Annual Report
Two Thousand Fifteen
Alessandro DiNello
President and Chief Executive Officer
To our shareholders:
Flagstar closed 2015 a bigger company, a stronger
company, and a more diversified company. It was
a transitional year where we pivoted from the
past to the future and saw our business model
validated as the strategies we put in place in prior
years came to fruition.
$1.3
Billion in Market
Capitalization
5th
Largest Savings
Bank
$13.7
Billion in
Assets
10th
Largest National
Mortgage Originator
We ended the year with earnings of $158 million, our highest level of pre-tax income since 2003.
We also ended 2015 as a $13.7-billion-asset company, adding almost $4 billion in high-quality assets
to our balance sheet during the year.
After several years of aggressively selling lower-performing and higher-risk assets—over $1 billion in
2015 alone—we have completed the de-risking of our balance sheet. We are now reaping the benefits
in lower asset resolution costs and FDIC expenses.
We grew commercial loans nearly $900 million in 2015, led by warehouse lending, thanks in large part
to a new strategy to open our warehouse lines to lenders who sell to investors other than Flagstar.
We increased commercial lending and commercial real estate assets 30 percent year over year, as we
built relationships with borrowers in diverse industries to achieve a risk-balanced portfolio.
To build a solid, consistent source of interest income, we added almost $2 billion of high-quality consumer
loans from our own originations to our loan portfolio.
The spread income from a larger commercial portfolio and from the consumer loans we added to our
balance sheet boosted banking revenue and helped us increase net interest income to $287 million, up
$40 million from 2014. And from a credit perspective, the quality of our book of business on the banking
side allows us to operate efficiently, with lower provision costs.
Despite a year that was at times challenging for mortgage lending, we ended 2015 with nearly $30 billion in
mortgage originations, up from almost $25 billion in 2014.
Thanks to scrupulous expense management and good revenue growth, we generated positive operating
leverage during 2015, resulting in an improvement in our efficiency ratio to 70.9 percent in 2015 from
95.4 percent in 2014.
Finally, we kept our capital strong, closing the year with a tier 1 leverage ratio of 11.51 percent. We are
well-positioned with sufficient capital to support our planned growth.
Improving our customer experience is always top of mind, which is why we launched an enterprise-wide
service quality initiative in 2015 and rolled out state-of-the-art ATMs, along with a new, highly interactive
mortgage site and upgraded online and mobile banking platforms.
We continued to add strong, experienced executives to our team—leaders who are highly motivated to
make Flagstar a leading community bank and a chart-topping mortgage lender. They have led the
transformation of Flagstar into a company committed to cost control, vigilant on compliance, and
relentless on risk management. Today these principles are embedded in our culture.
We recently started to leverage our strength in housing finance to grow our company—especially our
community bank. We brought on board a team of experienced lenders to focus on a new, national lending
channel—builder financing—that will generate assets for community banking. We also are pursuing
lending against mortgage servicing rights as a growth opportunity in community banking. Finally, we are
expanding the footprint of our retail mortgage business.
During 2015 we saw our hard work to position Flagstar for growth and the future begin to pay off. It was a
year in which we put to rest key credit concerns, strengthened both our balance sheet and our capital, and
delivered on our promise to produce consistent, diversified earnings.
Flagstar is no longer a mortgage company inside a bank charter. It is now a
strong and growing community bank with a powerful mortgage platform.
I thank the talented, resourceful, all-in team of Flagstar employees for the progress we made and the success
we achieved during the year. I thank our board of directors for their tireless efforts on behalf of Flagstar and
their valuable guidance and counsel. And I thank you, our shareholders, for the confidence you have placed
in our vision and strategy and the support you have provided.
As we move forward, we will continue to give outstanding service to our customers as we work hard to
produce ever increasing returns to our shareholders.
Alessandro DiNello
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2015
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 ($18.48 per share) as reported on the New York Stock Exchange on June 30, 2015, was approximately
$385 million. The registrant does not have any non-voting common equity shares.
As of March 10, 2016, 56,557,895 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 2016 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
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30
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86
155
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157
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PART I
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
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
ITEM 9A. CONTROLS AND PROCEDURES
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
Certain statements in this Form 10-K, including but not limited to statements included within the Management’s
Discussion and Analysis of Financial Condition and Results of Operations, are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended. In addition, Flagstar Bancorp, Inc. also may
make forward-looking statements in its other documents filed with or furnished to the SEC, and its management may make
forward-looking statements orally to analysts, investors, representatives of the media and others.
Generally, forward-looking statements are not based on historical facts but instead represent management’s beliefs
regarding future events. Such statements may be identified by words such as believe, expect, anticipate, intend, plan, believe,
estimate, may increase, may fluctuate, and similar expressions or future or conditional verbs such as will, should, would and
could. Such statements are based on management’s current expectations and are subject to risks, uncertainties and changes in
circumstances. Actual results and capital and other financial conditions may differ materially from those included in these
statements due to a variety of factors, including without limitation the precautionary statements included within each individual
business’ discussion and analysis of its results of operations and the factors listed and described under "Risk Factors" below.
Any forward-looking statements made by or on behalf of Flagstar Bancorp, Inc. speak only as to the date they are
made, and do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise
after the date the forward-looking statements were made.
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ITEM 1.
BUSINESS
PART I
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, 2015,
based on our assets, we are the largest bank headquartered in Michigan and one of the top 10 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
63.1 percent of our common stock as of December 31, 2015.
We primarily originate or purchase residential mortgage loans throughout the country and sell them into securitization
pools, primarily to Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Corporation
("Freddie Mac") and the Government National Mortgage Association ("Ginnie Mae") (collectively, the "Agencies") or as whole
loans. In addition, we originate or purchase residential first mortgage loans, consumer loans, commercial loans and warehouse
loans included in held-for-investment loan portfolios. Our revenues include net interest income, income from banking services
we provide customers, and noninterest income from sales of residential first mortgage loans to the Agencies, the servicing of
loans for others and the sale of servicing rights related to mortgage loans serviced for others. 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.
The majority of our total loan originations during the year ended December 31, 2015 represented mortgage loans that
were collateralized by residential first mortgages on single-family residences and were eligible for sale to the Agencies. At
December 31, 2015, we originated or purchased residential mortgage loans in all 50 states, the U.S. Virgin Islands, and the
District of Columbia through relationships with approximately 514 mortgage brokers and approximately 679 correspondents.
At December 31, 2015, we also operated 10 retail centers located in nine states, which primarily originate one-to-four family
residential mortgage loans as part of our Mortgage Originations segment. In addition, we originate other consumer and
commercial loans through our Community Banking segment.
Our business also includes the activities conducted through our Community Banking segment. This segment 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. We maintain a
portfolio of commercial and industrial and commercial real estate loans with our commercial customers and we originate or
purchase residential mortgage loans through referrals from our branches, consumer direct call center and our website,
flagstar.com. At December 31, 2015, we operated 99 branches in Michigan. We leverage the customer relationships we have
gained throughout our branch network to cross-sell products to existing customers and increase our customer base.
At December 31, 2015, we had 2,713 full-time equivalent employees inclusive of account executives and loan officers.
Mortgage Originations
We originate, acquire and sell one-to-four family residential mortgage loans. Substantially all of the residential
mortgage loans we sell are delivered into the secondary market on a whole loan basis or securitizing the loans into mortgage-
backed securities with the agencies.
Mortgage Servicing
We also service and sub-service mortgage loans on a fee basis for others, and we service residential mortgages held-
for-investment for our own portfolio.
4
Lending Activities
Our principal lending activities consist of 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 conforming and non-conforming residential first mortgage loans that
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 extended to borrowers to finance their primary residence. Applications are underwritten
centrally using consistent credit policies and processes.
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. Second mortgage loans require full documentation and are underwritten and priced to ensure high
credit quality and loan profitability.
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 are based on minimum credit scores, debt-to-income ratios, and LTV ratios, with current collateral valuations.
Commercial loans. Commercial loans include commercial and industrial, commercial real estate and warehouse loans.
Commercial and industrial loans are made to commercial customers involved in a broad range of industries for use in normal
business operations to finance working capital needs, equipment purchases and other capital investments. Our commercial and
industrial customers are involved in financial, insurance, service, manufacturing, and distribution. Commercial borrowers are
made of up primarily of Michigan relationships, as well as national finance companies. Commercial real estate loans consist of
loans to developers and support income producing commercial real estate properties. These loans are made to finance properties
such as owner-occupied, retail, office, multi-family apartment buildings, industrial buildings, and residential developments.
They are repaid through cash flows related to the operation, sale, or refinance of the property. Warehouse loans are lines of
credit to other mortgage lenders. In 2016, we launched a national home builder finance program to grow our balance sheet,
increase commercial deposits and develop incremental revenue through our retail purchase mortgage channel.
Deposits
Deposits include retail, commercial, government and company controlled deposits. Through our branches and
commercial relationships, we gather deposits and offer a line of consumer and commercial financial products to individuals 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. Government deposits are
gathered from local municipalities primarily across the state of Michigan and are comprised mainly of property taxes that are
collected. See Note 12 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 funding on a fully collateralized basis to us. 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, such as residential first mortgage loans, home equity lines of credit, commercial real estate loans.
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 agree to
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, 2015, our corporate legal structure consisted of the Bank, including its wholly-owned subsidiaries
and wholly-owned non-bank subsidiaries through which we conduct other non-material business or which are inactive. The
Bank comprised of 99.5 percent of our total assets at December 31, 2015. We also own nine statutory trusts that are not
5
consolidated with our operations. For additional information, see Notes 1, 7 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.
The Bank is a savings and loan holding company. We must comply with a wide variety of banking, consumer
protection and securities laws, regulations and supervisory expectations and are regulated by multiple regulators, including the
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"), Consumer Financial Protection Bureau (the "CFPB"), the Federal
Deposit Insurance Corporation ("FDIC") and the Securities and Exchange Commission (the "SEC") or collectively "the
regulatory agencies." The Bank's deposits are insured by the FDIC through the Deposit Insurance Fund.
As a general matter, the regulatory agencies are taking a more stringent approach to supervising and regulating
financial institutions and financial products and services over which they exercise their respective supervisory authorities. We,
the Bank and our products and services all remain subject to greater supervisory scrutiny and enhanced supervisory
requirements and expectations.
Consent Order with OCC
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." For further information and a complete description of all of
the terms of the Consent Order, please refer to the copy of the Consent Order filed with the SEC as an exhibit to our Current
Report on Form 8-K filed on October 24, 2012.
Supervisory Agreement
We are also subject to the Supervisory Agreement with the Board of Governors of the Federal Reserve (the
"Supervisory Agreement"), dated January 27, 2010. A 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. For
further information and a complete description of all of the terms of the Supervisory Agreement, please refer to the copy of the
Supervisory Agreement filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on January 28,
2010.
Consent Order with CFPB
On September 29, 2014, the Bank entered into a Consent Order with the CFPB. The Consent Order relates to alleged
violations of federal consumer financial laws arising from the Bank’s residential first mortgage loan loss mitigation practices
and default servicing operations dating back to 2011. Under the terms of the Consent Order, the Bank has paid $28 million for
borrower remediation and $10 million in civil money penalties. The settlement does not involve any admission of wrongdoing
on the part of the Bank or its employees, directors, officers, or agents.
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-
6
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.
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.
Regulatory Capital Requirements
The Bank and the holding company are currently subject to the regulatory capital framework and the implementation
of the agreement reached by the Basel Committee on Banking and Supervision “Basel III” as adopted by the OCC and Federal
Reserve. The OCC and Federal Reserve have risk-based capital adequacy guidelines intended to measure capital adequacy with
regard to a banking organization’s balance sheet, including off-balance sheet exposures such as unused portions of loan
commitments, letters of credit, and recourse arrangements. The Bank is required to comply with these capital adequacy
standards. Beginning in 2015, our holding company was required to comply with the Federal Reserve Bank’s capital adequacy
guidelines. Prior to 2015, these rules did not apply to savings and loan holding companies. Federal law and regulations
established five levels of capital compliance: well-capitalized, adequately capitalized, under-capitalized, significantly under-
capitalized and critically under-capitalized.
At December 31, 2015, the Bank and the holding company were considered "well-capitalized" for regulatory purposes
under the Prompt Corrective Action framework. 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 8.0 percent or more,
its ratio of common equity tier 1 capital to risk-weighted assets is 6.5 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 under-
capitalized. Any institution with a tangible equity to total assets ratio of 2.0 percent or less is considered critically under-
capitalized. See Note 22 - Regulatory Matters - Regulatory Capital, for additional information.
Effective on January 1, 2015, the capital framework under the Basel III final rule replaced 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. The final rule implements a new common equity Tier 1 minimum capital
requirement. In addition, 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 capital conservation buffer becomes
effective January 1, 2016 with transition provisions through 2018.
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 $15.0 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 through December 31, 2018. Basel III will
materially change our Tier 1, Tier 1 common and total capital calculations.
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
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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.
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.
The FDIC has established a higher reserve ratio of 2 percent as a long-term goal beyond what is required by statute. The FDIC
is operating under a DIF Restoration Plan while the reserve ratio remains below the minimum target. The Restoration Plan
allows the FDIC to evaluate whether growth in the DIF under current assessment rates is likely to be sufficient to meet the
statutory requirements. In October of 2015, the FDIC proposed to increase the DIF to the statutorily required minimum level of
1.35 percent. The Dodd-Frank Act made banks with $10 billion or more in total assets responsible for the increase from 1.15
percent to 1.35 percent. Under the current rule regular assessment rates for all banks will decline when the reserve ratio reaches
1.15 percent, which the FDIC expects will occur in early 2016. The proposed rule will impose on the Bank a surcharge of 4.5
cents per $100 of our assessment base, after making certain adjustments. The FDIC expects the reserve ratio would likely reach
1.35 percent after approximately two years of payments of the proposed surcharges. The DIF is funded mainly through
quarterly assessments on insured banks.
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.
During 2015, the Bank was classified as a small institution for deposit insurance assessment purposes. As a small
institution, the Bank was assigned to one of three Capital Groups based on our capitalization level. The Bank was 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, was determined based upon the Risk Category to which we are assigned. Our Risk
Category was determined based on a combination of our Supervisory and Capital Group assignments.
Effective January 1, 2016, as a result of reporting assets of more than $10 billion for four consecutive quarters, the
Bank is classified as a large institution for deposit insurance assessment purposes. 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
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(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.
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
The Bank is subject to the affiliate and insider transaction rules applicable to member banks of the Federal Reserve as
well as additional limitations imposed by the OCC. These provisions prohibit or limit the Bank from extending credit to, or
entering into certain transactions with certain affiliates, principal stockholders, directors and executive officers of the banking
institution and certain of its affiliates. The Dodd-Frank Act imposed further restrictions on transactions with certain affiliates
and extension of credit to executive officers, directors and principal stockholders.
Incentive Compensation
The U.S. bank regulatory agencies issued comprehensive guidance on incentive compensation policies intended to
ensure that the incentive compensation policies of U.S. banks do not undermine 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
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). During 2016, a 3 percent reserve is to be maintained
against aggregate transaction accounts between $15 million and $110 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 $110 million. 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 0.50 percent per annum.
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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.
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. As a part of the Consent Order, the Bank agreed 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.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001 (the "PATRIOT Act")
The PATRIOT Act 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 comply with the PATRIOT Act’s
provisions, the BSA, as well as other aspects of anti-money laundering legislation.
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
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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.
During 2015, the Bank was not subject to the CFPB’s supervisory, examination and enforcement authority with respect
to consumer protection laws and regulations because the Bank had reported assets of less than $10 billion for four consecutive
quarters. Instead, it was subject to the OCC’s supervisory, examination and enforcement authority in this area. As of December
31, 2015, the total assets of the Bank have exceeded $10 billion for four consecutive quarters, and as such, the Bank is again
subject to the CFPB’s supervisory, examination and enforcement authority with respect to consumer protection laws and
regulations starting in January 2016.
In 2016 and future years, the Company anticipates that it will continue to be financially impacted by several
meaningful regulatory changes. The most significant changes of which include:
Amendments to the 2014 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. While these final rules amended
existing regulations applicable to Flagstar, adjustments in our business operations necessary to comply with these rules have
increased our overall regulatory compliance costs. In addition, the CFPB continues to modify and refine the new substantive
requirements. 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
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.
The TILA-RESPA Integrated Disclosure Rule. On November 20, 2013, the CFPB issued a final rule and official
interpretation, which established 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, commonly referred to as "TRID,"
became effective as to mortgage applications received on or after October 3, 2015 and combines 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. 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 content not required by the
prior 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.
The Home Mortgage Disclosure Act (the “HMDA”) and Updated Reporting Requirements. 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. Regulation C provides the mechanism for this collection and reporting of data, which has been applicable to closed-
end consumer loans secured by a dwelling and which a financial institution originates, purchases, or for which it receives an
application. On October 15, 2015, the CFPB issued a final rule amending Regulation C, expanding the amount of data to be
gathered and reported as well as subjecting home equity lines of credit and reverse mortgages to these requirements. The new
data gathering requirements will become effective on January 1, 2018 while the new reporting obligations will become
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effective in 2019, although it is not yet clear how much of this new data will be made publicly available. We will continue to
assess the impact to Flagstar as we update our procedures and system controls and as the CFPB provides additional guidance on
how much of the data will be made publicly available.
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.
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, through its
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implementation of Regulation Z also provides a variety of substantive protections for consumers, including but not limited to
the technical requirements of the new TILA RESPA Integrated Disclosure Rule. These protections also include the rules
applicable to assessing a consumer’s ability to repay as well as what constitutes a “qualified mortgage," the rules applicable to
higher-priced mortgage loans, the strict requirements applicable to making a “High Cost Mortgage Loan," and rules restricting
loan originator compensation. Regulation Z also impacts mortgage loan servicing, through rules applying to billing statements,
interest rate adjustment notices, and the way in which payments are to be applied. Violations of these provisions can result in
civil liability and/or administrative sanctions.
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.
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. While many of these requirements are now spelled out under
the Truth in Lending Act’s Regulation Z pursuant to the TILA RESPA Integrated Disclosure Rule, RESPA and its Regulation X
continue to impact mortgage servicing compliance through several rules, including but not limited to those applicable to
handling borrower requests for information and notices of error, force placed insurance, loss mitigation and foreclosure, and the
transfer of servicing. 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
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.
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. Pursuant to the requirements of the Volcker Rule, we have established a standard
compliance program based on the size and complexity of our operations. The standard compliance program includes written
policies and procedures that document and limit our risk mitigating hedging and market-making related activities; a system of
internal controls to monitor compliance; a management framework that provides a clear accountability for compliance
including appropriate management review of limits; incentive compensation; and other matters identified as requiring attention;
independent testing and audits; training; and recordkeeping requirements.
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We expect to incur ongoing operational and system costs for ongoing 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 February 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.
Limitation on Capital Distributions
Under the Supervisory Agreement, we shall not declare or pay any cash dividends or other capital distributions or
purchase, repurchase, or redeem, or commit to purchase, repurchase, or redeem any equity stock without the prior written
nonobjection of the Federal Reserve. 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:
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• Total reported loans for construction, land development and other land represent 100 percent or more of the
institution’s total capital, or
• Total commercial real estate loans represent 300 percent 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 percent or more during the prior
36 months.
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 (as defined by HOLA). 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 an additional 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
In its normal course of business, the OCC charges assessments to savings associations to 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 million for each of the years ending December 31, 2015 and 2014.
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. At December 31, 2015, we held
169,881,300 shares of FHLB stock with a value of $170 million.
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.
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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
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 these funds 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 offered a broad range of 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.
16
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
Economic and general market conditions may adversely affect our business.
Our business and results of operations are affected by the financial markets and general economic, market, political
and social conditions, including factors such as the level and volatility of short-term and long-term interest rates, inflation,
home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations
in both debt and equity capital markets and currencies, liquidity of the financial markets, the availability and cost of capital and
credit, investor sentiment and confidence in the financial markets, political risks and the sustainability of economic growth.
Continued economic challenges include under-employment, declines in energy prices, the ongoing low interest rate
environment, restrained growth in consumer demand, the strengthening of the U.S. Dollar versus other currencies, and
continued risk in the consumer and commercial real estate markets. Deterioration of any of these conditions could adversely
affect our consumer and commercial businesses, our level of charge-offs and provision for credit losses, our capital levels and
liquidity, and our results of operations.
Our business and results of operations are also affected by domestic and international fiscal and monetary policy. For
example, the recent rate increase by the Federal Reserve impacts our cost of funds for investing and lending activities. Central
bank actions can also affect the value of financial instruments and other assets, such as debt securities and mortgage servicing
rights ("MSRs"), and their policies can affect our borrowers, potentially increasing the risk that they may fail to repay their
loans. Changes in fiscal and monetary policies are beyond our control and difficult to predict but could have an adverse impact
on our capital requirements and the costs of running our business.
Further, 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.
Changes in interest rates could lead to lower mortgage origination volume, which could adversely affect our business,
financial condition and results of operations.
In 2015, approximately 60 percent of our revenue was derived from the origination of residential mortgages. The
residential real estate mortgage lending business is sensitive to interest rates, and lower interest rates generally increase that
business, while higher interest rates generally cause that business to decrease. Therefore, our performance is typically correlated
to fluctuations in interest rates. Historically, mortgage origination volumes and sales for the Bank and for other financial
institutions have widened and narrowed in response to these and other factors. During portions of 2015, the interest rate
environment was quite favorable for mortgage loan originations, particularly refinancing activity. There is no guarantee that
these conditions will persist, and a change in these conditions could have a material adverse effect on our operating results.
In addition, increasing long-term interest rates may decrease our mortgage loan originations. Generally, the volume of
mortgage loan originations is inversely related to the long-term interest rate curve. 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.
Changes in interest rates could adversely affect our held-for-investment mortgage loan portfolio, our mortgage
related assets, our financial condition and results of operations.
Changes in interest rates may affect the average life of our mortgage loans and mortgage related securities. Decreases
in interest rates can trigger an increase in prepayments of our mortgage loans and mortgage-related securities, as borrowers
refinance to reduce their own borrowing costs. As prepayment speeds on mortgage related securities increase, any premium
17
amortization would increase on a prospective basis. Any immediate adjustments required under the application of the interest
method of income recognition may also result in lower net interest income. On the other hand, increases in interest rates may
decrease loan demand and make it more difficult for borrowers to repay adjustable rate mortgage loans. Additionally, there
were wider spreads between short- and long-term interest rates during portions of 2015, resulting in higher profit margins on
loan sales than in prior periods.
Changes in interest rates could adversely affect our results of operations and financial condition, including on our net
interest margin and the value of our investment assets.
Our results of operations and financial condition could be significantly affected by changes in interest rates. Our
financial results depend substantially on net interest income, which is the difference between the interest income that we
earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. While we have modeled
rising interest rate scenarios using historic data and such scenarios result in an increase in our net interest income, our
interest-bearing liabilities may reprice or mature more quickly than modeled, thus resulting in a decrease in our net interest
income.
Changes in interest rates also affect the value of our variable rate loans held-for-sale, loans held-for-investment and
investment securities. Generally, the value of our investment securities fluctuates inversely with changes in interest rates.
Decreases in the fair value of our investment securities, therefore, could have an adverse effect on our stockholders’ equity or
our earnings if the decrease in fair value is deemed to be other than temporary.
At December 31, 2015 we had $296 million of MSRs which we manage using certain derivative strategies which may be
ineffective.
We invest in MSRs to support mortgage strategies and to deploy capital at acceptable returns. Our MSRs are sensitive
to interest rate volatility and are highly susceptible to prepayment risk, basis risk, market volatility and changes in the shape of
the yield curve, 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, in particular as interest rates
vary. We utilize derivatives and other fair value assets as part of our overall hedging strategy to manage the impact of changes
in the fair value of the MSRs, but these 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 may not adequately mitigate the impact of changes in interest rates or prepayment speeds,
and as a result we may incur losses that would adversely impact earnings.
At December 31, 2015, our MSR was $296 million or 20.6 percent of Tier 1 Capital. We may be unable to effectively manage
our MSR concentration risk which could impact capital under Basel III, which when fully phased-in will require any MSR
balance exceeding 10 percent of our Common Equity Tier 1 (CET1) capital deduction threshold.
As of January 1, 2015, we are subject to new rules relating to capital standards requirements, including requirements
contemplated by Section 171 of the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on
Banking Supervision, which standards are commonly referred to as Basel III. Basel III established a new qualifying criteria for
regulatory capital, including new limitations on the inclusion of deferred tax assets and mortgage servicing rights. Basel III
limits the inclusion of MSRs and deferred tax assets to 10 percent of Common Equity Tier 1 (as defined in the Basel III final
framework, "CET1"), individually, and 15 percent of CET1, in the aggregate. We have established a plan to reduce these assets
before the Basel III full implementation date of March 31, 2018 and are taking other actions to reduce our book balance by that
date. However, no assurances can be given that we will be able to do so, or that we will be successful in selling these assets at
their current fair value. If implemented today, we would experience another 263 basis points reduction in Tier 1 Capital (to risk
weighted assets) and 149 basis points reduction in the leverage ratio (Tier 1 Capital to adjusted average assets). The application
of more stringent capital requirements could, among other things, result in lower returns on invested capital and result in
regulatory actions if we were to be unable to comply with such requirements. See Note 22 of the Consolidated Financial
Statements, in Item 8. Financial Statements and Supplementary Data, herein, for additional information regarding Basel III.
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At December 31, 2015 our allowance for loan and lease losses was $187 million, covering 3.0 percent of total loans held-for-
investment. Our estimate of the inherent losses are imperfect, the portfolio is relatively new and we are using underwriting
standards which have not been in place for a long period of time.
Our estimate of the allowance for loan and lease losses of $187 million at December 31, 2015, 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. Our allowance for loan losses is based on prior experience as well as an evaluation of
the risks incurred in the current portfolio. The determination of an appropriate level of loan loss allowance is an inherently
subjective process that requires significant management judgment including estimates of loss and the loss emergence period.
We make various assumptions, estimates and judgments about the collectability of our loan portfolio including but not limited
to the creditworthiness of our borrowers and the value of real estate or other collateral backing the repayment of loans. New
information regarding existing loans, identification of additional problem loans, failure of borrowers and guarantors to perform
in accordance with the terms of their loans, and other factors, both within and outside of our control, may require an increase in
the allowance for loan losses. Moreover, our regulators, as part of their supervisory function, periodically review our allowance
for loan losses. Our regulators, who have access to broader industry data that we do not have, may recommend or require us to
change our allowance for loan 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.
Concentration of loans held-for-investment in certain geographic locations may increase risk.
Our mortgage loan portfolio is geographically concentrated in certain states, including California, Michigan, Florida,
and Texas, which is approximately 60 percent of the portfolio. In addition, approximately 90 percent of our commercial real
estate 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. Michigan and California have had significant volatility in housing prices in the recent past.
Adverse conditions beyond our control, including unemployment, inflation, recession, natural disasters, declining property
values, municipal bankruptcies and other factors in these markets could increase default rates in our loan portfolio and could
reduce our ability to generate new loans and otherwise negatively affect our financial results.
In 2015, we continued to grow our portfolio of commercial real estate and commercial industrial loans, which
generally expose us to a greater risk of nonpayment and loss than residential real estate loans due to the more complex nature of
underwriting associated with commercial loans. Additionally, such loans typically involve larger loan balances to single
borrowers or groups of related borrowers compared to residential real estate loans. Also, many of our borrowers have more than
one commercial loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can
expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential real estate
loan.
Liquidity is essential to our business and our ability to borrow funds, maintain or increase deposits or raise capital at
commercially reasonable terms or at all may 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 with 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, 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 higher cash outflows requiring additional access to liquidity, having a
limited ability to borrow funds, maintain or increase deposits (including custodial deposits for our agency servicing portfolio)
or to raise capital on commercially reasonable terms or at all.
19
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 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 mortgage 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 prolonged significant 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.
In addition, we previously provided notice to the U.S. Treasury exercising our contractual right to defer regularly
scheduled quarterly payments of dividends, beginning with the February 2012 payment, on preferred stock issued and
outstanding. Also, under the terms of our indenture agreements related to the trust preferred securities ("TPS"), we deferred
interest payments since 2012 and may do so for up to 20 consecutive quarters without default or penalty. If we intend to resume
interest or dividend payments on either or both the preferred stock and the trust preferred securities and do not have adequate
financing at the Holding Company this would require a dividend from the Bank to the Holding Company, which could
adversely affect the business, financial condition and results of operations of the Bank. Please see "Regulatory Risk Factors,"
for additional risk factors on the risk of default of the TPS.
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.
A total of $4,301 million of assets and $110 million of liabilities are carried on our Consolidated Statements of
Financial Condition at fair value, including our MSRs, loans held-for-sale, certain loans held-for-investment, available-for-sale
investment securities, derivatives, certain long-term debt 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
We and the Bank remain subject to the restrictions and conditions of the Consent Orders with the OCC and CFPB, and
Supervisory Agreement with the Federal Reserve. Failure to comply with the Consent Orders or Supervisory Agreement
could result in further enforcement action against us.
There is no guarantee that the Bank will be able to fully comply with the Consent Orders. In the event that we are in
material non-compliance with the terms of the Consent Orders, the CFPB and OCC have the authority to subject the Bank to
additional corrective actions. Moreover, they could initiate further enforcement actions against the Bank, seek an injunction
requiring the Bank and its officers and directors to comply with the Consent Orders and seek civil money penalties against us
and our officers and directors. Any failure by the Bank to comply with the terms of the Consent Orders or additional actions
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. These corrective actions could negatively
impact the Bank's operations and financial performance. See the Consent Order discussions in Item 1. Business, herein, for
further details.
20
We also 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.
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 noted in "Item 1 - Business - Regulation and Supervision," we are subject to a wide variety of banking, consumer
protection and securities laws, regulations and supervisory expectations and numerous regulatory and enforcement authorities.
As a result of and in addition to new legislation aimed at regulatory reform, such as the Dodd-Frank Act, and the increased
capital requirements introduced by the Basel III final rules, the regulatory agencies generally are taking a more stringent
approach to supervising and regulating financial institutions and financial products and services over which they exercise their
respective supervisory authorities. We, the Bank and our products and services all remain subject to greater supervisory scrutiny
and enhanced supervisory requirements and expectations. We expect to continue to face greater supervisory scrutiny and
enhanced supervisory requirements in the foreseeable future.
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, as well as potentially resulting in costs associated with fines, penalties,
settlements or judgments. 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 reduce our revenue, limit the products or services that we offer or increase the costs thereof, impose
additional compliance costs, harm our reputation or otherwise adversely affect our businesses. Some of these laws may provide
a private right of action that a consumer or class of consumers may seek to pursue to enforce these laws and regulations.
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 and may continue to increase 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. Furthermore, the combined effect of numerous rulemakings
by multiple governmental agencies and regulators, and the potential conflicts or inconsistencies among such rules, present
challenges and risks to our business and operations.
The CFPB has broad and unique rulemaking authority to administer and carry out the provisions of the Dodd-Frank
Act with respect to financial institutions that offer covered financial products and services to consumers, including prohibitions
against unfair, deceptive or abusive practices in connection with any transaction with a consumer for a consumer financial
product or service, or the offering of a consumer financial product or service including regulations related to the origination and
servicing of residential mortgages. The concept of what may be considered to be an "abusive" practice is new under the law.
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. Effective in 2016, the Bank is again
subject to the CFPB’s supervisory, examination and enforcement authority with respect to consumer protection laws and
regulations, due to reporting assets of more than $10 billion for four consecutive quarters. As a result, we could incur increased
costs, potential litigation or be materially limited or restricted in our business, product offerings or services in the future.
21
We are highly dependent on the Agencies to sell mortgage loans and any changes in these entities or their current roles
could adversely affect our business, financial condition and results of operations.
We sell approximately 70 percent of our mortgage loans to Fannie Mae and Freddie Mac. The future roles of Fannie
Mae and Freddie Mac remain in conservatorship and a path forward is unclear. These roles could be reduced, modified or
eliminated and the nature of their guarantees could be limited or eliminated relative to historical measurements.
The elimination or modification of the traditional roles of Fannie Mae or Freddie Mac could 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.
Changes in the servicing or origination guidelines required by the Agencies 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.
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 changed significantly over time and any future increases in these fees would adversely
affect our business, financial condition and results of operations.
We depend upon having FDIC insurance to raise deposit funding at reasonable rates. Increases in deposit insurance
premiums and special FDIC assessments will adversely affect our earnings.
The Dodd-Frank Act required the FDIC to substantially revise its regulations for determining the amount of an
institution's deposit insurance premiums. The FDIC has defined the deposit insurance assessment base for an insured depository
institution as average consolidated total assets during the assessment period, minus average tangible equity. Our assessment rate
is determined by use of a scorecard that combines 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.
We are a holding company and therefore dependent on the Bank for funding of obligations and dividends.
As a holding company with no 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 shares, is dependent upon available cash on hand and the receipt of dividends from the Bank on such
capital stock. 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 receiving approval from the OCC,
compliance with the 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.
22
At December 31, 2015, we had accumulated deferrals for 16 consecutive quarters of interest payments due on our TPS
totaling $27 million of deferred interest. We are only allowed up to 20 consecutive quarters of deferral after which we will be
in default. If we default and are unable, or not allowed, to make the required payments, TPS holders could file to put the
Holding Company into bankruptcy.
We exercised our contractual right in 2012 to defer interest payments with respect to our TPS. Under the terms of the
related indentures, we may only defer interest payments for up to 20 consecutive quarters without default or penalty. As of
December 31, 2015 we had deferred interest payments for 16 consecutive quarters, with the cumulative amount in arrears as of
December 31, 2015 totaling $27 million. If we do not pay all deferred amounts then due by the end of the 20th quarter, i.e., by
December 31, 2016, and resume current interest payments, we will be in default. There can be no assurances that we will be
able, or allowed, to pay off these deferred amounts and resume making current interest payments by that time. If we default and
do not cure the default through such payments, TPS holders could file to put the Holding Company into bankruptcy.
Operational Risk
A failure of our information technology systems, or those of our key third party vendors or service providers, could cause
operational losses and damage our reputation.
