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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
  
(Mark One)
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012March 31, 2013
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16577
 
 
 
(Exact name of registrant as specified in its charter).
 
 
Michigan  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)
 
  
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 ninety 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 filerý
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 OctoberApril 25, 20122013, 55,833,10956,039,487 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.


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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, by their nature, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in a forward-looking statement. Examples of forward-looking statements include statements regarding our expectations, beliefs, plans, goals, objectives and future financial or other performance. 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. 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.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include:

(1)Volatile interest rates that impact, amongst other things, (i) the mortgage banking business, (ii) our ability to originate loans and sell assets at a profit, (iii) prepayment speeds and (iv) our cost of funds, could adversely affect earnings growth opportunities and our ability to pay dividends to stockholders;

(2)Competitive factors for loansmortgage loan originations could negatively impact gain on loan sale margins;

(3)Competition from banking and non-banking companies for deposits and loans can affect our growth opportunities, earnings, gain on sale margins and market share and ability to transform business model;share;

(4)Changes in the regulation of financial services companies and government-sponsored housing enterprises, and in particular, declines in the liquidity of the residential mortgage loan secondary market, could adversely affect our business;

(5)Changes in regulatory capital requirements or an inability to achieve or maintain desired capital ratios could adversely affect our growth and earnings opportunities and our ability to originate certain types of loans, as well as our ability to sell certain types of assets for fair market value or to transform business model;value;

(6)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 criminal activity and the further decline of asset values in certain geographic markets, may significantly affect our business activities, loan losses, reserves, earnings and business prospects;

(7)Factors concerning the implementation of proposed refinementsRepurchases and transformation of our business model could result in slower implementation times than we anticipate and negate any competitive advantage that we may enjoy;

(8)Actions ofindemnity demands by mortgage loan purchasers, guarantors and insurers, regarding repurchases and indemnity demands and uncertainty related to foreclosure procedures, and the outcome of current and future legal or regulatory proceedings, including our litigation with Assured Guaranty Municipal Corp. and MBIA Insurance Corporation, could result in unforeseen consequences and adversely affect our business activities and earnings;

(9)(8)The Dodd-Frank Wall Street Reform and Consumer Protection Act has resulted in the elimination of the Office of Thrift Supervision (the "OTS"), tightening of capital standards, and the creation of a new Consumer Financial Protection Bureau and has resulted, or will result, in new laws and regulations, and regulatory supervisorssuch as the emerging mortgage servicing standards, that are expected to increase our costs of operations. In addition, the change to the Board of Governors of the Federal Reserve System (the "Federal Reserve") as our primary federal regulator and to the Office of the Comptroller of the Currency (the "OCC") as ourthe primary federal regulator of Flagstar Bank, FSB and its subsidiary (collectively, the "Bank") may result in interpretations or in OCC enforcement actions, different thanthat differ from those of the OTS and may affectin a manner that adversely affects our operations and our relationships with institutional counterparties;operations;

(10)(9)Both the volume and the nature of consumer actions and other forms of litigation against financial institutions have increased, and to the extent that such actions are brought against us, or threatened, the cost of defending such suits as well as potential exposure could increase our costs of operations;

(11)(10)Our compliance with the terms and conditions of the agreement with the U.S. Department of Justice, the impact of performance and enforcement of commitments under, and provisions contained in the agreement, and our accuracy and ability to estimate the financial impact of that agreement, including the fair value of the future payments required, could accelerate our related litigation settlement expenses;


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agreement, and our accuracy and ability to estimate the financial impact of that agreement, including the fair value of the future payments required, could accelerate our litigation settlement expenses relating thereto;
(11)Our, or the Bank's, failure to comply with the terms and conditions of the Supervisory Agreement with the Federal Reserve or the Consent Order with the OCC, respectively, could result in further enforcement actions against us, which could negatively affect our results of operations and financial condition; and

(12)Our compliance with the terms and conditions of the Consent Order with the OCC;

(13)The downgrade by Standards & Poor's of the long-term credit rating of the U.S. by one or more ratings agencies could materially affect global and domestic financial markets and economic conditions, which may affect our business activities, financial condition, and liquidity;

(14)If we do not regain compliance with the New York Stock Exchange (“NYSE”) continued listing requirements, our common stock may be delisted from the NYSE (the stock price deficiency is deemed cured if it promptly exceeds $1.00 per share after October 11, 2012, the date of the reverse split, and remains above that level for at least the following 30 trading days); and

(15)Our potential loss of key personnel or our inability to attract and retain qualified personnel in the future could affect our ability to operate effectively.liquidity.

All of the above factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such factor on our business.

Please also refer to Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 20112012 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.

Although we believe that these forward-looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies and other factors. Accordingly, we cannot give you 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.




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FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2012MARCH 31, 2013
TABLE OF CONTENTS
 
   
   
Item 1.
Item 2.
Item 3.
Item 4.
   
   
Item 1.
Item 1A.  
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
   

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated financial statements of the Company are as follows:
Consolidated Statements of Financial ConditionSeptember 30, 2012March 31, 2013 (unaudited) and December 31, 20112012
Consolidated Statements of Operations – For the three and nine months ended September 30, 2012March 31, 2013 and 20112012 (unaudited)
Consolidated Statements of Comprehensive Income (Loss) – For the three and nine months ended September 30, 2012March 31, 2013 and 20112012 (unaudited)
Consolidated Statements of Stockholders’ Equity – For the ninethree months ended September 30, 2012March 31, 2013 and 20112012 (unaudited)
Consolidated Statements of Cash Flows – For the ninethree months ended September 30, 2012March 31, 2013 and 20112012 (unaudited)
Notes to the Consolidated Financial Statements (unaudited)
        Note 1 - Nature of Business
        Note 2 - Basis of Presentation and Accounting Policies
        Note 3 - Fair Value Accounting
        Note 4 - Investment Securities
        Note 5 - Loans Held-for-Sale
        Note 6 - Loans Repurchased With Government Guarantees
        Note 7 - Loans Held-for-Investment
        Note 8 - Pledged Assets
        Note 9 - Private-Label Securitization Activity
        Note 10 - Mortgage Servicing Rights
        Note 11 - Derivative Financial Instruments
        Note 12 - FHLB Advances
        Note 13 - Long-Term Debt
        Note 14 - Representation and Warranty Reserve
        Note 15 - Warrant Liabilities
        Note 16 - Stockholders' Equity
        Note 17 - Earnings (Loss) Per Share
        Note 18 - Compensation Plans
        Note 19 - Income Taxes
        Note 20 - Legal Proceedings, Contingencies and Commitments
        Note 21 - Segment Information
        
        




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Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In thousands, except share data)
September 30,
2012
 December 31,
2011
March 31,
2013
 December 31,
2012
(Unaudited)  (Unaudited)  
Assets      
Cash and cash items$53,883
 $49,715
$50,840
 $38,070
Interest-earning deposits949,514
 681,343
2,179,846
 914,723
Cash and cash equivalents1,003,397
 731,058
2,230,686
 952,793
Securities classified as trading170,073
 313,383
170,139
 170,086
Securities classified as available-for-sale198,861
 481,352
169,827
 184,445
Loans held-for-sale ($3,076,994 and $1,629,618 at fair value at September 30, 2012 and December 31, 2011, respectively)3,251,936
 1,800,885
Loans held-for-sale (including $2,510,669 and $2,865,696 at fair value at March 31, 2013 and December 31, 2012, respectively)2,677,239
 3,939,720
Loans repurchased with government guarantees1,931,163
 1,899,267
1,604,906
 1,841,342
Loans held-for-investment ($21,392 and $22,651 at fair value at September 30, 2012 and December 31, 2011, respectively)6,552,399
 7,038,587
Loans held-for-investment (including $18,393 and $20,219 at fair value at March 31, 2013 and December 31, 2012, respectively)4,743,266
 5,438,101
Less: allowance for loan losses(305,000) (318,000)(290,000) (305,000)
Loans held-for-investment, net6,247,399
 6,720,587
4,453,266
 5,133,101
Total interest-earning assets12,748,946
 11,896,817
11,255,223
 12,183,417
Accrued interest receivable106,458
 105,200
81,056
 91,992
Repossessed assets, net119,468
 114,715
114,356
 120,732
Federal Home Loan Bank stock301,737
 301,737
301,737
 301,737
Premises and equipment, net211,981
 203,578
223,276
 219,059
Mortgage servicing rights at fair value686,799
 510,475
727,207
 710,791
Other assets669,950
 455,236
340,455
 416,214
Total assets$14,899,222
 $13,637,473
$13,094,150
 $14,082,012
Liabilities and Stockholders’ Equity      
Deposits$9,489,169
 $7,689,988
$7,847,291
 $8,294,295
Federal Home Loan Bank advances3,088,000
 3,953,000
2,900,000
 3,180,000
Long-term debt248,560
 248,585
247,435
 247,435
Total interest-bearing liabilities12,825,729
 11,891,573
10,994,726
 11,721,730
Accrued interest payable12,522
 8,723
15,402
 13,420
Representation and warranty reserve202,000
 120,000
185,000
 193,000
Other liabilities ($19,100 and $18,300 at fair value at September 30, 2012 and December 31, 2011, respectively)608,372
 537,461
Other liabilities (including $19,100 at fair value at both March 31, 2013 and December 31, 2012)714,994
 994,500
Total liabilities13,648,623
 12,557,757
11,910,122
 12,922,650
Commitments and contingencies – Note 20
 

 
Stockholders’ Equity      
Preferred stock $0.01 par value, liquidation value $1,000 per share, 25,000,000 shares authorized; 266,657 issued and outstanding at September 30, 2012 and December 31, 2011, respectively258,973
 254,732
Common stock $0.01 par value, 70,000,000 shares authorized; 55,828,470 and 55,577,564 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively5,583
 5,558
Preferred stock $0.01 par value, liquidation value $1,000 per share, 25,000,000 shares authorized; 266,657 issued and outstanding at March 31, 2013 and December 31, 2012, respectively261,828
 260,390
Common stock $0.01 par value, 70,000,000 shares authorized; 56,033,204 and 55,863,053 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively561
 559
Additional paid in capital1,470,355
 1,466,461
1,476,624
 1,476,569
Accumulated other comprehensive loss(2,042) (7,819)(656) (1,658)
Accumulated deficit(482,270) (639,216)(554,329) (576,498)
Total stockholders’ equity1,250,599
 1,079,716
1,184,028
 1,159,362
Total liabilities and stockholders’ equity$14,899,222
 $13,637,473
$13,094,150
 $14,082,012
The accompanying notes are an integral part of these Consolidated Financial Statements.

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Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
(Unaudited)(Unaudited)
Interest Income          
Loans$114,158
 $109,966
 $343,677
 $310,234
$91,950
 $113,908
Securities classified as available-for-sale or trading4,912
 9,626
 20,333
 26,673
2,094
 8,571
Interest-earning deposits and other672
 433
 1,546
 2,358
946
 412
Total interest income119,742
 120,025
 365,556
 339,265
94,990
 122,891
Interest Expense          
Deposits17,819
 22,679
 55,126
 74,603
13,508
 18,986
FHLB advances27,091
 30,121
 81,870
 90,317
24,161
 27,394
Other1,753
 1,611
 5,270
 4,834
1,652
 1,778
Total interest expense46,663
 54,411
 142,266
 169,754
39,321
 48,158
Net interest income73,079
 65,614
 223,290
 169,511
55,669
 74,733
Provision for loan losses52,595
 36,690
 225,696
 113,383
20,415
 114,673
Net interest income (expense) after provision for loan losses20,484
 28,924
 (2,406) 56,128
35,254
 (39,940)
Non-Interest Income          
Loan fees and charges37,359
 18,383
 102,116
 49,233
33,360
 29,973
Deposit fees and charges5,255
 7,953
 15,216
 23,297
5,146
 4,923
Loan administration11,099
 (3,478) 74,997
 66,308
20,356
 38,885
Gain (loss) on trading securities237
 20,385
 (2,023) 20,414
51
 (5,971)
Loss on transferors’ interest(118) (186) (1,771) (4,825)(174) (409)
Net gain on loan sales334,427
 103,858
 751,945
 193,869
137,540
 204,853
Net loss on sales of mortgage servicing rights(1,332) (2,587) (4,631) (5,080)(4,219) (2,317)
Net gain on securities available-for-sale2,616
 
 2,946
 
Net gain on securities available-for-sale (includes zero and $310 accumulated other comprehensive income reclassifications for unrealized net gains on available-for-sale securities)
 310
Net gain on sale of assets
 1,041
 
 1,297
958
 27
Total other-than-temporary impairment gain
 51,003
 2,810
 35,993

 3,872
Loss recognized in other comprehensive income before taxes
 (52,325) (5,002) (52,899)
 (5,047)
Net impairment losses recognized in earnings
 (1,322) (2,192) (16,906)
 (1,175)
Representation and warranty reserve – change in estimate(124,492) (38,985) (231,058) (80,776)(17,395) (60,538)
Other fees and charges, net8,686
 7,489
 29,903
 20,064
9,320
 12,816
Total non-interest income273,737
 112,551
 735,448
 266,895
184,943
 221,377

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Flagstar Bancorp, Inc.
Consolidated Statements of Operations, Continued
(In thousands, except per share data)
Flagstar Bancorp, Inc.
Consolidated Statements of Operations, Continued
(In thousands, except per share data)
Flagstar Bancorp, Inc.
Consolidated Statements of Operations, Continued
(In thousands, except per share data)
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
(Unaudited)(Unaudited)
Non-Interest Expense          
Compensation and benefits67,386
 55,238
 198,776
 164,701
77,208
 65,989
Commissions19,888
 10,188
 53,193
 25,193
17,462
 15,466
Occupancy and equipment18,833
 17,083
 54,490
 50,669
19,375
 16,950
Asset resolution12,487
 34,515
 70,108
 95,906
16,445
 36,770
Federal insurance premiums12,643
 10,665
 37,071
 30,180
11,240
 12,324
Other taxes2,036
 647
 3,363
 2,178
897
 946
Warrant expense (income)1,516
 (4,202) 3,513
 (7,027)
Loss on extinguishment of debt15,246
 
 15,246
 
Warrant (income) expense(3,500) 2,549
Loan processing expense17,111
 10,686
Legal and professional expense28,839
 16,817
General and administrative83,456
 26,557
 155,975
 67,044
11,513
 10,249
Total non-interest expense233,491
 150,691
 591,735
 428,844
196,590
 188,746
Income (loss) before federal income taxes60,730
 (9,216) 141,307
 (105,821)23,607
 (7,309)
(Benefit) provision for federal income taxes(20,380) 264
 (19,880) 792
Provision for federal income taxes
 
Net Income (Loss)81,110
 (9,480) 161,187
 (106,613)23,607
 (7,309)
Preferred stock dividend/accretion (1)
(1,417) (4,719) (4,241) (14,148)(1,438) (1,407)
Net income (loss) applicable to common stock$79,693
 $(14,199) $156,946
 $(120,761)$22,169
 $(8,716)
Income (loss) per share          
Basic (2)
$1.37
 $(0.26) $2.63
 $(2.18)$0.33
 $(0.22)
Diluted (2)
$1.36
 $(0.26) $2.61
 $(2.18)$0.33
 $(0.22)
(1)
The preferred stock dividend/accretion for the three and nine months ended September 30, 2012, respectively, represents only the accretion. On January 27, 2012, the Company elected to defer payment of dividends and interest on the preferred stock.
(2)Restated for a one-for-ten reverse stock split announced September 27, 2012 and began trading on October 11, 2012.

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 thousands)

For the Three Months Ended
March 31,
For the Three Months Ended September 30, For the Nine Months Ended September 30,2013 2012
2012 2011 2012 2011(Unaudited)
Net income (loss)$81,110
 $(9,480) $161,187
 $(106,613)$23,607
 $(7,309)
Other comprehensive income (loss), before tax          
Securities available-for-sale          
Change in net unrealized loss on sale of securities available-for-sale12,180
 (5,040) 26,411
 (4,815)1,002
 13,121
Reclassification of gain on sale of securities available-for-sale(2,616) 
 (2,946) 

 (310)
Additions for the amount related to the credit loss for which an OTTI impairment was not previously recognized
 1,322
 2,192
 16,906

 1,175
Total securities available-for-sale9,564
 (3,718) 25,657
 12,091
Other comprehensive income, before tax
 
 
 
Deferred tax benefit related to other comprehensive income resulting from non-agency CMO securities sales(19,880) 
 (19,880) 
Total securities available-for-sale, before tax1,002
 13,986
Other comprehensive income, net of tax(10,316) (3,718) 5,777
 12,091
1,002
 13,986
          
Comprehensive income (loss)$70,794
 $(13,198) $166,964
 $(94,522)
Comprehensive income$24,609
 $6,677
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 thousands)
Preferred
Stock
 
Common
Stock
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated
Deficit)
 
Total
Stockholders’
Equity
Preferred
Stock
 
Common
Stock
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated
Deficit)
 
Total
Stockholders’
Equity
Balance at December 31, 2010$249,196
 $5,533
 $1,461,373
 $(16,165) $(440,274) $1,259,663
Balance at December 31, 2011$254,732
 $556
 $1,471,463
 $(7,819) $(639,216) $1,079,716
(Unaudited)                      
Net loss
 
 
 
 (106,613) (106,613)
 
 
 
 (7,309) (7,309)
Total other comprehensive income
 
 
 12,091
 
 12,091

 
 
 13,986
 
 13,986
Restricted stock issued
 2
 (2) 
 
 
Dividends on preferred stock
 
 
 
 (10,000) (10,000)
Accretion of preferred stock4,148
 
 
 
 (4,148) 
1,407
 
 
 
 (1,407) 
Stock-based compensation
 15
 4,183
 
 
 4,198
Balance at September 30, 2011$253,344
 $5,550
 $1,465,554
 $(4,074) $(561,035) $1,159,339
Balance at December 31, 2011$254,732
 $5,558
 $1,466,461
 $(7,819) $(639,216) $1,079,716
Stock-based compensation (1)

 1
 1,027
 
 
 1,028
Balance at March 31, 2012$256,139
 $557
 $1,472,490
 $6,167
 $(647,932) $1,087,421
Balance at December 31, 2012$260,390
 $559
 $1,476,569
 $(1,658) $(576,498) $1,159,362
(Unaudited)                      
Net income
 
 
 
 161,187
 161,187

 
 
 
 23,607
 23,607
Total other comprehensive income
 
 
 5,777
 
 5,777

 
 
 1,002
 
 1,002
Restricted stock issued
 6
 (6) 
 
 

 1
 (1) 
 
 
Dividends on preferred stock
 
 
 
 
 
Accretion of preferred stock (1)
4,241
 
 
 
 (4,241) 
Accretion of preferred stock (2)
1,438
 
 
 
 (1,438) 
Stock-based compensation
 19
 3,900
 
 
 3,919

 1
 56
 
 
 57
Balance at September 30, 2012$258,973
 $5,583
 $1,470,355
 $(2,042) $(482,270) $1,250,599
Balance at March 31, 2013$261,828
 $561
 $1,476,624
 $(656) $(554,329) $1,184,028
(1)
Restated for a one-for-ten reverse stock split announced September 27, 2012 and began trading on October 11, 2012.
(2)The preferred stock dividend/accretion during the nine months ended September 30, 2012 represents only the accretion. On January 27, 2012, the Company elected to defer payment of dividends and interest on the preferred stock.

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 thousands)
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)
For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 20112013 2012
(Unaudited)(Unaudited)
Operating Activities      
Net income (loss)$161,187
 $(106,613)$23,607
 $(7,309)
Reconciliation of net income (loss) to net cash used in operating activities      
Provision for loan losses225,696
 113,383
20,415
 114,673
Depreciation and amortization14,774
 10,871
5,404
 4,469
Decrease in fair value of residential first mortgage servicing rights165,897
 60,598
Loss on fair value of mortgage servicing rights15,641
 6,927
Stock-based compensation expense3,919
 4,198
57
 1,028
Net (gain) loss on the sale of assets(6,632) 208
(7,034) 670
Net gain on loan sales(751,945) (193,869)(137,540) (204,853)
Net loss on sales of mortgage servicing rights4,631
 5,080
4,219
 2,317
Net gain on securities classified as available-for-sale(2,946) 

 (310)
Other than temporary impairment losses on securities classified as available-for-sale2,192
 16,906

 1,175
Net loss (gain) on trading securities2,023
 (20,414)
Net loss on transferor interest1,771
 4,825
Net (gain) loss on trading securities(51) 5,971
Net loss on transferors' interest174
 409
Proceeds from sales of loans held-for-sale38,985,990
 17,446,482
13,850,730
 11,474,194
Origination and repurchase of mortgage loans held-for-sale, net of principal repayments(39,807,021) (16,832,399)(12,623,530) (11,881,504)
Increase in repurchase of mortgage loans with government guarantees, net of claims received(31,895) (71,222)
Purchase of trading securities
 (131,746)
Increase in accrued interest receivable(1,258) (16,549)
Proceeds from sales of trading securities141,220
 
(Increase) decrease in other assets(216,266) 99,370
Increase (decrease) in accrued interest payable3,799
 (4,513)
(Decrease) increase liability for checks issued(711) 4,911
Decrease in payable for mortgage repurchase option(25,828) (3,478)
Increase in representation and warranty reserve82,000
 5,600
Increase in other liabilities164,700
 70,954
Net cash (used in) provided by operating activities(884,703) 462,583
Decrease (increase) in repurchase of mortgage loans with government guarantees, net of claims received236,436
 (103,732)
Decrease (increase) in accrued interest receivable10,936
 (2,943)
Decrease in other assets76,049
 122,214
Increase in accrued interest payable1,982
 1,401
Decrease liability for checks issued(377) (988)
Increase in payable for mortgage repurchase option(13,966) (30,683)
Representation and warranty reserve-change in estimate17,395
 60,538
Net charge-offs in representation and warranty reserve(31,213) (43,589)
Decrease in other liabilities(34,258) (20,073)
Net cash provided by (used in) operating activities1,415,076
 (499,998)
Investing Activities      
Proceeds from the sale of investment securities available-for-sale234,212
 

 20,665
Net repayment (purchase) of investment securities available-for-sale54,074
 (50,887)
Net repayment of investment securities available-for-sale15,378
 25,405
Net change from sales of loans held-for-investment(248,640) (26,331)61,645
 (187,768)
Origination of portfolio loans, net of principal repayments156,320
 (724,220)
Principal repayments net of origination of portfolio loans635,929
 208,523
Proceeds from the disposition of repossessed assets91,580
 89,816
27,285
 25,035
Redemption of Federal Home Loan Bank Stock
 35,453
Acquisitions of premises and equipment, net of proceeds(22,387) (29,113)(9,379) (7,150)
Proceeds from the sale of mortgage servicing rights24,712
 83,255
89,928
 16,394
Net cash provided by (used in) investing activities289,871
 (622,027)
Net cash provided by investing activities820,786
 101,104

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Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows, continued
(In thousands)
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows, continued
(In thousands)
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows, continued
(In thousands)
For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 20112013 2012
(Unaudited)(Unaudited)
Financing Activities      
Net increase in deposit accounts1,799,181
 130,159
Net (decrease) increase in deposit accounts(447,004) 909,165
Net decrease in Federal Home Loan Bank advances(865,000) (110,083)(280,000) (362,000)
Payment on long-term debt(25) (25)
Net (disbursement) receipt of payments of loans serviced for others(94,013) 82,673
Net disbursement of payments of loans serviced for others(234,846) (126,288)
Net receipt of escrow payments27,028
 15,984
3,881
 4,907
Dividends paid to preferred stockholders
 (10,000)
Net cash provided by financing activities867,171
 108,708
Net increase (decrease) in cash and cash equivalents272,339
 (50,736)
Net cash (used in) provided by financing activities(957,969) 425,784
Net increase in cash and cash equivalents1,277,893
 26,890
Beginning cash and cash equivalents731,058
 953,534
952,793
 731,058
Ending cash and cash equivalents$1,003,397
 $902,798
$2,230,686
 $757,948
Supplemental disclosure of cash flow information   
Loans held-for-investment transferred to repossessed assets$328,384
 $159,007
$50,247
 $171,375
Total interest payments made on deposits and other borrowings$138,466
 $174,267
$37,339
 $46,756
Federal income taxes paid$225
 $
$5,300
 $225
Reclassification of mortgage loans originated for portfolio to mortgage loans held-for-sale$288,428
 $42,891
Reclassification of loans originated for portfolio to loans held-for-sale$1,129
 $200,908
Reclassification of mortgage loans originated held-for-sale then transferred to portfolio loans$39,788
 $16,560
$62,774
 $13,140
Mortgage servicing rights resulting from sale or securitization of loans$370,013
 $153,465
$126,494
 $111,484
      

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 – Nature of Business

Flagstar Bancorp, Inc. ("Flagstar" or the "Company"), is the holding company for Flagstar Bank, FSB (the "Bank"), is 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. WithAt $14.9 billionMarch 31, 2013 in, our total assets atwere September 30, 2012$13.1 billion, the. The Company is the largest insured depository institutionbank headquartered in Michigan and isone of the top 10 largest publicly held savings bank headquarteredbanks in the Midwest.United States.

The Company is a full-service financial services company, offeringoffers a range of products and services to consumers, businesses, and homeowners. As of September 30, 2012March 31, 2013, the Company operated 111 banking centers in Michigan and 3141 home loan centers in 1419 states, and a total of four commercial banking offices in Massachusetts, Connecticut, and Rhode Island. During the second quarter 2012, two banking centers in Michigan were closed to better align the branch structure with the Company's focus on key market areas and to improve banking center efficiencies.states. The Company originates loans nationwide and is one ofamong the top ten leading originators of residential first mortgage loans.loans in the United States. The Company also offers consumer products including deposit accounts, standard and jumbo home loans, home equity lines of credit ("HELOC"), and personal loans, including auto and boat loans. The Company also offers commercial loans and treasury management services throughout Michigan and through the commercial banking offices.services. Commercial products include deposit and sweep accounts, telephone banking, term loans and lines of credit, lease financing, government banking products and treasury management services such as remote deposit and merchant services.

The Company sells or securitizes most of the residential mortgage loans that it originates and generally retains the right to service the mortgage loans that it sells. These mortgage-servicingmortgage servicing rights ("MSRs") are occasionally sold by the Company in transactions separate from the sale of the underlying mortgages. The Company has, from time to time, retained certain loan originations in the held-for-investment portfolio, although the Company has sold substantially all of its originations for the past several years. The decision-making process to retain certain loan originations has, in the past, taken into account interest rate management, liquidity and capital factors, and generally occur infrequently and within well-defined guidelines and parameters.

The Bank is subject to regulation, examination and supervision by the Office of the Comptroller of the Currency ("OCC") of the United StatesU.S. Department of the Treasury ("U.S. Treasury"). The Bank is also subject to regulation, examination and supervision by the Federal Deposit Insurance Corporation ("FDIC") and the Consumer Financial Protection Bureau (the "CFPB"). The Bank's deposits are insured by the FDIC through the Deposit Insurance Fund ("DIF"). The Company is subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve ("Federal Reserve"). The Bank is also a member of the Federal Home Loan Bank ("FHLB") of Indianapolis.

Troubled Asset Relief Program

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (initially introduced as the Troubled Asset Relief Program ("TARP")) was enacted, and the U.S. Treasury injected capital into U.S. financial institutions under the TARP Capital Purchase Program. On January 30, 2009, the Company entered into a letter agreement including the securities purchase agreement with the U.S. Treasury pursuant to which, among other things, the Company sold to the U.S. Treasury preferred stock and a warrant. The preferred stock accrues cumulative dividends quarterly at a rate of 5 percent per annum until January 30, 2014, and 9 percent per annum thereafter. As long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including the Company's common stock, par value $0.01 per share (the "Common Stock"), are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions.

