard 1 3 7 8 2 21 - 1 43 25
Home Equity
Pass 4 4 15 6 3 15 508 49 604 838
Watch - - - - - - - 1 1 13
Substandard - - - - - 1 2 3 6 3
Other Consumer
Pass 380 227 226 101 1 5 284 5 1,229 1,000
Watch - - 1 1 - - - - 2 1
Substandard 1 1 2 1 - - - - 5 3
Total Consumer Loans (1)(2) $ 704 $ 433 $ 496 $ 209 $ 118 $ 460 $ 876 $ 72 $ 3,368 $ 4,109
(1)Excludes loans carried under the fair value option.
(2)The delinquency status for loans in forbearance are frozen for loans at inception of the forbearance period and will resume when the borrower's forbearance period ends.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents the amortized cost in residential and consumer loans based on credit scores:
Revolving Loans Converted to Term Loans Amortized Cost Basis
FICO Band Revolving Loans Amortized Cost Basis Total
Amortized Cost Basis by Closing Year
As of December 31, 2021 2021 2020 2019 2018 2017 Prior
Consumer Loans (Dollars in millions)
Residential First Mortgage
>750 $ 139 $ 94 $ 107 $ 40 $ 70 $ 212 $ 49 $ 5 $ 716
700-750 117 58 69 36 36 161 22 6 505
<700 63 49 76 24 8 66 11 3 300
Home Equity
>750 2 2 4 2 1 4 238 13 266
700-750 2 1 6 2 1 6 210 22 250
<700 - 1 5 2 1 6 62 18 95
Other Consumer
>750 251 162 142 56 1 4 273 3 892
700-750 128 62 79 39 - 1 7 - 316
<700 2 4 8 8 - - 4 2 28
Total Consumer Loans (1) $ 704 $ 433 $ 496 $ 209 $ 118 $ 460 $ 876 $ 72 $ 3,368
(1)Excludes loans carried under the fair value option.
Loan-to-value ratios primarily impact the allowance on mortgages within the consumer loan portfolio. The following table presents the amortized cost in residential first mortgages and home equity based on loan-to-value ratios:
Revolving Loans Converted to Term Loans Amortized Cost Basis
LTV Band Revolving Loans Amortized Cost Basis Total
Amortized Cost Basis by Closing Year
As of December 31, 2021 2021 2020 2019 2018 2017 Prior
Consumer Loans (Dollars in millions)
Residential first mortgage
>90 $ 88 $ 74 $ 142 $ 53 $ 16 $ 16 $ - $ - $ 389
71-90 109 78 58 29 31 185 - - 490
55-70 69 26 27 9 36 163 2 - 332
<55 53 23 25 9 31 75 80 14 310
Home Equity
>90 - - - - 1 7 - - 8
71-90 3 3 11 4 1 6 369 35 432
<=70 1 1 4 2 1 3 141 18 171
Total (1) $ 323 $ 205 $ 267 $ 106 $ 117 $ 455 $ 592 $ 67 $ 2,132
(1)Excludes loans carried under the fair value option.
Commercial Loans
Risk rating and the average loan duration have the most significant impact on the ACL for commercial loans. Additional factors which impact the ACL are debt-service-coverage ratio, loan-to-value ratio, interest-coverage ratio and leverage ratio.
Internal audit conducts periodic examinations which serve as an independent verification of the accuracy of the ratings assigned. All loans are examined on at least an annual basis. 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 risk rating for the borrowing relationship.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Based on the most recent credit analysis performed, the amortized cost basis, by risk category for each class of loans within the commercial portfolio, is as follows:
Term Loans Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis Total December 31, 2020
Amortized Cost Basis by Closing Year
As of December 31, 2021 2021 2020 2019 2018 2017 Prior
Commercial Loans (Dollars in million)
Commercial real estate
Pass $ 518 $ 257 $ 558 $ 313 $ 238 $ 402 $ 785 $ - $ 3,071 $ 2,805
Watch 2 5 1 13 64 35 8 - 128 166
Special mention - - 2 - - - - - 2 53
Substandard - - - - 22 - - - 22 37
Commercial and industrial
Pass 257 81 156 30 95 7 1,059 - 1,685 1,200
Watch 4 4 10 9 - - 44 - 71 106
Special mention - - - - - - - - - 24
Substandard - - 17 18 2 - 33 - 70 52
Warehouse
Pass 4,834 - - - - - - - 4,834 7,398
Watch 140 - - - - - - - 140 260
Special mention - - - - - - - - - -
Substandard - - - - - - - - - -
Total commercial loans $ 5,755 $ 347 $ 744 $ 383 $ 421 $ 444 $ 1,929 $ - $ 10,023 $ 12,101
Note 5 - Loans with Government Guarantees
Substantially all LGG are insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs. 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 60 days delinquent until the loan is conveyed to HUD (if foreclosure timelines are met), which is not paid by the FHA until claimed. The Bank has a unilateral option to repurchase loans sold to GNMA if the loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) and can recover losses through a claims process from the guarantor. These loans are recorded in LGG and the liability to repurchase the loans is recorded as loans with government guarantees repurchase liability on the Consolidated Statements of Financial Condition. This resulted in $0.2 billion of repurchase liability as of December 31, 2021, a $1.7 billion decrease from December 31, 2020 due to a lower amount of loans being in active forbearance. Certain loans within our portfolio may be subject to indemnifications and insurance limits which expose us to limited credit risk. We have reserved for these risks within other assets and as a component of our ACL on residential first mortgages.
At December 31, 2021 and December 31, 2020, respectively, LGG totaled $1.7 billion and $2.5 billion.
Repossessed assets and the associated claims related to government guaranteed loans are recorded in other assets and totaled $7 million and $17 million at December 31, 2021 and December 31, 2020, respectively.
Note 6 - Repossessed Assets
Repossessed assets include the following:
December 31,
2021 2020
(Dollars in millions)
One-to-four family properties $ 4 $ 4
Commercial properties 3 4
Total repossessed assets $ 7 $ 8
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following schedule provides the activity for repossessed assets:
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Beginning balance $ 8 $ 10 $ 7
Additions, net 6 8 12
Disposals (6) (7) (4)
Net write down on disposal (1) (3) (5)
Ending balance $ 7 $ 8 $ 10
Note 7 - Variable Interest Entities
We have no consolidated VIEs as of December 31, 2021 and December 31, 2020.
In connection with our non-qualified mortgage securitization activities, we have retained a five percent interest in the investment securities of certain trusts ("other MBS") and are contracted as the subservicer of the underlying loans, compensated based on market rates, which constitutes a continuing involvement in these trusts. Although we have a variable interest in these securitization trusts, we are not their primary beneficiary due to the relative size of our investment in comparison to the total amount of securities issued by the VIE and our inability to direct activities that most significantly impact the VIE’s economic performance. As a result, we have not consolidated the assets and liabilities of the VIE in our Consolidated Statements of Financial Condition. The Bank’s maximum exposure to loss is limited to our five percent retained interest in the investment securities that had a fair value of $267 million as of December 31, 2021 as well as the standard representations and warranties made in conjunction with the loan transfers. For additional information, see Note 2 - Investment Securities and Note 20 - Fair Value Measurements.
