Notes to Financial Statements
December 31, 2016 and 2015
Note 1 — Description of Plan
The following description of the Flagstar Bank 401(k) Plan (the "Plan") provides only general information. Participants should refer to the plan document for a more complete description of the Plan’s provisions.
General
The Plan is a defined contribution plan available to all employees of Flagstar Bancorp, Inc. (the "Company") who have met the service eligibility requirements, as defined in the Plan document. The Plan was amended on April 29, 2016, with no minimum age for participation in the Plan.
Contributions
As defined in the Plan document, eligible employees may contribute up to 60 percent of their eligible compensation to the Plan in
2016
and
2015
, not to exceed the annual Internal Revenue Service ("IRS") dollar limitation of
$18,000
for both
2016
and
2015
. Participants who are age 50 or over at the end of the calendar year, were also able to make additional contributions of up to
$6,000
for both the years ended December 31,
2016
and
2015
. Certain participants were also able to contribute amounts representing rollover contributions from other qualified defined benefit or defined contribution plans. The Plan was amended as of April 29, 2016, to adjust the non-discretionary matching contribution in an amount equal to
50 percent
of qualified earnings contributed by the participant to the Plan, subject to the maximum of
four percent
of the participant's eligible compensation contributed to the Plan. Prior to the effective date of the amendment, matching contributions were subject to a maximum of three percent of the participant's eligible compensation contributed to the Plan. The Company made
$2,905,748
and
$2,319,101
of non-discretionary matching contributions to the Plan in
2016
and
2015
, respectively. The Company may also make discretionary contributions to the Plan. No discretionary contributions were made in
2016
and
2015
. All contributions are invested in accordance with the participant’s directive.
Effective January 1, 2017, the Plan was amended to adjust the non-discretionary matching contribution in an amount equal to
50 percent
of qualified earnings contributed by the participant to the Plan, subject to the maximum of
five percent
of the participant's eligible compensation contributed to the Plan.
Vesting
Participants are immediately vested in their voluntary contributions and related earnings. The Plan was amended as of April 29, 2016, to a three-year graded vesting schedule for employer provided contributions which provides
33 percent
vesting credit after one year of credited service,
66 percent
vesting credit after two years of credited service, and
100 percent
vesting credit after three years of credited service for participants who were actively employed as of April 29, 2016. Plan participants whose employment terminated on or before April 28, 2016 are subject to the five-year graded vesting schedule for employer provided contributions and receives 20 percent credit for each year employed by the Company. Plan participants who were employed by the Company for four years as of April 29, 2016 are considered fully vested for employer contributions.
Participant accounts
Individual accounts are maintained for each of the Plan’s participants. Each participant’s account is credited with the participant’s contributions, the Company contributions made on the participant’s behalf and an allocation of the Plan's earnings based on the participant’s share of net earnings or losses of their respective elected investment options. A participant is entitled to the benefit in the participant’s vested account.
Notes receivable from participants
Notes receivable from participants ("loans") are permitted by the Plan. Participants may borrow a minimum of
$1,000
up to the lesser of
$50,000
or
50 percent
of the participant’s vested account balance, reduced by the highest outstanding loan balance in the preceding 12 months. All loans bear a rate of interest based upon the prime rate at the time the loan is issued, plus 1 percent. A participant may continue to contribute to the Plan while they have an outstanding loan balance. Loans are classified as notes receivable from participants, segregated from plan investments and recorded at unpaid principal balance plus any accrued but unpaid interest. Loans are repaid in level payments through after-tax payroll deductions over a five-year
period, or up to 10 years where the loan was used for the purchase of a primary residence. Payments are applied to the outstanding unpaid principal and accrued interest balance and subsequently reinvested in the investment funds elected for current contributions. Upon default, termination of employment or death, loans must be repaid or rolled over within 60 days, or a taxable distribution will be declared. The Plan was amended April 29, 2016, to allow participants who terminate employment to continue to repay their loan. Other loan provisions may apply as defined by the Plan document.
Investment options
Upon enrollment in the Plan, a participant may direct contributions in
one percent
increments in any of the available investment options. Participants may change their designation daily.
