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Annual Report 2014
Local matters.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-16577
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction of incorporation or organization)
5151 Corporate Drive, Troy, Michigan
(Address of principal executive offices)
38-3150651
(I.R.S. Employer Identification No.)
48098-2639
(Zip Code)
Registrant’s telephone number, including area code: (248) 312-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Securities registered pursuant to Section 12(g) of the Act: None
Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in
Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The estimated aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by
reference to the closing sale price ($18.00 per share) as reported on the New York Stock Exchange on June 30, 2014, was approximately
$373.6 million. The registrant does not have any non-voting common equity shares.
As of March 12, 2015, 56,436,026 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.
Portions of the registrant’s Proxy Statement relating to the 2015 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
PART I
BUSINESS
RISK FACTORS
ITEM 1.
ITEM 1A.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
ITEM 6.
ITEM 7.
MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
CONTROLS AND PROCEDURES
ITEM 9A.
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
2
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, as amended. Forward-looking statements are based on management’s current expectations and assumptions regarding
the Company’s business and performance, the economy and other future conditions, and forecasts of future events,
circumstances and results. However, they are not guarantees of future performance and are subject to known and unknown
risks, uncertainties, contingencies and other factors. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking
statements The Company’s actual results or outcomes may vary materially from those expressed or implied in a forward-
looking statement. Accordingly, we cannot and do not provide you with any assurance that our expectations will in fact occur or
that actual results will not differ materially from those expressed or implied by such forward-looking statements. In light of the
significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should
not be regarded as a representation by us or any other person that the results or conditions described in such statements or our
objectives and plans will be achieved.
Factors that could cause future results to differ materially from historical performance and these forward-looking
statements include, but are not limited to, the following items:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
General business and economic conditions, including unemployment rates, movements in interest rates, the
slope of the yield curve, any increase in mortgage fraud and other related activity and the changes in asset
values in certain geographic markets, that affect us or our counterparties;
Volatile interest rates, and our ability to effectively hedge against them, which could affect, among other
things, (i) the overall mortgage business, (ii) our ability to originate or acquire loans and to sell assets at a
profit, (iii) prepayment speeds, (iv) our cost of funds and (v) investments in mortgage servicing rights;
The adequacy of our allowance for loan losses and our representation and warranty reserves;
Changes in accounting standards generally applicable to us and our application of such standards, including
in the calculation of the fair value of our assets and liabilities;
Our ability to borrow funds, maintain or increase deposits or raise capital on commercially reasonable terms
or at all and our ability to achieve or maintain desired capital ratios;
Changes in material factors affecting our loan portfolio, particularly our residential mortgage loans, and the
market areas where our business is geographically concentrated or further loan portfolio or geographic
concentration;
Changes in, or expansion of, the regulation of financial services companies and government-sponsored
housing enterprises, including new legislation, regulations, rulemaking and interpretive guidance,
enforcement actions, the imposition of fines and other penalties by our regulators, the impact of existing laws
and regulations, new or changed roles or guidelines of government-sponsored entities, changes in regulatory
capital ratios, and increases in deposit insurance premiums and special assessments of the Federal Deposit
Insurance Corporation;
Our ability to comply with the terms and conditions of the Supervisory Agreement with the Board of
Governors of the Federal Reserve and the Bank’s ability to comply with the Consent Order of the Office of
Comptroller of the Currency and the Consent Order of the Consumer Financial Protection Bureau and our
ability to address any further matters raised by these regulators, and other regulators or government bodies;
Our ability to comply with the terms and conditions of the agreement with the U.S. Department of Justice and
the impact of compliance with that agreement and our ability to accurately estimate the financial impact of
that agreement, including the fair value and timing of the future payments;
The Bank’s ability to make capital distributions and our ability to pay dividends on our capital stock or
interest on our trust preferred securities;
Our ability to attract and retain senior management and other qualified personnel to execute our business
strategy, including our entry into new lines of business, our introduction of new products and services and
3
(12)
(13)
(14)
management of risks relating thereto, and our competing in the mortgage loan originations, mortgage
servicing and commercial and retail banking lines of business;
Our ability to satisfy our mortgage servicing and subservicing obligations and manage repurchases and
indemnity demands by mortgage loan purchasers, guarantors and insurers;
The outcome and cost of defending current and future legal or regulatory litigation, proceedings or
investigations;
Our ability to create and maintain an effective risk management framework and effectively manage risk,
including, among other things, market, interest rate, credit and liquidity risk, including risks relating to the
cyclicality and seasonality of our mortgage banking business, litigation and regulatory risk, operational risk,
counterparty risk and reputational risk;
(15)
The control by, and influence of, our majority stockholder;
(16)
(17)
(18)
(19)
A failure of, interruption in or cybersecurity attack on our network or computer systems, which could impact
our ability to properly collect, process and maintain personal data, ensure ongoing mortgage and banking
operations, or maintain system integrity with respect to funds settlement;
Our ability to meet our forecasted earnings such that we would need to establish a valuation allowance
against our deferred tax asset;
Any adverse effects on our business as a result of the restatement of our Consolidated Statements of Cash
Flows for certain prior periods included herein, including potential adverse regulatory consequences, negative
publicity and reactions from our stockholders, creditors or others with which we do business, investor
litigation, impacts on our stock price and other potential consequences; and
Our ability to remediate the material weakness in our internal control over financial reporting discussed
herein and to implement effective internal control over financial reporting and disclosure controls and
procedures in the future and the risk of future misstatements in our financial statements if we do not complete
our remediation in a timely manner or if our remediation plan is inadequate.
Factors that may cause future results to differ materially from historical performance and from forward-looking
statements, including but not limited to the factors listed above, may be difficult to predict, may contain uncertainties that
materially affect actual results, and may be beyond our control. Also, new factors emerge from time to time, and it is not
possible for our management to predict the occurrence of all such factors or to assess the effect of each such factor, or the
combined effect of several of the factors at one time, on our business. Any forward-looking statement speaks only as of the date
on which it is made. Except to fulfill our obligations under the U.S. securities laws, we undertake no obligation to update any
such statement to reflect events or circumstances after the date on which it is made.
Please also refer to Part I, Item 1A of this Annual Report on Form 10-K, which is incorporated by reference herein, for
further information on these and other factors affecting us.
4
PART I
EXPLANATORY NOTE
In this Annual Report on Form 10-K for the year ended December 31, 2014 (the "2014 Form 10-K"), Flagstar
Bancorp, Inc. is restating our previously reported financial information as filed with the Securities and Exchange Commission
(the "SEC") on March 5, 2014 (the "2013 Form 10-K") to correct our audited consolidated financial statements as of and for the
year ended December 31, 2013 in Part II - Item 8. Financial Statements and Supplementary Data as it relates to the year ended
December 31, 2013.
During the process of compiling the Consolidated Statement of Cash Flows for the 2014 Form 10-K, we became aware
of presentation errors in cash flows from operating, financing and investing activities in the Consolidated Statements of Cash
Flows impacting the annual period ending December 31, 2013 and our quarterly reports on Form 10-Q for the three months
ended March 31, 2014 and 2013, the six months ended June 30, 2014 and 2013, and the nine months ended September 30, 2014
and 2013 (collectively, "the Form 10-Qs"). The Company reviewed the impact on the prior period financial statements and
determined that this was material to those financial statements. We have presented the Statements of Cash Flows for the periods
included in those Form 10-Qs in the footnotes to the financial statements within our 2014 Form 10-K. We have restated the
Company’s 2013 Consolidated Statement of Cash Flows.
For further detail on the financial statement impacts and the adjustments made, see Notes 1 and 27 of the Consolidated
Financial Statements included in Part II - Item 8. Financial Statements and Supplementary Data.
Management has assessed the effectiveness of our internal control over financial reporting and has determined that a
material weakness in our internal controls existed at December 31, 2014 related to the Statements of Cash Flows. For a
description of this matter and the steps taken to remediate that material weakness, see Part II - Item 9A. Controls and
Procedures of this report.
5
ITEM 1.
BUSINESS
Where we say "we," "us," or "our," we usually mean Flagstar Bancorp, Inc. However, in some cases, a reference to
"we," "us," or "our" will include our wholly-owned subsidiary Flagstar Bank, FSB (the "Bank").
General
We are a Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted
through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. At December 31, 2014,
our total assets were $9.8 billion, making us the largest bank headquartered in Michigan and one of the top ten largest savings
banks in the United States. Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "FBC."
We are considered a controlled company for NYSE purposes, because MP Thrift Investments, L.P. ("MP Thrift") held
approximately 63.2 percent of our common stock as of December 31, 2014.
In January 2014, we reorganized the manner in which our operations are managed based on core operating functions.
The segments are based on an internally-aligned segment leadership structure, consistent with how the results are monitored
and performance is assessed by management. We expect that the combination of our business model and the services that our
operating segments provide will result in a competitive advantage that supports revenue and earnings.
Our Mortgage Originations segment originates or purchases residential mortgage loans throughout the country and
sells them into securitization pools, to the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and the Government National Mortgage Association ("Ginnie Mae") (collectively, the
"Agencies") or as whole loans. The majority of our total loan originations during the year ended December 31, 2014
represented mortgage loans that were collateralized by residential mortgages on single-family residences and were eligible for
sale to the Agencies. Our revenue primarily consists of net gain on loan sales, loan fees and charges and interest income from
residential mortgage loans held-for-sale. At December 31, 2014, we originated residential mortgage loans through our
wholesale relationships with approximately 600 mortgage brokers and approximately 750 correspondents, which were located
in all 50 states. At December 31, 2014, we also operated 16 home loan centers located in 13 states, which primarily originate
one-to-four family residential mortgage loans as part of our Mortgage Originations segment. The combination of our home
lending, broker and correspondent channels gives us broad access to customers across diverse geographies to originate, fulfill,
sell and service our residential mortgage loan products. We also originate mortgage loans through referrals from our banking
centers, consumer direct call center and our website, www.flagstar.com.
Our Mortgage Servicing segment activities primarily consist of collecting cash for principal, interest and escrow
payments from borrowers, assisting homeowners through loss mitigation activities, and accounting for and remitting principal
and interest payments to mortgage-backed securities investors and escrow payments to third parties. These activities are
performed on a fee basis for third party mortgage servicing rights holders, residential mortgages held for investment by the
Community Banking segment and mortgage servicing rights held by the Other segment. Our revenue primarily consists of loan
administration income and net interest income from residential mortgage loans held-for-sale.
Our Community Banking segment revenues include net interest income and fee-based income from community
banking services, including a national warehouse lending business. At December 31, 2014, we operated 107 banking centers in
Michigan (of which eight were located in third-party retail stores). Of the 107 banking centers, 71 facilities are owned and 36
facilities are leased. Through our banking centers, we gather deposits and offer a line of consumer and commercial financial
products and services to individuals and businesses. We leverage our banking centers to cross-sell loans, deposit products and
other services to existing customers and to increase our customer base by attracting new customers.
At December 31, 2014, we had 2,739 full-time equivalent salaried employees of which 209 were account executives
and loan officers.
Lending Activities
Our principal lending activity has been the origination of residential first mortgage, second mortgage HELOC and
commercial loans generally located within our primary market and service areas.
Residential first mortgage loans. We originate residential first mortgage loans that are both held-for-investment and
held-for-sale. Residential first mortgage loans representing loans held-for-investment are generally made to consumers for the
purchase or refinance of a residence. These loans are generally financed over a 15-year to 30-year term and, in most cases, are
6
extended to borrowers to finance their primary residence. Applications are underwritten centrally using consistent credit
policies and processes. All residential first mortgage loan decisions utilize a full appraisal for collateral valuation.
Second mortgage loans. The majority of second mortgages we originate are closed in conjunction with the closing of
the residential first mortgages originated by us. We generally require the same levels of documentation and ratios as with our
residential first mortgages.
Home Equity Line of Credit ("HELOC") loans. HELOC guidelines and pricing parameters have been established to
attract high credit quality loans with long term profitability. HELOCs, which are secured by a first-lien or junior-lien on the
borrower’s residence, allow customers to borrow against the equity in their homes or refinance existing mortgage debt.
Applications are underwritten centrally in conjunction with an automated underwriting system. The HELOC underwriting
criteria is based on minimum credit scores, debt-to-income ratios, and LTV ratios, with current collateral valuations.
Commercial loans held-for-investment. Commercial loans include commercial real estate, commercial and industrial
and commercial lease financing loans. Commercial real estate loans consist of loans to developers and support income
producing or for-sale commercial real estate properties. These loans are made to finance properties such as apartment buildings,
office and industrial buildings, and retail shopping centers, and are repaid through cash flows related to the operation, sale, or
refinance of the property. Commercial and industrial loans and financing leases are made to commercial customers for use in
normal business operations to finance working capital needs, equipment purchases, or other projects. Warehouse loans are lines
of credit to other mortgage lenders. The majority of these borrowers are customers doing business within our geographic
regions.
Deposits
Through our banking centers, we gather deposits and offer a line of consumer and commercial financial products and
services to individuals, local municipalities and businesses. We continue to focus our efforts towards the growth of our core
deposits, which includes checking, savings and money market deposit accounts. We believe core deposits represent a more
stable funding source. See Note 13 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and
Supplementary Data, herein, for more information regarding deposits.
Borrowed funds
The Federal Home Loan Bank provides loans, also referred to as advances, on a fully collateralized basis, to savings
banks and other member financial institutions. We are currently authorized through a resolution of our board of directors to
apply for advances from the Federal Home Loan Bank using approved loan types as collateral.
We have arrangements with the Federal Reserve Bank of Chicago to borrow as appropriate from its discount window.
The discount window is a borrowing facility that is intended to be used only for short-term liquidity needs arising from special
or unusual circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we
provide. To collateralize the line, we pledge commercial and industrial loans that are eligible based on Federal Reserve Bank of
Chicago guidelines.
Non-bank Subsidiaries
At December 31, 2014, our corporate legal structure consisted of the Bank, including its wholly-owned subsidiaries
(which include two consolidated variable interest entities ("VIEs")) and wholly-owned non-bank subsidiaries through which we
conduct other non-material business or which are inactive. We also own nine statutory trusts that are not consolidated with our
operations. For additional information, see Notes 1, 8 and 26 of the Notes to the Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data.
Regulation and Supervision
The banking industry is highly regulated. Statutory and regulatory controls are designed primarily for the protection of
depositors and the financial system, and not for the purpose of protecting our shareholders. The following discussion is not
intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on
us and the Bank. Changes in applicable laws or regulations, and in their interpretation and application by regulatory agencies,
cannot be predicted and may have a material effect on our business and results.
7
The Bank is a savings and loan holding company. We are subject to regulation, examination and supervision by the
Board of Governors of the Federal Reserve (the "Federal Reserve"), the Office of the Comptroller of the Currency ("OCC") of
the U.S. Department of the Treasury ("U.S. Treasury"), and the Federal Deposit Insurance Corporation ("FDIC"). The Bank's
deposits are insured by the FDIC through the Deposit Insurance Fund.
Regulatory Capital Requirements
Currently, the OCC has risk-based capital adequacy guidelines intended to measure capital adequacy with regard to the
degree of risk associated with a banking organization’s operations for transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, that are reported as off-balance-sheet items. The Bank is
required to comply with these capital adequacy standards. Because these rules do not apply to savings and loan holding
companies, our holding company is currently not required to comply with these rules. Federal law and regulations establish five
levels of capital compliance: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized.
At December 31, 2014, the Bank was considered "well-capitalized" for regulatory purposes, with regulatory capital
ratios of 22.54 percent for Tier 1 capital to risk-weighted assets, 23.85 percent for total capital to risk-weighted assets, and
12.43 percent for the leverage ratio of Tier 1 capital to total assets. An institution is considered well-capitalized if its ratio of
total risk-based capital to risk-weighted assets is 10.0 percent or more, its ratio of Tier 1 capital to risk-weighted assets is 6.0
percent or more, and its leverage ratio of Tier 1 capital to total assets is 5.0 percent or more. Any institution that is not well
capitalized or adequately-capitalized is considered undercapitalized. Any institution with a tangible equity ratio of 2.0 percent
or less is considered critically undercapitalized.
The Bank is currently subject to regulatory capital rules based on the framework established by the 1988 capital
accord ("Basel I") of the Basel Committee on Banking Supervision. Savings and loan holding companies are not subject to the
Basel I capital requirements. In 2013, the OCC and Federal Reserve adopted a final rule ("Basel III") that replaces their existing
risk-based and leverage capital rules. Effective January 1, 2015, the Bank and the Holding Company are subject to the capital
requirements of the Basel III rules.
The capital framework under the Basel III final rule replaces the existing regulatory capital rules for all banks, savings
associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding
companies. Effective on January 1, 2015, the final rules require the Bank and the Holding Company to maintain Tier 1 capital
of at least 6 percent of risk-weighted assets and off-balance sheet items, total capital (the sum of Tier 1 capital and Tier 2
capital) of at least 8 percent of risk-weighted assets and off-balance sheet items, and Tier 1 capital of at least 4 percent of
adjusted quarterly average assets. In addition, for the Bank and the Holding Company the final rule implements a new common
equity Tier 1 minimum capital requirement of at least 4.5 percent of risk-weighted assets.
The new regulations subject a banking organization to certain limitations on capital distributions and discretionary
bonus payments to executive officers if the organization did not maintain a capital conservation buffer of common equity Tier 1
capital in an amount greater than 2.5 percent of its total risk-weighted assets. The effect of the capital conservation buffer will
be to increase the minimum common equity Tier 1 capital ratio to 7.0 percent, the minimum Tier 1 risk-based capital ratio to
8.5 percent and the minimum total risk-based capital ratio to 10.5 percent.
The new regulations grandfather the regulatory capital treatment of hybrid debt and equity securities, such as trust
preferred securities issued prior to May 19, 2010, for banks or holding companies with less than $15 billion in total
consolidated assets as of December 31, 2009. Although the Company may continue to include our existing trust preferred
securities as Tier 1 capital, the prohibition on the use of these securities as Tier 1 capital going forward may limit the
Company’s ability to raise capital in the future.
Various aspects of Basel III are subject to multi-year transition periods ending December 31, 2018. Basel III will
materially change our Tier 1, Tier 1 common and total capital calculations.
Consumer Financial Protection Bureau Settlement
On September 29, 2014, the Bank entered into a Consent Order with the Consumer Financial Protection Bureau (the
"CFPB"). The Consent Order relates to alleged violations of federal consumer financial laws arising from the Bank’s residential
first mortgage loan loss mitigation practices and default servicing operations dating back to 2011. Under the terms of the consent
order, the Bank has paid $27.5 million for borrower remediation and $10.0 million in civil money penalties. The settlement does
not involve any admission of wrongdoing on the part of the Bank or its employees, directors, officers or agents.
8
Consent Order
Effective October 23, 2012, the Bank's board of directors executed a Stipulation and Consent (the "Stipulation"),
accepting the issuance of a Consent Order (the "Consent Order") by the OCC. The Consent Order replaces the supervisory
agreement entered into between the Bank and the Office of Thrift Supervision (the "OTS") on January 27, 2010, which the
OCC terminated simultaneous with issuance of the Consent Order. We are still subject to the Supervisory Agreement with the
Board of Governors of the Federal Reserve (the "Supervisory Agreement").
Under the Consent Order, the Bank is required to adopt or review and revise various plans, policies and procedures
related to, among other things, regulatory capital, enterprise risk management and liquidity. Specifically, under the terms of the
Consent Order, the Bank's board of directors has agreed to, among other things, the following:
• Review, revise, and forward to the OCC a written capital plan for the Bank covering at least a three-year period and
establishing projections for the Bank's overall risk profile, earnings performance, growth expectations, balance sheet
mix, off-balance sheet activities, liability and funding structure, capital and liquidity adequacy, as well as a
contingency capital funding process and plan that identifies alternative capital sources should the primary sources not
be available;
• Adopt and forward to the OCC a comprehensive written liquidity risk management policy that systematically requires
the Bank to reduce liquidity risk; and
• Develop, adopt, and forward to the OCC a written enterprise risk management program that is designed to ensure that
the Bank effectively identifies, monitors, and controls its enterprise-wide risks, including by developing risk limits for
each line of business.
Each of the plans, policies and procedures referenced above in the Consent Order, as well as any subsequent
amendments or changes thereto, must be submitted to the OCC for a determination that the OCC has no supervisory objection
to them. Upon receiving a determination of no supervisory objection from the OCC, the Bank must implement and adhere to
the respective plan, policy or procedure. The foregoing summary of the Consent Order does not purport to be a complete
description of all of the terms of the Consent Order, and is qualified in its entirety by reference to the copy of the Consent Order
filed with the SEC as an exhibit to our Current Report on Form 8-K filed on October 24, 2012.
We intend to address the banking issues identified by the OCC in the manner required for compliance by the OCC.
There can be no assurance that the OCC will not provide substantive comments on the capital plan or other submissions that the
Bank makes pursuant to the Consent Order that will have a material impact on us. We believe that the actions taken, or to be
taken, to address the banking issues set forth in the Consent Order should, over time, improve our enterprise risk management
practices and risk profile. For further information regarding the risks related to the Consent Order, please also refer to Item 1A
to Part I of this Annual Report on Form 10-K.
Supervisory Agreement
We are subject to the Supervisory Agreement, dated January 27, 2010, which will remain in effect until terminated,
modified, or suspended in writing by the Federal Reserve. The failure to comply with the Supervisory Agreement could result in
the initiation of further enforcement action by the Federal Reserve, including the imposition of further operating restrictions. We
have taken actions which we believe are appropriate to comply with, and intend to maintain compliance with, all of the requirements
of the Supervisory Agreement.
Pursuant to the Supervisory Agreement, we submitted a capital plan to the OTS, predecessor in interest to the Federal
Reserve. In addition, we agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital
distributions; purchase, repurchase or redeem certain securities; incur, issue, renew, roll over or increase any debt; and enter
into certain affiliate transactions. We also agreed to comply with restrictions on the payment of severance and indemnification
payments, director and management changes and employment contracts and compensation arrangements. The foregoing
summary of the Supervisory Agreement does not purport to be a complete description of all of the terms of the Supervisory
Agreement and is qualified in its entirety by reference to the copy of the Supervisory Agreement filed with the SEC as an
exhibit to our Current Report on Form 8-K filed on January 28, 2010. For further information regarding the risks related to the
Supervisory Agreement, please also refer to Item 1A to Part I of this Annual Report.
9
Holding Company Status, Acquisitions and Activities
We are a unitary savings and loan holding company, as defined by federal banking law, as is our controlling
stockholder, MP Thrift. We may only conduct, or acquire control of companies engaged in, activities permissible for a savings
and loan holding company pursuant to the relevant provisions of the Savings and Loan Holding Company Act and relevant
regulations. Without prior written approval of the Federal Reserve, neither we, nor MP Thrift may: (i) acquire control of
another savings association or holding company thereof, or acquire all or substantially all of the assets thereof; or (ii) acquire or
retain, with certain exceptions, more than 5 percent of the voting shares of a non-subsidiary savings association or a non-
subsidiary savings and loan holding company. We are prohibited from acquiring control of a depository institution that is not
federally insured or retaining control of a savings association subsidiary for more than one year after the date that such
subsidiary becomes uninsured. Similarly, we may not be acquired by a bank holding company, or any company, unless the
Federal Reserve approves such transaction. In all situations, the public must have an opportunity to comment on any such
proposed acquisition, and the OCC or the Federal Reserve must complete an application review. In addition, the Gramm-Leach-
Bliley Act (the "GLBA") generally restricts any non-financial entity from acquiring us unless such non-financial entity was, or
had submitted an application to become, a savings and loan holding company on or before May 4, 1999.
Source of Strength
The Dodd-Frank Act codified the Federal Reserve’s “source of strength” doctrine and extended it to savings and loan
holding companies. Under the Dodd-Frank Act, the prudential regulatory agencies are required to promulgate joint rules
requiring bank holding companies and savings and loan holding companies to serve as a source of financial strength for any
depository institution subsidiary by maintaining the ability to provide financial assistance to such insured depository institution
in the event that it suffers financial distress.
Standards for Safety and Soundness
Federal law requires each U.S. bank regulatory agency to prescribe certain safety and soundness standards for all
insured financial institutions. To that end, the U.S. bank regulatory agencies adopted Interagency Guidelines Establishing
Standards for Safety and Soundness. These are used by the U.S. bank regulatory agencies to identify and address problems at
insured financial institutions before capital becomes impaired. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset
quality, compensation and benefits, earnings, and other operational and managerial standards as the agency deems appropriate.
In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. If the appropriate U.S. banking agency determines that an institution fails to meet any
standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard.
Qualified Thrift Lender
The Bank is required to meet a Qualified Thrift Lender ("QTL") test to avoid certain restrictions on operations,
including restrictions applicable to multiple savings and loan holding companies, restrictions on the ability to branch interstate,
and our mandatory registration as a bank holding company under the Bank Holding Company Act of 1956. A savings bank
satisfies the QTL test if: (i) on a monthly basis, for at least nine months out of each twelve month period, at least 65 percent of a
specified asset base of the savings bank consists of loans to small businesses, credit card loans, educational loans, or certain
assets related to domestic residential real estate, including residential mortgage loans and mortgage securities, as well as a
portion of residential loans originated and sold within 90 days of origination; or (ii) at least 60 percent of the savings bank’s
total assets consist of cash, U.S. government or government agency debt or equity securities, fixed assets, or loans secured by
deposits, real property used for residential, educational, church, welfare, or health purposes, or real property in certain urban
renewal areas. The Bank is currently, and expects to remain, in compliance with QTL standards.
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 Deposit Insurance Fund ("DIF"). The Dodd-Frank Act raised the standard maximum deposit insurance
amount to $250,000 per depositor, per insured financial institution for each account ownership category. Deposits held in
noninterest bearing transaction accounts are now aggregated with any interest bearing deposits the owner may hold in the same
ownership category and the combined total is insured up to at least $250,000.
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Pursuant to the Dodd-Frank Act, the minimum reserve ratio designated by the FDIC each year is 1.35 percent of the
assessment base, as opposed to 1.15 percent under prior law. The FDIC is required to meet the minimum reserve ratio by
September 30, 2020 and is required to offset the effect of the increased reserve ratio for banks with assets less than $10 billion.
If the Bank reports assets of less than $10 billion, it must do so for four consecutive quarters before it will be reclassified as a
small institution. The Dodd-Frank Act also eliminates requirements under prior law that the FDIC pay dividends to member
institutions if the reserve ratio exceeds certain thresholds, and the FDIC has proposed that in lieu of dividends, it will adopt
lower rate schedules when the reserve ratio exceeds certain thresholds. The FDIC has established a higher reserve ratio of 2
percent as a long-term goal beyond what is required by statute.
The FDIC maintains the DIF by assessing each financial institution an insurance premium. The FDIC defined deposit
insurance assessment base for an insured depository institution is equal to the average consolidated total assets during the
assessment period, minus average tangible equity. The assessment rate schedule for large financial institutions (i.e., financial
institutions with at least $10 billion in assets) is determined by use of a scorecard that combines a financial institution's Capital,
Asset Quality, Management, Earnings, Liquidity and Sensitivity ("CAMELS") ratings with certain forward-looking financial
information to measure the risk to the DIF. Pursuant to this scorecard method, two scores (a performance score and a loss
severity score) are combined and converted to an initial base assessment rate (also referred to as IBAR). The performance score
measures a financial institution's financial performance and ability to withstand stress. The loss severity score measures the
relative magnitude of potential losses to the FDIC in the event of the financial institution's failure. Total scores are converted
pursuant to a predetermined formula into an initial base assessment rate, which is subject to adjustment based upon significant
risk factors not captured in the scoreboard. Total assessment rates range from 2.5 basis points to 45 basis points for such large
financial institutions.
Effective October 1, 2014, as a result of reporting assets of less than $10 billion for four consecutive quarters, the
Bank was classified as a small institution for deposit insurance assessment purposes. As a small institution, the Bank is assigned
to one of three Capital Groups based on our capitalization level. The Bank is also assigned to one of three Supervisory Groups
based on the supervisory evaluations provided by the Bank’s primary federal regulator. Our assessment rate, as a small
institution, is determined based upon the Risk Category to which we are assigned. Our Risk Category is determined based on a
combination of our Supervisory and Capital Group assignments.
Premiums for the Bank are calculated based upon the average balance of total assets minus average tangible equity as
of the close of business for each day during the calendar quarter.
All FDIC-insured financial institutions must pay an annual assessment to provide funds for the payment of interest on
bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance
Board. The bonds, which are referred to as FICO bonds, were issued to capitalize the Federal Savings and Loan Insurance
Corporation, and the assessments will continue until the bonds mature in 2019.
Affiliate Transaction Restrictions
We are 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 a banking institution from extending credit to,
or entering into certain transactions with, affiliates, principal stockholders, directors and executive officers of the banking
institution and its affiliates. The Dodd-Frank Act imposed further restrictions on transactions with affiliates and extension of
credit to executive officers, directors and principal stockholders.
Incentive Compensation
The U.S. bank regulatory agencies issued comprehensive final guidance on incentive compensation policies intended
to ensure that the incentive compensation policies of U.S. banks do not undermine the safety and soundness of such banks by
encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk
profile of a bank, either individually or as part of a group, is based upon the key principles that a bank’s incentive compensation
arrangements should (i) provide incentives that do not encourage risk-taking beyond the bank’s ability to effectively identify
and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong
corporate governance, including active and effective oversight by the bank’s board of directors.
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. The findings of the supervisory initiatives are included in reports of examination. Deficiencies are incorporated
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into the bank’s supervisory ratings, which may affect the bank’s ability to make acquisitions and take other actions.
Enforcement actions will be taken against a bank if its incentive compensation arrangements, or related risk-management
control or governance processes, pose a risk to the bank’s safety and soundness and the organization is not taking prompt and
effective measures to correct the deficiencies. See the Supervisory Agreement discussion, in Item 1. Business for further
discussion of the executive compensation notice requirements.
Federal Reserve
Numerous regulations promulgated by the Federal Reserve affect our business operations as well as those of the Bank.
These include regulations relating to electronic fund transfers, collection of checks, availability of funds, and reserve
requirements.
Federal Reserve regulations require federally chartered savings associations to maintain cash reserves against their
transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3 percent is to be maintained against
aggregate transaction accounts between $13.3 million and $89.0 million (subject to adjustment by the Federal Reserve) plus a
reserve of 10 percent (subject to adjustment by the Federal Reserve between 8 percent and 14 percent) against that portion of
total transaction accounts in excess of $89.0 million. The first $13.3 million of otherwise reservable balances (subject to
adjustment by the Federal Reserve) is exempt from the reserve requirements. These amounts are adjusted annually. For 2015, a
3 percent reserve will be required to be maintained against aggregate transaction accounts between $14.5 million and $103.6
million (subject to adjustment by the Federal Reserve) plus a reserve of 10 percent (subject to adjustment by the Federal
Reserve between 8 percent and 14 percent) against that portion of total transaction accounts in excess of $103.6 million.
Required reserves must be maintained in the form of vault cash, an account at a Federal Reserve bank or a pass-
through account as defined by the Federal Reserve. Pursuant to the Emergency Economic Stabilization Act of 2008, the Federal
Reserve banks pay interest on depository institutions’ required and excess reserve balances. These interest rates are determined
by the Federal Reserve, and currently both rates are 0.25 percent at an annual rate. FHLB System members are also authorized
to borrow from the Federal Reserve "discount window," but Federal Reserve regulations require institutions to exhaust all
FHLB sources before borrowing from a Federal Reserve bank.
Bank Secrecy Act ("BSA")
The BSA requires all financial institutions, including banks, to, among other things, establish a risk-based system of
internal controls reasonably designed to prevent money laundering and the financing of terrorism. Under the BSA, an internal
controls program should, at a minimum, include independent testing for compliance, designate an individual responsible for
coordinating and monitoring day-to-day compliance and provide training for appropriate personnel. The BSA also includes a
variety of recordkeeping and reporting requirements (such as cash and suspicious activity reporting), as well as due diligence/
know-your-customer documentation requirements. The Bank has established a global anti-money laundering program in order
to comply with the BSA requirements and certain requirements under the Consent Order relating to its compliance with the
BSA.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001 (the "PATRIOT Act")
The PATRIOT Act, which was enacted following the events of September 11, 2001, amended the BSA to include
numerous provisions designed to detect and prevent the financing of international money laundering and terrorism. The
PATRIOT Act mandates that U.S. financial institutions (and foreign financial institutions with U.S. operations) implement
additional policies and procedures that meet certain minimum requirements and take heightened measures designed to address
any or all of the following: customer identification programs, money laundering, terrorist financing, identifying and reporting
suspicious activities and currency transactions, currency crimes and cooperation between financial institutions and law
enforcement authorities. Other required actions include terminating correspondent accounts for foreign "shell banks," obtaining
information about the owners of foreign bank clients, and providing the name and address of the foreign bank’s agent for
service of process in the United States. Significant penalties and fines, as well as other supervisory orders may be imposed on a
financial institution for non-compliance with these requirements. In addition, the U.S. bank regulatory agencies must consider
the effectiveness of financial institutions engaging in a merger transaction in combating money laundering activities. The Bank
has established policies and procedures intended to fully comply with the PATRIOT Act’s provisions, the BSA, as well as other
aspects of anti-money laundering legislation.
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Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries,
nationals, individuals, entities and others. These are typically known as the "OFAC" rules based on their administration by the
U.S. Treasury’s Office of Foreign Assets Control ("OFAC"). The OFAC-administered sanctions targeting certain persons and
countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on
trade with or investment in a sanctioned country or with a sanctioned person, including prohibitions against direct or indirect
imports from and exports to a sanctioned country or person and prohibitions on "U.S. persons" engaging in financial
transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country or
person; and (ii) a blocking of assets in which the sanctioned country or person have an interest, by prohibiting transfers of
property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g.,
property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.
Failure to comply with these sanctions could have serious legal and reputational consequences.
Consumer Protection Laws and Regulations
The Bank is subject to many federal consumer protection statutes and regulations, the examination and enforcement of
which has become more pronounced since the passage of the Dodd-Frank Act and the creation of the CFPB. The CFPB has
assumed the responsibility for the development and enforcement of the federal consumer protection statutes and regulations,
such as the Electronic Fund Transfer Act, the Fair Credit Reporting Act, the Homeowners Protection Act, the Fair Debt
Collection Practices Act, the Home Mortgage Disclosure Act, the Home Ownership and Equity Protection Act, the Secure and
Fair Enforcement for Mortgage Licensing Act, the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate
Settlement Procedures Act, the Servicemembers’ Civil Relief Act and the Truth in Saving Act. The Dodd-Frank Act gave the
CFPB: (i) broad rule-making, supervisory, examination and enforcement authority in this area over financial institutions that
have assets of more than $10 billion, (ii) expanded data collecting powers for fair lending purposes for both small business and
mortgage loans and (iii) authority to prevent unfair, deceptive and abusive practices. The consumer complaint function of the
OCC also has been transferred to the CFPB. The Dodd-Frank Act also narrows the scope of federal preemption of state laws
related to federally chartered financial institutions, including savings banks such as the Bank, which gives broader rights to
state attorney generals to enforce certain consumer protection loans.
The Bank was previously subject to the CFPB’s supervisory, examination and enforcement authority with respect to
consumer protection laws and regulations; however, because the Bank has reported assets of less than $10 billion for the last
four consecutive quarters, it is currently subject to the OCC’s supervisory, examination and enforcement authority in this area.
If the total assets of the Bank exceed $10 billion for four consecutive quarters in the future, the Bank will again be subject to
the CFPB’s supervisory, examination and enforcement authority with respect to consumer protection laws and regulations.
CFPB and Regulations Related to Mortgage Origination and Servicing. In January 2013, the CFPB issued a series of
final rules related to mortgage loan origination and mortgage loan servicing. Compliance with these rules has increased our
overall regulatory compliance costs.
On January 10, 2013, the CFPB issued a final rule concerning lenders ’assessments of consumers’ ability to repay
home loans. Currently, Regulation Z prohibits creditors from extending higher priced mortgage loans without regard for the
consumer’s ability to repay. The rule extends application of this requirement to all loans secured by dwellings (except open-end
credit plans, timeshares, reverse mortgages and temporary loans) regardless of the terms or pricing. Creditors must, at a
minimum, consider eight specified factors while making a reasonable and good faith determination that the consumer has a
reasonable ability to repay the loan before entering any consumer credit transaction secured by virtually any dwelling. The
factors include information such as the consumer’s income, debt obligations, credit history and monthly payments on the loan.
Lenders that generate Qualified Mortgage loans will receive specific protections against borrower lawsuits that could result
from failing to satisfy the ability-to-repay rule. As defined by the CFPB, Qualified Mortgages are mortgages that must meet the
following standards prohibiting or limiting certain high risk products and features: (1) no excessive upfront points and fees -
generally points and fees paid by the borrower must not exceed 3 percent of the total amount borrowed; (2) no toxic loan
features - prohibited features include interest-only loans, negative-amortization loans, terms beyond 30 years and balloon loans;
and (3) limit on debt-to-income ratios - borrowers’ debt-to-income ratios must be no higher than 43 percent. Special rules that
extend the definition of Qualified Mortgages to include loans that are eligible for purchase by the Agencies or to be insured or
guaranteed by HUD, Veterans Affairs or the Rural Development Guaranteed Housing are temporarily in place. There are two
levels of liability protection for Qualified Mortgages, the Safe Harbor protection and the Rebuttable Presumption protection.
Safe Harbor Qualified Mortgages are generally lower priced loans with interest rates closer to the prime rate, issued to
borrowers with high credit scores. Borrowers suing lenders under Safe Harbor Qualified Mortgages are faced with overcoming
the pre-determined legal conclusion that the lender has satisfied the ability-to-repay rule. Rebuttable Presumption Qualified
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Mortgages are generally loans at higher prices that are granted to borrowers with lower credit scores. Lenders generating
Rebuttable Presumption Qualified Mortgages receive the protection of a presumption that they have legally satisfied the ability-
to-repay rule while the borrower can rebut that presumption by proving that the lender did not consider the borrower’s living
expenses after their mortgage and other debts. The rule became effective January 10, 2014. The special temporary Qualified
Mortgages rules are in place for Agencies eligible loans until the earlier of the end of the FHFA's conservatorship or January
10, 2021, and for loans eligible to be insured or guaranteed by HUD, VA or the USDA, until the earlier of the date the agency
promulgates its own Qualified Mortgages rule or January 10, 2021.
Also on January 10, 2013, the CFPB issued its final mortgage escrow account rule relating to the establishment of
mandatory escrow accounts on higher-priced mortgage loans. The final rule became effective June 1, 2013. This rule
implements changes to earlier regulations, lengthens the time that mandatory escrow accounts must be maintained on higher-
priced mortgage loans from one year to five years and exempts certain types of transactions from the escrow requirement. A
creditor or servicer may not cancel escrow accounts required under the rule except upon either the termination of the loan or
receipt of a consumer's request to cancel the escrow account no earlier than five years after consummation, whichever happens
first. The creditor or servicer may not cancel the escrow account unless the unpaid principal balance is less than 80 percent of
the secured property's original value and the consumer is not delinquent or in default on the loan at the time of the request.
Additionally, on January 10, 2013, the CFPB issued a final rule to expand the types of mortgage loans that are subject
to the protections of the Home Ownership and Equity Protections Act of 1994 ("HOEPA"). Loans that meet HOEPA’s high-cost
coverage tests are subject to special disclosure requirements and restrictions on loan terms, and borrowers in high-cost
mortgages have enhanced remedies for violations of the law. The rule revises and expands the definition of high-cost mortgages
and imposes additional restrictions on mortgages that are covered by HOEPA, including a pre-loan counseling requirement.
This rule also bans certain features from high-cost mortgages, such as prepayment penalties, loan modification fees, and most
fees charged to a borrower who requests a payoff statement. Balloon payments would also be banned, except in special
circumstances. The rule became effective January 10, 2014.
On January 17, 2013, the CFPB issued its final rules relating to mortgage servicing. These rules address the following
nine major servicing topics: (i) periodic billing statements with timing, form and content requirements; (ii) interest rate
adjustment notices for ARM loans that must be provided to consumers prior to payment changes from rate changes; (iii) prompt
crediting of payments and timing requirements for payoff statements; (iv) force placed insurance notice, coverage and
cancellation requirements; (v) procedural requirements for error resolution and information requests from consumers; (vi)
policy and procedure requirements for servicing functions and document management; (vii) early intervention notice
requirements with delinquent borrowers about loss mitigation options; (viii) continuity of contact between servicer personnel
and delinquent borrowers throughout the loss mitigation process; and (ix) loss mitigation procedures and restrictions on "dual
tracking" of foreclosure alternatives with the foreclosure process. The rule became effective on January 10, 2014.
On January 18, 2013, the CFPB issued final rules related to appraisals for higher-priced mortgage loans and consumer
access to appraisals. The rule on appraisals for higher-price mortgages prohibits creditors from making such mortgage loans
unless certain conditions are met, including obtaining a written appraisal based on a full interior appraisal. The rule on appraisal
access requires creditors to notify consumers within a certain time period of their right to receive a copy of the appraisal and
requires creditors to provide copies of the appraisal and other written valuation. The rule became effective January 18, 2014.
On January 20, 2013, the CFPB issued its final loan originator compensation rules which, among other things, created
compensation restrictions and qualifications for loan originators. Under the rule, loan originators are prohibited from basing
their compensation on “any transaction's terms or conditions” and dual compensation is generally prohibited. This portion of
the rule became effective on January 1, 2014. The rule also mandates certain qualifications for loan originators, such as
licensing, and requires loan originator organizations to ensure compliance with the Secure and Fair Enforcement for Mortgage
Licensing Act, where applicable. Additionally, the rule prohibits: (i) the use of mandatory arbitration clauses in both mortgage
and home equity loan agreements; and (ii) the financing of single premiums or fees for credit insurance in connection with a
consumer credit transaction secured by a dwelling. These later provisions became effective June 1, 2013. All other provisions
of the rule became effective January 10, 2014.
In 2014, the CFPB issued final and proposed rules and guidance to amend and supplement its mortgage loan servicing
rules. On July 8, 2014, the CFPB issued a final rule to clarify that the name of a deceased borrower’s heir generally may be
added to a mortgage without triggering the ability-to-repay rule. On August 19, 2014, the CFPB issued guidance that outlines
what CFPB examiners will look for when mortgage servicing rights are transferred to ensure that mortgage servicers are
fulfilling their obligations under the mortgage servicing rules and highlights regulatory requirements that may be implicated by
a transfer of mortgage servicing rights. On October 22, 2014, the CFPB issued a final rule that provides a limited, post-
consummation cure mechanism for loans that exceed the points and fees limit for Qualified Mortgages, but that meet the other
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requirements for being a Qualified Mortgage at consummation. In addition, on November 20, 2014, the CFPB proposed several
amendments to certain mortgage servicing rules, including amendments that would require servicers to provide certain
borrowers with foreclosure protections more than once over the life of the loan, clarify when a consumer is considered
“delinquent,” expand protections provided to certain borrowers during a servicing transfer and prevent wrongful disclosures.
The CFPB is expected to continue to revise its rules related to mortgage loan origination and mortgage loan servicing, and
additional rulemaking affecting the residential mortgage business is expected.
On November 20, 2013, the CFPB issued a final rule and official interpretation establishing integrated mortgage
disclosure requirements for lenders and settlement agents in connection with most closed-end consumer credit transactions
secured by real property. The final rule becomes effective August 1, 2015. This rule, the official interpretation and related forms
published by the CFPB combine certain disclosures that consumers receive in connection with applying for and closing on a
mortgage loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act, implement new requirements
imposed by the Dodd-Frank Act and provide guidance regarding compliance with those requirements. Among other things, the
rule mandates the use of two new disclosure forms, a Loan Estimate form and a Closing Disclosure form, which replace
existing disclosure forms and include additional disclosure not currently required by the existing forms. In addition, the rule
requires that the Closing Disclosure form be received by the borrower at least three business days before closing in most cases,
limits the circumstances in which borrowers may be required to pay more for settlement services than the amount stated on the
Loan Estimate form and imposes certain recordkeeping requirements. We will continue to assess the impact to Flagstar as we
update our procedures and systems and our correspondent lenders, brokers and settlement agents implement their procedures
and system changes.
Predatory lending. Federal regulations require additional disclosures and consumer protections to borrowers for
certain lending practices, including predatory lending. The term "predatory lending," much like the terms "safety and
soundness" and "unfair and deceptive practices," is far-reaching and covers a potentially broad range of behavior. As such, it
does not lend itself to a concise or a comprehensive definition. Predatory lending typically involves at least one, and perhaps all
three, of the following elements:
• Making unaffordable loans based on the assets of the borrower rather than on the borrower's ability to repay an
•
obligation;
Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is
refinanced, also known as loan flipping; and/or
• Engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or
unsophisticated borrower.
In addition, many states also have predatory lending laws that may be applicable to the Bank.
Gramm-Leach Bliley Act ("GLBA"). The GLBA includes provisions that protect consumers from the unauthorized
transfer and use of their non-public personal information by financial institutions. Privacy policies are required by federal
banking regulations which limit the ability of banks and other financial institutions to disclose non-public personal information
about consumers to non-affiliated third parties. Pursuant to those rules, financial institutions must provide:
•
Initial notices to customers about their privacy policies, describing the conditions under which they may disclose non-
public personal information to non-affiliated third parties and affiliates;
• Annual notices of their privacy policies to current customers; and
• A reasonable method for customers to "opt out" of disclosures to non-affiliated third parties.
These privacy protections affect how consumer information is transmitted through diversified financial companies and
conveyed to outside vendors. In addition, states are permitted under the GLBA to have their own privacy laws, which may offer
greater protection to consumers than the GLBA. Numerous states in which the Bank does business have enacted such laws.
In addition, the Bank is subject to regulatory guidelines establishing standards for safeguarding customer information.
These regulations implement certain provisions of the GLBA. The guidelines describe the U.S. bank regulatory agencies
expectations for the creation, implementation and maintenance of an information security program, which would include
administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of
customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records
and protect against unauthorized access to, or use of, such records or information that could result in substantial harm or
inconvenience to any customer.
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Fair Credit Reporting Act and the Fair and Accurate Credit Transactions Act (“FACT Act”). The Fair Credit Reporting
Act, as amended by the FACT Act, requires financial firms to help deter identity theft, including developing appropriate fraud
response programs, and gives consumers more control of their credit data. It also reauthorizes a federal ban on state laws that
interfere with corporate credit granting and marketing practices. In connection with the FACT Act, U.S. bank regulatory
agencies proposed rules that would prohibit an institution from using certain information about a consumer it received from an
affiliate to make a solicitation to the consumer, unless the consumer has been notified and given a chance to opt out of such
solicitations. A consumer's election to opt out would be applicable for at least five years.
Equal Credit Opportunity Act (“ECOA”). The ECOA generally prohibits discrimination in any credit transaction,
whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except
in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the
Consumer Credit Protection Act.
Truth In Lending Act (“TILA”). The TILA is designed to ensure that credit terms are disclosed in a meaningful way so
that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the
same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount
financed, the total of payments and the payment schedule, among other things. In addition, the TILA also provides a variety of
substantive protections for consumers.
Fair Housing Act (“FH Act”). The FH Act regulates many practices, including making it unlawful for any lender to
discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex,
handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered illegal,
under the FH Act, including some that are not specifically mentioned in the FH Act itself.
The Home Mortgage Disclosure Act (the “HMDA”). The HMDA grew out of public concern over credit shortages in
certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the
housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a "fair
lending" aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of
identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. The Federal Reserve amended
regulations issued under HMDA to require the reporting of certain pricing data with respect to higher-priced mortgage loans.
On July 24, 2014, the CFPB issued a proposed rule that would, among other things, revise the tests for determining which
financial institutions and housing-related credit transactions are covered under HMDA and further expand financial institutions’
reporting obligations.
Real Estate Settlement Procedures Act (“RESPA”). Lenders are required by RESPA to provide borrowers with
disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as
kickbacks, and places limitations on the amount of escrow accounts. Violations of RESPA may result in civil liability or
administrative sanctions.
Servicemembers’ Civil Relief Act (the “SCRA”). The SCRA applies to all debts incurred prior to commencement of
active military service (including credit card and other open-end debt) and limits the amount of interest, including service and
renewal charges and any other fees or charges (other than bona fide insurance) that is related to the obligation or liability.
Enforcement. Enforcement actions under the above laws may include fines, reimbursements and other penalties. Due
to heightened regulatory concern related to compliance with the FACT Act, ECOA, TILA, FH Act, HMDA, RESPA and SCRA
generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local
community.
Community Reinvestment Act ("CRA")
The CRA, as implemented by OCC regulations, requires the OCC to evaluate how federal savings associations have
helped to meet the credit needs of the communities they serve, including low to moderate income neighborhoods, while
maintaining safe and sound banking practices. The evaluation rates an institution based on its actual performance in meeting
community needs. In particular, the current evaluation system focuses on three tests: (i) a lending test, to evaluate the
institution’s record of making loans in its service areas; (ii) an investment test, to evaluate the institution’s record of investing in
community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and
businesses; and (iii) a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices.
The OCC assigns one of four possible ratings to an institution's CRA performance and is required to make public an
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institution's rating and written evaluation. The four possible ratings of meeting community credit needs are outstanding,
satisfactory, needs to improve and substantial non-compliance.
An institution’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions
on its activities, including, but not limited to, engaging in acquisitions and mergers. CRA ratings are also considered in
evaluating applications to open a branch. In 2009, the Bank received a "satisfactory" CRA rating from the OTS (as predecessor
to the OCC) and this remains our current rating.
Regulatory Reform
The Dodd-Frank Act requires the federal financial regulatory agencies to adopt rules that prohibit banks and affiliates
from engaging in proprietary trading and investing in and sponsoring certain "covered funds," including hedge funds and
private equity funds. The statutory provision is commonly called the "Volcker Rule." The final rules implementing the Volcker
Rule, as drafted by a variety of federal financial regulatory agencies, were issued December 10, 2013. The final rules extend the
conformance period to July 21, 2015, and in December of 2014 the Federal Reserve issued an extension order to extend the
relevant conformance date for certain covered funds activities to July 21, 2016. The final rules are highly complex, and many
aspects of their application remain uncertain. We do not currently anticipate that the Volcker Rule will have a meaningful effect
on our operations or those of our subsidiaries, as we do not materially engage in the businesses prohibited by the Volcker Rule.
We may incur costs if required to adopt additional policies and systems to ensure compliance with the Volcker Rule, but any
such costs are not expected to be material.
We expect to incur ongoing operational and system costs in order to prepare for compliance with the multitude of new
laws and regulations. Furthermore, there may be additional federal or state laws enacted during this period that place additional
obligations on servicers of residential loans.
Stress Testing Requirements
The U.S. federal banking agencies, including the OCC and the Federal Reserve, issued final rules implementing
provisions of the Dodd-Frank Act that require banking organizations, including savings associations and savings and loan
holding companies, with total consolidated assets of more than $10 billion but less than $50 billion to conduct annual company-
run stress tests, report the results to their primary federal regulator and the Federal Reserve and publish a summary of the
results. Each Dodd-Frank Act Stress Test, or DFAST, must be conducted using certain scenarios (baseline, adverse and
severely adverse), which the OCC and Federal Reserve will publish by November 15 of each year. Banking organizations are
required to use the scenarios to calculate, for each quarter-end within a nine-quarter planning horizon, the impact of such
scenarios on revenues, losses, loan loss reserves and regulatory capital levels and ratios, taking into account all relevant
exposures and activities. The rules also require each banking organization to establish and maintain a system of controls,
oversight and documentation, including policies and procedures, designed to ensure that the DFAST procedures used by the
banking organization are effective in meeting the requirements of the rules. In June 2014, the U.S. federal banking agencies,
including the OCC and the Federal Reserve, issued proposed rules that would, among other things, shift the dates of the annual
DFAST cycle by approximately four months for cycles beginning January 1, 2016 and thereafter for savings and loan holding
companies and savings associations with total consolidated assets of more than $10 billion but less than $50 billion and amend
the current transition and applicability provisions of the rules to preserve the length of the transition period for banking
organizations that become subject to the rules after their initial effective dates.
Because the Bank had average total consolidated assets (calculated pursuant to the rule) that were greater than $10
billion but less than $50 billion as of October 9, 2012, it was required to conduct its first DFAST as of September 30, 2013, but
was not required to publicly disclose the results.
Under the OCC’s stress test rule, a banking organization ceases to be subject to stress test requirements if it reports
total consolidated assets of $10 billion or less in its call report for each of the most recent four consecutive quarters. Such a
banking organization would become subject to the stress test requirements again if the average of its total consolidated assets
(calculated pursuant to the rule) over the most recent four quarters were to exceed $10 billion and would be required to comply
with the rule in the following calendar year. Although the Bank has reported total consolidated assets of $10 billion or less in its
call reports for each of the most recent four consecutive quarters, it intends to continue conducting stress tests consistent with
the requirements of the OCC’s stress test rule, as we anticipate that the Bank’s average total consolidated assets (calculated
pursuant to the rule) will likely exceed $10 billion in the foreseeable future.
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Limitation on Capital Distributions
Under the Supervisory Agreement, prior written non-objection by the Federal Reserve is required before we may
declare or pay any cash dividend or other capital distribution or make any payment or commitment to purchase, repurchase or
redeem our shares. The Company does not currently pay dividends on the capital stock.
OCC regulations impose limitations upon certain capital distributions by savings associations, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and
other distributions charged against capital.
The OCC regulates all capital distributions made by the Bank, directly or indirectly, to the holding company, including
dividend payments. A subsidiary of a savings and loan holding company, such as the Bank, must file a notice or application
with the OCC at least 30 days prior to each proposed capital distribution. Whether an application is required is based on a
number of factors including whether the institution qualifies for expedited treatment under the OCC rules and regulations or if
the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year
exceeds net income for that year to date plus the retained net income for the preceding two years. Under the Consent Order, the
Bank may not pay a dividend or make a capital distribution if it is not in compliance with its approved capital plan or would not
remain in compliance after making the dividend or capital distribution, and the Bank must receive OCC approval under the
generally applicable application or notice requirements. In addition, as a subsidiary of a savings and loan holding company, the
Bank must receive approval from the Federal Reserve Bank ("FRB") before declaring any dividends. Additional restrictions on
dividends apply if the Bank fails the QTL test.
The Bank may not pay dividends to us if, after paying those dividends, it would fail to meet the required minimum
levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements or if the dividend
would violate a prohibition contained in any statute, regulation or agreement. Under the Federal Deposit Insurance Act
("FDIA") an insured depository institution such as the Bank is prohibited from making capital distributions, including the
payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is used
in the FDIA). Payment of dividends by the Bank also may be restricted at any time at the discretion of the OCC if it deems the
payment to constitute an unsafe and unsound banking practice.
Commercial Real Estate Lending
Lending operations that involve concentrations of commercial real estate loans are subject to enhanced scrutiny by
federal banking regulators. Regulators have advised financial institutions of the risks posed by commercial real estate lending
concentrations. Such loans generally include land development, construction loans and loans secured by multifamily property
and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with
the property. Interagency guidance prescribes the following guidelines for examiners to help identify institutions that are
potentially exposed to concentration risk and may warrant greater supervisory scrutiny:
•
•
total reported loans for construction, land development and other land represent 100% or more of the institution’s total
capital, or
total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance
of the institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.
In 2009, the federal banking regulators issued additional guidance on commercial real estate lending that emphasizes
these considerations.
In addition, the Dodd-Frank Act contains provisions that may cause us to reduce the amount of our commercial real
estate lending and increase the cost of borrowing, including rules relating to risk retention of securitized assets. Section 941 of
the Dodd-Frank Act requires, among other things, a loan originator or a securitizer of asset-backed securities to retain a
percentage of the credit risk of securitized assets. On October 22, 2014, the banking agencies jointly issued a final rule to
implement these requirements. The final rule generally requires sponsors of asset-backed securities ("ABS") to retain not less
than five percent of the credit risk of the assets collateralizing the ABS issuance, and the rule sets forth prohibitions on
transferring or hedging the credit risk that the sponsor is required to retain. The final rule also defines a "qualified residential
mortgage" ("QRM") and exempts securitizations of QRMs from the risk retention requirement. The final rule aligns the QRM
definition with that of a Qualified Mortgage as defined by the CFPB.
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Loans to One Borrower
Under the Home Owners Loan Act ("HOLA"), savings associations are generally subject to the national bank limits on
loans to one borrower. Generally, savings associations may not make a loan or extend credit to a single or related group of
borrowers in excess of 15 percent of the institution’s unimpaired capital and surplus. Additional amounts may be loaned if such
loans or extensions of credit are secured by readily-marketable collateral, but in no case may they be in excess of 10 percent of
unimpaired capital and surplus.
Regulatory Enforcement
Both the OCC and the FDIC may take regulatory enforcement actions against any of their regulated institutions, such
as the Bank, that do not operate in accordance with applicable regulations, policies and directives. Proceedings may be
instituted against any banking institution, or any "institution-affiliated party," such as a director, officer, employee, agent or
controlling person, who engages in unsafe and unsound practices, including violations of applicable laws and regulations. The
OCC has authority under various circumstances to appoint a receiver or conservator for an insured institution that it regulates,
to issue cease and desist orders, to obtain injunctions restraining or prohibiting unsafe or unsound practices, to revalue assets
and to require the establishment of reserves. The FDIC has additional authority to terminate insurance of accounts, after notice
and hearing, upon a finding that the insured institution is or has engaged in any unsafe or unsound practice that has not been
corrected, is operating in an unsafe or unsound condition or has violated any applicable law, regulation, rule, or order of, or
condition imposed by, the FDIC. In addition, the Federal Reserve may take regulatory enforcement actions against us, and the
CFPB may also have the authority to take regulatory enforcement actions against us or the Bank.
Assessments
The OCC charges assessments to savings associations that fund its operations. The general assessment is paid on a
semi-annual basis and is generally based on an institution’s total assets, with a surcharge for an institution with a composite
rating of 3, 4 or 5 in its most recent safety and soundness examination. Our expense for these assessments totaled $3.0 million
and $3.9 million, respectively, for the years ending December 31, 2014 and 2013.
Federal Home Loan Bank System
The primary purpose of the Federal Home Loan Banks ("FHLBs") is to act as a central credit facility and provide
loans to their respective members, such as the Bank, in the form of collateralized advances for making housing loans as well as
for affordable housing and community development lending. The FHLBs are generally able to make advances to their member
institutions at interest rates that are lower than the members could otherwise obtain. The Federal Housing Finance Agency, a
government agency, is generally responsible for regulating the FHLB system. The FHLB system consists of 12 regional
FHLBs, each being federally chartered, but privately owned, by their respective member institutions. The Bank is currently a
member of the FHLB of Indianapolis, and as such, is required to purchase and hold shares of capital stock in that FHLB in an
amount as required by that FHLB’s capital plan and minimum capital requirements.
Environmental Regulation
Our business and properties are subject to federal, state and local laws and regulations governing environmental
matters, including the regulation of hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act, as amended, and similar state laws, owners and operators of
contaminated properties may be liable for the costs of cleaning up hazardous substances without regard to whether such persons
actually caused the contamination. Such laws may affect us both as a current or former owner or operator of properties used in
or held for our business or upon which we have foreclosed, and as a secured lender on property that is found to contain
hazardous substances or wastes. Our general practice is to obtain an environmental assessment prior to foreclosing on
commercial property. We may elect not to foreclose on properties that contain such hazardous substances or wastes, thereby
limiting, and in some instances precluding, the liquidation of such properties.
Anti-Tying Restrictions
Under HOLA, the Bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers. In
general, the Bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on
the condition that: (i) the customer obtain or provide some additional credit, property, or services from or to the Bank, us or the
Bank’s or our subsidiaries or (ii) the customer may not obtain some other credit, property, or services from a competitor, except
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in each case to the extent reasonable conditions are imposed to assure the soundness of the credit extended. Certain arrangements
are permissible. For example, the Bank may offer more favorable terms if a customer obtains two or more traditional bank products.
Competition
We face substantial competition in attracting deposits and making loans. Our most direct competition for deposits has
historically come from other savings banks, commercial banks and credit unions in our local market areas. Money market funds
and full-service securities brokerage firms also compete with us for deposits and, in recent years, many financial institutions
have competed for deposits through the Internet. We compete for deposits by offering high quality and convenient banking
services at a large number of convenient locations, and "sit-down" banking in which a customer is served at a desk rather than
in a teller line and offering a broad range of treasury management products. We also compete by offering competitive interest
rates on our deposit products.
From a lending perspective, there are a large number of institutions offering mortgage loans, consumer loans and
commercial loans, including many mortgage lenders that operate on a national scale, as well as local savings banks, commercial
banks, and other lenders. With respect to those products that we offer, we compete by offering competitive interest rates, fees,
and other loan terms, banking products and services and by offering efficient and rapid service.
Additional Information
Our executive offices are located at 5151 Corporate Drive, Troy, Michigan 48098, and our telephone number is
(248) 312-2000. Our stock is traded on the NYSE under the symbol "FBC."
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge
on our website at www.flagstar.com, under "Investor Relations," as soon as reasonably practicable after we electronically file
such material with the Securities and Exchange Commission (the "SEC"). These reports are also available without charge on
the SEC website at www.sec.gov.
ITEM 1A. RISK FACTORS
Our financial condition and results of operations may be adversely affected by various factors, many of which are
beyond our control. In addition to the factors identified elsewhere in this Report, the most significant risk factors affecting our
business include those set forth below. The below description of risk factors is not exhaustive, and readers should not consider
the description of such risk factors to be a complete set of all potential risks that could affect us.
Market, Interest Rate, Credit and Liquidity Risk
Our business has been and may continue to be affected by conditions in the mortgage and real estate markets, global
financial markets and macro-economic conditions.
Our business, and the financial services industry generally, have been materially and adversely affected by a
significant and prolonged period of negative market and economic conditions in our recent history. This was initially triggered
by declines in the values of subprime mortgages, but spread to virtually all mortgage and real estate asset classes, to leveraged
bank loans and to nearly all asset classes. Although the industry has recovered somewhat, continued concerns regarding the
recovery of the U.S. and global economies, unemployment, declines in real property values, global political and economic
issues, such as political instability and sovereign debt defaults, access to credit and capital markets, high rates of delinquencies
and defaults on loans and other factors have continued to contribute to volatility and uncertainty in the mortgage and real estate
markets, global financial markets and the U.S. economy. There can be no assurance that economic and market conditions will
continue to improve or even that the existing improvements will be sustained. As a result, our results of operations could be
affected. Moreover, unlike many of our competitors, we are subject to regulatory and other limitations, such as requirements
under the Consent Order and the Supervisory Agreement, which could limit our ability to recover from the recession at the
same pace as other financial services institutions.
In addition, these negative market and economic conditions led to difficulty in refinancing for some of our commercial
and residential mortgage customers and increased the rate of defaults and foreclosures. Furthermore, the decline in asset values
in recent years resulted in considerable losses to the Bank and other secured lenders that historically have been able to rely on
the underlying collateral value of their loans to minimize or eliminate losses. A significant portion of our loans-held-for-
investment portfolio is comprised of loans collateralized by real estate in which we are in the first lien position. Although there
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have been signs of recovery, there can be no assurance that property values will continue to stabilize or improve, and if they
decline again, there can be no assurance that the Bank will not incur credit losses. Deterioration in the housing and commercial
real estate markets may lead to increased loss severities and increases in past due loans and nonperforming assets in our loan
portfolios. Additionally, it is often expensive and difficult to pursue collection efforts and foreclosure proceedings due to
regulatory and other issues, which could increase our costs or otherwise cause us to incur losses in our mortgage portfolio. Any
of these effects could adversely affect our business, financial condition and results of operations.
Any deterioration in the mortgage market may also reduce the number of new mortgages that we originate, increase
the costs of servicing mortgages without a corresponding increase in servicing fees or adversely affect our ability to sell
mortgage loans originated by us. Any such event could adversely affect our business, financial condition and results of
operations.
Furthermore, declining asset values, defaults on mortgages and consumer loans, and the lack of market and investor
confidence, as well as other factors, had combined in recent years to increase swap spreads, cause rating agencies to lower
credit ratings, and otherwise increase the cost and decrease the availability of liquidity, despite very significant declines in
central bank borrowing rates and other government actions. Banks and other lenders suffered significant losses in recent years
and often became reluctant to lend, even on a secured basis, due to the increased risk of default and the impact of declining
asset values on the value of collateral.
Volatility of interest rates could lead to increased prepayment rates or lower mortgage origination volume and sales, which
could adversely affect our business, financial condition and results of operations.
The majority of our revenues are derived from the origination, sale and servicing of residential mortgages. The
residential real estate mortgage lending business is very sensitive to interest rates, and lower interest rates generally increase
that business, while higher interest rates generally cause that business to decrease. Thus, our performance normally has a strong
correlation to interest rate levels. In particular, our profitability depends in substantial part on our net interest margin, which is
the difference between the rates we receive on loans made to others and investments and the rates we pay for deposits and other
sources of funds, as well as the volume of mortgage loan originations and sales and the related fees received. Our net interest
margin and our volume of mortgage originations and sales will depend on many factors that are partly or entirely outside our
control, including competition, federal economic, monetary and fiscal policies, and global and domestic economic conditions
generally. Historically, net interest margin and the mortgage origination volumes and sales for the Bank and for other financial
institutions have widened and narrowed in response to these and other factors. A significant or prolonged change in prevailing
interest rates may have a material adverse effect on our business, financial condition and results of operations.
In addition, increasing long-term interest rates may decrease our mortgage loan originations and sales. Generally, the
volume of mortgage loan originations is inversely related to the level of long-term interest rates. During periods of low long-
term interest rates, a significant number of our customers may elect accelerated prepayments as they seek to refinance their
mortgages (i.e., pay off their existing higher rate mortgage loans with new mortgage loans obtained at lower interest rates). Our
profitability levels and those of others in the mortgage industry have generally been strongest during periods of low and/or
declining interest rates, as we have historically been able to sell the resulting increased volume of loans into the secondary
market at a gain.