Note 8 - Federal Home Loan Bank Stock
Our investment in FHLB stock was $377 million at December 31, 2021 and December 31, 2020. 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. There were no required purchases or redemptions of FHLB stock during the year-ended December 31, 2021. We had $74 million of required purchases and no redemptions of FHLB stock during the year-ended December 31, 2020. Dividends received on the stock equaled $8 million, $12 million and $16 million for the years ended December 31, 2021, 2020 and 2019, respectively. These dividends were recorded in the Consolidated Statements of Operations as other noninterest income.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 9 - Premises and Equipment
The following presents our premises and equipment balances and estimated useful lives:
Estimated
Useful Lives December 31,
2021 2020
(Dollars in millions)
Land N/A $ 67 $ 68
Computer hardware and software 3 - 7 years
398 410
Office buildings and improvements 15 - 31.5 years
190 195
Furniture, fixtures and equipment 5 - 10 years
41 66
Leased equipment 3 - 10 years
- 19
Leasehold improvements 5 - 10 years
9 10
Fixed assets in progress (1) N/A 46 43
Right-of-use asset N/A 18 23
Total 769 834
Less: accumulated depreciation (409) (442)
Premises and equipment, net $ 360 $ 392
(1)Consists primarily of internally developed software and software upgrades which have not yet been placed in service.
Depreciation expense was $64 million, $64 million, and $59 million for the years ended December 31, 2021, 2020 and 2019, 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 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:
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Balance at beginning of period $ 329 $ 291 $ 290
Additions from loans sold with servicing retained 269 268 223
Reductions from sales (164) (71) (57)
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other (1) (99) (109) (89)
Changes in estimates of fair value due to interest rate risk (1) (2) 57 (50) (76)
Fair value of MSRs at end of period $ 392 $ 329 $ 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 which we manage through the use of derivatives.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table summarizes the hypothetical effect on the fair value of servicing rights using adverse changes of 10 percent and 20 percent to the weighted average of certain significant assumptions used in valuing these assets:
December 31, 2021 December 31, 2020
Fair value Fair value
Actual 10% adverse change 20% adverse change Actual 10% adverse change 20% adverse change
(Dollars in millions)
Option adjusted spread 7.12 % $ 383 $ 374 7.98 % $ 321 $ 313
Constant prepayment rate 9.24 % 373 355 10.53 % 305 283
Weighted average cost to service per loan $ 79.38 387 383 $ 81.24 325 321
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 return on mortgage servicing rights on the Consolidated Statements of Operations. Contractual subservicing fees including late fees and other ancillary income are included within loan administration income on the Consolidated Statements of Operations. Subservicing fee income is recorded for fees earned on subserviced loans, net of third-party subservicing costs.
The following table summarizes income and fees associated with owned MSRs:
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Net return on mortgage servicing rights
Servicing fees, ancillary income and late fees (1) $ 115 $ 107 $ 96
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes and other (99) (109) (89)
Changes in fair value due to interest rate risk 57 (50) (76)
Gain (loss) on MSR derivatives (2) (37) 65 76
Net transaction costs (13) (3) (1)
Total return (loss) included in net return on mortgage servicing rights $ 23 $ 10 $ 6
(1)Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on a cash basis.
(2)Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs.
The following table summarizes income and fees associated with our mortgage loans subserviced for others:
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Loan administration income on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1) $ 140 $ 126 $ 106
Charges on subserviced custodial balances (2) (10) (29) (67)
Other servicing charges (9) (13) (9)
Total income on mortgage loans subserviced, included in loan administration $ 121 $ 84 $ 30
(1)Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on a cash basis.
(2)Charges on subserviced custodial balances represent interest due to MSR owner.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 11 - Derivative Financial Instruments
Derivative financial instruments are recorded at fair value in other assets and other liabilities on the Consolidated Statements of Financial Condition. Our policy is to present our 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 and 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 and US Treasury futures. Changes in the fair value of derivatives not designated as hedging instruments are recognized on the Consolidated Statements of Operations.
Derivatives designated as hedging instruments. We have designated certain interest rate swaps as fair value hedges of investment securities available for sale and residential first mortgage loans held for investment using the last-of-layer method. Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged item.
We have also designated certain interest rate swaps as cash flow hedges on LIBOR-based variable interest payments on certain custodial deposits. 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 in the same period in which the hedge transaction is recognized in earnings. At December 31, 2021, we had $20 million (net-of-tax) of unrealized gains on derivatives classified as cash flow hedges recorded in accumulated other comprehensive income. We had $5 million (net-of-tax) of unrealized losses on derivatives classified as cash flow hedges at December 31, 2020. The estimated amount to be reclassified from other comprehensive income into earnings during the next 12 months represents $1 million of losses (net-of-tax).
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, 2021.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables present the notional amount, estimated fair value and maturity of our derivative financial instruments:
December 31, 2021 (1)
Notional Amount Fair Value (2) Expiration Dates
(Dollars in millions)
Derivatives in cash flow hedge relationships
Liabilities
Interest rate swaps on custodial deposits $ 800 $ - 2026-2027
Derivatives in fair value hedge relationships:
Assets
Interest rate swaps on AFS securities 85 - 2022
Total derivative assets $ 85 $ -
Liabilities
Interest rate swaps on HFI Residential First Mortgages 100 - 2024
Interest rate swaps on AFS securities 350 - 2024-2025
Total derivative liabilities $ 450
Derivatives not designated as hedging instruments:
Assets
Futures $ 1,117 $ - 2022-2023
Mortgage-backed securities forwards 4,008 11 2022
Rate lock commitments 5,169 54 2022
Interest rate swaps and swaptions 4,070 76 2022-2031
Total $ 14,364 $ 141
Liabilities
Mortgage-backed securities forwards $ 4,023 $ 14 2022
Rate lock commitments 370 1 2022
Interest rate swaps and swaptions 1,493 5 2022-2031
Total $ 5,886 $ 20
(1)Variation margin pledged to, or received from, a Central Counterparty Clearing House to cover the prior day's fair value of open positions is considered settlement of the derivative position for accounting purposes.
(2)Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 (1)
Notional Amount Fair Value (2) Expiration Dates
(Dollars in millions)
Derivatives in cash flow hedge relationships
Liabilities
Interest rate swaps on custodial deposits $ 800 $ 1 2026-2027
Derivatives in fair value hedge relationships
Liabilities
Interest rate swaps on HFI residential first mortgages 100 - 2024
Interest rate swaps on AFS securities 450 - 2022-2025
Total $ 1,350 $ 1
Derivatives not designated as hedging instruments
Assets
Futures $ 1,346 $ - 2021-2023
Mortgage-backed securities forwards 749 14 2021
Rate lock commitments 10,587 208 2021
Interest rate swaps and swaptions 1,481 59 2021-2051
Total $ 14,163 $ 281
Liabilities
Mortgage-backed securities forwards $ 11,194 $ 98 2021
Rate lock commitments 115 - 2021
Interest rate swaps and swaptions 1,305 4 2021-2030
Total $ 12,614 $ 102
(1)Variation margin pledged to, or received from, a Central Counterparty Clearing House to cover the prior day's fair value of open positions is considered settlement of the derivative position for accounting purposes.
(2)Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.
