FLAGSTAR BANCORP INC (Form: 10-Q, Received: 11/06/2015 15:16:07)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 001-16577

(Exact name of registrant as specified in its charter).



Michigan		38-3150651
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

5151 Corporate Drive, Troy, Michigan		48098-2639
(Address of principal executive offices)		(Zip code)

(248) 312-2000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and formal fiscal year, if changed since last report)

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 ý 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 ý No ¨ .

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 the 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	ý
Non-accelerated filer	o (Do not check if smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý .

As of November 3, 2015 , 56,441,157 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

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FLAGSTAR BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS




PART I. – FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Statements of Financial Condition – September 30, 2015 (unaudited) and December 31, 2014	4
	Consolidated Statements of Operations – For the three and nine months ended September 30, 2015 and 2014 (unaudited)	5
	Consolidated Statements of Comprehensive Income (Loss) – For the three and nine months ended September 30, 2015 and 2014 (unaudited)	6
	Consolidated Statements of Stockholders’ Equity – For the nine months ended September 30, 2015 and 2014 (unaudited)	6
	Consolidated Statements of Cash Flows – For the nine months ended September 30, 2015 and 2014 (unaudited)	8
	Notes to the Consolidated Financial Statements (unaudited)
	Note 1 - Basis of Presentation	9
	Note 2 - Investment Securities	9
	Note 3 - Loans Held-for-Sale	11
	Note 4 - Loans with Government Guarantees	11
	Note 5 - Loans Held-for-Investment	11
	Note 6 - Variable Interest Entities ("VIEs")	20
	Note 7 - Mortgage Servicing Rights	21
	Note 8 - Derivative Financial Instruments	23
	Note 9 - Federal Home Loan Bank Advances	26
	Note 10 - Long-Term Debt	27
	Note 11 - Representation and Warranty Reserve	29
	Note 12 - Stockholders' Equity	29
	Note 13 - Earnings (Loss) Per Share	30
	Note 14 - Income Taxes	31
	Note 15 - Regulatory Matters	32
	Note 16 - Legal Proceeding, Contingencies, and Commitments	33
	Note 17 - Fair Value Measurements	35
	Note 18 - Segment Information	47
	Note 19 - Recently Issued Accounting Standards	51
	Note 20 - Restatement of Consolidated Statements of Cash Flows	52

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	100
Item 4.	Controls and Procedures	101

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FLAGSTAR BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS (continued)



PART II. – OTHER INFORMATION

Item 1.	Legal Proceedings	102
Item 1A.	Risk Factors	102
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	102
Item 3.	Defaults upon Senior Securities	102
Item 4.	Mine Safety Disclosures	102
Item 5.	Other Information	102
Item 6.	Exhibits	102

SIGNATURES		104

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Flagstar Bancorp, Inc.

Consolidated Statements of Financial Condition

(In millions, except share data)



	September 30, 2015			December 31, 2014
	(Unaudited)
Assets
Cash and cash equivalents
Cash	$	65		$	47
Interest-earning deposits	130			89
Total cash and cash equivalents	195			136
Investment securities available-for-sale	1,150			1,672
Investment securities held-to-maturity	1,108			—
Loans held-for-sale ($2,164 and $1,196 measured at fair value, respectively)	2,408			1,244
Loans with government guarantees	509			1,128
Loans held-for-investment, net
Loans held-for-investment ($132 and $211 measured at fair value, respectively)	5,514			4,448
Less: allowance for loan losses	(197		)	(297		)
Total loans held-for-investment, net	5,317			4,151
Mortgage servicing rights	294			258
Federal Home Loan Bank stock	113			155
Premises and equipment, net	243			238
Net deferred tax asset	372			442
Other assets	810			416
Total assets	$	12,519		$	9,840
Liabilities and Stockholders’ Equity
Deposits
Noninterest bearing	$	1,749		$	1,209
Interest bearing	6,388			5,860
Total deposits	8,137			7,069
Federal Home Loan Bank advances (includes both short-term and long-term)	2,024			514
Long-term debt ($32 and $84 measured at fair value, respectively)	279			331
Representation and warranty reserve	45			53
Other liabilities ($84 and $82 measured at fair value, respectively)	530			500
Total liabilities	11,015			8,467
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	267			267
Common stock $0.01 par value, 70,000,000 shares authorized; 56,436,026 and 56,332,307 shares issued and outstanding, respectively	1			1
Additional paid in capital	1,484			1,482
Accumulated other comprehensive income	12			8
Accumulated deficit	(260		)	(385		)
Total stockholders’ equity	1,504			1,373
Total liabilities and stockholders’ equity	$	12,519		$	9,840

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Flagstar Bancorp, Inc. Consolidated Statements of Operations (In millions, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Interest Income	(Unaudited)
Loans	$	77		$	64		$	216		$	185
Investment securities	14			11			43			28
Interest-earning deposits and other	—			—			1			—
Total interest income	91			75			260			213
Interest Expense
Deposits	10			8			30			21
Federal Home Loan Bank advances	6			1			13			2
Other	2			2			6			5
Total interest expense	18			11			49			28
Net interest income	73			64			211			185
(Benefit) provision for loan losses	(1		)	8			(18		)	127
Net interest income after provision for loan losses	74			56			229			58
Noninterest Income
Net gain on loan sales	68			52			242			152
Loan fees and charges	17			19			53			56
Deposit fees and charges	7			6			19			16
Loan administration income	8			6			19			19
Net return on the mortgage servicing asset	12			1			19			22
Net gain (loss) on sale of assets	1			5			(1		)	11
Representation and warranty benefit (provision)	6			(13		)	13			(16		)
Other noninterest income	9			9			9			3
Total noninterest income	128			85			373			263
Noninterest Expense
Compensation and benefits	58			54			178			174
Commissions	10			10			31			26
Occupancy and equipment	20			20			60			60
Asset resolution	—			14			13			43
Federal insurance premiums	6			6			18			17
Loan processing expense	14			10			40			26
Legal and professional expense	10			15			27			40
Other noninterest expense	13			50			40			53
Total noninterest expense	131			179			407			439
Income (loss) before income taxes	71			(38		)	195			(118		)
Provision (benefit) for income taxes	24			(10		)	70			(38		)
Net income (loss)	47			(28		)	125			(80		)
Preferred stock accretion	—			—			—			(1		)
Net income (loss) from continuing operations	$	47		$	(28	)	$	125		$	(81	)
Income (loss) per share
Basic	$	0.70		$	(0.61	)	$	1.82		$	(1.79	)
Diluted	$	0.69		$	(0.61	)	$	1.80		$	(1.79	)
Weighted average shares outstanding
Basic	56,436,026			56,249,300			56,419,354			56,224,850
Diluted	57,207,503			56,249,300			57,050,789			56,224,850

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Flagstar Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In millions)



	Three Months Ended September 30,
	2015			2014
	(Unaudited)
Net income (loss)	$	47		$	(28	)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on investment securities available-for-sale
Unrealized gain (loss) (net of ($5) and $4 tax effect, respectively)	9			(5		)
Less: Reclassification of net loss on the sale (net of zero and zero tax effect, respectively)	—			(2		)
Net change in unrealized gain (loss) on investment securities available-for-sale, net of tax	9			(7		)
Unrealized (loss) on derivative instruments designated to cash flow hedges
Unrealized (loss) (net of $2 tax effect and zero respectively)	(5		)	—
Less: Reclassification of net loss on derivative instruments	—			—
Net change in unrealized (loss) on derivative instruments, net of tax	(5		)	—
Other comprehensive income (loss), net of tax	4			(7		)
Comprehensive income (loss)	$	51		$	(35	)



	Nine Months Ended September 30,
	2015			2014
	(Unaudited)
Net income (loss)	$	125		$	(80	)
Other comprehensive income (loss), net of tax
Unrealized gain on investment securities available-for-sale
Unrealized gain (net of ($5) and ($1) tax effect, respectively)	9			11
Less: Reclassification of net loss on the sale (net of zero and ($4) tax effect, respectively)	—			(7		)
Net change in unrealized gain on investment securities available-for-sale, net of tax	9			4
Unrealized (loss) on derivative instruments designated to cash flow hedges
Unrealized (loss) (net of $2 tax effect and zero respectively)	(5		)	—
Less: Reclassification of net loss on derivative instruments	—			—
Net change in unrealized (loss) on derivative instruments, net of tax	(5		)	—
Other comprehensive income, net of tax	4			4
Comprehensive income (loss)	$	129		$	(76	)

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Flagstar Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

(In millions)



	Preferred Stock		Common Stock		Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
Balance at December 31, 2013	$	266	$	1	$	1,479	$	(5	)	$	(315	)	$	1,426
(Unaudited)
Net loss	—		—		—		—			(80		)	(80		)
Total other comprehensive income	—		—		—		4			—			4
Accretion of preferred stock	1		—		—		—			(1		)	—
Stock-based compensation	—		—		2		—			—			2
Balance at September 30, 2014	$	267	$	1	$	1,481	$	(1	)	$	(396	)	$	1,352
Balance at December 31, 2014	267		1		1,482		8			$	(385	)	$	1,373
(Unaudited)
Net income	—		—		—		—			125			125
Total other comprehensive income	—		—		—		4			—			4
Stock-based compensation	—		—		2		—			—			2
Balance at September 30, 2015	$	267	$	1	$	1,484	$	12		$	(260	)	$	1,504

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Flagstar Bancorp, Inc. Consolidated Statements of Cash Flows (In millions)

	Nine Months Ended September 30,
	2015			2014
	(Unaudited)			(Unaudited)
				As Restated
Operating Activities
Net income (loss)	$	125		$	(80	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
(Benefit) provision for loan losses	(18		)	127
Representation and warranty (benefit) provision	(13		)	16
Depreciation and amortization	17			18
Deferred income taxes	68			(35		)
Net gain on loan and asset sales	(241		)	(163		)
Change in fair value and other non-cash changes	(231		)	(150		)
Other changes:
Proceeds from sales of loans held-for-sale ("HFS")	15,247			12,610
Origination, premium paid and repurchase of loans, net of principal repayments	(22,180		)	(18,225		)
Increase in accrued interest receivable	(6		)	(12		)
Decrease (increase) in other assets, excludes purchase of other investments	155			(82		)
Net charge-offs in representation and warranty reserve	(1		)	(18		)
Increase in other liabilities	11			35
Net cash used in operating activities	(7,067		)	(5,959		)
Investing Activities
Proceeds from sale of available-for-sale securities, including loans that have been securitized	6,603			6,532
Collection of principal on investment securities available-for-sale ("AFS")	185			118
Purchase of investment securities available-for-sale and other	(783		)	(756		)
Collection of principal on investment securities held-to-maturity ("HTM")	38			—
Purchase of investment securities HTM	(10		)	—
Proceeds received from the sale of held-for-investment loans ("HFI")	788			62
Origination and purchase of loans HFI, net of principal repayments	(2,249		)	(623		)
Purchase of bank owned life insurance	(175		)	—
Proceeds from the disposition of repossessed assets	19			30
Redemption of Federal Home Loan Bank stock	42			—
Acquisitions of premises and equipment, net of proceeds	(28		)	(26		)
Proceeds from the sale of mortgage servicing rights	183			168
Net cash provided by investing activities	4,613			5,505
Financing Activities
Net increase in deposit accounts	1,068			1,094
Proceeds from increases in Federal Home Loan Bank advances	22,235			13,633
Repayment of Federal Home Loan Bank advances	(20,725		)	(14,471		)
Repayment of long-term debt	(55		)	(19		)
Net (reduction) receipt of payments of loans serviced for others	(23		)	39
Net receipt of escrow payments	13			4
Net cash provided by financing activities	2,513			280
Net increase (decrease) in cash and cash equivalents	59			(174		)
Beginning cash and cash equivalents	136			281
Ending cash and cash equivalents	$	195		$	107
Supplemental disclosure of cash flow information
Interest paid on deposits and other borrowings	$	42		$	23
Income tax payments (refund)	$	3		$	(1	)
Non-cash reclassification of investments AFS to HTM	$	1,136		$	—
Non-cash reclassification of loans HFI to loans HFS	$	1,113		$	384
Non-cash reclassification of loans HFS to loans HFI	$	30		$	15
Non-cash reclassification of loans HFS to AFS securities	$	6,617		$	6,234
Mortgage servicing rights resulting from sale or securitization of loans	$	220		$	198
Non-cash reclassification of loans with government guarantee to other assets	$	373		$	—

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

The accompanying financial statements of Flagstar Bancorp, Inc. ("Flagstar" or the "Company"), including its wholly owned principal subsidiary, Flagstar Bank, FSB (the "Bank"), have been prepared using U.S. generally accepted accounting principles ("GAAP") for interim financial statements.

These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission. These interim financial statements are unaudited and include, in the opinion of the Company, all adjustments necessary for a fair presentation of the results for the periods indicated, which are not necessarily indicative of results which may be expected for the full year. These consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 , which is available on the Company’s website, at flagstar.com, and on the SEC website, at sec.gov. Certain prior period amounts have been reclassified to conform to the current period presentation.

Note 2 – Investment Securities

As of September 30, 2015 and December 31, 2014 , investment securities were comprised of the following.



	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in millions)
September 30, 2015
Available-for-sale securities
Agency	$	463	$	7	$	(1	)	$	469
Agency-collateralized mortgage obligations	657		11		—			668
Municipal obligations	13		—		—			13
Total available-for-sale securities	$	1,133	$	18	$	(1	)	$	1,150
Held-to-maturity securities
Agency	$	445	$	4	$	—		$	449
Agency-collateralized mortgage obligations	663		6		—			669
Total held-to-maturity securities	$	1,108	$	10	$	—		$	1,118
December 31, 2014 (2)
Available-for-sale securities
Agency	$	925	$	6	$	(2	)	$	929
Agency-collateralized mortgage obligations	734		8		(1		)	741
Municipal obligations	2		—		—			2
Total available-for-sale securities	$	1,661	$	14	$	(3	)	$	1,672


(1)	Includes the investment securities that were transfered to held-to-maturity at fair value.


(2)	The Company did not have any held-to-maturity securities at December 31, 2014.

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. 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.

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Available-for-sale securities

Securities available-for-sale are carried at fair value, with unrealized gains reported as a component of other comprehensive income and unrealized losses reported as a component of other comprehensive income to the extent they are temporary in nature.

The Company purchased $59 million and $783 million of available-for-sale securities, which included agency securities, comprised of mortgage-backed securities, collateralized mortgage and municipal obligations during the three and nine months ended September 30, 2015 , respectively. During the third quarter the Company subsequently transferred $462 million of the securities purchased during 2015 to held-to-maturity investments. The Company purchased $86 million and $762 million of available-for-sale securities, which included agency securities, comprised of mortgage-backed securities and collateralized mortgage obligations during the three and nine months ended September 30, 2014 , respectively.

Gains (losses) on sales of available-for-sale securities are reported in other noninterest income in the Consolidated Statements of Operations. During both the three and nine months ended September 30, 2015 , there were no sales of available-for-sale securities except those related to loans that had been securitized for sale in the normal course of business, compared to $255 million and $314 million , respectively, in sales of available-for-sale securities, resulting in a gain of $2 million and $3 million during the three and nine months ended September 30, 2014 , respectively.

Held-to-maturity securities

Investment securities held-to-maturity are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method.

During the third quarter 2015 , the Company transferred $1.1 billion of available-for-sale securities to held-to-maturity securities at 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 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 classify investment securities as held-to-maturity at December 31, 2014.

The Company purchased $10 million of held-to-maturity securities, which included agency-collateralized mortgage obligations during both the three and nine months ended September 30, 2015 , respectively. During both the three and nine months ended September 30, 2015 , there were $25 million of maturities in held-to-maturity securities. The Company did not hold held-to-maturity securities for the three and nine months ended September 2014.

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
Type of Security	(Dollars in millions)
September 30, 2015
Available-for-sale securities
Agency	$	8	2	$	—		$	87	7	$	(1	)
Agency-collateralized mortgage obligations	—		—	—			42		3	—
Held-to-maturity securities
Agency	$	—	—	$	—		$	10	1	$	—
December 31, 2014
Available-for-sale securities
Agency	$	53	6	$	—		$	305	21	$	(2	)
Agency-collateralized mortgage obligations	98		10	(1		)	38		4	—

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The amortized cost and estimated fair value of securities at September 30, 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		Fair Value		Weighted-Average Yield		Amortized Cost		Fair Value		Weighted-Average Yield
September 30, 2015	(Dollars in millions)						(Dollars in millions)
Due in one year or less	$	—	$	—	—	%	$	—	$	—	—	%
Due after one year through five years	—		—		—	%	—		—		—	%
Due after five years through 10 years	13		13		4.60	%	69		69		2.43	%
Due after 10 years	1,120		1,137		2.50	%	1,039		1,049		2.44	%
Total	$	1,133	$	1,150			$	1,108	$	1,118

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. The Company did not recognize any other than temporary impairment losses on its investment securities during the third quarter or nine months ended September 2015 and 2014.

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 September 30, 2015 and December 31, 2014 , loans held-for-sale totaled $2.4 billion and $1.2 billion , respectively. For the three and nine months ended September 30, 2015 , the Company reported net gain on loan sales of $68 million and $242 million , respectively, compared to $52 million and $152 million net gain on loan sales during the three and nine months ended September 30, 2014 , respectively.

At September 30, 2015 and December 31, 2014 , $243 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 elected the fair value option.

Note 4 – Loans with Government Guarantees

The majority of loans with government guarantees continue to be insured or guaranteed by the Federal Housing Administration. 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 September 30, 2015 , loans with government guarantees actually repurchased totaled $509 million and were classified as loans with government guarantees. At December 31, 2014 , loans with government guarantees actually repurchased totaled $1.1 billion and were classified as loans with government guarantees.

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 September 30, 2015 , repossessed assets and the associated claims recorded in other assets totaled $231 million and at December 31, 2014 repossessed assets and the associated claims were $373 million and included in loans with government guarantees.

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Note 5 – Loans Held-for-Investment

Loans held-for-investment are summarized as follows.



	September 30, 2015			December 31, 2014
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,726		$	2,193
Second mortgage	140			149
HELOC	405			257
Other	32			31
Total consumer loans	3,303			2,630
Commercial loans
Commercial real estate	707			620
Commercial and industrial	493			429
Warehouse lending	1,011			769
Total commercial loans	2,211			1,818
Total loans held-for-investment	5,514			4,448
Less allowance for loan losses	(197		)	(297		)
Loans held-for-investment, net	$	5,317		$	4,151

During the third quarter 2015, the Company transferred interest-only residential first mortgage loans with unpaid principal balances totaling $214 million to held-for-sale, which were subsequently sold in October 2015. In addition the Company transferred $19 million of nonperforming first mortgage loans to held-for-sale, which were subsequently sold at a gain on sale of $1 million during the third quarter 2015. A portion of the general allowance for loan losses associated with both of these loan sales was reduced, resulting in a $16 million reduction in the general allowance.

During the second quarter 2015, the Company sold interest-only residential first mortgage loans with unpaid principal balances totaling $386 million , along with $70 million of nonperforming and troubled debt restructured first mortgage loans. A portion of the allowance for loan losses associated with these loans was reduced, resulting in a $15 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 loss on sale of $1 million during the three months ended June 30, 2015 .

During the first quarter 2015, the Company re-measured the specifically identified reserve relating to the troubled debt restructured loans, resulting in a $36 million reduction in reserve based on a change in expected future cash flows. During the first quarter 2015, the Company changed its intent to hold these loans for investment and instead decided to hold these loans for sale. The loans for which the intent changed had an approximate unpaid principal balance of $331 million , including approximately $291 million of troubled debt restructured residential first mortgage loans, and $30 million in specifically identified reserves at the time this intent was changed. These loans were transferred to loans held-for-sale and subsequently sold resulting in a loss on sale of less than $1 million during the first quarter 2015.

During the first quarter 2014, the Company sold nonperforming, troubled debt restructured residential first mortgage and residential first mortgage jumbo loans with unpaid principal balances totaling $313 million . A portion of the allowance for loan losses associated with these loans was reduced, resulting in a $2 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 second quarter 2014, the Company sold nonperforming, troubled debt restructured residential first mortgage and residential first mortgage jumbo loans with unpaid principal balances totaling $234 million . 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 $4 million .

During the third quarter 2014, the Company sold nonperforming, troubled debt restructured residential first mortgage and residential first mortgage jumbo loans with unpaid principal balances totaling $81 million . A portion of the allowance for loan losses associated with these loans was reduced, resulting in a $5 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 $5 million .

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During the first and second quarter of 2015 , the Company purchased $197 million of HELOC loans with a premium of $7 million .

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 September 30, 2015 and December 31, 2014 , the Company pledged $5.2 billion and $4.1 billion , respectively.

The allowance for loan losses by class of loan are summarized in the following table.



	Residential First Mortgage			Second Mortgage			HELOC			Other Consumer			Commercial Real Estate			Commercial and Industrial			Warehouse Lending			Total
	(Dollars in millions)
Three Months Ended September 30, 2015
Beginning balance allowance for loan losses	$	151		$	14		$	25		$	1		$	15		$	12		$	4		$	222
Charge-offs (1)	(21		)	(1		)	(1		)	(1		)	—			(3		)	—			(27		)
Recoveries	1			1			—			1			—			—			—			3
Provision (benefit)	(2		)	(1		)	(1		)	—			(2		)	5			—			(1		)
Ending balance allowance for loan losses	$	129		$	13		$	23		$	1		$	13		$	14		$	4		$	197
Three Months Ended September 30, 2014
Beginning balance allowance for loan losses	$	249		$	14		$	14		$	2		$	19		$	5		$	3		$	306
Charge-offs (1)	(12		)	(1		)	(1		)	(1		)	—			—			—			(15		)
Recoveries	1			—			—			1			—			—			—			2
Provision (benefit)	2			(1		)	6			—			2			—			(1		)	8
Ending balance allowance for loan losses	$	240		$	12		$	19		$	2		$	21		$	5		$	2		$	301

Nine Months Ended September 30, 2015
Beginning balance allowance for loan losses	$	234		$	12		$	19		$	1		$	17		$	11		$	3		$	297
Charge-offs (1)	(80		)	(2		)	(2		)	(3		)	—			(3		)	—			(90		)
Recoveries	3			1			—			2			2			—			—			8
Provision (benefit)	(28		)	2			6			1			(6		)	6			1			(18		)
Ending balance allowance for loan losses	$	129		$	13		$	23		$	1		$	13		$	14		$	4		$	197
Nine Months Ended September 30, 2014
Beginning balance allowance for loan losses	$	162		$	12		$	8		$	2		$	19		$	3		$	1		$	207
Charge-offs (1)	(29		)	(3		)	(5		)	(2		)	(2		)	—			—			(41		)
Recoveries	3			—			—			2			3			—			—			8
Provision (benefit)	104			3			16			—			1			2			1			127
Ending balance allowance for loan losses	$	240		$	12		$	19		$	2		$	21		$	5		$	2		$	301


(1)	Includes charge-offs of $16 million and $6 million related to the sale or transfer of loans during the three months ended September 30, 2015 and September 30, 2014 , respectively, and $67 million and $8 million related to the sale or transfer of loans during the nine months ended September 30, 2015 and September 30, 2014 , respectively.

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The loans held-for-investment and allowance for loan losses by class of loan is summarized in the following table.



	Residential First Mortgage		Second Mortgage		HELOC		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total
	(Dollars in millions)
September 30, 2015
Loans held-for-investment
Individually evaluated	$	77	$	29	$	3	$	—	$	—	$	3	$	—	$	112
Collectively evaluated (1)	2,642		66		322		32		707		490		1,011		5,270
Total loans	$	2,719	$	95	$	325	$	32	$	707	$	493	$	1,011	$	5,382
Allowance for loan losses
Individually evaluated	$	21	$	7	$	1	$	—	$	—	$	—	$	—	$	29
Collectively evaluated (1)	108		6		22		1		13		14		4		168
Total allowance for loan losses	$	129	$	13	$	23	$	1	$	13	$	14	$	4	$	197

December 31, 2014
Loans held-for-investment
Individually evaluated	$	385	$	31	$	1	$	—	$	—	$	—	$	—	$	417
Collectively evaluated (1)	1,782		65		124		31		620		429		769		3,820
Total loans	$	2,167	$	96	$	125	$	31	$	620	$	429	$	769	$	4,237
Allowance for loan losses
Individually evaluated	$	82	$	5	$	1	$	—	$	—	$	—	$	—	$	88
Collectively evaluated (1)	152		7		18		1		17		11		3		209
Total allowance for loan losses	$	234	$	12	$	19	$	1	$	17	$	11	$	3	$	297


(1)	Excludes loans carried under the fair value option.

The allowance for loan losses, other than for loans that have been identified for individual evaluation for impairment, is determined on a loan pool basis by grouping loan types with similar risk characteristics to determine the Company's best estimate of incurred losses. Management evaluates the results of the allowance for loan losses model and makes qualitative adjustments to the results of the model when it is determined that model results do not reflect all losses inherent in the loan portfolios due to changes in recent economic trends and conditions, or other relevant factors.

For those loans not individually evaluated for impairment, management has categorized the commercial and consumer loans into portfolios with common risk characteristics.

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The following table sets forth the loans held-for-investment aging analysis as of September 30, 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
	(Dollars in millions)
September 30, 2015
Consumer loans
Residential first mortgage	$	8	$	5	$	51	$	64	$	2,662	$	2,726
Second mortgage	1		—		1		2		138		140
HELOC	4		3		7		14		391		405
Other	—		—		1		1		31		32
Total consumer loans	13		8		60		81		3,222		3,303
Commercial loans
Commercial real estate	—		—		—		—		707		707
Commercial and industrial	—		—		3		3		490		493
Warehouse lending	—		—		—		—		1,011		1,011
Total commercial loans	—		—		3		3		2,208		2,211
Total loans (2)	$	13	$	8	$	63	$	84	$	5,430	$	5,514
December 31, 2014
Consumer loans
Residential first mortgage	$	29	$	8	$	115	$	152	$	2,041	$	2,193
Second mortgage	1		1		2		4		145		149
HELOC	4		1		3		8		249		257
Other	—		—		—		—		31		31
Total consumer loans	34		10		120		164		2,466		2,630
Commercial loans
Commercial real estate	—		—		—		—		620		620
Commercial and industrial	—		—		—		—		429		429
Warehouse lending	—		—		—		—		769		769
Total commercial loans	—		—		—		—		1,818		1,818
Total loans (2)	$	34	$	10	$	120	$	164	$	4,284	$	4,448


(1)	Includes performing nonaccrual loans that are less than 90 days delinquent and for which interest can not be accrued.


(2)	Includes $9 million and $5 million of loans 90 days or greater past due accounted for under the fair value option at September 30, 2015 and December 31, 2014 , respectively.

Loans held-for-investment and loans held-for-sale on which interest accruals have been discontinued totaled approximately $77 million and $135 million at September 30, 2015 and December 31, 2014 , respectively, and $122 million at September 30, 2014 . Interest income is recognized on impaired loans using a modified cost recovery method. Interest that would have been accrued on impaired loans totaled approximately $1 million and $4 million during the three and nine months ended September 30, 2015 , respectively, and $2 million and $4 million during the three and nine months ended September 30, 2014 , respectively. At September 30, 2015 and December 31, 2014 , the Company had no loans 90 days past due and still accruing.

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Troubled Debt Restructuring

The Company may modify certain loans in both consumer and commercial loan portfolios to retain customers or to maximize collection of the outstanding loan balance. The Company has programs designed to assist borrowers by extending payment dates or reducing the borrower's contractual payments. All loan modifications are made on a case-by-case basis. The Company's standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. TDRs result in those instances in which a borrower demonstrates financial difficulty and for which a concession has been granted, which includes reductions of interest rate, extensions of amortization period, principal and/or interest forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. These loans are classified as nonperforming TDRs if the loan was nonperforming prior to the restructuring, or based upon the results of a collateral credit evaluation. Such loans will continue on nonaccrual status until the borrower has established a willingness and ability to make the restructured payments for at least six months, after which they will begin to accrue interest.

The following table provides a summary of TDRs outstanding by type and performing status.



	TDRs
	Performing		Nonperforming		Total
September 30, 2015	(Dollars in millions)
Consumer loans
Residential first mortgage	$	41	$	20	$	61
Second mortgage	34		1		35
HELOC	22		5		27
Total consumer loans	97		26		123
Commercial loans
Commercial real estate	—		—		—
Commercial and industrial	—		—		—
Total commercial loans	—		—		—
Total TDRs (1)(2)	$	97	$	26	$	123

December 31, 2014
Consumer loans
Residential first mortgage	$	306	$	44	$	350
Second mortgage	35		1		36
HELOC	20		1		21
Total consumer loans	361		46		407
Commercial loans
Commercial real estate	1		—		1
Total TDRs (1)(2)	$	362	$	46	$	408


(1)	The allowance for loan losses on consumer TDR loans totaled $16 million and $81 million at September 30, 2015 and December 31, 2014 , respectively.


(2)	Includes $31 million and $30 million of TDR loans accounted for under the fair value option at September 30, 2015 and December 31, 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.

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The following table provides a summary of newly modified TDRs and TDR loans that subsequently defaulted in the previous 12 months during the three and nine months ended September 30, 2015 and 2014 . All TDR classes within consumer and commercial loan portfolios are considered subsequently defaulted when they are greater than 90 days past due.



	Number of Accounts	Pre-Modification Unpaid Principal Balance		Post-Modification Unpaid Principal Balance (1)		Increase (Decrease) in Allowance at Modification
Three Months Ended September 30, 2015		(Dollars in millions)
Residential first mortgages	48	$	13	$	14	$	—
Second mortgages	15	1		1		—
HELOC (2)	46	4		4		—
Total TDR loans	109	$	18	$	19	$	—

Three Months Ended September 30, 2014
Residential first mortgages	36	$	11	$	11	$	1
Second mortgages	85	3		3		—
HELOC (2)	4	—		—		—
Total TDR loans	125	$	14	$	14	$	1

Nine Months Ended September 30, 2015
Residential first mortgages	239	$	66	$	65	$	(1	)
Second mortgages	83	4		3		—
HELOC (2)	204	12		11		—
Consumer	3	—		—		—
Total TDR loans	529	$	82	$	79	$	(1	)

Nine Months Ended September 30, 2014
Residential first mortgages	107	$	31	$	30	$	2
Second mortgages	291	9		9		—
HELOC (2)	19	1		—		—
Total TDR loans	417	$	41	$	39	$	2

TDRs that subsequently defaulted in previous 12 months	Number of Accounts			Unpaid Principal Balance		Increase in Allowance at Subsequent Default
Three Months Ended September 30, 2015				(Dollars in millions)
Residential first mortgages	1			$	—	$	—
Total TDR loans	1			$	—	$	—

Three Months Ended September 30, 2014
Second mortgages	2			$	—	$	—
Total TDR loans	2			$	—	$	—

Nine Months Ended September 30, 2015
Residential first mortgages	1			$	—	$	—
Second mortgages	1			—		—
Total TDR loans	2			$	—	$	—

Nine Months Ended September 30, 2014
Residential first mortgages	2			$	—	$	—
Second mortgages	15			—		—
HELOC (2)	5			—		—
Total TDR loans	22			$	—	$	—


(1)	Post-modification balances include past due amounts that are capitalized at modification date.


(2)	HELOC post-modification unpaid principal balance reflects write downs.

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The following table presents impaired loans and the associated allowance:



	September 30, 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 loans	$	6	$	6	$	—	$	63	$	78	$	—
Second mortgage	—		—		—		1		6		—
HELOC	—		—		—		—		1		—
Commercial loans
Commercial and industrial	3		6		—		—		—		—
	$	9	$	12	$	—	$	64	$	85	$	—
With an allowance recorded
Consumer loans
Residential first mortgage	$	70	$	71	$	22	$	321	$	326	$	82
Second mortgage	29		29		7		29		29		6
HELOC	3		3		1		1		1		1
	$	102	$	103	$	30	$	351	$	356	$	89
Total
Consumer loans
Residential first mortgage	$	76	$	77	$	22	$	384	$	404	$	82
Second mortgage	29		29		7		30		35		6
HELOC	3		3		1		1		2		1
Commercial loans
Commercial and industrial	3		6		—		—		—		—
Total impaired loans	$	111	$	115	$	30	$	415	$	441	$	89

The following table presents average impaired loans and the interest income recognized:



	Three Months Ended September 30,								Nine Months Ended September 30,
	2015				2014				2015				2014
	Average Recorded Investment		Interest Income Recognized		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	$	96	$	1	$	406	$	3	$	172	$	4	$	408	$	8
Second mortgage	29		—		30		—		30		—		28		1
HELOC	15		—		1		—		6		—		1		—
Commercial loans
Commercial real estate	—		—		—		—		—		—		1		—
Commercial and industrial	2		—		—		—		1		—		—		—
Total impaired loans	$	142	$	1	$	437	$	3	$	209	$	4	$	438	$	9

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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. Commercial credits are classified using a risk-based approach by assigning a risk rating individually to each loan. Management conducts periodic examinations which serve as an independent verification of the accuracy of the ratings assigned. Loan grades are based on different factors within the borrowing relationship: entity sales, debt service coverage, debt/total net worth, liquidity, balance sheet and income statement trends, management experience, business stability, financing structure of the deal, and financial reporting requirements. The underlying collateral is also rated based on the specific type of collateral and corresponding LTV. The combination of the borrower and collateral risk ratings result in the final rating for the borrowing relationship. Descriptions of the Company's internal risk ratings as they relate to credit quality follow the ratings used by the U.S. bank regulatory agencies as listed below.

Pass. Pass assets are not impaired nor do they have any known deficiencies that could impact the quality of the asset.

Watch. Watch assets are defined as pass rated assets that exhibit elevated risk characteristics or other factors that deserve management’s close attention and increased monitoring. However, the asset does not exhibit a potential or well-defined weakness that would warrant a downgrade to criticized or adverse classification.

Special mention. Assets identified as special mention possess credit deficiencies or potential weaknesses deserving management's close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk that, if not corrected, could weaken the assets and increase risk in the future. Special mention assets are criticized, but do not expose an institution to sufficient risk to warrant adverse classification.

Substandard . Assets identified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses 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.

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 consists 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.

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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
September 30, 2015	(Dollars in millions)
Grade
Pass	$	659	$	445	$	921	$	2,025
Watch	43		19		76		138
Special mention	5		7		11		23
Substandard	—		19		3		22
Doubtful	—		3		—		3
Total loans	$	707	$	493	$	1,011	$	2,211

December 31, 2014
Pass	$	578	$	398	$	650	$	1,626
Watch	29		10		119		158
Special mention	2		—		—		2
Substandard	11		21		—		32
Total loans	$	620	$	429	$	769	$	1,818



Consumer Credit Loans	Residential First Mortgage		Second Mortgage		HELOC		Other Consumer		Total
September 30, 2015	(Dollars in millions)
Grade
Pass	$	2,625	$	104	$	374	$	32	$	3,135
Watch	44		34		24		—		102
Substandard	57		2		7		—		66
Total loans	$	2,726	$	140	$	405	$	32	$	3,303

December 31, 2014
Pass	$	1,764	$	111	$	233	$	31	$	2,139
Watch	314		36		21		—		371
Substandard	115		2		3		—		120
Total loans	$	2,193	$	149	$	257	$	31	$	2,630

Note 6 – Variable Interest Entities ("VIEs")

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 had elected the fair value option for these assets and liabilities.

In June 2015, the Company executed a clean-up call of the FSTAR 2005-1 long-term debt associated with the HELOC securitization trust. 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 has been dissolved as of second quarter 2015. The Company initiated the clean-up call process with respect to the 2006-2 HELOC securitization trust, which the Company expects to complete in the fourth quarter 2015.

The Company continues to consolidate the VIE, which consists of the HELOC securitization trust formed in 2006. The Company has determined the trust is a VIE and has concluded that the Company is the primary beneficiary of this trust because it has the power to direct the activities of the entity that most significantly affect the entity's economic performance and has either the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits

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from the entity that could potentially be significant to the VIE. The beneficial owners of the trust can look only to the assets of the securitization trust for satisfaction of the debt issued by the securitization trust.

The following table provides a summary of the classifications of consolidated VIE assets and liabilities included in the Consolidated Financial Statements.



	2005-1		2006-2		Total
September 30, 2015	(Dollars in millions)
HELOC Securitizations
Assets
Loans held-for-investment	$	—	$	57	$	57
Liabilities
Long-term debt	$	—	$	32	$	32



	2005-1		2006-2		Total
December 31, 2014	(Dollars in millions)
HELOC Securitizations
Assets
Loans held-for-investment	$	63	$	69	$	132
Liabilities
Long-term debt	$	42	$	42	$	84

The economic performance of the VIE is most significantly impacted by the performance of the underlying loans. The principal risks to which the entities were exposed include credit risk and interest-rate risk.

FSTAR 2007-1 mortgage securitization trust is an unconsolidated VIE. The Company has a continuing involvement, but is not the primary beneficiary and de-recognized the assets upon transfer. In accordance with the settlement agreement with MBIA, there is no further recourse to the Company related to FSTAR 2007-1. At September 30, 2015 and December 31, 2014 , the FSTAR 2007-1 mortgage securitization trust included 3,215 loans and 3,624 loans, respectively, with an aggregate principal balance of $124 million and $141 million , respectively.

Note 7 – Mortgage Servicing Rights

The Company has investments in mortgage servicing rights ("MSRs") to support mortgage strategies and to deploy capital at acceptable returns. 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. 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. 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 8 of the Notes to the Consolidated Financial Statements, herein, for additional information regarding the instruments utilized to hedge the risks of MSRs.