Payment of benefits
Upon termination of services, retirement, attainment of age 59-1/2, death or disability, the participant or their beneficiaries are entitled to receive a distribution or rollover to an IRA or other eligible plan in a single lump sum amount equal to the vested amount of their account. On April 29, 2016, the Plan was amended to allow participants who have attained age 59-1/2 to request partial withdrawals. A participant may also receive a distribution of his or her vested account balance in the case of financial hardship is subject to the Internal Revenue Service regulations.
Forfeitures
If a participant terminates employment, any non-vested Company provided portion of the participant’s account may be forfeited. Forfeitures occur in the year of distribution of the entire vested account, or if there is no distribution, after five consecutive one-year breaks in service. Forfeitures are applied to plan expenses and any amounts remaining are then used to reduce the contributions of the Company. The unapplied balance of forfeited non-vested accounts was
$6,210
and
$164,203
at
December 31, 2016 and 2015
, respectively. The forfeitures are applied to reduce administrative expenses or employer contributions. During
2016
, administrative expenses were reduced by
$80,623
and employer contributions were reduced by
$372,146
due to forfeitures. During
2015
, administrative expenses were reduced by
$4,120
and employer contributions were reduced by
$175,985
due to forfeitures.
Administrative expenses
The Company pays some of the Plan’s administrative expenses. Fees associated with loan distributions, withdrawals and investment transactions are paid by the participants. Administrative expenses include investment management service fees, recordkeeping, legal fees, and audit fees.
Plan termination
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time or to terminate the Plan, subject to provisions of the Internal Revenue Code ("IRC") and Employee Retirement Income Security Act of 1974 ("ERISA"). In the event of termination of the Plan, the net assets of the Plan shall be distributed to all participants to the extent of the value of each participant’s account after adjustment for liquidation expenses, which would not be paid by the Company. In the event of the Plan's termination, participants would become 100 percent vested in the Company contributions made on the participant's behalf.
Note 2 — Summary of Accounting Policies
A summary of the significant accounting polices consistently applied in the preparation of the accompanying financial statements follows:
Basis of accounting
The accompanying financial statements have been prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Investment valuation and income recognition
Investments are stated at fair value using the methods described in Note 3. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
Participants may elect to contribute to the Managed Income Portfolio, a common trust fund of the Fidelity Group Trust for the Plan (the "Managed Income Portfolio Fund").
Purchases and sales of securities are recorded on a trade-date basis. Realized gains and losses are reported based on the average cost of securities sold. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Payment of benefits
Benefits are recorded when they have been approved for payment and distributed by the Plan.
Notes receivable from participants
Notes receivable from participants are valued at their unpaid principal balance, plus any accrued but unpaid interest. Delinquent notes receivable from participants are recorded as distributions based on the terms of the plan document. The plan document states that any scheduled repayment that remains unpaid at the end of the cure period specified in the loan procedures will be considered delinquent, unless a waiver is granted for a participant who is on a leave of absence.
Recently adopted accounting standards
In May 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-07,
Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its equivalent)
. The amendments in this ASU remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient pursuant to Accounting Standards Codification ("ASC") 820,
Fair Value Measurement
. Instead, those investments must be included as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. Note 3 - Fair Value Measurements reflects the presentation required by ASU 2015-07. Further, the ASU specifies that, for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. ASU 2015-07 was adopted as of January 1, 2016, and did not have a material impact on the Plan's financial statements.
In July 2015, the FASB issued ASU No. 2015-12,
Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965) - I. Fully Benefit-Responsive Investment Contracts; II. Plan Investment Disclosures, and III. Measurement Date Practical Expedient
. Part I requires fully-benefit responsive investment contracts to be measured, presented, and disclosed only at contract value. Part II requires that investments that are measured using fair value (both participant-directed and nonparticipant-directed investments) be grouped only by general type, eliminating the need to disaggregate the investments by nature, characteristics, and risks. Part II also eliminates the disclosure of individual investments that represent 5 percent or more of net assets available for benefits and the disclosure of net appreciation or depreciation for investments by general type, requiring only presentation of net appreciation or depreciation in investments in the aggregate. Additionally, if an investment is measured using the net asset value per share as a practical expedient and that investment is a fund that files a U.S. Department of Labor Form 5500, as a direct filing entity, disclosure of that investment's strategy is no longer required. Part III of the update permits plans to measure investments and investment-related accounts (e.g., a liability for a pending trade with a broker) as of a month-end date that is closest to the plan's fiscal year-end, when the fiscal period does not coincide with month-end. Part III is not applicable to the Plan. ASU 2015-12 was adopted as of January 1, 2016, and did not have a material impact on the Plan's financial statements.