Our businesses are increasingly dependent on our ability to process, record and monitor a large number of complex
transactions and data. If our internal financial, accounting, or other information technology systems fail, we may be unable to
conduct business for a period of time, which may impact our financial results if that interruption is sustained. In addition, our
reputation with our customers or counterparties may suffer, which could have a further, long-term impact on our financial
results.
Also, because we conduct part of our business over the Internet and outsource a significant number of our critical
functions to third parties, our operations depend on our third-party service providers to maintain and operate their own
technology systems. To the extent these third parties’ systems fail, we may be unable to conduct business or provide certain
services, and we may face financial and reputational losses as a result.
We collect, store and transfer our customers’ personally identifiable information, and any compromise to the security of that
information may have meaningful consequences for us.
Data breaches are of a particular concern as in the processing of consumer transactions, our businesses receive,
transmit and store a large volume of personally identifiable information and other user data. There are a myriad of federal, state
and international laws regarding privacy and the storing, sharing, use, disclosure and protection of personally identifiable
information and user data.
We have policies and processes in place that are intended to meet the requirements of those laws, including security
systems in place to prevent unauthorized access to that information. Nevertheless, those processes and systems may be
inadequate. Also, to the extent we rely upon third parties to handle personally identifiable data on our behalf, we may be
responsible if such data is compromised while in the custody and control of those third parties.
Privacy laws are still evolving, and many local jurisdictions have laws that differ from federal law. At times, we may
also be governed by privacy laws outside the U.S., with which we are less familiar. If we fail to comply with applicable privacy
policies or federal, state or international laws and regulations or any compromise of security that results in the unauthorized
release of personally identifiable information or other user data, those events could damage the reputation of our business, and
discourage potential users from utilizing our products and services. In addition, we may have to bear the cost of mitigating
identity theft concerns, and may additionally be subject to fines or legal proceedings by governmental agencies or consumers.
Any of these events could adversely affect our business, financial condition and results of operations.
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, which is approximately 10 percent of
our revenue and $1.2 billion of our average deposits. In such capacities for those loans, we have certain contractual obligations,
including foreclosing on defaulted mortgage loans or, to the extent applicable, considering alternatives to foreclosure. If we
commit a material breach of our obligations as servicer, we may be subject to termination if the breach is not cured within a
specified period of time following notice, causing us to lose servicing income.
23
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 for which we did not satisfy our obligations as a servicer, or increased loss
severity on such repurchases, we may have a significant reduction to noninterest income or increase to noninterest expense. We
may incur significant costs if we are required to, or if we elect to, re-execute or re-file documents or take other action in our
capacity as a servicer in connection with pending or completed foreclosures. We may incur litigation costs if the validity of a
foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the
foreclosure process, we may have liability to the borrower and/or to any title insurer of the property sold in foreclosure if the
required process was not followed. These costs and liabilities may not be legally or otherwise reimbursable to us.
We may be required to repurchase mortgage loans, pay fees or indemnify buyers against losses in some circumstances,
which could harm liquidity, results of operations and financial condition.
When mortgage loans are sold by us, we make customary representations and warranties to purchasers, guarantors and
insurers, including the Agencies, about the mortgage loans, and the manner in which they were originated. We have made, and
will continue to make, such representations and warranties in connection with the sale of loans. Whole loan sale agreements
require us to repurchase or substitute mortgage loans, or indemnify buyers against losses, in the event we breach these
representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of early payment default
of the borrower on a mortgage loan or we may be required to pay fees. We also are subject to litigation relating to these
representations and warranties and the costs of such litigation may be significant. With respect to loans that are originated
through our broker or correspondent channels, the remedies we have available against the originating broker or correspondent,
if any, may not be as broad as the remedies available to purchasers, guarantors and insurers of mortgage loans against us. 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 also be adversely
affected.
Our representation and warranty reserve for losses at December 31, 2015 is $40 million. This may not be adequate to
cover losses for loans that we have sold or securitized into the secondary market which we may be subsequently required to
repurchase, pay fines or fees, or indemnify purchasers and insurers because of violations of customary representations and
warranties. In addition, our regulators, as part of their supervisory function, periodically review our representation and warranty
reserve for losses. Our regulators may recommend or require us to increase our reserve, based on their judgment, which may be
different from that of our management. Any increase in our loan losses could have an adverse effect on our earnings and
financial condition.
We utilize third party mortgage originators over whom we have less control which may expose us to risk.
We rely on third party mortgage originators to make and document the mortgage loans we purchase. 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
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 mortgage volume may be impacted by our use of third party mortgage originators.
Approximately 95 percent of our residential first mortgage volume depends 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 market share which would negatively impact our net income.
Due to increasing regulatory scrutiny, our third party mortgage originators could choose or be required to either reduce
the scope of their business or exit the mortgage origination business altogether. This could lead to a decrease in our mortgage
volume.
24
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 followed 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. Furthermore, Basel III also provides for a countercyclical capital buffer to induce banking organizations to hold
capital in excess of regulatory minimums.
While we recently reversed the valuation allowance for our deferred tax assets, we may not be able to realize these assets or
may have to establish a valuation allowance in the future, which could adversely affect our operating results.
Management assesses the valuation allowance recorded against deferred tax assets at each reporting period and
currently has no valuation allowance related to federal deferred tax assets and a valuation of allowance of $22 million related to
state taxes. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable
judgment and requires an evaluation of all available positive and negative evidence. 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 as described in
Note 21 to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein. Changes in
our current estimates, due to unanticipated events or otherwise, could have a material effect on our financial condition and
results of operations.
General Risk Factors
MP Thrift, an entity managed and controlled by MatlinPatterson, owns 63.1 percent of our common stock and has
significant influence over us, including control over decisions that require the approval of stockholders, whether or not such
decisions are in the best interests of other stockholders.
MP Thrift owns a substantial majority of our outstanding common stock and as a result, has control over our decisions
to enter into any corporate transaction and also the ability to prevent any transaction that requires the approval of our board of
directors or the stockholders regardless of whether or not other members of our board of directors or stockholders believe that
any such transactions are in their own best interests. So long as MP Thrift continues to hold a majority of our outstanding
common stock, it will have the ability to control the vote in any election of directors and other matters being voted on, and
continue to exert significant influence over us. Furthermore, MP Thrift may have interests that could diverge from the interests
of other stockholders, and may use its control to make decisions that adversely affect the interest of other common stockholders
and other holders of our debt or other equity instruments.
Additionally, our ability to use our deferred tax assets to offset future taxable income may be significantly limited if
we experience an "ownership change" as defined for U.S. federal income tax purposes. Section 382 of the Internal Revenue
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. As we have a controlling stockholder, any stock offering in isolation or when
combined with other ownership changes, could cause us to experience an ownership change. If an ownership change were to
occur, we believe it could cause us to permanently lose the ability to realize a portion of our net operating losses ("NOL")
related deferred tax asset, resulting in reduction to total stockholders’ equity.
We are subject to a number of legal or regulatory proceedings, therefore making them difficult to predict.
At any given time, we are defending ourselves against a number of legal and regulatory investigating and 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
25
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, 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. As a result, 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.
ITEM 2. PROPERTIES
At December 31, 2015, through our headquarters located in Troy, Michigan, totaling approximately 373,210 square
feet with approximately 80 percent capacity. We also operate a regional office in Jackson, Michigan, 99 branches in Michigan
and 10 retail centers in nine states (Michigan, Arizona, Connecticut, Florida, Kentucky, Missouri, New York, North Carolina
and Ohio). We also maintain five wholesale lending offices, one underwriting office and one commercial lending office. Our
banking centers consist of 76 free-standing office buildings, two in-store banking centers and 21 centers in buildings in which
there are other tenants, typically strip malls.
As of December 31, 2015, we owned buildings and land for 73 of our offices (including our headquarters) and lease
the remaining 42 offices. The offices that we lease have lease expiration dates ranging from 2016 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.
26
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, 2015, there were 56,483,258
shares of our common stock outstanding held by approximately 14,514 stockholders of record. The following table shows the
high and low sale prices for our common stock during each calendar quarter during 2015 and 2014.
Quarter Ending
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
Dividends
$
$
Highest Sale
Price
Lowest Sale
Price
$
$
24.95
21.01
19.44
16.50
16.78
19.25
21.83
22.57
20.60
17.83
14.61
14.10
14.42
16.26
16.43
19.57
We have not paid dividends on our common stock since the fourth quarter 2007. The amount and nature of any
dividends declared on our common stock in the future will be determined by our board of directors. We are generally prohibited
from making any dividend payments on stock except pursuant to the prior non-objection of the Federal Reserve as set forth in
the Supervisory Agreement. 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.
On January 27, 2012, we provided notice to the U.S. Treasury exercising our contractual right to defer regularly
scheduled quarterly payments of dividends, beginning with the February 2012 payment, on preferred stock issued and
outstanding. The cumulative amount in arrears as of December 31, 2015 is $86 million.
In addition, our principal sources of funds are cash dividends paid by the Bank to us 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 must seek prior approval from the OCC at least 30 days before it may make a dividend payment or
other capital distribution to us.
27
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, 2015.
Plan Category
Equity compensation plans approved by security
holders (2)
Equity compensation plans not approved by security
holders (3)
Total
Number of
Securities to Be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights (1)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
445,528
$
907,741
1,353,269
$
80.00
—
80.00
437,402
—
437,402
(1) Weighted average exercise price is calculated including restricted stock units, which for this purpose are treated as having an
exercise price of zero. If calculated solely for options and stock appreciation rights that have an exercise price, the weighted
exercise price of outstanding options, warrants and rights at December 31, 2015 was $80.00.
(2) 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").
(3) If the 2016 Flagstar Bancorp, Inc. Stock and Incentive Plan (the "2016 Plan") is approved by shareholders, these shares will remain
in the 2006 Plan, and will not be available for equity awards pursuant to the terms of the proposed 2016 Plan.
Sale of Unregistered Securities
We made no unregistered sales of our equity securities during the fiscal year ended December 31, 2015.
Issuer Purchases of Equity Securities
We made no purchases of equity securities during the fiscal year ended December 31, 2015.
28
Performance Graph
CUMULATIVE TOTAL STOCKHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDICES
DECEMBER 31, 2010 THROUGH DECEMBER 31, 2015
S&P Small Cap 600
100
100
115
160
167
162
Russell 2000
Flagstar Bancorp
100
95
108
148
154
145
100
31
119
120
97
142
Nasdaq Financial
Nasdaq Bank
December 31, 2010
December 31, 2011
December 31, 2012
December 31, 2013
December 31, 2014
December 31, 2015
100
87
99
137
140
145
100
88
101
141
145
154
29
ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31,
2015
2014
2013
2012
2011
(In millions, except share data and percentages)
$
$
$
$
$
$
$
$
$
Summary of Consolidated
Statements of Operations
Interest income
Interest expense
Net interest income
(Benefit) provision for loan losses
Net interest income after provision for
loan losses
Noninterest income
Noninterest expense
Income before income taxes
provision
Provision for income taxes (1)
Net income (loss)
Preferred stock dividends/accretion
Net income (loss) from continuing
operations
Income (loss) per share:
Basic (2)
Diluted (2)
Weighted average shares outstanding:
Basic (2)
Diluted (2)
Mortgage loans originated (3)
Mortgage loans sold and securitized
Interest rate spread
Net interest margin
Average interest-earning assets
Average interest paying liabilities
Average stockholders’ equity
Return (loss) on average assets
Return (loss) on average equity
Efficiency ratio
Equity/assets ratio (average for the
period)
Net charge-offs to average LHFI
$
355
68
287
(19)
306
470
536
240
82
158
—
158
2.27
2.24
56,426,977
57,164,523
29,402
26,307
2.58%
2.74%
10,436
8,305
1,486
1.32%
10.63%
70.9%
12.43%
1.85%
$
$
$
$
$
$
$
$
$
286
39
247
132
115
361
579
(103)
(34)
(69)
(1)
(70) $
(1.72) $
(1.72) $
330
144
186
70
116
653
918
(149)
(416)
267
(6)
261
4.40
4.37
56,246,528
56,246,528
56,063,282
56,518,181
$
$
$
$
$
24,608
24,407
2.80 %
2.91 %
8,440
6,780
1,406
(0.71)%
(4.97)%
95.4 %
14.22 %
1.07 %
37,482
39,075
1.50%
1.72%
10,882
9,338
1,239
2.08%
21.09%
109.4%
9.87%
4.00%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
481
184
297
276
21
1,021
989
53
(16)
69
(6)
63
0.88
0.87
55,762,196
56,193,515
53,587
53,094
1.96%
2.26%
13,104
10,786
1,192
0.43%
5.26%
75.1%
8.10%
4.43%
465
220
245
177
68
386
635
(181)
1
(182)
(17)
(199)
(3.62)
(3.62)
55,434,296
55,434,296
26,613
27,451
1.85 %
2.07 %
11,804
10,539
1,186
(1.49)%
(16.78)%
100.6 %
8.88 %
2.14 %
(1) The effective tax rate was 34.2 percent, 32.9 percent, 29.7 percent, 0.6 percent, and 0.6 percent for the years ended December 31, 2015, 2014, 2013,
2012 and 2011, respectively.
(2) For the year ended December 31, 2011, the amounts have been restated for one-for-ten stock split announced September 27, 2012 and began trading
on October 11, 2012.
Includes residential first mortgage and second mortgage loans.
(3)
30
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 (thousands) (2)
Ratio of allowance for loan losses
to LHFI (3)
Ratio of nonperforming assets to
total assets
Equity-to-assets ratio
Common equity-to-assets ratio
Tier 1 capital ratio (to adjusted total
assets) (4)
Common equity Tier 1 capital ratio
(to risk-weighted assets) (4)
Total risk-based capital ratio (to
risk-weighted assets) (4)
Number of banking centers
Number of FTE employees
2015
2014
2013
2012
2011
(In millions, except per share data and percentages)
December 31,
$
$
$
$
$
$
$
$
13,715
9,226
296
7,935
3,541
247
1,529
22.33
56,483
9,840
6,523
258
7,069
514
331
1,373
19.64
$
$
$
$
$
$
$
$
9,407
6,637
285
6,140
988
353
1,426
20.66
$
$
$
$
$
$
$
$
56,332
56,138
$
$
$
$
$
$
$
$
14,082
10,914
711
8,294
3,180
247
1,159
16.12
55,863
3.00%
7.01%
5.42%
0.61%
11.14%
9.20%
1.41%
13.95%
11.24%
1.94%
15.16%
12.33%
11.79%
12.43%
13.97%
19.42%
20.71%
99
2,713
N/A
N/A
23.85%
107
2,739
28.11%
111
3,253
5.61%
3.70%
8.53%
6.38%
9.26%
N/A
17.18%
111
3,662
13,637
10,421
511
7,690
3,953
249
1,080
14.80
55,578
4.52%
4.42%
7.92%
6.05%
8.95%
N/A
16.64%
111
3,136
(1) Includes preferred stock totaling $267 million, $267 million, $266 million, $260 million, and $255 million at December 31, 2015
through 2011, respectively.
(2) Restated for one-for-ten reverse stock splits effective on October 10, 2012.
(3) Excludes loans carried under the fair value option
(4) 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.
31
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Critical Accounting Policies
Allowance for Loan Losses
Accounting for Income Taxes
Representation and Warranty Reserve
Fair Value Measurements
Accounting and Reporting Developments
Summary of Operation
Net Interest Income
Rate/Volume Analysis
Provision for Loan Losses
Noninterest Income
Noninterest Expense
Provision (Benefit) for Income Taxes
Fourth Quarter Results
Operating Segments
Risk Management
Credit Risk
Mortgage Originations
Loans Held-For-Sale
Mortgage Servicing
Loans Held-For-Investment
Loan Principal Payments
Credit Quality
Troubled Debt Restructuring
Allowance For Loan Losses
Liquidity Risk
Deposits
Borrowings
Federal Home Loan Bank Stock
Contractual Obligations and Commitments
Market Risk
Mortgage Servicing Rights
Investment Securities
Impact of Inflation and Changing Prices
Operational Risk
Loans with Government Guarantees
Representation and Warranty Reserve
Capital
Use of Non-GAAP Financial Measurements
32
33
33
33
34
35
35
36
37
39
40
41
42
45
46
47
50
52
52
52
54
54
57
63
64
67
69
71
72
74
75
75
75
77
78
79
79
79
80
81
83
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, 2015,
our total assets were $14 billion, making us the largest bank headquartered in Michigan and one of the top 10 largest savings
banks in the United States. We have three major operating segments: Mortgage Originations, Mortgage Servicing, and
Community Banking. 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.
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 policies are described in Note 1 to the Consolidated Financial Statements. Some
of our significant accounting policies require complex judgments and estimates to determine values of assets and liabilities. The
more judgmental, uncertain and complex estimates are further discussed below. These estimates are based on information
available to management as of the date of the Consolidated Financial Statements. Accordingly, as this information changes,
future financial statements could reflect different estimates or judgments.
Allowance for Loan Losses
The 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 establish an allowance when (a) available information indicates that it is probable that a loss has occurred and
(b) the amount of the loss can be reasonably estimated. We believe that the accounting estimates related to the allowance for
loan losses are critical because they require us to make larger 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 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 our financial position in future
periods.
Consumer loans. Impaired residential loans include loan modifications considered to be TDRs as well as all
nonperforming loans. The allowance related to 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 attributed 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 original 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 primarily utilizing a
historical loss model based on common risk characteristics that include a qualitative factor component.
Our historical loss model is based upon management's qualitative assessment 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 is
recorded. The loss emergence period is variable and may change based on changes in underlying economic conditions or
market factors. For portfolios that do not have adequate loss experience and purchased portfolios, we utilize peer loss data in
determining the allowance for loan losses.
Management assigns qualitative factors to each loan portfolio segment in the consumer portfolio based on
consideration of the following factors: changes in lending policies and procedures, changes in economic and business
conditions, changes in the nature and volume of the portfolio, changes in lending management, changes in credit quality
33
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.
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 we become aware of information
indicating that collection of principal and interest is in doubt.
Commercial loans. Nonperforming commercial and commercial real estate loans are considered to be impaired and
have a specific allowance 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, the allowance for loan losses is determined on a collective
basis utilizing a historical loss model 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 is recorded. The loss emergence period is variable and may
change based on changes in underlying economic conditions or market factors. The historical loss model represents
management’s best estimate of inherent loss within the commercial loan portfolio sub-divided into homogeneous portfolios
based on common risk characteristics.
The commercial loan portfolio is segmented into two primary groups: (1) Special Assets Group ("SAG") loans which
represent all loans risk rated substandard or worse, and (2) all other commercial loans risk rated special mention or better,
which are further subdivided into commercial real estate, commercial and industrial, and warehouse. Due to the changes in our
strategy and to changes in underwriting and origination practices and controls related to that strategy, management determined
the aforementioned segmentation better reflected the dynamics in the commercial loan portfolios. The loss rates attributed to the
SAG portfolio are based on historical losses of the Bank’s own commercial loan portfolio. Due to the absence of a sufficient
loss history over the brief period of time that loans in the non-SAG portfolios have been outstanding, we have used peer loss
data from publicly available information provided by bank regulators (adjusting for our qualitative factors) instead of our own
historical losses.
Management assigns qualitative factors for each loan segment in the portfolio in consideration of the following
factors: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and
volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in the quality of the loan
review system, changes in the value of underlying collateral for collateral-dependent loans, changes in concentrations of credit,
and 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.
Accounting for Income Taxes
Net deferred tax assets, reported as a component of other assets on the Consolidated Statements of Financial
Condition, represent the net decrease in taxes expected to be paid in the future because of 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 or other internal factors which may cause a substantial change to our financial results. See
Note 21 to the Consolidated Financial Statements for additional information.
34
Representation and Warranty Reserve
When we sell mortgage loans we make customary representations and warranties to the purchasers about various
characteristics of each loan and how it was originated. 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, 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, historical experience, 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 or the framework applied by the GSEs
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 that 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
period ("recurring") and those assets and liabilities that are only required to be adjusted to fair value under certain
circumstances ("nonrecurring").
At December 31, 2015 and 2014, Level 3 assets recorded at fair value on a recurring basis totaled $428 million and
$576 million, or 3.1 percent and 5.9 percent of total assets, respectively, and consisted primarily of loans held-for-investment,
MSRs and mortgage rate lock commitments. At December 31, 2015 and 2014, there were $84 million and $166 million Level 3
liabilities recorded at fair value on a recurring basis, respectively, which primarily consisted of long-term debt and the DOJ
litigation settlement.
At December 31, 2015 and 2014, Level 3 assets recorded at fair value on a nonrecurring basis were $59 million and
$93 million, respectively, and there were no Level 3 liabilities recorded at fair value on a nonrecurring basis at December 31,
2015 and 2014. The Level 3 assets recorded at fair value on a nonrecurring basis were 0.4 percent and 0.9 percent of total assets
at December 31, 2015 and December 31, 2014, 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 frequently retain the right to
continue to service these loans and earn a servicing fee. At the time the loan is sold on a servicing retained basis, we record the
MSR as an asset at its fair value. Determining the fair value of MSRs involves a calculation of the present value of a set of
market driven and MSR specific cash flows. MSRs do not trade in an active market with readily observable market prices.
35
However, the market price of MSRs is generally a function of demand and interest rates. When mortgage interest rates decline,
mortgage loan prepayments are expected to increase due to increased refinances. If this happens, the income stream from a
MSR portfolio is expected to decline and the fair value of the portfolio will decline. Similarly, when mortgage interest rates
increase, mortgage loan prepayments tend to slow and therefore the value of the MSR tends to increase. 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, 10 and 24 of the
Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein, for additional information
and a sensitivity analysis of our MSR fair values. 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, our MSR
valuation is compared to two independent valuations performed by third parties. See Note 24 of the Consolidated Financial
Statements for an interest rate sensitivity analysis on the MSRs.
DOJ litigation settlement. Upon the DOJ litigation settlement, we elected the fair value option to account for the
liability representing the remaining future payments. As of December 31, 2015 the remaining future payments totaled $118
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, 2015 and 2014, the liability was $84 million and $82 million, respectively. Refer to Note 1 of the Notes to
Consolidated Financial Statements, herein for a further discussion of the DOJ liability.
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.
36
Summary of Operations
Net interest income
Provision (benefit) for loan losses
Total noninterest income
Total noninterest expense
Provision (benefit) for income taxes
Preferred stock accretion
Net income (loss)
Income (loss) per share:
Basic
Diluted
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
287
(19)
470
536
82
—
158
2.27
2.24
$
$
$
$
$
247
132
361
579
(34)
(1)
(70) $
(1.72) $
(1.72) $
186
70
653
918
(416)
(6)
261
4.40
4.37
$
$
$
$
Our net income for the year ended December 31, 2015 was $158 million ($2.24 per diluted share), compared to a net
loss of $70 million ($1.72 loss per diluted share) for the year ended December 31, 2014. During the year ended December 31,
2015, we had strong mortgage revenue with little commensurate expense increases. In addition, we significantly de-risked the
balance sheet through the sales of approximately $1.0 billion loans and grew assets which drove an overall improvement in
portfolio quality.
Net interest income increased $40 million for the year ended December 31, 2015 as compared to the same period in
2014, primarily due to strong growth in average interest-earning assets, partially offset by a decrease in the net interest margin
due to a significant portion of the interest earning asset growth being in relatively lower spread mortgage loans which were
funded with higher cost/longer tenured liabilities.
Our provision for loan losses improved by $151 million for the year ended December 31, 2015 as compared to the
same period in 2014. In 2014, we recorded a $132 million provision that was primarily driven by two changes in estimates
(described further in the prior year comparison): the evaluation of current data related to the loss emergence period on our
residential mortgage loan portfolio and the evaluation of the enhanced risk associated with payment resets relating to interest-
only loans. In 2015, we sold 90 percent of our interest-only loans at prices that were favorable as compared to the continuing
reset risk associated with us continuing to hold these loans which was recorded consistent with the incurred loss methodology.
This action along with the sale of $444 million TDR, nonperforming and jumbo loans resulted in a $69 million reduction to the
allowance for loan losses which along with an overall improvement in portfolio quality was the primary driver of the $19
million net benefit reported in 2015 being partially offset by a $1.9 billion increase in volume of average loans held-for-
investment due to the origination of residential first mortgages and increased commercial lending.
Noninterest income increased $109 million for the year ended December 31, 2015 as compared to the same period in
2014, primarily due to an $82 million increase in net gain on loan sales due to higher origination volumes and a $29 million
benefit in the representation and warranty provision.
Noninterest expense decreased $43 million for the year ended December 31, 2015 as compared to the same period in
2014, primarily due to lower asset resolution expense, a decrease in legal and professional expenses and the CFPB penalty in
2014. These items were partially offset by increases in expenses related to the DOJ settlement valuation, loan processing,
warrant expense, compensation and benefits and commissions.
Income tax provision increased $116 million for the year ended December 31, 2015 as compared to the same period in
2014, primarily due to higher pre-tax book income.
37
The following table presents on a consolidated basis interest income from average assets and liabilities, expressed in
dollars and yields.
For the Years Ended December 31,
2015
2014
2013
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale
$
2,188 $
Loans with government guarantees
633
Loans held-for-investment
Consumer loans (1)
Commercial loans (1)
Loans held-for-investment
Investment securities
Interest-bearing deposits
Total interest-earning assets
Other assets
Total assets
Interest-Bearing Liabilities
Retail deposits
Demand deposits
Savings deposits
Money market deposits
Certificate of deposits
Total retail deposits
Government deposits
Demand deposits
Savings deposits
Certificate of deposits
Total government deposits
Total deposits
Federal Home Loan Bank advances
Other
Total interest-bearing liabilities
Noninterest-bearing deposits (2)
Other liabilities
Stockholders’ equity
3,083
1,993
5,076
2,305
234
10,436 $
1,520
$
11,956
$
429 $
3,693
258
787
5,167
257
405
358
1,020
6,187
1,811
307
8,305
1,690
475
1,486
85
18
114
78
192
59
1
355
1
30
1
6
38
1
2
1
4
42
19
7
68
3.90 % $
1,534 $
2.86 %
1,216
3.68 %
3.88 %
3.76 %
2.55 %
0.50 %
3.39 %
2,681
1,294
3,975
1,496
219
8,440 $
1,446
9,886
$
0.14 % $
422 $
0.82 %
0.31 %
0.77 %
0.73 %
0.39 %
0.52 %
0.39 %
0.44 %
0.68 %
1.00 %
2.42 %
0.82 %
3,139
266
915
4,742
182
320
349
851
5,593
939
248
6,780
1,141
559
1,406
9,886
1,660
65
29
103
49
152
39
1
286
1
18
1
6
26
1
2
1
4
30
2
7
39
89
48
123
54
177
12
5
331
1
20
1
18
40
—
1
2
3
43
95
7
145
4.24 % $
2,499 $
2.39 %
1,477
3.85 %
3.70 %
3.80 %
2.61 %
0.25 %
3.38 %
3,113
1,215
4,328
474
2,104
10,882 $
1,673
$
12,555
0.14 % $
397 $
0.61 %
0.20 %
0.73 %
0.57 %
0.38 %
0.51 %
0.33 %
0.41 %
0.54 %
0.23 %
2.72 %
0.58 %
2,729
335
2,055
5,516
96
203
360
659
6,175
2,915
247
9,337
1,197
782
1,239
$
$
12,555
1,545
Total liabilities and stockholders' equity $
11,956
Net interest-earning assets
$
2,131
$
$
Net interest income
Interest rate spread (3)
Net interest margin (4)
Ratio of average interest-earning assets
to interest-bearing liabilities
$
287
$
247
$
186
2.58 %
2.74 %
125.7 %
2.80 %
2.91 %
124.5 %
(1) Consumer loans include: residential first mortgage, second mortgage, HELOC and other consumer loans. Commercial loans include: commercial
real estate, commercial and industrial, and warehouse lines.
Includes noninterest-bearing company controlled deposits that arise due to the servicing of loans for others.
Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.
(2)
(3)
(4) Net interest margin is net interest income divided by average interest-earning assets.
38
3.55 %
3.26 %
3.95 %
4.37 %
4.07 %
2.51 %
0.25 %
3.03 %
0.19 %
0.63 %
0.25 %
0.89 %
0.67 %
0.43 %
0.35 %
0.41 %
0.39 %
0.69 %
3.22 %
2.68 %
1.53 %
1.50 %
1.72 %
116.5 %
Net Interest Income
Net interest income is the amount we earn on the average balances of our interest-earning assets, less the amount the
average balances of our interest-bearing liabilities cost us. Interest income recorded on loans is reduced by the amortization of
net premiums and net deferred loan origination costs.
2015 Compared to 2014
Net interest income increased $40 million for the year ended December 31, 2015, compared to the same period in
2014, primarily due to strong growth in interest-earning assets, partially offset by a decrease in the net interest margin.
Our net interest margin for the year ended December 31, 2015 was 2.74 percent, as compared to 2.91 percent for the
year ended December 31, 2014. The decrease from 2014 was primarily driven by a significant portion of the interest earning
asset growth being in relatively lower spread mortgage loans which were funded with higher cost/longer tenured liabilities .
Interest income increased $69 million for the year ended December 31, 2015, compared to the same period in 2014,
primarily driven by higher average loans held-for-sale, loans held-for-investment and investment securities, partially offset by a
decrease in loans with government guarantees. Average warehouse loans increased $431 million for the year ended
December 31, 2015 to $877 million, compared to $446 million for the year ended December 31, 2014, primarily due to higher
line utilization and new accounts. Average HELOC loans increased $225 million for the year ended December 31, 2015 to $347
million, compared to $122 million for the year ended December 31, 2014, resulting from the acquisitions of loan portfolios in
2015. Average residential first mortgage loans increased $195 million for the year ended December 31, 2015 to $2,561 million,
compared to $2,366 million for the year ended December 31, 2014, primarily due to retained loan production from our
mortgage origination business. Average commercial real estate loans increased $153 million for the year ended December 31,
2015 to $679 million, compared to $526 million for the year ended December 31, 2014. Average commercial and industrial
loans increased $116 million for the year ended December 31, 2015 to $438 million, compared to $322 million for the year
ended December 31, 2014, in line with our strategy to grow interest-earning assets.
Interest expense increased $29 million for the year ended December 31, 2015, compared to the same period in 2014,
primarily due to increased Federal Home Loan Bank advances and interest-bearing deposits. Average interest-bearing deposits
were $6.2 billion during the year ended December 31, 2015, increasing $0.6 billion or 10.6 percent, compared to the year ended
December 31, 2014. Retail deposits increased $0.4 billion, led by growth in savings deposits. Average Federal Home Loan
Bank advances were $1.8 billion for the year ended December 31, 2015, an increase of $0.9 billion compared to the year ended
December 31, 2014. Throughout 2015, we replaced certain short-term advances with longer term advances primarily to match-
fund our longer duration asset growth which resulted in slightly higher cost debt.
2014 Compared to 2013
Net interest income increased $61 million for the year ended December 31, 2014, compared to the same period in
2013, primarily due to the prepayment of higher cost long-term Federal Home Loan Bank advances at the end of 2013 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 net interest margin for the year ended December 31, 2014 was 2.91 percent, as compared to 1.72 percent for the
year ended December 31, 2013. The increase was driven primarily by the replacement of high cost long term Federal Home
Loan Bank advances with lower cost funds and increased interest income resulting from higher average loan balances.
Interest income decreased $45 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 industry originations during the
year ended December 31, 2014, as compared to the year ended December 31, 2013.
Interest expense decreased $105 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.
39
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). The rate/volume
variances are allocated to variances due to rate.
For the Years Ended December 31,
2015 Versus 2014 Increase
(Decrease) Due to:
2014 Versus 2013 Increase
(Decrease) Due to:
Rate
Volume
Total
Rate
Volume
Total
(Dollars in millions)
$
(8) $
28
$
20
$
11
$
(35) $
(14)
(11)
(11)
(8)
Interest-Earning Assets
Loans held-for-sale
Loans with government
guarantees
Loans held-for-investment
Consumer loans (1)
Commercial loans (2)
Total loans held-for-investment
Investment securities
Interest-earning deposits
Total interest-earning assets
Interest-Bearing Liabilities
Retail deposits
Savings deposits
Certificate of deposits
Total retail deposits
Government deposits
Savings deposits
Total government deposits
Wholesale deposits
Total deposits
Federal Home Loan Bank
advances
Total interest-bearing liabilities
Change in net interest income
3
(5)
3
(2)
(1)
—
(8) $
8
—
8
—
—
—
8
15
23
$
$
(31) $
$
$
$
$
(24)
(19)
(20)
(5)
(25)
27
(5)
(46)
2
(12)
(10)
1
1
(3)
(12)
16
26
42
21
—
77
4
—
4
—
—
—
4
2
6
71
$
$
$
$
11
29
40
20
—
69
12
—
12
—
—
—
12
17
29
40
$
$
$
$
(3)
(8)
(11)
1
—
(10) $
(1) $
(2)
(3)
—
—
—
(3)
(29)
(32) $
$
22
(17)
3
(14)
26
(5)
(36) $
$
3
(10)
(7)
1
1
(3)
(9)
(64)
(73) $
$
37
(93)
(105)
59
(1) Consumer loans include residential first mortgage, second mortgage, HELOC and other consumer loans.
(2) Commercial loans include: commercial real estate, commercial and industrial, and warehouse lending.
40
Provision for Loan Losses
2015 Compared to 2014
The provision for loan losses decreased $151 million for the year ended December 31, 2015, as compared to the year
ended December 31, 2014. In 2014, we recorded a $132 million provision that was primarily driven by two changes in
estimates (described further in the prior year comparison): the evaluation of current data related to the loss emergence period on
our residential mortgage loan portfolio and the evaluation of the enhanced risk associated with payment resets relating to
interest-only loans. In 2015, we sold 90 percent of our interest-only loans at prices that were favorable as compared to the
continuing reset risk associated with us continuing to hold these loans which was recorded consistent with the incurred loss
methodology. This action along with the sale of $444 million TDR, nonperforming and jumbo loans resulted in a $69 million
reduction to the allowance for loan losses which along with an overall improvement in portfolio quality was the primary driver
of the $19 million net benefit reported in 2015 being partially offset by a $1.9 billion increase in volume of average loans held-
for-investment due to the origination of residential first mortgages and increased commercial lending.