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Changes in the carrying value of residential first mortgage MSRs, accounted for at fair value, were as follows.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Balance at beginning of period	$	317		$	289		$	258		$	285
Additions from loans sold with servicing retained	74			79			220			199
Reductions from sales	(73		)	(68		)	(144		)	(161		)
Changes in fair value due to (1)
Decrease in MSR due to pay-offs, pay-downs and run-off	(9		)	(10		)	(34		)	(22		)
Changes in valuation inputs or assumptions (2)	(15		)	(5		)	(6		)	(16		)
Fair value of MSRs at end of period	$	294		$	285		$	294		$	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 Note 17 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.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Income on mortgage servicing asset
Servicing fees, ancillary income and late fees (1)	$	18		$	17		$	52		$	50
Fair value adjustments (2)	(24		)	(15		)	(38		)	(38		)
Gain on hedging activity (3)	15			—			10			10
Net transaction costs	3			(1		)	(5		)	—
Total income on mortgage servicing asset, included in net return on mortgage servicing asset	$	12		$	1		$	19		$	22


(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 nine months ended September 30, 2015 .


(3)	Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs.

Contractual servicing and subservicing fees . Contractual servicing and subservicing fees, including late fees and other ancillary income, for each type of loan serviced are presented below. Contractual servicing fees are included within net return on mortgage servicing asset on the Consolidated Statements of Operations. Contractual subservicing fees including late fees and other ancillary income are included within loan administration income on the Consolidated Statements of Operations. Subservicing fee income is recorded for fees earned, net of third-party subservicing costs, for loans subserviced.

The following table summarizes income and fees associated with the mortgage loans subserviced.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2015		2014			2015			2014
	(Dollars in millions)
Income on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1)	$	8	$	7		$	24		$	21
Other servicing charges	—		(1		)	(5		)	(2		)
Total income on mortgage loans subserviced, included in loan administration	$	8	$	6		$	19		$	19


(1)	Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on cash basis.

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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.



	September 30, 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
				(Dollars in millions)
Option adjusted spread	8.68		%	$	285	$	276	8.88		%	$	250	$	243
Constant prepayment rate	13.27		%	283		272		14.98		%	253		245
Weighted average cost to service per loan	$	73.48		290		286		$	74.49		258		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 8 – 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 credit risk inherent in all its derivative contracts is minimal based on credit standards and the netting and collateral provisions of the interest rate swap agreements.

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 realized into earnings. At September 30, 2015 , the Company had $5 million (net-of-tax) of realized and unrealized 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 remainder of 2015 and the next 12 months represents gains of less than $1 million (net-of-tax) and $3 million of losses (net-of-tax), respectively. All cash flow hedges were highly effective as of September 30, 2015 .

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. Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged item.

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The gains/(losses), by hedge designation, recorded in income for the periods ended September 30 were as follows:



		Three Months Ended September 30,						Nine Months Ended September 30,
	Location of Gain/(Loss)	2015			2014			2015			2014
		(Dollars in millions)
Derivatives not designated as hedging instruments:
U.S. Treasury and euro dollars futures	Net return on mortgage servicing asset	$	3		$	—		$	6		$	6
Swap futures	Net return on mortgage servicing asset	10			—			2			—
Mortgage backed securities forwards	Net return on mortgage servicing asset	2			—			2			4
Rate lock commitments and forward agency and loan sales	Net gain on loan sales	(24		)	(1		)	(4		)	(8		)
Rate lock commitments	Other noninterest income	1			—			(1		)	—
Interest rate swaps	Other noninterest income	2			1			2			2
Total derivative (loss) gain		$	(6	)	$	—		$	7		$	4

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The notional amount, estimated fair value and maturity of our derivative financial instruments were as follows:



	Notional Amount		Fair Value		Expiration Dates
	(Dollars in millions)
September 30, 2015
Derivatives designated as hedging instruments:
Liabilities (2)
Interest rate swaps on FHLB advances	$	225	$	8	2025
Derivatives not designated as hedging instruments:
Assets (1)
U.S. Treasury and euro dollar futures	$	232	$	2	2015-2019
Mortgage backed securities forwards	173		2		2015
Swap futures	179		3		2028-2045
Rate lock commitments	4,234		44		2015
Forward agency and loan sales	69		1		2015
Interest rate swaps and swaptions	769		15		2016-2033
Total derivative assets	$	5,656	$	67
Liabilities (2)
U.S. Treasury and euro dollar futures	$	1,793	$	2	2015-2020
Mortgage backed securities forwards	10		—		2015
Swap futures	26		1		2022
Rate lock commitments	41		—		2015
Forward agency and loan sales	4,150		29		2015
Interest rate swaps	399		10		2016-2025
Total derivative liabilities	$	6,419	$	42
December 31, 2014
Derivatives not designated as hedging instruments:
Assets (1)
Mortgage servicing rights
U.S. Treasury and euro dollar futures	$	2,530	$	7	2015-2020
Mortgage backed securities forwards	161		2		2015
Rate lock commitments	2,604		31		2015
Forward agency and loan sales	194		—		2015
Interest rate swaps	355		6		2015-2021
Total derivative assets	$	5,844	$	46
Liabilities (2)
Mortgage servicing rights
U.S. Treasury and euro dollar futures	$	687	$	1	2015-2020
Rate lock commitments	22		—		2015
Forward agency and loan sales	2,789		13		2015
Interest rate swaps	367		6		2015-2021
Total derivative liabilities	$	3,865	$	20


(1)	Derivative assets are included in other assets on the Consolidated Statements of Financial Condition.


(2)	Derivatives liabilities are included in other liabilities on the Consolidated Statements of Financial Condition.

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The following tables present the derivatives subject to a master netting arrangement.



								Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amount		Gross Amounts Offset in the Statement of Financial Position		Net Amount Presented in the Statement of Financial Position			Financial Instruments		Cash Collateral			Net Amount (1)
	(Dollars in millions)
September 30, 2015
Derivatives designated as hedging instruments:
Liabilities
Interest Rate Swaps on FHLB advances	$	—	$	—	$	—		$	—	$	(8	)	$	8

Derivatives not designated as hedging instruments:
Assets
Swap futures	$	6	$	—	$	6		$	—	$	3		$	3
U.S. Treasury swap and euro dollar futures	—		2		(2		)	—		(2		)	—
Mortgage backed securities forwards	37		—		37			—		35			2
Interest rate swaps and swaptions	17		—		17			—		2			15
Total derivative assets	$	60	$	2	$	58		$	—	$	38		$	20

Liabilities
Swap Futures	$	1	$	—	$	1		$	—	$	—		$	1
Interest rate swaps and swaptions	18		—		18			—		8			10
Total derivative liabilities	$	19	$	—	$	19		$	—	$	8		$	11

December 31, 2014
Derivatives not designated as hedging instruments:
Assets
U.S. Treasury swap and euro dollar futures	$	18	$	1	$	17		$	—	$	10		$	7
Mortgage backed securities forwards	26		—		26			—		24			2
Interest rate swaps	8		—		8			—		2			6
Total derivative assets	$	52	$	1	$	51		$	—	$	36		$	15

Liabilities
Interest rate swaps	$	6	$	—	$	6		$	—	$	—		$	6


(1)	Includes gross amounts for items not netted in the Company's Consolidated Statements of Financial Condition.

The Company pledged a total of $48 million of cash collateral to counterparties and had an obligation to return cash of $10 million at September 30, 2015 for derivative activities. The Company pledged a total of $36 million of investment securities and 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.

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Note 9 – Federal Home Loan Bank Advances

The portfolio of Federal Home Loan Bank advances includes short-term fixed rate advances and long-term fixed rate advances. The following is a breakdown of the advances outstanding.



	September 30, 2015				December 31, 2014
	Amount		Rate		Amount		Rate
	(Dollars in millions)
Short-term fixed rate term advances	$	824	0.18	%	$	214	0.26	%
LIBOR adjustable advances long-term	225		0.46	%	—		—	%
Long-term fixed rate term advances	975		1.54	%	300		1.36	%
Total	$	2,024	0.86	%	$	514	0.90	%

At September 30, 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 September 30, 2015 , the Company had $2.0 billion of advances outstanding and an additional $1.6 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 September 30, 2015 , $225 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.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Maximum outstanding at any month end	$	2,127		$	1,000		$	2,198		$	1,300
Average outstanding balance	1,795			998			1,597			995
Average remaining borrowing capacity	1,738			2,026			1,711			1,832
Weighted-average interest rate	1.17		%	0.23		%	1.05		%	0.23		%

The following outlines the Company’s Federal Home Loan Bank advance final maturity dates as of September 30, 2015 .



	September 30, 2015
	(Dollars in millions)
2015	$	824
2016	175
2017	50
2018	125
Thereafter	850
Total	$	2,024

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Note 10 – Long-Term Debt

The Company sponsored nine trust subsidiaries, including the consolidated VIEs, which issued trust preferred securities to third-party investors and loaned the proceeds to the Company in the form of junior subordinated notes included in long-term debt. The notes held by each trust are the sole assets of that trust. Distributions on the trust preferred securities of each trust are payable quarterly at a rate equal to the interest being earned by the trust on the notes held by these trusts.

The following table presents the carrying value on each junior subordinated note and VIE, along with the related interest rates of the long-term debt as of the dates indicated.



	September 30, 2015				December 31, 2014
	(Dollars in millions)
Trust Preferred Securities
Floating Three Month LIBOR
Plus 3.25%, matures 2032	$	26	3.58	%	$	26	3.50	%
Plus 3.25%, matures 2033	26		3.54	%	26		3.48	%
Plus 3.25%, matures 2033	26		3.53	%	26		3.51	%
Plus 2.00%, matures 2035	26		2.29	%	26		2.23	%
Plus 2.00%, matures 2035	26		2.29	%	26		2.23	%
Plus 1.75%, matures 2035	51		2.09	%	51		1.99	%
Plus 1.50%, matures 2035	25		1.79	%	25		1.73	%
Plus 1.45%, matures 2037	25		1.79	%	25		1.69	%
Plus 2.50%, matures 2037	16		2.84	%	16		2.74	%
Subtotal	$	247			$	247
Notes associated with consolidated VIEs
Floating One Month LIBOR
Plus 0.46% (1) , matures 2018 (3)	—				42
Plus 0.16% (2) , matures 2019 (4)	32				42
Total long-term debt	$	279			$	331


(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)	The par value for the debt was $33 million and $45 million , respectively, at September 30, 2015 and December 31, 2014 .

At September 30, 2015 and December 31, 2014 the three month LIBOR interest rate was 0.33 percent and 0.26 percent , respectively. At September 30, 2015 the one month LIBOR interest rate was 0.19 percent , compared to 0.17 percent at December 31, 2014 .

Trust Preferred Securities

The trust preferred securities outstanding are callable by the Company are junior subordinated notes. The interest is payable quarterly; 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 September 30, 2015 , the Company has deferred for 15 quarters and has $26 million accrued for these deferred interest payments.

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Notes Associated with Consolidated VIEs

As previously discussed in Note 6 of the Notes to the Consolidated Financial Statements, herein, the Company determined it was the primary beneficiary of VIEs associated with HELOC securitizations and such VIEs proceeds from the HELOC assets are therefore consolidated in the Consolidated Financial Statements. The assets in the securitization trust are utilized to repay the outstanding debt of the securitization trust. The Company has elected the fair value option for the debt and changes in fair value are recorded to "other noninterest income" on the Consolidated Statements of Operations. Fair value is estimated using quantitative models which incorporate observable and, in some instances, unobservable inputs including security prices, interest rate yield curves, option volatility, currency, commodity or equity rates, and correlations between these inputs. The Company also considers the impact of its own observable credit spreads in the secondary bond markets in determining the discount rate used to value these liabilities. See Note 17 of the Notes to the Consolidated Financial Statements, herein, for additional recurring fair value disclosures.

The final legal maturity of the long-term debt associated with the VIE is June 2019; however, this debt agreement has a contractual provision that allows for a clean-up call of the debt when less than 10 percent of the balance remains outstanding. The Company initiated the clean-up call process with respect to the 2006-2 HELOC securitization trust, which the Company expects to complete in the fourth quarter 2015.

Note 11 - Representation and Warranty Reserve

The following table shows the activity impacting the representation and warranty reserve.



		Three Months Ended September 30,						Nine Months Ended September 30,
		2015			2014			2015			2014
		(Dollars in millions)
Balance, beginning of period		$	48		$	50		$	53		$	54
Provision
	Charged to gain on sale for current loan sales	2			2			6			5
	Charged to representation and warranty reserve - change in estimate	(6		)	13			(13		)	16
	Total	(4		)	15			(7		)	21
Charge-offs, net		1			(8		)	(1		)	(18		)
Balance, end of period		$	45		$	57		$	45		$	57

At the time a loan is sold, an estimate of the fair value of such loss associated with the mortgage loans is recorded in the representation and warranty reserve in the Consolidated Statements of Financial Condition and charged against the net gain on loan sales in the Consolidated Statements of Operations. Subsequent to the sale, the liability is re-measured on an ongoing basis based on an estimate of probable future losses. Changes in the estimate are recorded in the representation and warranty provision on the Consolidated Statements of Operations.

Note 12 – Stockholders’ Equity

Preferred Stock and Other Warrants

On January 30, 2009, the Company sold to the U.S. Treasury 266,657 shares of Series C fixed rate cumulative non-convertible perpetual preferred stock ("Series C Preferred Stock") and a warrant to purchase up to approximately 1 million shares of Common Stock at an exercise price of $62.00 per share (the "Warrant") for $267 million . The Series C Preferred Stock qualifies as Tier 1 capital and currently pays cumulative dividends quarterly at a rate of 9 percent per annum. The Warrant is exercisable through 2019.

In 2013 the U.S. Treasury sold the Series C Preferred Stock and Warrants which are now held by unrelated third-party investors and are no longer held by the U.S. government under the TARP Capital Purchase Program. The warrants are valued utilizing the equity method.

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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 September 30, 2015 is summarized as follows.



	Rate		Earliest Redemption Date	Shares Outstanding	Preferred Shares		Additional Paid in Capital
					(Dollars in millions)
Series C Preferred Stock	9.0	%	1/31/2012	266,657	$	—	$	267

At September 30, 2015 , the Company has deferred $79 million of dividend payments on the Series C Preferred Stock.

Accumulated Other Comprehensive Income (Loss)

The following table sets forth the components in accumulated other comprehensive income (loss) for investment securities available-for-sale, investment securities held-to-maturity and cash flow hedges.



	Held-to-Maturity Securities		Available-for-Sale Securities			Cash Flow Hedges
	(Dollars in millions)
Accumulated other comprehensive income (loss)
Balance at December 31, 2014, net of tax	$	—	$	8		$	—
Net unrealized loss, net of tax	—		9			(5		)
Transfer of net unrealized loss from AFS to HTM	5		(5		)	—
Balance at September 30, 2015, net of tax (1)	$	5	$	12		$	(5	)

Balance at December 31, 2013, net of tax	$	—	$	(5	)	$	—
Net unrealized gain, net of tax	—		4			—
Balance at September 30, 2014, net of tax (1)	$	—	$	(1	)	$	—


(1)	For the periods ended September 30, 2015 and 2014 , there were no reclassifications out of accumulated other comprehensive income (loss) into earnings.

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Note 13 – Earnings (Loss) Per Share

Basic earnings (loss) per share, excluding dilution, are computed by dividing (loss) earnings available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings per share reflect 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 (loss) earnings per share of common stock.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions, except share data)

Net income (loss)	$	47		$	(28	)	$	125		$	(80	)
Less: preferred stock dividend/accretion	—			—			—			(1		)
Net income (loss) from continuing operations	47			(28		)	125			(81		)
Deferred cumulative preferred stock dividends	(8		)	(7		)	(22		)	(19		)
Net income (loss) applicable to common stock	$	39		$	(35	)	$	103		$	(100	)
Weighted average shares
Weighted average common shares outstanding	56,436,026			56,249,300			56,419,354			56,224,850
Effect of dilutive securities
Warrants (1)	339,478			—			290,840			—
Stock-based awards	431,999			—			340,595			—
Weighted average diluted common shares	57,207,503			56,249,300			57,050,789			56,224,850
Earnings (loss) per common share
Net income (loss) applicable to common stock	$	0.70		$	(0.61	)	$	1.82		$	(1.79	)
Effect of dilutive securities
Warrants	—			—			(0.01		)	—
Stock-based awards	(0.01		)	—			(0.01		)	—
Diluted earnings (loss) per share	$	0.69		$	(0.61	)	$	1.80		$	(1.79	)


(1)	Includes the May warrants at an exercise price of $10.00 per share and a fair value of $8 million at September 30, 2015 .

The three and nine months ended September 30, 2014 diluted loss per share calculation excludes all common stock equivalents, including 248,089 and 273,407 shares pertaining to stock based awards, respectively, and 303,026 and 326,102 shares 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 September 30, 2015 is $79 million .

N ote 14 – Income Taxes

The provision for income taxes in interim periods requires the Company to make a best estimate of the effective tax rate expected to be applicable for the full year. This estimated effective tax rate is then applied to interim consolidated pre-tax operating income to determine the interim provision for income taxes.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Provision (benefit) for income taxes	$	24		$	(10	)	$	70		$	(38	)
Effective tax provision (benefit) rate	34.4		%	(27.2		)%	36.0		%	(32.3		)%

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As of each reporting date, the Company considers both positive and negative evidence including any annual limitations to the realization of the Company's net operating loss carryforwards that could impact the view with regard to realization of deferred tax assets. The Company continues to believe it is more likely than not that the benefit for federal deferred tax assets will be realized. The Company continues to believe it is more likely than not that the benefit for certain state deferred tax assets will not be realized. In recognition of this risk, the Company continues to provide a partial valuation allowance on the deferred tax assets relating to state deferred tax assets.

The Company believes that it is unlikely that the unrecognized tax benefits will change by a material amount during the next 12 months . The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

Note 15 — Regulatory Matters

Regulatory Capital

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, 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 about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that could have a material effect on the Consolidated Financial Statements. On January 1, 2015, the Basel III rules became effective and include transition provisions through 2018. Under Basel III, Total capital consists of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital is further composed of common equity Tier 1 capital and additional Tier 1 capital.

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 September 30, 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 table shows 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)
September 30, 2015 (1)
Tangible capital (to tangible assets)	$	1,393	11.65	%	N/A		N/A		N/A		N/A
Tier 1 capital (to adjusted tangible assets)	1,393		11.65	%	$	478	4.0	%	$	598	5.0	%
Common equity Tier 1 capital (to RWA)	1,024		14.93	%	309		4.5	%	446		6.5	%
Tier 1 capital (to risk-weighted assets)	1,393		20.32	%	411		6.0	%	549		8.0	%
Total capital (to risk-weighted assets)	1,483		21.64	%	549		8.0	%	686		10.0	%
December 31, 2014
Tangible capital (to tangible assets)	$	1,184	12.59	%	N/A		N/A		N/A		N/A
Tier 1 capital (to adjusted tangible assets)	1,184		12.59	%	$	376	4.0	%	$	470	5.0	%
Tier 1 capital (to risk-weighted assets)	1,184		22.81	%	208		4.0	%	311		6.0	%
Total capital (to risk-weighted assets)	1,252		24.12	%	415		8.0	%	519		10.0	%

N/A - Not applicable


(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.

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Bank	Actual				For Capital Adequacy Purposes				Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in millions)
September 30, 2015 (1)
Tangible capital (to tangible assets)	$	1,426	11.91	%	N/A		N/A		N/A		N/A
Tier 1 capital (to adjusted tangible assets)	1,426		11.91	%	$	479	4.0	%	$	599	5.0	%
Common equity tier 1 capital (to RWA)	1,426		20.75	%	309		4.5	%	447		6.5	%
Tier 1 capital (to risk-weighted assets)	1,426		20.75	%	412		6.0	%	550		8.0	%
Total capital (to risk-weighted assets)	1,516		22.05	%	550		8.0	%	687		10.0	%
December 31, 2014
Tangible capital (to tangible assets)	$	1,167	12.43	%	N/A		N/A		N/A		N/A
Tier 1 capital (to adjusted tangible assets)	1,167		12.43	%	$	376	4.0	%	$	470	5.0	%
Tier 1 capital (to risk-weighted assets)	1,167		22.54	%	207		4.0	%	311		6.0	%
Total capital (to risk-weighted assets)	1,235		23.85	%	414		8.0	%	518		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.

Note 16 – 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 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

Per the February 2012 DOJ litigation settlement, the Company is required to make future additional payments contingent upon the occurrence of certain future events. The Company elected the fair value option to account for this liability and uses a weighted average discounted cash flow model to measure fair value. The fair value of the DOJ litigation settlement liability was $84 million and $82 million at September 30, 2015 and December 31, 2014 , respectively. The undiscounted amount of the DOJ litigation settlement liability remains at $118 million at September 30, 2015 .

At September 30, 2015 and December 31, 2014 , the Company's total liability for contingent liabilities was $85 million and $86 million , respectively, including the legal proceedings and fair value liability relating to the DOJ litigation settlement.

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Commitments

A summary of the contractual amount of significant commitments is as follows.



	September 30, 2015		December 31, 2014
	(Dollars in millions)
Commitments to extend credit
Mortgage loans interest-rate lock commitments	$	4,314	$	2,172
HELOC commitments	133		88
Other consumer commitments	25		7
Warehouse loan commitments	1,046		827
Standby and commercial letters of credit	14		10
Commercial and industrial commitments	297		276
Other commercial commitments	447		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 8 - Derivative Financial Instruments.

The Company has unfunded commitments under its contractual arrangement with the HELOC securitization trust to fund future advances on the underlying HELOC. Refer to further discussion of this issue as presented in Note 6 of the Notes to the Consolidated Financial Statements, herein.

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.

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.

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The Company maintains a reserve for letters of credit which is included in other liabilities, which represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unfunded loans with available balances, new commitments to lend that are not yet funded, and standby and commercial letters of credit. The balance of $2 million and $1 million for September 30, 2015 and December 31, 2014 , respectively, is reflected in other liabilities on the Consolidated Statements of Financial Condition.

Note 17 – Fair Value Measurements

The Company utilizes fair value measurements to record certain assets and liabilities at fair value.

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 an asset or liability.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Assets

Investment securities available-for-sale. These securities are comprised of U.S. government sponsored agencies and municipal obligations. The Company measures fair value using prices obtained from pricing services. A review is performed on the security prices received from the pricing services, which includes discussion and analysis of the inputs used by the pricing services to value our securities and comparisons to independent pricing. Where possible, fair values are generated using market inputs 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. For fixed income securities that are not actively traded, the pricing services use alternative methods to determine fair value for the securities, including quotes for similar fixed-income securities, matrix pricing, discounted cash flow using benchmark curves or other factors to determine fair value. Investment securities are classified within level 2 of the valuation hierarchy.

Loans held-for-sale. The Company generally estimates the fair value of loans held-for-sale based on quoted market prices for securities backed by similar types of loans. Where quoted market prices were available, such market prices were utilized as estimates for fair values. Otherwise, the fair value of loans was computed by discounting cash flows using observable inputs inclusive of interest rates, prepayment speeds and loss assumptions for similar collateral. These loans are classified as level 2.

Loans held-for-investment. Loans held-for-investment are generally recorded at amortized cost. Such loans are not recorded at fair value on a recurring basis. However, from time to time, a loan becomes impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Once a loan is identified as impaired, the fair value of the impaired loan is estimated using one of several methods, including collateral value less costs to sell, market value of similar debt, or discounted cash flows. The fair value of the underlying collateral is determined, where possible, using market prices derived from appraisals or market evaluations which are considered a non-recurring level 3 valuation. Fair value may also be measured using the present value of expected cash flows discounted at the loan's effective interest rate.

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Loans held-for-investment that are recorded at fair value on a recurring basis are loans that were previously recorded as loans held-for-sale but subsequently transferred to the held-for-investment category. As the Company elected the fair value option for the held-for-sale loans, they continue to be reported at fair value and measured consistent with the level 2 methodology for loans held-for-sale. Certain HELOC loans associated with the previous FSTAR 2005-1 and the current FSTAR 2006-2 securitization trusts have been recorded in the Consolidated Financial Statement as loans held-for-investment at fair value. The Company records these loans as a recurring level 3 valuation. Also included in loans held-for-investment are the second mortgage loans associated with the previous FSTAR 2006-1 mortgage securitization trust. The loans are carried at fair value and valued using a discounted estimated net future cash flow model and are classified within the level 3 valuation hierarchy as the model utilizes significant inputs which are unobservable. See Note 6 - Variable Interest Entities ("VIEs") for additional information.

Repossessed assets. Repossessed assets are measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the repossessed asset. The fair value of repossessed assets, upon initial recognition, are estimated using level 3 inputs based on appraisals or evaluations. The significant unobservable inputs used in the level 3 fair value measurements of the Company's impaired loans and repossessed assets primarily relate to internal valuations or analysis.

Mortgage Servicing Rights ("MSRs"). The current market for MSRs is not sufficiently liquid to provide participants with quoted market prices. Therefore, the Company uses an option-adjusted spread valuation approach to determine the fair value of MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. 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. In certain circumstances, based on the probability of the completion of a sale of MSRs pursuant to a bona-fide purchase offer, the Company considers the bid price of that offer and identifiable transaction costs in comparison to the calculated fair value and may adjust the estimate of fair value to reflect the terms of the pending transaction. Due to the nature of the valuation inputs, MSRs are classified within level 3 of the valuation hierarchy.

Other investments. The fair value of the reverse repurchase agreement is determined by cost, which approximates the fair value due to its short term nature. The reverse repurchase agreement is guaranteed by a third party and secured by level 2 government and agency securities which are unobservable by the Company, which are held by a third party. In case of default, the Company would receive the collateral from the third party. The reverse repurchase agreement is included in other assets on the Consolidated Statements of Financial Condition.

Derivative financial instruments. Certain classes of derivative contracts are listed on an exchange and are actively traded, and they are therefore classified within level 1 of the valuation hierarchy. These include U.S. Treasury futures and U.S. Treasury options. The Company's forward loan sale commitments, swap futures and interest rate swaps are valued based on quoted prices for similar assets in an active market with inputs that are observable and are classified within level 2 of the valuation hierarchy. Rate lock commitments are valued using internal models with significant unobservable market parameters and therefore are classified within level 3 of the valuation hierarchy. The Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. The derivatives are reported in either other assets or other liabilities on the Consolidated Statements of Financial Condition.

Liabilities

Warrants. Warrant liabilities are valued using a binomial lattice model and are classified within level 2 of the valuation hierarchy. Significant observable inputs include expected volatility, a risk free rate and an expected life. Warrant liabilities are reported in "other liabilities" on the Consolidated Statements of Financial Condition.

Long-term debt. The Company records the long-term debt associated with the previous FSTAR 2005-1 and the current FSTAR 2006-2 HELOC securitization trusts at fair value. The fair value of the debt is estimated using quantitative models which incorporate observable and, in some instances, unobservable inputs including security prices, interest rate yield curves, option volatility, currency, commodity or equity rates and correlations between these inputs. The Company also considers the impact of its own credit spreads in determining the discount rate used to value these liabilities. The credit spread is determined by reference to observable spreads in the secondary bond markets, which are considered to be level 3. The Company records this debt as a recurring level 3 valuation.

Litigation settlement. Upon settlement of the DOJ litigation settlement, we elected the fair value option to account for the liability representing the remaining future payments. As of September 30, 2015 the fair value totaled $84 million , using a

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discount rate of 7.6 percent for which we use a discounted cash flow model to determine the current fair value. The model utilizes our forecast and considers multiple scenarios including possible outcomes that impact the timing of the additional payments which are discounted using a risk free rate adjusted for nonperformance 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.

The liability is classified within level 3 of the valuation hierarchy as the projections of earnings and growth rate and other assumptions are unobservable inputs which affect the estimated timing of the cash flow payments. The Company considers factors which could affect those projections from the perspective of a market participant, which is incorporated into the assessment of fair value. The litigation settlement is included in other liabilities on the Consolidated Statements of Financial Condition and changes in the fair value of the litigation settlement will be recorded each quarter in other noninterest expense on the Consolidated Statements of Operations.

Assets and liabilities measured at fair value on a recurring basis

The following tables present the financial instruments carried at fair value as of September 30, 2015 and December 31, 2014 , by caption on the Consolidated Statement of Financial Condition and by level in the valuation hierarchy (as described above).



	Level 1			Level 2			Level 3			Total Fair Value
September 30, 2015	(Dollars in millions)
Investment securities available-for-sale
Agency	$	—		$	469		$	—		$	469
Agency-collateralized mortgage obligations	—			668			—			668
Municipal obligations	—			13			—			13
Loans held-for-sale
Residential first mortgage loans	—			2,164			—			2,164
Loans held-for-investment
Residential first mortgage loans	—			7			—			7
Second mortgage loans	—			—			45			45
HELOC loans	—			—			80			80
Mortgage servicing rights	—			—			294			294
Derivative assets
Rate lock commitments	—			—			44			44
Swap futures	—			3			—			3
U.S. Treasury and euro dollar futures	2			—			—			2
Forward agency and loans sales	—			1			—			1
Mortgage backed securities forwards	2			—			—			2
Interest rate swaps and swaptions	—			15			—			15
Total derivative assets	4			19			44			67
Other investments	—			—			100			100
Total assets at fair value	$	4		$	3,340		$	563		$	3,907
Derivative liabilities
U.S. Treasury and euro dollar futures	$	(2	)	$	—		$	—		$	(2	)
Forward agency and loans sales	—			(29		)	—			(29		)
Interest rate swap on FHLB advances	(8		)	—			—			(8		)
Swap futures	—			(1		)	—			(1		)
Interest rate swaps	—			(10		)	—			(10		)
Total derivative liabilities	(10		)	(40		)	—			(50		)
Warrant liabilities	—			(8		)	—			(8		)
Long-term debt	—			—			(32		)	(32		)
DOJ litigation settlement	—			—			(84		)	(84		)
Total liabilities at fair value	$	(10	)	$	(48	)	$	(116	)	$	(174	)

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	Level 1			Level 2			Level 3			Total Fair Value
December 31, 2014	(Dollars in millions)
Investment securities available-for-sale
Agency	$	—		$	929		$	—		$	929
Agency-collateralized mortgage obligations	—			741			—			741
Municipal obligations	—			—			2			2
Loans held-for-sale
Residential first mortgage loans	—			1,196			—			1,196
Loans held-for-investment
Residential first mortgage loans	—			26			—			26
Second mortgage loans	—			—			53			53
HELOC loans	—			—			132			132
Mortgage servicing rights	—			—			258			258
Derivative assets
U.S. Treasury and euro dollar futures	7			—			—			7
Rate lock commitments	—			—			31			31
Mortgage backed securities forwards	2			—			—			2
Interest rate swaps	—			6			—			6
Total derivative assets	9			6			31			46
Other investments	—			—			100			100
Total assets at fair value	$	9		$	2,898		$	576		$	3,483
Derivative liabilities
Forward agency and loan sales	$	—		$	(13	)	$	—		$	(13	)
U.S. Treasury and euro dollar futures	(1		)	—			—			(1		)
Interest rate swaps	—			(6		)	—			(6		)
Total derivative liabilities	(1		)	(19		)	—			(20		)
Warrant liabilities	—			(6		)	—			(6		)
Long-term debt	—			—			(84		)	(84		)
DOJ litigation settlement	—			—			(82		)	(82		)
Total liabilities at fair value	$	(1	)	$	(25	)	$	(166	)	$	(192	)

The Company had no transfers of assets or liabilities recorded at fair value between fair value levels during the three and nine months ended September 30, 2015 .

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.

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Fair value measurements using significant unobservable inputs

The tables below include a roll forward of the Consolidated Statement of Financial Condition amounts for the three and nine months ended September 30, 2015 and 2014 (including the change in fair value) for financial instruments classified by the Company within level 3 of the valuation hierarchy.



				Recorded in Earnings						Recorded in OCI
Three Months Ended September 30, 2015	Balance at Beginning of Period			Total Unrealized Gains / (Losses)			Total Realized Gains / (Losses)			Total Unrealized Gains / (Losses)		Purchases / Originations		Sales			Settlements			Transfers In (Out)		Balance at End of Period			Changes in Unrealized Gains / (Losses) Held at End of Period
Assets	(Dollars in millions)
Loans held-for-investment
Second mortgage loans	$	48		$	—		$	—		$	—	$	—	$	—		$	(3	)	$	—	$	45		$	—
HELOC loans	93			2			—			—		—		—			(15		)	—		80			1
Mortgage servicing rights	317			(24		)	—			—		74		(73		)	—			—		294			(14		)
Other investments	100			—			—			—		—		—			—			—		100			—
Totals	$	558		$	(22	)	$	—		$	—	$	74	$	(73	)	$	(18	)	$	—	$	519		$	(13	)
Liabilities
Long-term debt	$	(36	)	$	—		$	—		$	—	$	—	$	—		$	4		$	—	$	(32	)	$	—
DOJ litigation settlement	(84		)	—			—			—		—		—			—			—		(84		)	—
Totals	$	(120	)	$	—		$	—		$	—	$	—	$	—		$	4		$	—	$	(116	)	$	—
Derivative financial instruments (net)
Rate lock commitments	$	30		$	53		$	—		$	—	$	81	$	(104	)	$	(16	)	$	—	$	44		$	14

Three Months Ended September 30, 2014
Assets
Investment securities available-for-sale
Municipal obligation	$	—		$	—		$	—		$	—	$	—	$	—		$	—		$	4	$	4		$	—
Loans held-for-investment
Second mortgage loans	$	59		$	1		$	—		$	—	$	—	$	—		$	(4	)	$	—	$	56		$	1
HELOC loans	147			(1		)	1			—		—		—			(7		)	—		140			(8		)
Mortgage servicing rights	289			(13		)	—			—		79		(70		)	—			—		285			(5		)
Totals	$	495		$	(13	)	$	1		$	—	$	79	$	(70	)	$	(11	)	$	4	$	485		$	(12	)
Liabilities
Long-term debt	$	(98	)	$	—		$	(2	)	$	—	$	—	$	—		$	8		$	—	$	(92	)	$	—
DOJ litigation settlement	(78		)	(2		)	—			—		—		—			—			—		(80		)	(2		)
Totals	$	(176	)	$	(2	)	$	(2	)	$	—	$	—	$	—		$	8		$	—	$	(172	)	$	(2	)
Derivative financial instruments (net)
Rate lock commitments	$	51		$	10		$	—		$	—	$	66	$	(85	)	$	(15	)	$	—	$	27		$	1

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				Recorded in Earnings						Recorded in OCI
Nine Months Ended September 30, 2015	Balance at Beginning of Period			Total Unrealized Gains / (Losses)			Total Realized Gains / (Losses)			Total Unrealized Gains / (Losses)		Purchases / Originations		Sales			Settlements			Transfers In (Out)		Balance at End of Period			Changes In Unrealized Held at End of Period
Assets	(Dollars in millions)
Investment securities available-for-sale
Municipal obligations	$	2		$	—		$	—		$	—	$	—	$	—		$	(2	)	$	—	$	—		$	—
Loans held-for-investment
Second mortgage loans	53			2			1			—		—		—			(11		)	—		45			1
HELOC loans	132			(4		)	—			—		—		—			(48		)	—		80			4
Mortgage servicing rights	258			(40		)	—			—		220		(144		)	—			—		294			(3		)
Other investments	100			—			—			—		—		—			—			—		100			—
Totals	$	545		$	(42	)	$	1		$	—	$	220	$	(144	)	$	(61	)	$	—	$	519		$	2
Liabilities
Long-term debt	$	(84	)	$	—		$	(3	)	$	—	$	—	$	24		$	31		$	—	$	(32	)	$	—
DOJ litigation	(82		)	(2		)	—			—		—		—			—			—		(84		)	(2		)
Totals	$	(166	)	$	(2	)	$	(3	)	$	—	$	—	$	24		$	31		$	—	$	(116	)	$	(2	)
Derivative financial instruments (net)
Rate lock commitments	$	31		$	60		$	—		$	—	$	272	$	(276	)	$	(43	)	$	—	$	44		$	30

Nine Months Ended September 30, 2014
Assets
Investment securities available-for-sale
Municipal obligation	$	—		$	—		$	—		$	—	$	—	$	—		$	—		$	4	$	4		$	—
Loans held-for-investment
Second mortgage loans	$	65		$	2		$	1		$	—	$	—	$	—		$	(12	)	$	—	$	56		$	2
HELOC loans	155			(1		)	1			—		—		—			(15		)	—		140			(16		)
Mortgage servicing rights	285			(37		)	—			—		198		(161		)	—			—		285			(11		)
Totals	$	505		$	(36	)	$	2		$	—	$	198	$	(161	)	$	(27	)	$	4	$	485		$	(25	)
Liabilities
Long-term debt	$	(106	)	$	—		$	(5	)	$	—	$	—	$	—		$	19		$	—	$	(92	)	$	—
DOJ litigation	(93		)	13			—			—		—		—			—			—		(80		)	13
Totals	$	(199	)	$	13		$	(5	)	$	—	$	—	$	—		$	19		$	—	$	(172	)	$	13
Derivative financial instruments (net)
Rate lock commitments	$	10		$	110		$	—		$	—	$	203	$	(244	)	$	(52	)	$	—	$	27		$	24

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The following tables present the quantitative information about recurring level 3 fair value financial instruments and the fair value measurements as of September 30, 2015 and December 31, 2014 .