Certain hedging strategies that we use to manage investment in Mortgage Servicing Rights ("MSRs") and other interest rate
risks may be ineffective.
We invest in MSRs to support mortgage strategies and to deploy capital at acceptable returns. We utilize derivatives
and other fair value assets as economic hedges to offset changes in fair value of the MSRs resulting from the actual or
anticipated changes in prepayments stemming from changing interest rate environments and to otherwise manage interest rate
risk. Our main objective in managing interest rate risk is to maximize the benefit and minimize the adverse effect of changes in
interest rates on our earnings over an extended period of time. In managing these risks, we look at, among other things, yield
curves and hedging strategies. As such, our interest rate risk management strategies may result in significant earnings volatility
in the short term because the market value of our assets and related hedges may be significantly impacted either positively or
negatively by unanticipated variations in interest rates. In particular, our portfolio of MSRs and our mortgage pipeline are
highly sensitive to movements in interest rates, and hedging activities related to the portfolio. Our MSRs could lose a
substantial portion of their value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by
declining interest rates. Conversely, MSRs generally increase in value in a rising interest rate environment to the extent that
prepayments are slower than anticipated.
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Our hedging strategies to manage these risks relating to our MSRs and interest rate volatility are highly susceptible to
prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition,
when interest rates fluctuate, repricing risks arise from the timing difference in the maturity and/or repricing of assets, liabilities
and off-balance sheet positions. While such repricing mismatches are fundamental to our business, they can expose us to
fluctuations in income and economic value as interest rates vary. Our interest rate risk management strategies do not completely
eliminate repricing risk. Although we use models to assess the impact of interest rates on mortgage related revenues, the
estimates of revenues produced by these models are dependent on estimates and assumptions of future loan demand,
prepayment speeds and other factors which may differ from actual subsequent experience. In addition, our hedging strategies
rely on assumptions and projections regarding assets and general market factors, many of which are outside of our control. If
one or more of these assumptions and projections proves to be incorrect or our hedging strategies do not adequately mitigate the
impact of changes in interest rates or prepayment speeds, we may incur losses that would adversely impact earnings. Hedging
strategies also involve transaction and other costs. The failure of our ability to effectively hedge interest rate risks could
adversely affect our business, financial condition and results of operations.
Our allowance for loan losses may be insufficient.
There is a risk of default with respect to all of our mortgages and other loans, and our remedies to collect, foreclose or
otherwise recover may not fully satisfy the debt owed to us. We maintain an allowance for loan losses, which is a reserve
established through a provision for loan losses, to provide for probable and inherent losses in loans held-for-investment. Our
allowance for loan losses, however, may not be adequate to cover actual credit losses, and future provisions for credit losses
could adversely affect our business, financial condition, results of operations, cash flows and prospects. The allowance for loan
losses reflects management’s estimate of the probable and inherent losses in our portfolio of held-for-investment loans at the
relevant statement of financial condition date. Our allowance for loan losses is based on prior experience as well as an
evaluation of the risks in the current portfolio. The underwriting and credit monitoring policies and procedures that we have
adopted to address this risk may not prevent unexpected losses that could have an adverse effect on our business, financial
condition, results of operations, cash flows and prospects. The determination of an appropriate level of loan loss allowance is an
inherently subjective process that requires significant management judgment and is based on numerous assumptions. Changes
in economic conditions affecting borrowers and real estate valuations, 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 allowance for loan losses. Moreover, our
regulators, as part of their supervisory function, periodically review our allowance for loan losses. Our regulators may
recommend or require us to increase our allowance for loan losses or to recognize further losses, based on their judgment,
which may be different from that of our management or other regulators. Any increase in our loan losses could have an adverse
effect on our earnings and financial condition.
Changes in the fair value of our securities may reduce our stockholders’ equity, net earnings, or results of operations.
The estimated fair value of available-for-sale securities portfolio may increase or decrease depending on market
conditions. Our securities portfolio is comprised primarily of fixed rate securities. We increase or decrease stockholders’ equity
by the amount of the change in the unrealized gain or loss (difference between the estimated fair value and the amortized cost)
of available-for-sale securities portfolio, net of the related tax benefit, under the category of accumulated other comprehensive
income (loss). Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported stockholders’
equity, as well as book value per common share and tangible book value per common share. This decrease will occur even
though the securities are not sold.
We conduct a periodic review and evaluation of the securities portfolio to determine if the decline in the fair value of
any security below its cost basis is other-than-temporary. Factors which are considered in the analysis include, but are not
limited to, the severity and duration of the decline in fair value of the security, the financial condition and near-term prospects
of the issuer, whether the decline appears to be related to issuer conditions or general market or industry conditions, intent and
ability to retain the security for a period of time sufficient to allow for any anticipated recovery in fair value and the likelihood
of any near-term fair value recovery. Generally these changes in fair value caused by changes in interest rates are viewed as
temporary, which is consistent with experience. If we deem such decline to be other than temporary impairment ("OTTI")
related to credit losses, the security is written down to a new cost basis and the resulting loss is charged to earnings as a
component of noninterest income.
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Liquidity is essential to our business and our inability to borrow funds, maintain or increase deposits or raise capital on
commercially reasonable terms or at all could adversely affect our liquidity and earnings.
We require substantial liquidity to meet our deposit and debt obligations as they come due, fund our operations and for
potential unforeseen liabilities or losses, including without limitation those that could be incurred in connection the settlement
of litigation, regulatory proceedings or other matters. Our access to liquidity could be impaired by our inability to access the
capital markets or unforeseen outflows of deposits. Our access to external sources of financing, including deposits, as well as
the cost of that financing, is dependent on various factors including regulatory restrictions. A number of factors could make
funding more difficult, more expensive or unavailable on any terms, including, but not limited to, downgrades in our debt
ratings, declining financial results and losses, material changes to operating margins, financial leverage on an absolute or
relative to peers, changes within the organization, specific events that impact our financial condition or reputation, disruptions
in the capital markets, specific events that adversely impact the financial services industry, counterparty availability, changes
affecting assets, the corporate and regulatory structure, balance sheet and capital structure, geographic and business
diversification, interest rate fluctuations, market share and competitive position, general economic conditions and the legal,
regulatory, accounting and tax environments governing funding transactions. Many of these factors are beyond our control. The
material deterioration in any one or a combination of these factors could result in a downgrade of our credit or servicer standing
with counterparties or a decline in our reputation within the marketplace and could result in our having a limited ability to
borrow funds, maintain or increase deposits (including custodial deposits for our agency servicing portfolio) or to raise capital
on commercially reasonable terms or at all. Furthermore, in prior years, we raised capital on terms that were significantly
dilutive to our stockholders, and we could be required to do so again in the future. We compete for funding with other banks
and similar companies, many of which are substantially larger, and have more capital and other resources than we do. In the
event that these competitors consolidate with other financial institutions, these advantages may increase. Competition from
these institutions may increase our cost of funds.
Our ability to make mortgage loans and fund our investments and operations depends largely on our ability to secure
funds on terms acceptable to us. Our primary sources of funds to meet our financing needs include loan sales; deposits, which
include custodial accounts from our servicing portfolio and brokered deposits and public funds; borrowings from the Federal
Home Loan Bank or other federally backed entities; borrowings from investment and commercial banks through repurchase
agreements; and capital-raising activities. If we are unable to maintain any of these financing arrangements, are restricted from
accessing certain of these funding sources by our regulators, are unable to arrange for new financing on terms acceptable to us
or at all, or if we default on any of the covenants imposed upon us by our borrowing facilities, then we may have to reduce the
number of loans we are able to originate for sale in the secondary market or for our own investment or take other actions that
could have other negative effects on our operations. A significant or prolonged reduction in loan originations that occurs as a
result could adversely impact our earnings, financial condition, results of operations and future prospects. There is no
guarantee that we will be able to renew or maintain our financing arrangements or deposits or that we will be able to adequately
access capital markets when or if a need for additional capital arises.
Our loan portfolio and geographic concentration could increase our potential for significant losses.
Our mortgage loan portfolio is geographically concentrated in certain states, including California, Michigan, Florida,
Washington and Arizona. In addition, a significant number of commercial loans are in Michigan or are repayable by borrowers
who have significant operations in Michigan. This concentration has made, and will continue to make, our loan portfolio
particularly susceptible to downturns in the general economy and the real estate and mortgage markets in the geographic areas
where we conduct our business activities. Adverse conditions, including unemployment, inflation, recession, natural disasters,
declining property values, municipal bankruptcies and other factors in these markets could cause delinquencies and charge-offs
of these loans to increase, likely resulting in a corresponding and disproportionately large decline in revenues and demand for
our services and an increase in credit risk and the value of collateral for our loans to decline, in turn reducing customers’
borrowing power, and reducing the value of assets and collateral associated with our existing loans. Furthermore, the economic,
real estate market and other conditions in any one or more of our market areas may recover at a slower pace than any recovery
in the U.S. real estate market generally.
Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or
economic conditions in our market areas could adversely affect the value of our assets, revenues, results of operations and
financial condition. Moreover, there are no assurances that we will benefit from any market growth or favorable economic
conditions in our primary market areas when and if they do occur. Any efforts that we may undertake to diversify our loan
portfolio and business activities against concentration risks may not be successful.
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We depend on our institutional counterparties to provide services that are critical to our business. If one or more of our
institutional counterparties defaults on its obligations to us or becomes insolvent, it could have a material adverse effect on
our earnings, liquidity, capital position and financial condition.
Financial services institutions are interrelated as a result of market-making, trading, clearing, counterparty, or other
relationships. We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual obligations
to us. We believe that our primary exposures to institutional counterparty risk are with third-party providers of credit
enhancement on the mortgage assets that we hold in our investment portfolio, including mortgage insurers and financial
guarantors, issuers of securities held on our Consolidated Statements of Financial Condition, and derivatives counterparties.
Furthermore, a significant deterioration in the credit quality of one or more of our counterparties could lead to concerns about
the credit quality of other counterparties in the industry. Counterparty risk can also adversely affect our ability to acquire, sell
or hold MSRs in the future. Adverse mortgage and credit market conditions have adversely affected, and if recent positive
trends are not sustained, they could again adversely affect, the liquidity and financial condition of a number of our institutional
counterparties, particularly those whose businesses are concentrated in the mortgage industry. One or more of these institutions
may default in its obligations to us for a number of reasons, such as changes in financial condition that affect their credit
ratings, a reduction in liquidity, operational failures or insolvency. A default by a counterparty with significant obligations to us
could result in significant financial losses to us and could have a material adverse effect on our ability to conduct our
operations, which would adversely affect our earnings, liquidity, capital position and financial condition. In addition, a default
by a counterparty may require us to obtain a substitute counterparty which may not exist in this economic climate and which
may, as a result, cause us to default on our related financial obligations. In addition, concerns about, or a default or threatened
default by one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other
institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as banks
with which we interact on a daily basis, and therefore could adversely affect us.
We use assumptions and estimates in determining the fair value of certain of our assets and liabilities, which assumptions
and estimates may prove to be incorrect, resulting in significant declines or increases in valuation.
Pursuant to accounting principles generally accepted in the United States, we are required to use certain assumptions
and estimates in preparing our Consolidated Statements of Financial Condition. A portion of our assets and liabilities are carried
on our Consolidated Statements of Financial Condition at fair value, including our MSRs, certain mortgage loans held-for-sale,
trading assets, available-for-sale securities, derivatives and the future obligations arising from our settlement with the
Department of Justice ("DOJ"). Generally, for assets that are reported at fair value, we use quoted market prices when available.
In certain cases, observable market prices and data may not be readily available or their availability may be diminished due to
market conditions. In such cases, we use internally developed financial models that utilize observable market data inputs as
well as asset specific collateral data and market inputs for interest rates to estimate the fair value of certain of these assets and
liabilities. These valuation models rely to some degree on management's assumptions, estimates and judgment, which are
inherently uncertain. We cannot be certain that the models or the underlying assumptions will prove to be predictive and
remain so over time, and therefore, actual results may differ from our models and assumptions. Different assumptions could
result in significant declines in valuation, which in turn could result in significant declines or increases in the dollar amount of
assets or increases in the liabilities we report on our Consolidated Statements of Financial Condition. In addition, sudden
illiquidity in markets or declines in prices of certain loans and securities may make it more difficult to value certain balance
sheet items, which may lead to the possibility that such valuations will be subject to further change or adjustment. If
assumptions or estimates underlying our Consolidated Statements of Financial Condition are incorrect, we may experience
material losses.
Regulatory Risk
Our business is highly regulated and the regulations applicable to us are subject to change.
The banking industry is extensively regulated at the federal and state levels. Insured financial institutions and their
holding companies are subject to comprehensive regulation and supervision by financial regulatory authorities covering all
aspects of their organization, management and operations. These laws and regulations significantly affect the way that we do
business and could restrict the scope of our existing and future businesses, product offerings and operations, restrict our ability
to pursue acquisitions and divestitures, reduce the profitability of products and services that we offer and make our products
and services more expensive for our customers.
Currently, the Bank is subject to supervision and regulation by the OCC and the FDIC. In addition, the Federal
Reserve is responsible for supervising and regulating all savings and loan holding companies that were formerly regulated by
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the OTS, including us. We are subject to regulatory capital requirements. The Federal Reserve is also authorized to impose new
and potentially heightened examination and reporting requirements. Savings and loan holding companies, including us, are also
required to serve as a source of financial strength for their insured depository institution subsidiaries by maintaining the ability
to provide financial assistance to such subsidiaries in the event they suffer financial distress. Under the Dodd-Frank Act, the
prudential regulatory agencies are required to promulgate joint rules implementing the source of strength requirement, and such
rules, when adopted, could place further restrictions on our ability to pay dividends or make other capital distributions or could
otherwise restrict our business or financing activities.
The OCC is the primary regulator of the Bank and its affiliated entities. In addition to its regulatory powers, the OCC
has significant enforcement authority that it can use to address banking practices that it believes to be unsafe and unsound,
violations of laws, and capital and operational deficiencies. The FDIC also has significant regulatory authority over the Bank
and may impose further regulation at its discretion for the protection of the DIF. Such regulation and supervision are intended
primarily for the protection of the DIF and for the Bank’s depositors and borrowers, and are not intended to protect the interests
of investors in our securities. The CFPB has supervisory, examination and enforcement authority with respect to the principal
federal consumer protection laws over institutions that have assets of $10 billion or more. The Bank was previously subject to
such authority of the CFPB. However, because the Bank has reported assets of less than $10 billion for the last four consecutive
quarters, it is currently subject to the CFPB's supervisory, examination and enforcement authority in this area. If the total assets
of the Bank exceed $10 billion for four consecutive quarters in the future, the Bank will again be subject to the CFPB’s
supervisory, examination and enforcement authority with respect to consumer protection laws and regulations. Since we believe
the Bank’s assets will likely return to $10 billion in the near future, we will continue to operate as if we are subject to the
CFPB’s supervisory, examination and enforcement authority. The CFPB also continues to assert authority over the Bank's
implementation of the CFPB Consent Order discussed in Item 1. Business.
The Bank's business is also subject to state and federal consumer protection laws and regulations that provide for a
private right of action and some of which pose a risk of class action lawsuits. In the current environment, there have been, and
will likely be, significant changes to the banking and financial institutions regulatory regime, and it is not possible to predict the
impact of all such changes on our results of operations. Changes to, or in the interpretation or implementation of, statutes,
regulations or policies, heightened regulatory scrutiny, requirements or expectations, implementation of new government
programs and plans, and changes to judicial interpretations of statutes or regulations could affect us in substantial and
unpredictable ways. Among other things, such changes, as well as the implementation of such changes, could result in
unintended consequences and could subject us to additional costs, constrain our resources, limit the types of financial services
and products that we may offer, increase the ability of non-banks to offer competing financial services and products, and/or
reduce our ability to effectively hedge against risk. See the Regulatory discussion, in Item 1. Business, herein, for further
discussion of regulations applicable to us.
The Bank has entered into a Consent Order with the OCC, which requires the Bank to adopt or review and revise various
plans, policies and procedures. Non-compliance with the Consent Order may lead to additional corrective actions by the
OCC, civil penalties or other adverse actions, which could negatively impact our operations and financial performance.
Effective October 23, 2012, the Bank entered into a Consent Order with the OCC. Under the Consent Order, the Bank
is required to adopt or review and revise various plans, policies and procedures related to, among other things, regulatory
capital; enterprise risk management, liquidity and capital; allowance for loan and lease losses and our representation and
warranty reserve; internal audit; internal loan review; concentrations; Bank Secrecy Act risk assessment, program, internal
controls, customer due diligence, and independent testing; compliance management; flood insurance; and information
technology. See the Consent Order discussion, in Item 1. Business, herein. The Bank has submitted policies and procedures to
the OCC. The Consent Order requires the Bank to implement and ensure adherence to the plans, policies and procedures.
Although management continues to work on resolving the concerns of the OCC under the Consent Order, the OCC may not
agree that it has resolved all of these issues.
While subject to the Consent Order, the Bank's management and board of directors will be required to focus a
substantial amount of time on complying with its terms, which could adversely affect our financial performance. We cannot
guarantee that the Bank will be able to fully comply with the Consent Order. In the event the Bank is in non-compliance with
the terms of the Consent Order, the OCC has the authority to subject the Bank to additional corrective actions. In particular, if
the Bank fails to submit a written capital plan within a time period acceptable to the OCC, or fails to implement a written
capital plan for which the OCC has provided a written determination of no supervisory objection, then at the sole discretion of
the OCC, the Bank may be deemed undercapitalized. If the OCC determines that the Bank is undercapitalized for purposes of
the Consent Order, it may at its discretion impose certain additional corrective actions on the Bank's operations that are
applicable to undercapitalized institutions. These corrective actions could negatively impact the Bank's operations and financial
25
performance. Moreover, in the event the OCC believes that the Bank has failed to comply with the Consent Order, it could
initiate further enforcement actions against the Bank, seek an injunction requiring the Bank and its officers and directors to
comply with the Consent Order and seek civil money penalties against us and our officers and directors. Any failure by us to
comply with the terms of the Consent Order or additional actions by the OCC could adversely affect our business, financial
condition and results of operations. In addition, the Bank’s competitors may not be subject to similar actions, which could limit
our ability to compete effectively. See the Consent Order discussion in Item 1. Business, herein, for further details.
We remain subject to the restrictions and conditions of the Supervisory Agreement. Failure to comply with the Supervisory
Agreement could result in further enforcement action against us, which could negatively affect our results of operations and
financial condition.
We remain subject to the Supervisory Agreement, which requires that we take certain actions to address issues
identified by the OTS. The Supervisory Agreement is enforced by the Federal Reserve as the successor regulator to the OTS
with respect to savings and loan holding companies. The Supervisory Agreement requires that we submit a capital plan; receive
written non-objection before declaring or paying any dividend or other capital distribution, incurring or renewing any debt and
engaging in affiliate transactions (with limited exceptions); comply with applicable regulatory requirements before making
certain severance and indemnification payments; and provide notice prior to changes in directors and certain executive officers
or entering into, renewing, extending or revising compensation or benefits agreements of such directors or executive officers,
with such changes being subject to Federal Reserve approval. While we believe that we have taken numerous steps to comply
with, and intend to comply with in the future, the requirements of the Supervisory Agreement, failure to comply with the
Supervisory Agreement in the time frames provided, or at all, could result in additional enforcement orders or penalties, which
could include further restrictions on us, assessment of civil money penalties on us, as well as our directors, officers and other
affiliated parties and removal of one or more officers and/or directors. Any failure by us to comply with the terms of the
Supervisory Agreement or additional actions by the Federal Reserve could adversely affect our business, financial condition
and results of operations. Moreover, our competitors may not be subject to similar actions, which could limit our ability to
compete effectively. See the Supervisory Agreement discussion in Item 1. Business, herein, for further details.
The Bank has entered into a Consent Order with the CFPB (the “CFPB Consent Order”) relating to the Bank’s loss
mitigation and default servicing operations. Non-compliance with the CFPB Consent Order may lead to additional
corrective actions by the CFPB, civil penalties or other adverse actions, which could negatively impact our operations and
financial performance.
On September 29, 2014, the Bank and the CFPB entered into the CFPB Consent Order, which related to the Bank’s
residential first mortgage loan loss mitigation and default servicing operations. There is no guarantee that the Bank will be able
to fully comply with the CFPB Consent Order. In the event the Bank is in material non-compliance with the terms of the CFPB
Consent Order, the CFPB has the authority to subject the Bank to additional corrective actions. Moreover, in the event the
CFPB believes that the Bank has failed to comply with the CFPB Consent Order, it could initiate further enforcement actions
against the Bank, seek an injunction requiring the Bank and its officers and directors to comply with the CFPB Consent Order
and seek civil money penalties against us and our officers and directors. Any failure by the Bank to comply with the terms of
the CFPB Consent Order or additional actions by the CFPB could adversely affect our business, financial condition and results
of operations. In addition, the Bank’s competitors may not be subject to similar actions, which could limit our ability to
compete effectively.
Financial services reform legislation has resulted in, among other things, numerous restrictions and requirements which
could negatively impact our business and increase our costs of operations.
The Dodd-Frank Act has significantly changed the bank regulatory structure and affected the lending, deposit,
investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act and its
implementing regulations have increased our operating and compliance costs and our interest expense. In addition, compliance
obligations have exposed us and will continue to expose us to additional noncompliance risk and could divert management’s
focus from our business operations. Moreover, the Dodd-Frank Act did not address reform of Fannie Mae and Freddie Mac
(collectively, government sponsored entities or the "GSEs"). While options for the reform of the GSEs have been released, no
specific reform proposal has been enacted. The results of any such reform, and its effect on us, are difficult to predict and may
result in unintended and materially adverse consequences. In addition, we cannot predict the impact of any future legislation or
regulations that may affect our business or the financial institutions and their holding companies more broadly.
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The CFPB reshaped the consumer financial laws through rulemaking and enforcement. Compliance with any such changes
may impact our operations.
The CFPB has broad and unique rulemaking authority to administer and carry out the provisions of the Dodd-Frank
Act with respect to financial institutions that offer covered financial products and services to consumers, including prohibitions
against unfair, deceptive or abusive practices in connection with any transaction with a consumer for a consumer financial
product or service, or the offering of a consumer financial product or service. The concept of what may be considered to be an
"abusive" practice is new under the law. Although the Bank is currently subject to the OCC’s supervisory, examination and
enforcement authority with respect to consumer protection laws and regulations, if it reports assets of more than $10 billion for
four consecutive quarters, it will be subject to authority of the CFPB. The CFPB has also finalized a number of significant rules
and guidance that impact nearly every aspect of the life cycle of a residential mortgage. The CFPB continues to revise these
rules and propose new rules. In addition, forthcoming additional rulemaking affecting the residential mortgage business is
expected. For further details, please refer to "Business-Regulation and Supervision- Consumer Protection Laws and
Regulations."
The CFPB and consumer protection regulations promulgated under the Dodd-Frank Act or by the CFPB more
generally, including regulations related to the origination and servicing of residential mortgages, could materially and adversely
affect the manner in which we conduct our businesses, result in heightened federal regulation and oversight of our business
activities, increase costs and potential litigation associated with our business activities and materially limit and restrict the
Bank’s business, product offerings and services. Furthermore, our failure to comply with the laws, rules or regulations to which
we are subject, whether actual or alleged, would expose us to fines, penalties or potential litigation liabilities, including costs,
settlements and judgments, any of which could have a material adverse effect on our business, financial condition or results of
operations.
Expanded regulatory oversight over our business could significantly increase our risks and costs associated with complying
with current and future regulations, which could adversely affect our financial condition and results of operations.
As a result of increasing scrutiny and regulation of the banking industry and consumer practices, we may face a greater
number or wider scope of examinations, investigations, enforcement actions and litigation, thereby increasing our costs
associated with responding to or defending such actions. In addition, increased regulatory inquiries and investigations, as well
as any additional legislative or regulatory developments affecting our businesses, and any required changes to our operations
resulting from these developments, could result in a loss of revenue, limit the products or services that we offer or increase the
costs thereof, impose additional compliance costs, harm our reputation or otherwise adversely affect our businesses. Some of
these laws may provide a private right of action that a consumer or class of consumers may seek to pursue to enforce these laws
and regulations.
We are highly dependent on the Agencies, and any changes in these entities or their current roles could adversely affect our
business, financial condition and results of operations.
Our ability to generate revenues through mortgage loan sales depends significantly on programs administered by the
Agencies, such as Fannie Mae and Freddie Mac, government agencies, including Ginnie Mae, and others that facilitate the
issuance of mortgage-backed securities in the secondary market. These agencies play a critical role in the residential mortgage
industry, and we have significant business relationships with many of them. We also derive other material financial benefits
from these relationships, including the assumption of credit risk by these agencies on loans included in such mortgage securities
in exchange for our payment of guarantee fees and the ability to avoid certain loan inventory finance costs through streamlined
loan funding and sale procedures.
There is uncertainty regarding the future of Fannie Mae and Freddie Mac, including with respect to how long they will
continue to be in existence, the extent of their roles in the market and what forms they will have. The future roles of Fannie Mae
and Freddie Mac could be reduced or eliminated and the nature of their guarantees could be limited or eliminated relative to
historical measurements.
The elimination or modification of the traditional roles of Fannie Mae or Freddie Mac could adversely affect our
business, financial condition and results of operations. Furthermore, any discontinuation of, or significant reduction in, the
operation of these agencies, any significant adverse change in the level of activity of these agencies in the primary or secondary
mortgage markets or in the underwriting criteria of these agencies could materially and adversely affect our business, financial
condition and results of operations.
27
Changes in the Agencies' guidelines or guarantees could adversely affect our business, financial condition and results of
operations.
We are required to follow specific guidelines that impact the way that we service and originate agency loans, including
guidelines with respect to credit standards for mortgage loans, our staffing levels and other servicing practices, the servicing
and ancillary fees that we may charge, our modification standards and procedures and the amount of non-reimbursable
advances.
In particular, the FHFA has directed the Agencies to align their guidelines for servicing delinquent mortgages that they
own or that back securities which they guarantee, which can result in monetary incentives for servicers that perform well and
penalties for those that do not. In addition, the FHFA has directed Fannie Mae to assess compensatory penalties against
servicers in connection with the failure to meet specified timelines relating to delinquent loans and foreclosure proceedings, and
other breaches of servicing obligations.
We cannot negotiate these terms with the Agencies and they are subject to change at any time. A significant change in
these guidelines that has the effect of decreasing the fees we charge or requires us to expend additional resources in providing
mortgage services could decrease our revenues or increase our costs, which would adversely affect our business, financial
condition and results of operations.
In addition, changes in the nature or extent of the guarantees provided by Fannie Mae and Freddie Mac or the
insurance provided by the FHA could also have broad adverse market implications. The fees that we are required to pay to the
Agencies for these guarantees have increased significantly over time and any future increases in these fees would adversely
affect our business, financial condition and results of operations.
Current or future regulations and programs to limit foreclosures and loan modifications may result in increased costs to
service loans which could affect our margins or impair the value of our MSRs.
In the recent past, the housing and the residential mortgage markets have experienced a variety of difficulties and
changed economic conditions. In response, federal and state governments, as well as the Agencies, have developed a number of
programs and instituted a number of requirements on servicers in an effort to limit foreclosures and, in the case of the Agencies,
to minimize losses on loans that they guarantee or own. These additional programs and requirements may increase operating
expenses or otherwise increase the costs associated with servicing loans for others.
Increases in deposit insurance premiums and special FDIC assessments will adversely affect our earnings.
The Dodd-Frank Act required the FDIC to substantially revise its regulations for determining the amount of an
institution's deposit insurance premiums. The Dodd-Frank Act also made changes, among other things, to the minimum
designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total
insured deposits, and eliminating the requirement that the FDIC pay dividends to financial institutions when the reserve ratio
exceeds certain thresholds. The FDIC has established a higher reserve ratio of 2 percent as a long-term goal beyond what is
required by statute. The FDIC has defined the deposit insurance assessment base for an insured depository institution as average
consolidated total assets during the assessment period, minus average tangible equity. The assessment rate schedule for large
financial institutions (i.e., financial institutions with at least $10 billion in assets) is determined by use of a scorecard that
combines a financial institution's Capital, Asset Quality, Management, Earnings, Liquidity and Sensitivity ("CAMELS") ratings
with certain forward-looking financial information. The FDIC may determine that we present a higher risk to the DIF than
other banks due to certain factors. These factors include significant risks relating to interest rates, loan portfolio and geographic
concentration, concentration of high credit risk loans, increased loan losses, regulatory compliance (including under existing
agreements with regulators such as the Consent Order and Supervisory Agreement), existing and future litigation and other
factors. As a result, we could be subject to higher deposit insurance premiums and special assessments in the future that could
adversely affect our earnings. The Bank’s deposit insurance premiums and special assessments in the future also may be higher
than competing banks may be required to pay.
Effective October 1, 2014, as a result of reporting assets of less than $10 billion for four consecutive quarters, the
Bank was classified as a small institution for deposit insurance assessment purposes. As a small institution, the Bank is assigned
to one of three Capital Groups based on our capitalization level. The Bank is also assigned to one of three Supervisory Groups
based on the supervisory evaluations provided by the Bank’s primary federal regulator. Our assessment rate, as a small
institution, is determined based upon the Risk Category to which we are assigned. Our Risk Category is determined based on a
28
combination of our Supervisory and Capital Group assignments. Changes in the Bank’s CAMELs rating could adversely affect
our Risk Category rating resulting in higher deposit insurance premiums and special assessments in the future.
We are subject to heightened regulatory scrutiny with respect to bank secrecy anti-money laundering, and economic
sanctions statutes and regulations.
In recent years, regulators have intensified their focus on bank secrecy and anti-money laundering statutes, regulations
and compliance requirements, as well as compliance with economic sanctions administered by OFAC, and we have been
required to revise policies and procedures and install new systems in order to comply with regulations, guidelines and
examination procedures in this area. More recently, the Bank agreed in the Consent Order to review and revise the Bank’s bank
secrecy and anti-money laundering risk assessment and written program of policies and procedures adopted in accordance with
the Bank Secrecy Act and update the status of the Bank’s plan and timeline for the implementation of enhanced bank secrecy
and anti-money laundering internal controls. We cannot be certain that the policies, procedures and systems we have in place or
may in the future put in place are or will be successful. Therefore, there is no assurance that in every instance we are and will
be in full compliance with these requirements or the Consent Order. Banks that are not subject to consent orders have been
heavily fined for violations of bank secrecy and anti-money laundering laws, and, thus, irrespective of compliance with the
Consent Order, non-compliance with bank secrecy and anti-money laundering laws may result in significant fines.
We may incur fines, penalties and other negative consequences from regulatory violations, possibly even for inadvertent or
unintentional violations.
We maintain systems and procedures designed to ensure that we comply with all applicable laws and regulations.
However, some legal and regulatory frameworks provide for the imposition of fines or penalties for noncompliance even
though the noncompliance was inadvertent or unintentional and even though there was in place at the time systems and
procedures designed to ensure compliance. There may be other negative consequences resulting from a finding of
noncompliance, including restrictions on certain activities. Failure to comply with sanctions may also damage our reputation as
described below and could restrict the ability of institutional investment managers to invest in our securities.
We are a holding company and therefore dependent on the Bank for funding of obligations and dividends.
As a holding company without significant assets other than the capital stock of the Bank, our ability to service our debt
or preferred stock obligations, including interest payments on debentures underlying the trust preferred securities and dividend
payments on the preferred stock we issued to the U.S. Treasury, is dependent upon available cash on hand and the receipt of
dividends from the Bank on such capital stock. Our ability to pay dividends or make other capital distributions is also
dependent upon available cash on hand and the receipt of dividends from the Bank its capital stock, among other factors. See
"Risk Factors-Regulatory Risk - We may not be able to resume making future payments of dividends on our capital stock and
interest on trust preferred securities" for further information. The declaration and payment of dividends by the Bank on all
classes of its capital stock is subject to the discretion of the Bank's board of directors and to applicable regulatory and legal
limitations, including providing prior notice to or, following submission of an application, receiving approval from the OCC,
complying with and continuing to comply with its approved capital plan submitted pursuant to the Consent Order and receiving
approval from the Federal Reserve. If the Bank does not make dividend payments to us, we may not be able to service our debt
or preferred stock obligations, which could have a material adverse effect on our financial condition and results of operations.
Furthermore, under the Supervisory Agreement, the Federal Reserve has the authority, and under certain circumstances the duty,
to prohibit or to limit our payment of dividends.
We may not be able to resume making future payments of dividends on our capital stock and interest on trust preferred
securities.
We have not paid dividends on any of our stock in 2014 and 2013 and dividends on preferred stock were last paid in
2011. In addition, our ability to make dividend payments in the future is subject to the limitations set forth in the Supervisory
Agreement, which provides that we must receive the prior written non-objection of the Federal Reserve in order to pay
dividends and to receive dividends from the Bank, which are restricted by the Consent Order. In early 2012, we provided notice
to the U.S. Treasury exercising our contractual right to defer our regularly scheduled quarterly payments of dividends,
beginning with the February 2012 payment, on preferred stock issued and outstanding. We also exercised our contractual right
to defer interest payments with respect to our trust preferred securities. Under the terms of the related indentures, we may defer
interest payments for up to 20 consecutive quarters without default or penalty. At December 31, 2014, we have deferred for 12
consecutive quarters. As a result of such deferrals, we are prohibited from making dividend payments on our capital stock,
because the terms of the preferred stock and the trust preferred securities prohibit dividend payments and repurchases or
29
redemptions of certain equity securities until all accrued and unpaid dividends and interest are paid, subject to limited
exceptions. Also, under Michigan law, we are prohibited from paying dividends on our capital stock if, after giving effect to the
dividend, (i) we would not be able to pay our debts as they become due in the usual course of business or (ii) our total assets
would be less than the sum of our total liabilities plus the preferential rights upon dissolution of stockholders with preferential
rights on dissolution which are superior to those receiving the dividend. There can be no assurances that we will be able to
resume making these dividend and interest payments in the future, and our inability to do so after a number of quarters may
cause us to default on those obligations. See Note 18 to the Consolidated Financial Statements for additional information
regarding the Series C fixed rate cumulative non-convertible perpetual preferred stock.
Operational Risk
We recently restructured our executive team, and our new management team’s ability to execute our business strategy may
not prove successful.
Many members of our executive team are new to the Company. These are significant changes implemented over a
relatively short period of time. Some of our executive team members are in new positions or come from different companies
and backgrounds, so it may take time for our new executive team to develop a coordinated management style. New executive
teams also are generally more likely to experience turnover and may take more time to develop effective teamwork. Our
restructured executive team has devoted substantial efforts to significantly change our business strategy and operational
activities, yet there is no assurance that these efforts will prove successful or that the executive team will be able to successfully
execute upon our business strategy and operational activities.
Our challenges in attracting and retaining members of senior management and other qualified employees in the future
could affect our ability to operate effectively.
We depend on the services of our senior management and other qualified employees to carry out our business and
investment strategies. We may experience challenges in attracting and retaining key members of senior management and other
qualified employees due in part to our ongoing regulatory compliance issues, long-term performance issues and our geographic
location away from other regions that have clusters of financial institutions. As we continue to refine and reshape our business
model and execute our business plan, it is critical that we retain our senior management team and recruit qualified individuals to
succeed existing key personnel that leave our employ. In addition, in order to grow and diversify our business, we will need to
continue to attract and retain qualified banking and other personnel. Furthermore, we depend on senior management and other
key employees to meet our regulatory compliance requirements under applicable laws regulations and our obligations under the
Consent Order, Supervisory Agreement and CFPB Consent Order.
Competition for such personnel is intense in our geographic markets and the businesses in which we engage. In
addition, we are required to receive regulatory approval prior to entering into compensation arrangements with certain
executives and subject certain regulatory limitations on payments upon termination to any employee. The effect could be to
limit our ability to attract and retain senior management in the future, because our competitors may not be subject to such
approval requirements and limitations. If we are unable to attract and retain talented people, our business could suffer. The loss
of the services of any senior management personnel, and, in particular, the loss for any reason, including death or disability of
our chairman, our chief executive officer or other members of the executive team, or the inability to recruit and retain senior
management and other qualified employees in the future, could have an adverse effect on our business, financial condition and
results of operations.
We may be subject to additional risks as we enter new lines of business or introduce new products and services.
From time to time, we may implement new lines of business or offer new products and services within existing lines of
business. For example, in late 2013, the Bank sold a substantial portion of its MSRs to a third party but will continue to act as
the subservicer on essentially all of the mortgage loans underlying such MSRs and thereby retain the right to receive certain
fees relating to such subservicing activities but not certain liabilities associated with the MSRs. In addition, we continue to
evaluate the expansion of our commercial and retail lending businesses. There are substantial risks and uncertainties associated
with these and any other efforts to enter into new lines of business or introduce new products and services, particularly in
instances where the markets are not fully developed. 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.
External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also
impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of
30
business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls.
Failure to successfully manage these risks in the development and implementation of new lines of business or new products or
services could have a material adverse effect on our business, results of operations and financial condition.
We may be terminated as a servicer or subservicer or incur costs, liabilities, fines and other sanctions if we fail to satisfy our
servicing obligations, including our obligations with respect to mortgage loan foreclosure actions.
We act as servicer and subservicer for mortgage loans owned by third parties. In such capacities for those loans, we
have certain contractual obligations, including foreclosing on defaulted mortgage loans or, to the extent applicable, considering
alternatives to foreclosure such as loan modifications or short sales. If we commit a material breach of our obligations as
servicer, we may be subject to termination if the breach is not cured within a specified period of time following notice, causing
us to lose servicing income.
For certain investors and/or certain transactions, we may be contractually obligated to repurchase a mortgage loan or
reimburse the investor for credit 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 that we did not satisfy our obligations as a servicer, or increased loss
severity on such repurchases, we may have a significant reduction to net servicing income within our mortgage banking
noninterest income. We may incur significant costs if we are required to, or if we elect to, re-execute or re-file documents or
take other action in our capacity as a servicer in connection with pending or completed foreclosures. We may incur litigation
costs if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of
errors or deficiencies in the foreclosure process, we may have liability to the borrower and/or to any title insurer of the property
sold in foreclosure if the required process was not followed. These costs and liabilities may not be legally or otherwise
reimbursable to us. In addition, if certain documents required for a foreclosure action are missing or defective, we could be
obligated to cure the defect or repurchase the loan. We also may incur liability to securitization investors relating to delays or
deficiencies in our processing of mortgage assignments or other documents necessary to comply with state law governing
foreclosures. The fair value of our MSRs may be negatively affected to the extent our servicing costs increase because of higher
foreclosure costs. We may be subject to fines and other sanctions imposed by Federal or state regulators as a result of actual or
perceived deficiencies in our foreclosure practices or in the foreclosure practices of other mortgage loan servicers. Any of these
actions may harm our reputation or negatively affect our home lending or servicing business.
We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could
harm liquidity, results of operations and financial condition.
When mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are required to make
customary representations and warranties to purchasers, guarantors and insurers, including the Agencies, about the mortgage
loans, and the manner in which they were originated. We have made, and will continue to make, such representations and
warranties in connection with the sale of loans. Whole loan sale agreements require 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 on a mortgage loan. We also are subject to
litigation relating to these representations and warranties and the costs of such litigation may be significant. With respect to
loans that are originated through our broker or correspondent channels, the remedies available against the originating broker or
correspondent, if any, may not be as broad as the remedies available to purchasers, guarantors and insurers of mortgage loans
against us. In addition, we also face further risk that the originating broker or correspondent, if any, may not have financial
capacity to perform remedies that otherwise may be available. Therefore, if a purchaser, guarantor or insurer enforces its
remedies against us, we may not be able to recover losses from the originating broker or correspondent. If repurchase and
indemnity demands increase and such demands are valid claims, the liquidity, results of operations and financial condition may
be adversely affected.
Our mortgage business depends, in part, upon third party mortgage originators who do not originate mortgages for us
exclusively and over whom we have less control.
Our mortgage business depends, in part, upon the use of third party mortgage originators who are not our employees.
These third parties originate mortgages and provide services to many different banks and other entities. Accordingly, they may
have relationships with or loyalties to such banks and other parties that are different from those they have with or to us. Failure
to maintain good relations with such third party mortgage originators could have a negative impact on our business. Moreover,
we must rely on the third party mortgage originators in making and documenting the mortgage loans. While we perform
investigations on the mortgage companies with whom we do business and review the loan files and loan documents we
purchase to attempt to detect any irregularities or legal noncompliance, we have less control over these originators than
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employees of the Bank. Our ability to control the third party mortgage originators could have an adverse impact on our
business. In addition, these arrangements with third party mortgage originators and the fees payable by us to such third parties
could be subject to additional regulatory scrutiny and restrictions in the future.
Our representation and warranty reserve for losses could be insufficient.
We currently maintain a representation and warranty reserve, which is a liability on the Consolidated Statements of
Financial Condition, to reflect our best estimate of probable losses that have been incurred on loans that we have sold or
securitized into the secondary market and must subsequently repurchase or with respect to which we must indemnify the
purchasers and insurers because of violations of customary representations and warranties. Our representation and warranty
reserve takes into account both our estimate of probable losses inherent in loans sold during the current accounting period, as
well as adjustments to our previous estimates of probable losses inherent in loans sold based upon a number of factors. In
addition, the OCC, as part of its supervisory function, periodically reviews our representation and warranty reserve. The OCC
may require us to increase our representation and warranty reserve or to recognize further losses, based on its judgment, which
may be different from that of our management. The results of such reviews could have an effect on the Bank’s reserves. In each
case, these estimates are based on our most recent data regarding loan repurchases, and actual credit losses on repurchased
loans and rely on managements’ assumptions, estimates and judgment, which are inherently uncertain. We also make increases
or decreases to the representation and warranty reserve based on current loan sales which reduces our net gain on loan sales.
Adjustments to our previous estimates are recorded as an increase or decrease in our representation and warranty reserve -
change in estimate. Both the assumptions and estimates used could be inaccurate, resulting in a level of reserve that is less than
actual losses. If additional reserves are required, it could have an adverse effect on our financial condition and results of
operations. See Note 16 to the consolidated financial statements for additional information regarding the representation and
warranty reserve.
Our mortgage business profitability could be significantly reduced if we are not able to originate and resell a high volume of
mortgage loans.
Our loan portfolio is significantly concentrated in residential mortgage loans. Mortgage originations, especially
refinancing activity, decline in rising interest rate environments. While we have been experiencing relatively low interest rates,
the low interest rate environment likely will not continue indefinitely. When interest rates increase, there can be no assurance
that our mortgage production will continue at current levels. Because we sell a substantial portion of the mortgage loans we
originate, the profitability of our mortgage business depends in large part upon our ability to aggregate a high volume of loans
and sell them in the secondary market at a gain. Thus, in addition to our dependence on the interest rate environment, we are
dependent upon (i) the existence of an active secondary market and (ii) our ability to profitably sell loans or securities into that
market. If our level of mortgage production declines, the profitability will depend upon our ability to reduce our costs
commensurate with the reduction of revenue from our mortgage operations.
Our ability to originate and sell mortgage loans readily is dependent upon the availability of an active secondary
market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by
the Agencies and other institutional and non-institutional investors. These entities account for a substantial portion of the
secondary market in residential mortgage loans. Because the largest participants in the secondary market are government-
sponsored enterprises whose activities are governed by federal law, any future changes in laws that significantly affect the
activity of the Agencies could, in turn, adversely affect our operations. In September 2008, the Agencies were placed into
conservatorship by the U.S. government. Although the conservatorship has not had a significant or adverse effect on our
operations, it is currently unclear whether further changes to the Agencies’ operations or their role in the mortgage
securitization market would significantly and adversely affect our operations. Numerous options to reform or dissolve the
Agencies have been suggested by various stakeholders, but the effects of any such reform or dissolution, and their impact on us,
are difficult to predict. To date, no reform or dissolution proposal has been enacted. In addition, our ability to sell mortgage
loans readily is dependent upon our ability to remain eligible for the programs offered by the Agencies and other institutional
and non-institutional investors. Our ability to remain eligible to originate and securitize government insured loans may also
depend on having an acceptable peer-relative delinquency ratio for FHA loans and maintaining a delinquency rate with respect
to Ginnie Mae pools that are below Ginnie Mae guidelines. In the case of Ginnie Mae pools, the Bank has repurchased past due
loans to maintain compliance with the minimum required delinquency ratios. Although these loans are typically insured as to
principal by FHA, such repurchases increase our liquidity needs, and there can be no assurance that we will have sufficient
liquidity to continue to purchase such loans out of the Ginnie Mae pools. In addition, due to our unilateral ability to repurchase
such loans out of the Ginnie Mae pools, we are required to account for them on our balance sheet whether or not we choose to
repurchase them, which could adversely affect our capital ratios.
32
Any significant impairment of our eligibility with any of the Agencies could materially and adversely affect our
operations. Further, the criteria for loans to be accepted under such programs may be changed from time-to-time by the
sponsoring entity which could result in a lower volume of corresponding loan originations. The profitability of participating in
specific programs may vary depending on a number of factors, including our administrative costs of originating and purchasing
qualifying loans and our costs of meeting such criteria.
We may incur additional costs and expenses relating to foreclosure procedures.
Officials in 50 states and the District of Columbia concluded a joint investigation of foreclosure practices across the
industry and proposed significant changes in servicing practices related to foreclosures and substantial penalties, and, in the first
quarter of 2012, DOJ announced that the federal government and attorneys general of 49 states (the state of Oklahoma reached
a separate agreement) reached a $25 billion settlement agreement with five of the largest servicers to address mortgage loan
servicing and foreclosure abuses. We were not a party to this settlement, but we reached a separate settlement with DOJ on
related matters. Although we are continuing to review available information to ascertain the potential impact of the settlement
agreement on servicing and foreclosure practices, there are a number of structural differences between our business model and
the resulting practices and those of the larger servicers that have been publicized in the media. For example, we do not engage
in the practice of bulk purchases of loans from other servicers or investors, nor have we engaged in any acquisitions that
typically result in multiple servicing locations and integration issues from both a processing and personnel standpoint. As a
result, we are not required to service seasoned loans following a transfer. In addition, we sell servicing rights with some
regularity and the sale of servicing rights has allowed for a more reasonable volume of loans that our staff has to manage.
Despite these structural differences, we expect to incur additional costs and expenses in connection with foreclosure procedures.
In addition, there can be no assurance that we will not incur additional costs and expenses as a result of legislative,
administrative or regulatory investigations or actions relating to foreclosure procedures.
We operate in a highly competitive industry, and our inability to compete successfully could adversely affect our business,
financial condition and results of operations.
We operate in a highly competitive industry that could become even more competitive as a result of economic,
legislative, regulatory and technological changes. With respect to mortgage loan origination, we face competition in such areas
as mortgage loan offerings, rates, fees and customer service. With respect to mortgage servicing, we face competition in areas
such as fees, performance in reducing delinquencies and entering into successful modifications. Competition in servicing
mortgage loans and in originating or acquiring newly originated mortgage loans primarily comes from large commercial banks
and savings institutions and other independent mortgage servicers and originators. Many of these institutions have significantly
greater resources and access to capital than we do, which gives them the benefit of a lower cost of funds. In addition,
technological advances and heightened e-commerce activities have increased consumers' accessibility to products and services.
This has intensified competition among banks and non-banks, as applicable, in offering mortgage loans and commercial and
retail banking services. If we are unable to compete successfully in our industry, it could adversely affect our business, financial
condition and results of operations.
We depend on the accuracy and completeness of information about customers and counterparties, and any inaccurate or
misleading information could adversely affect our financial condition and results of operations.
In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on
behalf of customers and counterparties, including financial statements, credit reports, and other financial information. We may
also rely on representations and warranties of those customers, counterparties or other third parties, as to the accuracy and
completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial
information could cause us to enter into unfavorable transactions, which could adversely affect our financial condition and
results of operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may
foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances
could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well
as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may
materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or
more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental
liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action
33
on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and
any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial
condition and results of operations.
Our financial results fluctuate as a result of the cyclical nature of our business and seasonality, which may adversely affect
our business, financial condition and results of operations and make it difficult to predict our future performance.
Our mortgage origination business is subject to the cyclical and seasonal trends of the real estate market. Cyclicality
in our industry could lead to periods of strong growth in the mortgage and real estate markets following by periods of sharp
declines and losses in such markets. One of the primary influences on our mortgage business is the aggregate demand for
mortgage loans in our market areas, which is affected by prevailing interest rates. If we are unable to respond to the cyclicality
of our industry by appropriately adjusting our operations, headcount and overhead, our business, financial condition and results
of operations could be adversely affected.
In addition, seasonal trends have historically reflected the general patterns of residential and commercial real estate
sales, which typically peak in the spring and summer seasons. Although in recent periods the broader cyclical trends in the
mortgage and real estate markets have disrupted the customary historical seasonal trends, such seasonal trends could resume in
the future, which could cause our quarterly operating results to fluctuate and make it difficult to predict our future operating
performance.
We may be exposed to other operational, legal and reputational risks.
We are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of
fraud or theft by employees, disputes with employees and contractors, customers or outsiders, litigation, unauthorized
transactions by employees, breaches of internal control systems and information systems and compliance requirements,
business continuation, disaster recovery, or operational errors. Negative public opinion can result from our actual or alleged
conduct in activities, such as lending practices, data security, corporate governance and foreclosure practices, or our
involvement in government programs and may damage our reputation. Additionally, actions taken by government regulators
and community organizations in response to any of the above may also damage our reputation. This negative public opinion can
adversely affect our ability to attract and keep customers and can expose us to litigation and regulatory action which, in turn,
could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and
penalties and cause us to incur related costs and expenses. For example, current public opinion regarding defects in the
foreclosure practices of financial institutions may lead to an increased risk of consumer litigation, uncertainty of title, a
depressed market for nonperforming assets and indemnification risk from our counterparties, including the Agencies. We are
further exposed to the risk that our third party service providers may be unable to fulfill their contractual obligations (or will be
subject to the same risk of fraud or operational errors as we are). These disruptions may interfere with service to our customers
and result in the bank suffering reputational damage in addition to financial losses and/or liability.
While we recently reversed the valuation allowance for our deferred tax assets, we may not be able to realize these assets in
the future and they may be subject to additional valuation allowances, which could adversely affect our operating results.
During 2009, we established a valuation allowance to reflect the reduced likelihood that we would realize the benefits
of our deferred tax assets. Management assesses the valuation allowance recorded against deferred tax assets at each reporting
period. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable
judgment and requires an evaluation of all positive and negative evidence. As indicated by applicable accounting standards, it is
inherently difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative
evidence, such as cumulative losses in recent years. We utilize a rolling three years of actual and current year anticipated results
as the primary measure of cumulative losses. The evaluation of deferred tax assets requires judgment in assessing the likely
future tax consequences of events that have been recognized in our financial statements or tax returns and future profitability.
Our accounting for deferred taxes represents our best estimate of those future events. Changes in our current estimates, due to
unanticipated events or otherwise, could have a material effect on our financial condition and results of operations.
Based on the weight of all the positive and negative evidence at December 31, 2013, management concluded that it
was more likely than not that the net deferred tax assets would be realized based upon future taxable income and therefore,
reversed 100 percent of the valuation allowance on our federal deferred tax asset and a portion of our state deferred tax asset at
December 31, 2013.
34
At December 31, 2014, approximately $321.0 million of our deferred tax assets was disallowed when calculating
regulatory capital. Applicable banking regulations permit us to include these deferred tax assets, up to a maximum amount,
when calculating our regulatory capital to the extent these assets will be realized based on future projected earnings within one
year of the report date.
The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative
evidence. Management's conclusion at December 31, 2014 and 2013 that the net deferred tax asset will be realized, was based
upon management's estimate of future taxable income. Management's estimate of future taxable income was based on internal
projections which consider historical performance, various internal estimates and assumptions, as well as certain external data,
all of which management believed to be reasonable although inherently subject to significant judgment. Factual results may
differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions,
and if so, the valuation allowance may need to be increased for some or all of our deferred tax asset. Such an increase to the
deferred tax asset valuation allowance could have a material adverse effect on our financial condition and results of operations.
For a further discussion of the deferred tax asset, see Note 21 of the Notes to the Consolidated Financial Statements, in Item 8.
Financial Statements and Supplementary Data, herein.
We have restated information from our prior period financial statements and identified a material weakness in our internal
control over financial reporting, which could have a material adverse effect on our business.
In this Form 10-K we are restating certain information in the consolidated cash flow statements that were included in
our 2013 Form 10-K and quarterly reports on Form 10-Q for each of the quarters in 2014. For further detail on the financial
statement impacts and the adjustments made as a result of the restatement, see Notes 1 and 27 of the consolidated financial
statements.
Our management determined that there was a material weakness in our internal control over financial reporting with
respect to our Consolidated Statement of Cash Flow for the year ended December 31, 2014. As a result of this determination,
management has concluded that our internal control over financial reporting and our disclosure controls and procedures were
not effective as of December 31, 2014. The specific material weakness is described herein in Part II -Item 9A, Controls and
Procedures under Management’s Report on Internal Control Over Financial Reporting. We have taken a number of actions and
continue to devote significant time and attention to remedy the identified material weakness in internal control over financial
reporting. However, if we do not complete our remediation in a timely manner or if our remediation plan is inadequate, there
will continue to be an increased risk of future material misstatements in our annual or interim financial statements.
Restatements could subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, investor
litigation and other adverse actions. Moreover, we may be the subject of negative publicity focusing on the financial statement
adjustments and resulting restatement and negative reactions from our stockholders, creditors or others with which we do
business. The occurrence of any of the foregoing could harm our business, operating results and financial condition.
General Risk Factors
Our framework for managing risks may not be effective in mitigating risk and loss to us.
We have experienced significant issues relating to risk management, and our regulators, including the OCC, continue
to focus on our risk management practices and deficiencies. We recently faced issues with respect to continuity in our risk
management practices following the departure of our chief risk officer in 2013, who was replaced in June 2014. We have
established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we
are subject, including liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and
reputational risk, among others. Although we have made, and continue to make, material changes to our risk management
framework, in part due to guidance provided by our regulators and consultants, there are inherent limitations to our risk
management strategies as there may exist, or develop in the future risks that we have not appropriately anticipated or identified.
Furthermore, as our business changes or grows in the future, our risk management framework may not keep pace with such
changes and developments, and we may not be able to appropriately identify, monitor or manage new risks associated with our
changing business. If our risk management framework proves ineffective, we could suffer unexpected losses which could have
a materially adverse effect on our results of operations or financial condition.
35
Our network and computer systems on which we depend could fail, experience an interruption, or experience a cyber-
security attack which could adversely affect our business, financial condition and results of operations.
Our businesses are dependent on our ability to process, record and monitor a large number of complex transactions. If
our financial, accounting, or other data processing systems fail, experience an interruption or breach in security or have other
significant shortcomings, we could be materially adversely affected. Our computer systems could be vulnerable to unforeseen
problems. Because we conduct part of our business over the Internet and outsource several critical functions to third parties, our
operations depend on our ability, as well as that of third-party service providers, to protect computer systems and network
infrastructure against damage from fire, power loss, telecommunications failure, physical break-ins or similar catastrophic
events. Any damage or failure that causes interruptions in operations could have a material adverse effect on our business,
financial condition and results of operations.
In addition, a significant risk related to online financial transactions is the secure transmission of confidential
information over public networks. Our Internet banking system relies on encryption and authentication technology to provide
the security and authentication necessary to effect secure transmission of confidential information. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the
algorithms our third-party service providers use to protect customer transaction data. If any such compromise of security were
to occur, it could have a material adverse effect on our business, financial condition and results of operations. In addition, if
another provider of commercial services through the Internet were to suffer damage from physical break-in, security breach or
other disruptive problems caused by the Internet or other users, the use and continued public acceptance of the Internet for
commercial transactions, including Internet banking, could suffer. This type of event could deter our potential customers or
cause customers to leave us and thereby materially and adversely affect our business, financial condition and results of
operations.
To date we have not experienced any material incidents relating to cyber-security or other forms of information
security breaches, although there can be no assurance that we will not suffer such losses in the future given the rapidly
expanding and evolving cyber-security threats that exists today. This is especially true because techniques used tend to change
frequently or are not recognized until launched, and attacks can originate from a wide array of sources, including unrelated third
parties. These risks may increase in the future given our increased emphasis on Internet based products and services, including
mobile banking and mobile payments. As cyber-security threats continue to evolve, we may be required to expend additional
resources to continue to modify or refine our protective measures against these threats, and we may be unable to anticipate or
implement effective preventative measures against security breaches. There are no assurances that our security measures or
efforts to upgrade and maintain our computer and network systems and processes will be adequate and any failures,
interruptions or security breaches could adversely affect our business, financial condition and results of operations.
The collection, processing, storage, use and disclosure of personal data could give rise to liabilities as a result of
governmental regulation, conflicting legal requirements or differing views of personal privacy rights.
In the processing of consumer transactions, our businesses receive, transmit and store a large volume of personally
identifiable information and other user data. The collection, sharing, use, disclosure and protection of this information are
governed by the privacy and data security policies maintained by us and our businesses. Moreover, there are federal, state and
international laws regarding privacy and the storing, sharing, use, disclosure and protection of personally identifiable
information and user data. Specifically, personally identifiable information is increasingly subject to legislation and regulations
in numerous jurisdictions around the world, the intent of which is to protect the privacy of personal information that is
collected, processed and transmitted in or from the governing jurisdiction. We could be adversely affected if legislation or
regulations are expanded to require changes in business practices or privacy policies, or if governing jurisdictions interpret or
implement their legislation or regulations in ways that negatively affect our business, financial condition and results of
operations.
Our businesses may also become exposed to potential liabilities as a result of differing views on the privacy of
consumer and other user data collected by these businesses. Our failure, and/or the failure by the various third-party vendors
and service providers with whom we do business, to comply with applicable privacy policies or federal, state or similar
international laws and regulations or any compromise of security that results in the unauthorized release of personally
identifiable information or other user data could damage the reputation of these businesses, discourage potential users from our
products and services and/or result in fines and/or proceedings by governmental agencies and/or consumers, one or all of which
could adversely affect our business, financial condition and results of operations.
36
Lack of system integrity or credit quality related to funds settlement could adversely affect our results of operations.
We settle funds on behalf of financial institutions, other businesses and consumers and receive funds from clients, card
issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by us
include wire transfers, debit card, credit card and electronic bill payment transactions. These payment activities rely upon the
technology infrastructure that facilitates the verification of activity with counterparties and the facilitation of the payment. If the
continuity of operations or integrity of our processing were compromised, it could result in a financial loss to us due to a failure
in payment facilitation. In addition, we may issue credit to consumers, financial institutions or other businesses as part of the
funds settlement. A default on this credit by a counterparty could adversely affect our results of operations.
We are a controlled company that is exempt from certain NYSE corporate governance requirements.
Our common stock is currently listed on the NYSE. The NYSE generally requires a majority of directors to be
independent and requires audit, compensation and nominating committees to be composed solely of independent directors.
However, under the applicable NYSE rules, if another company owns more than 50 percent of the voting power of a listed
company, that company is considered a "controlled company" and exempt from rules relating to independence of the board of
directors and the compensation and nominating committees. We are a controlled company because MP Thrift beneficially owns
more than 50 percent of our outstanding voting stock. A majority of the directors on the compensation and nominating
committees are affiliated with MP Thrift. MP Thrift has the right, if exercised, to designate a majority of the directors on the
board of directors. Accordingly, our stockholders do not have, and may never have, the same protections afforded to
stockholders of other companies subject to all of the corporate governance requirements of the NYSE. If we become unable to
continue to be deemed a controlled company, we would be required to meet these independence requirements and, if we are not
able to do so, our common stock could be delisted from the NYSE.
Our controlling stockholder has significant influence over us, including control over decisions that require the approval of
stockholders, whether or not such decisions are in the best interests of other stockholders.
MP Thrift beneficially owns a substantial majority of our outstanding common stock and as a result, has control over
our decisions to enter into any corporate transaction and also the ability to prevent any transaction that requires the approval of
our board of directors or the stockholders regardless of whether or not other members of our board of directors or stockholders
believe that any such transactions are in their own best interests. So long as MP Thrift continues to hold a majority of our
outstanding common stock, it will have the ability to control the vote in any election of directors and other matters being voted
on, and continue to exert significant influence over us. Furthermore, MP Thrift may have interests that could diverge from the
interests of other stockholders.
We could, as a result of a stock offering or future trading activity in our common or preferred stock, experience an
"ownership change" for tax purposes that could cause us to permanently lose a portion of U.S. federal deferred tax assets.
Our net deferred tax asset includes both federal and state operating losses. During the fourth quarter 2013, we reversed
100 percent of the valuation allowance on the federal DTA and a portion of the state DTA, which had been previously
established as of September 30, 2009. Our ability to use our deferred tax assets to offset future taxable income will be
significantly limited if we experience an "ownership change" as defined for U.S. federal income tax purposes. MP Thrift, our
controlling stockholder held approximately 63.2 percent of common stock as of December 31, 2014. As a result of MP Thrift's
ownership, issuances or sales of common stock or other securities in the future or certain other direct or indirect changes in
ownership, could result in an "ownership change" under Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"). Section 382 of the Code imposes restrictions on the use of a corporation’s net operating losses, certain recognized
built-in losses, and other carryovers after an "ownership change" occurs. An "ownership change" is generally a greater than 50
percentage point increase by certain "five percent shareholders" during the testing period, which is generally the three year-
period ending on the transaction date. Upon an "ownership change," a corporation generally is subject to an annual limitation
on its prechange losses and certain recognized built-in losses equal to the value of the corporation’s market capitalization
immediately before the "ownership change" multiplied by the long-term tax-exempt rate (subject to certain adjustments). The
annual limitation is increased each year to the extent that there is an unused limitation in a prior year. Since U.S. federal net
operating losses generally may be carried forward for up to 20 years, the annual limitation also effectively provides a cap on the
cumulative amount of prechange losses and certain recognized built-in losses that may be utilized. Prechange losses and certain
recognized built-in losses in excess of the cap are effectively lost.
The relevant calculations under Section 382 of the Code are technical and highly complex. Any stock offering,
combined with other ownership changes, could cause us to experience an "ownership change." If an "ownership change" were
37
to occur, we believe it could cause us to permanently lose the ability to realize a portion of our deferred tax asset, resulting in
reduction to total shareholders’ equity.
Even if there is an "ownership change," and part or all of our deferred tax assets would be limited, our obligations
under the terms of the DOJ Agreement would not be relieved. Moreover, if we or the Bank are party to a business transaction so
large that it causes the deferred tax asset to be completely eliminated, then 12 months following the transaction we, or our
successor, are required to begin making the additional payments required under the DOJ Agreement, for more information see
Item 1. Business.
We are subject to a number of legal or regulatory proceedings which can be complicated and slow moving, thus making
them difficult to predict.
At any given time, we are defending ourselves against a number of legal and regulatory proceedings. Proceedings or
actions brought against us may result in judgments, settlements, fines, penalties, injunctions, business improvement orders,
consent orders, supervisory agreements, restrictions on our business activities or other results adverse to us, which could
materially and negatively affect our businesses. If such claims and other matters are not resolved in a manner favorable to us,
they may result in significant financial liability and/or adversely affect the market perception of us and our products and
services, as well as impact customer demand for those products and services. In addition, 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 also have been, and may continue to be in the future, subject to stockholder derivative actions, which
could seek significant damages or other relief. Any financial liability or reputational damage could have a material adverse
effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Moreover, claims asserted against us can be highly complicated and slow to develop, thus 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 continue to experience a high level of litigation and regulatory scrutiny and investigations relating to our business and
operations. The results of these legal and regulatory proceedings could lead to significant monetary damages or penalties,
restrictions on the way in which we conduct our business, or reputational harm.
Although we establish accruals for legal proceedings when information related to the loss contingencies represented by
those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have
accruals for all legal proceedings where we face a risk of loss. In addition, 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. Thus, our ultimate losses may be higher, and possibly significantly so,
than the amounts accrued for legal loss contingencies.
For a further discussion of the unpredictability of legal proceedings and description of certain of our pending legal
proceedings, see Note 23 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and
Supplementary Data, herein.
Other Risk Factors
The above description of risk factors is not exhaustive. Other risk factors are described elsewhere herein as well as in
other reports and documents that we file with or furnish to the SEC. Other factors that could also cause results to differ from
our expectations may not be described in any such report or document. Each of these factors could by itself, or together with
one or more other factors, adversely affect our business, results of operations and/or financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
At December 31, 2014, we operated through our headquarters in Troy, Michigan, a regional office in Jackson,
Michigan, 107 banking centers in Michigan and 16 home loan centers in 13 states. We also maintain five wholesale lending
offices, one warehouse lending office, one underwriting office and one commercial lending office. Our banking centers consist
of 75 free-standing office buildings, eight in-store banking centers and 24 centers in buildings in which there are other tenants,
typically strip malls.
We own the buildings and land for 71 of our offices (including our headquarters), own the building, but lease the land
for one office, and lease the remaining 77 offices. The offices that we lease have lease expiration dates ranging from 2015 to
2023.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to legal proceedings incident to its business. See Note 23 of the Consolidated
Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein, which is incorporated herein by
reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
39
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PART II
Our common stock trades on the NYSE under the trading symbol FBC. At December 31, 2014, there were 56,332,307
shares of our common stock outstanding held by approximately 17,117 stockholders of record. The following table shows the
high and low sale prices for our common stock during each calendar quarter during 2014 and 2013.
Quarter Ending
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
Dividends
$
$
Highest Sale
Price
Lowest Sale
Price
$
$
16.78
19.25
21.83
22.57
19.62
16.96
14.94
20.25
14.42
16.26
16.43
19.57
14.25
13.75
12.41
13.03
We have not paid dividends on our common stock since the fourth quarter of 2007. The amount and nature of any
dividends declared on our common stock in the future will be determined by our board of directors in their sole discretion. We
are generally prohibited from making any dividend payments on stock except pursuant to the prior non-objection of the Federal
Reserve as set forth in the Supervisory Agreement. In addition, we are prohibited from paying dividends on our common stock
so long as we have deferred and unpaid dividends on our preferred stock issues and deferred and unpaid interest on our trust
preferred securities.