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 Statements of Financial Condition Net Amount Presented in the Statements of Financial Condition Gross Amounts Not Offset in the Statements of Financial Condition
Gross Amount Financial Instruments Cash Collateral
(Dollars in millions)
December 31, 2021
Derivatives designated as hedging instruments
Assets
Interest rate swaps on AFS securities $ - $ - $ - $ - $ 1
Total derivative assets $ - $ - $ - $ - $ 1
Liabilities
Interest rate swaps on AFS securities $ - $ - $ - $ - $ 4
Interest rate swaps on HFI residential first mortgages - - - - 1
Interest rate swaps on custodial deposits - - - - 9
Total derivative liabilities $ - $ - $ - $ - $ 14
Derivatives not designated as hedging instruments
Assets
Mortgage-backed securities forwards $ 10 $ - $ 10 $ - $ 12
Interest rate swaptions (1) 77 - 77 - 17
Total derivative assets $ 87 $ - $ 87 $ - $ 29
Liabilities
Mortgage-backed securities forwards $ 14 $ - $ 14 $ - $ 9
Interest rate swaps 6 - 6 - 24
Total derivative liabilities $ 20 $ - $ 20 $ - $ 33
December 31, 2020
Derivatives designated as hedging instruments
Liabilities
Interest rate swaps on AFS securities $ - $ - $ - $ - $ 5
Interest rate swaps on HFI residential first mortgages - - - - 1
Interest rate swaps on custodial deposits 1 - 1 - 8
Total derivative liabilities $ 1 $ - $ 1 $ - $ 14
Derivatives not designated as hedging instruments
Assets
Mortgage-backed securities forwards $ 14 $ - $ 14 $ - $ -
Interest rate swaps 59 - 59 - 6
Total derivative assets $ 73 $ - $ 73 $ - $ 6
Liabilities
Mortgage-backed securities forwards $ 98 $ - $ 98 $ - $ 68
Interest rate swaps and swaptions (1) 4 - 4 - 26
Total derivative liabilities $ 102 $ - $ 102 $ - $ 94
(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.
Losses of $4 million and $2 million on fair value hedging relationships of AFS securities were recorded in interest income for the year-ended December 31, 2021 and December 31, 2020, respectively.
Losses of $4 million and $2 million on cash flow hedging relationships of custodial deposits were reclassified from AOCI into loan administration income during the year-ended December 31, 2021 and December 31, 2020, respectively.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Gains and losses on fair value hedging relationships of HFI residential first mortgages for the year-ended December 31, 2021 were de-minimis.
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 $1.0 billion at December 31, 2021 and $1.7 billion at December 31, 2020, of which unrealized losses of $5 million and unrealized gains of $6 million, respectively, were due to the fair value hedge relationship. The closed portfolio of AFS securities designated in this last layer method hedge was $1.0 billion par (amortized cost of $1.0 billion) at December 31, 2021 and $1.6 billion par (amortized cost of $1.6 billion) at December 31, 2020, of which we have designated $435 million and $450 million at December 31, 2021 and December 31, 2020, respectively.
The fair value basis adjustment on our hedged fair HFI residential first mortgages is included in LHFI on our Consolidated Statements of Financial Condition. The carrying amount of our hedged loans was $175 million at December 31, 2021, of which unrealized losses of $1 million was due to the fair value hedge relationship. We have designated $100 million of this closed portfolio of loans in a hedging relationship as of December 31, 2021 and 2020.
At December 31, 2021, we pledged a total of $66 million related to derivative financial instruments, consisting of $28 million of cash collateral on derivative liabilities and $38 million of maintenance margin on centrally cleared derivatives and had a $12 million obligation to return cash on derivative assets. We pledged a total of $114 million related to derivative financial instruments, consisting of $84 million of cash collateral on derivatives and $30 million of maintenance margin on centrally cleared derivatives and had a de minimis obligation to return cash on derivative assets at December 31, 2020. Within the Consolidated Statements of Financial Condition, the collateral related to derivative activity is included in other assets and other liabilities and the cash pledged as maintenance margin is restricted and included in other assets.
The following table presents the net gain (loss) recognized in income on derivative instruments, net of the impact of offsetting positions:
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Derivatives not designated as hedging instruments Location of Gain (Loss)
Futures Net return on mortgage servicing rights $ - $ 1 $ (2)
Interest rate swaps and swaptions Net return on mortgage servicing rights (23) 28 57
Mortgage-backed securities forwards Net return on mortgage servicing rights (14) 36 21
Rate lock commitments and US Treasury futures Net gain on loan sales (57) 86 35
Forward commitments Other noninterest income - - 2
Interest rate swaps (1) Other noninterest income 2 3 5
Total derivative (loss) gain $ (92) $ 154 $ 118
(1)Includes customer-initiated commercial interest rate swaps.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 12 - Deposit Accounts
The deposit accounts are as follows:
December 31,
2021 2020
(Dollars in millions)
Retail deposits
Branch retail deposits
Savings accounts $ 3,751 $ 3,437
Demand deposit accounts 1,946 1,726
Certificates of deposit/CDARS 951 1,355
Money market demand accounts 494 490
Total branch retail deposits 7,142 7,008
Commercial deposits (1)
Demand deposit accounts 2,194 2,294
Savings accounts 520 461
Money market demand accounts 408 208
Total commercial retail deposits 3,122 2,963
Total retail deposits 10,264 9,971
Government deposits
Savings accounts 721 778
Demand deposit accounts 664 529
Certificates of deposit/CDARS 609 458
MMDA 6 -
Total government deposits (2) 2,000 1,765
Wholesale deposits 1,141 1,031
Custodial deposits (3) 4,604 7,206
Total deposits $ 18,009 $ 19,973
(1)Includes deposits from commercial and business banking customers.
(2)Government deposits include funds from municipalities and schools.
(3)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 time/certificates of deposit in excess of $250,000:
December 31,
2021 2020
(Dollars in millions)
Three months or less $ 170 $ 220
Over three months to six months 215 220
Over six months to twelve months 279 153
One to two years 45 71
Thereafter 26 19
Total $ 735 $ 683
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:
December 31, 2021 December 31, 2020
Amount Rate Amount Rate
(Dollars in millions)
Short-term fixed rate term advances $ 1,600 0.19 % $ 3,415 0.20 %
Other short-term borrowings 280 0.11 % 485 0.08 %
Total short-term Federal Home Loan Bank advances and other borrowings 1,880 3,900
Long-term fixed rate advances 1,400 0.90 % 1,200 1.03 %
Total long-term Federal Home Loan Bank advances 1,400 1,200
Total Federal Home Loan Bank advances and other borrowings $ 3,280 $ 5,100
The following table contains detailed information on our FHLB advances and other borrowings:
For the Years Ended December 31,
2021 2020
(Dollars in millions)
Maximum outstanding at any month end $ 5,595 $ 6,841
Average outstanding balance 3,583 3,873
Average remaining borrowing capacity 5,492 5,282
Weighted average interest rate 0.46 % 0.72 %
The following table outlines the maturity dates of our FHLB advances and other borrowings:
December 31, 2021
(Dollars in millions)
2022 2,080
2023 500
2024 100
Thereafter 600
Total $ 3,280
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Parent Company Senior Notes, Subordinated Notes and Trust Preferred Securities
The following table presents long-term debt, net of debt issuance costs:
December 31, 2021 December 31, 2020
Amount Interest Rate Amount Interest Rate
(Dollars in millions)
Senior Notes
Senior notes, matures 2021 $ - - % $ 246 6.125%
Subordinated Notes
Notes, matures 2030 149 4.125 % 148 4.125 %
Trust Preferred Securities
Floating Three Month LIBOR Plus:
Plus 3.25%, matures 2032 26 3.47 % 26 3.50 %
Plus 3.25%, matures 2033 26 3.37 % 26 3.49 %
Plus 3.25%, matures 2033 26 3.47 % 26 3.49 %
Plus 2.00%, matures 2035 26 2.12 % 26 2.24 %
Plus 2.00%, matures 2035 26 2.12 % 26 2.24 %
Plus 1.75%, matures 2035 51 1.95 % 51 1.97 %
Plus 1.50%, matures 2035 25 1.62 % 25 1.74 %
Plus 1.45%, matures 2037 25 1.65 % 25 1.67 %
Plus 2.50%, matures 2037 16 2.70 % 16 2.72 %
Total Trust Preferred Securities 247 247
Total other long-term debt $ 396 $ 641
Senior Notes
We settled the Senior Notes on January 22, 2021 and as of December 31, 2021 we had no Senior Notes outstanding.