	Fair Value			Valuation Technique	Unobservable Input	Range (Weighted Average)
September 30, 2015	(Dollars in millions)
Assets
Second mortgage loans	$	45		Discounted cash flows	Discount rate Prepay rate - 12 month historical average CDR rate - 12 month historical average	7.2% - 10.8% (9.0%) 15.4% - 23.2% (19.3%) 2.6% - 3.9% (3.3%)
HELOC loans	$	80		Discounted cash flows	Loss severity on defaulted balance Weighted average discount rate	24.4% - 36.7% (30.6%) 6.9% - 10.3% (8.6%)
Mortgage servicing rights	$	294		Discounted cash flows	Option adjusted spread Constant prepayment rate Weighted average cost to service per loan	7.0% - 10.4% (8.7%) 10.8% - 15.6% (13.3%) $59 - $88 ($73)
Liabilities
Long-term debt	$	(32	)	Discounted cash flows	Discount rate Prepay rate - 3 month historical average Weighted average life	7.2% - 10.8% (9.0%) 18.4% - 27.6% (23.0%) 0.2 - 0.4 (0.3)
DOJ litigation settlement	$	(84	)	Discounted cash flows	Asset growth rate MSR growth rate Return on assets (ROA) improvement Peer group ROA	4.4% - 6.6% (5.5%) 0.9% - 1.4% (1.2%) 0.02% - 0.04% (0.03%) 0.5% - 0.8% (0.7%)
Derivative financial instruments
Rate lock commitments	$	44		Consensus pricing	Origination pull-through rate	65.3% - 97.9% (81.6%)



	Fair Value			Valuation Technique	Unobservable Input	Range (Weighted Average)
December 31, 2014	(Dollars in millions)
Assets
Second mortgage loans	$	53		Discounted cash flows	Discount rate Prepay rate - 12 month historical average CDR rate - 12 month historical average	7.2% - 10.8% (9.0%) 11.3% - 17.0% (14.2%) 2.4% - 3.6% (3.0%)
HELOC loans	$	132		Discounted cash flows	Yield Weighted average life (CPR) Weighted average life (CDR) Discount loss severity	8.0% - 12.0% (10.0%) 7.2% - 10.8% (9.0%) 6.6% - 9.9% (8.3%) 60.2% - 90.2% (75.2%)
Mortgage servicing rights	$	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)
Liabilities
Long-term debt	$	(84	)	Discounted cash flows	Discount rate Prepay rate - 3 month historical average Weighted average life	6.4% - 9.6% (8.0%) 16.0% - 24.0% (20.0%) 0.5 - 0.7 (0.6)
DOJ litigation settlement	$	(82	)	Discounted cash flows	Asset growth rate MSR growth rate Return on assets (ROA) improvement Peer group ROA	4.4% - 6.6% (5.5%) 0.9% - 1.4% (1.2%) 0.02% - 0.04% (0.03%) 0.5% - 0.8% (0.7%)
Derivative financial instruments
Rate lock commitments	$	31		Consensus pricing	Origination pull-through rate	66.2% - 99.3% (82.7%)

Recurring Significant Unobservable Inputs

The significant unobservable inputs used in the fair value measurement of the second mortgage loans are discount rates, prepayment rates, and default rates. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases in prepay rates in isolation result in a higher fair value and increases (decreases) in default rates in isolation result in a (higher) lower fair value.

At September 30, 2015 , the significant unobservable inputs used in the fair value measurement of the HELOC loans are the loss severity on defaulted loans and the weighted average discount rate. For the HELOC loans, increases (decreases) in the loss severity on defaulted balance, in isolation, would result in a lower (higher) fair value measurement; increases

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(decreases) in the weighted average discount rate, in isolation, would lower (higher) fair value measurement. For the debt carried at fair value (liability), increases (decreases) in the discount rate in isolation would result in a lower (higher) fair value measurement; increases (decreases) in prepayment rates in isolation results in a shorter (longer) weighted average life and ultimately a higher (lower) fair value measurement. In June 2015, the Company executed a clean-up call of the FSTAR 2005-1 long-term debt associated with the HELOC securitization trust. After payment of the debt, the FSTAR 2005-1 HELOC securitization trust has been dissolved as of June 30, 2015.

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.

The key economic assumptions used in determining the fair value of those MSRs capitalized during the three and nine months ended September 30, 2015 and 2014 periods were as follows.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Weighted-average life (in years)	7.9		7.9		7.9		8.0
Weighted-average constant prepayment rate	11.0	%	12.0	%	11.2	%	11.8	%
Weighted-average discount rate	10.9	%	11.7	%	10.8	%	12.0	%

The key economic assumptions reflected in the overall fair value of the entire portfolio of MSRs were as follows.



	September 30, 2015		December 31, 2014
Weighted-average life (in years)	7.1		6.6
Weighted-average constant prepayment rate	13.3	%	15.0	%
Weighted-average discount rate	10.4	%	10.9	%

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 asset growth, MSR growth, peer group return on assets and return on assets improvement. The current assumptions are based on management's approved, strategic performance targets beyond the current strategic modeling horizon (2015). The Bank's target asset growth rate post-2015 is based on growth in the balance sheet. Significant increases (decreases) in the Bank's growth rate in isolation could result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the Bank's MSR growth rate in isolation could result in a marginally lower (higher) fair value measurement. Significant increases (decreases) in the peer group's return on assets improvement in isolation could result in a marginally higher (lower) fair value measurement. Significant increases (decreases) in the Bank's return on assets in isolation could result in a marginally higher (lower) fair value measurement.

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Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are measured at the lower of cost or fair value and had a fair value below cost at the end of the period as summarized below.



	Level 3 (1)
	(Dollars in millions)
September 30, 2015
Impaired loans held-for-investment (2)
Residential first mortgage loans	$	36
Commercial and industrial loans	3
Repossessed assets (3)	17
Totals	$	56
December 31, 2014
Impaired loans held-for-investment (2)
Residential first mortgage loans	$	74
Repossessed assets (3)	19
Totals	$	93


(1)	The fair values are obtained at various dates during the three months ended September 30, 2015 and December 31, 2014 , respectively.


(2)	The Company recorded $20 million and $76 million in fair value losses on impaired loans (included in provision for loan losses on Consolidated Statements of Operations) during the three and nine months ended September 30, 2015 , respectively, compared to $10 million and $38 million in fair value losses on impaired loans during the three and nine months ended September 30, 2014 , respectively.

(3)

The Company recorded $1 million and $2 million in losses related to write downs of repossessed assets based on the estimated fair value of the specific assets during the three and nine months ended September 30, 2015 , respectively, and recognized net gain of $1 million and $2 million on sales of repossessed assets (both write downs and net gains/losses are included in assets resolution expense on the Consolidated Statements of Operations) during the three and nine months ended September 30, 2015 , respectively. The Company recorded $2 million and $4 million in losses related to write downs of repossessed assets based on the estimated fair value of the specific assets during the three and nine months ended September 30, 2014 , respectively, and recognized net gains of $1 million and $4 million on sales of repossessed assets during the three and nine months ended September 30, 2014 , respectively.

The following tables present the quantitative information about non-recurring level 3 fair value financial instruments and the fair value measurements as of September 30, 2015 and December 31, 2014 .



	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
September 30, 2015	(Dollars in millions)
Impaired loans held-for-investment
Residential first mortgage loans	$	36	Fair value of collateral	Loss severity discount	35% - 45% (41.4%)
Commercial and industrial loans	$	3	Fair value of collateral	Loss severity discount	40% - 50% (50.1%)
Repossessed assets	$	17	Fair value of collateral	Loss severity discount	0% - 100% (39.5%)



	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
December 31, 2014	(Dollars in millions)
Impaired loans held-for-investment
Residential first mortgage loans	$	74	Fair value of collateral	Loss severity discount	35% - 47% (36.9%)
Repossessed assets	$	19	Fair value of collateral	Loss severity discount	7% - 100% (45.4%)

Non-Recurring Significant Unobservable Inputs

The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties.

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Fair Value of Financial Instruments

The following tables present the carrying amount of financial instruments measured at either fair value, historical cost or amortized cost and the estimated fair value of those financial instruments.



	September 30, 2015
				Estimated Fair Value
	Carrying Value			Total			Level 1			Level 2			Level 3
	(Dollars in millions)
Assets
Cash and cash equivalents	$	195		$	195		$	195		$	—		$	—
Investment securities available-for-sale	1,150			1,150			—			1,150			—
Investment securities held-to-maturity	1,108			1,118			—			1,118			—
Loans held-for-sale	2,408			2,164			—			2,164			—
Loans with government guarantees	509			494			—			494			—
Loans held-for-investment, net	5,317			5,307			—			7			5,300
Repossessed assets	17			17			—			—			17
Federal Home Loan Bank stock	113			113			—			113			—
Mortgage servicing rights	294			294			—			—			294
Bank owned life insurance	176			176			—			176			—
Other investments	100			100			—			—			100
Other assets, foreclosure claims	231			231			—			231			—
Derivative Financial Instruments
U.S. Treasury and euro dollar futures	2			2			2			—			—
Rate lock commitments	44			44			—			—			44
Swap futures	3			3			—			3			—
Mortgage back securities forwards	2			2			2			—			—
Forward agency and loan sales	1			1			—			1			—
Interest rate swaps and swaptions	15			15			—			15			—
Liabilities
Retail deposits
Demand deposits and savings accounts	(4,850		)	(4,643		)	—			(4,643		)	—
Certificates of deposit	(813		)	(816		)	—			(816		)	—
Government deposits	(1,207		)	(1,189		)	—			(1,189		)	—
Company controlled deposits	(1,267		)	(1,179		)	—			(1,179		)	—
Federal Home Loan Bank advances	(2,024		)	(2,027		)	—			(2,027		)	—
Long-term debt	(279		)	(117		)	—			(85		)	(32		)
Warrant liabilities	(8		)	(8		)	—			(8		)	—
Litigation settlement	(84		)	(84		)	—			—			(84		)
Derivative Financial Instruments
U.S. Treasury and euro dollar futures	(2		)	(2		)	(2		)	—			—
Interest rate swap on FHLB advances	(8		)	(8		)	(8		)	—			—
Swap futures	(1		)	(1		)	—			(1		)	—
Forward agency and loan sales	(29		)	(29		)	—			(29		)	—
Interest rate swaps	(10		)	(10		)	—			(10		)	—

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	December 31, 2014
				Estimated Fair Value
	Carrying Value			Total			Level 1			Level 2			Level 3
	(Dollars in millions)
Assets
Cash and cash equivalents	$	136		$	136		$	136		$	—		$	—
Investment securities available-for-sale	1,672			1,672			—			1,670			2
Loans held-for-sale	1,244			1,196			—			1,196			—
Loans with government guarantees	1,128			1,094			—			1,094			—
Loans held-for-investment, net	4,151			3,998			—			26			3,972
Repossessed assets	19			19			—			—			19
Federal Home Loan Bank stock	155			155			155			—			—
Mortgage servicing rights	258			258			—			—			258
Other investments	100			100			—			—			100
Derivative Financial Instruments
Interest rate swaps	6			6			—			6			—
U.S. Treasury futures	7			7			7			—			—
Rate lock commitments	31			31			—			—			31
Agency forwards	2			2			2			—			—
Liabilities
Retail deposits
Demand deposits and savings accounts	(4,565		)	(4,291		)	—			(4,291		)	—
Certificates of deposit	(813		)	(816		)	—			(816		)	—
Government deposits	(918		)	(884		)	—			(884		)	—
Company controlled deposits	(773		)	(770		)	—			(770		)	—
Federal Home Loan Bank advances	(514		)	(514		)	(514		)	—			—
Long-term debt	(331		)	(172		)	—			(88		)	(84		)
Warrant liabilities	(6		)	(6		)	—			(6		)	—
Litigation settlement	(82		)	(82		)	—			—			(82		)
Derivative Financial Instruments
Interest rate swaps	(6		)	(6		)	—			(6		)	—
U.S. Treasury futures	(1		)	(1		)	(1		)	—			—
Forward agency and loan sales	(13		)	(13		)	—			(13		)	—

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.

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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.



		Three Months Ended September 30,						Nine Months Ended September 30,
		2015			2014			2015			2014
Assets		(Dollars in millions)
Loans held-for-sale
	Net gain on loan sales	$	134		$	80		$	276		$	269
	Other noninterest income	—			—			—			(1		)
Loans held-for-investment
	Interest income on loans	$	1		$	—		$	4		$	—
	Other noninterest income	(1		)	(6		)	(35		)	(35		)
Liabilities
Long-term debt
	Other noninterest income	$	3		$	6		$	28		$	14
Litigation settlement
	Other noninterest expense	$	—		$	(2	)	2			$	13

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The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding as of September 30, 2015 and December 31, 2014 for assets and liabilities for which the fair value option has been elected.



		September 30, 2015										December 31, 2014
		(Dollars in millions)
		Unpaid Principal Balance			Fair Value			Fair Value Over / (Under) Unpaid Principal Balance			Unpaid Principal Balance				Fair Value			Fair Value Over / (Under) Unpaid Principal Balance
Assets
	Nonaccrual loans
Loans held-for-investment		$	19		$	9		$	(10	)		$	11		$	5		$	(6	)
Total nonaccrual loans		$	19		$	9		$	(10	)		$	11		$	5		$	(6	)
Other performing loans
Loans held-for-sale		$	2,060		$	2,164		$	104			$	1,144		$	1,196		$	52
Loans held-for-investment		136			123			(13		)		225			206			(19		)
Total other performing loans		$	2,196		$	2,287		$	91			$	1,369		$	1,402		$	33
Total loans
Loans held-for-sale		$	2,060		$	2,164		$	104			$	1,144		$	1,196		$	52
Loans held-for-investment		155			132			(23		)		236			211			(25		)
Total loans		$	2,215		$	2,296		$	81			$	1,380		$	1,407		$	27
Liabilities
Long-term debt		$	(33	)	$	(32	)	$	1			$	(88	)	$	(84	)	$	4
Litigation settlement (1)		$	(118	)	(84		)	$	34			$	(118	)	(82		)	$	36


(1)	The Company is obligated to pay $118 million in installment payments upon meeting certain performance conditions.

Note 18 – 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 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.

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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.



	Three Months Ended September 30, 2015
	Mortgage Origination			Mortgage Servicing			Community Banking			Other			Total
Summary of Operations	(Dollars in millions)
Net interest income	$	19		$	4		$	44		$	6		$	73
Net gain (loss) on loan sales	72			—			(4		)	—			68
Representation and warranty reserve - change in estimate	(4		)	10			—			—			6
Other noninterest income	17			14			12			11			54
Total net interest income and noninterest income	104			28			52			17			201
Benefit for loan losses	—			—			1			—			1
Asset resolution	—			—			—			—			—
Depreciation and amortization expense	(1		)	(1		)	(1		)	(9		)	(12		)
Other noninterest expense	(47		)	(37		)	(38		)	3			(119		)
Total noninterest expense	(48		)	(38		)	(39		)	(6		)	(131		)
Income (loss) before federal income taxes	56			(10		)	14			11			71
Provision for federal income taxes	—			—			—			24			24
Net income (loss)	$	56		$	(10	)	$	14		$	(13	)	$	47
Intersegment revenue	$	15		$	(5	)	$	(4	)	$	(6	)	$	—

Average balances
Loans held-for-sale	$	2,179		$	—		$	21		$	—		$	2,200
Loans with government guarantees	—			547			—			—			547
Loans held-for-investment	4			—			5,348			60			5,412
Total assets	2,337			860			5,336			3,772			12,305
Deposits	—			1,487			6,773			—			8,260

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	Three Months Ended September 30, 2014
	Mortgage Origination			Mortgage Servicing			Community Banking			Other			Total
Summary of Operations	(Dollars in millions)
Net interest income	$	16		$	6		$	38		$	4		$	64
Net gain on loan sales	52			—			—			—			52
Representation and warranty reserve - change in estimate	(11		)	(2		)	—			—			(13		)
Other noninterest income	17			12			14			3			46
Total net interest income and noninterest income	74			16			52			7			149
Provision for loan losses	—			—			(8		)	—			(8		)
Asset resolution	—			(13		)	(1		)	—			(14		)
Depreciation and amortization expense	—			(2		)	(1		)	(3		)	(6		)
Other noninterest expense	(59		)	(56		)	(41		)	(3		)	(159		)
Total noninterest expense	(59		)	(71		)	(43		)	(6		)	(179		)
Income (loss) before federal income taxes	15			(55		)	1			1			(38		)
Benefit for federal income taxes	—			—			—			(10		)	(10		)
Net income (loss)	$	15		$	(55	)	$	1		$	11		$	(28	)
Intersegment revenue	$	2		$	4		$	—		$	(6	)	$	—

Average balances
Loans held-for-sale	$	1,590		$	—		$	39		$	—		$	1,629
Loans with government guarantees	—			1,215			—			—			1,215
Loans held-for-investment	—			—			4,088			—			4,088
Total assets	1,747			1,358			4,005			3,143			10,253
Deposits	—			865			6,182			—			7,047

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	Nine Months Ended September 30, 2015
	Mortgage Origination			Mortgage Servicing			Community Banking			Other			Total
Summary of Operations	(Dollars in millions)
Net interest income	$	54		$	11		$	126		$	20		$	211
Net gain (loss) on loan sales	255			—			(13		)	—			242
Representation and warranty reserve - change in estimate	(3		)	16			—			—			13
Other noninterest income (loss)	52			41			19			6			118
Total net interest income and noninterest income	358			68			132			26			584
Benefit for loan losses	—			—			18			—			18
Asset resolution	—			(12		)	(1		)	—			(13		)
Depreciation and amortization expense	(2		)	(2		)	(4		)	(28		)	(36		)
Other noninterest expense	(156		)	(96		)	(116		)	10			(358		)
Total noninterest expense	(158		)	(110		)	(121		)	(18		)	(407		)
Income (loss) before federal income taxes	200			(42		)	29			8			195
Provision for federal income taxes	—			—			—			70			70
Net income (loss)	$	200		$	(42	)	$	29		$	(62	)	$	125
Intersegment revenue	$	18		$	1		$	(9	)	$	(10	)	$	—

Average balances
Loans held-for-sale	$	2,052		$	—		$	36		$	—		$	2,088
Loans with government guarantees	—			679			—			—			679
Loans held-for-investment	3			—			4,786			96			4,885
Total assets	2,194			1,004			4,753			3,712			11,663
Deposits	—			1,189			6,602			—			7,791

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	Nine Months Ended September 30, 2014
	Mortgage Origination			Mortgage Servicing			Community Banking			Other			Total
Summary of Operations	(Dollars in millions)
Net interest income	$	42		$	17		$	111		$	15		$	185
Net gain (loss) on loan sales	155			—			(3		)	—			152
Representation and warranty reserve - change in estimate	(10		)	(6		)	—			—			(16		)
Other noninterest income	42			47			13			25			127
Total net interest income and noninterest income	229			58			121			40			448
Provision for loan losses	—			—			(127		)	—			(127		)
Asset resolution	—			(41		)	(2		)	—			(43		)
Depreciation and amortization expense	(1		)	(4		)	(4		)	(8		)	(17		)
Other noninterest expense	(159		)	(92		)	(119		)	(9		)	(379		)
Total noninterest expense	(160		)	(137		)	(125		)	(17		)	(439		)
Income (loss) before federal income taxes	69			(79		)	(131		)	23			(118		)
Benefit for federal income taxes	—			—			—			(38		)	(38		)
Net income (loss)	$	69		$	(79	)	$	(131	)	$	61		$	(80	)
Intersegment revenue	$	7		$	14		$	(3	)	$	(18	)	$	—

Average balances
Loans held-for-sale	$	1,407		$	—		$	75		$	—		$	1,482
Loans with government guarantees	—			1,241			—			—			1,241
Loans held-for-investment	—			—			3,956			—			3,956
Total assets	1,559			1,379			3,945			2,913			9,796
Deposits	—			723			5,873			—			6,596

Note 19 – Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under the amended guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 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 disclosures to 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 income statement, net of tax, after income from continuing operations. 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.

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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 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 on the Company’s Consolidated Financial Statements, but disclosures to the Notes thereto will be updated per the requirements.

Note 20 – Restatement of Consolidated Statements of Cash Flows

The Company reclassified the reporting of certain cash flows from operating, financing, and investing activities in the Consolidated Statements of Cash Flows for each of the quarterly periods in the year ended 2014 . The primary cause of the reclassifications related to cash flows associated with our nonperforming loan sales that occurred throughout 2014, which were presented as cash flows provided by operating activities but should have been included in cash flows provided by investing activities consistent with the original balance sheet classification rather than their classification at the time of sale per ASC 230-45-12. These reclassifications have no impact on the total cash flows for the periods impacted or on the beginning or ending cash balances for any of these periods. The Company has included the comparison of the as stated and restated amounts for the period ended September 30, 2014 , herein.

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	Nine Months Ended September 30,
	2014
	(Unaudited)			(Unaudited)
	As Restated			As Reported
Operating Activities
Net loss	$	(80	)	$	(80	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for loan losses	127			127
Representation and warranty provision	16			16
Depreciation and amortization	18			18
Loss on fair value of mortgage servicing rights	*			36
Loss on fair value of long-term debt	*			5
Deferred income taxes	(35		)	*
Net gain on loan and asset sales	(163		)	(167		)
Change in fair value and other non-cash changes	(150		)	*
Net gain on investment securities	*			(3		)
Net change in:
Proceeds from sales of loans held-for-sale ("HFS")	12,610			13,249
Origination, premium paid and repurchase of loans, net of principal repayments	(18,225		)	(18,927		)
Decrease in repurchase loans with government guarantees, net of claims received	*			82
Increase in accrued interest receivable	(12		)	(12		)
Increase in other assets, excludes purchase of other investments	(82		)	(103		)
Increase in payable for mortgage repurchase option	*			(17		)
Net charge-offs in representation and warranty reserve	(18		)	(18		)
Increase in other liabilities	35			20
Net cash used in operating activities	(5,959		)	(5,774		)
Investing Activities
Proceeds from sale of available-for-sale securities including loans that have been securitized	6,532			*
Proceeds received from sale of investment securities available-for-sale	*			6,317
Collection of principal on investment securities available-for-sale	118			*
Repayment of investment securities available-for-sale	*			118
Purchase of investment securities available-for-sale and other	(756		)	(755		)
Proceeds received from the sale of held-for-investment loans ("HFI")	62			*
Origination and purchase of loans HFI, net of principal repayments	(623		)	*
Net change from sales of loans held-for-investment	*			(369		)
Principal repayments net of origination of loans held-for-investment	*			(150		)
Proceeds from the disposition of repossessed assets	30			30
Acquisitions of premises and equipment, net of proceeds	(26		)	(26		)
Proceeds from the sale of mortgage servicing rights	168			155
Net cash provided by investing activities	5,505			5,320
Financing Activities
Net increase in deposit accounts	1,094			1,094
Net increase in Federal Home Loan Bank Advances	*			(838		)
Proceeds from increases in Federal Home Loan Bank Advances	13,633			*
Repayment of Federal Home Loan Bank advances	(14,471		)	*
Repayment of trust preferred securities and long-term debt	(19		)	(19		)
Net receipt of payments of loans serviced for others	39			39
Net receipt of escrow payments	4			4
Net cash provided by financing activities	280			280
Net decrease in cash and cash equivalents	(174		)	(174		)
Beginning cash and cash equivalents	281			281
Ending cash and cash equivalents	$	107		$	107
Supplemental disclosure of cash flow information
Interest paid on deposits and other borrowings	$	23		$	23
Income tax refund	$	(1	)	$	—
Non-cash reclassification of loans HFI to loans HFS	$	384		$	384
Non-cash reclassification of mortgage loans HFS to HFI	$	15		$	15
Non-cash reclassification of mortgage loans HFS to AFS securities	$	6,234		*
Mortgage servicing rights resulting from sale or securitization of loans	$	198		$	198
Loans held-for-investment transferred to repossessed assets	*			$	49
* Line item caption changes. Activity has been reported under a new caption.

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ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

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").

FORWARD – LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are based on management’s current expectations and assumptions regarding the Company’s business and performance, the economy and other future conditions, and forecasts of future events, circumstances and results. However, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies and other factors. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. The Company’s actual results or outcomes may vary materially from those expressed or implied in a forward-looking statement. Accordingly, we cannot and do not provide you with any assurance that our expectations will in fact occur or that actual results will not differ materially from those expressed or implied by such forward-looking statements. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.

Factors that could cause future results to differ materially from historical performance and these forward-looking statements include, but are not limited to, the following items:


(1)	General business and economic conditions, including unemployment rates, movements in interest rates, the slope of the yield curve, any increase in mortgage fraud and other related activity and changes in asset values in certain geographic markets, that affect us or our counterparties;


(2)	Volatile interest rates and our ability to effectively hedge against them, which could affect, among other things, (i) the overall mortgage business, (ii) our ability to originate or acquire loans and to sell assets at a profit, (iii) prepayment speeds, (iv) our cost of funds and (v) investments in mortgage servicing rights;


(3)	The adequacy of our allowance for loan losses and our representation and warranty reserves;


(4)	Changes in accounting standards generally applicable to us and our application of such standards, including the calculation of the fair value of our assets and liabilities;


(5)	Our ability to borrow funds, maintain or increase deposits or raise capital on commercially reasonable terms or at all, and our ability to achieve or maintain desired capital ratios;


(6)	Changes in material factors affecting our loan portfolio, particularly our residential mortgage loans, and the market areas where our business is geographically concentrated or further loan portfolio or geographic concentration;

(7)

Changes in, or expansion of, the regulation of financial services companies and government-sponsored housing enterprises, including new legislation, regulations, rulemaking and interpretive guidance, enforcement actions, the imposition of fines and other penalties by our regulators, the impact of existing laws and regulations, new or changed roles or guidelines of government-sponsored entities, changes in regulatory capital ratios, increases in deposit insurance premiums, and special assessments of the Federal Deposit Insurance Corporation;

(8)

Our ability to comply with the terms and conditions of the Supervisory Agreement with the Board of Governors of the Federal Reserve and the Bank’s ability to comply with the Consent Order with the Office of Comptroller of the Currency and the Consent Order of the Consumer Financial Protection Bureau and our ability to address any further matters raised by these regulators, and other regulators or government bodies;


(9)	Our ability to comply with the terms and conditions of the agreement with the U.S. Department of Justice and the impact of compliance with that agreement and our ability to accurately estimate the financial impact of that agreement, including the fair value and timing of the future payments;

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(10)	The Bank’s ability to make capital distributions and our ability to pay dividends on our capital stock or interest on our trust preferred securities;


(11)	Our ability to attract and retain senior management and other qualified personnel to execute our business strategy, including our entry into new lines of business, our introduction of new products and services and management of risks relating thereto, and our competing in the mortgage loan originations, mortgage servicing and commercial and retail banking lines of business;


(12)	Our ability to satisfy our mortgage servicing and subservicing obligations and manage repurchases and indemnity demands by mortgage loan purchasers, guarantors, and insurers;


(13)	The outcome and cost of defending current and future legal or regulatory litigation, proceedings, or investigations;


(14)	Our ability to create and maintain an effective risk management framework and effectively manage risk, including, among other things, market, interest rate, credit and liquidity risk, including risks relating to the cyclicality and seasonality of our mortgage banking business, litigation and regulatory risk, operational risk, counterparty risk, and reputational risk;


(15)	The control by, and influence of, the fund that is our majority stockholder, and any changes that may occur with respect to that fund or its ownership interest in us;


(16)	A failure of, interruption in or cybersecurity attack on our network or computer systems, which could impact our ability to properly collect, process, and maintain personal data, ensure ongoing mortgage and banking operations, or maintain system integrity with respect to funds settlement; and


(17)	Factors that may require us to establish a valuation allowance against our deferred tax asset or that impact our ability to maximize the tax benefit of our net operating losses.

Factors that may cause future results to differ materially from historical performance and from forward-looking statements, including but not limited to the factors listed above, may be difficult to predict, may contain uncertainties that materially affect actual results, and may be beyond our control. Also, new factors emerge from time to time, and it is not possible for our management to predict the occurrence of all such factors or to assess the effect of each such factor, or the combined effect of several of the factors at one time, on our business. Any forward-looking statement speaks only as of the date on which it is made. Except to fulfill our obligations under the U.S. securities laws, we undertake no obligation to update any such statement to reflect events or circumstances after the date on which it is made.

Please also refer to Item 1A to Part I of our Annual Report on Form 10-K for the year ended December 31, 2014 and Item 1A to Part II of this Quarterly Report on Form 10-Q, which are incorporated by reference herein, for further information on these and other factors affecting us.

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 September 30, 2015 , based on our assets, we are the largest bank headquartered in Michigan and one of the top 10 larg est 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 September 30, 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 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 nine months ended September 30, 2015 represented mortgage loans that were collateralized by residential mortgages on single-family residences and were eligible for sale to the Agencies. At September 30, 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 517 mortgage brokers and approximately 679 correspondents. At September 30, 2015 , we also operated 14 retail centers located in 10 states, which primarily originate one-to-four family residential mortgage loans as part of our Mortgage Originations segment.

We also originate or purchase mortgage loans through referrals from our branches, consumer direct call center and our website, flagstar.com. At September 30, 2015 , we operated 99 branches in Michigan. Through our branches, we gather deposits and offer a line of consumer and commercial financial products and services to individuals and businesses. We also gather deposits on a nationwide basis through our banking group, and provide deposit and cash management services to governmental units on a relationship basis. We leverage our branches and Internet banking to cross-sell products to existing customers and increase our customer base.

At September 30, 2015 , we had 2,677 full-time equivalent employees inclusive of account executives and loan officers.

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Critical Accounting Policies

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain accounting policies that, due to the judgment, estimates and assumptions inherent in those policies are critical to an understanding of our Consolidated Financial Statements, in Item 1. Financial Statements herein. These policies relate to: (a) fair value measurements; (b) the determination of our allowance for loan losses; and (c) the determination of our representation and warranty reserve. We believe the judgment, estimates and assumptions used in the preparation of our Consolidated Financial Statements and the Notes, in Item 1., are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements and the Notes, in Item 1., herein, to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations and/or financial condition. For further information on our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2014 , which is available on our website, flagstar.com, under the Investor Relations section, or on the website of the Securities and Exchange Commission, at sec.gov.

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Selected Financial Ratios

(Dollars in millions, except share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Mortgage loans originated (1)	$	7,876		$	7,187		$	23,578		$	18,004
Mortgage loans sold and securitized	$	7,318		$	7,072		$	21,143		$	17,577
Interest rate spread	2.56		%	2.79		%	2.59		%	2.84		%
Net interest margin	2.75		%	2.91		%	2.76		%	2.95		%
Average common shares outstanding	56,436,026			56,249,300			56,419,354			56,224,850
Average fully diluted shares outstanding	57,207,503			56,249,300			57,050,789			56,224,850
Average interest earning assets	$	10,693		$	8,815		$	10,165		$	8,345
Average interest paying liabilities	$	8,354		$	7,034		$	8,044		$	6,734
Average stockholders' equity	$	1,510		$	1,402		$	1,466		$	1,410
Return (loss) on average assets	1.52		%	(1.08		)%	1.43		%	(1.10		)%
Return (loss) on average equity	12.41		%	(7.88		)%	11.36		%	(7.66		)%
Efficiency ratio	65.0		%	120.0		%	69.6		%	98.3		%
Equity-to-assets ratio (average for the period)	12.27		%	13.68		%	12.56		%	14.39		%
Charge-offs to average LHFI (2)	1.84		%	1.36		%	2.34		%	1.17		%
Charge-offs, to average LHFI adjusted (3)	0.61		%	0.70		%	0.43		%	0.87		%



	September 30, 2015			December 31, 2014			September 30, 2014
Book value per common share	$	21.91		$	19.64		$	19.28
Number of common shares outstanding	56,436,026			56,332,307			56,261,652
Mortgage loans serviced for others	$	26,306		$	25,427		$	26,378
Mortgage loans subserviced for others	$	42,282		$	46,724		$	46,695
Weighted average service fee (basis points)	28.3			27.2			26.8
Capitalized value of mortgage servicing rights	1.12		%	1.01		%	1.08		%
Mortgage servicing rights to Tier 1 capital	21.1		%	21.8		%	24.9		%
Ratio of allowance for loan losses to LHFI (2)	3.66		%	7.01		%	7.60		%
Ratio of nonperforming assets to total assets	0.64		%	1.41		%	1.39		%
Equity-to-assets ratio	12.01		%	13.95		%	14.04		%
Common equity-to-assets ratio	9.88		%	11.24		%	11.27		%
Tier 1 leverage ratio (to adjusted total assets) (4)	11.65		%	12.59		%	12.50		%
Common equity Tier 1 capital ratio (to risk-weighted assets) (4)	14.93		%	N/A			N/A
Total risk-based capital ratio (to risk-weighted assets) (4)	21.64		%	24.12		%	24.35		%
Number of branches	99			107			106
Number of FTE employees	2,677			2,739			2,725


(1)	Includes residential first mortgage and second mortgage loans.


(2)	Excludes loans carried under the fair value option.


(3)	Excludes charge-offs of $16 million and $6 million related to the sale of loans during the three months ended September 30, 2015 and September 30, 2014 , respectively, and $67 million and $8 million related to the sale of loans during the nine months ended September 30, 2015 and September 30, 2014 , respectively.


(4)	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.

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Summary of Operations



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Net interest income	$	73		$	64		$	211		$	185
Provision (benefit) for loan losses	(1		)	8			(18		)	127
Total noninterest income	128			85			373			263
Total noninterest expense	131			179			407			439
Provision (benefit) for income taxes	24			(10		)	70			(38		)
Preferred stock accretion	—			—			—			(1		)
Net income (loss) from continuing operations	$	47		$	(28	)	$	125		$	(81	)
Income (loss) per share:
Basic	$	0.70		$	(0.61	)	$	1.82		$	(1.79	)
Diluted	$	0.69		$	(0.61	)	$	1.80		$	(1.79	)

Net interest income in creased $26 million for the nine months ended September 30, 2015 , compared to the same period in 2014, primarily due to growth in interest-earning assets.

Provision for loan losses improved by $145 million for the nine months ended September 30, 2015 , compared to the same period in 2014, primarily driven by the two changes in estimates, which occurred in the first quarter 2014: 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. Also impacting this variance was a release of reserves previously associated with the sale or transfer of interest-only residential first mortgage loans, non-performing loans and troubled debt restructured first mortgage loans during the nine months ended September 30, 2015 .

Noninterest income in creased $110 million for the nine months ended September 30, 2015 , compared to the same period in 2014, primarily due to a $90 million in crease in net gain on loan sales and a benefit in the representation and warranty provision.

Noninterest expense de creased $32 million for the nine months ended September 30, 2015 , compared to the same period in 2014, primarily due to lower asset resolution expense resulting from a decline in levels of lower quality assets and a decrease in legal expenses as the CFPB settlement occurred in 2014. These variances were partially offset by an increase in loan processing expense due to an increase in loan originations.

Income tax provision in creased $108 million for the nine months ended September 30, 2015 , compared to the same period in 2014, which was primarily due to higher taxable income.

Net Interest Income

Net interest income is the amount we earn on the average balances of our interest-earning assets, less the amount we incur on the average balances of our interest-bearing liabilities. Interest income recorded on loans is reduced by the amortization of net premiums and net deferred loan origination costs.

Comparison to Prior Year Quarter

Net interest income in creased $9 million to $73 million for the three months ended September 30, 2015 , compared to $64 million for the three months ended September 30, 2014 , primarily due to growth in interest-earning assets, partially offset by a decrease in the net interest margin.

Our net interest margin for the three months ended September 30, 2015 was 2.75 percent , compared to 2.91 percent for the three months ended September 30, 2014 . The decrease was driven primarily by the impact of match-funding our long-duration asset growth, partially offset by increased interest income resulting from higher quality loans held-for-investment.

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Interest income in creased $16 million for the three months ended September 30, 2015 to $91 million , compared to $75 million during the three months ended September 30, 2014 , primarily driven by growth in interest-earning assets. Average loans held-for-investment totaled $5.4 billion for the three months ended September 30, 2015 , increasing $1.3 billion or 32.4 percent compared to the three months ended September 30, 2014 . We realized growth in warehouse, HELOC loans and residential first mortgage loans. Average warehouse loans increased $385 million for the three months ended September 30, 2015 to $936 million, compared to $551 million for the three months ended September 30, 2014 , primarily due to higher line utilization and new accounts. Average HELOC loans increased $292 million for the three months ended September 30, 2015 to $411 million, compared to $119 million for the three months ended September 30, 2014 , resulting from the acquisitions of loan portfolios in the first and second quarter 2015. Average residential first mortgage loans increased $0.5 billion for the three months ended September 30, 2015 to $2.8 billion, compared to $2.3 billion for the three months ended September 30, 2014 , primarily due to retained loan production.

Interest expense in creased $7 million for the three months ended September 30, 2015 to $18 million , compared to $11 million for the three months ended September 30, 2014 , primarily due to Federal Home Loan Bank advances. Average Federal Home Loan Bank advances were $1.8 billion for the three months ended September 30, 2015 an increase of $0.8 billion compared to the three months ended September 30, 2014 , primarily to match-fund our long-duration asset growth. Average interest-bearing deposits were $6.3 billion during the three months ended September 30, 2015 , increasing $0.5 billion or 8.4 percent, compared to the three months ended September 30, 2014 , led by higher demand and savings deposits.

Comparison to Prior Year to Date

Net interest income in creased $26 million to $211 million for the nine months ended September 30, 2015 , compared to $185 million for the nine months ended September 30, 2014 , primarily due to growth in interest-earning assets, partially offset by a decrease in the net interest margin.

Our net interest margin for the nine months ended September 30, 2015 was 2.76 percent , compared to 2.95 percent for the nine months ended September 30, 2014 . The decrease was driven primarily by the impact of match-funding our long-duration asset growth.

Interest income in creased $47 million for the nine months ended September 30, 2015 to $260 million , compared to $213 million during the nine months ended September 30, 2014 , primarily driven by higher average loan balances and investment securities. Average loans held-for-investment totaled $4.9 billion for the nine months ended September 30, 2015 , increasing $0.9 billion or 23.5 percent compared to the nine months ended September 30, 2014 . We realized solid growth in warehouse, HELOC loans and commercial and industrial loans. Average warehouse loans increased $430 million for the nine months ended September 30, 2015 to $844 million, compared to $414 million for the nine months ended September 30, 2014 , primarily due to higher line utilization and new accounts. Average HELOC loans increased $208 million for the nine months ended September 30, 2015 to $330 million, compared to $122 million for the nine months ended September 30, 2014 , resulting from the acquisitions of loan portfolios in 2015. Average commercial and industrial loans increased $131 million for the nine months ended September 30, 2015 to $429 million, compared to $298 million for the nine months ended September 30, 2014 .