Net charge-offs for the year ended December 31, 2015 totaled $91 million, compared to $42 million for the year ended
December 31, 2014. The increase was primarily due to the charge-off of allowance relating to loans sold or transferred to held-
for-sale during the year ended December 31, 2015. We sought to de-risk the balance sheet by selling lower performing or
interest-only loans. As a percentage of the average loans held-for-investment, annualized net charge-offs for the year ended
December 31, 2015 increased to 1.85 percent from 1.07 percent for the year ended December 31, 2014. During the year ended
December 31, 2015 and 2014, the annualized net charge-offs as a percentage of the average loans held-for-investment were
0.45 percent and 0.77 percent, respectively, excluding the charge-offs related to the loan sales or transfers of $69 million and
$11 million, respectively.
2014 Compared to 2013
The provision for loan losses increased $61 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 $37 million increase to the allowance
for loan loss that reflected 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 increases upon inclusion of the amortization of
principal and may also increase as a result of increases in interest rates. The payment reset increases could give rise to a
"payment shock" as in 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 increased 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 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, we noted that these loans were 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 million at December 31, 2014
from $207 million at December 31, 2013. These allowance amounts included approximately $112 million at December 31,
2014 and $52 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 change in the average loss emergence period and
in our qualitative assessment of the reset risk.
41
Net charge-offs for the year ended December 31, 2014 totaled $42 million, compared to $168 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 loan sales, lower levels of nonperforming loans, and lower loss severity due to
continuing improvement in underlying collateral values.
See the section captioned "Allowance for Loan Losses" in this discussion for further analysis of the provision for loan
losses.
Noninterest Income
The following table sets forth the components of our noninterest income.
Net gain on loan sales
Loan fees and charges
Deposit fees and charges
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
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
$
$
288
67
25
26
28
(1)
—
19
18
$
206
73
22
24
24
12
—
(10)
10
$
470
$
361
$
402
104
21
6
91
2
(9)
(36)
72
653
The following tables provide 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
Mortgage rate lock commitments (fallout
adjusted) (1)
Net margin on mortgage rate lock
commitments (fallout adjusted) (1)
$
$
$
$
First
Quarter
Second
Quarter
2015
Third
Quarter
Fourth
Quarter
Full Year
91
9,035
6,254
7,185
$
$
$
$
(Dollars in millions)
83
8,400
7,571
6,804
$
$
$
$
68
8,025
7,318
6,495
$
$
$
$
46
6,258
5,164
5,027
$
$
$
$
288
31,718
26,307
25,511
1.27%
1.22%
1.05%
0.92%
1.13%
(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.
42
Net gain on loan sales
Mortgage rate lock commitments (gross)
Loans sold and securitized
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 millions)
Fourth
Quarter
Full Year
45
6,040
4,474
4,854
$
$
$
$
55
8,188
6,030
6,693
$
$
$
$
52
7,713
7,072
6,304
$
$
$
$
54
7,605
6,831
6,156
$
$
$
$
206
29,546
24,407
24,007
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.
Net gain on loan sales
Mortgage rate lock commitments (gross)
Loans sold and securitized
Mortgage rate lock commitments (fallout
adjusted) (1)
Net margin on mortgage rate lock
commitments (fallout adjusted) (1)
First
Quarter
Second
Quarter
2013
Third
Quarter
(Dollars in millions)
Fourth
Quarter
Full Year
$
$
$
$
137
12,142
12,823
9,848
$
$
$
$
145
12,353
11,124
9,838
$
$
$
$
75
8,340
8,345
6,605
$
$
$
$
45
6,482
6,783
5,299
$
$
$
$
402
39,317
39,075
31,590
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.
2015 Compared to 2014
Total noninterest income increased $109 million during the year ended December 31, 2015 from the year ended
December 31, 2014. The increase was led by higher net gain on loan sales and lower representation and warranty provision,
partially offset by a decrease in net gain on sale of assets and loan fees and charges.
Net gain on loan sales increased $82 million for the year ended December 31, 2015, compared to the year ended
December 31, 2014. The increase in gain on loan sales was primarily due to higher fallout-adjusted lock volume and improved
gain on loan sale margins. Loans sold and securitized increased to $26.3 billion during the year ended December 31, 2015,
compared to $24.4 billion sold and securitized in the year ended December 31, 2014. For the year ended December 31, 2015,
the mortgage rate lock commitments increased to $31.7 billion, compared to $29.5 billion in the year ended December 31,
2014.
Total loan fees and charges decreased $6 million for the year ended December 31, 2015, compared to the year ended
December 31, 2014, primarily reflecting a decrease in deferred commercial and mortgage loan fees related to payoffs.
Net return on mortgage servicing asset increased $4 million for the year ended December 31, 2015, compared to the
year ended December 31, 2014. The increase was primarily due to elevated collections of contingent reserves, originally held
back by the purchaser on prior MSR sales, partially offset by a decrease related to the net impact of market-driven changes.
Also driving the increase was a benefit from slower prepayments and positive economic hedging results.
Net (loss) gain on sale of assets decreased $13 million to a loss of $1 million during the year ended December 31,
2015, compared to a gain of $12 million for the year ended December 31, 2014. The decrease was primarily due to a gain from
loan sales during the year ended December 31, 2014 and a write down of land assets during the year ended December 31, 2015.
Our provision for representation and warranty reserve was $29 million lower for the year ended December 31, 2015,
compared to the same period in 2014. An ongoing trend of lower charge-offs and volume of repurchase demands has been the
43
primary driver of the decrease partially offset by an increase related to indemnification agreements on loans with government
guarantees.
Other noninterest income increased $8 million, compared to the same period in 2014. The improvement was primarily
due to a $10 million increase in the fair value adjustment on residential first mortgages, partially offset by a decrease in Federal
Home Loan Bank dividend income as a result of holding less Federal Home Loan Bank stock.
2014 Compared to 2013
Total noninterest income decreased $292 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.
Net gain on loan sales decreased $196 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
million for the year ended December 31, 2014, compared to a loss of $42 million during the year ended December 31, 2013.
Total loan fees and charges decreased $31 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 million benefit from a contract
renegotiation during the year ended December 31, 2014.
Deposit fees and charges increased $1 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 111,230 at December 31, 2013 to 114,286 as of December 31, 2014.
The increase of $18 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 return on mortgage servicing asset decreased $67 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 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. We
had $470 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 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 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 $62 million, compared to the same period in 2013, primarily due to a $21 million
negative fair value adjustment on repurchased performing loans related to loans repurchased principally during periods prior to
44
2014 and income of $37 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.
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
2015 Compared to 2014
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
$
237
39
81
15
23
—
52
36
53
$
233
35
80
57
23
—
37
51
63
279
54
80
52
35
178
52
78
110
$
536
70.9%
$
579
95.4%
918
109.4%
$
$
Total noninterest expense decreased $43 million during the year ended December 31, 2015 from the year ended
December 31, 2014. The decrease during the year ended December 31, 2015, was primarily due to decreases in asset resolution
expense, legal and professional expenses and a CFPB penalty in 2014, which is included in other noninterest expense. These
decreases were partially offset by increases in other noninterest expense, including higher general and administrative costs, an
increase in fair value changes related to the DOJ settlement and an increase in the outstanding warrant.
The $4 million increase in compensation and benefits expense for the year ended December 31, 2015, compared to the
same period in 2014, was primarily due to an increase in performance-related compensation, partially offset by lower overall
headcount. Our full-time equivalent employees decreased overall by 26 from December 31, 2014 to a total of 2,713 full-time
equivalent employees at December 31, 2015.
Commission expense increased $4 million for the year ended December 31, 2015, compared to the same period in
2014, primarily due to an increase in the volume of loan originations. Loan originations increased to $29.9 billion for the year
ended December 31, 2015 from $25.1 billion in the year ended December 31, 2014.
Asset resolution expenses decreased $42 million for the year ended December 31, 2015, compared to the same period
in 2014, primarily due to fewer repurchases related to servicer errors, lower compensatory fees resulting from higher win rates
related to rebuttals and improved realization of claims and lower balances of FHA loans. In addition, there was a favorable
variance in the repossessed asset portfolio driven by lower foreclosure expenses and higher gains on the sale of repossessed
assets.
Loan processing expense increased $15 million for the year ended December 31, 2015, compared to the same period in
2014, primarily due to higher volume of loan closings.
Legal and professional expense decreased $15 million during the year ended December 31, 2015, compared to the year
ended December 31, 2014, primarily due to a decrease in legal fees resulting from fewer litigation expenses and a reduction in
consulting expenses resulting from cost saving initiatives.
Other noninterest expense decreased $10 million for the year ended December 31, 2015, compared to the same period
in 2014, primarily due to a decrease of $38 million in expenses related to the CFPB settlement and penalties that occurred in
45
2014, partially offset by a $14 million increase in the DOJ settlement expense, and an $8 million increase in the value of the
warrants as a result of an increase in the Bank's stock price.
2014 Compared to 2013
Total noninterest expense decreased $339 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 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 $19 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 $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.
Federal insurance premiums decreased $12 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 $178 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 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 $51 million during the year ended December 31, 2014, compared to $78
million for 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 $47 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 DOJ
settlement arising principally from updating the related payment schedule within the settlement agreement. This decrease was
partially offset by an increase of $28 million related to the CFPB settlement.
Provision (benefit) for Income Taxes
Our provision for income taxes for the year ended December 31, 2015 was $82 million, compared to a benefit of $34
million in 2014 and a benefit of $416 million in 2013.
The Company’s effective tax rate for 2015 was a provision of 34.2 percent. The difference between the effective tax
rate and the statutory tax rate of 35 percent is primarily due to the change in the state valuation allowance for net deferred taxes,
non-taxable income and expense items, primarily recognition of research and development tax credits and the non-taxable
impact of changes related to our warrants and bank owned life insurance, partially offset by non-deductible expense and
compensation items.
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 the exclusion of the non-deductible penalty paid to the CFPB and the
non-taxable impact of changes related to our warrants.
46
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 expense - 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,
2015
2014
2013
(Dollars in millions)
33
$
(11)
—
22
$
25
$
8
—
33
$
379
(348)
(6)
25
See Note 21 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary
Data, herein.
Fourth Quarter Results
The following table sets forth selected quarterly data.
Net interest income
(Benefit) provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Provision for income taxes
Net income
Income per share
Diluted
Efficiency ratio
December 31,
2015
(Unaudited)
Three Months Ended
September 30,
2015
(Unaudited)
(Dollars in millions)
December 31,
2014
(Unaudited)
$
$
$
$
$
$
76
(1)
77
97
129
45
12
33
0.44
75.2%
$
$
$
73
(1)
74
128
131
71
24
47
0.69
65.0%
61
5
56
98
139
15
4
11
0.07
87.2%
Fourth Quarter 2015 compared to Third Quarter 2015
Our net income for the three months ended December 31, 2015 was $33 million, or $0.44 per diluted share, as
compared to $47 million, or $0.69 per share, for the three months ended September 30, 2015.
Net interest income increased to $76 million for the three months ended December 31, 2015, as compared to $73
million during the three months ended September 30, 2015. The increase was attributable to earning asset growth of 5 percent,
partially offset by a decrease in net interest margin. Net interest margin decreased 6 basis points to 2.69 percent for the fourth
quarter 2015, as compared to 2.75 percent for the third quarter 2015. The decrease from the prior quarter was primarily driven
by a lower spread on mortgage loans and loans repurchased with government guarantees. These decreases were partially offset
by a lower average borrowing rates on FHLB advances. The net interest margin was also negatively impacted by a seasonal
decline in company-controlled deposits due to tax payments.
Average loans held-for-investment totaled $5.6 billion for the fourth quarter 2015, increasing $230 million, or 4
percent, compared to the third quarter 2015. The increase was driven by higher commercial real estate and mortgage loans.
Average commercial real estate loans grew $115 million, or 17 percent, and average residential mortgage loans rose $77
million, or 3 percent.
47
Average total deposits were $8.1 billion in the fourth quarter 2015, decreasing $128 million, or 2 percent, from the
prior quarter. The decline was led by a seasonal drop in company-controlled deposits, partially offset by an increase in
government and retail deposits. 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. Average company controlled deposits decreased $244
million, or 16 percent, due to tax payments. Average government deposits rose $49 million, or 5 percent, due to seasonal
increases. Average retail deposits increased $67 million, or 1 percent, led by a 4 percent increase in demand deposits.
The benefit for loan losses totaled $1 million for the fourth quarter 2015, unchanged from a benefit of $1 million for
the third quarter 2015. The fourth quarter 2015 included a reduction in the general allowance relating to loan sales and the full
pay-off of a single commercial credit. Net charge-offs in the fourth quarter 2015 were $9 million, or 0.62 percent of applicable
loans, compared to $24 million, or 1.84 percent of applicable loans in the prior quarter. The fourth quarter 2015 amount
included $2 million of net charge-offs associated with the sale of $11 million (unpaid principal balance) of nonperforming
loans. The third quarter 2015 amount included $16 million of net charge-offs associated with the sale of $233 million (unpaid
principal balance) of interest-only and lower performing loans.
Fourth quarter 2015 noninterest income was $97 million, as compared to noninterest income of $128 million for the
third quarter 2015. The decrease was primarily due to lower net gain on loan sales, a decrease in loan fees and charges and a
reduced net return on mortgage servicing asset.
Fourth quarter 2015 net gain on loan sales decreased to $46 million, as compared to $68 million for the third quarter
2015, primarily due to seasonal factors and the impact of TRID, see Item 1: Business section for additional information
regarding TRID. We took a careful approach with TRID implementation, taking greater control in creating and delivering
disclosure documents. As such, we experienced more of an impact than other bank originators due to our third party business
model. Thus, fallout-adjusted locks were $5.0 billion for the fourth quarter 2015, as compared to $6.5 billion for the third
quarter 2015. The net gain on loan sale margin decreased to 0.92 percent for the fourth quarter 2015, as compared to 1.05
percent for the third quarter 2015, led by seasonal price competition.
Net return on the mortgage servicing asset (including the impact of economic hedges) decreased to $9 million for the
fourth quarter 2015, as compared to $12 million for the third quarter 2015, primarily reflecting a smaller impact from the
collection of contingencies held-back by the purchaser relating to MSR sales in prior periods. Excluding the impact of net
transaction costs, the return on the mortgage servicing asset was consistent with the prior quarter. The return in the fourth
quarter 2015 was better than our long-term return target as it benefited from slower prepayments and positive economic
hedging results.
Loan fees and charges fell to $14 million for the fourth quarter 2015, as compared to $17 million in the third quarter
2015. The decrease primarily reflected lower mortgage closings.
Noninterest expense decreased to $129 million for the fourth quarter 2015, as compared to $131 million for the third
quarter 2015, primarily due to lower volume-driven categories such as commissions and loan processing expenses and a decline
in federal insurance premiums, partially offset by higher asset resolution expense reflecting our efforts to de-risk the balance
sheet.
Commissions were $8 million for the fourth quarter 2015, as compared to $10 million for the third quarter 2015. The
$2 million decrease in the fourth quarter 2015 was primarily attributable to lower mortgage closings. Fourth quarter 2015 asset
resolution expense was $2 million higher than third quarter 2015. The prior quarter reflected a benefit for reimbursements. The
low level of asset resolution expense in the fourth quarter 2015 reflected our success in de-risking the balance sheet. Federal
insurance premiums were $5 million for the fourth quarter 2015, as compared to $6 million for the third quarter 2015, reflecting
our improved risk profile. Loan processing expense was $12 million for the fourth quarter 2015, as compared to $14 million for
the third quarter 2015. The $2 million decline in the current quarter was primarily attributable to lower mortgage closings.
Fourth Quarter 2015 compared to Fourth Quarter 2014
Our net income from continuing operations for the three months ended December 31, 2015 was $33 million, or $0.44
per diluted share, as compared to income of $11 million, or $0.07 per diluted share, for the three months ended December 31,
2014. The increase was primarily due to higher net interest income and lower noninterest expense.
Net interest income increased $15 million for the three months ended December 31, 2015, compared to the same
period in December 31, 2014, primarily due to earning asset growth, partially offset by a decrease in net interest margin
48
resulting from a lower yield on mortgage loans and loans repurchased with government guarantees, partially offset by a lower
average rate on FHLB advances primarily to match-fund our long-duration asset growth through low cost debt. We have placed
this debt in a derivative hedging relationship which locks in our margins for that aspect of the portfolio.
The provision (benefit) for loan losses decreased to a benefit of $1 million for the three months ended December 31,
2015, as compared to a provision of $5 million for the three months ended December 31, 2014, primarily due to the
improvements in asset quality. Net charge-offs for the three months ended December 31, 2015 were $9 million, or 0.62 percent
of applicable loans, compared to $9 million, or 0.91 percent of applicable loans for the three months ended December 31, 2014.
The fourth quarter 2015 amount included $2 million of net charge-offs associated with the sale of $11 million of nonperforming
loans during the quarter. The fourth quarter 2014 amount included $3 million of net charge-offs associated with the sale of $24
million of lower performing loans during the quarter.
Noninterest income decreased $1 million for the three months ended December 31, 2015, compared to the same period
in December 31, 2014. The slight decrease primarily reflects lower net gain on loan sales and loan fees and charges, partially
offset by higher net return on mortgage servicing asset.
Net gain on loan sales decreased to $46 million for the three months ended December 31, 2015, as compared to $54
million for the three months ended December 31, 2014, primarily due to lower volume which was impacted by the new lending
regulation TRID. Fallout-adjusted locks were $5.0 billion in the fourth quarter 2015, as compared to $6.2 billion in the fourth
quarter 2014. The net gain on loan sale margin increased 5 basis points to 0.92 percent for the fourth quarter 2015, as compared
to 0.87 percent for the fourth quarter 2015, driven by stronger market pricing power and improved business performance.
Loan fees and charges decreased to $14 million for the three months ended December 31, 2015, as compared to $17
million during the three months ended December 31, 2014, primarily due to lower mortgage origination volume.
Net return on the mortgage servicing asset (including the impact of economic hedges) increased to $9 million for the
fourth quarter of 2015, as compared to $2 million for the fourth quarter of 2014. The primary drivers of the increase are lower
transaction costs due to fewer sales and lower prepayments due to the interest rate environment.
Noninterest expense decreased $10 million for the three months ended December 31, 2015, compared to the same
period in 2014. The decrease was primarily attributable to lower asset resolution and legal and professional expenses.
Asset resolution was $2 million for the three months ended December 31, 2015, as compared to $13 million for the
three months ended December 31, 2014. The decrease was primarily attributable to lower modification volume on loans with
government guarantees and lower compensatory fees.
Legal and professional fees were $9 million for the three months ended December 31, 2015, as compared to $11
million for the three months ended December 31, 2014. The decrease was primarily attributable to lower attorney expenses and
lower professional fees resulting from cost saving initiatives.
The provision for income taxes increased $8 million for the three months ended December 31, 2015, compared to the
three month ended December 31, 2014. The increase was primarily due to higher income before taxes, partially offset by a
lower effective tax rate. The effective tax rate in the fourth quarter 2015 was 27 percent, as compared to 29 percent in the fourth
quarter 2014.
49
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.
Year Ended December 31,
2015
2014
2013
(Dollars in millions)
$
$
232
(54)
40
(60)
158
$
$
$
106
(101)
(130)
56
(69) $
185
(83)
(62)
227
267
Mortgage Originations
Mortgage Servicing
Community Banking
Other
Total net income (loss)
Mortgage Originations
2015 compared to 2014
The Mortgage Originations segment net income increased $126 million during the year ended December 31, 2015,
compared to the same period in 2014, primarily due to an increase in net gain on loan sales, partially offset by increases in
commissions and loan processing expense. The increase in net gain on loan sales during the year ended December 31, 2015, as
compared to the year ended December 31, 2014 was primarily driven by increased margin and higher fallout adjusted rate
locks. During the year ended December 31, 2015, total noninterest expense increased as compared to the year ended December
31, 2014, primarily due to higher mortgage origination volume.
2014 compared to 2013
The Mortgage Originations segment net income decreased $79 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. 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. During the year ended December 31, 2014, total noninterest expense decreased as compared to the year ended
December 31, 2013, primarily due to reduced corporate overhead and direct operating allocations.
Mortgage Servicing
2015 compared to 2014
The Mortgage Servicing segment reported a net loss of $54 million for the year ended December 31, 2015, compared
to a net loss of $101 million for the year ended December 31, 2014, primarily due to decreases in asset resolution expense,
representation and warranty provision and expenses related to the 2014 CFPB settlement, partially offset by an increase in loan
processing expense and a decrease in net interest income from lower average balances of loans with government guarantees.
Total noninterest income decreased during the year ended December 31, 2015, as compared to the year ended December 31,
2014, which was primarily due to a benefit from a contract renegotiation achieved in 2014. Noninterest expense decreased for
the year ended December 31, 2015, as compared to the year ended December 31, 2014, primarily due to the 2014 CFPB
settlement and the benefit relating to the DOJ liability estimate that was recorded in 2014.
2014 compared to 2013
The Mortgage Servicing segment reported a net loss of $101 million for the year ended December 31, 2014, compared
to a net loss of $83 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
50
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. Noninterest expense increased for the year ended
December 31, 2014, as compared to the year ended December 31, 2013, primarily due to the 2014 CFPB settlement, partially
offset by a decrease in compensation and benefits and asset resolution.
Community Banking
2015 compared to 2014
During the year ended December 31, 2015, the Community Banking segment had net income of $40 million,
compared to a net loss of $130 million for the year ended December 31, 2014, primarily due to a decrease in provision for loan
losses. In 2014, we recorded a $132 million provision that was primarily driven by two changes in estimates that occurred in the
first quarter (described further in the prior year comparison): the evaluation of current data related to the loss emergence period
on our residential mortgage loan portfolio and the evaluation of the enhanced risk associated with payment resets relating to
interest-only loans. In 2015, we sold 90 percent of our interest-only loans at prices that were favorable as compared to the
continuing reset risk associated with us continuing to hold these loans which was recorded consistent with the incurred loss
methodology. This action along with the sale of $444 million nonperforming loans resulted in a $69 million reduction to the
allowance for loan losses which along with an overall improvement in portfolio quality was the primary driver of the $19
million net benefit reported in 2015 being partially offset by a $1.9 billion increase in volume of average loans held-for-
investment due to the origination of residential first mortgages and increased commercial lending. Net interest income increased
during the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily due to growth in the
loans held-for-investment loan portfolios; including HELOC, residential first mortgage and total commercial loans.
2014 compared to 2013
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.
Other
2015 compared to 2014
For the year ended December 31, 2015, the Other segment net loss increased by $116 million, as compared to the year
ended December 31, 2014. The increase was primarily due to an increase in provision for income taxes due to higher pre-tax
book income. Net interest income increased due to higher average balances of investment securities, partially offset by higher
FHLB advances to match-fund our long-duration asset growth. Other noninterest income decreased for the year ended
December 31, 2015, as compared to the year ended December 31, 2014, primarily due to an adjustment in HELOC valuation
and FHLB dividend due to stock redemptions, partially offset by an increase in the return on mortgage servicing assets resulting
from higher service fee income driven by an increase in assets and a gain from the early settlement of FHLB debt.
2014 compared to 2013
For the year ended December 31, 2014, the Other segment net income decreased by $171 million, as compared to the
year ended December 31, 2013. The decrease was primarily due to the change in the benefit for income taxes and a decrease in
noninterest income, partially offset by an increase in net interest income and a decrease in noninterest expense. 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 paid on the extinguishment of the Federal Home Loan Bank advance. Our
benefit for income taxes decreased due to the reversal of the valuation allowance against the federal deferred tax asset.
51
RISK MANAGEMENT
Like all financial services companies, we engage in business activities and assume the related risks. The risks we are
subject to in the normal course of business, include, but are not limited to, credit, regulatory compliance, legal, reputation,
liquidity, market, operational, and strategic. 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. We
hold capital to protect from the risk of unexpected loss.
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, and operational risks are described in the following paragraphs.
Credit Risk
Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or
performance terms. 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.
Mortgage Originations
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 2015, we remained one of the country's leading
mortgage loan originators. We utilize production channels to originate or acquire mortgage loans and 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. 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. We have initiated a plan to improve
volume levels and we continue to build a stronger distributed and direct-to-consumer retail business.
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 679 companies, including banks, credit unions and mortgage companies located in all 50 states.
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 514 mortgage brokers, credit unions and mortgage brokerage
companies located in all 50 states.
Home Lending. In a home lending transaction, loans are originated through our 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, 2015,
we maintained 10 loan origination centers. At the same time, our centralized loan processing provides efficiencies and allows
lending sales staff to focus on originations.
52
As of December 31, 2015, we ranked in the top 10 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.
Correspondent
Broker
Home Lending Centers
Total
Purchase originations
Refinance originations
Total
Conventional
Government
Jumbo
Total
Correspondent
Broker
Home Lending Centers
Total
Purchase originations
Refinance originations
Total
Conventional
Government
Jumbo
Total
First
Quarter
Second
Quarter
2015
Third
Quarter
(Dollars in millions)
Fourth
Quarter
Full Year
$
$
$
$
$
$
$
$
$
$
$
$
5,026
1,829
393
7,248
2,648
4,600
7,248
4,616
1,351
1,281
7,248
First
Quarter
3,546
1,091
226
4,863
2,797
2,066
4,863
2,951
1,216
696
4,863
$
$
$
$
$
$
$
$
$
$
$
$
5,818
2,170
450
8,438
3,816
4,622
8,438
5,152
1,710
1,576
8,438
$
$
$
$
$
$
5,584
1,930
353
7,867
4,357
3,510
7,867
4,452
1,908
1,507
7,867
Second
Quarter
4,385
1,267
291
5,943
3,854
2,089
5,943
3,707
1,508
728
5,943
2014
Third
Quarter
(Dollars in millions)
5,333
$
1,498
349
7,180
$
$
$
$
$
4,460
2,720
7,180
4,392
1,854
934
7,180
$
$
$
$
$
$
$
$
$
$
$
4,115
1,406
294
5,815
2,875
2,940
5,815
3,351
1,416
1,048
5,815
Fourth
Quarter
4,788
1,483
328
6,599
3,543
3,056
6,599
4,108
1,556
935
6,599
$
$
$
$
$
$
$
$
$
$
$
$
20,543
7,335
1,490
29,368
13,696
15,672
29,368
17,571
6,385
5,412
29,368
Full Year
18,052
5,339
1,194
24,585
14,654
9,931
24,585
15,158
6,134
3,293
24,585
53
First
Quarter
Second
Quarter
$
$
$
$
$
$
8,525
3,201
697
12,423
2,339
10,084
12,423
8,592
2,799
1,032
12,423
$
$
$
$
$
$
7,332
2,975
575
10,882
3,146
7,736
10,882
7,682
2,535
665
10,882
2013
Third
Quarter
(Dollars in millions)
5,479
$
1,845
412
7,736
$
$
$
$
$
3,682
4,054
7,736
5,248
1,931
557
7,736
$
$
$
$
$
$
Fourth
Quarter
Full Year
4,549
1,591
296
6,436
3,673
2,763
6,436
4,131
1,560
745
6,436
$
$
$
$
$
$
25,885
9,612
1,980
37,477
12,840
24,637
37,477
25,653
8,825
2,999
37,477
Correspondent
Broker
Home Lending Centers
Total
Purchase originations
Refinance originations
Total
Conventional
Government
Jumbo
Total
Loans held-for-sale
Most of our mortgage loans originated are sold into the secondary market on a whole loan basis. Sales of loans totaled
$26.3 billion, or 89.5 percent of originations during the year ended December 31, 2015, compared to $24.4 billion, or 99.2
percent of originations during the year ended December 31, 2014. The increase in the dollar volume of sales during the year
ended December 31, 2015 was primarily due to the increase in origination volumes, as compared to the year ended
December 31, 2014. The decrease in our percentage of originations sold was due to us deliberately slowing our deliveries to the
Agencies to better optimize profitability. As of December 31, 2015, we had outstanding commitments to sell $4.5 billion of
mortgage loans. Generally, these commitments are funded within 120 days. 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.
Consumer loans
Commercial loans (1)
Total consumer and commercial loans
held-for-sale
$
$
December 31,
2015
2014
2013
2012
2011
$
2,576
—
(Dollars in millions)
1,480
$
—
$
1,244
—
$
3,012
928
1,801
—
2,576
$
1,244
$
1,480
$
3,940
$
1,801
(1) Includes the loans that were sold as part of the agreement to sell Northeast commercial loans.
Mortgage Servicing
The Mortgage Servicing segment services and subservices mortgage loans for others on a fee for service basis and
may also collect ancillary fees, such as late fees and earn income through the use of noninterest bearing escrows. The Mortgage
Servicing segment services residential mortgages for our own held-for-investment loan portfolio held by the Community
Banking segment for which it earns revenue via an intercompany service fee allocation. The segment also services loans for
others which primarily includes servicing Agency loans wherein the associated MSR’s are owned by the Bank's Other segment
with revenue being earned on a contractual fee basis. Lastly, the Mortgage Servicing segment subservices loans for others
which primarily includes servicing Agency loans wherein the associated MSR’s are owned by third parties. Revenue on our
subserviced loans is earned on a contractual fee basis, with the fees varying based on the status of the underlying loans.
54
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. Our subserviced portfolio makes us the ninth largest subservicer in the nation.
December 31, 2015
December 31, 2014
Amount
Number of
accounts
Amount
Number of
accounts
(Dollars in millions)
Residential loan servicing
Serviced for own loan portfolio (1)
Serviced for others
Subserviced for others (2)
Total residential loans serviced (2)
$
$
6,088
26,145
40,244
72,477
30,683
118,662
211,740
361,085
$
$
4,521
25,427
46,724
76,672
26,268
117,881
238,498
382,647
(1) Includes loans held-for-investment (residential first mortgage, second mortgage and HELOC), loans held-for-sale (residential first
mortgage), loans 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.
Set forth below is a table describing the characteristics of the mortgage loans serviced for others at December 31,
2015, by year of origination.
Year of Origination
2011 and Prior
2012
2013
2014
2015
(Dollars in millions)
$
$
1,103
149
$
$
306
188
$
$
832
157
$
$
8,597
205
$
$
29.5
4.69%
360
83
703
81.5%
25.6
3.63%
330
41
763
72.3%
26.7
4.48%
327
26
740
80.0%
26.8
4.27%
337
17
729
79.8%
$
$
15,307
245
27.6
3.98%
336
7
736
76.5%
Total /
Weighted
Average
26,145
220
27.4
4.12%
337
15
733
77.9%
Unpaid principal balance (1)
Average unpaid principal balance
per loan (thousands)
Weighted average service fee
(basis points)
Weighted average coupon
Weighted average original
maturity (months)
Weighted average age (months)
Average current FICO score (2)
Average original LTV ratio
Housing Price Index LTV, as
recalculated (3)
Loan count
66.9%
7,407
50.5%
1,632
65.7%
5,302
71.1%
73.1%
71.7%
41,891
62,430
118,662
(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, 2015.
Set forth below is a table of the past due trends in mortgage loans serviced for others at December 31, 2015, by year of
origination.
Year of Origination
2011 and Prior
2012
2013
2014
2015
Total
(Dollars in millions)
30-59 days past due
60-89 days past due
90 days or greater past due
Total past due
Current
Unpaid principal balance (1)
$
$
50
18
52
120
983
1,103
$
$
3
1
—
4
302
306
$
$
8
1
3
12
820
832
$
$
75
14
20
109
8,488
8,597
$
$
62
11
5
78
15,229
15,307
$
$
198
45
80
323
25,822
26,145
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
55
At December 31, 2015, the unpaid balance relating to originations within the past two years has improved to 91.4
percent of the total unpaid balance, compared to 88.2 percent at December 31, 2014. The loan count for the same two year
period has also improved as a percentage of the total loan count, from 85.2 percent at December 31, 2014 to 87.9 percent at
December 31, 2015.
The unpaid balance of loans originated four years ago and prior has improved to 4.2 percent of the total unpaid
balance, compared to 6.0 percent at December 31, 2014. The loan count for this category has also improved from 9,442 at
December 31, 2014 to 7,407 at December 31, 2015, representing an improvement as a percentage of the total loan count, from
8.0 percent to 6.2 percent, respectively.
Mortgage loans originated four years ago and prior continue to represent the highest percentage of loans past due
within the respective buckets, with 89.1 percent being current within that category at December 31, 2015. This represents an
improvement from December 31, 2014 which exhibited a current rate of 82.0 percent within the same category.
By year of origination, the current bucket has improved in most categories and has improved in totality from 98.3
percent at December 31, 2014 to 98.8 percent at December 31, 2015. We continue to focus on collections and keeping
customers current in order to limit the number of loans in default.
Set forth below is a table describing the characteristics of the residential mortgage loans subserviced for others at
December 31, 2015, by year of origination.
Year of Origination
2011 and Prior
2012
2013
2014
2015
Unpaid principal balance (1)
Average unpaid principal balance
per loan (thousands)
Weighted average service fee
(basis points)
Weighted average coupon
$
$
Weighted average original
maturity (months)
Weighted average age (months)
Average current FICO score (2)
$
$
10,097
138
32.9
4.78%
335
69
713
14,436
208
28.2
3.61%
328
41
753
(Dollars in millions)
$
$
8,817
211
$
$
1,144
258
$
$
5,750
248
$
$
27.6
3.62%
329
32
749
25.2
4.40%
360
19
755
31.6
3.90%
348
5
716
Total /
Weighted
Average
40,244
190
29.7
3.97%
334
40
737
Average original LTV ratio
82.8%
74.5%
75.8%
73.4%
85.5%
78.4%
Housing Price Index LTV, as
recalculated (3)
Loan count
65.0%
53.4%
58.5%
72,903
69,561
41,698
64.3%
4,437
83.8%
62.1%
23,141
211,740
(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, 2015.
Set forth below is a table of the past due trends in residential mortgage loans subserviced for others at December 31,
2015, by year of origination.