Subordinated Notes
On October 28, 2020, we issued $150 million of Subordinated Debt (the "Notes") with a maturity date of November 1, 2030. The Notes bear interest at a fixed rate of 4.125 percent through October 31, 2025, and a variable rate tied to SOFR thereafter until maturity. We have the option to redeem all or a part of the Notes beginning on November 1, 2025, and on any subsequent interest payment date. The Notes qualify as Tier 2 capital for regulatory purposes.
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, 2021, we had no deferred interest.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 14 - Accumulated Other Comprehensive Income
The following table sets forth the components in accumulated other comprehensive income:
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Investment Securities
Beginning balance $ 52 $ 1 $ (47)
Unrealized (loss) gain (47) 68 57
Less: Tax (benefit) provision (11) 16 14
Net unrealized (loss) gain (36) 52 43
Reclassifications out of AOCI (1) (1) (1) 6
Less: Tax provision - - 1
Net reclassifications out of AOCI (1) (1) 5
Other comprehensive (loss) income, net of tax (37) 51 48
Ending balance $ 15 $ 52 $ 1
Cash Flow Hedges
Beginning balance $ (5) $ - $ -
Unrealized gain (loss) 28 (9) -
Less: Tax provision (benefit) 6 (2) -
Net unrealized gain (loss) 22 (7) -
Reclassifications out of AOCI (1) 4 2 -
Less: Tax provision 1 - -
Net reclassifications out of AOCI 3 2 -
Other comprehensive income (loss), net of tax 25 (5) -
Ending balance $ 20 $ (5) $ -
(1)Reclassifications are reported in noninterest income on the Consolidated Statement of Operations.
Note 15 - Earnings Per Share
Basic earnings per share, excluding dilution, is computed by dividing earnings applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that could then share in our earnings.
The following table sets forth the computation of basic and diluted earnings per share of common stock:
For the Years Ended December 31,
2021 2020 2019
(In millions, except share data)
Net income applicable to common stockholders $ 533 $ 538 $ 218
Weighted Average Shares
Weighted average common shares outstanding 52,792,931 56,094,542 56,584,238
Effect of dilutive securities
Stock-based awards 726,155 411,271 654,740
Weighted average diluted common shares 53,519,086 56,505,813 57,238,978
Earnings per common share
Basic earnings per common share $ 10.10 $ 9.59 $ 3.85
Effect of dilutive securities
Stock-based awards (0.14) (0.07) (0.05)
Diluted earnings per common share $ 9.96 $ 9.52 $ 3.80
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 16 - Stock-Based Compensation
We had stock-based compensation expense of $14 million, $17 million, and $13 million during each of the years ended December 31, 2021, 2020 and 2019, respectively.
Restricted Stock and Restricted Stock Units
We have issued restricted stock units to officers, directors and certain employees under the 2016 Stock Plan through our long-term incentive program ("LTIP"). Restricted stock units generally will vest in three 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 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 year 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, 2021, the stock performance hurdles have been met and 94 percent of the shares had vested.
At December 31, 2021, the maximum number of shares of common stock that may be issued under the 2016 Stock Plan was 1.4 million shares. The total grant date fair value of awards vested during the years ended December 31, 2021, 2020 and 2019 was $22 million, $15 million, and $10 million, respectively. As of December 31, 2021, the total unrecognized compensation cost related to non-vested awards was $14 million with a weighted average expense recognition period of 1.9 years.
The following table summarizes restricted stock and restricted stock units activity:
For the Years Ended December 31,
2021 2020 2019
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 Weighted Average Grant-Date Fair Value per Share
Restricted Stock and Restricted Stock Units
Non-vested balance at beginning of period 974,186 $ 30.88 1,399,127 $ 28.72 1,620,568 $ 27.27
Granted 369,198 42.39 379,835 27.97 338,737 32.11
Vested (682,902) 31.99 (537,571) 27.06 (379,936) 26.98
Canceled and forfeited (59,909) 31.75 (267,205) 23.13 (180,242) 25.66
Non-vested balance at end of period 600,573 $ 36.61 974,186 $ 30.88 1,399,127 $ 28.72
2017 Employee Stock Purchase Plan
The Employee Stock Purchase Plan ("2017 ESPP") became effective on July 1, 2017 and was terminated on June 30, 2021, pursuant to the Merger Agreement with NYCB as approved by the Board on April 24, 2021. There were 106,707 and 181,875 shares issued under the ESPP during the years ended December 31, 2021 and 2020, respectively. The associated compensation expense was de minimis for both periods.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 17 - Income Taxes
Components of the provision for income taxes consist of the following:
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Current
Federal $ 66 $ 154 $ 17
State 13 14 6
Total current income tax expense 79 168 23
Deferred
Federal 70 (10) 39
State 8 8 (14)
Total deferred income tax expense 78 (2) 25
Total income tax expense $ 157 $ 166 $ 48
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,
2021 2020 2019
(Dollars in millions)
Provision at statutory federal income tax rate $ 145 $ 148 $ 56
(Decreases) increases resulting from:
Bank owned life insurance (2) (2) (2)
State income tax (benefit), net of federal income tax effect (net of valuation allowance release) 17 18 (6)
Low income housing tax losses (2) (1) (1)
Other (1) 3 1
Provision for income taxes $ 157 $ 166 $ 48
Effective tax provision rate 22.7 % 23.5 % 18.1 %
The decrease in our income tax provision and effective tax provision rate during the year-ended December 31, 2021, as compared to the year-ended December 31, 2020, was primarily due to a reduction to our state deferred tax asset valuation allowance and a decrease to our employee retirement plan accrual.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Temporary differences and carryforwards that give rise to DTAs and liabilities are comprised of the following:
December 31,
2021 2020
(Dollars in millions)
Deferred tax assets
Net operating loss carryforwards (Federal and State) $ 28 $ 36
Allowance for credit losses 28 58
Accrued compensation 16 15
Litigation settlement - 8
Lease liability 5 6
Contingent consideration 8 7
General business reserves - 11
Other 10 4
Total $ 95 $ 145
Valuation allowance (5) (7)
Total net $ 90 $ 138
Deferred tax liabilities
Mark-to-market adjustments $ (6) $ (4)
Premises and equipment (15) (7)
State and local taxes (3) (6)
Commercial lease financing (1) (1)
Mortgage loan servicing rights (72) (53)
Right of use asset (5) (5)
Total $ (102) $ (76)
Net deferred tax (liability) asset $ (12) $ 62
We have not provided deferred income taxes for the Bank’s pre-1988 tax bad debt reserve at December 31, 2021, of approximately $4 million because it is not anticipated that this temporary difference will reverse in the foreseeable future. Such reserves would only be taken into taxable income if the Bank, or a successor institution, liquidates, redeems shares, pays dividends in excess of earnings, or ceases to qualify as a bank for tax purposes.
During the years ended December 31, 2021 and 2020, we had federal net operating loss carryforwards of $33 million and $51 million, respectively. These carryforwards, if unused, expire in calendar years 2028 through 2029. As a result of a change in control occurring on January 30, 2009 and November 10, 2020, Section 382 of the Internal Revenue Code places an annual limitation on the use of our new operating loss carryforwards that existed at those times. $33 million of net operating loss carryforwards are 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 GAAP. 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 state DTA of $19 million which includes total state net operating loss carryforwards of $316 million at December 31, 2021, that expire if unused in calendar years through 2033. In connection with our ongoing assessment of deferred taxes, we analyzed each state net operating loss separately, determined the amount of net operating loss available and estimated the amount which we expected to expire unused. Based on that assessment, we recorded a valuation allowance of $5 million to reduce the DTA for state net operating losses to the amount which is more likely than not to be realized.