In addition, our principal sources of funds are cash dividends paid by the Bank and other subsidiaries, investment
income and borrowings. Federal laws and regulations limit the amount of dividends or other capital distributions that the Bank
may pay us. The Bank has an internal practice to remain "well-capitalized" under OCC capital adequacy regulations as
discussed above. The Bank does not currently expect to pay dividends to us and, even if it determined to do so, would not make
payments if the Bank was not well-capitalized at the time or if such payment would result in the Bank not being well-
capitalized. In addition, the Bank must seek prior approval from the OCC at least 30 days before it may make a dividend
payment or other capital distribution to us.
Equity Compensation Plan Information
The following table sets forth certain information with respect to securities to be issued under our equity compensation
plans as of December 31, 2014.
Plan Category
Equity compensation plans approved by security
holders (1)
Number of
Securities to Be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
63,598
$
94.33
737,861
(1) See Note 20 of the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein, for
additional information regarding the 2006 Equity Incentive Plan (the “2006 Plan”).
Sale of Unregistered Securities
We made no unregistered sales of our equity securities during the fiscal year ended December 31, 2014.
40
Issuer Purchases of Equity Securities
We made no purchases of equity securities during the fiscal year ended December 31, 2014.
Performance Graph
CUMULATIVE TOTAL STOCKHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDICES
DECEMBER 31, 2009 THROUGH DECEMBER 31, 2014
Nasdaq Financial
Nasdaq Bank
S&P Small Cap 600
Russell 2000
Flagstar Bancorp
December 31, 2009
December 31, 2010
December 31, 2011
December 31, 2012
December 31, 2013
December 31, 2014
100
112
97
111
153
157
100
125
125
143
200
209
100
125
118
136
186
193
100
27
8
32
33
26
100
112
98
113
158
162
41
ITEM 6. SELECTED FINANCIAL DATA
Summary of Consolidated
Statements of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income (loss) after
provision for loan losses
Noninterest income
Noninterest expense
(Loss) income before federal income
taxes provision
(Benefit) provision for federal
income taxes (1)
Net (loss) income
Preferred stock dividends/accretion
Net (loss) income attributable to
common stock
(Loss) income per share:
Basic (2)
Diluted (2)
Weighted average shares outstanding:
Basic (2)
Diluted (2)
$
$
$
$
For the Years Ended December 31,
2014
2013
2012
2011
2010
(In thousands, except per share data and percentages)
$
285,561
39,271
246,290
(131,553)
$
330,687
144,036
186,651
(70,142)
$
480,970
183,739
297,231
(276,047)
$
465,409
220,036
245,373
(176,931)
114,737
361,065
579,246
116,509
652,343
918,115
21,184
1,021,242
989,695
68,442
385,516
634,680
532,781
322,118
210,663
(426,353)
(215,690)
453,680
610,699
(103,444)
(149,263)
52,731
(180,722)
(372,709)
(33,979)
(69,465)
(483)
(416,250)
266,987
(5,784)
(69,948) $
261,203
(1.72) $
(1.72) $
56,247
56,247
4.40
4.37
56,063
56,518
$
$
$
(15,645)
68,376
(5,658)
62,718
0.88
0.87
55,762
56,194
$
$
$
1,056
(181,778)
(17,165)
2,104
(374,813)
(18,748)
(198,943) $
(393,561)
(3.62) $
(3.62) $
55,434
55,434
(24.36)
(24.36)
16,157
16,157
Mortgage loans originated (3)
$ 24,607,550
$ 37,481,877
$ 53,586,856
$ 26,612,800
$ 26,560,810
Other loans originated
Mortgage loans sold and securitized
$
490,849
$ 24,407,054
$
300,823
$ 39,074,649
$
754,155
$ 53,094,326
$
700,969
$ 27,451,362
$
40,420
$ 26,506,672
Interest rate spread (4)
Net interest margin (5)
2.80 %
2.91 %
1.50%
1.72%
1.96%
2.26%
1.85 %
2.07 %
1.43 %
1.67 %
Average interest earning assets
$ 8,400,413
$ 10,881,618
$ 13,104,401
$ 11,803,670
$ 12,522,639
Average interest paying liabilities
Average stockholders’ equity
$ 6,780,341
$ 1,406,038
$
$
9,337,936
$ 10,786,252
$ 10,539,369
$ 11,437,410
1,238,550
$
1,192,281
$ 1,185,731
$ 1,074,571
Return on average assets
Return on average equity
Efficiency ratio
Equity/assets ratio (average for the
period)
Net charge-offs to average LHFI
(0.71)%
(4.97)%
95.4 %
14.22 %
1.07 %
2.08%
21.09%
109.4%
9.87%
4.00%
0.43%
5.26%
75.1%
8.10%
4.43%
(1.49)%
(16.78)%
100.6 %
8.88 %
2.14 %
(2.81)%
(36.63)%
91.9 %
7.66 %
9.34 %
(1) The effective tax rate was 32.9 percent, 29.7 percent, 0.6 percent and 0.6 percent for the years ended December 31, 2014, 2012,
2011 and 2010, respectively.
(2) For the years ended December 31, 2011 and 2010, the amounts have been restated for one-for-ten stock split announced September
27, 2012 and began trading on October 11, 2012.
(3) Includes residential first mortgage and second mortgage loans.
(4) Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period
and the annualized average rate of interest paid on average interest-bearing liabilities for the period.
(5) Net interest margin is the annualized effect of the net interest income divided by that period's average interest-earning assets.
42
Summary of Consolidated
Statements of Financial Condition
$
Total assets
$
Loans receivable, net
$
Mortgage servicing rights
Total deposits
$
Federal Home Loan Bank advances $
$
Long-term debt
$
Stockholders' equity (1)
$
Book value per common share (2)
Number of common shares
outstanding (2)
Ratio of allowance for loan losses
to nonperforming LHFI (3) (4)
Ratio of allowance for loan losses
to LHFI (3) (4)
Ratio of nonperforming assets to
total assets (3)
Equity-to-assets ratio
Common equity-to-assets ratio
Tier 1 capital ratio (to adjusted total
assets) (5)
Total risk-based capital ratio (to
risk-weighted assets) (5)
Number of banking centers
Number of employees (excluding
loan officers and account
executives)
Number of loans officers and
account executives
2014
2013
2012
2011
2010
(In thousands, except per share data and percentages)
December 31,
9,839,851
6,522,705
257,827
7,068,606
514,000
331,194
1,372,821
19.64
$
$
$
$
$
$
$
$
9,407,301
6,637,247
284,678
6,140,326
988,000
353,248
1,425,874
20.66
$ 14,082,012
$ 10,914,163
710,791
$
8,294,295
$
3,180,000
$
247,435
$
1,159,362
$
16.12
$
$ 13,637,473
$ 10,420,739
510,475
$
7,689,988
$
3,953,000
$
248,585
$
1,079,716
$
14.80
$
$ 13,643,504
$ 10,291,435
580,299
$
7,998,099
$
3,725,083
$
248,610
$
1,259,663
$
18.30
$
56,332
56,138
55,863
55,578
55,331
255.7%
145.9%
7.01%
5.42%
1.42%
13.95%
11.24%
1.95%
15.16%
12.33%
12.43%
13.97%
23.85%
107
28.11%
111
2,530
209
2,894
359
76.3%
5.61%
3.70%
8.23%
6.38%
9.26%
17.18%
111
3,328
334
65.1%
4.52%
4.43%
7.92%
6.05%
8.95%
16.64%
111
2,839
297
86.1%
4.35%
4.35%
9.23%
7.41%
9.61%
18.55%
162
3,001
278
(1) Includes preferred stock totaling $266.7 million, $266.2 million, $260.4 million, $254.7 million and $249.2 million at December 31,
2014 through 2010, respectively.
(2) Restated for one-for-ten reverse stock splits effective on October 10, 2012 and May 27, 2010.
(3) Bank only assets and does not include nonperforming loans held-for-sale.
(4) Excludes loans carried under the fair value option
(5) Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of risk-based
capital and total risk-based capital. These ratios are applicable to the Bank only.
43
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Recent Developments
Critical Accounting Policies
Allowance for Loan Losses
Income tax estimates
Representation and Warranty Reserve
Fair Value Measurements
Accounting and Reporting Development
Summary of Operation
Results of Operations
Net Interest Income
Rate/Volume Analysis
Provision for Loan Losses
Noninterest Income
Noninterest Expense
Benefit for Income Taxes
Fourth Quarter Results
Operating Segments
Mortgage Originations
Mortgage Servicing
Community Banking
Other
Risk Management
Credit Risk
Loans Held-For-Sale
Loans Repurchased with Government Guarantees
Loans Held-For-Investment
Quality of Earning Assets
Troubled Debt Restructuring
Allowance For Loan Losses
Mortgage Servicing Rights
Repossessed Assets
Investment Securities Available-For-Sale
Representation and Warranty Reserve
Liquidity Risk
Federal Home Loan Bank Stock
Deposits
Borrowings
Loan Sales
Loan Repayment
Contractual Obligations and Commitments
Market Risk
Operational Risk
Capital Resources
Impact of Inflation and Changing Prices
Use of Non-GAAP Financial Measurements
44
45
45
45
45
47
47
47
48
48
49
49
52
52
53
57
59
59
61
62
65
68
77
78
79
79
79
79
81
83
86
89
90
91
91
92
92
94
96
97
97
98
98
100
100
102
102
The following is an analysis of our financial condition and results of operations. You should read this item in
conjunction with our Consolidated Financial Statements and related notes filed with this report in Part II, Item 8. Financial
Statements and Supplementary Data and the description of our business filed here within Part 1, Item I. Business.
Overview
We are a Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted
through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. At December 31, 2014,
our total assets were $9.8 billion, making us the largest bank headquartered in Michigan and one of the top ten largest savings
banks in the United States. We have four major operating segments: Mortgage Originations, Mortgage Servicing, Community
Banking and Other. Through these lines of business, we emphasize the delivery of a complete set of mortgage and banking
products and services and are distinguished by local delivery, customer service and product pricing.
Recent Developments
Organizational Restructuring
On January 16, 2014, we completed an organizational restructuring to reduce expenses consistent with our previously
communicated strategy of optimizing our cost structure across all business lines. As part of this restructuring initiative, we
reduced full-time equivalents by approximately 350 during the first quarter 2014. Including the restructuring completed in the
third quarter 2013, we have reduced staffing levels across the organization by approximately 600 full-time equivalents from our
September 30, 2013 level.
Change in Accountants
We made a decision to change audit firms in 2014. On October 24, 2014, the Audit Committee of the Company and the
Bank approved the dismissal of Baker Tilly Virchow Krause, LLP and the appointment of PricewaterhourseCoopers, LLP.
Further details regarding this change can be found on our Interim Report on Form 8-K, which was filed on October 30, 2014,
and will be available via the Form 8-K/A filing related to this matter that management intends to make following the filing of
this report on Form 10-K.
Consumer Financial Protection Bureau Settlement
The Bank has entered into a Consent Order with the Consumer Financial Protection Bureau (the "CFPB"). The
Consent Order relates to alleged violations of federal consumer financial laws arising from the Bank's loss mitigation practices
and default servicing operations dating back to 2011. Under the terms of the consent order, the Bank has paid $27.5 million for
borrower remediation and $10.0 million in civil money penalties. The settlement does not involve any admission of wrongdoing
on the part of the Bank or its employees, directors, officers or agents.
Critical Accounting Policies
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP and reflect general practices
within our industry. Our significant accounting standards are described in Note 1 to the Consolidated Financial Statements.
Certain of our significant accounting policies require complex judgments and estimates to determine values of assets and
liabilities. The more judgmental, uncertain and complex estimates are further discussed below. These estimates are based on
information available to management as of the date of the Consolidated Financial Statements. Accordingly, as this information
changes, future financial statements could reflect different estimates or judgments.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of probable losses that are inherent in our loans held-
for-investment portfolio but which have not yet been realized as of the date of our Consolidated Statements of Financial
Condition. We recognize these losses when (a) available information indicates that it is probable that a loss has occurred and
(b) the amount of the loss can be reasonably estimated. We believe that the accounting estimates related to the allowance for
loan losses are critical because they require us to make subjective and complex judgments about the effect of matters that are
inherently uncertain. As a result, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result
in significant changes in the allowance for loan losses. Our methodology for assessing the adequacy of the allowance involves a
significant amount of judgment. Although management believes its process for estimating the allowance for loan losses
45
adequately considers all of the factors that could potentially result in loan losses, the process also includes subjective elements
and may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional
provision for loan losses could be required that could adversely affect operations or financial position in future periods.
Consumer loans. Impaired residential loans include loan modifications considered to be TDRs as well as all
nonperforming loans. Fair value of nonperforming residential mortgage loans, including re-defaulted TDRs and certain other
severely past due loans, is based on the underlying collateral value obtained through appraisals or broker's price opinions,
updated at least semi-annually, less management's estimates of cost to sell. The allowance allocated to TDRs performing under
the terms of their modification is based on the present value of the expected future cash flows discounted at the loan's effective
interest rate as these loans are not considered to be collateral dependent.
For those loans not individually evaluated for impairment, management has sub-divided the consumer loans into
homogeneous portfolios for which the allowance for loan losses is determined on a collective basis utilizing a historical loss
model that includes a qualitative factor component.
The model is based on historical loss rates and utilizes a loss emergence period that represents the average amount of
time between when the loss event first occurs and when the specific loan is charged-off. The time period starts when the
borrower first begins to experience financial difficulty and continues until the actual loss becomes visible to the Company.
Management utilizes a qualitative factor matrix related to each loan class in the consumer portfolio, which includes the
following factors: changes in lending policies and procedures, changes in economic and business conditions, changes in the
nature and volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in the quality
of the loan review system, changes in the value of underlying collateral for collateral-dependent loans, changes in
concentrations of credit, and other internal or external factor changes. These factors are used to reflect changes in the
collectability of the portfolio not captured by the historical loss model. As such, the qualitative factors supplement actual loss
experience based on management's judgment to estimate the loss within the loan portfolios based upon market and other
indicators.
Commercial loans. Nonperforming commercial and commercial real estate loans are considered to be impaired and
have an allowance allocated based on the underlying collateral's appraised value, less management's estimates of costs to sell.
In estimating the fair value of collateral, we utilize outside fee-based appraisers to evaluate various factors such as occupancy
and rental rates in our real estate markets and the level of obsolescence that may exist on assets acquired from commercial
business loans. Appraisals are updated at least annually but may be obtained more frequently if changes to the property or
market conditions warrant.
For those loans not individually evaluated for impairment, management has sub-divided the commercial loans into
homogeneous portfolios for which the allowance for loan losses is determined on a collective basis utilizing a historical loss
model that represent management’s best estimate of inherent loss.
The commercial loan portfolio is segmented into commercial "legacy" loans (loans originated prior to January 1, 2011
and all loans risk rated substandard or worse) and commercial "new" loans (loans originated on or after January 1, 2011 and
former "legacy" loans that have been re-underwritten using the current underwriting standards). Due to the changes in our
strategy and to changes in underwriting and origination practices and controls related to that strategy, management determined
the segmentation better reflected the dynamics in the two portfolios. The loss rates attributed to the "legacy" portfolio are based
on historical losses of this segment. Due to the brief period of time that loans in the "new" portfolio have been outstanding, and
thus the absence of a sufficient loss history for that portfolio, we used loss data from a third party data aggregation firm
(adjusting for our qualitative factors) as a proxy for estimating an allowance for loan losses on the "new" portfolio. We
separately identify a population of commercial banks with similar size balance sheets (and loan portfolios) to serve as our peer
group. We use this peer group's publicly available historical loss data (adjusted for our qualitative factors) as a new proxy for
loss rates used to determine the allowance for loan losses on our "new" commercial portfolio.
Management uses a qualitative factor matrix for each loan segment in the portfolio, which includes the following
factors: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and
volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in the quality of the loan
review system, changes in the value of underlying collateral for collateral-dependent loans, changes in concentrations of credit,
and changes in other external factors. These factors are used to reflect changes in the collectability of the portfolio not captured
by the historical loss rates. As such, the qualitative factors supplement actual loss experience and allow us to better estimate the
loss within the loan portfolios based upon market and other indicators.
46
Deferred Tax Assets
We apply a more-likely-than-not recognition threshold for all tax uncertainties. Such uncertainties include any claims
by the Internal Revenue Service for income taxes, interest, and penalties attributable to audits of open tax years.
Net deferred tax assets, reported as a component of other assets on the Consolidated Balance Sheet, represent the net
decrease in taxes expected to be paid in the future because of net operating losses ("NOL"), tax credit carryforwards and the
future reversals of temporary differences in the bases of assets and liabilities as measured by tax laws versus their bases as
reported in the financial statements. NOL and tax credit carryforwards result in reductions to future tax liabilities, and many of
these attributes can expire if not utilized within certain periods. We consider the need for valuation allowances to reduce net
deferred tax assets to the amounts that we estimate are more-likely-than-not to be realized. While we have established some
valuation allowances for certain state deferred tax assets, we have concluded that no valuation allowance was necessary with
respect to all U.S. federal deferred tax assets, including NOL and tax credit carryforwards. Management’s conclusion is
supported by future forecasts of taxable income and historical experience adjusted for items considered to not be reflective of
the Company’s ability to generate future earnings. Significant changes to our estimates, such as a substantial worsening of the
mortgage origination market, a rapid decline in home prices or an economic recession, could lead management to reassess its
valuation allowance conclusions. See Note 21 to the Consolidated Financial Statements for additional information.
Representation and Warranty Reserve
When we sell mortgage loans we make customary representations and warranties to the purchasers about various
characteristics of each loan. The estimate of the liability for obligations under representations and warranties relating to
transfers of residential mortgage loans is dependent on a variety of factors. These factors include actual defaults, estimated
future defaults, historical loss experience, estimated home prices, other economic conditions, estimated probability that we will
receive a repurchase request, including consideration of whether presentation thresholds will be met and estimated probability
that we will be required to repurchase a loan. The estimate of the liability for obligations under representations and warranties is
based upon currently available information, significant judgment and a number of other factors, including those set forth above,
that are subject to change. Changes to any one of these factors could significantly impact the estimate of our liability. The
representations and warranties provision may vary significantly each period as the methodology used to estimate the expense
continues to be refined based on the level and type of repurchase requests presented, defects identified, the latest experience
gained on repurchase requests, and other relevant facts and circumstances.
Fair Value Measurements
A portion of our assets and liabilities are carried at fair value on the Consolidated Statements of Financial Condition,
with changes in fair value recorded either through earnings or other comprehensive income (loss) in accordance with applicable
accounting principles generally accepted in the United States.
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, which include assumptions for interest rates,
discount rates, prepayments and credit losses, are independently verified against observable market data where possible. Where
observable market data is not available, the estimate of fair value becomes more subjective and involves a high degree of
judgment. In this circumstance, fair value is estimated based on management’s judgment regarding the value that market
participants would assign to the asset or liability. Therefore, the results cannot be determined with precision and may not be
realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash
flows, which could significantly affect the results of current or future values.
Level 3 Financial Instruments. Level 3 valuations are based upon financial models using primarily unobservable
inputs. These unobservable inputs reflect estimates of assumptions market participants would use in pricing the asset or
liability. The unobservable inputs are developed based on the best information available in the circumstances, which might
include our financial data such as internally developed pricing models and discounted cash flow methodologies, as well as
instruments for which the fair value determination requires significant management judgment. Fair value measurement and
disclosure guidance differentiates between those assets and liabilities required to be carried at fair value at every reporting
47
period ("recurring") and those assets and liabilities that are only required to be adjusted to fair value under certain
circumstances ("non-recurring").
At December 31, 2014 and 2013, Level 3 assets recorded at fair value on a recurring basis totaled $575.2 million and
$514.7 million, or 5.8 percent and 5.5 percent of total assets, respectively, and consisted primarily of loans held-for-investment,
MSRs, a reverse repurchase agreement investment and mortgage rate lock commitments. At December 31, 2014 and 2013,
there were $165.4 million and $198.8 million Level 3 liabilities recorded at fair value on a recurring basis, respectively, which
primarily consisted of long-term debt and DOJ litigation.
At December 31, 2014 and 2013, Level 3 assets recorded at fair value on a non-recurring basis were $92.8 million and
$106.4 million, respectively, and no Level 3 liabilities were recorded at fair value on a non-recurring basis. The Level 3 assets
recorded at fair value on a non-recurring basis were 0.9 percent and 1.1 percent of total assets at December 31, 2014 and
December 31, 2013, respectively, and consisted of residential first mortgage and commercial real estate impaired loans held-
for-investment and repossessed assets.
Mortgage Servicing Rights. When we sell mortgage loans in the secondary market, we usually retain the right to
continue to service these loans and earn a servicing fee. At the time the loan is sold on a servicing retained basis, we record the
MSR as an asset at its fair value. Determining the fair value of MSRs involves a calculation of the present value of a set of
market driven and MSR specific cash flows. MSRs do not trade in an active market with readily observable market prices.
However, the market price of MSRs is generally a function of demand and interest rates. When mortgage interest rates decline,
mortgage loan prepayments more frequently increase to the extent customers refinance their loans. If this happens, the income
stream from a MSR portfolio will decline and the fair value of the portfolio will decline. Similarly, when mortgage interest rates
increase, mortgage loan prepayments tend to slow and therefore the value of the MSR tends to increase. Accordingly, we must
make assumptions about future interest rates and other market conditions in order to estimate the current fair value of our MSR
portfolio. In certain circumstances, based on the probability of the completion of a sale of MSRs pursuant to a bona-fide
purchase offer, we consider the bid price of that offer and identifiable transaction costs in comparison to the calculated fair
value and may adjust the estimate of fair value to reflect the terms of the pending transaction. See Notes 1, 11 and 24 of the
Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein, for additional information
on MSRs. On an ongoing basis, we compare our fair value estimates based on both unobservable inputs and market inputs,
where available, to report the various assumptions. On a quarterly basis, the value of our MSR portfolio is reviewed by an
outside valuation expert. See Note 24 of the Consolidated Financial Statements for an interest rate sensitivity analysis on the
MSRs.
DOJ litigation. Upon settlement of the DOJ litigation, we elected the fair value option to account for the liability
representing the remaining future payments. As of December 31, 2014 the remaining future payments totaled $118.0 million for
which we use a discounted cash flow model to determine the current fair value. The model utilizes our forecast and considers
multiple scenarios and possible outcomes that impact the timing of the additional payments which are discounted using a risk
free rate adjusted for non-performance risk that represents our credit risk. These scenarios are probability weighted and consider
the view of an independent market participant to estimate the most likely fair value of the liability. As of December 31, 2014,
the liability was $81.6 million.
Refer to Note 24 of the Notes to Consolidated Financial Statements, herein for a further discussion of fair value
measurements.
Accounting and Reporting Developments
See Note 1 to the Consolidated Financial Statements for details of recently issued accounting pronouncements and
their expected impact on our Consolidated Financial Statements.
48
Summary of Operations
Net interest income
Provision for loan losses
Total noninterest income
Total noninterest expense
Benefit for income taxes
Net (loss) income attributable to common stock
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
$
$
246,290
(131,553)
361,065
579,246
(33,979)
(69,948) $
186,651
(70,142)
652,343
918,115
(416,250)
261,203
$
$
297,231
(276,047)
1,021,242
989,695
(15,645)
62,718
Our net loss applicable to common stock for the year ended December 31, 2014 was $69.9 million (loss of $1.72 per
diluted share), compared to net income of $261.2 million ($4.37 per diluted share) for the year ended December 31, 2013.
Net interest income increased $59.6 million for the year ended December 31, 2014 as compared to the same period in
2013 primarily due to our prepayment of Federal Home Loan Bank advances in December 2013 and the deployment of interest
earning deposits into higher yielding investment securities during 2014.
Provision for loan losses increased by $61.4 million for the year ended December 31, 2014 as compared to the same
period in 2013 primarily driven by a change in estimate of our loss emergence period and an increase in the allowance
pertaining to our assessment of the risk associated with payment resets relating to interest-only loans.
Noninterest income decreased $291.3 million for the year ended December 31, 2014 as compared to the same period
in 2013, primarily due to a $226.9 million reduction in net gain on loan sales and loan fees and charges consistent with an
overall residential mortgage industry production decrease, largely impacted by the interest rate environment and the continuing
evolution of the application of new underwriting expectations established by the industry regulators and GSEs. This was
slightly offset by an increase in our market share.
Noninterest expense decreased $338.9 million for the year ended December 31, 2014 as compared to the same period
in 2013. In 2014, our ongoing efforts to optimize our cost structure and manage expenses in line with our current business
model and operating requirements drove a combined $73.2 million reduction in compensation and benefits and legal and
professional fees. The remaining decline is primarily due to the $177.6 million loss on the prepayment of debt and an $85.3
million higher fair value expense recorded associated with the DOJ settlement incurred in 2013.
Income tax benefit decreased $382.3 million for the year ended December 31, 2014 as compared to the same period in
2013 primarily due to the reversal of the deferred tax asset valuation allowance in 2013.
49
Net Interest Income
2014 Compared to 2013
Net interest income increased $59.6 million for the year ended December 31, 2014, compared to the same period in
2013, primarily due to the prepayment of long-term Federal Home Loan Bank advances and lower interest earning asset and
interest bearing liability levels. The overall cost of funds decreased to 0.58 percent for the year ended December 31, 2014, as
compared to 1.53 percent for the year ended December 31, 2013. Net interest income represented 40.6 percent of our total
revenue during the year ended December 31, 2014, compared to 22.2 percent for the year ended December 31, 2013. Our
consolidated net interest margin for the year ended December 31, 2014 increased 119 basis points to 2.91 percent, as compared
to 1.72 percent for the year ended December 31, 2013.
Interest income decreased $45.1 million for the year ended December 31, 2014, compared to the same period in 2013,
primarily due to lower average balances in our mortgage loans available-for-sale and warehouse loans held-for-investment
portfolios. Lower asset levels in these portfolios were primarily due to a decrease in mortgage loan originations during the year
ended December 31, 2014, as compared to the year ended December 31, 2013 which reflects an industry-wide reduction in
mortgage loan originations due to slightly higher rates and tightened industry credit standards.
Interest expense decreased $104.8 million for the year ended December 31, 2014, compared to the same period in
2013, primarily due to a decrease of $2.6 billion in average interest-bearing liabilities. This decline was the result of a $2.0
billion decrease in average Federal Home Loan Bank advances and a $0.6 billion decrease in the average balance of deposits.
2013 Compared to 2012
Net interest income decreased $110.6 million for the year ended December 31, 2013, compared to the same period in
2012, primarily due to a $2.2 billion decrease in the average balance of interest earning assets, partially offset by lower average
balances of certificate of deposits. The overall cost of funds decreased to 1.53 percent for the year ended December 31, 2013, as
compared to 1.70 percent for the year ended December 31, 2012. Net interest income represented 22.2 percent of our total
revenue during the year ended December 31, 2013, compared to 22.5 percent for the year ended December 31, 2012. Our
consolidated net interest margin for the year ended December 31, 2013 decreased 54 basis points to 1.72 percent, as compared
to 2.26 percent for the year ended December 31, 2012.
Interest income decreased $150.3 million for the year ended December 31, 2013, compared to the same period in
2012, primarily due to lower average balance of loans held-for-investment due to commercial and nonperforming residential
first mortgage loan sales, and portfolio run off. Also impacting interest income was lower average balances in the mortgage
loans available-for-sale and warehouse loans held-for-investment portfolios, primarily due to a decrease in mortgage loan
originations during the year ended December 31, 2013, as compared to the same period in 2012.
Interest expense decreased $39.7 million for the year ended December 31, 2013, compared to the same period in 2012,
primarily due to a decrease in the average balance of Federal Home Loan Bank advances, as a result of a reduction in funding
needs from the decrease in new loan originations as compared to the year ended December 31, 2012.
The following table presents on a consolidated basis interest income from average assets and liabilities, expressed in
dollars and yields.
50
For the Years Ended December 31,
2014
2013
2012
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
(Dollars in thousands)
Interest-Earning Assets
Loans held-for-sale
$ 1,533,666 $
65,087
4.24 % $ 2,498,893 $
88,666
3.55 % $ 3,078,690 $ 115,425
3.75 %
Loans repurchased with
government guarantees
Loans held-for-investment
1,215,516
29,099
2.39 %
1,476,801
48,131
3.26 %
2,018,079
64,887
3.22 %
Consumer loans (1)
2,681,456
103,129
Commercial loans (1)
1,293,775
48,592
3.85 %
3.70 %
3,113,183
122,899
1,214,994
53,781
3.95 %
4.37 %
3,632,603
2,887,457
148,201
127,628
Loans held-for-investment
3,975,231
151,721
3.80 %
4,328,177
176,680
4.07 %
6,520,060
275,829
4.08 %
4.35 %
4.21 %
Securities classified as
available-for- sale or
trading
Interest-bearing deposits
and other
1,496,090
39,097
2.61 %
474,205
11,912
2.51 %
573,445
22,609
3.94 %
Total interest-earning assets
8,440,414 $ 285,561
3.38 %
10,881,618 $ 330,687
219,911
557
0.25 %
2,103,542
5,298
0.25 %
3.03 %
914,127
2,220
13,104,401 $ 480,970
0.24 %
3.66 %
Other assets
Total assets
1,445,973
$ 9,886,387
1,673,298
$ 12,554,916
1,622,369
$ 14,726,770
$
421,839 $
586
0.14 % $
397,094 $
769
0.19 % $
363,247 $
950
Interest-Bearing Liabilities
Retail Deposits
Demand deposits
Savings deposits
Money market deposits
Certificate of deposits
3,139,106
19,047
265,819
914,823
525
6,682
Total retail deposits
4,741,587
26,840
Government deposits
Demand deposits
Savings deposits
Certificate of deposits
Total government
deposits
Wholesale deposits
181,779
319,887
349,265
850,931
831
695
1,621
1,147
3,463
31
Total deposits
5,593,349
30,334
2,206
6,731
Federal Home Loan Bank
advances
Other
Total interest-bearing
liabilities
Noninterest-bearing deposits
Other liabilities (2)
Stockholders’ equity
Total liabilities and
stockholders' equity
939,173
247,819
6,780,341
1,140,758
559,250
1,406,038
$ 9,886,387
Net interest-earning assets
$ 1,660,073
Net interest income
Interest rate spread (3)
Net interest margin (4)
Ratio of average interest-
earning assets to interest-
bearing liabilities
0.61 %
0.20 %
0.73 %
0.57 %
0.38 %
0.51 %
0.33 %
0.41 %
3.76 %
0.54 %
0.23 %
2.72 %
2,668,571
16,924
334,945
2,054,834
5,455,444
96,112
203,191
360,406
659,709
60,711
824
18,249
36,766
409
707
1,489
2,605
3,021
6,175,864
42,392
2,914,637
247,435
95,024
6,620
0.63 %
0.25 %
0.89 %
0.67 %
0.43 %
0.35 %
0.41 %
0.39 %
4.98 %
0.69 %
3.22 %
2.68 %
1,775,449
463,490
3,170,103
5,772,289
96,000
280,313
393,731
770,044
296,997
6,839,330
12,828
2,232
38,308
54,318
459
1,539
2,534
4,532
11,293
70,143
3,698,362
106,625
248,561
6,971
0.26 %
0.72 %
0.48 %
1.21 %
0.94 %
0.48 %
0.55 %
0.64 %
0.59 %
3.80 %
1.03 %
2.88 %
2.80 %
39,271
0.58 %
9,337,936
144,036
1.53 %
10,786,253
183,739
1.70 %
1,197,000
781,430
1,238,550
$ 12,554,916
$ 1,543,682
2,066,876
681,360
1,192,281
$ 14,726,770
$ 2,318,148
$ 246,290
$ 186,651
$ 297,231
2.80 %
2.91 %
124.5 %
1.50 %
1.72 %
116.5 %
1.96 %
2.26 %
121.5 %
(1) Consumer loans include: residential first mortgage, second mortgage, HELOC and other consumer loans. Commercial loans include: commercial
real estate, commercial and industrial, commercial lease financing loans and warehouse lines.
Includes company controlled deposits that arise due to the servicing of loans for others, which do not bear interest.
Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.
(2)
(3)
(4) Net interest margin is net interest income divided by average interest-earning assets.
51
Rate/Volume Analysis
The following tables present the dollar amount of changes in interest income and interest expense for the components
of interest-earning assets and interest-bearing liabilities that are presented in the preceding table. The table below distinguishes
between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the
changes related to average interest rates (changes in average rates while holding the initial balance constant). Changes
attributable to both a change in volume and a change in rates were included as changes in rate.
Interest-Earning Assets
Loans held-for-sale
Loans repurchased with
government guarantees
Loans held-for-investment
Consumer loans (1)
Commercial loans (2)
Total loans held-for-investment
Securities available-for-sale or
trading
Interest-earning deposits and
other
Total interest-earning assets
Interest-Bearing Liabilities
Demand deposits
Savings deposits
Money market deposits
Certificate of deposits
Total retail deposits
Demand deposits
Savings deposits
Certificate of deposits
Total government deposits
Wholesale deposits
Total deposits
Federal Home Loan Bank
advances
Other
$
$
For the Years Ended December 31,
2014 Versus 2013 Increase
(Decrease) Due to:
2013 Versus 2012 Increase
(Decrease) Due to:
Rate
Volume
Total
Rate
Volume
Total
(Dollars in thousands)
$
10,659
$
(34,238) $
(23,579) $
(5,021) $
(21,738) $
(26,759)
(10,516)
(8,516)
(19,032)
648
(17,404)
(16,756)
(2,726)
(8,629)
(11,355)
(17,044)
3,440
(13,604)
(19,770)
(5,189)
(24,959)
(4,111)
(1,135)
(5,246)
(21,191)
(72,712)
(93,903)
(25,302)
(73,847)
(99,149)
1,515
25,670
27,185
(6,784)
(3,913)
(10,697)
—
(4,741)
(9,697) $
(35,429) $
(4,741)
(45,126) $
194
(16,209) $
2,884
(134,074) $
3,078
(150,283)
(231) $
48
$
(862)
(129)
(1,442)
(2,664)
(80)
508
(296)
132
(10)
(2,542)
2,985
(170)
(10,125)
(7,262)
366
406
(46)
726
(2,980)
(9,516)
(29,295)
(63,523)
101
10
(183) $
2,123
(299)
(11,567)
(9,926)
286
914
(342)
858
(2,990)
(12,058)
(269) $
88
$
(2,357)
(789)
(6,582)
(9,997)
(51)
(408)
(831)
(1,290)
713
(10,574)
6,453
(619)
(13,477)
(7,555)
1
(424)
(214)
(637)
(8,985)
(17,177)
(181)
4,096
(1,408)
(20,059)
(17,552)
(50)
(832)
(1,045)
(1,927)
(8,272)
(27,751)
(92,818)
111
(104,765) $
$
59,639
10,624
(320)
(270) $
(15,939) $
(22,225)
(31)
(39,433) $
(94,641) $
(11,601)
(351)
(39,703)
(110,580)
Total interest-bearing liabilities
Change in net interest income
$
$
(31,736) $
(73,029) $
22,039
$
37,600
$
(1) Consumer loans include residential first mortgage, second mortgage, HELOC and other consumer loans.
(2) Commercial loans include: commercial real estate, commercial and industrial, commercial lease financing loans and warehouse lending.
52
Provision for Loan Losses
2014 Compared to 2013
The provision for loan losses increased $61.4 million for the year ended December 31, 2014, as compared to the year
ended December 31, 2013. The increase was primarily driven by two changes in estimates: the loss emergence period related to
the portfolio of residential loans and the evaluation of the risk associated with payment resets relating to the interest-only loans.
The loss emergence period is an assumption within our model and represents the average amount of time between
when the loss event first occurs and when the specific loan is charged-off. The time period starts when the borrower first begins
to experience financial difficulty and continues until the actual loss becomes visible to us. We analyzed our recent data
including early stage delinquency, the increase in charge-offs for the first quarter 2014, continued emergence of nonperforming
loans and our assessment of the time from first delinquency to charge-off. As a result, we qualitatively determined that our
estimate of the average loss emergence period has lengthened. This change resulted in a $36.9 million increase to the allowance
for loan loss that reflects our updated estimate of probable losses inherent in the portfolio as of December 31, 2014.
In addition, during the first quarter 2014, certain loans in our interest-only residential first mortgage and HELOC loan
portfolios began to reset. At the point of reset, the borrower’s monthly payment will increase upon inclusion of repayments of
principal and may increase as a result of changes in interest rates. The payment reset increases could give rise to a "payment
shock" i.e. a sudden and significant increase in the borrower’s monthly payment. For instance, as of November 30, 2014 we
estimated an average payment shock for borrowers with resets in 2015 of approximately 101 percent (i.e. their total monthly
payments increase by 101 percent). The extent of the payment shock may increase the likelihood that a borrower could default.
Data we reviewed through December 31, 2014 indicated that interest-only loan modifications and defaults were greater than our
previous estimates while in addition refinancing levels were below our previous estimates. These conditions resulted in a $59.2
million increase to the allowance for loan loss as of December 31, 2014.
Data we reviewed through December 31, 2014 indicated that actual modifications and defaults in the interest-only
portfolio were greater than we had estimated at December 31, 2013. Additionally, these loans are refinancing at levels below
those previously estimated. We believe that the combination of these two factors indicated an increase in future delinquencies
and charge-offs; therefore, the allowance for loan losses was increased to $297.0 million at December 31, 2014 from $207.0
million at December 31, 2013. These amounts include approximately $111.5 million at December 31, 2014 and $52.3 million at
December 31, 2013 related to certain interest-only loans included in our residential first mortgage and HELOC loan held-for-
investment portfolios which increased due to both the estimates of the average loss emergence period and our qualitative
assessment of the reset risk.
Net charge-offs for the year ended December 31, 2014 totaled $41.6 million, compared to $168.1 million for the year
ended December 31, 2013. As a percentage of the average loans held-for-investment, net charge-offs for the year ended
December 31, 2014 decreased to 1.07 percent from 4.00 percent for the year ended December 31, 2013. The decrease was
primarily due to lower net credit losses on bulk sales, lower levels of nonperforming loans and lower loss severity due to
continuing improvement in underlying collateral values.
2013 Compared to 2012
The provision for loan losses decreased $205.9 million for the year ended December 31, 2013, as compared to the year
ended December 31, 2012. The decrease was primarily due to the refinements to existing loss models adopted during the first
quarter 2012. The decrease also reflects a release of reserves associated with the second and third quarter 2013 troubled debt
restructure ("TDR") and nonperforming residential first mortgage loan sales, overall lower net charge-offs, and refinements to
the estimates of the allowance for loan losses throughout 2013.
Net charge-offs for the year ended December 31, 2013 totaled $168.1 million, compared to $289.0 million for the year
ended December 31, 2012. As a percentage of the average loans held-for-investment, net charge-offs for the year ended
December 31, 2013 decreased to 4.00 percent from 4.43 percent for the year ended December 31, 2012. The decrease was
primarily due the write down of specific valuation allowances as a result of the refinements to existing loss models adopted
during the first quarter 2012 and overall lower net charge-offs due to improvement in credit quality.
See the section captioned "Allowance for Loan Losses" in this discussion for further analysis of the provision for loan
losses.
53
Noninterest Income
The following table sets forth the components of our noninterest income.
Loan fees and charges
Deposit fees and charges
Net gain on loan sales
Loan administration income
Net return on mortgage servicing asset
Net gain on sale of assets
Net impairment losses
Representation and warranty provision
Other noninterest income
Total noninterest income
2014 Compared to 2013
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
$
73,033
21,625
205,803
24,304
24,082
12,361
—
(10,011)
9,868
361,065
$
$
103,501
20,942
402,193
6,035
90,609
2,172
(8,789)
(36,116)
71,796
652,343
$
$
142,908
20,370
990,898
(797)
88,485
—
(2,192)
(256,289)
37,859
1,021,242
Total noninterest income decreased $291.3 million during the year ended December 31, 2014 from the year ended
December 31, 2013. The decrease was primarily due to decreases in net gain on loan sales, net return on mortgage servicing
asset, lower other noninterest income and loan fees and charges, partially offset by a decrease in representation and warranty
provision.
Our Mortgage Originations and Community Banking segments both earn loan origination fees and collect other
charges in connection with originating residential first mortgages, commercial loans and other consumer loans held-for-sale and
held-for-investment. Total loan fees and charges decreased $30.5 million for the year ended December 31, 2014, compared to
the year ended December 31, 2013, primarily due to a decrease in consumer loan originations to $24.7 billion, as compared to
$37.5 billion during the year ended December 31, 2013. The decrease was slightly offset by a $10.0 million unanticipated
benefit from a contract renegotiation during the year ended December 31, 2014.
Our Community Banking segment collects deposit fees and other charges such as fees for non-sufficient funds checks,
cashier check fees, ATM fees, overdraft protection and other account fees for services we provide to our banking customers.
Deposit fees and charges increased $0.7 million for the year ended December 31, 2014, compared to the year ended
December 31, 2013, primarily due to an increase in deposit accounts. Our total number of customer checking accounts
increased 2.7 percent from approximately 111,230 at December 31, 2013 to 114,286 as of December 31, 2014.
The increase of $18.3 million in loan administration income during the year ended December 31, 2014, as compared to
the year ended December 31, 2013 was primarily due to the December 2013 sale of mortgage servicing rights. Subservicing
fees, ancillary income and charges on our residential first mortgage servicing increased during the year ended December 31,
2014, compared to the year ended December 31, 2013, primarily due to the MSR sale in December 2013, which we
simultaneously entered into an agreement to subservice the residential mortgage loans. The total unpaid principal balance of
loans subserviced for others at December 31, 2014 was $46.7 billion, as compared to $40.4 billion at December 31, 2013.
Net gain on loan sales decreased $196.4 million for the year ended December 31, 2014, compared to the year ended
December 31, 2013. Loan sales decreased to $24.4 billion during the year ended December 31, 2014, compared to $39.1 billion
sold in the year ended December 31, 2013. For the year ended December 31, 2014, the mortgage rate lock commitments
decreased to $29.5 billion, compared to $39.3 billion in the year ended December 31, 2013. The decrease in gain on loan sales
was primarily due to a lower volume of mortgage rate lock commitments and a lower gain on sale margin, reflecting a lower
overall market. Changes in amounts related to loan commitments and forward sales commitments amounted to a loss of $12.2
million for the year ended December 31, 2014, compared to a loss of $42.0 million during the year ended December 31, 2013.
The provision for representation and warranty reserve included in net gain on loan sales reflects our initial estimate of losses on
probable mortgage repurchases arising from current loan sales and amounted to $6.9 million and $17.6 million for the years
ended December 31, 2014 and 2013, respectively.
54
Net return on mortgage servicing asset decreased $66.5 million for the year ended December 31, 2014, compared to
the year ended December 31, 2013. The decrease was primarily due to a decline in the MSR asset as a result of MSR sales.
During the year ended December 31, 2014, we sold mortgage servicing rights on a bulk basis associated with $20.1 billion of
underlying mortgage loans and $223.1 million on a mortgage servicing released basis (i.e., sold together with the sale of
underlying loans). During the year ended December 31, 2013, we sold mortgage servicing rights on a bulk basis associated with
$74.9 billion of underlying mortgage loans (including the $40.7 billion sold) and $0.3 billion on a servicing released basis.
Under Basel III, the amount MSRs includable in regulatory capital are subject to stricter limitations. We had $470.2 million of
sales on a flow basis during the year ended December 31, 2014, compared to $1.8 billion during the year ended December 31,
2013. The total unpaid principal balance of loans serviced for others at December 31, 2014 was $25.4 billion, compared to
$25.7 billion at December 31, 2013.
Our provision for representation and warranty reserve decreased $26.1 million for the year ended December 31,
2014, compared to the same period in 2013, primarily due to a change in our estimate of probable future losses related to loans
sold in prior periods. The decrease from the year ended December 31, 2014, as compared to the year ended December 31, 2013
is primarily due to lower losses expected following our settlements with Fannie Mae and Freddie Mac along with our continued
refinement of the representation and warranty reserve estimate while taking into consideration the recent revisions to the
representation and warranty framework as published by the Federal Housing Finance Agency.
Other noninterest income decreased $61.9 million, compared to the same period in 2013. primarily due to a $21.1
million negative fair value adjustment on repurchased performing loans related to loans repurchased principally during periods
prior to 2014 and income of $36.8 million related to the reconsolidation, at fair value, of the HELOC securitization trusts and
elimination of contingent liabilities as a result of a legal settlement in the second quarter 2013.
2013 Compared to 2012
Total noninterest income decreased $368.9 million during the year ended December 31, 2013, compared to the year
ended December 31, 2012, primarily due to a decrease in net gain on loan sales and loan fees and charges, partially offset by a
decrease in representation and warranty provision and an increase in other noninterest income.
Total loan fees and charges decreased $39.4 million for the year ended December 31, 2013, compared to the year
ended December 31, 2012, primarily due to a decrease in consumer loan originations to $37.5 billion, as compared to $53.6
billion during the year ended December 31, 2012.
Deposit fees and charges increased $0.6 million for the year ended December 31, 2013, compared to the year ended
December 31, 2012, primarily due to an increase in deposit accounts. Our total number of customer checking accounts
increased 2.6 percent from approximately 108,436 at December 31, 2012 to 111,230 as of December 31, 2013.
Loan administration income increased $6.8 million for the year ended December 31, 2013, compared to the year ended
December 31, 2012, primarily due to a decline in activity due to a decrease in mortgage loan originations.
Net gain on loan sales decreased $588.7 million for the year ended December 31, 2013, compared to the year ended
December 31, 2012. The decrease was primarily due to a lower volume of mortgage rate lock commitments and a lower gain on
sale margin, reflecting lower base production margin, as well as higher hedging costs, loan level pricing adjustments and the
impact from guarantee fee changes from the Agencies. Loan sales decreased to $39.1 billion in loans during the year ended
December 31, 2013, compared to $53.1 billion sold in the year ended December 31, 2012. For the year ended December 31,
2013, the mortgage rate lock commitments decreased to $39.3 billion, compared to $66.7 billion in the year ended
December 31, 2012. Changes in amounts related to loan commitments and forward sales commitments amounted to a loss of
$42.0 million for the year ended December 31, 2013, as compared to a gain of $44.2 million during the year ended
December 31, 2012. The provision for representation and warranty reserve included in net gain on loan sales reflects our initial
estimate of losses on probable mortgage repurchases arising from current loan sales and amounted to $17.6 million and $24.4
million for the years ended December 31, 2013 and 2012, respectively.
Net return on mortgage servicing asset increased $2.1 million during the year ended December 31, 2013, compared to
the year ended December 31, 2012. During the year ended December 31, 2012, we sold mortgage servicing rights on a bulk
basis associated with underlying mortgage loans totaling $17.4 billion and on a servicing released basis totaling $0.5 billion.
We had $1.8 billion of sales on a flow basis during the year ended December 31, 2013 and no sales on a flow basis during the
year ended December 31, 2012. The total unpaid principal balance of loans serviced for others at December 31, 2013 was $25.7
55
billion, as compared to $76.8 billion at December 31, 2012, which decreased primarily due to the sale of the MSR portfolio
completed in the fourth quarter 2013.
Our provision for representation and warranty reserve decreased $220.2 million for the year ended December 31,
2013, compared to the same period in 2012. The decrease was primarily due to a lower level of charge-offs and settlement
agreements with Fannie Mae and Freddie Mac further explained below.
During the fourth quarter 2013, we entered into settlement agreements with both Fannie Mae and Freddie Mac to
resolve substantially all of the repurchase requests and obligations associated with loans originated between January 1, 2000
and December 31, 2008. The settlement with Fannie Mae, reached on November 6, 2013, was for a total resolution amount of
$121.5 million and, after paid claim credits and other adjustments, we paid $93.5 million. We settled with Freddie Mac on
December 30, 2013 for a total resolution amount of $10.8 million and, after paid claim credits and other adjustments, we paid
$8.9 million. As a result of these settlements, we released approximately $24.9 million of previously accrued reserves.
Other noninterest income increased $33.9 million during the year ended December 31, 2013, compared to the same
period in 2012, primarily due to a fair value adjustment of $44.1 million related to the Financial Security Assurance Inc.
("Assured") settlement agreement, offset by a loss of $7.2 million related to the MBIA Insurance Corporation ("MBIA")
settlement agreement.
The following table provides information on our net gain on loan sales reported in our consolidated financial
statements and loans sold within the period.
Net gain on loan sales
Mortgage rate lock commitments
(gross)
Loans sold and securitized
Net margin on loan sales
Mortgage rate lock commitments
(fallout adjusted) (1)
Net margin on mortgage rate lock
commitments (fallout adjusted) (1)
First
Quarter
Second
Quarter
2014
Third
Quarter
(Dollars in thousands)
Fourth
Quarter
Full Year
$
45,342
$
54,756
$
52,175
$
53,528
205,803
6,039,871
4,474,287
8,187,881
6,029,817
7,713,074
7,072,398
7,604,879
6,830,552
29,545,705
24,407,054
1.01%
0.91%
0.74%
0.78%
0.84%
$ 4,853,637
$ 6,693,366
$ 6,304,425
$ 6,155,532
$ 24,006,960
0.93%
0.82%
0.83%
0.87%
0.86%
(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.
First
Quarter
Second
Quarter
2013
Third
Quarter
(Dollars in thousands)
Fourth
Quarter
Full Year
Net gain on loan sales
$
137,540
$
144,791
$
75,073
$
44,790
$
402,193
Mortgage rate lock commitments
(gross)
Loans sold and securitized
Net margin on loan sales
Mortgage rate lock commitments
(fallout adjusted) (1)
Net margin on mortgage rate lock
commitments (fallout adjusted) (1)
12,142,000
12,353,000
12,822,879
11,123,821
8,340,000
8,344,737
6,481,782
6,783,212
39,316,782
39,074,649
1.07%
1.30%
0.90%
0.66%
1.03%
$ 9,848,417
$ 9,837,573
$ 6,605,432
$ 5,298,728
$ 31,590,150
1.40%
1.47%
1.14%
0.85%
1.27%
(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.
56
Net gain on loan sales
Mortgage rate lock commitments
(gross)
Loans sold and securitized
Net margin on loan sales
Mortgage rate lock commitments
(fallout adjusted) (1)
Net margin on mortgage rate lock
commitments (fallout adjusted) (1)
First
Quarter
Second
Quarter
2012
Third
Quarter
(Dollars in thousands)
Fourth
Quarter
Full Year
$
204,853
$
212,666
$
334,426
$
238,953
$
990,898
14,867,000
10,829,798
17,534,000
12,777,311
18,089,000
13,876,627
16,242,000
15,610,590
66,732,000
53,094,326
1.89%
1.66%
2.42%
1.53%
1.87%
$ 10,725,618
$ 13,346,568
$ 13,972,922
$ 12,587,980
$ 50,633,088
1.91%
1.59%
2.39%
1.90%
1.96%
(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.
Noninterest Expense
The following table sets forth the components of our noninterest expense.
Compensation and benefits
Commissions
Occupancy and equipment
Asset resolution
Federal insurance premiums
Loss on extinguishment of debt
Loan processing expense
Legal and professional expense
Other noninterest expense
Total noninterest expense
Efficiency ratio (1)
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
233,185
35,480
$
80,386
56,486
22,716
—
36,996
50,603
63,394
$
279,268
54,407
80,042
52,033
34,873
177,556
52,223
77,742
109,971
$
579,246
$
918,115
$
270,859
75,345
73,674
91,349
49,273
15,246
56,070
70,612
287,267
989,695
95.4%
109.4%
75.1%
(1) Total operating and administrative expenses divided by the sum of net interest income and noninterest income.
2014 Compared to 2013
Total noninterest expense decreased $338.9 million during the year ended December 31, 2014 from the year ended
December 31, 2013. The decrease during the year ended December 31, 2014, was primarily due to decreases in compensation
and benefits, legal and professional expenses, other noninterest expense and the absence of loss on extinguishment of debt.
The $46.1 million decrease in compensation and benefits expense for the year ended December 31, 2014, compared to
the same period in 2013, is primarily attributable to a reduction in our headcount. Our full-time equivalent employees decreased
overall by 514 from December 31, 2013 to a total of 2,739 full-time equivalent employees at December 31, 2014 primarily due
to the organization restructuring in January 2014.
Commission expense decreased $18.9 million for the year ended December 31, 2014, compared to the same period in
2013, primarily due to a decrease in loan originations for the year ended December 31, 2014.
Asset resolution expenses increased $4.5 million for the year ended December 31, 2014, compared to the same period
in 2013, primarily due to increases in expenses related to GNMA buybacks, expenses related to real estate owned and expenses
related to commercial loans, offset by decreases in expenses related to repurchased loans and expenses related to loans serviced
for others.
57
Federal insurance premiums decreased $12.2 million for the year ended December 31, 2014, compared to the same
period in 2013, primarily due to a decrease in our assessment base as well as a decrease in our assessment rate. The reduction in
the assessment base was caused primarily by a decrease in average total assets from December 31, 2013 compared to
December 31, 2014. The decrease in the assessment rate was due to the bank reporting assets of less than $10 billion for four
consecutive quarters beginning December 31, 2013 and therefore, qualifying for small bank pricing.
Loss on extinguishment of debt decreased $177.9 million for the year ended December 31, 2014, compared to the
same period in 2013, as no prepayments took place in 2014 compared to the prepayment of $2.9 billion of certain long-term
Federal Home Loan Bank advances in 2013.
Loan processing expense decreased $15.2 million for the year ended December 31, 2014, compared to the same
period in 2013, primarily due to a decrease of $12.7 billion in total loan originations.
Legal and professional expense decreased to $50.6 million during the year ended December 31, 2014, compared to the
year ended December 31, 2013. The decrease was primarily due to lower consulting expenses and legal fees related to the
significant reduction in ongoing legal matters.
Other noninterest expense decreased $46.6 million for the year ended December 31, 2014, compared to the same
period in 2013. The decrease was primarily due to a change in the estimate of the fair value liability associated with the
Department of Justice (“DOJ”) settlement arising principally from updating the related payment schedule within the settlement
agreement. This decrease was partially offset by an increase of $27.5 million related to the CFPB settlement.
2013 Compared to 2012
Total noninterest expense decreased $71.6 million during the year ended December 31, 2013 from the year ended
December 31, 2012, primarily due to a decrease in commissions, asset resolution, and other noninterest expense, partially offset
by higher loss on extinguishment of debt.
The $8.4 million increase in compensation and benefits expense for the year ended December 31, 2013, compared to
the year ended December 31, 2012 is primarily due to having a higher number of non-commissioned salaried employees during
the first three quarters of the year ended December 31, 2013, compared to the same time period for the year ended December
31, 2012. The increase is partially offset by decreases in incentive pay related to underwriting, production and overtime
compensation which resulted from a decline in mortgage activity and an overall reduction in headcount and contract employees
at December 31, 2013. This is consistent with our ongoing efforts to optimize our cost structure and manage expenses in line
with our current business model and operating requirements. Our full-time equivalent employees decreased overall by 409 from
December 31, 2012 to a total of 3,253 at December 31, 2013.
Commission expense decreased $20.9 million for the year ended December 31, 2013, compared to the same period in
2012, primarily due to the decrease in residential first mortgage loan originations for the year ended December 31, 2013.
Asset resolution expense decreased $39.3 million for the year ended December 31, 2013, compared to the same period
in 2012, primarily due to gains on the sale of real estate owned which resulted in an expense reduction of $25.9 million. There
was also a $27.7 million reduction in expense on repurchased loans and a $15.7 million reduction in agency compensatory fees
during the year ended December 31, 2013.
Federal insurance premiums decreased $14.4 million for the year ended December 31, 2013, compared to the same
period in 2012, primarily due to a lower assessment rate. Our assessment rate reflected improvement in risk assessment values
related to balance sheet liquidity and lower underperforming assets, and a decrease in our average total assets used in the
calculation of our assessment base
Loss on extinguishment of debt increased $162.3 million for the year ended December 31, 2013, compared to the same
period in 2012, primarily due to the prepayment of $2.9 billion of certain long-term Federal Home Loan Bank advances in
2013.
Loan processing expense decreased $3.8 million during the year ended December 31, 2013 as compared to the year
ended December 31, 2012. This reflects decreases in residential first mortgage loan origination volume, contract underwriting
58
expenses and costs related to the transfer of loans due to servicing sales, partially offset by an increase in contracted default
servicing costs.
Legal and professional expense increased $7.1 million during the year ended December 31, 2013, compared to the
year ended December 31, 2012. The increase was primarily due to consulting fees.
Other noninterest expense decreased $177.3 million for the year ended December 31, 2013, compared to the same
period in 2012. The decrease was primarily due to $236.6 million lower legal settlement costs for pending and threatened
litigation, related to the Assured and MBIA litigations, partially offset by a $73.0 million increase related to the fair value
liability arising from the DOJ litigation. The increase in the fair value liability related to the DOJ litigation was triggered by
various business and economic events, including the reversal of the valuation allowance on the DTA and other items affecting
the timing of the expected cash flows. This resulted in a $64.5 million increase in the fair value liability associated with the
DOJ settlement in the fourth quarter of 2013.
Benefit for Income Taxes
Our benefit for income taxes for the year ended December 31, 2014 was $34.0 million, compared to a benefit of
$416.3 million in 2013 and a benefit of $15.6 million in 2012.
The Company’s effective tax rate for 2014 was a benefit of 32.9 percent. The difference between the effective tax rate
and the statutory tax rate of 35 percent is primarily due to non-taxable income and expense items, primarily the exclusion of the
non-deductible penalty paid to the CFPB and the non-taxable impact of changes related to our warrants. See Note 21 of the
Notes to the Consolidated Financial Statements for additional details.
The Company’s effective tax rate for 2012 was a benefit of 29.7 percent. The difference between the effective tax rate
and the statutory tax rate of 35 percent is primarily due to a change in our valuation allowance for net deferred tax assets and
the tax benefit representing the recognition of the residual tax effect associated with previously unrealized losses on securities
recorded in other comprehensive income (loss).
The table below provides the balance of our deferred tax asset valuation allowance and the associated activity.
Deferred tax asset valuation allowance
Balance, beginning of year
Charged to costs and expenses - net operating losses and other
temporary differences
Charged to other accounts - other comprehensive income tax benefit
Balance, end of year
$
$
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
24,864
$
379,149
$
418,393
8,196
—
33,060
$
(348,177)
(6,108)
24,864
$
(19,364)
(19,880)
379,149
See Note 21 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary
Data, herein.
59
Fourth Quarter Results
The following table sets forth selected quarterly data.
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
(Provision) benefit for income taxes
Net income (loss)
Preferred stock dividend/accretion
Net income (loss) applicable to common stockholders
Income (loss) per share
Diluted
Efficiency ratio
Fourth Quarter 2014 compared to Third Quarter 2014
Three Months Ended
December 31,
2014
September 30,
2014
December 31,
2013
(Unaudited)
(Unaudited)
(Unaudited)
(Dollars in thousands)
$
$
$
61,302
(4,986)
56,316
98,441
(139,253)
15,504
(4,428)
11,076
—
11,076
0.07
87.2%
$
$
$
64,363
(8,097)
56,266
85,188
(179,389)
(37,935)
10,303
(27,632)
—
(27,632)
(0.61)
120.0%
$
$
$
41,203
(14,112)
27,091
113,146
(388,693)
(248,456)
410,362
161,906
(1,449)
160,457
2.77
251.8%
Our net income applicable to common stock for the three months ended December 31, 2014 was $11.1 million, or
$0.07 per diluted share, as compared to a loss of $27.6 million, or $0.61 loss per share, for the three months ended September
30, 2014.
Net interest income decreased to $61.3 million for the three months ended December 31, 2014, as compared to $64.4
million during the three months ended September 30, 2014. The decrease in net interest income was attributable to lower
interest income from the Company's Ginnie Mae early buy-outs, due to a reduction in the average interest rate earned in
accordance with the terms of loans with government guarantees, as well as jumbo residential first mortgage loan sales.
Provision for loan losses totaled $5.0 million for the three months ended December 31, 2014, as compared to $8.1
million for the three months ended September 30, 2014. The decrease was primarily attributable to lower net charge-offs. Net
charge offs for the three months ended December 31, 2014 were $9.0 million, or 0.91 percent of applicable loans, compared to
$13.1 million, or 1.36 percent of applicable loans for the three months ended September 30, 2014. The fourth quarter 2014
amount included $3.0 million of net charge-offs associated with the sale of $24.0 million of lower performing loans during the
quarter. The net charge-offs associated with these loan sales accounted for 31 basis points of the fourth quarter's net charge-off
rate.
Fourth quarter 2014 noninterest income was $98.4 million, as compared to noninterest income of $85.2 million for the
third quarter 2014. The third quarter of 2014 included a $10.4 million charge related to certain Federal Housing Administration
indemnifications.
Fourth quarter 2014 net gain on loan sales increased to $53.5 million, as compared to $52.2 million for the third quarter
2014. The increase from the prior quarter reflects higher refinance volume driven by lower rates in October and early December,
offsetting the seasonal decline in purchase origination volume. Fallout-adjusted locks were $6.2 billion for the fourth quarter 2014,
as compared to $6.3 billion for the third quarter 2014. The net gain on loan sale margin increased to 0.87 percent for the fourth
quarter 2014, as compared to 0.83 percent for the third quarter 2014.
Representation and warranty provision improved to income of $6.1 million for the fourth quarter 2014, as compared to
an expense of $12.5 million reported for the third quarter 2014. The change was primarily due to a $10.4 million charge in the
prior quarter related to certain indemnifications made by the Company.
60
Noninterest expense was $139.3 million for the three months ended December 31, 2014, as compared to $179.4
million during the three months ended September 30, 2014. The third quarter 2014 included a $37.5 million litigation
settlement expense with the CFPB, as well as $1.1 million in related legal expenses.
Fourth Quarter 2014 compared to Fourth Quarter 2013
Our net income applicable to common stock for the three months ended December 31, 2014 was $11.1 million, or
$0.07 per diluted share, as compared to income of $160.5 million, or $2.77 per diluted share, for the three months ended
December 31, 2013. The decrease was primarily due to the reversal of the tax asset valuation allowance, partially offset by
lower noninterest expense and higher net interest income.
Net interest income increased $20.1 million for the three months ended December 31, 2014, compared to the same
period in 2013. The increase primarily reflects a $21.8 million decrease in the interest expense on Federal Home Loan Bank
advances resulting from the prepayment of long-term advances in the fourth quarter of 2013.
The provision for loan losses decreased to $5.0 million for the three months ended December 31, 2014, as compared to
$14.1 million for the three months ended December 31, 2013. The decrease was primarily attributable to lower net charge-offs.
Noninterest income decreased $14.7 million in the fourth quarter of 2014, compared to the same period in 2013. The
decrease was primarily attributable to a $15.1 million decrease in the net return on the mortgage servicing asset (including off-
balance sheet hedges of mortgage servicing rights) resulting from lower derivative gains, partially offset by lower net
transaction costs on the sales of MSR assets. Our provision for representation and warranty decreased $9.3 million due to the
benefit associated with the previously announced settlement agreements with Fannie Mae and Freddie Mac.
Noninterest expense decreased $249.4 million for the three months ended December 31, 2014, compared to the same
period in 2013. The fourth quarter of 2013 reflected a loss on extinguishment of debt in the amount of $177.9 million resulting
from the prepayment of $2.9 billion in long-term fixed-rate Federal Home Loan Bank advances. Other noninterest expense
decreased by $63.2 million primarily due to a decrease in the fair value liability associated with the DOJ settlement. In addition,
compensation and benefits decreased $10.6 million primarily due to a reduction in headcount. These decreases were partially
offset by a $10.0 million increase in asset resolution expense resulting from higher loss rates on Federal Housing
Administration ("FHA") loans.
Provision for income tax increased $414.8 million to $4.4 million for the three months ended December 31, 2014,
compared to a benefit of $410.4 million during the three months ended December 31, 2013. The change was primarily
attributable to the full reversal of the federal DTA valuation allowance and a partial reversal of the state DTA valuation
allowance in the fourth quarter of 2013.
61
OPERATING SEGMENTS
Overview
For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Item 1:
Business section and in Note 25 of the Notes to Consolidated Financial Statements, in Item 8. Financial Statements and
Supplementary Data, herein, and other sections for a full understanding of our consolidated financial performance.
The net income (loss) by operating segment is presented in the following table.
Mortgage Originations
Mortgage Servicing
Community Banking
Other
Total net income (loss)
Year Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
$
$
106,263
(101,331)
(130,248)
55,851
(69,465) $
185,657
(82,689)
(62,572)
226,591
266,987
$
$
426,936
85,052
(256,681)
(186,931)
68,376
The selected average balances by operating segment are presented in the following table.
Average loans held-for-sale
Mortgage Originations
Average loans repurchased with government
guarantees
Mortgage Servicing
Average loans held-for-investment
Community Banking
Average total assets
Mortgage Originations
Mortgage Servicing
Community Banking
Other
Average interest-earning deposits
Community Banking
Mortgage Originations
Year Ended December 31,
2014
2013
2012
(Dollars in thousands)
1,471,257
$
2,312,129
$
3,075,284
$
$
$
1,215,516
4,121,036
1,630,184
1,349,230
3,943,106
2,963,867
$
$
$
1,476,801
4,407,177
2,442,375
1,711,147
4,509,497
3,891,897
2,018,079
6,511,455
3,135,077
2,376,169
6,483,269
2,732,255
5,593,349
$
6,168,679
$
6,606,246
$
$
$
$
$
Our Mortgage Originations segment originates, acquires and sells one-to-four family residential mortgage loans. We
sell substantially all of the residential mortgage loans we produce into the secondary market on a whole loan basis or
securitizing the loans into mortgage-backed securities with the Agencies. During 2014, we remained one of the country's
leading mortgage loan originators. We utilize three production channels to originate or acquire mortgage loans: home lending
(also referred to as "retail"), as well as brokers and correspondents (also collectively referred to as "wholesale"). Each
production channel originates mortgage loan products which are underwritten to the same standards. We expect to continue to
leverage technology to streamline the mortgage origination process, thereby bringing service and convenience to brokers and
correspondents. Sales support offices are maintained to assist brokers and correspondents nationwide. We also continue to make
available to our customers various web-based tools that facilitate the mortgage loan origination process through each of our
production channels. Brokers and correspondents are able to register and lock loans, check the status of inventory, deliver
documents in electronic format, generate closing documents, and request funds through the Internet. Funding for our Mortgage
Originations segment is provided primarily by deposits and borrowings obtained by our Community Banking segment.