On January 27, 2012, the Company exercised its contractual right to defer regularly scheduled quarterly payments of dividends, beginning with the February 2012 payment, on preferred stock issued and outstanding in connection with participation in the TARP Capital Purchase Program. These payments will be periodically evaluated and reinstated when appropriate, subject to the provisions of the Company's supervisory agreement, dated January 27, 2010, with the Federal Reserve, as a successor regulator to the OTS (the "Supervisory Agreement"). Under the terms of the preferred stock, the Company may defer payments of dividends for up to six quarters in total without default or penalty.

On December 18, 2012, the U.S. Treasury announced its intention to auction the Company's preferred stock issued and outstanding under the TARP Capital Purchase Program during 2013.On March 15, 2013, the U.S. Treasury announced that it had priced auctions for the preferred stock of several institutions, including the Company, which it had purchased in early 2009 through the TARP Capital Purchase Program. The auction closed on March 28, 2013. The Company's preferred stock is now held by unrelated third party investors and is no longer held by the federal government under the TARP Capital Purchase Program. The U.S. Treasury remains the holder of a warrant to purchase shares of Common Stock.


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Commercial Loan Sales
Effective December 31, 2012, the Bank entered into a definitive Transaction Purchase and Sale Agreement (the "CIT Agreement") with CIT Bank, the wholly-owned U.S. commercial bank subsidiary of CIT Group Inc. ("CIT"). Under the terms of the CIT Agreement, CIT acquired $1.3 billion in commercial loan commitments, $784.3 million of which was outstanding at December 31, 2012. The loans sold consist primarily of asset-based loans, equipment leases and commercial real estate loans. The sale resulted in a reversal of $12.6 million in loan loss reserves associated with such loans and which the reversal was recognized at December 31, 2012. The total purchase price for the portfolio was $779.2 million. During the three months ended March 31, 2013, the Company sold $710.5 million of these commercial loans to CIT, and we expect the remaining loans to close in early April 2013.

Effective February 5, 2013, the Bank entered into a definitive Asset and Portfolio Purchase and Sale Agreement (the "Customers Agreement") with Customers Bank ("Customers") located in Wyomissing, Pennsylvania. Under the terms of the Customers Agreement, Customers acquired $187.6 million in commercial loan commitments, $150.9 million of which were outstanding at December 31, 2012. The loans sold consist primarily of commercial and industrial loans. The transaction settled on March 28, 2013 for $148.5 million.

Pending and Threatened Litigations

On February 5, 2013, the U.S. District Court for the Southern District of New York (the "Court") issued a decision in the lawsuit filed by Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Inc. ("Assured"). The Court issued a decision in favor of Assured on its claims for breach of contract against the Bank in the amount of $89.2 million plus contractual interest and attorneys' fees and costs. On April 1, 2013, the court issued a final judgment against the Company for a total of $106.5 million, consisting of $90.7 million in damages plus $15.9 million in pre-judgment interest. The Bank filed a notice of appeal later that month. The Court subsequently issued a memorandum order, in which the Court reserved the decision regarding attorneys' fees until after the appeal.

In May 2010, the Bank received repurchase demands from MBIA Insurance Corporation with respect to closed-end, fixed and adjustable second mortgage loans that were sold by the Bank in connection with its two non-agency second mortgage loan securitizations. On January 11, 2013, MBIA filed a complaint against the Bank in the U.S. District Court for the Southern District of New York, alleging a breach of various loan level representations and warranties and seeking relief for breach of contract, as well as full indemnification and reimbursement of amounts that it has paid and will pay under the respective insurance policies, plus interest and costs. In the litigation, MBIA alleges damages to date of $165.0 million and unspecified future damages. In March 2013, the Bank filed a motion to dismiss, and MBIA filed a motion for partial summary judgment on the basis of collateral estoppel. The parties are scheduled to complete a briefing and make oral arguments on these motions in May 2013.

Following the Court's decision in the Assured case, the Company increased the accrual for pending and threatened litigation. The total amount accrued for pending and threatened litigation, including amounts paid in anticipation of future settlements, was approximately $247.9 million at March 31, 2013 and $188.5 million of the accrual was recorded during the fourth quarter 2012. Included in this reserve are amounts for the Court's decision regarding Assured and for the lawsuit that the MBIA Insurance Corporation filed against the Bank on January 11, 2013, along with other pending litigation. The litigation accrual is recorded in "legal and professional expense" on the Consolidated Statement of Operations and in "other liabilities" on the Consolidated Statements of Financial Condition. For further information, see Note 20 - Legal Proceedings, Contingencies, and Commitments.

Reverse Stock Split

The Company's board of directors authorized a one-for-ten reverse stock split on September 24, 2012 following the annual meeting of stockholders at which the reverse stock split was approved by its stockholders. The reverse stock split began trading on a post-split basis on October 11, 2012. Unless noted otherwise, all share-related amounts herein reflect the one-for-ten reverse stock split.

In connection with the reverse stock split, stockholders received one new share of common stockCommon Stock for every ten shares held at the effective time. The reverse stock split reduced the number of shares of outstanding common stockCommon Stock from approximately 558.3 million to 55.8 million. The number of authorized shares of common stockCommon Stock was reduced from 700 million to 70 million. Proportional adjustments were made to the Company’s outstanding options, warrants and other securities entitling their holders to purchase or receive shares of common stock.Common Stock. In lieu of fractional shares, stockholders received cash payments for fractional shares that were determined on the basis of the common stock'sCommon Stock's closing price on October 9, 2012, adjusted for the reverse stock split. The reverse stock split did not negatively affect any of the rights that accrue to holders of the Company's outstanding options,

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warrants and other securities entitling their holders to purchase or receive shares of common stock,Common Stock, except to adjust the number of shares relating thereto accordingly. For further information, see Note 16 - Stockholders' Equity and Note 17 - Earnings (Loss) per CommonPer Share.

Management Change
    
On October 1, 2012, the Company announced that its and the Bank's respective boards of directors appointed Michael J. Tierney to serve as President of the Company and the Bank appointed Michael J. Tierney as the President, effective immediately, and as the Chief Executive Officer and a director of each entity,the Company and the Bank, effective November 1, 2012, in each case subject to receipt of regulatory non-objection. Such non-objection has since been received from the Federal Reserve, the Company's primary regulator, and the OCC, the Bank's regulators. Upon becoming CEO,primary regulator. Mr. Tierney will joinalso was appointed to the boards of directors of the Company and the Bank, subject to receipt of Federal Reserve and OCC non-objections. The Company has received non-objection from the Federal Reserve for Mr. Tierney to serve as President and Chief Executive Officer and a member of board of directors of the Company, and the Bank has received OCC approval for Mr. Tierney to serve on an interim basis as the Bank's President and Chief Executive Officer but OCC non-objection for Mr. Tierney to serve as a member of the Company's board of directors.directors is pending. The Company also announced that John D. Lewis, Managing Director of Donnelly Penman & Partners and former Vice

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Chairman of Comerica Bank, has beenwas appointed a directorto serve as Non-Executive Chairman of the board of directors of the Company and the Bank, and will serve as Non-Executive Chairman of their respective boards of directors, in each case subject to receipt of regulatory non-objection. The Company and the Bank received non-objection from the Federal Reserve and the OCC.

Effective December 18, 2012, the Company and the Bank's boards of directors appointed Alessandro DiNello as the President of the Bank and as the Company and the Bank's Chief Administrative Officer, subject to receipt of Federal Reserve and OCC non-objection. The Bank has received non-objection from the OCC for Mr. DiNello to serve as President and Chief Administrative Officer of the Bank, and the non-objection from the Federal Reserve is pending. In addition, the Bank's boards of directors appointed Matthew A. Kerin as the President of the Bank's Mortgage Banking Division, subject to receipt of OCC non-objection. The Bank has received OCC non-objection for Mr. Kerin to serve as President of the Bank's Mortgage Banking Division.

Consent Order

Effective October 23, 2012, the Bank's board of directors executed a Stipulation and Consent (the “Stipulation”"Stipulation"), accepting the issuance of a Consent Order (the “Consent Order”"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”"OTS") on January 27, 2010. The Company is still subject to a supervisory agreement, dated January 27, 2010,the Supervisory Agreement with the Federal Reserve. The OCC terminated the supervisory agreement simultaneous with issuance of the Consent Order.
Under the Consent Order, the Bank is required to adopt or review and revise various plans, policies and procedures related to, among other things, regulatory capital, enterprise risk management and liquidity. Specifically, under the terms of the Consent Order, the BankBank's board of directors has agreed to, among other things, take the following actions:

within 120 days of the date of the Consent Order, and at least annually thereafter, the Bank's board of directors shall review,Review, revise, and forward to the OCC a written capital plan for the Bank covering at least a three-year period and establishing projections for the Bank's overall risk profile, earnings performance, growth expectations, balance sheet mix, off-balance sheet activities, liability and funding structure, capital and liquidity adequacy, as well as a contingency capital funding process and plan that identifies alternative capital sources should the primary sources not be available;
within 90 days of the date of the Consent Order, the Bank's board of directors shall review, revise, adopt and forward to the OCC written policies and procedures for maintaining an adequate allowance for loan and lease losses in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”);
within 90 days of the date of the Consent Order, the Bank's board of directors shall review, revise, adopt and forward to the OCC written policies and procedures for maintaining an adequate representation and warranty reserve in accordance with U.S. GAAP;
within 60 days of the date of the Consent Order, the Bank's board of directors shall adoptAdopt and forward to the OCC a comprehensive written liquidity risk management policy that systematically requires the Bank to reduce liquidity risk;
and
within 60 days of the date of the Consent Order, the Bank's board of directors shall adopt, implement, and ensure Bank adherence to an independent, internal audit program covering all Bank operations and shall implement appropriate actions to remedy deficiencies cited in such audit reports;
within 90 days of the date of the Consent Order, the Bank's board of directors shall develop,Develop, adopt, and forward to the OCC a written enterprise risk management program that is designed to ensure that the Bank effectively identifies, monitors, and controls its enterprise-wide risks, including by developing risk limits for each line of business;
business.
within 90 days of the date of the Consent Order, the Bank's board of directors shall adopt, implement, and ensure Bank adherence to an independent, ongoing loan review system to review the Bank's loan and lease portfolios, which system shall provide for the filing with the Bank's board of directors of internal loan and lease review reports and shall require the Bank's board of directors to review the reports and take immediate remedial action if appropriate;
within 90 days of the date of the Consent Order, the Bank's board of directors shall establish, adopt, and forward to the OCC written policies and procedures designed to identify, measure, monitor, and control risks associated with the Bank's credit concentrations;
within 90 days of the date of the Consent Order, the Bank's board of directors shall review, revise, and ensure Bank adherence to the Bank's written Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) Risk Assessment to ensure BSA/AML risks posed to the Bank are accurately identified after consideration of all pertinent information;
within 90 days of the date of the Consent Order, the Bank's board of directors shall review, revise, and ensure Bank adherence to the Bank's written program of policies and procedures adopted in accordance with the Bank Secrecy Act (“BSA”), which shall include the production of periodic reports designed to identify, monitor, and evaluate unusual or suspicious activity;
within 90 days of the date of the Consent Order, the Bank's board of directors shall update the status of its plan and timeline for the implementation of enhanced BSA/AML internal controls and shall forward a copy of the plan and timeline to the OCC;
within 90 days of the date of the Consent Order, the Bank's board of directors shall review, revise, and ensure Bank adherence to its risk-based processes to obtain and analyze appropriate information from its customer due diligence program, both at the time of account opening and on an ongoing basis, in order to effectively monitor for, and investigate, suspicious or unusual activity;
within 90 days of the date of the Consent Order, the Bank's board of directors shall review, revise, and ensure Bank adherence to its BSA independent testing program;
within 90 days of the date of the Consent Order, the Bank's board of directors shall adopt and forward to the OCC a written program to improve the Bank's compliance management process, which the Bank's board of directors shall implement and ensure compliance with following the OCC's determination of non-objection;

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within 60 days of the date of the Consent Order, the Bank's board of directors shall adopt, implement, and ensure Bank adherence to (i) written Flood Disaster Protection Act (“FDPA”) policies and procedures detailing a coordinated program to ensure Bank compliance with the FDPA, and (ii) a comprehensive FDPA training program for all applicable lending staff to ensure awareness of their FDPA compliance responsibilities; and
within 180 days of the date of the Consent Order, the Bank's board of directors shall adopt and forward to the OCC a comprehensive written business continuity plan, which the Bank's board of directors shall implement and ensure compliance with following the OCC's determination of non-objection.
Each of the plans, policies and procedures referenced above thatin the Consent Order, requires the Bank to submit to the OCC, as well as any subsequent amendments or changes thereto, must be submitted to the OCC for a determination that the OCC has no supervisory objection to them. Upon receiving a determination of no supervisory objection from the OCC, the Bank must implement and adhere to the respective plan, policy or procedure.

The Consent Order also requires the Bank to establish a Compliance Committee to oversee the Bank's adherence to the provision of the Consent Order. The Bank's board of directors has re-designated the Bank's existing Regulatory Oversight Committee as its Compliance Committee. The current members of the Compliance Committee are Jay J. Hansen, David J. Matlin, Peter Schoels and David L. Treadwell. The Compliance Committee is responsible for monitoring and coordinating the Bank's adherence to the provisions of the Consent Order. The Bank's board of directors has appointed John D. Lewis to serve as the Chairman of the Compliance Committee, replacing Mr. Treadwell, effective upon receipt of OCC non-objection to Mr. Lewis's appointment to the Bank's board of directors. In addition, the Board has appointed Peter Schoels to serve as Vice Chairman of the Committee, effective upon receipt of non-objection to Mr. Schoels's election to the Board of Directors of the Company from the Federal Reserve, an application for which is pending. Mr. Schoels became a director of the Bank effective October 5, 2012 upon the Bank's receipt of OCC's non-objection to Mr. Schoels's appointment to the Bank's board of directors.

The Bank intends to address the banking issues identified by the OCC in the manner and within the time periods required for compliance with the Consent Order, and the Company does not believe that the Bank's continued compliance with the Consent Order will have any material adverse impact on the Company or the Bank's future financial results.

The foregoing summary of the Stipulation and the Consent Order does not purport to be a complete description of all of the terms of such documents,the Consent Order, and is qualified in its entirety by reference to copiesthe copy of the Stipulation and the Consent Order filed with the SEC on October 24, 2012 as exhibitsan exhibit to the Company's Current Report on Form 8-K.8-K filed on October 24, 2012.

The Bank intends to address the banking issues identified by the OCC in the manner required for compliance by the OCC. There can be no assurance that the OCC will not provide substantive comments on the capital plan or other submissions that the Bank makes pursuant to the Consent Order that will have a material impact on the Company. The Company believes that the actions taken, or to be taken, to address the banking issues set forth in the Consent Order should, over time, improve its enterprise

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risk management practices and risk profile. For further information regarding the risks related to the Consent Order, please also refer to the section captioned "Forward-Looking Statements" above and the risk factors previously disclosed in Item 1A to Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Supervisory Agreement

The Company is subject to a supervisory agreement, dated January 27, 2010, with the Federal Reserve, as a successor regulator to the OTS (the "Supervisory Agreement"). The Supervisory Agreement will remain in effect until terminated, modified, or suspended in writing by the Federal Reserve, and 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 intendintends to maintain compliance with, all of the requirements of the Supervisory Agreement.

Pursuant to the Supervisory Agreement, the Company submitted a capital plan to the OTS, predecessor in interest to the Federal Reserve. In addition, the Company agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital distributions; purchases, repurchasespurchase, repurchase or redemptions ofredeem certain securities; incurrence, issuance, renewal, rollingincur, issue, renew, roll over or increase of any debt and enter into certain affiliate transactions; and comply with restrictions on the payment of severance and indemnification payments, director and management changes and employment contracts and compensation arrangements. The foregoing summary of the Supervisory Agreement does not purport to be a complete description of all of the terms of the Supervisory Agreement, and is qualified in its entirety by reference to the copy of the Supervisory Agreement filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on January 28, 2010.

The Company addressed For further information regarding the banking issues identified byrisks related to the Federal ReserveConsent Order, please also refer to the section captioned "Forward-Looking Statements" above and the risk factors previously disclosed in the manner and within the time periods required for compliance with the Supervisory Agreement, and does not believe that continued compliance with the Supervisory Agreement will have any material adverse impact on its future financial results.


14


Branch Sales

During the fourth quarter 2011, the Bank completed the previously announced sale of 27 banking centers in Georgia and 22 banking centers in Indiana to PNC Bank, N.A., part of The PNC Financial Services Group, Inc. ("PNC") and First Financial Bank, N.A. ("First Financial"), respectively. Management believed that the Company's presence inAnnual Report on Form 10-K for the Georgia and Indiana markets lacked market density and sufficient scale, and that these transactions are consistent with the strategic focus on core Midwest banking markets and on deployment of capital towards continuing growth in commercial and consumer banking, while remaining a national mortgage lender.

In the Georgia sale, PNC purchased the facilities or assumed the leases associated with the banking centers and purchased associated business and retail deposits in the amount offiscal year ended $211.3 millionDecember 31, 2012. PNC paid the net carrying value of the acquired real estate and fixed and other personal assets associated with the banking centers.

In the Indiana sale, First Financial paid a consideration of a seven percent premium on the consumer and commercial deposits in the Indiana banking centers. The total amount of such consumer and commercial deposits was $462.0 million for a gain of $22.1 million. First Financial paid net carrying value on real estate and personal assets of the banking centers and assumed the existing leases on 14 of the banking centers.

The Company predominantly originated residential mortgage loans for sale in the secondary market in both the Georgia and Indiana markets. Accordingly, the amount of loans on the balance sheet was immaterial and no loans were transferred in either transaction.

Troubled Asset Relief Program

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (initially introduced as the Troubled Asset Relief Program ("TARP")) was enacted, and the U.S. Treasury injected capital into U.S. financial institutions. On January 30, 2009, the Company entered into a letter agreement including the securities purchase agreement with the U.S. Treasury pursuant to which, among other things, the Company sold to the U.S. Treasury preferred stock and warrants. Furthermore, as long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including the Company's common stock, par value $0.01 per share (the "Common Stock"), are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. The preferred stock accrues cumulative dividends quarterly at a rate of 5 percent per annum until January 30, 2014, and 9 percent per annum thereafter.

On January 27, 2012, the Company exercised its contractual right to defer regularly scheduled quarterly payments of dividends, beginning with the February 2012 payment, on preferred stock issued and outstanding in connection with participation in the TARP Capital Purchase Program. Under the terms of the preferred stock, the Company may defer payments of dividends for up to six quarters in total without default or penalty. Concurrently, the Company also exercised contractual rights to defer interest payments with respect to its trust preferred securities.

Note 2 – Basis of Presentation and Accounting Policies

The unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the SEC. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America ("U.S. GAAPGAAP") for complete financial statements. The accompanying interim financial statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2012March 31, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 20122013. In addition, certain prior period amounts have been reclassified to conform to the current period presentation. All per share amounts and share counts have been adjusted to reflect the one-for-ten reverse stock split that began trading on a post-split basis October 11, 2012 following receipt of stockholder approval at the Company's annual meeting of stockholders. For further information, reference should be made to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20112012, which are available on the Company’s Investor Relations web page, at www.flagstar.com,, and on the SEC website, at www.sec.gov.www.sec.gov.

Recently Adopted Accounting Standards

On JulyJanuary 1, 2012,2013, the Company adopted anthe update to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 360, "Property, Plant, and Equipment: Derecognition of in Substance Real Estate - a Scope Clarification" and applied the provisions prospectively. The guidance represents the consensus reached in Emerging Issues Task

15


Force Issue No. 10-E, "Derecognition of in Substance Real Estate" and applies to a parent that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary's nonrecourse debt. The guidance provides that when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary's nonrecourse debt. The adoption of the guidance did not have a material effect on the Company's Consolidated Financial Statements or the Notes thereto.

On January 1, 2012, the Company adopted the update to FASB ASC Topic 220, "Comprehensive Income"Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," and applied the provisions retrospectively. Under the amended guidance, an entity hadis required to provide information about the option to present the totalamounts reclassified out of comprehensive income, the components of net income, and the components ofaccumulated other comprehensive income ("OCI") either in a single continuous statement of comprehensive income or in two separate but consecutive statements.by component. In both choices, theaddition, an entity is required to present, either on the face of the financial statements reclassification adjustments for items that arestatement where net income is presented or in the notes, significant amounts reclassified fromout of accumulated other comprehensive income by the respective line items of net income. However, only the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the statement(s) where the components ofsame reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, and the components ofan entity is required to cross-reference to other comprehensive income are presented.disclosures required under U.S. GAAP that provide additional detail about those amounts. The adoption of the guidance did not have a material effect on the Company's Consolidated Financial Statements or the Notes thereto. For further information concerning comprehensive income, refer to Consolidated Statements of Comprehensive Income andNote 15 - Stockholders' Equity.

On January 1, 2012, the Company prospectively adopted the update to FASB ASC Topic 820, "Fair Value Measurement." The amended guidance did not modify the requirements for when fair value measurements apply, rather it generally represents clarifications on how to measure and disclose fair value under Topic 820, Fair Value Measurement. The guidance is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards ("IFRS"), by ensuring that fair value has the same meaning in U.S. GAAP and IFRS and respective disclosure requirements are the same except for inconsequential differences in wording and style. The adoption of the guidance did not have a material effect on the Company's Consolidated Financial Statements or the Notes thereto. For further information concerning fair value, refer to Note 3 - Fair Value Accounting.

On January 1, 2012, the Company adopted FASB ASC Topic 860, "Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements." Under the amended guidance, a transferor maintains effective control over transferred financial assets if there is an agreement that both entitles and obligates the transferor to repurchase the financial assets before maturity. In addition, the following requirements must be met: (i) the financial asset to be repurchased or redeemed are the same or substantially the same as those transferred, (ii) the agreement is to repurchase or redeem the transferred financial asset before maturity at a fixed or determinable price, and (iii) the agreement is entered into contemporaneously with, or in contemplation of the transfer. The adoption of the guidance did not have a material effectimpact on the Company's Consolidated Financial Statements or the Notes thereto.

On JulyJanuary 1, 2011,2013, the Company adopted the update to FASB ASC Topic 310, "Receivables - A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring"210, "Balance Sheet: Disclosures about Offsetting Assets and Liabilities," and applied the provisions retrospectivelyretrospectively. Under the amended guidance, an entity is required to January 1, 2011.disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position. The troubled debt restructuring ("TDR") guidance clarifies whether loan modifications constitute TDRs, includes factorsapplies to derivatives accounted for in accordance with Topic 815, Derivatives and examples for creditorsHedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibits creditors from using the borrower's effective rate test to evaluate whether the restructuring constitutes as a TDR and a concession has been granted to the borrower, and clarifies the guidance for creditors to use in determining whether a borrower is experiencing financial difficulties.an enforceable master netting

15


arrangement or similar agreement. The adoption of the guidance did not have a material effectimpact on the Company's Consolidated Financial Statements or the Notes thereto. For further information concerning TDRs, refer toSee Note 711 - Loans Held-for-Investment.Derivative Financial Instruments.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company's Consolidated Financial Statements or the Notes thereto or results of operations upon adoption.

In December 2011,February 2013, the FASB issued Accounting Standards Update ("ASU") No. 2011-11, "Balance Sheet2013-04, "Liabilities (Topic 210)405): Disclosures about Offsetting AssetsObligations Resulting from Joint and Liabilities.Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date." The guidance requires an entity to disclose information about offsettingmeasure obligations resulting from joint and relatedseveral liability arrangements to enable usersfor which the total amount of financial statements to understand the effect of those arrangements on its financial position. The FASB issued common disclosure requirements related to offsetting arrangements to allow investors to better compare financial statements prepared in accordance with IFRS or U.S. GAAP. The objectiveobligation within the scope of this guidance is fixed at the reporting date, as the sum of (a) the amount the reporting entity agreed to facilitate comparison between those entities that prepare their financial statementspay on the basis of U.S. GAAPits arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation as well as other information about those entities that prepare their financial statements on the basis of IFRS.obligations. This guidance is effective retrospectively, for annual and interim periods, beginning on or after January 1,December 15, 2013. The adoption of the guidance is not expected to have a material impact on the Company's Consolidated Financial Statements or the Notes thereto.

Regulatory Developments

The following updates previous disclosures on recent market and industry developments, including with respect to regulatory developments, mortgage matters and governmental programs. Among the recent legislative and regulatory developments

16


affecting the banking industry are evolving regulatory capital standards for banking organizations. These evolving standards include the so-called "Basel III" initiatives that are part of the effort by international banking supervisors to improve the ability of the banking sector to absorb shocks in periods of financial and economic stress and changes by the federal banking agencies to reduce the use of credit ratings in the rules governing regulatory capital.

In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as "Basel III." Basel III, when implemented by the U.S. bank regulatory agencies and fully phased-in, will require U.S. banks to maintain substantially more capital, with a greater emphasis on common equity.

In June 2012, the U.S. banking regulatorsbank regulatory agencies requested comment on three sets of proposed rules that implement the Basel III capital framework and also make other changes to U.S. regulatory capital standards for banking institutions. The Basel III proposed rules include heightened capital requirements for banking institutions in terms of both higher quality capital and higher regulatory capital ratios. These proposed rules, among other things, would revise the capital levels at which a banking institution would be subject to the prompt corrective action framework (including the establishment of a new tierTier 1 common capital requirement), eliminate or reduce the ability of certain types of capital instruments to count as regulatory capital, eliminate the Tier 1 treatment of trust preferred securities (as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act)Act (the "Dodd-Frank Act")) following a phase-in period beginning in 2013, and require new deductions from capital for investments in unconsolidated financial institutions, mortgage servicing assets and deferred tax assets that exceed specified thresholds. The proposed rules also would establish a new capital conservation buffer and, for large or internationally active banks, a supplemental leverage capital requirement that would take into account certain off-balance sheet exposures and a countercyclical capital buffer that would initially be set at zero. TheOnce fully phased in, the Basel III capital rules will significantly reduce the allowable amount of the fair value of MSRs included in Tier 1 capital. While the proposed Basel III rules would have become effective under a phase-in period beginningthat was to have begun January 1, 2013 and to be in full effect on January 1, 2019.2019, the U.S. bank regulatory agencies announced on November 9, 2012 that the implementations of the proposed Basel III rules would be delayed. No date or time period for implementation has subsequently been announced.

In addition, proposed rules issued by the U.S. banking regulators in June 2012 would also revise the manner in which a banking institution determines risk-weighted assets for risk-based capital purposes under the Basel II framework applicable to large or internationally active banks (referred to as the advanced approach) and under the Basel I framework applicable to all banking institutions (referred to as the standardized approach). These rules would replace references to credit ratings with alternative methodologies for assessing creditworthiness. In addition, among other things, the advanced approach proposal would implement the changes to counterparty credit risk weightings included in the Basel III capital framework, and the standardized approach would modify the risk weighting framework for residential mortgage assets. The standardized approach changes to the Basel I risk-weighting rules are proposed to become effective no later than July 1, 2015.


16


In June 2012, the U.S. banking regulators also adopted final market risk capital rules to implement the enhancements to the market risk framework adopted by the Basel Committee (commonly referred to as "Basel II.5"). The final rules are effective January 1, 2013 and, among other things, establish new stressed Value at Risk ("VaR") and incremental risk charges for covered trading positions and replace references to credit ratings in the market risk rules with alternative methodologies for assessing credit risk.