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, 2021, 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.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
We recognize interest and penalties related to uncertain tax positions in income tax expense. For the years ended December 31, 2021, 2020 and 2019, we did not recognize any interest income, interest expense, or increases 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, are subject to the Basel III based U.S. capital rules, including capital simplification in 2020. Under these requirements, we 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.
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, 2021 and December 31, 2020.
The following tables present the regulatory capital requirements under the applicable Basel III based U.S. capital rules:
Flagstar Bancorp Actual Minimum Capital Ratios Well-Capitalized Under Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in millions)
December 31, 2021
Tier 1 capital (to adjusted avg. total assets) $ 2,798 10.54 % $ 1,062 4.0 % $ 1,327 5.0 %
Common equity Tier 1 capital (to RWA) 2,558 13.19 % 873 4.5 % 1,261 6.5 %
Tier 1 capital (to RWA) 2,798 14.43 % 1,164 6.0 % 1,552 8.0 %
Total capital (to RWA) 3,080 15.88 % 1,552 8.0 % 1,940 10.0 %
December 31, 2020
Tier 1 capital (to adjusted avg. total assets) $ 2,270 7.71 % $ 1,178 4.0 % $ 1,472 5.0 %
Common equity Tier 1 capital (to RWA) 2,030 9.15 % 999 4.5 % 1,442 6.5 %
Tier 1 capital (to RWA) 2,270 10.23 % 1,331 6.0 % 1,775 8.0 %
Total capital (to RWA) 2,638 11.89 % 1,775 8.0 % 2,219 10.0 %
Flagstar Bank Actual Minimum Capital Ratios Well-Capitalized Under Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in millions)
December 31, 2021
Tier 1 capital (to adjusted avg. total assets) $ 2,706 10.21 % $ 1,060 4.0 % $ 1,325 5.0 %
Common equity Tier 1 capital (to RWA) 2,706 13.96 % 872 4.5 % 1,260 6.5 %
Tier 1 capital (to RWA) 2,706 13.96 % 1,163 6.0 % 1,551 8.0 %
Total capital (to RWA) 2,839 14.65 % 1,551 8.0 % 1,938 10.0 %
December 31, 2020
Tier 1 capital (to adjusted avg. total assets) $ 2,390 8.12 % $ 1,177 4.0 % $ 1,472 5.0 %
Common equity Tier 1 capital (to RWA) 2,390 10.77 % 999 4.5 % 1,443 6.5 %
Tier 1 capital (to RWA) 2,390 10.77 % 1,332 6.0 % 1,775 8.0 %
Total capital (to RWA) 2,608 11.75 % 1,775 8.0 % 2,219 10.0 %
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 closing, 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. Payments made to settle our liabilities may differ from the contingency or fair value recorded due to factors that differ from our assumptions.
At December 31, 2021, 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 materially adverse effect on our financial condition, results of operations or cash flows.
DOJ Liability
On February 24, 2012, the Bank entered into a Settlement Agreement with the DOJ under which we agreed to make future payments totaling $118 million in annual increments of up to $25 million upon meeting certain conditions. On March 30, 2021, the Bank signed a $70 million final Settlement and Dismissal Amendment (the "Amendment") with the DOJ. The Amendment required us to make a $70 million one-time restitution cash payment and removed any further obligations related to the original Settlement Agreement. We recorded a $35 million expense to adjust the fair value of the DOJ Liability through general, administrative and other noninterest expense in the first quarter of 2021. The payment was made on April 8, 2021, fully satisfying the Amendment and reducing the liability to $0. For further information on the fair value of the liability, see Note 20 - Fair Value Measurements.
Other litigation accruals
At December 31, 2021 and December 31, 2020, excluding the fair value liability relating to the DOJ Liability, our total accrual for contingent liabilities and settled litigation was $9 million and $7 million, respectively.
Commitments
In the normal course of business, we have various commitments outstanding which are not included on our Consolidated Statements of Financial Condition. The following table is a summary of the contractual amount of significant commitments:
December 31,
2021 2020
(Dollars in millions)
Commitments to extend credit
Warehouse loan commitments $ 6,840 $ 2,849
Mortgage loan commitments including interest rate locks 5,539 10,702
Other construction commitments 2,719 1,934
Commercial and industrial commitments 1,582 1,271
HELOC commitments 631 544
Other consumer commitments 273 121
Standby and commercial letters of credit 107 95
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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. Because 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 on 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 construction commitments. Conditional commitments issued under various terms to lend funds to businesses 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. Because many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.
HELOC commitments. Commitments to extend, originate or purchase credit are primarily lines of credit to consumers and have specified rates and maturity dates. Many of these commitments also have adverse change clauses, which allow us to cancel the commitment due to deterioration in the borrowers’ creditworthiness or a decline in the collateral value.
Other consumer commitments. Conditional commitments issued to accommodate the financial needs of customers. The commitments are made under various terms to lend funds to consumers, which include revolving credit agreements, term loan commitments and short-term borrowing agreements.
Standby and commercial letters of credit. Conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. These financial standby letters of credit irrevocably obligate the bank to pay a third-party beneficiary when a customer fails to repay an outstanding loan or debt instrument.
We maintain a reserve for estimated lifetime credit losses 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 $16 million at December 31, 2021 and $28 million at December 31, 2020, 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. In the second quarter of 2021, we entered into a settlement agreement with the former CEO that terminates the SERP and all other prior employment agreements in exchange for a maximum payment of $6 million which remains subject to regulatory approval as of December 31, 2021.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 given 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.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the financial instruments carried at fair value by caption on the Consolidated Statements of Financial Condition and by level in the valuation hierarchy:
December 31, 2021
Level 1 Level 2 Level 3 Total Fair Value
(Dollars in millions)
Loans held-for-sale
Residential first mortgage loans $ - $ 4,920 $ - $ 4,920
Investment securities available-for-sale
Agency - Commercial - 747 - 747
Agency - Residential - 696 - 696
Other MBS - 267 - 267
Corporate debt obligations - 73 - 73
Municipal obligations - 20 - 20
Certificate of deposit - 1 - 1
Derivative assets
Interest rate swaps and swaptions - 77 - 77
Rate lock commitments (fallout-adjusted) - - 54 54
Mortgage-backed securities forwards - 10 - 10
Loans held-for-investment
Residential first mortgage loans - 15 - 15
Home equity - - 1 1
Mortgage servicing rights - - 392 392
Total assets at fair value $ - $ 6,826 $ 447 $ 7,273
Derivative liabilities
Mortgage-backed securities forwards - (14) - (14)
Interest rate swaps and swaptions - (5) - (5)
Rate lock commitments (fallout-adjusted) - - (1) (1)
DOJ Liability - - - -
Total liabilities at fair value $ - $ (19) $ (1) $ (20)
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020
Level 1 Level 2 Level 3 Total Fair Value
(Dollars in millions)
Investment securities available-for-sale
Agency - Commercial $ - $ 1,061 $ - $ 1,061
Agency - Residential - 735 - 735
Municipal obligations - 28 - 28
Corporate debt obligations - 77 - 77
Other MBS - 42 - 42
Certificate of deposit - 1 - 1
Loans held-for-sale
Residential first mortgage loans - 7,009 - 7,009
Loans held-for-investment
Residential first mortgage loans - 11 - 11
Home equity - - 2 2
Mortgage servicing rights - - 329 329
Derivative assets
Rate lock commitments (fallout-adjusted) - - 208 208
Mortgage-backed securities forwards - 14 - 14
Interest rate swaps and swaptions - 59 - 59
Total assets at fair value $ - $ 9,037 $ 539 $ 9,576
Derivative liabilities
Mortgage-backed securities forwards - (98) - (98)
Interest rate swaps and swaptions - (4) - (4)
DOJ Liability - - (35) (35)
Total liabilities at fair value $ - $ (102) $ (35) $ (137)
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Fair Value Measurements Using Significant Unobservable Inputs
The following tables include a roll forward of the Consolidated Statements of Financial Condition amounts (including the change in fair value) for financial instruments classified by us within Level 3 of the valuation hierarchy:
Balance at
Beginning
of 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, 2021
Assets
Loans held-for-investment
Home equity $ 2 $ - $ - $ - $ (1) $ - $ 1
Mortgage servicing rights (1) 329 (42) 269 (164) - - 392
Rate lock commitments (net) (1)(2) 208 (100) 607 - - (661) 54
Totals $ 539 $ (142) $ 876 $ (164) $ (1) $ (661) $ 447
Liabilities
DOJ Liability $ (35) $ (35) $ - $ - $ 70 $ - $ -
Year-Ended December 31, 2020
Assets
Loans held-for-investment
Home equity $ 2 $ - $ - $ - $ - $ - $ 2
Mortgage servicing rights (1) 291 (159) 268 (71) - - 329
Rate lock commitments (net) (1)(2) 34 358 1,005 - - (1,189) 208
Totals $ 327 $ 199 $ 1,273 $ (71) $ - $ (1,189) $ 539
Liabilities
DOJ Liability $ (35) $ - $ - $ - $ - $ - $ (35)
Contingent consideration (10) (17) - - 27 - -
Totals $ (45) $ (17) $ - $ - $ 27 $ - $ (35)
Year-Ended December 31, 2019
Assets
Loans held-for-investment
Home equity $ 2 $ - $ - $ - $ - $ - $ 2
Mortgage servicing rights (1) 290 (165) 223 (57) - - 291
Rate lock commitments (net) (1)(2) 20 86 326 - - (398) 34
Totals $ 312 $ (79) $ 549 $ (57) $ - $ (398) $ 327
Liabilities
DOJ Liability $ (60) $ 25 $ - $ - $ - $ - $ (35)
Contingent consideration (6) (7) - - 3 - (10)
Totals $ (66) $ 18 $ - $ - $ 3 $ - $ (45)
(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.