Year of Origination
2011 and Prior
2012
2013
2014
2015
Total
30-59 days past due
60-89 days past due
90 days or greater past due
Total past due
Current
$
384
144
394
922
9,175
(Dollars in millions)
$
$
99
33
$
49
16
$
5
1
$
30
3
83
215
14,221
48
113
8,704
2
8
1,136
2
35
5,715
Unpaid principal balance (1)
$
10,097
$
14,436
$
8,817
$
1,144
$
5,750
$
567
197
529
1,293
38,951
40,244
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
56
Loans held-for-investment
Loans held-for-investment increased $1.9 billion at December 31, 2015, from December 31, 2014. In 2015, we
executed our strategy to build a stable held-for-investment loan portfolio that generates consistent interest income through the
origination or purchase of high quality conforming and non-conforming (jumbo) loans, expanding our commercial and
industrial lending portfolio, and increasing our warehouse customers and available lines. These efforts lead to residential first
mortgages increasing by $907 million, warehouse loans increasing by $567 million, commercial real estate loans increasing by
$194 million and commercial and industrial loans increasing by $123 million, and HELOC loans increasing by $127 million.
For information relating to the loans held-for-investment, see Notes 5 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 (unpaid principal balance) at
December 31, 2015.
LOANS HELD-FOR-INVESTMENT, BY RATE TYPE
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Fixed
Rate
Adjustable
Rate
(Dollars in millions)
Total
$
1,044
$
2,032
$
138
—
30
1,212
52
44
—
96
5
390
—
2,427
769
512
1,367
2,648
Total consumer and commercial loans held-for-
investment (1)
$
1,308
$
5,075
$
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
3,076
143
390
30
3,639
821
556
1,367
2,744
6,383
57
The following 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,
2015
2014
2013
2012
2011
(Dollars in millions)
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total consumer and commercial loans
held-for-investment
Allowance for loan losses
$
$
3,100
135
384
31
3,650
814
552
1,336
2,702
6,352
(187)
Total loans held-for-investment, net
$
6,165
$
$
2,193
149
257
31
2,630
620
429
769
1,818
$
2,509
170
290
37
3,006
409
217
424
1,050
4,448
(297)
4,151
$
4,056
(207)
3,849
$
3,009
115
179
50
3,353
640
97
1,348
2,085
5,438
(305)
5,133
LOANS HELD-FOR-INVESTMENT PORTFOLIO ACTIVITY SCHEDULE
2015
2014
2013
2012
For the Years Ended December 31,
(Dollars in millions)
Balance, beginning of year
Loans originated and purchased (1)
Change in lines of credit (2)
Loans transferred from loans held-for-sale
Loans transferred to loans held-for-sale (3)
(4)(5)
Loan amortization / prepayments
Loans transferred to repossessed assets
Balance, end of year
$
$
4,447
2,975
678
32
(1,198)
(569)
(13)
6,352
$
$
4,056
894
424
56
(509)
(451)
(23)
4,447
$
$
5,438
868
380
64
(832)
(1,687)
(175)
4,056
$
$
7,039
901
139
62
(1,221)
(1,113)
(369)
5,438
$
$
$
$
3,750
139
222
67
4,178
1,243
444
1,174
2,861
7,039
(318)
6,721
2011
6,305
1,017
108
17
(136)
(61)
(212)
7,038
(1) During the year ended December 31, 2013, there were $171 million of HELOC loans and $73 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, 2012, loans transferred from held-for-investment to held-for-sale include $928 million of
commercial loans related to the agreements to sell a substantial portion of Northeast-based commercial loans.
(4) During the year ended December 31, 2013, loans transferred from held-for-investment to held-for-sale include $508 million unpaid
principal balance of residential first mortgage nonperforming and TDR loans that were sold and $278 million unpaid principal
balance of residential first jumbo adjustable-rate mortgage loans.
(5) During the year ended December 31, 2014, loans transferred from held-for-investment to held-for-sale included $225 million unpaid
principal balance of residential first jumbo mortgage loans.
Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and
adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing
owner occupied and second home properties. The LTV requirements vary depending on occupancy, property type, loan amount,
and FICO. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance.
58
At December 31, 2015, the largest geographic concentrations of our residential first mortgage loans in our held-for
investment portfolio were in California, Florida and Michigan, which represented 52.7 percent of such loans outstanding.
The following table details the geographic distribution of properties collateralizing residential first mortgage loans
held-for-investment throughout the United States (measured by unpaid principal balance and expressed as a percent of the
total).
State
California
Michigan
Florida
Texas
Washington
Illinois
Arizona
All other states (1)
Total
December 31,
2015
2014
35.9%
9.0%
7.9%
6.2%
5.4%
3.7%
2.6%
29.3%
100.0%
28.1%
12.0%
13.7%
2.4%
4.5%
2.1%
4.0%
33.2%
100.0%
(1) No other state contains more than 3.0 percent of the total.
The following table identifies our held-for-investment mortgages by major category, at December 31, 2015 and
December 31, 2014.
December 31, 2015
Residential first mortgage
loans
Amortizing
Interest only (4)
Option ARMs (5)
Total residential first
mortgage loans
December 31, 2014
Residential first mortgage
loans
Amortizing
Interest only (4)
Option ARMs (5)
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 millions)
$
2,999
64
13
3.52%
3.48%
3.29%
$
3,076
3.52%
$
1,541
628
34
3.79%
3.63%
3.19%
$
2,203
3.73%
752
753
710
752
714
727
714
718
752
755
728
752
715
738
715
721
304
320
268
304
292
263
282
283
68.3%
62.0%
69.0%
68.2%
75.7%
74.0%
69.9%
75.2%
62.5%
55.1%
62.1%
62.4%
70.6%
80.1%
87.4%
73.6%
(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, 2015.
(3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2015.
(4) Includes only those loans that are currently in the interest-only phase of repayment. Loans originated as interest-only that are now
amortizing are included in amortizing loans.
(5) Primarily Option ARMs.
59
The following table identifies our held-for-investment mortgages by major category, at December 31, 2015.
December 31, 2015
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 millions)
Residential first mortgage
loans
$
Amortizing
3/1 ARM
5/1 ARM
7/1 ARM
Other ARM
Fixed mortgage loans
Total amortizing
Interest-only (4)
Other (5)
Total residential first
mortgage loans
67
959
913
22
1,038
2,999
64
13
3.59%
3.12%
3.32%
3.58%
4.05%
3.52%
3.48%
3.29%
$
3,076
3.52%
706
756
767
709
740
752
753
710
752
704
756
768
703
737
752
755
728
752
225
323
353
226
249
304
320
268
304
75.7%
65.2%
67.2%
76.8%
71.6%
68.3%
62.0%
69.0%
68.2%
58.5%
58.3%
62.0%
56.6%
67.0%
62.5%
55.1%
62.1%
62.4%
(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, 2015.
(3) The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2015.
(4) Includes only those loans that are currently in the interest-only phase of repayment. Loans originated as interest-only that are now
amortizing are included in amortizing loans.
(5) Primarily Option ARMs.
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 95 percent, but subordinate (or second mortgage)
financing was not allowed over a 95 percent LTV ratio. At a 95 percent LTV ratio with private mortgage insurance, the
minimum acceptable FICO score, or the "floor," was 620, and at lower LTV ratio levels, the FICO floor was also 620.
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;
60
The following table details the unpaid principal balance, net of write downs, of these loans at December 31, 2015 and
2014.
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, 2015
December 31, 2014
(Dollars in millions)
$
$
$
67
960
914
2
11
1
11
66
2,032
$
123
572
166
89
367
30
32
95
1,474
Of the loans listed above, the following table details the amount that have original LTV ratios exceeding 80 percent.
Loans with original LTV ratios above 80 percent
> 80%< = 90%
> 90%< = 100%
> 100%
Total
Principal Outstanding
December 31,
2015
December 31,
2014
(Dollars in millions)
$
$
473
$
26
3
502
$
91
74
1
166
Set forth below as of December 31, 2015, 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.
2016
2017
2018
Later years (1)
st
Quarter
1
nd
2
Quarter
rd
3
Quarter
th
4
Quarter
$
$
128
138
139
349
(Dollars in millions)
$
138
142
144
540
$
146
147
152
861
131
133
136
813
(1) Later years reflect one reset period per loan.
Second mortgage loans. The majority of second mortgages we currently 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. Our current allowable debt-to-income ratio for approval of second mortgages is capped at
43 percent. We currently limit the maximum CLTV to 80 percent and FICO scores to a minimum of 680. Current fixed rate
loans are available with terms up to 15 years. The second mortgage loans require full documentation and are underwritten and
priced to ensure high credit quality and loan profitability.
Home Equity Line of Credit loans. Underwriting guidelines for our HELOC originations have been established to
attract higher credit quality loans with long-term profitability. The minimum FICO is 680, maximum CLTV up to 89 percent,
and the maximum debt-to-income ratio is 43 percent. HELOCs are adjustable-rate loans that generally contain a 10-year
interest-only draw period followed by a 20-year amortizing period
61
Included in HELOC loans are interest-only loans. At December 31, 2015, the unpaid principal balance of our interest-
only mortgage loans was $64 million. Upon a change in our intent, we sold approximately $601 million of interest-only
mortgage loans that were transferred to held-for-sale and subsequently sold during the year ended December 31, 2015 as part of
a concerted effort to de-risk our balance sheet and reduce the costs associated with nonperforming and higher risk assets.
Commercial loans held-for-investment. During the twelve months ended December 31, 2015, we have continued to
grow our commercial loan portfolio. Our Commercial and Business Banking group includes relationships with relationship
managers throughout Michigan's major markets. Our commercial loans held-for-investment totaled $2.7 billion at
December 31, 2015 and $1.8 billion at December 31, 2014. The portfolio consists of three loan types: commercial real estate,
commercial and industrial, and warehouse loans, each of which is discussed in more detail below.
The following table identifies the commercial loan held-for-investment portfolio by loan type and selected criteria at
December 31, 2015 and December 31, 2014.
Commercial Loans Held-for-Investment
Commercial real estate loans:
Fixed rate
Adjustable rate
Total commercial real estate loans
Net deferred fees and other
Total commercial real estate loans, net
Commercial and industrial loans:
Fixed rate
Adjustable rate
Total commercial and industrial loans
Net deferred fees and other
Total commercial and industrial loans, net
Warehouse loans:
Adjustable rate
Net deferred fees and other
Total warehouse loans, net
Total commercial loans:
Fixed rate
Adjustable rate
Total commercial loans
Net deferred fees and other
Total commercial loans, net
December 31, 2015
December 31, 2014
Balance
Average
Note Rate
Balance
Average
Note Rate
(Dollars in millions)
$
$
$
$
$
$
$
$
52
769
821
(7)
814
44
512
556
(4)
552
1,367
(31)
1,336
96
2,648
2,744
(42)
2,702
4.9% $
2.8%
$
4.7% $
3.0%
$
3.4% $
$
4.8% $
3.1%
$
81
542
623
(3)
620
28
408
436
(7)
429
789
(20)
769
109
1,739
1,848
(30)
1,818
5.1%
2.9%
3.9%
3.4%
3.8%
4.8%
3.3%
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.
62
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, 2015.
Collateral Type
Office
Retail
Industrial
Apartments
Special Purpose
Shopping center
Hotel/Motel
Senior living facility
Other
Total
Percent
Michigan
State
California
Other
Total (1)
(Dollars in millions)
$
$
156
100
102
95
81
44
37
33
69
717
$
$
7
9
11
—
1
—
—
—
9
37
$
$
— $
39
6
11
1
—
—
—
10
67
$
163
148
119
106
83
44
37
33
88
821
87.3%
4.5%
8.2%
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 financial service, small and middle market businesses for use in normal business operations to
finance working capital needs, owner occupied real estate loans, equipment purchases, and expansion projects. Most of our
commercial and industrial loans earn interest at a variable rate and we offer our customers the ability to enter into interest rate
swaps for which we offset our risk by entering into offsetting market trades.
Warehouse lending. We also 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 draw-down on the line is collateralized by mortgage loans
being funded and is paid off once the loan is sold to an outside investor which may include ourselves. Underlying mortgage
loans are predominately originated using the agencies' underwriting standards. We believe we are increasing market share in the
warehouse lending market through our strategic initiative to increase lending to customers who originate loans they then sell to
outside third party investors. The aggregate committed amount of adjustable-rate warehouse lines of credit granted to other
mortgage lenders at December 31, 2015 was $2.2 billion, of which $1.3 billion was outstanding, compared to $1.6 billion
committed at December 31, 2014, of which $0.8 billion was outstanding.
Loan Principal Payments
The following tables set forth, at December 31, 2015, 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, 2015
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 millions)
Residential first mortgage
$
33 $
34 $
36 $
76 $
219 $
269 $
377 $
1,044
Second mortgage
Other consumer
Commercial real estate
Commercial and industrial
6
6
22
6
7
4
22
7
7
4
8
6
16
6
—
14
50
10
—
11
52
—
—
—
—
—
—
—
138
30
52
44
Total loans
$
73 $
74 $
61 $
112 $
290 $
321 $
377 $
1,308
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
63
LOAN PRINCIPAL REPAYMENT SCHEDULE
ADJUSTABLE RATE LOANS
December 31, 2015
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)
Residential first mortgage
Second mortgage
HELOC
Commercial real estate
Commercial and industrial
Warehouse lending
Total loans
$
$
47 $
—
12
235
169
1,367
1,830 $
49 $
—
12
242
173
—
476 $
50 $
1
13
248
170
—
482 $
(Dollars in millions)
105 $
1
28
44
—
—
178 $
295 $
3
83
—
—
—
381 $
347 $
—
106
—
—
—
453 $
1,139 $
—
136
—
—
—
1,275 $
2,032
5
390
769
512
1,367
5,075
(1) Unpaid principal balance, net of write downs, does not include premiums or discounts.
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 following tables, trends in
certain credit quality characteristics such as nonperforming loans and past due statistics have recently shown signs of
improvement. This is predominantly a result of the nonperforming and TDR loan sales, as well as run off of the legacy
portfolios and the addition of new loans with strong credit characteristics to the held-for-investment portfolio.
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
2015
2014
2013
2012
2011
At December 31,
Nonperforming loans held-for-investment
Nonperforming TDRs
$
Nonperforming TDRs at inception but
performing for less than six months
Total nonperforming loans held-for
investment (1)
Real estate and other nonperforming assets,
net
Nonperforming assets held-for-investment,
net
Ratio of nonperforming assets to total
assets
Ratio of nonperforming loans held-for-
investment to loans held-for-investment
$
Ratio of allowance to loans held-for-
investment (2)
Ratio of net charge-offs to average loans
held-for-investment (2)
Ratio of nonperforming assets to loans
held-for-investment and repossessed assets
31
7
28
66
17
83
0.61%
1.05%
3.00%
1.85%
1.32%
$
(Dollars in millions)
$
74
29
17
120
19
$
99
26
21
146
36
$
254
61
85
400
121
$
139
$
182
$
521
$
1.41%
2.71%
7.01%
1.07%
3.12%
1.94%
3.59%
5.42%
4.00%
4.46%
3.70%
7.35%
5.61%
4.43%
9.36%
292
67
130
489
114
603
4.42%
6.94%
4.52%
2.14%
8.43%
(1) Does not include nonperforming loans held-for-sale of $12 million, $15 million, $1 million, $2 million and $5 million at December 31, 2015, 2014,
2013, 2012, and 2011, respectively.
(2) Excludes loans carried under the fair value option.
64
Past due loans held-for-investment
For all portfolios within the consumer and commercial loan portfolio, loans are placed on nonaccrual status when any
portion of principal or interest is 90 days past due (or nonperforming), or earlier when we become aware of information
indicating that collection of principal and interest is in doubt. While it is the goal of management to collect on loans, we attempt
to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure
proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist
borrowers in meeting their contractual obligations and minimize losses incurred by the bank. When a loan is placed on
nonaccrual status, the accrued interest income is reversed. Loans return to accrual status when principal and interest become
current and are anticipated to be fully collectible. At December 31, 2015, we had $80 million of past due loans held-for-
investment. Of those past due loans, $66 million loans were nonperforming. At December 31, 2014, we had $164 million of
past due loans held-for-investment. Of those past due loans, $120 million loans were nonperforming. The decrease from
December 31, 2015 to December 31, 2014 was primarily due to the sale of nonperforming residential first mortgage loans and
our overall improved credit quality.
Consumer loans. As of December 31, 2015, nonperforming consumer loans totaled $64 million, a decrease from $120
million at December 31, 2014, primarily due to the sale of nonperforming residential first mortgage loans and improvement in
our overall credit quality. Net charge-offs in consumer loans totaled $90 million for the year ended December 31, 2015,
compared to $42 million for the year ended December 31, 2014, primarily due to charge-offs related to the sale of
nonperforming residential first mortgage loans.
Commercial loans. As of December 31, 2015, nonperforming commercial loans totaled $2 million. There were no
nonperforming loans as of December 31, 2014. Net charge-offs in commercial loans totaled $1 million for the year ended
December 31, 2015, which was an increase from net recoveries of $1 million for the year ended December 31, 2014, primarily
due to nonperforming commercial loans during the year ended December 31, 2015.
65
The following table sets forth information regarding past due loans at the dates listed.
PAST DUE LOANS HELD-FOR-INVESTMENT
December 31,
Days Past Due
2015
2014
2013
2012
2011
(Dollars in millions)
$
30 – 59 days
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Commercial loans
Commercial real estate
Total 30 – 59 days past due
60 – 89 days
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Commercial loans
Commercial real estate
Total 60 – 89 days past due
90 days or greater
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Commercial loans
Commercial real estate
Commercial and industrial
Total 90 days or greater past due
(1)
Total past due loans
$
7
—
2
1
—
10
3
—
1
—
4
53
2
9
—
—
2
66
80
$
$
29
1
4
—
—
34
8
1
1
—
10
115
2
3
—
—
—
$
37
2
2
—
—
41
19
—
1
—
20
134
3
7
—
2
—
$
63
1
2
1
7
74
17
1
1
7
26
306
4
3
—
86
—
120
164
$
146
207
$
399
499
$
$
75
2
5
2
7
91
37
2
2
12
53
373
6
8
1
99
2
489
633
(1) Includes performing nonaccrual loans that are less than 90 days delinquent for which interest cannot be accrued.
The $84 million decrease in total past due loans at December 31, 2015, compared to December 31, 2014 was primarily
driven by the sale of $421 million unpaid principal balance of nonperforming and interest-only loans during the year ended
December 31, 2015. In addition, our overall credit quality has improved. The 30 to 59 days past due loans decreased to $10 million
at December 31, 2015, compared to $34 million at December 31, 2014, primarily driven by improved asset quality and growth in
higher quality residential mortgage loans.
66
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
December 31, 2015
Loans
Held-for-Investment
Nonaccrual
Loans
As a % of Specified
Loan Portfolio
As a % of
Nonaccrual Loans
(Dollars in millions)
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans (1)
Less allowance for loan losses
Total loans held-for-investment, net
$
$
$
$
$
3,100
135
384
31
3,650
814
552
1,336
2,702
6,352
(187)
6,165
53
2
9
—
64
—
2
—
2
66
1.7%
1.5%
2.3%
—%
1.8%
—%
0.4%
—%
0.1%
1.0%
80.4%
3.0%
13.6%
—%
97.0%
—%
3.0%
—%
3.0%
100.0%
(1) Includes $10 million of nonaccrual loans carried under the fair value option at December 31, 2015.
Troubled debt restructurings (held-for-investment)
Troubled debt restructurings ("TDRs") are modified loans in which a borrower demonstrates financial difficulties and
for which a concession has been granted. The decrease in our total TDR loans at December 31, 2015, compared to
December 31, 2014 was primarily due to TDR loan sales. Nonperforming TDRs were 53.4 percent and 37.9 percent of total
nonperforming loans at December 31, 2015 and December 31, 2014, respectively.
Nonperforming TDRs are included in nonaccrual loans. TDRs remain in nonperforming status until a borrower has
made at least six consecutive months of payments under the modified terms. Performing TDRs are excluded from nonaccrual
loans because it is reasonably assured that all contractual principal and interest due under the restructured terms will be
collected. Within consumer nonperforming loans, residential first mortgage TDRs were 50.5 percent of residential first
mortgage nonperforming loans at December 31, 2015, compared to 37.5 percent at December 31, 2014.
67
The following table provides a summary of TDRs by performing status.
December 31, 2015
Consumer loans (1)
Total TDRs
December 31, 2014
Consumer loans (1)
Commercial loans (2)
Total TDRs
TDRs
Performing
Nonperforming
Total
(Dollars in millions)
$
$
$
$
101
101
361
1
362
$
$
$
$
35
35
46
—
46
$
$
$
$
136
136
407
1
408
(1) Consumer loans include: residential first mortgage, second mortgage, HELOC and other consumer loans. The allowance for loan
losses on consumer TDR loans totaled $15 million and $81 million at December 31, 2015 and 2014, respectively.
(2) Commercial loans include: commercial real estate, commercial and industrial and warehouse loans.
The $272 million decrease in TDRs loans at December 31, 2015, compared to December 31, 2014 was primarily due
to the sale of TDR loans during the year ended December 31, 2015.
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
TDRs
For the Years Ended December 31,
2015
2014
2013
$
$
$
$
(Dollars in millions)
383
44
(34)
7
(7)
(31)
362
47
14
34
(7)
(1)
(41)
46
362
75
(16)
5
(3)
(322)
101
46
23
16
(5)
—
(45)
35
$
$
$
$
$
$
$
$
590
58
(17)
16
(5)
(259)
383
145
15
17
(16)
(1)
(113)
47
(1) Includes loans paid in full or otherwise settled, sold or charged off.
68
Allowance for Loan Losses
See Notes 1 and 5 to the Consolidated Financial Statements for additional information.
The allowance for loan losses was $187 million and $297 million at December 31, 2015 and 2014, respectively. The
decrease in the allowance for loan losses was primarily due to the improvements in asset quality and the release of reserves
from loan sales. In 2014, we recorded a $132 million provision that was primarily driven by two changes in estimates that
occurred in the first quarter (described further in the prior year comparison): the evaluation of current data related to the loss
emergence period on our residential mortgage loan portfolio and the evaluation of the enhanced risk associated with payment
resets relating to interest-only loans. In 2015, we sold 90 percent of our interest-only loans at prices that were favorable as
compared to the continuing reset risk associated with us continuing to hold these loans which was recorded consistent with the
incurred loss methodology. This action along with the sale of $444 million nonperforming loans resulted in a $69 million
reduction to the allowance for loan losses which along with an overall improvement in portfolio quality was the primary driver
of the $19 million net benefit reported in 2015 being partially offset by a $1.9 billion increase in volume of average loans held-
for-investment due to the origination of residential first mortgages and increased commercial lending.
The allowance for loan losses as a percentage of loans held-for-investment decreased to 3.0 percent as of
December 31, 2015 from 7.0 percent as of December 31, 2014, primarily as a result of the improvements in asset quality and
sale of lower quality interest-only residential first mortgage loans, nonperforming loans and troubled debt restructured first
mortgage loans. At December 31, 2015, we had a 4.2 percent allowance coverage of our consumer loan portfolio, consistent
with the decrease in consumer past due loans and sale of lower quality assets. The commercial loan allowance for loan losses
coverage ratio was 1.4 percent at December 31, 2015, reflecting the strong credit quality of this portfolio and growth in
warehouse loans during the nine month ended December 31, 2015.
The following table set forth certain information regarding the allocation of our allowance for loan losses to each loan
category.
ALLOWANCE FOR LOAN LOSSES
December 31, 2015
Investment
Loan
Portfolio
Percent
of
Portfolio
Allowance
Amount
Allowance as a
Percentage of
Loan Portfolio
(Dollars in millions)
49.7% $
1.5%
5.1%
0.5%
56.8%
13.0%
8.8%
21.4%
43.2%
100.0% $
115
11
21
3
150
18
13
6
37
187
3.7%
11.8%
6.5%
9.7%
4.2%
2.2%
2.4%
0.4%
1.4%
3.0%
Consumer loans
Residential first mortgage
$
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total consumer and commercial loans (1)
$
(1) Excludes loans carried under the fair value option.
3,094
93
321
31
3,539
814
552
1,336
2,702
6,241
69
The following tables set forth certain information regarding our allowance for loan losses as of December 31, 2015 and
the allocation of the allowance for loan losses over the past five years.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
At December 31,
2015
2014
2013
2012
2011
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
Allowance
Amount
Allowance
to Total
Loans
(Dollars in millions)
$
116
1.9% $
234
5.6% $
11
21
2
0.2%
0.3%
—%
12
19
1
0.3%
0.4%
—%
162
12
8
2
4.2% $
220
4.0% $
179
0.3%
0.2%
0.1%
20
18
2
0.4%
0.3%
0.1%
17
15
2
2.5%
0.2%
0.2%
0.1%
150
2.4%
266
6.3%
184
4.8%
260
4.8%
213
3.0%
18
13
6
37
0.3%
0.2%
0.1%
0.6%
17
11
3
31
0.4%
0.2%
0.1%
0.7%
19
0.5%
41
0.7%
97
1.4%
3
1
0.1%
—%
3
1
0.1%
—%
7
1
0.1%
—%
23
0.6%
45
0.8%
105
1.5%
$
187
3.0% $
297
7.0% $
207
5.4% $
305
5.6% $
318
4.5%
Consumer loans
Residential first
mortgage
Second mortgage
HELOC
Other
Total consumer
loans
Commercial loans
Commercial real
estate
Commercial and
industrial
Warehouse
lending
Total commercial
loans
Total consumer
and commercial
loans (1)
(1) Excludes loans carried under the fair value option.
70
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
Beginning balance
Provision for loan losses
Charge-offs
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total charge offs
Recoveries
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other consumer
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Total commercial loans
Total recoveries
Charge-offs, net of recoveries
Ending balance
Net charge-off ratio (1)
For the Years Ended December 31,
2015
2014
2013
2012
2011
$
$
297
(19)
(Dollars in millions)
$
207
132
$
305
70
$
318
276
274
177
(87)
(4)
(3)
(4)
(98)
—
(3)
—
(3)
(101)
3
2
—
3
8
2
—
2
10
$
(91)
187
1.85%
$
(38)
(3)
(6)
(2)
(49)
(3)
—
—
(3)
(52)
3
1
—
3
7
3
—
3
10
(42)
297
1.07%
$
(133)
(6)
(5)
(4)
(148)
(47)
(2)
—
(49)
(197)
15
1
1
2
19
10
—
(176)
(19)
(17)
(4)
(216)
(105)
(6)
—
(111)
(327)
19
2
—
2
23
15
—
(42)
(19)
(17)
(5)
(83)
(58)
(1)
(1)
(60)
(143)
2
2
2
2
8
2
—
10
29
(168)
207
4.00%
$
15
38
(289)
305
4.43%
$
2
10
(133)
318
2.14%
(1) Excludes loans carried under the fair value option.
Liquidity Risk
Liquidity risk is the risk that we will not have sufficient funds to meet current and future cash flow needs as they
become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows
in deposits and to take advantage of interest rate and market opportunities. The ability of a financial institution to meet current
financial obligations is a function of the balance sheet structure, the ability to liquidate assets, and access to various sources of
funds.
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 banking business due to
its flexibility in terms of being able to borrow or repay borrowings as daily cash needs require.
71
Our principal uses of funds include loan originations and operating expenses. At December 31, 2015, we had
outstanding rate-lock commitments of $3.8 billion, compared to $2.2 billion at December 31, 2014. These commitments may
expire without being drawn upon and therefore, do not necessarily represent future cash requirements. Total commitments
totaled $5.5 billion at December 31, 2015 and $3.5 billion at December 31, 2014.
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 to originate or purchase 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 monthly principal, interest, taxes and insurance escrow payments.
Our Consolidated Statements of Cash Flows shows cash used in operating activities of $9.5 billion, $8.1 billion, and
$1.6 billion for the years ended December 31, 2015, 2014 and 2013, respectively. This primarily reflects our mortgage
operations and 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 unanticipated liquidity. In addition to this liquidity, we also maintain targeted minimum levels of unused collateralized
borrowing capacity as another cushion against unexpected liquidity needs. Each business day, we forecast 90 days of daily cash
needs. This allows us to determine our projected near term daily cash fluctuations and also to plan and adjust, if necessary,
future activities. As a result, in an adverse environment, we would be able to make adjustments to operations as required to
meet the liquidity needs of our business, including adjusting deposit rates to increase deposits, planning for additional 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.
Deposits
Our deposits consist of three primary categories: retail deposits, government deposits, and company controlled
deposits. Total deposits increased $866 million, or 12.3 percent at December 31, 2015, compared to December 31, 2014,
primarily due to an increase in retail deposits and company controlled deposits.
We have continued to focus on increasing our core deposit accounts such as branch and commercial demand deposits,
savings and money market accounts. These core deposits provide a lower cost funding source to the Bank. During the year
ended December 31, 2015 our core deposits increased $433 million, primarily due to our promotional campaign to increase our
retail savings accounts.
We utilize local governmental agencies, and other public units, as an additional source for deposit funding. These
deposit accounts include $397 million of certificates of deposit with maturities typically less than one year and $665 million in
checking and savings accounts at December 31, 2015.
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. Certain deposits require us to reimburse the owner for the spread on these funds.
This cost is a component of net loan administration income. During the year ended December 31, 2015 these deposits increased
$266 million. This increase is primarily due to the return of these deposits to the Company in September 2015 from another
depository.
72
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 million. At December 31, 2015, we had $310 million of total CDs
enrolled in the CDARS program. The total CDARS balances decreased $83 million at December 31, 2015, from December 31,
2014.
The composition of our deposits was as follows at the date indicated.
December 31,
2015
2014
(Dollars in millions)
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
Commercial deposits
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificate of deposit/CDARS (1)
Total commercial deposits
Total retail deposits subtotal
Government deposits
Demand deposit accounts
Savings accounts
Certificate of deposit/CDARS
Total government deposits (2)
Company controlled deposits (3)
Total deposits (4)
$
797
3,717
163
811
5,488
194
34
104
14
346
302
363
397
1,062
1,039
7,935
$
5,834
0.07%
0.79%
0.15%
0.86%
0.68%
0.41%
0.56%
0.76%
1.03%
0.55%
0.67%
0.39%
0.51%
0.55%
0.49%
—%
0.56%
10.0% $
46.8%
2.1%
10.2%
69.2%
2.4%
0.4%
1.3%
0.2%
4.3%
73.5% $
3.8%
4.6%
5.0%
13.4%
13.1%
726
3,428
209
807
5,170
133
27
43
5
208
5,378
246
317
355
918
773
100.0% $
7,069
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%
—%
0.50%
10.3%
48.5%
3.0%
11.4%
73.1%
1.9%
0.4%
0.6%
0.1%
3.0%
76.1%
3.5%
4.5%
5.0%
13.0%
10.9%
100.0%
(1) The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $0.9 billion at
December 31, 2015 and $0.8 billion at 2014.
(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 $3.4 billion and $2.6 billion at December 31,
2015 and 2014, respectively.
73
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, 2015.
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
$
$
356
41
44
7
24
23
495
$
$
381
10
—
—
—
—
391
$
$
737
51
44
7
24
23
886
The following table sets forth information relating to our total deposit flows for each of the years indicated.
2015
2014
2013
2012
2011
For the Years Ended December 31,
Beginning deposits
Interest credited
Net deposit increase (decrease)
Total deposits, end of the year
$
$
7,068
42
825
7,935
$
$
(Dollars in millions)
8,294
$
42
(2,196)
6,140
$
$
$
6,140
30
898
7,068
7,690
70
534
8,294
$
$
7,998
96
(404)
7,690
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, 2015, we had
the authority and approval from the Federal Home Loan Bank to utilize a line of credit of up to $7.0 billion and we may access
that line to the extent that collateral is provided. At December 31, 2015, we had $3.5 billion of advances outstanding and an
additional $0.5 billion of collateralized borrowing capacity available at Federal Home Loan Bank.
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, 2015, we had pledged commercial and industrial loans amounting to $75 million with a
lendable value of $45 million. At December 31, 2014, we had pledged commercial and industrial loans amounting to $53
million with a lendable value of $31 million. At December 31, 2015 and 2014, we had no borrowings outstanding against this
line of credit.
Federal Home Loan Bank advances. Federal Home Loan Bank advances increased $3.0 billion at December 31, 2015
from December 31, 2014. 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 long-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, 2015, we entered into short-term and long-term fixed rate advances and adjustable rate advances
based on the three-month LIBOR index. Interest rates on the LIBOR index advances reset every three-months and the advances
may be prepaid without penalty, with notification, at scheduled three-month intervals after an initial 12-month lockout period.
See Note 13 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.
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
74
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.
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 These payments will be
periodically evaluated and reinstated when appropriate, subject to provisions of the Consent Order and Supervisory Agreement.
At December 31, 2015, we have deferred interest payments for 16 consecutive quarters for a total amount of $27 million.
Following the Assured Settlement Agreement, we consolidated the debt associated with certain HELOC securitizations
held in a trust or variable interest entity ("VIE"), at fair value. We exercised our clean-up call with respect to the 2005-1
HELOC securitization trust, during the second quarter 2015. The transaction resulted in a cash payment of $24 million to the
debt bondholders. After payment of the debt, the FSTAR 2005-1 HELOC securitization trust was dissolved during the second
quarter 2015. We exercised our clean-up call with respect to the 2006-2 HELOC securitization trust, during the fourth quarter
2015. The transaction resulted in a cash payment of $28 million to the debt bondholders. After payment of the debt, the FSTAR
2006-2 HELOC securitization was dissolved during the fourth quarter 2015.
For information relating to long-term debt, see Note 14 of the Notes to the Consolidated Financial Statements, in
Item 8. Financial Statements herein.
Federal Home Loan Bank stock
As a member of the Federal Home Loan Bank, we are required to hold shares of Federal Home Loan Bank stock in an
amount equal to at least one percent of aggregate unpaid principal balance of our mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or 4.5 percent of our Federal Home Loan Bank advances, whichever is greater.
Once purchased, Federal Home Loan Bank shares must be held for five years before they can be redeemed. At December 31,
2015, holdings of Federal Home Loan Bank stock increased to $170 million from $155 million at December 31, 2014, due to a
Federal Home Loan Bank stock purchase which was required due to our higher borrowing levels.
Contractual Obligations and Commitments
We have various financial obligations, including contractual obligations and commitments, which require future cash
payments. Refer to Notes 1, 12, 13 and 14 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, 2015.
Less than
1 Year
1-3 Years
3-5 Years
(Dollars in millions)
More than
5 Years
Total
Deposits without stated maturities
$
5,674
$
— $
— $
— $
Certificates of deposits
Federal Home Loan Bank advances
Trust preferred securities
Operating leases
Other debt
Total
Market Risk
940
2,291
—
4
—
8,909
$
$
191
175
—
5
—
371
$
59
250
—
2
—
311
32
825
247
1
84
1,189
$
$
5,674
1,222
3,541
247
12
84
10,780
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 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
75
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.