In June 2012, the Federal Reserve and other U.S. regulators issued a Notice of Proposed Rulemaking (“NPR”), relatedThe regulations ultimately applicable to capital adequacy rules, to address implementation ofus may be substantially different from the Basel III framework for financial institutionsas published in December 2010 and the United States. While muchrules proposed by the U.S. bank regulatory agencies in June 2012. Until such regulations, as well as any other capital regulations under the Dodd-Frank Act, are adopted, the Company cannot be certain that such regulations will apply to the Company or of the NPR was consistent withimpact such regulations will have on the Basel III framework that was updated in June of 2011, there are some substantial differences from that original framework. The Company is continuing to do an analysis of the NPR; however, as currently proposed, risk-weighted assets will increase primarily due to the ranges of risk-weightings for residential first mortgage and home equity loans, resulting in a decline inCompany's capital ratios. The regulatory agencies askedRequirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely affect the Company's results of operations and financial institutions to provide comment on the NPR and are expected to consider the feedback and draft a final rule. Accordingly, the final rule may differ from the current NPR. Further, the NPR indicates a phase-in for the new capital rules with the proposed risk-weightings requirement not becoming effective until 2015.condition.

Note 3 – Fair Value Accounting

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in either case through an orderly transaction between market participants at the measurement date. The Company utilizes fair value measurements to record certain assets and liabilities at fair value and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, the Company uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves, credit spreads or unobservable inputs. Unobservable inputs may be based on management's judgment, assumptions and estimates related to credit quality, asset growth, the Company's future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.


17


Valuation Hierarchy

U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements that is based on the transparency of the inputs used in the valuation process. The three levels of the hierarchy, highest ranking to lowest, are as follow:follows.

Level 1 -Quoted- 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- 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- Unobservable inputs that reflect the Company's own assumptions about the expectations that market participants would use in pricing andan 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 by the Company for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Assets

Securities classified as trading. These securities are comprised of U.S. government sponsored agency securities, U.S. Treasury bonds and non-investment grade residual securities that arose from private-label securitizations of the Company. The U.S. government sponsored agency securities and U.S. Treasury bonds trade in an active, open market with readily observable prices and are therefore classified within the Level 1 valuation hierarchy. The non-investment grade residual securities do not trade in an active, open market with readily observable prices and are therefore classified within the Level 3 valuation hierarchy. Under Level 3, the fair value of residual securities is determined by discounting estimated net future cash flows using expected prepayment rates and discount rates that approximate current market rates. Estimated net future cash flows include assumptions related to expected credit losses on these securities. The Company maintains a model that evaluates the default rate and severity of loss on the residual securities collateral, considering such factors as loss experience, delinquencies, loan-to-value ratios, borrower credit scores and property type. At September 30, 2012March 31, 2013 and December 31, 20112012, the Company had no Level 3 securities classified as

17


trading. See Note 9 - Private-LabelPrivate Label Securitization Activity, herein, for the key assumptions used in the residual interest valuation process.

Securities classified as available-for-sale. These securities are comprised of U.S. government sponsored agencies and non-agency collateralized mortgage obligations ("CMOs") and municipal obligations.

U.S. government sponsored agencies are classified within Level 1 of the valuation hierarchy due to the quoted prices for these securities being available in an active market.

The quoted market prices are not available for municipal obligations and the fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and those securities are classified within Level 2 of the valuation hierarchy.

Non-agency CMOs are classified within Level 2 of the valuation hierarchy and were previously classified within Level 3. Non-agency CMOs were transferred from Level 3 to Level 2 during the first quarter 2012 due to increased market liquidity and an increase in the number of available pricing models. The non-agency CMOs are valued based on pricing provided by external pricing services. Previously, the markets were illiquid and fair values were based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement, which was the reason for a Level 3 classification. As of September 30, 2012, the Company sold the remaining securities in non-agency collateralized mortgage obligation securities that were related to the investments arising out of strategies to fully utilize available balance sheet leverage capacity.

Due to illiquidity in the markets, theThe Company determined the fair value of the mortgage securitization, Flagstar Home Equity Loan TrustSecond Mortgage 2006-1 (“("FSTAR 2006-1”2006-1") securitization trust, using a discounted estimated net future cash flow model and therefore classified it within the Level 3 valuation hierarchy as the model utilizes significant inputs which are unobservable.

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Loans held-for-sale. The Company generally estimates the fair value of mortgage 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 measurements are classified as Level 2.

Loans held-for-investment. Loans held-for-investment are generally recorded at amortized cost. cost. The Company does not record these loans at fair value on a recurring basis. However, from time to time, a loan is consideredbecomes 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, 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 broker price opinions which are considered to be Level 3. Fair value may also be measured using the present value of expected cash flows discounted at the loan's effective interest rate. The Company records the impaired loan as a non-recurring Level 3 valuation.

Loans held-for-investment 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 selected 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.

Included in loans held-for-investment is the transferor'stransferors' interest on the home equity line of credit ("HELOC")HELOC securitizations. The Company fair value of the transferor'stransferors' interest is based on the claims due to the note insurer and continuing credit losses on the loans underlying the securitizations, which are considered to be Level 3. See Note 9 - Private-Label Securitization Activity, for the key assumptions used in the transferor'stransferors' interest valuation process.

Repossessed assets. Loans on which the underlying collateral has been repossessed are adjusted to fair value less costs to sell upon transfer to repossessed assets. Subsequently, repossessed assets are carried at the lower of carrying value or fair value, less anticipated marketing and selling costs. Fair value is generally based upon third-party appraisals or internal estimates and considered a Level 3 classification.

Residential MSRs. TheAlthough there are MSR sales transacting, the current market for residential MSRs is not sufficiently liquid to provide participants with quoted market prices.prices for all tranches of MSRs. Therefore, the Company uses an option-adjusted spread valuation approach to determine the fair value of residential 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 residential MSRs include mortgage prepayment speeds and discount rates. Management obtains third-party valuations of the residential MSR portfolio on a quarterly basis from independent valuation experts to assess the reasonableness of the fair value calculated by its internal valuation model. Due to the nature of the valuation inputs, residential MSRs are classified within Level

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3 of the valuation hierarchy. See Note 10 - Mortgage Servicing Rights, for the key assumptions used in the residential MSR valuation process.

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 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.

Equity-linked transaction and option commitment. The Company previously offered, for a short period of time, the equity-linked transaction and option commitments as a hedge (off-set) to the market risk incurred with the Company's participation of equity-linked certificates of deposit. The option represents the premium over the total notional amount of the hedge. The valuations are based on counter-party risk systems measuring the present value of each instrument and its future payments. The risk systems take into consideration economic terms of the trade and current market levels including spot rates, and underlying volatility and correlation among other factors.


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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.

LitigationDOJ litigation settlement. On February 24, 2012, the Company announced that the Bank had entered into an agreement (the "DOJ Agreement") with the U.S. Department of Justice ("DOJ") relating to certain underwriting practices associated with loans insured by the Federal Housing Administration ("FHA") of the Department of Housing and Urban Development ("HUD"). The Bank and the DOJ entered into the DOJ Agreement pursuant to which the Bank agreed to comply with all applicable HUD and FHA rules related to the continued participation in the direct endorsement lender program, make an initial payment of $15.0 million within 30 business days of the effective date of the DOJ Agreement (paid on April 3, 2012), make payments of approximately $118.0 million contingent upon the occurrence of certain future events (as further described below) (the "Additional Payments"), and complete a monitoring period by an independent third party chosen by the Bank and approved by HUD.
Based on analysis of the DOJ Agreement, the Company recorded a liability of $33.3 million at December 31, 2011. During the nine months ended September 30, 2012, the Company recorded an increase to the liability of $0.8 million, principally representing the recognition of the periodic effect of discounting. During the second quarter 2012, a payment of $15.0 million was paid against the liability. At September 30, 2012 the liability was $19.1 million, which represents the estimated fair value of the $118.0 million Additional Payments. Future changes in the fair value of the Additional Payments could affect in future earnings each quarters.

The Company has elected the fair value option to account for the liability representing the obligation to make Additional Payments under the DOJ Agreement. The signed settlement contract with the DOJ establishes a legally enforceable contract with a stipulated payment plan that meets the definition of a financial liability. The Company made the fair value election as of December 31, 2011,, the date the Company first recognized the financial instrument in its financial statements.

The specific terms of the payment structure are as follow:

The Company generates positive income for a sustained period, such that part or all of the Deferred Tax Asset ("DTA"), which has been offset by a valuation allowance ("DTA Valuation Allowance"), is likely to be realized, as evidenced by the reversal of the DTA Valuation Allowance in accordance with U.S. GAAP;

The Company is able to include capital derived from the reversal of the DTA Valuation Allowance in the Bank's Tier 1 capital, which is the lesser of 10 percent of Tier 1 capital or the amount of the DTA that the Company expects to recover within one year based on financial projections;

The Company's obligation to repay the $266.7 million in preferred stock held by the U.S. Treasury under the TARP Capital Purchase Program has been either extinguished or excluded from Tier 1 capital for purposes of calculating the Tier 1 capital ratio as described in the paragraph below;

Upon the occurrence of each of the future events described above, and provided doing so would not violate any banking regulatory requirement or the OCC does not otherwise object, the Company will begin making Additional Payments provided that (i) each annual payment would be equal to the lesser of $25 million or the portion of the Additional Payments that remains outstanding after deducting prior payments; and (ii) no obligation arises until the Company's call report as filed with the OCC, including any amendments thereto, for the period ending at least six months prior to the making of such Additional Payments, reflects a minimum Tier 1 capital ratio of 11 percent (or higher if required by regulators), after excluding any unextinguished portion of the preferred stock held by U.S. Treasury under the TARP Capital Purchase Program; and

In no event will the Company be required to make an Additional Payment if doing so would violate any material banking regulatory requirement or the OCC (or any successor regulator under the safety and soundness program) objects in writing to the making of an Additional Payment.

The fair value of the DOJ Agreement is based on a discounted cash flow valuation model that incorporates the Company's current estimate of the most likely timing and amount of the cash flows necessary to satisfy the obligation. These cash flow estimates are reflective of the Company's detailed financial and operating projections for the next three years, as well as more general growth earnings and capital assumptions for subsequent periods.


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The timing of each of the metrics is dependent on the preceding metric being achieved and actual Bank operating results and forecasted assumptions could materially change the value of the liability. As the Bank's profitability increases, the value of the deferred liability would also increase.

At September 30, 2012March 31, 2013, the cash flows are discounted using a 15.614.0 percent discount rate that is inclusive of the risk free rate based on the expected duration of the liability and an adjustment for non-performance risk that represents the Company's credit risk. The model assumes 12 quarters of profitability prior to reversing the valuation allowance associated with the deferred tax asset.

The liability is classified within Level 3 of the valuation hierarchy given the projections of earnings and growth rate assumptions are unobservable inputs. The litigation settlement is included in other liabilities on the Consolidated Financial Statements and changes in the fair value of the litigation settlement will be recorded each quarter in general and administrative expense within non-interest expense on the Consolidated Statements of Operations.


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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, 2012March 31, 2013 and December 31, 20112012, by caption on the Consolidated Statement of Financial Condition and by the valuation hierarchy (as described above).

Level 1 Level 2 Level 3 
Total  Fair
Value
Level 1 Level 2 Level 3 
Total  Fair
Value
September 30, 2012(Dollars in thousands)
March 31, 2013(Dollars in thousands)
Securities classified as trading              
U.S. Treasury bonds$170,073
 $
 $
 $170,073
$170,139
 $
 $
 $170,139
Securities classified as available-for-sale              
Mortgage securitization
 
 96,108
 96,108

 
 87,356
 87,356
U.S. government sponsored agencies87,397
 
 
 87,397
71,489
 
 
 71,489
Municipal obligations
 15,356
 
 15,356

 10,982
 
 10,982
Loans held-for-sale              
Residential first mortgage loans
 2,878,503
 
 2,878,503

 2,510,669
 
 2,510,669
Loans held-for-investment              
Residential first mortgage loans
 20,770
 
 20,770

 18,393
 
 18,393
Transferor's interest
 
 7,617
 7,617
Residential mortgage servicing rights
 
 686,799
 686,799
Equity-linked CD purchase option492
 
 
 492
Transferors' interest
 
 6,872
 6,872
Mortgage servicing rights
 
 727,207
 727,207
Derivative assets              
U.S. Treasury futures7,750
 
 
 7,750
7,998
 
 
 7,998
Agency forwards2,462
 
 
 2,462
2,845
 
 
 2,845
Rate lock commitments
 
 230,050
 230,050

 
 51,389
 51,389
Interest rate swaps
 6,079
 
 6,079

 1,853
 
 1,853
Total derivative assets10,212
 6,079
 230,050
 246,341
10,843
 1,853
 51,389
 64,085
Total assets at fair value$268,174
 $2,920,708
 $1,020,574
 $4,209,456
$252,471
 $2,541,897
 $872,824
 $3,667,192
Derivative liabilities              
Forward agency and loan sales$
 $(138,109) $
 $(138,109)$
 $(18,876) $
 $(18,876)
Interest rate swaps
 (6,079) 
 (6,079)
 (1,853) 
 (1,853)
Total derivative liabilities
 (144,188) 
 (144,188)
 (20,729) 
 (20,729)
Warrant liabilities
 (5,925) 
 (5,925)
 (7,847) 
 (7,847)
Equity-linked CD written option(492) 
 
 (492)
Litigation settlement
 
 (19,100) (19,100)
DOJ litigation settlement
 
 (19,100) (19,100)
Total liabilities at fair value$(492) $(150,113) $(19,100) $(169,705)$
 $(28,576) $(19,100) $(47,676)
              

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Level 1 Level 2 Level 3 
Total  Fair
Value
Level 1 Level 2 Level 3 
Total  Fair
Value
December 31, 2011(Dollars in thousands)
December 31, 2012(Dollars in thousands)
Securities classified as trading              
U.S. Treasury bonds$313,383
 $
 $
 $313,383
$170,086
 $
 $
 $170,086
Securities classified as available-for-sale              
Non-agency collateralized mortgage obligations
 
 254,928
 254,928
Mortgage securitization
 
 110,328
 110,328

 
 91,117
 91,117
U.S. government sponsored agencies116,096
 
 
 116,096
79,717
 
 
 79,717
Municipal obligations
 13,611
 
 13,611
Loans held-for-sale              
Residential first mortgage loans
 1,629,618
 
 1,629,618

 2,865,696
 
 2,865,696
Loans held-for-investment              
Residential first mortgage loans
 22,651
 
 22,651

 20,219
 
 20,219
Residential mortgage servicing rights
 
 510,475
 510,475
Transferors' interest
 
 7,103
 7,103
Mortgage servicing rights
 
 710,791
 710,791
Derivative assets              
U.S. Treasury futures3,316
 
 
 3,316
2,203
 
 
 2,203
Rate lock commitments
 
 70,965
 70,965

 
 86,200
 86,200
Agency forwards9,362
 
 
 9,362
3,618
 
 
 3,618
Interest rate swaps
 3,296
 
 3,296

 5,813
 
 5,813
Total derivative assets12,678
 3,296
 70,965
 86,939
5,821
 5,813
 86,200
 97,834
Total assets at fair value$442,157
 $1,655,565
 $946,696
 $3,044,418
$255,624
 $2,905,339
 $895,211
 $4,056,174
Derivative liabilities              
Forward agency and loan sales$
 $(42,978) $
 $(42,978)$
 $(14,021) $
 $(14,021)
Interest rate swaps
 (3,296) 
 (3,296)
 (5,813) 
 (5,813)
Total derivative liabilities
 (46,274) 
 (46,274)
 (19,834) 
 (19,834)
Warrant liabilities
 (2,411) 
 (2,411)
 (11,346) 
 (11,346)
Litigation settlement (1)

 
 (18,300) (18,300)
DOJ litigation settlement
 
 (19,100) (19,100)
Total liabilities at fair value$
 $(48,685) $(18,300) $(66,985)$
 $(31,180) $(19,100) $(50,280)

(1)
Does not include the $15.0 million payment required to be paid within 30 business days after the effective date of the DOJ Agreement, which was paid on April 3, 2012.

A determination to classify a financial instrument within Level 3 of the valuation hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources). Also, the Company manages the risk associated with the observable components of Level 3 financial instruments using securities and derivative positions that are classified within Level 1 or Level 2 of the valuation hierarchy; these Level 1 and Level 2 risk management instruments are not included below, and therefore the gains and losses in the tables do not reflect the effect of the Company's risk management activities related to such Level 3 instruments. If the market for an instrument becomes more liquid or active and pricing models become available which allow for readily observable inputs, the Company will transfer the instruments from Level 3 to Level 2 valuation hierarchy.

Interest rate swap derivatives were transferred from Level 1 to Level 2 during the fourth quarter 2011 because the derivatives are not actively being traded on a listed exchange. The interest rate swap derivatives are valued based on quoted prices for similar assets in an active market with inputs that are observable and are now classified within Level 2 of the valuation hierarchy.

Non-agency CMOs were transferred from Level 3 to Level 2 during the first quarter 2012 due to increased market liquidity and an increase in the number of available pricing models. The non-agency CMOs are valued based on pricing provided by external pricing services.

Transferor's interest were transferred into Level 3 during the first quarter 2012 due to the assumptions utilized in the valuation of the claims to the note insurer and continuing credit losses on the loans underlying the securitization. Transferor's

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interest are valued based on pricing of the loans underlying the securitization and are now classified within Level 3 of the valuation hierarchy.

The Company had no transfers of recurring assets or liabilities recorded at fair value for the three and nine months ended September 30, 2011March 31, 2013. The Company reclassified the 2011 nonrecurring hierarchy disclosures for impaired loans and repossessed assets from Level 2 to Level 3 to reflect that the appraised values, broker price opinions or internal estimates contain unobservable inputs. The impact of the transfer did not have a material effect on the Company's Consolidated Financial Statements or the Notes thereto and was limited to disclosure.


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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, 2012March 31, 2013 and 20112012 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy. 
  Recorded in EarningsRecorded in OCI      
For the Three Months Ended September 30, 2012
Balance at
Beginning of
Period
Total Unrealized Gains / (Losses)Total Realized Gains / (Losses)Total Unrealized Gains / (Losses)PurchasesSalesSettlementsTransfers In (Out)
Balance at
End of 
Period
Changes In Unrealized Held at End of Period (4)
Assets(Dollars in thousands)
Securities classified as available-for-sale (1)(2)
          
Mortgage securitization$100,306
$
$
$400
$
$(4,598)$
$
$96,108
$400
Loans held-for-investment          
Transferor's interest7,660
75
(118)




7,617

Residential mortgage servicing rights638,865
(28,762)

131,837
(9,589)(45,552)
686,799
���
Derivative financial instruments          
Rate lock commitments132,388
255,947


287,537
(344,909)(100,913)
230,050

          Totals
$879,219
$227,260
$(118)$400
$419,374
$(359,096)$(146,465)$
$1,020,574
$400
Liabilities          
Litigation settlement$(19,100)$
$
$
$
$
$
$
$(19,100)$
           
For the Three Months Ended September 30, 2011          
Securities classified as available-for-sale (1)(2)(3)          
Non-agency CMOs$294,178
$
$(6,296)$
$
$(11,003)$
$
$276,879
$(4,974)
Mortgage securitization124,587




(8,217)

116,370

Residential mortgage servicing rights577,401
(164,423)

64,490
(40,130)

437,338

Derivative financial instruments          
Rate lock commitments10,920
122,393


114,066
(101,012)(56,305)
90,062

Totals$1,007,086
$(42,030)$(6,296)$
$178,556
$(160,362)$(56,305)$
$920,649
$(4,974)
           

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 Recorded in EarningsRecorded in OCI  Recorded in EarningsRecorded in OCI 
For the Nine Months Ended September 30, 2012
Balance at
Beginning of
Period
Total Unrealized Gains / (Losses)Total Realized Gains / (Losses)Total Unrealized Gains / (Losses)PurchasesSalesSettlementsTransfers In (Out)
Balance at
End of 
Period
Changes In Unrealized Held at End of Period (4)
For the Three Months Ended March 31, 2013
Balance at
Beginning of
Period
Total Unrealized Gains / (Losses)Total Realized Gains / (Losses)Total Unrealized Gains / (Losses)PurchasesSalesSettlementsTransfers In (Out)
Balance at
End of 
Period
Unrealized Gains / (Losses) Held at End of Period (4)
Assets(Dollars in thousands)(Dollars in thousands)
Securities classified as available-for-sale (1)(2)
 
Mortgage securitization$91,117
$
$
$1,227
$
$
$(4,988)$
$87,356
$
Loans held-for-investment 
Transferors' interest7,103
(174)



(57)
6,872
(174)
Mortgage servicing rights710,791
(15,641)

126,494
(94,437)

727,207
17,540
Derivative financial instruments 
Rate lock commitments86,200
(30,828)

139,514
(118,815)(24,682)
51,389
3,230
Totals
$895,211
$(46,643)$
$1,227
$266,008
$(213,252)$(29,727)$
$872,824
$20,596
Liabilities 
DOJ litigation settlement$(19,100)$
$
$
$
$
$
$
$(19,100)$
 
For the Three Months Ended March 31, 2012 
Securities classified as available-for-sale (1)(2)(3)
  
Non-agency CMOs$254,928
$
$
$
$
$
$
$(254,928)$
$
$254,928
$(1,175)$310
$16,504
$
$(24,104)$(11,327)$
$235,136
$
Mortgage securitization110,328
2,091



(16,311)

96,108
2,091
110,328


685


(5,979)
105,034

Loans held-for-investment  
Transferor's interest
(206)(1,771)



9,594
7,617

Residential mortgage servicing rights510,475
(64,348)

370,012
(27,791)(101,549)
686,799

Transferors' interest9,594
(409)



(200)
8,985
(409)
Mortgage servicing rights510,475
(6,927)

111,484
(18,202)

596,830
17,493
Derivative financial instruments  
Rate lock commitments70,965
490,712


673,989
(753,822)(251,794)
230,050

70,965
48,338


171,149
(159,168)(63,036)
68,248
(1,364)
Totals$946,696
$428,249
$(1,771)$
$1,044,001
$(797,924)$(353,343)$(245,334)$1,020,574
$2,091
$956,290
$39,827
$310
$17,189
$282,633
$(201,474)$(80,542)$
$1,014,233
$15,720
Liabilities  
Litigation settlement$(18,300)$
$(800)$
$
$
$
$
$(19,100)$
For the Nine Months Ended September 30, 2011 
Securities classified as available-for-sale (1)(2)(3)
 
Non-agency CMOs$330,781
$
$(3,937)$
$
$(49,965)$
$
$276,879
$12,969
Mortgage securitization136,707




(20,337)

116,370

Residential mortgage servicing rights580,299
(209,140)

153,444
(87,265)

437,338

Derivative financial instruments 
 
Rate lock commitments14,396
160,983


211,126
(163,453)(132,990)
90,062

Totals$1,062,183
$(48,157)$(3,937)$
$364,570
$(321,020)$(132,990)$
$920,649
$12,969
DOJ litigation settlement$(18,300)$
$(800)$
$
$
$
$
$(19,100)$
 
(1)Realized gains (losses), including unrealized losses deemed other-than-temporary and related to credit issues, are reported in non-interest income.
(2)U.S. government agency securities classified as available-for-sale are valued predominantly using quoted broker/dealer prices with adjustments to reflect for any assumptions a willing market participant would include in its valuation. Non-agency CMOs classified as available-for-sale are valued using internal valuation models and pricing information from third parties. Mortgage securitization is classified as available-for-sale is valued using a discounted estimated net future cash flow model.
(3)Management had anticipated that the non-agency CMOs would be classified under Level 2 of the valuation hierarchy. However, due to illiquidity in the markets, the fair value of these securities has been determined using internal models and therefore is classified within Level 3 of the valuation hierarchy and pricing information from third parties.
(4)ChangesThis reflects the amount of total gains (losses) for the period which are included in earnings, which are attributable to the change in unrealized gains (losses) relatedrelating to financial instrumentsassets still held at the end of the period.


    

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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,March 31, 2013 and December 31, 2012.
Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average)Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average)
September 30, 2012(Dollars in thousands)
March 31, 2013(Dollars in thousands)
Assets  
Mortgage securitization$96,108
Discounted cash flowsDiscount rate
Prepay rate - 12 month historical average
CDR rate - 12 month historical average
Loss severity
7.2% - 10.8% (9.0%)
7.6% - 11.4% (9.5%)
4.7% - 7.1% (5.9%)
80.0% - 120.0% (100.0%)
$87,356
Discounted cash flowsDiscount rate
Prepay rate - 12 month historical average
CDR rate - 12 month historical average
Loss severity
7.2% - 10.8% (9.0%)
8.6% - 13.0% (10.8%)
4.1% - 6.1% (5.1%)
80.0% - 120.0% (100.0%)
Transferor's interest$7,617
Discounted cash flowsDiscount rate
Prepay rate - 3 month historical average
Cumulative loss rate
Loss severity
4.6% - 6.9% (5.7%)
9.6% - 14.4% (12.0%)
11.3% - 17.0% (14.1%)
80.0% - 120.0% (100.0%)
Residential mortgage servicing rights$686,799
Discounted cash flowsOption adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
5.1% - 7.7% (6.4%)
16.2% - 24.3% (20.3%)
59.7% - 89.6% (74.7%)
Transferors' interest$6,872
Discounted cash flowsDiscount rate
Prepay rate - 3 month historical average
Cumulative loss rate
Loss severity
4.6% - 6.9% (5.7%)
8.8% - 13.2% (11.0%)
11.4% - 17.2% (14.3%)
80.0% - 120.0% (100.0%)
Mortgage servicing rights$727,207
Discounted cash flowsOption adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
5.1% - 7.7% (6.4%)
11.8% - 17.5% (14.7%)
59.3% -89.0% (74.1%)
Rate lock commitments$230,050
Mark-to-MarketOrigination pull-through rate60.2% - 90.2% (75.2%)$51,389
Mark-to-MarketOrigination pull-through rate63.0% - 94.5% (78.8%)
Liabilities    
Litigation settlement$(19,100)Discounted cash flowsAsset 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%)
DOJ litigation settlement$(19,100)Discounted cash flowsAsset 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%)
 Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average)
December 31, 2012(Dollars in thousands)
  Assets 
Mortgage securitization$91,117
Discounted cash flowsDiscount rate
Prepay rate - 12 month historical average
CDR rate - 12 month historical average
Loss severity
7.2% - 10.8% (9.0%)
7.6% - 11.3% (9.4%)
5.3% - 8.0% (6.7%)
80.0% - 120.0% (100.0%)
Transferors' interest$7,103
Discounted cash flowsDiscount rate
Prepay rate - 3 month historical average
Cumulative loss rate
Loss severity
4.6% - 6.9% (5.7%)
9.6% - 14.4% (12.0%)
11.4% - 17.2% (14.3%)
80.0% - 120.0% (100.0%)
Mortgage servicing rights$710,791
Discounted cash flowsOption adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
4.9% - 7.4% (6.1%)
14.0% - 20.3% (17.3%)
58.6% - 87.9% (73.3%)
Rate lock commitments$86,200
Mark-to-MarketOrigination pull-through rate62.8% - 94.2% (78.5%)
  Liabilities    
DOJ litigation settlement$(19,100)Discounted cash flowsAsset 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%)

The significant unobservable inputs used in the fair value measurement of the mortgage securitization (FSTAR 2006-1 securitization trust) are discount rates, prepayment rates and default rates. While loss severity (in the event of default) is an unobserveableunobservable input, the sensitivity of the fair value to this input is zero because of the insurer coverage on the deal. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases in both prepay rates and default rates in isolation result in a higher fair value; however, generally a change in the assumption used for the probability of default is accompanied by a directionally opposite change in the assumption used for prepayment rates, which would offset a portion of the fair value change.