Interest expense in creased $21 million for the nine months ended September 30, 2015 to $49 million , compared to $28 million for the nine months ended September 30, 2014 , primarily due to Federal Home Loan Bank advances and interest-bearing deposits. Average interest-bearing deposits were $6.1 billion during the nine months ended September 30, 2015 , increasing $0.6 billion or 11.7 percent, compared to the nine months ended September 30, 2014 . Retail deposits increased $0.5 billion, led by growth in savings deposits. Average Federal Home Loan Bank advances were $1.6 billion for the nine months ended September 30, 2015 an increase of $0.6 billion compared to the nine months ended September 30, 2014 , primarily to match-fund our long-duration asset growth.

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The following table presents on a consolidated basis interest income from average assets and liabilities, expressed in dollars and yields.



	Three Months Ended September 30,
	2015						2014
	Average Balance		Interest		Annualized Yield/ Rate		Average Balance		Interest		Annualized Yield/ Rate
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	2,200	$	22	3.94	%	$	1,629	$	18	4.41	%
Loans with government guarantees	547		5		3.37	%	1,215		8		2.50	%
Loans held-for-investment
Consumer loans (1)	3,367		30		3.67	%	2,635		25		3.77	%
Commercial loans (1)	2,045		20		3.80	%	1,453		14		3.69	%
Total loans held-for-investment	5,412		50		3.72	%	4,088		39		3.74	%
Investment securities	2,313		14		2.50	%	1,642		10		2.64	%
Interest-earning deposits	221		—		0.53	%	241		—		0.25	%
Total interest-earning assets	10,693		91		3.42	%	8,815		75		3.39	%
Other assets	1,612						1,438
Total assets	$	12,305					$	10,253
Interest-Bearing Liabilities
Retail deposits
Demand deposits	$	429	$	—	0.14	%	$	421	$	—	0.14	%
Savings deposits	3,732		8		0.84	%	3,274		5		0.66	%
Money market deposits	262		—		0.33	%	262		—		0.20	%
Certificates of deposit	785		2		0.80	%	891		2		0.75	%
Total retail deposits	5,208		10		0.75	%	4,848		7		0.61	%
Government deposits
Demand deposits	286		—		0.39	%	218		—		0.39	%
Savings deposits	445		1		0.52	%	378		1		0.53	%
Certificates of deposit	335		—		0.40	%	344		—		0.35	%
Total government deposits	1,066		1		0.45	%	940		1		0.43	%
Total deposits	6,274		11		0.70	%	5,788		8		0.58	%
Federal Home Loan Bank advances	1,795		5		1.17	%	998		1		0.23	%
Other	285		2		2.51	%	248		2		2.69	%
Total interest-bearing liabilities	8,354		18		0.86	%	7,034		11		0.60	%
Noninterest-bearing deposits (2)	1,986						1,259
Other liabilities	455						558
Stockholders’ equity	1,510						1,402
Total liabilities and stockholders' equity	$	12,305					$	10,253
Net interest-earning assets	$	2,339					$	1,781
Net interest income			$	73					$	64
Interest rate spread (3)					2.56	%					2.79	%
Net interest margin (4)					2.75	%					2.91	%
Ratio of average interest-earning assets to interest-bearing liabilities					128.0	%					125.3	%


(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.


(2)	Includes company controlled deposits that arise due to the servicing of loans for others.


(3)	Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.


(4)	Net interest margin is net interest income divided by average interest-earning assets.

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	Nine Months Ended September 30,
	2015						2014
	Average Balance		Interest		Annualized Yield/ Rate		Average Balance		Interest		Annualized Yield/ Rate

Interest-Earning Assets
Loans held-for-sale	$	2,088	$	61	3.91	%	$	1,482	$	47	4.26	%
Loans with government guarantees	679		15		2.86	%	1,241		24		2.53	%
Loans held-for-investment
Consumer loans (1)	2,968		83		3.75	%	2,739		79		3.86	%
Commercial loans (1)	1,917		57		3.92	%	1,217		35		3.74	%
Loans held-for-investment	4,885		140		3.82	%	3,956		114		3.82	%
Investment securities	2,260		43		2.54	%	1,454		28		2.60	%
Interest-earning deposits	253		1		0.50	%	212		—		0.26	%
Total interest-earning assets	10,165		260		3.41	%	8,345		213		3.40	%
Other assets	1,498						1,451
Total assets	$	11,663					$	9,796
Interest-Bearing Liabilities
Retail deposits
Demand deposits	$	428	$	—	0.14	%	$	422	$	1	0.14	%
Savings deposits	3,683		22		0.81	%	3,054		13		0.58	%
Money market deposits	253		1		0.28	%	269		—		0.19	%
Certificates of deposit	778		4		0.73	%	941		5		0.74	%
Total retail deposits	5,142		27		0.72	%	4,686		19		0.55	%
Government deposits
Demand deposits	241		1		0.39	%	166		—		0.38	%
Savings deposits	406		1		0.52	%	298		1		0.50	%
Certificates of deposit	341		1		0.36	%	341		1		0.32	%
Total government deposits	988		3		0.44	%	805		2		0.40	%
Total Deposits	6,130		30		0.67	%	5,491		21		0.53	%
Federal Home Loan Bank advances	1,597		13		1.05	%	995		2		0.23	%
Other	317		6		2.35	%	248		5		2.68	%
Total interest-bearing liabilities	8,044		49		0.81	%	6,734		28		0.56	%
Noninterest-bearing deposits (2)	1,661						1,105
Other liabilities	492						547
Stockholders’ equity	1,466						1,410
Total liabilities and stockholders' equity	$	11,663					$	9,796
Net interest-earning assets	$	2,121					$	1,611
Net interest income			$	211					$	185
Interest rate spread (3)					2.59	%					2.84	%
Net interest margin (4)					2.76	%					2.95	%
Ratio of average interest-earning assets to interest-bearing liabilities					126.4	%					123.9	%


(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.


(2)	Includes company controlled deposits that arise due to the servicing of loans for others.


(3)	Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.


(4)	Net interest margin is net interest income divided by average interest-earning assets.

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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.



	Three Months Ended September 30,
	2015 Versus 2014 Increase (Decrease) Due to:
	Rate			Volume			Total
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	(2	)	$	6		$	4
Loans with government guarantees	1			(4		)	(3		)
Loans held-for-investment
Consumer loans (1)	(1		)	6			5
Commercial loans (2)	1			5			6
Total loans held-for-investment	—			11			11
Investment securities	(1		)	5			4
Total other interest-earning assets	$	(2	)	$	18		$	16
Interest-Bearing Liabilities
Savings deposits	$	2		$	1		$	3
Federal Home Loan Bank advances	4			—			4
Total interest-bearing liabilities	$	6		$	1		$	7
Change in net interest income	$	(8	)	$	17		$	9


(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.

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	Nine Months Ended September 30,
	2015 Versus 2014 Increase (Decrease) Due to:
	Rate			Volume			Total
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	(6	)	$	20		$	14
Loans with government guarantees	2			(11		)	(9		)
Loans held-for-investment
Consumer loans (1)	(2		)	6			4
Commercial loans (2)	3			19			22
Total loans held-for-investment	1			25			26
Investment securities	(1		)	16			15
Interest-earning deposits and other	—			1			1
Total other interest-earning assets	$	(4	)	$	51		$	47
Interest-Bearing Liabilities
Demand deposits	$	—		$	(1	)	$	(1	)
Savings deposits	7			2			9
Money market deposits	—			1			1
Certificates of deposit	—			(1		)	(1		)
Total retail deposits	7			1			8
Demand deposits	—			1			1
Total government deposits	—			1			1
Total deposits	7			2			9
Federal Home Loan Bank advances	10			1			11
Other	(1		)	2			1
Total interest-bearing liabilities	$	16		$	5		$	21
Change in net interest income	$	(20	)	$	46		$	26


(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.

Provision for Loan Losses

Comparison to Prior Year Quarter

The benefit from loan losses was $1 million for the three months ended September 30, 2015 , an improvement from the provision of $8 million for the three months ended September 30, 2014 . During the three months ended September 30, 2015 , the benefit for loan losses included a net reduction in the allowance for loan losses relating to loan transfers to held-for-sale and sales, which included a net reduction in the allowance relating to interest-only residential first mortgage loan transfers, partially offset by an increase in provision related to an increase in the average loans held-for-investment loan portfolio.

Net charge-offs for the three months ended September 30, 2015 increased to $24 million , compared to $13 million for the three months ended September 30, 2014 , primarily due to the charge-off of allowance related to loans sold or transferred during the three months ended September 30, 2015. As a percentage of the average loans held-for-investment, annualized net charge-offs for the three months ended September 30, 2015 increased to 1.84 percent from 1.36 percent for the three months ended September 30, 2014 . During the three months ended September 30, 2015 , the annualized net charge-offs as a percentage of the average loans held-for-investment were 0.61 percent , excluding the charge-offs related to the loan sales or transfers of $16 million , compared to an annualized net charge-offs as a percentage of the average loans held-for-investment of 0.70 percent , excluding the charge-offs related to the loan sales of $6 million during the three months ended September 30, 2014 .

Comparison to Prior Year to Date

The benefit for loan losses was $18 million for the nine months ended September 30, 2015 , an improvement from the provision of $127 million for the nine months ended September 30, 2014 , primarily driven by the two changes in estimates, which occurred in the first quarter 2014: the evaluation of current data related to the loss emergence period on our residential

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mortgage loan portfolio and the evaluation of the enhanced risk associated with payment resets relating to interest-only loans. Also impacting this variance was a release of reserves previously associated with the sale or transfer of interest-only residential first mortgage loans, non-performing loans and troubled debt restructured first mortgage loans during the nine months ended September 30, 2015 , partially offset by an increase related to the growth in average loans held-for-investment loan portfolio.

Net charge-offs for the nine months ended September 30, 2015 totaled $82 million , compared to $33 million for the nine months ended September 30, 2014 . The increase was primarily due to the charge-off of allowance relating to loans sold or transferred during the nine months ended September 30, 2015 . As a percentage of the average loans held-for-investment, annualized net charge-offs for the nine months ended September 30, 2015 increased to 2.34 percent from 1.17 percent for the nine months ended September 30, 2014 . During the nine months ended September 30, 2015 and 2014 , the annualized net charge-offs as a percentage of the average loans held-for-investment were 0.43 percent and 0.87 percent , respectively, excluding the charge-offs related to the loan sales or transfers of $67 million and $8 million , respectively.

See the section captioned "Allowance for Loan Losses" in this discussion for further analysis of the provision (benefit) for loan losses.

Noninterest Income

The following table sets forth the components of our noninterest income.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2015		2014			2015			2014
	(Dollars in millions)
Net gain on loan sales	$	68	$	52		$	242		$	152
Loan fees and charges	17		19			53			56
Deposit fees and charges	7		6			19			16
Loan administration income	8		6			19			19
Net return on mortgage servicing asset	12		1			19			22
Net gain (loss) on sale of assets	1		5			(1		)	11
Representation and warranty benefit (provision)	6		(13		)	13			(16		)
Other noninterest income	9		9			9			3
Total noninterest income	$	128	$	85		$	373		$	263

Comparison to Prior Year Quarter

Total noninterest income was $128 million during the three months ended September 30, 2015 , which was a $43 million in crease from $85 million of noninterest income during the three months ended September 30, 2014 . The in crease during the three months ended September 30, 2015 , was primarily due to the representation and warranty benefit (provision), higher net gain on loan sales and an increase in net return on mortgage servicing asset, partially offset by a decrease in net gain on sale of assets.

Net gain on loan sales in creased $16 million to $68 million during the three months ended September 30, 2015 , compared to $52 million for the three months ended September 30, 2014 . The in crease in gain on loan sales was primarily due to higher fallout adjusted lock volume and improved gain on loan sale margins, driven by stronger market pricing. The net gain on loan sale margin increased 22 basis points to 1.05 percent during the three months ended September 30, 2015 , compared to 0.83 percent for the three months ended September 30, 2014 . For the three months ended September 30, 2015 , the fallout-adjusted mortgage rate lock commitments increased to $6.5 billion , compared to $6.3 billion in the three months ended September 30, 2014 , led by an increase in refinance activity driven by lower mortgage interest rates.

Net return on mortgage servicing asset in creased $11 million to $12 million for the three months ended September 30, 2015 , compared to $1 million during the three months ended September 30, 2014 . The in crease was primarily due to an increase in the mortgage servicing asset and a benefit from collections of contingencies held back by the purchaser relating to MSR sales in prior periods, partially offset by the net impact of market-driven changes in the position.

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Net gain on sale of assets de creased $4 million to $1 million during the three months ended September 30, 2015 , compared to income of $5 million for the three months ended September 30, 2014 . The de crease in gain on sale of assets was primarily due to the 2014 loan sales.

Representation and warranty provision improved $19 million to a benefit of $6 million for the three months ended September 30, 2015 , compared to a loss of $13 million during the three months ended September 30, 2014 . The change was primarily due to the provision in the three months ended September 30, 2014 resulting from an increase in the number of claims expected on government loans for which we had previously executed indemnification agreements. The remaining improvement is primarily due to lower net charge-offs driven by sustained reductions in the volume of repurchased loans.

Comparison to Prior Year to Date

Total noninterest income was $373 million during the nine months ended September 30, 2015 , which was a $110 million in crease from $263 million of noninterest income during the nine months ended September 30, 2014 . The in crease during the nine months ended September 30, 2015 , 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.

Net gain on loan sales in creased $90 million to $242 million during the nine months ended September 30, 2015 , compared to $152 million for the nine months ended September 30, 2014 . The increase in gain on loan sales was primarily due to higher fallout-adjusted lock volume and improved gain on loan sale margins, driven by stronger market pricing. For the nine months ended September 30, 2015 , the fallout-adjusted mortgage rate lock commitments increased to $20.5 billion , compared to $17.9 billion in the nine months ended September 30, 2014 , primarily due to higher refinance activity, higher origination volumes, and improved margins.

Net return on mortgage servicing asset de creased $3 million to $19 million for the nine months ended September 30, 2015 , compared to income of $22 million during the nine months ended September 30, 2014 . The de crease was primarily a result of increased prepayments resulting from lower interest rates, partially offset by an increase in the mortgage servicing asset and a benefit from collections of contingencies held back by the purchaser relating to MSR sales in prior periods.

Net (loss) gain on sale of assets de creased $12 million to a loss of $1 million during the nine months ended September 30, 2015 , compared to a gain of $11 million for the nine months ended September 30, 2014 . The de crease in net (loss) gain on sale of assets was primarily due to loan sales in the nine months ended September 30, 2014 and the write down of land assets to be sold during the nine months ended September 30, 2015 .

Representation and warranty provision improved $29 million to a benefit of $13 million for the nine months ended September 30, 2015 , compared to a loss of $16 million during the nine months ended September 30, 2014 . The change was primarily due to the provision in the nine months ended September 30, 2014 resulting from an increase in the number of claims expected on government loans for which we had previously executed indemnification agreements. The remaining improvement is primarily due to lower net charge-offs driven by sustained reductions in the volume of repurchased loans.

Other noninterest income in creased $6 million to $9 million during the nine months ended September 30, 2015 , compared to $3 million during the nine months ended September 30, 2014 . The improvement was primarily due to the first quarter 2014 adjustment of $21 million to the carrying value of loans that had been repurchased which were performing at the time of repurchase, partially offset by a change in the fair value related to loans carried under the fair value option and a net gain on investment securities available-for-sale during the nine months ended September 30, 2014 .

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The following table provides information on our net gain on loan sales reported in our consolidated financial statements and loans sold within the period.



	Three Months Ended
	September 30, 2015			June 30, 2015			March 31, 2015			December 31, 2014			September 30, 2014
	(Dollars in millions)
Net gain on loan sales	$	68		$	83		$	91		$	53		$	52
Mortgage rate lock commitments (gross)	$	8,025		$	8,400		$	9,035		$	7,605		$	7,713
Loans sold and securitized	$	7,318		$	7,571		$	6,254		$	6,831		$	7,072
Mortgage rate lock commitments (fallout-adjusted) (1)	$	6,495		$	6,804		$	7,185		$	6,156		$	6,304
Net margin on mortgage rate lock commitments (fallout-adjusted) (1)	1.05		%	1.21		%	1.27		%	0.87		%	0.83		%


(1)	Fallout-adjusted locks are mortgage rate lock commitments (gross) which are adjusted for estimated mortgage loans in the pipeline that are not expected to close.

Noninterest Expense

The following table sets forth the components of our noninterest expense.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Compensation and benefits	$	58		$	54		$	178		$	174
Commissions	10			10			31			26
Occupancy and equipment	20			20			60			60
Asset resolution	—			14			13			43
Federal insurance premiums	6			6			18			17
Loan processing expense	14			10			40			26
Legal and professional expense	10			15			27			40
Other noninterest expense	13			50			40			53
Total noninterest expense	$	131		$	179		$	407		$	439
Efficiency ratio	65.0		%	120.0		%	69.6		%	98.3		%

Comparison to Prior Year Quarter

Total noninterest expense was $131 million during the three months ended September 30, 2015 , which was a $48 million de crease from $179 million of noninterest expense during the three months ended September 30, 2014 . The de crease during the three months ended September 30, 2015 , was primarily due to decreases related to the 2014 CFPB settlement and asset resolution expense, partially offset by an increase in compensation and benefits and loan processing expense.

The $4 million in crease in compensation and benefits expense for the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 , was primarily due to a higher performance-related compensation, partially offset by a decrease in health benefits expense. Our full-time equivalent employees decreased from 2,725 at September 30, 2014 to 2,677 at September 30, 2015 .

Asset resolution expenses de creased $14 million during the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 , primarily due to the positive impact from carrying lower levels of default loans, including early buyout mortgage loans.

During the three months ended September 30, 2015 , loan processing expense in creased $4 million to $14 million , compared to $10 million for the three months ended September 30, 2014 , primarily due to higher loan originations.

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During the three months ended September 30, 2015 , legal and professional expenses de creased $5 million to $10 million , compared to $15 million for the three months ended September 30, 2014 , primarily due to a decrease in litigation expenses and consulting fees.

During the three months ended September 30, 2015 , other noninterest expense de creased $37 million to $13 million , compared to $50 million for the three months ended September 30, 2014 , primarily due to the $38 million CFPB settlement and penalties that occurred in 2014.

Comparison to Prior Year to Date

Total noninterest expense was $407 million during the nine months ended September 30, 2015 , which was a $32 million de crease from $439 million of noninterest expense during the nine months ended September 30, 2014 . The de crease during the nine months ended September 30, 2015 , was primarily due to a decrease in asset resolution expense and expenses related to the CFPB settlement, offset by increases in compensation and benefits, commissions, and loan processing expense.

Compensation and benefits was $178 million during the nine ended September 30, 2015 , which was a $4 million increase from the nine months ended September 30, 2014 , primarily due to an increase in performance-related compensation. Our full-time equivalent employees decreased from 2,725 at September 30, 2014 to 2,677 at September 30, 2015 .

Commission expense, is a variable cost associated with loan originations. Commissions increased $5 million to $31 million during the nine months ended September 30, 2015 , compared to $26 million in the nine months ended September 30, 2014 , primarily due to an increase in the volume of loan originations. Loan originations increased to $23.9 billion for the nine months ended September 30, 2015 from $18.4 billion in the nine months ended September 30, 2014 .

Asset resolution expenses decreased $30 million to $13 million during the nine months ended September 30, 2015 , compared to $43 million in the nine months ended September 30, 2014 , primarily due to the positive impact from carrying lower levels of default loans, including early buyout mortgage loans.

During the nine months ended September 30, 2015 , loan processing expense in creased $14 million to $40 million , compared to $26 million for the nine months ended September 30, 2014 , primarily due to an increase in the volume of loan originations.

During the nine months ended September 30, 2015 , legal and professional expenses de creased $13 million to $27 million , compared to $40 million for the nine months ended September 30, 2014 , primarily due to a de crease in legal fees resulting from fewer litigation expenses and a reduction in consulting fees.

During the nine months ended September 30, 2015 , other noninterest expense de creased $13 million to $40 million , compared to $53 million for the nine months ended September 30, 2014 , primarily due to a decrease of expenses related to the CFPB settlement, lower advertising costs and regulatory-related expense, partially offset by an increase associated with our outstanding warrants due to a higher stock price.

Provision for Income Taxes

Our provision for income taxes for the three and nine months ended September 30, 2015 was $24 million and $70 million , respectively, compared to a benefit of $10 million and a benefit of $38 million during the three and nine months ended September 30, 2014 , respectively. The Company’s effective tax rate for the three and nine months ended September 30, 2015 was an effective tax provision rate of 34.4 percent and 36.0 percent , respectively, compared to a benefit rate of (27.2) percent and a benefit rate of (32.3) percent for the three and nine months ended September 30, 2014 , respectively. The effective rate for the three and nine months ended September 30, 2015 differs from the combined federal and state statutory tax rate due to the recognition of research and development tax credits and tax exempt income.

See Note 14 of the Notes to the Consolidated Financial Statements.

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OPERATING SEGMENTS

Overview

For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 18 of the Notes to Consolidated Financial Statements, herein, for a full understanding of our consolidated financial performance.

The net income (loss) by operating segment is presented in the following table.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Mortgage Originations	$	56		$	15		$	200		$	69
Mortgage Servicing	(10		)	(55		)	(42		)	(79		)
Community Banking	14			1			29			(131		)
Other	(13		)	11			(62		)	61
Total net income (loss)	$	47		$	(28	)	$	125		$	(80	)

Mortgage Originations

Our Mortgage Originations segment originates, acquires and sells one-to-four family residential mortgage loans. We sell the residential mortgage loans we produce into the secondary market on a whole loan basis or by securitizing the loans into mortgage-backed securities with the agencies. During 2014 and continuing into 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 with enhance compliance and quality controls, thereby bringing service and convenience to loan officers, 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.

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. Underwriting may be performed by the correspondent (delegated) or may be performed by us (nondelegated). After the bank or mortgage company has funded the transaction, we purchase the loan at a market price. We do not acquire loans from correspondents on a bulk basis without prior review. Instead, we perform a review of each loan, purchasing only those that were originated in accordance with our underwriting guidelines. We have active correspondent relationships with approximately 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 approximately 517 banks, credit unions and mortgage brokerage companies located in all 50 states.

Home Lending. In a home lending transaction, loans are originated through a 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 September 30, 2015 , we maintained 14 loan origination centers (including four in Michigan and ten outside of Michigan). At the same time, our centralized loan processing provides efficiencies and allows lending sales staff to focus on originations.

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As of September 30, 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.



	Three Months Ended
	September 30, 2015		June 30, 2015		March 31, 2015		December 31, 2014		September 30, 2014
	(Dollars in millions)
Correspondent	$	5,584	$	5,818	$	5,026	$	4,787	$	5,333
Broker	1,930		2,170		1,829		1,484		1,498
Home Lending Centers	353		450		393		328		349
Total	$	7,867	$	8,438	$	7,248	$	6,599	$	7,180

Purchase originations	$	4,357	$	3,816	$	2,648	$	3,543	$	4,460
Refinance originations	3,510		4,622		4,600		3,056		2,720
Total	$	7,867	$	8,438	$	7,248	$	6,599	$	7,180

Conventional	$	4,452	$	5,152	$	4,616	$	4,108	$	4,392
Government	1,908		1,710		1,351		1,556		1,854
Jumbo	1,507		1,576		1,281		935		934
Total	$	7,867	$	8,438	$	7,248	$	6,599	$	7,180

The following table sets forth the net income of the Mortgage Originations segment.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Net interest income	$	19		$	16		$	54		$	42
Net gain on loan sales	72			52			255			155
Loan fees and charges	16			15			47			38
Other noninterest income	(3		)	(8		)	2			(6		)
Compensation and benefits	(18		)	(17		)	(53		)	(55		)
Commissions	(10		)	(10		)	(33		)	(26		)
Loan processing expense	(5		)	(4		)	(15		)	(11		)
Other noninterest expense	(15		)	(29		)	(57		)	(68		)
Net income	$	56		$	15		$	200		$	69
Average balances
Total loans held-for-sale	$	2,179		$	1,590		$	2,052		$	1,407
Total assets	2,337			1,747			2,194			1,559

Comparison to Prior Year Quarter

The Mortgage Originations segment net income increased $41 million to $56 million during the three months ended September 30, 2015 , compared to $15 million in the three months ended September 30, 2014 , primarily due to an increase in net gain on loan sales and a decrease in other noninterest expense .

Net interest income increased to $19 million for the three months ended September 30, 2015 , compared to $16 million for the three months ended September 30, 2014 , primarily due to higher average balances of loans held-for-sale driven by an increase in mortgage loan origination volume.

The increase in net gain on loan sales during the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 was primarily due to improved gain on sale margins and higher fallout-adjusted rate lock volume. Other noninterest income increased to a loss of $3 million for the three months ended September 30, 2015, compared to a loss of $8 million for the three months ended September 30, 2014. During the three months ended September 30, 2014, we

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had an increase in provision as a result of an increase in the number of claims expected on government loans for which we had previously executed indemnification agreements.

Other noninterest expense decreased during the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 , primarily due to the CFPB settlement and penalties that occurred in 2014 and lower consulting expenses.

Comparison to Prior Year to Date

The Mortgage Originations segment net income increased $131 million to $200 million during the nine months ended September 30, 2015 , compared to $69 million in the nine months ended September 30, 2014 . This increase was primarily due to an increase in net gain on loans sales as a result of higher fallout adjusted rate lock volume and higher lock margin.

Net interest income increased to $54 million for the nine months ended September 30, 2015 , compared to $42 million for the nine months ended September 30, 2014 , primarily due to higher average balances of loans held-for-sale driven by an increase in loan origination volume.

The increase in net gain on loan sales during the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 was primarily due to higher fallout-adjusted lock volume and improved gain on sales margins. Loan fees and charges increased to $47 million for the nine months ended September 30, 2015 , compared to $38 million for the nine months ended September 30, 2014 , primarily due to higher mortgage origination volume. Other noninterest income increased $8 million during the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily due to a 2014 adjustment to the carrying value of loans that had been repurchased which were performing at the time of repurchase.

Commission expense increased $7 million during the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 . Loan processing expense increased $4 million during the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 . Both commission expense and loan processing expense increased as a result of higher loan origination volume. Other noninterest expense decreased $11 million during the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily due to the benefit relating to the DOJ liability recorded during the nine months ended September 30, 2014 resulting from the exercise of a subjective contractual provision outside of our control which changed the estimated timing of payments.

Mortgage Servicing

The Mortgage Servicing segment services and sub-services mortgage loans on a fee basis for others. The Mortgage Servicing segment services residential mortgages held-for-investment by the Community Banking segment and mortgage servicing rights held by the Other segment.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Net interest income	$	4		$	6		$	11		$	17
Loan administration	12			9			33			31
Representation and warranty benefit (provision)	10			(2		)	16			(6		)
Other noninterest income	3			3			9			16
Compensation and benefits	(4		)	(3		)	(12		)	(10		)
Asset resolution	—			(13		)	(12		)	(41		)
Loan processing expense	(7		)	(4		)	(21		)	(11		)
Other noninterest expense	(28		)	(51		)	(66		)	(75		)
Net loss	$	(10	)	$	(55	)	$	(42	)	$	(79	)
Average balances
Total loans with government guarantees	$	547		$	1,215		$	679		$	1,241
Total assets	860			1,358			1,004			1,379

Comparison to Prior Year Quarter

The Mortgage Servicing segment reported a net loss of $10 million for the three months ended September 30, 2015 , compared to a net loss of $55 million for the three months ended September 30, 2014 , primarily due to decreases relating to the 2014 CFPB settlement expense and an improvement in representation and warranty benefit.

Loan administration income improved $3 million for the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 , primarily due to higher income from loans serviced for others. Representation and warranty provision improved $12 million for the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 . This was primarily due to an increase in the number of claims expected on government loans for which we had previously executed indemnification agreements during the three months ended September 30, 2014 . The remaining improvement is primarily due to lower net charge-offs driven by sustained reductions in the volume of repurchased loans.

Asset resolution expense decreased $13 million for the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 , primarily due to the positive impact from carrying lower levels of default loans, including early buyout mortgage loans. Loan processing expense increased $3 million for the three months ended September 30, 2015 to $7 million , compared to a net loss of $4 million during the three months ended September 30, 2014 , primarily attributable to higher expenses on loans subserviced for others. Other noninterest expense decreased to $28 million for the three months ended September 30, 2015 , compared to $51 million for the three months ended September 30, 2014 , primarily due to expenses relating to the CFPB settlement recorded in the prior year quarter.

Servicing of residential mortgage loans for third parties generates fee income and represents a significant business activity. We had a total average balance of serviced mortgage loans of $27.0 billion for the three months ended September 30, 2015 and $27.5 billion for the three months ended September 30, 2014 , which generated net income from servicing of $12 million and $1 million , respectively, which increased primarily due to higher income on loans serviced for others. We had a total average balance of subserviced mortgage loans of $42.5 billion for the three months ended September 30, 2015 and $43.8 billion for the three months ended September 30, 2014 , which generated net income on subservicing of $8 million and $6 million , respectively, which increased primarily from the default rate in loans subserviced for others.

Comparison to Prior Year to Date

The Mortgage Servicing segment reported a net loss of $42 million for the nine months ended September 30, 2015 , compared to a net loss of $79 million for the nine months ended September 30, 2014 , primarily due to a decrease in asset resolution, an increase in representation and warranty benefit and a decrease in the expenses related to the 2014 CFPB settlement, partially offset by an increase in loan processing expense.

Net interest income decreased to $11 million for the nine months ended September 30, 2015 , compared to $17 million for the nine months ended September 30, 2014 , primarily due to lower average balances of loans with government guarantees resulting from lower volumes of repurchases and higher volume of claims filed.

Representation and warranty provision improved $22 million for the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily due to the provision in the nine months ended September 30, 2014 resulting from an increase in the number of claims expected on government loans for which we had previously executed indemnification agreements. The remaining improvement was primarily due to lower net charge-offs driven by sustained reductions in the volume of repurchased loans. Other noninterest income decreased to $9 million for the nine months ended September 30, 2015 , compared to $16 million for the nine months ended September 30, 2014 , primarily due to a benefit from a contract renegotiation achieved in 2014.

Asset resolution expense decreased $29 million for the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily due to the positive impact from carrying lower levels of default loans, including early buyout mortgage loans, higher recoveries on modified loans with government guarantees and includes a benefit of an FHA indemnification release. Loan processing expense increased $10 million for the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily attributable to higher expenses on loans subserviced for others. Other noninterest expense decreased to $66 million for the nine months ended September 30, 2015 , compared to $75 million for the nine months ended September 30, 2014 , primarily due to the 2014 CFPB settlement and the benefit relating to the DOJ liability estimate recorded in 2014.

Servicing of residential mortgage loans for third parties generates fee income and represents a significant business activity. At September 30, 2015 and December 31, 2014 , we serviced portfolios of mortgage loans of $26.3 billion and $25.4

billion , respectively. We had a total average balance of serviced mortgage loans of $26.5 billion for the nine months ended September 30, 2015 and $26.8 billion for the nine months ended September 30, 2014 , which generated net income from servicing of $19 million and $22 million , respectively, which increased primarily due to income from loans serviced for others.

At September 30, 2015 and December 31, 2014 , we subserviced portfolios of mortgage loans of $42.3 billion and $46.7 billion , respectively. We had a total average balance of subserviced mortgage loans of $43.9 billion for the nine months ended September 30, 2015 and $42.6 billion for the nine months ended September 30, 2014 , which generated net income on subservicing of $19 million and $19 million , respectively.

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.



	September 30, 2015			December 31, 2014
	Amount		Number of accounts	Amount		Number of accounts
	(Dollars in millions)
Residential loan servicing
Serviced for own loan portfolio (1)	$	5,707	29,764	$	4,521	26,268
Serviced for others	26,306		118,702	25,427		117,881
Subserviced for others (2)	42,282		220,648	46,724		238,498
Total residential loans serviced (2)	$	74,295	369,114	$	76,672	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.

Community Banking

Our Community Banking segment consists primarily of four groups: Branch Banking, Commercial and Business Banking, Warehouse Lending and Mortgage Held-for-Investment Portfolio. The groups within the Community Banking segment originate consumer loans, commercial loans and warehouse loans; accept consumer, business, and governmental deposits; and offer investment and insurance services, liquidity management products, and capital markets services. The liquidity management products include customized treasury management solutions and international wire services. Capital market services that allow for risk mitigation are offered through interest rate derivative products. At September 30, 2015 , Branch Banking included 99 branches located throughout Michigan. Commercial and Business Banking includes relationship and portfolio managers throughout Michigan's major markets. Warehouse Lending offers lines of credit to other mortgage lenders nationally, allowing those lenders to fund the closing of residential first mortgage loans.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Net interest income	$	44		$	38		$	126		$	111
Benefit (provision) for loan losses	1			(8		)	18			(127		)
Deposit fees and charges	7			6			19			16
Other noninterest income (loss)	1			8			(13		)	(6		)
Compensation and benefits	(12		)	(13		)	(36		)	(43		)
Federal insurance premiums	(4		)	(4		)	(12		)	(12		)
Other noninterest expense	(23		)	(26		)	(73		)	(70		)
Net income (loss)	$	14		$	1		$	29		$	(131	)
Average balances
Total loans held-for-investment	$	5,348		$	4,088		$	4,786		$	3,956
Total assets	5,336			4,005			4,753			3,945
Total deposits	6,773			6,182			6,602			5,873

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Comparison to Prior Year Quarter

During the three months ended September 30, 2015 , the Community Banking segment reported net income of $14 million , compared to a net income of $1 million for the three months ended September 30, 2014 , primarily due to an improvement in the provision for loan losses and an increase in net interest income, partially offset by a decrease in other noninterest income.

Net interest income increased $6 million during the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 , primarily due to growth in average loans held-for-investment, partially offset by a decrease in the net interest margin.

The provision for loan losses improved to a benefit of $1 million during the three months ended September 30, 2015 , compared to a provision of $8 million for the three months ended September 30, 2014 , primarily driven by the two changes in estimates, which occurred in the first quarter 2014: 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. Also impacting this variance was a release of reserves previously associated with the transfer of interest-only residential first mortgage loans during the three months ended September 30, 2015 , partially offset by an increase related to the growth in average loans held-for-investment loan portfolio.

All other noninterest income accounts decreased $6 million during the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 , primarily due to loan origination costs related to an increase in mortgage originations resulting from an increase in loans held-for-investment as we continue to grow our balance sheet.

Comparison to Prior Year to Date

During the nine months ended September 30, 2015 , the Community Banking segment reported net income of $29 million , compared to a loss of $131 million for the nine months ended September 30, 2014 , primarily due to an improvement in provision for loan losses and an increase in net interest income.

Net interest income increased $15 million during the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily due to higher average loans held-for-investment balances.

The provision for loan losses improved to a benefit of $18 million during the nine months ended September 30, 2015 , compared to a provision of $127 million during the nine months ended September 30, 2014 . For the nine months ended September 30, 2015 , the benefit for loan losses included a net reduction in the allowance for loan losses relating to several loan sales and transfers, including a net reduction in the allowance relating to interest-only residential first mortgage loans, partially offset by an increase related to the growth in average loans held-for-investment loan portfolio. The provision for the nine months ended September 30, 2014 was primarily driven by two changes in estimates: the evaluation of current data related to the loss emergence period and the evaluation of the enhanced risk associated with payment resets relating to the interest-only loans.

Deposit fees and charges increased $3 million during the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, primarily due to higher debit card revenue. All other noninterest income accounts decreased $7 million during the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily due to fair value adjustments on loans held-for-investment, purchased commitments and loan costs related to an increase in loan originations.

Compensation and benefits was $36 million during the nine ended September 30, 2015 , which was a $7 million decrease from the nine months ended September 30, 2014 , primarily due to a decrease in our full-time equivalent employees.

Other

The Other segment includes treasury functions, income and expense impact of equity and cash, the effect of eliminations of transactions between segments, tax benefits not assigned to specific operating segments, the funding revenue associated with stockholders' equity, and miscellaneous other expenses of a corporate nature. The treasury functions include administering the investment portfolio, balance sheet funding, interest rate risk management and MSR asset valuation, certain derivatives and sales into the secondary market.

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Net interest income	$	6		$	4		$	20		$	15
Loan administration (expense) income	(3		)	(2		)	(11		)	(8		)
Net return on mortgage servicing asset	13			1			19			22
Other noninterest (loss) income	1			4			(2		)	11
Noninterest expense	(6		)	(6		)	(18		)	(17		)
Income before taxes	11			1			8			23
Provision (benefit) for income taxes	24			(10		)	70			(38		)
Net (loss) income	$	(13	)	$	11		$	(62	)	$	61
Average balances
Total investment securities	$	2,358		$	1,465		$	2,296		$	1,272
Total assets	3,772			3,143			3,712			2,913

Net interest income includes interest on the investment securities portfolios, debt, and the net impact of derivatives used to manage interest rate sensitivity. Noninterest income includes servicing fees from MSRs net of a loan administration fee to the Mortgage Servicing segment to service the loan and the impact of hedging (see Note 11 of the Notes to the Consolidated Financial Statements, herein, for additional information regarding MSRs), gains or losses on the sale of MSRs, trading asset gains or losses and other treasury related items. Noninterest income also includes insurance income and miscellaneous fee income not allocated to other operating segments. Noninterest expense includes treasury operating expenses, certain corporate administrative and other miscellaneous expenses not allocated to other operating segments. The provision for income taxes is not allocated to the operating segments.