62
Home Lending. In a home lending transaction, loans are originated through a nationwide network of stand-alone home
loan centers, as well as referrals from our Community Banking segment and the national direct to consumer call center. When
loans are originated on a retail basis, most aspects of the lending process are completed internally, including the origination
documentation (inclusive of customer disclosures) as well as the funding of the transactions. At December 31, 2014 we
maintained 16 loan origination centers. At the same time, our centralized loan processing provides efficiencies and allows
lending sales staff to focus on originations.
Broker. In a broker transaction, an unaffiliated bank or mortgage brokerage company completes several steps of the
loan origination process including the loan paperwork, but the loans are underwritten on a loan-level basis to our underwriting
standards and we supply the funding for the loan at closing (also known as "table funding") thereby becoming the lender of
record. Currently, we have active broker relationships with approximately 600 banks, credit unions and mortgage brokerage
companies located in all 50 states.
Correspondent. In a correspondent transaction, an unaffiliated bank or mortgage company completes the loan
paperwork and also supplies the funding for the loan at closing. After the bank or mortgage company has funded the
transaction, we purchase the loan at a market price. We perform a full review of each loan, whether purchased in bulk or not,
purchasing only those that were originated in accordance with our underwriting guidelines. We have active correspondent
relationships with approximately 750 companies, including banks, credit unions and mortgage companies located in all 50
states.
As of December 31, 2014, we ranked in the top ten mortgage lenders nationwide based on our residential first
mortgage loan originations. The following tables disclose residential first mortgage loan originations by channel, type and mix
for each respective period.
Home Lending Centers
Broker
Correspondent
Total
Purchase originations
Refinance originations
Total
Conventional
Government
Jumbo
Total
First
Quarter
Second
Quarter
2014
Third
Quarter
(Dollars in thousands)
Fourth
Quarter
Full Year
$
$
$
$
$
$
226,007
$
291,159
$
349,244
$
327,699
$
1,194,109
1,091,068
3,545,588
4,862,663
2,796,654
2,066,009
4,862,663
2,950,876
1,215,652
696,135
$
$
$
$
1,267,403
4,384,181
5,942,743
3,853,266
2,089,477
5,942,743
3,706,807
1,508,134
727,802
$
$
$
$
1,497,548
5,333,469
1,483,493
4,787,706
7,180,261
$
6,598,898
4,460,628
2,719,633
7,180,261
4,392,367
1,853,645
934,249
$
$
3,543,232
3,055,666
6,598,898
4,108,262
1,555,977
934,659
$
$
$
$
5,339,512
18,050,944
24,584,565
14,653,780
9,930,785
24,584,565
15,158,312
6,133,408
3,292,845
4,862,663
$
5,942,743
$
7,180,261
$
6,598,898
$
24,584,565
63
Home Lending Centers
Broker
Correspondent
Total
Purchase originations
Refinance originations
Total
Conventional
Government
Jumbo
Total
Home Lending Centers
Broker
Correspondent
Total
Purchase originations
Refinance originations
Total
Conventional
Government
Jumbo
Total
First
Quarter
Second
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
697,340
3,201,371
8,524,540
12,423,251
2,339,269
10,083,982
12,423,251
8,591,784
2,799,000
1,032,467
12,423,251
First
Quarter
729,369
2,909,446
7,530,594
11,169,409
2,188,508
8,980,901
11,169,409
7,859,960
2,611,691
697,758
11,169,409
$
$
$
$
$
$
$
$
$
$
$
$
575,016
2,974,555
7,332,558
10,882,129
3,146,501
7,735,628
10,882,129
7,681,337
2,535,378
665,414
10,882,129
Second
Quarter
751,075
3,156,949
8,638,977
12,547,001
3,324,501
9,222,500
12,547,001
8,762,268
3,085,247
699,486
12,547,001
2013
Third
Quarter
(Dollars in thousands)
411,940
$
1,845,465
5,478,385
7,735,790
$
$
$
$
$
3,682,411
4,053,379
7,735,790
5,247,910
1,930,538
557,342
7,735,790
2012
Third
Quarter
(Dollars in thousands)
961,591
$
4,117,742
9,434,287
14,513,620
$
$
$
$
$
3,267,788
11,245,832
14,513,620
10,020,863
3,178,563
1,314,194
14,513,620
$
$
$
$
$
$
$
$
$
$
Fourth
Quarter
Full Year
296,123
1,591,372
4,548,166
6,435,661
3,672,538
2,763,123
6,435,661
4,130,976
1,560,059
744,626
6,435,661
Fourth
Quarter
998,804
4,524,775
9,833,218
15,356,797
2,915,724
12,441,073
15,356,797
10,427,131
3,363,134
1,566,532
15,356,797
$
$
$
$
$
$
$
$
$
$
$
$
1,980,419
9,612,763
25,883,649
37,476,831
12,840,719
24,636,112
37,476,831
25,652,007
8,824,975
2,999,849
37,476,831
Full Year
3,440,839
14,708,912
35,437,076
53,586,827
11,696,521
41,890,306
53,586,827
37,070,222
12,238,635
4,277,970
53,586,827
The following table sets forth the net income of the Mortgage Originations segment.
Net interest income
Net loan fees and charges
Net gain on loan sales
Other noninterest income
Compensation and benefits
Commissions
Loan processing expense
Other noninterest expense
Net income
Average balances
Total loans held-for-sale
Total assets
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
58,180
$
75,774
$
51,763
208,975
(4,491)
(71,983)
(35,601)
(15,452)
(85,128)
106,263
1,471,257
1,630,184
$
$
85,156
419,342
9,043
(90,825)
(53,369)
(30,751)
(228,713)
185,657
2,312,129
2,442,375
$
$
$
$
64
99,850
120,181
1,014,586
4,277
(84,995)
(74,759)
(39,734)
(612,470)
426,936
3,075,284
3,135,077
2014 compared to 2013
The Mortgage Originations segment net income decreased $79.4 million during the year ended December 31, 2014,
compared to the same period in 2013, primarily due to a decrease in net gain on loan sales, partially offset by a decrease in
noninterest expense. Net loan fees and charges decreased $33.4 million, primarily due to a decrease in residential mortgage loan
originations. The decrease in net gain on loan sales during the year ended December 31, 2014, as compared to the year ended
December 31, 2013 was primarily due to lower residential mortgage rate lock commitments and a lower gain on sale margin.
Compensation and benefits decreased to $72.0 million for the year ended December 31, 2014, as compared to $90.8
million for the year ended December 31, 2013, primarily due to the completion of previously announced staff reductions and
decreases in employee benefit and incentive compensation costs. During the year ended December 31, 2014, as compared to the
year ended December 31, 2013, the decreases in commissions and loan processing expense were primarily due to lower
residential first mortgage originations. During the year ended December 31, 2014, other noninterest expense decreased to $85.1
million, as compared to $228.7 million for the year ended December 31, 2013, primarily due to reduced corporate overhead and
direct operating allocations.
2013 compared to 2012
The Mortgage Originations segment net income decreased $241.3 million during the year ended December 31, 2013,
compared to the year ended December 31, 2012. This decrease was primarily due to a decrease in net gain on loan sales,
partially offset by a decrease in noninterest expense during the year ended December 31, 2013, compared to the year ended
December 31, 2012. Net loan fees and charges decreased to $85.2 million for the year ended December 31, 2013, as compared
to $120.2 million for the year ended December 31, 2012, primarily due to a decrease in residential mortgage loan originations.
The decrease in net gain on loan sales during the year ended December 31, 2013, as compared to the year ended December 31,
2012 was primarily due to lower residential mortgage rate lock commitments and a lower gain on sale margin.
Compensation and benefits increased to $90.8 million for the year ended December 31, 2013, as compared to $85.0
million for the year ended December 31, 2012, primarily due to an expansion of the Home Lending production channel in 2013.
During the year ended December 31, 2013, as compared to the year ended December 31, 2012, the decreases in commissions
and loan processing expense were primarily due to lower residential first mortgage originations. During the year ended
December 31, 2013, other noninterest expense decreased to $228.7 million, as compared to $612.5 million for the year ended
December 31, 2012, primarily due to reduced corporate overhead and direct operating allocations.
Mortgage Servicing
The Mortgage Servicing segment services and subservices mortgage loans on a fee basis for others. Also, the
Mortgage Servicing segment services residential mortgages held-for-investment by the Community Banking segment and
mortgage servicing rights held by the Other segment. Funding for our Mortgage Servicing segment is provided primarily by
deposits and borrowings obtained by our Community Banking segment.
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
Net interest income
Loan administration
Representation and warranty provision
Other noninterest income
Compensation and benefits
Asset resolution
Loan processing expense
Other noninterest expense
Net income
Average balances
Total loans repurchased with government guarantees
Total assets
$
20,873
$
39,946
551
17,788
(13,675)
(52,789)
(16,870)
(97,155)
(101,331) $
38,031
$
48,111
(36,116)
(3,984)
(31,454)
(61,374)
(16,769)
(19,134)
(82,689) $
47,440
18,068
(256,289)
188,164
(31,841)
(86,761)
(13,033)
219,304
85,052
1,215,516
$
1,476,801
$
1,349,230
1,711,147
2,018,079
2,376,169
$
$
65
2014 compared to 2013
The Mortgage Servicing segment reported a net loss of $101.3 million for the year ended December 31, 2014,
compared to a net loss of $82.7 million for the year ended December 31, 2013, primarily due to an increase in other noninterest
expense, partially offset by decreases in representation and warrant reserve, asset resolution expense and compensation and
benefits expense and an increase in other noninterest income. The decrease in the representation and warranty reserve for the
year ended December 31, 2014, as compared to the year ended December 31, 2013, was primarily due to the settlement
agreements with Fannie Mae and Freddie Mac in the quarter ending December 31, 2013. Other noninterest income increased to
$17.8 million for the year ended December 31, 2014, as compared to a loss of $4.0 million for the year ended December 31,
2013, primarily due to an unanticipated benefit in tax service fees from a contract renegotiation during the third quarter 2014,
offset by a decrease in other loan fees due to subservice agreements and a loss on the sale of repurchased loans during the year
ended December 31, 2013.
Noninterest expense increased for the year ended December 31, 2014, as compared to the year ended December 31,
2013, primarily due to an increase in other noninterest expense, partially offset by a decrease in compensation and benefits and
asset resolution. During the year ended December 31, 2014, other noninterest expense increased to $97.2 million, as compared
to $19.1 million for the year ended December 31, 2013, primarily due to an increase in net corporate overhead allocations
following the settlement agreement with the CFPB, including legal fees and penalties, during the third quarter 2014.
Compensation and benefits decreased to $13.7 million for the year ended December 31, 2014, as compared to $31.5 million for
the year ended December 31, 2013, primarily due to staff reductions. Asset resolution expense decreased to $52.8 million for
the year ended December 31, 2014, as compared to $61.4 million for the year ended December 31, 2013, as a result of a
reduction in legacy foreclosure expense and expenses related to repurchased loans.
2013 compared to 2012
The Mortgage Servicing segment reported a net loss of $82.7 million for the year ended December 31, 2013, compared
to net income of $85.1 million for the year ended December 31, 2012, primarily due to a decrease in other noninterest income
and an increase in other noninterest expense, partially offset by an increase in loan administration income and a decrease in
representation and warrant reserve and asset resolution expense. Loan administration income increased to $48.1 million for the
year ended December 31, 2013 as compared to $18.1 million for the year ended December 31, 2012, due to a change in transfer
pricing methodology to loans held-for-investment by the Community Banking segment and mortgage servicing rights held by
the other segment. The decrease in the representation and warranty reserve for the year ended December 31, 2013, as compared
to the year ended December 31, 2012, was primarily due to lower loss rates following the settlement agreements with Fannie
Mae and Freddie Mac. Other noninterest income decreased to a loss of $4.0 million for the year ended December 31, 2013, as
compared to income of $188.2 million for the year ended December 31, 2012, primarily due to a redistribution of MSR asset
income as part of the previously announced company reorganization.
Noninterest expense increased for the year ended December 31, 2013, as compared to the year ended December 31,
2012, primarily due to an increase in other noninterest expense, partially offset by a decrease in asset resolution expense. Asset
resolution expense decreased to $61.4 million for the year ended December 31, 2013, as compared to $86.8 million for the year
ended December 31, 2012, as a result of decreases in debenture interest expense on government insured loans and agency fee
accruals. During the year ended December 31, 2013, other noninterest expense increased to $19.1 million, as compared to
income of $219.3 million for the year ended December 31, 2012. The increase is a result of a net benefit received from the
allocation of representation and warrants expenses to the Mortgage Origination segment throughout 2012.
The Mortgage Servicing segment primarily services mortgage loans for others. Servicing of residential mortgage loans
for third parties generates fee income and represents a significant business activity. At December 31, 2014 and December 31,
2013, we serviced portfolios of mortgage loans of $25.4 billion and $25.7 billion, respectively. We had a total average balance
of serviced mortgage loans of $26.7 billion for the year ended December 31, 2014 and $69.9 billion for the year ended
December 31, 2013, which generated servicing fee revenue of $11.4 million and $37.0 million, respectively.
The Mortgage Servicing segment also began subservicing mortgage loans for others in the fourth quarter 2013.
Subservicing residential mortgage loans for third parties generates fee income. At December 31, 2014 and December 31, 2013,
we subserviced portfolios of mortgage loans of $46.7 billion and $40.4 billion, respectively. We had a total average balance of
subserviced mortgage loans of $43.4 billion, which generated gross servicing fee revenue of $19.9 million, during the year
ended December 31, 2014.
66
The following table presents the unpaid principal balance (net of write downs) of residential loans serviced and the
number of accounts associated with those loans.
Residential loan servicing
Serviced for Flagstar (1)
Serviced for others
Subserviced for others (2)
Total residential loans serviced
December 31, 2014
December 31, 2013
Amount
Number of
accounts
Amount
Number of
accounts
$
$
4,521,125
25,426,768
46,723,713
76,671,606
26,268
117,881
238,498
382,647
$
$
4,375,009
25,743,396
40,431,867
70,550,272
28,069
131,413
198,256
357,738
(1) Includes loans held-for-investment (residential first mortgage, second mortgage and HELOC), loans held-for-sale (residential first
mortgage), loans repurchased with government guarantees and repossessed assets.
(2) Does not include temporary short-term subservicing performed as a result of sales of servicing-released mortgage servicing rights.
Includes repossessed assets.
Over the past three years, we sold MSRs related to $112.4 billion of loans serviced for others on a bulk basis,
including $20.1 billion during the year ended December 31, 2014. We incurred $2.0 million of transaction costs on the sale of
our MSRs during the year ended December 31, 2014, which is included in net return on mortgage servicing asset on the
Consolidated Statements of Operations.
Set forth below is a table describing the characteristics of the mortgage loans serviced for others at December 31,
2014, by year of origination.
Year of Origination
2010 and Prior
2011
2012
2013
2014
Total /
Weighted
Average
Unpaid principal balance (1) $ 1,515,507
Average unpaid principal
balance per loan
Weighted average service
fee (basis points)
Weighted average coupon
Weighted average original
maturity (months)
Weighted average age
(months)
Average current FICO score
(2)
Average original LTV ratio
Housing Price Index LTV,
as recalculated (3)
Loan count
$
161
28.0
4.73%
357
73
705
80.3%
71.3%
9,442
(Dollars in thousands)
159,371
$ 1,332,481
$ 3,128,773
$19,290,636
$25,426,768
137
$
195
$
221
$
224
$
216
$
$
27.0
4.59%
323
42
729
76.2%
60.1%
1,166
29.0
3.49%
344
28
735
86.8%
71.0%
6,835
26.0
4.33%
326
14
746
76.0%
68.3%
14,169
27.0
4.17%
335
6
729
80.9%
78.4%
27.0
4.19%
336
12
730
80.6%
76.3%
86,278
117,890
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2) Average note rate reflects the rate that is currently in effect. As these loans adjust on a monthly basis, the average note rate could
increase, but would not decrease, as in the current market, the floor rate on virtually all of the loans is in effect.
(3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2014.
67
Set forth below is a table of the past due trends in mortgage loans serviced for others at December 31, 2014, by year of
origination.
Year of Origination
2010 and Prior
2011
2012
2013
2014
Total
(Dollars in thousands)
$
30-59 days past due
60-89 days past due
90 days or greater past due
Total past due
Current
Unpaid principal balance (1) $
72,535
32,578
167,991
273,104
1,242,403
1,515,507
$
$
5,590
2,223
5,651
13,464
145,907
159,371
$
$
13,712
4,710
3,735
22,157
1,310,325
1,332,482
$
$
9,641
1,247
5,859
16,747
3,112,026
3,128,773
$
79,821
13,880
7,918
101,619
19,189,016
$ 19,290,635
$
181,299
54,638
191,154
427,091
24,999,677
$ 25,426,768
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
Set forth below is a table describing the characteristics of the residential mortgage loans subserviced for others at
December 31, 2014, by year of origination.
Year of Origination
2010 and Prior
2011
2012
2013
2014
(Dollars in thousands)
Total /
Weighted
Average
Unpaid principal balance (1) $ 7,773,686
$ 5,109,332
$19,759,465
$12,484,686
$ 1,596,544
$46,723,713
Average unpaid principal
balance per loan
Weighted average service
fee (basis points)
Weighted average coupon
Weighted average original
maturity (months)
Weighted average age
(months)
Average current FICO score
(2)
Average original LTV ratio
Housing Price Index LTV,
as recalculated (3)
Loan count
$
134
$
176
$
220
$
223
$
280
$
196
36.0
5.16%
346
67
692
88.8%
27.0
4.19%
318
40
751
72.6%
28.0
3.61%
327
29
755
73.5%
27.0
3.62%
328
20
751
75.0%
78.3%
58,044
55.8%
29,078
57.6%
89,803
63.5%
55,864
25.0
4.40%
360
7
756
73.0%
70.0%
5,709
29.0
3.96%
330
33
744
76.3%
62.9%
238,498
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2) Average note rate reflects the rate that is currently in effect. As these loans adjust on a monthly basis, the average note rate could
increase, but would not decrease, as in the current market, the floor rate on virtually all of the loans is in effect.
(3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2014.
Set forth below is a table of the past due trends in residential mortgage loans subserviced for others at December 31,
2014, by year of origination.
Year of Origination
2010 and Prior
2011
2012
2013
2014
Total
30-59 days past due
60-89 days past due
90 days or greater past due
Total past due
Current
$
400,134
$
51,059
$
103,184
$
48,996
$
2,042
$
(Dollars in thousands)
219,878
378,050
998,062
23,604
40,581
115,244
35,661
67,895
206,740
15,150
28,270
92,416
605,415
294,293
514,796
—
—
2,042
1,414,504
6,775,623
4,994,089
19,552,725
12,392,270
1,594,502
45,309,209
Unpaid principal balance (1) $
7,773,685
$
5,109,333
$ 19,759,465
$ 12,484,686
$
1,596,544
$ 46,723,713
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
68
Community Banking
Our Community Banking segment consists primarily of four groups: Branch Banking, Commercial and Business
Banking, Warehouse Lending and held-for-investment loan portfolio. The groups within the Community Banking segment
originate consumer loans, commercial loans and warehouse loans; accept consumer, business and governmental deposits; and
offer liquidity management products, capital markets services and other services. The liquidity management products include
customized treasury management solutions and international wire services. Capital market services that allow for risk
mitigation are offered through interest rate swap products. At December 31, 2014, Branch Banking included 107 banking
centers located throughout Michigan. During year ended December 31, 2014, we relocated one and closed five banking centers
to better align the branch structure with the Company's focus on key market areas and to improve banking center efficiencies.
Commercial and Business Banking includes relationship and portfolio managers throughout Michigan's major markets.
Warehouse Lending offers lines of credit to other mortgage lenders nationally, allowing those lenders to fund the closing of
residential first mortgage loans.
Net interest income
Provision for loan losses
Deposit fees and charges
Other noninterest income
Compensation and benefits
Federal insurance premiums
Other noninterest expense
Net (loss) income
Average balances
Total loans held-for-investment
Total assets
Total interest-bearing deposits
2014 compared to 2013
Year Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
149,586
(131,553)
21,613
(2,699)
(56,842)
(15,071)
(95,282)
(130,248) $
$
159,859
(70,142)
20,942
6,912
(64,751)
(21,064)
(94,328)
(62,572) $
208,209
(276,047)
20,379
5,635
(68,923)
(30,329)
(115,605)
(256,681)
$
4,121,036
3,943,106
5,593,349
$
4,407,177
4,509,497
6,168,679
6,511,455
6,483,269
6,606,246
$
$
$
During the year ended December 31, 2014, the Community Banking segment reported an increase in net loss, as
compared to the year ended December 31, 2013. The increase in net loss during the year ended December 31, 2014, as
compared to the year ended December 31, 2013, was primarily due to an increase in provision for loan losses and decreases in
net interest income and noninterest income.
Net interest income decreased to $149.6 million during the year ended December 31, 2014, as compared to $159.9
million during the year ended December 31, 2013, as a result of lower average residential first mortgage held-for-sale loans and
lower average warehouse and residential first mortgage held-for-investment loans.
The provision for loan losses increased to $131.6 million during the year ended December 31, 2014, as compared to
$70.1 million during the year ended December 31, 2013, primarily driven by two changes in estimates: the change in estimate
of the loss emergence period and the risk associated with payment resets relating to the interest-only loans.
Noninterest income decreased during the year ended December 31, 2014, as compared to the year ended December 31,
2013, primarily due to the first quarter 2014 adjustment to the originally recorded fair value of performing repurchased loans.
Total noninterest expenses increased for the year ended December 31, 2014, as compared to the year ended December 31, 2013,
due to decreases in compensation and benefits and federal deposit insurance premiums, partially offset by an increase in asset
resolution expenses.
69
2013 compared to 2012
During the year ended December 31, 2013, the Community Banking segment reported a decrease in net loss as
compared to the year ended December 31, 2012 primarily due to a decrease in provision for loan losses and a decrease in
noninterest expense, partially offset by a decrease in net interest income.
Net interest income decreased to $159.9 million during the year ended December 31, 2013, as compared to $208.2
million during the year ended December 31, 2012, as a result of lower average commercial, warehouse and residential first
mortgage held-for-investment loans due to a decrease in loan originations and the sale of commercial loans during the year
ended December 31, 2013.
The provision for loan losses decreased to $70.1 million during the year ended December 31, 2013, as compared to
$276.0 million during the year ended December 31, 2012, primarily due to continued run-off of the loan portfolio, risk model
enhancements and the release of loan loss reserves resulting from the sale of TDR and nonperforming loans.
Noninterest income increased during the year ended December 31, 2013, as compared to the year ended December 31,
2012, primarily due to lower internal loan servicing charges. Total noninterest expenses decreased for the year ended December
31, 2013, as compared to the year ended December 31, 2012 due to decreases in compensation and benefits, federal deposit
insurance premiums and asset resolution expenses.
Loans held-for-investment
Residential first mortgage loans. At December 31, 2014, most of our held-for-investment residential first mortgage loans
had been originated in 2008 or prior years with underwriting criteria that varied by product and with the standards in place at the
time of origination. Loans originated after 2008 are loans that generally satisfy specific criteria for sale into securitization pools
insured by the Agencies or were repurchased from the Agencies subsequent to such sales.
At December 31, 2014, the largest geographic concentrations of our residential first mortgage loans in our held-for
investment portfolio were in California, Florida and Michigan, which represented 53.9 percent of such loans outstanding.
70
The following table identifies our held-for-investment mortgages by major category, at December 31, 2014 and
December 31, 2013.
December 31, 2014
Residential first mortgage
loans
Amortizing
Interest only
Option ARMs
Subprime (4)
Total residential first
mortgage loans
December 31, 2013
Residential first mortgage
loans
Amortizing
Interest only
Option ARMs
Subprime (4)
Total residential first
mortgage loans
Unpaid
Principal
Balance (1)
Average
Note Rate
Average
Original
FICO Score
Average
Current FICO
Score (2)
Weighted
Average
Maturity
Average
Original
LTV Ratio
Housing Price
Index LTV, as
recalculated (3)
(Dollars in thousands)
$ 1,540,298
627,982
32,417
2,018
3.79%
3.63%
2.86%
8.42%
$ 2,202,715
3.73%
$ 1,392,778
1,051,157
37,159
3,230
4.03%
3.76%
2.94%
8.16%
$ 2,484,324
3.90%
714
727
719
625
718
707
724
717
628
714
715
738
717
685
721
695
733
708
643
711
292
263
282
268
283
302
264
297
282
286
75.7%
74.0%
69.6%
74.8%
70.6%
80.1%
87.5%
85.2%
75.2%
73.6%
75.3%
74.6%
69.2%
70.2%
78.9%
83.7%
92.0%
92.0%
74.9%
81.2%
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2) Current FICO scores obtained at various times during the year ended December 31, 2014.
(3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2014.
(4) Subprime loans are defined in accordance with the FDIC's assessment regulations definitions for subprime loans, which includes loans
with FICO scores below 620 or similar characteristics.
71
The following table identifies our held-for-investment mortgages by major category, at December 31, 2014.
Unpaid
Principal
Balance (1)
Average
Note Rate
Average
Original
FICO Score
Average
Current FICO
Score (2)
Weighted
Average
Maturity
Average
Original
LTV Ratio
Housing Price
Index LTV, as
recalculated (3)
(Dollars in thousands)
December 31, 2014
Residential first mortgage
loans
Amortizing
3/1 ARM
5/1 ARM
7/1 ARM
Other ARM
Fixed mortgage loans (4)
Total amortizing
Interest only
3/1 ARM
5/1 ARM
7/1 ARM
Other ARM
Other interest only
Total interest only
Option ARMs
Subprime (5)
3/1 ARM
Other ARM
$
122,947
571,820
165,631
45,138
634,762
1,540,298
89,116
366,580
30,155
50,232
91,899
627,982
32,417
3.19%
3.33%
3.56%
3.09%
4.44%
3.79%
3.26%
3.13%
2.74%
3.13%
6.52%
3.63%
2.86%
47
71
1,900
2,018
10.30%
9.75%
8.32%
8.42%
Other subprime
Total subprime
$
Total residential first
mortgage loans
Second mortgage loans (6)
(7)
HELOC loans (6) (7)
$ 2,202,715
3.73%
$
$
149,779
255,663
6.88%
5.39%
688
721
758
679
703
714
727
723
731
751
729
727
719
685
572
625
625
718
728
731
709
736
774
700
683
715
727
739
736
765
730
738
717
683
658
686
685
721
728
731
238
259
345
234
322
292
249
259
268
307
270
263
282
250
258
269
268
283
115
78
79.2%
74.5%
70.7%
83.2%
77.1%
75.7%
74.3%
75.0%
74.5%
65.1%
73.7%
74.0%
69.6%
95.0%
90.0%
73.7%
74.8%
75.2%
20.6%
26.0%
66.4%
65.5%
65.8%
65.0%
77.8%
70.6%
78.3%
82.0%
86.2%
60.4%
84.4%
80.1%
87.5%
62.0%
76.6%
86.0%
85.2%
73.6%
19.0%
24.3%
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2) Current FICO scores obtained at various times during the year ended December 31, 2014.
(3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2014.
(4) Includes substantially fixed rate mortgage loans.
(5) Subprime loans are defined in accordance with the FDIC's assessment regulations definitions for subprime loans, which includes loans
with FICO scores below 620 or similar characteristics.
(6) Reflects lower LTV only as to second liens because information regarding the first liens is not available.
(7) Includes $53.1 million and $131.6 million of second mortgage and HELOC loans, respectively, that are accounted for under the fair
value option at December 31, 2014. The combined LTV information is not available for these loans.
Adjustable-rate mortgage loans. Adjustable rate mortgage ("ARM") loans held-for-investment were originated using
Fannie Mae and Freddie Mac guidelines as a base framework, and the debt-to-income ratio guidelines and documentation
typically followed the Automated Underwriting System guidelines. Our underwriting guidelines were designed with the intent
to minimize layered risk. The maximum ratios allowable for purposes of both the LTV ratio and the combined loan-to-value
("CLTV") ratio, which includes second mortgages on the same collateral, was 100 percent, but subordinate (or second
mortgage) financing was not allowed over a 90 percent LTV ratio. At a 100 percent LTV ratio with private mortgage insurance,
the minimum acceptable FICO score, or the "floor," was 700, and at lower LTV ratio levels, the FICO floor was 620.
Option ARMs. We previously offered option ARMs, which are adjustable rate mortgage loans that permit a borrower to
select one of three monthly payment options when the loan is first originated: (i) a principal and interest payment that would
fully repay the loan over its stated term, (ii) an interest-only payment that would require the borrower to pay only the interest
72
due each month but would have a period (usually 10 years) after which the entire amount of the loan would need to be repaid or
refinanced, and (iii) a minimum payment amount selected by the borrower and which might include principal and some interest,
with the unpaid interest added to the balance of the loan (i.e., a process known as "negative amortization").
Set forth below are the accumulated amounts of interest income arising from the net negative amortization portion of
loans during the years ended December 31.
2014
2013
2012
Unpaid Principal Balance of
Loans in Negative Amortization
At Year-End (1)
Amount of Net Negative
Amortization Accumulated as
Interest Income During Period
(Dollars in thousands)
$18,934
$23,254
$37,747
$2,063
$2,368
$3,513
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
Set forth below are the frequencies at which the interest rate on ARM loans outstanding at December 31, 2014, will reset.
Reset frequency
Monthly
Semi-annually
Annually
No reset — nonperforming loans
Total
# of Loans
Balance
% of the Total
(Dollars in thousands)
90
2,719
2,295
1,235
6,339
$16,860
826,242
314,251
316,801
$1,474,154
1.1%
56.0%
21.3%
21.5%
100.0%
Set forth below as of December 31, 2014, are the amounts of the ARM loans in our held-for-investment loan portfolio
with interest rate reset dates in the periods noted. As indicated in the above table, loans may reset more than once over a three-
year period and nonperforming loans do not reset while in the nonperforming status. Accordingly, the table below may include
the same loans in more than one period.
2015
2016
2017
Later years (1)
(1) Later years reflect one reset period per loan.
st
Quarter
1
nd
2
Quarter
rd
Quarter
3
th
4
Quarter
(Dollars in thousands)
$463,454
$484,432
$519,162
$477,114
512,441
515,570
596,269
492,977
497,775
566,010
524,791
526,579
641,559
484,231
487,034
584,963
Interest-only mortgages. We offer, on a limited basis, adjustable-rate, fixed term loans with 10-year, interest-only
options. These loans were originated using Fannie Mae and Freddie Mac guidelines as a base framework. We generally applied
the debt-to-income ratio guidelines and documentation using the automated underwriting Approve/Reject response
requirements of Fannie Mae and Freddie Mac. During 2013, we began originating interest-only home equity line of credit loans
that were secured by first lien mortgages. These loans have a 10-year interest-only draw period followed by a 20-year fixed
fully amortizing period. Once these loans reach the 20-year fixed fully amortizing period these loans are classified as
amortizing loans for this disclosure.
73
Set forth below is a table describing the characteristics of the interest-only mortgage loans at the dates indicated in our
held-for-investment mortgage portfolio at December 31, 2014, by year of origination.
Year of Origination
2004 and
Prior
2005
2006
2007
Post 2008
(Dollars in thousands)
Total /
Weighted
Average
Unpaid principal balance (1)
Average note rate
Average original FICO score
Average current FICO score (2)
Average original LTV ratio
Housing Price Index LTV, as
recalculated (3)
Underwritten with low or stated
income documentation
$
28,843
$ 304,974
$
57,610
$ 204,954
$
31,601
$ 627,982
3.37%
716
694
75.3%
3.32%
728
743
75.0%
3.38%
724
729
74.0%
4.25%
724
734
74.6%
3.27%
763
767
59.0%
3.63%
727
738
74.0%
72.2%
79.5%
84.3%
85.9%
47.2%
80.1%
25.0%
31.0%
47.0%
52.0%
1.0%
37.0%
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2) Current FICO scores obtained at various times during the year ended December 31, 2014.
(3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2014.
Set forth below is a table describing the amortization date and payment shock of current interest-only mortgage loans
at the dates indicated in our held-for-investment mortgage portfolio at December 31, 2014.
2015
2016
2017
2018
Thereafter
(Dollars in thousands)
Total /
Weighted
Average
Unpaid principal balance (1)
$ 313,242
$
55,307
$ 221,210
Weighted average rate
Average original monthly
payment per loan (dollars)
Average current monthly payment
per loan (dollars)
Average amortizing payment per
loan (dollars)
Loan count
Payment shock (dollars) (2)
Payment shock (percent)
$
$
$
$
3.34%
3.31%
4.07%
$
$
$
$
1,399
776
1,593
1,132
818
105.0%
$
$
$
$
1,562
798
1,610
198
811
102.0%
2,760
1,726
3,038
448
1,313
76.0%
$
$
$
$
$
9,574
$
28,649
$ 627,982
4.54%
3.09%
3.45%
$
$
$
$
2,323
1,538
2,191
25
653
42.0%
$
$
$
$
293
145
344
472
198
137.0%
1,458
844
1,623
2,275
779
92.0%
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2) Represents difference between current payment and new payment.
Second mortgage loans. The majority of second mortgages we originated were closed in conjunction with the closing
of the residential first mortgages originated by us. We generally required the same levels of documentation and ratios as with
our residential first mortgages. For second mortgages closed in conjunction with a residential first mortgage loan that was not
being originated by us, our allowable debt-to-income ratios for approval of the second mortgages were capped at 40 percent to
45 percent. In the case of a loan closing in which full documentation was required and the loan was being used to acquire the
borrower's primary residence, we allowed a CLTV ratio of up to 100 percent; for similar loans that also contained higher risk
elements, we limited the maximum CLTV to 90 percent. FICO floors ranged from 620 to 720, and fixed and adjustable rate
loans were available with terms ranging from five to 20 years.
Home Equity Line of Credit loans. HELOC loan originations were re-launched in June 2011 as a banking center
originated portfolio product. Current HELOC guidelines and pricing parameters have been established to attract high credit
quality loans with long term profitability. The minimum FICO is 680, maximum CLTV is 80 percent, and the maximum debt-
to-income ratio is 45 percent. In relation to HELOC loans originated in 2009 and prior years, the majority were closed in
conjunction with the closing of related first mortgage loans originations. Documentation requirements for HELOC applications
were generally the same as those required of borrowers for the first mortgage loans originated by us, and debt-to-income ratios
were capped at 50 percent. For HELOCs closed in conjunction with the closing of a first mortgage loan that was not being
74
originated by us, our debt-to-income ratio requirements were capped at 40 percent to 45 percent and the LTV was capped at 80
percent. The qualifying payment varied over time and included terms such as either 0.75 percent of the line amount or the
interest only payment due on the full line based on the current rate plus 0.5 percent. HELOCs were available in conjunction
with primary residence transactions that required full documentation, and the borrower was allowed a CLTV ratio of up to 100
percent. For similar loans that also contained higher risk elements, we limited the maximum CLTV to 90 percent. FICO floors
ranged from 620 to 720. The HELOC terms called for monthly interest only payments with a balloon principal payment due at
the end of 10 years. At times, initial teaser rates were offered for the first three months.
Commercial loans held-for-investment. Our Commercial and Business Banking group includes relationship and
portfolio managers throughout Michigan's major markets. Our commercial loans held-for-investment totaled $1.8 billion at
December 31, 2014 and $1.0 billion at December 31, 2013, and consists of four loan types: commercial real estate, commercial
and industrial, commercial lease financing and warehouse loans, each of which is discussed in more detail below. During the
year ended December 31, 2014, we originated $397.8 million in commercial loans, compared to $239.5 million during the year
ended December 31, 2013. The following table identifies the commercial loan held-for-investment portfolio by loan type and
selected criteria.
Commercial Loans Held-for-Investment
December 31, 2014
Commercial real estate loans:
Fixed rate
Adjustable rate
Total commercial real estate loans
Net deferred fees and other
Total commercial real estate loans
Commercial and industrial loans:
Fixed rate
Adjustable rate
Total commercial and industrial loans
Net deferred fees and other
Total commercial and industrial loans
Commercial lease financing loans:
Fixed rate
Net deferred fees and other
Total commercial lease financing loans
Warehouse Loans
Adjustable rate
Net deferred fees and other
Total warehouse loans
Total commercial loans and warehouse loans:
Fixed rate
Adjustable rate
Total commercial loans held-for-investment
Net deferred fees and other
Total commercial loans held-for-investment
Balance
Average Note Rate
(Dollars in thousands)
Loan on
Nonaccrual Status
$
$
$
$
$
$
$
$
80,999
541,519
622,518
(2,505)
620,013
17,702
408,407
426,109
(6,609)
419,500
9,654
33
9,687
788,518
(19,874)
768,644
108,355
1,738,444
1,846,799
(28,955)
1,817,844
5.1%
2.9%
4.2%
3.4%
3.5%
3.8%
4.8%
3.3%
$
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
75
Commercial Loans Held-for-Investment
December 31, 2013
Commercial real estate loans:
Fixed rate
Adjustable rate
Total commercial real estate loans
Net deferred fees and other
Total commercial real estate loans
Commercial and industrial loans:
Fixed rate
Adjustable rate
Total commercial and industrial loans
Net deferred fees and other
Total commercial and industrial loans
Commercial lease financing loans:
Fixed rate
Net deferred fees and other
Total commercial lease financing loans
Warehouse Loans
Adjustable rate
Net deferred fees and other
Total warehouse loans
Total commercial loans:
Fixed rate
Adjustable rate
Total commercial loans held-for-investment
Net deferred fees and other
Total commercial loans held-for-investment
Balance
Average Note Rate
(Dollars in thousands)
Loan on
Nonaccrual Status
$
$
$
$
$
$
$
$
172,598
237,071
409,669
(799)
408,870
12,782
195,500
208,282
(1,095)
207,187
10,613
(272)
10,341
429,158
(5,641)
423,517
195,993
861,729
1,057,722
(7,807)
1,049,915
5.4%
3.0%
4.3%
2.7%
3.5%
4.2%
5.2%
3.5%
$
$
$
$
$
$
$
1,500
—
1,500
—
—
—
—
1,500
—
1,500
The average loan balance in our total commercial held-for-investment loan portfolio was approximately $1.2 million
for the period ending December 31, 2014, with the largest loan being $49.8 million. There are approximately 53 loans with
more than $5.0 million of unpaid principal balance (net of write downs) and those loans comprised approximately $601.1
million, or 56.8 percent, of the total commercial held-for-investment loan portfolio in the aggregate.
Commercial real estate loans. Our commercial real estate held-for-investment loan portfolio is comprised of loans that
are collateralized by real estate properties intended to be income-producing in the normal course of business.
76
The following table discloses our total unpaid principal balance (net of write downs) of commercial real estate held-
for-investment loans by geographic concentration and collateral type at December 31, 2014.
Collateral Type
Office
Retail
Industrial
Apartments
Other
Total
Percent
Michigan
State
California
Other
Total (1)
(Dollars in thousands)
$
$
145,833
89,874
79,292
72,225
162,491
549,715
$
$
7,017
9,259
10,734
—
1,301
28,311
$
$
— $
17,623
9,884
4,902
12,083
44,492
$
152,850
116,756
99,910
77,127
175,875
622,518
88.3%
4.5%
7.1%
100.0%
(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
Commercial and industrial loans. Commercial and industrial held-for-investment loan facilities typically include lines
of credit and term loans to small or middle market businesses for use in normal business operations to finance working capital
needs, equipment purchases and expansion projects.
Warehouse lending. We also continue to offer warehouse lines of credit to other mortgage lenders. These allow the
lender to fund the closing of residential first mortgage loans. Each extension or drawdown on the line is collateralized by the
residential first mortgage loan being funded. Underlying mortgage loans are predominately originated using Agencies
underwriting standards. These lines of credit are, in most cases, personally guaranteed by one or more principal officers of the
borrower. The aggregate committed amount of adjustable rate warehouse lines of credit granted to other mortgage lenders at
December 31, 2014 was $1.6 billion, of which $0.8 billion was outstanding, compared to $2.1 billion committed at
December 31, 2013, of which $0.4 billion was outstanding.
Other
The Other segment includes treasury functions, income and expense impact of equity and cash, the effect of
eliminations of transactions between segments, tax benefits not assigned to specific operating segments, the funding revenue
associated with stockholders' equity, and charges or credits of an unusual or infrequent nature that are not reflective of the
normal operations of the operating segments and miscellaneous other expenses of a corporate nature. The treasury functions
include administering the investment portfolio, balance sheet funding, interest rate risk management and MSR asset valuation,
hedging and sales into the secondary market.
Net interest income
Loan administration
Net return on mortgage servicing asset
Other noninterest income
Noninterest expense
Income (loss) before taxes
Benefit for income taxes
Net (loss) income
Average balances
Total assets
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
$
17,651
(11,388)
23,976
15,030
(23,397)
21,872
33,979
(87,013) $
(36,995)
90,854
49,077
(205,582)
(189,659)
416,250
$
55,851
$
226,591
$
(58,268)
(7)
(109,690)
15,938
(50,549)
(202,576)
15,645
(186,931)
2,963,867
3,891,897
2,732,255
Net interest income includes the impact of administering our investment securities portfolios, debt, and the net impact
of derivatives used to hedge interest rate sensitivity. Noninterest income includes servicing fees from MSRs net of a loan
administration fee to the Mortgage Servicing segment to service the loan and the impact of hedging (see Note 11 of the Notes to
the Consolidated Financial Statements, herein, for additional information regarding MSRs), gains or losses on the sale of
77
MSRs, trading asset gains or losses and other treasury related items. Noninterest income also includes insurance income and
miscellaneous fee income not allocated to other operating segments. Noninterest expense includes treasury operating expenses,
certain corporate administrative and other miscellaneous expenses not allocated to other operating segments. The provision for
income taxes is not allocated to the operating segments as new corporate income tax liability will not occur until after the
utilization of the existing deferred tax assets.
2014 compared to 2013
For the year ended December 31, 2014, the Other segment net income decreased by $170.7 million, as compared to the
year ended December 31, 2013. The increase was primarily due to an increase in net interest income and a decrease in
noninterest expense, partially offset by decreases in noninterest income and benefit for income taxes. Net interest income
increased during the year ended December 31, 2014, as compared to the year ended December 31, 2013, primarily due to the
fourth quarter 2013 extinguishment of Federal Home Loan Bank long-term advances. Noninterest income decreased for the
year ended December 31, 2014, as compared to the year ended December 31, 2013, primarily due to a second quarter 2013 fair
value adjustment related to the Assured settlement agreement and decrease in net return on MSR. Noninterest expense
decreased primarily due to the prepayment fee on the extinguishment of the Federal Home Loan Bank advance. Benefit for
income taxes decreased due to the reversal of the valuation allowance against the deferred tax asset.
2013 compared to 2012
For the year ended December 31, 2013, the Other segment net income increased $413.5 million, as compared to the
year ended December 31, 2012. The increased net income was primarily due to the reversal of the valuation allowance against
the deferred tax asset, an increase in net return on mortgage servicing asset and the fair value adjustment related to the Assured
settlement agreement, partially offset by the loss on extinguishment of debt (included in noninterest expense) from the
prepayment of Federal Home Loan Bank advances during the year ended December 31, 2013. The increase in net return on
mortgage servicing asset was due to a redistribution of income as part of the previously announced company reorganization.
78
RISK MANAGEMENT
Like all financial services companies, we engage in business activities and assume the related risks. The risks we are
subject to in the normal course of business, include, but are not limited to, credit, regulatory compliance, legal, reputation,
liquidity, market, operational, strategic and capital adequacy. Our risk management activities are focused on ensuring we
properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize
profitability.
A comprehensive discussion of risk management and capital matters affecting us can be found in the Risk Factors
section included in Item 1A of this Form 10-K. Some of the more significant processes used to manage and control credit,
liquidity, market, operational and capital risks are described in the following paragraphs.
Credit Risk
Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or
performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities and enter into
financial derivative contracts, all of which have related credit risk. The majority of our credit risk is associated with lending
activities, as the acceptance and management of credit risk is central to profitable lending.
Loans held-for-sale. Essentially all of our mortgage loans produced are sold into the secondary market on a whole
loan basis. For further information on loans held-for-sale, see Note 3 of the Notes to the Consolidated Financial Statements, in
Item 8. Financial Statements and Supplementary Data, herein.
The following table sets forth the balance of loans in our held-for-sale portfolio, by loan type, as of the December 31,
for the past five years.
December 31,
2014
2013
2011
2010
2009
(Dollars in thousands)
Consumer loans
Commercial loans (1)
$
1,243,792
—
$
1,480,418
—
$
3,012,039
927,681
$
1,800,885
—
$
2,585,200
—
Total consumer and commercial loans
held-for-sale
$
1,243,792
$
1,480,418
$
3,939,720
$
1,800,885
$
2,585,200
(1) Includes the loans that were sold as part of the agreement to sell Northeast commercial loans.
Loans repurchased with government guarantees. The amount of loans repurchased with government guarantees
totaled $1.1 billion at December 31, 2014 and the loans which we have not yet repurchased but had the unilateral right to
repurchase totaled $9.2 million and were classified as loans held-for-sale. At December 31, 2013, loans repurchased with
government guarantees totaled $1.3 billion and those loans which we had not yet repurchased but had the unilateral right to
repurchase totaled $20.8 million and were classified as loans held-for-sale. The balance of this portfolio continued to decrease
during the year ended December 31, 2014, primarily due to reductions in repurchases, normal pay-downs, re-sales and
accelerated dispositions.
Substantially all of these loans continue to be insured or guaranteed by the Federal Housing Administration ("FHA")
and management believes that the reimbursement process is proceeding appropriately. These repurchased loans earn interest at
a statutory rate, which varies for each loan, but is based on the 10-year U.S. Treasury note rate at the time the loan becomes
greater than 60 days delinquent. This interest is recorded as interest income and the related claims settlement expenses are
recorded in asset resolution expense on the Consolidated Statements of Operations. When a government guaranteed loan
becomes nonperforming and is outside the reasonable period, the interest is recognized in accrued interest and is offset by a
contra account.
Beginning in January 2015, the adoption of ASU Update No. 2014-14, Receivables - Troubled Debt Restructuring by
Creditors (Subtopic 310-40) will move approximately $372.8 million of repossessed assets and claims receivable from loans
repurchased with government guarantees to other assets on the Consolidated Statements of Financial Condition.
For further information on loans repurchased with government guarantees, see Note 4 of the Notes to the Consolidated
Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.
79
Loans held-for-investment. Loans held-for-investment increased $391.2 million at December 31, 2013, from
December 31, 2014, primarily due to increases in warehouse, commercial real estate loans and commercial and industrial loans.
Warehouse loans increased $345.1 million, primarily due to an increase in warehouse lending lines of credit transaction levels
through pricing adjustments and marketing efforts. Commercial real estate loans increased $211.1 million, primarily due to new
originations. These increases were partially offset by a decrease in residential first mortgage loans, primarily due to loan sales
and continuing amortization of our legacy residential mortgage loan portfolio.
Loans held-for-investment includes $211.2 million and $238.3 million of loans valued under the fair value option at
December 31, 2014 and 2013, respectively.
For information relating to the loans held-for-investment and concentration of credit of our loans held-for-investment,
see Notes 5 and 6 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statement and Supplementary
Data, herein.
The following table sets forth a breakdown of our loans held-for-investment portfolio at December 31, 2014.
LOANS HELD-FOR-INVESTMENT, BY RATE TYPE
Consumer loans
Residential first mortgage (1)
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Commercial lease financing
Warehouse lending
Total commercial loans
Fixed
Rate
Adjustable
Rate
Total
(Dollars in thousands)
$
713,437
$
1,479,815
$
2,193,252
142,925
—
31,108
887,470
79,334
11,549
9,687
—
100,570
6,107
256,318
—
149,032
256,318
31,108
1,742,240
2,629,710
540,680
407,950
—
768,644
1,717,274
620,014
419,499
9,687
768,644
1,817,844
4,447,554
Total consumer and commercial loans held-for-investment
$
988,040
$
3,459,514
$
(1) Includes $629.2 million of owner occupied real estate loans.
80
The two tables below provide a comparison of the breakdown of loans held-for-investment and the detail for the activity
in our loans held-for-investment portfolio for each of the past five years.
LOANS HELD-FOR-INVESTMENT
At December 31,
2014
2013
2012
2011
2010
(Dollars in thousands)
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Commercial lease financing
Warehouse lending
Total commercial loans
Total consumer and commercial
loans held-for-investment
Allowance for loan losses
$
$
2,193,252
149,032
256,318
31,108
2,629,710
620,014
419,499
9,687
768,644
1,817,844
4,447,554
(297,000)
Total loans held-for-investment, net
$
4,150,554
$
$
2,508,968
169,525
289,880
37,468
3,005,841
408,870
207,187
10,341
423,517
1,049,915
$
3,009,251
114,885
179,447
49,611
3,353,194
640,315
90,565
6,300
1,347,727
2,084,907
$
3,749,821
138,912
221,986
67,613
4,178,332
1,242,969
328,879
114,509
1,173,898
2,860,255
3,792,712
174,789
271,326
86,710
4,325,537
1,250,301
8,875
—
720,770
1,979,946
4,055,756
(207,000)
3,848,756
$
5,438,101
(305,000)
5,133,101
$
7,038,587
(318,000)
6,720,587
$
6,305,483
(274,000)
6,031,483
LOANS HELD-FOR-INVESTMENT PORTFOLIO ACTIVITY SCHEDULE
2014
2013
2012
2011
2010
For the Years Ended December 31,
(Dollars in thousands)
Balance, beginning of year
$
4,055,756
$
5,438,101
$
7,038,587
$
6,305,483
$
7,714,308
Loans originated (1)
Change in lines of credit (2)
Loans transferred from loans held-for-
sale
Loans transferred to loans held-for-
sale (3)(4)(5)(6)
Loan amortization / prepayments
Loans transferred to repossessed
assets
1,266,249
—
868,288
379,526
901,121
139,021
1,017,330
107,912
168,995
(159,329)
19,201
64,289
61,770
16,733
90,746
(425,589)
(410,902)
(831,739)
(1,687,294)
(1,220,231)
(1,112,900)
(136,149)
(61,203)
(740,155)
(212,046)
Balance, end of year
$
4,447,554
$
(57,161)
(175,415)
4,055,756
$
(369,267)
5,438,101
$
(211,519)
7,038,587
$
(557,036)
6,305,483
(1) During the year ended December 31, 2013, there were $170.5 million of HELOC loans and $73.3 million of second mortgage loans
that were reconsolidated at fair value as a result of the settlement agreements with Assured and MBIA.
(2) A reclass of warehouse loans is included in the schedule in 2014.
(3) During the year ended December 31, 2010, loans transferred from various portfolios include $578.2 million transferred to loans
held-for-sale as part of the sale of nonperforming residential first mortgage loans in the year.
(4) During the year ended December 31, 2012, loans transferred from held-for-investment to held-for-sale include $927.7 million of
commercial loans related to the agreements to sell a substantial portion of Northeast-based commercial loans.
(5) During the year ended December 31, 2013, loans transferred from held-for-investment to held-for-sale include $508.4 million
unpaid principal balance of residential first mortgage nonperforming and TDR loans that were sold and $277.9 million unpaid
principal balance of residential first jumbo adjustable-rate mortgage loans.
(6) During the year ended December 31, 2014, loans transferred from held-for-investment to held-for-sale included $225.4 million
unpaid principal balance of residential first jumbo mortgage loans.
81
Credit Quality
Management considers a number of qualitative and quantitative factors in assessing the level of its allowance for loan
losses. See the section captioned "Allowance for Loan Losses" in this discussion. As illustrated in the tables following, trends in
certain credit quality characteristics such as nonperforming loans and past due statistics have recently stabilized or even begun
to show signs of improvement. This is predominantly a result of the nonperforming and TDR loan sales and a decrease in net
charge-offs, as well as run off of the legacy portfolios and the addition of new commercial loans with strong credit
characteristics.
The following table sets forth certain information about our nonperforming assets as of the end of each of the last five
years.
NONPERFORMING LOANS AND ASSETS
Nonperforming loans held-for-investment (1)
Nonperforming TDRs
Nonperforming TDRs at inception but
performing for less than six months
Total nonperforming loans held-for
investment
Repurchased nonperforming assets, net (1)
Real estate and other repossessed assets, net
At December 31,
2014
2013
2012
2011
2010
(Dollars in thousands)
$
$
74,839
28,687
98,976
25,808
$
254,582
60,516
$
291,782
66,567
$
200,111
77,858
16,965
20,901
84,728
130,018
40,447
120,491
—
18,693
145,685
—
36,636
399,826
—
120,732
488,367
—
114,715
318,416
28,472
151,085
Nonperforming assets
$
139,184
$
182,321
$
520,558
$
603,082
$
497,973
Ratio of nonperforming assets to total assets
Ratio of nonperforming loans held for
investment to loans held-for-investment
Ratio of allowance to nonperforming loans
held-for-investment (1)
Ratio of allowance to loans held-for-
investment (1)
Ratio of net charge-offs to average loans held-
for-investment (1)
Ratio of nonperforming assets to loans held-
for-investment and repossessed assets
(1) Excludes loans carried under the fair value option.
1.42%
2.71%
1.95%
3.59%
255.7%
145.9%
7.01%
1.07%
3.12%
5.42%
4.00%
4.46%
3.70%
7.35%
76.3%
5.61%
4.43%
9.36%
4.43%
6.94%
65.1%
4.52%
2.14%
8.43%
4.35%
5.05%
86.1%
4.35%
9.34%
7.71%
The following table sets forth the activity of nonperforming commercial loans, exclusive of premiums or discounts
(primarily commercial real estate and commercial and industrial loans).
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
Beginning unpaid principal balance
$
12,940
$
139,128
$
Additions
Returned to performing
Principal payments
Sales
Charge-offs, net of recoveries
Valuation write downs
Ending unpaid principal balance
5,235
—
(6,369)
(11,079)
1,013
(1,740)
$
— $
82
120,655
—
(96,992)
(101,951)
(39,075)
(8,825)
12,940
$
145,006
266,309
(12,081)
(75,765)
(63,404)
(108,585)
(12,352)
139,128
Past due loans held-for-investment
At December 31, 2014, we had $164.4 million of past due loans held-for-investment. Of those past due loans, $120.5
million loans were nonperforming. At December 31, 2013, we had $207.4 million of past due loans held-for-investment. Of
those past due loans, $145.7 million loans were nonperforming. The decrease from December 31, 2013 to December 31, 2014
was primarily due to sales of nonperforming and TDR residential first mortgage loans in the amount of $69.3 million.
Consumer loans. As of December 31, 2014, nonperforming consumer loans totaled $120.5 million, a decrease from
$144.2 million at December 31, 2013, primarily due to the sale of nonperforming and TDR residential first mortgage loan. Net
charge-offs in consumer loans totaled $42.6 million for the year ended December 31, 2014, compared to $129.1 million for the
year ended December 31, 2013, primarily due to lower net losses related to loan sales, lower levels of nonperforming loans and
improving property values thereby reducing the level of write downs.
Commercial loans. As of December 31, 2014, there were no nonperforming commercial loans compared to $1.5
million at December 31, 2013. Nonperforming commercial loans percentage of total commercial loans was 0.2 percent at
December 31, 2013. Net recoveries in commercial loans totaled $1.0 million for the year ended December 31, 2014, which was
a decrease from net charge-offs of $39.0 million for the year ended December 31, 2013, primarily due to a continued decline in
nonperforming loans and legacy portfolio balances.
Troubled debt restructurings (held-for-investment)
Troubled debt restructurings ("TDRs") are modified loans in which a borrower is experiencing financial difficulties
and has been granted concession not otherwise available. Our ongoing loan modification efforts to assist homeowners and other
borrowers continued to increase our overall balance of TDRs. Nonperforming TDRs were 37.9 percent and 32.1 percent of total
nonperforming loans at December 31, 2014 and 2013, respectively.
Nonperforming TDRs are included in nonaccrual loans and performing TDRs are excluded from nonaccrual loans
because it is probable that all contractual principal and interest due under the restructured terms will be collected. Within
consumer nonperforming loans, residential first mortgage TDRs were 37.5 percent of residential first mortgage nonperforming
loans at December 31, 2014, compared to 31.7 percent at December 31, 2013. The level of modifications that were determined
to be TDRs in these portfolios is expected to result in elevated nonperforming loan levels for longer periods, because TDRs
remain in nonperforming status until a borrower has made at least six consecutive months of payments under the modified
terms, or ultimate resolution occurs. TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers
having difficulty making their payments. Although many of the TDRs continue to be performing, we have increased our
allowance on TDRs, which also increased the allowance for loan losses.
December 31, 2014
Consumer loans (1)
Commercial loans
Total TDRs
December 31, 2013
Consumer loans (1)
Commercial loans
Total TDRs
TDRs
Performing
Nonperforming
Total
(Dollars in thousands)
$
$
$
$
361,450
403
361,853
382,529
456
382,985
$
$
$
$
45,652
—
45,652
46,709
—
46,709
$
$
$
$
407,102
403
407,505
429,238
456
429,694
(1) Consumer loans include: residential first mortgage, second mortgage, HELOC and other consumer loans. The allowance for loan
losses on consumer TDR loans totaled $81.2 million and $82.3 million at December 31, 2014 and 2013, respectively.
83
The following table sets forth the activity during each of the years presented with respect to performing TDRs and
nonperforming TDRs.
Performing
Beginning balance
Additions
Transfer to nonperforming TDR
Transfer from nonperforming TDR
Principal repayments
Reductions (1)
Ending balance
Nonperforming
Beginning balance
Additions
Transfer to nonperforming TDR
Transfer from nonperforming TDR
Principal repayments
Reductions (1)
Ending balance
(1) Includes loans paid in full or otherwise settled, sold or charged off.
TDRs
For the Years Ended December 31,
2014
2013
2012
382,985
43,703
(33,782)
6,892
(7,252)
(30,693)
361,853
(Dollars in thousands)
589,762
$
57,245
(40,342)
43,419
(258,475)
(8,624)
382,985
$
46,709
13,899
33,782
(6,892)
(588)
(41,258)
45,652
$
$
145,244
48,018
40,342
(43,419)
(134,924)
(8,552)
46,709
$
$
$
$
517,175
115,924
(111,230)
117,688
(23,463)
(26,332)
589,762
196,585
83,685
111,230
(117,688)
(85,065)
(43,503)
145,244
$
$
$
$
84
The following table sets forth information regarding past due loans at the dates listed. At December 31, 2014, 92.7
percent of all past due loans were loans in which we had a first lien position on residential real estate, compared to 91.6 percent
at December 31, 2013.
PAST DUE LOANS HELD-FOR-INVESTMENT
December 31,
Days Past Due
2014
2013
2012
2011
2010
(Dollars in thousands)
30 – 59 days
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Commercial loans
Commercial real estate
Commercial and industrial
$
$
29,157
971
3,581
296
$
36,526
1,997
2,197
293
—
—
—
—
Total 30 – 59 days past due
34,005
41,013
60 – 89 days
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Commercial loans
Commercial real estate
Commercial and industrial
8,099
393
1,344
58
—
—
19,096
271
1,238
127
—
—
Total 60 – 89 days past due
9,894
20,732
$
62,445
1,171
2,484
587
6,979
—
73,666
$
74,934
1,887
5,342
1,507
7,453
11
91,134
96,768
3,587
3,735
939
28,245
175
133,449
16,693
37,493
40,821
727
910
248
6,990
—
25,568
1,527
2,111
471
12,323
62
53,987
1,968
3,783
335
6,783
55
53,745
90 days or greater
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
115,093
134,340
306,486
372,514
122,924
2,054
3,222
122
—
—
—
2,820
6,826
199
3,724
3,025
183
1,500
86,367
—
—
41
—
6,236
7,973
611
99,335
1,670
28
7,480
6,713
822
175,559
4,918
—
Total 90 days or greater past due (1)
120,491
145,685
399,826
488,367
318,416
Total past due loans
$
164,390
$
207,430
$
499,060
$
633,488
$
505,610
(1) Includes loans carried under the fair value option of $4.5 million and $4.0 million at December 31, 2014 and 2013, respectively.
85
The following table sets forth information regarding loans held-for-investment and nonperforming loans (i.e., 90 days
or greater past due loans) as to which we have ceased accruing interest.
LOANS HELD-FOR-INVESTMENT AND NONACCRUAL LOANS
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Commercial lease financing
Warehouse lending
Total commercial loans
Total loans (1)
Less allowance for loan losses
Total loans held-for-investment, net
December 31, 2014
Investment
Loan
Portfolio
Non
Accrual
Loans
As a % of
Loan
Specified
Portfolio
As a % of
Non
Accrual
Loans
(Dollars in thousands)
$
$
$
$
2,193,252
149,032
256,318
31,108
2,629,710
620,014
419,499
9,687
768,644
1,817,844
4,447,554
(297,000)
4,150,554
$
115,093
2,054
3,222
122
120,491
—
—
—
—
—
120,491
5.2%
1.4%
1.3%
0.4%
4.6%
—%
—%
—%
—%
—%
2.7%
95.5%
1.7%
2.7%
0.1%
100.0%
—%
—%
—%
—%
—%
100.0%
(1) Includes $4.5 million of nonaccrual loans carried under the fair value option at December 31, 2014.
The following table sets forth the nonperforming (i.e., 90 days or greater past due loans) residential first mortgage
loans by year of origination (i.e., vintage) and the total amount of unpaid principal balance (net of write downs) loans
outstanding at December 31, 2014.
RESIDENTIAL FIRST MORTGAGE LOANS
Vintage
Pre-2006
2006
2007
2008
2009
2010
2011
2012
2013
2014
Total loans
Net deferred fees and other
Total residential first mortgage loans
December 31, 2014
Performing Loans
NonAccrual
Loans
Unpaid Principal
Balance (1)
(Dollars in thousands)
$
984,490
$
39,504
$
1,023,994
167,671
525,624
64,637
32,282
15,045
22,729
21,425
45,029
9,800
37,013
19,556
3,435
1,866
1,667
—
713
208,690
2,087,622
$
$
1,539
115,093
177,471
562,637
84,193
35,717
16,911
24,396
21,425
45,742
210,229
2,202,715
(9,463)
2,193,252
$
$
(1) Unpaid principal balance, net of write downs, does not include net deferred fees, premiums or discounts and other.
86
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of probable losses that are inherent in our loans held-
for-investment portfolio but which have not yet been realized. The consumer loan portfolio includes residential first mortgages,
second mortgages, HELOC and other consumer loans. The commercial loan portfolio includes commercial real estate,
commercial and industrial, commercial lease financing loans and warehouse lending. See Notes 1 and 5 to the Consolidated
Financial Statements for additional information.
The allowance for loan losses was $297.0 million and $207.0 million at December 31, 2014 and 2013, respectively.
The increase in the allowance for loan losses was driven primarily by an increase in our estimated average loss emergence
period for the consumer portfolio as well as an increase to our qualitative assessment of the reset risk related to loans in our
interest-only portfolio. Both of these items are further explained above in the Provision for Loan Losses section of
Management’s Discussion and Analysis.
The allowance for loan losses as a percentage of nonperforming loans increased to 255.7 percent at December 31,
2014 from 145.9 percent at December 31, 2013, which was primarily due to the sale of nonperforming and TDR loans and the
increase in the allowance for loan losses.
The allowance for loan losses as a percentage of loans held-for-investment increased to 7.01 percent as of
December 31, 2014 from 5.42 percent as of December 31, 2013, primarily due to the increase in the allowance for loan losses.
The allowance for loan losses is considered adequate based upon management's assessment of relevant factors,
including the types and amounts of nonperforming loans, historical and current loss experience on such types of loans, and the
current economic environment.
The following tables set forth certain information regarding the allocation of our allowance for loan losses to each loan
category.
ALLOWANCE FOR LOAN LOSSES
December 31, 2014
Investment
Loan
Portfolio
Percent
of
Portfolio
Allowance
Amount
Percentage of
Total
Allowance
(Dollars in thousands)
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Commercial lease financing
Warehouse lending
Total commercial loans
$
2,167,321
51.2% $
234,288
95,915
124,754
31,108
2,419,098
620,014
419,499
9,687
768,644
1,817,844
2.3%
2.9%
0.7%
57.1%
14.6%
9.9%
0.2%
18.2%
42.9%
12,424
18,723
766
266,201
17,359
10,581
131
2,728
30,799
297,000
78.9%
4.2%
6.3%
0.3%
89.7%
5.8%
3.6%
—%
0.9%
10.3%
100.0%
Total consumer and commercial loans (1)
$
4,236,942
100.0% $
(1) Excludes loans carried under the fair value option.
87
The following tables set forth certain information regarding our allowance for loan losses as of December 31, 2014 and
the allocation of the allowance for loan losses over the past five years.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
At December 31,
2014
2013
2012
2011
2010
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
(Dollars in thousands)
Consumer loans
Residential first
mortgage
Second mortgage
HELOC
Other
Total consumer
loans
Commercial loans
Commercial real
estate
Commercial and
industrial
Commercial lease
financing
Warehouse lending
Total commercial
loans
Total consumer
and commercial
loans (1)
$ 234,288
5.6% $ 161,142
4.2% $ 219,230
4.0% $ 179,218
2.5% $ 122,437
12,424
18,723
766
0.3%
0.4%
—%
12,141
7,893
2,412
0.3%
0.2%
0.1%
20,201
18,348
2,040
0.4%
0.3%
0.1%
16,666
14,845
2,434
0.2%
0.2%
0.1%
25,187
21,369
3,450
1.9%
0.4%
0.3%
0.1%
266,201
6.3%
183,588
4.8%
259,819
4.8%
213,163
3.0%
172,443
2.7%
17,359
0.4%
18,540
0.5%
41,310
0.7%
96,984
1.4%
95,844
1.5%
10,581
0.2%
3,332
0.1%
2,878
0.1%
5,425
0.1%
1,542
—%
131
2,728
—%
0.1%
148
1,392
—%
—%
94
899
—%
—%
1,178
1,250
—%
—%
—
4,171
—%
0.1%
30,799
0.7%
23,412
0.6%
45,181
0.8%
104,837
1.5%
101,557
1.6%
$ 297,000
7.0% $ 207,000
5.4% $ 305,000
5.6% $ 318,000
4.5% $ 274,000
4.3%
(1) Excludes loans carried under the fair value option.