The significant unobservable inputs used in the fair value measurement of the transferor'stransferors' interest are discount rates, prepayment rates, loss rates and loss severity. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases in both prepay rates and loss rates in isolation result in a lower fair value; however, generally a change in the assumption used for the loss rate is accompanied by a directionally opposite change in the assumption used for prepayment rates, which would offset a portion of the fair value change. Significant increases (decreases) in the loss severity rate in isolation would result in a significantly lower (higher) fair value measurement.

23

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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 threethe assumptions in isolation would result in a significantly lower (higher) fair value measurement.

The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull through rate. The pull through rate is a statistical analysis of the Company's actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fall out ratios (i.e., the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the assumption utilized for the probability of default is accompanied by a directionally similar change in the assumption utilized for the loss severity and a directionally opposite change in assumption utilized for prepayment rates.

The significant unobservable inputs used in the fair value measurement of the DOJ litigation settlement with DOJSettlement are future balance sheet and growth rate assumptions 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)(2013). The Company'sBank's target asset growth rate post 20152013 is based off of growth in the balance sheet post TARP preferred stock repayment. Significant increases (decreases) in the Company'sbank's growth rate in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the Company'sbank's MSR growth rate in isolation would result in a marginally lower (higher) fair value measurement. Significant increases (decreases) in the peer group's return on assets improvement in isolation would result in a marginally higher (lower) fair value measurement. Significant increases

25

Table of Contents

(decreases) in the Company'sbank's return on assets improvement in isolation would result in a marginally higher (lower) fair value measurement. Changes in the regulatory environment could impact the calculation of capital ratio.

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below.
Assets Measured at Fair Value on a Non-recurring Basis
Total Level 3 Level 3
(Dollars in thousands)  
September 30, 2012   
March 31, 2013  
Impaired loans held-for-investment (1)
     
Residential first mortgage loans$139,764
 $139,764
 $149,181
Commercial real estate loans101,289
 101,289
 51,881
Repossessed assets (2)
119,468
 119,468
 114,356
Totals$360,521
 $360,521
 $315,418
December 31, 2011   
December 31, 2012  
Impaired loans held-for-investment (1)
     
Residential first mortgage loans$210,040
 $210,040
 $147,036
Commercial real estate loans180,306
 180,306
 73,810
Repossessed assets (2)
114,715
 114,715
 120,732
Totals (3)
$505,061
 $505,061
 $341,578
 
(1)
The Company recorded $26.7(37.5) million and $116.6(47.8) million in fair value losses on impaired loans (included in provision for loan losses on the Consolidated Statements of Operations) during the three and nine months ended September 30,March 31, 2013 and 2012, respectively, compared to $12.0 million and $41.8 million in fair value losses on impaired loans during the three and nine months ended September 30, 2011, respectively.
(2)
The Company recorded a gainloss of $(0.9)(0.8) million and a loss of $8.9(5.9) million related to write-downs of repossessed assets based on the estimated fair value of the specific assets, and recognized net gains of $4.24.4 million and a net loss of $7.3(0.7) million on sales of repossessed assets (both write-downs and net gains/losses are included in asset resolution expense on the Consolidated Statements of Operations) during the three and nine months ended September 30,March 31, 2013 and 2012, respectively, compared to $5.5 million and $17.7 million in losses related to write-downs of repossessed assets based on the estimated fair value of the specific assets, and recognized net gains of $2.0 million and $2.7 million on sales of repossessed assets during the three and nine months ended September 30, 2011, respectively.
(3)
As of December 31, 2011, the Company reclassified impaired loans and repossessed assets from Level 2 to Level 3 to reflect that many of the appraised values, price opinions or internal estimates contain unobservable inputs.


24

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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,March 31, 2013 and December 31, 2012.
Fair ValueValuation Technique(s)Unobservable InputRange (Weighted Average)Fair ValueValuation Technique(s)Unobservable InputRange (Weighted Average)
September 30, 2012(Dollars in thousands)
March 31, 2013(Dollars in thousands)
Impaired loans held-for-investment    
Residential mortgage loans$139,764
Fair value of collateralLoss severity discount0% - 100% (47.3%)$149,181
Fair value of collateralLoss severity discount0% - 100% (45.7%)
Commercial real estate loans$101,289
Fair value of collateralLoss severity discount0% - 100% (48.4%)$51,881
Fair value of collateralLoss severity discount0% - 100% (36.2%)
Repossessed assets$119,468
Fair value of collateralLoss severity discount0% - 86.8% (48.1%)$114,356
Fair value of collateralLoss severity discount0% - 100% (43.2%)
 Fair ValueValuation Technique(s)Unobservable InputRange (Weighted Average)
December 31, 2012(Dollars in thousands)
Impaired loans held-for-investment    
     Residential mortgage loans$147,036
Fair value of collateralLoss severity discount0% - 100% (46.6%)
     Commercial real estate loans$73,810
Fair value of collateralLoss severity discount0% - 100% (41.6%)
Repossessed assets$120,732
Fair value of collateralLoss severity discount0% - 100% (44.0%)

The Company has certain impaired residential and commercial real estate loans that are measured at fair value on a nonrecurring basis. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals or other third party price opinions are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties. In cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized.

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 customized discounting criteria. The significant unobservable inputs used in the Level 3 fair value

26

Table of Contents

measurements of the Company's impaired loans and repossessed assets included in the table above primarily relate to internal valuations or analysis.

Fair Value of Financial Instruments

The accounting guidance for financial instruments requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair values. Certain financial instruments and all non-financial instruments are excluded from the scope of this guidance. Accordingly, the fair value disclosures required by this guidance are only indicative of the value of individual financial instruments as of the dates indicated and should not be considered an indication of the fair value of the Company.


25

Table of Contents

The following table presents the carrying amount and estimated fair value of certain financial instruments not recorded at fair value in entirety on a recurring basis.instruments. 
September 30, 2012March 31, 2013
  Estimated Fair Value  Estimated Fair Value
Carrying
Value
 Total Level 1 Level 2 Level 3
Carrying
Value
 Total Level 1 Level 2 Level 3
(Dollars in thousands)(Dollars in thousands)
Financial Instruments                  
Assets                  
Cash and cash equivalents$1,003,397
 $1,003,397
 $1,003,397
 $
 $
$2,230,686
 $2,230,686
 $2,230,686
 $
 $
Securities classified as trading170,073
 170,073
 170,073
 
 
170,139
 170,139
 170,139
 
 
Securities classified as available-for-sale198,861
 198,861
 87,397
 15,356
 96,108
169,827
 169,827
 71,489
 10,982
 87,356
Loans held-for-sale3,251,936
 3,113,188
 
 3,113,188
 
2,677,239
 2,677,259
 
 2,677,259
 
Loans repurchased with government guarantees1,931,163
 1,833,917
 
 1,833,917
 
1,604,906
 1,507,767
 
 1,507,767
 
Loans held-for-investment, net6,247,399
 6,266,760
 
 20,770
 6,245,990
4,453,266
 4,364,213
 
 18,393
 4,345,820
Accrued interest receivable106,458
 106,458
 
 106,458
 
81,056
 81,056
 
 81,056
 
Repossessed assets119,468
 119,468
 
 
 119,468
114,356
 114,356
 
 
 114,356
FHLB stock301,737
 301,737
 301,737
 
 
301,737
 301,737
 301,737
 
 
Mortgage servicing rights686,799
 686,799
 
 
 686,799
727,207
 727,207
 
 
 727,207
Customer initiated derivative interest rate swaps6,079
 6,079
 
 6,079
 
1,853
 1,853
 
 1,853
 
Equity-linked CD purchase option492
 492
 492
 
 
Liabilities                  
Retail deposits                  
Demand deposits and savings accounts(2,795,476) (2,733,946) 
 (2,733,946) 
(3,611,043) (3,533,087) 
 (3,533,087) 
Certificates of deposit(3,271,501) (3,298,392) 
 (3,298,392) 
(2,613,046) (2,631,999) 
 (2,631,999) 
Government accounts(906,431) (902,531) 
 (902,531) 
Government deposits(774,891) (772,539) 
 (772,539) 
Wholesale deposits(315,229) (318,942) 
 (318,942) 
(74,465) (76,201) 
 (76,201) 
Company controlled deposits(2,200,532) (2,197,722) 
 (2,197,722) 
(773,846) (829,938) 
 (829,938) 
FHLB advances(3,088,000) (3,352,394) (3,352,394) 
 
(2,900,000) (3,129,087) (3,129,087) 
 
Long-term debt(248,560) (77,079) 
 (77,079) 
(247,435) (81,046) 
 (81,046) 
Accrued interest payable(12,522) (12,522) 
 (12,522) 
(15,402) (15,402) 
 (15,402) 
Warrant liabilities(5,925) (5,925) 
 (5,925) 
(7,847) (7,847) 
 (7,847) 
Litigation settlement(19,100) (19,100) 
 
 (19,100)
DOJ litigation settlement(19,100) (19,100) 
 
 (19,100)
Customer initiated derivative interest rate swaps(6,079) (6,079) 
 (6,079) 
(1,853) (1,853) 
 (1,853) 
Equity-linked CD written option(492) (492) (492) 
 
Derivative Financial Instruments                  
Forward delivery contracts(138,109) (138,109) 
 (138,109) 
(18,876) (18,876) 
 (18,876) 
Commitments to extend credit230,050
 230,050
 
 
 230,050
51,389
 51,389
 
 
 51,389
U.S. Treasury and agency futures/forwards10,212
 10,212
 10,212
 
 
10,842
 10,842
 10,842
 
 


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December 31, 2011December 31, 2012
  Estimated Fair Value  Estimated Fair Value
Carrying
Value
 Total Level 1 Level 2 Level 3
Carrying
Value
 Total Level 1 Level 2 Level 3
(Dollars in thousands)(Dollars in thousands)
Financial Instruments                  
Assets                  
Cash and cash equivalents$731,058
 $731,058
 $731,058
 $
 $
$952,793
 $952,793
 $952,793
 $
 $
Securities classified as trading313,383
 313,383
 313,383
 
 
170,086
 170,086
 170,086
 
 
Securities classified as available-for-sale481,352
 481,352
 116,096
 
 365,256
184,445
 184,445
 79,717
 13,611
 91,117
Loans held-for-sale1,800,885
 1,823,421
 
 1,823,421
 
3,939,720
 3,945,133
 
 3,945,133
 
Loans repurchased with government guarantees1,899,267
 1,899,267
 
 1,899,267
 
1,841,342
 1,704,317
 
 1,704,317
 
Loans held-for-investment, net6,720,587
 6,748,914
 
 
 6,748,914
5,133,101
 5,119,704
 
 20,219
 5,099,485
Accrued interest receivable105,200
 105,200
 
 105,200
 
91,992
 91,992
 
 91,992
 
Repossessed assets114,715
 114,715
 
 
 114,715
120,732
 120,732
 
 
 120,732
FHLB stock301,737
 301,737
 301,737
 
 
301,737
 301,737
 301,737
 
 
Mortgage servicing rights510,475
 510,475
 
 
 510,475
710,791
 710,791
 
 
 710,791
Customer initiated derivative interest rate swaps3,296
 3,296
 
 3,296
 
5,813
 5,813
 
 5,813
 
Liabilities                  
Retail deposits                  
Demand deposits and savings accounts(2,520,710) (2,440,208) 
 (2,440,208) 
(3,192,006) (3,121,643) 
 (3,121,643) 
Certificates of deposit(2,972,258) (3,001,645) 
 (3,001,645) 
(3,175,481) (3,199,242) 
 (3,199,242) 
Government accounts(711,097) (705,991) 
 (705,991) 
(819,078) (816,258) 
 (816,258) 
Wholesale deposits(384,910) (394,442) 
 (394,442) 
(99,338) (101,729) 
 (101,729) 
Company controlled deposits(1,101,013) (1,095,602) 
 (1,095,602) 
(1,008,392) (1,005,780) 
 (1,005,780) 
FHLB advances(3,953,000) (4,195,163) (4,195,163) 
 
(3,180,000) (3,422,567) (3,422,567) 
 
Long-term debt(248,585) (80,575) 
 (80,575) 
(247,435) (78,220) 
 (78,220) 
Accrued interest payable(8,723) (8,723) 
 (8,723) 
(13,420) (13,420) 
 (13,420) 
Warrant liabilities(2,411) (2,411) 
 (2,411) 
(11,346) (11,346) 
 (11,346) 
Litigation settlement(18,300) (18,300) 
 
 (18,300)
DOJ litigation settlement(19,100) (19,100) 
 
 (19,100)
Customer initiated derivative interest rate swaps(3,296) (3,296) 
 (3,296) 
(5,813) (5,813) 
 (5,813) 
Derivative Financial Instruments                  
Forward delivery contracts(42,978) (42,978) 
 (42,978) 
(14,021) (14,021) 
 (14,021) 
Commitments to extend credit70,965
 70,965
 
 
 70,965
86,200
 86,200
 
 
 86,200
U.S. Treasury and agency futures/forwards12,678
 12,678
 12,678
 
 
5,821
 5,821
 5,821
 
 

The methods and assumptions were used by the Company in estimating fair value of financial instruments that were not previously disclosed.disclosed, are as follows:

Cash and cash equivalents. Due to their short-term nature, the carrying amount of cash and cash equivalents approximates fair value.

Loans repurchased with government guarantees. The fair value of loans 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 of loans 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.

FHLB stock. No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. Management believes that the recorded value is the fair value.

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Accrued interest receivable. The carrying amount is considered a reasonable estimate of fair value.

Deposit accounts. The fair value of demand deposits and savings accounts approximates the carrying amount. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for certificates of deposit with similar remaining maturities.

FHLB advances. Rates currently available to the Company 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 the Company’s current borrowing rates for similar types of borrowing arrangements.

Accrued interest payable. The carrying amount is considered a reasonable estimate of fair value.

Fair Value Option

The Company has elected, under the fair value option in FASB ASC 825: Financial825, "Financial Instruments,," to record at fair value certain financial assets and financial liabilities. The fair value election is typically made on an instrument by instrument basis. The decision to measure a financial instrument at fair value cannot be revoked once the election is made. Upon adoption of Statement of Financial Accounting Standards ("SFAS") 159: The159, "The Fair Value Option for Financial Assets and Financial Liabilities," the Company made a policy decision to electelected the fair value option for loans held-for-sale originated post 2009.

The Company has elected the fair value option to account for the liability representing the obligation to make Additional Payments under the DOJ Agreement. The signed settlement contract with the DOJ establishes a legally enforceable contract with a stipulated payment plan that meets the definition of a financial liability. The Company made the fair value election as of December 31, 2011, the date the Company first recognized the financial instrument in its financial statements.

The Company elected the fair value option for held-for-sale loans and the litigation settlement liability to better reflect the management of these financial instruments on a fair value basis. Interest income on loans held-for-sale is accrued on the principal outstanding primarily using the "simple-interest" method. Interest expense on the litigation settlement will be included in the overall change in fair value of the liability each quarter.

At September 30, 2012March 31, 2013 and December 31, 20112012, the balance of theloans held-for-sale that are carried at fair value of the loans held-for-sale waswere $3.12.5 billion and $1.62.9 billion, respectively. The change in fair value included in earnings was $273.387.6 million and $571.2121.1 million for the three and nine months ended September 30, 2012, respectively, compared to $132.3 millionMarch 31, 2013 and $259.4 million for the three and nine months ended September 30, 20112012, respectively. Changes in fair value of the loans held-for-sale are recorded in net gain on loan sales on the Company's Consolidated Statements of Operations.

At September 30, 2012March 31, 2013 and December 31, 20112012, the balance of theloans held-for-investment that are carried at fair value of the loans held-for-investment waswere $21.418.4 million and $22.720.2 million, respectively. The change in fair value included in earnings was $0.3(0.8) million and $0.7(1.1) million during the three and nine months ended September 30, 2012, respectively, compared to $0.8 millionMarch 31, 2013 and $0.7 million for the three and nine months ended September 30, 20112012, respectively. Changes in fair value of the loans held-for-investment are reflected in interest income on loans on the Company's Consolidated Statements of Operations.

At both September 30, 2012March 31, 2013 and December 31, 20112012, the fair value of financial liabilities, which related to the DOJ Agreement was $19.1 million and $18.3 million, respectively, andwas included in other liabilities in the Consolidated Statements of Financial Condition. The change in fair value of the DOJ Agreement liability increasedfor the three months ended March 31, 2013 and 2012 was zero and $0.8 million for the nine months ended September 30, 2012,respectively, primarily due to the recognition of the periodic effect of discounting. The increase was recorded in generallegal and administrativeprofessional expense within non-interest expense on the Consolidated Statements of Operations.
    

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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, 2012March 31, 2013 and December 31, 20112012 for assets and liabilities for which the fair value option has been elected.
 September 30, 2012 December 31, 2011 March 31, 2013 December 31, 2012
 (Dollars in thousands) (Dollars in thousands)


Unpaid Principal Balance ("UPB")Fair ValueFair Value Over / (Under) UPBUnpaid Principal BalanceFair ValueFair Value Over / (Under) UPB


Unpaid Principal Balance ("UPB")Fair ValueFair Value Over / (Under) UPBUnpaid Principal BalanceFair ValueFair Value Over / (Under) UPB
AssetsAssets   Assets   
Nonaccrual loans   Nonaccrual loans   
Loans held-for-sale$
$
$
 $281
$291
$10
Loans held-for-sale$
$
$
 $222
$240
$18
Loans held-for-investment Loans held-for-investment1,155
1,166
11
 2,989
2,963
(26) Loans held-for-investment2,007
1,760
(247) 2,021
2,064
43
Total loans Total loans1,155
1,166
11
 3,270
3,254
(16) Total loans$2,007
$1,760
(247) $2,243
$2,304
$61
Other performing loans Other performing loans    Other performing loans   
Loans held-for-sale Loans held-for-sale2,878,503
3,076,994
198,491
 1,570,302
1,629,327
59,025
Loans held-for-sale$2,415,027
$2,510,669
$95,642
 $2,734,756
$2,865,456
$130,700
Loans held-for-investment Loans held-for-investment19,615
20,226
611
 18,699
19,688
989
Loans held-for-investment16,671
16,633
(38) 17,589
18,155
566
Total loans Total loans2,898,118
3,097,220
199,102
 1,589,001
1,649,015
60,014
Total loans$2,431,698
$2,527,302
$95,604
 $2,752,345
$2,883,611
$131,266
Total loans Total loans    Total loans   
Loans held-for-sale Loans held-for-sale2,878,503
3,076,994
198,491
 1,570,583
1,629,618
59,035
Loans held-for-sale$2,415,027
$2,510,669
$95,642
 $2,734,978
$2,865,696
$130,718
Loans held-for-investment Loans held-for-investment20,770
21,392
622
 21,688
22,651
963
Loans held-for-investment18,678
18,393
(285) 19,610
20,219
609
Total loans Total loans$2,899,273
$3,098,386
$199,113
 $1,592,271
$1,652,269
$59,998
Total loans$2,433,705
$2,529,062
$95,357
 $2,754,588
$2,885,915
$131,327
Liabilities   
Litigation settlementN/A (1)$(19,100)N/A (1) N/A (1)$(18,300)N/A (1)
(1)Remaining principal outstanding is not applicable to the litigation settlement because it does not obligate the Company to return a stated amount of principal at maturity, but instead return an amount based upon performance on the underlying terms in the Agreement.

Note 4 – Investment Securities

As of September 30, 2012March 31, 2013 and December 31, 20112012, investment securities were comprised of the following.
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
 (Dollars in thousands) (Dollars in thousands)
September 30, 2012        
March 31, 2013        
Securities classified as trading                
U.S. Treasury bonds $169,990
 $83
 $
 $170,073
 $169,993
 $146
 $
 $170,139
Securities classified as available-for-sale                
Mortgage securitization $106,940
 $
 $(10,832) $96,108
 $96,284
 $
 $(8,928) $87,356
U.S. government sponsored agencies 84,715
 2,682
 
 87,397
 69,325
 2,164
 
 71,489
Municipal obligations 15,356
 
 
 15,356
 10,982
 
 
 10,982
Total securities classified as available-for-sale $207,011
 $2,682
 $(10,832) $198,861
 $176,591
 $2,164
 $(8,928) $169,827
December 31, 2011        
December 31, 2012        
Securities classified as trading                
U.S. Treasury bonds $291,809
 $21,574
 $
 $313,383
 $169,991
 $95
 $
 $170,086
Securities classified as available-for-sale                
Non-agency CMOs $278,022
 $
 $(23,094) $254,928
Mortgage securitization 123,251
 
 (12,923) 110,328
 $101,272
 $
 $(10,155) $91,117
U.S. government sponsored agencies 113,885
 2,211
 
 116,096
 77,328
 2,389
 
 79,717
Municipal obligations 13,611
 
 
 13,611
Total securities classified as available-for-sale $515,158
 $2,211
 $(36,017) $481,352
 $192,211
 $2,389
 $(10,155) $184,445


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Trading

Securities classified as trading are comprised of AAA-rated U.S. Treasury bonds. U.S. Treasury bonds held in trading are distinguished from available-for-sale based upon the intent of the Company to use them as an economic offset against changes in the valuation of the MSR portfolio; however, these securities do not qualify as an accounting hedge.

For U.S. Treasury bonds held, the Company recorded an unrealized gain of $0.20.1 million and an unrealized loss of $21.56.0 million during the three and nine months ended September 30,March 31, 2013 and 2012, respectively, compared to an unrealized gain of $20.4 million during both the three and nine months ended September 30, 2011, respectively. Additionally, theThe Company had no sales of U.S. Treasury bonds for both the three months ended September 30, 2012March 31, 2013 and$19.5 million for the nine months ended September 30, 2012, compared to no sales for the same periods ending September 30, 2011.respectively.

Available-for-Sale

At September 30, 2012March 31, 2013 and December 31, 20112012, the Company had $198.9169.8 million and $481.4184.4 million, respectively, in securities classified as available-for-sale which were comprised of U.S. government sponsored agencies, non-agency CMOs, mortgage securitization and municipal obligations. Securities available-for-sale are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive loss to the extent they are temporary in nature or "other-than-temporary impairments" ("OTTI") as to non-credit related issues. If unrealized losses are, at any time, deemed to have arisen from OTTI, then the credit related portion is reported as an expense for that period. The Company sold the remaining non-agency CMOs and seasoned agency securities during the three months ended September 30, 2012. As a result of the sale of these securities, the Company also recognized a tax benefit representing the recognition of the residual tax effect associated with previously unrealized losses on these securities recorded in other comprehensive income.

The following table summarizes by duration the unrealized loss positions, at September 30, 2012March 31, 2013 and December 31, 20112012, on securities classified as available-for-sale. 
 
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 thousands)
September 30, 2012           
Mortgage securitization$96,108
 1
 $(10,832) $
 
 $
December 31, 2011           
Non-agency CMOs$208,515
 9
 $(21,123) $46,413
 2
 $(1,971)
Mortgage securitization$110,328
 1
 $(12,923) $
 
 $
The unrealized losses on securities available-for-sale amounted to $10.8 million on the mortgage securitization at September 30, 2012. The unrealized losses on securities available-for-sale were $36.0 million on non-agency CMOs and the mortgage securitization at December 31, 2011. These non-agency CMOs and the mortgage securitization consist of interests in investment vehicles backed by mortgage loans.
 
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 thousands)
March 31, 2013           
Mortgage securitization$87,356
 1
 $(8,928) $
 
 $
December 31, 2012           
Mortgage securitization$91,117
 1
 $(10,155) $
 
 $
    
Generally, an investment impairment analysis is performed every three months. Before an analysis is performed, the Company reviews the general market conditions for the specific type of underlying collateral of each of the non-agency CMOs, mortgage securitization and municipal obligations; in this case, the mortgage securitization. The housing market, in general, has suffered from significant losses in value.value over the past five years; however, home prices appear to have bottomed in 2012 and have recently been trending upward. With the assistance of third party experts as deemed necessary, the Company models the expected cash flows of the underlying mortgage assets using historical factors such as default rates, current delinquency rates and estimated factors such as prepayment, speed, default, speed and severity speed.speeds. Next, the cash flows are modeled through the appropriate waterfall for each non-agency CMOssecuritization tranche owned; the level of credit support provided by subordinated tranches is included in the waterfall analysis. The resulting cash flow of principal and interest is then utilized by management to determine the amount of credit losses by security.

The credit losses onin the portfolio reflect the economic conditions present in the United States over the course of the last several years and the forecasted effect of changes in such conditions, including changes in the forecastedforecast level of home prices. This includes high mortgageThe continued decline in the delinquency rates of the mortgages in the underlying securitization suggest a stabilization of expected future defaults declinesand reflect the recent improvements in collateral values and changes in homeowner behavior, such as intentionally defaulting on a note due to a home value worth less than the outstanding debt on the home (so-called "strategic defaults").housing market.


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During the three and nine months ended September 30, 2012March 31, 2013, the Company recognized zerono and $2.2 million, respectively, ofadditional OTTI on non-agency CMOs andthe one mortgage securitization, which were recognized on seven securities that had losses prior to September 30, 2012, primarily due to forecasted credit losses.securitization. At September 30, 2012March 31, 2013, the Company had total OTTI of $2.8 million previously recorded on one mortgage securitization, with existing OTTI in the available-for-sale portfolio, of which $4.7 million net loss was recognized in other comprehensive income.securitization. During the three and nine months ended September 30, 2011March 31, 2012, there werethe Company recognized $1.31.2 million andof OTTI on CMOs, representing $16.9 millionseven, respectively, of additional OTTI due securities that had losses prior to credit losses on non-agency CMOs and the mortgage securitization.March 31, 2012. All OTTI due to credit losses washas been recognized in current operations. At December 31, 20112012, the cumulative amount of OTTI due to credit losses totaled $59.42.8 million on 11one non-agency CMOs and the mortgage securitization in the available-for-sale portfolio. The impairment losses arising from credit related matters were reportedportfolio, of which a $5.0 million net loss was recognized in the Consolidated Statements of Operations.other comprehensive income. The following table shows the activity for OTTI credit loss. 

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For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
(Dollars in thousands)(Dollars in thousands)
Beginning balance of amount related to credit losses on non-agency CMOs and mortgage securitization$(50,821) $(53,111) $(59,376) $(40,045)$(2,793) $(59,376)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the non-agency CMOs and mortgage securitization1,080
 757
 6,680
 3,276

 (1,175)
Reductions for non-agency CMOs sold during the period (realized)46,948
 
 52,095
 

 3,591
Additions for the amount related to the credit loss for which an OTTI impairment was not previously recognized
 (1,322) (2,192) (16,907)
 2,962
Ending balance of amount related to credit losses on non-agency CMOs and mortgage securitization$(2,793) $(53,676) $(2,793) $(53,676)$(2,793) $(53,998)

Gains (losses) on the sale of U.S. government sponsored agency securities available-for-sale that are recently created with underlying mortgage products originated by the Bank are reported within net gain on loan sale. Securities in this category have typically remained in the portfolio less than 90 days before sale. During both the three and nine months ended September 30,March 31, 2013 and 2012 and 2011, there were no sales of U.S. government sponsored agencies with underlying mortgage products recently originated by the Bank.

Gain (losses) on sales for all other available-for-sale securities types are reported in "net gain on securities available-for-sale" in the Consolidated Statements of Operations. During the three and nine months ended September 30, 2012March 31, 2013, the Company hadthere were no sales of non-agency CMOs and U.S. government sponsored agencies, compared to $215.522.9 million and $253.7 million, respectively, inof sales of non-agency CMOs and U.S. government sponsored agencies resulting in a gain of $2.60.3 million and $2.9 million, respectively, compared to no sales of non-agency CMOs and U.S. government sponsored agencies for thethree and nine months ended September 30, 2011. The gain on the sale of non-agency CMOs and seasoned agency securities completed during three months ended September 30,March 31, 2012 resulted in the Company also recognizing .$19.9 million of tax benefits representing the recognition of the residual tax effect associated with unrealized losses on this portfolio previously recorded in other comprehensive income.