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, 2021
Assets
Loans held-for-investment
Mortgage servicing rights $ 392 Discounted cash flows Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan 3.9% - 21.6% (7.1%)
0% - 11.1% (9.2%)
$67 - $90 ($80)
(1)
Rate lock commitments (net) $ 53 Consensus pricing Origination pull-through rate 72.8%
(1)
Fair Value Valuation Technique Unobservable Input Range (Weighted Average)
(Dollars in millions)
December 31, 2020
Assets
Loans held-for-investment
Home equity $ 2 Discounted cash flows Discount rate
Constant prepayment rate
Constant default rate 7.2% -10.8% (9.0%)
12.6% - 18.9% (15.8%)
1.5%-2.3% (1.9%)
(1)
Mortgage servicing rights $ 329 Discounted cash flows Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan 3.4% - 21.2% (8.0%)
0% - 13.3% (10.5%)
$67 - $95 ($81)
(1)
Rate lock commitments (net) $ 208 Consensus pricing Closing pull-through rate 75.7% - 87.2% (77.5%)
(1)
Liabilities
DOJ Liability $ (35) Discounted cash flows See description below See description below
(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, 2021 and December 31, 2020, the weighted average life (in years) for the entire MSR portfolio was 5.8 and 4.2, respectively.
DOJ Liability. The DOJ liability was settled for $70 million in the second quarter of 2021, fully satisfying the Amendment and reducing the liability to $0 at December 30, 2021. Prior to settlement, the significant unobservable inputs used in the fair value measurement of the DOJ Liability were 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.
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.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We also have assets that are subject to measurement at fair value on a nonrecurring basis under certain conditions. The following table presents assets measured at fair value on a nonrecurring basis:
Total (1) Level 2 Level 3 Gains/(Losses)
(Dollars in millions)
December 31, 2021
Loans held-for-sale (2) $ 116 $ 116 $ - $ (1)
Commercial loans HFS 18 - 18 -
Impaired loans held-for-investment (2)
Residential first mortgage loans 36 - 36 (5)
Repossessed assets (3) 6 - 6 (1)
Totals $ 176 $ 116 $ 60 $ (7)
December 31, 2020
Residential first mortgage loans $ 30 $ 30 $ - $ (1)
Commercial loans HFS 57 - 57 -
Impaired loans held-for-investment (2)
Residential first mortgage loans 24 - 24 (3)
Repossessed assets (3) 8 - 8 (3)
Totals $ 119 $ 30 $ 89 $ (7)
(1)The fair values are determined at various dates dependent upon when certain conditions were met requiring fair value measurement.
(2)Gains/(losses) reflect fair value adjustments on assets for which we did not elect the fair value option.
(3)Gains/(losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets.
The following table presents the quantitative information about nonrecurring Level 3 fair value financial instruments and the fair value measurements:
Fair Value Valuation Technique Unobservable Input Range (Weighted Average)
(Dollars in millions)
December 31, 2021
Impaired loans held-for-sale
Commercial loans HFS $ 18 Fair value of collateral Market price N/A (2)
Impaired loans held-for-investment
Residential first mortgage loans $ 36 Fair value of collateral Loss severity discount 0% - 100% (12.7%)
Repossessed assets $ 6 Fair value of collateral Loss severity discount 0% - 96.3% (19.8%)
December 31, 2020
Commercial loans HFS $ 57 Fair value of collateral Market price N/A (2)
Impaired loans held-for-investment
Residential first mortgage loans $ 24 Fair value of collateral Loss severity discount 0% - 100% (12.8%)
(1)
Repossessed assets $ 8 Fair value of collateral Loss severity discount 0% - 96.3% (24.5%)
(1)
(1)Unobservable inputs were weighted by their relative fair value of the instruments.
(2)Fair value has been determined based on an unobservable market price.
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.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair value of financial instruments that are carried either at fair value, cost or amortized cost:
December 31, 2021
Estimated Fair Value
Carrying Value Total Level 1 Level 2 Level 3
(Dollars in millions)
Assets
Cash and cash equivalents $ 1,051 $ 1,051 $ 1,051 $ - $ -
Investment securities available-for-sale 1,804 1,804 - 1,804 -
Investment securities held-to-maturity 205 209 - 209 -
Loans held-for-sale 5,054 5,054 - 5,054 -
Loans held-for-investment 13,408 13,453 - 14 13,439
Loans with government guarantees 1,650 1,650 - 1,650 -
Mortgage servicing rights 392 392 - - 392
Federal Home Loan Bank stock 377 377 - 377 -
Bank owned life insurance 365 365 - 365 -
Repossessed assets 6 6 - - 6
Other assets, foreclosure claims 7 7 - 7 -
Derivative financial instruments, assets 141 141 - 87 54
Liabilities
Retail deposits
Demand deposits and savings accounts $ (9,313) $ (8,469) $ - $ (8,469) $ -
Certificates of deposit (951) (952) - (952) -
Wholesale deposits (1,141) (1,137) - (1,137) -
Government deposits (2,000) (1,904) - (1,904) -
Company controlled deposits (4,604) (4,580) - (4,580) -
Federal Home Loan Bank advances and other (3,280) (3,288) - (3,288) -
Long-term debt (396) (340) - (340) -
Derivative financial instruments, liabilities (20) (20) - (19) (1)
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020
Estimated Fair Value
Carrying Value Total Level 1 Level 2 Level 3
(Dollars in millions)
Assets
Cash and cash equivalents $ 623 $ 623 $ 623 $ - $ -
Investment securities available-for-sale 1,944 1,944 - 1,944 -
Investment securities held-to-maturity 377 393 - 393 -
Loans held-for-sale 7,098 7,098 - 7,098 -
Loans held-for-investment 16,227 16,188 - 11 16,177
Loans with government guarantees 2,516 2,498 - 2,498 -
Mortgage servicing rights 329 329 - - 329
Federal Home Loan Bank stock 377 377 - 377 -
Bank owned life insurance 356 358 - 358 -
Repossessed assets 8 8 - - 8
Other assets, foreclosure claims 17 17 - 17 -
Derivative financial instruments 281 281 - 73 208
Liabilities
Retail deposits
Demand deposits and savings accounts $ (8,616) $ (7,864) $ - $ (7,864) $ -
Certificates of deposit (1,355) (1,365) - (1,365) -
Wholesale deposits (1,031) (1,047) - (1,047) -
Government deposits (1,765) (1,706) - (1,706) -
Custodial deposits (7,206) (7,133) - (7,133) -
Federal Home Loan Bank advances (5,100) (5,124) - (5,124) -
Long-term debt (641) (596) - (596) -
DOJ litigation settlement (35) (35) - - (35)
Contingent consideration - - - - -
Derivative financial instruments (102) (102) - (102) -
Fair Value Option
We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements to more closely align the accounting method with the underlying economic exposure. Interest income on LHFS is accrued on the principal outstanding primarily using the "simple-interest" method.