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 11 and 24 of the Notes to Consolidated Financial Statements. 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 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
12 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, 2015 and December 31, 2014 and adjusted by instantaneous parallel rate changes plus or minus 200 basis points.
The minus 200 basis point shock scenario is a flattener scenario as rates are floored at zero given the current interest rate levels.
Scenario
200
Constant
(200)
Scenario
200
Constant
(200)
$
$
December 31, 2015
Net interest Income
$ Change
% Change
(Dollars in millions)
$
312
306
258
December 31, 2014
6
—
(48)
Net interest Income
$ Change
% Change
(Dollars in millions)
$
297
254
207
42
—
(48)
2.0 %
— %
(16.0)%
17.0 %
— %
(19.0)%
We have also projected the potential impact to net interest income in a hypothetical "bear flattener" interest rate
scenario as of December 31, 2015. When increasing short-term interest rates instantaneously by 100 basis points and holding
the longer term interest rates unchanged, the decrease to net interest income over a 12-month and 24-month period based on our
forecasted balance sheet is a loss of $23 million and $40 million, respectively.
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 of time, typically 12 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.
76
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 off-
balance sheet instruments. The interest rate scenarios presented in the table include interest rates at December 31, 2015 and
December 31, 2014, 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.
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
EVE
December 31, 2015
EVE%
$ Change
% Change
Scenario
EVE
December 31, 2014
EVE%
$ Change
% Change
$
300
200
100
Current
(100)
1,814
1,915
2,004
2,059
2,027
14.6% $
14.9%
15.1%
15.1%
14.6%
(245)
(144)
(55)
—
(33)
(Dollars in millions)
(11.9)%
(7.0)%
(2.7)%
300
200
100
— % Current
(1.6)%
(100)
$
1,462
1,537
1,618
1,680
1,703
16.6% $
17.0%
17.4%
17.7%
17.6%
(217)
(143)
(62)
—
24
(12.9)%
(8.5)%
(3.7)%
— %
1.4 %
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. The (100)
is a flattener scenario as shorter term rates are unable to decrease 100 basis points due to the absolute level of rates. Therefore,
the yields of the longer term variable rate assets decrease by the full 100 basis points, but the liabilities repricing to shorter term
rates decrease to less than 100 basis points, leading to a reduction in EVE.
Mortgage servicing rights
At December 31, 2015, MSRs at fair value increased $38 million to $296 million, compared to $258 million at
December 31, 2014, primarily due to an increase in the volume of the unpaid principal balance of servicing retained MSRs.
In the third quarter 2015, we began economically hedging the risk of changes in implied volatility caused by changing
market expectations, which impacts the fair value of the MSRs.
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 have continued to reduce our MSR concentration which should result in a decrease of the
exclusion to our allowable capital levels under Basel III. See Note 10 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 20.6 percent at
December 31, 2015, as compared to 21.8 percent at December 31, 2014.
77
The principal balance of the loans underlying our total MSRs was $26.1 billion at December 31, 2015, compared to
$25.4 billion at December 31, 2014, with the increase primarily attributable to an increase in loan origination activity for the
year ended December 31, 2015 offset by our bulk servicing sales of $19.0 billion in underlying loans.
The recorded amount of the MSR portfolio at December 31, 2015 and 2014 as a percentage of the unpaid principal
balance of the loans we are servicing was 1.1 percent and 1.0 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 27.7 basis points of the unpaid principal balance. 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 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, 2015, 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 12.6 CPR; and (3) annual servicing costs of $67 per
conventional loan, $88 for each government loan and $85 for each adjustable-rate loan, respectively. 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) servicing costs of $67 per conventional loan, $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
2015
2014
2013
2012
2011
For the Years Ended December 31,
$
$
$
25,427
26,306
(6,612)
(18,976)
26,145
$
(Dollars in millions)
25,743
24,407
(3,919)
(20,804)
25,427
$
$
76,821
35,827
(9,896)
(77,009)
25,743
$
$
63,771
53,094
(22,097)
(17,947)
76,821
$
$
56,040
27,437
(9,488)
(10,218)
63,771
Balance, beginning of year
Loans serviced additions
Loan amortization/prepayments
Servicing sales
Balance, end of year
Investment securities
Investment securities available-for-sale, decreased from $1.7 billion at December 31, 2014, to $1.3 billion at
December 31, 2015. The decrease was primarily due to the transfer of $1.1 billion of available-for-sale securities to held-to-
maturity securities, partially offset by the purchases and sales of $0.9 billion and $0.2 billion, respectively, of agency securities,
including mortgage-backed securities and collateralized mortgage obligations.
Investment securities held-to-maturity increased to $1.3 billion at December 31, 2015, primarily due to the transfer of
$1.1 billion of available-for-sale securities to held-to-maturity securities during the third quarter 2015 and purchases of $0.2
billion. The investment securities transferred and purchased for the held-to-maturity portfolio reflects our intent and ability to
hold those securities to maturity. We did not classify any investment securities held-to-maturity at December 31, 2014.
See Note 2 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary
Data, herein.
78
Impact of Inflation and Changing Prices
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 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.
Operational Risk
Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls; violations of,
or noncompliance with, laws, rules and regulations, prescribed practices, or ethical standards; and external influences such as
market conditions, fraudulent activities, disasters, and security risks. We continuously strive to 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.
Loans with government guarantees
The amount of loans with government guarantees totaled $485 million at December 31, 2015 and the loans which we
have not yet repurchased but had the unilateral right to repurchase totaled $9 million and were classified as loans with
government guarantees. At December 31, 2014, loans with government guarantees totaled $1.1 billion and those loans which
we had not yet repurchased but had the unilateral right to repurchase totaled $9 million and were classified as loans with
government guarantees. The balance of this portfolio decreased $643 million for the year ended December 31, 2015, as
compared to the year ended December 31, 2014 due to a higher volume of claims filed, lower volumes of repurchases, and a
reclassification of $373 million of repossessed assets and claims as a result of the adoption of ASU Update No. 2014-14,
Receivables - Troubled Debt Restructuring by Creditors (Subtopic 310-40). Repossessed assets and the associated claims
recorded in other assets declined $163 million at December 31, 2015, from December 31, 2014 to $210 million. The decrease
was primarily driven by a higher volume of claims filed and lower volume of loans being transferred in.
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.
For further information on loans with government guarantees, see Note 4 of the Notes to the Consolidated Financial
Statements, in Item 8. Financial Statements and Supplementary Data, herein.
79
Representation and warranty reserve
When we sell mortgage loans, we make customary representations and warranties to the purchasers, including
sponsored securitization trusts and their insurers (primarily Fannie Mae and Freddie Mac).
REPRESENTATION AND WARRANTY RESERVE
Beginning balance
Charge to gain on sale for current loan
sales
Provision (benefit) representation and
warranty reserve - change in estimate
Charge-offs, net
Ending balance
$
$
2015
2014
2013
2012
2011
For the Years Ended December 31,
53
$
54
$
193
$
120
$
(Dollars in millions)
7
(19)
(1)
40
$
7
10
(18)
53
$
18
24
36
(193)
54
$
256
(207)
193
$
79
9
150
(118)
120
Note: In the fourth quarter 2013, we settled substantially all of the repurchase requests and obligations associated with loans originated
between January 1, 2000 and December 31, 2008 and sold to Fannie Mae and Freddie Mac which has resulted in lower charge offs
subsequent to 2013.
The decrease in the provision adjustment charged to representation and warranty reserve expense during the year
ended December 31, 2015, was primarily due to lower charge-offs coupled with our ongoing efforts to continue to refine our
estimates as more data becomes available reflecting the trend under the revised representation and warranty reserve framework
as published by the Federal Housing Finance Agency.
During the year ended December 31, 2015, we had $81 million in Fannie Mae new repurchase demands and $30
million in Freddie Mac new repurchase demands.
The following table summarizes the aggregate amount of pending repurchase demands, which are put-backs we have
received and are in process of being reviewed, at the end of each year noted. The increase in non-agency pending repurchase
demands was primarily due to the decline in the overall pending repurchase demands.
Period end balance
Percent non-agency (approximately)
2015
December 31,
2014
2013
$
$
(Dollars in millions)
43
1.6%
$
20
7.0%
97
2.6%
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)
Loans expected to be repurchased (percent of loss severity rate) (2)
December 31, 2015
December 31, 2014
(Dollars in millions)
$
162,301
$
143,605
0.03%
0.04%
(1) Includes unpaid principal balance of 2009 and later vintage loans sold to Fannie Mae and Freddie Mac through December 31, 2015.
(2) Loans expected to be funded post appeal loss. Average loss severity rate expected to be experienced on actual repurchases made
(post appeal loss).
See Note 15 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary
Data, herein.
80
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 the 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. At December 31, 2015, the amount of the arrearage on the dividend payments
of the Series C Preferred Stock was $86 million. At the time that the Company pays the deferred 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 expect to redeem our Series C Preferred Stock and restore interest payments on our trust
preferred securities in the second half of 2016, thus optimizing our capital structure.
Consent Orders
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. We continue to be encouraged by our progress with the OCC on the consent order.
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 $28 million for borrower remediation and $10 million in civil money penalties. The
settlement does not involve any admission of wrongdoing on the part of the Bank or its employees, directors, officers, or
agents.
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. For
further information and a complete description of all of the terms of the Supervisory Agreement, please refer to the copy of the
Supervisory Agreement filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on January 28,
2010.
Regulatory Capital Composition - Transition
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific
capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors. We are currently subject to regulatory capital rules issued by
U.S. banking regulators. On January 1, 2015, we became subject to the Basel III rules, which include certain transition
provisions through 2018. Through December 31, 2014, we were subject to the Basel I general risk-based capital rules.
Important differences in determining the composition of regulatory capital between the Basel I Rules and Basel III
include changes in capital deductions related to the Company's MSRs and deferred tax assets. These changes will be impacted
by, among other things, future changes in interest rates, overall earnings performance and corporate actions. Changes to the
composition of regulatory capital under Basel III, as compared to the Basel I Rules, are recognized in 20 percent annual
81
increments, and will be fully recognized as of January 1, 2018. When presented on a fully phased-in basis, capital, risk-
weighted assets, and the capital ratios assume all regulatory capital adjustments and deductions are fully recognized.
As of December 31, 2015, the Company and the Bank were subject to a partial phase-in limitation on deductions
related to MSRs and certain deferred tax assets. This partial phase-in reduced our Tier 1 leverage ratio when compared to the
same ratio under Basel I. Our common equity Tier I ratio increased under the phase-in rules, as the absorption of the write-off
of excess MSRs and net operating loss-dependent deferred tax assets are included at only 40 percent by common equity Tier 1
in the first year of the phase-in. The remaining net operating loss-dependent DTAs above the Basel III limits are written off
against the non-common elements of Tier 1 capital (the preferred shares and the trust preferred securities) in this first year of
phase-in.
Effective on January 1, 2015, the capital framework under the Basel III final rule replaced 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. The final rule implements a new common equity Tier 1 minimum capital
requirement. 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. The capital conservation
buffer becomes effective January 1, 2016 with transition provisions through 2018.
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 $15.0 billion in total
consolidated assets as of December 31, 2009. Although the Company continues 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.
At December 31, 2015, we were considered "well-capitalized" for regulatory purposes. The following table shows the
regulatory capital ratios as of the dates indicated.
Bancorp
Tier 1 leverage (to adjusted tangible assets)
Total adjusted tangible asset base (2)
Tier 1 capital (to risk weighted assets)
Common equity Tier 1 (to RWA) (1)
Total risk-based capital (to risk weighted assets)
Risk weighted asset base (2)
Bank
Tier 1 leverage (to adjusted tangible assets)
Total adjusted tangible asset base (2)
Tier 1 capital (to risk weighted assets)
Common equity Tier 1 (to RWA) (1)
Total risk-based capital (to risk weighted assets)
Risk weighted asset base (2)
December 31, 2015
December 31, 2014
Amount
Ratio
Amount
Ratio
1,435
12,474
1,435
1,065
1,534
7,561
11.51% $
$
18.98% $
14.09%
20.28% $
$
1,184
9,403
1,184
N/A
1,252
5,190
12.59%
22.81%
N/A
24.12%
December 31, 2015
December 31, 2014
Amount
Ratio
Amount
Ratio
1,472
12,491
1,472
1,472
1,570
7,582
11.79% $
$
19.42% $
19.42%
20.71% $
$
1,167
9,392
1,167
N/A
1,235
5,179
12.43%
22.54%
N/A
23.85%
$
$
$
$
$
$
$
$
$
$
$
$
(1) N/A - Not applicable
(2) Based on adjusted total assets for purposes of Tier 1 leverage capital and risk-weighted assets for purposes Tier1, common equity
Tier 1, and total risk-based capital. On January 1, 2015, the Basel III rules became effective, subject to transition provisions
primarily related to regulatory deductions and adjustments impacting common equity Tier 1 capital and Tier 1 capital. The
Company and the Bank reported under Basel I (which included the Market Risk Final Rules) at December 31, 2014
Our Tier 1 leverage ratio decreased at December 31, 2015, as compared to December 31, 2014, primarily resulting
from the growth in the ending balance of total adjusted assets, which was generated from overall growth in all loan portfolios.
The decrease was partially offset by the positive impact of earnings for the year.
82
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.
Certain regulatory capital ratios for the Bank and the Company as of December 31, 2015 are shown in the following
table.
December 31, 2015
Basel III Ratios (transitional)
Common equity Tier I capital ratio
Tier I leverage ratio
Basel III Ratios (fully phased-in) (1)
Common equity Tier I capital ratio
Tier I leverage ratio
(1) See "Use of Non-GAAP Financial Measures."
Regulatory
Minimums
Regulatory
Minimums to be
Well-Capitalized
Bank
Company
4.50%
4.00%
4.50%
4.00%
6.50%
5.00%
6.50%
5.00%
19.42%
11.79%
16.98%
10.64%
14.09%
11.51%
9.40%
10.01%
Looking at the impact of a fully phased in implementation of Basel III, our Tier 1 leverage ratio would have been
10.01 percent and our Tier 1 common ratio would have been 9.40 percent at December 31, 2015. The impact to our Tier 1
leverage ratio is mostly driven by the treatment that mortgage servicing rights receive under Basel III. Over the long term, we
plan to continue to reduce our mortgage servicing rights to Tier 1 ratio, taking into consideration market conditions to guide our
pace of MSR reduction. At December 31, 2015, we had $296 million of mortgage servicing rights, representing 20.6 percent of
Tier 1 capital. We will continue to look for opportunities to reduce our mortgage servicing rights exposure over time.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures such as
the 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.
83
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.
2015
2014
2013
2012
2011
(Dollars in millions)
December 31,
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 prior to 2013.
$
83
1,435
(187)
$
139
1,184
(297)
$
182
1,281
(207)
$
521
1,296
(305)
603
1,215
(318)
1,622
$
1,481
$
1,488
$
1,601
$
1,533
5.1%
9.4%
12.2%
32.5%
39.3%
Basel III (transitional) to Basel III (fully phased-in) reconciliation. On January 1, 2015, the Basel III rules became
effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity
Tier 1 capital and Tier 1 capital. We reported under Basel I (which included the Market Risk Final Rules) at December 31,
2014. 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 2018.
Accordingly, the calculations provided below are estimates. These measures are considered to be non-GAAP financial measures
because they are not formally defined by GAAP and the Basel III implementation regulations will not be fully phased-in until
January 1, 2019. The 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.
December 31, 2015
Flagstar Bancorp
Common Equity
Tier 1 (to Risk
Weighted Assets)
Tier 1 Leverage
(to Adjusted
Tangible Assets) (1)
Tier 1 Capital (to
Risk Weighted
Assets
Total Risk-Based
Capital (to Risk-
Weighted Assets)
(Dollars in millions)
Regulatory capital – Basel III (transitional) to Basel III (fully
phased-in) (1)
Basel III (transitional)
Increased deductions related to deferred tax assets, mortgage
servicing assets, and other capital components
Basel III (fully phased-in) capital (1)
Risk-weighted assets – Basel III (transitional) to Basel III
(fully phased-in) (1)
Basel III assets (transitional)
Net change in assets
Basel III (fully phased-in) assets (1)
Capital ratios
Basel III (transitional)
Basel III (fully phased-in) (1)
$
$
$
$
$
$
$
$
1,065
(360)
705
7,561
(60)
7,501
14.09%
9.40%
$
$
$
$
1,435
(209)
1,226
12,474
(224)
12,250
11.51%
10.01%
1,435
(209)
1,226
7,561
(60)
7,501
$
$
$
$
1,534
(209)
1,325
7,561
(60)
7,501
18.98%
16.35%
20.28%
17.67%
(1) On January 1, 2015, the Basel III rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments
impacting common equity Tier I capital and Tier I capital. We reported under Basel I (which included the Market Risk Final Rules) at December 31,
2014.
84
December 31, 2015
Flagstar Bank
Common Equity
Tier 1 (to Risk
Weighted Assets)
Tier 1 Leverage
(to Adjusted
Tangible Assets) (1)
Tier 1 Capital (to
Risk Weighted
Assets
Total Risk-Based
Capital (to Risk-
Weighted Assets)
(Dollars in millions)
Regulatory capital – Basel III (transitional) to Basel III (fully
phased-in) (1)
Basel III (transitional)
Increased deductions related to deferred tax assets, mortgage
servicing assets, and other capital components
Basel III (fully phased-in) capital (1)
Risk-weighted assets – Basel III (transitional) to Basel III
(fully phased-in) (1)
Basel III assets (transitional)
Net change in assets
Basel III (fully phased-in) assets (1)
Capital ratios
Basel III (transitional)
Basel III (fully phased-in) (1)
$
$
$
$
$
$
$
$
1,472
(160)
1,312
7,582
148
7,730
19.42%
16.98%
$
$
$
$
1,472
(160)
1,312
12,491
(160)
12,331
11.79%
10.64%
1,472
(160)
1,312
7,582
148
7,730
$
$
$
$
1,570
(159)
1,411
7,582
148
7,730
19.42%
16.98%
20.71%
18.25%
(1) On January 1, 2015, the Basel III rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments
impacting common equity Tier I capital and Tier I capital. We reported under Basel I (which included the Market Risk Final Rules) at December 31,
2014.
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."
85
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Management's Report
Report of Independent Registered Public Accounting Firms
Consolidated Statements of Financial Condition as of December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015,
2014 and 2013
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and
2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
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 with Government Guarantees
Note 5 - Loans Held-for-Investment
Note 6 - Repossessed Assets
Note 7 - Variable Interest Entities ("VIEs")
Note 8 - Federal Home Loan Bank Stock
Note 9 - Premises and Equipment
Note 10 - Mortgage Servicing Rights
Note 11 - Derivative Financial Instruments
Note 12 - Deposit Accounts
Note 13 - Federal Home Loan Bank Advances
Note 14 - Long-Term Debt
Note 15 - Representation and Warranty Reserve
Note 16 - Warrant Liabilities
Note 17 - Stockholders' Equity
Note 18 - Accumulated Other Comprehensive Income
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)
87
88
90
91
92
93
94
96
96
105
107
107
108
116
116
117
117
118
119
123
124
125
126
126
127
127
128
128
130
133
135
137
147
151
153
86
March 14, 2016
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, 2015, based on the
framework and criteria established in the 2013 Internal Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31,
2015, has been audited by PricewaterhouseCoopers, 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)
87
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Flagstar Bancorp, Inc.
Troy, MI
In our opinion, the accompanying consolidated statement of financial condition as of December 31, 2015 and the related
consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the year then
ended present fairly, in all material respects, the financial position of Flagstar Bancorp, Inc. and its subsidiaries at December 31,
2015, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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
Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated
audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall 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 audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides 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 financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers, LLP
Detroit, Michigan
March 14, 2016
88
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
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 the related consolidated statements of operations, comprehensive income
(loss), stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2014. The Company's
management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated
financial statements 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. 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. We believe that our audits provide a reasonable basis for our opinion.
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 the consolidated results of their
operations and their cash flows for each of the two years in the period ended December 31, 2014, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Baker Tilly Virchow Krause, LLP
Southfield, Michigan
March 16, 2015
89
Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In millions, except share data)
Assets
Cash and cash equivalents
Cash
Interest-earning deposits
Total cash and cash equivalents
Investment securities available-for-sale
Investment securities held-to-maturity
Loans held-for-sale ($2,541 and $1,196 measured at fair value, respectively)
Loans with government guarantees
Loans held-for-investment, net
Loans held-for-investment ($111 and $211 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 (includes both long-term and short-term)
Long-term debt ($0 and $84 measured at fair value, respectively)
Representation and warranty reserve
Other liabilities ($84 and $82 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; 56,483,258 and
56,332,307 shares issued and outstanding, respectively
Additional paid in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
December 31,
2015
2014
$
54
$
$
$
154
208
1,294
1,268
2,576
485
6,352
(187)
6,165
296
170
250
364
639
13,715
1,574
6,361
7,935
3,541
247
40
423
12,186
267
1
1,486
2
(227)
1,529
$
$
Total liabilities and stockholders’ equity
$
13,715
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
47
89
136
1,672
—
1,244
1,128
4,448
(297)
4,151
258
155
238
442
416
9,840
1,209
5,860
7,069
514
331
53
500
8,467
267
1
1,482
8
(385)
1,373
9,840
90
Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
Interest Income
Loans
Investment securities
Interest-earning deposits and other
Total interest income
Interest Expense
Deposits
Federal Home Loan Bank advances
Other
Total interest expense
Net interest income
(Benefit) provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Net gain on loan sales
Loan fees and charges
Deposit fees and charges
Loan administration income
Net return on mortgage servicing asset
Net (loss) gain on sale of assets
Net impairment losses
Representation and warranty benefit (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
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Preferred stock dividend/accretion
Net income (loss) from continuing operations
Earnings (loss) per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
For the Years Ended December 31,
2015
2014
2013
$
295
$
246
$
59
1
355
42
18
8
68
287
(19)
306
288
67
25
26
28
(1)
—
19
18
$
$
470
237
$
$
39
81
15
23
—
52
36
53
536
240
82
158
—
158
2.27
2.24
$
$
$
$
$
39
1
286
30
2
7
39
247
132
115
206
73
22
24
24
12
—
(10)
10
361
233
35
80
57
23
—
37
51
63
$
$
$
$
579
$
(103) $
(34)
(69)
(1)
(70) $
(1.72) $
(1.72) $
$
$
$
$
$
$
$
$
$
313
12
5
330
42
95
7
144
186
70
116
402
104
21
6
91
2
(9)
(36)
72
653
279
54
80
52
35
178
52
78
110
918
(149)
(416)
267
(6)
261
4.40
4.37
56,426,977
57,164,523
56,246,528
56,246,528
56,063,282
56,518,181
The accompanying notes are an integral part of these Consolidated Financial Statements.
91
Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
Net income (loss)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on investment securities
available-for-sale
For the Years Ended December 31,
2015
2014
2013
$
158
$
(69) $
267
Unrealized gain (loss) (net of tax effect ($2), $8, and
$1, respectively)
Less: Reclassification of net gain (loss) on the sale
(net of tax effect $1, ($1), and $1, respectively)
Net change in unrealized gain (loss) on investment
securities available-for-sale, net of tax
Unrealized loss on derivative instruments designated to
cash flow hedges
Unrealized loss (net of tax effect ($1), zero and zero,
respectively)
Less: Reclassification of net loss on derivative
instruments
Net change in unrealized loss on derivative
instruments, net of tax
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
$
(5)
2
(3)
(5)
2
(3)
(6)
152
$
16
(3)
13
—
—
—
13
(56) $
(20)
17
(3)
—
—
—
(3)
264
The accompanying notes are an integral part of these Consolidated Financial Statements.
92
Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders' Equity
(In millions, except share data)
Preferred Stock
Common Stock
Number of
Shares
Outstanding
Amount of
Preferred
Stock
Number of
Shares
Outstanding
Amount of
Common
Stock
Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
266,657 $
260 55,863,053 $
1 $
1,477 $
—
—
—
—
—
—
6
—
—
—
—
275,021
—
—
—
—
—
—
—
2
(2) $
—
(576) $
267
1,160
267
(3)
—
—
—
(6)
—
(3)
—
2
266,657 $
266 56,138,074 $
1 $
1,479 $
(5) $
(315) $
1,426
—
—
—
—
—
—
1
—
—
—
—
194,233
—
—
—
—
—
—
—
3
—
13
—
—
—
(1)
—
(69)
(69)
266,657 $
267 56,332,307 $
1 $
1,482 $
8 $
(385) $
—
—
—
—
—
—
—
—
—
—
150,951
—
—
—
—
—
—
—
3
1
—
(6)
—
—
158
—
—
—
266,657 $
267 56,483,258 $
1 $
1,486 $
2 $
(227) $
1,529
13
—
3
1,373
158
(6)
3
1
Balance at December 31,
2012
Net income
Total other
comprehensive income
Accretion of preferred
stock
Stock-based
compensation
Balance at December 31,
2013
Net loss
Total other
comprehensive loss
Accretion of preferred
stock
Stock-based
compensation
Balance at December 31,
2014
Net income
Total other
comprehensive income
Stock-based
compensation
Warrant exercise
Balance at December 31,
2015
The accompanying notes are an integral part of these Consolidated Financial Statements.
93
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In millions)
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
$
158
$
(69) $
For the Years Ended December 31,
2015
2014
2013
(Benefit) provision for loan losses
Representation and warranty (benefit) provision
Depreciation and amortization
Changes in valuation allowance on deferred tax assets
Deferred income taxes
Change in fair value and other non-cash changes
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 ("HFS")
Origination, premium paid and purchase of loans, net of principal repayments
(Increase) decrease in accrued interest receivable
Net proceeds from sales of trading securities
Decrease (increase) 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 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
Collection of principal on investment securities held-to-maturity ("HTM")
Purchase of investment securities held-to-maturity
Proceeds received from the sale of held-for-investment ("HFI") loans
Origination and purchase of loans HFI, net of principal repayments
Purchase of bank owned life insurance
Proceeds from the disposition of repossessed assets
Net (purchase) 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
$
$
$
(19)
(19)
24
11
67
(132)
(288)
—
—
18,467
(28,008)
(8)
—
211
(1)
132
10
24
8
(36)
(280)
(218)
—
—
17,189
(24,899)
33
—
(33)
(18)
(10)
(9,547) $
12
(8,145) $
9,098
$
9,191
$
218
(1,148)
85
(217)
946
(3,130)
(175)
24
(15)
(46)
245
5,885
$
160
(1,278)
—
—
73
(923)
—
39
54
(33)
226
7,509
$
267
70
36
23
(356)
(59)
(121)
(430)
9
(46)
37,162
(37,957)
44
170
125
(193)
(306)
(1,562)
3,412
55
(1,057)
—
—
1,434
666
—
117
92
(36)
851
5,534
94
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In millions)
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 (disbursement) of escrow payments
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Supplemental disclosure of cash flow information
Interest paid on deposits and other borrowings
Income tax payments (refund)
FHLB prepayment penalty payment
Non-cash reclassification of investment securities AFS to HTM
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
Initial non-cash reclassification of loans with government guarantees to other
assets
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
For the Years Ended December 31,
2015
2014
2013
866
$
928
$
37,399
(34,372)
(88)
(76)
5
18,972
(19,446)
(29)
70
(4)
3,734
$
491
$
72
136
208
58
6
$
$
$
— $
$
1,112
1,140
30
8,853
373
$
$
$
$
260
$
— $
— $
— $
(145)
281
136
32
$
$
(1) $
— $
— $
426
19
8,800
$
$
$
— $
271
$
— $
— $
— $
(2,154)
4,315
(6,507)
(20)
(278)
—
(4,644)
(672)
953
281
143
6
178
—
832
64
3,376
—
402
91
171
120
The accompanying notes are an integral part of these Consolidated Financial Statements.
95
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 1 — Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies
Description of Business
Flagstar Bancorp, Inc. ("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 is 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") and the Consumer Financial Protection Bureau (the
"CFPB"). 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 financial reporting policies of Flagstar and its subsidiaries conform
to accounting principles generally accepted in the United States ("GAAP"). Additionally, where applicable the policies conform
to the accounting and reporting guidelines prescribed by regulatory authorities. Certain prior period amounts have been
reclassified to conform to the current period presentation. The preparation of the Consolidated Financial Statements, requires
management to make estimates and assumptions that affect reported amounts of assets and liabilities, revenues and expenses
and disclosures of contingent assets and liabilities. Actual results could be materially different from these estimates.
Subsequent Events
Subsequent to December 31, 2015, the Company transferred approximately $800 million conforming residential loans
that remained eligible for sale to the Agencies previously classified as held-for-investment to held-for-sale. This transfer was
due to a change in management’s intent in 2016 related to those specific loans driven by significant changes in market
conditions during the first quarter of 2016 primarily related to a decline in interest rates. Management expects there will be no
adverse material impact to the Consolidated Statements of Operations resulting from the change in classification.
The Company has evaluated all subsequent events for potential recognition and disclosure through the filing date of
this Form 10-K.
Cash and Cash Equivalents
Cash and cash equivalents include amounts due from correspondent banks and the Federal Reserve Bank. Short-term
investments that have a maturity at the date of acquisition of three months or less and are readily convertible to cash.
Investment Securities
Investment securities classified as trading are recorded at fair value, with unrealized and realized gains or losses
included as a component of "other noninterest income" in the Consolidated Statements of Operations.
The Company measures securities classified as available-for-sale at fair value, with unrealized gains and losses, net of
tax, included in "other comprehensive income (loss)" in stockholders’ 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 "other noninterest income" in the Consolidated
Statements of Operations. The fair value of investment securities is based on observable market prices, when available. If
observable market prices are not available, our valuations are based on alternative methods, including: quotes for similar fixed-
income securities, matrix pricing, discounted cash flow using benchmark interest rate curves or other factors. The fair values
are obtained through independent third parties from pricing services which the Company compares to independent pricing
96
Flagstar Bancorp, Inc.
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sources on a quarterly basis. 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.
Investment securities held-to-maturity are carried at amortized cost and adjusted for amortization of premiums and
accretion of discounts using the interest method. Transfers of investment securities into the held-to-maturity category from the
available-for-sale category are accounted for at fair value at the date of transfer. Any related unrealized holding gain (loss), net
of tax, that was included in the transfer is retained in other comprehensive income (loss) and is amortized as an adjustment to
interest income over the remaining life of the securities.
The Company evaluates available-for-sale and held-to-maturity investment 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 costs and the Company (1) has the intent to sell the security, (2) will more likely than not be required to sell
the security before recovery of its amortized cost, or (3) does not expect to recover the entire amortized cost basis of the
security. Investments that have an OTTI are written down through a charge to earnings in "net impairment losses" in the
Consolidated Statements of Operations 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.
Investment securities transactions are recorded on the trade date for purchases and sales. Interest earned on investment
securities, including the amortization of premiums and the accretion of discounts 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.
Loans Held-for-Sale
The Company classifies loans as held-for-sale when it originates or purchases loans that it intends to sell. The
Company has elected the fair value option for the majority of its loans held-for-sale. 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 by
discounting estimated cash flows using observable inputs inclusive of interest rates, prepayment speeds and loss assumptions
for similar collateral. Loans held-for-sale that are recorded at lower of cost or fair value may be carried at fair value on a
nonrecurring basis when the fair value is less than cost. See Note 24 of the Notes to the Consolidated Financial Statements,
herein, for additional recurring fair value disclosures.
Loans that are transferred into the held-for-sale portfolio from the held-for-investment portfolio are recorded at the
lower of cost or fair value when there is an intent to sell these loans. 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 unamortized premiums, discounts,
deferred fees and costs (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.
Loans originally classified as held-for-sale and subsequently transferred to held-for-investment continue to be
measured and reported at fair value on a recurring basis. As a result of the election of the fair value option, changes in fair value
are recorded to "other noninterest income" on the Consolidated Statements of Operations. The fair value of these loans is
determined using the same methods described above for loans held-for-sale. See Note 24 of the Notes to the Consolidated
Financial Statements, herein, for additional recurring fair value disclosures.
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.
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Notes to the Consolidated Financial Statements
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. Concessions include reduction of interest rate, extension 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 a 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 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 the scheduled payment
date. While it is the goal of management to collect on loans, the Company attempts to work out a satisfactory repayment
schedule or modification with past due borrowers and will undertake foreclosure proceedings if the delinquency is not
satisfactorily resolved. 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 ceases the accrual of interest on consumer and commercial loans once they become 90 days past due, or
earlier when concerns exist as to the ultimate collection of principal or interest. When a loan is placed on nonaccrual status, the
accrued interest income is reversed and may only return to accrual status when principal and interest become current and are
anticipated to be fully collectible.
Loans are considered impaired if it is probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement or when any portion of principal or interest is 90 days past due. See Note 24 of
the Consolidated Financial Statements, herein, for additional nonrecurring 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. Interest income is recognized on impaired loans using a cost recovery method unless amounts
contractually due are not 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 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. The Company establishes an allowance when
(a) available information indicates that it is probable that a loss has occurred and (b) the amount of the loss can be reasonably
estimated. The allowance provides for probable losses that have been identified with specific customer relationships
(individually evaluated) and for probable losses believed to be inherent in the loan portfolio but that have not been specifically
identified (collectively evaluated). Management assigns qualitative factors to each loan portfolio segment based on
consideration of the following factors: changes in lending policies and procedures, changes in economic and business
conditions, changes in the nature and volume of the portfolio, changes in lending management, changes in credit quality
statistics, changes in the quality of the loan review system, changes in the value of underlying collateral for collateral-
dependent loans, changes in concentrations of credit, and other internal or external factor changes.
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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. The required allowance is measured
using either the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of
the collateral less estimated disposal costs if the loan is collateral dependent. A general allowance is established for losses
inherent on non-impaired loans by segmenting the portfolio based upon common risk characteristics. The general loss is then
determined by using a historical loss model which utilizes 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 model utilizes a loss emergence period that
represents the average amount of time between when the loss event first occurs and when the specific loan is charged-off. In
addition to the loss history or peer data, the Company also includes a qualitative adjustment that considers economic risks,
industry and geographic concentrations and other factors not adequately captured in the Company's methodology.