At September 30, 2012 and December 31, 2011, the aggregate amount of available-for-sale securities from each of the following non-agency CMO and mortgage securitization issuers was greater than 10 percent of the Company’s stockholders’ equity.
 September 30, 2012 December 31, 2011
 
Amortized
Cost
 
Fair Market
Value
 
Amortized
Cost
 
Fair Market
Value
Name of Issuer(Dollars in thousands)
Countrywide Home Loans$
 $
 $134,993
 $124,313
FSTAR 2006-1 (1)

 
 123,251
 110,328
Total$
 $
 $258,244
 $234,641
(1)
As of March 31, 2012, mortgage securitization (FSTAR 2006-1) available-for-sale security no longer represents 10.0 percent of the Company's stockholders' equity.




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Note 5 – Loans Held-for-Sale

Total loans held-for-sale were $3.32.7 billion and $1.83.9 billion at September 30, 2012March 31, 2013 and December 31, 20112012, respectively, and were comprised primarily of residential first mortgage and commercial loans. The decrease in the loans held-for-sale was primarily due to the agreements to sell the Northeast-based commercial loan portfolio, through which we sold $859.0 million of commercial loans.
 March 31, 2013 December 31, 2012
 (Dollars in thousands)
Consumer loans 
Residential first mortgage$2,608,583
 $3,012,039
Commercial loans   
Commercial real estate19,332
 280,399
Commercial and industrial38,549
 488,361
Commercial lease financing10,775
 158,921
Total commercial loans68,656
 927,681
Total consumer and commercial loans held-for-sale$2,677,239
 $3,939,720

At September 30, 2012March 31, 2013 and December 31, 20112012, $3.12.5 billion and $1.62.9 billion of loans held-for-sale were recorded at fair value, respectively. The Company estimates the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans for which quoted market prices were available. Otherwise, theThe fair values of loans were estimated by discounting estimated cash flows using management’s best estimate of market interest rates for similar collateral. The loans not carried at fair value are recorded at lower of cost or market ("LOCOM") based on a decision to sell the loans. The LOCOM loans were transferred into the held-for-sale portfolio from the held-for-investment portfolio. At the time of the transfer, any amount by which cost exceeds fair value was accounted for as a valuation allowance.

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Note 6 – Loans Repurchased With Government Guarantees
    
Pursuant to Ginnie Mae servicing guidelines, the Company has the unilateral option to repurchase certain delinquent loans (loans past due 90 days or more) securitized in Ginnie Mae pools, if the loans meet defined criteria. As a result of this unilateral option, once the delinquency criteria have been met, and regardless of whether the repurchase option has been exercised, the Company must treat the loans as having been repurchased and recognize the loans as loans held-for-sale on the Consolidated Statement of Financial Condition and also recognize a corresponding liability for a similar amount. If the loans are actually repurchased, the Company transfers the loans to loans repurchased with government guarantees and eliminates the corresponding liability. At September 30, 2012March 31, 2013, the amount of such loans actually repurchased totaled $1.91.6 billion and were classified as loans repurchased with government guarantees, and those loans which the Company had not yet repurchased but had the unilateral right to repurchase totaled $91.458.4 million and were classified as loans held-for-sale. At December 31, 20112012, the amount of such loans actually repurchased totaled $1.91.8 billion and were classified as loans repurchased with government guarantees, and those loans which the Company had not yet repurchased but had the unilateral right to repurchase totaled $117.272.4 million and were classified as loans held-for-sale.

Substantially all of these loans continue to be insured or guaranteed by the FHA, and the Company's management believes that the reimbursement process is proceeding appropriately. On average, claims have historically been filed and paid in approximately 18 months from the date of the initial delinquency; however increasing volumes throughout the country, as well as changes in the foreclosure process in certain states and other forms of government intervention may result in changes to the historical norm. These repurchased loans earn interest at a statutory rate, which varies and is based upon the 10-year U.S. Treasury note rate at the time the underlying loan becomes delinquent.

During the three months ended September 30, 2012March 31, 2013, the Company participated in a HUD-coordinated market auction of loans repurchased with government guarantees, which is expected to resultresulted in the conveyance in an accelerated fashion of $302.4131.9 million of loans at par value to HUD within prescribed time frames (claims proceeds of $127.7 million were received during three months ended September 30, 2012 with the remainder to be received in fourth quarter 2012). As a result, the Company recognized a reduction in otherwise expected curtailments of debenture interest income previously provided for, resulting in a benefit of $7.8 million that was applied against asset resolution expense during the three months ended September 30, 2012.HUD.


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Note 7 – Loans Held-for-Investment

Loans held-for-investment are summarized as follows. 
September 30,
2012
 December 31,
2011
March 31,
2013
 December 31,
2012
(Dollars in thousands)(Dollars in thousands)
Consumer loans      
Residential first mortgage$3,086,096
 $3,749,821
$2,991,394
 $3,009,251
Second mortgage122,286
 138,912
112,385
 114,885
Warehouse lending1,307,292
 1,173,898
750,765
 1,347,727
HELOC192,117
 221,986
167,815
 179,447
Other53,188
 67,613
44,488
 49,611
Total consumer loans4,760,979
 5,352,230
4,066,847
 4,700,921
Commercial loans      
Commercial real estate1,005,498
 1,242,969
562,916
 640,315
Commercial and industrial597,273
 328,879
107,688
 90,565
Commercial lease financing188,649
 114,509
5,815
 6,300
Total commercial loans1,791,420
 1,686,357
676,419
 737,180
Total consumer and commercial loans held-for-investment6,552,399
 7,038,587
4,743,266
 5,438,101
Less allowance for loan losses(305,000) (318,000)(290,000) (305,000)
Loans held-for-investment, net$6,247,399
 $6,720,587
$4,453,266
 $5,133,101

ForDuring the three and nine months ended September 30,March 31, 2013, the Company transferred $62.8 million in loans held-for-sale to loans held-for-investment. During the three months ended March 31, 2012, the Company transferred $21.313.1 million and $39.8 million, respectively, in loans held-for-sale to loans to held-for-investment. The loans transferred were carried at fair value, and will continue to be reported at fair value while classified as held-for-investment. During the three and nine months ended September 30, 2011, the Company transferred $4.0 million and $16.6 million, respectively, in loans held-for-sale to loans to held-for-investment.

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The Company’s commercial leasing activities consist primarily of equipment leases. Generally, lessees are responsible for all maintenance, taxes, and insurance on leased properties. The following table lists the components of the net investment in financing leases.
September 30,
2012
 December 31,
2011
March 31,
2013
 December 31,
2012
(Dollars in thousands)(Dollars in thousands)
Total minimum lease payment to be received$190,467
 $115,216
$5,073
 $5,634
Estimated residual values of lease properties11,132
 6,967
940
 913
Unearned income(15,118) (8,894)(282) (346)
Net deferred fees and other2,168
 1,220
84
 99
Net investment in commercial financing leases$188,649
 $114,509
$5,815
 $6,300

Accounting standards require a reserve to be established as a component of the allowance for loan losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan and the recorded investment in the loan exceeds its fair value. Fair value is measured using either the present value of the expected future cash flows discounted at the loan's effective interest rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent, reduced by estimated disposal costs.

Non-performing commercial and commercial real estate loans are considered to be impaired and typically have an allowance allocated based on the underlying collateral's appraised value, less management's estimates of costs to sell. In estimating the fair value of collateral, the Company utilizes outside fee-based appraisers to evaluate various factors such as occupancy and rental rates in our real estate markets and the level of obsolescence that may exist on assets acquired from commercial business loans. Appraisals are updated at least annually but may be obtained more frequently if changes to the property or market conditions warrant.

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Impaired residential loans include loan modifications considered to be TDRstroubled debt restructurings ("TDRs") and certain non-performing loans that have been charged down to collateral value. Fair value of non-performing residential mortgage loans, including redefaulted TDRs and certain other severely past due loans, is based on the underlying collateral's value obtained through appraisals or broker's price opinions, updated at least semi-annually, less management's estimates of cost to sell. The allowance allocated to TDRs performing under the terms of their modification is typically based on the present value of the expected future cash flows discounted at the loan's effective interest rate, on a pooled basis, as these loans are not considered to be collateral dependent.

For those loans not individually evaluated for impairment, management has sub-divided the commercial and consumer loans into homogeneous portfolios.

As part of the Company's ongoing risk assessment process which remains focused on the impacts of the current economic environment and the related borrower repayment behavior on the Company's credit performance, management continues to back test and validate the results of quantitative and qualitative modeling of the risk in loans held-for-investment portfolio, in efforts to use the best quality information available. This is consistent with the expectations of the Bank's primary regulator and a continuing evaluation of the performance dynamics within the mortgage industry. As a result of an analysis completed during the first quarter 2012, the Company determined it was appropriate to make refinements to its allowance for loan loss methodology and related model. Such refinements included improved risk segmentation and quantitative analysis, and enhancements to and alignment of the qualitative risk factors.

The impact of the refinements adopted during the first quarter 2012 resulted in an increase to the Company's allowance for loan loss of $59.0 million in the consumer portfolio and $11.0 million in the commercial portfolio.

The following key refinements were made:

First, the Company utilized refined segmentation and more formal qualitative factors during the first quarter 2012, which resulted in an increase in the adjusted historical factors used to calculate the ASC 450-20 allowance related to the consumer portfolio. Historically, the Company segmented the population of consumer loans held-for-investment by product type and by delinquency status for purposes of estimating an adequate allowance for loan losses. The Company performed a thorough analysis of the largest product type, residential first mortgage loans, to assess the relative reliability of its risk segmentation in connection with the ability to detect losses inherent in the portfolio, and determined that there was a higher correlation of loan losses to LTV ratios than to delinquency status. As a result, the Company refined the process to use LTV segmentation, rather than product and delinquency segmentation, as the more appropriate consumer residential loan characteristic in determining the related allowance for loan losses.

Additionally, the Company created a more formal process and framework surrounding the qualitative factors and better aligned the factors with regulatory guidance and the changes in the mortgage environment. The Company formally implemented a qualitative factor matrix related to each loan class in the consumer portfolio in the first quarter 2012, which includes the following factors: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes in the value of underlying collateral for collateral-dependent loans, changes in concentrations of credit, and other external factor changes. These factors are used to reflect changes in the collectability of the portfolio not captured by the historical loss rates. As such, the qualitative factors supplement actual loss experience and allow the Company to better estimate the loss within the loan portfolios based upon market and other indicators. Qualitative factors are analyzed to determine a quantitative impact of each factor which adjusts the historical loss rate. Adjusted historical loss rates are then used in the calculation of the allowance for loan losses. The adjusted historical loss rates in 2012 were higher than those used in the calculation of the consumer allowance for loan losses in 2011, thereby resulting in an increase to the 2012 level of allowance for loan losses.

Second, to allow the Company the appropriate amount of time to analyze portfolio statistics and allow for the appropriate validation of the reasonableness of the new qualitative factors, management adjusted the historical look back period for loss rates to lag a quarter (as compared to the previous policy of a month). This adjustment resulted in a decrease to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses, partially offsetting the increase resulting from the refined segmentation.

Third, the commercial loan portfolio was segmented into commercial "legacy" loans (loans originated prior to January 1, 2011) and commercial "new" loans (loans originated on or after January 1, 2011) while still retaining the segmentation by product type. Due to the changes in the Company's strategy and to changes in underwriting and origination practices and controls related to that strategy, the Company determined the refined segmentation better reflected the dynamics in the two portfolios. The loss rates attributed to the "legacy" portfolio are based on historical losses of this segment. Due to the brief period of time that

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loans in the "new" portfolio were outstanding, and thus the absence of a sufficient loss history for that portfolio, the Company had used loss data from a third party data aggregation firm (adjusting for our qualitative factors) as a proxy for estimating an allowance for loan losses on the "new" portfolio. As a refinement in the first quarter 2012, the Company separately identified a population of commercial banks with similar size balance sheets (and loan portfolios) to serve as our peer group. The Company now uses this peer group's publicly available historical loss data (adjusted for our qualitative factors) as a new proxy for loss rates used to determine the allowance for loan losses on the "new" commercial portfolio. This refined segmentation resulted in an increase to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses.

Fourth, as a result of these refinements (in addition to the refinements noted below), the Company has determined that it no longer requires an unallocated portion of allowance for loan losses. The Company expects to review these models on an ongoing basis and update them as appropriate to reflect then-current industry conditions, heightened access to enhanced loss data, and refinements based upon continuous back testing of the allowance for loan losses model. This change to the unallocated reserve resulted in a decrease to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses.

Lastly, part of the increase in allowance for loan losses was a result of the TDR refinement. Historically, the Company performed impairment analysis on TDRs by using the discounted cash flows method on a portfolio or pooled approach when the TDRs were not deemed collateral dependent. During the fourth quarter 2011, the Company adopted a strategic focus that improved loss mitigation processes so that the Company could continue the rate of loan modifications and other loss mitigation activities. Due to the emphasis on loss mitigation activities, the Company implemented new procedures relating to "new" TDRs (loans that were designated TDRs generally beginning on or after October 1, 2011) to capture the necessary data to perform the impairment analysis on a portfolio level. Such data was not previously available and currently continues to not be available for loans designated as TDRs prior to September 30, 2011. This data is now being captured in part due to the loan servicing system conversion in late 2011. As such, for a significant percentage of "new" TDRs, management was able to perform the impairment calculation on a portfolio basis. Given data constraints the "old" TDR portfolio as of December 31, 2011, is still utilizing the pooled approach. This refinement resulted in an increase to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses. The Company expects to continue to refine this process for operational efficiency purposes that will allow for periodic review and updates of impairment data of all TDRs grouped by similar risk characteristics.    

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The allowance for loan losses by class of loan is summarized in the following tables.
Residential
First
Mortgage
 
Second
Mortgage
 
Warehouse
Lending
 HELOC 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and Industrial
 
Commercial Lease
Financing
 Total
Residential
First
Mortgage
 
Second
Mortgage
 
Warehouse
Lending
 HELOC 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and Industrial
 
Commercial Lease
Financing
 Total
(Dollars in thousands)(Dollars in thousands)
For the Three Months Ended September 30, 2012                 
For the Three Months Ended March 31, 2013                 
Beginning balance allowance for loan losses$175,716
 $20,083
 $1,556
 $17,853
 $2,585
 $58,407
 $8,508
 $2,292
 $287,000
$219,230
 $20,201
 $899
 $18,348
 $2,040
 $41,310
 $2,878
 $94
 $305,000
Charge-offs(23,999) (3,990) 
 (1,483) (892) (15,532) (12) 
 (45,908)(25,692) (1,955) 
 (2,061) (699) (13,162) 
 
 (43,569)
Recoveries5,899
 428
 
 44
 448
 4,461
 33
 
 11,313
5,353
 390
 
 105
 454
 1,843
 9
 
 8,154
Provision47,236
 2,367
 (518) 1,142
 88
 1,499
 348
 433
 52,595
15,185
 2,047
 (367) 1,726
 420
 2,729
 (1,315) (10) 20,415
Ending balance allowance for loan losses$204,852
 $18,888
 $1,038
 $17,556
 $2,229
 $48,835
 $8,877
 $2,725
 $305,000
$214,076
 $20,683
 $532
 $18,118
 $2,215
 $32,720
 $1,572
 $84
 $290,000
For the Three Months Ended September 30, 2011                 
For the Three Months Ended March 31, 2012                 
Beginning balance allowance for loan losses$145,027
 $20,097
 $1,620
 $18,691
 $4,941
 $81,128
 $2,320
 $176
 $274,000
$179,218
 $16,666
 $1,250
 $14,845
 $2,434
 $96,984
 $5,425
 $1,178
 $318,000
Charge-offs(11,233) (4,629) (272) (3,477) (1,208) (9,853) (587) 
 (31,259)(95,432) (5,283) 
 (6,419) (1,190) (45,033) (1,581) 
 (154,938)
Recoveries756
 371
 
 524
 423
 373
 122
 
 2,569
550
 249
 
 257
 212
 1,992
 5
 
 3,265
Provision17,717
 2,397
 475
 1,404
 981
 11,633
 1,949
 134
 36,690
74,325
 7,435
 574
 6,095
 1,137
 17,527
 6,104
 1,476
 114,673
Ending balance allowance for loan losses$152,267
 $18,236
 $1,823
 $17,142
 $5,137
 $83,281
 $3,804
 $310
 $282,000
$158,661
 $19,067
 $1,824
 $14,778
 $2,593
 $71,470
 $9,953
 $2,654
 $281,000
For the Nine Months Ended September 30, 2012                 
Beginning balance allowance for loan losses$179,218
 $16,666
 $1,250
 $14,845
 $2,434
 $96,984
 $5,425
 $1,178
 $318,000
Charge-offs(142,001) (13,330) 
 (12,159) (2,810) (91,842) (1,616) 
 (263,758)
Recoveries13,031
 1,716
 
 394
 1,055
 8,797
 69
 
 25,062
Provision154,604
 13,836
 (212) 14,476
 1,550
 34,896
 4,999
 1,547
 225,696
Ending balance allowance for loan losses$204,852
 $18,888
 $1,038
 $17,556
 $2,229
 $48,835
 $8,877
 $2,725
 $305,000
For the Nine Months Ended September 30, 2011                 
Beginning balance allowance for loan losses$119,400
 $25,186
 $4,171
 $24,819
 $5,445
 $93,437
 $1,542
 $
 $274,000
Charge-offs(22,517) (16,545) (560) (13,465) (3,813) (55,099) (644) 
 (112,643)
Recoveries1,251
 1,581
 5
 1,453
 1,284
 1,564
 122
 
 7,260
Provision54,133
 8,014
 (1,793) 4,335
 2,221
 43,379
 2,784
 310
 113,383
Ending balance allowance for loan losses$152,267
 $18,236
 $1,823
 $17,142
 $5,137
 $83,281
 $3,804
 $310
 $282,000
                 
Residential
First
Mortgage
 
Second
Mortgage
 
Warehouse
Lending
 HELOC 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and  Industrial
 
Commercial
Lease
Financing
 Total
Residential
First
Mortgage
 
Second
Mortgage
 
Warehouse
Lending
 HELOC 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and  Industrial
 
Commercial
Lease
Financing
 Total
(Dollars in thousands)(Dollars in thousands)
September 30, 2012                 
March 31, 2013                 
Loans held-for-investment                                  
Individually evaluated (1)
$791,803
 $17,257
 $172
 $
 $
 $123,879
 $78
 $
 $933,189
$805,692
 $19,941
 $
 $942
 $
 $66,095
 $40
 $
 $892,710
Collectively evaluated (2)
2,294,293
 105,029
 1,307,120
 192,117
 53,188
 881,619
 597,195
 188,649
 5,619,210
2,185,702
 92,444
 750,765
 166,873
 44,488
 496,821
 107,648
 5,815
 3,850,556
Total loans$3,086,096
 $122,286
 $1,307,292
 $192,117
 $53,188
 $1,005,498
 $597,273
 $188,649
 $6,552,399
$2,991,394
 $112,385
 $750,765
 $167,815
 $44,488
 $562,916
 $107,688
 $5,815
 $4,743,266
Allowance for loan losses                                  
Individually evaluated (1)
$129,902
 $6,410
 $
 $2,340
 $
 $1,722
 $20
 $
 $140,394
$150,932
 $7,844
 $
 $3,283
 $
 $199
 $10
 $
 $162,268
Collectively evaluated (2)
74,950
 12,478
 1,038
 15,216
 2,229
 47,113
 8,857
 2,725
 164,606
63,144
 12,839
 532
 14,835
 2,215
 32,521
 1,562
 84
 127,732
Total allowance for loan losses$204,852
 $18,888
 $1,038
 $17,556
 $2,229
 $48,835
 $8,877
 $2,725
 $305,000
$214,076
 $20,683
 $532
 $18,118
 $2,215
 $32,720
 $1,572
 $84
 $290,000
December 31, 2011                 
December 31, 2012                 
Loans held-for-investment                                  
Individually evaluated (1)
$744,604
 $14,237
 $307
 $1,775
 $2
 $207,144
 $2,402
 $
 $970,471
$805,787
 $16,949
 $
 $734
 $
 $95,322
 $41
 $
 $918,833
Collectively evaluated (2)
3,005,217
 124,675
 1,173,591
 220,211
 67,611
 1,035,825
 326,477
 114,509
 6,068,116
2,203,464
 97,936
 1,347,727
 178,713
 49,611
 544,993
 90,524
 6,300
 4,519,268
Total loans$3,749,821
 $138,912
 $1,173,898
 $221,986
 $67,613
 $1,242,969
 $328,879
 $114,509
 $7,038,587
$3,009,251
 $114,885
 $1,347,727
 $179,447
 $49,611
 $640,315
 $90,565
 $6,300
 $5,438,101
Allowance for loan losses                                  
Individually evaluated (1)
$113,569
 $4,738
 $
 $1,775
 $2
 $53,146
 $1,588
 $
 $174,818
$150,545
 $7,028
 $
 $3,074
 $
 $2,538
 $10
 $
 $163,195
Collectively evaluated (2)
65,649
 11,928
 1,250
 13,070
 2,432
 43,838
 3,837
 1,178
 143,182
68,685
 13,173
 899
 15,274
 2,040
 38,772
 2,868
 94
 141,805
Total allowance for loan losses$179,218
 $16,666
 $1,250
 $14,845
 $2,434
 $96,984
 $5,425
 $1,178
 $318,000
$219,230
 $20,201
 $899
 $18,348
 $2,040
 $41,310
 $2,878
 $94
 $305,000
 
(1)
Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.
(2)
Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for unimpaired loans.loans not impaired.


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The following table presents an age analysis of past due loans by class of loan.
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater Past
Due
 
Total
Past Due
 Current 
Total
Investment
Loans
 
90 Days and Still
Accruing
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater Past
Due
 
Total
Past Due
 Current 
Total
Investment
Loans
 
90 Days and Still
Accruing
(Dollars in thousands)(Dollars in thousands)
September 30, 2012             
March 31, 2013             
Consumer loans             
Residential first mortgage$56,341
 $18,754
 $296,395
 $371,490
 $2,619,904
 $2,991,394
 $
Second mortgage996
 836
 4,298
 6,130
 106,255
 112,385
 
Warehouse lending
 
 
 
 750,765
 750,765
 
HELOC684
 876
 2,343
 3,903
 163,912
 167,815
 
Other347
 15
 132
 494
 43,994
 44,488
 
Total consumer loans58,368
 20,481
 303,168
 382,017
 3,684,830
 4,066,847
 
Commercial loans             
Commercial real estate (1)
1,465
 6,400
 66,095
 73,960
 488,956
 562,916
 
Commercial and industrial
 
 40
 40
 107,648
 107,688
 
Commercial lease financing
 
 
 
 5,815
 5,815
 
Total commercial loans1,465
 6,400
 66,135
 74,000
 602,419
 676,419
 
Total loans$59,833
 $26,881
 $369,303
 $456,017
 $4,287,249
 $4,743,266
 $
December 31, 2012             
Consumer loans                          
Residential first mortgage$48,263
 $24,085
 $268,210
 $340,558
 $2,745,538
 $3,086,096
 $
$62,445
 $16,693
 $306,486
 $385,624
 $2,623,627
 $3,009,251
 $
Second mortgage1,388
 606
 4,406
 6,400
 115,886
 122,286
 
1,171
 727
 3,724
 5,622
 109,263
 114,885
 
Warehouse lending
 
 28
 28
 1,307,264
 1,307,292
 

 
 
 
 1,347,727
 1,347,727
 
HELOC3,459
 1,869
 3,435
 8,763
 183,354
 192,117
 
2,484
 910
 3,025
 6,419
 173,028
 179,447
 
Other809
 137
 240
 1,186
 52,002
 53,188
 
587
 248
 183
 1,018
 48,593
 49,611
 
Total consumer loans53,919
 26,697
 276,319
 356,935
 4,404,044
 4,760,979
 
66,687
 18,578
 313,418
 398,683
 4,302,238
 4,700,921
 
Commercial loans                          
Commercial real estate9,563
 397
 122,586
 132,546
 872,952
 1,005,498
 
6,979
 6,990
 86,367
 100,336
 539,979
 640,315
 
Commercial and industrial
 35
 43
 78
 597,195
 597,273
 

 
 41
 41
 90,524
 90,565
 
Commercial lease financing
 
 
 
 188,649
 188,649
 

 
 
 
 6,300
 6,300
 
Total commercial loans9,563
 432
 122,629
 132,624
 1,658,796
 1,791,420
 
6,979
 6,990
 86,408
 100,377
 636,803
 737,180
 
Total loans$63,482
 $27,129
 $398,948
 $489,559
 $6,062,840
 $6,552,399
 $
$73,666
 $25,568
 $399,826
 $499,060
 $4,939,041
 $5,438,101
 $
December 31, 2011             
Consumer loans             
Residential first mortgage$74,934
 $37,493
 $372,514
 $484,941
 $3,264,880
 $3,749,821
 $
Second mortgage1,887
 1,527
 6,236
 9,650
 129,262
 138,912
 
Warehouse lending
 
 28
 28
 1,173,870
 1,173,898
 
HELOC5,342
 2,111
 7,973
 15,426
 206,560
 221,986
 
Other1,507
 471
 611
 2,589
 65,024
 67,613
 34
Total consumer loans83,670
 41,602
 387,362
 512,634
 4,839,596
 5,352,230
 34
Commercial loans             
Commercial real estate7,453
 12,323
 99,335
 119,111
 1,123,858
 1,242,969
 5,536
Commercial and industrial11
 62
 1,670
 1,743
 327,136
 328,879
 65
Commercial lease financing
 
 
 
 114,509
 114,509
 
Total commercial loans7,464
 12,385
 101,005
 120,854
 1,565,503
 1,686,357
 5,601
Total loans$91,134
 $53,987
 $488,367
 $633,488
 $6,405,099
 $7,038,587
 $5,635
(1)
The $74.0 million in past due commercial real estate loans are handled by the loan workout group and represent loans in a run-off portfolio, which are not part of the new business that began in early 2011.

Loans on which interest accruals have been discontinued totaled approximately $398.9369.7 million and $482.7401.7 million at September 30, 2012March 31, 2013 and December 31, 20112012, respectively.respectively, and $409.4 million at March 31, 2012. Interest on these loans is recognized as income when collected. Interest that would have been accrued on such loans totaled approximately $5.54.4 million and $14.56.6 million during the three and nine months ended September 30,March 31, 2013 and 2012, respectively, compared to $5.0 million and $16.1 million during the three and nine months ended September 30, 2011.respectively.

Loan ModificationsTroubled Debt Restructuring
    
A portionThe Company may modify certain loans in both consumer and commercial loan portfolios to retain customers or to maximize collection of the loan balance. The Company has maintained several 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 residential first mortgages have been modified under Company-developed programs. These programs first require an extension of term followed by a reductionstandards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the interest rate. Duringloan are modified to meet a borrower's specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved. Loan modification programs for borrowers have resulted in a significant increase in restructured loans. These loans are classified as TDRs and are included in non-accrual loans if the nine months ended September 30, 2012, 692 accounts with an aggregate balance of $237.1 million residential first mortgage loans have been modified and were still outstanding. Forloan was non-performing prior to the year ended December 31, 2011, 489 accounts with an aggregate balance of $181.0 million residential first mortgage loans have been modified and were still outstanding.
At September 30, 2012 and December 31, 2011, approximately $4.6 million and $47.2 million, respectively, in commercial loan balances had been modified, primarily consisting of commercial real estate loans.restructuring.