Comparison to Prior Year Quarter

For the three months ended September 30, 2015 , the Other segment net income decreased by $23 million, compared to the three months ended September 30, 2014 . The decrease was primarily due to an increase provision for income taxes, partially offset by an increase in net return on mortgage servicing asset.

Net interest income increased by $2 million for the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 , primarily due to growth in investment securities portfolios, partially offset by higher Federal Home Loan Bank advances as we lengthened the duration of liabilities in 2015.

Net return on mortgage servicing asset increased $12 million for the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 , primarily due to reduced transaction costs, higher service fee income and the three months ended September 30, 2015 benefited from collections of contingencies held back by the purchaser relating to MSA sales in prior periods. These benefits were partially offset in the current quarter by the net impact of market-driven changes in the position.

Provision for income taxes increased $34 million for the three months ended September 30, 2015 , compared to the three months ended September 30, 2014 , primarily due to primarily due to higher taxable income.

We had MSR bulk sales of $6.7 billion of loans serviced for others during the three months ended September 30, 2015 . We incurred $3 million of net transaction costs on the sale of our MSRs during the three months ended September 30, 2015 , which is included in net return on mortgage servicing asset on the Consolidated Statements of Operations.

Comparison to Prior Year to Date

For the nine months ended September 30, 2015 , the Other segment net income decreased by $123 million, compared to the nine months ended September 30, 2014 , primarily due to an increase in the provision for income taxes and a decrease in other noninterest income.

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Net interest income increased by $5 million for the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily due to a higher average investment securities portfolios, partially offset by a higher average balance in Federal Home Loan Bank advances as we lengthened the duration of liabilities in 2015.

Loan administration income decreased by $3 million during the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily due to charges attributable to higher prepayments in the mortgage servicing portfolio. Net return on mortgage servicing asset decreased $3 million during the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , resulting from higher prepayment speeds related to elevated mortgage refinance volumes and a net hedge loss related to an increase in market implied volatility. Other noninterest income decreased $13 million for the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily due to the change in estimate of the fair value loans.

Provision for income taxes increased $108 million for the nine months ended September 30, 2015 , compared to the nine months ended September 30, 2014 , primarily due to higher taxable income.

We had MSR bulk sales of $13.9 billion of loans serviced for others during the nine months ended September 30, 2015 . We incurred a loss of $5 million of net transaction costs on the sale of our MSRs during the nine months ended September 30, 2015 , which is included in net return on mortgage servicing asset on the Consolidated Statements of Operations.

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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 our Annual Report on Form 10-K for the year ended December 31, 2014 . Some of the more significant processes used to manage and control credit, liquidity, market, operational, and capital risks are described in the following paragraphs.

Credit Risk

Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities, and enter into financial derivative contracts, all of which have related credit risk. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending.

Loans held-for-investment

Loans held-for-investment increased from $4.4 billion at December 31, 2014 , to $5.5 billion at September 30, 2015 , primarily due to increases in warehouse, residential first mortgage and HELOC loans. Warehouse loans increased $242 million , primarily led by higher line utilization and new accounts. Further, this was due to an increase in residential first mortgage loans as we retained certain residential first mortgage loan production on the balance sheet and to an increase in HELOC loans primarily due to purchases of HELOC loans during 2015.

Loans held-for-investment include $132 million and $211 million of loans accounted for under the fair value option at September 30, 2015 and December 31, 2014 , respectively.

For information relating to the concentration of credit of our loans held-for-investment, see Note 5 of the Notes to the Consolidated Financial Statements, herein.

Residential first mortgage loans. We offer various types of fixed and adjustable rate loans for non-conforming loan amounts for the purpose of purchasing or refinancing owner occupied and second home properties. Our underwriting guidelines were designed with the intent to minimize layered risk, and meet the Ability to Repay. 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. We generally originate loans that meet accepted secondary market underwriting standards. We also originate adjustable rate mortgage ("ARM"), fixed rate mortgage, and high cost area mortgage loans held-for-investment using Fannie Mae and Freddie Mac guidelines. The debt-to-income ratio and documentation requirements were determined by the automated underwriting system.

At September 30, 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 59.5 percent of such loans outstanding.

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The following table identifies our held-for-investment residential mortgages by major category, at September 30, 2015 and December 31, 2014 .



	Unpaid Principal Balance (1)		Average Note Rate		Average Original FICO Score	Average Current FICO Score (2)	Weighted Average Maturity (months)	Average Original LTV Ratio		Housing Price Index LTV, as recalculated (3)
September 30, 2015	(Dollars in millions)
Residential first mortgage loans
Amortizing	$	2,608	3.55	%	751	749	303	68.0	%	63.6	%
Interest-only (4)	97		3.49	%	743	732	291	66.4	%	64.2	%
Other (5)	1		8.59	%	610	669	258	77.8	%	80.0	%
Total residential first mortgage loans	$	2,706	3.55	%	750	748	302	67.9	%	63.6	%

December 31, 2014
Residential first mortgage loans
Amortizing	$	1,540	3.79	%	714	715	292	75.7	%	70.6	%
Interest-only (4)	628		3.63	%	727	738	263	74.0	%	80.1	%
Other (5)	34		3.19	%	714	715	282	69.9	%	87.4	%
Total residential first mortgage loans	$	2,202	3.73	%	718	721	283	75.2	%	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 nine months ended September 30, 2015 .


(3)	The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of June 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.

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The following table identifies our residential first mortgage loans held-for-investment by major category, at September 30, 2015 .



September 30, 2015	Unpaid Principal Balance (1)		Average Note Rate		Average Original FICO Score	Average Current FICO Score (2)	Weighted Average Maturity (months)	Average Original LTV Ratio		Housing Price Index LTV, as recalculated (3)
	(Dollars in millions)
Residential first mortgage loans
Amortizing
3/1 ARM	$	65	3.55	%	704	703	228	75.6	%	58.3	%
5/1 ARM	833		3.11	%	755	755	320	64.5	%	58.7	%
7/1 ARM	733		3.35	%	767	768	353	66.2	%	63.4	%
Other ARM	34		3.47	%	708	710	245	73.6	%	58.6	%
Fixed mortgage loans	943		4.09	%	739	733	256	71.8	%	68.6	%
Total amortizing	2,608		3.55	%	751	749	303	68.0	%	63.6	%
Interest-only
3/1 ARM	11		3.32	%	715	692	243	73.5	%	76.3	%
5/1 ARM	35		3.24	%	730	703	253	73.6	%	78.2	%
7/1 ARM	1		2.70	%	686	759	255	56.0	%	56.9	%
Other ARM	42		3.17	%	769	773	343	57.6	%	46.1	%
Other interest-only	8		6.49	%	717	709	272	71.6	%	79.0	%
Total interest-only (4)	97		3.49	%	743	732	291	66.4	%	64.2	%
Other (5)	1		8.59	%	610	669	258	77.8	%	80.0	%
Total residential first mortgage loans	$	2,706	3.55	%	750	748	302	67.9	%	63.6	%


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.


(2)	Current FICO scores obtained at various times during the nine months ended September 30, 2015 .


(3)	The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of June 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.

Set forth below as of September 30, 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 noted 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.



	1 ^st Quarter		2 ^nd Quarter		3 ^rd Quarter		4 ^th Quarter
	(Dollars in millions)
2015 (1)	N/A		N/A		N/A		$	134
2016	$	143	$	151	$	154	146
2017	147		155		156		148
Later years (2)	345		591		882		703


(1)	Reflect loans that have reset through September 30, 2015 .


(2)	Later years reflect one reset period per loan.

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Second mortgage loans. The majority of second mortgages we currently originate were closed in conjunction with the closing of the residential first mortgages originated by us. We generally required the same levels of documentation and ratios as with our residential first mortgages. 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. Current HELOC guidelines and pricing parameters 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, interest-only home equity line of credit loans generally with a 10-year, interest-only draw period followed by a 20-year amortizing period.

We also offer HELOC loans for a term period of five to 15 years to repay. The minimum FICO is 680, maximum CLTV up to 89 percent, and the maximum debt-to-income ratio is 43 percent.

Set forth below is a table describing the characteristics of the interest-only mortgage loans in our held-for-investment portfolio at September 30, 2015 , by year of origination.



Year of Origination	2005 and Prior			2006			2007			2008 to 2012			Post 2013			Total / Weighted Average
	(Dollars in millions)
Unpaid principal balance (1)	$	36		$	5		$	17		$	1		$	38		$	97
Average current note rate	3.40		%	3.42		%	4.48		%	3.00		%	3.15		%	3.49		%
Average original FICO score	728			701			726			688			770			743
Average current FICO score (2)	698			698			718			642			776			732
Average original LTV ratio	74.6		%	64.3		%	71.9		%	64.9		%	56.9		%	66.4		%
Housing Price Index LTV, as recalculated (3)	77.3		%	64.2		%	82.1		%	62.4		%	44.5		%	64.2		%
Underwritten with low or stated income documentation	39.0		%	49.0		%	67.0		%	—		%	—		%	28.0		%


(1)	Unpaid principal balance (net of write downs) does not include premiums or discounts.


(2)	Current FICO scores obtained at various times during the nine months ended September 30, 2015 .


(3)	The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data a s of June 30, 2015 .

We sold or transferred approximately $600 million of interest-only mortgage loans from our held-for-investment portfolio during the nine months ended September 30, 2015 as part of a concerted effort to de-risk our balance sheet and reduce the costs associated with nonperforming and higher risk assets.

Set forth below is a table describing the amortization date and payment shock of interest-only mortgage loans at the dates indicated in our held-for-investment mortgage portfolio at September 30, 2015 .



	2015			2016			2017			2018			Thereafter			Total / Weighted Average
Unpaid principal balance (millions) (1)	$	35		$	4		$	18		$	—		$	40		$	97
Weighted average rate	3.39		%	3.90		%	4.28		%	7.00		%	3.15		%	1.22		%
Average original monthly payment per loan (dollars)	$	1,375		$	1,423		$	2,554		$	2,426		$	298		$	612
Average current monthly payment per loan, primarily interest-only (dollars)	$	749		$	959		$	1,778		$	2,426		$	163		$	358
Average amortizing payment per loan, principal plus interest (dollars)	$	1,517		$	1,643		$	2,892		$	2,086		$	369		$	710
Loan count	133			15			39			1			608			796
Payment shock (dollars) (2)	$	819		$	807		$	1,218		$	—		$	199		$	573
Payment shock (percent)	109.0		%	84.0		%	69.0		%	—		%	122.0		%	160.0		%


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.


(2)	Represents difference between current payment and new payment.

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Commercial loans held-for-investment. During the nine months ended September 30, 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 $2.2 billion at September 30, 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 loans held-for-investment portfolio by loan type and selected criteria at September 30, 2015 and December 31, 2014 .



Commercial Loans Held-for-Investment
	September 30, 2015					December 31, 2014
	Balance			Average Note Rate		Balance			Average Note Rate
	(Dollars in millions)
Commercial real estate loans:
Fixed rate	$	55		5.0	%	$	81		5.1	%
Adjustable rate	655			2.8	%	542			2.9	%
Total commercial real estate loans	710					623
Net deferred fees and other	(3		)			(3		)
Total commercial real estate loans, net	$	707				$	620
Commercial and industrial loans:
Fixed rate	$	30		3.9	%	$	28		4.3	%
Adjustable rate	467			3.8	%	408			3.4	%
Total commercial and industrial loans	497					436
Net deferred fees and other	(4		)			(7		)
Total commercial and industrial loans, net	$	493				$	429
Warehouse loans:
Adjustable rate	$	1,038		3.3	%	$	789		3.8	%
Net deferred fees and other	(27		)			(20		)
Total warehouse loans, net	$	1,011				$	769
Total commercial loans:
Fixed rate	$	85		4.6	%	$	109		4.8	%
Adjustable rate	2,160			3.3	%	1,739			3.3	%
Total commercial loans	2,245					1,848
Net deferred fees and other	(34		)			(30		)
Total commercial loans, net	$	2,211				$	1,818

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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.

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 September 30, 2015 .



	State
Collateral Type	Michigan			California			Other			Total (1)
	(Dollars in millions)
Office	$	156		$	8		$	—		$	164
Retail	93			9			30			132
Apartments	88			—			8			96
Industrial	66			10			6			82
Shopping center	35			—			—			35
Senior living facility	31			—			—			31
Other	158			1			11			170
Total	$	627		$	28		$	55		$	710
Percent	88.3		%	3.9		%	7.8		%	100.0		%


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.

Commercial and industrial loans. Commercial and industrial held-for-investment loan facilities typically include lines of credit and term loans to small or middle market businesses for use in normal business operations to finance working capital needs, equipment purchases, and expansion projects.

Warehouse lending. We also 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 the residential first mortgage loans being funded. Underlying mortgage loans are predominately originated using agencies' underwriting standards. We believe we are increasing market share in warehouse, as our operating model has fundamentally changed. Where once we were the primary purchaser of loans funded by our warehouse lending, now, loans purchased by other investors represent the majority of our fundings. These lines of credit are, in most cases, personally guaranteed by one or more principal officers of the borrower. The aggregate committed amount of adjustable rate warehouse lines of credit granted to other mortgage lenders at September 30, 2015 was $2.1 billion , of which $1.0 billion was outstanding, compared to $1.6 billion committed at December 31, 2014 , of which $0.8 billion was outstanding.

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 stabilized or even begun to show 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.

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The following table sets forth certain information about our nonperforming assets as of the end of each of the last five quarters.

NONPERFORMING LOANS AND ASSETS



	September 30, 2015			June 30, 2015			March 31, 2015			December 31, 2014			September 30, 2014
	(Dollars in millions)
Nonperforming loans held-for-investment	$	37		$	41		$	55		$	74		$	72
Nonperforming TDRs	6			11			18			29			18
Nonperforming TDRs at inception but performing for less than six months	20			13			10			17			17
Total nonperforming loans held-for-investment (1)	63			65			83			120			107
Real estate and other nonperforming assets, net	17			18			17			19			27
Nonperforming assets held-for-investment, net	$	80		$	83		$	100		$	139		$	134
Ratio of nonperforming assets to total assets	0.64		%	0.69		%	0.87		%	1.41		%	1.39		%
Ratio of nonperforming loans held-for-investment to loans held-for-investment	1.15		%	1.22		%	1.81		%	2.71		%	2.56		%
Ratio of allowance for loan losses to loans held-for-investment (2)	3.66		%	4.31		%	5.69		%	7.01		%	7.60		%
Ratio of net charge-offs to average loans held-for-investment (annualized) (2)	1.84		%	1.49		%	3.97		%	0.91		%	1.36		%
Ratio of nonperforming assets to loans held-for-investment and repossessed assets	1.45		%	1.55		%	2.15		%	3.12		%	3.18		%


(1)	Does not include nonperforming loans held-for-sale of $14 million , $14 million , $19 million , $15 million and $15 million at September 30, 2015 , June 30, 2015 , December 31, 2014 and September 30, 2014 , respectively.


(2)	Excludes loans carried under the fair value option.

Past due loans held-for-investment

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. 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 September 30, 2015 , we had $84 million of loans held-for-investment that were determined to be past due loans. Of those past due loans, $63 million of loans were nonperforming held-for-investment. At December 31, 2014 , we had $164 million of loans held-for-investment that were determined to be past due loans. Of those past due loans, $120 million of loans were nonperforming. The decrease from December 31, 2014 to September 30, 2015 was primarily due to the sale of nonperforming residential first mortgage loans.

Consumer loans. As of September 30, 2015 , nonperforming consumer loans decreased from December 31, 2014 , primarily due to the sale of nonperforming residential first mortgage loans. Net charge-offs in consumer loans totaled $21 million and $81 million for the three and nine months ended September 30, 2015 , respectively, compared to $13 million and $34 million for the three and nine months ended September 30, 2014 , respectively. The increase was primarily due to charge-offs related to the sale of nonperforming residential first mortgage loans.

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The following table sets forth information regarding past due loans at the dates listed.



Days Past Due	September 30, 2015		December 31, 2014
	(Dollars in millions)
30 – 59 days
Consumer loans
Residential first mortgage	$	8	$	29
Second mortgage	1		1
HELOC	4		4
Total 30-59 days past due	13		34
60 – 89 days
Consumer loans
Residential first mortgage	5		8
Second mortgage	—		1
HELOC	3		1
Total 60-89 days past due	8		10
90 days or greater
Consumer loans
Residential first mortgage	51		115
Second mortgage	1		2
HELOC	7		3
Other	1		—
Commercial loans
Commercial and industrial	3		—
Total 90 days or greater past due (1) (2)	63		120
Total past due loans	$	84	$	164


(1)	Includes loans carried under the fair value option of $9 million and $5 million at September 30, 2015 and December 31, 2014 , respectively.


(2)	Includes performing nonaccrual loans that are less than 90 days delinquent and for which interest can not be accrued.

The $79 million decrease in total past due loans at September 30, 2015 , compared to December 31, 2014 was primarily driven by the sale of $411 million unpaid principal balance of lower performing loans during the nine months ended September 30, 2015 . The 30 to 59 days past due loans decreased to $13 million at September 30, 2015 , compared to $34 million at December 31, 2014 , primarily driven by improved asset quality, the sale of nonperforming loans and growth in higher quality residential mortgage loans.

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The following table sets forth information regarding nonperforming loans (i.e., greater than 90 days past due loans) as to which we have ceased accruing interest.



	September 30, 2015
	Loans Held-for-Investment			Nonaccrual Loans		As a % of Loan Specified Portfolio		As a % of Nonaccrual Loans
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,726		$	51	1.9	%	80.9	%
Second mortgage	140			1		0.7	%	1.6	%
HELOC	405			7		1.7	%	11.1	%
Other consumer	32			1		3.1	%	1.6	%
Total consumer loans	3,303			60		1.8	%	95.2	%
Commercial loans
Commercial real estate	707			—		—	%	—	%
Commercial and industrial	493			3		0.6	%	4.8	%
Warehouse lending	1,011			—		—	%	—	%
Total commercial loans	2,211			3		0.1	%	4.8	%
Total loans (1)	$	5,514		$	63	1.1	%	100.0	%
Less allowance for loan losses	(197		)
Total loans held-for-investment, net	$	5,317


(1)	Includes $9 million of nonaccrual loans carried under the fair value option at September 30, 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 September 30, 2015 , compared to December 31, 2014 was primarily due to TDR loan sales. Nonperforming TDRs were 41.6 percent and 37.9 percent of total nonperforming loans at September 30, 2015 and December 31, 2014 , respectively.

Nonperforming TDRs are included in nonaccrual loans and 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 39.7 percent of residential first mortgage nonperforming loans at September 30, 2015 , compared to 37.5 percent at December 31, 2014 . The level of modifications that was determined to be TDRs in these portfolios is expected to result in elevated nonperforming loan levels for longer periods because nonperforming TDRs remain in nonperforming status until a borrower has made at least six consecutive months of payments under the modified terms or ultimate resolution occurs. TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers having difficulty making their payments.



	TDRs Held-for-Investment
	Performing		Nonperforming		Total
	(Dollars in millions)
September 30, 2015
Consumer loans (1)	$	97	$	26	$	123
Commercial loans (2)	—		—		—
Total TDRs	$	97	$	26	$	123
December 31, 2014
Consumer loans (1)	$	361	$	46	$	407
Commercial loans (2)	1		—		1
Total TDRs	$	362	$	46	$	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 $16 million and $81 million at September 30, 2015 and December 31, 2014 , respectively.


(2)	Commercial loans include: commercial real estate, commercial and industrial and warehouse loans.

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The $285 million decrease in TDRs loans at September 30, 2015 , compared to December 31, 2014 was primarily due to the sale of TDR loans during the nine months ended September 30, 2015 .

The following table sets forth the activity during each of the periods presented with respect to performing TDRs and nonperforming TDRs.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Performing	(Dollars in millions)
Beginning balance	$	108		$	372		$	362		$	383
Additions	16			10			67			28
Transfer to nonperforming TDR	(7		)	(5		)	(12		)	(20		)
Transfer from nonperforming TDR	1			1			1			5
Principal repayments	(1		)	(2		)	(3		)	(5		)
Reductions (1)	(20		)	(10		)	(318		)	(25		)
Ending balance	$	97		$	366		$	97		$	366
Nonperforming
Beginning balance	$	24		$	34		$	46		$	47
Additions	3			4			13			11
Transfer from performing TDR	7			5			12			20
Transfer to performing TDR	(1		)	(1		)	(1		)	(5		)
Reductions (1)	(7		)	(7		)	(44		)	(38		)
Ending balance	$	26		$	35		$	26		$	35


(1)	Includes loans paid in full or otherwise settled, sold or charged-off.

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable losses that are inherent in our loans held-for-investment portfolio but which have not yet been realized. The consumer loan portfolio includes residential first mortgages, second mortgages, HELOC, and other consumer loans. The commercial loan portfolio includes commercial real estate, commercial and industrial and warehouse lending. See Note 5 to the Consolidated Financial Statements for additional information.

The allowance for loan losses decreased to $197 million at September 30, 2015 from $297 million at December 31, 2014 . The decrease from December 31, 2014 was primarily attributable to the reduction of reserves relating to the residential first mortgage loans which were sold or transferred, partially offset by growth in the average loan held-for-investment loan portfolio.

The allowance for loan losses as a percentage of loans held-for-investment decreased to 3.66 percent as of September 30, 2015 from 7.01 percent as of December 31, 2014 , primarily as a result of the sale or transfer of interest-only residential first mortgage loans, nonperforming loans and troubled debt restructured first mortgage loans and the continued growth of higher quality assets, such as our warehouse loans where credit risks are low. At September 30, 2015 , we had a 5.2 percent allowance coverage of our consumer loan portfolio, consistent with the decrease in consumer past due loans and fewer lower quality assets. The commercial loan allowance for loan losses coverage ratio was 1.4 percent at September 30, 2015 , reflecting the strong credit quality of this portfolio and growth in warehouse loans during the nine month ended September 30, 2015 .

The allowance for loan losses is considered adequate based upon management's assessment of relevant factors, including the types and amounts of nonperforming loans, historical and current loss experience, and the current economic environment.

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The following tables set forth certain information regarding the allocation of our allowance for loan losses to each loan category.



	September 30, 2015
	Loans Held-for-Investment		Percent of Portfolio		Allowance Amount		Percentage to Total Allowance
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,719	50.5	%	$	129	65.5	%
Second mortgage	95		1.8	%	13		6.6	%
HELOC	325		6.0	%	23		11.7	%
Other	32		0.6	%	1		0.5	%
Total consumer loans	3,171		58.9	%	166		84.3	%
Commercial loans
Commercial real estate	707		13.1	%	13		6.6	%
Commercial and industrial	493		9.2	%	14		7.1	%
Warehouse lending	1,011		18.8	%	4		2.0	%
Total commercial loans	2,211		41.1	%	31		15.7	%
Total consumer and commercial loans (1)	$	5,382	100.0	%	$	197	100.0	%

(1) Excludes loans carried under the fair value option.

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ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Beginning balance	$	222		$	306		$	297		$	207
Provision for loan losses	(1		)	8			(18		)	127
Charge-offs
Consumer loans
Residential first mortgage (1)	(21		)	(12		)	(80		)	(29		)
Second mortgage	(1		)	(1		)	(2		)	(3		)
HELOC	(1		)	(1		)	(2		)	(5		)
Other consumer	(1		)	(1		)	(3		)	(2		)
Total consumer loans	(24		)	(15		)	(87		)	(39		)
Commercial loans
Commercial real estate	—			—			—			(2		)
Commercial and industrial	(3		)	—			(3		)	—
Total commercial loans	(3		)	—			(3		)	(2		)
Total charge offs	(27		)	(15		)	(90		)	(41		)
Recoveries
Consumer loans
Residential first mortgage	1			1			3			3
Second mortgage	1			—			1			—
Other consumer	1			1			2			2
Total consumer loans	3			2			6			5
Commercial loans
Commercial real estate	—			—			2			3
Total recoveries	3			2			8			8
Charge-offs, net of recoveries	(24		)	(13		)	(82		)	(33		)
Ending balance	$	197		$	301		$	197		$	301
Net charge-off ratio (1)	1.84		%	1.36		%	2.34		%	1.17		%
Net charge-off ratio, adjusted (1) (2)	0.61		%	0.70		%	0.43		%	0.87		%


(1)	Excludes loans carried under the fair value option.


(2)	Excludes charge-offs of $16 million and $6 million related to the sale or transfer of loans during the three months ended September 30, 2015 and September 30, 2014 , respectively, and $67 million and $8 million related to the sale or transfer of loans during the nine months ended September 30, 2015 and September 30, 2014 , respectively.

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.

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" off the market

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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.

Our principal uses of funds include loan originations and operating expenses. At September 30, 2015 , we had outstanding interest-rate lock commitments to lend $4.3 billion in mortgage loans, 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 $6.3 billion at September 30, 2015 and $3.5 billion at December 31, 2014 .

Our cash flows relate primarily to cash outflows to originate loans held-for-investment and held-for-sale, cash inflows when those loans held-for-sale are sold, cash flows related to our servicing business, interest income, interest expense, and operating expenses.

Our Consolidated Statements of Cash Flows shows cash used in operating activities of $7.1 billion and $6.0 billion for the nine months ended September 30, 2015 and 2014 , respectively. This primarily reflects the 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 excess liquid assets and unused collateralized borrowing capacity at sufficient levels to cover 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.

Deposits

Our deposits consist of three primary categories: retail deposits, government deposits, and company controlled deposits. Total deposits increased $1.1 billion, or 15.1 percent at September 30, 2015 , compared to December 31, 2014 .

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 nine months ended September 30, 2015 our core deposits increased $286 million, due primarily to our promotional campaign to increase our retail savings accounts.

We call on local governmental agencies and other public units as an additional funding source. These deposit accounts include $372 million of certificates of deposit with maturities typically less than one year and $835 million in checking and savings accounts at September 30, 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. These deposits do not bear interest, but these 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 nine months ended September 30, 2015 these deposits increased $493 million.

We participate in the Certificates of Deposit Account Registry Service ("CDARS") program, through which certain customer certificates of deposit ("CDs") 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 September 30, 2015 , we had $314 million of total CDs enrolled in the CDARS program.

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The composition of our deposits was as follows:



	September 30, 2015						December 31, 2014
	(Dollars in millions)
	Balance		Yield/Rate		% of Deposits		Balance		Yield/Rate		% of Deposits
Retail deposits
Branch retail deposits
Demand deposit accounts	$	746	0.07	%	9.2	%	$	726	0.08	%	10.3	%
Savings accounts	3,671		0.84	%	45.1	%	3,428		0.72	%	48.5	%
Money market demand accounts	176		0.15	%	2.2	%	209		0.15	%	3.0	%
Certificates of deposit/CDARS (1)	799		0.82	%	9.8	%	807		0.65	%	11.4	%
Total branch retail deposits	5,392		0.71	%	66.3	%	5,170		0.60	%	73.1	%
Commercial retail deposits
Demand deposit accounts	$	149	0.38	%	1.8	%	$	133	0.01	%	1.9	%
Savings accounts	32		0.56	%	0.4	%	27		0.35	%	0.4	%
Money market demand accounts	75		0.76	%	0.9	%	43		0.60	%	0.6	%
Certificates of deposit/CDARS (1)	14		1.03	%	0.2	%	5		0.29	%	0.1	%
Total commercial retail deposits	270		0.54	%	3.3	%	208		0.18	%	3.0	%
Total retail deposits subtotal	$	5,662	0.73	%	69.6	%	$	5,378	0.59	%	76.1	%
Government deposits
Demand deposit accounts	$	367	0.39	%	4.5	%	$	246	0.38	%	3.5	%
Savings accounts	468		0.52	%	5.8	%	317		0.52	%	4.5	%
Certificates of deposit/CDARS (1)	372		0.54	%	4.6	%	355		0.43	%	5.0	%
Total government deposits (2)	1,207		0.49	%	14.8	%	918		0.45	%	13.0	%
Company controlled deposits (3)	1,267		—	%	15.6	%	773		—	%	10.9	%
Total deposits (4)	$	8,136	0.58	%	100.0	%	$	7,069	0.50	%	100.0	%


(1)	The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $0.8 billion at both September 30, 2015 and December 31, 2014 , respectively.


(2)	Government deposits include funds from municipalities and schools.


(3)	These accounts represent a portion of the investor custodial accounts and escrows controlled by us in connection with loans serviced, or subserviced for others and that have been placed on deposit with the Bank.


(4)	The aggregate amount of deposits with a balance over $250,000 was approximately $3.3 billion and $2.6 billion at September 30, 2015 and December 31, 2014 , respectively.

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 September 30, 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 September 30, 2015 , we had $2.0 billion of advances outstanding and an additional $1.6 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 September 30, 2015 , we had pledged commercial and industrial loans amounting to $72 million with a lendable value of $40 million . At December 31, 2014 , we had pledged commercial and industrial loans amounting to $53 million with a lendable value of $31 million . At September 30, 2015 and December 31, 2014 , we had no borrowings outstanding against this line of credit.

Federal Home Loan Bank advances. Federal Home Loan Bank advances increased $1.5 billion at September 30, 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 medium-term financing. The outstanding balance of Federal Home Loan Bank advances fluctuates from time to time depending on our

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current inventory of mortgage loans held-for-sale and the availability of lower cost funding sources such as repurchase agreements. During the nine months ended September 30, 2015 , we entered into longer-term fixed rate advances to provide more stable funding for interest-earning asset growth and extend the duration of our borrowings to be commensurate with the growth in longer-duration assets, such as residential first mortgage loans.

See Note 9 of the Notes to the Consolidated Financial Statements, for additional information of Federal Home Loan Bank advances.

Long-term debt. As part of our overall capital strategy, we previously raised capital through the issuance of trust-preferred securities by our special purpose financing entities formed for the offerings. The outstanding trust preferred securities mature 30 years from issuance, are callable by us after 20 quarters, 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 20 quarters 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, with respect to trust preferred securities. These payments will be periodically evaluated and reinstated when appropriate, subject to provisions of the Consent Order and Supervisory Agreement. At September 30, 2015 , we have deferred for 15 consecutive quarters for a total amount of $26 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 has been dissolved during the second quarter 2015. At September 30, 2015 , the fair value of the long-term debt associated with the remaining HELOC securitization trust was $32 million . The final legal maturity of the long-term debt associated with the VIE is June 2019. However, this debt agreement has a contractual provision that allows for a clean-up call of the debt when less than 10 percent of the original loan balances of that securitization trust remain outstanding. As of September 30, 2015 , FSTAR 2006-2 (LIBOR plus 16.00 percent ) is expected to be below the threshold near the end of 2015. The debt pays interest based on a spread over the 30-day LIBOR interest rate. We initiated the clean-up call process with respect to the 2006-2 HELOC securitization trust, which we expect to complete in the fourth quarter 2015.

For information relating to long-term debt, see Note 10 of the Notes to the Consolidated Financial Statements.

Market Risk

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 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 8 and 17 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

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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 September 30, 2015 and December 31, 2014 and adjusted by instantaneous parallel rate changes plus or minus 200 basis points.



September 30, 2015
Scenario	Net interest Income		$ Change			% Change
	(Dollars in millions)
200	$	294	$	16		6.0	%
Constant	279		—			—	%
(200)	225		(53		)	(19.0	)%
December 31, 2014
Scenario	Net interest Income		$ Change			% Change
	(Dollars in millions)
200	$	297	$	42		17.0	%
Constant	255		—			—	%
(200)	207		(48		)	(19.0	)%

We have also projected the potential impact to net interest income in a hypothetical "bear flattener" interest rate scenario as of September 30, 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 $19 million and $39 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 over 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.

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 September 30, 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.

This analysis is based on our interest rate exposure at September 30, 2015 and December 31, 2014 , and does not contemplate any actions that we might undertake in response to changes in market interest rates, which could impact EVE. Further, as this framework evaluates risks to the current statement of financial condition only, changes to the volumes and pricing of new business opportunities that can be expected in the different interest rate outcomes are not incorporated in this analytical framework. For instance, analysis of our history suggests that declining interest rate levels are associated with higher loan production volumes at higher levels of profitability. While this "natural business hedge" historically offset most, if not all,

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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.



September 30, 2015										December 31, 2014
Scenario	EVE		EVE%		$ Change			% Change		Scenario	EVE		EVE%		$ Change			% Change
	(Dollars in millions)										(Dollars in millions)
300	$	1,812	15.7	%	$	(262	)	(12.6	)%	300	$	1,462	16.6	%	$	(217	)	(12.9	)%
200	1,918		16.2	%	(156		)	(7.5	)%	200	1,537		17.0	%	(143		)	(8.5	)%
100	2,015		16.5	%	(59		)	(2.9	)%	100	1,618		17.4	%	(62		)	(3.7	)%
Current	2,074		16.6	%	—			—	%	Current	1,680		17.7	%	—			—	%
(100)	2,038		16.0	%	(36		)	(1.7	)%	(100)	1,703		17.6	%	24			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.

Mortgage servicing rights

At September 30, 2015 , MSRs at fair value increased $36 million to $294 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.

Changes in the carrying value of residential first mortgage MSRs, accounted for at fair value, were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in millions)
Balance at beginning of period	$	317		$	289		$	258		$	285
Additions from loans sold with servicing retained	74			79			220			199
Reductions from sales	(73		)	(68		)	(144		)	(161		)
Changes in fair value due to
Payoffs	(9		)	(10		)	(34		)	(22		)
Valuation inputs or assumptions	(15		)	(5		)	(6		)	(16		)
Fair value of MSRs at end of period	$	294		$	285		$	294		$	285

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.

Our ratio of MSRs to Tier 1 capital was 21.1 percent and 21.8 percent at September 30, 2015 and December 31, 2014 , respectively.

The principal balance of the loans underlying our total MSRs was $26.3 billion at September 30, 2015 , compared to $25.4 billion at December 31, 2014 .

For information relating to the mortgage servicing rights, see Note 7 of the Notes to the Consolidated Financial Statements, herein.

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Investment securities available-for-sale

Investment securities available-for-sale, decreased from $1.7 billion at December 31, 2014 to $1.2 billion at September 30, 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 purchase of $783 million of agency securities, including mortgage-backed securities and collateralized mortgage obligations.

Investment securities held-to-maturity

Investment securities held-to-maturity increased to $1.1 billion at September 30, 2015 as a result of the transfer of $1.1 billion of available-for-sale securities to held-to-maturity securities during the third quarter of 2015 reflecting the Company’s intent and ability to hold those securities to maturity. We did not hold investment securities held-to-maturity at December 31, 2014 . See Note 2 of the Notes to the Consolidated Financial Statements, herein.

Operational Risk

Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls; violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk. We evaluate internal systems, processes, and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses. The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational and fraud losses, and enhance our overall performance.

Loans with government guarantees

The amount of loans with government guarantees totaled $509 million at September 30, 2015 . This includes the $11 million of loans which we have not yet repurchased but had the unilateral right to repurchase. 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 other liability. The balance of this portfolio decreased at September 30, 2015 , primarily due to $373 million of repossessed assets and claims that were reclassified from loans with government guarantees to other assets as a result of the adoption of ASU Update No. 2014-14, Receivables - Troubled Debt Restructuring by Creditors (Subtopic 310-40) and lower volumes of repurchases, as well as higher volume of claims filed.

Substantially all of these loans continue to be insured or guaranteed by the Federal Housing Administration ("FHA") and management believes that the reimbursement process is proceeding appropriately. These repurchased loans earn interest at a statutory rate, which varies for each loan, but is based on the 10-year U.S. Treasury note rate at the time the loan becomes greater than 60 days delinquent. This interest is recorded as interest income and the related claims settlement expenses are recorded in asset resolution expense on the Consolidated Statements of Operations. When a government guaranteed loan becomes nonperforming and is outside the reasonable period, the interest is no longer recognized.

For further information on loans with government guarantees, see Note 4 of the Notes to the Consolidated Financial Statements, herein.

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Representation and warranty reserve

We sell most of the residential first mortgage loans that we originate into the secondary mortgage market. When we sell mortgage loans, we make customary representations and warranties to the purchasers, including sponsored securitization trusts and their insurers (primarily Fannie Mae and Freddie Mac).

REPRESENTATION AND WARRANTY RESERVE



		Three Months Ended September 30,						Nine Months Ended September 30,
		2015			2014			2015			2014
		(Dollars in millions)
Balance, beginning of period		$	48		$	50		$	53		$	54
Provision
	Charge to gain on sale for current loan sales	2			2			6			5
	Provision (benefit) representation and warranty reserve - change in estimate	(6		)	13			(13		)	16
	Total	(4		)	15			(7		)	21
Charge-offs, net		1			(8		)	(1		)	(18		)
Balance, end of period		$	45		$	57		$	45		$	57

The decrease in the provision adjustment charged to representation and warranty reserve expense during the nine months ended September 30, 2015 , was primarily due to lower than expected 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.

The following table summarizes the amount of annual Fannie Mae and Freddie Mac audit file review requests by number of accounts. Such requests precede the repurchase demands that Fannie Mae and Freddie Mac may make thereafter.



	Three Months Ended
	September 30, 2015	June 30, 2015	March 31, 2015	December 31, 2014	September 30, 2014
Fannie Mae	788	912	1,185	988	766
Freddie Mac	402	442	449	487	588
Total	1,190	1,354	1,634	1,475	1,354

During the nine months ended September 30, 2015 , we had $75 million in Fannie Mae new repurchase demands and $23 million in Freddie Mac new repurchase demands. The following table summarizes the amount of quarterly new repurchase demands we have received by loan origination year.