The following table reflects the change in fair value included in earnings of financial instruments for which the fair value option has been elected:
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Assets
Loans held-for-sale
Net gain on loan sales $ 408 $ 1,204 $ 348
Loans held-for-investment
Other noninterest income 1 - 1
Liabilities
DOJ Liability
Other noninterest income - - 25
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, 2021 December 31, 2020
Unpaid Principal Balance Fair Value Fair Value Over / (Under) Unpaid Principal Balance Unpaid Principal Balance Fair Value Fair Value Over / (Under) Unpaid Principal Balance
(Dollars in millions)
Assets
Nonaccrual loans
Loans held-for-sale $ 18 $ 16 $ (2) $ 9 $ 7 $ (2)
Loans held-for-investment 15 13 (2) 9 8 (1)
Total nonaccrual loans 33 29 (4) 18 15 (3)
Other performing loans
Loans held-for-sale 4,790 4,904 114 6,704 7,002 298
Loans held-for-investment 5 3 (2) 5 4 (1)
Total other performing loans 4,795 4,907 112 6,709 7,006 297
Total loans
Loans held-for-sale 4,808 4,920 112 6,713 7,009 296
Loans held-for-investment 20 16 (4) 14 12 (2)
Total loans $ 4,828 $ 4,936 $ 108 $ 6,727 $ 7,021 $ 294
Liabilities
DOJ Liability (1) $ - $ - $ - $ (118) $ (35) $ 83
(1) For additional information, see 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 are incurred for which discrete financial information is available that is evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. The operating segments have been determined based on the products and services offered and reflect the manner in which financial information is currently evaluated by Management. Each segment operates under the same banking charter, but is reported on a segmented basis for this report. Each of the operating segments is complementary to each other and because of the interrelationships of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.
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 and Warehouse Lending. Products offered through these groups include checking accounts, savings accounts, money market accounts, CD, consumer loans, commercial loans, CRE loans, 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 interest income on LHFI is recognized in the Community Banking segment, excluding residential first mortgages and newly originated home equity products within the Mortgage Originations segment.
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 Originations segment recognizes interest income on loans that are held-for-sale and the gains from sales associated with these loans, along with the interest income on residential mortgages and newly originated home equity products within LHFI.
The Mortgage Servicing segment services and subservices mortgage and other consumer loans for others on a fee for service basis and may also collect ancillary fees and earn income through the use of noninterest-bearing escrows. Revenue for those serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the status of the underlying loans. The Mortgage Servicing segment also services loans for our LHFI portfolio and our own LHFS portfolio in the Mortgage Originations segment, for which it earns revenue via an intercompany service fee allocation.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 credit losses) and noninterest income. Noninterest expenses and a majority of provision (benefit) for income taxes, are allocated to each operating segment. Provision for credit losses is allocated to segments based on net charge-offs and changes in outstanding balances. In contrast, the level of the consolidated provision for credit losses is determined based on an allowance model using the methodologies described in Item 2 - MD&A. The net effect of the credit provision is recorded in the Other 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:
Year-Ended December 31, 2021
Community Banking Mortgage Originations Mortgage Servicing Other (1) Total
(Dollars in millions)
Summary of Operations
Net interest income $ 601 $ 248 $ 15 $ (117) $ 747
Provision (benefit) for credit losses 4 (10) - (106) (112)
Net interest income after provision (benefit) for credit losses 597 258 15 (11) 859
Net gain on loan sales - 655 - - 655
Loan fees and charges 1 65 75 - 141
Net return on mortgage servicing rights - 23 - - 23
Loan administration (expense) income (1) (34) 165 (9) 121
Other noninterest income 65 14 - 25 104
Total noninterest income 65 723 240 16 1,044
Compensation and benefits 107 200 65 161 533
Commissions 2 192 - - 194
Loan processing expense 5 45 32 4 86
Other noninterest expense 60 88 87 165 400
Total noninterest expense 174 525 184 330 1,213
Income before indirect overhead allocations and income taxes 488 456 71 (325) 690
Indirect overhead allocation (expense) income (35) (67) (19) 121 -
Provision (benefit) for income taxes 95 81 11 (30) 157
Net income (loss) $ 358 $ 308 $ 41 $ (174) $ 533
Intersegment (expense) revenue $ 119 $ (2) $ 43 $ (160) $ -
Average balances
Loans held-for-sale $ 15 $ 7,131 $ - $ - $ 7,146
Loans with government guarantees $ - $ 2,156 $ - $ - $ 2,156
Loans held-for-investment (2) $ 12,062 $ 1,780 $ - $ 18 $ 13,860
Total assets $ 12,427 $ 11,981 $ 223 $ 3,565 $ 28,196
Deposits $ 11,964 $ 28 $ 6,463 $ 1,198 $ 19,653
(1)Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
(2) Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Year-Ended December 31, 2020
Community Banking Mortgage Originations Mortgage Servicing Other (1) Total
(Dollars in millions)
Summary of Operations
Net interest income $ 570 $ 191 $ 18 $ (94) $ 685
Provision (benefit) for credit losses 3 (11) - 157 149
Net interest income after provision (benefit) for credit losses 567 202 18 (251) 536
Net gain on loan sales 2 969 - - 971
Loan fees and charges 1 83 66 - 150
Net return on mortgage servicing rights - 10 - - 10
Loan administration (expense) income (3) (35) 151 (29) 84
Other noninterest income 61 8 - 26 95
Total noninterest income 61 1,035 217 (3) 1,310
Compensation and benefits 108 161 46 151 466
Commissions 2 230 - - 232
Loan processing expense 5 40 36 2 83
Other noninterest expense 271 136 79 (125) 361
Total noninterest expense 386 567 161 28 1,142
Income before indirect overhead allocations and income taxes 242 670 74 (282) 704
Indirect overhead allocation (40) (60) (19) 119 -
Provision (benefit) for income taxes 42 128 12 (16) 166
Net income (loss) $ 160 $ 482 $ 43 $ (147) $ 538
Intersegment (expense) revenue $ (96) $ (48) $ 39 $ 105 $ -
Average balances
Loans held-for-sale $ 1 $ 5,541 $ - $ - $ 5,542
Loans with government guarantees $ - $ 1,571 $ - $ - $ 1,571
Loans held-for-investment (2) $ 11,376 $ 2,591 $ - $ 30 $ 13,997
Total assets $ 11,760 $ 10,735 $ 85 $ 4,328 $ 26,908
Deposits $ 10,996 $ - $ 6,712 $ 836 $ 18,544
(1)Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
(2) Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Year-Ended December 31, 2019
Community Banking Mortgage Originations Mortgage Servicing Other (1) Total
(Dollars in millions)
Summary of Operations
Net interest income $ 410 $ 145 $ 16 $ (9) $ 562
Provision (benefit) for credit losses 20 2 - (4) 18
Net interest income after provision for credit losses 390 143 16 (5) 544
Net (loss) gain on loan sales (14) 349 - 335
Loan fees and charges 1 67 32 - 100
Net return on mortgage servicing rights - 6 - - 6
Loan administration (expense) income (3) (24) 124 (67) 30
Other noninterest income 62 12 - 65 139
Total noninterest income 46 410 156 (2) 610
Compensation and benefits 103 111 28 135 377
Commissions 2 109 - - 111
Loan processing expense 6 36 36 2 80
Other noninterest expense 165 90 59 6 320
Total noninterest expense 276 346 123 143 888
Income before indirect overhead allocations and income taxes 160 207 49 (150) 266
Indirect overhead allocation (41) (42) (18) 101 -
Provision (benefit) for income taxes 24 35 6 (17) 48
Net income (loss) $ 95 $ 130 $ 25 $ (32) $ 218
Intersegment revenue (expense) $ (3) $ 13 $ 26 $ (36) $ -
Average balances
Loans held-for-sale $ - $ 3,952 $ - $ - $ 3,952
Loans with government guarantees $ - $ 553 $ - $ - $ 553
Loans held-for-investment (2) $ 7,876 $ 3,027 $ - $ 29 $ 10,932
Total assets $ 8,319 $ 8,467 $ 47 $ 3,841 $ 20,674
Deposits $ 10,301 $ - $ 3,851 $ 556 $ 14,708
(1)Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
(2) Includes adjustment made to reclassify operating lease assets to loans held-for-investment.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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.