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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 will continue on non-accrual 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.

Periodically, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable period of time subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or non-performing) through the calendar year in which historical payment performance on the restructured note has been established. At September 30, 2012March 31, 2013 and December 31, 20112012, there was approximately $6.61.2 million and $21.85.7 million, respectively, in carrying amount representing fiveone and tenfour A/B structures, respectively.

Troubled Debt Restructurings

The following table provides a summary of TDRs outstanding at the date indicated, by type and performing status. 
TDRsTDRs
Performing Non-performing TotalPerforming Non-performing Total
September 30, 2012(Dollars in thousands)
March 31, 2013(Dollars in thousands)
Consumer loans (1)
     
Residential first mortgage$581,009
 $141,558
 $722,567
Second mortgage17,032
 2,909
 19,941
HELOC
 2
 2
Total consumer loans598,041
 144,469
 742,510
Commercial loans (2)
     
Commercial real estate
 1,446
 1,446
Total TDRs$598,041
 $145,915
 $743,956
     
December 31, 2012     
Consumer loans (1)
          
Residential first mortgage$598,543
 $103,486
 $702,029
$573,941
 $140,773
 $714,714
Second mortgage14,413
 2,764
 17,177
14,534
 2,415
 16,949
Total consumer loans612,956
 106,250
 719,206
588,475
 143,188
 731,663
Commercial loans (2)
          
Commercial real estate1,294
 3,230
 4,524
1,287
 2,056
 3,343
Commercial and industrial35
 
 35
Total commercial loans1,329
 3,230
 4,559
Total TDRs$614,285
 $109,480
 $723,765
$589,762
 $145,244
 $735,006
     
December 31, 2011     
Consumer loans (1)
     
Residential first mortgage$488,896
 $165,655
 $654,551
Second mortgage10,542
 1,419
 11,961
Other consumer
 2
 2
Total consumer loans499,438
 167,076
 666,514
Commercial loans (2)
     
Commercial real estate17,737
 29,509
 47,246
Total TDRs$517,175
 $196,585
 $713,760
(1)
The allowance for loan losses on consumer TDR loans totaled $138.1159.9 million and $85.2159.0 million at September 30, 2012March 31, 2013 and December 31, 20112012, respectively.
(2)
The allowance for loan losses on commercial TDR loans totaled $0.4 millionzero and $32.20.3 million at September 30, 2012March 31, 2013 and December 31, 20112012, respectively.
    
TDRs returned to performing (accrual) status totaled $34.317.2 million and $95.411.2 million during the three and nine months ended September 30,March 31, 2013 and 2012, respectively, and are excluded from non-performing loans, compared to $10.8 million and $39.9 million during the three and nine months ended September 30, 2011.loans. TDRs that have demonstrated a period of at least six months of consecutive performance under the modified terms, are returned to performing (i.e., accrual) status and are excluded from non-performing loans. Although these TDRs have been returned to performing status, they will still continue to be classified as impaired until they are repaid in full, or foreclosed and sold, and included as such in the tables within "repossessed assets." At September 30, 2012March 31, 2013 and December 31, 20112012, remaining commitments to lend additional funds to debtors whose terms have been modified in a commercial or consumer TDR were immaterial.

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Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, but instead give rise to potential incremental losses. Such losses are factored into the Company's allowance for loan losses estimate. Once a loan becomes a TDR, it will continue to be reported as a TDR, regardless of performance, until it is ultimately repaid in full, sold, or foreclosed upon. The impairment of TDRs is measured in accordance with ASC 310-10 (see the table below presenting impaired loans with change in allowance upon modification). Management uses the pooling method to

36


measure impairment under ASC 310-10 for certain loans in its portfolio and also individually measures impairment under ASC 310-10 for other loans in the portfolio depending on the risk characteristics underlying the loan and the availability of data. Management expects to continue to refine this process for operational efficiency purposes that will allow for periodic review and updates of impairment data of TDRs grouped by similar risk characteristics. The Company measures impairment using the discounted cash flow method for performing TDRs and measures impairment based on collateral values for re-defaulted TDRs. The Company has allocated reserves in the allowance for loan loss for the TDR portfolio of $138.5 million and $117.4 million at September 30, 2012, and December 31, 2011, respectively.

The following table presents the three and nine months ended September 30,March 31, 2013 and 2012 and 2011 number of accounts, pre-modification unpaid principal balance, and post-modification unpaid principal balance that were new modified TDRs during the three and nine months ended September 30,March 31, 2013 and 2012. In addition, the table presents the number of accounts and unpaid principal balance of loans that have subsequently defaulted during the three and nine months ended September 30,March 31, 2013 and 2012 and 2011 that had been modified in a TDR during the 12 months precedingproceeding each quarterly period. All TDR classes within consumer and commercial loan portfoliosTDRs are considered subsequently defaulted as ofwhen greater than 90 days past due.due for both consumer and commercial loan portfolios.

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Table of Contents

For the Three Months Ended September 30, 2012Number of AccountsPre-Modification Unpaid Principal Balance
Post-Modification Unpaid Principal Balance (1)
Increase (Decrease) in Allowance at Modification
 (Dollars in thousands)Number of Accounts Pre-Modification Unpaid Principal Balance 
Post-Modification Unpaid Principal Balance (1)
 Increase (Decrease) in Allowance at Modification
New TDRs  
For the Three Months Ended March 31, 2013(Dollars in thousands)
Residential first mortgages156
$47,297
$52,865
$5,236
156
 $46,144
 $39,677
 $331
Second mortgages46
2,802
1,929
(25)120
 3,928
 3,752
 176
HELOC (2)
3
 45
 
 (1)
Total TDR loans202
$50,099
$54,794
$5,211
279
 $50,117
 $43,429
 $506
         
TDRs that subsequently defaulted in previous 12 months (2)
Number of AccountsUnpaid Principal Balance Increase in Allowance at Subsequent DefaultNumber of Accounts Unpaid Principal Balance Increase in Allowance at Subsequent Default
Residential first mortgages23
 $7,973
$2,652
14
   $3,681
 $1,015
Second mortgages9
 562
119
3
   169
 193
Total TDR loans32
 $8,535
$2,771
17
   $3,850
 $1,208
         
For the Three Months Ended September 30, 2011Number of AccountsPre-Modification Unpaid Principal Balance
Post-Modification Unpaid Principal Balance (1)
Increase in Allowance
at Modification
New TDRs  
Residential first mortgages39
$9,968
$10,575
$(523)
Second mortgages1
38
38

Total TDR loans40
$10,006
$10,613
$(523)
  Number of Accounts Pre-Modification Unpaid Principal Balance 
Post-Modification Unpaid Principal Balance (1)
 Increase (Decrease) in Allowance at Modification
TDRs that subsequently defaulted in previous 12 months (2)
Number of AccountsUnpaid Principal Balance Increase in Allowance at Subsequent Default
Residential first mortgages20
 $5,886
$383
Second mortgages2
 152

Total TDR loans22
 $6,038
$383
  
For the Nine Months Ended September 30, 2012Number of AccountsPre-Modification Unpaid Principal Balance
Post-Modification Unpaid Principal Balance (1)
Increase (Decrease) in Allowance at Modification
New TDRs   
For the Three Months Ended March 31, 2012(Dollars in thousands)
Residential first mortgages692
$228,213
$237,064
$28,559
281
 $100,807
 $100,655
 $8,489
Second mortgages194
12,010
8,336
(181)75
 5,520
 3,211
 (112)
Other consumer19
779
637
9
6
 255
 234
 2
Total TDR loans905
$241,002
$246,037
$28,387
362
 $106,582
 $104,100
 $8,379
         
TDRs that subsequently defaulted in previous 12 months (2)
Number of AccountsUnpaid Principal Balance Increase in Allowance at Subsequent Default
TDRs that subsequently defaulted in previous 12 months (3)
Number of Accounts Unpaid Principal Balance Increase in Allowance at Subsequent Default
Residential first mortgages48
 $14,434
$4,055
9
   $1,789
 $46
Second mortgages14
 855
375
Total TDR loans62
 $15,289
$4,430
         
For the Nine Months Ended September 30, 2011Number of AccountsPre-Modification Unpaid Principal Balance
Post-Modification Unpaid Principal Balance (1)
Increase (Decrease) in Allowance at Modification
New TDRs   
Residential first mortgages150
$41,803
$43,432
$481
Second mortgages16
1,088
1,089
(1)
Commercial real estate6
12,025
7,871
(1,011)
Total TDR loans172
$54,916
$52,392
$(531)
  
TDRs that subsequently defaulted in previous 12 months (2)
Number of AccountsUnpaid Principal Balance Increase in Allowance at Subsequent Default
Residential first mortgages48
 $17,811
$1,370
Second mortgages2
 152

Total TDR loans50
 $17,963
$1,370
 

(1)Post-modification balances include past due amounts that are capitalized at modification date.
(2)
HELOC post-modification unpaid principal balance reflects write downs, which bring the balances to zero.
(3)
Subsequent default is defined as a payment re-defaulted within 12 months of the restructuring date.

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The following table presents impaired loans with no related allowance and with an allowance recorded. 
 September 30, 2012 December 31, 2011
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 (Dollars in thousands)
With no related allowance recorded           
Consumer loans           
Residential first mortgage loans$182,720
 $297,673
 $
 $45,604
 $45,604
 $
Second mortgage1,150
 1,150
 
 
 
 
Warehouse lending172
 651
 
 307
 869
 
Commercial loans           
Commercial real estate105,366
 157,386
 
 47,564
 49,156
 
 $289,408
 $456,860
 $
 $93,475
 $95,629
 $
With an allowance recorded           
Consumer loans           
Residential first mortgage$609,083
 $608,631
 $129,903
 $699,000
 $699,000
 $113,569
Second mortgage16,107
 16,107
 6,410
 14,237
 14,237
 4,738
HELOC2,340
 2,340
 2,340
 1,775
 1,775
 1,775
Other consumer
 
 
 2
 2
 2
Commercial loans           
Commercial real estate18,513
 24,736
 1,722
 159,581
 166,874
 53,145
Commercial and industrial (1)
78
 135
 20
 2,402
 2,402
 1,588
 $646,121
 $651,949
 $140,395
 $876,997
 $884,290
 $174,817
Total           
Consumer loans           
Residential first mortgage$791,803
 $906,304
 $129,903
 $744,604
 $744,604
 $113,569
Second mortgage17,257
 17,257
 6,410
 14,237
 14,237
 4,738
Warehouse lending172
 651
 
 307
 869
 
HELOC2,340
 2,340
 2,340
 1,775
 1,775
 1,775
Other consumer
 
 
 2
 2
 2
Commercial loans           
Commercial real estate123,879
 182,122
 1,722
 207,145
 216,030
 53,145
Commercial and industrial (1)
78
 135
 20
 2,402
 2,402
 1,588
Total impaired loans$935,529
 $1,108,809
 $140,395
 $970,472
 $979,919
 $174,817
            
(1)These impaired loans are from originations prior to 2011.


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For the Three Months Ended September 30, For the Nine Months Ended September 30,March 31, 2013 December 31, 2012
2012 2011 2012 2011
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
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 thousands)
With no related allowance recorded           
Consumer loans           
Residential first mortgage loans$234,816
 $374,801
 $
 $231,750
 $360,575
 $
Second mortgage1,000
 4,342
 
 1,170
 4,545
 
HELOC2
 2,305
 
 
 2,506
 
Commercial loans           
Commercial real estate62,216
 83,139
 
 79,782
 109,483
 
(Dollars in thousands)$298,034
 $464,587
 $
 $312,702
 $477,109
 $
With an allowance recorded           
Consumer loans                          
Residential first mortgage$773,690
 $26,754
 $592,194
 $864
 $750,966
 $28,468
 $595,228
 $12,999
$570,876
 $570,334
 $150,932
 $574,037
 $573,610
 $150,545
Second mortgage16,916
 331
 13,273
 101
 15,745
 303
 13,342
 389
18,941
 18,941
 7,844
 15,779
 15,779
 7,028
Warehouse lending224
 
 435
 
 265
 
 217
 
HELOC219
 
 
 
 571
 
 13
 
940
 940
 3,283
 734
 734
 3,074
Other consumer42
 
 
 
 22
 
 
 
Commercial loans                          
Commercial real estate150,125
 337
 174,643
 856
 170,410
 590
 196,804
 4,595
3,879
 7,012
 199
 15,540
 22,917
 2,538
Commercial and industrial (1)
84
 1
 2,570
 70
 689
 1
 2,094
 442
40
 96
 10
 41
 97
 10
$594,676
 $597,323
 $162,268
 $606,131
 $613,137
 $163,195
Total           
Consumer loans           
Residential first mortgage$805,692
 $945,135
 $150,932
 $805,787
 $934,185
 $150,545
Second mortgage19,941
 23,283
 7,844
 16,949
 20,324
 7,028
HELOC942
 3,245
 3,283
 734
 3,240
 3,074
Commercial loans           
Commercial real estate (2)
66,095
 90,151
 199
 95,322
 132,400
 2,538
Commercial and industrial (1)
40
 96
 10
 41
 97
 10
Total impaired loans$941,300
 $27,423
 $783,115
 $1,891
 $938,668
 $29,362
 $807,698
 $18,425
$892,710
 $1,061,910
 $162,268
 $918,833
 $1,090,246
 $163,195
           

(1)These impaired loans are from originations prior to 2011.
(2)The impaired commercial real estate loans are handled by the loan workout group and represent loans in a run-off portfolio, which are not part of the new business that began in early 2011.



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Table of Contents

 For the Three Months Ended
March 31,
 2013 2012
 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
 (Dollars in thousands)
Consumer loans       
Residential first mortgage$804,357
 $6,102
 $728,242
 $7,204
Second mortgage18,920
 281
 14,573
 182
Warehouse lending
 
 307
 
HELOC881
 40
 924
 3
Other consumer
 
 2
 
Commercial loans       
Commercial real estate80,709
 280
 190,694
 1,315
Commercial and industrial41
 
 1,293
 4
Total impaired loans$904,908
 $6,703
 $936,035
 $8,708

The Company utilizes an internal risk rating system which is applied to all commercial and commercial real estate credits. 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 liquidity. 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 are as follows.

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

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.

Substandard. Assets identified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. For HELOC loans and other consumer loans, the Company evaluates credit quality based on the aging and status of payment activity and includes all non-performing loans.

Doubtful. Assets identified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. The possibility of a loss on a doubtful asset is high. However, due to important and reasonably specific pending factors, which may work to strengthen (or weaken) the asset, its classification as an estimated loss is deferred until its more exact status can be determined.

Commercial Credit ExposureAs of September 30, 2012As of March 31, 2013
Commercial  Real
Estate
 
Commercial and
Industrial
 
Commercial Lease
Financing
 
Total
Commercial
Commercial Real Estate 
Commercial and
Industrial
 
Commercial Lease
Financing
 
Total
Commercial
(Dollars in thousands)(Dollars in thousands)
Grade              
Pass$560,633
 $560,426
 $164,072
 $1,285,131
$297,501
 $104,582
 $
 $402,083
Special mention/watch253,425
 36,255
 17,914
 307,594
125,810
 2,365
 
 128,175
Substandard191,440
 592
 6,663
 198,695
139,605
 741
 5,815
 146,161
Total loans$1,005,498
 $597,273
 $188,649
 $1,791,420
$562,916
 $107,688
 $5,815
 $676,419

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Consumer Credit ExposureAs of September 30, 2012As of March 31, 2013
Residential First
Mortgage
 
Second 
Mortgage
 Warehouse HELOC Other Consumer Total
Residential First
Mortgage
 
Second 
Mortgage
 Warehouse HELOC Other  Consumer 
Total
Consumer
(Dollars in thousands)(Dollars in thousands)
Grade                      
Pass$2,205,073
 $103,167
 $1,092,095
 $186,813
 $52,811
 $3,639,959
$2,098,273
 $90,395
 $647,061
 $164,596
 $44,341
 $3,044,666
Special mention/watch612,812
 14,713
 215,025
 1,869
 137
 844,556
596,726
 17,692
 95,650
 876
 15
 710,959
Substandard268,211
 4,406
 172
 3,435
 240
 276,464
296,395
 4,298
 8,054
 2,343
 132
 311,222
Total loans$3,086,096
 $122,286
 $1,307,292
 $192,117
 $53,188
 $4,760,979
$2,991,394
 $112,385
 $750,765
 $167,815
 $44,488
 $4,066,847
 
Commercial Credit ExposureAs of December 31, 2011As of December 31, 2012
Commercial  Real
Estate
 
Commercial and
Industrial
 Commercial Lease Financing 
Total
Commercial
Commercial  Real
Estate
 
Commercial and
Industrial
 Commercial Lease Financing 
Total
Commercial
(Dollars in thousands)(Dollars in thousands)
Grade              
Pass$702,641
 $324,920
 $114,509
 $1,142,070
$277,037
 $82,184
 $6,300
 $365,521
Special mention/watch347,440
 1,595
 
 349,035
230,937
 1,642
 
 232,579
Substandard192,853
 2,364
 
 195,217
132,341
 6,739
 
 139,080
Doubtful35
 
 
 35
Total loans$1,242,969
 $328,879
 $114,509
 $1,686,357
$640,315
 $90,565
 $6,300
 $737,180

Consumer Credit ExposureAs of December 31, 2011As of December 31, 2012
Residential First
Mortgage
 
Second 
Mortgage
 Warehouse HELOC Other Consumer Total
Residential First
Mortgage
 
Second 
Mortgage
 Warehouse HELOC Other  Consumer 
Total
Consumer
(Dollars in thousands)(Dollars in thousands)
Grade                      
Pass$3,430,894
 $132,671
 $1,173,591
 $213,912
 $67,002
 $5,018,070
$2,118,961
 $95,969
 $1,081,579
 $175,512
 $49,180
 $3,521,201
Special mention/watch583,804
 15,192
 266,148
 910
 248
 866,302
Substandard318,927
 6,241
 307
 8,074
 611
 334,160
306,486
 3,724
 
 3,025
 183
 313,418
Total loans$3,749,821
 $138,912
 $1,173,898
 $221,986
 $67,613
 $5,352,230
$3,009,251
 $114,885
 $1,347,727
 $179,447
 $49,611
 $4,700,921


4440

Table of Contents

Note 8 – Pledged Assets

The Company has pledged certain securities and loans to collateralize lines of credit and/or borrowings with the Federal Reserve Bank of Chicago, and the FHLB of Indianapolis and others. The following table details pledged assetassets by asset class, and the carrying value of pledged investments and the investments' maturities. See Note 11 - Derivative Financial Instruments for cash and securities pledged for derivative activities.
September 30, 2012 December 31, 2011March 31, 2013 December 31, 2012
Carrying Value 
Investment
Maturities
 Carrying Value 
Investment
Maturities
Carrying Value 
Investment
Maturities
 Carrying Value 
Investment
Maturities
(Dollars in thousands)(Dollars in thousands)
Cash$9,811
  $31,716
 $3,569
  $9,812
 
Securities classified as trading        
U.S. Treasury bonds66,989
 Various 166,934
 Various51,323
 Various 62,382
 Various
Securities classified as available-for-sale    
Non-agency collateralized mortgage obligations
  110,328
 2036
Loans        
Residential first mortgage loans4,608,939
 Various 4,444,186
 Various
Residential first mortgage loans (1)
4,271,089
 Various 4,517,632
 Various
Second mortgage loans101,849
 Various 128,113
 Various92,360
 Various 97,133
 Various
Warehouse loans220,561
 Various 
 Various237,215
 Various 411,320
 Various
HELOC loans169,214
 Various 33,505
 Various150,176
 Various 161,016
 Various
Commercial loans497,165
 Various 504,579
 Various332,143
 Various 495,281
 Various
Loans repurchased with government guarantees1,363,468
 Various 1,741,857
 Various976,529
 Various 1,452,642
 Various
Totals$7,037,996
 $7,161,218
 $6,114,404
 $7,207,218
 
(1)Includes residential first mortgage loans held-for-investment and residential first mortgage loans held-for-sale.

Note 9 – Private-Label Securitization Activity

The Company previously participated in four private-label securitizations of financial assets involving two HELOC loan transactions and two second mortgage loan transactions.

In each of thesethree securitizations, the financial assets were derecognized by the Company upon transfer to the securitization trusts, which then issued and sold mortgage-backed securities to third party investors. The Company relinquished control over the loans at the time the financial assets were transferred to the securitization trusts and the Company recognized a gain on the sale of the transferred assets. These fourthree securitizations were as follows:

In December 2005, and December 2006, the Company participated incompleted a $600.0 million non-agency HELOC securitizations (the "FSTAR 2005-1 HELOC Securitization" and the "FSTAR 2006-2 HELOC Securitization," respectively) in the amount of $600.0 million and $302.2 million, respectively.). As a result of these securitizations,this securitization, the Company recorded assets of $26.1 million and $11.2 millionin residual interests, respectively.interests. The offered securities in the twoFSTAR 2005-1 HELOC securitizationsSecuritization were both guaranteed by Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Inc. ("Assured").

In AprilDecember 2006, the Company completed a $400.0302.2 million non-agency HELOC securitizations (the "FSTAR 2006-2 HELOC Securitization"). As a result of this securitization, transaction involving fixed second mortgage loans that the Company held at the time in its investment portfolio. The transaction was treated as a recharacterization of loans held for investment to securities held to maturity and, therefore, no gain on sale was recorded. Asrecorded assets of September 30, 2012$11.2 million, the Company still holds this mortgage securitization in available-for-sale investment securities.residual interests. The offered securities in the this second mortgage loan securitization2006-2 HELOC Securitization were guaranteed by MBIA Insurance Corporation.Assured.
    
In addition, in March 2007, the Company completed a $620.9 million non-agency securitization transaction involving closed-ended, fixed and adjustable rate second mortgage loans and recorded $22.6 million in residual interests and servicing assets. In June 2007, the Company completed a secondary closing for $98.2 million and recorded an additional $4.2 million in residual interests. The offered securities in this second mortgage loan securitization were guaranteed by MBIA Insurance Corporation.Corporation ("MBIA").
    
In the fourth securitization, the transaction was treated as a recharacterization of loans held-for-investment to securities held to maturity and, therefore, no gain on sale was recorded. In April 2006, the Company completed a $400.0 million non-agency securitization transaction involving fixed second mortgage loans that the Company held at the time in its investment portfolio. As of March 31, 2013, the Company still holds this mortgage securitization in available-for-sale investment securities. The offered securities in this second mortgage loan securitization were guaranteed by MBIA.


41

Table of Contents

The Company has not engaged in any private-label securitization activity sinceexcept for these four securitizations completed from 2005 to 2007.
    
In connection with the four private-label securitizations, the Company'sCompany retained interests in the securitized mortgage loans and trusts, which generally consisted of residual interests, transferor'stransferors' interests, and servicing assets. The residual interests

45


represent the present value of future cash flows expected to be received by the Company. Residual interests are accounted for at fair value and are included as securities classified as trading in the Consolidated Statements of Financial Condition. Any gains or losses realized on the sale of such securities and any subsequent changes in unrealized gains and losses are reported in the Consolidated Statements of Operations. At September 30, 2012March 31, 2013, the Company’s residual interests have been deemed to have no value and have been written off. The transferor’stransferors' interests represent draws on the HELOCs subsequent to them being sold to the trusts that were funded by the Bank rather than being purchased by the securitization trusts. The transferor'stransferors' interest relating to the FSTAR 2006-2 HELOC Securitization has been fully reserved for and the FSTAR 2005-1 HELOC Securitization has been partially reserved for. The transferor’stransferors' interests are included in loans held-for-investment in the Consolidated Statements of Financial Condition. At September 30, 2012March 31, 2013, the Company no longer serviced any of the loans that were sold to the private-label securitization trusts, and therefore had no servicing assets accounted for on an amortized cost method.
    
The following table sets forth certain characteristics of each of the HELOC securitizations at their inception and the current characteristics as of and for the ninethree month periodmonths ended September 30, 2012March 31, 2013. 
 2005-1 2006-2
 At Inception Current Levels At Inception Current Levels
HELOC Securitizations(Dollars in thousands)
Number of loans8,155
 2,309
 4,186
 1,764
Aggregate principal balance$600,000
 $103,473
 $302,182
 $105,854
Average principal balance$55
 $45
 $72
 $60
Weighted average fully indexed interest rate8.43% 5.72% 9.43% 6.43%
Weighted average original term120 months
 120 months
 120 months
 120 months
Weighted average remaining term112 months
 33 months
 112 months
 47 months
Weighted average original credit score722
 717
 715
 719
  
2005-1 at
Inception
 
2005-1
Current
Levels
 
2006-2 at
Inception
 
2006-2
Current 
Levels
 
 HELOC Securitizations(Dollars in thousands)
 Number of loans8,155
 2,124
 4,186
 1,637
 Aggregate principal balance$600,000
 $94,529
 $302,182
 $97,763
 Average principal balance$55
 $44
 $72
 $60
 Weighted average fully indexed interest rate8.43% 5.72% 9.43% 6.37%
 Weighted average original term120 months
 120 months
 120 months
 120 months
 Weighted average remaining term112 months
 27 months
 112 months
 41 months
 Weighted average original credit score722
 717
 715
 718

Transferor’sThe following table sets forth certain characteristics of each of the fixed rate second mortgage securitizations at their inception and the current characteristics as of and for the three months ended March 31, 2013.
 
2006-1 at
Inception
 
2006-1
Current
Levels
 
2007-1 at
Inception
 
2007-1
Current
Levels
 (Dollars in thousands)
Fixed Rate Second Mortgage Securitization       
Number of loans8,325
 2,539
 12,416
 4,801
Aggregate principal balance$398,706
 $94,484
 $622,100
 $195,462
Average principal balance$49
 $37
 $50
 $41
Weighted average fully indexed interest rate7.04% 6.78% 8.22% 7.20%
Weighted average original term187 months
 187 months
 194 months
 194 months
Weighted average remaining term179 months
 97 months
 185 months
 114 months
Weighted average original credit score729
 727
 726
 729

Transferors' Interests

Under the terms of the HELOC securitizations, the trusts have purchased and were initially obligated to pay for any subsequent additional draws on the lines of credit transferred to the trusts. Upon entering a rapid amortization period, the Company becomes obligated to fund the purchase of those additional balances as they arise in exchange for a beneficial interest in the trust (transferor's(transferors' interest). The Company must continue to fund the required purchase of additional draws by the trust as long as the securitization remains active. The table below identifies the draw contributions for each of the HELOC securitization trusts as well as the fair value of the transferor'stransferors' interests.  

42


 September 30, 2012 December 31, 2011
 FSTAR 2005-1 FSTAR 2006-2 FSTAR 2005-1 FSTAR 2006-2
Summary of Transferor’s Interest by Securitization(Dollars in thousands)
Total draw contribution$35,630
 $51,319
 $35,430
 $51,265
Additional balance increase amount (1)
$25,557
 $28,476
 $26,567
 $29,964
Transferor’s interest ownership percentage24.16% 26.19% 22.18% 24.49%
Fair value of transferor’s interests$7,617
 $
 $9,594
 $
Transferor’s interest reserve$391
 $72
 $309
 $643
 March 31, 2013 December 31, 2012
 FSTAR 2005-1 FSTAR 2006-2 FSTAR 2005-1 FSTAR 2006-2
Summary of Transferors' Interest by Securitization(Dollars in thousands)
Total draw contribution$35,809
 $51,321
 $35,782
 $51,320
Additional balance increase amount (1)
$25,059
 $27,635
 $25,311
 $28,134
Transferors' interest ownership percentage25.87% 27.77% 24.99% 26.96%
Fair value of transferors' interests$6,872
 $
 $7,103
 $
Transferors' interest reserve$414
 $77
 $479
 $97
(1)Additional draws on lines of credit for which the Company receives a beneficial interest in the Trust.