	Three Months Ended
	September 30, 2015		June 30, 2015		March 31, 2015		December 31, 2014		September 30, 2014
	(Dollars in millions)
2008 and prior (1)	$	—	$	2	$	5	$	19	$	2
2009-2015	13		33		45		28		37
Total	$	13	$	35	$	50	$	47	$	39
Number of accounts	56		150		237		265		177


(1)	Includes a significant portion of the repurchase requests and obligations associated with loans within the settlement agreements with Fannie Mae and Freddie Mac.

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The following table summarizes the aggregate amount of pending repurchase demands at the end of each quarterly period noted.



	Three Months Ended
	September 30, 2015			June 30, 2015			March 31, 2015			December 31, 2014			September 30, 2014
	(Dollars in millions)
Period end balance	$	30		$	46		$	58		$	43		$	31
Percent non-agency (approximately)	0.1		%	0.3		%	0.3		%	1.6		%	2.4		%

The following table summarizes the trends with respect to key model attributes and assumptions for estimating the representation and warranty reserve.



	September 30, 2015			December 31, 2014
	(Dollars in millions)
UPB of loans sold (1)	$	158,490		$	143,605
Loans expected to be repurchased (percent of loans sold) (2)	0.2		%	0.4		%
Loss severity rate (3)	21.1		%	8.7		%


(1)	Includes unpaid principal balance of 2009 and later vintage loans sold to Fannie Mae and Freddie Mac through September 30, 2015 .


(2)	Loans expected to be funded post appeal loss.


(3)	Average loss severity rate expected to be experienced on actual repurchases made (post appeal loss).

See Note 11 of the Notes to the Consolidated Financial Statements.

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.

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.

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 for a capital distribution at least 30 days prior to the declaration of a dividend or the approval by our board of directors of the proposed capital distribution. The 30-day period allows the OCC to determine whether the distribution would not be advisable. Because we are under the Consent Order, we currently must seek approval from the OCC prior to making a capital distribution from the Bank. In addition, under the Supervisory Agreement, the Company agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital distributions.

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Under the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "Series C Preferred Stock") the Company may defer payments of dividends. Beginning with the February 2012 payment, the Company has exercised its contractual right to defer regularly scheduled quarterly payments of dividends on Series C Preferred Stock, and is therefore currently in arrears with the dividend payments. As of September 30, 2015 , the amount of the arrearage on the dividend payments of the Series C Preferred Stock was $79 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.

Regulatory Developments

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.

Regulatory Capital Composition – Transition

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, compared to the Basel I Rules, are recognized in 20 percent annual 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 September 30, 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 (NOL) 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. If additional Tier 1 Capital elements are not available to absorb the remaining NOL deductions, these deductions are then applied to common equity elements.

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 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.

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At September 30, 2015 , we were considered "well-capitalized" for regulatory purposes. The following tables show the regulatory capital ratios as of the dates indicated.



Bancorp	September 30, 2015				December 31, 2014
	Amount		Ratio		Amount		Ratio
	(Dollars in millions)
Tier 1 leverage (to adjusted tangible assets)	$	1,393	11.65	%	$	1,184	12.59	%
Total adjusted tangible asset base (1)	11,957				9,403
Tier 1 capital (to risk-weighted assets)	$	1,393	20.32	%	$	1,184	22.81	%
Common equity Tier 1 (to RWA) (2)	1,024		14.93	%	N/A		N/A
Total risk-based capital (to risk-weighted assets)	1,483		21.64	%	1,252		24.12	%
Risk-weighted asset base (1)	$	6,857			$	5,190

N/A - Not applicable


(1)	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.


(2)	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.



Bank	September 30, 2015				December 31, 2014
	Amount		Ratio		Amount		Ratio
	(Dollars in millions)
Tier 1 leverage (to adjusted tangible assets)	$	1,426	11.91	%	$	1,167	12.43	%
Total adjusted tangible asset base (1)	11,975				9,392
Tier 1 capital (to risk-weighted assets)	$	1,426	20.75	%	$	1,167	22.54	%
Common equity Tier 1 (to RWA) (2)	1,426		20.75	%	N/A		N/A
Total risk-based capital (to risk-weighted assets)	1,516		22.05	%	1,235		23.85	%
Risk-weighted asset base (1)	$	6,874			$	5,179

N/A - Not applicable


(1)	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.


(2)	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 September 30, 2015 , compared to December 31, 2014 , primarily resulted from the deployment of capital for balance sheet growth, partially offset by earnings retention.

Certain regulatory capital ratios for the Bank and the Company as of September 30, 2015 are shown in the following table.



September 30, 2015	Regulatory Minimums		Regulatory Minimums to be Well-Capitalized		Bank		Company

Basel III Ratios (transitional)
Common equity Tier I capital ratio	4.50	%	6.50	%	20.75	%	14.93	%
Tier I leverage ratio	4.00	%	5.00	%	11.91	%	11.65	%

Basel III Ratios (fully phased-in) (1)
Common equity Tier I capital ratio	4.50	%	6.50	%	17.95	%	9.61	%
Tier I leverage ratio	4.00	%	5.00	%	10.62	%	9.87	%


(1)	See "Use of Non-GAAP Financial Measures."

Looking at the impact of a fully phased in implementation of Basel III, our Tier 1 leverage ratio would have been 9.87 percent and our Tier 1 common ratio would have been 9.61 percent at September 30, 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 September 30, 2015 , we had $294 million of mortgage servicing rights, representing 21.1 percent of Tier

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1 capital. The value of the mortgage servicing rights asset increased at September 30, 2015 from December 31, 2014 , primarily due to higher interest rates and slower prepayment speeds, increasing the mortgage servicing rights to Tier 1 ratio. 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.

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.



	September 30, 2015			December 31, 2014			September 30, 2014
Nonperforming assets / Tier 1 capital + allowance for loan losses	(Dollars in millions)
Nonperforming assets	$	80		$	139		$	134
Tier 1 capital (to adjusted total assets)	1,426			1,184			1,146
Allowance for loan losses	197			297			301
Tier 1 capital + allowance for loan losses	$	1,623		$	1,481		$	1,447
Nonperforming assets / Tier 1 capital + allowance for loan losses	4.9		%	9.4		%	9.3		%

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.

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September 30, 2015	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)
Flagstar Bancorp	(Dollars in millions)
Regulatory capital – Basel III (transitional) to Basel III (fully phased-in) (1)
Basel III (transitional)	$	1,024		$	1,393		$	1,393		$	1,483
Increased deductions related to deferred tax assets, mortgage servicing assets, and other capital components	(373		)	(237		)	(237		)	(236		)
Basel III (fully phased-in) capital (1)	$	651		$	1,156		$	1,156		$	1,247
Risk-weighted assets – Basel III (transitional) to Basel III (fully phased-in) (1)
Basel III assets (transitional)	$	6,857		$	11,957		$	6,857		$	6,857
Net change in assets	(94		)	(237		)	(94		)	(94		)
Basel III (fully phased-in) assets (1)	$	6,763		$	11,720		$	6,763		$	6,763
Capital ratios
Basel III (transitional)	14.93		%	11.65		%	20.32		%	21.64		%
Basel III (fully phased-in) (1)	9.61		%	9.87		%	17.11		%	18.44		%


(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.



September 30, 2015	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)
Flagstar Bank	(Dollars in millions)
Regulatory capital – Basel III (transitional) to Basel III (fully phased-in) (1)
Basel III (transitional)	$	1,426		$	1,426		$	1,426		$	1,516
Increased deductions related to deferred tax assets, mortgage servicing assets, and other capital components	(173		)	(173		)	(173		)	(173		)
Basel III (fully phased-in) capital (1)	$	1,253		$	1,253		$	1,253		$	1,343
Risk-weighted assets – Basel III (transitional) to Basel III (fully phased-in) (1)
Basel III assets (transitional)	$	6,874		$	11,975		$	6,874		$	6,874
Net change in assets	107			(173		)	107			107
Basel III (fully phased-in) assets (1)	$	6,981		$	11,802		$	6,981		$	6,981
Capital ratios
Basel III (transitional)	20.75		%	11.91		%	20.75		%	22.05		%
Basel III (fully phased-in) (1)	17.95		%	10.62		%	17.95		%	19.23		%


(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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

A discussion regarding our management of market risk is included in "Market Risk" in this report in "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures. As of September 30, 2015 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), an evaluation was performed by the Bank’s management, including our principal executive and financial officers regarding the design and effectiveness of our disclosure controls and procedures. Based upon that evaluation, the principal executive and financial officers have concluded that our current disclosure controls and procedures were effective as of September 30, 2015 .


(b)	Changes in Internal Controls. There have been no changes in the Bank’s internal control over financial reporting (as defined in Rule 13a-15(d) of the Exchange Act) during the three months ended September 30, 2015 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

From time to time, the Company is party to legal proceedings incident to its business. See Note 16 of the Notes to Consolidated Financial Statements, in Item 1 Financial Statements, which is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 .

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sale of Unregistered Securities

The Company made no sales of unregistered securities during the quarter ended September 30, 2015 .

Issuer Purchases of Equity Securities

The Company made no purchases of its equity securities during the quarter ended September 30, 2015 .

Item 3. Defaults upon Senior Securities

The Company had no defaults on senior securities.

The following sets forth arrearage of the payment of dividends on preferred stock.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits



Exhibit No.		Description

10.1		Form of Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan

10.2		Form of Award Agreement for the Flagstar Bancorp, Inc. Executive Long-Term Incentive Program

10.3		Second Amendment to Employment Agreement, effective October 22, 2015, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith

10.4		Amendment to Employment Agreement effective October 22, 2015, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Alessandro DiNello

11		Statement regarding computation of per share earnings incorporated by reference to Note 13 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements.

31.1		Section 302 Certification of Chief Executive Officer

31.2		Section 302 Certification of Chief Financial Officer

32.1		Section 906 Certification, as furnished by the Chief Executive Officer

32.2		Section 906 Certification, as furnished by the Chief Financial Officer

101		Financial statements from Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 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.

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SIGNATURES

Pursuant to the requirements 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.




		FLAGSTAR BANCORP, INC.
		Registrant

Date:	November 6, 2015	/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)

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EXHIBIT INDEX



Exhibit No.		Description

10.1		Form of Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan

10.2		Form of Award Agreement for the Flagstar Bancorp, Inc. Executive Long-Term Incentive Program

10.3		Second Amendment to Employment Agreement, effective October 22, 2015, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith

10.4		Amendment to Employment Agreement effective October 22, 2015, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Alessandro DiNello

11		Statement regarding computation of per share earnings incorporated by reference to Note 13 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements.

31.1		Section 302 Certification of Chief Executive Officer

31.2		Section 302 Certification of Chief Financial Officer

32.1		Section 906 Certification, as furnished by the Chief Executive Officer

32.2		Section 906 Certification, as furnished by the Chief Financial Officer

101		Financial statements from Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 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.

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EXHIBIT 10.1

FLAGSTAR BANCORP, INC.

2016 Stock Award and Incentive Plan


1.	Purpose of the Plan .

The purpose of the Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (the "Plan") is to aid Flagstar Bancorp, Inc., a Michigan corporation (the "Company"), in attracting, retaining, motivating and rewarding employees, non-employee directors and other persons who provide substantial services to the Company or its Affiliates, to provide for equitable and competitive compensation opportunities for such persons, to incentivize outstanding Company and individual performance with appropriate limitations on risk, and to promote the creation of long-term value for shareholders by closely aligning the interests of Participants with the interests of shareholders. The Plan authorizes both Stock-based and cash-based Awards.


2.	Definitions .

In addition to the terms defined in Section 1 above and elsewhere in the Plan, the following capitalized terms used in the Plan have the respective meanings set forth in this Section 2:


(a)	"2006 Plan" has the meaning set forth in Section 4(a).


(b)	"409A Compliance Rules" has the meaning set forth in Section 8(c).

(c)

"Affiliate" means (i) any entity that is directly, or indirectly through one or more intermediaries, controlled by the Company, and (ii) any entity, including a joint venture, limited liability company or limited liability partnership, in which the Company or an entity controlled by the Company has a substantial direct or indirect equity investment, if such entity is designated an "Affiliate" for purposes of the Plan by the Committee. An entity shall be deemed an "Affiliate" for purposes of this definition only for such periods as the requisite ownership or control relationship is maintained.


(d)	"Annual Incentive Award" means a Performance Award granted under Section 7(c).


(e)	"Annual Limit" has the meaning set forth in Section 5(b).


(f)	"Award" means any Option, SAR, Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another award, Dividend Equivalent, Other Stock-Based Award, or Performance Award, together with any related right or interest, granted to a Participant under the Plan.


(g)	"Award Agreement" has the meaning set forth in Section 6(a).


(h)	"Board" means the Company’s Board of Directors.

(i)

"Cause" has the meaning specified in any employment, consulting or other agreement in effect between the Participant and the Company or an Affiliate. If there is no employment, consulting or other agreement in effect between the Participant and the Company or an Affiliate, then "Cause" shall have the meaning specified by the Committee in the applicable Award Agreement or, if not so specified, as follows: (i) engaging in willful or gross misconduct or willful or gross neglect of duties, (ii) repeatedly and willfully failing to adhere to the directions of superiors or the Board or the written policies and practices of the Company or an Affiliate, (iii) the commission of or plea of nolo contendere to a felony, a crime of moral turpitude, or any crime involving the Company or an Affiliate that causes damage to the property or business of the Company or an Affiliate, (iv) fraud, misappropriation, dishonesty, or embezzlement in each case which causes damage to the property or business of the Company or an Affiliate, (v) a material breach of the Participant’s employment agreement (if any) with the Company or an Affiliate (other than a termination of employment by the Participant), (vi) loss of any license or registration that is necessary for the Participant to perform his or her duties for the Company or an Affiliate, or (vii) any unlawful act which causes damage to the property or

business of the Company or an Affiliate, all as determined in the sole discretion of the Committee. Before the Committee determines that "Cause" has occurred under clause (i), (ii), (v), or (vii) above, the Committee will provide to the Participant in writing, in reasonable detail, the reasons for the determination that such "Cause" exists, and afford the Participant a reasonable opportunity to remedy any such breach, action or inaction, if such breach action or inaction, is capable of being remedied. In addition, a Participant’s termination of employment or service will be deemed to have terminated for Cause if, within twelve (12) months after the Participant’s termination of employment or service has terminated, facts and circumstances are discovered that would have justified a termination for Cause. For purposes of this Plan, no act or failure to act on the Participant’s part will be considered "willful" unless it is done, or omitted to be done, by him or her in bad faith or without reasonable belief that his or her action or omission was in the best interests of the Company or an Affiliate. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company or an Affiliate will be conclusively presumed to be done, or omitted to be done, in good faith and in the best interests of the Company or an Affiliate.


(j)	"Change in Control" means the occurrence of any one of the following events, unless otherwise specified by the Committee in an Award Agreement:

(i)

Any "person," as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, or any person (including affiliates) that beneficially owns thirty-five (35%) or more of the combined voting power of the outstanding voting securities of the Company as of the Effective Date), acquires voting securities of the Company and immediately thereafter is the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the outstanding voting securities of the Company or, if the Company is not the principal surviving parent entity of the Company and its Affiliates, such principal surviving parent entity;

(ii)

Individuals who on the Grant Date of an Award constitute the Board of Directors, and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the Grant Date of the Award or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute at least a majority thereof;

(iii)

There is consummated a merger, consolidation, recapitalization, or reorganization of the Company, or a reverse stock split of any class of voting securities of the Company, if, immediately following consummation of any of the foregoing, the voting securities of the Company outstanding immediately prior to such event do not represent (either by remaining outstanding or by being converted into voting securities of a principal surviving parent entity) fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company or such surviving parent entity; or

(iv)

The shareholders of the Company have approved a plan of complete liquidation of the Company and there occurs any distribution pursuant to such plan of complete liquidation, and all material contingencies to the completion of the transaction have been satisfied or waived, or there is consummated an agreement for the sale or disposition by the Company of fifty percent (50%) or more in value of the Company’s assets (or any transaction have a similar effect).


(k)	"Code" means the Internal Revenue Code of 1986, as amended. References to any provision of the Code or regulation (including a proposed regulation) thereunder shall include any successor provision or regulation.

(l)

"Committee" means the Compensation Committee of the Board. The qualification requirements applicable to members of the Committee and the processes of the Committee are governed by the Committee’s Charter, as adopted and from time to time amended by the Board or the Committee. No action of the Committee shall be void or deemed to be without authority due to the failure of any member, at the time the action was taken, to meet any qualification standard set forth in the Committee’s Charter or otherwise applicable. The full Board may perform any function of the Committee hereunder, in which case the term "Committee" shall refer to the Board.


(m)	"Covered Employee" means an Eligible Person who is a Covered Employee as specified in Section 11(j).


(n)	"Deferred Stock" means a right, granted to a Participant under Section 6(e), to receive Stock or other non-cash Awards or a combination thereof at the end of a specified deferral period. Deferred Stock may be denominated as "stock units," "restricted stock units," "phantom shares," "performance shares" or other appellations.

(o)

"Disability" has the meaning specified in any employment, consulting or other agreement in effect between the Participant and the Company or an Affiliate. If there is no employment, consulting or other agreement in effect between the Participant and the Company or an Affiliate, then "Disability" shall have the meaning specified by the Committee in the applicable Award Agreement or, if not so specified, as follows: that such Participant is (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months or (ii) is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits of not less than three (3) months under an accident and health plan of the Company covering the Participant.


(p)	"Dividend Equivalent" means a right, granted to a Participant under Section 6(g), to receive cash, Stock, other Awards, or other property equal in value to all or a specified portion of the dividends paid with respect to a specified number of shares of Stock.


(q)	"Effective Date" has the meaning set forth in Section 11(p).


(r)	"Eligible Person" has the meaning set forth in Section 5(a).


(s)	"Exchange Act" means the Securities Exchange Act of 1934, as amended. References to any provision of the Exchange Act or rule (including a proposed rule) thereunder shall include any successor provision or rule.


(t)	"Fair Market Value" means the fair market value of Stock, Awards or other property as determined by the Committee or under the following procedure or a substitute procedure as may be approved from time to time by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of a share of Stock as of any given date means as follows:

(i)

If the Stock then is traded in a trading market that reports sale prices, the closing sale price of a share of Stock reported on the principal trading market for Stock (or, if shares of Stock are then principally traded on a national securities exchange, in the reported "composite transactions" for such exchange) for such date or, if no shares of Stock were traded on that date, on the next preceding day on which there was such a trade;


(ii)	If the Stock then is traded in the over-the-counter market for which sale prices are not reported, the average of the closing bid and asked prices for Stock on that date or, if the market is not open on that date, on the next preceding day on which the market was open and a sale of Stock on such market took place; or


(iii)	If neither (i) nor (ii) applies, such value as the Committee in its discretion may determine. Notwithstanding the foregoing, in the event that (i) or (ii) would apply but the Stock has not been traded for ten (10) or more trading days, the Committee may, in its discretion, determine the value of Stock under this clause (iii).

(u)

"Good Reason" has the meaning specified in any employment, consulting or other agreement in effect between the Participant and the Company or an Affiliate. If there is no employment, consulting or other agreement in effect between the Participant and the Company or an Affiliate, then "Good Reason" shall have the meaning specified by the Committee in the applicable Award Agreement or, if not so specified, the occurrence of any of the following events without the written consent of the Participant: (1) the Participant is assigned duties adverse to the Participant and materially inconsistent with the Participant’s titles, positions, status, reporting relationships, authority, duties or responsibilities or any other action by the Company which results in a material diminution in the Participant’s titles, positions, status, reporting relationships, authority, duties or responsibilities from those existing immediately before the Change in Control, other than insubstantial or inadvertent actions not taken in bad faith which are remedied by the Company promptly after receipt of notice thereof given by the Participant; (2) the Company materially reduces the Participant’s salary and annual incentive award opportunity from the levels prevailing immediately before the Change in Control; (3) the Participant’s assigned office or principal work location is relocated by more than thirty (30) miles from its location immediately before the Change in Control or (4) the Company materially breaches the Participant’s

employment, consulting or other agreement in effect between the Participant and the Company or an Affiliate; provided, however , that the Participant may only separate from service for "Good Reason" if the Participant has given written notice to the Company that an event or events giving rise to Good Reason have occurred within sixty (60) calendar days after the Participant first has gained knowledge of such occurrence, and the Company has not remedied or otherwise cured the event or events giving rise to Good Reason within thirty (30) calendar days after receiving such notice, and the Participant then gives notice of termination for Good Reason not later than one hundred twenty (120) calendar days after the Participant first has gained knowledge of such occurrence specifying a termination date within sixty (60) calendar days after the giving of such notice.


(v)	"Grant Date" means, with respect to any Award, the date of the grant or award specified by the Committee or the Board in a resolution or other writing, duly adopted, and as set forth in the Award Agreement, provided that such Grant Date will not be earlier than the date of the Committee (or Board) action.


(w)	"Incentive Stock Option" or "ISO" means any Option designated as an "incentive stock option" within the meaning of Code Section 422 or any successor provision thereto and qualifying thereunder.


(x)	"Option" means a right, granted to a Participant under Section 6(b), to purchase Stock or other Awards at a specified price during specified time periods.


(y)	"Other Stock-Based Awards" means Awards granted to a Participant under Section 6(h).


(z)	"Participant" means a person who has been granted an Award that remains outstanding, including at times at which such person no longer is an Eligible Person.


(aa)	"Performance Award" means a conditional right, granted to a Participant under Sections 6(i) and 7, to receive cash, Stock or other Awards or payments, as determined by the Committee, based upon performance criteria specified by the Committee.


(ab)	"Plan" has the meaning set forth in Section 1.


(ac)	"Qualified Member" means a member of the Committee who is a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) and an "outside director" within the meaning of Treasury Regulation § 1.162-27(e)(3) under Code Section 162(m).


(ad)	"Restricted Stock" means Stock granted to a Participant under Section 6(d) that is subject to certain restrictions and to a risk of forfeiture.


(ae)	"Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, and any successor rule.


(af)	"Stock" means the Company’s Common Stock, par value $.01 per share, and any other equity securities of the Company that may be substituted for Stock pursuant to Section 11(c).


(ag)	"Stock Appreciation Right" or "SAR" means a right granted to a Participant under Section 6(c).


3.	Administration .

(a)

Authority of the Committee . The Plan shall be administered by the Committee, which shall have full and final authority, in each case subject to and consistent with the provisions of the Plan, to select Eligible Persons to become Participants; to grant Awards; to determine the type and number of Awards, the dates on which Awards may be granted or exercised and on which the risk of forfeiture or deferral period relating to Awards shall lapse or terminate, the acceleration of any such dates, the expiration date of any Award, whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Stock (including Stock deliverable in connection with the Award), other Awards, or other property, and other terms and conditions of, and all other matters relating to, Awards (including authority to specify terms of Awards applicable upon a Change in Control or similar event); to prescribe documents evidencing or setting terms of Awards (such Award Agreements need not be identical for each Participant), amendments thereto, and rules and regulations for the administration of the Plan and amendments thereto; to construe and interpret the Plan and Award Agreements and correct defects, supply omissions or reconcile inconsistencies therein; and to make all other decisions and determinations as the Committee may deem

necessary or advisable for the administration of the Plan. Notwith-standing the foregoing, the Board shall approve any policy relating to the type, timing, amount and vesting conditions of Awards granted to non-employee directors and/or any individual Awards to non-employee directors, although the Committee will retain its full authority to administer the Plan with regard to such outstanding Awards. Decisions of the Committee with respect to the administration and interpretation of the Plan shall be final, conclusive, and binding upon all persons including Participants, beneficiaries, transferees under Section 11(b) and other persons claiming rights from or through a Participant, and shareholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. In no event will the Board or Committee be permitted to (A) reduce the exercise price of any outstanding Option or SAR, (B) exchange or replace an outstanding Option or SAR with a new Option or SAR with a lower exercise price, (C) cancel an Option or SAR in exchange for cash or other Awards, or (D) increase the number or percentage of shares of Stock authorized for Awards under the Plan, without approval of the Company’s stockholders, except as provided in Section 11(c).


(b)	Manner of Exercise of Committee Authority .

(i)

Delegation . To the fullest extent authorized under applicable provisions of the Michigan Business Corporation Act, the Committee may delegate to officers or managers of the Company or an Affiliate, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions, including administrative functions, as the Committee may determine, to the extent that such delegation (A) will not result in the loss of an exemption under Rule 16b-3(d) or (e) for Awards granted to Participants subject to Section 16 of the Exchange Act in respect of the Company, (B) will not cause Awards intended to be "qualified performance-based compensation" under Code Section 162(m) to fail to so qualify, (C) will not result in a related-person transaction with an executive officer required to be disclosed under Item 404(a) of Regulation S-K (in accordance with Instruction 5.a.ii thereunder) under the Exchange Act, and (D) is permitted under applicable provisions of the Michigan Business Corporation Act and other applicable laws and regulations.


(ii)	Committee Policies . The Committee will apply its policies relating to compensation, including its policies with respect to preserving tax deductibility under Code Section 162(m), according to such processes as the Committee may from time to time approve.

(c)

Limitation of Liability . The Committee and each member thereof, and any person acting pursuant to authority delegated by the Committee, shall be entitled, in good faith, to rely or act upon any report or other information furnished to him or her by any officer or other employee of the Company or an Affiliate, the Company’s independent certified public accountants or any executive compensation consultant, legal counsel or other professional retained by the Company or the Committee to assist in the administration of the Plan. Members of the Committee, any person acting pursuant to authority delegated by the Committee, and any officer or employee of the Company or an Affiliate acting at the direction or on behalf of the Committee or a delegatee shall not be personally liable for any action, determination or interpretation taken or made in good faith with respect to the Plan, and any such person shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination or interpretation. Without limiting the generality of the foregoing, neither the Company, nor any Affiliate, nor the Committee or any of its members, nor any person acting on behalf of the Company or any Affiliate or the Committee, will be liable to any Participant or to the estate or beneficiary of any Participant or to any other holder of an Award by reason of any acceleration of income, or any additional tax (including any interest and penalties), in either case, asserted by reason of the failure of an Award to satisfy the requirements of Code Section 422 or Code Section 409A or by reason of Code Section 4999, or with respect to any delay in the delivery of shares of Stock in connection with an Award or changes in the fair market value of shares of Stock during any such delay.


4.	Stock Subject to Plan and Related Limitations .

(a)

Overall Number of Shares of Stock Available for Delivery . Subject to adjustment as provided in Section 11(c), the total number of shares of Stock reserved and available for delivery in connection with Awards under the Plan shall be [______] shares of Stock, plus any shares of Stock subject to outstanding equity awards under the Company’s 2006 Equity Incentive Plan (the "2006 Plan") that become available for issuance under Section 4(b). Up to the total number of shares of Stock available for Awards may be issued upon exercise of ISOs, but nothing herein will be construed as requiring that any, or any fixed number of, ISOs be granted under the Plan. Any shares of Stock delivered under the Plan shall consist of authorized and unissued shares or treasury shares.

(b)

Share Counting Rules . The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute Awards) and make adjustments in accordance with this Section 4(b). Shares of Stock shall be counted against those reserved to the extent such shares of Stock have been delivered and are no longer subject to a substantial risk of forfeiture. Accordingly, (i) to the extent that an Award under the Plan or an award under the 2006 Plan, in whole or in part, is canceled, expired, forfeited, settled in cash, or otherwise terminated without delivery of shares of Stock to the Participant, the shares of Stock retained by or returned to the Company will not be deemed to have been delivered under the Plan or the 2006 Plan and will be deemed to remain or to become available under this Plan; (ii) upon exercise of an Option or SAR (or portion thereof) for shares of Stock, the number of shares of Stock deemed to be delivered under the Plan shall be the full number of shares of Stock underlying the Option or SAR (or portion thereof) then exercised, regardless of any net delivery of shares of Stock or withholding of shares of Stock for taxes; and (iii) shares of Stock that are withheld from an Award or award under the 2006 Plan other than an Option, an option under the 2006 Plan, or a SAR in payment of taxes shall not be deemed to have been delivered and therefore will be available for future grants of Awards under the Plan. The Committee may determine that Awards may be outstanding that relate to more shares of Stock than the aggregate number that remain available under the Plan and not subject to outstanding Awards so long as Awards will not in fact result in delivery and vesting of shares of Stock in excess of the number then available under the Plan. In addition, in the case of any Award granted in assumption of or substitution for an award of a company or business acquired by the Company or an Affiliate, shares of Stock delivered or deliverable in connection with such assumed or substituted Award shall not be counted against the number of shares of Stock reserved under the Plan (such assumed or substituted Awards may be administered under the Plan, however). This Section 4(b) shall apply to the share limit relating to ISOs only to the extent consistent with applicable regulations relating to ISOs under the Code.


5.	Eligibility and Certain Award Limitations .

(a)

Eligibility. Awards may be granted under the Plan only to Eligible Persons. For purposes of the Plan, an "Eligible Person" means an employee of the Company or an Affiliate, an executive officer or non-employee director of the Company, or a consultant or other person who provides substantial services to the Company or an Affiliate. An employee on leave of absence may be considered as still in the employ of the Company or an Affiliate for purposes of eligibility for participation in the Plan. Holders of awards granted by a company or business acquired by the Company or an Affiliate (including a business combination) are eligible for Awards granted in assumption of or in substitution for such outstanding awards. Eligibility for ISOs is limited to individuals described in this Section 5(a) who are employees of the Company or an Affiliate that is a "parent corporation" or "subsidiary corporation" of the Company as those terms are defined in Code Section 424 and the regulations thereunder. Eligibility for Options other than ISOs and for SARs is limited to individuals described in this Section 5(a) who are providing direct services on the Grant Date of the Award to the Company or to an Affiliate that is described in the first sentence of Treasury Regulation § 1.409A-1(b)(5)(iii)(E).


(b)	Per-Person Award Limitations. In each fiscal year of the Company during any part of which the Plan is in effect, an Eligible Person may be granted in the aggregate Awards subject to the following individual limits (as defined for purposes of the Plan in this Section 5(b), the "Annual Limits"):


(i)	A Participant’s Annual Limit relating to Awards denominated in shares of Stock, in any fiscal year during any part of which the Participant is then eligible under the Plan, shall equal 800,000 shares of Stock, subject to adjustment as provided in Section 11(c).

(ii)

In the case of an Award denominated in cash and not in shares of Stock (for example, an Annual Incentive Award under Section 7), an Eligible Person may not be granted Awards authorizing the earning during any fiscal year of an amount that exceeds the Participant’s Annual Limit, which for this purpose shall equal $8 million, provided, however , that in the case of a cash-denominated Award earned by performance over a period

of longer than one year, the cash-denominated limit shall apply proportionately over the number of years and partial years in the actual performance period, unless the Committee specifies a different allocation method that allocates the limit in proportion to the rate at which the Award can be earned in the actual performance period. For this purpose, (1) the Annual Limit for cash-denominated Awards is separate from and not affected by the Annual Limit on share-denominated Awards; (2) "earning" means satisfying performance conditions so that an amount becomes payable, without regard to whether it is to be paid currently or on a deferred basis or continues to be subject to any service requirement or other non-performance-based condition; (3) a Participant’s Annual Limit is used to the extent a number of shares of Stock or cash amount may be potentially earned or paid under an Award, regardless of whether such shares of Stock or amount in fact are earned or paid (thus, for example, if an Award is canceled, the amount counted against the Annual Limit for such Award does not become available for a new Award to such Participant); (4) the Annual Limit for any cash-denominated Award that may be earned over a period of longer than one year shall be cumulative over the earning period; and (5) the Annual Limit applies to Dividend Equivalents under Section 6(g) only if such Dividend Equivalents are granted separately from and not as a feature of another Award.

(iii)

In the case of a non-employee director of the Company, additional limits shall apply such that the maximum grant-date fair value of Stock-denominated Awards granted in any fiscal year of the Company during any part of which the director is then eligible under the Plan shall be $400,000, except that such limit for a non-employee Chairman of the Board or Lead Director shall be $800,000, in each case, computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification 718 or any successor provision ("FASB ASC Topic 718"). The foregoing additional limits related to non-employee directors of the Company shall not apply to any Award or shares of Stock granted pursuant to a non-employee director’s election to receive an Award or shares of Stock in lieu of cash retainers or other fees, provided, however , that such Award or shares of Stock have a Fair Market Value not exceeding the value of such cash retainers or other fees.


6.	Specific Terms of Awards .

(a)

General . Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof, at the Grant Date or thereafter (subject to Section 11(e)), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms governing the treatment of Awards in the event of a Participant’s voluntary or involuntary termination of employment or service (for example, a termination for or without Cause, for or without Good Reason, or due to death or Disability) and terms permitting a Participant to make elections relating to his or her Award. The Committee shall retain full power and discretion with respect to any term or condition of an Award that is not mandatory under the Plan. The Committee may require payment of consideration for an Award, including, but not limited to, for purposes of satisfying any requirement of the Michigan Business Corporation Act relating to lawful consideration for the purchase of shares. Awards shall be evidenced by and subject to the terms of an Award Agreement issued by the Company, which Award Agreement shall be signed by the Company and, if the Committee so requires, by the Participant. For purposes of the Plan, the term "Award Agreement" includes any written policy, resolution, or other document that specifies Award terms.


(b)	Options . The Committee is authorized to grant Options to Participants on the following terms and conditions:

(i)

Exercise Price . The exercise price per share of Stock purchasable under an Option (including both ISOs and non-qualified Options) shall be determined by the Committee, provided, however , that such exercise price shall be not less than the Fair Market Value (or in the case of an ISO granted to a ten-percent shareholder within the meaning of Code Section 422(b)(6), 110% of the Fair Market Value) of a share of Stock on the Grant Date of such Option, subject to Sections 6(f), 6(h) and 8(a). Notwithstanding the foregoing, any Award resulting from an assumption or granted in substitution for an outstanding award granted by a company or business acquired by the Company or an Affiliate (including a business combination) shall satisfy this Section 6(b)(i) if the assumption or substitution preserves without enlarging the in-the-money value of the original award at the date of the acquisition. No adjustment will be made for a dividend or other right for which the record date is prior to the date on which the stock is issued, except as provided in Section 11(c) of the Plan.

(ii)

Option Term; Time and Method of Exercise . The Committee shall determine the term of each Option, provided, however , that in no event shall the term of any Option exceed a period of ten years (five years from the Grant Date in the case of an ISO granted to a ten-percent shareholder described in Code Section 422(b)(6)) from the Grant Date. The Committee shall determine, and the applicable Award Agreement shall specify, the time or

times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such exercise price may be paid or deemed to be paid and the form of such payment (subject to Section 11(k)), which may include cash, Stock (including through withholding of Stock deliverable upon exercise and broker-assisted "cashless exercise" arrangements, to the extent permitted by applicable law), other Awards or awards granted under other plans of the Company or any Affiliate, or other property, and the methods by or forms in which Stock will be delivered or deemed to be delivered to the Participant in satisfaction of Options. Notwithstanding the foregoing, if, on the date an outstanding Option would expire, the exercise of the Option would violate applicable securities laws, the expiration date applicable to the Option will be extended to a date that is thirty (30) calendar days after the date the exercise of the Option would no longer violate applicable securities laws.

(iii)

ISOs . The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Code Section 422. This Plan does not set forth all of the requirements applicable to an ISO, and therefore such requirements must be incorporated into the Award Agreement and/or complied with in fact by the Participant in order for the Option to be accorded the tax treatment applicable to an ISO.


(c)	Stock Appreciation Rights . The Committee is authorized to grant SARs to Participants on the following terms and conditions:


(i)	Right to Payment . A SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise over (B) the grant price of the SAR as determined by the Committee, which grant price shall be not less than the Fair Market Value of a share of Stock on the Grant Date of such SAR.

(ii)

Other Terms . The Committee shall determine at the Grant Date or thereafter the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be delivered to Participants, whether or not a SAR shall be freestanding or in tandem or combination with any other Award, whether a SAR that potentially could be settled in cash will be converted to a SAR that can be settled solely in Stock, and the maximum term of an SAR, which in no event shall exceed a period of ten (10) years from the Grant Date. Notwithstanding the foregoing, if, on the date an outstanding SAR would expire, the exercise of the SAR would violate applicable securities laws, the expiration date applicable to the SAR will be extended to a date that is thirty (30) calendar days after the date the exercise of the SAR would no longer violate applicable securities laws.


(d)	Restricted Stock . The Committee is authorized to grant Restricted Stock to Participants on the following terms and conditions:

(i)

Grant and Restrictions . Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise and under such other circumstances as the Committee may determine at the Grant Date or thereafter. Except to the extent restricted under the terms of the Plan or any Award Agreement, a Participant granted Restricted Stock shall have all of the rights of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends thereon (subject to Section 6(d)(iv) below).

(ii)

Forfeiture . Except as otherwise determined by the Committee, upon termination of employment or service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be immediately forfeited and reacquired by the Company; provided, however , that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock will lapse in whole or in part in specified circumstances, including in the event of terminations resulting from specified causes.

(iii)

Certificates for Stock . Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company retain physical

possession of the certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted Stock.

(iv)

Dividends and Splits . As a condition to the grant of an Award of Restricted Stock, the Committee may require that any dividends paid on a share of Restricted Stock shall be either (A) paid with respect to such Restricted Stock at the dividend payment date in cash, in kind, or in a number of shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) automatically reinvested in additional Restricted Stock or held in kind, which shall be subject to the same terms (including any restrictions and risk of forfeiture) as applied to the Restricted Stock to which it relates, or (C) deferred as to payment, either as a cash deferral or with the amount or value thereof automatically deemed reinvested in shares of Deferred Stock, other Awards or other investment vehicles, subject to such terms as the Committee shall determine or permit a Participant to elect; provided, however , that dividends on Restricted Stock subject to a risk of forfeiture based on performance conditions shall be subject to the same risk of forfeiture based on performance conditions. Unless otherwise determined by the Committee, Stock distributed in connection with a Stock split or Stock dividend, and other non-cash property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or such other property has been distributed.