88
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
For the Years Ended December 31,
2014
2013
2012
2011
2010
(Dollars in thousands)
$
207,000
131,553
$
305,000
70,142
$
318,000
276,047
$
274,000
176,931
$
524,000
426,353
(37,584)
(3,211)
(5,857)
(1,923)
(48,575)
(2,463)
—
—
(74)
(2,537)
(51,112)
3,049
477
183
2,311
6,020
(133,326)
(6,252)
(5,473)
(3,622)
(148,673)
(47,982)
(350)
(1,299)
(45)
(49,676)
(198,349)
15,329
1,178
1,020
2,079
19,606
(175,803)
(18,753)
(17,159)
(4,423)
(216,138)
(105,285)
(4,627)
(1,191)
—
(111,103)
(327,241)
18,561
1,912
461
1,786
22,720
3,319
10,162
15,397
151
288
—
77
—
—
111
47
62
3,539
9,559
(41,553)
$
297,000
$
10,601
30,207
(168,142)
207,000
15,474
38,194
(289,047)
305,000
$
2,535
8,946
(132,931)
318,000
$
(41,559)
(19,217)
(16,980)
(4,729)
(82,485)
(57,626)
(644)
—
(1,122)
(59,392)
(141,877)
1,656
1,642
1,510
1,603
6,411
2,408
122
—
5
(474,195)
(27,846)
(21,495)
(5,583)
(529,119)
(153,020)
(1,181)
—
(2,154)
(156,355)
(685,474)
2,513
1,806
1,531
1,615
7,465
1,123
17
—
516
1,656
9,121
(676,353)
274,000
$
Beginning balance
Provision for loan losses (1)
Charge-offs
Consumer loans
Residential first mortgage (1)(2)
Second mortgage
HELOC
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Commercial lease financing
Warehouse lending
Total commercial loans
Total charge offs
Recoveries
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Commercial lease financing
Warehouse lending
Total commercial loans
Total recoveries
Charge-offs, net of recoveries
Ending balance
Net charge-off ratio (1)(2)(3)
1.07%
4.00%
4.43%
2.14%
9.34%
(1) December 31, 2010 includes the provision for loan losses and charge-offs related to the sale of nonperforming loans held-for-sale of
$176.5 million and $327.3 million, respectively. Excluding the sale of nonperforming loans held-for-sale the net charge-off ratio
would have been 4.82 percent at December 31, 2010.
(2) Includes charge-offs of $15.1 million related to the sale of nonperforming loans and TDRs during the year ended December 31, 2014.
Excluding the sale of nonperforming and TDR loans, the net charge-off ratio would have been 0.62 percent for the year ended
December 31, 2014.
(3) Excludes loans carried under the fair value option.
Mortgage servicing rights
At December 31, 2014 MSRs at fair value decreased $26.9 million, compared to December 31, 2013, primarily due to
MSR sales and a reduction in fair value of MSRs during the year ended December 31, 2014. During the years ended
December 31, 2014 and 2013, we recorded additions to our MSRs of $271.5 million and $401.7 million, respectively. Also,
89
during the year ended December 31, 2014, we reduced the amount of MSRs by $231.5 million related to bulk servicing sales
and $31.0 million related to loans that paid off during the period. The fair value of MSRs decreased by $35.8 million resulting
from the recognition of expected cash flows and market driven changes, primarily as a result of decreases in mortgage loan
rates that led to an expected increase in prepayment speeds. During the year ended December 31, 2013, we reduced the amount
of MSRs by $834.5 million as a result of bulk servicing sales, $99.3 million due to loans that paid off during the period, and an
increase of $106.0 million in the fair value of MSRs resulting from the realization of expected cash flows, as well as market
driven changes, primarily decreases in mortgage loan rates, that caused us to assume a higher level of prepayment speeds. Once
fully phased in, the Basel III capital rules will significantly reduce the allowable amount of the fair value of MSRs included in
Tier 1 capital. We reduced our MSR concentration during the fourth quarter 2013 (discussed below) which should result in a
decrease of the exclusion to our allowable capital levels under Basel III. See Note 11 of the Notes to the Consolidated Financial
Statements, in Item 8. Financial Statements and Supplementary Data, herein. Our ratio of MSRs to Tier 1 capital is 22.1 percent
at December 31, 2014, as compared to 22.6 percent at December 31, 2013. See "Use of Non-GAAP Financial Measures."
On December 18, 2013, we entered into a definitive agreement to sell $40.7 billion unpaid principal balance of our
MSR portfolio to Matrix Financial Services Corporation ("Matrix"), a wholly owned subsidiary of Two Harbors Investment
Corp. Covered under the agreement are certain mortgage loans serviced for both Fannie Mae and Ginnie Mae, originated
primarily after 2010. Simultaneously, we entered into an agreement with Matrix to subservice the residential mortgage loans
covered under the agreement to sell. As a result, we will receive subservicing income and return a portion of the ancillary fees
to be paid as the subservicer of the loans.
The principal balance of the loans underlying our total MSRs was $25.4 billion at December 31, 2014, compared to
$25.7 billion at December 31, 2013, with the decrease primarily attributable to our bulk and flow servicing sales of $20.6
billion in underlying loans and by a decrease in loan origination activity for the year ended December 31, 2014.
The recorded amount of the MSR portfolio at December 31, 2014 and 2013 as a percentage of the unpaid principal
balance of the loans we are servicing was 1.0 percent and 1.1 percent, respectively. When our Mortgage Originations segment
sells mortgage loans in the secondary market, it usually retains the right to continue to service the mortgage loans for a fee. The
weighted average service fee on loans serviced for others is currently 27.2 basis points of the loan principal balance
outstanding. The amount of MSRs initially recorded is based on the fair value of the MSRs determined on the date when the
underlying loan is sold. Our determination of fair value, and thus the amount we record (i.e., the capitalization amount) is based
on internal valuations and available market pricing. Estimates of fair value reflect the anticipated prepayment speeds (also
known as the constant prepayment rate ("CPR"), product type (i.e., conventional, government, balloon), fixed or adjustable rate
of interest, interest rate, term (i.e., 15 or 30 years), servicing costs per loan, discounted yield rate and estimate of ancillary
income such as late fees and prepayment fees.
At December 31, 2014, the fair value of the MSR was based upon the following weighted-average assumptions: (1) a
discount rate of 10.9 percent; (2) an anticipated loan prepayment rate of 15.0 CPR; and (3) annual servicing costs per
conventional loan of $67, $88 for each government loan and $85 for each adjustable-rate loan, respectively. At December 31,
2013, the fair value of the MSR was based upon the following weighted-average assumptions: (1) a discount rate of 10.2
percent; (2) an anticipated loan prepayment rate of 11.9 CPR; and (3) servicing costs per conventional loan of $67, $88 for each
government loan and $85 for each adjustable-rate loan, respectively.
The following table sets forth activity in loans serviced for others during the past five years.
LOANS SERVICED FOR OTHERS
2014
2013
2012
2011
2010
For the Years Ended December 31,
(Dollars in thousands)
Balance, beginning of year
$
25,743,396
$
76,821,222
$
63,770,676
$
56,040,063
$
56,521,902
Loans serviced additions
Loan amortization/prepayments
Servicing sales (1)
24,407,054
(3,919,312)
(20,804,370)
Balance, end of year
$
25,426,768
$
35,827,484
(9,895,791)
(77,009,519)
25,743,396
$
53,094,326
(22,096,691)
(17,947,089)
76,821,222
$
27,437,433
(9,488,100)
(10,218,720)
63,770,676
$
26,325,610
(11,673,592)
(15,133,857)
56,040,063
(1) Includes the sale of $40.7 billion to Matrix in 2013, which we now subservice.
90
Repossessed assets
Real property we acquire as a result of the foreclosure process is classified as real estate owned until it is sold. It is
transferred from the loans held-for-investment portfolio at the lower of cost or market value, less disposal costs. Management
decides whether to rehabilitate the property or sell it "as is" and whether to list the property with a broker. The $17.9 million
decrease in repossessed assets from December 31, 2013 to December 31, 2014 was primarily due to the sale of commercial
repossessed assets.
The following schedule provides the activity for repossessed assets during each of the past five years.
2014
2013
2012
2011
2010
For the Years Ended December 31,
(Dollars in thousands)
$
$
36,636
33,177
(51,120)
18,693
$
$
120,732
63,609
(147,705)
36,636
$
$
114,715
124,879
(118,862)
120,732
$
$
151,085
88,755
(125,125)
114,715
$
$
176,968
204,926
(230,809)
151,085
Beginning balance
Additions
Disposals
Ending balance
Investment securities available-for-sale
Investment securities available-for-sale, comprised of U.S. government sponsored agencies and municipal obligations,
increased from $1.0 billion at December 31, 2013, to $1.7 million at December 31, 2014. The increase was primarily due to the
purchase of $1.1 billion in U.S. government sponsored agencies during the year ended December 31, 2014, offset by sales of
approximately $0.4 billion. The investment securities available-for-sale were purchased as part of our strategy to redeploy a
portion of our cash into higher yielding, yet very liquid, investment alternatives. See Note 2 of the Notes to the Consolidated
Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.
Representation and warranty reserve
We sell most of the residential first mortgage loans that we originate into the secondary mortgage market. When we
sell mortgage loans, we make customary representations and warranties to the purchasers, including sponsored securitization
trusts and their insurers (primarily Fannie Mae and Freddie Mac).
REPRESENTATION AND WARRANTY RESERVE
For the Years Ended December 31,
2014
2013
2012
2011
2010
(Dollars in thousands)
Beginning balance
Provision for new loan sales
Provision adjustment for previous estimates
Charge-offs, net of recoveries
Ending balance
$
54,000
$
193,000
$
120,000
$
79,400
$
6,854
10,011
(17,865)
$
53,000
$
17,606
36,116
(192,722)
54,000
$
24,410
256,289
(207,699)
193,000
$
8,993
150,055
(118,448)
120,000
$
66,000
35,200
61,523
(83,323)
79,400
The decrease in the amount charged to representation and warranty reserve expense was primarily due to lower losses
estimates following our settlements with Fannie Mae and Freddie Mac, along with our change in estimates related to the recent
revision to the representation and warranty reserve framework as published by the Federal Housing Finance Agency, offset
partially by an increase to account for the liability associated with estimated losses on claims expected from HUD on losses
incurred related to loans on which we have executed indemnification agreements.
91
The following table summarizes the amount of annual Fannie Mae and Freddie Mac audit file review requests by
number of accounts. Such requests precede the repurchase demands that Fannie Mae and Freddie Mac may make thereafter.
Fannie Mae
Freddie Mac
Total
For the Years Ended December 31,
2014
2013
2012
3,765
2,361
6,126
9,510
3,876
13,386
8,578
5,963
14,541
During the year ended December 31, 2014, we had $117.1 million in Fannie Mae new repurchase demands and $40.5
million in Freddie Mac new repurchase demands. The following table summarizes the amount of yearly new repurchase
demands we have received by loan origination year.
2008 and prior (1)
2009-2014
Total
Number of accounts
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
$
$
$
33,372
124,655
158,027
761
$
$
570,597
74,471
645,068
3,478
865,670
182,749
1,048,419
5,255
(1) Includes a significant portion of the repurchase requests and obligations associated to loans within the settlement agreements with
Fannie Mae and Freddie Mac.
The following table summarizes the aggregate amount of pending repurchase demands at the end of each year noted.
Period end balance
Percent non-agency (approximately)
2014
$
43,368
1.6%
December 31,
2013
(Dollars in thousands)
97,170
$
2012
$
224,182
2.6%
0.3%
The following table summarizes the trends over the last two years with respect to key model attributes and
assumptions for estimating the representation and warranty reserve.
UPB of loans sold (1) (2)
Loan file review as percentage of unpaid principal balance
Repurchase demand rate (3)
Actual repurchase rate (4)
Loss severity rate (5)
December 31, 2014
December 31, 2013
(Dollars in Thousands)
$
261,000,000
$
244,100,000
7.1%
15.9%
33.3%
8.7%
8.2%
14.5%
35.5%
12.3%
(1) Includes servicing sold with recourse.
(2) Includes a significant portion of the repurchase requests and obligations associated to loans within the settlement agreements with
Fannie Mae and Freddie Mac.
(3) The percent of loan file reviews that is expected to result in a repurchase demand.
(4) Weighted average of the appeals loss rate.
(5) Average loss severity rate expected to be experienced on actual repurchases made (post appeal loss).
See Note 16 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary
Data, herein.
92
Liquidity Risk
Liquidity risk is the risk that we will not have sufficient funds to meet current and future cash flow needs as they
become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows
in deposits and to take advantage of interest rate and market opportunities. The ability of a financial institution to meet current
financial obligations is a function of the balance sheet structure, the ability to liquidate assets, and the access to various sources
of funds.
We primarily originate agency eligible loans held-for-sale and therefore the majority of new residential first mortgage
loan originations are readily convertible to cash, either by selling them as part of our monthly agency sales, private party whole
loan sales, or by pledging them to the Federal Home Loan Bank of Indianapolis and borrowing against them. We use the
Federal Home Loan Bank of Indianapolis as a significant source for funding our residential mortgage business due to its
flexibility in terms of being able to borrow or repay borrowings as daily cash needs require.
Our principal uses of funds include loan originations and operating expenses. At December 31, 2014, we had
outstanding rate-lock commitments to lend $2.6 billion in mortgage loans, compared to $2.3 billion at December 31, 2013.
These commitments may expire without being drawn upon and therefore, do not necessarily represent future cash requirements.
Total commercial and consumer unused collateralized lines of credit totaled $1.4 billion at December 31, 2014 and $2.0 billion
at December 31, 2013.
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.
In addition to operating expenses at a particular level of mortgage originations, our cash flows are fairly predictable
and relate primarily to the funding cash outflows of residential first mortgages and sales cash inflows of those residential first
mortgages. Our mortgage warehouse funding line of business also generates cash flows as funds are extended to correspondent
relationships to close new loans. Those loans are repaid when the correspondent sells the loan. Other material cash flows relate
to growing our commercial lines of business and the loans we service for others and consist primarily of principal, interest,
taxes and insurance escrows. Those monies come in over the course of the month and are paid out based on predetermined
schedules. Those flows are largely a function of the size of the servicing book and the volume of refinancing activity of the
loans serviced. In general, monies received in one month are paid during the following month with the exception of taxes and
insurance monies that are held until they are due.
Our Consolidated Statements of Cash Flows shows cash used in operating activities of $8.1 billion, $1.6 billion, $0.4
billion for the years ended December 31, 2014, 2013 and 2012, respectively. This does not have an impact on our liquidity
position or how we manage liquidity. Rather, it is a reflection of the manner in which we execute certain loan sales for which
the cash outflow is included in operating activities and the corresponding cash inflow is included in the investing section.
As governed and defined by our internal liquidity policy, we maintain adequate excess liquidity levels appropriate to
cover both unanticipated operational and regulatory requirements. In addition to this liquidity, we also maintain targeted
minimum levels of unused borrowing capacity as an additional 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, 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 Federal
Home Loan Bank borrowings, accelerating sales of loans held-for-sale (Agencies and/or private), selling loans held-for-
investment or securities, borrowing through the use of repurchase agreements, reducing originations, making changes to
warehouse funding facilities or borrowing from the discount window.
Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of
funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse
effect on our liquidity, capital resources or operations.
Federal Home Loan Bank stock. At December 31, 2014, holdings of Federal Home Loan Bank stock decreased to
$155.4 million from $209.7 million at December 31, 2013, due to the Federal Home Loan Bank’s repurchase of excess stock
for $54.3 million. Once purchased, Federal Home Loan Bank shares must be held for five years before they can be redeemed.
As a member of the Federal Home Loan Bank, we are required to hold shares of Federal Home Loan Bank stock in an amount
93
equal to at least 1.0 percent of aggregate unpaid principal balance of our mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5.0 percent of our Federal Home Loan Bank advances, whichever is greater.
Deposits. Our deposits consist of four primary categories: retail deposits, government deposits, wholesale deposits and
company controlled deposits. Total deposits increased $928.3 million, or 15.1 percent at December 31, 2014, compared to
December 31, 2013, primarily due to increases in savings accounts and government deposits.
Our branch deposits increased $364.0 million, or 7.6 percent at December 31, 2014, compared to December 31, 2013,
primarily due to an increase in core deposits.
We have continued to increase our core deposit accounts and improve our mix of deposits. The overall need for deposit
funding declined in the second half of 2014, consistent with the slow-down in mortgage originations. This has allowed us to
run-off higher costing deposits, as we continue to have success in bringing in core checking, savings and money market
accounts.
We have focused on increasing our commercial retail deposits. Our commercial retail deposits have increased $67.1
million or 47.5 percent at December 31, 2014, compared to December 31, 2013.
We call on local governmental agencies, and other public units, as an additional source for deposit funding. These
deposit accounts include $355.0 million of certificates of deposit with maturities typically less than one year and $563.0 million
in checking and savings accounts at December 31, 2014.
We generate deposits from our retail banking network and no longer purchase wholesale deposits. Wholesale deposits
continued to run-off during the year ended December 31, 2014 and decreased by $8.5 million from December 31, 2013.
Company controlled deposits arise due to our servicing of loans for others and represent the portion of the investor
custodial accounts on deposit with the Bank. These deposits do not bear interest.
We participate in the Certificates of Deposit Account Registry Service ("CDARS") program, through which certain
customer certificates of deposit ("CD") are exchanged for CDs of similar amounts from other participating banks. This gives
customers the potential to receive FDIC insurance up to $50.0 million. At December 31, 2014, we had $393.2 million of total
CDs enrolled in the CDARS program. We received reciprocal CDs from other participating banks totaling $94.3 million from
public entities and $299.0 million from retail customers at December 31, 2014. We had CDARS originations of $390.8 million
from public entities and $5.5 million from retail customers at December 31, 2014. The total CDARS balances increased $57.3
million at December 31, 2014, from December 31, 2013.
94
The composition of our deposits was as follows at the date indicated.
December 31,
2014
2013
(Dollars in thousands)
Balance
Yield/Rate
% of Deposits
Balance
Yield/Rate
% of Deposits
Retail deposits
Branch retail deposits
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificates of deposit/CDARS(1)
Total branch retail deposits
$
726,157
3,426,722
208,549
807,400
5,168,828
Commercial retail deposits
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificate of deposit/CDARS (1)
Total commercial retail deposits
Total retail deposits subtotal
Government deposits
Demand deposit accounts
Savings accounts
Certificate of deposit/CDARS
Total government deposits (2)
Wholesale deposits
Company controlled deposits (3)
133,296
26,948
42,901
5,145
208,290
5,377,118
246,055
316,917
354,971
917,943
247
773,298
Total deposits (4)
$ 7,068,606
0.08%
0.72%
0.15%
0.65%
0.60%
0.01%
0.35%
0.60%
0.29%
0.18%
0.59%
0.38%
0.52%
0.43%
0.45%
0.06%
—%
0.50%
670,039
10.3% $
48.5% 2,849,644
262,009
3.0%
11.4% 1,023,141
73.1% 4,804,833
1.9%
0.4%
0.6%
0.1%
3.0%
93,515
19,635
25,095
2,988
141,233
76.1% 4,946,066
3.5%
4.5%
5.0%
13.0%
—%
10.9%
314,804
183,128
104,466
602,398
8,717
583,145
100.0% $ 6,140,326
0.09%
0.46%
0.15%
0.72%
0.45%
0.01%
0.40%
0.54%
0.41%
0.17%
0.44%
0.38%
0.27%
0.26%
0.33%
3.43%
—%
0.39%
10.9%
46.4%
4.3%
16.7%
78.3%
1.5%
0.3%
0.4%
0.1%
2.3%
80.6%
5.1%
3.0%
1.7%
9.8%
0.1%
9.5%
100.0%
(1) The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $0.8 billion at both
December 31, 2014 and 2013.
(2) Government deposits include funds from municipalities and schools.
(3) These accounts represent a portion of the investor custodial accounts and escrows controlled by us in connection with loans
serviced for others and that have been placed on deposit with the Bank.
(4) The aggregate amount of deposits with a balance over $250,000 was approximately $2.6 billion and $1.7 billion at December 31,
2014 and 2013, respectively.
The following table indicates the scheduled maturities of our certificates of deposit with a minimum denomination of
$100,000 by acquisition channel as of December 31, 2014.
Twelve months or less
One to two years
Two to three years
Three to four years
Four to five years
Thereafter
Total
Retail
Deposits
Government
Deposits
Total
(Dollars in thousands)
$
381,113
$
337,498
$
718,611
30,584
22,686
5,988
5,749
5,078
8,865
—
—
—
—
39,449
22,686
5,988
5,749
5,078
$
451,198
$
346,363
$
797,561
95
The following table sets forth information relating to our total deposit flows for each of the years indicated.
2014
2013
2012
2011
2010
For the Years Ended December 31,
Beginning deposits
Interest credited
Net deposit increase (decrease)
Total deposits, end of the year
$
$
6,140,326
30,334
897,946
7,068,606
$
$
8,294,295
42,392
(2,196,361)
6,140,326
$
(Dollars in thousands)
7,689,988
70,143
534,164
8,294,295
$
$
$
7,998,099
95,546
(403,657)
7,689,988
$
$
8,778,469
154,692
(935,062)
7,998,099
We continue to focus our efforts towards the growth of our core deposits, which includes checking, savings and money
market deposit accounts. We believe core deposits represent a more stable funding source and their increase has allowed us to
replace maturing brokered CDs and other potentially less stable funding sources.
Borrowings. The Federal Home Loan Bank provides loans, also referred to as advances, on a fully collateralized basis,
to savings banks and other member financial institutions. We are currently authorized through a resolution of our board of
directors to apply for advances from the Federal Home Loan Bank using approved loan types as collateral. At December 31,
2014, we had an authorized line of credit of $7.0 billion that could be utilized to the extent we provide sufficient collateral. At
December 31, 2014, we had available collateral sufficient to access $2.7 billion of the line and as to which we had $0.5 billion
of advances outstanding.
We have arrangements with the Federal Reserve Bank of Chicago to borrow as appropriate from its discount window.
The discount window is a borrowing facility that is intended to be used only for short-term liquidity needs arising from special
or unusual circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we
provide. To collateralize the line, we pledge commercial and industrial loans that are eligible based on Federal Reserve Bank of
Chicago guidelines. At December 31, 2014, we had pledged commercial and industrial loans amounting to $53.3 million with a
lendable value of $30.6 million. At December 31, 2013, we had pledged commercial and industrial loans amounting to $38.7
million with a lendable value of $25.5 million. At December 31, 2014 and 2013, we had no borrowings outstanding against this
line of credit.
Federal Home Loan Bank advances. Federal Home Loan Bank advances decreased $0.5 billion at December 31, 2014
from December 31, 2013. We rely upon advances from the Federal Home Loan Bank as a source of funding for the origination
or purchase of loans for sale in the secondary market and for providing duration specific short-term and medium-term
financing. The outstanding balance of Federal Home Loan Bank advances fluctuates from time to time depending on our
current inventory of mortgage loans held-for-sale and the availability of lower cost funding sources such as repurchase
agreements. During the year ended December 31, 2014, we had an increase in funds available from other sources, including
proceeds from the sale of mortgage servicing rights, commercial loans, and residential first mortgage nonperforming and TDR
loans, which reduced the need for the short-term borrowings from Federal Home Loan Bank.
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
Maximum outstanding at any month end
$
1,300,000
$
2,907,598
$
Average balance
Average remaining borrowing capacity
Average interest rate
939,173
1,947,000
2,914,637
735,391
3,770,000
3,698,362
1,040,677
0.23%
3.22%
2.88%
See Note 14 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary
Data, herein for additional information of Federal Home Loan Bank advances.
Long-term debt. As part of our overall capital strategy, we previously raised capital through the issuance of trust-
preferred securities by our special purpose financing entities formed for the offerings. The outstanding trust preferred securities
mature 30 years from issuance, are callable by us after five years and pay interest quarterly. Under these trust preferred
arrangements, we have the right to defer interest payments to the trust preferred security holders for up to five years without
default or penalty.
96
On January 27, 2012, we notified holders of the trust preferred securities our intention to exercise the contractual right
to defer regularly scheduled quarterly payments of interest, beginning with the February 2012 payment, with respect to trust
preferred securities. These payments will be periodically evaluated and reinstated when appropriate, subject to provisions of the
Consent Order and Supervisory Agreement. At December 31, 2014, we have deferred for 12 consecutive quarters.
As of June 30, 2013, following the Assured Settlement Agreement, we reconsolidated the debt associated with the
HELOC securitizations, held in a trust or variable interest entity ("VIE"), at fair value. At December 31, 2014, long-term debt
includes a fair value of $83.8 million in VIE long-term debt associated with HELOC securitizations, which are consolidated in
the Consolidated Financial Statements, in Item 1. Financial Statements herein. We acquired the HELOC loans and the proceeds
of which were used by the trust to repay outstanding debt.
Loan Sales. We sell a significant portion of our mortgage loans we originate. Sales of loans totaled $24.4 billion, or
99.2 percent of originations during the year ended December 31, 2014, compared to $39.1 billion, or 104.3 percent of
originations during the year ended December 31, 2013. The decrease in the dollar volume of sales during the year ended
December 31, 2014 was primarily due to the decrease in origination volumes, as compared to the year ended December 31,
2013. As of December 31, 2014, we had outstanding commitments to sell $3.0 billion of mortgage loans. Generally, these
commitments are funded within 120 days.
Loan Principal Payments. We also invest in loans that we hold for our own portfolio and their principal payments on
which provide another source of funds for us.
The following tables set forth, at December 31, 2014, the expected repayment of our loans held-for-investment, both
as fixed rate and adjustable rate loans.
LOAN PRINCIPAL REPAYMENT SCHEDULE
FIXED RATE LOANS
December 31, 2014
Within
1 Year
1 Year to
2 Years
2 Years to
3 Years
3 Years to
5 Years
5 Years to
10 Years
10 Years to
15 Years
Over
15 Years
Totals (1)
(Dollars in thousands)
Residential first
mortgage
Second mortgage
Other consumer
Commercial real
estate
Commercial and
industrial
Commercial lease
financing
$
14,675 $
6,239
15,382 $
6,681
16,124 $
7,155
34,625 $ 102,362 $ 129,779 $ 412,133 $ 725,080
143,638
57,051
15,870
50,642
—
3,143
3,318
3,507
5,834
11,886
877
30,349
31,921
18,729
—
3,756
3,916
4,082
5,948
—
—
1,177
1,219
1,261
2,657
3,340
—
—
—
—
—
—
—
28,565
80,999
17,702
9,654
Total loans
$
59,339 $
62,437 $
50,858 $
64,934 $ 168,230 $ 187,707 $ 412,133 $ 1,005,638
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
97
LOAN PRINCIPAL REPAYMENT SCHEDULE
ADJUSTABLE RATE LOANS
December 31, 2014
Within
1 Year
1 Year to
2 Years
2 Years to
3 Years
3 Years to
5 Years
5 Years to
10 Years
10 Years to
15 Years
Over
15 Years
Totals (1)
(Dollars in thousands)
$
46,494 $
267
34,262
26
48,029 $
286
36,153
—
49,614 $
306
38,149
—
104,195 $
678
82,732
—
292,113 $
2,165
64,367
—
343,619 $
2,439
—
—
593,571 $ 1,477,635
6,141
255,663
26
—
—
—
141,337
145,445
149,671
105,066
128,810
133,301
137,948
8,348
788,518
—
—
—
—
—
—
—
—
—
—
—
—
541,519
408,407
788,518
Residential first
mortgage
Second mortgage
HELOC
Other consumer
Commercial real
estate
Commercial and
industrial
Warehouse
lending
Total loans
$ 1,139,714 $
363,214 $
375,688 $
301,019 $
358,645 $
346,058 $
593,571 $ 3,477,909
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
Contractual Obligations and Commitments
We have various financial obligations, including contractual obligations and commitments, which require future cash
payments. Refer to Notes 1, 13, 14 and 15 of the Notes to Consolidated Financial Statements, in Item 8. Financial Statements
and Supplementary Data, herein. The following table presents the aggregate annual maturities of contractual obligations (based
on final maturity dates) at December 31, 2014.
Deposits without stated maturities
$
5,127,792
$
— $
— $
— $
5,127,792
Less than
1 Year
1-3 Years
3-5 Years
(Dollars in thousands)
More than
5 Years
Total
Certificates of deposits
Federal Home Loan Bank advances
Trust preferred securities
Consolidated VIEs
Operating leases
Other debt
Total
Market Risk
981,105
214,000
—
—
6,075
—
140,179
175,000
—
—
7,492
—
33,882
—
—
83,759
1,724
—
12,350
125,000
247,435
—
954
81,580
1,167,516
514,000
247,435
83,759
16,245
81,580
$
6,328,972
$
322,671
$
119,365
$
467,319
$
7,238,327
Market risk is the risk of reduced earnings and or declines in the net market value of the balance sheet primarily due to
changes in interest rates, currency exchange rates, or equity prices. We do not have any material foreign currency exchange risk
or equity price risk. The primary market risk is interest rate risk and results from timing differences in the repricing of our
assets and liabilities, changes in the relationships between rate indices, and the potential exercise of explicit or embedded
options.
Interest rate risk is monitored by the asset liability committee ("ALCO"), which is composed of several of our
executive officers and other members of management, in accordance with policies approved by our board of directors. In
determining the appropriate level of interest rate risk, the ALCO considers the impact projected interest rate scenarios have on
earnings and capital, liquidity, business strategies, and other factors. The ALCO meets monthly or as deemed necessary to
review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and fair values of assets and
liabilities, unrealized gains and losses, purchase and sale activity, loans held-for-sale and commitments to originate loans, and
the maturities of investments, borrowings and time deposits.
98
Financial instruments used to manage interest rate risk include derivative financial instruments such as interest rate
swaps and forward sales commitments. Further discussion of the use of and the accounting for derivative instruments is
included in Notes 12 and 24 of the Notes to Consolidated Financial Statements, in Item 8 Financial Statements and
Supplementary Data, herein. All of our derivatives are accounted for at fair market value. All mortgage loan production
originated for sale is accounted for on a fair value basis.
To effectively measure and manage interest rate risk, sensitivity analysis is used to determine the impact on earnings
and the net market value of the balance sheet across various interest rate scenarios, balance sheet trends, and strategies. From
these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. Additionally,
duration and net interest income sensitivity measures are utilized when they provide added value to the overall interest rate risk
management process. The overall interest rate risk position and strategies are reviewed by executive management and the board
of directors on an ongoing basis. Business is traditionally managed to reduce overall exposure to changes in interest rates.
However, management has the latitude to increase interest rate sensitivity position within certain limits if, in management's
judgment, the increase will enhance profitability.
Net interest income simulation analysis provides estimated net interest income of the current balance sheet across
alternative interest rate scenarios. The net interest income analysis measures the sensitivity of interest sensitive earnings over a
twelve month time horizon. The analysis holds the current balance sheet values constant and does not take into account
management intervention. The net interest income simulation demonstrates the level of interest rate risk inherent in the existing
balance sheet.
The following table is a summary of the changes in our net interest income that are projected to result from
hypothetical changes in market interest rates. The interest rate scenarios presented in the table include interest rates as of
December 31, 2014 and 2013 and adjusted by instantaneous parallel rate changes plus or minus 200 basis points.
Scenario
200
Constant
(200)
Scenario
200
Constant
(200)
$
$
December 31, 2014
Net interest Income
$ Change
% Change
(Dollars in thousands)
296,811
$
254,499
206,953
December 31, 2013
42,312
—
(47,546)
Net interest Income
$ Change
% Change
(Dollars in thousands)
286,048
$
250,990
211,613
35,058
—
(39,377)
17.0 %
— %
(19.0)%
14.0 %
— %
(16.0)%
In the net interest income simulation, our balance sheet exhibits slight asset sensitivity. When interest rates rise our
interest income increases, conversely when interest rates fall our interest income decreases. The net interest income simulation
measures the interest rate risk of the balance sheet over a short period over time, typically twelve months. An additional
analysis is completed that measures the interest rate risk over an extended period of time. The Economic Value of Equity
("EVE") analysis provides a fair value of the balance sheet in alternative interest rate scenarios. The EVE analysis does not take
into account management intervention and assumes the new rate environment is constant and the change is instantaneous.
The following table is a summary of the changes in our EVE that are projected to result from hypothetical changes in
market interest rates. EVE is the market value of assets, less the market value of liabilities, adjusted for the market value of
of
sheet instruments. The interest rate scenarios presented in the table include interest rates at December 31, 2014 and
2013, and as adjusted by instantaneous parallel rate changes upward to 300 basis points and downward to 100 basis points. The
scenarios are not comparable due to differences in the interest rate environments, including the absolute level of rates and the
shape of the yield curve. Each rate scenario reflects unique prepayment, repricing, and reinvestment assumptions. Management
derives these assumptions by considering published market prepayment expectations, the repricing characteristics of individual
instruments or groups of similar instruments, our historical experience, and our asset and liability management strategy.
Further, this analysis assumes that certain instruments would not be affected by the changes in interest rates or would be
partially affected due to the characteristics of the instruments.
99
This analysis is based on our interest rate exposure at December 31, 2014 and 2013, and does not contemplate any
actions that we might undertake in response to changes in market interest rates, which could impact EVE. Further, as this
framework evaluates risks to the current statement of financial condition only, changes to the volumes and pricing of new
business opportunities that can be expected in the different interest rate outcomes are not incorporated in this analytical
framework. For instance, analysis of our history suggests that declining interest rate levels are associated with higher loan
production volumes at higher levels of profitability. While this "natural business hedge" historically offset most, if not all, of the
identified risks associated with declining interest rate scenarios, these factors fall outside of the EVE framework. Further, there
can be no assurance that this natural business hedge would positively affect the economic value of equity in the same manner
and to the same extent as in the past.
There are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates. It
is not possible to fully model the market risk in instruments with leverage, option, or prepayment risks. Also, we are affected by
basis risk, which is the difference in repricing characteristics of similar term rate indices. As such, this analysis is not intended
to be a precise forecast of the effect a change in market interest rates would have on us.
If EVE increases in any interest rate scenario, that would indicate an increasing direction for the margin in that
hypothetical rate scenario. A perfectly matched balance sheet would possess no change in the EVE, no matter what the rate
scenario. The following table presents the EVE in the stated interest rate scenarios.
Scenario
NPV
December 31, 2014
NPV%
$ Change
% Change
Scenario
NPV
(Dollars in thousands)
December 31, 2013
NPV%
$ Change
% Change
$ 1,462,245
16.6% $ (217,372)
(12.9)%
300
200
100
Current
(100)
1,537,040
1,617,851
1,679,617
1,703,179
17.0%
17.4%
17.7%
17.6%
(142,577)
(61,766)
—
23,562
(8.5)%
(3.7)%
300
200
100
— % Current
1.4 % (100)
$ 1,131,146
13.4% $ (261,137)
1,233,357
1,325,836
1,392,283
1,416,747
14.3%
15.0%
15.4%
15.4%
(158,926)
(66,447)
—
24,464
(18.8)%
(11.4)%
(4.8)%
— %
1.8 %
Our balance sheet exhibits sensitivity in a rising interest rate scenario as the EVE decreases. The decrease in EVE is
the result of the amount of liabilities that would be expected to reprice in the near term exceeding the amount of assets that
could similarly reprice over the same time period because such assets may have longer maturities or repricing terms.
Operational Risk
As with all companies, we are subject to operational risk. Operational risk is the risk of loss due to human error;
inadequate or failed internal systems and controls; violations of, or noncompliance with, laws, rules, regulations, prescribed
practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security
risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and
regulations, and to improve the oversight of our operational risk. We evaluate internal systems, processes and controls to
mitigate loss from cyber-attacks and, to date, have not experienced any material losses. The goal of this framework is to
implement effective operational risk techniques and strategies, minimize operational and fraud losses and enhance our overall
performance.
Capital
Under the capital distribution regulations, a savings bank that is a subsidiary of a savings and loan holding company
must either notify or seek approval from the OCC of an association capital distribution at least 30 days prior to the declaration
of a dividend or the approval by our board of directors of the proposed capital distribution. The 30-day period allows the OCC
to determine whether the distribution would not be advisable. Because we are under the Consent Order, we currently must seek
approval from the OCC prior to making a capital distribution from the Bank. In addition, under the Supervisory Agreement, the
Company agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital distributions.
Under the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "Series C Preferred Stock") the
Company may defer payments of dividends. Beginning with the February 2012 payment, the Company has exercised its
contractual right to defer regularly scheduled quarterly payments of dividends on Series C Preferred Stock, and is therefore
currently in arrears with the dividend payments. As of December 31, 2014, the amount of the arrearage on the dividend
payments of the Series C Preferred Stock was $56.3 million. At the time that the Company pays the $56.3 million of deferred
100
dividends, this payment will result in a reduction of equity. Currently, the impact of the deferred dividends is removed from net
income, for calculating the Company's earnings per share. We also would have to simultaneously bring the deferred interest
payments of the Trust Preferred Securities current, which total $20.3 million, at December 31, 2014, have been accrued and
reflected within interest expense during the appropriate period.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments
by regulators about components, risk weightings and other factors.
At December 31, 2014, the Bank was considered "well-capitalized" for regulatory purposes. The following table
shows the regulatory capital ratios as of the dates indicated. These ratios are applicable to the Bank only.
December 31, 2014
December 31, 2013
Amount
Ratio
Amount
Ratio
Tier 1 leverage (to adjusted tangible assets)
Total adjusted tangible asset base (1)
Tier 1 capital (to risk weighted assets)
Total risk-based capital (to risk weighted assets)
Risk weighted asset base (1)
1,257,608
9,004,904
1,257,608
1,317,964
4,688,545
(1) Based on adjusted total assets for purposes of core capital and risk-weighted assets for purposes of total risk-based capital.
1,167,422
9,392,178
1,167,422
1,234,958
5,178,781
12.43% $
$
22.54% $
23.85%
$
$
$
$
$
13.97%
26.82%
28.11%
The bank regulatory agencies have issued guidelines establishing capital requirements for banks. These guidelines are
based upon the 1988 capital accord ("Basel I") of the Basel Committee on Banking Supervision ("BCBS"). We currently
calculate our risk-based capital ratios under guidelines adopted by the OCC based on the Basel I framework. Under the current
risk based capital framework, a bank’s balance sheet assets and credit equivalent amounts of off-balance sheet items are
assigned to one of four broad risk categories. The aggregated dollar amount in each category is then multiplied by the risk
weighting assigned to that category. The resulting weighted values from each of the four categories are added together and this
sum is the risk-weighted assets total that comprises the denominator of certain risk-based capital ratios. Tier 1 capital and Total
Risk Based capital are each divided by this denominator (risk-weighted assets) to determine the Tier 1 capital and Total Risk-
Based capital ratios.
In July 2013, the federal bank regulators issued interim final rules (the "New Capital Rules") implementing the Basel
Committee’s December 2010 final capital framework for strengthening international capital standards, known as Basel III, as
well as certain provisions of the Dodd-Frank Act. In October 2013, the OCC and Federal Reserve released final rules detailing
the U.S. implementation of Basel III. The New Capital Rules substantially revise the risk-based capital requirements applicable
to bank holding companies and their depository institution subsidiaries. The New Capital Rules revise the components of
capital and address other issues affecting the numerator in regulatory capital ratios. The New Capital Rules also address asset
risk weights and other issues affecting the denominator in regulatory capital ratios and replace the existing general risk-
weighting approach based on Basel I with a more risk-sensitive approach based, in part, on the standardized approach as part of
Basel II. The New Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references
to credit ratings from the federal bank regulators’ rules.
The New Capital Rules are effective for us on January 1, 2015 subject to a phase-in period extending through January
2019. The New Capital Rules, among other things, (i) introduce a new capital measure called "Common Equity Tier
1" ("CET1"), (ii) specify that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments meeting certain
revised requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures
be made to CET1, and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.
Savings and loan holding companies are not currently subject to consolidated capital requirements. Pursuant to the
Dodd-Frank Act, the U.S. bank regulatory agencies have established minimum leverage and risk-based capital requirements for
savings and loan holding companies. Beginning January 1, 2015, savings and loan holding companies are subject to the same
consolidated capital requirements as bank holding companies.
The New Capital Rules also introduce a new capital conservation buffer designed to absorb losses during periods of
economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk-weighted asset
ratios. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation
101
buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. When fully
phased-in on January 1, 2019, the New Capital Rules will require us to maintain an additional capital conservation buffer of 2.5
percent of risk-weighted assets above the minimum risk-based capital ratio requirements.
We are not subject to the Federal Reserve’s Comprehensive Capital Analysis and Review ("CCAR") program. Banks
with assets greater than $10 billion are required to submit a Dodd-Frank stress test ("DFAST") under the final rules established
by their primary regulator. DFAST requires banks to project results over a nine-quarter planning horizon under three scenarios
(baseline, adverse, and severely adverse) published by the Federal Reserve and to show that the bank would exceed regulatory
minimum capital standards for the Tier 1 leverage ratio, Tier 1 common ratio, Tier 1 risk-based capital ratio, and the Total risk-
based capital ratio under all of these scenarios. In addition, banks are encouraged to employ an additional bank-specific,
idiosyncratic scenario designed to "break the bank". This latter scenario is designed to provide senior management and the
Board with a worst-case analysis to guide their capital planning.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for
example, the requirement that mortgage servicing rights, certain deferred tax assets and significant investments in non-
consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10 percent of CET1 or
all such items, in the aggregate, exceed 15 percent of CET1. The New Capital Rules prescribe a new standardized approach for
risk weightings that expands the risk-weighting categories from the current four Basel I-derived categories to a much larger and
more risk-sensitive number of categories resulting in higher risk weights for a variety of asset classes.
Certain regulatory capital ratios for the Bank as of December 31, 2014 are shown in the following table.
December 31, 2014
Basel I Ratios
Tier 1 leverage ratio
Basel III Ratios (fully phased-in) (1)
Common equity Tier 1 capital ratio (1)
Tier 1 leverage ratio (1)
(1) See "Use of Non-GAAP Financial Measures."
Impact of Inflation and Changing Prices
Regulatory
Minimums
Regulatory
Minimums to be
Well-Capitalized
Bank
4.00%
5.00%
12.43%
4.50%
4.00%
6.50%
5.00%
19.80%
10.96%
The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with
U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are
monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
102
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures such as
an adjusted efficiency ratio, adjusted earnings, the ratio of total nonperforming assets to Tier 1 capital (to adjusted total assets)
and estimated Basel III ratios. We believe these non-GAAP financial measures provide additional information that is useful to
investors in helping to understand the underlying performance and trends of the Company.
Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and are not
audited. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To
mitigate these limitations, we have practices in place to ensure that these measures are calculated using the appropriate GAAP
or regulatory components in their entirety and to ensure that our performance is properly reflected to facilitate consistent
period-to-period comparisons. 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.
Efficiency ratio and efficiency ratio (adjusted). The efficiency ratio, which generally measures the productivity of a
bank, is calculated as noninterest expense divided by total operating income. Total operating income includes net interest
income and total noninterest income. Management utilizes the efficiency ratio to monitor its own productivity and believes the
ratio provides investors with a meaningful tool to monitor period-to-period productivity trends. The efficiency ratio (adjusted),
excludes from noninterest expense and noninterest income (GAAP) certain adjusting items, that are described in the table
below. As the provision for loan losses is already excluded by the ratio's own definition, we believe that the exclusion of
representation and warranty provision provides investors with a more complete picture of our productivity and ability to
generate operating income. The efficiency ratio (adjusted) provides investors with a meaningful base for period to period
comparisons, which management believes will assist investors in analyzing our operating results and predicting future
performance. These non-GAAP financial measures are also utilized internally by management to assess the performance of our
own business.
Our calculations of the efficiency ratio may differ from the calculation of similar measures used by other bank and
thrift holding companies, and should be used to determine and evaluate period to period trends in our performance, rather than
in comparison to other similar non-GAAP measurements utilized by other companies. In addition, investors should keep in
mind that certain items excluded from income and expenses in the efficiency ratio (adjusted) are recurring and integral expenses
to our operations, and that these expenses will still accrue under similar GAAP measures.
Adjusted Income from Operations and Adjusted Earnings Per Share. In addition to analyzing the Company’s results
on a reported basis, management reviews the Company’s results and the results on an adjusted basis. These non-GAAP
measures reflect the adjustment of the reported U.S. GAAP results for significant items that management does not believe are
reflective of the Company’s current and ongoing operations.
103
The following table provides a reconciliation of non-GAAP financial measures utilized in the adjusted efficiency ratio
and adjusted earnings per share.
For the Years Ended December 31,
2014
2013
Net interest income (a)
Noninterest income (b)
Less provisions:
Representation and warranty provision
Adjusting items:
Loan fees and charges (1)
Net impairment loss (2)
Representation and warranty provision (3)
Other noninterest income (4)
Adjusted noninterest income
Adjusted income (c)
Noninterest expense (d)
Adjusting items:
Loss on extinguishment of debt (5)
Legal and professional expense (6)
Other noninterest expense (7)
Adjusted noninterest expense
Efficiency ratio (d/(a+b))
Efficiency ratio (adjusted) ((d-e)/(a+b+c))
Net (loss) income applicable to common stockholders
Adjustment to remove adjusting items (1-7 above), net of tax
Tax impact of adjusting items
Adjusting tax item
Adjusted net (loss) income applicable to common stockholders
Diluted (loss) income per share
Adjustment to remove adjusting items
Tax impact of adjusting items
Adjusting tax item
Diluted adjusted (loss) income per share
Weighted average shares outstanding
Basic
Diluted
$
$
$
$
$
$
$
$
$
(Dollars in thousands)
246,291
361,065
$
186,651
652,343
364
61,016
(10,000)
—
10,375
21,056
382,496
629,151
579,246
—
(3,995)
(27,500)
547,751
95.4%
87.1%
$
$
$
$
(69,948)
$
52,926
—
—
(17,022)
(1.72)
0.94
—
—
$
$
(0.78)
$
—
8,789
(24,900)
(36,854)
599,378
847,045
918,115
(177,556)
—
(51,000)
689,559
109.4%
81.4%
261,203
175,591
(60,579)
(355,769)
20,446
4.37
3.11
(1.07)
(6.30)
0.11
56,246,528
56,246,528
56,063,282
56,518,181
(1) Reverse benefit for contract renegotiation.
(2) Add back impairment charge related to the litigation settlement with MBIA.
(3) Add back reserve increase related to indemnifications claims on government insured loans.
(4)
In 2014, negative fair value adjustment on repurchased performing loans and a benefit for contract renegotiation. In 2013, reversal of contingent
liability reserve resulting from terms of settlement reached on a litigation settlement related to the HELOC securitization trusts.
(5) Loss on extinguishment of debt as a result of the prepayment of the higher cost long-term Federal Home Loan Bank advances.
(6) Adjust for legal expenses related to the litigation settlements during the respective periods.
(7) Adjust CFPB litigation settlement expense.
104
Nonperforming assets / Tier 1 + Allowance for Loan Losses. The ratio of nonperforming assets to Tier 1 and
allowance for loan losses divides the total level of nonperforming assets held for investment by Tier 1 capital (to adjusted total
assets), as defined by bank regulations, plus allowance for loan losses. We believe these measurements are meaningful
measures of capital adequacy used by investors, regulators, management and others to evaluate the adequacy of capital in
comparison to other companies within the industry.
Nonperforming assets / Tier 1 capital + allowance
for loan losses
Nonperforming assets
Tier 1 capital (to adjusted total assets) (1)
Allowance for loan losses
Tier 1 capital + allowance for loan losses
Nonperforming assets / Tier 1 capital + allowance
for loan losses
(1) Represents Tier 1 capital for the Bank.
December 31,
2014
2013
2012
2011
2010
(Dollars in thousands)
$
139,184
1,167,422
297,000
$ 1,464,422
$
182,321
1,257,608
207,000
$ 1,464,608
$
520,557
1,295,841
305,000
$ 1,600,841
$
603,082
1,215,220
318,000
$ 1,533,220
$
497,973
1,306,104
274,000
$ 1,580,104
9.5%
12.4%
32.5%
39.3%
31.5%
Mortgage servicing rights to Tier 1 capital ratio. The ratio of mortgage servicing rights to Tier 1 capital divides the
total mortgage servicing rights by Tier 1 capital, as defined by bank regulations. We believe these measurements are meaningful
measures of capital adequacy, especially in relation to the level of our mortgage servicing rights. This ratio allows our investors,
regulators, management and other parties to measure the adequacy and quality of our mortgage servicing rights and capital, in
comparison to other companies within our industry.
Flagstar Bank
Mortgage servicing rights to Tier 1 capital ratio
Mortgage servicing rights
Tier 1 capital (to adjusted total assets)
Mortgage servicing rights to Tier 1 capital ratio
Flagstar Bancorp
Mortgage servicing rights to Tier 1 capital ratio
Mortgage servicing rights
Tier 1 capital (to adjusted total assets)
Mortgage servicing rights to Tier 1 capital ratio
December 31,
2014
2013
(Dollars in thousands)
$
257,827
$
1,167,422
22.1%
284,678
1,257,608
22.6%
December 31,
2014
2013
(Dollars in thousands)
$
257,827
$
1,183,625
21.8%
284,678
1,280,532
22.2%
Basel I to Basel III (fully phased-in) reconciliation. We currently calculate our risk-based capital ratios under
guidelines adopted by the OCC based on the 1988 Capital Accord ("Basel I") of the Basel Committee on Banking Supervision
(the "Basel Committee"). In December 2010, the Basel Committee released its final framework for Basel III, which will
strengthen international capital and liquidity regulations. When fully phased-in, Basel III will increase capital requirements
through higher minimum capital levels as well as through increases in risk-weights for certain exposures. Additionally, the final
Basel III rules place greater emphasis on common equity. In October 2013, the OCC and Federal Reserve released final rules
detailing the U.S. implementation of Basel III and the application of the risk-based and leverage capital rules to top-tier savings
and loan holding companies. We have transitioned to the Basel III framework beginning in January 2015 and are subject to a
phase-in period extending through January 2019. Accordingly, the calculations provided below are estimates. These measures
are considered to be non-GAAP financial measures because they are not formally defined by GAAP and the Basel III
implementation regulations will not be fully phased-in until 2019. The regulations are subject to change as clarifying guidance
becomes available and the calculations currently include our interpretations of the requirements including informal feedback
received through the regulatory process. Other entities may calculate the Basel III ratios differently from ours based on their
interpretation of the guidelines. Since analysts and banking regulators may assess our capital adequacy using the Basel III
framework, we believe that it is useful to provide investors information enabling them to assess our capital adequacy on the
same basis.
105
December 31, 2014
Flagstar Bank
Regulatory capital – Basel I to Basel III (fully phased-in) (2)
Basel I capital
Increased deductions related to deferred tax assets, mortgage servicing assets, and other capital
components
Basel III (fully phased-in) capital (2)
Risk-weighted assets – Basel I to Basel III (fully phased-in) (2)
Basel I assets
Net change in assets
Basel III (fully phased-in) assets (2)
Capital ratios
Basel I (3)
Basel III (fully phased-in) (2)
Common Equity Tier
1 (to Risk Weighted
Assets)
Tier 1 Leverage (to
Adjusted Tangible
Assets) (1)
$
$
$
$
1,167,422
(117,406)
1,050,016
5,178,781
124,516
5,303,297
$
$
$
$
1,167,422
(117,406)
1,050,016
9,392,178
192,481
9,584,659
22.54%
19.80%
12.43%
10.96%
(1) The definition of total assets used in the calculation of the Tier 1 Leverage ratio changed from ending total assets under
Basel I to quarterly average total assets under Basel III.
(2) Basel III information is considered estimated and not final at this time as the Basel III rules continue to be subject to
interpretation by U.S. Banking Regulators.
(3) The Bank is currently subject to the requirements of Basel I.
December 31, 2013
Flagstar Bancorp
Regulatory capital – Basel I to Basel III (fully phased-in) (2)
Basel I capital
Increased deductions related to deferred tax assets, mortgage servicing assets, and other capital
components
Basel III (fully phased-in) capital (2)
Risk-weighted assets – Basel I to Basel III (fully phased-in) (2)
Basel I assets
Net change in assets
Basel III (fully phased-in) assets (2)
Capital ratios
Basel I (3)
Basel III (fully phased-in) (2)
Common Equity Tier
1 (to Risk Weighted
Assets)
Tier 1 Leverage (to
Adjusted Tangible
Assets) (1)
$
$
$
$
669,533
(205,243)
464,290
5,189,822
(97,735)
5,092,087
$
$
$
$
1,183,624
(209,028)
974,596
9,403,220
108,862
9,512,082
12.90%
9.12%
12.59%
10.25%
(1) The definition of total assets used in the calculation of the Tier 1 Leverage ratio changed from ending total assets under
Basel I to quarterly average total assets under Basel III.
(2) Basel III information is considered estimated and not final at this time as the Basel III rules continue to be subject to
interpretation by U.S. Banking Regulators.
(3) The Company is currently subject to the requirements of Basel I.
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."
106
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Management's Report
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2013 and 2012
Consolidated Statements of Operations for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013,
2012 and 2011
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and
2011
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
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 Repurchased with Government Guarantees
Note 5 - Loans Held-for-Investment
Note 6 - Concentrations of Credit
Note 7 - Repossessed Assets
Note 8 - Variable Interest Entities ("VIEs")
Note 9 - Federal Home Loan Bank Stock
Note 10 - Premises and Equipment
Note 11 - Mortgage Servicing Rights
Note 12 - Derivative Financial Instruments
Note 13 - Deposit Accounts
Note 14 - Federal Home Loan Bank Advances
Note 15 - Long-Term Debt
Note 16 - Representation and Warranty Reserve
Note 17 - Warrant Liabilities
Note 18 - Stockholders' Equity
Note 19 - Earnings (Loss) Per Share
Note 20 - Stock-Based Compensation
Note 21 - Income Taxes
Note 22 - Regulatory Matters
Note 23 - Legal Proceedings, Contingencies and Commitments
Note 24 - Fair Value Measurements
Note 25 - Segment Information
Note 26 - Holding Company Only Financial Statements
Note 27 - Quarterly Financial Data (Unaudited)
108
109
110
111
112
112
113
114
114
124
126
126
126
134
135
135
137
137
138
139
142
143
144
146
146
147
148
149
150
154
157
159
170
173
176
107
March 16, 2015
Management’s Report
Flagstar Bancorp’s management is responsible for establishing and maintaining effective 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 U.S. 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 because of changes in conditions, or that the degree of compliance with existing policies or procedures may
deteriorate.
With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an
assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014, based on the
framework and criteria established in the 1992 Internal Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on this assessment, as of December 31, 2014, we have not maintained effective internal control over financial
reporting based on the COSO criteria because of control deficiencies identified in the preparation and review process of the
statements of cash flows that, when evaluated, constituted a material weakness.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31,
2014, has been audited by Baker Tilly Virchow Krause, LLP, our independent registered public accounting firm, as stated in
their report, which is included herein.
/s/ Alessandro DiNello
Alessandro DiNello
President and Chief Executive Officer
(Principal Executive Officer)
/s/ James K. Ciroli
James K. Ciroli
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
108
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
To Shareholders, Audit Committee and Board of Directors
Flagstar Bancorp, Inc.
Troy, MI
We have audited the accompanying consolidated statements of financial condition of Flagstar Bancorp, Inc. and subsidiaries (the "Company")
as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity,
and cash flows for each of the three years in the period ended December 31, 2014. We also have audited the Company's internal control over
financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). The Company's management is responsible for
these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances.We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated 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 (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated 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 (3) 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 consolidated
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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Flagstar Bancorp Inc. and subsidiaries as of December 31, 2014 and 2013, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, because of a material weakness in internal controls related to the classification
of certain transactions within its statement of cash flows, as described in Management’s Report on Internal Control appearing under Item 9A,
the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (1992 framework). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis. We considered this material weakness in determining the nature, timing, and extent of audit tests
applied in our audit of the 2014 consolidated financial statements. Our opinion regarding the effectiveness of the Company’s internal control
over financial reporting does not affect our opinion on those consolidated financial statements.
As described in Note 1, the consolidated statement of cash flows for the year ended December 31, 2013 has been restated to correct an error
in the classification of certain transactions between operating, investing, and financing cash flows.
/s/ Baker Tilly Virchow Krause, LLP
Southfield, Michigan
March 16, 2015
109
Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In thousands, except share data)
Assets
Cash and cash equivalents
Investment securities available-for-sale
Loans held-for-sale ($1,196,216 and $1,140,507 measured at fair value, respectively)
Loans repurchased with government guarantees
Loans held-for-investment, net
Loans held-for-investment ($210,612 and $238,322 measured at fair value, respectively)
Less: allowance for loan losses
Total loans held-for-investment, net
Mortgage servicing rights
Federal Home Loan Bank stock
Premises and equipment, net
Net deferred tax asset
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits
Noninterest bearing
Interest bearing
Total deposits
Federal Home Loan Bank advances
Long-term debt ($83,759 and $105,813 measured at fair value, respectively)
Representation and warranty reserve
Other liabilities ($81,580 and $93,000 measured at fair value, respectively)
Total liabilities
Stockholders’ Equity
Preferred stock $0.01 par value, liquidation value $1,000 per share, 25,000,000 shares
authorized; 266,657 issued and outstanding, respectively
Common stock $0.01 par value, 70,000,000 shares authorized; 56,332,307 and 56,138,074
shares issued and outstanding, respectively
Additional paid in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2014
2013
$
136,014
1,672,179
1,243,792
1,128,359
$
280,505
1,045,548
1,480,418
1,308,073
4,447,554
(297,000)
4,150,554
257,827
155,443
237,942
442,349
415,392
$ 9,839,851
4,055,756
(207,000)
3,848,756
284,678
209,737
231,350
414,681
303,555
$ 9,407,301
$ 1,209,275
5,859,331
7,068,606
514,000
331,194
53,000
500,230
8,467,030
$
930,060
5,210,266
6,140,326
988,000
353,248
54,000
445,853
7,981,427
266,657
266,174
563
1,482,465
8,380
(385,244)
1,372,821
$ 9,839,851
561
1,479,265
(4,831)
(315,295)
1,425,874
$ 9,407,301
The accompanying notes are an integral part of these Consolidated Financial Statements.
110
Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
For the Years Ended December 31,
2014
2013
2012
$
245,907
$
313,477
$
Interest Income
Loans
Investment securities available-for-sale or trading
Interest-earning deposits and other
Total interest income
Interest Expense
Deposits
Federal Home Loan Bank advances
Other
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Loan fees and charges
Deposit fees and charges
Net gain on loan sales
Loan administration income
Net return on mortgage servicing asset
Net gain on sale of assets
Net impairment losses
Representation and warranty provision
Other noninterest income
Total noninterest income
Noninterest Expense
Compensation and benefits
Commissions
Occupancy and equipment
Asset resolution
Federal insurance premiums
Loss on extinguishment of debt
Loan processing expense
Legal and professional expense
Other noninterest expense
Total noninterest expense
(Loss) income before income taxes
Benefit for income taxes
Net (loss) income
Preferred stock dividend/accretion
Net (loss) income applicable to common stock
(Loss) earnings per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
39,097
557
285,561
30,334
2,206
6,731
39,271
246,290
131,553
114,737
73,033
21,625
205,803
24,304
24,082
12,361
—
(10,011)
9,868
361,065
233,185
35,480
80,386
56,486
22,716
—
36,996
50,603
63,394
$
$
$
$
579,246
$
(103,444) $
(33,979)
(69,465)
(483)
(69,948) $
$
$
$
$
$
$
$
$
$
11,912
5,298
330,687
42,392
95,024
6,620
144,036
186,651
70,142
116,509
103,501
20,942
402,193
6,035
90,609
2,172
(8,789)
(36,116)
71,796
652,343
279,268
54,407
80,042
52,033
34,873
177,556
52,223
77,742
109,971
$
$
$
$
918,115
$
(149,263) $
(416,250)
266,987
(5,784)
261,203
$
$
$
456,141
22,609
2,220
480,970
70,143
106,625
6,971
183,739
297,231
276,047
21,184
142,908
20,370
990,898
(797)
88,485
—
(2,192)
(256,289)
37,859
1,021,242
270,859
75,345
73,674
91,349
49,273
15,246
56,070
70,612
287,267
989,695
52,731
(15,645)
68,376
(5,658)
62,718
0.88
0.87
(1.72) $
(1.72) $
4.40
4.37
56,246,528
56,246,528
56,063,282
56,518,181
55,762,196
56,193,515
The accompanying notes are an integral part of these Consolidated Financial Statements.
111
Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net (loss) income
Other comprehensive income (loss), before tax
Investment securities available-for-sale
For the Years Ended December 31,
2014
(69,465) $
$
2013
2012
266,987
$
68,376
Unrealized gains (loss)
Reclassification of net gain (loss) on the sale, dissolution and OTTI
Total investment securities available-for-sale, before tax
Other comprehensive income, deferred tax (loss) benefit
24,431
(4,038)
20,393
(19,197)
17,921
(1,276)
Provision for income taxes
Other comprehensive income (loss), net of tax
Comprehensive (loss) income
7,182
13,211
(56,254) $
1,897
(3,173)
263,814
$
$
26,485
(444)
26,041
19,880
6,161
74,537
The accompanying notes are an integral part of these Consolidated Financial Statements.
Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
Preferred
Stock
Common
Stock
Balance at December 31, 2011
Net income
Total other comprehensive income
Restricted stock issued
Accretion of preferred stock
Stock-based compensation
Balance at December 31, 2012
Net income
Total other comprehensive loss
Restricted stock issued
Accretion of preferred stock
Stock-based compensation
Balance at December 31, 2013
Net loss
Total other comprehensive income
Restricted stock issued
Accretion of preferred stock
Stock-based compensation
Balance at December 31, 2014
$
$
$
$
254,732
—
—
—
5,658
—
260,390
—
—
—
5,784
—
266,174
—
—
—
483
—
266,657
$
$
$
$
556
—
—
1
—
2
559
—
—
1
—
1
561
—
—
2
—
—
563
Additional
Paid in
Capital
1,471,463
—
—
(1)
—
5,107
1,476,569
—
—
(1)
—
2,697
1,479,265
—
—
(2)
—
3,202
1,482,465
$
$
$
$
$
$
$
Accumulated
Other
Comprehensive
Income (Loss)
$
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
1,079,716
68,376
6,161
—
—
5,109
1,159,362
266,987
(3,173)
—
—
2,698
1,425,874
(69,465)
13,211
—
(1)
3,202
1,372,821
(639,216) $
68,376
—
—
(5,658)
—
(576,498) $
266,987
—
—
(5,784)
—
(315,295) $
(69,465)
—
—
(484)
—
(385,244) $
(7,819) $
—
6,161
—
—
—
(1,658) $
—
(3,173)
—
—
—
(4,831) $
—
13,211
—
—
—
8,380
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
112
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)
2014
For the Years Ended December 31,
2013
As Restated
2012
$
(69,465) $
266,987
$
68,376
Operating Activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Provision for loan losses
Representation and warranty provision
Depreciation and amortization
Changes in valuation allowance on deferred tax assets
Deferred income taxes
Changes in fair value of MSRs, DOJ liability and long-term debt
Premium, change in fair value, and other non-cash changes of loans
Stock-based compensation expense
Net gain on loan and asset sales
Other than temporary impairment losses on investment securities AFS
Net (gain) loss on transferors' interest
Net change in:
Proceeds from sales of loans held-for-sale
Origination and repurchase of loans held-for-sale, net of principal repayments
Repurchase of loans with government guarantees, net of claims received
(Increase) decrease in accrued interest receivable
Net proceeds from sales of trading securities
(Increase) decrease in other assets, excludes purchase of other investments
Net charge-offs in representation and warranty reserve
Increase (decrease) in other liabilities
Net cash (used in) provided by operating activities
Investing Activities
Proceeds from sale of available for sale securities including loans that have been
securitized
Collection of principal on investment securities available-for-sale
Purchase of investment securities available-for-sale and other
Proceeds received from the sale of held-for-investment loans
Origination of loans held-for-investment, net of principal repayments
Proceeds from the disposition of repossessed assets
Redemption of Federal Home Loan Bank stock
Acquisitions of premises and equipment, net of proceeds
Proceeds from the sale of mortgage servicing rights
Net cash provided by investing activities
Financing Activities
Net increase (decrease) in deposit accounts
Proceeds from increases in Federal Home Loan Bank Advances
Repayment of Federal Home Loan Bank advances
Repayment of trust preferred securities and long-term debt
Net receipt (disbursement) of payments of loans serviced for others
Net receipt of escrow payments
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
131,553
10,011
23,983
8,196
(35,864)
63,909
(998,424)
3,203
(223,186)
—
—
70,142
36,116
23,232
(355,769)
(58,912)
94,632
(1,070,333)
2,698
(429,450)
8,789
(45,534)
17,188,671
(24,178,597)
(63,673)
33,524
—
(32,539)
(17,865)
11,593
(8,144,970) $
37,161,473
(37,065,736)
(39,833)
43,833
170,154
125,008
(192,722)
(306,163)
(1,561,388) $
9,191,583
$
3,411,754
$
160,011
(1,277,784)
72,500
(923,047)
38,796
54,293
(33,027)
225,727
7,509,052
928,281
18,972,000
(19,446,000)
(28,638)
70,249
(4,465)
491,427
(144,491)
280,505
136,014
$
$
$
$
55,348
(1,057,389)
1,434,391
665,680
117,310
92,000
(35,979)
850,478
5,533,593
$
(2,153,969) $
4,315,000
(6,507,000)
(20,335)
(278,382)
193
(4,644,493) $
(672,288)
952,793
280,505
$
$
$
$
$
$
$
Supplemental disclosure of cash flow information
Interest paid on deposits and other borrowings
Income tax (refund) payments
FHLB prepayment penalty payment
Non-cash reclassification of loans originated HFI to loans held-for-sale ("HFS)
Non-cash reclassification of mortgage loans originated HFS to HFI
Non-cash reclassification of mortgage loans HFS to AFS securities
Mortgage servicing rights resulting from sale or securitization of loans
Recharacterization of investment securities AFS to loans HFI
Reconsolidation of HELOC's of variable interest entities (VIEs)
Reconsolidation of long-term debt of VIEs
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
113
32,325
$
(1,357) $
— $
$
$
$
$
— $
— $
— $
142,720
6,352
177,556
831,739
64,289
3,375,562
401,735
91,117
170,507
119,980
425,589
19,201
8,800,280
271,459
$
$
$
$
$
$
$
$
$
$
276,047
256,289
20,206
(19,224)
—
163,290
(1,619,528)
5,109
(1,002,040)
2,192
2,552
55,766,614
(54,649,464)
57,925
13,208
141,220
57,546
(207,699)
277,566
(389,815)
233,902
88,645
(20,000)
—
70,487
85,362
—
(34,673)
128,119
551,842
604,307
25,231,000
(26,004,000)
(1,150)
216,108
13,443
59,708
221,735
731,058
952,793
179,043
2,930
—
1,220,231
61,770
—
535,875
—
—
—
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 1 — Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards
Description of Business
Flagstar Bancorp, Inc. ("Flagstar" or the "Company"), is a Michigan-based savings and loan holding company founded
in 1993. The Company's business is primarily conducted through its principal subsidiary, Flagstar Bank, FSB (the "Bank"), a
Michigan-based federally chartered stock savings bank founded in 1987. The Company has the largest bank headquartered in
Michigan.