FSTAR 2005-1 HELOC Securitization. At September 30, 2012March 31, 2013 and December 31, 20112012, outstanding claims due to the note insurer were $16.216.9 million and $14.416.8 million, respectively, and based on the Company’s internal model, the Company believed that because of the claims due to the note insurer and continuing credit losses on the loans underlying the securitization, the fair value/carrying amount of the transferor’stransferors' interest was $7.66.9 million and $9.67.1 million, respectively. The Company recorded a liability to reflect the expected liability arising from losses on future draws associated with this securitization, of which $0.4 million remained at September 30, 2012March 31, 2013. In determining this liability, the Company assumed (i) no further draws would be made with respect to those HELOCs as to which further draws were currently prohibited, (ii) the remaining HELOCs would continue to operate in the same manner as their historical draw behavior indicated, as measured on an individual loan basis and on a pool drawdown basis, and (iii) that any draws actually made and therefore recognized as transferor’stransferors' interests by the Company would have a loss rate of 79.672.6 percent.



46


FSTAR 2006-2 HELOC Securitization. At September 30, 2012March 31, 2013 and December 31, 20112012, outstanding claims due to the note insurer were $87.590.1 million and $82.788.7 million, respectively, and based on the Company’s internal model, the Company believed that because of the claims due to the note insurer and continuing credit losses on the loans underlying the securitization, there was no carrying amount of the transferor’stransferors' interest. The Company recorded a liability of $7.6 million to reflect the expected liability arising from losses on future draws associated with this securitization, of which $0.1 million remained at September 30, 2012March 31, 2013. In determining this liability, the Company (i) assumed no further draws would be made with respect to those HELOCs as to which further draws were currently prohibited, (ii) the remaining HELOCs would continue to operate in the same manner as their historical draw behavior indicated, as measured on an individual loan basis and on a pool drawdown basis, and (iii) that any draws actually made and therefore recognized as transferor’stransferors' interests by the Company would have a loss rate of 100 percent.
    
The following table outlines the Company’sCompany's expected losses on future draws on loans in the FSTAR 2005-1 HELOC Securitization and the FSTAR 2006-2 HELOC Securitization at September 30, 2012March 31, 2013. 
Unfunded Commitments (1)
 
Expected Future Draws as % of Unfunded Commitments (2)
 
Expected Future Draws (3)
 
Expected Loss (4)
 
Potential Future Liability (5)
Unfunded Commitments (1) Expected Future Draws as % of Unfunded Commitments (2) Expected Future Draws (3) Expected Loss (4) Potential Future Liability (5)
(Dollars in thousands)(Dollars in thousands)
FSTAR 2005-1 HELOC Securitization$3,117
 12.5% $390
 79.6% $310
$2,726
 17.3% $471
 72.6% $342
FSTAR 2006-2 HELOC Securitization427
 16.8% 72
 100.0% 72
497
 19.3% 96
 100.0% 96
Total$3,544
   $462
   $382
$3,223
   $567
   $438
(1)Unfunded commitments represent the amounts currently fundable at the dates indicated because the underlying borrowers’ lines of credit are still active.
(2)Expected future draws on unfunded commitments represents the historical draw rate within the securitization.
(3)Expected future draws reflects unfunded commitments multiplied by expected future draws percentage.
(4)Expected losses represent an estimated reduction in carrying value of future draws.
(5)Potential future liability reflects expected future draws multiplied by expected losses.

Assured LitigationSecuritization Litigations

In 2009The Company is in litigation with Assured and 2010,MBIA regarding the Bank received repurchase demands from Assured, with respect to HELOCs that were sold by the Bank in connection with the HELOC securitizations. Assured is the note insurer for each of the two HELOC securitizations completed by the Bank. In April 2011, Assured filed a lawsuit against the Bank in the U.S. District Court for the Southern District of New York, alleging aalleged breach of various loan level representations and warranties made by the Company in connection with the four private-label securitizations. See Note 20 - Legal Proceedings, Contingencies and seeking reliefCommitments, herein, for breach of contract, as well as full indemnification and reimbursement of amounts that it had paid under the respective insurance policy, plus interest and costs. Assured is seeking $111.0 million in damages. On March 1, 2012, the court dismissed Assured's claims for indemnification and reimbursement, but allowed the case to proceed on the breach of contract claims related to the Bank's repurchase obligations. The court issued a memorandum opinion, on September 25, 2012, supporting and explaining the court's March 1 decision. In the memorandum, the court stated that the principal issue in the case is whether the Bank's breach of representations and warranties materially increased the risk of loss to Assured at the time offurther information regarding the securitization as compared to the risk of loss that Assured reasonably should have expected. The bench trial began on October 10, 2012, and the Company expects that it will conclude in November 2012. The court has not informed the parties when they can expect a decision.litigations.





4743


Unfunded Commitments

The table below identifies separately for each HELOC securitization trust: (i) the notional amount of the total unfunded commitment under the Company’sCompany's contractual arrangements, (ii) unfunded commitments that have been frozen or suspended because the borrowers do not currently meet the contractual requirements under their home equity line of creditHELOC with the Company, and (iii) the amount currently fundable because the underlying borrowers’borrowers' lines of credit are still active. 
FSTAR 2005-1 FSTAR 2006-2 TotalFSTAR 2005-1 FSTAR 2006-2 Total
September 30, 2012(Dollars in thousands)
March 31, 2013(Dollars in thousands)
Notional amount of unfunded commitments (1)
$32,119
 $27,446
 $59,565
$30,410
 $26,691
 $57,101
Less: Frozen or suspended unfunded commitments29,002
 27,019
 56,021
27,684
 26,194
 53,878
Unfunded commitments still active3,117
 427
 3,544
2,726
 497
 3,223
December 31, 2011 
December 31, 2012 
Notional amount of unfunded commitments (1)
$33,226
 $31,257
 $64,483
$30,767
 $27,447
 $58,214
Less: Frozen or suspended unfunded commitments29,454
 29,667
 59,121
27,825
 26,958
 54,783
Unfunded commitments still active3,772
 1,590
 5,362
2,942
 489
 3,431
(1)The Company’s total potential funding obligation is dependent on both (a) borrower behavior (e.g., the amount of additional draws requested) and (b) the contractual draw period (remaining term) available to the borrowers. Because borrowers can make principal payments and restore the amounts available for draws and then borrow additional amounts as long as their lines of credit remain active, the funding obligation has no specific limitation and it is not possible to define the maximum funding obligation. However, the Company expects that the maturity dates of the FSTAR 2005-1 HELOC Securitization and the FSTAR 2006-2 HELOC Securitization pools will be reached in 2015 and 2017, respectively, and the Company’s exposure will be substantially mitigated at such times, based on prepayment speeds and losses in the cash flow forecast.

Credit Risk on Securitization

With respect to the issuance of private-label securitizations, the Company retains certain limited credit exposure in that it retains non-investment grade residual securities in addition to customary representations and warranties. The Company does not have credit exposure associated with non-performing loans in securitizations beyond its investment in retained interests in non-investment grade residuals and draws (transferor’s(transferors' interests) on HELOCs that it funds and which are not reimbursed by the respective trust. The value of the Company’s transferor’stransferors' interests reflects the Company’s credit loss assumptions as applied to the underlying collateral pool. To the extent that actual credit losses exceed the assumptions, the value of the Company’s non-investment grade residual securities and unreimbursed draws will be diminished.

During the fourth quarter 2010, allAll servicing related to loans underlying the private-label securitizations (i.e., HELOC and second mortgage loans) washas been transferred to a third party servicer.

The following table summarizes the Company's consumer servicing portfolio and the balance of retained assets with credit exposure, which includes residential interests that are included as securities classified as trading and unreimbursed HELOC draws that are included in loans held-for-investment.
 September 30,
2012
 December 31,
2011
 
Amount of
Loans Serviced
 
Balance of
Retained Assets
With Credit
Exposure
 
Amount of
Loans
Serviced
 
Balance of
Retained Assets
With Credit
Exposure
 (Dollars in thousands)
Private-Label securitizations$
 $7,617
 $
 $9,594
 March 31, 2013 December 31, 2012
 
Amount of
Loans Serviced
 
Balance of
Retained Assets
With Credit
Exposure
 
Amount of
Loans
Serviced
 
Balance of
Retained Assets
With Credit
Exposure
 (Dollars in thousands)
Private-label securitizations$
 $6,872
 $
 $7,103


48


Note 10 – Mortgage Servicing Rights
The Company has obligations to service residential first mortgage loans. A description of these classes of servicing assets follows.
Residential MSRs. Servicing of residential first mortgage loans is a significant business activity of the Company. The Company recognizes MSR assets on residential first mortgage loans when it retains the obligation to service these loans upon sale. MSRs are subject to changes in value from, among other things, changes in interest rates, prepayments of the underlying loans and changes in credit quality of the underlying portfolio. The Company utilizes the fair value method for residential first MSRs.MSRs, as elected by under ASC Topic 820, "Fair Value Measurement." As such, the Company currently specifically hedges certain risks of fair value changes of MSRs using derivative instruments that are intended to change in value inversely to part or all of the changes in the components underlying the fair value of MSRs.

44


Changes in the carrying value of residential first mortgage MSRs, accounted for at fair value, were as follows. 
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
(Dollars in thousands)(Dollars in thousands)
Balance at beginning of period$638,865
 $577,401
 $510,475
 $580,299
$710,791
 $510,475
Additions from loans sold with servicing retained131,837
 64,490
 370,012
 153,444
126,494
 111,484
Reductions from bulk sales (1)
(9,589) (40,130) (27,791) (87,265)(94,437) (18,202)
Changes in fair value due to(2)          
Payoffs (2)
(45,552) (17,485) (101,549) (45,951)
Decrease in MSR value (3)
(37,481) (26,832)
All other changes in valuation inputs or assumptions (3)(4)
(28,762) (146,938) (64,348) (163,189)21,840
 19,905
Fair value of MSRs at end of period$686,799
 $437,338
 $686,799
 $437,338
$727,207
 $596,830
Unpaid principal balance of residential first mortgage loans serviced for others (period end)$82,414,799
 $56,772,598
 $82,414,799
 $56,772,598
$73,933,296
 $68,207,554
(1)
Includes bulk sales related to underlying serviced loans totaling $1.2 billion and $3.610.7 billion for the three and nine months ended September 30, 2012March 31, 2013, respectively, compared to $4.5 billion and $9.22.4 billion for the three and nine months ended September 30, 2011March 31, 2012, respectively.
(2)Represents decreaseChanges in MSRfair value associated with loans that were paid-off duringare included within loan administration income on the period.Consolidated Statements of Operations.
(3)    Represents decrease in MSR value associated with loans that were paid-off during the period.
(3)(4)Represents estimated MSR value change resulting primarily from market-driven changes in interest rates.

The fair value of residential MSRs is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. The Company periodically obtains third-party valuations of its residential MSRs to assess the reasonableness of the fair value calculated by the valuation model.
The key economic assumptions used in determining the fair value of those MSRs capitalized during the three and nine months ended September 30, 2012March 31, 2013 and 20112012 periods were as follows. 
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
Weighted-average life (in years)5.4
 4.5
 5.9
 4.1
5.4
 6.1
Weighted-average constant prepayment rate17.3% 27.2% 15.7% 25.4%15.5% 15.2%
Weighted-average discount rate7.2% 6.8% 7.1% 7.2%7.9% 7.0%
The key economic assumptions reflected in the overall fair value of the entire portfolio of MSRs were as follows. 
September 30,
2012
��December 31,
2011
March 31,
2013
 December 31,
2012
Weighted-average life (in years)4.9
 4.5
5.7
 5.3
Weighted-average constant prepayment rate20.3% 21.6%14.7% 17.3%
Weighted-average discount rate7.1% 7.2%7.6% 7.0%

49



Contractual servicing fees. Contractual servicing fees, including late fees and ancillary income, for each type of loan serviced are presented below. Contractual servicing fees are included within loan administration income on the Consolidated Statements of Operations.  
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
(Dollars in thousands)(Dollars in thousands)
Residential first mortgage$53,433
 $40,473
 $152,369
 $126,787
$54,078
 $48,326
Other203
 51
 509
 120
198
 173
Total$53,636
 $40,524
 $152,878
 $126,907
$54,276
 $48,499


45


Note 11 – Derivative Financial Instruments

The Company follows the provisions of derivatives and hedging accounting guidance, which require it to recognize all derivative instruments on the Consolidated Statements of Financial Condition at fair value. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require a small or no net investment, and allow for the net settlement of positions. A derivative's notional amount serves as the basis for the payment provision of the contract, and takes the form of units, such as shares or dollars. A derivative's underlying variable is a specified interest rate, security price, commodity price, foreign exchange rate, index, or other variable. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the fair value of the derivative contract. Generally, these instruments help the Company manage exposure to interest rate risk, mitigate the credit risk inherent in the loan portfolio, hedge against changes in foreign currency exchange rates, and meet client financing and hedging needs. The following derivative financial instruments were identified and recorded at fair value as of September 30, 2012March 31, 2013 and December 31, 20112012.

Fannie Mae, Freddie Mac, Ginnie Mae and other forward loan sale contracts;
Rate lock commitments;
Interest rate swap agreements;swap; and
U.S. Treasury and euro dollar futures and options.

Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking into account the effects of bilateral collateral and master netting agreements. Gross positive fair values are netted with gross negative fair values by counterparty pursuant to a valid master netting agreement. In addition, payables and receivables in respect of collateral received from or paid to a given counterparty are included in this netting. These agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. As a result, the Company could have derivative contracts with negative fair values included in derivative assets on the balance sheet and contracts with positive fair values included in derivative liabilities.

Derivatives Not Designated in Hedge Relationships

Like other financial services institutions, the Company originates loans and extends credit, both of which expose the Company to credit risk. The Company actively manages the overall loan portfolio and the associated credit risk in a manner consistent with asset quality objectives. This objective is accomplished primarily through the use of an investment-grade diversified dealer-traded basket of swaps. These transactions may generate fee income, and diversify and reduce overall portfolio credit risk volatility. Although the Company utilizes swaps for risk management purposes, they are not treated as hedging instruments.

The Company hedges the risk of overall changes in fair value of loans held-for-sale and rate lock commitments generally by selling forward contracts on securities of Fannie Mae, Freddie Mac and Ginnie Mae.Mae (collectively, government sponsored entities or the "GSEs"). The forward contracts used to economically hedge the loan commitments are accounted for as non-designated hedges and naturally offset rate lock commitment mark-to-market gains and losses recognized as a component of gain on loan sale. The Company recognized a pre-tax gainsloss of $5.839.7 million and gain of $64.041.1 million for the three and nine months ended September 30,March 31, 2013 and 2012, respectively, compared to a pre-tax gain of $26.5 million and a loss of $21.0 million for the three and nine months ended September 30, 2011, respectively, on hedging activity relating to loan commitments and loans held-for-sale. Additionally, the Company hedges the risk of overall changes in fair value of MSRs through the use of various derivatives including purchases of forward contracts on securities of Fannie Mae and Freddie Mac, the purchase/sale of U.S. Treasury futures contracts on U.S. Treasury futures contracts and the purchase/sale of euro dollar future contracts. These derivatives are accounted for as non-designated hedges against changes in the fair value of MSRs. The Company recognized a gainsloss of $31.818.3 million and a loss of $88.02.7 million for the three and nine months ended September 30,March 31, 2013 and 2012, respectively, compared to a gains of $118.8 million and $147.0 million for the three and nine months ended September 30, 2011, respectively, on MSR fair value hedging activities. The Company does not apply hedge accounting, as prescribed in ASC 815: Derivatives and Hedging to any derivatives.

The Company uses a combination of derivatives (U.S. Treasury futures, euro dollar futures, swap futures, and "to be announced" forwards) and certain trading securities to hedge the MSRs. For accounting purposes, these hedges represent economic hedges of the MSR asset with both the hedges and the MSR asset carried at fair value on the balance sheet. Certain hedging strategies that we use to manage our investment in MSRs may be ineffective to fully offset changes in the fair value of such asset due to changes in interest rates and market liquidity. As both the hedges and the MSR asset are carried at fair value on the balance sheet, any hedge ineffectiveness is recognized in current period earnings.

The Company writes and purchases interest rate swaps to accommodate the needs of customers requesting such services. Customer-initiated trading derivatives are used primarily to focus on providingprovide derivative products to customers that enablesenabling them to manage interest rate risk exposure. Customer-initiated trading derivatives are tailored to meet the needs of the counterparties involved and, therefore, contain a greater degree of credit risk and liquidity risk than exchange-traded contracts, which have standardized terms and readily available price information. The Company mitigates most of the inherent market risk of customer-initiated interest

46


rate swap contracts by taking offsetting positions. Market risk from unfavorable movements in interest rates is generally economically hedged by concurrently entering into offsetting derivative contracts. The offsetting derivative contracts have nearly identical notional values, terms and indices. These limits are established annually and reviewed quarterly. Interest rate swaps are agreements in which two parties periodically exchange fixed cash payments for variable payments based on a designated market rate or index, or variable payments based on two different rates or indices, applied to a specified notional amount until a stated maturity. The Company's swap agreements are structured such that variable payments are primarily based on LIBOR (one-month, three-month or six-month) or prime. These instruments are principally negotiated over-the-counter and are subject to credit risk, market risk and liquidity risk.     

50


The Company had the following derivative financial instruments.
Notional Amount 

Fair Value
 

Expiration Dates
Notional Amount 

Fair Value
 

Expiration Dates
(Dollars in thousands)(Dollars in thousands)
September 30, 2012    
March 31, 2013    
Assets (1)
        
Mortgage servicing rights    
U.S. Treasury and agency futures / forwards$10,382,000
 $10,212
 2012
Mortgage banking derivatives    
U.S. Treasury and euro dollar futures$11,252,600
 $7,998
 2014
Mortgage backed securities forwards$655,000
 $2,845
 2014
Rate lock commitments6,634,008
 230,050
 20124,749,416
 51,389
 2014
Customer-initiated derivatives    
Interest rate swaps86,826
 6,079
 Various67,341
 1,853
 Various
Total derivative assets$17,102,834
 $246,341
 $16,724,357
 $64,085
 
Liabilities (2)
        
Mortgage banking derivatives    
Forward agency and loan sales$8,300,988
 $138,109
 2012$6,199,000
 $18,876
 2014
Customer-initiated derivatives    
Interest rate swaps86,826
 6,079
 Various67,341
 1,853
 Various
Total derivative liabilities$8,387,814
 $144,188
 $6,266,341
 $20,729
 
December 31, 2011    
December 31, 2012    
Assets (1)
        
Mortgage servicing rights    
U.S. Treasury and agency futures / forwards$1,552,000
 $12,678
 2012
Mortgage banking derivatives    
U.S. Treasury and euro dollar futures$11,778,600
 $2,203
 2013
Mortgage backed securities forwards1,275,000
 3,619
 2013
Rate lock commitments3,869,901
 70,965
 20125,149,891
 86,200
 2013
Customer-initiated derivatives    
Interest rate swaps32,360
 3,296
 Various101,246
 5,954
 Various
Total derivative assets$5,454,261
 $86,939
 $18,304,737
 $97,976
 
Liabilities (2)
        
Mortgage servicing rights    
U.S. Treasury and agency futures$5,029,000
 $42,978
 2012
Customer-initiated derivatives    
Forward agency and loan sales$7,385,430
 $14,021
 2013
Interest rate swaps32,360
 3,296
 Various101,246
 5,954
 Various
Total derivative liabilities$5,061,360
 $46,274
 $7,486,676
 $19,975
 
(1)Asset derivatives are included in "other assets" on the Consolidated Statements of Financial Condition.
(2)Liability derivatives are included in "other liabilities" on the Consolidated Statements of Financial Condition.
    
Customer−Customer initiated derivatives. Fee income on customer-initiated trading derivatives are earned from entering into various transactions at the request of the customer, (customer-initiated contracts)primarily interest rate swap contracts. Fair values of customer-initiated derivative financial instruments represent the net unrealized gains or losses on such contracts and are recorded in the Consolidated Statement of Financial Condition in "other assets" and "other liabilities." Changes in fair value are recognized in "other non-interest income" on the Consolidated Statements of Income. There was were no net gains (losses) recognized in income on customer-initiated derivative instruments for the three and nine months ended September 30, 2012March 31, 2013 and 20112012, respectively.

The Company enters into legally enforceable master netting agreements which reduce risk by permitting the closeout and netting of transactions with the same counterparty upon the occurrence of certain events. A master netting agreement allows two counterparties, who have multiple derivative contracts with each other, the ability to net settle amounts under all contracts, including any related collateral posted, through a single payment and in a single currency. The rights of offset associated with the derivative assets and liabilities are subject to the provisions of collateral agreements, certain of which as applicable to the Company are unilateral and/or contain restrictions on minimum collateral.


47


Collateral agreements require the counterparty to post, on a daily basis, collateral (typically cash or investment securities) equal to the Company’s net derivative receivable. For highly-rated counterparties, the agreements may include minimum dollar posting thresholds, but allow for the Company to call for immediate, full collateral coverage when credit-rating thresholds are triggered by counterparties. The Company’s collateral agreements contain provisions that require collateralization of the Company’s net liability derivative positions. Required collateral coverage is based on certain net liability thresholds. Under circumstances which constitute default under the agreements, the counterparties to the derivatives could request immediate full collateral coverage for derivatives in net liability positions. The Company's collateral agreements in which the collateral is restricted include provisions requiring unilateral funding of coverage for derivatives in net liability positions, as well as minimum collateral positions.

The following tables present the derivatives subject to a master netting arrangement, including the cash pledged as collateral.
 March 31, 2013
       Gross Amounts Not Offset in the Statement of Financial Position  
 Economic Undesignated HedgesGross 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
 (Dollars in thousands)
Assets           
U.S. Treasury and euro dollar futures$33,099
 $2,171
 $30,928
 $15,010
 $7,920
 $7,998
Mortgage backed securities forwards33,505
 
 33,505
 
 30,660
 2,845
Forward agency and loan sales1,935
 1,935
 
 
 
 
Rate lock commitments51,705
 316
 51,389
 
 
 51,389
Interest rate swaps9,383
 
 9,383
 
 7,530
 1,853
        Total derivative assets$129,627
 $4,422
 $125,205
 $15,010
 $46,110
 $64,085
Liabilities           
U.S. Treasury and euro dollar futures$2,171
 $2,171
 $
 $
 $
 $
Forward agency and loan sales20,811
 1,935
 18,876
 
 
 18,876
Rate lock commitments316
 316
 
 
 
 
Interest rate swaps1,853
 
 1,853
 
 
 1,853
        Total derivative liabilities$25,151
 $4,422
 $20,729
 $
 $
 $20,729



48


 December 31, 2012
       Gross Amounts Not Offset in the Statement of Financial Position  
 Economic Undesignated HedgesGross 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
 (Dollars in thousands)
Assets           
U.S. Treasury and euro dollar futures$36,801
 $5,076
 $31,725
 $15,006
 $14,516
 $2,203
Mortgage backed securities forwards42,194
 
 42,194
 (4) 38,579
 3,619
Forward agency and loan sales3,401
 3,401
 
 
 
 
Rate lock commitments86,286
 86
 86,200
 
 
 86,200
Interest rate swaps14,164
 
 14,164
 
 8,210
 5,954
        Total derivative assets$182,846
 $8,563
 $174,283
 $15,002
 $61,305
 $97,976
Liabilities           
U.S. Treasury and euro dollar futures$5,076
 $5,076
 $
 $
 $
 $
Forward agency and loan sales17,422
 3,401
 14,021
 
 
 14,021
Rate lock commitments86
 86
 
 
 
 
Interest rate swaps5,954
 
 5,954
 
 
 5,954
        Total derivative liabilities$28,538
 $8,563
 $19,975
 $
 $
 $19,975

The Company pledged a total of $61.1 million and $76.3 million of investment securities and cash collateral to counterparties at March 31, 2013 and December 31, 2012, respectively, for derivative activities. The Company pledged $46.1 million and $61.3 million in cash collateral to counterparties at March 31, 2013 and December 31, 2012, respectively, and $15.0 million in U.S. Treasury bonds at both March 31, 2013 and December 31, 2012. The total collateral pledged is included in "other assets" on the Consolidated Statements of Financial Condition.

Counterparty credit risk. The Bank is exposed to credit loss in the event of non-performance by the counterparties to its various derivative financial instruments. The Company manages this risk by selecting only well-established, financially strong counterparties, spreading the credit risk among such counterparties, and by placing contractual limits on the amount of unsecured credit risk from any single counterparty.
The Company pledged a total of $218.1 million and $17.7 million of investment securities and cash collateral to counterparties at September 30, 2012 and December 31, 2011, respectively, for derivative activities. The Company pledged $202.1

51


million and zero in cash collateral to counterparties at September 30, 2012 and December 31, 2011, respectively, and $16.1 million and $17.7 million in U.S. Treasury bonds at September 30, 2012 and December 31, 2011, respectively. The total collateral pledged is included in "other assets" on the Consolidated Statements of Financial Condition.

Note 12 – FHLB Advances

The portfolio of FHLB advances includes floating rate short-term adjustable advances and long-term fixed rate advances. The following is a breakdown of the advances outstanding.
September 30, 2012 December 31, 2011March 31, 2013 December 31, 2012
Amount 
Weighted
Average
Rate
 Amount 
Weighted
Average
Rate
Amount 
Weighted
Average
Rate
 Amount 
Weighted
Average
Rate
(Dollars in thousands)(Dollars in thousands)
Short-term adjustable advances$188,000
 0.51% $553,000
 0.40%
Daily adjustable advances$
 % $280,000
 0.50%
Long-term fixed rate term advances2,900,000
 3.30% 3,400,000
 3.10%2,900,000
 3.30% 2,900,000
 3.30%
Total$3,088,000
 3.13% $3,953,000
 2.72%$2,900,000
 3.30% $3,180,000
 3.80%

49


 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2012 2011 2012 2011
 (Dollars in thousands)
Maximum outstanding at any month end$3,400,000
 $3,615,000
 $3,703,000
 $3,615,000
Average balance3,561,532
 3,528,024
 3,884,049
 3,465,986
Average remaining borrowing capacity1,138,447
 946,149
 849,789
 783,491
Average interest rate3.03% 3.39% 2.82% 3.48%

The Company restructured $1.0 billion in FHLB advances during the third quarter 2011. The Company prepaid $500.0 million in higher cost long-term FHLB advances during the third quarter 2012, which resulted in a loss on extinguishment of debt of $15.2 million.
 For the Three Months Ended
March 31,
 2013 2012
 (Dollars in thousands)
Maximum outstanding at any month end$2,900,000
 $3,770,000
Average balance3,105,556
 4,097,630
Average remaining borrowing capacity4,259,155
 4,777,313
Average interest rate3.16% 2.69%

At September 30, 2012March 31, 2013, the Company had the authority and approval from the FHLB to utilize a line of credit equal to $7.0 billion and the Company may access that line to the extent that collateral is provided. At September 30, 2012March 31, 2013, the Company had available collateral sufficient to access $4.33.8 billion of the line and had $3.12.9 billion of advances outstanding. Pursuant to collateral agreements with the FHLB, advances can be collateralized by non-delinquent single-family residential first mortgage loans, loans repurchased with government guarantees, certain other loans and investment securities.