For both consumer and commercial 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.
Consumer loans secured by real estate are charged-off to the estimated fair value of the collateral when a loss is
confirmed or at 180 days past due, 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. For consumer loans not secured by real estate, the charge-off is taken upon confirmation or 120
days past due.
Commercial loans are evaluated on a loan level basis and either charged-off or written down to net realizable value if a
loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued
delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of
repayment.
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 (1) whether the transferee would be a
consolidated affiliate, (2) the existence and extent of any continuing involvement in the transferred financial assets and (3) 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 will
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).
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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 nonrecurring fair value disclosures.
Loans with Government Guarantees
The Company originates government guaranteed loans which are pooled and sold as Ginnie Mae mortgage backed
securities. 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
been exercised, the Company accounts for the loans as if they had been repurchased. The Company recognizes the loans as
loans with government guarantees on the Consolidated Statements of Financial Condition and also recognizes a corresponding
liability for a corresponding amount recorded in other liabilities on the Consolidated Statement of Financial Condition. If the
loan is repurchased, the liability is settled and the loan with government guarantee remains. Once repurchased, the Company
may collect losses through a claims process with the FHA, as an approved lender.
The Company adopted ASU Update No. 2014-14, Receivables - Troubled Debt Restructuring by Creditors (Subtopic
310-40) in the first quarter 2015 at which time repossessed assets and the associated claims were recorded separately from the
associated loans. At December 31, 2015, repossessed assets and the associated claims were recorded in other assets and at
December 31, 2014 repossessed assets and the associated claims were included in loans with government guarantees.
Federal Home Loan Bank Stock
The Bank owns stock in the Federal Home Loan Bank of Indianapolis. No market quotes exist 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 utilizing an internal valuation 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. Changes in fair value of the Company's
mortgage servicing rights are reported on the Consolidated Statements of Operations in "net return on mortgage servicing". 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
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associated with those provisions. As MSRs are not considered financial assets for accounting purposes, the transfer of an MSR
asset qualifies as a sale based on a risks and rewards approach.
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 net return on mortgage servicing asset.
Subservicing fee income is recorded for fees earned, net of third party subservicing costs, for loans subserviced. Contractual
subservicing fees including late fees and other ancillary income are included within loan administration income on the
Consolidated Statements of Operations.
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 uses derivatives to manage 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 manage the cash flows on certain liabilities. For all derivatives outside of those noted below, the Company
does not elect to apply or does not qualify for hedge accounting and therefore accounts for the derivatives as economic
undesignated derivatives. 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 uses interest rate swaps to hedge the forecasted cash flows from its underlying variable-rate Federal
Home Loan Bank ("FHLB") advances in a qualifying cash flow hedge accounting relationship. Changes in the fair value of
derivatives designated as cash flow hedges are recorded in other comprehensive income on the Consolidated Statement of
Financial Condition and reclassified into interest expense along with the debt interest expense in the same period in which the
identified hedge transaction is recognized in earnings. Cash flows and the impact on income related to designated hedges is
reported in the same category as the underlying hedged item. Derivatives that are designated in hedging relationships are
evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period.
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, 2015 and 2014, 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 their interest rate risk. 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.
The Company also enters into various derivative agreements with customers in the form of interest-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.
The Company recognizes all derivatives as either other assets or other liabilities in the Consolidated Statements of
Financial Condition at their fair value.
Additional information regarding the accounting for derivatives is provided in Note 11 and additional recurring fair
value disclosures in Note 24 of the Notes to the Consolidated Financial Statements, herein.
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Income Taxes
We evaluate two components of income tax expense: current and deferred. Current income tax expense represents our
estimated taxes to be paid or refunded for the current period. Deferred taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. 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 evaluates
its deferred tax assets to determine if, based on all available evidence, it is more likely than not that the deferred tax assets will
be realized and establishes a valuation allowance when they are not. We evaluate two components of income tax expense:
current and deferred. Current income tax expense represents our estimated taxes to be paid or refunded for the current period.
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, pay a fee or indemnify the purchaser for losses it sustains on the loan. If there are no such defects,
the Company has no liability to the purchaser for losses it may incur on such loan. Upon the sale of a loan, the Company
recognizes a liability for that guarantee at its fair value as a reduction of the Company's net gain on loan sales. 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 including loss severity on repurchased and indemnified loans, and
repurchase requests, among other factors. Changes to the Company’s previous estimates are recorded in the 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"
in the Consolidated Statements of Operations. Advertising expenses totaled $9 million, $10 million, and $9 million for the years
ended December 31, 2015, 2014 and 2013, 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 future
additional payments under the DOJ litigation settlement. 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, 2015 the remaining future payments totaled $118 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,
2015, the liability was $84 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
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capital assumptions for subsequent periods. The liability is included in "other liabilities" on the Consolidated Financial
Statements. See Note 24 of the Consolidated Financial Statements, herein, for additional information on the valuation of the
DOJ litigation settlement.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. The FASB has voted to approve another year deferral
of the effective date from January 1, 2017 to January 1, 2019, while allowing for early adoption as of January 1, 2018.
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 changes to disclosures in the Notes thereto will be required.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual items (Subtopic
225-20). ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items, which, among other things, required an
entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and
show the item separately in the financial statements. The ASU is effective for the annual period beginning after December 15,
2015, though early adoption is permitted. 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 February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation
Analysis. Under the amended guidance all reporting entities are within the scope of Subtopic 810-10, Consolidation - Overall,
including limited partnerships and similar legal entities, unless a scope exception applies. The presumption that a general
partner controls a limited partnership has been eliminated. The ASU is effective for the annual period beginning after December
15, 2015, and all reporting 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 April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30). The amendments
will require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability, consistent with debt discounts. The ASU is effective prospectively or
retrospectively for annual and interim periods beginning after December 15, 2015. 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 April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other Internal-Use Software. The
amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software
license. If a cloud computing arrangement includes a software license, then the customer should account for the software
license element of the arrangement consistent with the acquisition of other licenses. If it does not include a software license, the
customer should account for the arrangement as a service contract. The ASU is effective for the annual period beginning after
December 15, 2015, and all reporting 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 May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities that Calculate Net
Asset Value per Share (or its equivalent). The amendments in this ASU remove the requirement to categorize within the fair
value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient pursuant
to ASC 820, Fair Value Measurement. Instead, those investments must be included as a reconciling line item so that the total
fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. Further, the ASU specifies
that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred
business before the date of a dropdown transaction should be allocated entirely to the general partner. ASU 2015-07 is effective
for interim and annual periods beginning after December 15, 2015 and early adoption is permitted. This guidance is not
expected to have a material impact on the Company’s Consolidated Financial Statements or the Notes thereto.
In July 2015, the FASB issued ASU No 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960),
Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-
Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient
(consensuses of the FASB Emerging Issues Task Force). Under the amendments, fully benefit-responsive investment contracts
are measured, presented, and disclosed only at contract value. A plan will continue to provide disclosures that help users
understand the nature and risks of fully benefit-responsive investment contracts. ASU 2015-12 is effective retrospectively for
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fiscal years beginning after December 15, 2015 and early adoption is permitted. This guidance is not expected to have a
material impact on the Company’s Consolidated Financial Statements, but disclosures to the Notes thereto will be updated per
the requirements.
In September 2015, the FASB issued ASU No 2015-16, Business Combinations (Topic 805): Simplifying the
Accounting for Measurement-Period Adjustments. The amendments in this ASU require that an acquirer recognize adjustments
to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment
amounts are determined and in the same period’s financial statements, the effect on earnings of changes in depreciation,
amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting
had been completed at the acquisition date. In addition, the amendments require an entity to present separately on the face of
the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item that
would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of
the acquisition date. ASU 2015-16 is effective retrospectively for fiscal years beginning after December 15, 2015 and early
adoption is permitted. This guidance is not expected to have a material impact upon adoption on the Company’s Consolidated
Financial Statements, but disclosures to the Notes thereto will be updated per the requirements.
In January 2016, the FASB issued Update 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities. The new standard significantly revises an entity’s accounting
related to the classification and measurement of investments in equity securities and the presentation of certain fair value
changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair
value of financial instruments. ASU 2016-01 is effective retrospectively for fiscal years beginning after December 15, 2017 and
early adoption is permitted. Management is currently evaluating this guidance and does not expect this guidance to have a
material impact on the Company’s Consolidated Financial Statements, if any.
In February 2016, the FASB issued Update 2016-02, Leases (Topic 842): Section A - Leases: Amendments to the
FASB Accounting Standards Codification, Section B - Conforming Amendments Related to Leases: Amendment to the FASB
Accounting Standards Codification, Section C - Background Information and Basis For Conclusions. Lessees will need to
recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the
FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on
criteria that are largely similar to those applied in current lease accounting. ASU 2016-02 is effective retrospectively for fiscal
years beginning after December 15, 2019 and early adoption is permitted. The guidance in the Update supersedes Topic 840,
Leases. Management is currently evaluating this guidance and does not expect this guidance to have a material impact on the
Company’s Consolidated Financial Statements.
104
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 2 — Investment Securities
As of December 31, 2015 and 2014, investment securities were comprised of the following:
December 31, 2015
Available-for-sale securities
Agency - Commercial
Agency - Residential
Municipal obligations
Total available-for-sale securities
Held-to-maturity securities
Agency - Commercial
Agency - Residential
Total held-to-maturity securities
December 31, 2014
Available-for-sale securities
Agency - Commercial
Agency - Residential
Municipal obligations
Total available-for-sale securities
Trading
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in millions)
Fair Value
$
$
$
$
$
$
$
$
$
$
$
766
514
14
1,294
634
634
1,268
541
1,118
2
1,661
$
3
2
—
5
$
$
— $
—
— $
1
13
—
14
$
$
(3) $
(2)
—
(5) $
(2) $
(4)
(6) $
(2) $
(1)
—
(3) $
766
514
14
1,294
632
630
1,262
540
1,130
2
1,672
The Company classifies mortgage backed securities it receives from its operations that it has committed to sell as
trading securities. During the year ended December 31, 2013, the Company sold $170 million of trading securities, which
resulted in a realized gain of less than $1 million.
Available-for-Sale
The Company purchased $1.1 billion of investment securities, all of which were U.S. government sponsored agencies,
comprised of mortgage-backed securities and collateralized mortgage obligations and $14 million of municipal obligations
during the year ended December 31, 2015. During the year ended December 31, 2014 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, compared to $1.1 billion of investment securities issued by U.S. government sponsored
agencies and $20 million of municipal obligations during the year ended December 31, 2013.
Gains (losses) on the sales of investment securities available-for-sale are reported in other noninterest income in the
Consolidated Statements of Operations. During the year ended December 31, 2015, there were $170 million in sales of U.S.
government sponsored agency securities, which resulted in a gain of $3 million. During the year ended December 31, 2014, the
Company sold $414 million of U.S. government sponsored agency securities, which resulted in a gain of $4 million, compared
to $39 million of U.S. government sponsored agencies, which resulted in a gain of $1 million during the year ended
December 31, 2013.
Held-to-Maturity
During the year ended December 31, 2015, the Company transferred $1.1 billion of available-for-sale securities to
held-to-maturity securities including a premium of $8 million, reflecting the Company’s intent and ability to hold those
securities to maturity. Transfers of investment securities into the held-to-maturity category from the available-for-sale category
are accounted for at fair value at the date of transfer. The related $5 million of unrealized holding gain, net of tax, that was
included in the transfer is retained in other comprehensive income (loss) and is being amortized as an adjustment to interest
105
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
income over the remaining life of the securities. There were no gains or losses recognized as a result of this transfer. The
Company did not have any investment securities classified as held-to-maturity at December 31, 2014.
The Company purchased $217 million of held-to-maturity securities, which included agency-collateralized mortgage
obligations during the year ended December 31, 2015. There were no purchases during the years ended December 31, 2014 and
December 31, 2013. The Company had no sales in held-to-maturity securities during the years ending December 31, 2015,
2014 and 2013, respectively.
The following table summarizes by duration the unrealized loss positions on investment securities.
Unrealized Loss Position with Duration
12 Months and Over
Unrealized Loss Position with Duration
Under 12 Months
Fair
Value
Number of
Securities
Unrealized
Loss
Fair
Value
Number of
Securities
Unrealized
Loss
(Dollars in millions)
December 31, 2015
Available-for-sale securities
Agency - Commercial
Agency - Residential
Held-to-maturity securities
Agency - Commercial
Agency - Residential
December 31, 2014
Available-for-sale securities
Agency - Commercial
Agency - Residential
December 31, 2013
Available-for-sale securities
Agency - Commercial
Agency - Residential
$
$
$
$
$
$
$
$
482
224
471
547
53
98
—
—
27 $
15 $
27 $
50 $
6 $
10 $
— $
— $
(3) $
(2) $
(2) $
(4) $
— $
(1) $
— $
— $
—
8
—
—
305
37
326
500
— $
$
2
— $
— $
21
$
4 $
19
44
$
$
—
—
—
—
(2)
—
(4)
(6)
Credit related declines in the available-for-sale and held-to-maturity securities are classified as other-than temporary
impairments ("OTTI") and are reported as a separate component of noninterest income within the Consolidated Statement of
Operations. If an impaired investment security is considered to be other than temporary if (1) the Company intends to sell the
security; (2) it is more likely than not the Company will be required to sell the security before recovery of its amortized cost
basis; or (3) the present value of expected cash flows is not sufficient to recover all contractually required principal and interest
payments.
Management evaluates its securities portfolio each quarter to determine if any security is considered to be other than
temporarily impaired. In making this evaluation, management considers its ability and intent to hold securities to recover
current market losses. During the years ended December 31, 2015 and December 31, 2014, the Company had no other-than-
temporary impairments ("OTTI").
During the year ended December 31, 2013, the Company recognized $9 million of OTTI on the FSTAR 2006-1
mortgage securitization, which was subsequently dissolved at June 30, 2013. The Company recognized a tax benefit of $6
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.
106
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table shows the OTTI roll forward.
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,
2015
2014
2013
(Dollars in millions)
— $
— $
—
—
—
—
—
—
— $
— $
(3)
1
11
(9)
—
The amortized cost and estimated fair value of investment securities at December 31, 2015, are presented below by
contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or
prepay obligations.
Investment Securities
Available-for-Sale
Investment Securities
Held-to-Maturity
Amortized
Cost
Estimated Fair
Value
Weighted-
Average
Yield
Amortized
Cost
Estimated Fair
Value
Weighted-
Average
Yield
December 31, 2015
Due after five years through 10 years $
Due after 10 years
Total
$
(Dollars in millions)
(Dollars in millions)
14 $
1,280
1,294 $
14
1,280
1,294
4.47% $
2.54%
$
58 $
1,210
1,268 $
57
1,205
1,262
2.48%
2.41%
The Company has pledged investment securities, primarily municipal taxable and agency collateralized mortgage
obligations, to collateralize lines of credit and/or borrowings with the Fannie Mae and other institutions. At December 31, 2015,
the Company pledged $14 million of investment securities, compared to less than $1 million and $8 million at December 31,
2014 and December 31, 2013, respectively.
Note 3 — Loans Held-for-Sale
The majority of our mortgage loans originated as loans held-for-sale are sold into the secondary market on a whole
loan basis or by securitizing the loans into securities. At December 31, 2015 and 2014, loans held-for-sale totaled $2.6 billion
and $1.2 billion, respectively. For the years ended December 31, 2015, 2014 and 2013, the Company reported net gain on loan
sales of $288 million, $206 million and $402 million, respectively.
At December 31, 2015 and 2014, $35 million and $48 million, respectively, of loans held-for-sale were recorded at
lower of cost or fair value. The remainder of the loans in the portfolio are recorded at fair value as the Company has elected the
fair value option for such loans.
Note 4 — Loans with Government Guarantees
The majority of loans with government guarantees continue to be insured or guaranteed by the Federal Housing
Administration ("FHA"). These loans earn interest at a rate based upon the 10-year U.S. Treasury note rate at the time the
underlying loan becomes delinquent, which is not paid by the FHA until claimed.
At December 31, 2015 and December 31, 2014, respectively, loans with government guarantees totaled $485 million
and $1.1 billion.
The Company adopted ASU Update No. 2014-14, Receivables - Troubled Debt Restructuring by Creditors (Subtopic
310-40) in the first quarter 2015 at which time repossessed assets and the associated claims were recorded separately from the
associated loans. At December 31, 2015, repossessed assets and the associated claims recorded in other assets totaled $210
million and at December 31, 2014 repossessed assets and the associated claims were $373 million included in loans with
government guarantees.
107
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
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, 2015
December 31, 2014
(Dollars in millions)
$
$
3,100
135
384
31
3,650
814
552
1,336
2,702
6,352
(187)
6,165
$
$
2,193
149
257
31
2,630
620
429
769
1,818
4,448
(297)
4,151
For the years ended December 31, 2015, 2014 and 2013, the Company transferred $30 million, $19 million and $64
million, respectively, of loans held-for-sale to loans held-for-investment.
During the year ended December 31, 2015, the Company sold interest-only residential first mortgage loans with
unpaid principal balances totaling $601 million, and residential first mortgage jumbo loans with unpaid principal balances of $9
million. In addition, the Company sold past due (including nonperforming) and troubled debt restructured first residential
mortgage loans with unpaid principal balances of $427 million and $8 million of other residential mortgage loans. Upon a
change in the Company’s intent, the loans were transferred to held-for-sale and subsequently sold resulting in a gain on sale of
$1 million during the year ended December 31, 2015. A portion of the general allowance for loan losses associated with these
loan sales was reduced, resulting in a $69 million reduction in the allowance.
During the year ended December 31, 2014, the Company sold nonperforming, troubled debt restructured residential
first mortgage and residential first mortgage jumbo loans with unpaid principal balances totaling $632 million and $20 million
of other residential first mortgage loans. A portion of the allowance for loan losses associated with these loans was reduced,
resulting in a $9 million reduction in allowance. Upon a change in the Company’s intent, the loans were transferred to held-for-
sale and subsequently sold resulting in a gain on sale of $11 million.
During the year ended December 31, 2013, the Company sold nonperforming residential first mortgage loans with
unpaid principal balances totaling $508 million. A portion of the allowance for loan losses associated with these loans was
reduced, resulting in a $66 million reduction in allowance. Upon a change in the Company’s intent, the loans were transferred
to held-for-sale and subsequently sold resulting in a gain on sale of $1 million.
During the year ended December 31, 2015, the Company purchased $197 million of HELOC loans with a premium of
$7 million, none of which were credit impaired.
The Company has pledged certain loans held-for-investment, loans held-for-sale, and loans with government
guarantees 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, 2015 and 2014, the Company pledged $5.8 billion and $4.1 billion, respectively,
of loans held-for-investment.
108
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The allowance for loan losses by class of loan and evaluation type are summarized in the following tables.
Residential
First
Mortgage
Second
Mortgage
HELOC
Other
Consumer
Commercial
Real
Estate
Commercial
and
Industrial
Warehouse
Lending
Total
Year Ended December 31, 2015
Beginning balance allowance for
loan losses
Charge-offs
Recoveries
Provision
Ending balance allowance for loan
losses
Year Ended December 31, 2014
Beginning balance allowance for
loan losses
Charge-offs
Recoveries
Provision
Ending balance allowance for loan
losses
Year Ended December 31, 2013
Beginning balance allowance for
loan losses
Charge-offs
Recoveries
Provision
$
$
$
$
(Dollars in millions)
1
$
(4)
$
234
$
12
$
19
$
(87)
3
(34)
(4)
2
1
(3)
—
5
116
$
11
$
21
$
3
2
2
17
—
2
(1)
$
11
$
(3)
—
5
$
18
$
13
$
162
$
12
$
8
$
2
$
19
$
(38)
3
107
(3)
1
2
(6)
—
17
(2)
3
(2)
(3)
3
(2)
$
3
—
—
8
234
$
12
$
19
$
1
$
17
$
11
$
220
$
20
$
18
$
2
$
41
$
3
$
(133)
15
60
(6)
1
(3)
(5)
1
(6)
(4)
2
2
(47)
10
15
(2)
—
2
$
$
$
$
$
3
—
—
3
6
1
—
—
2
3
1
—
—
—
297
(101)
10
(19)
187
207
(52)
10
132
297
305
(197)
29
70
Ending balance allowance for loan
losses
$
162
$
12
$
8
$
2
$
19
$
3
$
1
$
207
Residential
First
Mortgage
Second
Mortgage
HELOC
Other
Consumer
Commercial
Real
Estate
Commercial
and
Industrial
Warehouse
Lending
Total
December 31, 2015
Loans held-for-investment
Individually evaluated
Collectively evaluated (1)
Total loans
Allowance for loan losses
Individually evaluated
Collectively evaluated (1)
$
$
$
Total allowance for loan losses $
December 31, 2014
Loans held-for-investment
Individually evaluated
Collectively evaluated (1)
Total loans
Allowance for loan losses
Individually evaluated
Collectively evaluated (1)
$
$
$
Total allowance for loan losses $
87
3,007
3,094
22
94
116
385
1,782
2,167
82
152
234
$
$
$
$
$
$
$
$
(1) Excludes loans carried under the fair value option.
28
65
93
6
5
11
31
65
96
5
7
12
$
$
$
$
$
$
$
$
3
318
321
1
20
21
1
124
125
1
18
19
$
$
$
$
$
$
$
$
— $
31
31
$
1
1
2
$
$
— $
31
31
$
— $
814
814
$
2
550
552
$
$
— $
1,336
1,336
$
— $
— $
— $
18
18
$
13
13
$
6
6
$
— $
620
620
$
— $
429
429
$
— $
769
769
$
120
6,121
6,241
30
157
187
417
3,820
4,237
— $
— $
— $
— $
1
1
$
17
17
$
11
11
$
3
3
$
88
209
297
109
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, 2015 and December 31,
2014, of past due and current loans.
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
Greater Past
Due (1)
Total
Past Due
Current
Total
Investment
Loans
$
3,037
$
3,100
December 31, 2015
Consumer loans
Residential first mortgage
$
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans (2)
December 31, 2014
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Other
Total consumer loans
Commercial loans
Commercial real estate
Commercial and industrial
Warehouse lending
Total commercial loans
Total loans (2)
$
$
$
7
—
2
1
10
—
—
—
—
10
29
1
4
—
34
—
—
—
—
34
$
$
$
$
3
—
1
—
4
—
—
—
—
4
8
1
1
—
10
—
—
—
—
10
(Dollars in millions)
$
53
$
$
$
2
9
—
64
—
2
—
2
66
115
2
3
—
120
—
—
—
—
$
$
63
2
12
1
78
—
2
—
2
80
152
4
8
—
164
—
—
—
—
$
$
133
372
30
3,572
814
550
1,336
2,700
6,272
2,041
145
249
31
2,466
620
429
769
1,818
$
$
135
384
31
3,650
814
552
1,336
2,702
6,352
2,193
149
257
31
2,630
620
429
769
1,818
4,448
$
120
$
164
$
4,284
$
(1)
(2)
Includes performing nonaccrual loans that are less than 90 days delinquent and for which interest cannot be accrued.
Includes $10 million and $5 million of loans 90 days or greater past due accounted for under the fair value option at December 31, 2015 and 2014,
respectively.
Interest that would have been accrued on impaired loans totaled approximately $6 million, $17 million and $23
million during the years ended December 31, 2015, 2014 and 2013, respectively. At December 31, 2015 and 2014, the
Company had no loans 90 days or greater past due and still accruing interest.
110
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, 2015
Consumer loans (1)
Residential first mortgage
Second mortgage
HELOC
Total TDRs (2)
December 31, 2014
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 millions)
$
$
$
$
$
49
32
20
101
$
$
306
35
20
361
1
362
$
27
$
1
7
35
$
44
1
1
46
—
46
$
$
76
33
27
136
350
36
21
407
1
408
(1) The allowance for loan losses on consumer TDR loans totaled $15 million and $81 million at December 31, 2015 and 2014,
respectively.
(2) Includes $32 million and $30 million of TDR loans accounted for under the fair value option at December 31, 2015 and 2014,
respectively.
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. The Company measures impairment using the discounted cash flow
method for performing TDRs and measures impairment based on collateral values for re-defaulted TDRs.
111
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table provides a summary of newly modified TDRs and TDR loans in the past 12 months that have been
subsequently defaulted during the years ended December 31, 2015, 2014 and 2013. All TDR classes within consumer and
commercial loan portfolios are considered subsequently defaulted when greater that 90 days past due.
Year Ended December 31, 2015
Residential first mortgages
Second mortgages
HELOC (2)
Other consumer
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 (3)
HELOC (2) (3)
Commercial real estate
Total TDR loans
Year Ended December 31, 2015
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
New TDRs
Number of
Accounts
Pre-
Modification Unpaid
Principal Balance
Post-
Modification Unpaid
Principal Balance (1)
Increase (Decrease)
in Allowance at
Modification
(Dollars in millions)
325
97
273
3
698
165
325
30
520
322
571
313
5
1,211
$
$
$
$
$
$
81
4
17
—
102
48
11
1
60
86
22
27
3
138
$
$
$
$
$
$
80
3
15
—
98
47
10
1
58
75
20
23
3
121
$
$
$
$
$
$
(2)
—
—
—
(2)
3
—
—
3
2
1
—
—
3
TDRs that subsequently defaulted in previous 12 months (4)
Number of
Accounts
Unpaid Principal Balance
(Dollars in millions)
Increase (Decrease) in
Allowance at Subsequent
Default
$
$
$
$
$
3
2
3
8
2
18
5
25
26
41
33
100
$
— $
—
—
— $
— $
—
—
— $
6
1
1
8
$
$
—
—
—
—
—
—
—
—
1
1
—
2
(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 $31 million of post modification unpaid
principal balance second mortgage and HELOC loans carried at fair value.
(4) Subsequent default is defined as a payment re-defaulted within 12 months of the restructuring date.
112
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Impaired Loans
The following table presents impaired loans with the associated allowance recorded.
December 31, 2015
December 31, 2014
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
(Dollars in millions)
With no related allowance
recorded
Consumer loans
Residential first mortgage
$
Second mortgage
HELOC
Commercial loans
Commercial and industrial
$
$
$
$
With an allowance recorded
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Total
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Commercial loans
20
—
—
5
25
65
28
3
96
85
28
3
Commercial and industrial
Total impaired loans
$
5
121
$
$
$
$
$
$
20
—
—
2
22
67
28
3
98
87
28
3
2
120
$
$
$
$
$
$
— $
—
—
—
— $
23
6
1
30
23
6
1
—
30
$
$
$
$
63
1
—
—
64
321
29
1
351
384
30
1
—
415
$
$
$
$
$
$
78
6
1
—
85
326
29
1
356
404
35
2
—
441
$
$
$
$
$
$
—
—
—
—
—
82
6
1
89
82
6
1
—
89
The following table presents average impaired loans and the interest income recognized.
For the Years Ended December 31,
2015
2014
2013
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in millions)
Consumer loans
Residential first mortgage
Second mortgage
HELOC
Commercial loans
Commercial real estate
Commercial and industrial
$
$
150
29
10
—
2
Total impaired loans
$
191
$
$
$
402
28
1
1
—
$
432
$
11
1
—
—
—
12
$
$
603
21
1
46
2
$
673
$
17
1
—
1
—
19
5
—
—
—
—
5
113
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Credit Quality
The Company utilizes an internal risk rating system in accordance with the Rating Credit Risk booklet of the
Comptroller's Handbook, April 2011 and the Uniform Retail Credit classification and Account Management Policy issued June
20, 2000 by the Federal Financial Institution Examination Council (FFIEC) which is applied to all consumer and commercial
loans. 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 that
jeopardize the liquidation of the debt. 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. An asset classified as doubtful has all the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable and improbable. A doubtful asset has a high probability of total or substantial loss, but because of
specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in
default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can
include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of
collateral, and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be
adjusted based on the new information. Because of high probability of loss, non-accrual accounting treatment is required for
doubtful assets.
Loss. An asset classified as 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 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.
Consumer Loans
The same rating principles are used for consumer and commercial loans, but the principles are applied differently for
consumer loans. Consumer loans consist of open and closed end loans extended to individuals for household, family, and other
personal expenditures, and includes consumer loans, loans to individuals secured by their personal residence, including first
mortgage, home equity, and home improvement loans. Because consumer loans are usually relatively small-balance,
homogeneous exposures, consumer loans are rated primarily on payment performance. Payment performance is a proxy for the
strength of repayment capacity and loans are generally classified based on their payment status rather than by an individual
review of each loan.
114
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
In accordance with regulatory guidance, the Company assigns risk ratings to consumer loans in the following manner:
• Consumer loans are classified as Watch once the loan becomes 60 days past due.
• Open and closed-end consumer loans 90 days or more past due are classified Substandard.
Commercial Credit Loans
Commercial Real
Estate
Commercial and
Industrial
Warehouse
Total
Commercial
(Dollars in millions)
December 31, 2015
Grade
Pass
Watch
Special Mention
Substandard
Total loans
$
$
$
766
42
2
4
$
492
30
21
9
$
1,181
155
—
—
814
$
552
$
1,336
$
2,439
227
23
13
2,702
Consumer Credit Loans
Residential First
Mortgage
Second
Mortgage
HELOC
Other Consumer
Total
December 31, 2015
Grade
Pass
Watch
Substandard
Total loans
Commercial Credit Loans
Grade
Pass
Watch
Special mention
Substandard
Total loans
2,993
49
58
3,100
$
$
(Dollars in millions)
101
32
2
135
$
$
353
22
9
384
$
$
December 31, 2014
31
—
—
31
$
$
3,478
103
69
3,650
Commercial Real
Estate
Commercial and
Industrial
Warehouse
Total
Commercial
(Dollars in millions)
578
29
2
11
620
$
$
398
10
—
21
429
$
$
650
119
—
—
769
$
$
1,626
158
2
32
1,818
$
$
$
$
Consumer Credit Loans
Residential First
Mortgage
Second
Mortgage
December 31, 2014
HELOC
Other Consumer
Total
(Dollars in millions)
Grade
Pass
Watch
Substandard
Total loans
$
$
1,764
314
115
2,193
$
$
111
36
2
149
$
$
233
21
3
257
$
$
31
—
—
31
$
$
2,139
371
120
2,630
115
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 6 — Repossessed Assets
Repossessed assets include the following.
One-to-four family properties
Commercial properties
Total repossessed assets
December 31,
2015
2014
(Dollars in millions)
$
$
12
5
17
$
$
The following schedule provides the activity for repossessed assets.
Beginning balance
Additions/transfers in
Disposals
Write-down and other changes
Transfers out
Ending balance
$
$
Note 7 — Variable Interest Entities ("VIEs")
For the Years Ended December 31,
2015
2014
(Dollars in millions)
2013
19
42
(27)
(10)
(7)
17
$
$
37
40
(46)
(10)
(2)
19
$
$
18
1
19
121
78
(116)
(11)
(35)
37
Due to the Assured Settlement Agreement in 2013, the Company became the primary beneficiary and reconsolidated
the FSTAR 2005-1 and the FSTAR 2006-2 HELOC securitization trust's assets and liabilities. The Company elected the fair
value option for these assets and liabilities.
In 2015, the Company executed clean-up calls of the FSTAR 2005-1and FSTAR 2006-2 long-term debt associated
with the HELOC securitization trusts. The transactions resulted in cash payments of $52 million to the debt bondholders during
the year ended December 31, 2015. After payment of the debt, the FSTAR 2005-1 and FSTAR 2006-2 HELOC securitization
trusts were dissolved and the Company no longer has any consolidated VIEs as of December 31, 2015.
The following table provides a summary of the classifications of consolidated VIE assets and liabilities included in the
Consolidated Financial Statements as of December 31, 2014.
HELOC Securitizations
Assets
Loans held-for-investment
Liabilities
Long-term debt
2005-1
2006-2
Total
(Dollars in millions)
$
$
63
42
$
$
69
42
$
$
132
84
The Company has a continuing involvement, but is not the primary beneficiary for one unconsolidated VIE related to
the FSTAR 2007-1 mortgage securitization trust. In accordance with the settlement agreement with MBIA, there is no further
recourse to the Company related to FSTAR 2007-1. At December 31, 2015 and 2014, the FSTAR 2007-1 mortgage
securitization trust included 3,061 loans and 3,624 loans, respectively, with an aggregate principal balance of $117 million and
$141 million, respectively.
116
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 8 — Federal Home Loan Bank Stock
The Company’s investment in Federal Home Loan Bank ("FHLB") stock was $170 million at December 31, 2015
compared to $155 million at December 31, 2014. 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 $57 million in required stock purchases during the year ending December 31, 2015. The Company had $42
million, $54 million and $92 million redemptions of FHLB stock during the years ended December 31, 2015, 2014 and 2013,
respectively. Dividends received on the stock equaled $6 million, $9 million and $11 million for the years ended December 31,
2015, 2014, and 2013, respectively. These dividends were recorded in the Consolidated Statements of Operations as other
noninterest income.
Note 9 — 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
Total
Less accumulated depreciation
Premises and equipment, net
Estimated
Useful Lives
—
7 — 31.5 years
3 — 7 years
3 — 7 years
December 31,
2015
2014
(Dollars in millions)
58
149
214
61
482
(232)
250
$
$
66
144
180
67
457
(219)
238
$
$
Depreciation expense amounted to approximately $26 million, $26 million and $23 million, for the years ended
December 31, 2015, 2014 and 2013, 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 $7 million, $8 million and $8 million for the years
ended December 31, 2015, 2014 and 2013, respectively. The following outlines the Company’s minimum contractual lease
obligations.
2016
2017
2018
2019
2020
Thereafter
Total
December 31, 2015
(Dollars in millions)
4
3
2
1
1
1
12
$
$
117
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 10 — Mortgage Servicing Rights
The Company has investments in mortgage servicing rights ("MSRs") resulting from the sale of loans to the secondary
market and retaining the servicing. The primary risk associated with MSRs is the potential change in value as a result of higher
than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates or government intervention.
Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are
slower than anticipated. The Company also utilizes derivatives as economic hedges to offset changes in the fair value of the
MSRs resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments. The
Company's portfolio of MSRs is highly sensitive to movements in interest rates. 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 11 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.