The Bank is subject to regulation, examination and supervision by the Office of the Comptroller of the Currency
("OCC") of the U.S. Department of the Treasury ("U.S. Treasury"). The Bank is also subject to regulation, examination and
supervision by the Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposits are insured by the FDIC through the
Deposit Insurance Fund. The Company is subject to regulation, examination and supervision by the Board of Governors of the
Federal Reserve ("Federal Reserve"). The Bank is also a member of the Federal Home Loan Bank ("FHLB") of Indianapolis.
Consolidation and Basis of Presentation
The Consolidated Financial Statements include our accounts and accounts of all variable interest entities ("VIEs") for
which we are the primary beneficiary. The accounting and reporting policies of Flagstar and the methods of applying those
policies that materially affect the consolidated financial statements conform with accounting principles generally accepted in
the United States ("GAAP") and with general financial services industry practices. Certain prior period amounts have been
reclassified to conform to the current period presentation.
Restatement of Consolidated Statements of Cash Flows
During the course of compiling the 2014 Consolidated Statements of Cash Flows utilizing an enhanced preparation
and control process, the Company self-identified the need to reclassify the reporting of certain cash flows as coming from
operating, financing and investing activities in the Consolidated Statements of Cash Flows for the year ended December 31,
2013 and each of the quarterly periods in the years 2013 and 2014. These reclassifications relate only to the presentation of
certain cash flows among the cash flows from operating, financing and investing activities within the Consolidated Statements
of Cash Flows and have no impact on the total cash flows for the periods impacted or beginning or ending cash balances for any
of these periods.
These reclassifications have no impact on the Consolidated Statements of Financial Condition, Consolidated
Statements of Operations or the Consolidated Statements of Comprehensive Income (Loss) or on any of the Company’s key
financial ratios, including liquidity measures and regulatory capital.
On March 10, 2015, the Audit Committee of the Board of Directors of the Company, upon consultation with the
Company’s independent auditors, determined that, as a result of the reclassification of the presentation of these cash flows
within the Consolidated Statements of Cash Flows, the financial statements for the periods above should not be relied upon.
The Company intends to file its Annual Report on Form 10-K for the year ended December 31, 2014 on March 16, 2015 with a
restated Consolidated Statement of Cash Flows for the year ended December 31, 2013 and each of the quarterly periods in the
years 2013 and 2014. The Company believes that the financial statements filed in that report can be relied upon.
The primary cause of the reclassifications related to cash flows associated with our commercial loan sales that settled
in the first quarter of 2013 and our nonperforming loan sales that occurred throughout 2013 and 2014, which were presented as
cash flows provided from operating activities but should have been included in cash flows provided by investing activities.
Prior to closing on these transactions, the Company in accordance with GAAP, transferred these assets from loans held-for-
investment to loans held-for-sale. Cash Flows related to these assets are required to be classified consistent with the original
balance sheet classification rather than their classification at the time of sale per ASC 230-45-12.
The Consolidated Statement of Cash Flows for the year ended December 31, 2013, has been restated in this Form 10-
K. The restated Consolidated Statements of Cash Flows revising the amounts as originally included in the Form 10-Q for the
three months ended March 31, 2014 and 2013, the six months ended June 30, 2014 and 2013, and the nine months ended
September 30, 2014 and 2013 are included in this Form 10-K, see Note 27 to the consolidated financial statements.
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Net cash used in operating activities
Net cash provided by investing activities
Net cash used in financing activities
Subsequent Events
For the Year Ended December 31, 2013
As Reported
As Restated
(Dollars in thousands)
$
(195,938) $
4,161,975
(4,638,325)
(1,561,388)
5,533,593
(4,644,493)
The Company has evaluated all subsequent events for potential recognition and disclosure through the filing date of
this Form 10-K. In February of 2015, the Company no longer intends to hold certain TDR loans for investment purposes. As a
result of this decision, the Company will transfer approximately $300.0 million (unpaid principal balance) loans currently
classified as held-for-investment to loans held-for-sale in the first quarter of 2015. Management does not expect the impact of
this subsequent event to have a detrimental impact in the first quarter of 2015. No other significant subsequent events have been
identified.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Actual results could materially differ from the reported amounts
due to estimates and assumptions used in a variety of areas, including but not limited to, assets and liabilities measured at fair
value, other litigation accruals, the allowance for loan losses and the representation and warranty reserve.
Fair Value Measurements
The Company utilizes 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, the Company uses present value
techniques and other valuation methods to estimate the fair values of its 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, the Company's 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.
Cash and Cash Equivalents
Cash on hand, cash items and amounts due from correspondent banks and the Federal Reserve Bank are included in
cash and cash equivalents. Short-term investments that have a maturity at the date of acquisition of three months or less and are
readily convertible to cash are considered cash equivalents.
Investment Securities
Trading securities are debt and equity securities that we purchase and hold but intend to sell in the near term. These
assets are recorded at fair value in the Company’s Consolidated Statements of Financial Condition, with unrealized and realized
gains or losses included as a component of "gain on trading securities" in the Consolidated Statements of Operations. As of
December 31, 2014, the Company had no trading securities.
The Company measures available-for-sale securities at fair value in the Consolidated Statements of Financial
Condition, with unrealized gains and losses, net of tax, included in "other comprehensive income (loss)" in shareholders’ equity.
The Company recognizes realized gains and losses on available-for-sale 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 "net gain on securities available-for-sale" in the Consolidated Statements of Operations.
The fair value of available-for-sale 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
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
securities, matrix pricing, discounted cash flow using benchmark curves or other factors. The fair values are obtained through
independent third parties from pricing services which the Company compares to independent pricing sources. Also included in
available-for-sale securities is a municipal obligation which is valued based on similar non-rated bonds and cost approximates
fair value. See Note 2 and Note 24 of the Notes to the Consolidated Financial Statements, herein, for additional information on
recurring fair value and investment security disclosures.
The Company evaluates available-for-sale securities for other-than-temporary impairment ("OTTI") on a quarterly
basis. An OTTI is considered to have occurred when the fair value of a debt security is below its amortized cost and the
Company intends to sell or it is more likely than not that the Company will be required to sell the security before recovery when
a credit loss exists. At December 31, 2014, the Company had no OTTI on the available-for-sale investment securities held.
Any security for which there has been an OTTI is written down to its estimated fair value through a charge to earnings
for the amount representing the credit loss on the security and a charge is recognized in other comprehensive income (loss)
related to gains (losses), reclassifications, impairments, credit loss and deferred tax. Realized securities gains and declines in
value judged to be other-than-temporary representing credit losses are included in "net impairment losses" in the Consolidated
Statements of Operations.
Investment transactions are recorded on the trade date. Interest earned on securities, including the amortization of
premiums and the accretion of discounts using the effective interest method over the period of maturity, is included in interest
income. For a discussion of valuation of securities, see Note 2 of the Notes to the Consolidated Financial Statements, herein.
Reverse Repurchase Agreement
The fair value of the reverse repurchase agreement is determined by cost, which approximates the fair value. The
reverse repurchase agreement is guaranteed by a third party and secured by government and agency securities, which are held
by a third party. In case of default, the Company would receive the collateral from the third party. The reverse repurchase
agreement is included in other assets on the Consolidated Statements of Financial Condition and in Note 24 as an other
investment. See Note 24 of the Notes to the Consolidated Financial Statements, herein, for additional information on recurring
fair value and investment security disclosures.
Loans Held-for-Sale
The Company classifies loans as held-for-sale when it originates or purchases loans that it intends to sell. For loans
originated that the Company intends to sell, the Company has elected the fair value option. The Company estimates the fair
value of mortgage loans based on quoted market prices for securities backed by similar types of loans, where available, or is
determined by discounting estimated cash flows using observable inputs inclusive of interest rates, prepayment speeds and loss
assumptions for similar collateral. See Note 24 of the Notes to the Consolidated Financial Statements, herein, for additional
recurring fair value disclosures.
Loans are transferred into the held-for-sale portfolio from the held-for-investment portfolio when there is an intent to
sell these loans. Loans held-for-sale are recorded at 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
The Company classifies loans that it has the intent and ability to hold until maturity as held-for-investment. Loans
held-for-investment are reported at their outstanding principal balance adjusted for any deferred and unamortized cost basis
adjustments, including purchase premiums, discounts and other cost basis adjustments (amortized cost). The Company
recognizes interest income on held-for-investment loans using the interest method, including the amortization of any deferred
cost basis adjustments; unless the Company believes that the ultimate collection of contractual principal or interest payments in
full is not reasonably assured. Interest income recorded on our loans is adjusted by the amortization of net premiums, net
deferred loan origination costs and the amount of negative amortization (i.e., capitalized interest) arising from our option ARM
loans.
As a result of the Company carrying its mortgage loans held-for-sale at fair value, any transfers of loans held-for-sale
to loans held-for-investment continue to be measured and reported at fair value on a recurring basis with any changes in fair
value reported in the Company’s Consolidated Statements of Operations. See Note 24 of the Notes to the Consolidated
Financial Statements, herein, for additional recurring fair value disclosures.
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Also included in loans held-for-investment are the reconsolidated VIE loans associated with the FSTAR 2005-1,
2006-1, and 2006-2 securitization trusts. The Company elected the fair value option for these assets and changes in fair value
are recorded to "other noninterest income" on the Consolidated Statements of Operations. Fair value of these loans is calculated
using a discounted cash flow model which utilizes observable inputs inclusive of interest rates, prepayment speeds and loss
assumptions for similar collateral.
When loans originally designated as held-for-sale or loans originally designated as held-for-investment are
reclassified, cash flows associated with the loans will be classified in the Consolidated Statements of Cash Flows as operating
or investing, as appropriate, in accordance with the initial classification of the loans rather than their current classification. As a
result of the Company carrying its mortgage loans held-for-sale at fair value, any transfers of loans held-for-sale to loans held-
for-investment continue to be reported at fair value with any changes in fair value reported in the Company’s Consolidated
Statements of Operations.
Loan Modifications (Troubled Debt Restructurings)
The Company may modify certain loans in both consumer and commercial loan portfolio segments. Troubled Debt
Restructurings ("TDRs") result in those instances in which a borrower demonstrates financial difficulty and for which a
concession has been granted, which includes reductions of interest rate, extensions of amortization period, principal and/or
interest forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of
collateral. If the loan was nonperforming prior to restructuring, these 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 begin
to accrue interest.
Consumer loan modifications. For consumer loan programs (e.g., residential first mortgages, second mortgages,
HELOC, and other consumer), the Company enters into a modification when the borrower has indicated a hardship, including
illness or death in the family, or a loss of employment. Other modifications occur when it is confirmed that the borrower does
not possess the financial resources necessary to continue making loan payments at the current amount, but the Company’s
expectation is that payments at lower amounts can be made. The primary concession given to consumer loan borrowers
includes a reduced interest rate and/or an extension of the amortization period or maturity date.
Commercial loan modifications. Modifications of terms for commercial loans are based on individual facts and
circumstances. Commercial loan modifications may involve a reduction of the interest rate and/or an extension of the term of
the loan. The Company also engages in other loss mitigation activities with troubled borrowers, which include repayment plans,
forbearance arrangements, and the capitalization only of past due amounts.
Past Due and Impaired Loans
Loans are considered to be past due when any payment of principal or interest is 30 days past due. While it is the goal
of management to collect on loans, a method we use is to work out a satisfactory repayment schedule or modification with a
past due borrower, we will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. The Company's
practices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations and minimize
losses incurred by the bank. The Company customarily mails several notices of past due payments to the borrower within 30
days after the due date and late charges are assessed in accordance with certain parameters. The Company's collection
department makes telephone or personal contact with borrowers after loans are 30 days past due. In certain cases, the Company
recommends that the borrower seek credit-counseling assistance and may grant forbearance if it is determined that the borrower
is likely to correct a past due loan within a reasonable period of time. The Company ceases the accrual of interest on loans that
we classify as "nonperforming" once they become 90 days past due or earlier when concerns exist as to the ultimate collection
of principal or interest. Subsequently, interest is recognized as income only when it is actually collected.
For all classes 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 the Company becomes aware of
information indicating that collection of principal and interest is in doubt. 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.
Loans are considered impaired if it is probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement or when any portion of principal or interest is 90 days past due (or
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
nonperforming). See Note 24 of the Consolidated Financial Statements, herein, for additional non-recurring fair value
disclosures.
When a loan within any class is impaired, the accrual of interest income is discontinued unless the receipt of principal
and interest is no longer in doubt. Cash receipts received on nonperforming impaired loans within any class are applied entirely
against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest
income. Cash receipts received on accruing impaired loans within any class are applied in the same manner as accruing loans
that are not considered impaired.
Allowance for Loan Losses
The consumer portfolio segment includes residential first mortgages, second mortgages, HELOC and other consumer
loans. The commercial portfolio segment includes commercial real estate, commercial and industrial, commercial lease
financing and warehouse lending loans. The allowance for loan losses represents management's estimate of probable losses in
the Company's loans held-for-investment portfolio, excluding loans carried under the fair value option, as of the date of the
consolidated financial statements. The allowance provides for probable losses that have been identified with specific customer
relationships (individually evaluated) and for probable losses believed to be inherent in the loan portfolio but that have not been
specifically identified (collectively evaluated).
A specific allowance is established on a loan when it is probable all amounts due will not be collected pursuant to the
contractual terms of the loan and the recorded investment in the loan exceeds its fair value. Fair value is measured using either
the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the
collateral if the loan is collateral dependent, reduced by estimated disposal costs. A general allowance for losses inherent on
non-impaired loans is calculated using the Company's loss history by specific product, or if the product is not sufficiently
seasoned, per readily available industry peer loss data.
The loss history is normally a one- to five-year rolling average updated periodically as new data becomes available. In
addition to the loss history, the Company will also include a qualitative adjustment that considers economic risks, industry and
geographic concentrations and other factors not adequately captured in the Company's loss methodology.
Consumer loans. For consumer loans that have not been identified for evaluation for impairment, the allowance for
loan losses is determined based on a collective basis utilizing forecasted losses that represent management’s best estimate of
inherent loss. Loans are pooled by loan types with similar risk characteristics. Historical loss models designed for each pool are
utilized to develop the loss estimates based on historical losses. Management evaluates the results of the allowance for loan
losses model and makes qualitative adjustments to the results of the model when it is determined that model results do not
reflect all losses inherent in the loan portfolios due to changes in recent economic trends and conditions, or other relevant
factors.
For consumer loans deemed impaired, the loans are evaluated on at least a quarterly basis for impairment. The
Company measures the level of impairment based on the present value of the expected future cash flows discounted at the
loan’s effective interest rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral
dependent, reduced by estimated disposal costs. If the fair value less the costs to sell are less than the carrying value of the loan,
an impairment is recorded, otherwise no allowance is recorded.
Loans secured by real estate are charged-off to the estimated fair value of the collateral when a loss is confirmed or at
120 days past due, whatever is sooner. Loss confirming events include, but are not limited to, bankruptcy (unsecured),
continued delinquency, foreclosure or receipt of an asset valuation indicating a collateral deficiency and the asset is the sole
source of repayment.
Commercial loans. Commercial loans are assessed for estimated losses by grouping the portfolio into two segments
based on underwriting and origination characteristics: legacy and new. For both segments, management observes historical
losses over a relevant period. These loss estimates are adjusted as appropriate based on additional analysis of long-term average
loss experience compared to previously forecasted losses, external loss data or other risks identified from current economic
conditions and credit quality trends.
The commercial loan portfolio is segmented into loans originated prior to January 1, 2011 and loans originated on or
after January 1, 2011, while still retaining the segmentation by product type. The loss rates attributed to the loans originated
prior to January 1, 2011 portfolio are based on historical losses of this segment. Due to the brief period of time that loans in the
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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
loans originated on or after January 1, 2011 portfolio have been outstanding, and thus the absence of a sufficient loss history for
that portfolio, the Company uses loss data from a third party data aggregation firm (adjusting for the qualitative factors) as a
proxy for estimating an allowance for loan losses. The Company separately identifies a population of commercial banks with
similar size balance sheets (and loan portfolios) to serve as the Company's peer group. The Company utilizes this peer group's
publicly available historical loss data (adjusted for the qualitative factors) as a proxy for loss rates used to determine the
allowance for loan losses on the loans originated on or after January 1, 2011 commercial portfolio.
Commercial loans are evaluated on a loan level basis and either charged-off or written down to net realizable value if a
loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued
delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of
repayment.
Potential losses that may not be reflected in our model assumptions are captured through the qualitative factor
adjustments discussed above. Management reviews these models on an ongoing basis and updates them as appropriate to reflect
then-current industry conditions, heightened access to enhanced loss data and based upon continuous back testing of the
allowance for loan losses model.
Loan Sales and Variable Interest Entities
The Company’s recognition of gain or loss on the sale of loans for which it surrenders control is accounted for as a
sale to the extent that consideration received does not include a beneficial interest in the transferred assets. In the event the
Company retains a beneficial interest in the transferred assets, the carrying value of the assets sold is allocated between the
assets sold and the retained interests, other than the mortgage servicing rights, based on their relative fair values. Retained
mortgage servicing rights are recorded at fair value.
In assessing whether control has been surrendered, the Company considers whether the transferee would be a
consolidated affiliate, the existence and extent of any continuing involvement in the transferred financial assets and the impact
of all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not
entered into at the time of transfer.
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. For certain transfers, such as in connection with complex transactions or
where the Company has continuing involvement such as servicing responsibilities, generally a legal opinion is obtained as to
whether the transfer results in a "true sale" by law.
In order to conclude whether or not a variable interest entity is required to be consolidated, careful consideration and
judgment must be given to the Company's continuing involvement with the variable interest entity. In circumstances where the
Company has both the power to direct the activities of the entity that most significantly impact the entity's performance and the
obligation to absorb losses or the right to receive benefits of the entity that could be significant, the Company would conclude
that it would consolidate the entity, which would also preclude the Company from recording an accounting sale on the
transaction. In the case of a consolidated variable interest entity, the accounting is similar to a secured financing, (i.e., the
Company continues to carry the loans and records the related securitized debt on the balance sheet).
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 at 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 "asset resolution" within noninterest
expense in the Consolidated Statements of Operations as incurred. See Note 24 of the Notes to the Consolidated Financial
Statements, herein, for additional non-recurring fair value disclosures.
Loans Repurchased with Government Guarantees
Pursuant to Ginnie Mae servicing guidelines, the Company has the unilateral right to repurchase certain delinquent
loans (loans past due 90 days or more) securitized in Ginnie Mae pools, if the loans meet defined delinquent loan criteria. As a
result of this unilateral right, once the delinquency criteria have been met, and regardless of whether the repurchase option has
119
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
been exercised, the Company accounts for the loans as if they had been repurchased and recognizes the loans as loans
repurchased with government guarantees on the Consolidated Statements of Financial Condition and also recognizes a
corresponding liability for a similar amount recorded in other liabilities on the Consolidated Statement of Financial Condition.
If the loans are actually repurchased, the Company records the loans to loans repurchased with government guarantees and
eliminates the corresponding liability.
Federal Home Loan Bank Stock
The Bank owns stock in the Federal Home Loan Bank of Indianapolis. No market quotes exists for the stock. The
stock is redeemable at par and is carried at cost. The investment is required to permit the Bank to obtain membership in and to
borrow from the Federal Home Loan Bank.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Land is carried at historical cost.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets which generally ranges from three
to thirty years. Capitalized software is amortized on a straight-line basis over its useful life, which generally ranges from three
to seven years. Repair and maintenance costs and software expenditures that are considered general, administrative, or of a
maintenance nature are expensed as incurred.
Mortgage Servicing Rights ("MSRs")
The Company purchases and originates mortgage loans for sale to the secondary market and sells the loans on either a
servicing-retained or servicing-released basis. For servicing retained sales, an MSR is created at the time of sale which is
recorded at fair value. The Company uses an option-adjusted spread valuation approach to determine the fair value of MSRs.
The key assumptions used in the valuation of MSRs include mortgage prepayment speeds and discount rates. Management
obtains third-party valuations of the MSR portfolio on a quarterly basis from independent valuation experts to assess the
reasonableness of the fair value calculated by its internal valuation model. For the mortgage servicing rights, the gains and
losses recorded in earnings are included in "net return on mortgage servicing" on the Consolidated Statements of Operations.
See Note 24 of the Notes to the Consolidated Financial Statements, herein, for additional recurring fair value disclosures.
The Company periodically sells portions of its MSRs, and may simultaneously enter into an agreement to subservice
the residential mortgage loans sold, 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. As MSRs are not considered financial assets for accounting purposes, the accounting model
used to determine if the transfer of an MSR asset qualifies as a sale is based on a risks and rewards approach. Upon completion
of MSR sales, we account for the transactions as a sale and derecognize the mortgage servicing rights from the Consolidated
Statements of Financial Condition.
Servicing Fee Income
Servicing fee income, which is included on the Consolidated Statements of Operations as loan administration income,
is recorded for fees earned, net of third party subservicing costs, for servicing loans. The fees are based on a contractual
percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Late fees and
ancillary fees are also included on the Consolidated Statements of Operations as loan administration income.
Financial Instruments and Derivatives
The Company enters into derivative financial instruments to manage interest rate risk and to facilitate asset/liability
management. The Company generally hedges its pipeline of loans held-for-sale with forward commitments to sell Fannie Mae
or Freddie Mac or Ginnie Mae mortgage backed securities. Further, the Company occasionally enters into swap agreements to
hedge the cash flows on certain liabilities. The Company does not elect to apply or does not qualify for hedge accounting and
therefore accounts for the derivatives as economic undesignated derivatives.
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Notes to the Consolidated Financial Statements
The Company recognizes all derivatives as either other assets or other liabilities in the Consolidated Statements of
Financial Condition at their fair value. Changes in the fair value of the derivatives and realized gains and losses are recognized
immediately in total noninterest income on the Consolidated Statements of Operations.
The Company also enters into various derivative agreements with customers desiring protection from possible adverse
future fluctuations in interest rates using rate lock commitments. As an intermediary, the Company generally maintains a
portfolio of matched offsetting derivative agreements. The Company takes into account the impact of bilateral collateral and
master netting agreements that allow all derivative contracts held to settle with a single counterparty on a net basis, and to offset
the net derivative position with the related collateral when recognizing derivative assets and liabilities. For the rate lock
commitments, the gains and losses recorded in earnings are included in "net gain on loan sales" on the Consolidated Statements
of Operations.
U.S. Treasury futures and U.S. Treasury options are actively traded and their fair values are obtained from an
exchange. Forward loan sale commitments and interest rate swaps are valued based on quoted prices for similar assets in an
active market with inputs that are observable. Rate lock commitments are valued using internal models with significant
unobservable market parameters. The Company assesses the significance of the impact of the credit valuation adjustments on
the overall valuation of its derivative positions at each period end. As of December 31, 2014 and 2013, the Company
determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives.
The Company writes and purchases interest rate swaps for customer-initiated trading derivatives which are used
primarily to provide derivative products to customers enabling them to manage interest rate risk exposure. In the event that a
customer requests early termination of a derivative transaction, a termination confirmation and transaction summary will be
completed. If the market rate is higher at termination than at trade inception, the customer will receive a payment from the
Company. In turn, the Company will receive that payment from the dealer due to the termination of the hedge. Conversely, if
the market rate is lower at termination than at trade inception, the Company will be due a payment from the customer. In turn,
the Company will owe that payment to the dealer due to the termination of the hedge.
Additional information regarding the accounting for derivatives is provided in Note 12 and additional recurring fair
value disclosures in Note 24 of the Notes to the Consolidated Financial Statements, herein.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect
management’s best assessment of estimated future taxes to be paid. Significant judgments and estimates are required in
determining the income tax expense and the Company is subject to the income tax laws of the U.S., its states and
municipalities.
Deferred taxes are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as
income or expense in the period that includes the enactment date. The Company records a valuation allowance to reduce its
deferred tax assets to the amount it believes will be realized if, based on available evidence at the time the determination is
made, it is more likely than not that some or all of the deferred tax assets will not be realized.
Representation and Warranty Reserve
When the Company sells mortgage loans into the secondary mortgage market, it makes customary representations and
warranties to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent
of underwriting standards applied and the types of documentation being provided. Typically, these representations and
warranties are in place for the life of the loan. If a defect in the origination process is identified, the Company may be required
to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no such defects, the
Company has no liability to the purchaser for losses it may incur on such loan. Upon the sale of a loan, the Company recognizes
a liability for that guarantee at its fair value. Subsequent to the sale, the liability is re-measured on an ongoing basis based on an
estimate of probable future losses. In each case, these estimates are based on the Company’s most recent data regarding loan
repurchases and indemnifications, and loss severity on repurchased and indemnified loans, among other factors. Increases to the
representation and warranty reserve for current loan sales reduce the Company’s net gain on loan sales. Adjustments to the
121
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Company’s previous estimates are recorded as an increase or decrease to representation and warranty provision in the
Consolidated Statements of Operations.
Advertising Costs
Advertising costs are expensed in the period they are incurred and are included as part of "other noninterest expense"
expenses in the Consolidated Statements of Operations. Advertising expenses totaled $10.0 million, $8.9 million, and $11.9
million for the years ended December 31, 2014, 2013 and 2012, respectively.
Stock-Based Compensation
All share-based payments to employees, including grants of employee stock options and restricted stock units, are
recognized as expense 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. The
Company utilizes the weighted average assumptions in applying a Black-Scholes model to determine the fair value of employee
stock options. See Note 20 of the Notes to the Consolidated Financial Statements, herein, for further discussion and details of
stock-based compensation.
Department of Justice ("DOJ") Litigation Settlement
The Company elected the fair value option to account for the liability representing the obligation to make additional
payments under the DOJ Agreement. The executed settlement agreement with the DOJ establishes a legally enforceable
contract with a stipulated payment plan that meets the definition of a financial liability.
As of December 31, 2014 the remaining future payments totaled $118.0 million for which the Company used a
discounted cash flow model to estimate the current fair value. The model utilizes estimates including the Company's forecasts
of net income, balance sheet and capital levels and considers multiple scenarios and possible outcomes as a result of the
uncertainty inherent in those inputs which impact the estimated timing of the additional payments. These scenarios are
probability weighted and consider the view of a market participant to estimate the fair value of the liability. As of December 31,
2014, the liability was $81.6 million.
We value our contractual obligation to pay utilizing a discounted cash flow model that incorporates our current
estimate of the most likely timing and amount of the cash flows necessary to satisfy the obligation. These cash flow estimates
are reflective of our detailed financial and operating projections for the next three years, as well as more general earnings and
capital assumptions for subsequent periods. At December 31, 2014, we discounted the expected cash flows using an 8.7 percent
discount rate that is inclusive of the risk free rate based on the expected duration of the liability and an adjustment for
nonperformance risk that represents our own credit risk. The recorded liability, at fair value, represents the present value of
these estimated cash flows and is included in "other liabilities" on the Consolidated Financial Statements. We will estimate the
fair value of this liability at each measurement date and record any changes in that estimate, as well as the effect of the
accretion of the face amount of the liability, during the period in which these changes occur. See Note 24 of the Consolidated
Financial Statements, herein, for additional information on the valuation of the litigation settlement.
Recently Issued Accounting Pronouncements
In January 2014, the FASB issued ASU No. 2014-04, "Receivables-Troubled Debt Restructurings by Creditors (Topic
310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The guidance
amends the guidance in the FASB Accounting Standards Codification Topic 310-40, "Receivables - Troubled Debt
Restructurings by Creditors," in efforts to reduce diversity in practice through clarifying when an in substance repossession or
foreclosure occurs. Essentially, the guidance addresses when a creditor should be considered to have received physical
possession of residential real estate property collateralizing a consumer mortgage loan so that the loan should be derecognized
and the real estate property recognized in the financial statements. This guidance is effective prospectively, for annual and
interim periods, beginning after December 15, 2014. The Company's current policy reflects the practices discussed in this
guidance. Therefore, the adoption of the guidance is not expected to have a material impact on the consolidated financial
statements or the Notes thereto.
In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property,
Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an
Entity." The amendments in this guidance will allow discontinued operations to include a component of an entity or a group of
122
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
components of an entity. A disposal is required to be reported in discontinued operations if it represents a strategic shift that has
(or will have) a major effect on an entity’s operations and financial results. This guidance is effective prospectively, for annual
and interim periods, beginning after December 15, 2014. The adoption of the guidance is not expected to have a material effect
on the Company’s Consolidated Financial Statements or the Notes thereto.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under the
amended guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This
guidance is effective prospectively, for annual and interim periods, beginning after December 15, 2016. Management is
currently evaluating this guidance and does not expect this guidance to have a material impact on the Company’s Consolidated
Financial Statements, but significant disclosures to the Notes thereto will be required.
In June 2014, the FASB issued ASU No. 2014-11, "Transfers and Servicing (Topic 860): Repurchase-to-Maturity
Transactions, Repurchase Financing, and Disclosures." The amendments in this guidance requires repurchase-to-maturity
transactions to be accounted for as secured borrowings. The guidance for certain transactions accounted for as a sale,
repurchase agreements, securities lending transactions and repurchase-to-maturity transactions accounted for as secured
borrowings is effective prospectively, for annual and interim periods, beginning after December 15, 2014. The adoption of the
guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements or the Notes thereto.
In August 2014, the FASB issued ASU No. 2014-13, Consolidation (Topic 810). A reporting entity that consolidates a
collateralized financing entity within the scope of this update may elect to measure the financial assets and the financial
liabilities of that collateralized financing entity using either the measurement alternative included in this update or Topic 820 on
fair value measurement. When the measurement alternative is not elected for a consolidated collateralized financing entity
within the scope of this update, the amendments clarify that (1) the fair value of the financial assets and the fair value of the
financial liabilities of the consolidated collaterlized financing entity should be measured using the requirements of Topic 820
and (2) any differences in the fair value of the financial assets and the fair value of the financial liabilities of that consolidated
collateralized financing entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement
of income (loss). The amendments in this update are effective for public business entities for annual periods, and interim
periods within those annual periods, beginning after December 15, 2015. The Company's current policy reflects the practices
discussed in this guidance. Therefore, the adoption of this guidance is not expected to have a material effect on the Company’s
Consolidated Financial Statements or the Notes thereto.
In August 2014, the FASB issued ASU Update No. 2014-14, Receivables - Troubled Debt Restructuring by Creditors
(Subtopic 310-40). The amendments in this update require that a mortgage loan be derecognized and that a separate other
receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is
not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate
property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3)
at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.
Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and
interest) expected to be recovered from the guarantor. The amendments in this update are effective for public business entities
for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this
guidance is expected to move approximately $372.8 million of repossessed assets and claims receivable to other assets on the
Consolidated Statements of Financial Condition.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic
205-40). In connection with preparing financial statements for each annual and interim reporting period, an entity's
management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt
about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or
within one year after the date that the financial statements are available to be issued when applicable). Management's
evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the
financial statements are issued (or at the date that the financial statements are available to be issued when applicable). The
amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and
interim periods thereafter. The adoption of this guidance is not expected to have a material effect on the Company’s
Consolidated Financial Statements or the Notes thereto.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual items (Subtopic
22-20). The amendments in this update eliminate the concept of extraordinary items. The amendments in this update are
effective prospectively or retrospectively for annual and interim periods beginning after December 15, 2015. The adoption of
123
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
this guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements or the Notes
thereto.
Note 2 — Investment Securities
As of December 31, 2014 and 2013, investment securities were comprised of the following:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Fair Value
December 31, 2014
Available-for-sale securities
Agency
Agency-collateral mortgage obligations
Municipal obligations
Total available-for-sale securities
December 31, 2013
Available-for-sale securities
Agency
Agency-collateral mortgage obligations
Municipal obligations
$
$
$
924,405
734,443
1,980
1,660,828
$
$
426,083
$
611,206
17,300
$
$
$
6,244
8,322
—
14,566
862
684
—
Total available-for-sale securities
$
1,054,589
$
1,546
$
Trading
(2,147) $
(1,068)
—
(3,215) $
928,502
741,697
1,980
1,672,179
(4,101) $
(6,486)
—
(10,587) $
422,844
605,404
17,300
1,045,548
For trading securities held, the Company recorded a loss of zero, $0.1 million and $21.5 million during the years ended
December 31, 2014, 2013 and 2012, respectively.
The Company had no sales of trading securities during the year ended December 31, 2014, as compared to $170.0
million sold, which resulted in a realized gain of $0.2 million for the year ended December 31, 2013 and $290.0 million sold,
which resulted in a realized gain of $19.5 million for the year ended December 31, 2012.
The Company had no purchases of trading securities at December 31, 2014 and 2013. During the year ended
December 31, 2012, the Company purchased $170.0 million of trading securities.
Available-for-sale
The Company purchased $1.2 billion of investment securities, all of which were U.S. government sponsored agencies,
comprised of mortgage-backed securities and collateralized mortgage obligations during the year ended December 31, 2014.
During the year ended December 31, 2013 the Company purchased $1.1 billion of investment securities issued by U.S.
government sponsored agencies and $20.0 million of municipal obligations, compared to no purchases of U.S. government
sponsored agencies and $20.0 million of municipal obligations during the year ended December 31, 2012.
The Company has pledged investment securities available-for-sale, primarily agency collateralized mortgage
obligations, to collateralize lines of credit and/or borrowings with the Fannie Mae and other institutions. At December 31, 2014,
the Company pledged $0.1 million of available-for-sale securities, compared to $7.8 million at December 31, 2013.
124
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table summarizes by duration the unrealized loss positions on securities classified as available-for-sale.
Type of Security
Fair
Value
Number of
Securities
Unrealized
Loss
Fair
Value
Number of
Securities
Unrealized
Loss
Unrealized Loss Position with Duration
12 Months and Over
Unrealized Loss Position with Duration
Under 12 Months
(Dollars in thousands)
December 31, 2014
Agency
Agency-collateralized
mortgage obligations
December 31, 2013
Agency
Agency-collateralized
mortgage obligations
December 31, 2012
Mortgage securitization
$
53,298
6
$
(461) $
304,972
21
$
(1,686)
97,906
10
(790)
37,664
—
—
— $
— $
325,711
— $
— $
499,597
4
19
44
$
$
(278)
(4,102)
(6,485)
91,117
1
$
(10,155) $
—
— $
—
$
$
$
During the year ended December 31, 2014, the Company had no other-than-temporary impairments ("OTTI") due to
credit losses.
During the year ended December 31, 2013, the Company recognized $8.8 million of additional OTTI on the FSTAR
2006-1 mortgage securitization, which was subsequently dissolved at June 30, 2013. The Company recognized a tax benefit of
$6.1 million during the second quarter 2013 representing the recognition of the residual tax effect associated with the
previously unrealized losses on the mortgage securitization recorded in other comprehensive income (loss). At December 31,
2013, the Company had no OTTI.
During the year ended December 31, 2012, the Company recognized $2.2 million of OTTI on non-agency
collateralized mortgage obligations and the mortgage securitization, which were recognized on seven securities that had losses
prior to December 31, 2012, primarily due to forecasted credit losses. At December 31, 2012, the Company had total OTTI of
$2.8 million on one non-agency collateralized mortgage obligation and the mortgage securitization, with existing OTTI in the
available-for-sale portfolio, of which $5.0 million net gain was recognized in other comprehensive income (loss).
The following table shows the activity for OTTI credit loss.
Beginning balance of amount related to credit losses
Reductions for increases in cash flows expected to be collected that are
recognized over the remaining life
Reductions for investment securities sold during the period (realized)
Additions for the amount related to the credit loss for which an OTTI
impairment was not previously recognized
Ending balance of amount related to credit losses
$
$
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
— $
(2,793) $
(59,376)
—
—
—
389
11,193
(8,789)
— $
— $
6,680
52,095
(2,192)
(2,793)
Gains (losses) on the sales of investment securities available-for-sale are reported in net gain on securities available-
for-sale in the Consolidated Statements of Operations. During the year ended December 31, 2014, there were $413.7 million in
sales of U.S. government sponsored agency securities, which resulted in a gross gain of $4.4 million, partially offset by a gross
loss of $0.4 million. During the year ended December 31, 2013, the Company sold $38.6 million of U.S. government sponsored
agencies, which resulted in a gross gain of $1.0 million, compared to $253.7 million sales of agency and agency collateralized
mortgage obligations during the year ended December 31, 2012, which resulted in a gross gain of $5.7 million, partially offset
by a gross loss of $3.1 million. The gain on the sale of non-agency collateralized mortgage obligations and seasoned agency
securities completed during the year ended December 31, 2012, resulted in the Company also recognizing $19.9 million of tax
benefits representing the recognition of the residual tax effect associated with unrealized losses on this portfolio previously
recorded in other comprehensive income.
125
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The amortized cost and estimated fair value of securities, excluding trading securities, at December 31, 2014 and 2013,
are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations.
December 31, 2014
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Note 3 — Loans Held-for-Sale
Investment Securities Available-for-Sale
Amortized
Cost
Estimated Fair
Value
(Dollars in thousands)
$
$
1,980
—
57,062
1,601,786
1,660,828
$
$
1,980
—
57,189
1,613,010
1,672,179
Weighted-
Average
Yield
3.66%
—%
2.58%
2.68%
At December 31, 2014 and 2013, residential first mortgage loans held-for-sale totaled $1.2 billion and $1.5 billion, of
which $1.2 billion and $1.1 billion were recorded at fair value, respectively, under the fair value option.
At December 31, 2014 and 2013, $47.5 million and $340.0 million, respectively, of loans held-for-sale were recorded
at lower of cost or fair value, based on the intent to sell the loans. Certain loans were transferred into the held-for-sale portfolio
from the held-for-investment portfolio and after the transfer, any amount by which cost exceeded fair value was recorded as a
valuation adjustment.
During the year ended December 31, 2014, the Company sold nonperforming and TDR residential first mortgage loans
with UPB in the amount of $72.5 million, with an allowance for loan loss reserve release of $5.8 million and recognized a gain
of $2.5 million. During the year ended December 31, 2013, the Company sold nonperforming mortgage loans with UPB in the
amount of $508.4 million, with an allowance for loan loss reserve of $66.1 million and recognized a gain of $1.0 million.
During the year ended December 31, 2014, the Company sold residential first mortgage jumbo loans with unpaid
principal balance in the amount of $559.8 million and recognized a gain of $8.1 million.
The Company has pledged certain loans held-for-sale to collateralize lines of credit and/or borrowings with the Federal
Home Loan Bank of Indianapolis. At December 31, 2014 and 2013, the Company pledged $0.9 billion and $1.2 billion,
respectively, of loans held-for-sale.
Note 4 — Loans Repurchased with Government Guarantees
At December 31, 2014, the amount of loans repurchased totaled $1.1 billion, and those loans which the Company had
the unilateral right to repurchase which had not been exercised totaled $9.2 million and were classified as loans repurchased
with government guarantees. At December 31, 2013, the amount of loans repurchased totaled $1.3 billion and were classified as
loans repurchased with government guarantees, and those loans which the Company had the unilateral right to repurchase
which had not been exercised totaled $20.8 million and were classified as loans held-for-sale.
During the year ended December 31, 2014, the Company sold loans repurchased with government guarantees with
UPB in the amount of $19.7 million, with an allowance for loan losses reserve release of $0.9 million and recognized a gain of
$1.8 million.
Substantially all of these loans continue to be insured or guaranteed by the FHA, and the Company's management
believes that the reimbursement process is proceeding appropriately. These repurchased loans earn interest at a statutory rate,
which varies and is based upon the 10-year U.S. Treasury note rate at the time the underlying loan becomes delinquent, which
can be curtailed under certain circumstances.
The Company has pledged certain loans repurchased with government guarantees to collateralize lines of credit and/or
borrowings with the Federal Home Loan Bank of Indianapolis. At December 31, 2014 and 2013, the Company pledged $763.8
million and $787.1 million, respectively, of loans repurchased with government guarantees.
126
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 5 — Loans Held-for-Investment
Loans held-for-investment are summarized as follows.
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Commercial lease financing
Warehouse lending
Total commercial loans
Total consumer and commercial loans held-for-investment
Less allowance for loan losses
Loans held-for-investment, net
December 31, 2014
December 31, 2013
(Dollars in thousands)
$
$
2,193,252
149,032
256,318
31,108
2,629,710
620,014
419,499
9,687
768,644
1,817,844
4,447,554
(297,000)
4,150,554
$
$
2,508,968
169,525
289,880
37,468
3,005,841
408,870
207,187
10,341
423,517
1,049,915
4,055,756
(207,000)
3,848,756
For the years ended December 31, 2014, 2013 and 2012, the Company transferred $19.2 million, $64.3 million and
$61.8 million, respectively, of loans held-for-sale to loans held-for-investment.
The Company has pledged certain loans held-for-investment to collateralize lines of credit and/or borrowings with the
Federal Reserve Bank of Chicago and the Federal Home Loan Bank of Indianapolis. At December 31, 2014 and 2013, the
Company pledged $2.4 billion and $2.5 billion, respectively, of loans held-for-investment.
The allowance for loan losses, other than those that have been identified for individual evaluation for impairment, is
determined on a loan pool basis by grouping loan types with similar risk characteristics to determine the Company's best
estimate of incurred losses. Management evaluates the results of the allowance for loan losses model and makes qualitative
adjustments to the results of the model when it is determined that model results do not reflect all losses inherent in the loan
portfolios due to changes in recent economic trends and conditions, or other relevant factors.
For those loans not individually evaluated for impairment, management has sub-divided the commercial and consumer
loans into portfolios with common risk characteristics.
127
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The allowance for loan losses by class of loan is summarized in the following tables.
Residential
First
Mortgage
Second
Mortgage
HELOC
Other
Consumer
Commercial
Real
Estate
Commercial
and
Industrial
Commercial
Lease
Financing
Warehouse
Lending
Total
Year Ended December 31, 2014
Beginning balance
allowance for loan losses
$
161,142
$ 12,141
$
7,893
$
2,412
$
18,540
$
3,332
$
148
$
1,392
$
207,000
Charge-offs
Recoveries
Provision
(37,584)
(3,211)
(5,857)
3,049
107,681
477
3,017
183
16,504
(1,923)
2,311
(2,034)
(2,463)
3,319
(2,037)
—
111
7,138
—
47
(64)
(74)
62
(51,112)
9,559
1,348
131,553
Ending balance allowance
for loan losses
Year Ended December 31, 2013
Beginning balance
allowance for loan losses
Charge-offs
Recoveries
Provision
Ending balance allowance
for loan losses
Year Ended December 31, 2012
Beginning balance
allowance for loan losses
$
234,288
$ 12,424
$ 18,723
$
766
$
17,359
$
10,581
$
131
$
2,728
$
297,000
$
219,230
$ 20,201
$ 18,348
$
2,040
$
41,310
$
2,878
$
94
$
899
$
305,000
(133,326)
(6,252)
(5,473)
(3,622)
(47,982)
(350)
(1,299)
(45)
(198,349)
15,329
59,909
1,178
1,020
(2,986)
(6,002)
2,079
1,915
10,162
15,050
151
653
288
1,065
—
538
30,207
70,142
$
161,142
$ 12,141
$
7,893
$
2,412
$
18,540
$
3,332
$
148
$
1,392
$
207,000
$
179,218
$ 16,666
$ 14,845
$
2,434
$
96,984
$
5,425
$
1,178
$
1,250
$
318,000
Charge-offs
Recoveries
Provision
(175,803)
(18,753)
(17,159)
(4,423)
(105,285)
(4,627)
(1,191)
18,561
197,254
1,912
20,376
461
20,201
1,786
2,243
15,397
34,214
77
2,003
—
107
—
—
(327,241)
38,194
(351)
276,047
Ending balance allowance
for loan losses
$
219,230
$ 20,201
$ 18,348
$
2,040
$
41,310
$
2,878
$
94
$
899
$
305,000
Residential
First
Mortgage
Second
Mortgage
HELOC
Other
Consumer
Commercial
Real
Estate
Commercial
and
Industrial
Commercial
Lease
Financing
Warehouse
Lending
Total
December 31, 2014
Loans held-for-investment
Individually evaluated
$
385,358
$ 30,625
$
1,114
Collectively evaluated (1)
1,781,963
65,290
123,640
Total loans
$ 2,167,321
$ 95,915
$124,754
Allowance for loan losses
Individually evaluated
$
81,842
$
5,633
$
1,049
Collectively evaluated (1)
152,446
6,791
17,674
$
$
$
121
$
403
$
— $
— $
— $
417,621
30,987
619,611
419,499
9,687
768,644
3,819,321
31,108
$
620,014
$
419,499
$
9,687
$ 768,644
$ 4,236,942
121
645
$
— $
— $
— $
— $
88,645
17,359
10,581
131
2,728
208,355
Total allowance for loan
losses (2)
December 31, 2013
Loans held-for-investment
$
234,288
$ 12,424
$ 18,723
$
766
$
17,359
$
10,581
$
131
$
2,728
$
297,000
Individually evaluated
$
419,703
$ 24,356
$
406
$
— $
1,956
$
— $
— $
— $
446,421
Collectively evaluated (1)
2,070,640
80,484
134,462
37,468
406,914
207,187
10,341
423,517
3,371,013
Total loans
$ 2,490,343
$ 104,840
$134,868
Allowance for loan losses
Individually evaluated
$
81,765
$
4,566
$
405
$
$
37,468
$
408,870
$
207,187
$
10,341
$ 423,517
$ 3,817,434
— $
— $
— $
— $
— $
86,736
Collectively evaluated (1)
79,377
7,575
7,488
2,412
18,540
3,332
148
1,392
120,264
Total allowance for loan
losses (2)
$
161,142
$ 12,141
$
7,893
$
2,412
$
18,540
$
3,332
$
148
$
1,392
$
207,000
(1) Excludes loans carried under the fair value option.
(2)
Includes interest-only residential first mortgage and HELOC loans with an allowance for loan losses of $111.5 million and $52.3 million at
December 31, 2014 and December 31, 2013, respectively.
128
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table sets forth the loans held-for-investment aging analysis as of December 31, 2014 and December 31,
2013, of past due and current loans.
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
Greater Past
Due
Total
Past Due
Current
Total
Investment
Loans
(Dollars in thousands)
$
$
$
December 31, 2014
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Commercial lease financing
Warehouse lending
Total commercial loans
Total loans (1)
December 31, 2013
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Commercial lease financing
Warehouse lending
Total commercial loans
$
29,157
971
3,581
296
34,005
$
8,099
393
1,344
58
9,894
$
115,093
2,054
3,222
122
120,491
152,349
3,418
8,147
476
164,390
$ 2,040,903
145,614
248,171
30,632
2,465,320
$ 2,193,252
149,032
256,318
31,108
2,629,710
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
620,014
419,499
9,687
768,644
620,014
419,499
9,687
768,644
—
34,005
$
—
9,894
$
—
120,491
$
—
164,390
1,817,844
$ 4,283,164
1,817,844
$ 4,447,554
36,526
$
19,096
$
134,340
$
189,962
$ 2,319,006
$ 2,508,968
1,997
2,197
293
41,013
—
—
—
—
—
271
1,238
127
20,732
—
—
—
—
—
2,820
6,826
199
144,185
1,500
—
—
—
5,088
10,261
619
205,930
1,500
—
—
—
164,437
279,619
36,849
2,799,911
407,370
207,187
10,341
423,517
169,525
289,880
37,468
3,005,841
408,870
207,187
10,341
423,517
1,500
1,500
1,048,415
1,049,915
Total loans (1)
$
41,013
$
20,732
$
145,685
$
207,430
$ 3,848,326
$ 4,055,756
(1) Includes $4.5 million and $4.0 million of loans 90 days or greater past due accounted for under the fair value option at December 31, 2014 and
2013, respectively.
Loans on which interest accruals have been discontinued totaled approximately $135.3 million, $146.5 million and
$401.7 million at December 31, 2014, 2013 and 2012, respectively. Interest income is recognized on impaired loans using a
cost recovery method unless amounts contractually due are not in doubt. Interest that would have been accrued on impaired
loans totaled approximately $16.5 million, $22.5 million and $35.4 million during the years ended December 31, 2014, 2013
and 2012, respectively. At December 31, 2014 and 2013, the Company had no loans 90 days or greater past due and still
accruing interest.
129
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Troubled Debt Restructurings
The following table provides a summary of TDRs by type and performing status.
December 31, 2014
Consumer loans (1)
Residential first mortgage
Second mortgage
HELOC
Total consumer loans
Commercial loans (2)
Commercial real estate
Total TDRs (3)
December 31, 2013
Consumer loans (1)
Residential first mortgage
Second mortgage
HELOC
Total consumer loans
Commercial loans
Commercial real estate
Total TDRs (2)
TDRs
Performing
Nonperforming
Total
(Dollars in thousands)
$
$
$
$
305,940
35,349
20,161
361,450
403
361,853
$
$
43,118
1,243
1,291
45,652
—
45,652
$
332,285
$
42,633
$
30,352
19,892
382,529
456
1,631
2,445
46,709
—
$
382,985
$
46,709
$
349,058
36,592
21,452
407,102
403
407,505
374,918
31,983
22,337
429,238
456
429,694
(1) The allowance for loan losses on consumer TDR loans totaled $81.2 million and $82.3 million at December 31, 2014 and 2013,
respectively.
(2) Includes $29.8 million and $31.3 million of TDR loans accounted for under the fair value option at December 31, 2014 and 2013,
respectively.
TDRs returned to performing, or accrual, status totaled $6.9 million, $43.4 million and $117.7 million during the years
ended December 31, 2014, 2013 and 2012, respectively, and are excluded from nonperforming loans. TDRs that have
demonstrated a period of at least six months of consecutive performance under the modified terms, are returned to performing
(i.e., accrual) status and are excluded from nonperforming loans. Although these TDRs have been returned to performing status,
they will continue to be classified as impaired until they are repaid in full, or foreclosed and sold, and included as such in the
tables within "repossessed assets." Although many of the TDRs continue to be performing, the full collection of principal and
interest on some TDRs may not occur. The resulting potential incremental losses are measured through impairment analysis on
all TDRs which are included in our allowance for loan losses.
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. Such losses are factored into the Company's allowance for loan
losses estimate. Management evaluates loans for impairment both collectively and individually depending on the risk
characteristics underlying the loan and the availability of data. The Company measures impairment using the discounted cash
flow method for performing TDRs and measures impairment based on collateral values for re-defaulted TDRs.
The following tables present the years ended December 31, 2014, 2013 and 2012 number of accounts, pre-
modification unpaid principal balance (net of write downs), and post-modification unpaid principal balance (net of write
downs) that were new modified TDRs during the years ended December 31, 2014, 2013 and 2012. In addition, the tables
present the number of accounts and unpaid principal balance (net of write downs) of loans that have subsequently defaulted
during the years ended December 31, 2014, 2013 and 2012 that had been modified in a TDR during the 12 months preceding
each period. All TDR classes within consumer and commercial loan portfolios are considered subsequently defaulted when 90
days or greater past due.
130
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
New TDRs
Number of
Accounts
Pre-
Modification Unpaid
Principal Balance
Post-
Modification Unpaid
Principal Balance (1)
Increase (Decrease) in
Allowance at
Modification
$
$
$
$
$
165
325
30
520
322
571
313
5
1,211
884
301
69
$
(Dollars in thousands)
48,098
10,449
1,022
59,569
$
$
$
$
85,440
21,920
27,425
2,938
137,723
287,865
15,287
2,515
$
$
$
$
$
46,957
9,978
665
57,600
75,730
19,558
23,066
2,938
121,292
267,364
9,312
—
1,254
$
305,667
$
276,676
$
2,601
209
119
2,929
2,614
517
(10)
—
3,121
29,357
(435)
(178)
28,744
TDRs that subsequently defaulted in previous 12 months (4)
Number of
Accounts
Unpaid Principal Balance
Increase (Decrease) in
Allowance at Subsequent
Default
2
18
5
25
26
41
33
100
72
19
91
$
$
$
$
$
$
(Dollars in thousands)
281
160
24
465
6,401
991
397
7,789
20,523
1,094
21,617
$
$
$
$
$
$
28
107
—
135
1,141
531
—
1,672
4,451
441
4,892
Year Ended December 31, 2014
Residential first mortgages
Second mortgages
HELOC (2)
Total TDR loans
Year Ended December 31, 2013
Residential first mortgages
Second mortgages (3)
HELOC (2) (3)
Commercial real estate
Total TDR loans
Year Ended December 31, 2012
Residential first mortgages
Second mortgages
HELOC (2)
Total TDR loans
Year Ended December 31, 2014
Residential first mortgages
Second mortgages
HELOC (2)
Total TDR loans
Year Ended December 31, 2013
Residential first mortgages
Second mortgages
Commercial real estate
Total TDR loans
Year Ended December 31, 2012
Residential first mortgages
Second mortgages
Total TDR loans
(1) Post-modification balances include past due amounts that are capitalized at modification date.
(2) HELOC post-modification unpaid principal balance reflects write downs.
(3) New TDRs during the year ended December 31, 2013, include 463 loans for a total of $30.8 million of post modification unpaid
principal balance second mortgage and HELOC loans carried at fair value that were reconsolidated as a result of the litigation
settlements with MBIA and Assured.
(4) Subsequent default is defined as a payment re-defaulted within 12 months of the restructuring date.
131
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents impaired loans with no related allowance and with an allowance recorded.
December 31, 2014
December 31, 2013
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
(Dollars in thousands)
With no related allowance
recorded
Consumer loans
Residential first mortgage $
Second mortgage
HELOC
Commercial loans
Commercial real estate
$
With an allowance recorded
Consumer loans
Residential first mortgage $
Second mortgage
HELOC
Other consumer
Total
Consumer loans
$
$
$
62,832
1,126
—
403
64,361
321,172
28,886
1,061
121
$
$
$
77,749
5,916
774
403
84,842
325,395
29,204
1,114
121
— $
—
—
—
— $
78,421
1
1
1,956
80,379
81,842
5,633
1,050
121
$
341,283
24,355
405
—
$
$
$
$
$
$
130,520
3,592
1,544
6,427
142,083
345,293
24,355
405
—
—
—
—
—
—
81,764
4,566
405
—
$
351,240
$
355,834
$
88,646
$
366,043
$
370,053
$
86,735
Residential first mortgage $
384,004
$
403,144
$
81,842
$
419,704
$
475,813
$
81,764
Second mortgage
HELOC
Other consumer
Commercial loans
30,012
1,061
121
35,120
1,888
121
5,633
1,050
121
24,356
406
—
27,947
1,949
—
Commercial real estate
403
403
—
1,956
6,427
4,566
405
—
—
Total impaired loans $
415,601
$
440,676
$
88,646
$
446,422
$
512,136
$
86,735
The following table presents average impaired loans and the interest income recognized.
For the Years Ended December 31,
2014
2013
2012
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
Consumer loans
Residential first mortgage
$
402,124
$
10,626
$
602,355
$
16,828
$
761,213
$
12,833
Second mortgage
HELOC
Commercial loans
Commercial real estate
Commercial and industrial
Commercial lease financing
Warehouse lending
28,096
851
1,099
—
—
—
1,298
—
26
—
—
—
21,248
700
46,132
99
2,411
14
1,201
41
654
—
—
—
15,609
522
142,454
99
—
—
155
—
2,345
5
—
—
Total impaired loans
$
432,170
$
11,950
$
672,959
$
18,724
$
919,897
$
15,338
132
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The Company follows the guidance provided in the FFIEC’s "Uniform Retail Credit Classification and Account
Management Policy" issued June 20, 2000 for Retail Credits. This policy focuses on the delinquency status, loan type, collateral
protection, and other events influencing repayment, such as bankruptcy, death, and fraud, in determining the appropriate risk
classification for a retail credit. The Company classifies performing retail loans that are 60 days delinquent as well as all
performing retail TDRs as Watch. All non-accruing retail loans as well as retail loans 90 days or more delinquent are classified
as Substandard. In cases of bankruptcy, death, or fraud, the Company will follow the FFIEC policy and classify the loans as
appropriate.
The Company utilizes an internal risk rating system which is applied to all consumer and commercial loans.
Management conducts periodic examinations which serve as an independent verification of the accuracy of the ratings assigned.
Loan grades are based on different factors within the borrowing relationship: entity sales, debt service coverage, debt/total net
worth, liquidity, balance sheet and income statement trends, management experience, business stability, financing structure of
the deal and financial reporting requirements. The underlying collateral is also rated based on the specific type of collateral and
corresponding LTV. The combination of the borrower and collateral risk ratings result in the final rating for the borrowing
relationship. Descriptions of the Company's internal risk ratings as they relate to credit quality follow the ratings used by the
U.S. bank regulatory agencies as listed below.
Pass. Pass assets are not impaired nor do they have any known deficiencies that could impact the quality of the asset.
Watch. Watch assets are defined as pass rated assets that exhibit elevated risk characteristics or other factors that
deserve management’s close attention and increased monitoring. However, the asset does not exhibit a potential or well defined
weakness that would warrant a downgrade to criticized or adverse classification.
Special mention. Assets identified as special mention possess credit deficiencies or potential weaknesses deserving
management's close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk that, if
not corrected, could weaken the assets and increase risk in the future. Special mention assets are criticized, but do not expose an
institution to sufficient risk to warrant adverse classification.
Substandard. Assets identified as substandard are inadequately protected by the current net worth and paying capacity
of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses. They
are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. For
HELOC loans and other consumer loans, the Company evaluates credit quality based on the aging and status of payment
activity and includes all nonperforming loans.
Doubtful. Assets identified as doubtful have all the weaknesses inherent in those classified as substandard, with the
added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions
and values, highly questionable and improbable. The possibility of a loss on a doubtful asset is high. However, due to
important and reasonably specific pending factors, which may work to strengthen (or weaken) the asset, its classification as an
estimated loss is deferred until its more exact status can be determined.
Loss. An asset classified loss is considered uncollectible and of such little value that the continuance as bankable asset
is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather that it is
not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the
future.
Commercial Credit
Loans
Commercial Real
Estate
Commercial and
Industrial
Commercial
Lease Financing
Warehouse
Total
Commercial
(Dollars in thousands)
December 31, 2014
Grade
Pass
Watch
Special Mention
Substandard
Total loans
$
$
$
578,275
28,898
2,003
10,838
$
388,479
10,308
237
20,475
$
9,687
—
$
650,131
118,513
—
—
—
—
1,626,572
157,719
2,240
31,313
620,014
$
419,499
$
9,687
$
768,644
$
1,817,844
133
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Consumer Credit Loans
Residential First
Mortgage
Second
Mortgage
December 31, 2014
HELOC
(Dollars in thousands)
Other
Consumer
Total
Grade
Pass
Watch
Special mention
Substandard
Total loans
Commercial Credit Loans
Commercial Real
Estate
Grade
Pass
Watch
Special mention
Substandard
Total loans
$
$
296,983
26,041
3,802
82,044
$
$
$
1,764,609
313,550
—
115,093
2,193,252
$
$
111,285
35,693
—
2,054
149,032
$
$
231,714
21,382
—
3,222
256,318
$
$
30,929
58
—
121
31,108
$
$
2,138,537
370,683
—
120,490
2,629,710
December 31, 2013
Commercial and
Industrial
Commercial
Lease Financing
Warehouse
Total
Commercial
(Dollars in thousands)
$
192,013
5,534
9,097
543
$
10,341
—
—
—
$
243,017
157,500
23,000
—
742,354
189,075
35,899
82,587
408,870
$
207,187
$
10,341
$
423,517
$
1,049,915
Consumer Credit Loans
Residential First
Mortgage
Second
Mortgage
December 31, 2013
HELOC
(Dollars in thousands)
Other
Consumer
Total
Grade
Pass
Watch
Special mention
Substandard
Total loans
Note 6 — Concentrations of Credit
$
$
2,031,536
343,092
—
134,340
2,508,968
$
$
136,224
30,482
—
2,819
169,525
$
$
262,138
20,916
—
6,826
289,880
$
$
37,142
127
—
199
37,468
$
$
2,467,040
394,617
—
144,184
3,005,841
Properties collateralizing residential first mortgage loans held-for-investment were geographically disbursed
throughout the United States (measured by unpaid principal balance and expressed as a percent of the total).
State
California
Florida
Michigan
Washington
Arizona
All other states (1)
Total
December 31,
2014
2013
28.1%
13.7%
12.0%
4.5%
4.0%
37.7%
100.0%
27.9%
14.3%
10.3%
4.6%
4.1%
38.8%
100.0%
(1) No other state contains more than 3.0 percent of the total.
At December 31, 2014, the Company’s commercial real estate loan portfolio in Michigan was 70.3 percent of the total
portfolio, compared to 77.7 percent of the total portfolio at December 31, 2013.
134
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Additionally, the following loan products’ contractual terms may give rise to a concentration of credit risk and increase
the Company’s exposure to risk of non-payment or realization:
(a) Hybrid or ARM loans that are subject to future payment increases;
(b) Option ARM loans that permit negative amortization; and
(c) Loans under (a) or (b) above with LTV ratios above 80 percent;
The following table details the unpaid principal balance, net of write downs, of these loans at December 31, 2014 and
2013.
Amortizing hybrid ARMs
3/1 ARM
5/1 ARM
7/1 ARM
Interest only hybrid ARMs
3/1 ARM
5/1 ARM
7/1 ARM
Option ARMs
All other ARMs
Total
Loans Held-for-Investment
December 31, 2014
December 31, 2013
(Dollars in thousands)
$
$
$
122,947
571,820
165,631
89,116
366,580
30,155
32,417
95,488
1,474,154
$
125,463
335,424
132,084
172,949
668,717
38,061
37,159
96,307
1,606,164
Of the loans listed above, the following have original LTV ratios exceeding 80 percent.
Loans with original LTV ratios above 80 percent
> 80%< = 90%
> 90%< = 100%
> 100%
Total
Note 7 — Repossessed Assets
Repossessed assets include the following.
One-to-four family properties
Commercial properties
Total repossessed assets
Note 8 — Variable Interest Entities ("VIEs")
Principal Outstanding
December 31,
2014
December 31,
2013
(Dollars in thousands)
$
$
91,044
$
73,683
1,133
165,860
$
95,041
84,756
1,512
181,309
December 31,
2014
2013
(Dollars in thousands)
$
$
17,699
994
18,693
$
$
24,038
12,598
36,636
The Company previously participated in four private-label securitizations of financial assets involving two HELOC
loan transactions and two second mortgage loan transactions. The following private-label securitizations have been
reconsolidated or dissolved as a result of settlement agreements. The Company has not engaged in any private-label
securitization activity except for these securitizations.
135
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Due to the Assured Settlement Agreement in 2013, the Company became the primary beneficiary and reconsolidated
the FSTAR 2005-1 HELOC securitization trust's assets and liabilities. The Company had elected the fair value option for these
assets and liabilities. At December 31, 2014, the Company has a fair value of HELOC loans of $62.9 million and long-term
debt of $41.9 million. At December 31, 2013, the Company has a fair value of HELOC loans of $78.0 million and long-term
debt of $55.2 million.
Due to the Assured Settlement Agreement in 2013, the Company became the primary beneficiary and reconsolidated
the FSTAR 2006-2 HELOC securitization trust's assets and liabilities. The Company had elected the fair value option for these
assets and liabilities. At December 31, 2014, the Company has a fair value of HELOC loans of $68.7 million and long-term
debt of $41.8 million. At December 31, 2013, the Company has a fair value of HELOC loans of $77.0 million and long-term
debt of $50.6 million.
Due to the MBIA Settlement Agreement in 2013, the FSTAR 2006-1 mortgage securitization trust was collapsed and
the Company consolidated the loans associated with the FSTAR 2006-1 mortgage securitization trust. The Company elected the
fair value option for these assets. At December 31, 2014, the Company recorded a fair value of $53.2 million of second
mortgage loans. At December 31, 2013, the Company recorded a fair value of $64.7 million of second mortgage loans.
Consolidated VIEs
The Company has consolidated VIEs, which consist of the HELOC securitization trusts formed in 2005 and 2006. The
Company has determined the trusts are VIEs and has concluded that the Company is the primary beneficiary of these trusts
because it has the power to direct the activities of the entity that most significantly affect the entity's economic performance and
has either the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive
benefits from the entity that could potentially be significant to the VIE. The Company has the power to select the servicer of the
whole loans held in the HELOC securitization trust. The beneficial owners of the trusts can look only to the assets of the
securitization trusts for satisfaction of the debt issued by the securitization trusts.