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Plan as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Plan's financial statements or the Notes thereto.
Subsequent Events
There are no subsequent events requiring recognition or disclosure based upon management's evaluation through the filing date of this Form 11-K.
Note 3 — Fair Value Measurements
U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active markets and the lowest priority to unobservable inputs where no active market exists, as discussed below.
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which we can participate as of the measurement date;
Level 2 - Quoted prices for similar instruments in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3 - Unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following is a description of the valuation methodologies used by the Plan for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. The Plan had no Level 2 or Level 3 investments as of
December 31, 2016 and 2015
.
Flagstar Bancorp, Inc. common stock.
Valued at the closing price at year-end reported on the active market on which the security is traded and are therefore classified within the Level 1 valuation hierarchy.
Interest-bearing cash
. Valued at cost and classified within Level 1 of the valuation hierarchy.
Mutual funds.
Valued at the net asset value of the shares held by the Plan at year end. The net asset value is based on the fair value of the underlying assets of the assets of the trust, minus its liabilities divided by the number of units outstanding and represents the exit price and are therefore classified within the Level 1 valuation hierarchy. These funds are required to publish their daily net asset value and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded.
Money market funds.
Valued at cost which approximates the net asset value of the shares held by the Plan at year end and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Money market funds are traded in active markets at their net asset value per share and are classified within Level 1 of the valuation hierarchy. This fund publishes its daily net asset value and transacts at that price. The money market fund is deemed to be actively traded.
Common collective trust fund.
Valued as the sum of (a) the fair value of the investments in managed income portfolio fund and (b) the fair value of the fund's investments in externally managed collective investment funds as determined by those funds' trustees. The common collective trust fund represent deposits which guarantee a stated interest rate for the term of the contracts. Valued at the unit value, which is based on the aggregate current fair values of the underlying assets in relation to the total number of units outstanding. Unit value, of the equivalent of net asset value, is a practical expedient for estimating the fair values of those investments.
The following table presents the Plan’s investments carried at fair value by valuation hierarchy (as described above):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
Investments measured at NAV
(1)
|
|
Total
|
|
Flagstar Bancorp, Inc. common stock
|
|
$
|
5,704,356
|
|
|
$
|
—
|
|
|
$
|
5,704,356
|
|
|
Interest-bearing cash
|
|
159,175
|
|
|
—
|
|
|
159,175
|
|
|
Mutual funds
|
|
128,640,157
|
|
|
—
|
|
|
128,640,157
|
|
|
Money market funds
|
|
6,474,513
|
|
|
—
|
|
|
6,474,513
|
|
|
Common collective trust fund
|
|
—
|
|
|
2,441,319
|
|
|
2,441,319
|
|
|
Investments, at fair value
|
|
$
|
140,978,201
|
|
|
$
|
2,441,319
|
|
|
$
|
143,419,520
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
Investments measured at NAV
(1)
|
|
Total
|
|
Flagstar Bancorp, Inc. common stock
|
|
$
|
5,548,087
|
|
|
$
|
—
|
|
|
$
|
5,548,087
|
|
|
Interest-bearing cash
|
|
411,363
|
|
|
—
|
|
|
411,363
|
|
|
Mutual funds
|
|
112,399,009
|
|
|
—
|
|
|
112,399,009
|
|
|
Money market funds
|
|
5,439,924
|
|
|
—
|
|
|
5,439,924
|
|
|
Common collective trust fund
|
|
—
|
|
|
1,935,259
|
|
|
1,935,259
|
|
|
Investments, at fair value
|
|
$
|
123,798,383
|
|
|
$
|
1,935,259
|
|
|
$
|
125,733,642
|
|
|
|
|
|
(1)
|
Investments measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the line items presented in the Statements of Net Assets Available for Benefits.
|
The following table summarizes investments for which fair value is measured using the NAV per share practical expedient. There are no participant redemption restrictions for these investments; the redemption notice period is applicable only to the Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Fair Value
|
|
Unfunded Commitments
|
|
Redemption Frequency
|
|
Redemption Notice Period
|
|
Common collective trust fund
|
|
$
|
2,441,319
|
|
|
N/A
|
|
Daily
|
|
90 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Fair Value
|
|
Unfunded Commitments
|
|
Redemption Frequency
|
|
Redemption Notice Period
|
|
Common collective trust fund
|
|
$
|
1,935,259
|
|
|
N/A
|
|
Daily
|
|
90 days
|
Note 4 — Parties-In-Interest
Parties-in-interest are defined under Department of Labor regulations as any fiduciary of the Plan, any party rendering service to the Plan, the employer and certain other parties.