(e)	Deferred Stock (Including Restricted Stock Units) . The Committee is authorized to grant Deferred Stock to Participants, which are rights to receive Stock, other Awards, or a combination thereof at the end of a specified period of time, subject to the following terms and conditions:

(i)

Award and Restrictions . Issuance of Stock will occur upon expiration of the period of time specified for an Award of Deferred Stock by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Deferred Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, and under such other circumstances as the Committee may determine at the Grant Date or thereafter. Forfeitable Deferred Stock may be designated as "Restricted Stock Units" or otherwise designated by the Committee. Deferred Stock may be settled by delivery of cash, Stock, other Awards, or a combination thereof (subject to Section 11(k)), as determined by the Committee at the Grant Date or thereafter. The Committee may grant Dividend Equivalents in respect of Deferred Stock, in accordance with Section 6(g).

(ii)

Forfeiture . Except as otherwise determined by the Committee, upon termination of employment or service during the applicable period or portion thereof to which forfeiture conditions apply (as provided in the Award Agreement evidencing the Deferred Stock), all Deferred Stock that is at that time subject to such forfeiture conditions shall be immediately forfeited; provided, however , that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock will lapse in whole or in part in specified circumstances, including in the event of terminations resulting from specified causes.


(f)	Bonus Stock and Awards in Lieu of Obligations . The Committee is authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu of obligations of the Company or an Affiliate to pay cash or deliver other property under the Plan or under other plans or compensatory arrangements, subject to such terms as shall be determined by the Committee.

(g)

Dividend Equivalents . The Committee is authorized to grant Dividend Equivalents to a Participant, entitling the Participant to receive cash, Stock, other Awards, or other property equivalent to all or a portion of the dividends paid with respect to a specified number of shares of Stock. Dividend Equivalents may be awarded on a freestanding basis or included as a feature of another Award (for example, Deferred Stock). The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles, and subject to restrictions on transferability, risks of forfeiture and such other terms as the Committee may specify; provided, however , that dividend equivalents relating to an Award subject to a risk of forfeiture based on performance conditions shall be subject to the same risk of forfeiture based on such performance conditions.


(h)	Other Stock-Based Awards . The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or

otherwise based on, or related to, Stock or factors that may influence the value of Stock, including convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or business units thereof or any other factors designated by the Committee, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified Affiliates of the Company or other business units. The Committee shall determine the terms and conditions of such Awards. Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including cash, Stock, other Awards, or other property, as the Committee shall determine (the purchase price shall be set at levels consistent with the requirements for options in Section 6(b)(i)). Cash awards, as an element of or supplement to any other Award under the Plan, may also be granted pursuant to this Section 6(h).


(i)	Performance Awards . Performance Awards, denominated in cash, in Stock or in other Awards, may be granted by the Committee in accordance with Section 7.


7.	Performance Awards .

(a)

Performance Awards Generally . The Committee is authorized to grant Performance Awards on the terms and conditions specified in this Section 7. Performance Awards may be denominated as a cash amount, number of shares of Stock, or specified number of other Awards (or a combination) that may be earned upon achievement or satisfaction of performance conditions specified by the Committee. The Committee may grant Performance Awards that are intended to be "qualified performance-based compensation" for purposes of Code Section 162(m) and Performance Awards that are not intended to qualify as such. In addition, the Committee may specify that any other Award shall constitute a Perform-ance Award by conditioning the right of a Participant to exercise the Award or have it settled, and/or the timing thereof, upon achievement or satisfaction of such performance conditions as may be specified by the Committee. The Committee may use such individual or business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may reserve the right to exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions; provided, however , that (i) the reservation of discretion shall be limited as specified under Sections 7(b) and 7(c) in the case of a Performance Award intended to be "qualified performance-based compensation" under Code Section 162(m) (subject to Section 7(d)); and (ii), in the case of any Performance Award denominated in shares of Stock at the Grant Date ( i.e. , an Award which constitutes share-based equity under FASB ASC Topic 718, no discretion to reduce or increase the amounts payable (except as provided under Section 11(c)) shall be reserved unless such reservation of discretion is expressly stated by the Committee at the time it acts to authorize or approve the grant of such Performance Award.

(b)

Performance Awards Granted to Covered Employees . If the Committee determines that a Performance Award to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should be "qualified performance-based compensation" for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of a pre-established performance goal or goals and other terms set forth in this Section 7(b) (subject to Section 7(d)).

(i)

Performance Goals Generally . The performance goal for such Performance Awards shall consist of one or more business criteria (as described in clause (ii) below) and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 7(b). The performance goal shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder (including Treasury Regulation § 1.162-27 and successor regula-tions thereto), including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being "substantially uncertain" at the time such goals are established. The Committee may determine that such Performance Awards shall be granted, exercised, and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise, and/or settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants.

(ii)

Business Criteria . One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified Affiliates or other business units of the Company, shall be used by the Committee in establishing performance goals for such Performance Awards: (1) revenues, interest income, net interest income or non-interest income; (2) earnings measures, including earnings from operations, earnings before or after taxes, earnings before or after interest, depreciation, amortization, or any items that are of an unusual nature and/or any items that indicate infrequency of occurrence or special items; (3) pre-tax income, net income, or net income per common share (basic or diluted), operating income or gross profit; (4) return

measures, including return on assets (gross or net), return on investment, return on capital, or return on equity; (5) bank regulatory agency metrics relating to financial strength, soundness, management or control of risk, stress test outcomes, and regulatory compliance, including CAMELS rating and bank regulatory and other third-party ratings of financial strength, soundness, and governance, including meeting conditions that result in reduced regulatory restrictions or other favorable more regulatory status; (6) interest expense; (7) net economic profit (operating earnings minus a charge for capital) or economic value created; (8) operating margin, profit margin, efficiency ratio, expense/deposit ratios and equity/assets ratios; (9) shareholder value creation measures, including stock price or total shareholder return; (10) dividend payout levels, including as a percentage of net income; (11) expense targets, cost containment, cost reduction, working capital targets, or operating efficiency; (12) loan originations or volume, provisions for loan losses and management of non-performing loans and loan losses; (13) gross dollar volume, deposits, market share, geographic or other targeted market expansion; (14) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (15) other strategic business criteria, consisting of one or more objectives based on meeting specified market penetration, completion of capital-raising and borrowing transactions, capital management, total market capitalization, enterprise value, business retention, new product development, customer satisfaction, employee satisfaction, internal accounting controls, risk management objectives, management of employment practices and employee benefits, supervision of information technology, litigation-related milestones, goals related to capital structure and goals relating to acquisitions or divestitures of Affiliates or joint ventures. The targeted level or levels of performance with respect to such business criteria may be established at such levels and in such terms as the Committee may determine, in its discretion, including in absolute terms, as a goal relative to performance in prior periods or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies or an industry or area of business. The performance goal need not be based on audited financial information. The Committee may specify that performance will be determined before payment of bonuses, capital charges, income or expense items related to items that are non-recurring or items that are of an unusual nature and/or events that indicate infrequency of occurrence or other financial or general and administrative expenses for the performance period, or based on the cash or non-cash or tangible or intangible components of the selected business performance metric, or based on averaging of performance with respect to the selected business performance metric. Provided that the Committee has specified at least one performance goal under this Section 7(b)(ii) qualifying the Award as performance-based under Code Section 162(m) - referred to as a "gating" goal - the Committee may specify other performance goals or criteria (whether or not listed in this Section 7(b)(ii)) as a basis for its exercise of negative discretion that may reduce the payout below the maximum potentially payable as a result of achieving the "gating" goal.

(iii)

Performance Period; Timing for Establishing Performance Goals . Achievement of performance goals in respect of such Performance Awards shall be measured over a performance period of up to one year or more than one year, as specified by the Committee. A performance goal under Section 7(b)(ii) qualifying under Code Section 162(m) shall be established not later than the earlier of (A) ninety (90) calendar days after the beginning of any performance period applicable to such Performance Award or (B) the time 25% of such performance period has elapsed.

(iv)

Performance Award Pool . The Committee may establish a Performance Award pool, which shall be an unfunded pool, for purposes of measuring performance of the Company in connection with Performance Awards. The amount of such Performance Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) during the given performance period, as specified by the Committee in accordance with Section 7(b)(iv). The Committee may specify the amount of the Performance Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount or as another amount, which need not bear a strictly mathematical relationship to such business criteria.

(v)

Settlement of Performance Awards; Other Terms . Settlement of such Performance Awards shall be in cash, Stock, other Awards, or other property, in the discretion of the Committee. Subject to Section 7(a), the Committee may, in its discretion, increase or reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable to a Covered Employee in respect of a Perform-ance Award subject to this Section 7(b) to the extent that such discretion would increase the amount payable above that amount designated as potentially payable upon achievement of the performance goal intended to cause the Award to be "qualified performance-based compensation" under Code Section 162(m). Any settlement which changes the form of payment from that

originally specified shall be implemented in a manner such that the Performance Award and other related Awards do not, solely for that reason, fail to be "qualified performance-based compensation" for purposes of Code Section 162(m) (subject to Section 7(d)). The Committee shall specify the circum-stances (if any) in which such Performance Awards shall be paid or forfeited in the event of termination of employment by the Participant or other event (including a change in ownership or control) prior to the end of a performance period or settlement of such Performance Awards.

(c)

Annual Incentive Awards Granted to Covered Employees. The Committee may grant a Performance Award under Section 7(b), in the form of an Annual Incentive Award, to an Eligible Person who is designated by the Committee as likely to be a Covered Employee. Such Annual Incentive Award will be intended to be "qualified performance‑based compensation" for purposes of Code Section 162(m), and therefore its grant, exercise and/or settlement shall be contingent upon achievement of a pre-established performance goal or goals and other terms set forth in Section 7(b) and this Section 7(c) (subject to Section 7(d)). Not later than the applicable deadline specified in Section 7(b)(iii), the Committee shall determine the Covered Employees who will potentially receive Annual Incentive Awards, the amount(s) potentially payable thereunder, and the performance period in which such amount(s) may be earned. The amount(s) potentially payable as Annual Incentive Awards shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) in the given performance period, as specified by the Committee. The Committee may designate an Annual Incentive Award pool as the means by which Annual Incentive Awards will be measured, which pool shall conform to the provisions of Section 7(b)(iv). In such case, the portion of the Annual Incentive Award pool potentially payable to each Covered Employee shall be pre-established by the Committee. Notwithstanding the foregoing, if any portion of the Annual Incentive Award pool for a given fiscal year is not allocated and paid out for that year, the Committee, at any time after such fiscal year, may allocate and pay out from such then-unallocated amounts of hypothetical funding remaining an Award to any Eligible Person other than a Covered Employee, but such allocations may not affect the allocations or payouts to any Covered Employee. In all cases, the maximum Annual Incentive Award of any Participant shall be subject to the applicable Annual Limit set forth in Section 5(b). After the end of the performance period, the Committee shall determine the amount, if any, of the Annual Incentive Award for that performance period payable to each Participant. Other provisions of Section 7(b) shall apply to an Annual Incentive Award under this Section 7(c).

(d)

Written Determinations . Determinations by the Committee as to the establishment of performance goals, the amount potentially payable in respect of Performance Awards, the level of actual achievement of the specified performance goals relating to Performance Awards, and the amount of any final Performance Award shall be recorded in writing in the case of Performance Awards intended to be "qualified performance-based compensation" under Code Section 162(m). Specifically, the Committee shall certify in writing, in a manner conforming to applicable regulations under Code Section 162(m), prior to settlement of each such Award granted to a Covered Employee, that the performance objective relating to the Performance Award and other material terms of the Award upon which settlement of the Award was conditioned have been satisfied.


8.	Certain Provisions Applicable to Awards .

(a)

Stand-Alone, Additional, Tandem, and Substitute Awards . Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any Affiliate, or any business entity to be acquired by the Company or an Affiliate, or any other right of a Participant to receive payment from the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards or awards may be granted either as of the same time as or a different time from the grant of such other Awards or awards.


(b)	Term of Awards . The term of each Award shall be for such period as may be determined by the Committee, subject to the express limitations set forth in Section 6(b)(ii) and 6(c)(ii) (limits on Option and SAR terms, which limit will apply to any other Award in the nature of a stock right that provides the Participant with a right to exercise over a period of more than one year).

(c)

Form and Timing of Payment under Awards; Deferrals; 409A Compliance Rules . Subject to the terms of the Plan (including Section 11(k)) and any applicable Award Agreement, payments to be made by the Company or an Affiliate upon the settlement of an Award or the exercise of an Option or SAR (subject to applicable limitations under Code Section 409A) may be made in such forms as the Committee shall determine, including cash, Stock, other Awards or other property, and may be made in it single payment or transfer, in installments or on a deferred basis. The settlement of any Award may be accelerated, and cash paid in lieu of Stock in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events (subject to Section 11(k)). Installment or

deferred payments may be required by the Committee (subject to Section 11(e)) or permitted at the election of the Participant on terms and conditions established by the Committee. Payments may include provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Stock. The Committee may adopt and from time to time amend compliance rules intended to ensure that Awards meet applicable requirements to avoid adverse tax consequences under Code Section 409A ("409A Compliance Rules"); such 409A Compliance Rules shall be deemed to be terms incorporated by reference into each Award Agreement, except as otherwise provided in such 409A Compliance Rules or as otherwise provided by the Committee.

(d)

No Personal Loans to Participants or Reloads . No term of an Award shall provide for a personal loan to a Participant for payment of the exercise price of an Option or the consideration for any other Award or withholding taxes relating to any Award providing for delivery of shares of Stock to the Participant. For this purpose, customary broker-assisted cashless exercise features of Options will not be considered to constitute or result in loans. No term of an Award shall provide for automatic "reload" grants of additional Awards upon exercise of an Option or SAR or otherwise as a term of an Award.

(e)

Avoidance of Section 16(b) Liability . With respect to a Participant who is then subject to the reporting requirements of Section 16(a) of the Exchange Act in respect of the Company, the Committee shall implement transactions under the Plan and administer the Plan in a manner that is intended to prevent such a Participant from incurring liability under Section 16(b) of the Exchange Act, except that this provision shall not apply to a Participant’s sales of shares of Stock and a Participant otherwise may engage in non-exempt transactions under the Plan. The Committee may authorize the Company to repurchase any Award or shares of Stock deliverable or delivered in connection with any Award (subject to Sections 11(k) and 11(l)) in order that a Participant who is subject to Section 16 of the Exchange Act will avoid incurring liability under Section 16(b) thereunder. Unless otherwise specified by the Participant, for purposes of Section 16 equity securities or derivative securities acquired under the Plan that are disposed of by a Participant shall be deemed to be disposed of in the order acquired by the Participant. In no event, however, shall the Committee, the Company, any Affiliate, nor any person acting on behalf of any of the foregoing, have any liability with respect to the foregoing.


9.	Change in Control .

(a)

Assumption or Substitution . In the event of a Change in Control, the Committee may (but, for the avoidance of doubt, need not) provide for or agree to the assumption or continuation of some or all outstanding Awards or for the grant of new awards in substitution therefor by the acquirer or survivor or an affiliate of the acquirer or survivor. In such case, the following terms will apply to any such assumed, continued or substituted Award:

(i)

Continued Vesting. The vesting terms of the Award shall continue, but shall not extend beyond or otherwise expand the vesting requirements applicable to the Award immediately before the Change in Control, and any applicable performance conditions shall be reasonably determined by the Committee to be no less probable of achievement than the performance conditions applicable to the original Award (as of the time of the Change in Control); and

(ii)

"Double-Trigger" Protections Apply. Except as limited by applicable law or regulation, the Award shall provide for accelerated vesting in full in the event that, within one year following the Change in Control, the Participant has a "separation from service" (as defined in Treasury Regulation Section 1.409A-1(h)) and (A) such separation does not occur at a time that Cause exists for the termination of the Participant by the Company (which term for purposes of this Section 9(a) includes its Affiliates), and (B) such separation is either directed by the Company or is a separation by the Participant for Good Reason. In addition, if such Award is subject to performance conditions, upon a qualifying termination under this Section 9(a)(ii) the performance conditions shall be deemed to be achieved at the actual level of performance achieved as of the date of the separation from service projected to continue over remainder of the performance period, but in no event at less than the designated target level of performance (if a target level has been designated)

(iii)

Treatment of Awards If Double-Trigger Protection Prohibited by Law or Regulation. Notwithstanding the other provisions of this Section 9(a), if at the time of the Change in Control the Company (or any successor) is prohibited by law or regulation from according to the Participant the "double-trigger" protections specified in Section 9(a)(ii), then the original Award shall not be subject to assumption, continuation of substitution under this Section 9(a), but instead such Award shall be subject to Section 9(c) (i.e., vesting of the Award will be accelerated at the time of the Change in Control).

(b)

Pay-Out of Awards . In the event of a Change in Control, if the Change in Control is one in which holders of Stock, upon consummation, will receive a payment (whether cash, non-cash or a combination of the foregoing), then the Committee may (but, for the avoidance of doubt, need not) provide for payment (a "pay-out," which includes non-cash property paid out), with respect to some or all Awards (including unvested Awards), equal in the case of each affected Award to the excess, if any, of (i) the Fair Market Value of one share of Stock on the specified pay-out date times the number of shares of Stock subject to the Award (or portion of the Award subject to the pay-out), over (i) the aggregate exercise or purchase price, if any, under the Award (or such portion) or, in the case of an SAR, the aggregate base price, in each case on such other payment terms (which need not be the same as the corresponding terms of payment to holders of Stock or other holders of Awards) and other terms, and subject to such conditions, as the Committee determines; provided, however, that the amount of any payment relating to an Option or SAR shall be determined in accordance with applicable requirements of Code Section 409A. In the case of an unvested Award, the pay-out may be subject to vesting terms, but in such case the provisions of Section 9(a)(i), (ii) and (iii) will apply (treating the unvested pay-out as a continuing Award thereunder). For the avoidance of doubt, if the exercise, purchase or base price of any Award is equal to or exceeds the Fair Market Value of a share of Stock at the time a Change in Control is consummated, such Award may be terminated hereunder without payment due thereon.

(c)

Acceleration of Awards Not Assumed, Continued, Substituted or Cashed-Out . In the event of a Change in Control in which there is to be no assumption, continuation, substitution or cash-out of some or all Awards (including an Award to which Section 9(a)(iii) applies), then the Committee will provide that each such Award requiring exercise will become immediately exercisable, and the delivery of any shares of Stock remaining deliverable under each outstanding Award of Deferred Stock (including Restricted Stock Units and Performance Awards to the extent consisting of Deferred Stock) or Restricted Stock or Other Stock-Based Award will be accelerated and such shares of Stock will be delivered, prior to the Change in Control, in each case on a basis that gives the holder of the Award a reasonable opportunity, as determined by the Committee, following exercise of the Award or the delivery of the shares of Stock, as the case may be, to participate as a shareholder in the Change in Control; provided, however , that if an Award is subject to performance conditions, the Committee shall determine in good faith the extent to which the performance conditions shall be deemed to have been achieved, but such deemed achievement level shall not be less than the actual level of performance achieved as of the date of the Change in Control projected to continue over remainder of the performance period; and provided further , that, to the extent acceleration and/or delivery pursuant to this Section 9(c) of an Award subject to Code Section 409A would cause the Award to fail to satisfy the requirements of Code Section 409A, the Award settlement shall not be accelerated and/or shares of Stock delivered and the Committee, in lieu thereof, shall take such steps as are necessary to ensure that payment of the Award is made in a medium other than Stock and on terms that, as nearly as possible but taking into account adjustments required or permitted under the Plan and the applicable Award Agreement, replicate the prior terms of the Award.

(d)

Additional Terms . The Committee may provide, in any Award Agreement relating to an Award granted prior to a Change in Control terms that vary from the terms of this Section 9. The Committee shall not exercise its discretion under this Section 9 with respect to an Award or portion thereof providing for "nonqualified deferred compensation" subject to Code Section 409A or an Award excluded from Code Section 409A in a manner that would constitute an extension or acceleration of, or other change in, payment terms if such change would be inconsistent with the applicable requirements of Code Section 409A (so as to cause Participants to incur tax penalties). In the case of Restricted Stock that does not vest in connection with the Change in Control, the Committee may require that any amounts delivered, exchanged or otherwise paid in respect of such Stock in connection with the Change in Control be placed in escrow or otherwise made subject to such restrictions as the Committee deems appropriate to carry out the intent of the Plan.


10.	Additional Award Forfeiture Provisions; Clawback.

The Committee may condition a Participant’s right to receive a grant of an Award, to exercise the Award, to retain cash, Stock, other Awards or other property acquired in connection with an Award, or to retain the profit or gain realized by a Participant in connection with an Award, including cash or other proceeds received upon sale of Stock acquired in connection with an Award, upon (a) compliance by the Participant with specified conditions relating to adherence to standards of conduct in the preparation of financial statements and reports filed with the Securities and Exchange Commission, non-competition, confidentiality of information relating to or possessed by the Company, non-solicitation of customers, suppliers, and employees of the Company, cooperation in litigation, non-disparagement of the Company and its officers, directors and Affiliates and other restrictions upon or covenants of the Participant, including during specified periods following termination of employment or service to the Company; and (b), in the case of performance-based compensation, the absence of material inaccuracies in the financial or other information

upon which achievement of performance goals was assessed. Without limiting the generality of the foregoing, Awards held by a Participant are subject to forfeiture, termination and rescission, and a Participant will be obligated to return to the Company payments received with respect to Awards as required by law, regulation or applicable stock exchange listing standards, including Section 10D of the Exchange Act, and in accordance with the Company’s Clawback Policy, as such Policy may be from time to time amended or modified, or any successor to the Clawback Policy adopted by the Company and as in effect from time to time.


11.	General Provisions .

(a)

Compliance with Legal and Other Requirements . The Company may, to the extent deemed necessary or advisable by the Committee, postpone the issuance or delivery of Stock or payment of other benefits under any Award until completion of such registration or qualification of such Stock or other required action under any federal or state law, rule or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which the Stock or other securities of the Company are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require any Participant to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of Stock or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations.

(b)

Limits on Transferability; Treatment of Awards Upon Death . No Award or other right or interest of a Participant under the Plan shall be pledged, hypothecated or otherwise encumbered or subject to any lien, obligation or liability of such Participant to any party (other than the Company or an Affiliate), or assigned or transferred by such Participant, and such Awards or rights that may be exercisable shall be exercised during the lifetime of the Participant only by the Participant or his or her guardian or legal representative, except that (i) Awards and related rights that remain in effect after a Participant’s death shall be transferred to a Participant’s surviving spouse or, if permitted by the Committee, a designated beneficiary (or, if none, to the Participant’s estate) upon the death of the Participant, and (ii), to facilitate estate planning by a Participant, Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred to one or more transferees during the lifetime of the Participant, and may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent such transfers are permitted by the Committee and the Committee has determined that there will be no transfer of the Award to a third party for value, and subject to any terms and conditions which the Committee may impose thereon (including limitations the Committee may deem appropriate in order that offers and sales under the Plan will meet applicable requirements of registration forms under the Securities Act of 1933 specified by the Securities and Exchange Commission). A spouse, beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant must file with the Company a copy of the death notice or other sufficient documentation as may be required by the Company, and otherwise shall be subject to all terms and conditions of the Plan and any Award Agreement applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee.

(c)

Adjustments . In the event that any special and non-recurring dividend or other distribution (whether in the form of cash or property other than Stock), recapitalization, forward or reverse split, Stock dividend, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution, sale of all or substantially all of the Company’s assets or other similar corporate transaction or event affects the Stock such that an adjustment is determined by the Committee to be appropriate under the Plan, then the Committee may, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Stock that may be delivered in connection with Awards granted thereafter, including the aggregate share limitation then applicable under the Plan, (ii) the number and kind of shares of Stock by which per-person Annual Limits are measured under Section 5(b), (iii) the number and kind of shares of Stock subject to or deliverable in respect of outstanding Awards, (iv) the exercise price, grant price or purchase price relating to any Award or, if deemed appropriate, the Committee may make provision for a payment of cash or property to the holder of an outstanding Award (subject to Section 11(k)), and (v) performance goals based on performance on a per share basis. The Committee shall provide for such equitable adjustments of outstanding awards in order to preserve the positive intrinsic value of such awards, unless in the circumstances the Participant would be able to continue to realize such intrinsic value in the absence of an adjustment. In furtherance of the foregoing, a Participant shall have a legal right to an adjustment (including as described in items (iii) - (v) above) to an outstanding Award that constitutes a "share-based payment arrangement" in the event of an "equity restructuring," as such terms are defined under FASB ASC Topic 718, which adjustment shall preserve without enlarging the value of the Award to the Participant. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including Performance Awards and performance goals and any hypothetical funding pool relating thereto) in recognition of any events that are of an unusual nature and/or events that indicate infrequency of

occurrence or nonrecurring events (including events described above in this Section 11(c), as well as acquisitions and dispositions of businesses and assets) affecting the Company, any Affiliate or other business unit of the Company, or the financial statements of the Company or any Affiliate, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee’s assessment of the business strategy of the Company, any Affiliate or business unit thereof, performance of comparable organiza-tions, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided, however , that no such adjustment shall be authorized or made if and to the extent that the existence of such authority or the making of a particular adjustment would cause Options, SARs, or Performance Awards granted to Participants designated by the Committee as Covered Employees and intended to be "qualified performance-based compensation" under Code Section 162(m) and regulations thereunder to otherwise fail to so qualify. All determinations hereunder shall be made by the Committee in its sole discretion and shall be final and binding on all persons.

(d)

Tax and Withholding . The Company and any Affiliate is authorized to and shall withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any payroll or other payment to a Participant (to the extent permitted by law), amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and are authorized to take such other action as the Committee may deem advisable to enable the Company or any Affiliate and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant’s withholding obligations, either as a mandatory term of Awards or at the election of the Participant as determined by the Committee. Other provisions of the Plan notwithstand-ing, only the amount of Stock deliverable in connection with an Award necessary to satisfy statutory minimum withholding requirements will be withheld, except a greater amount of Stock may be withheld provided that any such withholding transaction that will result in additional accounting expense to the Company must be expressly authorized by the Committee. In accordance with Section 4(b), any Stock that is withheld from an Award other than an Option, an option under the 2006 Plan, or a SAR in payment of taxes shall not be deemed to have been delivered and therefore will be available for future grants of Awards under the Plan.

(e)

Changes to the Plan and Awards . The Board may amend, suspend or terminate the Plan or the Committee’s authority to grant Awards under the Plan without the consent of shareholders or Participants; provided, however , that any amendment to the Plan shall be submitted to the Company’s shareholders for approval if such shareholder approval is required by any federal or state law or regulation or the rules of any stock exchange or trading system on which the Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other amendments to the Plan to shareholders for approval. The Committee is authorized to amend the Plan if its actions are within the scope of the Committee’s authority under its charter, and subject to all other requirements (including shareholder approval) that would apply if the amendment were approved by the Board. Except as limited by the Plan, the Committee is authorized to amend outstanding Awards, which may include cancelation of an outstanding Award in exchange for a new Award or the extension of the term of an outstanding Award. The Board and Committee may not, however, amend outstanding Awards (including by means of an amendment to the Plan) without the consent of an affected Participant if such amendment would materially and adversely affect the legal rights of such Participant under any outstanding Award (for this purpose, actions that alter the timing of federal income taxation of a Participant will not be deemed material unless such action results in an income tax penalty materially adverse to the Participant, and any discretion reserved by the Board or Committee with respect to an Award is not limited by this provision). Notwithstanding the foregoing, without the approval of shareholders, the Board or Committee will not amend previously granted Options or SARs (including by means of an amendment to the Plan) in a transaction that constitutes a "repricing." For this purpose, a "repricing" means: (1) amending the terms of an Option or SAR after it is granted to lower its exercise price or base price; (2) any other action that is treated as a repricing under generally accepted accounting principles; and (3) canceling an Option or SAR at a time when its exercise price is equal to or greater than the fair market value of the underlying Stock, in exchange or substitution for another Option, SAR, Restricted Stock, other equity, or cash or other property, unless the cancellation and exchange or substitution occurs in connection with a merger, acquisition, spin-off or other similar corporate transaction. Adjustments to awards under Section 11(c) will not be deemed "repricings," however. The Committee shall have no authority to waive or modify any Award term after the Award has been granted to the extent that the waived or modified term at that time would be mandatory for a new Award of the same type under the Plan.


(f)	Right of Setoff . The Company or any Affiliate may, to the extent permitted by applicable law and will not incur penalties under Code Section 409A, deduct from and set off against any amounts the Company or an Affiliate may owe to the Participant from time to time, including amounts payable in connection with any Award, owed as wages,

fringe benefits, or other compensation owed to the Participant, such amounts as may be owed by the Participant to the Company, although the Participant shall remain liable for any part of the Participant’s payment obligation not satisfied through such deduction and setoff. By accepting any Award granted hereunder, the Participant agrees to any deduction or setoff under this Section 11(f) .

(g)

Unfunded Status of Awards; Creation of Trusts . The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation (excluding awards of Restricted Stock). With respect to any payments not yet made to a Participant or obligation to deliver Stock pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided, however , that the Committee may authorize the creation of trusts and deposit therein cash, Stock, other Awards or other property or make other arrangements to meet the Company’s obligations under the Plan. Such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines.

(h)

Nonexclusivity of the Plan . Neither the adoption of the Plan by the Board nor its submission to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board or Committee to adopt such other incentive arrangements, apart from the Plan, as it may deem desirable, including incentive arrangements and awards which do not qualify under Code Section 162(m), and such other arrangements may be either applicable generally or only in specific cases.


(i)	Fractional Shares . No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether and when cash, other Awards, or other property shall be issued or paid in lieu of such fractional shares of Stock, or whether such fractional shares of Stock or any rights thereto shall be forfeited or otherwise eliminated.

(j)

Compliance with Code Section 162(m) . It is the intent of the Company that Options and SARs granted to Covered Employees and other Awards designated as Awards to Covered Employees subject to Section 7 shall constitute "qualified performance-based compensation" within the meaning of Code Section 162(m) and regulations thereunder, unless otherwise determined by the Committee at the time of authorization or grant of an Award or to the extent that such Awards would not be subject to a limitation on tax deductibility by the Company under other applicable provisions of Code Section 162(m). Accordingly, the terms of Sections 7(b), 7(c) and 7(d), including the definitions of "Covered Employee" and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. Notwithstanding the foregoing, because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term "Covered Employee" as used herein shall mean only a person designated by the Committee as likely to be a Covered Employee with respect to a specified fiscal year. If any provision of the Plan or any Award Agreement relating to a Performance Award that is designated as intended to comply with Code Section 162(m) does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements, and no provision shall be deemed to confer upon the Committee or any other person discretion to increase the amount of compensation otherwise payable in connection with any such Award upon attainment of the applicable performance objectives.

(k)

Certain Limitations Relating to Accounting Treatment of Awards . Other provisions of the Plan notwithstanding, the Committee’s authority under the Plan (including under Sections 8, 9, 11(c) and 11(e)) is limited to the extent necessary to ensure that any Award of a type that the Committee has intended to be "share-based equity" (and not a "share-based liability") subject to fixed accounting with a measurement date at the Grant Date under FASB ASC Topic 718 shall not be deemed a share-based liability (subject to "variable" accounting) solely due to the existence of such authority, unless the Committee specifically determines that the Award shall remain outstanding as a share-based liability ( i.e. , subject to "mark-to-market" expense accounting).

(l)

Governing Law . The validity, construction, and effect of the Plan, any rules and regulations under the Plan, and any agreement under the Plan shall be determined in accordance with the Michigan Business Corporation Act, to the extent applicable, other laws (including those governing contracts) of the State of Michigan, without giving effect to principles of conflicts of laws, and applicable federal law. The jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), the Plan will be exclusively in the courts in the State of Michigan, Counties of Oakland and Wayne, including the Federal Courts located therein (should Federal jurisdiction exist).


(m)	Awards to Participants Outside the United States . The Committee may modify the terms of any Award under the Plan made to or held by a Participant who is then resident or primarily employed outside of the United States or is subject

to taxation by a non-U.S. jurisdiction in any manner deemed by the Committee to be necessary or appropriate in order that such Award shall conform to laws, regulations, sound business practices and customs of the country in which the Participant is then resident or primarily employed, or so that the value and other benefits of the Award to the Participant, as affected by foreign tax laws and other restrictions applicable as a result of the Participant’s residence or employment abroad shall be comparable to the value of such an Award to a Participant who is resident or primarily employed in the United States. An Award may be modified under this Section 11(m) in a manner that is inconsistent with the express terms of the Plan, so long as such modifications will not contravene any applicable law or regulation or result in actual liability under Section 16(b) of the Exchange Act for the Participant whose Award is modified.

(n)

Limitation on Rights Conferred under Plan . No Participant shall have any of the rights or privileges of a shareholder of the Company under the Plan, including as a result of the grant of an Award or the creation of any trust and deposit of shares of Stock therein, except at such time as an Option or SAR may have been duly exercised or shares of Stock may be actually delivered in settlement of an Award; provided, however , that a Participant granted Restricted Stock shall have rights of a shareholder except to the extent that those rights are limited by the terms of the Plan and the agreement relating to the Restricted Stock. Neither the Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company or an Affiliate or in any particular office or position, (ii) interfering in any way with the right of the Company or an Affiliate to terminate any Eligible Person’s or Participant’s employment or service at any time, or (iii) giving an Eligible Person or Participant any claim to be granted any Award under the Plan or to be treated uniformly with other Participants and employees. Except as expressly provided in the Plan and an Award Agreement, neither the Plan nor any Award Agreement shall confer on any person other than the Company and the Participant any rights or remedies thereunder. An Award shall not be deemed compensation for purposes of computing benefits under any retirement plan of the Company or any Affiliate and shall not affect any benefits under any other benefit plan at any time in effect under which the availability or amount of benefits is related to the level of compensation (unless required by such other plan or arrangement with specific reference to Awards under this Plan, provided that cash Annual Incentive Awards will generally be deemed to be annual bonuses or annual incentives under such other plans or arrangements).

(o)

Severability . If any of the provisions of this Plan or any Award Agreement is finally held to be invalid, illegal or unenforceable (whether in whole or in part), such provision shall be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability, and the remaining provisions shall not be affected thereby; provided, however , that if any such provision is finally held to be invalid, illegal, or unenforceable because it exceeds the maximum scope determined to be acceptable to permit such provision to be enforceable, such provision shall be deemed to be modified to the minimum extent necessary to modify such scope in order to make such provision enforceable hereunder.

(p)

Plan Effective Date and Termination; Termination of Granting Authority Under the 2006 Plan . The Plan shall become effective upon its approval by the Board of Directors (the "Effective Date"), provided that the Plan and any Awards granted hereunder prior to approval of the Company’s shareholders shall be subject to shareholder approval of the Plan at the Company’s first Annual Meeting of Shareholders (including any adjournment thereof) following the end of the Company’s 2015 fiscal year (the "Shareholder Approval Date"). Unless earlier terminated by action of the Board, the authority to make new grants under this Plan shall terminate on the tenth (10 ^th ) anniversary of the later of the Effective Date or any shareholder approval of the Plan, as then amended, after the initial Shareholder Approval Date. If the Plan is approved by shareholders at the Shareholder Approval Date, any authority to make new grants under the 2006 Plan shall terminate. During any period following termination of the authority to make new grants under this Plan or under the 2006 Plan, the Board and the Committee shall retain full authority to amend or modify outstanding Awards or awards, including amendments or modifications that may enhance the fair value of such outstanding Awards or awards.


(q)	Successors and Assigns . The terms of the Plan will be binding upon the Company and its successors and assigns.

EXHIBIT 10.2

FLAGSTAR BANCORP, INC.

Executive Long-Term Incentive Program Award Agreement

This Award Agreement (this " Agreement" ) is made effective October 22, 2015 (the " Grant Date" ), by and between Flagstar Bancorp, Inc., a Michigan corporation (the " Company" ), and _______________ (the " Executive" ). Capitalized terms that are used in this Agreement but not defined herein shall have the meanings given to them in the Plan.

WHEREAS, the Company has adopted the Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (the " Plan" ), subject to approval by the Company’s shareholders at the Company’s 2016 annual meeting of shareholders; and

WHEREAS, the Company has implemented the Flagstar Bancorp, Inc. Executive Long-Term Incentive Program subject to the terms and conditions provided herein (the " Program" ); and

WHEREAS, the Compensation Committee (the " Committee" ) of the Board of Directors of the Company (the " Board" ) has recommended that the Board select the Executive to receive an award of Restricted Stock Units (" RSUs" ) under the Program, and the Board has approved that recommendation.

NOW, THEREFORE, the Company and the Executive hereby agree as follows:

Section 1. Award of RSUs . The Company hereby awards to the Executive, as of the Grant Date, ____________ shares of RSUs under the Plan, on the terms and conditions set forth in this Agreement and the Plan, and subject to approval of the Plan by the Company’s shareholders at the Company’s 2016 annual meeting of shareholders. Each RSU represents the right to receive one share of Stock. The Executive shall have no voting or other rights with respect to shares of Stock that are represented by the RSUs. If the Company’s shareholders do not approve the Plan and the authorized shares thereunder at the Company’s 2016 annual meeting of shareholders, this Agreement shall be null and void and the RSUs shall be forfeited; provided, however, that the Company shall use its reasonable best efforts to cause the Plan to be approved.