The following table provides a summary of the classifications of consolidated VIE assets and liabilities included in the
Consolidated Financial Statements.
December 31, 2014
HELOC Securitizations
Assets
Loans held-for-investment
Liabilities
Long-term debt
December 31, 2013
HELOC Securitizations
Assets
Loans held-for-investment
Liabilities
Long-term debt
2005-1
2006-2
Total
(Dollars in thousands)
62,885
68,679
131,564
41,938
$
41,821
$
83,759
(Dollars in thousands)
78,009
77,003
155,012
55,172
$
50,641
$
105,813
$
$
The economic performance of the VIEs is most significantly impacted by the performance of the underlying loans. The
principal risks to which the entities were exposed include credit risk and interest rate risk.
Unconsolidated VIEs
The Company sponsored nine trust subsidiaries, which issued trust preferred securities to third party investors and
loaned the proceeds to the Company in the form of junior subordinated notes. The Company has determined that it is not the
primary beneficiary of these entities as it does not possess the power to direct the activities that most significantly impact the
economic performance of the VIEs. The Company's maximum exposure to losses is limited to its investment in the trusts,
136
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
which was $7.4 million at both December 31, 2014 and 2013. See Note 15 of the Notes to the Consolidated Financial
Statements, herein, for additional information regarding unconsolidated variable interest entities.
The Company also has an unconsolidated VIE with which the Company has a significant continuing involvement, but
is not the primary beneficiary. The financial assets were derecognized by the Company upon transfer to the FSTAR 2007-1
mortgage securitization trust, which then issued and sold mortgage-backed securities to third party investors. In accordance
with the MBIA Settlement Agreement, MBIA is required to satisfy all of its obligation under the FSTAR 2007-1 insurance
policy and related FSTAR 2007-1 obligations without further recourse to the Company. At December 31, 2014, the FSTAR
2007-1 mortgage securitization trust included 3,624 loans, with an aggregate principal balance of $141.3 million.
Note 9 — Federal Home Loan Bank Stock
The Company’s investment in Federal Home Loan Bank ("FHLB") stock was $155.4 million at December 31, 2014
compared to $209.7 million at December 31, 2013. As a member of the FHLB, the Company is required to hold shares of
FHLB stock in an amount equal to at least one percent of the aggregate unpaid principal balance of its mortgage loans, home
purchase contracts and similar obligations at the beginning of each year or five percent of FHLB advances, whichever is
greater. The Company had $54.3 million, $92.0 million and no redemptions of FHLB stock during the years ended December
31, 2014, 2013 and 2012, respectively. Dividends received on the stock equaled $8.9 million, $10.6 million and $9.4 million for
the years ended December 31, 2014, 2013 and 2012, respectively. These dividends were recorded in the Consolidated
Statements of Operations as other noninterest income.
Note 10 — Premises and Equipment
Premises and equipment balances and estimated useful lives are as follows.
Land
Office buildings
Computer hardware and software
Furniture, fixtures and equipment
Automobiles
Total
Less accumulated depreciation
Premises and equipment, net
Estimated
Useful Lives
December 31,
2014
2013
(Dollars in thousands)
—
$
65,527
$
7 — 31.5 years
3 — 7 years
3 — 7 years
3 years
144,485
179,578
66,693
396
456,679
(218,737)
237,942
$
$
66,253
138,157
156,104
66,090
228
426,832
(195,482)
231,350
Depreciation expense amounted to approximately $26.2 million, $22.6 million and $19.2 million, for the years ended
December 31, 2014, 2013 and 2012, respectively.
Operating Leases
The Company conducts a portion of its business from leased facilities. Such leases are considered to be operating
leases based on their lease terms. Lease rental expense totaled approximately $8.3 million, $8.0 million and $6.8 million for the
years ended December 31, 2014, 2013 and 2012, respectively.
137
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following outlines the Company’s minimum contractual lease obligations.
2015
2016
2014
2018
2019
Thereafter
Total
December 31, 2014
(Dollars in thousands)
6,075
4,412
3,080
1,073
651
954
16,245
$
$
Note 11 — Mortgage Servicing Rights
The Company has investments in MSRs to support mortgage strategies and to deploy capital at acceptable returns. The
Company also deploys derivatives and other fair value assets as economic hedges to offset changes in fair value of the MSRs
resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments. The
Company's portfolio of MSRs is highly sensitive to movements in interest rates. The primary risk associated with MSRs is the
potential value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining
interest rates. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that
prepayments are slower than anticipated. There is also a risk of valuation decline due to higher than expected increases in
default rates, which the Company does not believe can be effectively hedged. See Note 12 of the Notes to the Consolidated
Financial Statements, herein, for additional information regarding the instruments utilized to hedge the risks of MSRs.
Changes in the carrying value of residential first mortgage MSRs, accounted for at fair value, were as follows.
Balance at beginning of period
Additions from loans sold with servicing retained
Reductions from bulk sales (1)
Changes in fair value due to (2)
Decrease in MSR value (3)
All other changes in valuation inputs or assumptions (4)
Fair value of MSRs at end of period
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
$
284,678
271,459
(231,518)
(31,026)
(35,766)
257,827
$
$
710,791
401,735
(834,499)
(99,320)
105,971
284,678
$
$
510,475
535,875
(139,738)
(151,470)
(44,351)
710,791
(1) Includes flow sales related to underlying serviced loans totaling $0.5 billion, $74.9 billion and $17.4 billion, respectively, for the
years ended December 31, 2014, 2013 and 2012.
(2) Changes in fair value are included within net return on mortgage servicing asset on the Consolidated Statements of Operations.
(3) Represents decrease in MSR value associated with loans that paid-off during the period.
(4) Represents estimated MSR value change resulting primarily from market-driven changes in interest rates.
The following table summarizes income and fees associated with the mortgage servicing asset.
Income on mortgage servicing asset
Servicing fees, ancillary income and late fees
Fair value adjustments
Gain (loss) on hedging activity (1)
Net transaction costs
Total income on mortgage servicing asset, included in net
return on mortgage servicing asset
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
$
$
68,641
(68,653)
26,047
(1,953)
$
184,661
(4,664)
(70,160)
(19,228)
210,412
(195,821)
86,213
(12,319)
24,082
$
90,609
$
88,485
(1) Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs.
138
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Contractual servicing and subservicing fees. Contractual servicing and subservicing fees, including late fees and other
ancillary income, for each type of loan serviced are presented below. Contractual servicing fees are included within net return
on mortgage servicing asset on the Consolidated Statements of Operations. Contractual subservicing fees including late fees
and other ancillary income are included within loan administration income on the Consolidated Statements of Operations.
Subservicing fee income is recorded for fees earned, net of third party subservicing costs, for loans subserviced.
The following table summarizes income and fees associated with the mortgage loan subserviced.
Income (expenses) on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1)
Other servicing charges (1)
Total income on mortgage loans subserviced
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
$
28,618
(4,314)
24,304
$
$
16,552
(10,517)
6,035
$
$
18,107
(18,904)
(797)
(1) Includes the servicing fees, ancillary income and late fees on mortgage loans subserviced, which is included in loan administration
income on the Consolidated Statements of Operations.
The following table presents the unpaid principal balance of residential loans serviced for others and the number of
accounts associated with those loans.
December 31, 2014
December 31, 2013
Amount
Number of
accounts
Amount
Number of
accounts
(Dollars in thousands)
Residential mortgage servicing
Serviced for others
Subserviced for others (1)
Total residential loans serviced for others (1)
$
$
25,426,768
46,723,713
72,150,481
117,881
238,498
356,379
$
$
25,743,396
40,431,867
66,175,263
131,413
198,256
329,669
(1) Does not include temporary short-term subservicing performed as a result of some sales of servicing.
Note 12 — Derivative Financial Instruments
Derivative assets and liabilities are recorded at fair value on the Consolidated Statements of Financial Condition, after
taking into account the effects of legally enforceable bilateral collateral and master netting agreements. Gross positive fair
values are netted with gross negative fair values by counterparty pursuant to a valid master netting agreement. In addition,
collateral received from or paid to a given counterparty are considered in this netting. These agreements allow the Company to
settle all derivative contracts held with a single counterparty on a net basis in a single currency, and to offset net derivative
positions with related collateral, where applicable.
Counterparty credit risk. The Bank is exposed to credit loss in the event of nonperformance by the counterparties to
its various derivative financial instruments. Should a counterparty fail to perform under the terms of a derivative contract, the
Company’s counterparty credit risk is equal to the amount reported as a derivative asset in the Consolidated Statements of
Condition. The Company manages this risk by selecting only well-established, financially strong counterparties, spreading the
credit risk among such counterparties, and by placing contractual limits on the amount of unsecured credit risk from any single
counterparty. Counterparties to the Company's derivatives include major financial institutions with investment grade credit
ratings from the major rating agencies.
Collateral agreements require the counterparty to post, on a daily basis, collateral (typically cash or investment
securities) equal to the Company’s net derivative receivable. For highly-rated counterparties, the agreements may include
minimum dollar posting thresholds, but allow for the Company to call for immediate, full collateral coverage when credit-rating
thresholds are triggered by counterparties. The Company’s collateral agreements contain provisions that require
collateralization of the Company’s net liability derivative positions. Required collateral coverage is based on certain net liability
thresholds. Under circumstances which constitute default under the agreements, the counterparties to the derivatives could
request immediate full collateral coverage for derivatives in net liability positions. The Company's collateral agreements in
139
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
which the collateral is restricted include provisions requiring unilateral funding of coverage for derivatives in net liability
positions, as well as minimum collateral positions.
The Company originates loans and extends credit, both of which expose the Company to interest rate risk. The
Company actively manages the overall loan portfolio and the associated interest rate risk in a manner consistent with asset
quality objectives. This objective is accomplished primarily through the use of an investment-grade diversified dealer-traded
basket of swaps. These transactions may generate fee income, and diversify and reduce overall portfolio interest rate risk
volatility. Although the Company utilizes swaps for risk management purposes, they are not treated as or do not qualify as
hedging instruments.
The Company hedges the risk of overall changes in fair value of loans held-for-sale and rate lock commitments
generally by selling forward contracts on securities of the Agencies. The forward contracts used to economically hedge the loan
commitments are accounted for as non-designated hedges and naturally offset rate lock commitment mark-to-market gains and
losses recognized as a component of gain on loan sale. Additionally, the Company hedges the risk of overall changes in fair
value of MSRs through the use of various derivatives including purchases of forward contracts on securities of Fannie Mae and
Freddie Mac, the purchase/sale of U.S. Treasury futures contracts and the purchase/sale of euro dollar future contracts. These
derivatives are accounted for as non-designated hedges against changes in the fair value of MSRs and recognized as a
component of net return on mortgage servicing asset.
The Company uses a combination of derivatives (U.S. Treasury futures, euro dollar futures, swap futures, and "to be
announced" forwards with settlement dates beyond the next regular settlement date for such securities) and certain trading
securities to hedge the MSRs. For accounting purposes, these hedges represent economic hedges of the MSR asset with both the
hedges and the MSR asset carried at fair value on the balance sheet. Certain derivative strategies that the Company uses to
manage its investment in MSRs may not fully offset changes in the fair value of such asset due to changes in interest rates and
market liquidity.
The Company writes and purchases interest rate swaps to accommodate the needs of customers requesting such
services. Customer-initiated trading derivatives are used primarily to provide derivative products to customers enabling them to
manage interest rate risk exposure. The Company mitigates most of the inherent market risk of customer-initiated interest rate
swap contracts by entering into offsetting derivative contracts with other counterparties. The offsetting derivative contracts have
nearly identical notional values, terms and indices. The difference in the asset and liability is an adjustment for non-
performance risk in the measurement of fair value of derivative instruments, which is insignificant. The performance risk is
established annually and reviewed quarterly. The Company's interest rate swap agreements are structured such that variable
payments are primarily based on LIBOR (one-month, three-month or six-month). Fee income on customer-initiated trading
derivatives is earned from entering into various transactions at the request of the customer, primarily interest rate swap
contracts. Changes in fair value are recognized in "other noninterest income" on the Consolidated Statements of Operations.
Fair values of derivative instruments represent the net unrealized gains or losses on such contracts and are recorded in
the consolidated balance sheets. Changes in fair value are recognized in the consolidated statements of income. The net gains
recognized in income on derivative instruments, net of the impact of offsetting positions, were as follows.
For the Years Ended December 31,
Location of Gain/(Loss)
2014
2013
2012
(Dollars in thousands)
Net return on mortgage
servicing asset
Net return on mortgage
servicing asset
$
17,922
$
(36,588) $
34,722
8,247
(33,348)
51,890
Net gain on loan sales
Other noninterest income
(12,218)
110
(42,003)
—
44,192
—
$
14,061
$
(111,939) $
130,804
U.S. Treasury and euro dollar futures
Mortgage backed securities forwards
Rate lock commitments and forward
agency and loan sales
Interest rate swaps
Total derivative
140
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The Company had the following derivative financial instruments.
Assets (1)
U.S. Treasury and euro dollar futures
Mortgage backed securities forwards
Rate lock commitments
Forward agency and loan sales
Interest rate swaps
Total derivative assets
Liabilities (2)
U.S. Treasury and euro dollar futures
Rate lock commitments
Forward agency and loan sales
Interest rate swaps
Total derivative liabilities
December 31, 2014
Notional
Amount
Fair
Value
Expiration
Dates
(Dollars in thousands)
$
$
$
$
$
$
$
$
2,530,400
161,000
2,603,607
193,865
354,689
5,843,561
687,500
21,540
2,789,300
366,710
$
3,865,050
$
7,268
2,371
30,801
154
5,813
46,407
783
83
12,913
5,853
19,632
2015-2020
2015
2015
2015
2015-2021
2015-2020
2015
2015
2015-2021
December 31, 2013
Notional
Amount
Fair
Value
Expiration
Dates
(Dollars in thousands)
Assets (1)
U.S. Treasury and euro dollar futures
$
4,300,100
$
Rate lock commitments
Forward agency and loans sales
Interest rate swaps
Total derivative assets
Liabilities (2)
Mortgage backed securities forwards
Rate lock commitments
Forward agency and loans sales
Interest rate swaps
Total derivative liabilities
$
$
1,589,308
2,608,000
102,448
8,599,856
95,000
667,286
211,896
102,448
$
$
$
1,076,630
$
1,221
14,510
20,326
1,797
37,854
1,665
4,181
479
1,797
8,122
2014
2014
2014
2015-2021
2014
2014
2014
2015-2021
(1) Asset derivatives are included in "other assets" on the Consolidated Statements of Financial Condition.
(2) Liability derivatives are included in "other liabilities" on the Consolidated Statements of Financial Condition.
141
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.
Economic Undesignated Hedges
Gross
Amount
December 31, 2014
Gross Amounts Not Offset in
the Statement of Financial
Position
Gross
Amounts
Offset in the
Statement of
Financial
Position
Net Amount
Presented in
the Statement
of Financial
Position
Financial
Instruments
Cash
Collateral
Net Amount
(Dollars in thousands)
Assets
U.S. Treasury and euro dollar futures
Mortgage backed securities forwards
Interest rate swaps
Total derivative assets
Liabilities
Interest rate swaps
Economic Undesignated Hedges
Assets
U.S. Treasury and euro dollar futures
Interest rate swaps
Total derivative assets
Liabilities
Mortgage backed securities forwards
$
$
$
$
$
$
17,504
$
783
$
16,721
$
— $
10,236
$
26,496
7,471
—
—
26,496
7,471
231
—
23,894
1,658
6,485
2,371
5,813
51,471
$
783
$
50,688
$
231
$
35,788
$
14,669
5,853
$
— $
5,853
$
— $
— $
5,853
December 31, 2013
Gross Amounts Not Offset in
the Statement of Financial
Position
Gross
Amounts
Offset in the
Statement of
Financial
Position
Net Amount
Presented in
the Statement
of Financial
Position
Gross
Amount
Financial
Instruments
Cash
Collateral
Net Amount
(Dollars in thousands)
7,074
$
1,701
$
5,373
$
— $
4,152
$
3,045
—
3,045
—
1,248
10,119
$
1,701
$
8,418
$
— $
5,400
$
1,221
1,797
3,018
13,837
$
— $
13,837
$
— $
(12,172) $
1,665
The Company pledged a total of $36.0 million and $6.8 million of investment securities and cash collateral to
counterparties at December 31, 2014 and 2013, respectively, for derivative activities. The cash pledged was restricted and is
included in other assets on the Consolidated Statements of Financial Condition.
142
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 13 — Deposit Accounts
The deposit accounts are as follows:
Retail deposits
Branch retail deposits
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificates of deposit/CDARS
Total branch retail deposits
Commercial retail deposits
Demand deposit account
Savings account
Money market demand accounts
Certificate of deposit/CDARS
Total commercial retail deposits
Total retail deposits subtotal
Government deposits
Demand deposit accounts
Savings accounts
Certificate of deposit/CDARS
Total government deposits
Wholesale deposits
Company controlled deposits
Total deposits
December 31,
2014
2013
(Dollars in thousands)
$
$
726,157
3,426,722
208,549
807,400
5,168,828
133,296
26,948
42,901
5,145
208,290
5,377,118
246,055
316,917
354,971
917,943
247
773,298
7,068,606
$
$
670,039
2,849,644
262,009
1,023,141
4,804,833
93,515
19,635
25,095
2,988
141,233
4,946,066
104,466
183,128
314,804
602,398
8,717
583,145
6,140,326
Noninterest bearing deposits included in above balances at December 31, 2014 and 2013, were approximately $1.2
billion and $0.9 billion, respectively.
The following indicates the scheduled maturities for certificates of deposit with a minimum denomination of
$100,000:
Three months or less
Over three months to six months
Over six months to twelve months
One to two years
Thereafter
Total
December 31,
2014
2013
(Dollars in thousands)
326,968
$
205,134
186,509
39,449
39,501
797,561
$
341,989
186,746
223,131
40,396
35,593
827,855
$
$
143
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 14 — Federal Home Loan Bank Advances
The portfolio of Federal Home Loan Bank advances includes floating rate short-term daily adjustable advances and
long-term fixed rate advances. The following is a breakdown of the advances outstanding.
2014
Weighted
Average
Rate
Amount
December 31,
2013
Amount
Weighted
Average
Rate
(Dollars in thousands)
2012
Weighted
Average
Rate
Amount
Short-term floating rate daily
adjustable advances
Short-term fixed rate term
advances
Long-term fixed rate term
advances
Total
$
$
—
—% $
216,000
0.50% $
280,000
0.50%
214,000
0.26%
772,000
0.30%
—
300,000
514,000
1.36%
0.90% $
—
988,000
—%
2,900,000
0.34% $ 3,180,000
—%
3.30%
3.05%
The Company prepaid $2.9 billion in higher cost long-term Federal Home Loan Bank advances during the fourth
quarter 2013, which resulted in a loss on extinguishment of debt of $177.9 million.
The Company prepaid $500.0 million in higher cost long-term Federal Home Loan Bank advances during the third
quarter 2012, which resulted in a loss on extinguishment of debt of $15.2 million.
At December 31, 2014, the Company had the authority and approval from the Federal Home Loan Bank to utilize a
line of credit of up to $7.0 billion and the Company may access that line to the extent that collateral is provided. At
December 31, 2014, the Company had $0.5 billion of advances outstanding and an additional $2.2 billion of collateralized
borrowing capacity available at the Federal Home Loan Bank. The advances are collateralized by non-delinquent single-family
residential first mortgage loans, loans repurchased with government guarantees, certain other loans and investment securities.
Maximum outstanding at any month end
Average outstanding balance
Average remaining borrowing capacity
Weighted-average interest rate
For the Years Ended December 31,
2014
2013
2012
$
1,300,000
$
2,907,598
$
(Dollars in thousands)
939,173
1,947,000
2,914,637
735,391
3,770,000
3,698,362
1,040,677
0.23%
3.22%
2.88%
At December 31, 2014, the Company's Federal Home Loan Bank advance final maturity dates includes $214.0 million
which mature in 2015, $175.0 million which mature in 2016, and $125.0 million which mature in 2020, compared to $988.0
million all of which matured in 2014 at December 31, 2013. Advances may be repaid prior to maturity, in whole or in part, at
the option of the borrower upon payment of any applicable fee specified in the contract governing such advance.
The Company is required to maintain a minimum amount of qualifying collateral. In the event of default, the Federal
Home Loan Bank advance is similar to a secured borrowing, whereby the Federal Home Loan Bank has the right to sell the
pledged collateral to settle the fair value of the outstanding advances.
Note 15 — Long-Term Debt
The Company sponsored nine trust subsidiaries, including the consolidated VIEs, which issued trust preferred
securities to third party investors and loaned the proceeds to the Company in the form of junior subordinated notes included in
long-term debt. Each of the trusts has issued trust preferred securities to third party investors and loaned the proceeds to the
Company in the form of junior subordinated notes, which are included in long-term debt in the Statements of Financial
Condition. The notes held by each trust are the sole assets of that trust. Distributions on the trust preferred securities of each
trust are payable quarterly at a rate equal to the interest being earned by the trust on the notes held by these trusts.
144
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents the outstanding balance on each junior subordinated note and related interest rates of the
long-term debt as of the dates indicated.
Trust Preferred Securities
Floating Three Month LIBOR
Plus 3.25%, matures 2032
Plus 3.25%, matures 2033
Plus 3.25%, matures 2033
Plus 2.00%, matures 2035
Plus 2.00%, matures 2035
Plus 1.75%, matures 2035
Plus 1.50%, matures 2035
Plus 1.45%, matures 2037
Plus 2.50%, matures 2037
Subtotal
Notes associated with consolidated VIEs
Floating One Month LIBOR
Plus 0.46% (1), matures 2018
Plus 0.16% (2), matures 2019
Total long-term debt
December 31,
2014
2013
(Dollars in thousands)
Amount
Weighted
Average
Interest Rate
Amount
Weighted
Average
Interest Rate
$
$
$
$
25,774
25,774
25,780
25,774
25,774
51,547
25,774
25,774
15,464
247,435
41,938
41,821
331,194
3.50% $
3.48%
3.51%
2.23%
2.23%
1.99%
1.73%
1.69%
2.74%
$
25,774
25,774
25,780
25,774
25,774
51,547
25,774
25,774
15,464
247,435
0.63% $
0.33%
$
55,172
50,641
353,248
3.50%
3.49%
3.50%
2.24%
2.24%
2.00%
1.74%
1.69%
2.74%
0.63%
0.33%
(1) The Notes will accrue interest at a rate equal to the lesser of (i) one-month LIBOR plus 0.46 percent (ii) the net weighted average
coupon, or (iii) 16.00 percent.
(2) The interest rate for the notes may adjust monthly and will be subject to (i) a cap based on the weighted average of the loan rates on
the mortgage loans, minus the rates at which certain fees and expenses of the issuing entity are calculated and minus any required
spread and adjusted for actual days and (ii) a fixed cap of 16.00 percent.
At December 31, 2014 and 2013 the three-month LIBOR interest rate was 0.26 percent and 0.25 percent, respectively.
At both December 31, 2014 and 2013, the one-month LIBOR interest rate was 0.17 percent.
Trust Preferred Securities
The trust preferred securities outstanding are callable by the Company and are junior subordinated notes. Under the
terms of the related indentures interest is payable quarterly, however, the Company may defer interest payments for up to 20
consecutive quarters without default or penalty. In January 2012, the Company exercised its contractual rights to defer its
interest payments with respect to trust preferred securities. The payments are periodically evaluated and will be reinstated when
appropriate, subject to the provisions of the Company's Supervisory Agreement and Consent Order. The Company has $20.3
million accrued at December 31, 2014, for these deferred interest payments.
Notes Associated with Consolidated VIEs
As previously discussed in Note 8 of the Notes to the Consolidated Financial Statements, herein, the Company
determined it was the primary beneficiary of VIEs associated with HELOC securitizations and such VIEs are therefore
consolidated in the Consolidated Financial Statements. As of June 30, 2013, the Company reconsolidated the assets and
liabilities associated with the HELOC securitization trusts, the proceeds of which were used by the trust to repay outstanding
debt.
The Company has elected the fair value option for these liabilities and changes in fair value are recorded to "other
noninterest income" on the Consolidated Statements of Operations. Fair value is estimated using quantitative models which
incorporate observable and, in some instances, unobservable inputs including security prices, interest rate yield curves, option
volatility, currency, commodity or equity rates and correlations between these inputs. The Company also considers the impact
145
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
of its own observable credit spreads in the secondary bond markets in determining the discount rate used to value these
liabilities. See Note 24 of the Notes to the Consolidated Financial Statements, herein, for additional recurring fair value
disclosures.
The final legal maturities of the long-term debt associated with the VIEs are June 2018 and June 2019, respectively,
however these debt agreements have contractual provisions that allow for the debt to be paid off based on the cash flows of the
collateral. As of December 31, 2014, the Company's cash flow analysis indicated that the notes are estimated to be paid off by
June 2015 for FSTAR 2005-1 (LIBOR plus 0.46 percent) and June 2016 for FSTAR 2006-2 (LIBOR plus 0.16 percent). The
estimated maturity dates may change going forward as the inputs used (prepayments, defaults, etc.) for the cash flow analysis
will likely change. The debt pays interest based on a spread over the 30-day LIBOR interest rate.
Note 16 — Representation and Warranty Reserve
The following table shows the activity in the representation and warranty reserve.
Balance, beginning of period,
Provision
Charged to gain on sale for current loan sales
Charged to representation and warranty provision
Total
Charge-offs, net
Balance, end of period
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
54,000
$
193,000
$
120,000
6,854
10,011
16,865
(17,865)
53,000
$
17,606
36,116
53,722
(192,722)
54,000
$
24,410
256,289
280,699
(207,699)
193,000
$
At the time a loan is sold, an estimate of the fair value of such loss associated with the mortgage loans is recorded in
the representation and warranty reserve in the Consolidated Statements of Financial Condition and charged against the net gain
on loan sales in the Consolidated Statements of Operations. Subsequent to the sale, the liability is re-measured on an ongoing
basis based on an estimate of probable future losses. Changes in the estimate are recorded in the representation and warranty
provision on the Consolidated Statements of Operations. Charge-offs are recorded in representation and warranty reserve on the
Consolidated Statements of Financial Condition.
Note 17 — Warrant Liabilities
May Investors
In full satisfaction of the Company’s obligations under anti-dilution provisions applicable to certain investors (the
"May Investors") in the Company’s May 2008 private placement capital raise, the Company granted warrants (the "May
Investor Warrants") to the May Investors on January 30, 2009 for the purchase of 142,598 shares of Common Stock at $62.00
per share. The holders of such warrants are entitled to acquire shares of Common Stock for a period of ten years. During
2009, May Investors exercised May Investor Warrants to purchase 31,484 shares of Common Stock.
As a result of the Company’s registered offering on March 31, 2010, of 5.8 million shares of Common Stock at a price
per share of $50.00, the number of shares of the Company’s Common Stock issuable to the May Investors under the May
Investor Warrants was increased by 26,667 shares and the exercise price was decreased to $50.00 pursuant to the antidilution
provisions of the May Investors Warrants.
As a result of the Company’s registered offering on November 2, 2010 of 11.6 million shares of Common Stock at a
price per share of $10.00, the number of shares of Common Stock issuable to the May Investors under the May Investor
Warrants was increased by 551,126 shares and the exercise price was decreased to $10.00 pursuant to the antidilution
provisions of the May Investors Warrants.
For the year ended December 31, 2014, no shares of Common Stock were issued upon exercise of May Investor
Warrants, and at December 31, 2014, the May Investors held warrants to purchase 688,907 shares at an exercise price of
$10.00.
146
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The May Investor Warrants do not meet the definition of a contract that is indexed to the Company’s own stock under
U.S. GAAP. Therefore, the May Investor Warrants are classified as "other liabilities" on the Consolidated Statements of
Financial Condition and are measured at fair value, with changes in fair value recognized through operations.
At December 31, 2014 and 2013, the Company’s liabilities to the holders of May Investors Warrants amounted to $6.3
million and $10.8 million, respectively. Warrant liabilities are valued using a binomial lattice model and are classified within
Level 2 of the valuation hierarchy. Significant observable inputs include expected volatility, a risk free rate and an expected life.
Warrant liabilities are reported in "other liabilities" on the Consolidated Statements of Financial Condition. See Note 24 of the
Notes to the Consolidated Financial Statements, herein, for additional recurring fair value disclosures.
Note 18 — Stockholders' Equity
Preferred Stock and Other Warrants
On January 30, 2009, the Company sold to the U.S. Treasury 266,657 shares of Series C fixed rate cumulative non-
convertible perpetual preferred stock ("Series C Preferred Stock") and a warrant to purchase up to approximately 0.7 million
shares of Common Stock at an exercise price of $62.00 per share (the "Warrant") for $266.7 million. The issuance and the sale
of the Series C Preferred Stock and Warrant were exempt from the registration requirements of the Securities Act of 1933, as
amended. The Series C Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends quarterly at a rate of 5 percent
per annum for the first five years, and 9 percent per annum thereafter. The Warrant is exercisable through 2019.
In 2013 the U.S. Treasury sold the Series C Preferred Stock and Warrants which are now held by unrelated third party
investors and are no longer held by the U.S. government under the TARP Capital Purchase Program. The warrants are valued
utilizing the equity method. In 2013, the U.S. Treasury sold the preferred stock and warrants. The U.S. Treasury also auctioned
the Warrant, which closed on June 5, 2013, to purchase up to approximately 645,138 shares of Common Stock at an exercise
price of $62.00 per share. At December 31, 2014 and 2013, the Company’s warrant value was $6.3 million and $10.8 million,
respectively.
Preferred stock with a par value of $0.01 and a liquidation value of $1,000 and additional paid in capital attributable to
preferred shares at December 31, 2014 is summarized as follows.
Rate (1)
Earliest Redemption
Date (1)
Shares
Outstanding
Preferred
Shares
Preferred Stock
(Dollars in thousands)
Series C Preferred Stock
9% January 31, 2012
266,657
$
3
$
266,654
(1) Earliest redemption date at the Company's option.
At December 31, 2014, the Company has deferred $56.3 million of dividend payments on Series C Preferred Stock.
147
Accumulated Other Comprehensive Income (Loss)
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table sets forth the components in accumulated other comprehensive income (loss) for each type of
available-for-sale security.
Pre-tax Amount
Income Tax
(Expense) Benefit
(Dollars in thousands)
After-Tax Amount
Accumulated other comprehensive loss
December 31, 2014
Net unrealized gain (loss) on securities available-for-sale,
U.S. government sponsored agencies
Total net unrealized gain (loss) on securities available-for-sale
December 31, 2013
Net unrealized (loss) gain on securities available-for-sale,
U.S. government sponsored agencies
Total net unrealized (loss) gain on securities available-for-sale
December 31, 2012
Net unrealized (loss) gain on securities available-for-sale,
U.S. government sponsored agencies
FSTAR 2006-1 securitization trust
Total net unrealized (loss) gain on securities available-for-sale
$
$
$
$
$
$
Note 19 — Earnings (Loss) Per Share
11,351
11,351
$
$
(2,971) $
(2,971) $
8,380
8,380
(9,042) $
(9,042) $
4,211
4,211
$
$
$
2,389
(10,155)
(7,766) $
— $
6,108
6,108
$
(4,831)
(4,831)
2,389
(4,047)
(1,658)
Basic earnings (loss) per share, excluding dilution, is computed by dividing earnings (loss) available to common
stockholders by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings
(loss) per share reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were
exercised and converted into Common Stock or resulted in the issuance of Common Stock that could then share in the earnings
of the Company.
The following table sets forth the computation of basic and diluted earnings (loss) per share of Common Stock.
For the Years Ended December 31,
2014
2013
2012
(In thousands, except share data)
Net (loss) income
$
(69,465) $
266,987
$
Less: preferred stock dividend/accretion
Net (loss) income from continuing operations
Deferred cumulative preferred stock dividends
(483)
(69,948)
(26,539)
(5,784)
261,203
(14,366)
Net (loss) income applicable to Common Stockholders
$
(96,487) $
246,837
$
68,376
(5,658)
62,718
(13,670)
49,048
Weighted Average Shares
Weighted average common shares outstanding
56,246,528
56,063,282
55,762,196
Effect of dilutive securities
Warrants
Stock-based awards
Weighted average diluted common shares
(Loss) earnings per common share
—
—
56,246,528
237,412
217,487
56,518,181
6,108
425,211
56,193,515
Net (loss) income applicable to Common Stockholders
$
(1.72) $
4.40
$
Effect of dilutive securities
Warrants
Stock-based awards
—
—
Diluted (loss) earnings per share
$
(1.72) $
148
(0.02)
(0.01)
4.37
$
0.88
—
(0.01)
0.87
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The December 31, 2014 diluted loss per share calculation excludes all Common Stock equivalents, including
1,334,045 shares pertaining to warrants and 263,267 shares pertaining to stock-based awards. The inclusion of these securities
would be anti-dilutive.
Under the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "Series C Preferred Stock") the
Company may defer dividend payments. The Company elected to defer dividend payments beginning in February 2012
payment and is currently in arrears in the amount of $56.3 million at December 31, 2014.
Note 20 — Stock-Based Compensation
The Company's board of directors participates in various stock option and purchase plans and incentive compensation
plans. Certain key employees, officers, directors and others are eligible to receive awards. Awards that may be granted under the
plan include stock options, incentive stock options, cash-settled stock appreciation rights, restricted stock units, performance
shares and performance units and other awards. Under the current plan, the exercise price of any award granted must be at least
equal to the fair market value of Common Stock on the date of grant. Non-qualified stock options granted to directors expire 5
years from the date of grant. Grants other than non-qualified stock options have term limits set by the board of directors in the
applicable agreement. Stock appreciation rights generally expire 7 years from the date of grant. Awards still outstanding under
any of the prior plans will continue to be governed by their respective terms.
During the years ended December 31, 2014, 2013 and 2012, compensation expense recognized related to the plan
totaled $4.0 million, $4.8 million and $6.9 million, respectively.
Stock Option Plan
The following tables summarize the activity that occurred in the years ended December 31.
Options outstanding, beginning of year
Options canceled, forfeited and expired
Options outstanding, end of year
Options vested and expected to vest, end of year
Options exercisable, end of year
Number of Shares
2014
2013
2012
82,937
(19,339)
63,598
63,598
32,532
93,628
(10,691)
82,937
82,937
43,281
111,273
(17,645)
93,628
93,628
34,061
The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012, was zero.
Additionally, there was no aggregate intrinsic value of options outstanding and exercised at December 31, 2014, 2013 and
2012.
Options outstanding, beginning of year
Options canceled, forfeited and expired
Options outstanding, end of year
Options vested and expected to vest, end of year
Options exercisable, end of year
Weighted Average Exercise Price
2014
2013
2012
$
$
$
$
104.26
136.97
94.33
94.33
108.01
$
$
$
$
143.41
447.22
104.26
104.26
126.49
$
$
$
$
181.00
386.45
143.41
143.41
173.32
149
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following information pertains to the stock options issued pursuant to the Prior Plans, but not exercised at
December 31, 2014.
Range of Grant Price
$80.00
$1,523.00 - $2,072.50
Range of Grant Price
$80.00
$1,523.00 - $2,471.50
Number of Options
Outstanding at
December 31, 2014
Options Outstanding
Weighted Average
Remaining
Contractual Life
(Years)
Options Exercisable
Weighted Average
Exercise Price
Number Exercisable
at December 31,
2014
Weighted Average
Exercise Price
63,129
469
63,598
5.06
0.17
$
$
80.00
2,021.23
$
$
32,063
469
32,532
80.00
2,021.23
Options Vested and Expected to Vest
Number of Options
Outstanding at
December 31, 2014
Weighted Average
Remaining
Contractual Life
(Years)
Weighted Average
Exercise Price
63,129
469
63,598
5.06
0.17
$
$
80.00
2,021.23
At December 31, 2014 and 2013, options available for future grants were 233,017 and 213,678, respectively.
Restricted Stock Units
The Company has issued restricted stock units to officers, directors and certain employees. Restricted stock generally
will vest in 1/3 increments on each annual anniversary of the date of grant beginning with the first anniversary. At
December 31, 2014 and 2013, the maximum number of shares of Common Stock that may be issued were 737,861 shares and
961,913 shares, respectively. The Company incurred expenses of approximately $3.3 million, $1.4 million and $2.9 million
with respect to restricted stock units during the years ended December 31, 2014, 2013 and 2012, respectively. As of
December 31, 2014 and 2013 restricted stock units had a market value of $3.7 million and $5.6 million, respectively.
Restricted Stock
Non-vested at December 31, 2011
Granted
Vested
Canceled and forfeited
Non-vested at December 31, 2012
Granted
Vested
Canceled and forfeited
Non-vested at December 31, 2013
Granted
Vested
Canceled and forfeited
Non-vested at December 31, 2014
Incentive Compensation Plans
Shares
Weighted —
Average Grant-Date
Fair Value per Share
227,448
329,025
(109,588)
(21,674)
425,211
113,760
(190,949)
(60,096)
287,926
279,312
(276,548)
(56,999)
233,691
$
$
$
$
22.00
9.79
24.98
22.28
12.70
15.06
17.08
11.14
12.01
19.27
14.47
14.37
17.21
The Company had an expense of $20.5 million, $24.4 million and $31.1 million for the years ended December 31,
2014, 2013 and 2012, respectively, for incentive plans.
150
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 21— Income Taxes
Components of the (benefit) provision for income taxes from operations consist of the following.
Current
Federal
State
Total current income tax (benefit) expense
Deferred
Federal
State
Total deferred income tax (benefit) expense
Total Income Tax (Benefit) Expense
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
$
$
$
1,993
(771)
1,222
$
$
(35,067) $
(134)
(35,201)
(33,979) $
226
102
328
$
$
(407,611) $
(8,967)
(416,578)
(416,250) $
4,235
—
4,235
(19,880)
—
(19,880)
(15,645)
The Company’s effective tax rate differs from the statutory federal tax rate. The following is a summary of such differences.
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
(Benefit) provision at statutory federal income tax rate (35%)
$
(36,206) $
(52,242) $
18,456
Increases (decreases) resulting from
Change in valuation allowance, federal and state
Residual tax effect associated with other comprehensive income
State income tax benefit, net of federal income tax effect
Warrant (income) expense
Non-deductible compensation
Litigation settlement
Other
(Benefit) provision for income taxes
8,196
—
(9,101)
(1,570)
567
3,500
(355,769)
(6,108)
(2,647)
(190)
383
—
635
(33,979) $
323
(416,250) $
$
(19,224)
(19,880)
—
3,127
1,144
293
439
(15,645)
During the year ended December 31, 2014, the effective tax rate was a benefit of 32.9 percent, compared to a not
meaningful tax rate during the year ended December 31, 2013 and 29.7 percent for the year ended December 31, 2012. For the
year ended December 31, 2014, the effective tax rate varies from the statutory rates primarily due to non-taxable income and
expense items, primarily the exclusion of the non-deductible penalty paid to the CFPB and the non-taxable impact of changes
related to our warrants. The effective rate during the year ended December 31, 2013 differs from the combined statutory rate
principally due to the change in valuation allowance for net deferred taxes, as well as the recognition of the residual tax effect
associated with previously unrealized losses on securities recorded in other comprehensive income (loss) had the most
significant impacts on the difference between our statutory U.S. federal income tax rate of 35 percent and our effective tax rate.
151
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Temporary differences and carry forwards that give rise to deferred tax assets and liabilities are comprised of the
following.
Deferred tax assets
Tax loss carry forwards
Allowance for loan losses
Litigation settlement
Representation and warranty reserves
Alternative Minimum Tax credit carry forwards (indefinite carry forward period)
Non-accrual interest revenue
Real Estate Mortgage Investment Conduits
Deferred interest
Other
Total
Valuation allowance
Total (net)
Deferred tax liabilities
Mortgage loan servicing rights
Mark-to-market adjustments
Commercial lease financing
Premises and equipment
State and local taxes
Other
Total
Net deferred tax asset
December 31,
2014
2013
(Dollars in thousands)
292,329
140,423
30,328
19,703
12,854
6,131
4,919
4,015
6,849
517,551
(33,060)
484,491
(32,060)
(2,559)
(2,545)
(2,374)
(2,450)
(154)
(42,142)
442,349
$
$
337,472
127,739
34,378
19,962
10,880
11,571
4,644
—
8,090
554,736
(24,864)
529,872
(91,752)
(13,770)
(2,772)
(494)
(4,774)
(1,629)
(115,191)
414,681
$
$
During the years ended December 31, 2014 and 2013, the Company had a federal net operating loss carry forwards of
$743.1 million and $882.9 million, respectively. These carry forwards, if unused, expire in calendar years 2028 through 2033.
As a result of a change in control occurring on January 30, 2009, Section 382 of the Internal Revenue Code places an annual
limitation on the use of the Company’s net operating loss carry forwards that existed at that time. At December 31, 2014 and
2013, $174.1 million of the total net operating loss carry forwards of $743.1 million and $882.9 million respectively, is subject
to an annual use limitation of approximately $17.4 million and will expire in calendar years 2028 through 2029.
The Company has not provided deferred income taxes for the Bank’s pre-1988 tax bad debt reserve of approximately
$4.0 million because it is not anticipated that this temporary difference will reverse in the foreseeable future. Such reserves
would only be taken into taxable income if the Bank, or a successor institution, liquidates, redeems shares, pays dividends in
excess of earnings and profits, or ceases to qualify as a bank for tax purposes.
At December 31, 2014 and 2013, the deferred tax assets were primarily the result of U.S. net operating loss
carryforwards.
The Company regularly evaluates the need for deferred tax asset valuation allowances based on a more likely than not
standard as defined by generally accepted accounting principles. The ability to realize deferred tax assets depends on the ability
to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each
applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the
realization of deferred tax assets:
•
•
•
future reversals of existing taxable temporary differences;
future taxable income exclusive of reversing temporary differences and carryforwards;
taxable income in prior carryback years; and
152
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
•
tax planning strategies.
The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available
positive and negative evidence factors, including but not limited to:
•
•
•
•
nature, frequency and severity of recent losses;
duration of statutory carryforward periods;
historical experience with tax attributes expiring unused; and
near- and medium-term financial outlook.
As indicated by applicable accounting standards, it is inherently difficult to conclude a valuation allowance is not
required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The
Company utilizes a rolling three years of actual and current year anticipated results as the primary measure of cumulative
losses.
The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that
have been recognized in the financial statements or tax returns and future profitability. The Company's accounting for deferred
taxes represents management's best estimate of those future events. Changes in the current estimates, due to unanticipated
events or otherwise, could have a material effect on the Company's financial condition and results of operations.
Culminating in the fourth quarter 2013, the Company had taken significant actions to transform its business and reduce
uncertainty. These actions included the following:
(1)
(2)
(3)
(4)
(5)
the retirement of higher cost long-term Federal Home Loan Bank advances;
the related loss on extinguishment of debt as a result of the prepayment of the higher cost long-term Federal
Home Loan Bank advances;
the payment of litigation settlement costs incurred in connection with Assured and MBIA litigation
settlements;
the sale of mortgage servicing rights while retaining the subservicing; and
the settlements reached with Fannie Mae and Freddie Mac.
When evaluating whether the Company has overcome the significant negative evidence attributable to actual
cumulative losses in recent years, the Company adjusted those losses for items that the Company believes are not indicative of
its ability to generate taxable income in future years. The Company reflects adjusted cumulative income after applying those
items that are not indicative of its ability to generate taxable income in future years. The Company considers this objectively
verifiable evidence that its current earnings model is capable of generating future taxable income sufficient to utilize
substantially all of the net operating loss carryforwards as of December 31, 2014. The Company believes that this evidence is
sufficient to overcome the unadjusted cumulative losses in recent years.
Other positive evidence considered in connection with the Company's decision to release its federal deferred tax asset
valuation allowance include the historic ability to utilize deferred tax assets before they expire, as well as its detailed forecasts
projecting the complete realization of all federal deferred tax assets before expiration under the most conservative and stressed
earnings scenarios. In order to realize the deferred tax assets, the Company needs to generate approximately $1.1 billion of pre-
tax income over the next 20 years. The Company believes this level of pre-tax income will be achievable even under stressed
scenarios.
The Company also considered actions taken during the year ended December 31, 2013, which create more certainty
regarding its future taxable income including settlements reached with Fannie Mae, Freddie Mac, MBIA and Assured litigation
settlements, prepayment of higher cost long-term Federal Home Loan Bank advances and the sale of mortgage servicing rights
while retaining the subservicing. The Company has a history of utilizing 100 percent of deferred tax assets before they expire.
Forecasts of taxable earnings project a complete realization of all federal deferred tax assets before they expire, including under
stressed forecast scenarios. The unprecedented mortgage market conditions have been managed by the Company to minimize
the impact should similar volatility recur in the future through cost containment, employee reductions, etc. which give further
support to the reliability of forecasted taxable earnings.
Upon considering all of the available positive and negative evidence, and the extent to which that evidence was
objectively verifiable, the Company determined that the positive evidence outweighed the negative evidence and the deferred
tax assets are more likely than not realizable, as of and for the years ended December 31, 2014 and 2013.
153
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The Company had a total state deferred tax asset before valuation allowance of $42.3 million and total state net
operating loss carryforwards of $723.6 million at December 31, 2014. In connection with its ongoing assessment of deferred
taxes, the Company analyzed each state net operating loss separately and determined the amount of such net operating loss,
which is expected to expire unused and recorded a valuation allowance to reduce the deferred tax asset for state net operating
losses to the amount which is more likely than not to be realized. At December 31, 2014, the state deferred tax assets which will
more likely than not be realized was $9.3 million and have maintained a valuation allowance of $33.1 million due to loss
carryover limitations.
The Company will continue to regularly assess the realizability of its deferred tax assets. Changes in earnings
performance and future earnings projections, among other factors, may cause the Company to adjust its valuation allowance,
which will impact the Company's income tax expense in the period it determines that these factors have changes.
The Company’s 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, 2014, the Internal Revenue Service had completed an examination of the Company through the taxable year
ended December 31, 2010. The years open to examination by state and local government authorities vary by jurisdiction.
The following table provides a reconciliation of the total amounts of unrecognized tax benefits for the years ended
December 31, 2014, 2013 and 2012.
Balance at January 1,
Additions based on income tax positions related to prior
years
Reductions for income tax positions of prior years
Balance at December 31,
$
$
2014
December 31,
2013
(Dollars in thousands)
2012
1,277,892
$
837,557
$
837,557
312,014
(414,274)
1,175,632
440,335
—
—
—
$
1,277,892
$
837,557
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the years
ended December 31, 2014, 2013 and 2012, the Company recognized interest income of approximately $0.3 million and expense
of $0.1 million and $0.1 million respectively. In addition, the Company recognized a benefit in penalty of approximately $0.1
million for the year ended December 31, 2014 and no penalty expense for the years ended December 31, 2013 and 2012. The
total accrual for interest and penalties related to uncertain tax positions on the balance sheet is not material for the years ended
December 31, 2014, 2013 and 2012. At December 31, 2014, approximately $0.2 million of the above tax positions are expected
to reverse during the next 12 months, all of which relates to state tax controversies expected to be settled on resolution of a state
tax audit.
Note 22 — Regulatory Matters
Regulatory Capital
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors. 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.
154
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The Bank’s primary regulatory agency, the OCC, requires that the Bank maintain minimum ratios of tangible capital,
which are shown in the following table.
December 31, 2014
Basel I Ratios
Tier 1 leverage ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Regulatory
Minimums
Regulatory
Minimums to be
Well-Capitalized
4.00%
4.00%
8.00%
5.00%
6.00%
10.00%
To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios as set forth in the table below. The Bank is considered "well capitalized" at both December 31, 2014 and
2013. There have been no conditions or events that management believes have changed the Bank’s category.
The following table shows the regulatory capital ratios as of the dates indicated. These ratios are applicable to the
Bank only.
Actual
For Capital
Adequacy Purposes
Well Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 1,167,422
12.43%
N/A
N/A
N/A
N/A
1,167,422
1,167,422
1,234,958
12.43%
22.54%
23.85%
375,687
207,151
414,302
4.0%
4.0%
8.0%
469,609
310,727
517,878
5.0%
6.0%
10.0%
December 31, 2014
Tangible capital (to tangible assets)
Tier 1 capital (to adjusted tangible
assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
December 31, 2013
Tangible capital (to tangible assets)
$ 1,257,608
13.97%
N/A
N/A
N/A
N/A
Tier 1 capital (to adjusted tangible
assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
N/A - Not applicable.
Consent Orders
1,257,608
1,257,608
1,317,964
13.97%
26.82%
28.11%
360,196
187,542
375,084
4.0%
4.0%
8.0%
450,245
281,313
468,855
5.0%
6.0%
10.0%
Effective October 23, 2012, the Bank's board of directors executed a Stipulation and Consent (the "Stipulation"),
accepting the issuance of a Consent Order (the "Consent Order") by the OCC. The Consent Order replaces the supervisory
agreement entered into between the Bank and the Office of Thrift Supervision (the "OTS") on January 27, 2010, which the
OCC terminated simultaneous with issuance of the Consent Order. The Company is still subject to the Supervisory Agreement
with the Federal Reserve (discussed below).
Under the Consent Order, the Bank is required to adopt or review and revise various plans, policies and procedures
related to, among other things, regulatory capital, enterprise risk management and liquidity. Specifically, under the terms of the
Consent Order, the Bank's board of directors has agreed to, among other things, which include but not limited to the following:
• Review, revise, and forward to the OCC a written capital plan for the Bank covering at least a three-year period and
establishing projections for the Bank's overall risk profile, earnings performance, growth expectations, balance sheet
mix, off-balance sheet activities, liability and funding structure, capital and liquidity adequacy, as well as a
contingency capital funding process and plan that identifies alternative capital sources should the primary sources not
be available;
• Adopt and forward to the OCC a comprehensive written liquidity risk management policy that systematically requires
the Bank to reduce liquidity risk; and
155
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
• Develop, adopt, and forward to the OCC a written enterprise risk management program that is designed to ensure that
the Bank effectively identifies, monitors, and controls its enterprise-wide risks, including by developing risk limits for
each line of business.
Each of the plans, policies and procedures referenced above in the Consent Order, as well as any subsequent
amendments or changes thereto, must be submitted to the OCC for a determination that the OCC has no supervisory objection
to them. Upon receiving a determination of no supervisory objection from the OCC, the Bank must implement and adhere to
the respective plan, policy or procedure. The foregoing summary of the Consent Order does not purport to be a complete
description of all of the terms of the Consent Order, and is qualified in its entirety by reference to the copy of the Consent Order
filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on October 24, 2012.
The Bank intends to address the banking issues identified by the OCC in the manner required for compliance by the
OCC. There can be no assurance that the OCC will not provide substantive comments on the capital plan or other submissions
that the Bank makes pursuant to the Consent Order that will have a material impact on the Company. The Company believes
that the actions taken, or to be taken, to address the banking issues set forth in the Consent Order should, over time, improve its
enterprise risk management practices and risk profile.
Supervisory Agreement
The Company is subject to the Supervisory Agreement, which will remain in effect until terminated, modified, or
suspended in writing by the Federal Reserve. The failure to comply with the Supervisory Agreement could result in the
initiation of further enforcement action by the Federal Reserve, including the imposition of further operating restrictions, and
could result in additional enforcement actions against the Company. The Company has taken actions which it believes are
appropriate to comply with, and intends to maintain compliance with, all of the requirements of the Supervisory Agreement.
Pursuant to the Supervisory Agreement, the Company submitted a capital plan to the OTS, predecessor in interest to
the Federal Reserve. In addition, the Company agreed to request prior non-objection of the Federal Reserve to pay dividends or
other capital distributions; purchase, repurchase or redeem certain securities; incur, issue, renew, roll over or increase any debt
and enter into certain affiliate transactions; and comply with restrictions on the payment of severance and indemnification
payments, director and management changes and employment contracts and compensation arrangements. A complete
description of all of the terms of the Supervisory Agreement and is qualified in its entirety by reference to the copy of the
Supervisory Agreement filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on January 28,
2010.
Regulatory Developments
The Bank is currently subject to regulatory capital rules based on the framework established by the 1988 capital accord
(“Basel I”) of the Basel Committee on Banking Supervision. Savings and loan holding companies are not subject to the Basel I
capital requirements. In July 2013, the Federal Reserve Board and the FDIC promulgated interim final rules implementing
Basel III, providing for a strengthened set of capital requirements, as well as a standardized risk-weighting approach. In
October 2013, the OCC and Federal Reserve adopted a final rule consistent with Basel III that replaces their existing risk-based
and leverage capital rules. The Bank and Bank Holding Company are subject to the capital requirements of the Basel III rules
effective January 1, 2015.
The capital framework under the Basel III final rule will replace the existing regulatory capital rules for all banks,
savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan
holding companies. Effective on January 1, 2015 the final rules require the Bank and Holding Company to maintain Tier 1
capital of at least 6 percent of risk-weighted assets and off-balance sheet items, total capital (the sum of Tier 1 capital and Tier 2
capital) of at least 8 percent of risk-weighted assets and off-balance sheet items, and Tier 1 capital of at least 4 percent of
adjusted quarterly average assets. In addition, the final rule implements a new common equity Tier 1 minimum capital
requirement of at least 4.5 percent of risk-weighted assets.
In addition, the new regulations would subject a banking organization to certain limitations on capital distributions and
discretionary bonus payments to executive officers if the organization did not maintain a capital conservation buffer of common
equity tier 1 capital in an amount greater than 2.5 percent of its total risk-weighted assets. The effect of the capital conservation
buffer will be to increase the minimum common equity tier 1 capital ratio to 7.0 percent, the minimum tier 1 risk-based capital
ratio to 8.5 percent and the minimum total risk-based capital ratio to 10.5 percent.
156
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Under the increased capital standards established by the Dodd-Frank Act, bank holding companies are prohibited from
including in their regulatory Tier 1 capital hybrid debt and equity securities issued on or after May 19, 2010. Among the hybrid
debt and equity securities included in this prohibition are trust preferred securities, which the Company has used in the past as a
tool for raising additional Tier 1 capital and otherwise improving its regulatory capital ratios. Although the Company may
continue to include our existing trust preferred securities as Tier 1 capital, the prohibition on the use of these securities as Tier 1
capital going forward may limit the Company’s ability to raise capital in the future.
Note 23 — Legal Proceedings, Contingencies and Commitments
On at least a quarterly basis, the Company assesses the liabilities and loss contingencies in connection with pending or
threatened legal and regulatory proceedings utilizing the latest information available. The Company establishes accruals for
legal claims and regulatory matters when the Company believes 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 from time to time, as appropriate, in
light of additional information.
Legal Proceedings
The Company and certain subsidiaries are subject to various pending or threatened legal proceedings arising out of the
normal course of business or operations. On the basis of information currently available, advice of counsel, available insurance
coverage, and established reserves, it is the opinion of management that the eventual outcome of the current actions against us
will not have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. However, it
is possible that the ultimate resolution of legal matters, if unfavorable, may be material to our consolidated financial condition,
results of operations, or cash flows in a particular period.
From time to time, governmental agencies conduct investigations or examinations of various mortgage related
practices of the Bank. In the course of such investigations or examinations, the Bank cooperates with such agencies and
provides information as requested. In addition, the Bank is routinely named in civil actions throughout the country by
borrowers and former borrowers relating to the origination, purchase, sale and servicing of mortgage loans.
On August 15, 2013, shareholder Kenneth Taylor filed a derivative action against several current and former members
of the Company's board of directors and executive officers. The lawsuit requests unspecified monetary damages and purports to
seek to remedy defendants’ alleged breaches of fiduciary duties and unjust enrichment from 2011 to present, focusing on the
events leading up to the Company's February 24, 2012 settlement with the U.S. Department of Justice, as well as the settlement
itself. On October 23, 2013, Joel Rosenfeld filed a second derivative action in the same court alleging similar claims based on
the February 24, 2012 settlement, as well as Flagstar’s prior litigation with Assured Guaranty. The Court consolidated the
matters and appointed Rosenfeld as lead plaintiff and Rosenfeld’s counsel and lead plaintiffs’ counsel. The plaintiffs then filed a
consolidated complaint. The parties have been facilitating the matter and the litigation has been stayed while they do so. A
parallel action was filed by Kenneth Taylor on January 24, 2014 in the Federal Court for the Eastern District of Michigan. The
Taylor matter was also stayed by the court to allow the parties to facilitate.
In May 2012, the Bank and its subsidiary, Flagstar Reinsurance Company, were named as defendants in a putative
class action lawsuit alleging a violation of Section 2607 of the Real Estate Settlement Procedures Act ("RESPA"). The Court
granted summary judgment on June 26, 2014, and dismissed the case. Rather than proceed with an appeal, the parties have
reached an agreement in principle to settle the matter. Management does not believe that the settlement amount will be material
to the Company’s results of operations.
Consumer Financial Protection Bureau Settlement
On August 26, 2014, the Company disclosed that the Bank had commenced discussions with the Consumer Financial
Protection Bureau ("CFPB"), related to alleged violations of federal consumer financial laws arising from the Bank’s loss
mitigation practices and default servicing operations dating back to 2011. On September 29, 2014, the Bank reached a
settlement with the CFPB pursuant to the CFPB Consent Order. The settlement required the Bank to pay $27.5 million to the
CPFB for borrower remediation and $10.0 million in civil monetary penalties. The settlement did not involve any admission of
wrongdoing on the part of the Company or its employees, directors, officers or agents.
157
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
DOJ litigation settlement
Per the February 2012 DOJ Agreement, the Company is required to make future additional payments of approximately
$118.0 million contingent upon the occurrence of certain future events. The Company elected the fair value option to account
for this liability and uses a discounted cash flow model to measure fair value. The fair value of the DOJ liability was $81.6
million and $93.0 million using a discount rate of 8.7 percent and 9.9 percent at December 31, 2014 and 2013 respectively. The
undiscounted amount of the DOJ liability remains at $118.0 million.
The DOJ Agreement does not have any effect on FHA insured loans in the Company's portfolio, including loans
classified as loans repurchased with government guarantees as discussed in Notes 1 and 4 of the Notes to the Consolidated
Financial Statements, herein.
Litigation Accruals
As of December 31, 2014, the Company's total accrual for contingent liabilities was $86.3 million, which includes the
fair value liability relating to the DOJ Agreement and other pending cases.
Commitments
A summary of the contractual amount of significant commitments is as follows.
Commitments to extend credit
Mortgage loans (interest-rate lock commitments)
HELOC trust commitments
Other consumer commitments
Standby and commercial letters of credit
Other commercial commitments
December 31,
2014
2013
(Dollars in thousands)
$
2,171,890
88,291
$
7,326
9,502
444,880
1,857,775
67,060
7,430
7,982
296,713
Commitments to extend credit are agreements to lend. Since many of these commitments expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash flow requirements.
The Company enters into mortgage interest-rate lock commitments with its customers. These commitments are
considered to be derivative instruments and changes in the fair value of these commitments are recorded in the Consolidated
Statements of Financial Condition as an other asset. Further discussion on derivative instruments is included in Note 12 of the
Notes to the Consolidated Financial Statements, herein.
The Company has unfunded commitments under its contractual arrangement with the HELOC securitization trusts to
fund future advances on the underlying HELOC. Refer to further discussion of this issue as presented in Note 8 of the Notes to
the Consolidated Financial Statements, herein.
Standby and commercial letters of credit are 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 instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized
on the Consolidated Statement of Financial Condition. The contractual amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments. The Company's 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. The Company utilizes the same credit policies in making
commitments and conditional obligations as it does for balance sheet instruments. Commitments to extend credit are
agreements to lend to a customer as long as there is not a violation of any condition established in the contract.
158
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company, upon extension of credit is based on management's credit evaluation of the counter parties.
The Company maintains a reserve for letters of credit which is included in other liabilities, which represents the
estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit
include unfunded loans with available balances, new commitments to lend that are not yet funded, and standby and commercial
letters of credit. The balances of $1.4 million and less than $0.1 million for December 31, 2014 and 2013, respectively, are
reflected in other liabilities on the Consolidated Statements of Operations.
Note 24 — Fair Value Measurements
The Company utilizes fair value measurements to record certain assets and liabilities at fair value. A description of the
valuation methodologies used for instruments measured at fair value is provided in Note1, above, of the Notes to the Consolidated
Financial Statements, herein,
Valuation Hierarchy
U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based
on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active
markets and the lowest priority to unobservable inputs where no active market exists, as discussed below.
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which the Company 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 the Company's own assumptions about the assumptions that market participants
would use in pricing and 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.
159
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables present the financial instruments carried at fair value as of December 31, 2014 and 2013, by caption
on the Consolidated Statements of Financial Condition and by the valuation hierarchy (as described above).
December 31, 2014
Level 1
Level 2
Level 3
Total Fair Value
Other investments
Investment securities available-for-sale
Agency
Agency-collateralized mortgage obligations
Municipal obligations
Loans held-for-sale
Residential first mortgage loans
Loans held-for-investment
Residential first mortgage loans
Second mortgage loans
HELOC loans
Mortgage servicing rights
Derivative assets
U.S. Treasury and agency futures/forwards
Forward agency and loan sales
Rate lock commitments
Agency forwards
Interest rate swaps
Total derivative assets
Total assets at fair value
Derivative liabilities
Forward agency and loan sales
Rate lock commitments
U.S. Treasury and agency futures/forwards
Interest rate swaps
Total derivative liabilities
Warrant liabilities
Long-term debt
DOJ settlement
Total liabilities at fair value
$
— $
— $
100,000
$
100,000
(Dollars in thousands)
—
—
—
—
—
—
—
—
7,268
—
—
2,371
—
9,639
388,883
1,281,316
—
—
—
1,980
388,883
1,281,316
1,980
1,196,216
—
1,196,216
25,931
—
—
—
—
154
—
—
5,813
5,967
—
53,117
131,564
257,827
—
—
30,718
—
—
30,718
25,931
53,117
131,564
257,827
7,268
154
30,718
2,371
5,813
46,324
$
$
$
9,639
$
2,898,313
$
575,206
$
3,483,158
— $
—
(783)
—
(783)
—
—
—
(783) $
(12,914) $
—
—
(5,853)
(18,767)
(6,317)
—
—
(25,084) $
— $
(83)
—
—
(83)
—
(83,759)
(81,580)
(165,422) $
(12,914)
(83)
(783)
(5,853)
(19,633)
(6,317)
(83,759)
(81,580)
(191,289)
160
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2013
Level 1
Level 2
Level 3
Total Fair Value
(Dollars in thousands)
Investment securities available-for-sale
Agency
Agency-collateralized mortgage obligations
Municipal obligations
$
422,844
—
—
$
— $
605,404
17,300
— $
—
—
422,844
605,404
17,300
Loans held-for-sale
Residential first mortgage loans
Loans held-for-investment
Residential first mortgage loans
Second mortgage loans
HELOC loans
Mortgage servicing rights
Derivative assets
U.S. Treasury futures
Forward agency and loan sales
Rate lock commitments
Interest rate swaps
Total derivative assets
Total assets at fair value
Derivative liabilities
Agency forwards
Interest rate swaps
Total derivative liabilities
Warrant liabilities
Long-term debt
DOJ settlement
Total liabilities at fair value
—
—
—
—
—
1,221
—
—
—
1,221
1,140,507
—
1,140,507
18,625
—
—
—
—
19,847
—
1,797
21,644
—
64,685
155,012
284,678
—
—
10,329
—
10,329
18,625
64,685
155,012
284,678
1,221
19,847
10,329
1,797
33,194
$
$
$
424,065
$
1,803,480
$
514,704
$
2,742,249
(1,665) $
—
(1,665)
—
—
—
(1,665) $
— $
(1,797)
(1,797)
(10,802)
—
—
(12,599) $
— $
—
—
—
(105,813)
(93,000)
(198,813) $
(1,665)
(1,797)
(3,462)
(10,802)
(105,813)
(93,000)
(213,077)
The Company transferred $3.5 million of municipal obligation to Level 3 from Level 2 in the valuation hierarchy during
the year ended December 31, 2014. The municipal obligation was historically priced using Level 2 inputs and was transferred into a
Level 3 asset due to the obligation not being a readily marketable security. The Company had no other transfers during the year
ended December 31, 2014.
The Company had no transfers of assets or liabilities recorded at fair value between fair value Levels during the year ended
December 31, 2013.
A determination to classify a financial instrument within Level 3 of the valuation hierarchy is based upon the significance
of the unobservable inputs to the overall fair value measurement. The Company manages the risk associated with the observable
components of Level 3 financial instruments using securities and derivative positions that are classified within Level 1 or Level 2 of
the valuation hierarchy. If the market for an instrument becomes more liquid or active and pricing models become available which
allow for readily observable inputs, the Company will transfer the instruments from Level 3 to Level 2 valuation hierarchy. The
assets and/or liabilities transferred are valued at the end of the period. Gains and losses in the tables do not reflect the effect of the
Company's risk management activities related to such Level 3 instruments
Fair Value Measurements Using Significant Unobservable Inputs
The tables below include a roll forward of the Consolidated Statements of Financial Condition amounts for the years ended
December 31, 2014, 2013 and 2012 (including the change in fair value) for financial instruments classified by the Company within
Level 3 of the valuation hierarchy.