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
Balance at beginning of period
Additions from loans sold with servicing retained
Reductions from sales
Changes due to (1)
Decrease in MSR value due to pay-offs and pay-downs
Changes in estimates of fair value (2)
Fair value of MSRs at end of period
$
$
258
260
(176)
(43)
(3)
296
$
$
285
272
(232)
(31)
(36)
258
$
$
711
402
(835)
(99)
106
285
(1) Changes in fair value are included within net return on mortgage servicing asset on the Consolidated Statements of Operations.
(2) Represents estimated MSR value change resulting primarily from market-driven changes in interest rates.
See Notes 1 and 24 of the Notes to the Consolidated Financial Statements, herein, for additional fair value disclosures
relating to mortgage servicing rights.
The following table summarizes income and fees associated with the mortgage servicing asset.
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
Income on mortgage servicing asset
Servicing fees, ancillary income and late fees (1)
Fair value adjustments (2)
$
Gain (loss) on MSR derivatives (3)
Net transaction costs
$
69
(44)
5
(2)
$
69
(69)
26
(2)
Total income on mortgage servicing asset, included in
net return on mortgage servicing asset
$
28
$
24
$
(1) Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on a cash basis.
(2) Includes a $2 million gain related to the sale of MSRs during the year ended December 31, 2015.
(3) Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs.
185
(5)
(70)
(19)
91
Contractual servicing and subservicing fees. Contractual servicing and subservicing fees, including late fees and other
ancillary income are presented below. Contractual servicing fees are included within net return on mortgage servicing 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.
118
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table summarizes income and fees associated with subserviced mortgage loans.
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
Income (expenses) on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1)
Other servicing charges
Total income on mortgage loans subserviced,
included in loan administration
$
$
$
33
(7)
26
$
$
28
(4)
24
$
17
(11)
6
(1) Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on cash basis.
The following table summarizes the hypothetical effect on the fair value of servicing rights carried at fair value using
adverse changes of 10 percent and 20 percent to the weighted-average of certain significant assumptions used in valuing these
assets.
December 31, 2015
December 31, 2014
Fair value due to
Fair value due to
Actual
10% adverse
change
20% adverse
change
Actual
10% adverse
change
20% adverse
change
Option adjusted spread
8.24% $
Constant prepayment rate
Weighted average cost to service per loan
12.63%
71.86
$
$
287
285
292
(Dollars in millions)
8.88% $
14.98%
74.49
$
279
275
288
$
250
253
258
243
245
255
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future
performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be linear. To isolate the effect of the specified
change, the fair value shock analysis is consistent with the identified adverse change, while holding all other assumptions
impacting the fair value constant on the fair value of the servicing rights. In practice, a change in one assumption generally
impacts other assumptions, which may either magnify or counteract the effect of the change.
Note 11 — Derivative Financial Instruments
Derivative financial instruments are recorded at fair value in other assets and other liabilities on the Consolidated
Statements of Financial Condition after taking into account the effects of legally enforceable bilateral collateral and master
netting agreements. The Company is exposed to non-performance risk by the counterparties to its various derivative financial
instruments. The Company believes that the non-performance risk inherent in all its derivative contracts is minimal based on
credit standards and the collateral provisions of the derivative agreements. A majority of the Company’s derivatives are
centrally cleared through a Central Counterparty Clearing House or consist of residential mortgage interest rate lock
commitments further limiting non-performance risk.
Derivatives not designated as hedging instruments: The Company maintains a derivative portfolio of interest rate
swaps, futures and forward commitments used to manage exposure to changes in interest rates, MSR asset values and to meet
the needs of customers. The Company also enters into interest rate lock commitments, which are commitments to originate
mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that
interest rate. Market risk on interest rate lock commitments and mortgage loans held-for-sale is managed using corresponding
forward sale commitments.
Changes in fair value of derivatives not designated as hedging instruments are recognized in the Consolidated
Statements of Income.
Derivatives designated as hedging instruments: The Company uses interest rate swaps to hedge the forecasted cash
flows from its underlying variable-rate Federal Home Loan Bank (FHLB) advances in a qualifying cash flow hedge accounting
relationship. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive
income on the Consolidated Statement of Financial Condition and reclassified into interest expense in the same period in which
the hedge transaction is recognized in earnings. At December 31, 2015, the Company had $3 million (net-of-tax) of unrealized
119
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
losses on derivatives classified as cash flow hedges recorded in other comprehensive income (loss), compared to zero at
December 31, 2014. The estimated amount to be reclassified from other comprehensive income into earnings during the next 12
months represents $7 million of losses (net-of-tax).
Derivatives that are designated in hedging relationships are assessed for effectiveness using regression analysis at the
time they are designated and throughout the hedge period. All cash flow hedges were highly effective as of December 31, 2015.
Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged
item.
The net gains recognized in income on derivative instruments, net of the impact of offsetting positions, were as
follows.
Location of Gain/(Loss)
2015
2014
2013
For the Years Ended December 31,
(Dollars in millions)
Derivatives not designated as hedging
instruments:
U.S. Treasury and euro dollar futures
Mortgage backed securities forwards
Rate lock commitments and forward
agency and loan sales
Rate lock commitments
Interest rate swaps
Total derivative (loss) gain
Net return on mortgage
servicing asset
Net return on mortgage
servicing asset
Net gain on loan sales
Other noninterest income
Other noninterest income
$
$
6
1
9
(2)
—
14
$
$
18
$
8
(12)
—
3
17
$
(37)
(33)
(42)
—
1
(111)
120
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The Company had the following derivative financial instruments.
Derivatives designated as hedging instruments:
Liabilities (1)
Interest rate swaps on FHLB advances
Derivatives not designated as hedging instruments:
Assets
U.S. Treasury and euro dollar futures
Mortgage backed securities forwards
Rate lock commitments
Interest rate swaps and swaptions
Total derivative assets
Liabilities
U.S. Treasury and euro dollar futures
Mortgage backed securities forwards
Rate lock commitments
Interest rate swaps
Total derivative liabilities
Derivatives not designated as hedging instruments:
Assets
U.S. Treasury and euro dollar futures
Mortgage backed securities forward
Rate lock commitments
Interest rate swaps
Total derivative assets
Liabilities
U.S. Treasury and euro dollar futures
Rate lock commitments
Mortgage backed securities forwards
Interest rate swaps
Total derivative liabilities
December 31, 2015
Notional
Amount
Fair
Value
Expiration
Dates
(Dollars in millions)
825
$
4
2023-2025
1,892
$
1,931
3,593
1,554
8,970
768
2,655
168
422
4,013
$
$
$
2016-2019
2016
2016
2016-2035
2016-2019
2016
2016
2016-2025
—
7
26
25
58
1
6
—
7
14
December 31, 2014
Notional
Amount
Fair
Value
Expiration
Dates
2,530
$
355
2,604
355
5,844
687
22
2,789
367
$
$
3,865
$
2015-2020
2015
2015
2015-2021
2015-2020
2015
2015
2015-2021
7
2
31
6
46
1
—
13
6
20
$
$
$
$
$
$
$
$
$
121
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, 2015
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 millions)
December 31, 2015
Derivatives designated as hedging
instruments:
Liabilities
Interest Rate Swaps on FHLB
advances
Derivatives not designated as
hedging instruments:
Assets
Mortgage backed securities
forwards
Interest rate swaps and swaptions
Total derivative assets
Liabilities
U.S. Treasury and euro dollar
futures
Interest rate swaps and swaptions
Total derivative liabilities
$
$
$
$
$
4
$
— $
4
$
— $
— $
4
5
58
63
1
17
18
$
$
$
$
— $
—
— $
— $
—
— $
5
58
63
1
17
18
$
$
$
$
— $
—
— $
— $
—
— $
4
33
37
$
$
— $
10
10
$
1
25
26
1
7
8
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 millions)
Assets
U.S. Treasury swap and euro dollar
futures
Mortgage backed securities forwards
Interest rate swaps
Total derivative assets
Liabilities
Interest rate swaps
$
$
$
18
26
8
52
$
$
$
1
—
—
1
$
17
26
8
51
$
$
— $
—
—
— $
10
24
2
36
$
$
6
$
— $
6
$
— $
— $
7
2
6
15
6
The Company pledged a total of $37 million of cash collateral to counterparties and had an obligation to return cash of
$10 million at December 31, 2015 for derivative activities. The Company pledged a total of $36 million of cash collateral to
counterparties at December 31, 2014 for derivative activities. The net cash pledged is restricted and is included in other assets
on the Consolidated Statements of Financial Condition.
122
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 12 — Deposit Accounts
The deposit accounts are as follows:
Retail deposits
Branch retail deposits
Demand deposit accounts
Savings accounts
Money market demand accounts
Certificates of deposit/CDARS
Total branch retail deposits
Commercial deposits
Demand deposit account
Savings account
Money market demand accounts
Certificates of deposit/CDARS
Total commercial deposits
Total retail deposits subtotal
Government deposits
Demand deposit accounts
Savings accounts
Certificates of deposit/CDARS
Total government deposits
Company controlled deposits
Total deposits
December 31,
2015
2014
(Dollars in millions)
$
797
$
3,717
163
811
5,488
194
34
104
14
346
5,834
302
363
397
1,062
1,039
7,935
$
$
The following indicates the scheduled maturities for certificates of deposit with a minimum denomination of
$250,000:
Three months or less
Over three months to six months
Over six months to twelve months
One to two years
Thereafter
Total
December 31,
2015
2014
(Dollars in millions)
$
$
$
97
72
173
17
37
396
$
726
3,428
209
807
5,170
133
27
43
5
208
5,378
246
317
355
918
773
7,069
93
54
103
9
5
264
123
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 13 — Federal Home Loan Bank Advances
The portfolio of Federal Home Loan Bank advances includes floating rate short-term daily adjustable advances, short-
term fixed rate advances, long-term LIBOR adjustable advances and long-term fixed rate advances. The following is a
breakdown of the advances outstanding.
2015
Weighted
Average
Rate
Amount
December 31,
2014
Amount
Weighted
Average
Rate
(Dollars in millions)
2013
Weighted
Average
Rate
Amount
Short-term floating rate daily
adjustable advances
Short-term fixed rate term
advances
Long-term LIBOR adjustable
advances
Long-term fixed rate advances
$
—
—% $
2,291
825
425
0.36%
0.70%
1.58%
Total
$
3,541
0.59% $
—
214
—
300
514
—% $
0.26%
—%
1.36%
0.90% $
216
772
—
—
988
0.50%
0.30%
—%
—%
0.34%
The Company settled $375 million in long-term fixed rate Federal Home Loan Bank advances during the fourth
quarter 2015, which resulted in a gain on extinguishment of debt of $3 million, included in other noninterest income.
The Company settled $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 $178 million.
At December 31, 2015, 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, 2015, the Company had $3.5 billion of advances outstanding and an additional $0.5 billion of collateralized
borrowing capacity available at Federal Home Loan Bank. The advances can be collateralized by non-delinquent single-family
residential first mortgage loans, loans with government guarantees, certain other loans and investment securities.
At December 31, 2015, $825 million of the outstanding advances were adjustable rate based on the three month
LIBOR index. Interest rates on these advances reset every three months and the advances may be prepaid without penalty, with
notification at scheduled three month intervals after an initial 12 month lockout period. The outstanding advances included
$825 million in a cash flow hedge relationship as discussed in Note 11.
The following table highlights the Company’s Federal Home Loan Bank advances for the years ending December 31,
2015, 2014 and 2013.
Maximum outstanding at any month end
$
Average outstanding balance
Average remaining borrowing capacity
Weighted-average interest rate
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
$
1,300
$
939
1,947
0.23%
3,541
1,811
1,611
1.00%
2,908
2,915
735
3.22%
124
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table outlines the Company’s Federal Home Loan Bank advance final maturity dates as of December 31,
2015.
2016
2017
2018
2019
Thereafter
Total
December 31, 2015
(Dollars in millions)
2,291
50
125
—
1,075
3,541
$
$
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 14 — Debt
Long-term debt at December 31, 2015 and 2014, included the following:
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 (3)
Plus 0.16% (2), matures 2019 (4)
Total long-term debt
$
$
$
$
December 31,
2015
2014
(Dollars in millions)
Amount
Interest Rate
Amount
Interest Rate
26
26
26
26
26
51
25
25
16
247
—
—
247
3.85% $
3.57%
3.85%
2.32%
2.32%
2.26%
1.82%
1.96%
3.01%
$
$
$
26
26
26
26
26
51
25
25
16
247
42
42
331
3.50%
3.48%
3.51%
2.23%
2.23%
1.99%
1.73%
1.69%
2.74%
0.63%
0.33%
(1) The Note accrued interest at a rate equal to the least of (i) one month LIBOR plus 0.46 percent (ii) the net weighted average coupon,
and (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.
(3) In June 2015, the Company exercised a clean-up of the outstanding debt. The par value for the debt was $43 million at
December 31, 2014.
(4) In December 2015, the Company exercised a clean-up of the outstanding debt. The par value for the debt was $45 million at
December 31, 2014.
At December 31, 2015 and 2014 the three-month LIBOR interest rate was 0.61 percent and 0.26 percent, respectively.
At December 31, 2014 the one month LIBOR interest rate was 0.17 percent.
125
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Trust Preferred Securities
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. The notes held by each trust are the sole assets of that trust.
The trust preferred securities outstanding are junior subordinated notes which are callable by the Company. Interest is
payable quarterly at a rate equal to the interest rate being earned by the trust on the notes held by the trusts; however, the
Company may defer interest payments for up to 20 quarters without default or penalty. In January 2012, the Company exercised
its contractual rights to defer 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. At December 31, 2015, the Company has deferred for 16 quarters and has $27 million accrued for these
deferred interest payments, which is recorded in "other liabilities."
Note 15 — Representation and Warranty Reserve
The following table shows the activity in the representation and warranty reserve.
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
53
$
54
$
7
(19)
(12)
(1)
40
$
7
10
17
(18)
53
$
193
18
36
54
(193)
54
$
$
Balance, beginning of period,
Provision
Charged to gain on sale for current loan sales
Charged to representation and warranty (benefit) provision
Total
Charge-offs, net
Balance, end of period
Note 16 — Warrants
May Investor Warrant
The Company granted warrants (the "May Investor Warrants") to the May Investors on January 30, 2009 under anti-
dilution provisions applicable to certain investors (the "May Investors") in the Company’s May 2008 private placement capital
raise.
For the year ended December 31, 2015, 72,945 May Investor Warrants were exercised resulting in the issuance of,
42,101 shares of Common Stock. The May Investors held warrants to purchase 615,962 shares at an exercise price of $10.00 at
December 31, 2015.
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. Warrant liabilities are valued using a binomial lattice model and are
classified within Level 2 of the valuation hierarchy. Significant observable inputs include share price, expected volatility, a risk
free rate and an expected life.
At December 31, 2015 and 2014, the liability from May Investors Warrants amounted to $8 million and $6 million,
respectively. 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.
126
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
TARP Warrant
A warrant associated with Series C fixed rate cumulative non-convertible perpetual preferred stock ("Series C
Preferred Stock") to purchase up to 645,138 shares of Common Stock remains outstanding through December 2019 at an
exercise price of $62.00 per share.
The Company's Series C Preferred Stock was issued under the Troubled Asset Relief Program ("TARP") Capital
Purchase Program. The U.S. government subsequently sold the Series C Preferred Stock to an unrelated third-party. The
Company has deferred $86 million of dividend payments, which is not reflected in the Consolidated Financial Statements until
paid.
Note 17 — Stockholders' Equity
Preferred Stock
Preferred stock with a par value of $0.01 and a liquidation value of $1,000 and additional paid in capital attributable to
preferred stock at December 31, 2015 is summarized as follows.
Series C Preferred Stock
9.0% 1/31/2012
266,657
$
— $
267
Dividend Rate
(1)
Earliest
Redemption
Date (1)
Shares
Outstanding
Preferred
Shares
Preferred Stock
(Dollars in millions)
(1) Earliest redemption date at the Company's option.
Note 18 - Accumulated Other Comprehensive Income (Loss)
The following table sets forth the components in accumulated other comprehensive income (loss) for each type of
investment securities available-for-sale, investment securities held-to-maturity, and cash flow hedges.
Accumulated other comprehensive income (loss) ("AOCI")
Balance at December 31, 2014, net of tax
Net unrealized loss, net of tax
Reclassifications out of AOCI (1)
Transfer of net unrealized loss from AFS to HTM
Balance at December 31, 2015, net of tax
Balance at December 31, 2013, net of tax
Net unrealized gain, net of tax
Reclassifications out of AOCI (1)
Balance at December 31, 2014, net of tax
Balance at December 31, 2012, net of tax
Net unrealized gain, net of tax
Reclassifications out of AOCI (1)
Balance at December 31, 2013, net of tax
Held-to-
Maturity
Securities
Available-for-
Sale Securities
(1)
(Dollars in millions)
Cash Flow
Hedges
Accumulated
Other
Comprehensive
Income (Loss)
Net of Tax
$
$
$
$
$
$
— $
—
—
5
5
$
— $
—
—
— $
— $
—
—
— $
$
8
(5)
2
(5)
— $
(5) $
13
—
8
$
(2) $
(3)
—
(5) $
— $
(5)
2
—
(3) $
— $
—
—
— $
— $
—
—
— $
8
(10)
4
—
2
(5)
13
—
8
(2)
(3)
—
(5)
(1) Reclassifications are reported in other noninterest income on the Consolidated Statement of Operations.
127
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Note 19 — Earnings (Loss) Per Share
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.
Net income (loss)
Less: preferred stock dividend/accretion
Net income (loss) from continuing operations
Deferred cumulative preferred stock dividends
Net income (loss) applicable to Common Stockholders
Weighted Average Shares
Weighted average common shares outstanding
Effect of dilutive securities
May Investor Warrants (1)
Stock-based awards
Weighted average diluted common shares
Earnings (loss) per common share
Basic earnings (loss) per common share
Effect of dilutive securities
May Investor Warrants
Stock-based awards
Diluted earnings (loss) per common share
For the Years Ended December 31,
2015
2014
2013
(In millions, except share data)
158
$
(69) $
—
158
(30)
(1)
(70)
(26)
128
$
(96) $
267
(6)
261
(14)
247
56,426,977
56,246,528
56,063,282
305,484
432,062
—
—
237,412
217,487
57,164,523
56,246,528
56,518,181
2.27
$
(1.72) $
(0.01)
(0.02)
2.24
$
—
—
(1.72) $
4.40
(0.02)
(0.01)
4.37
$
$
$
$
(1)
Includes the May Warrants at an exercise price of $10.00 per share and a fair value of $8 million and $11 million at December 31, 2015 and 2013,
respectively.
The December 31, 2014 diluted loss per share calculation excludes all common stock equivalents, including 263,267
pertaining to stock based awards and 306,310 pertaining to warrants, respectively. The inclusion of these securities would be
anti-dilutive.
Under the terms of the Series C Preferred Stock the Company may defer dividend payments. The Company elected to
defer dividend payments beginning with the February 2012 dividend. Although not included in quarterly net income (loss) from
continuing operations, the deferral still impacts net income (loss) applicable to common stock for the purpose of calculating
earnings per share, as shown above. The cumulative amount in arrears as of December 31, 2015 is $86 million.
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 stock awards. Awards that may be granted
under the plan include stock options, incentive stock options, cash-settled stock appreciation rights, restricted stock units,
performance shares and performance units and other awards. Under the current plan, the exercise price of any award granted
must be at least equal to the fair market value of common stock on the date of grant. Non-qualified stock options granted to
directors expire 5 years from the date of grant. Grants other than non-qualified stock options have term limits set by the board
of directors in the applicable agreement. Stock appreciation rights generally expire 7 years from the date of grant. Awards still
outstanding under any of the prior plans will continue to be governed by their respective terms.
During the years ended December 31, 2015, 2014 and 2013, compensation expense recognized related to the plan
totaled $3 million, $4 million and $5 million, respectively.
128
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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 or expected to vest, end of year
Options exercisable, end of year
Number of Shares
December 31,
2015
2014
2013
63,598
(10,314)
53,284
53,284
27,197
82,937
(19,339)
63,598
63,598
32,532
93,628
(10,691)
82,937
82,937
43,281
The total intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013, was zero.
Additionally, there was no aggregate intrinsic value of options outstanding and exercised at December 31, 2015, 2014 and
2013.
Options outstanding, beginning of year
Options canceled, forfeited and expired
Options outstanding, end of year
Options vested or expected to vest, end of year
Options exercisable, end of year
Weighted Average Exercise Price
2015
December 31,
2014
2013
$
$
$
$
94.33
168.34
80.00
80.00
80.00
$
$
$
$
104.26
136.97
94.33
94.33
108.01
$
$
$
$
143.41
447.22
104.26
104.26
126.49
The following information pertains to the stock options issued pursuant to the Prior Plans, but not exercised at
December 31, 2015.
Range of Grant Price
$80.00
Range of Grant Price
$80.00
Options Outstanding
Weighted Average
Remaining
Contractual Life
(Years)
4.06
Number of Options
Outstanding at
December 31, 2015
53,284
53,284
Options Exercisable
Weighted
Average
Exercise Price
80.00
$
Number Exercisable
at December 31,
2015
27,197
27,197
Weighted
Average
Exercise Price
80.00
$
Options Vested or Expected to Vest
Number of Options
Outstanding at
December 31, 2015
Weighted Average
Remaining
Contractual Life
(Years)
Weighted Average
Exercise Price
53,284
53,284
4.06 $
80.00
At December 31, 2015 and 2014, options available for future grants were 243,331 and 233,017, 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 subject to
service and performance conditions. At December 31, 2015 and 2014, the maximum number of shares of common stock that
may be issued were 437,402 shares and 737,861 shares, respectively. The Company incurred expenses of approximately $3
million, $3 million and $1 million with respect to restricted stock units during the years ended December 31, 2015, 2014 and
2013, respectively. As of December 31, 2015 and 2014 restricted stock units had a market value of $9 million and $4 million,
respectively.
129
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
On October 20, 2015, the Board of the Company approved and adopted the Flagstar Bancorp, Inc. Executive Long-
Term Incentive Program ("ExLTIP"). The ExLTIP provides for payouts to certain executives only if the Company stock
achieves and sustains a specified market performance (the "Performance Hurdle") within ten years of the grant date. The
ExLTIP awards were made in the form of restricted stock units under and subject to the terms of the 2016 Flagstar Bancorp,
Inc. Stock and Incentive Plan, which remains subject to shareholder approval. If vested, the restricted stock units would pay out
in five installments, subject to a quality review, on the date the Performance Hurdle is attained and on each of the four
subsequent annual payout dates.
The following table summarize the activity that occurred in the years ended December 31.
Restricted Stock
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
Granted (1)
Vested
Canceled and forfeited
Non-vested at December 31, 2015
Shares
Weighted — Average Grant-
Date Fair Value per Share
425,211
113,760
(190,949)
(60,096)
287,926
279,312
(276,548)
(56,999)
233,691
1,325,134
(152,220)
(106,620)
1,299,985
$
$
$
$
12.70
15.06
17.08
11.14
12.01
19.27
14.47
14.37
17.21
16.11
15.25
18.46
16.36
(1)
Includes ExLTIP shares of 907,741, which were granted in 2015 and are pending approval at the May 24, 2016 Annual Shareholders Meeting.
Incentive Compensation Plans
The Company had an expense of $30 million, $21 million and $24 million for the years ended December 31, 2015,
2014 and 2013, respectively, for employee incentive plans.
Note 21— Income Taxes
Components of the provision (benefit) for income taxes consist of the following.
Current
Federal
State
Total current income tax expense
Deferred
Federal
State
Total deferred income tax expense (benefit)
Total income tax expense (benefit)
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
2
—
2
82
(2)
80
82
$
$
$
2
(1)
1
(35)
—
(35)
(34) $
—
—
—
(407)
(9)
(416)
(416)
$
$
130
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The Company’s effective tax rate differs from the statutory federal tax rate. The following is a summary of such differences.
Provision (benefit) at statutory federal income tax rate (35%)
(Decreases) increases 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 expense (income)
Non-deductible compensation
Litigation settlement
Other
Provision (benefit) for income taxes
$
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
$
84
$
(37) $
(6)
—
4
1
1
—
(2)
82
8
—
(9)
(2)
1
4
$
1
(34) $
(52)
(355)
(6)
(3)
—
—
—
—
(416)
During the year ended December 31, 2015, the effective tax rate was 34.2 percent, compared to an effective tax rate
benefit of 32.9 percent during the year ended December 31, 2014 and a not meaningful tax rate for the year ended
December 31, 2013.
Temporary differences and carry forwards that give rise to deferred tax assets and liabilities are comprised of the
following.
December 31,
2015
2014
(Dollars in millions)
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)
General business credit
Accrued compensation
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
Total
Net deferred tax asset
131
$
$
$
258
89
31
15
15
1
9
3
—
3
9
433
(22)
411
(19)
(17)
(3)
(3)
(5)
(47)
364
$
292
140
30
20
13
—
—
6
5
4
7
517
(33)
484
(32)
(3)
(3)
(2)
(2)
(42)
442
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The Company has not provided deferred income taxes for the Bank’s pre-1988 tax bad debt reserve at December 31,
2015 of approximately $4 million because it is not anticipated that this temporary difference will reverse in the foreseeable
future. Such reserves would only be taken into taxable income if the Bank, or a successor institution, liquidates, redeems shares,
pays dividends in excess of earnings, or ceases to qualify as a bank for tax purposes.
During the years ended December 31, 2015 and 2014, the Company had federal net operating loss carry forwards of
$660 million and $743 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 new operating loss carry forwards that existed at that time. At December 31, 2015 the
Company had $154 million of net operating loss carry forwards subject to certain annual use limitations which expire in
calendar years 2028 through 2029.
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
• 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.
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 each period end. The Company believes that this evidence is
sufficient to overcome the unadjusted cumulative losses in recent years.
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. The Company released its valuation allowance in the fourth quarter of 2013 and
continued to conclude that its Federal deferred tax assets are more likely than not realizable as of December 31, 2015 and 2014.
The Company had a total state deferred tax asset before valuation allowance of $33 million and total state net
operating loss carryforwards of $621 million at December 31, 2015. 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, 2015, the state deferred tax assets which will
more likely than not be realized, was $11 million and we have maintained a valuation allowance of $22 million due to state loss
carryover limitations.
132
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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, 2015, the Internal Revenue Service had completed an examination of the Company through the taxable year
ended December 31, 2011. The years open to examination by state and local government authorities vary by jurisdiction.
The total amounts of unrecognized tax benefits for the years ended December 31, 2015, 2014 and 2013 was $1 million
for each year.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the years
ended December 31, 2015, 2014 and 2013, the Company did not recognize any interest income, interest expense, or increase or
decreases to uncertain income tax positions of greater than $1 million, individually or in aggregate.
Note 22 — Regulatory Matters
Regulatory Capital
The Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s
assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital
amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that could have a
material effect on the Consolidated Financial Statements. On January 1, 2015, the Basel III rules became effective and include
transition provisions through 2018.
To be categorized as "well-capitalized," the Company and the Bank must maintain minimum tangible capital, Tier 1
capital, common equity Tier 1, and total capital ratios as set forth in the table below. The Company and the Bank are considered
"well-capitalized" at both December 31, 2015 and December 31, 2014. There have been no conditions or events that
management believes have changed the Company's or the Bank’s category.
The following tables show the regulatory capital ratios as of the dates indicated.
Bancorp
Actual
For Capital
Adequacy Purposes
Well Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in millions)
December 31, 2015
Tangible capital (to tangible assets)
Tier 1 capital (to adjusted tangible assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
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)
$
$
N/A - Not applicable.
1,435
1,435
1,065
1,435
1,534
1,184
1,184
1,184
1,252
11.51%
11.51% $
14.09%
18.98%
20.28%
N/A
499
340
454
605
N/A
4.0% $
4.5%
6.0%
8.0%
N/A
624
491
605
756
N/A
5.0%
6.5%
8.0%
10.0%
12.59%
N/A
N/A
N/A
N/A
12.59% $
22.81%
24.12%
376
208
415
4.0% $
4.0%
8.0%
470
311
519
5.0%
6.0%
10.0%
(1) On January 1, 2015, the Basel III rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments
impacting common equity Tier 1 capital and Tier 1 capital. The Company and the Bank reported under Basel I (which included the Market Risk
Final Rules) at December 31, 2014.
133
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Bank
Actual
For Capital
Adequacy Purposes
Well Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in millions)
December 31, 2015
Tangible capital (to tangible assets)
Tier 1 capital (to adjusted tangible assets)
Common equity Tier 1 capital (to RWA)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
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)
$
$
N/A - Not applicable.
1,472
1,472
1,472
1,472
1,570
1,167
1,167
1,167
1,235
11.79%
11.79% $
19.42%
19.42%
20.71%
N/A
500
341
455
607
N/A
4.0% $
4.5%
6.0%
8.0%
N/A
625
493
607
758
N/A
5.0%
6.5%
8.0%
10.0%
12.43%
N/A
N/A
N/A
N/A
12.43% $
22.54%
23.85%
376
207
414
4.0% $
4.0%
8.0%
470
311
518
5.0%
6.0%
10.0%
(1) On January 1, 2015, the Basel III rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments
impacting common equity Tier 1 capital and Tier 1 capital. The Company and the Bank reported under Basel I (which included the Market Risk
Final Rules) at December 31, 2014.
Consent Orders
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.
Under the Consent Order, the Bank is required to adopt or review and revise various plans, policies and procedures.
Specifically, under the terms of the Consent Order, the Bank's board of directors has agreed to, among other things, which
include but is 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
• 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.
134
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Supervisory Agreement
The Company remains 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 copy of the
Supervisory Agreement was 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 and Bank Holding Company were subject to the capital requirements of the Basel III rules beginning
January 1, 2015, which replaces the framework established by the 1988 capital accord ("Basel I") of the Basel Committee on
Banking Supervision.
The capital framework under the Basel III final rule replaces the 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. Beginning January 1, 2015 the final rules required 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 implemented a new common equity Tier 1 minimum capital requirement of
at least 4.5 percent of risk-weighted assets.
In addition, 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 is 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.
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. The Company continues to include our
existing trust preferred securities as Tier 1 capital as they were issued prior to May, 19, 2010.
Note 23 — Legal Proceedings, Contingencies and Commitments
Legal Proceedings
The Company and its subsidiaries are subject to various pending or threatened legal proceedings arising out of the
normal course of business operations. In addition, the Bank is routinely named in civil actions throughout the country by
borrowers and former borrowers relating to the origination, purchase, sale, and servicing of mortgage loans. From time to time,
governmental agencies also conduct investigations or examinations of various 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.
The Company assesses the liabilities and loss contingencies in connection with such pending or threatened legal and
regulatory proceedings on at least a quarterly basis and establishes accruals 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, as appropriate, in light of additional information.
Management does not believe that the amount of any reasonably possible losses in excess of any amounts accrued with
respect to ongoing proceedings or any other known claims, including the matters described below, will be material to the
135
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Company’s financial statements, or that the ultimate outcome of these actions will have a material adverse effect on its financial
condition, results of operations or cash flows.
DOJ litigation settlement
The Company elected the fair value option to account for the liability representing the obligation to make future
additional payments under the DOJ litigation settlement. 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, 2015 the remaining future payments totaled $118 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. The fair value of the
DOJ litigation settlement liability was $84 million and $82 million using a discount rate of 7.2 percent and 8.7 percent at
December 31, 2015 and 2014 respectively.
At both December 31, 2015 and December 31, 2014, excluding the fair value liability relating to the DOJ litigation
settlement, the Company's total accrual for contingent liabilities was $2 million and $4 million, respectively.
Commitments
A summary of the contractual amount of significant commitments is as follows.
Commitments to extend credit
Mortgage loans interest-rate lock commitments
HELOC commitments
Other consumer commitments
Warehouse loan commitments
Standby and commercial letters of credit
Commercial and industrial commitments
Other commercial commitments
December 31,
2015
2014
(Dollars in millions)
$
$
3,792
150
22
871
13
151
497
2,172
88
7
827
10
276
169
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. Commitments generally have
fixed expiration dates or other termination clauses. 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 counterparties.
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 in other assets. Further discussion on derivative instruments is included in Note 11 of the
Notes to the Consolidated Financial Statements, herein.
The Company has unfunded commitments under its contractual arrangement with the HELOC loans. Commitments to
extend, originate or purchase credit are primarily lines of credit to consumers and have specified rates and maturity dates.
Many of these commitments also have adverse change clauses, which allow the Company to cancel the commitment due to
deterioration in the borrowers’ creditworthiness.
Other consumer commitments are conditional commitments issued to accommodate the financial needs of customers.
The commitments are under various terms to lend funds to consumers, which include revolving credit agreements, term loan
commitments and short-term borrowing agreements.
136
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Warehouse loan commitments are lines of credit provided to mortgage originators to fund loans they originate and then
sell. The proceeds of the sale of the loan is used to repay the draw on the line used to fund the loan.
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.
Commercial and industrial and other commercial commitments are conditional commitments issued under various
terms to lend funds to business and other entities. These commitments include revolving credit agreements, term loan
commitments and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being
funded, the total commitment amounts do not necessarily represent future liquidity requirements.
These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized
on the Consolidated Statements of Financial Condition. 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.
The Company maintains a reserve for letters of credit, 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 $2
million and $1 million for December 31, 2015 and 2014, 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 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.
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.
137
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the financial instruments carried at fair value as of December 31, 2015 and 2014, by caption
on the Consolidated Statements of Financial Condition and by the valuation hierarchy (as described above).