Certain plan investments are shares of mutual funds managed by Fidelity Management Trust Company. Fidelity Management Trust Company is the trustee as defined by the plan document and, therefore, those transactions qualify as party-in-interest transactions. Pursuant to the plan document, the Company may pay a portion of the administrative fees of the Plan, at its discretion. Fees recognized by the Company amounted to an expense reduction of
$60,026
and an expense of
$5,181
for the years ended
December 31, 2016 and 2015
, respectively.
In addition, the Plan trades in the common stock of the Company. The Plan held
211,743
and
240,073
shares of Flagstar Bancorp, Inc. common stock as of
December 31, 2016 and 2015
, respectively. During
2016
and
2015
, Flagstar Bancorp, Inc. did not declare or pay any common stock dividends.
At times, the Plan receives a revenue credit from Fidelity Management Trust Company. A revenue credit program is a refund of a portion of the revenue Fidelity and other fund managers have received based on the funds participants have chosen. This credit is reflected in "other income" on the Statements of Changes in Net Assets Available for Benefits. Certain recordkeeping fees and other Plan fees are paid through the revenue credit program. For the years ended
December 31, 2016 and 2015
,
$10,000
and
$30,000
of other income was paid under this revenue credit program and was used to pay administrative expenses in
2016
and
2015
, respectively.
Note 5
—
Tax Status
The Plan utilizes the volume submitter document offered by Fidelity Management Trust Company. Although the Plan itself has not obtained a determination letter from the IRS, the volume submitter plan has received a favorable opinion letter dated March 31, 2014 from the IRS. The Plan has been amended since receiving the opinion letter. The plan administrator and the Company believe that the Plan, as amended, is designed and being operated in compliance with the applicable requirements of the Internal Revenue Code. Therefore, the plan administrator and the Company believe that the Plan was qualified and the related trust was tax-exempt as of December 31, 2016. Therefore, no provision for income taxes is included in the Plan’s financial statements. Participants are generally subject to income taxes when contributions and earnings are distributed as benefits from the Plan.
U.S. GAAP requires the Plan administrator to evaluate tax positions taken by the Plan and recognize a tax liability (tax asset) if the Plan has taken an uncertain tax position that more likely than not would not be sustained upon examination by the IRS. The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of
December 31, 2016 and 2015
, there were no uncertain tax positions taken or expected to be taken. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Plan administrator believes it is no longer subject to income tax examination for years prior to the year ended December 31, 2013.
Note 6 — Risks and Uncertainties
The Plan provides for various investment options in any combination of equity securities, bonds, fixed income securities and other investments with market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the financial statements.
As of
December 31, 2016 and 2015
, Plan assets representing more than 10 percent of the total investments included
$18,115,908
and
$16,776,994
, respectively, invested in a mutual fund.
Note 7 — Reconciliation of Financial Statements to Form 5500
Reconciliation of Statements of Net Assets Available for Benefits per the financial statements to the Form 5500:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
Net assets available for benefits per financial statements
|
|
$
|
146,881,629
|
|
|
$
|
129,319,422
|
|
|
Adjustment to fair value from contract value for common collective trust fund
|
|
6,008
|
|
|
13,216
|
|
|
Net assets available for benefits per Form 5500
|
|
$
|
146,887,637
|
|
|
$
|
129,332,638
|
|
Reconciliation of the activity reported within the Statements of Changes in Net Assets Available for Benefits per the financial statements to the Form 5500:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
Net increase in net assets available for benefits per financial statements
|
|
$
|
17,562,207
|
|
|
Change in adjustment to fair value from contract value for common collective trust fund
|
|
(7,208
|
)
|
|
Net income per Form 5500
|
|
$
|
17,554,999
|
|
Supplemental Schedule