Section 2. Performance Hurdle Vesting . The " Performance Hurdle" will be attained if, for any period of one-hundred twenty (120) consecutive calendar days, the volume-weighted average price per share of the Stock over such period is $28.00 or more. The last calendar day of the one-hundred twenty (120) day period will be the " Performance Hurdle Date ," on which date the Awards will vest. To vest in any RSUs under this Agreement, the Executive must be employed by the Company or an Affiliate on the Performance Hurdle Date, except in the event of (i) the Executive’s death or Disability, or (ii) a Change in Control (as defined below), in which case the Executive must be employed by the Company or an Affiliate until the occurrence of the applicable event described in clause (i) or (ii). Section 5 shall govern upon the occurrence of an event described in clause (i) or (ii) of the preceding sentence. In the event that the Performance Hurdle is not attained on or before the tenth anniversary of the Grant Date, any unvested RSUs shall be forfeited.

Section 3. Termination for Cause. If the Executive’s employment with the Company is terminated for Cause, whether prior to or after the Performance Hurdle Date, the Executive will forfeit all unvested RSUs as well as any RSUs that had vested but were not yet paid out pursuant to Section 2 or Section 4. For purposes of this Agreement, "Cause" shall mean the Executive’s (i) engaging in willful or gross misconduct or willful or gross neglect of duties, (ii) repeatedly and willfully failing to adhere to the directions of the Board or the written policies and practices of the Company or an Affiliate, (iii) commission of or plea of nolo contendere to a felony, a crime of moral turpitude, or any crime involving the Company or an Affiliate that causes damage to the property or business of the Company or an Affiliate, (iv) fraud, misappropriation, dishonesty, or embezzlement in each case which causes damage to the property or business of the Company or an Affiliate, (v) material breach of the Executive’s employment agreement (if any) with the Company or an Affiliate (other than a termination of employment by the Executive), (vi) loss of any license or registration that is necessary for the Executive to perform his duties for the Company or an Affiliate, or (vii) unlawful act that causes damage to the property or business of the Company or an Affiliate, all as determined in the sole discretion of the Committee. Before the Committee determines that "Cause" has occurred under clause (i), (ii), (v), or (vii) above, the Committee will provide to the Executive in writing, in reasonable detail, the reasons for the determination that such "Cause" exists, and afford the Executive a reasonable opportunity to remedy any such breach, action or inaction, if such breach action or inaction, is capable of being remedied. In addition, an Executive’s termination of employment or service will be deemed to have terminated for Cause if, within twelve (12) months after the Executive’s employment or service has terminated, facts and circumstances are discovered that would have justified a termination for Cause. For purposes of this Agreement, no act or failure to act on the Executive’s part will be considered "willful" unless it is done, or omitted to be done, by him or her in bad faith or without reasonable belief that his or her action or omission was in the best interests of the Company or an Affiliate. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company or an Affiliate will be conclusively presumed to be done, or omitted to be done, in good faith and in the best interests of the Company or an Affiliate.

Section 4. Vesting; Quality Review and Payment; Retirement .

(a)

On or as soon as practicable following the Performance Hurdle Date, the Compensation Committee or a duly authorized committee that satisfies the requirements of Code Section 162(m) shall certify that the Performance Hurdle has been attained. If so certified, the RSUs shall vest in full on the Performance Hurdle Date, and one-fifth (1/5) of the RSUs will be paid out in Stock on the Performance Hurdle Date and an additional one-fifth (1/5) of the RSUs will be paid out in Stock on the first, second, third, and fourth annual anniversary dates of the Performance Hurdle Date (each, a " Payout Date" ), subject to the Quality Review (as defined below) on each of the Performance Hurdle Date and the Payout Dates. If the Board determines that the results of the Quality Review are satisfactory, one hundred (100%) of the amount of RSUs payable on the Performance Hurdle Date or that Payout Date will be paid to the Executive in Stock.

(b)

If the Board determines that the results of the Quality Review are unsatisfactory: (1) fifty percent (50%) of the amount of RSUs payable on the Performance Hurdle Date or that Payout Date will be paid to the Executive in Stock; (2) twenty-five percent (25%) of the amount of RSUs that would have paid out on the Performance Hurdle Date or that Payout Date will be forfeited by the Executive and (3) another twenty-five percent (25%) portion of the RSUs that would have otherwise paid out on the Performance Hurdle Date or that Payout Date (the " Carry Forward RSUs" ) will be held back until the next following Payout Date. On the Payout Date next following the Performance Hurdle Date or a Payout Date on which the Board had determined that the results of the Quality Review were

unsatisfactory and held back a portion of the RSUs (a " Subsequent Payout Date" ), the Board again will conduct a Quality Review.

(c)

On any Subsequent Payout Date, the Board will conduct a Quality Review and determine if the results of the Quality Review are satisfactory. If satisfactory, the Carry Forward RSUs will be paid out on that Subsequent Payout Date, in addition to any amounts scheduled to be paid out under Section 4(a) on that Payout Date. If the Board determines the results of the Quality Review are not satisfactory, the Carry Forward RSUs will be combined with the RSUs that are due to be paid out on the Subsequent Payout Date, and (1) fifty percent (50%) of the combined RSUs will be paid out to the Executive in Stock; (2) twenty-five percent (25%) of the combined RSUs will be forfeited by the Executive; and (3) another twenty-five percent (25%) of the combined RSUs will become Carry Forward RSUs and will be held back until the following Payout Date.


(d)	"Quality Review" means the review of the factors described in Attachment A.


(e)	If the Board determines the results of the Quality Review are not satisfactory on the fourth and final Payout Date, all remaining RSUs that are or would have become Carry Forward RSUs will be forfeited.

(f)

Notwithstanding the foregoing, upon the Retirement (defined below) of the Executive after the Performance Hurdle has been attained, any unpaid RSUs, including Carry Forward RSUs, but not RSUs that had been forfeited before the Executive’s Retirement under Section 4(b) or (c) above, will continue to be paid in accordance with the schedule described above (but shall not be subject to any Quality Review) until Executive attains age sixty-seven (67), at which time the Executive will be paid out all remaining unpaid RSUs in full. For purposes of this Agreement, " Retirement" is defined as a termination of the Executive’s employment for any reason other than Cause after the Executive has both attained sixty-five (65) years of age and completed at least ten (10) years of service with the Company and its Affiliates. Following Retirement, (1) all payouts will be made without regard to any Quality Review, and (2) the Executive may only continue to receive payouts as long as the Executive adheres to the terms of the non-compete and other restrictive covenant provisions contained in this Agreement and any employment agreement between the Executive and the Company or an Affiliate.

Section 5. Death, Disability or Change in Control. If the Performance Hurdle has not been attained on or before the date of (i) the Executive’s death or Disability or (ii) a Change in Control (each of (i) and (ii), a " Trigger Event" and the date on which any such Trigger Event occurs, a " Trigger Date" ), and on the Trigger Date, the price per share is:


(a)	Less than $26.00 per share, one-third (1/3) of the RSUs will vest and become payable on the Trigger Date, without regard to any Quality Review, and the remainder of the RSUs will be forfeited; or


(b)	Equal to or greater than $26.00 per share, two-thirds (2/3) of the RSUs will vest and become payable on the Trigger Date, without regard to any Quality Review, and the remainder of the RSUs will be forfeited.

If the Performance Hurdle Date has occurred on or before the Trigger Date, any unpaid RSUs under Section 4 above, including Carry Forward RSUs, but not RSUs that had been forfeited before the Trigger Date under Section 4(b) or (c) above, will be accelerated and paid as soon as practicable after Trigger Date, without regard to any Quality Review; provided that if the Trigger Event giving rise to the acceleration described in this Section 5 is a Change in Control that is not a change in the

ownership or effective control of a corporation or in the ownership of a substantial portion of the assets of corporation within the meaning of Section 1.409A-3(i)(5) of the Treasury Regulations (a " 409A Change in Control" ), then any payment which would have been made on any Payment Date without regard to any Quality Review will not be paid until the earliest to occur of (i) the date on which the payment would otherwise have been made in absence of the Change in Control, (ii) the termination of the Executive’s employment with the Company for any reason other than Cause, and (iii) a 409A Change in Control.

For purposes of this Agreement, " Change in Control" is defined as (i) the occurrence of a "Change in Control" as defined by the Plan, (ii) MatlinPatterson Global Advisors LLC or its affiliates ceasing to be the beneficial owner, either directly or indirectly, of at least thirty percent (30%) of the Stock, or (iii) a person or entity other than MP Thrift Investments L.P. or its affiliates (together, "MatlinPatterson") becomes entitled, under an agreement to which the Company is a party, to appoint to the Board a number of directors equal to or greater than the number of directors MatlinPatterson is then entitled to appoint under an agreement to which the Company is a party.

Section 6. Withholding Taxes. On the Performance Hurdle Date and each Payout Date, the Company shall have the right to withhold all applicable federal, state or local taxes of any kind that are required by law to be withheld with respect to the distribution of shares of Stock. The Executive may elect to have such tax withholding satisfied, in whole or in part, by (a) authorizing the Company to withhold a number of shares of Stock to be issued in settlement of a RSU with a Fair Market Value (determined as of the date of payment of the Stock) equal to the amount of the required withholding tax, (b) transferring to the Company shares of Stock owned by the Executive with a Fair Market Value (determined as of the date of payment of the Stock) equal to the amount of the required withholding tax, (c) payment of cash, and/or (d) if the Executive is employed by the Company at the time such withholding is effected, by withholding from the Executive’s then-current cash compensation equal to the amount of the required withholding tax. The Executive’s satisfaction of any tax withholding requirements imposed by the Board shall be a condition precedent to the Company’s obligation as may otherwise be provided hereunder to pay any amounts in settlement of vested RSUs. Any Executive who surrenders previously owned shares of Stock to satisfy withholding obligations incurred in connection with the RSUs must comply with the applicable provisions of Rule 16b-3 of the Exchange Act, if applicable.

Section 7. Code Section 280G. If a Change in Control occurs and payments are made under this Agreement, and the aggregate of the RSUs awarded to the Executive that vest under this Agreement, and all payments under any other agreement, plan, program or policy of the Company in connection with such Change in Control (" Total Payments" ) will be subject to an excise tax under the provisions of Code Section 4999 (" Excise Tax" ), the Total Payments shall be reduced so that the maximum amount of the Total Payments (after reduction) will be one dollar ($1.00) less than the amount that would cause the Total Payments to be subject to the Excise Tax; provided, however, that the Total Payments shall only be reduced to the extent the after-tax value of amounts received by the Executive after application of the above reduction would exceed the after-tax value of the Total Payments received by the Executive without application of such reduction. In making any determination as to whether the Total Payments would be subject to an Excise Tax, consideration shall be given to whether any portion of the Total Payments could reasonably be considered, based on the relevant facts and circumstances, to be reasonable compensation for services rendered (whether before or after the consummation of the applicable Change in Control).

Section 8. Transferability of RSUs. The Executive may not sell, transfer, pledge, assign or otherwise alienate or hypothecate the RSUs, other than by will or the laws of descent and distribution. Any effort to

assign or transfer the RSUs or the rights under this Agreement will be wholly ineffective, and will be grounds for termination by the Board of all rights of the Executive under this Agreement.

Section 9. No Right to Continued Service. Neither this Agreement nor the Plan shall confer upon the Executive any right to continue as an employee of the Company or an Affiliate. Further, nothing in this Agreement or the Plan shall be construed to limit the right of the Company to terminate the Executive’s employment at any time, with or without cause.

Section 10. Adjustments . In the event that any change in the outstanding shares of Stock of the Company (including an exchange in Stock for stock or other securities of another corporation) occurs by reason of a Stock dividend or split, recapitalization, merger, consolidation, combination, exchange in shares or other similar corporate changes, other than for consideration received by the Company, the number of shares of RSUs awarded hereunder, and the Performance Hurdle, shall be appropriately adjusted by the Committee, in good faith, in its sole and absolute discretion, whose determination shall be conclusive, final and binding; provided, however, that fractional shares shall be rounded to the nearest whole share. In the event of any other change in the Stock, the Committee shall determine, in good faith, in its sole discretion whether such change equitably requires a change in the number or type of the shares of stock subject to the RSUs awarded hereunder, or in the Performance Hurdle, and any adjustment made by the Committee shall be conclusive, final, and binding.

Section 11. Restrictive Covenants. The Executive acknowledges and agrees that the services provided by the Executive to the Company and its Affiliates are of a special, unique and extraordinary nature, and that the restrictions contained in this Section are necessary to prevent the use and disclosure of Confidential Information and to protect other legitimate business interests of the Company and its Affiliates. The Executive acknowledges that all of the restrictions in this Section are reasonable in all respects, including duration, territory and scope of activity. In the event a court of competent jurisdiction determines as a matter of law that any of the terms of this Section 11 are unreasonable or overbroad, the Company and the Executive expressly allow such court to reform this Agreement to the extent necessary to make it reasonable as a matter of law and to enforce it as so reformed. The Executive agrees that the restrictions contained in this Section shall be construed as separate agreements independent of any other provision of this Agreement or any other agreement between the Executive and the Company or its Affiliates.

(a)

Confidentiality. In the course of the Executive’s performing his duties for the Company and its Affiliates, the Company expects to provide the Executive with various proprietary, confidential and trade secret information of the Company and its Affiliates. Such proprietary, confidential and trade secret information may include, but not be limited to, any database of customer accounts; any customer, supplier and distributor list; customer profiles; information regarding sales and marketing activities and strategies; trade secrets; data regarding technology, products and services; information regarding pricing, pricing techniques and procurement; financial data and forecasts regarding the Company and customers, suppliers and distributors of the Company; software programs and intellectual property (collectively, " Confidential Information" ). All Confidential Information shall be and remain the sole property of the Company and its assigns, and the Company shall be and remain the sole owner of all patents, copyrights, trademarks, names and other rights in connection therewith and without regard to whether the Company is at any particular time developing or marketing the same. The Executive acknowledges that the Confidential Information is a valuable, special and unique asset of the Company and its Affiliates and that his access to and knowledge of the Confidential Information is essential to the performance of his duties as an employee of the Company and its Affiliates. In light of the competitive nature of the business in which the Company and its Affiliates are engaged, the Executive agrees that he will, both during his employment or service with the

Company and its Affiliates and thereafter, maintain the strict confidentiality of all Confidential Information known or obtained by him or to which he has access in connection with his employment by or service with the Company and that he will not, without prior written consent of the Board, for and on behalf of the Company, (i) disclose any Confidential Information to any person or entity (other than in proper performance of his duties hereunder) or (ii) make any use of any Confidential Information for his own purposes or for the direct or indirect benefit of any person or entity other than the Company or its Affiliates. Confidential Information shall not be deemed to include information that (w) becomes generally available to the public through no fault of the Executive, (x) is previously known by the Executive prior to his receipt of such information from the Company, (y) becomes available to the Executive on a non-confidential basis from a source which, to the Executive’s knowledge, is not prohibited from disclosing such information by legal, contractual or fiduciary obligation to the Company or (z) is required to be disclosed in order to comply with any applicable law or court order. Immediately upon termination of the Executive’s employment or at any other time upon the Company’s request, the Executive will return to the Company all memoranda, notes and data, computer software and hardware, records or other documents compiled by the Executive or made available to the Executive during the Executive’s employment with the Company concerning the Business of the Company, including without limitation, all files, records, documents, lists, equipment, supplies, promotional materials, keys, phone or credit cards and similar items and all copies thereof or extracts therefrom.

(b)

No Competition. During the Executive’s employment with the Company or its Affiliates and for a period of one (1) year following termination of the Executive’s employment for any reason, but only if at least a portion of the RSUs has vested, the Executive agrees that the Executive shall not, on behalf of the Executive or for others, directly or indirectly (whether as employee, consultant, investor, partner, sole proprietor or otherwise), be employed by, perform any services for, or hold any ownership interest in any business engaged in the business of obtaining funds in the form of deposits and wholesale borrowings and investing those funds in single-family mortgages and other types of loans (the " Business of the Company" ) in any state of the United States where the Company is doing business. In addition, to the extent the one-year period following termination has elapsed, but the Executive is still entitled to payouts under this Agreement, the one-year period shall be extended until the final payout of RSUs. The parties agree that this provision shall not prohibit the ownership by the Executive, solely as an investment, of securities of a person engaged in the Business of the Company if (i) the Executive is not an "affiliate" (as such term is defined in Rule 12b-2 of the regulations promulgated under the Exchange Act) of the issuer of such securities, (ii) such securities are publicly traded on a national securities exchange and (iii) the Executive does not, directly or indirectly, beneficially own more than two percent (2%) of the class of which such securities are a part.

(c)

No Solicitation of Employees. The Executive agrees that, both during the Executive’s employment with the Company and for a period of one (1) year following termination of the Executive’s employment with the Company for any reason, the Executive will not, directly or indirectly, on behalf of the Executive or any other person or entity, hire, engage or solicit to hire for employment or consulting or other provision of services, any person who is actively employed (or in the six (6) months preceding the Executive’s termination of employment with the Company was actively employed) by the Company, except for rehire by the Company. This includes, but is not limited to, inducing or attempting to induce, or influence or attempting to influence, any person employed by the Company to terminate his or her employment with the Company.

(d)

No Solicitation of Customers. The Executive agrees that, both during the Executive’s employment with the Company and for a period of one (1) year following termination of the Executive’s employment with the Company and its Affiliates for any reason, the Executive will not directly, on behalf of any competitor of the Company in the Business of the Company, solicit the business of any entity within the United States who is known by the Executive to be a customer of the Company or its Affiliates.


(e)	Survival. The obligations and provisions contained in this Section shall survive the Executive’s separation from service and this Agreement and shall be fully enforceable thereafter.

Section 12. Company Policies; Forfeiture.

(a)

The Executive agrees that the grant of RSUs and the shares of Stock issued upon vesting of the RSUs will be subject to any applicable clawback or recoupment policies, insider trading policies, policies related to confidential information and assignment of intellectual property, stock ownership guidelines and other policies that may be implemented or amended by the Company, from time to time. This provision may be modified pursuant to any applicable laws or regulations.

(b)

Notwithstanding anything to the contrary in this Agreement, the Executive agrees that during the Executive’s employment or other service with the Company or an Affiliate and thereafter, if the Executive violates any of the restrictive covenants under Section 11 above, irrespective of whether the restrictive covenant is enforceable under applicable law, immediately upon demand by the Company, in addition to any other remedy that may apply under any employment agreement, the law or otherwise, the Executive shall return to the Company the RSUs under this Agreement and the proceeds resulting from a sale of Stock received under this Agreement during the twelve- (12-) month period ending on the Executive’s date of termination.

Section 13. Notices. Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery, upon deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or upon deposit with a reputable overnight courier. Notice shall be addressed to the Company at its principal executive office and to the Executive at the address most recently provided by the Executive to the Company.

Section 14. Entire Agreement; Amendments. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof. The Board shall have authority, subject to the express provisions of this Agreement, to interpret this Agreement, to establish, amend, and rescind any rules and regulations relating to this Agreement, to modify the terms and provisions of this Agreement, and to make all other determinations in the judgment of the Board necessary or desirable for the administration of this Agreement. The Board may correct any defect or supply any omission or reconcile any inconsistency in this Agreement in the manner and to the extent it shall deem necessary or desirable to carry it into effect. All action by the Board under the provisions of this Section shall be final, conclusive, and binding for all purposes. Except as otherwise provided in this Section, any amendment of this Agreement that materially adversely affects the Executive shall require the written consent of the Executive.

Section 15. Successors and Assigns. This Agreement and the award of RSUs hereunder are personal to the Executive and shall not be assignable by the Executive other than by will or the laws of descent and distribution, without the written consent of the Company. This Agreement shall inure to the benefit of and

be enforceable by the Executive’s legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors. It shall not be assignable by the Company except in connection with the sale or other disposition of all or substantially all the assets or business of the Company.

Section 16. No Impact on Other Benefits. The value of the Executive’s RSUs is not part of the Executive’s compensation for purposes of calculating any severance, retirement, welfare, insurance or similar employee benefit.

Section 17. Severability. If any provision of this Agreement for any reason should be found by any court of competent jurisdiction to be invalid, illegal or unenforceable, in whole or in part, such declaration shall not affect the validity, legality or enforceability of any remaining provision or portion hereof, which remaining provision or portion hereof shall remain in full force and effect as if this Agreement had been adopted with the invalid, illegal or unenforceable provision or portion hereof eliminated.

Section 18. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Michigan, as such, laws are applied to contracts entered into and performed in such State, without giving effect to the choice of law provisions thereof. The jurisdiction and venue for any disputes arising under, or any action brought to enforce the terms of, this Agreement shall be resolved exclusively in the courts of the State of Michigan, including the Federal Courts located therein (should Federal jurisdiction exist).

Section 19. Code Section 409A. Notwithstanding anything herein to the contrary, this Agreement and the award of RSUs hereunder are intended to comply with the requirements of Code Section 409A, and shall be interpreted and administered in accordance with such intent. Should any provision of this Agreement be found not to comply with, or otherwise not be exempt from, the provisions of Code Section 409A, such provision shall be modified and given effect (retroactively if necessary), in the sole discretion of the Committee, and without the consent of the Executive, in such manner as the Committee determines to be necessary or appropriate to comply with, or to effectuate an exemption from, Code Section 409A. Each payment or distribution of Stock made under this Agreement shall be designated as a separate payment within the meaning of Code Section 409A. Any payment or distribution that is subject to Code Section 409A and payable upon the Executive’s termination of employment or other similar event shall not be made unless the Executive has experienced a "separation from service" as defined under Code Section 409A. Any payment subject to Section 409A that is to be made upon a "separation from service" to the Executive on any date when the Executive is a "specified employee" as defined under Code Section 409A shall not be paid before the date that is six (6) months following the Executive’s "separation from service" or, if earlier, the Executive’s death. Notwithstanding anything in this Agreement to the contrary, the Executive shall be solely responsible for the tax consequences of the RSUs, and in no event shall the Company have any responsibility or liability if any payment under this Agreement is subject to and/or fails to comply with the requirements of Code Section 409A. The Company will settle and pay out any RSUs within two and one-half (2½) months following the end of the year in which the Executive’s right to the RSUs is no longer subject to a substantial risk of forfeiture.

Section 20. Headings. The headings and captions in this Agreement shall not be construed to limit or modify the terms or meaning of this Agreement.

Section 21. No Limitation on the Company’s Rights. The awarding of RSUs under this Agreement shall not and will not in any way affect the rights or powers of the Company or its Affiliates to make adjustments, reclassifications or changes in its capital or business structure or to merge, consolidate, reincorporate, dissolve, liquidate, sell or transfer all or any part of its business or assets.

Section 22. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument.

Section 23. Acceptance. As a condition of receiving this Award, the Executive agrees that the Committee, and to the extent that authority is afforded to the Board, the Board, shall have full and final authority to construe and interpret this Agreement, and to make all other decisions and determinations as may be required under this Agreement as they may deem necessary or advisable for administration of this Agreement, and that all such interpretations, decisions and determinations shall be final and binding on the Executive, the Company and all other interested persons. Any dispute regarding the interpretation of this Agreement shall be submitted by the Executive or the Company to the Committee for review. The resolution of such dispute by the Committee shall be final and binding on the Executive and the Company.

This Agreement is executed by the Company and the Executive as of the date and year first written above.

EXECUTIVE FLAGSTAR BANCORP, INC.

______________________________ By: __________________________________

Its: __________________________________

ATTACHMENT A

Quality Review for the Executive Long-Term Incentive Program

In conducting its Quality Review on each of the Performance Hurdle Date and the Payout Dates, the Board of Directors will measure performance relative to the Company peer group (listed below) with respect to the following two metrics:

Asset Quality : NPA Ratio (Non-Performing Assets / Total Assets)

Liquidity : Core Deposit Ratio (Total Deposits less Certificates of Deposits > $250,000 and excluding Brokered Deposits / Total Assets)

These metrics are measured on a pass/fail basis using the scale below. The Quality Review will be based on the publicly available metrics of the Company and the Company peer group as of the 12 month period ending on the last day of the most recently completed calendar quarter. If the Company has "passed" one or both of the metrics, then the Quality Review is satisfactory and all RSUs due to be paid are released to the Executive. If the Company has "failed" both metrics, then the Quality Review is not satisfactory and accordingly, the RSUs shall be paid, forfeited and/or carried forward in accordance with the terms of the Program.

Peer Group :


•	Associated Banc-Corp


•	BOK Financial Corp.


•	EverBank Financial


•	First Horizon National Corp.


•	First Niagara Financial Group


•	FirstMerit


•	Hilltop Holdings


•	HomeStreet


•	MB Financial


•	Nationstar Mortgage Holdings


•	PennyMac Financial Services


•	PHH


•	Talmer Bancorp


•	TCF Financial


•	Texas Capital BancShares


•	Umpqua Holdings


•	Walter Investment Management


•	Wintrust Financial Corp.

EXHIBIT 10.3

SECOND AMENDMENT TO

EMPLOYMENT AGREEMENT

WHEREAS, Flagstar Bancorp, Inc., a Michigan corporation maintaining offices at 5151 Corporate Drive, Troy, Michigan 48098 (the "Company"), Flagstar Bank, FSB a federally chartered savings bank and wholly-owned subsidiary of the Company (the "Bank" and, together with the Company, "Flagstar"), and Lee M. Smith (the "Executive") entered into an Employment Agreement, dated May 16, 2013 (the "Agreement"), which was subsequently amended effective March 2, 2015;

WHEREAS, Section 3.01 of the Agreement provides that the Agreement may be amended by written agreement signed by Flagstar and the Executive; and

WHEREAS, Flagstar and the Executive have agreed to amend the Agreement to restate certain provisions of the Agreement.

NOW THEREFORE, in consideration the Executive’s continued employment with the Bank and for other good and valuable consideration, the receipt of which is hereby acknowledged, effective as of October 22, 2015 (the "Effective Date"), Section 1.05 of the Agreement is amended in its entirety to read as follows:

1.05 Compensation .

(a)

Base Salary . During the portion of the Term commencing on February 28, 2015, the Bank shall pay to Executive a gross annualized base salary of $750,000 (the " Base Salary" ), payable monthly or more frequently in accordance with the Bank’s payroll policy for its other executives. During the Term, the Base Salary shall be reviewed for increase (but not decrease) at the discretion of the Board annually during the Term, subject to regulatory review, as applicable and, if increased, such increased amount shall become the Base Salary for purposes of this Agreement.

(b)

Annual Incentive Awards . During the portion of the Term commencing with the Company’s 2015 fiscal year, Executive shall be eligible to receive annual incentive awards (" Annual Incentives" ) with a target level of 70% of Base Salary based upon performance targets for the Bank’s holding company’s fiscal year, payable in cash as soon as practicable following the conclusion of that fiscal year, in accordance with the terms and conditions of the Company’s annual incentive program(s) as adopted from time to time by the Compensation Committee of the Board (the " Committee" ); provided that the Annual Incentive payout in 2016 for the Bank’s holding company’s performance in the 2015 fiscal year shall be pro-rated based upon the number of days from March 1, 2015 until December 31, 2015.


(1)	LTIP . During the portion of the Term commencing with the Company’s 2015 fiscal year, Executive shall be eligible to receive an annual long-term equity-based award (" LTIP" ) with a target level of 70% of Base Salary. The forms, vesting schedules

(including any performance goals) and other terms and conditions of the LTIP shall be determined by the Committee in accordance with the applicable long-term incentive program, as in effect from time to time, and shall further be subject to the terms and conditions of the award agreements evidencing the LTIP awards. Equity-based awards made in connection with the LTIP shall be granted under the Flagstar Bancorp, Inc. 2006 Equity Incentive Plan or any successor plan thereto.

(2)

ExLTIP . Executive has been granted a one-time, long-term equity-based incentive award (" ExLTIP" ). The ExLTIP award, granted as of the date hereof, consists of 264,884 Restricted Stock Units (" RSUs" ) that vest upon the achievement of a specified performance goal. If the performance goal is attained, the RSUs shall be paid out in five installments, subject to a quality review prior to each payment with respect to a portion of the RSUs. The forms, vesting, payout schedule (including the performance goal) and other terms and conditions of the ExLTIP are subject to the terms and conditions of the award agreement evidencing the ExLTIP award (a copy of which is attached hereto), and are further governed by the terms, and subject to shareholder approval, of the 2016 Stock and Incentive Plan and the authorized shares thereunder (the " Plan" ). If the Plan is not approved at the 2016 annual meeting of shareholders, this provision and the ExLTIP award (if made prior to such meeting) shall be null and void; provided, however, that the Company shall use its reasonable best efforts to cause the Plan to be approved.

(d)

Business Expenses . The Bank shall promptly pay directly, or shall reimburse Executive for, all business expenses, including but not limited to expenses for travel and entertainment, paid or incurred by Executive during the Term that are reasonable and appropriate to the conduct by Executive of Flagstar’s business, subject to Executive’s providing reasonable substantiation of such expenses to Flagstar in accordance with the Bank’s policies. .

(e)

Legal Expenses . The Bank shall pay the reasonable legal fees and expenses incurred by Executive in negotiating this Agreement and any amendment hereto; provided that the Executive submits a written request for such payment with reasonably detailed supporting documentation to the Bank’s Human Resources Department no later than sixty (60) days after the Effective Date and the effective date of any amendment. The Bank shall make the payment required by the immediately preceding sentence within thirty (30) days after the Executive’s submits such written request.

Except as set forth above, the Agreement shall continue in full force and effect in accordance with its terms.

IN WITNESS WHEREOF Flagstar and the Executive have caused this amendment to be executed by its duly authorized officers as of the Effective Date.

FLAGSTAR BANK, FSB

By: _______________________________

Name:

Title

FLAGSTAR BANCORP, INC.

By: _______________________________

Name:

Title

EXECUTIVE:

___________________________________

Lee M. Smith

EXHIBIT 10.4

AMENDMENT TO

EMPLOYMENT AGREEMENT

WHEREAS, Flagstar Bancorp, Inc., a Michigan corporation maintaining offices at 5151 Corporate Drive, Troy, Michigan 48098 (the " Company" ), Flagstar Bank, FSB, a federally chartered savings bank maintaining offices at 5151 Corporate Drive, Troy Michigan (the " Bank" and together with the Company, " Flagstar" ), and Alessandro DiNello (the " Executive" ) entered into an Employment Agreement, dated May 16, 2013 (the " Agreement" );

WHEREAS, Section 3.01 of the Agreement provides that the Agreement may be amended by written agreement signed by Flagstar and the Executive; and

WHEREAS, Flagstar and the Executive have agreed to amend the Agreement to restate certain provisions of the Agreement;

NOW THEREFORE, in consideration the Executive’s continued employment with the Bank and for other good and valuable consideration, the receipt of which is hereby acknowledged, effective as of October 22, 2015 (the " Effective Date" ), Section 1.05 of the Agreement is amended and restated in its entirety to read as follows:

1.05 Compensation .

(a)

Base Salary . During the Term, and continuing until January 1, 2016, the Bank shall pay to Executive a gross annualized base salary of $895,000 (the " Base Salary" ), payable monthly or more frequently in accordance with the Bank’s payroll policy for its other executives. During the portion of the Term commencing on January 1, 2016, the Bank shall pay to Executive a gross annualized base salary of $1,000,000 (which shall become the Base Salary hereunder), payable monthly or more frequently in accordance with the Bank’s payroll policy for its other executives. During the Term, the Base Salary shall be reviewed for increase (but not decrease) at the discretion of the Board annually during the Term, subject to regulatory review, as applicable and, if increased, such increased amount shall become the Base Salary for purposes of this Agreement.

(b)

Share Salary . During the Term, and continuing until December 31, 2015, the Company shall pay to Executive a gross annual share salary of $600,000, pro-rated for any partial calendar year during the Term (which proration period for 2013 shall begin on the Effective Date) and payable, at the time that base salary is payable to Executive, in grants of unrestricted shares of the Common Stock of the Company (the " Common Stock" ) pursuant to the Company’s 2006 Equity Incentive Plan, having a Fair Market Value on the date of grant equal to the pro rata portion of the share salary payable on each such pay date (the " Share Salary" ). For purposes of this Agreement, " Fair Market Value" shall mean, as of any specified date, the closing price of the Common Stock as reported in the Wall Street Journal’s New York Stock Exchange (" NYSE" ) - Composite Transactions listing for such day (corrected for obvious typographical errors), or if the shares are listed for trading on the NYSE but no closing price is reported in such listing for such day, then the last reported closing price for such shares on the NYSE, or if such shares are not listed or

traded on the NYSE, the closing sales price on any national securities exchange on which the Common Stock is traded, or if the Common Stock is not traded on any national securities exchange, then the mean of the reported high and low sales prices for such shares in the over-the-counter market, as reported by the OTC Bulletin Board or the OTC Markets Group, Inc., or in all other cases, the fair market value of a share of Common Stock as determined in good faith by the Board. The Board may, but shall have no obligation to, engage one or more appraisers in making its determination of Fair Market Value, and the Fair Market Value as determined by the Board may be higher or lower than any such appraisal. In making its determination of Fair Market Value, the Board shall comply with Section 409A (as defined below), to the extent applicable, and the applicable Internal Revenue Service and Treasury Department regulations thereunder.

(c)

Annual Incentive Awards . During the Term commencing with the Company’s 2016 fiscal year, Executive shall be eligible to receive annual incentive awards (" Annual Incentives" ) for each fiscal year during the Term with a target level of 100% of Base Salary based upon performance targets for the Company’s fiscal year, payable in cash as soon as practicable following the conclusion of that fiscal year, in accordance with the terms and conditions of the Company’s annual incentive program(s) as adopted from time to time by the Compensation Committee of the Board (the " Committee" ).


(d)	Equity-Based Awards .

(1)

Bonus Shares . The Company shall grant to Executive within sixty (60) days after the end of each calendar year during the Term a number of shares of restricted Common Stock having a Fair Market Value of $600,000 (the " Bonus Shares" ) (pro-rated for any partial calendar year during the Term, which proration period for 2013 shall begin on the Effective Date), with the Fair Market Value of such shares determined on the date of grant. Any such granted restricted shares shall vest (as determined by the Board, or a committee thereof designated to make such a determination, in its sole discretion) in accordance with performance goals (which performance goals shall be determined by the Board or such committee after consultation with Executive and shall be reasonably achievable without excessive risk taking in the context of Flagstar’s business plan approved by the Board or such committee after consultation with Executive). The Bonus Shares shall be reviewed for increase or decrease (but not below $600,000) at the discretion of the Board annually during the Term, and, if increased or decreased, such increased amount shall become the "Discretionary Share" for purposes of this Agreement.

(2)

ExLTIP . Executive has been granted a one-time, long-term equity-based incentive award (" ExLTIP" ). The ExLTIP award, granted as of the date hereof, consists of 642,857 Restricted Stock Units (" RSUs" ) that vest upon the achievement of a specified performance goal. If the performance goal is attained, the RSUs shall be paid out in five installments, subject to a quality review prior to each payment with respect to a portion of the RSUs. The forms, vesting, payout schedule (including the performance goal) and other terms and conditions of the ExLTIP are subject to the terms and conditions of the award agreement evidencing the ExLTIP award (a copy of which is attached hereto), and are further governed by the terms, and subject to shareholder approval, of the 2016 Stock and Incentive Plan and the authorized shares thereunder (the " Plan" ). If the Plan is not approved at the 2016 annual

meeting of shareholders, this provision and the ExLTIP award (if made prior to such meeting) shall be null and void; provided, however, that the Company shall use its reasonable best efforts to cause the Plan to be approved.

(3)

LTIP . In the event that the Performance Hurdle (as defined in the ExLTIP) is met, Executive shall no longer be entitled to receive Bonus Shares (other than a pro rata award with respect to the portion of the fiscal year that elapsed before the Performance Hurdle was met), but shall then become eligible to receive an annual long-term equity-based award (" LTIP" ) with a target level of 100% of Base Salary. The forms, vesting schedules (including any performance goals) and other terms and conditions of the LTIP shall be determined by the Committee in accordance with the applicable long-term incentive program, as in effect from time to time, and shall further be subject to the terms and conditions of the award agreements evidencing the LTIP awards. Equity-based awards made in connection with the LTIP shall be granted under the Flagstar Bancorp, Inc. 2006 Equity Incentive Plan or any successor plan thereto.

(e)

(f)

Except as set forth above, the Agreement shall continue in full force and effect in accordance with its terms.

IN WITNESS WHEREOF Flagstar and the Executive have caused this amendment to be executed by its duly authorized officers as of the Effective Date.

FLAGSTAR BANK, FSB

By: _______________________________

Name:

Title

FLAGSTAR BANCORP, INC.

By: _______________________________

Name:

Title

EXECUTIVE:

___________________________________

Alessandro DiNello

EXHIBIT 31.1

SECTION 302 CERTIFICATION

I, Alessandro DiNello certify that:


(1)	I have reviewed this quarterly report on Form 10-Q of Flagstar Bancorp, Inc. (the "registrant");


(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


(3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


(4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


(5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):


(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:	November 6, 2015	/s/ Alessandro DiNello
		Alessandro DiNello
		President and Chief Executive Officer

EXHIBIT 31.2

SECTION 302 CERTIFICATION

I, James K. Ciroli, certify that:


(1)	I have reviewed this quarterly report on Form 10-Q of Flagstar Bancorp, Inc. (the "registrant");


(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


(3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


(4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


(5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):


(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:	November 6, 2015	/s/ James K. Ciroli
		James K. Ciroli
		Executive Vice President and Chief Financial Officer

EXHIBIT 32.1

SECTION 906 CERTIFICATION

In connection with the quarterly report of Flagstar Bancorp, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alessandro DiNello, President and Chief Executive Officer of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date:	November 6, 2015	/s/ Alessandro DiNello
		Alessandro DiNello
		President and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Flagstar Bancorp, Inc. and will be retained by Flagstar Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

SECTION 906 CERTIFICATION

In connection with the quarterly report of Flagstar Bancorp, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James K. Ciroli, Executive Vice President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date:	November 6, 2015	/s/ James K. Ciroli
		James K. Ciroli
		Executive Vice President and Chief Financial Officer