December 31, 2015
Level 1
Level 2
Level 3
Total Fair Value
Investment securities available-for-sale
Agency - Commercial
Agency - Residential
Municipal obligations
Loans held-for-sale
Residential first mortgage loans
Loans held-for-investment
Residential first mortgage loans
Second mortgage loans
HELOC loans
Mortgage servicing rights
Derivative assets
Rate lock commitments
Mortgage backed securities forwards
Interest rate swaps and swaptions
Total derivative assets
Total assets at fair value
Derivative liabilities
U.S. Treasury and euro dollar futures
Forward agency and loans sales
Interest rate swap on FHLB advances
Interest rate swaps
Total derivative liabilities
Warrant liabilities
DOJ litigation settlement
Total liabilities at fair value
$
$
$
$
— $
—
—
—
—
42
64
296
26
—
—
26
428
$
— $
—
—
—
—
—
(84)
(84) $
766
514
14
2,541
6
42
64
296
26
7
25
58
4,301
(1)
(6)
(4)
(7)
(18)
(8)
(84)
(110)
(Dollars in millions)
$
766
514
14
2,541
6
—
—
—
—
—
25
— $
—
—
—
—
—
—
—
—
7
—
7
7
$
25
3,866
$
(1) $
—
(4)
—
(5)
—
—
(5) $
— $
(6)
—
(7)
(13)
(8)
—
(21) $
138
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2014
Level 1
Level 2
Level 3
Total Fair Value
(Dollars in millions)
Investment securities available-for-sale
Agency - Commercial
Agency - Residential
Municipal obligations
Loans held-for-sale
Residential first mortgage loans
Loans held-for-investment
Residential first mortgage loans
Second mortgage loans
HELOC loans
Mortgage servicing rights
Derivative assets
U.S. Treasury and euro dollar futures
Rate lock commitments
Mortgage backed securities forwards
Interest rate swaps
Total derivative assets
Other investments
Total assets at fair value
Derivative liabilities
Forward agency and loan sales
U.S. Treasury and euro dollar futures
Interest rate swaps
Total derivative liabilities
Warrant liabilities
Long-term debt
DOJ litigation settlement
Total liabilities at fair value
$
— $
540
$
— $
—
—
—
—
—
—
—
7
—
2
—
9
—
9
1,130
—
1,196
26
—
—
—
—
—
—
6
6
—
$
2,898
$
— $
(1)
—
(1)
—
—
—
(1) $
(13) $
—
(6)
(19)
(6)
—
—
(25) $
—
2
—
—
53
132
258
—
31
—
—
31
100
576
$
— $
—
—
—
—
(84)
(82)
(166) $
$
$
$
540
1,130
2
1,196
26
53
132
258
7
31
2
6
46
100
3,483
(13)
(1)
(6)
(20)
(6)
(84)
(82)
(192)
The Company had no transfers of assets or liabilities recorded at fair value between fair value levels during the year ended
December 31, 2015. The Company transferred $4 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.
The Company utilized US Treasury future, forward agency and loan sales and interest rate swaps to manage the risk
associated with mortgage servicing rights and rate lock commitments. The assets and/or liabilities transferred are valued at the end
of the period. Gains and losses for individual lines 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, 2015, 2014 and 2013 (including the change in fair value) for financial instruments classified by the Company within
Level 3 of the valuation hierarchy.
139
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)
Purchases /
Originations
Sales
Settlement
Transfers
In (Out)
Balance at
End of Year
(Dollars in millions)
Changes In
Unrealized
Held at
End of Year
Year Ended December 31, 2015
Assets
Investment securities available-
for-sale
Municipal obligation
$
2 $
— $
— $
— $
— $
— $
(2) $
— $
— $
Loans held-for-investment
Second mortgage loans
HELOC loans
Mortgage servicing rights
Other investments
Totals
Liabilities
Long-term debt
DOJ litigation
Totals
Derivative financial
instruments (net)
Rate lock commitments
Year Ended December 31, 2014
Assets
Investment securities available-
for-sale
Municipal obligation
Loans held-for-investment
Second mortgage loans
HELOC loans
Mortgage servicing rights
Other investments
Totals
Liabilities
Long-term debt
Litigation settlement
Totals
Derivative financial
instruments (net)
Rate lock commitments
Year Ended December 31, 2013
Assets
Investment securities available-
for-sale
Mortgage securitization
Loans held-for-investment
Second mortgage loans
HELOC loans
Transferors' interest
Mortgage servicing rights
Totals
Liabilities
Long-term debt
Litigation settlement
Totals
Derivative financial
instruments (net)
Rate lock commitments
$
$
$
$
$
$
$
$
$
$
$
$
$
$
—
2
5
3
—
10
—
(2)
(2)
2
(26)
(27)
—
(51)
—
11
11
34
—
14
15
—
19
48
53
132
258
100
2
(4)
(46)
—
1
(1)
—
—
—
—
—
—
—
—
260
—
—
—
(176)
—
(14)
(63)
—
(100)
—
—
—
—
42
64
296
—
545 $
(48) $
— $
— $
260 $
(176) $
(179) $
— $
402 $
(84) $
(82)
(166) $
— $
(2)
(2) $
(3) $
—
(3) $
— $
—
— $
— $
—
— $
52 $
—
52 $
35 $
—
35 $
— $
—
— $
— $
(84)
(84) $
31 $
60 $
— $
— $
330 $
(342) $
(53) $
— $
26 $
32
— $
— $
— $
— $
— $
— $
(2) $
4 $
2 $
—
65
155
285
—
2
(3)
(67)
—
2
2
—
—
—
—
—
—
—
1
271
100
—
—
(231)
—
(16)
(23)
—
—
—
—
—
—
53
132
258
100
505 $
(68) $
4 $
— $
372 $
(231) $
(41) $
4 $
545 $
(106) $
(93)
(199) $
— $
11
11 $
(7) $
—
(7) $
— $
—
— $
— $
—
— $
— $
—
— $
29 $
—
29 $
— $
—
(84) $
(82)
— $
(166) $
10 $
154 $
— $
— $
273 $
(353) $
(53) $
— $
31 $
91 $
— $
(9) $
1 $
— $
(73) $
(10) $
— $
— $
—
—
7
711
809 $
— $
(19)
(19) $
1
(8)
—
105
(6)
11
46
—
—
—
—
—
80
171
—
541
—
—
(53)
(973)
(10)
(19)
—
(99)
—
—
—
—
65
155
—
285
98 $
42 $
1 $
792 $
(1,099) $
(138) $
— $
505 $
— $
(74)
(74) $
(6) $
—
(6) $
— $
—
— $
(120) $
—
(120) $
— $
—
— $
20 $
—
20 $
— $
(106) $
—
(93)
— $
(199) $
—
(74)
(74)
86 $
— $
(150) $
— $
377 $
(241) $
(62) $
— $
10 $
(18)
140
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, 2015 and 2014.
December 31, 2015
Assets
Fair Value Valuation Technique
Unobservable Input
(Dollars in millions)
Range (Weighted
Average)
Second mortgage loans
HELOC loans
Mortgage servicing rights
$
$
$
Liabilities
42 Discounted cash flows
64 Discounted cash flows
Discount rate
Constant prepayment rate
Constant default rate
Discount rate
7.2% - 10.8% (9.0%)
13.5% - 20.2% (16.9%)
2.6% - 4.0% (3.3%)
6.8% - 10.1% (8.4%)
296 Discounted cash flows
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
6.6% - 9.9% (8.2%)
10.3% - 14.8% (12.6%)
$57 - $86 ($72)
DOJ litigation settlement (2) $
(84) Discounted cash flows
Discount rate
4.9% - 9.5% (7.2%)
Derivative financial
instruments
Rate lock commitments
$
26
Consensus pricing
Origination pull-through rate
67.6% - 101.5% (84.6%)
December 31, 2014
Assets
Second mortgage loans
HELOC loans
Mortgage servicing rights
Liabilities
Long-term debt (1)
DOJ litigation settlement (2)
Derivative financial
instruments
Rate lock commitments
$
$
$
$
$
$
Fair Value Valuation Technique
Unobservable Input
Range (Weighted
Average)
(Dollars in millions)
Discount rate
Constant prepayment rate
Constant default rate
Yield
Constant prepayment rate
Constant default rate
Discount loss severity
7.2% - 10.8% (9.0%)
11.3% - 17.0% (14.2%)
2.4% - 3.6% (3.0%)
8.0% - 12.0% (10.0%)
7.2% - 10.8% (9.0%)
6.6% - 9.9% (8.3%)
60.2% - 90.2% (75.2%)
53 Discounted cash flows
132 Discounted cash flows
258 Discounted cash flows
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
7.1% - 10.7% (8.9%)
12.2% - 17.1% (15.0%)
$67 - $88 ($78)
(84) Discounted cash flows
(82) Discounted cash flows
Discount rate
Constant prepayment rate
Weighted average life
Discount rate
6.4% - 9.6% (8.0%)
16.0% - 24.0% (20.0%)
0.5 - 0.7 (0.6)
6.4% - 11.0% (8.7%)
31
Consensus pricing
Origination pull-through rate
66.2% - 99.3% (82.7%)
(1) In December 2015, the Company executed a clean-up call of long-term debt accounted for under the fair value option associated with the
HELOC securitization trust.
(2) Refer to Note 1 and Note 23 o for a further discussion of the fair value of the DOJ litigation settlement
Recurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the second mortgage loans are discount rates,
constant prepayment rates, and default rates. The constant prepayment and default rates are based on a 12 month historical average.
Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value
measurement. Increases (decreases) in prepay rates in isolation result in a higher (lower) fair value and increases (decreases) in
default rates in isolation result in a lower (higher) fair value.
Our HELOC loans are valued utilizing a loan-level discounted cash flow model which projects expected cash flows given
three potential outcomes: (1) paid-in-full at scheduled maturity, (2) default at scheduled maturity (foreclosure), and (3) modification
at scheduled maturity into an amortizing HELOAN. Loans are placed into the potential outcome buckets based on their underlying
current delinquency, FICO scores and property CLTV all of which are unobservable inputs. Estimated cash flows are then
141
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
discounted back using an unobservable discount rate. Loans within the HELOC portfolio contain FICO scores with a minimum of
446, maximum of 818, and a weighted average of 681. For the HELOC loans, increases (decreases) in the discount rate, in isolation,
would lower (higher) the fair value measurement and increases (decreases) in the volume of loans expected to default in isolation,
would lower (higher) the fair value measurement.
For the HELOC loan related debt carried at fair value in 2014, increases (decreases) in the discount rate in isolation would
result in a lower (higher) fair value measurement; increases (decreases) in prepayment rates (based on three month historical
average) 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 three assumptions in isolation would result in a
significantly lower (higher) fair value measurement. Additionally, the key economic assumptions used in determining the fair value
of MSRs capitalized during the years ended December 31, 2015, 2014 and 2013 were as follows.
Weighted-average life (in years)
Weighted-average constant prepayment rate
Weighted-average discount rate
For the Years Ended December 31,
2015
2014
2013
7.9
11.3%
10.9%
7.8
12.3%
11.7%
The key economic assumptions reflected in the overall fair value of the MSRs were as follows.
Weighted-average life (in years)
Weighted-average constant prepayment rate
Weighted-average discount rate
2015
December 31,
2014
2013
7.3
12.6%
10.2%
6.6
15.0%
10.9%
6.1
13.8%
8.5%
7.3
11.9%
10.2%
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 fallout ratios (i.e., the inverse of the pull through rate) are applied accordingly.
Significant increases (decreases) in the pull through rate in isolation would result in a significantly higher (lower) fair value
measurement.
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 discount rate, including 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). Significant increases (decreases) in the discount rate in isolation could result in a
marginally higher (lower) fair value measurement.
142
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 nonrecurring 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, 2015
Loans held-for-sale (2)
Impaired loans held-for-investment (3)
Residential first mortgage loans
Commercial and industrial loans
Repossessed assets (4)
Totals
December 31, 2014
Loans held-for-sale (2)
Impaired loans held-for-investment (3)
Residential first mortgage loans
Repossessed assets (4)
Totals
Total (1)
Level 2
Level 3
(Dollars in millions)
8
$
8
$
40
2
17
67
27
74
19
120
$
$
$
—
—
—
8
27
—
—
27
$
$
$
—
40
2
17
59
—
74
19
93
$
$
$
$
(1) The fair values are obtained at various dates during the years ended December 31, 2015 and 2014, respectively.
(2) The Company recorded $2 million, $4 million and $4 million in fair value losses on loans held-for-sale for which the Company did not
elect the fair value option (included in interest income on the Consolidated Statements of Operations) during the years ended
December 31, 2015, 2014 and 2013, respectively.
(3) The Company recorded $84 million, $49 million and $155 million in fair value losses on impaired loans held-for-investment for which
the Company did not elect the fair value option (included in provision for loan losses on the Consolidated Statements of Operations)
during the years ended December 31, 2015, 2014 and 2013, respectively.
(4) The Company recorded $2 million, $4 million and $10 million in losses related to write downs of repossessed assets based on the
estimated fair value of the specific assets, and recognized net losses of $2 million, $5 million and $26 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, 2015, 2014 and 2013, respectively.
The following tables present the quantitative information about nonrecurring Level 3 fair value financial instruments and
the fair value measurements as of December 31, 2015.
December 31, 2015
Impaired loans held-for-investment
Residential first mortgage loans
Commercial and industrial loans
Repossessed assets
December 31, 2014
Impaired loans held-for-investment
Residential first mortgage loans
Repossessed assets
$
$
$
$
$
Fair Value
Valuation Technique(s) Unobservable Input
(Dollars in millions)
Range (Weighted
Average)
40
2
17
Fair value of collateral
Fair value of collateral
Fair value of collateral
35% - 45% (35.2%)
Loss severity discount
Loss severity discount
45% - 55% (50.1%)
Loss severity discount 16% - 100% (48.7%)
Fair Value
Valuation Technique(s) Unobservable Input
Range (Weighted
Average)
(Dollars in millions)
74
19
Fair value of collateral
Loss severity discount
35% - 47% (36.9%)
Fair value of collateral
Loss severity discount
7% - 100% (45.4%)
Nonrecurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are
appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties.
143
Fair Value of Financial Instruments
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
The following table presents the carrying amount and estimated fair value of financial instruments that are carried either at
fair value, cost, or amortized cost.
December 31, 2015
Estimated Fair Value
Carrying
Value
Total
Level 1
Level 2
Level 3
(Dollars in millions)
$
208
1,294
1,262
2,602
469
6,121
17
170
296
178
210
26
7
—
25
(4,744) $
(833)
(1,045)
(947)
(3,543)
(89)
(8)
(84)
(1)
(4)
(7)
208
—
—
—
—
—
—
—
—
—
—
—
7
—
—
$
— $
1,294
1,262
2,602
469
6
—
170
—
178
210
—
—
—
25
— $
—
—
—
—
—
—
—
(1)
(4)
—
(4,744) $
(833)
(1,045)
(947)
(3,543)
(89)
(8)
—
—
—
(7)
—
—
—
—
—
6,115
17
—
296
—
—
26
—
—
—
—
—
—
—
—
—
—
(84)
—
—
—
$
Assets
Cash and cash equivalents
Investment securities available-for-sale
Investment securities held-to-maturity
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment, net
Repossessed assets
Federal Home Loan Bank stock
Mortgage servicing rights
Bank owned life insurance
Other assets, foreclosure claims
Derivative Financial Instruments
Rate lock commitments
Mortgage back securities forwards
Forward agency and loan sales
Interest rate swaps and swaptions
Liabilities
Retail deposits
Demand deposits and savings accounts
Certificates of deposit
$
Government deposits
Company controlled deposits
Federal Home Loan Bank advances
Long-term debt
Warrant liabilities
DOJ litigation settlement
Derivative Financial Instruments
U.S. Treasury and euro dollar futures
Interest rate swap on FHLB advances
Interest rate swaps
$
208
1,294
1,268
2,576
485
6,165
17
170
296
178
210
26
7
—
25
(5,008) $
(826)
(1,062)
(1,039)
(3,541)
(247)
(8)
(84)
(1)
(4)
(7)
144
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2014
Estimated Fair Value
Carrying
Value
Total
Level 1
Level 2
Level 3
(Dollars in millions)
Assets
Cash and cash equivalents
Investment securities available-for-sale
$
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment, net
Repossessed assets
Federal Home Loan Bank stock
Mortgage servicing rights
Other investments
Derivative Financial Instruments
Interest rate swaps
U.S. Treasury futures
Rate lock commitments
Agency forwards
Liabilities
Retail deposits
Demand deposits and savings accounts
Certificates of deposit
$
Government deposits
Company controlled deposits
Federal Home Loan Bank advances
Long-term debt
Warrant liabilities
DOJ litigation settlement
Derivative Financial Instruments
Interest rate swaps
U.S. Treasury futures
Forward agency and loan sales
$
136
1,672
1,244
1,128
4,151
19
155
258
100
6
7
31
2
(4,565) $
(813)
(918)
(773)
(514)
(331)
(6)
(82)
(6)
(1)
(13)
$
136
1,672
1,196
1,094
3,998
19
155
258
100
6
7
31
2
(4,291) $
(816)
(884)
(770)
(514)
(172)
(6)
(82)
(6)
(1)
(13)
136
—
—
—
—
—
155
—
—
—
7
—
2
$
— $
1,670
1,196
1,094
26
—
—
—
—
6
—
—
—
— $
—
—
—
(514)
—
—
—
—
(1)
—
(4,291) $
(816)
(884)
(770)
—
(88)
(6)
—
(6)
—
(13)
—
2
—
—
3,972
19
—
258
100
—
—
31
—
—
—
—
—
—
(84)
—
(82)
—
—
—
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.
Investment securities held-to-maturity. Fair values are generated using market inputs, where possible, including quoted
prices (the closing price in an exchange market), bid prices (the price at which a buyer stands ready to purchase), and other market
information.
Loans 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 using internally developed discounted cash flow models using
market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
145
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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.
Bank owned life insurance. The fair value of bank owned life insurance policies is based on the cash surrender values of the
policies as reported by the insurance companies.
Other assets, foreclosure claims. The fair value of foreclosure claims with government guarantees approximates the carrying
amount.
Deposit accounts. The fair value of deposits with no defined maturity is estimated based on a discounted cash flow model
that incorporates current market rates for similar products and expected attrition. The fair value of fixed-maturity certificates of deposit
is estimated using the rates currently offered for certificates of deposit with similar remaining maturities.
Federal Home Loan Bank advances. Rates currently available for debt with similar terms and remaining maturities are used
to estimate the fair value of the existing debt.
Long-term debt. The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates
current borrowing rates for similar types of borrowing arrangements.
Fair Value Option
The Company elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial
Statements to mitigate a divergence between accounting losses and economic exposure. Interest income on loans held-for-sale is accrued
on the principal outstanding primarily using the "simple-interest" method.
The following table reflects the change in fair value included in earnings of financial instruments for which the value
option has been elected.
Assets
Loans held-for-sale
Net gain on loan sales
Other noninterest income
Loans held-for-investment
Other noninterest income
Liabilities
Long-term debt
Other noninterest income
Litigation settlement
Other noninterest expense
For the Years Ended December 31,
2015
2014
2013
(Dollars in millions)
$
$
321
$
—
40
$
401
(2)
44
29
$
22
$
(2)
11
201
—
29
5
(74)
146
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, 2015, 2014 and 2013 for assets and liabilities for which the fair value option has been
elected.
December 31, 2015
December 31, 2014
(Dollars in millions)
December 31, 2013
Unpaid
Principal
Balance
Fair Value
Over/
(Under) UPB
Unpaid
Principal
Balance
Fair Value
Fair Value
Over/
(Under) UPB
Unpaid
Principal
Balance
Fair Value
Over/
(Under) UPB
Fair Value
Fair Value
Assets
Nonaccrual loans
Loans held-for-sale
Loans held-for-
investment
Total nonaccrual
loans
Other performing
loans
Loans held-for-sale
Loans held-for-
investment
Total other
performing loans
Total loans
Loans held-for-sale
Loans held-for-
investment
Total loans
Liabilities
Long-term debt
Litigation settlement
$
$
$
$
$
$
$
1 $
— $
(1) $
— $
— $
— $
— $
— $
21
10
(11)
11
22 $
10 $
(12) $
11 $
5
5 $
(6)
11
(6) $
11 $
4
4 $
2,451 $
2,541 $
90 $
1,144 $
1,196 $
52 $
1,110 $
1,141 $
112
101
(11)
225
206
(19)
257
234
2,563 $
2,642 $
79 $
1,369 $
1,402 $
33 $
1,367 $
1,375 $
2,452 $
2,541 $
89 $
1,144 $
1,196 $
52 $
1,110 $
1,141 $
133
111
(22)
236
211
(25)
268
238
2,585 $
2,652 $
67 $
1,380 $
1,407 $
27 $
1,378 $
1,379 $
— $
(118)
— $
(84)
— $
34
(88) $
(118)
(84) $
(82)
4 $
36
(117) $
(118)
(106) $
(93)
—
(7)
(7)
31
(23)
8
31
(30)
1
11
25
(1) The Company is obligated to pay $118 million in installment payments upon meeting certain performance conditions.
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.
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 sub-services 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
segment and mortgage servicing rights held by the Other segment. The Mortgage Servicing segment may also collect ancillary
fees, such as late fees, and earns 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
147
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
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, 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, certain derivative 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 may be subject to periodic
adjustment as the internal management accounting system is revised and the business or product lines within the segments
change.
The following tables present financial information by business segment for the periods indicated.
Summary of Operations
Net interest income
Net gain (loss) on loan sales
Representation and warranty benefit
Other noninterest income
Total net interest income and
noninterest income
Benefit for loan losses
Asset resolution
Depreciation and amortization expense
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Intersegment revenue
Average balances
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment
Total assets
Deposits
$
$
$
$
Mortgage
Origination
Mortgage
Servicing
Community
Banking
Other
Total
Year Ended December 31, 2015
(Dollars in millions)
$
14
—
19
56
89
—
(14)
(3)
(126)
(143)
(54)
—
(54) $
(3) $
— $
633
—
944
1,203
$
171
(15)
—
25
181
19
(1)
(6)
(153)
(160)
40
—
$
40
(15) $
$
40
—
4,986
4,972
6,674
$
27
—
—
18
45
—
—
(13)
(10)
(23)
22
82
(60) $
(22) $
— $
—
86
3,738
—
287
288
19
163
757
19
(15)
(24)
(497)
(536)
240
82
158
—
2,188
633
5,076
11,956
7,877
$
$
$
$
75
303
—
64
442
—
—
(2)
(208)
(210)
232
—
232
40
2,148
—
4
2,302
—
148
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Summary of Operations
Net interest income
Net gain (loss) on loan sales
Representation and warranty (provision)
benefit
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 income taxes
Benefit for income taxes
Net income (loss)
Intersegment revenue
Average balances
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment
Total assets
Deposits
Mortgage
Origination
Mortgage
Servicing
Community
Banking
Other
Total
Year Ended December 31, 2014
(Dollars in millions)
$
58
$
209
(11)
58
314
—
—
(1)
(207)
(208)
106
—
106
9
1,452
—
1
1,630
—
$
$
$
$
$
$
$
20
—
1
58
79
—
(53)
(6)
(121)
(180)
(101)
—
(101) $
$
18
$
151
(3)
—
22
170
(132)
(3)
(6)
(159)
(168)
(130)
—
(130) $
(3) $
$
20
1,216
—
1,349
—
$
62
—
3,974
3,943
6,734
$
18
—
—
27
45
—
(1)
(11)
(11)
(23)
22
(34)
$
56
(24) $
— $
—
—
2,964
—
247
206
(10)
165
608
(132)
(57)
(24)
(498)
(579)
(103)
(34)
(69)
—
1,534
1,216
3,975
9,886
6,734
149
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Mortgage
Origination
Mortgage
Servicing
Community
Banking
Other
Total
Year Ended December 31, 2013
(Dollars in millions)
$
160
$
38
(18)
(36)
62
46
—
(62)
(6)
(61)
(129)
(83)
—
(83) $
$
51
$
49
1,477
—
1,711
—
1
—
27
188
(70)
10
(4)
(186)
(180)
(62)
—
(62) $
$
3
$
187
—
4,328
4,510
7,366
(88) $
—
—
104
16
—
—
(12)
(193)
(205)
(189)
(416)
227
$
(59) $
186
402
(36)
287
839
(70)
(52)
(23)
(843)
(918)
(149)
(416)
267
—
— $
—
—
3,892
7
2,499
1,477
4,328
12,555
7,373
Summary of Operations
Net interest income (loss)
Net gain (loss) 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 income taxes
Benefit for income taxes
Net income (loss)
Intersegment revenue
Average balances
Loans held-for-sale
Loans with government guarantees
Loans held-for-investment
Total assets
Deposits
$
76
$
419
—
94
589
—
—
(1)
(403)
(404)
185
—
185
5
2,263
—
—
2,442
—
$
$
$
$
$
$
150
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. In addition, the Holding Company's
principal sources of funds are cash dividends paid by the Bank to the Holding Company 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 the Holding Company. 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 the Holding Company.
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Financial Condition
(Dollars in millions)
December 31,
2015
2014
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
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
(1) Includes unconsolidated trusts.
$
$
$
$
37
1,738
50
1,825
247
247
49
296
267
1
1,486
2
(227)
1,529
1,825
$
$
$
$
46
1,571
43
1,660
248
248
39
287
267
1
1,482
8
(385)
1,373
1,660
151
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Operations
(Dollars in millions)
Expenses
Interest
General and administrative
Total
Loss before undistributed loss of subsidiaries
Income (loss) equity in undistributed of subsidiaries
Income (loss) before income taxes
Benefit for income taxes
Net income (loss)
Preferred stock dividends/accretion
Net income (loss) from continuing operations
Other comprehensive (loss) income (2)
Comprehensive income (loss)
For the Years Ended December 31,
2015
2014
2013
$
7
$
13
20
(20)
172
152
6
158
—
158
(6)
152
$
$
7
$
5
12
(12)
(63)
(75)
6
(69)
(1)
(70)
13
(57) $
7
9
16
(16)
247
231
36
267
(6)
261
(3)
258
(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.
Flagstar Bancorp, Inc.
Condensed Unconsolidated Statements of Cash Flows
(Dollars in millions)
For the Years Ended December 31,
2015
2014
2013
$
158
$
(69) $
267
Net income (loss)
Adjustments to reconcile net loss to net cash provided by
operating activities
Equity in (income) loss 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 in investment activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
152
(172)
3
(6)
1
9
(7)
(2)
(2)
(9)
46
37
$
63
3
(3)
—
4
(2)
(2)
(2)
(4)
50
46
$
(247)
3
(36)
—
7
(6)
—
—
(6)
56
50
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 2015, 2014 and 2013.
2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in millions, except per share data)
Interest income
Interest expense
Net interest income
Benefit for loan losses
Net interest income after provision for loan losses
Net gain on loan sales
Loan fees and charges
Loan administration income
Net (loss) return on the mortgage servicing assets
Representation and warranty benefit
Other noninterest income
Noninterest expense
Income before income tax
Provision for income taxes
Net income from continuing operations
Basic income per share
Diluted income per share
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest (expense) income after provision for loan
losses
Net gain on loan sales
Loan administration income
Net return on the mortgage servicing assets
Representation and warranty benefit (provision)
Other noninterest income
Noninterest expense
(Loss) income before income tax
(Benefit) provision for income taxes
Net (loss) income
Preferred stock dividends/accretion
Net (loss) income from continuing operations
Basic (loss) income per share
Diluted (loss) income per share
$
$
$
$
$
$
$
$
79
14
65
(4)
69
91
17
4
(2)
2
7
138
50
18
32
0.43
0.43
$
$
$
$
90
17
73
(13)
86
83
19
7
9
5
3
138
74
28
46
0.69
0.68
$
$
$
$
2014
91
18
73
(1)
74
68
17
8
12
6
17
131
71
24
47
0.70
0.69
First
Quarter
Second
Quarter
Third
Quarter
(Dollars in millions, except per share data)
$
$
$
$
$
Fourth
Quarter
$
66
8
58
112
(54)
45
7
16
2
5
139
(118)
(40)
(78)
(1)
(79) $
(1.51) $
(1.51) $
153
$
72
9
63
6
57
55
6
5
(5)
42
122
38
12
26
—
26
0.33
0.33
$
$
$
75
11
64
8
56
52
6
1
(13)
39
179
(38)
(10)
(28)
—
(28) $
(0.61) $
(0.61) $
95
19
76
(1)
77
46
14
7
9
6
15
129
45
12
33
0.45
0.44
72
11
61
5
56
53
5
2
6
32
139
15
4
11
—
11
0.07
0.07
Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Net gain on loan sales
Loan administration income
Net return on the mortgage servicing assets
Representation and warranty (provision) benefit
Other noninterest income
Noninterest expense
Income (loss) before income tax
Benefit for income taxes
Net income
Preferred stock dividends/accretion
Net income from continuing operations
Basic income per share
Diluted income per share
$
$
$
$
2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in millions, except per share data)
95
39
56
21
35
137
1
15
(17)
49
197
23
—
23
(1)
22
0.33
0.33
$
$
$
$
85
38
47
31
16
144
1
31
(29)
72
174
61
(6)
67
(1)
66
1.11
1.10
$
$
$
$
79
36
43
4
39
75
1
27
(5)
35
158
14
—
14
(1)
13
0.16
0.16
$
$
$
$
72
31
41
14
27
45
3
17
15
33
388
(248)
(410)
162
(2)
160
2.79
2.77
154
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934
as amended (the Exchange Act), our management, 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). In designing and evaluating our disclosure controls and procedures, we recognize that any controls
and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving the desired
control objectives, and that our management’s duties require it to make its best judgment regarding the design of our disclosure
controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2015.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that:
(i) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
(ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial
statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate 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, 2015, based on the
framework and criteria established in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on this assessment, as of December 31, 2015 we assert that we have maintained effective internal control over
financial reporting.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31,
2015, has been audited by PricewaterhouseCoopers, LLP, our independent registered public accounting firm, as stated in their
report, which is included herein.
155
Remediation of Prior Year Material Weaknesses
We previously identified and disclosed in our Form 10-K for the year ended December 31, 2014, 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. The
controls put in place and identified as of that date operated effectively for a sufficient period of time to conclude that the
material weakness was remediated as of December 31, 2015.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter
ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, such internal control over
financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
156
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 2016 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after the end of our 2015 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 2016 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 2016 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 2016 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 2016 Annual Meeting
of Stockholders and is hereby incorporated by reference.
157
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.
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*
Description
Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc. (previously
filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K, dated March 16, 2015,
and incorporated herein by reference).
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. 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).
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).
Form of Warrant to purchase up to 645,137.9 shares of the Company’s common stock.
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).
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).
158
Exhibit No.
10.13*
10.14*
10.15*+
10.16*+
10.17*+
10.18*+
10.19*+
10.20*+
10.21*+
10.22*+
11
12
16*
18*
21
23.1
23.2
Description
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).
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.,
Flagstar Bank, FSB and Alessandro P. DiNello (previously filed as Exhibit 10.43 to the
Company's Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated
herein by reference).
Amendment to Employment Agreement effective October 22, 2015, by and between Flagstar
Bancorp, Inc., Flagstar Bank, FSB and Alessandro DiNello (previously filed as Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and
incorporated herein by reference).
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.,
Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.44 to the Company's
Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated herein by
reference).
Amendment to Employment Agreement, dated March 2, 2015, by and between Flagstar
Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and
incorporated herein by reference).
Second Amendment to Employment Agreement, effective October 22, 2015, by and between
Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and
incorporated herein by reference).
Flagstar Bancorp, Inc. 2015 LTIP Form of Award Letter (previously filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K, dated as of April 6, 2015, and incorporated
herein by reference).
Form of Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (previously filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, dated as of September 30,
2015, and incorporated herein by reference).
Form of Award Agreement for the Flagstar Bancorp, Inc. Executive Long-Term Incentive
Program (previously filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q,
dated as of September 30, 2015, and incorporated herein by reference).
Statement regarding computation of per share earnings incorporated by reference to Note 19
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.
Letter, dated as of March 19, 2015, 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/A, dated as of March 20, 2015, 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
Consent of PricewaterhouseCoopers, LLP
159
Exhibit No.
Description
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, 2015, 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
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 "David
Urban, Director of Investor Relations" at the address of the principal executive offices set forth on the cover of this Annual
Report on Form 10-K.
(b) — Exhibits. See Item 15(a)(3) above.
(c) — Financial Statement Schedules. See Item 15(a)(2) above.
[Remainder of page intentionally left blank.]
160
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 14, 2016.
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 14, 2016.
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
SIGNATURE
TITLE
/S/ ALESSANDRO DINELLO
Alessandro DiNello
President and Chief Executive Officer (Principal
Executive Officer)
/S/ JAMES K. CIROLI
James K. Ciroli
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
/S/ BRUCE E. NYBERG
Bruce E. Nyberg
Director
Director
Director
Director
Director
Director
161
EXHIBIT INDEX
The following documents are filed as a part of, or incorporated by reference into, this report:
Exhibit No.
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*
Description
Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc. (previously
filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K, dated March 16, 2015,
and incorporated herein by reference).
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. 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).
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).
Form of Warrant to purchase up to 645,137.9 shares of the Company’s common stock.
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).
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).
162
Exhibit No.
10.13*
10.14*
10.15*+
10.16*+
10.17*+
10.18*+
10.19*+
10.20*+
10.21*+
10.22*+
11
12
16*
18*
21
23.1
23.2
Description
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).
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.,
Flagstar Bank, FSB and Alessandro P. DiNello (previously filed as Exhibit 10.43 to the
Company's Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated
herein by reference).
Amendment to Employment Agreement effective October 22, 2015, by and between Flagstar
Bancorp, Inc., Flagstar Bank, FSB and Alessandro DiNello (previously filed as Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and
incorporated herein by reference).
Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc.,
Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.44 to the Company's
Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated herein by
reference).
Amendment to Employment Agreement, dated March 2, 2015, by and between Flagstar
Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and
incorporated herein by reference).
Second Amendment to Employment Agreement, effective October 22, 2015, by and between
Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and
incorporated herein by reference).
Flagstar Bancorp, Inc. 2015 LTIP Form of Award Letter (previously filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K, dated as of April 6, 2015, and incorporated
herein by reference).
Form of Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (previously filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, dated as of September 30,
2015, and incorporated herein by reference).
Form of Award Agreement for the Flagstar Bancorp, Inc. Executive Long-Term Incentive
Program (previously filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q,
dated as of September 30, 2015, and incorporated herein by reference).
Statement regarding computation of per share earnings incorporated by reference to Note 19
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.
Letter, dated as of March 19, 2015, 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/A, dated as of March 20, 2015, 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
Consent of PricewaterhouseCoopers, LLP
163
Exhibit No.
Description
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, 2015, 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
31.1
31.2
32.1
32.2
101
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164
5151 Corporate Drive
Troy, MI 48098
(800) 945-7700
flagstar.com