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Financial Condition
(Dollars in millions)
December 31,
2021 2020
(Dollars in millions)
Assets
Cash and cash equivalents $ 213 $ 304
Investment in subsidiaries (1) 2,871 2,551
Other assets 39 17
Total assets $ 3,123 $ 2,872
Liabilities and Stockholders’ Equity
Liabilities
Long-term debt $ 396 $ 641
Other liabilities 9 30
Total liabilities 405 671
Stockholders’ Equity
Common stock 1 1
Additional paid in capital 1,355 1,346
Accumulated other comprehensive income 35 47
Retained earnings 1,327 807
Total stockholders’ equity 2,718 2,201
Total liabilities and stockholders’ equity $ 3,123 $ 2,872
(1)Includes unconsolidated trusts of $7 million for December 31, 2021 and 2020.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Operations
(Dollars in millions)
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Income
Interest $ - $ 2 $ 4
Cash dividends received from subsidiaries 225 82 100
Total 225 84 104
Expenses
Interest 14 25 28
General and administrative 10 14 6
Total 24 39 34
Net income (loss) before undistributed income of subsidiaries 201 45 70
Equity in undistributed income of subsidiaries 324 484 142
Net income before income taxes 525 529 212
Benefit for income taxes (8) (9) (6)
Net income 533 538 218
Other comprehensive income (loss) (1) (12) 46 48
Comprehensive income $ 521 $ 584 $ 266
(1)See Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail.
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Cash Flows
(Dollars in millions)
For the Years Ended December 31,
2021 2020 2019
(Dollars in millions)
Net income $ 533 $ 538 $ 218
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed income of subsidiaries (549) (566) (241)
Dividends received from subsidiaries 225 82 104
Other (41) 34 10
Net cash provided by operating activities 168 88 91
Investing Activities
Net cash provided by investing activities - - -
Financing Activities
Stock buyback - (150) (50)
Repayment of long-term debt (246) (4) -
Proceeds from issuance of long-term debt - 150 -
Debt issuance costs - (2) -
Dividends declared and paid (13) (11) (9)
Net cash used in financing activities (259) (17) (59)
Net increase in cash and cash equivalents (91) 71 32
Cash and cash equivalents, beginning of year 304 233 201
Cash and cash equivalents, end of year $ 213 $ 304 $ 233

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.

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ITEM 9A. CONTROLS AND PROCEDURES
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 Exchange Act, 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 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, 2021 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 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
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, Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021, 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, 2021 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, 2021, has been audited by PricewaterhouseCoopers, LLP, our independent registered public accounting firm, as stated in their report, included herein.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 2022 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.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained in our Proxy Statement relating to the 2022 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.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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 2022 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, 2021.
Plan Category 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
Equity compensation plans approved by security holders - Restricted Stock Units (2) 600,573 $ 36.61 1,351,275
Equity compensation plans not approved by security holders - - -
Total 600,573 $ 36.61 1,351,275
(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.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 2022 Annual Meeting of Stockholders and is hereby incorporated by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be contained in our Proxy Statement relating to the 2022 Annual Meeting of Stockholders and is hereby incorporated by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) - Financial Statements and Schedules
The information required by these sections of Item 15 are set forth in the Index to Consolidated Financial Statements under Item 8. of this annual report on Form 10-K.
(3) - Exhibits
The following documents are filed as a part of, or incorporated by reference into, this report:
Exhibit No. Description
2.1* Agreement and Plan of Merger, dated April 24, 2021, among New York Community Bancorp, Inc., 615 Corp., and Flagstar Bancorp, Inc. (previously filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated April 26, 2021, and incorporated herein by reference).
3.1* 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* 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).
4.1* Indenture, dated October 28, 2020, between Flagstar Bancorp, Inc. and Wilmington Trust, National Association, as Trustee (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated October 28, 2020, and incorporated herein by reference).
4.2* First Supplemental Indenture, dated October 28, 2020, between Flagstar Bancorp, Inc. and Wilmington Trust, National Association, as Trustee (previously filed as Exhibit 4.2 to the Company's Current Report on Form 8-K, dated October 28, 2020, and incorporated herein by reference).
4.3* Form of 4.125% Fixed-to-Floating Rate Subordinated Note due 2030 (included in Exhibit 4.2).
4.4* Description of Rights of Shareholders (previously filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for the period ended December 31, 2020, and incorporated herein by reference).
10.1*+ 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.
10.2*+ 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.
10.3*+ Amendment to the Employment Agreement dated as of September 4, 2020, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated March 31, 2021, incorporated herein by reference).
10.4*+ 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).
10.5*+ 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).
10.6*+ 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).
Exhibit No. Description
10.7*+ 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).
10.8*+ 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).
10.9*+ Form of Change in Control Agreement as between Flagstar Bancorp, Inc., Flagstar Bank, FSB and James K. Ciroli, Stephen Figliuolo, Reginald Davis and Karen Buck (previously filed as Exhibit 10.12 to the Company's' Annual Report on Form 10-K for the period ended December 31, 2020, and incorporated herein by reference).
10.10*+ Non-Competition and Non-Solicitation Agreement, dated April 24, 2021, by and between Flagstar Bancorp, Inc. and Alessandro DiNello (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated April 26, 2021, and incorporated herein by reference).
21 List of Subsidiaries of the Company.
23 Consent of PricewaterhouseCoopers, LLP.
31.1 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Financial Officer.
32.1 Section 906 Certification of Chief Executive Officer.
32.2 Section 906 Certification of Chief Financial Officer.
101 Financial statements from Annual Report on Form 10-K of the Company for the year-ended December 31, 2021, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (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.