161
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Recorded
in Earnings
Balance at
Beginning
of Year
Total
Unrealized
Gains/
(Losses)
Total
Realized
Gains/
(Losses)
Recorded
in OCI
Total
Unrealized
Gains/
(Losses)
Transfers
In (Out)
Balance at
End of
Year
Changes
In
Unrealized
Held at
End of
Year
Purchases
Sales
Settlement
(Dollars in thousands)
$
— $
— $
— $
— $ 100,000 $
— $
— $
— $ 100,000 $
—
—
—
64,685
155,012
284,678
1,812
(2,501)
(66,792)
1,617
2,215
—
—
—
—
—
—
386
—
—
—
— 271,459
(231,518)
—
(14,997)
(23,548)
—
53,117
1,890
— 131,564
— 257,827
(26,047)
(26,771)
(1,531)
3,511
1,980
$ 504,375 $
(67,481) $
3,832 $
— $ 371,845 $
(231,518) $
(40,076) $
3,511 $ 544,488 $
(50,928)
Year Ended December 31, 2014
Assets
Other investments
Investment securities AFS (1) (2) (3)
Municipal obligation
Loans held-for-investment
Second mortgage loans
HELOC loans
Mortgage servicing rights
Totals
Liabilities
Long-term debt
Litigation settlement
(93,000)
11,420
—
Totals
$ (198,813) $
11,420 $
(6,578) $
$ (105,813) $
— $
(6,578) $
— $
—
— $
— $
—
— $
— $
28,632 $
— $ (83,759) $
—
—
— (81,580)
— $
28,632 $
— $ (165,339) $
—
—
—
Derivative financial instruments (net)
Rate lock commitments
Totals
Year Ended December 31, 2013
Assets
Investment securities AFS (1)(2)
$
$
10,329 $ 153,841 $
10,329 $ 153,841 $
— $
— $
— $ 273,409 $
(353,982) $
(52,879) $
— $
30,718 $
33,906
— $ 273,409 $
(353,982) $
(52,879) $
— $
30,718 $
33,906
Mortgage securitization
$
91,117 $
— $
(8,789) $
871 $
— $
(73,327) $
(9,872) $
— $
— $
—
Loans held-for-investment
Second mortgage loans
HELOC loans
Transferors' interest
—
—
7,103
Mortgage servicing rights
710,791
105,971
817
(6,362)
(7,769)
(174)
10,816
45,708
—
—
80,543
— 170,727
—
—
(10,313)
(18,762)
—
64,685
— 155,012
—
—
(52,637)
—
—
—
14,277
15,073
—
— 541,039
(973,803)
(99,320)
— 284,678
18,828
$ 809,011 $
98,845 $
41,373 $
871 $ 792,309 $ (1,099,767) $ (138,267) $
— $ 504,375 $
48,178
Litigation settlement
(19,100)
(73,900)
—
—
—
—
—
— (93,000)
Totals
$
(19,100) $
(73,900) $
(6,168) $
— $ (119,980) $
— $
20,335 $
— $ (198,813) $
$
— $
— $
(6,168) $
— $ (119,980) $
— $
20,335 $
— $ (105,813) $
86,200
86,200
— (149,585)
— (149,585)
— 376,749
(241,264)
(61,771)
— 376,749
(241,264)
(61,771)
—
—
10,329
10,329
(17,534)
(17,534)
$ 254,928 $
(2,192) $
330 $
17,160 $
— $
(249,246) $
(20,980) $
— $
— $
110,328
9,594
—
61
—
2,768
(2,552)
—
—
—
—
(21,979)
—
—
—
—
91,117
—
2,768
7,103
—
—
—
Mortgage servicing rights
510,475
(195,821)
— 535,875
(139,738)
— 710,791
10,900
Totals
Liabilities
$ 885,325 $ (197,952) $
(2,222) $
19,928 $ 535,875 $
(410,963) $
(20,980) $
— $ 809,011 $
13,668
Litigation settlement
$
(18,300) $
(800) $
— $
— $
— $
— $
— $
— $ (19,100) $
—
Derivative financial instruments (net)
Rate lock commitments
Totals
70,965
70,965
—
—
530,431
530,431
— 920,512
(1,092,117)
(343,591)
— 920,512
(1,092,117)
(343,591)
—
—
86,200
86,200
84,031
84,031
(1) Realized gains (losses), including unrealized losses deemed other-than-temporary and related to credit issues, are reported in noninterest income.
(2) U.S. government agency investment securities available-for-sale are valued predominantly using quoted broker/dealer prices with adjustments to reflect for any assumptions a
willing market participant would include in its valuation. Non-agency CMOs classified as available-for-sale are valued using internal valuation models and pricing information
from third parties.
(3) Reflects the changes in the unrealized gains (losses) related to financial instruments held at the end of the period.
162
Totals
Liabilities
Long-term debt
Derivative financial instruments (net)
Rate lock commitments
Totals
Year Ended December 31, 2012
Assets
Investment securities AFS (1)(2)
Non-agency CMOs
Mortgage securitization
Loans held-for-investment
Transferors' interest
—
—
—
—
—
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the
fair value measurements as of December 31, 2014 and 2013.
Fair Value Valuation Technique
Unobservable Input
Range (Weighted
Average)
December 31, 2014
Assets
Loans held-for-investment
(Dollars in
thousands)
Second mortgage loans
$
53,117 Discounted cash flows
FSTAR 2005-1
HELOC loans
FSTAR 2006-2
HELOC loans
Mortgage servicing rights
Derivative financial instruments
Rate lock commitments
Liabilities
FSTAR 2005-1
Long-term debt
FSTAR 2006-2
Long-term debt
$
$
$
$
$
Discount rate
Prepay rate - 12 month historical average
CDR rate - 12 month historical average
7.2% - 10.8% (9.0%)
11.3% - 17.0% (14.2%)
2.4% - 3.6% (3.0%)
Required internal rate of return
(leveraged)
Weighted average life (CPR)
Remaining lifetime collateral loss %
Remaining lifetime collateral loss severity
Required internal rate of return
(leveraged)
Weighted average life (CPR)
Remaining lifetime collateral loss %
Remaining lifetime collateral loss severity
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
8.0% - 12.0% (10.0%)
7.4% - 11.1% (9.3%)
5.5% - 8.3% (6.9%)
57.5% - 86.3% (71.9%)
8.0% - 12.0% (10.0%)
7.1% - 10.6% (8.8%)
7.6% - 11.4% (9.5%)
62.5% - 93.8% (78.2%)
7.1% - 10.7% (8.9%)
12.2% - 17.1% (15.0%)
59.6% - 89.4% (74.5%)
$
62,885 Discounted cash flows
68,679 Discounted cash flows
257,827 Discounted cash flows
30,718
Consensus pricing
Origination pull-through rate
66.2% - 99.3% (82.7%)
(41,938) Discounted cash flows
(41,821) Discounted cash flows
Discount rate
Prepay rate - 3 month historical average
Weighted average life
Discount rate
Prepay rate - 3 month historical average
Weighted average life
Asset growth rate
MSR growth rate
Return on assets (ROA) improvement
Peer group ROA
5.6% - 8.4% (7.0%)
24.0% - 36.0% (30.0%)
0.2 - 0.3 (0.2)
7.2% - 10.8% (9.0%)
8.0% - 12.0% (10.0%)
0.7 - 1.1 (0.9)
4.4% - 6.6% (5.5%)
0.9% - 1.4% (1.2%)
0.02% - 0.04% (0.03%)
0.5% - 0.8% (0.7%)
DOJ litigation settlement
$
(81,580) Discounted cash flows
163
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Fair Value Valuation Technique
Unobservable Input
Range (Weighted
Average)
(Dollars in
thousands)
64,685 Discounted cash flows
78,009 Discounted cash flows
77,003 Discounted cash flows
284,678 Discounted cash flows
Discount rate
Prepay rate - 12 month historical average
CDR rate - 12 month historical average
7.1% - 10.7% (8.9%)
10.5% - 15.7% (13.1%)
2.2% - 3.2% (2.7%)
Discount rate
Prepay rate - 3 month historical average
Cumulative loss rate
Loss severity
Discount rate
Prepay rate - 3 month historical average
Cumulative loss rate
Loss severity
5.6% - 8.4% (7.0%)
12.8% - 19.2% (16.0%)
11.6% - 17.4% (14.5%)
80.0% - 120.0% (100.0%)
7.2% - 10.8% (9.0%)
9.6% - 14.4% (12.0%)
39.9% - 59.8% (49.9%)
80.0% - 120.0% (100.0%)
Origination adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
5.9% - 8.9% (7.7%)
9.7% - 14.0% (11.9%)
59.1% - 88.6% (73.8%)
10,329
Consensus pricing
Origination pull-through rate
65.9% - 98.8% (82.3%)
(55,172) Discounted cash flows
(50,641) Discounted cash flows
(93,000) Discounted cash flows
Discount rate
Prepay rate - 3 month historical average
Cumulative loss rate
Loss severity
Discount rate
Prepay rate - 3 month historical average
Cumulative loss rate
Loss severity
Asset growth rate
MSR growth rate
Return on assets (ROA) improvement
Peer group ROA
5.6% - 8.4% (7.0%)
12.8% - 19.2% (16.0%)
11.6% - 17.4% (14.5%)
80.0% - 120.0% (100.0%)
7.2% - 10.8% (9.0%)
9.6% - 14.4% (12.0%)
39.9% - 59.8% (49.9%)
80.0% - 120.0% (100.0%)
4.4% - 6.6% (5.5%)
0.9% - 1.4% (1.2%)
0.02% - 0.04% (0.03%)
0.5% - 0.8% (0.7%)
December 31, 2013
Assets
Loans held-for-investment
Second mortgage loans
FSTAR 2005-1
HELOC loans
FSTAR 2006-2
HELOC loans
Mortgage servicing rights
Derivative financial instruments
Rate lock commitments
Liabilities
FSTAR 2005-1
Long-term debt
FSTAR 2006-2
Long-term debt
DOJ litigation settlement
$
$
$
$
$
$
$
$
Recurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the second mortgage loans associated with the
FSTAR 2006-1 mortgage securitization trust are discount rates, prepayment rates and default rates. Significant increase (decreases)
in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases in both prepay rates
and default rates in isolation result in a higher fair value; however, generally a change in the assumption used for the probability of
default is accompanied by a directionally opposite change in the assumption used for prepayment rates, which would offset a
portion of the fair value change.
The significant unobservable inputs used in the fair value measurement of the HELOC securitization trusts are internal
rates of return, discount rates, prepayment rates, loss rates and loss severity. For the assets, increases (decreases) in the internal rate
of return in isolation would result in a lower (higher) fair value measurement; increases (decreases) in prepay rates in isolation
would result in a higher (lower) fair value measurement; while increases (decreases) in defaults and loss severities in isolation
would result in a lower (higher) fair value. For the liabilities, increases (decreases) in the discount rate in isolation would result in a
lower (higher) fair value measurement; increases (decreases) in prepayment rates in isolation results in a shorter (longer) weighted
average life and ultimately a higher (lower) fair value measurement.
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 the assumptions in isolation would result in a
significantly lower (higher) fair value measurement. The fair value of MSRs is estimated using a valuation model that calculates the
present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates,
discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. The Company
164
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
obtains third-party valuations of its MSRs on a quarterly basis to assess the reasonableness of the fair value calculated by the
valuation model. In certain circumstances, based on the probability of the completion of a sale of MSRs pursuant to a bona-fide
purchase offer, the Company considers the bid price of that offer and identifiable transaction costs in comparison to the calculated
fair value and may adjust the estimate of fair value to reflect the terms of the pending transaction.
The key economic assumptions used in determining the fair value of those MSRs capitalized during the years ended
December 31, 2014, 2013 and 2012 were as follows.
Weighted-average life (in years)
Weighted-average constant prepayment rate
Weighted-average discount rate
For the Years Ended December 31,
2014
2013
2012
7.8
12.3%
11.7%
6.1
13.8%
8.5%
6.1
14.8%
7.1%
The key economic assumptions reflected in the overall fair value of the entire portfolio of MSRs were as follows.
Weighted-average life (in years)
Weighted-average constant prepayment rate
Weighted-average discount rate
December 31,
2014
2013
2012
6.6
15.0%
10.9%
7.3
11.9%
10.2%
5.3
17.3%
7.0%
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 the Company's 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 fall out ratios (i.e., the inverse of the pull through rate) are applied accordingly.
Significant increases (decreases) in the pull through rate in isolation would result in a significantly higher (lower) fair value
measurement. Generally, a change in the assumption utilized for the probability of default is accompanied by a directionally similar
change in the assumption utilized for the loss severity and a directionally opposite change in assumption utilized for prepayment
rates.
The significant unobservable inputs used in the fair value measurement of the DOJ litigation settlement are future balance
sheet and growth rate projections for overall asset growth, MSR growth, peer group return on assets and return on assets
improvement. The current assumptions are based on management's approved, strategic performance targets beyond the current
strategic modeling horizon (2015). The Bank's target asset growth rate post 2015 is based off of growth in the balance sheet.
Significant increases (decreases) in the bank's growth rate in isolation could result in a significantly lower (higher) fair value
measurement. Significant increases (decreases) in the bank's MSR growth rate in isolation could result in a marginally lower
(higher) fair value measurement. Significant increases (decreases) in the peer group's return on assets improvement in isolation
could result in a marginally higher (lower) fair value measurement. Significant increases (decreases) in the bank's return on assets
improvement in isolation could result in a marginally higher (lower) fair value measurement.
165
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring
basis. These assets are measured at the lower of cost or market and had a fair value below cost at the end of the period as
summarized below.
December 31, 2014
Impaired loans held-for-investment (1)
Residential first mortgage loans
Repossessed assets (2)
Total
December 31, 2013
Impaired loans held-for-investment (1)
Residential first mortgage loans
Commercial real estate loans
Total impaired loans held-for-investment
Repossessed assets (2)
Total
Level 3
(Dollars in thousands)
$
$
$
$
74,153
18,693
92,846
68,252
1,500
69,752
36,636
106,388
(1) The Company recorded $48.8 million, $155.0 million and $208.1 million in fair value losses on impaired loans (included in provision for
loan losses on the Consolidated Statements of Operations) during the years ended December 31, 2014, 2013 and 2012, respectively.
(2) The Company recorded $4.1 million, $9.7 million and $11.4 million in losses related to write downs of repossessed assets based on the
estimated fair value of the specific assets, and recognized net gains of $5.2 million, $25.9 million and $11.2 million on sales of
repossessed assets (both write downs and net gains/losses are included in assets resolution expense on the Consolidated Statements of
Operations) during the years ended December 31, 2014, 2013 and 2012, respectively.
The following tables present the quantitative information about non-recurring Level 3 fair value financial instruments and
the fair value measurements as of December 31, 2014.
December 31, 2014
Impaired loans held-for-investment
Residential first mortgage loans
Repossessed assets
December 31, 2013
Impaired loans held-for-investment
Residential first mortgage loans
Commercial real estate loans
Repossessed assets
$
$
$
$
$
Fair Value
Valuation Technique(s) Unobservable Input
(Dollars in thousands)
Range (Weighted
Average)
74,153
18,693
Fair value of collateral
Fair value of collateral
Loss severity discount
35% - 47% (36.9%)
Loss severity discount 6.7% - 100% (45.4%)
Fair Value
Valuation Technique(s) Unobservable Input
Range (Weighted
Average)
(Dollars in thousands)
68,252
Fair value of collateral
Loss severity discount
40% - 50% (44.9%)
1,500
Fair value of collateral
Loss severity discount
35% - 40% (39.6%)
36,636
Fair value of collateral
Loss severity discount 5.9% - 100% (45.3%)
Non-Recurring 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 opinions which incorporate measures such as recent sales prices for comparable properties.
166
Fair Value of Financial Instruments
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents the carrying amount and estimated fair value of financial instruments that are carried either at
fair value or cost.
December 31, 2014
Estimated Fair Value
Carrying
Value
Total
Level 1
Level 2
Level 3
(Dollars in thousands)
Financial Instruments
Assets
Cash and cash equivalents
Other investments
Investment securities available-for-sale
Loans held-for-sale
Loans repurchased with government guarantees
Loans held-for-investment, net
Repossessed assets
Federal Home Loan Bank stock
Mortgage servicing rights
Derivative Financial Instruments
Customer initiated derivative interest rate swaps
U.S. Treasury futures
Forward agency and loan sales
Rate lock commitments
Agency forwards
Liabilities
Retail deposits
Demand deposits and savings accounts
Certificates of deposit
Government deposits
Wholesale deposit
Company controlled deposits
Federal Home Loan Bank advances
Long-term debt
Warrant liabilities
Litigation settlement
Derivative Financial Instruments
Customer initiated derivative interest rate swaps
U.S. Treasury futures
Forward agency and loan sales
Rate lock commitments
$
$
136,014
100,000
1,672,179
1,243,792
1,128,359
4,150,554
18,693
155,443
257,827
$
$
136,014
100,000
1,672,179
1,196,216
1,094,232
3,998,368
18,693
155,443
257,827
5,813
7,268
154
30,718
2,371
5,813
7,268
154
30,718
2,371
136,014
—
—
—
—
—
—
155,443
—
—
7,268
—
—
2,371
$
— $
—
1,670,199
1,196,216
1,094,232
25,931
—
—
—
—
100,000
1,980
—
—
3,972,437
18,693
—
257,827
5,813
—
154
—
—
(4,564,573)
(812,545)
(917,943)
(247)
(773,298)
(514,000)
(331,194)
(6,317)
(81,580)
(5,853)
(783)
(12,914)
(83)
(4,291,208)
(816,254)
(883,529)
(226)
(770,103)
(513,770)
(171,855)
(6,317)
(81,580)
(5,853)
(783)
(12,914)
(83)
— (4,291,208)
(816,254)
—
(883,529)
—
(226)
—
(770,103)
—
(513,770)
—
(88,096)
—
(6,317)
—
—
—
—
(783)
—
—
(5,853)
—
(12,914)
—
167
—
—
—
30,718
—
—
—
—
—
—
—
(83,759)
—
(81,580)
—
—
—
(83)
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Financial Instruments
Assets
Cash and cash equivalents
Investment securities available-for-sale
Loans held-for-sale
Loans repurchased with government guarantees
Loans held-for-investment, net
Repossessed assets
Federal Home Loan Bank stock
Mortgage servicing rights
Derivative Financial Instruments
Customer initiated derivative interest rate swaps
Liabilities
Retail deposits
Demand deposits and savings accounts
Certificates of deposit
Government deposits
Wholesale deposit
Company controlled deposits
Federal Home Loan Bank advances
Long-term debt
Warrant liabilities
Litigation settlement
Derivative Financial Instruments
Customer initiated derivative interest rate swaps
Forward agency and loan sales
Rate lock commitments
U.S. Treasury and agency futures/forwards
December 31, 2013
Estimated Fair Value
Carrying
Value
Total
Level 1
(Dollars in thousands)
Level 2
Level 3
$
280,505
1,045,548
1,480,418
1,308,073
3,848,756
36,636
209,737
284,678
$
280,505
1,045,548
1,469,820
1,247,182
3,653,292
36,636
209,737
284,678
$
280,505
1,028,248
—
—
—
—
209,737
—
$
— $
17,300
1,469,820
1,247,182
18,625
—
—
—
—
—
—
—
3,634,667
36,636
—
284,678
1,797
1,797
—
1,797
(3,919,937)
(1,026,129)
(602,398)
(8,717)
(583,145)
(988,000)
(353,248)
(10,802)
(93,000)
(1,797)
19,847
10,329
(444)
(3,778,890)
(1,034,599)
(596,778)
(8,716)
(577,662)
(988,102)
(202,887)
(10,802)
(93,000)
(1,797)
19,847
10,329
(444)
— (3,778,890)
— (1,034,599)
(596,778)
—
(8,716)
—
(577,662)
—
(97,074)
(10,802)
—
—
—
—
(988,102)
—
—
—
—
(444)
(1,797)
19,847
—
—
—
—
—
—
—
—
—
(105,813)
—
(93,000)
—
—
10,329
—
The methods and assumptions used by the Company in estimating fair value of financial instruments which are required for
disclosure only, are as follows:
Cash and cash equivalents. Due to their short-term nature, the carrying amount of cash and cash equivalents approximates
fair value.
Loans repurchased with government guarantees. The fair value is estimated by using internally developed discounted cash
flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Loans held-for-investment. The fair value is estimated by using internally developed discounted cash flow models using
market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Federal Home Loan Bank stock. No secondary market exists for Federal Home Loan Bank stock. The stock is bought and
sold at par by the Federal Home Loan Bank. Management believes that the recorded value equals the fair value.
Deposit accounts. The fair value of demand deposits and savings accounts approximates the carrying amount. The fair value
168
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
of fixed-maturity certificates of deposit is estimated using the rates currently offered for certificates of deposit with similar remaining
maturities.
Federal Home Loan Bank advances. Rates currently available for debt with similar terms and remaining maturities are used
to estimate the fair value of the existing debt.
Long-term debt. The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates
current borrowing rates for similar types of borrowing arrangements.
Fair Value Option
The Company elected the fair value option for certain items as discussed throughout the Notes above of the Notes to the
Consolidated Financial Statements, herein, to mitigate a divergence between accounting losses and economic exposure.
The following table reflects the change in fair value included in earnings (and the account recorded in) for the assets and
liabilities for which the fair value option has been elected.
Assets
Loans held-for-sale
Net gain on loan sales
Loans held-for-investment
Interest income on loans
Other noninterest income
Liabilities
Long-term debt
Other noninterest income
Litigation settlement
Other noninterest expense
For the Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$
401,313
$
200,639
$
784,760
—
43,950
(779)
29,175
(637)
—
$
22,058
$
5,117
$
—
11,420
(73,900)
(930)
169
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 as of December 31, 2014, 2013 and 2012 for assets and liabilities for which the fair value option has been
elected.
December 31, 2014
December 31, 2013
(Dollars in thousands)
December 31, 2012
Unpaid
Principal
Balance
Fair Value
Over/
(Under) UPB
Unpaid
Principal
Balance
Fair Value
Fair Value
Over/
(Under) UPB
Unpaid
Principal
Balance
Fair Value
Fair Value
Over/
(Under) UPB
Fair Value
Assets
Nonaccrual loans
Loans held-for-sale
$
— $
— $
— $
— $
— $
— $
222 $
240 $
Loans held-for-investment
10,757
Total nonaccrual loans $
10,757 $
4,487
4,487
(6,270)
10,764
4,014
(6,750)
2,021
2,064
(6,270) $
10,764 $
4,014 $
(6,750) $
2,243 $
2,304 $
18
43
61
Other performing loans
Loans held-for-sale
$
1,144,320 $ 1,196,216 $
51,896 $ 1,109,517 $ 1,140,507 $
30,990 $ 2,734,756 $ 2,865,456 $
130,700
Loans held-for-investment
224,934
206,125
(18,809)
257,665
234,308
(23,357)
17,589
18,155
566
Total other performing
loans
Total loans
Loans held-for-sale
Loans held-for-investment
Total loans
Liabilities
Long-term debt
$
$
$
$
1,369,254 $ 1,402,341 $
33,087 $ 1,367,182 $ 1,374,815 $
7,633 $ 2,752,345 $ 2,883,611 $
131,266
1,144,320 $ 1,196,216 $
51,896 $ 1,109,517 $ 1,140,507 $
30,990 $ 2,734,978 $ 2,865,696 $
130,718
235,691
210,612
(25,079)
268,429
238,322
(30,107)
19,610
20,219
609
1,380,011 $ 1,406,828 $
26,817 $ 1,377,946 $ 1,378,829 $
883 $ 2,754,588 $ 2,885,915 $
131,327
(87,867) $
(83,759) $
4,108 $ (116,504) $ (105,813) $
10,691 $
— $
— $
—
Litigation settlement
N/A (1)
(81,580)
N/A (1)
N/A (1)
(93,000)
N/A (1)
N/A (1)
(19,100)
N/A (1)
(1) Remaining principal outstanding is not applicable to the litigation settlement because it does not obligate the Company to return a stated
amount of principal at maturity, but instead return $118.0 million based upon performance on the underlying terms in the Agreement.
Note 25 — Segment Information
The Company’s operations are conducted through four operating segments: Mortgage Originations, Mortgage
Servicing, Community Banking and Other, which includes the remaining reported activities. Operating segments are defined as
components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which
discrete financial information is available that is evaluated regularly by executive management in deciding how to allocate
resources and in assessing performance. The operating segments have been determined based on the products and services
offered and reflect the manner in which financial information is currently evaluated by management. Each segment operates
under the same banking charter, but is reported on a segmented basis for this report. Each of the operating segments is
complementary to each other and because of the interrelationships of the segments, the information presented is not indicative
of how the segments would perform if they operated as independent entities. Certain prior period amounts have been
reclassified to conform to current year presentation.
In January 2014, the Company reorganized the way its operations are managed based on core functions. The segments
are based on an internally-aligned segment leadership structure, which is also how the results are monitored and performance
assessed. The Company expects that the combination of the business model and the services that the operating segments
provide will result in a competitive advantage that supports revenue and earnings. The Company's business model emphasizes
the delivery of a complete set of mortgage and banking products and services, including originating, acquiring, selling and
servicing one-to-four family residential mortgage loans, which we believe is distinguished by timely processing and customer
service.
The Mortgage Originations segment originates, acquires and sells one-to-four family residential mortgage loans. The
origination and acquisition of mortgage loans comprises the majority of the lending activity. Mortgage loans are originated
through home loan centers, national call centers, the Internet and unaffiliated banks and mortgage banking and brokerage
companies, where the net interest income and the gains from sales associated with these loans are recognized in the Mortgage
Originations segment.
The Mortgage Servicing segment services and subservices mortgage loans, on a fee basis, for others. Also, the
Mortgage Servicing segment services, on a fee basis, residential mortgages held-for-investment by the Community Banking
170
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
segment and mortgage servicing rights held by the Other segment. The Mortgage Servicing segment may also collect ancillary
fees, such as late fees and earn income through the use of noninterest bearing escrows.
The Community Banking segment originates loans, provides deposits and fee based services to consumer, business
and mortgage lending customers through its Branch Banking, Business and Commercial Banking, Government Banking,
Warehouse Lending and Held-for-Investment Portfolio groups. Products offered through these teams include checking
accounts, savings accounts, money market accounts, certificates of deposit, other services, consumer loans, commercial loans
and warehouse lines of credit. Other financial services available to consumer and commercial customers include lines of credit,
revolving credit, customized treasury management solutions, equipment leasing, inventory and accounts receivable lending and
capital markets services such as interest rate risk protection products.
The Other segment includes the treasury functions, funding revenue associated with stockholders' equity, the impact of
interest rate risk management, the impact of balance sheet funding activities, charges or credits of an unusual or infrequent
nature that are not reflective of the normal operations of the operating segments and miscellaneous other expenses of a
corporate nature. Treasury functions include administering the investment securities portfolios, balance sheet funding, interest
rate risk management and MSR asset valuation, hedging and sales into the secondary market. In addition, the Other segment
includes revenue and expenses related to treasury and corporate assets and liabilities and equity not directly assigned or
allocated to the Mortgage Originations, Mortgage Servicing or Community Banking operating segments.
Revenues are comprised of net interest income (before the provision for loan losses) and noninterest income.
Noninterest expenses are fully allocated to each operating segment. Allocation methodologies maybe subject to periodic
adjustment as the internal management accounting system is revised and the business or product lines within the segments
change. Also, because the development and application of these methodologies is a dynamic process, the financial results
presented may be periodically revised.
The following tables present financial information by business segment for the periods indicated.
Summary of Operations
Net interest income (loss)
Net gain on loan sales
Representation and warranty provision
Other noninterest income
Total net interest income and
noninterest income
Provision for loan losses
Asset resolution
Depreciation and amortization expense
Other noninterest expense
Total noninterest expense
Income (loss) before federal income taxes
Benefit for federal income taxes
Net income (loss)
Intersegment revenue
Average balances
Loans held-for-sale
Loans repurchased with government
guarantees
Loans held-for-investment
Total assets
Interest-bearing deposits
Year Ended December 31, 2014
Mortgage
Originations
Mortgage
Servicing
Community
Banking
Other
Total
(Dollars in thousands)
$
17,651
$
246,290
$
58,180
$
20,873
$
208,975
(10,562)
57,834
314,427
—
(56)
(1,191)
(206,917)
(208,164)
106,263
—
—
551
57,734
79,158
—
(52,789)
(6,293)
(121,407)
(180,489)
(101,331)
—
149,586
(3,181)
—
22,096
168,501
(131,553)
(3,641)
(5,066)
(158,489)
(298,749)
(130,248)
—
9
—
27,609
45,269
—
—
(11,586)
(11,811)
(23,397)
21,872
33,979
$
$
106,263
9,022
$
$
(101,331) $
$
17,725
(130,248) $
(2,972) $
$
55,851
(23,775) $
205,803
(10,011)
165,273
607,355
(131,553)
(56,486)
(24,136)
(498,624)
(710,799)
(103,444)
33,979
(69,465)
—
$
1,471,257
$
20,077
$
62,409
$
— $
1,553,743
—
537
1,630,184
—
1,215,516
—
1,349,230
—
—
4,121,036
3,943,106
5,593,349
—
—
2,963,867
—
1,215,516
4,121,573
9,886,387
5,593,349
171
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Year Ended December 31, 2013
Mortgage
Origination
Mortgage
Servicing
Community
Banking
Other
Total
Summary of Operations
Net interest income (loss)
Net gain on loan sales
Representation and warranty provision
Other noninterest income
Total net interest income and
noninterest income
Provision for loan losses
Asset resolution
Depreciation and amortization expense
Other noninterest expense
Total noninterest expense
Income (loss) before federal income taxes
Benefit for federal income taxes
Net income (loss)
Intersegment revenue
(Dollars in thousands)
$
$
$
$
75,774
419,342
—
94,200
589,316
—
(168)
(698)
(402,793)
(403,659)
185,657
—
185,657
4,505
$
$
$
38,031
(17,606)
(36,116)
61,733
46,042
—
(61,374)
(6,431)
(60,926)
(128,731)
(82,689)
—
(82,689) $
$
51,198
$
159,859
457
—
27,397
187,713
(70,142)
9,501
(4,036)
(185,608)
(250,285)
(62,572)
—
(62,572) $
$
3,354
(87,013) $
—
—
102,936
15,923
—
8
—
(205,590)
(205,582)
(189,659)
416,250
226,591
$
(59,057) $
186,651
402,193
(36,116)
286,266
838,994
(70,142)
(52,033)
(11,165)
(854,917)
(988,257)
(149,263)
416,250
266,987
—
Average balances
Loans held-for-sale
Loans repurchased with government
guarantees
Loans held-for-investment
Total assets
Interest-bearing deposits
$
2,312,129
$
49,517
$
186,764
$
— $
2,548,410
—
—
2,442,375
—
1,476,801
—
1,711,147
—
—
4,407,177
4,509,497
6,168,679
—
3,617
1,476,801
4,410,794
3,891,897
12,554,916
7,185
6,175,864
172
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Summary of Operations
Net interest income (loss)
Net gain on loan sales
Representation and warranty provision
Other noninterest income
Total net interest income and noninterest
income
Provision for loan losses
Asset resolution
Depreciation and amortization expense
Other noninterest expense
Total noninterest expense
Income (loss) before federal income taxes
Benefit for federal income taxes
Net income (loss)
Intersegment revenue
—
426,936
16,109
$
$
$
$
Year Ended December 31, 2012
Mortgage
Origination
Mortgage
Servicing
Community
Banking
Other
Total
(Dollars in thousands)
$
$
99,850
1,014,586
—
124,458
$
47,440
(24,410)
(256,289)
230,642
$
208,209
722
—
25,292
(58,268) $
—
—
(93,759)
297,231
990,898
(256,289)
286,633
1,238,894
—
700
(399)
(812,259)
(811,958)
426,936
(2,617)
—
(86,761)
(5,859)
180,289
87,669
85,052
—
85,052
25,735
234,223
(276,047)
(5,257)
(3,759)
(205,841)
(490,904)
(256,681)
—
$
$
(256,681) $
(9,229) $
(152,027)
—
(31)
—
(50,518)
(50,549)
(202,576)
15,645
(186,931) $
(32,615) $
1,318,473
(276,047)
(91,349)
(10,017)
(888,329)
(1,265,742)
52,731
15,645
68,376
—
Average balances
Loans held-for-sale
Loans repurchased with government
guarantees
Loans held-for-investment
Total assets
Interest-bearing deposits
$
3,075,284
$
92,501
$
3,406
$
— $ 3,171,191
—
241
3,135,077
—
2,018,079
—
2,376,169
—
—
6,511,455
6,483,269
6,606,246
—
8,364
2,732,255
233,083
2,018,079
6,520,060
14,726,770
6,839,329
173
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 26 — Holding Company Only Financial Statements
The following are unconsolidated financial statements for the Company. These condensed financial statements should
be read in conjunction with the Consolidated Financial Statements and Notes thereto.
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Financial Condition
(Dollars in thousands)
Assets
Cash and cash equivalents
Investment in subsidiaries (1)
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Long term debt
Total interest paying liabilities
Other liabilities
Total liabilities
Stockholders’ Equity
Preferred Stock
Common stock
Additional paid in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
(1) Includes unconsolidated trusts.
December 31,
2014
2013
$
$
$
45,726
1,570,670
43,225
1,659,621
$
$
247,435
$
247,435
39,365
286,800
266,657
563
1,482,465
8,380
(385,244)
1,372,821
$
1,659,621
$
49,628
1,618,207
40,618
1,708,453
247,435
247,435
35,144
282,579
266,174
561
1,479,265
(4,831)
(315,295)
1,425,874
1,708,453
174
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Operations
(Dollars in thousands)
Income
Interest
Total
Expenses
Interest
General and administrative
Total
(Loss) income before undistributed loss of subsidiaries
(Loss) income equity in undistributed of subsidiaries
(Loss) income before income taxes
Benefit for income taxes
Net (loss) income
Preferred stock dividends/accretion
Net (loss) income applicable to common stock
Other comprehensive income (loss) (2)
Comprehensive (loss) income
For the Years Ended December 31,
2014
2013 (1)
2012 (1)
$
$
$
228
228
$
276
276
6,730
5,682
12,412
(12,184)
(63,042)
(75,226)
5,761
(69,465)
(483)
(69,948)
13,211
(56,737) $
6,620
9,108
15,728
(15,452)
246,723
231,271
35,716
266,987
(5,784)
261,203
(3,173)
258,030
$
482
482
6,894
20,619
27,513
(27,031)
95,390
68,359
17
68,376
(5,658)
62,718
6,161
68,879
(1) Certain amounts within the financial statements have been restated to conform to current presentation
(2) See Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail.
175
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Cash Flows
(Dollars in thousands)
Net (loss) income
Adjustments to reconcile net loss to net cash provided by
operating activities
Equity in losses (income) of subsidiaries
Stock-based compensation
Change in other assets
Provision for deferred tax benefit
Change in other liabilities
Net cash used in operating activities
Investing Activities
Net change in investment in subsidiaries
Net cash (used) provided in investment activities
Financing Activities
Dividends paid on preferred stock
Net cash provided financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
For the Years Ended December 31,
2014
2013
2012
$
(69,465) $
266,987
$
68,376
63,042
3,203
(2,607)
2
4,220
(1,605)
(2,297)
(2,297)
—
—
(3,902)
49,628
(246,723)
2,698
(35,613)
5
6,178
(6,468)
(456)
(456)
—
—
(6,924)
56,552
$
45,726
$
49,628
$
(95,390)
5,109
(2,590)
2,567
18,538
(3,390)
(5,145)
(5,145)
—
—
(8,535)
65,087
56,552
176
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 27 — Quarterly Financial Data (Unaudited)
The following table represents summarized data for each of the quarters in 2014, 2013 and 2012.
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Loan administration income
Net gain on loan sales
Net return on the mortgage servicing assets
Representation and warranty provision
Other noninterest income
Noninterest expense
(Loss) income before income tax
Provision (benefit) for income taxes
Net (loss) income
Preferred stock dividends/accretion
Net (loss) income applicable to common stock
Basic (loss) income per share
Diluted (loss) income per share
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Loan administration income
Net gain on loan sales
Net return on the mortgage servicing assets
Representation and warranty provision
Other noninterest income
Noninterest expense
Income (loss) before income tax
(Benefit) provision for income taxes
Net income
Preferred stock dividends/accretion
Net income applicable to common stock
Basic income per share
Diluted income per share
2014
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in thousands, except per share data)
$
$
$
$
$
66,351
8,150
58,201
112,321
(54,120)
7,033
45,342
16,135
1,672
4,771
(139,252)
(118,419)
(39,996)
(78,423)
(483)
(78,906) $
(1.51) $
(1.51) $
71,913
9,488
62,425
6,150
56,275
6,196
54,756
4,994
(5,226)
41,764
(121,353)
37,406
11,892
25,514
—
25,514
0.33
0.33
$
$
$
$
2013
$
75,094
10,731
64,363
8,097
56,266
5,599
52,175
1,346
(12,538)
38,606
(179,389)
(37,935)
(10,303)
(27,632)
—
(27,632) $
(0.61) $
(0.61) $
72,203
10,901
61,302
4,986
56,316
5,478
53,528
1,607
6,080
31,748
(139,253)
15,504
4,428
11,076
—
11,076
0.07
0.07
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in thousands, except per share data)
$
94,990
$
85,058
$
78,807
$
39,321
55,669
20,415
35,254
767
137,540
15,370
(17,395)
48,661
(196,590)
23,607
—
23,607
(1,438)
22,169
0.33
0.33
$
$
$
37,962
47,096
31,563
15,533
530
144,791
31,363
(28,940)
72,215
(174,397)
61,095
(6,108)
67,203
(1,449)
65,754
1.11
1.10
36,122
42,685
4,053
38,632
1,454
75,073
27,217
(5,205)
35,757
(158,436)
14,492
220
14,272
(1,449)
12,823
0.16
0.16
$
$
$
$
$
$
$
$
$
177
71,833
30,630
41,203
14,112
27,091
3,284
44,790
16,659
15,424
32,989
(388,693)
(248,456)
(410,362)
161,906
(1,449)
160,457
2.79
2.77
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Interest income
Interest expense
Net interest income
Provision for loan losses
Net (expense) interest income after provision for loan losses
Loan administration income
Net gain on loan sales
Net return on the mortgage servicing assets
Representation and warranty provision
Other noninterest income
Noninterest expense
(Loss) income before income tax
Provision (benefit) for income taxes
Net (loss) income
Preferred stock dividends/accretion
Net (loss) income available to common stockholders
Basic (loss) income per share
Diluted (loss) income per share
2012
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in thousands, except per share data)
$
$
$
$
$
122,891
48,158
74,733
114,673
(39,940)
1,379
204,853
35,189
(60,538)
40,494
(188,746)
(7,309)
—
(7,309)
(1,407)
(8,716) $
(0.22) $
(0.22) $
$
122,923
47,445
75,478
58,428
17,050
12
212,666
24,017
(46,028)
49,667
(169,497)
87,887
500
87,387
(1,417)
85,970
1.48
1.47
$
$
$
119,742
46,663
73,079
52,595
20,484
(1,041)
334,427
10,808
(124,492)
54,035
(233,491)
60,730
(20,380)
81,110
(1,417)
79,693
1.37
1.36
$
$
$
$
115,415
41,474
73,941
50,351
23,590
(1,147)
238,953
18,470
(25,231)
54,750
(397,962)
(88,577)
4,235
(92,812)
(1,417)
(94,229)
(1.75)
(1.75)
178
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following tables represents the restated Statements of Cash Flows for the three months ended March 31, 2014 and
2013, the six months ended June 30, 2014 and 2013, and the nine months ended September 30, 2014 and 2013.
Operating Activities
Net (loss) income
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Provision for loan losses
Representation and warranty provision
Depreciation and amortization
Deferred income taxes
Changes in fair value of MSRs, DOJ liability
and long-term debt
Premium, change in fair value, and other non-
cash changes of loans
Stock-based compensation expense
Net gain on loan and asset sales
Other than temporary impairment losses on
investment securities available-for-sale
Net (gain) loss on transferors' interest
Net change in:
For the Three Months Ended
March 31,
For the Six Months Ended
June 30,
For the Nine Months Ended
September 30,
2014
2013
2014
2013
2014
2013
As Restated
$
(78,423) $
23,607
$
(52,909) $
90,810
$
(80,541) $
105,082
112,321
(1,672)
5,627
(36,711)
20,415
17,395
5,404
—
118,471
3,554
11,476
(20,536)
51,978
46,336
11,298
—
126,567
16,092
17,761
(34,894)
56,030
51,541
17,200
—
11,916
(11,422)
11,860
27,545
29,117
21,549
(136,170)
(238,015)
(377,903)
(494,379)
(636,020)
(725,103)
195
—
1,057
—
1,692
—
(48,439)
(144,574)
(106,724)
(294,748)
(166,680)
(374,153)
—
—
—
—
—
—
8,789
(45,534)
—
—
8,789
(45,534)
Proceeds from sales of loans held-for-sale
3,032,810
12,923,047
7,322,947
25,174,589
12,610,237
33,604,525
Origination and repurchase of loans held-for-
sale, net of principal repayments
Repurchase of loans with government
guarantees, net of claims and principal
repayments received
(Increase) decrease in accrued interest
receivable
Net proceeds from sales of trading securities
(Increase) decrease in other assets, excludes
purchase of other investments
Net charge-offs in representation and warranty
reserve
Increase (decrease) in other liabilities
Net cash (used in) provided by operating
activities
Investing Activities
Proceeds from sale of investment securities
available-for-sale including loans that have been
securitized
Collection of principal on investment securities
available-for-sale
Purchase of investment securities available-for-
sale and other
Proceeds received from the sale of held-for-
investment loans
Principal repayments of loans held-for-
investment, net of originations
Proceeds from the disposition of repossessed
assets
Acquisitions of premises and equipment, net of
proceeds
Proceeds from the sale of mortgage servicing
rights
(4,630,407)
(11,989,413)
(10,491,780)
(23,232,489)
(17,648,417)
(30,946,494)
(56,067)
(44,943)
(73,247)
(93,383)
(114,520)
(76,244)
(3,183)
—
10,936
—
(9,480)
—
25,342
120,122
(12,284)
—
42,680
120,122
14,402
60,180
(17,209)
(74,640)
(82,188)
(73,568)
(5,557)
(42,189)
(31,213)
(32,653)
(10,517)
9,691
(65,206)
(167,494)
(18,241)
33,008
(85,129)
(244,684)
$ (1,861,547) $
568,751
$ (3,681,249) $
1,088,936
$ (5,959,311) $
1,456,609
1,908,949
—
4,167,673
—
6,532,039
—
30,918
15,378
69,416
28,409
117,926
45,769
(205,554)
—
(669,376)
(20,000)
(755,408)
(436,585)
35,100
927,682
35,100
1,029,382
62,401
1,434,400
(312,602)
600,117
(678,711)
681,713
(623,128)
941,353
10,004
27,285
21,179
59,499
29,812
83,139
(7,786)
(9,379)
(16,062)
(19,733)
(26,279)
(27,067)
11,727
106,028
103,504
266,601
167,870
301,804
Net cash provided by investing activities
$
1,470,756
$
1,667,111
$
3,032,723
$
2,025,871
$
5,505,233
$
2,342,813
179
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
For the Three Months Ended
March 31,
For the Six Months Ended
June 30,
For the Nine Months Ended
September 30,
2014
2013
2014
2013
2014
2013
As Restated
Financing Activities
Net increase (decrease) in deposit accounts
$
169,975
$
(447,004) $
503,583
$
(824,228) $
1,094,071
$ (1,645,010)
Proceeds from increases in Federal Home Loan
Bank Advances
Repayment of Federal Home Loan Bank
advances
Repayment of trust preferred securities and
long-term debt
Net receipt (disbursement) of payments of loans
serviced for others
Net receipt of escrow payments
Net cash provided by (used in) financing
activities
Net (decrease) increase in cash and cash
equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Supplemental disclosure of cash flow information
Interest paid on deposits and other borrowings
Income tax (refund) payments
Non-cash reclassification of loans originated
HFI to loans HFS
Non-cash reclassification of mortgage loans
originated HFS to HFI
Non-cash reclassification of mortgage loans
HFS to AFS securities
Mortgage servicing rights resulting from sale or
securitization of loans
Recharacterization of investment securities AFS
to loans HFI
Reconsolidation of HELOC's of variable
interest entities (VIEs)
Reconsolidation of long-term debt of VIEs
$
$
$
$
$
$
$
$
$
$
4,332,000
2,707,000
10,109,996
2,707,000
13,633,000
2,707,000
(4,195,000)
(2,987,000)
(10,066,290)
(2,987,000)
(14,471,000)
(2,979,402)
(5,427)
—
(11,178)
—
(18,980)
(12,165)
24,895
3,040
(234,846)
3,881
30,992
3,453
(279,085)
20,156
38,866
4,456
(282,968)
11,440
$
329,483
$
(957,969) $
570,556
$ (1,363,157) $
280,413
$ (2,201,105)
(61,308)
1,277,893
(77,970)
1,751,650
(173,665)
1,598,317
280,505
219,197
6,409
3
308,349
4,628
1,889,129
51,043
$
$
$
$
$
$
$
952,793
2,230,686
37,368
6,241
281,040
62,774
$
$
$
$
$
280,505
202,535
14,010
3
313,816
6,796
— $
4,120,382
51,043
$
119,494
$
$
$
$
$
$
$
952,793
2,704,443
74,032
6,254
361,503
65,299
$
$
$
$
$
— $
6,233,914
237,106
198,051
280,505
106,840
23,082
$
$
952,793
2,551,110
109,158
(1,457) $
6,257
384,329
15,425
$
$
$
$
542,822
53,208
—
323,216
— $
91,117
— $
— $
170,727
119,580
$
$
$
$
— $
— $
— $
91,117
— $
— $
— $
— $
— $
— $
170,727
119,580
180
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Restatement
During the course of compiling the 2014 Consolidated Statements of Cash Flows utilizing an enhanced preparation
and control process, the Company self-identified the need to reclassify certain operating, financing and investing activities in
the Consolidated Statements of Cash Flows for the year ended December 31, 2013, the three months ended March 31, 2014 and
2013, the six months ended June 30, 2014 and 2013, and the nine months ended September 30, 2014 and 2013. On March 10,
2015 our audit committee concluded that our audited consolidated financial statements for the year ended December 31, 2013
should be restated, and that since this Form 10-K would be available shortly thereafter, the useful presentation, for readers of
the Company’s financial statements, would be to restate the 2013 financial statements in this report. We concluded that this
resulted in a material weakness in our internal control over financial reporting. Specifically, the controls over the completeness
and accuracy of data and the review of the classification and presentation of cash flows for certain non-routine activities were
not designed effectively.
We have implemented and enhanced certain controls and procedures affecting our internal control over financial
reporting as they relate to the matter identified above. Specifically, we instituted the following:
• We implemented enhanced controls to ensure completeness and accuracy of data utilized in the compilation of the
Statement of Cash Flows to ensure activities are properly classified in the operating, investing or financing sections of
the Consolidated Statement of Cash Flows.
• We have enhanced our review controls to assess and validate activity related to non-routine transactions are properly
classified in the Consolidated Statement of Cash Flows.
We believe the actions detailed above, which were implemented prior to and as of the filing date of this Form 10-K,
should remediate the material weakness in internal control over financial reporting; however, subsequent testing to demonstrate
sustainability of the enhanced controls will be required to conclude that the material weakness has been fully remediated.
Disclosure Controls and Procedures
As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934
as amended (the Exchange Act), Flagstar’s management, including 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). Based upon that evaluation, Flagstar’s Executive Officer and Chief Financial Officer
concluded that Flagstar’s disclosure controls and procedures were not effective specifically relating to the Statement of Cash
Flows, as of the end of the period covered by this report, in recording, processing, summarizing and reporting information
required to be disclosed by the Company in reports that it files or submits under the Exchange Act, within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective 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 U.S. 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;
181
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial
statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may
deteriorate.
With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an
assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014, based on the
framework and criteria established in 1992 Internal Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on this assessment, management concluded that the Company’s internal control over financial reporting was not
effective as of December 31, 2014 because of control deficiencies identified in the preparation and review process of the
statements of cash flows that, when evaluated, constituted the material weakness discussed above.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31,
2014, has been audited by Baker Tilly Virchow Krause, LLP, our independent registered public accounting firm, as stated in
their report, which is included herein.
Changes in Internal Control over Financial Reporting
Except as discussed previously, there have been no changes in our internal control over financial reporting that
occurred during the fiscal quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially
affect, such internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
On March 12, 2015, the Board adopted resolutions to amend and restate the Company's Amended and Restated
Articles of Incorporation. The Second Amended and Restated Articles of Incorporation merged a number of amendments that
had been approved by the Board and the Company's shareholders in prior years, and also eliminated the Certificate of
Designations of Mandatory Convertible Non-Cumulative Perpetual Preferred Stock, Series A ("Series A Preferred Stock"), the
Certificate of Designations of Convertible Participating Voting Preferred Stock Series B ("Series B Preferred Stock"), and the
Certificate of Designations of Mandatorily Convertible Non-Cumulative Perpetual Preferred Stock, Series D ("Series D
Preferred Stock"). The Series A Preferred Stock, Series B Preferred Stock, and Series D Preferred Stock were all converted to
common shares and are no longer outstanding. The Second Amended and Restated Articles of Incorporation will be effective
upon making the appropriate filings with the State of Michigan.
182
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
Except as set forth below, the information required by this Item 10 will be contained in our Proxy Statement relating to
the 2015 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after the end of our 2014 fiscal
year.
Our Code of Business Conduct and Ethics, our Corporate Governance Guidelines and charters for our Audit
Committee, Compensation Committee, and Nominating Corporate Governance Committee and copies are available at
www.flagstar.com or upon written request for stockholders to Flagstar Bancorp, Inc., Attn: James Ciroli, CFO, 5151 Corporate
Drive, Troy, MI 48098.
None of the information currently posted, or posted in the future, on our website is incorporated by reference into this
Form 10-K.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained in our Proxy Statement relating to the 2015 Annual Meeting
of Stockholders and is hereby incorporated by reference, provided that the Compensation Committee Report shall be deemed to
be furnished and not filed.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 will be contained in our Proxy Statement relating to the 2015 Annual Meeting
of Stockholders and is hereby incorporated by reference. Reference is also made to the information appearing under Item 5 of
this Form 10-K, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be contained in our Proxy Statement relating to the 2015 Annual Meeting
of Stockholders and is hereby incorporated by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be contained in our Proxy Statement relating to the 2015 Annual Meeting
of Stockholders and is hereby incorporated by reference.
183
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) — Financial Statements and Schedules
The information required by these sections of Item 15 are set forth in the Index to Consolidated Financial Statements
under Item 8 of this annual report on Form 10-K.
(3) — Exhibits
The following documents are filed as a part of, or incorporated by reference into, this report:
Exhibit No.
Description
3.1
3.2*
10.1*+
10.2*+
10.3*+
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc.
Sixth Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the
Company’s Current Report on Form 8-K, dated February 2, 2009, and incorporated herein by
reference).
Flagstar Bancorp, Inc. 1997 Employees and Directors Stock Option Plan as amended
(previously filed as Exhibit 4.1 to the Company’s Form S-8 Registration Statement (No.
333-125513), dated June 3, 2005, and incorporated herein by reference).
Basic Plan Document and Adoption Agreement for the Flagstar Bank 401(k) Plan (previously
filed as Exhibit 4.1 to the Company’s Form S-8 Registration Statement (No. 333-198320),
dated August 22, 2014, and incorporated herein by reference).
Flagstar Bancorp, Inc. 2006 Equity Incentive Plan (previously filed as Exhibit 10.1 to the
Company’s Current Report on Form 8 K, dated May 18, 2011, and incorporated herein by
reference).
Form of Purchase Agreement, dated as of May 16, 2008, between the Company and the
purchasers named therein (previously filed as Exhibit 10.1 to the Company’s Current Report
on Form 8-K, dated as of May 16, 2008, and incorporated herein by reference).
Form of First Amendment to Purchase Agreement, dated as of December 16, 2008, between
the Company and the purchasers named therein (previously filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K, dated as of December 17, 2008, and incorporated
herein by reference).
Form of Warrant (previously filed as Exhibit 99.1 to the Company’s Current Report on Form
8-K, dated as of December 17, 2008, and incorporated herein by reference).
Investment Agreement, dated as of December 17, 2008, between the Company and MP Thrift
Investments L.P. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K, dated as of December 19, 2008, and incorporated herein by reference).
Form of Registration Rights Agreement, dated as of January 30, 2009, between the Company
and certain management investors (previously filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K, dated as of February 2, 2009, and incorporated herein by reference).
Closing Agreement, dated as of January 30, 2009, between the Company and MP Thrift
Investments L.P. (previously filed as Exhibit 10.3 to the Company’s Current Report on Form
8-K, dated as of February 2, 2009, and incorporated herein by reference).
Warrant to purchase up to 64,513,790 shares of the Company’s common stock (previously
filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated as of February 2,
2009, and incorporated herein by reference).
Purchase Agreement, dated as of February 17, 2009, between the Company and MP Thrift
Investments L.P. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K, dated as of February 19, 2009, and incorporated herein by reference).
Second Purchase Agreement, dated as of February 27, 2009, between the Company and MP
Thrift Investments L.P. (previously filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K, dated as of February 27, 2009, and incorporated herein by reference).
Capital Securities Purchase Agreement, dated as of June 30, 2009, by and between the
Company, Flagstar Statutory Trust XI, a Delaware statutory trust and MP Thrift Investments
L.P. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated as
of July 1, 2009, and incorporated herein by reference).
184
Exhibit No.
10.14*+
10.15*
10.16*
10.17*+
10.18*
10.19*
10.20*
10.21*+
10.22*+
10.23*+
10.24*+
10.25*+
10.26*+
10.27*+
10.28*+
10.29+
Description
Form of Stock Award Agreement to be entered into by certain executive officers of the
Company (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K,
dated as of October 28, 2009, and incorporated herein by reference).
Supervisory Agreement, dated as of January 27, 2010, by and between the Company and the
Federal Reserve (as successor to the OTS) (previously filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K, dated as of January 28, 2010, and incorporated herein by
reference).
Stipulation and Order of Settlement and Dismissal, dated February 24, 2012, by and among
the Company, the Bank and the United States of America (previously filed as Exhibit 10.29
to the Company's Annual Report on Form 10-K, dated as of March 20, 2012, and
incorporated herein by reference).
Employment Agreement, dated as of October 1, 2012, by and between Flagstar Bancorp, Inc.
and Michael J. Tierney (previously filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K, dated as of October 3, 2012, and incorporated herein by reference).
Stipulation to the Issuance of a Consent Order, effective as of October 23, 2012, by and
between the Office of the Comptroller of the Currency and Flagstar Bank, FSB (previously
filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated as of October 24,
2012, and incorporated herein by reference).
Consent Order, dated October 23, 2012, by and between Flagstar Bank, FSB and the Office
of the Comptroller of the Currency (previously filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K, dated as of October 24, 2012, and incorporated herein by
reference).
Transaction Purchase and Sale Agreement, effective as of December 31, 2012, by and
between Flagstar Bank, FSB and CIT Bank (previously filed as Exhibit 10.34 to the
Company’s Annual Report on Form 10-K, dated March 5, 2013, and incorporated herein by
reference).
Retention Agreement, dated as of February 28, 2013, by and between Flagstar Bank, FSB and
Steven P. Issa (previously filed as Exhibit 10.38 to the Company's Quarterly Report on Form
10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Offer Letter, dated February 3, 2011, executed by Joseph P. Campanelli and accepted by
Daniel Landers (previously filed as Exhibit 10.39 to the Company's Quarterly Report on
Form10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Retention Agreement, dated as of February 14, 2013, by and between Flagstar Bank, FSB and
Daniel Landers (previously filed as Exhibit 10.40 to the Company's Quarterly Report on
Form 10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Retention Agreement, dated as of February 21, 2013, by and between Flagstar Bank, FSB and
Salvatore A. Rinaldi (previously filed as Exhibit 10.41 to the Company's Quarterly Report on
Form 10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Amended and Restated Employment Agreement, dated May 16, 2013, by and between
Flagstar Bancorp, Inc and Michael J. Tierney (previously filed as Exhibit 10.42 to the
Company's Quarterly Report on Form 10-Q, dated as of April 30, 2013, and incorporated
herein by reference).
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.
and Alessandro P. DiNello (previously filed as Exhibit 10.43 to the Company's Quarterly
Report on Form 10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.
and Lee M. Smith (previously filed as Exhibit 10.44 to the Company's Quarterly Report on
Form 10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Letter Agreement, dated January 24, 2012, by and between Flagstar Bank, FSB and Steven J.
Issa (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated as
of October 9, 2013, and incorporated herein by reference).
Amendment to Employment Agreement, dated March 2, 2015, by and between Flagstar
Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith.
185
Exhibit No.
Description
Statement regarding computation of per share earnings incorporated by reference to Note 20
of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and
Supplementary Data, herein.
Statement of Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends.
Flagstar Bancorp, Inc. Code of Business Conduct and Ethics (previously filed as Exhibit 14
to the Company’s Annual Report on Form 10-K, dated March 16, 2006, and incorporated
herein by reference)
Letter, dated as of October 30, 2014, from Baker Tilly Virchow Krause, LLP to the Securities
and Exchange Commission (previously filed as Exhibit 16.1 to the Company's Current Report
on Form 8-K, dated as of October 30, 2014, and incorporated herein by reference).
Letter re Change in Accounting Principles (previously filed as Exhibit 18 to the Company’s
Current Report on Form 8-K, dated as of May 18, 2011, and incorporated herein by
reference).
List of Subsidiaries of the Company.
Consent of Baker Tilly Virchow Krause, LLP
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer
Financial statements from Annual Report on Form 10-K of the Company for the year ended
December 31, 2014, formatted in XBRL: (i) the Consolidated Statements of Financial
Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements
of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity,
(v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated
Financial Statements.
Incorporated herein by reference
Constitutes a management contract or compensation plan or arrangement
11
12
14*
16*
18*
21
23
31.1
31.2
32.1
32.2
101
*
+
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 "Michael
C. Flynn, General Counsel" at the address of the principal executive offices set forth on the cover of this Annual Report on
Form 10-K.
(b) — Exhibits. See Item 15(a)(3) above.
(c) — Financial Statement Schedules. See Item 15(a)(2) above.
[Remainder of page intentionally left blank.]
186
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 16, 2015.
SIGNATURES
FLAGSTAR BANCORP, INC.
By:
/s/ James K. Ciroli
James K. Ciroli
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on March 16, 2015.
By:
By:
By:
By:
By:
By:
By:
By:
By:
SIGNATURE
TITLE
/S/ ALESSANDRO DINELLO
Alessandro DiNello
President and Chief Executive Officer (Principal
Executive Officer)
/S/ JAMES K. CIROLI
James K. Ciroli
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
/S/ BRYAN L. MARX
Bryan L. Marx
Senior Vice President and Chief Accounting
Officer (Principal Accounting Officer)
/S/ JOHN D. LEWIS
John D. Lewis
Chairman
/S/ DAVID J. MATLIN
David J. Matlin
/S/ PETER SCHOELS
Peter Schoels
/S/ DAVID L. TREADWELL
David L. Treadwell
/S/ JAY J. HANSEN
Jay J. Hansen
/S/ JAMES A. OVENDEN
James A. Ovenden
Director
Director
Director
Director
Director
187
Exhibit No.
Description
EXHIBIT INDEX
3.1
3.2*
10.1*+
10.2*+
10.3*+
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*+
10.15*
10.16*
Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc.
Sixth Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the
Company’s Current Report on Form 8-K, dated February 2, 2009, and incorporated herein by
reference).
Flagstar Bancorp, Inc. 1997 Employees and Directors Stock Option Plan as amended
(previously filed as Exhibit 4.1 to the Company’s Form S-8 Registration Statement (No.
333-125513), dated June 3, 2005, and incorporated herein by reference).
Basic Plan Document and Adoption Agreement for the Flagstar Bank 401(k) Plan (previously
filed as Exhibit 4.1 to the Company’s Form S-8 Registration Statement (No. 333-198320),
dated August 22, 2014, and incorporated herein by reference).
Flagstar Bancorp, Inc. 2006 Equity Incentive Plan (previously filed as Exhibit 10.1 to the
Company’s Current Report on Form 8 K, dated May 18, 2011, and incorporated herein by
reference).
Form of Purchase Agreement, dated as of May 16, 2008, between the Company and the
purchasers named therein (previously filed as Exhibit 10.1 to the Company’s Current Report
on Form 8-K, dated as of May 16, 2008, and incorporated herein by reference).
Form of First Amendment to Purchase Agreement, dated as of December 16, 2008, between
the Company and the purchasers named therein (previously filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K, dated as of December 17, 2008, and incorporated
herein by reference).
Form of Warrant (previously filed as Exhibit 99.1 to the Company’s Current Report on Form
8-K, dated as of December 17, 2008, and incorporated herein by reference).
Investment Agreement, dated as of December 17, 2008, between the Company and MP Thrift
Investments L.P. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K, dated as of December 19, 2008, and incorporated herein by reference).
Form of Registration Rights Agreement, dated as of January 30, 2009, between the Company
and certain management investors (previously filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K, dated as of February 2, 2009, and incorporated herein by reference).
Closing Agreement, dated as of January 30, 2009, between the Company and MP Thrift
Investments L.P. (previously filed as Exhibit 10.3 to the Company’s Current Report on Form
8-K, dated as of February 2, 2009, and incorporated herein by reference).
Warrant to purchase up to 64,513,790 shares of the Company’s common stock (previously
filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated as of February 2,
2009, and incorporated herein by reference).
Purchase Agreement, dated as of February 17, 2009, between the Company and MP Thrift
Investments L.P. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K, dated as of February 19, 2009, and incorporated herein by reference).
Second Purchase Agreement, dated as of February 27, 2009, between the Company and MP
Thrift Investments L.P. (previously filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K, dated as of February 27, 2009, and incorporated herein by reference).
Capital Securities Purchase Agreement, dated as of June 30, 2009, by and between the
Company, Flagstar Statutory Trust XI, a Delaware statutory trust and MP Thrift Investments
L.P. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated as
of July 1, 2009, and incorporated herein by reference).
Form of Stock Award Agreement to be entered into by certain executive officers of the
Company (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K,
dated as of October 28, 2009, and incorporated herein by reference).
Supervisory Agreement, dated as of January 27, 2010, by and between the Company and the
Federal Reserve (as successor to the OTS) (previously filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K, dated as of January 28, 2010, and incorporated herein by
reference).
Stipulation and Order of Settlement and Dismissal, dated February 24, 2012, by and among
the Company, the Bank and the United States of America (previously filed as Exhibit 10.29
to the Company's Annual Report on Form 10-K, dated as of March 20, 2012, and
incorporated herein by reference).
188
Exhibit No.
10.17*+
10.18*
10.19*
10.20*
10.21*+
10.22*+
10.23*+
10.24*+
10.25*+
10.26*+
10.27*+
10.28*+
10.29+
11
12
14*
16*
Description
Employment Agreement, dated as of October 1, 2012, by and between Flagstar Bancorp, Inc.
and Michael J. Tierney (previously filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K, dated as of October 3, 2012, and incorporated herein by reference).
Stipulation to the Issuance of a Consent Order, effective as of October 23, 2012, by and
between the Office of the Comptroller of the Currency and Flagstar Bank, FSB (previously
filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated as of October 24,
2012, and incorporated herein by reference).
Consent Order, dated October 23, 2012, by and between Flagstar Bank, FSB and the Office
of the Comptroller of the Currency (previously filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K, dated as of October 24, 2012, and incorporated herein by
reference).
Transaction Purchase and Sale Agreement, effective as of December 31, 2012, by and
between Flagstar Bank, FSB and CIT Bank (previously filed as Exhibit 10.34 to the
Company’s Annual Report on Form 10-K, dated March 5, 2013, and incorporated herein by
reference).
Retention Agreement, dated as of February 28, 2013, by and between Flagstar Bank, FSB and
Steven P. Issa (previously filed as Exhibit 10.38 to the Company's Quarterly Report on Form
10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Offer Letter, dated February 3, 2011, executed by Joseph P. Campanelli and accepted by
Daniel Landers (previously filed as Exhibit 10.39 to the Company's Quarterly Report on
Form10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Retention Agreement, dated as of February 14, 2013, by and between Flagstar Bank, FSB and
Daniel Landers (previously filed as Exhibit 10.40 to the Company's Quarterly Report on
Form 10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Retention Agreement, dated as of February 21, 2013, by and between Flagstar Bank, FSB and
Salvatore A. Rinaldi (previously filed as Exhibit 10.41 to the Company's Quarterly Report on
Form 10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Amended and Restated Employment Agreement, dated May 16, 2013, by and between
Flagstar Bancorp, Inc and Michael J. Tierney (previously filed as Exhibit 10.42 to the
Company's Quarterly Report on Form 10-Q, dated as of April 30, 2013, and incorporated
herein by reference).
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.
and Alessandro P. DiNello (previously filed as Exhibit 10.43 to the Company's Quarterly
Report on Form 10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.
and Lee M. Smith (previously filed as Exhibit 10.44 to the Company's Quarterly Report on
Form 10-Q, dated as of April 30, 2013, and incorporated herein by reference).
Letter Agreement, dated January 24, 2012, by and between Flagstar Bank, FSB and Steven J.
Issa (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated as
of October 9, 2013, and incorporated herein by reference).
Amendment to Employment Agreement, dated March 2, 2015, by and between Flagstar
Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith.
Statement regarding computation of per share earnings incorporated by reference to Note 20
of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and
Supplementary Data, herein.
Statement of Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends.
Flagstar Bancorp, Inc. Code of Business Conduct and Ethics (previously filed as Exhibit 14
to the Company’s Annual Report on Form 10-K, dated March 16, 2006, and incorporated
herein by reference)
Letter, dated as of October 30, 2014, from Baker Tilly Virchow Krause, LLP to the Securities
and Exchange Commission (previously filed as Exhibit 16.1 to the Company's Current Report
on Form 8-K, dated as of October 30, 2014, and incorporated herein by reference).
189
Exhibit No.
Description
Letter re Change in Accounting Principles (previously filed as Exhibit 18 to the Company’s
Current Report on Form 8-K, dated as of May 18, 2011, and incorporated herein by
reference).
List of Subsidiaries of the Company.
Consent of Baker Tilly Virchow Krause, LLP
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer
Financial statements from Annual Report on Form 10-K of the Company for the year ended
December 31, 2014, formatted in XBRL: (i) the Consolidated Statements of Financial
Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements
of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity,
(v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated
Financial Statements.
Incorporated herein by reference
Constitutes a management contract or compensation plan or arrangement
18*
21
23
31.1
31.2
32.1
32.2
101
*
+
190
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5151 Corporate Drive
Troy, MI 48098
(800) 945-7700
flagstar.com