52


Note 13 – Long-Term Debt

The Company’s long-term debt is comprised principally of junior subordinated notes which were issued in connection with the issuance of trust preferred securities. The following table presents the outstanding balance and related interest rates of the long-term debt as of the dates indicated.
September 30, 2012 December 31, 2011March 31, 2013 December 31, 2012
(Dollars in thousands)(Dollars in thousands)
Junior Subordinated Notes              
Floating 3 Month LIBOR              
Plus 3.25% (1), matures 2032
$25,774
 3.67% $25,774
 3.82%$25,774
 3.53% $25,774
 3.56%
Plus 3.25% (1), matures 2033
25,774
 3.71% 25,774
 3.65%25,774
 3.55% 25,774
 3.59%
Plus 3.25% (1), matures 2033
25,780
 3.61% 25,780
 3.83%25,780
 3.53% 25,780
 3.56%
Plus 2.00% (1), matures 2035
25,774
 2.46% 25,774
��2.40%25,774
 2.30% 25,774
 2.34%
Plus 2.00% (1), matures 2035
25,774
 2.46% 25,774
 2.40%25,774
 2.30% 25,774
 2.34%
Plus 1.75% (1), matures 2035
51,547
 2.14% 51,547
 2.30%51,547
 2.03% 51,547
 2.06%
Plus 1.50% (1), matures 2035
25,774
 1.96% 25,774
 1.90%25,774
 1.80% 25,774
 1.84%
Plus 1.45%, matures 203725,774
 1.84% 25,774
 2.00%
Plus 2.50%, matures 203715,464
 2.89% 15,464
 3.05%
Subtotal$247,435
   $247,435
  
Other debt       
Fixed 7.00% due 20131,125
   1,150
  
Plus 1.45% (1), matures 2037
25,774
 1.73% 25,774
 1.76%
Plus 2.50% (1), matures 2037
15,464
 2.78% 15,464
 2.81%
Total long-term debt$248,560
   $248,585
  $247,435
   $247,435
  
(1)The securities are currently callable by the Company.

Deferral of Interest Payments

Interest on all junior subordinated notes related to trust preferred securities is payable quarterly. Under the terms of the related indentures, the Company may defer interest payments for up to 20 consecutive quarters without default or penalty. On January 27, 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 with the Federal Reserve.Supervisory Agreement. Concurrently, the Company also exercised contractual rights to defer dividend payments with respect to preferred stock issued and outstanding in connection with participation in the TARP Capital Purchase Program. See Note 16 - Stockholders' Equity.


50


Note 14 - Representation and Warranty Reserve

The following table shows the activity in the representation and warranty reserve.
 For the Three Months Ended September 30, For the Nine Months Ended September 30, For the Three Months Ended
March 31,
20122011 20122011 2013 2012
(Dollars in thousands) (Dollars in thousands)
Balance, beginning of period, Balance, beginning of period,$161,000
$79,400
 $120,000
$79,400
Balance, beginning of period,$193,000
 $120,000
Provision Provision    Provision   
Charged to gain on sale for current loan sales6,432
1,797
 17,126
5,511
Charged to gain on sale for current loan sales5,818
 5,051
Charged to representation and warranty reserve - change in estimate124,492
38,985
 231,058
80,776
Charged to representation and warranty reserve - change in estimate17,395
 60,538
Total130,924
40,782
 248,184
86,287
Total23,213
 65,589
Charge-offs, net Charge-offs, net(89,924)(35,182) (166,184)(80,687) Charge-offs, net(31,213) (43,589)
Balance, end of period Balance, end of period$202,000
$85,000
 $202,000
$85,000
Balance, end of period$185,000
 $142,000
    

53


Reserve levels are a function of expected losses based on actual pending and expected claims and repurchase requests, historical experience and loan volume. To the extent actual outcomes differ from management estimates, additional provisions could be required that could adversely affect operations or financial position in future periods.

During late 2011 and throughout 2012, the Company continued to see an increase in demand request activity from mortgage investors. As a result of the increased demand request activity and communications with mortgage investors, the Company reviewed as part of the quarterly review of accounting estimates the representation and warranty reserve methodology to more effectively incorporate the most recent observable data and trends. This is consistent with the improved risk segmentation and qualitative analysis and modeling performed for other similar reserve estimates, and consistent with expectations of the Bank's primary regulator and the continuing evaluation of the performance dynamics within the mortgage industry. The Company's enhanced first quarter 2012 methodology and related model refines previous estimates by adding granularity to the model by segmenting the sold portfolio by vintage years and investor to assign assumptions specific to each segment. Key assumptions in the model include investor audits, demand requests, appeal loss rates, loss severity, and recoveries.

The increase in the overall reserve balance during the three and nine months ended September 30, 2012 was primarily due to refinements in the estimation process as described above, consistent with a more conservative posture taken by the Bank's new primary regulator and a continuing evolution of the performance dynamics within the mortgage industry. In addition, the increase reflected both charge-offs of certain loans previously sold into the secondary market and expectations of continued elevated levels of repurchase requests from government sponsored entities ("GSEs").

The Company routinely obtains information from the GSEs regarding the historical trends of demand requests, and occasionally obtains information on anticipated future loan reviews and potential repurchase demand projections. The Company believes this information provides helpful but limited insight in anticipating GSE behavior, thus helping to better estimate future repurchase requests and validate representation and warranty assumptions. Estimating the balance of the representation and warranty reserve involves using assumptions regarding future repurchase request volumes, expected loss severity on these requests and claims appeal success rates. Notwithstanding the information obtained from the GSEs, the assumptions used to estimate the representation and warranty reserve contain a level of uncertainty and risk that could have a material impact on the representation and warranty reserve balance if they differ from actual results. To assess the sensitivity of the representation and warranty reserve model to adverse changes, management periodically runs a sensitivity analysis using its reserve model by assuming hypothetical increases in the level of repurchase volume.

Note 15 – Warrant Liabilities

May Investors

In full satisfaction of the Company’s obligations under anti-dilution provisions applicable to certain investors (the "May Investors") in the Company’s May 2008 private placement capital raise, the Company granted warrants (the "May Investor Warrants") to the May Investors on January 30, 2009 for the purchase of 142,598 shares of Common Stock at $62.00 per share. The holders of such warrants are entitled to acquire shares of Common Stock for a period of ten years. During 2009, May Investors exercised May Investor Warrants to purchase 31,484 shares of Common Stock. As a result of the Company’s registered offering on March 31, 2010, of 5.8 million shares of Common Stock at a price per share of $50.00 (as adjusted for the subsequent one-for-ten reverse stock split), the number of shares of the Company’s Common Stock issuable to the May Investors under the May Investor Warrants was increased by 26,667 and the exercise price was decreased to $50.00 pursuant to the antidilution provisions of the May Investors Warrants. As a result of the Company’s registered offering on November 2, 2010 of 11.6 million shares of Common Stock at a price per share of $10.00, the number of shares of Common Stock issuable to the May Investors under the May Investor Warrants was increased by 551,126 and the exercise price was decreased to $10.00 pursuant to the antidilution provisions of the May Investors Warrants. For the ninethree months ended September 30, 2012March 31, 2013, no shares of Common Stock were issued upon exercise of May Investor Warrants, and at September 30, 2012March 31, 2013, the May Investors held warrants to purchase 688,907 shares at an exercise price of $10.00.

Management believes the May Investor Warrants do not meet the definition of a contract that is indexed to the Company’s own stock under U.S. GAAP. Therefore, the May Investor Warrants are classified as liabilities rather than as an equity instrument and are measured at fair value, with changes in fair value recognized through operations.

On January 30, 2009, in conjunction with the capital investments, the Company recorded the May Investor Warrants at their fair value of $6.1 million. From the issuance of the May Investor Warrants on January 30, 2009 through September 30, 2012March 31, 2013, the

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Table of Contents

Company marked these warrants to market which resulted in a decreasean increase in the liability during this time of $0.21.7 million for the ninethree months ended September 30, 2012March 31, 2013. This decreaseincrease was recorded as warrant incomeexpense included in non-interest expense.


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Table of Contents

At September 30, 2012March 31, 2013, the Company's liabilities to the holders of May Investor Warrants amounted to $5.97.8 million. The warrant liabilities are included in "other liabilities" in the Consolidated Statements of Financial Condition.

Treasury Warrants

On January 30, 2009, the Company sold to the U.S. Treasury 266,657 shares of Series C fixed rate cumulative non-convertible perpetual preferred stock ("Series C Preferred Stock") and a warrant to purchase up to approximately 0.7 million645,138 shares of Common Stock at an exercise price of $62.00 per share (the "Treasury Warrant") for $266.7 million. The issuance and the sale of the Series C Preferred Stock and Treasury Warrant were exempt from the registration requirements of the Securities Act of 1933, as amended. The Series C Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends quarterly at a rate of 5 percent per annum for the first five years, and 9 percent per annum thereafter. The Treasury Warrant became exercisable upon receipt of stockholder approval on May 26, 2009 and has a ten-year term.

The Company did not have available an adequate number of authorized and unissued shares of the Common Stock, therefore, during the first quarter 2009, the Company recorded a Treasury Warrant liability that arose in conjunction with the Company's participation in the TARP Capital Purchase Program. As described in Note 15 - Stockholders' Equity, the Company initially recorded the Treasury Warrant on January 30, 2009 at its fair value of $27.7 million. The Treasury Warrant was marked to market on March 31, 2009 resulting in an increase to the warrant liability of $9.1 million. Upon stockholder approval on May 26, 2009 to increase the number of authorized shares of Common Stock, the Company marked the liability to market at that date and reclassified the Treasury Warrant liability to additional paid in capital. The mark to market adjustment on May 26, 2009 resulted in an increase to the warrant liability of $12.9 million during the second quarter 2009. This increase was recorded as warrant expense and included in non-interest expense.

Note 16 – Stockholders’ Equity

On September 24, 2012, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Articles of Incorporation to effect a reverse stock split of common stockCommon Stock with the exact exchange ratio and timing of the reverse stock split to be determined at the discretion of the Company’s board of directors. The Company's board of directors approved a one-for-ten reverse stock split which began trading on a post-split-basis October 11, 2012. In lieu of fractional shares, stockholders received cash payments based on the common stock’sCommon Stock’s closing price on October 9, 2012 of $11.70 per share, which reflects the reverse stock split. The common stock par value per shares of Common Stock remained at $0.01 per share. All Common Stock and related per share amounts in the Consolidated Financial Statements and Notes to the Consolidated Financial Statements are reflected on an after-reverse-split basis for all periods presented.

Preferred Stock

Preferred stock with a par value of $0.01 and a liquidation value of $1,000 and additional paid in capital attributable to preferred stock at September 30, 2012March 31, 2013 is summarized as follows. 
 Rate 
Earliest
Redemption Date
 
Shares
Outstanding
 
Preferred
Shares
 
Additional
Paid in
Capital
 (Dollars in thousands)
Series C Preferred Stock5.0% January 31, 2012 266,657
 $3
 $258,970
 Rate 
Earliest
Redemption Date
 
Shares
Outstanding
 
Preferred
Shares
 
Additional
Paid in
Capital
 (Dollars in thousands)
Series C Preferred Stock5.0% January 31, 2012 266,657
 $3
 $261,825

See Note 15 - Warrant Liabilities, for further information regarding the Series C Preferred Stock.

Deferral of Dividend Payments

On January 27, 2012,, the Company provided notice to the U.S. Treasury exercising theexercised its contractual right to defer regularly scheduled quarterly payments of dividends, beginning with the February 2012 payment, on preferred stock issued and outstanding in connection with participation in the TARP Capital Purchase Program. These payments will be periodically evaluated and reinstated when appropriate, subject to the provisions of the Supervisory Agreement. Under the terms of the preferred stock, the Company may defer payments of dividends for up to six quarters in total without default or penalty. Concurrently, the Company also exercised contractual rights to defer interest payments with respect to trust preferred securities. See Note 13 - Long-Term Debt.


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Accumulated Other Comprehensive GainIncome (Loss)

The following table sets forth the components in accumulated other comprehensive gainincome (loss) for each type of available-for-sale security.
Pre-tax Amount 
Income Tax Expense (Benefit) (1)
 After-Tax AmountPre-tax Amount 
Income Tax (Expense) Benefit (1)
 After-Tax Amount
(Dollars in thousands)(Dollars in thousands)
Accumulated other comprehensive gain (loss)     
Accumulated other comprehensive income (loss)     
Net unrealized gain (loss) on securities available-for-sale,          
September 30, 2012     
March 31, 2013     
U.S. government sponsored agencies$2,682
 $
 $2,682
$2,164
 $
 $2,164
FSTAR 2006-1 securitization trust(10,832) 6,108
 (4,724)(8,928) 6,108
 (2,820)
Total net unrealized gain (loss) on securities available-for-sale$(8,150) $6,108
 $(2,042)$(6,764) $6,108
 $(656)
Net unrealized gain (loss) on securities available-for-sale,          
December 31, 2011     
Non-agency collateralized mortgage obligations$(23,095) $20,608
 $(2,487)
December 31, 2012     
U.S. government sponsored agencies2,211
 (728) 1,483
$2,389
 $
 $2,389
FSTAR 2006-1 securitization trust(12,923) 6,108
 (6,815)(10,155) 6,108
 (4,047)
Total net unrealized gain (loss) on securities available-for-sale$(33,807) $25,988
 $(7,819)$(7,766) $6,108
 $(1,658)
(1)The income tax (expense) benefit reflects the amount which existed at the time the Company established the valuation allowance for deferred securities that were held at the date disposed or matured.

Note 17 – Earnings (Loss) Per Share

Basic earnings (loss) per share excludes dilution and is computed by dividing earnings (loss) available to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised and converted into Common Stock or resulted in the issuance of Common Stock that could then share in the earnings (loss) of the Company.

On September 24, 2012, the Company's stockholders approved an amendment to the Company’s Amended and Restated Articles of Incorporation to effectaffect a reverse split of the Common Stock at any time prior to October 24, 2012, at an exchange rate of one-for-ten. The BoardCompany's board of Directorsdirectors on September 27, 2012 approved the one-for-ten reverse stock split, which began trading on a post-split basis on October 11, 2012. In lieu of fractional shares, stockholders received cash payments based on the Common Stock's closing price on October 9, 2012 of $11.70 per share, which reflected the reverse stock split. The par value of the Common Stock remained at $0.01 per share.

    

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The following tables set forth the computation of basic and diluted earnings (loss) per share of Common Stock for the three and nine months ended September 30,March 31, 2013 and 2012 and 2011. 
For the Three Months Ended September 30, 2012 For the Three Months Ended September 30, 2011For the Three Months Ended March 31, 2013 For the Three Months Ended March 31, 2012
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Earnings 
Weighted
Average  Shares
 
Per Share
Amount
 Loss 
Weighted
Average
 Shares
 
Per Share
Amount
Earnings 
Weighted
Average  Shares
 
Per Share
Amount
 Loss 
Weighted
Average
 Shares
 
Per Share
Amount
Net income (loss)$81,110
   $
 $(9,480)   $
$23,607
   $
 $(7,309)   $
Less: preferred stock dividend/accretion(1,417)   
 (4,719)   
(1,438)   
 (1,407)   
Basic earnings (loss) per share79,693
     (14,199)    22,169
     (8,716)    
Deferred cumulative preferred stock dividends(3,481) 
 
 
 
 
(3,525) 
 
 (3,333) 
 
Net income (loss) applicable to Common Stock76,212
 55,802
 1.37
 (14,199) 55,449
 (0.26)18,644
 55,974
 0.33
 (12,049) 55,662
 (0.22)
Effect of dilutive securities                      
Warrants
 
 
 
 
 

 252
 
 
 
 
Stock-based awards
 431
 (0.01) 
 
 

 189
 
 
 
 
Diluted earnings (loss) per share                      
Net income (loss) applicable to Common Stock$76,212
 56,233
 $1.36
 $(14,199) 55,449
 $(0.26)$18,644
 56,415
 $0.33
 $(12,049) 55,662
 $(0.22)

Due to the loss attributable to common stockholders for the three months ended September 30, 2011March 31, 2012, the diluted loss per share calculation excludes all common stockCommon Stock equivalents, in the amount ofincluding 1,334,0491,334,045 shares pertaining to warrants and 250,407 shares pertaining to stock-based awards. The inclusion of these securities would be anti-dilutive.

 For the Nine Months Ended September 30, 2012 For the Nine Months Ended September 30, 2011
 (Dollars in thousands, except per share data)
 Earnings 
Weighted
Average  Shares
 
Per Share
Amount
 Loss 
Weighted
Average
 Shares
 
Per Share
Amount
Net income (loss)$161,187
   $
 $(106,613)   $
Less: preferred stock dividend/accretion(4,241)   
 (14,148)   
Basic earnings (loss) per share156,946
     (120,761)    
Deferred cumulative preferred stock dividends(10,294) 
 
 
 
 
Net income (loss) applicable to Common Stock146,652
 55,735
 2.63
 (120,761) 55,400
 (2.18)
Effect of dilutive securities           
Warrants
 
 
 
 
 
Stock-based awards
 349
 (0.02) 
 
 
Diluted earnings (loss) per share           
Net income (loss) applicable to Common Stock$146,652
 56,084
 $2.61
 $(120,761) 55,400
 $(2.18)
Due to the loss attributable to common stockholders for the nine months ended September 30, 2011, the diluted loss per share calculation excludes all common stock equivalents in the amount of 1,334,049 shares pertaining to warrants and 258,820172,029 shares, pertaining to stock-based awards. The inclusion of these securities would be anti-dilutive.

Note 18 – Compensation Plans

Stock-Based Compensation

For the three and nine months ended September 30, 2012March 31, 2013, the Company recorded stock-based compensation expense of $1.81.5 million and $5.3 million, respectively, compared to $1.8 million and $5.41.7 million for the three and nine months ended September 30, 2011March 31, 2012, respectively..




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Incentive Compensation Plan

The Incentive Compensation Plans ("Incentive Plans") are administered by the compensation committee of the Company's board of directors. The Incentive Plans include department specific plans, which include commercial lending, banking, underwriting and others, as well as a general incentive plan. Each year, the compensation committee decides which employees of the Company will be eligible to participate in the general incentive planplans and the size of the bonus pool. During the three and nine months ended September 30, 2012 and 2011, respectively, all eligible members of the executive management team were included in the general incentive plan. The Company incurred a $8.4 million and $22.09.1 million expense for the three and nine months ended September 30, 2012March 31, 2013, respectively, compared to expenses of $6.3 million and $15.47.1 million for the three and nine months ended September 30, 2011March 31, 2012, respectively..

Note 19 – Income Taxes

The Company periodically reviews the carrying amount of the deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. In evaluating this available evidence, the Company considers historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earningearnings trends and the timing of reversals of temporary differences. The Company's evaluation is based on current tax laws as well as expectations of future performance.

The Company had cumulative pre-tax losses from the third quarter 2007 to the third quarter 2009 and continuing through first quarter 2012 and2012. This factor was considered this factor in the analysis of deferred tax assets. Additionally, based on the continued economic uncertaintyuncertainties that persists at thishave persisted since that time it was probablemore likely than not that the Company would not generate significant pre-tax income in the near term. As a result of these two significant facts,factors, the Company established a valuation allowance on its deferred tax asset during the third quarter 2009. TheBecause management believes it is still more likely than not that it will not realize the benefits of existing net deferred tax assets, the Company's net deferred tax assets of $309.1334.2 million and $383.8341.9 million at September 30, 2012March 31, 2013 and December 31, 20112012, respectively, have been entirely offset by a valuation allowance. A valuation allowance is established when management determines that it is more likely than not that all or a portion

54

Table of the Company’s net deferred tax assets will not be realized in future periods.Contents


For the three months ended September 30, March 31, 2013 and 2012, the net benefit for federal income taxes as a percentage of pretaxpre-tax income was (33.6)zero percent, compared to a provision of 2.9 percent for the three months ended September 30, 2011. During the three months ended September 30, 2012March 31, 2013, the variance to the statutory rate of 35 percent was attributable to a $24.5(7.3) million reductionchange to the valuation allowance for net deferred tax assets, certain non-deductible corporate expenses of $19.90.3 million, and non-taxable warrant income of tax benefits representing the recognition of the residual tax effect associated with previously unrealized losses on securities available-for-sale recorded in other comprehensive income, $3.3(1.2) million from income recorded in other comprehensive income and $(0.6) million in other net miscellaneous items.. The variance to the statutory rate of 35 percent for the three months ended September 30, 2011March 31, 2012 was attributable to a $4.90.4 million additionchange to valuation allowance for net deferred tax assets, certain non-deductible corporate expenses of $0.40.7 million and non-deductible, non-taxable warrant income of $1.50.9 million.

For the nine months ended September 30, 2012, the net benefit for federal income taxes as a percentage of pretax income was (14.1) percent, compared to a provision of 0.7 percent for the nine months ended September 30, 2011. During the nine months ended September 30, 2012, the variance to the statutory rate of 35 percent was attributable to a $59.6 million reduction to the valuation allowance for net deferred tax assets, $19.9 million of tax benefits representing the recognition of the residual tax effect associated with previously unrealized losses on securities available-for-sale recorded in other comprehensive income, $9.0 million, from income recorded in other comprehensive income and $1.10.6 million in other net miscellaneous items. The variancechange to the statutory rate of 35 percent for the nine months ended September 30, 2011 was attributable to a $39.4 million addition to the valuation allowance for net deferredalternative minimum tax assets, certain non-deductible corporate expenses of $1.2 million and non-deductible warrant income of $2.5 million.credit carryforwards.

The Company's income tax returns are subject to examination by federal, state and local government authorities. On an ongoing basis, numerous federal, state and local examinations are in progress and cover multiple tax years. As of September 30, 2012March 31, 2013, the Internal Revenue Service had completed examination of the Company's income tax returns through the years ended December 31, 2008. The years open to examination by state and local government authorities vary by jurisdiction.


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Note 20 – Legal Proceedings, Contingencies and Commitments

Legal Proceedings

The Company and certain subsidiaries are subject to various pending or threatened legal proceedings arising out of the normal course of business or operations. Although there can be no assurance as to the ultimate outcome of these proceedings, the Company, together with its subsidiaries, believes it has meritorious defenses to the claims presently asserted against the Company, including the matters described below. With respect to such legal proceedings, the Company intends to continue to defend itself vigorously, litigating or settling cases according to management's judgment as to the best interests of the Company and its shareholders.stockholders.

On at least a quarterly basis, the Company assesses the liabilities and loss contingencies in connection with pending or threatened legal proceedings utilizing the latest information available. In accordance with ASC 450, (formerly SFAS 5), the Company establishes reserves for legal claims and regulatory matters when the Company believes it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, accrued reserves are adjusted from time to time, as appropriate, in light of additional information.

ResolutionResolutions of legal claims are inherently dependent on the specific facts and circumstances of each specific case, and therefore the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved. Based on current knowledge, and after consultation with legal counsel, management believes that current reserves are adequate and the amount of any incremental liability that may otherwise arise is not expected to have a material adverse effect on the Company's consolidated financial condition or results of operations. Certain legal claims considered by the Company in its analysis of the sufficiency of its related reserves include the following.

DOJ Litigation settlementSettlement

On February 24, 2012, the Company announced that the Bank had entered into the DOJ Agreement relating to certain underwriting practices associated with loans insured by FHA. The Bank and the DOJ entered into the DOJ Agreement pursuant to which the Bank agreed to:

complyComply with all applicable HUD and FHA rules related to the continued participation in the direct endorsement lender program;
makeMake an initial payment of $15.0 million within 30 business days of the effective date of the DOJ Agreement (which was paid on April 3, 2012);
makeMake the Additional Payments of approximately $118.0 million contingent only upon the occurrence of certain future events (as further described below); and
completeComplete a monitoring period by an independent third party chosen by the Bank and approved by HUD.

Subject to the Bank’sBank's full compliance with the terms of the DOJ Agreement, the DOJ, HUD, and FHA, agreed to:government agreed:

immediatelyImmediately release the Bank and all of the current orand former officers, directors, employees, affiliates and assigns from any civil or administrative claim it has or may have under various federal laws, the common law or equitable theories of fraud or mistake of fact in connection with the mortgage loans the Bank endorsed for FHA insurance during the period January 1, 2002 to the date of the DOJ Agreement (the "Covered Period");

not
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Not refuse to pay any insurance claim or seek indemnification or other relief in connection with the mortgage loans the Bank endorsed for FHA insurance during the Covered Period but for which no claims have yet been paid on the basis of the conduct alleged in the complaint or referenced in the DOJ Agreement; and
notNot seek indemnification or other relief in connection with the mortgage loans the Bank endorsed for FHA insurance during the Covered Period and for which HUD has paid insurance claims on the basis of the conduct alleged in the complaint or referenced in the DOJ Agreement.

As of September 30, 2012March 31, 2013, the Bank has accrued $$19.1 million, which represents the fair value of the Additional Payments. See Note 3 - Fair Value Accounting, for further information on the fair value of the DOJ litigation settlement. Other than as set forth above, the DOJ Agreement does not have any effect on FHA insured loans in our portfolio, including loans classified as loans repurchased with government guarantees as discussed in Note 6 - Loans Repurchased With Government Guarantees. The Company believes that such loans retain FHA insurance, and the Company continues to process such loans for insurance claims in the normal course and receive payments thereon from the FHA. Based on the experience subsequent to the Bank's agreement with the DOJ, the Company believes such claims are not subject to denial or dispute other than in the normal course of insurance claim processing.

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ERISA Litigation

In February 2010, the Company was named as a defendant in a putative class action filed in the U.S. District Court alleging that it violated its fiduciary duty pursuant to the Employee Retirement Income Security Act ("ERISA") to employees who participated in the Company's 401(k) plan ("Plan") by continuing to offer Company stock as an investment option after investment in the stock allegedly ceased to be prudent. On July 16, 2010, the Company moved to dismiss the complaint and asserted, among other things, that the Plan's investment in employer stock was protected by a presumption of prudence under ERISA, and that plaintiff's allegations failed to overcome such presumption. On March 31, 2011, the court granted the Company's motion and dismissed the case. The plaintiffs appealed the matter to the U.S. Court of Appeals for the Sixth Circuit. On July 23, 2012, the Court of Appeals issued a ruling, reversing the district court's dismissal and remanding the case to the district court for further proceedings.

Mortgage-Related Litigation, Regulatory and Other Matters

Regulatory Matters
 
From time to time, governmental agencies conduct investigations or examinations of various mortgage related practices of the Bank. Currently, ongoing investigations relate to whether the Bank violated laws or regulations relating to mortgage origination or servicing practices and to whether its practices with regard to servicing residential first mortgage loans are adequate. The Bank is cooperating with such agencies and providing information as requested. In addition, the Bank has routinely been named in civil actions throughout the country by borrowers and former borrowers relating to the origination, purchase, sale and servicing of mortgage loans.

Repurchase Demands and Indemnification Claims

In the normal course of its operations, the Bank receives repurchase and indemnification demands from counterparties involved with the purchase of residential first mortgages for alleged breaches of representations and warranties. The Bank establishes a representation and warranty reserve in connection with the estimated potential liability for such potential demands.

In 2009 and 2010, the Bank received repurchase demands from Assured with respect to HELOCs that were sold by the Bank in connection with the HELOC securitizations. Assured is the note insurer forof each of the two HELOC securitizations completed by the Bank. In April 2011, Assured filed a lawsuit against the Bank in the U.S. District Court for the Southern District of New York, alleging a breach of various loan level representations and warranties and seeking relief for breach of contract, as well as full indemnification and reimbursement of amounts that it had paid under the respective insurance policy,policies, plus interest and costs. Assured is seekingsought $111.0 million in damages. Ondamages (the "Assured Litigation"). In March 1, 2012, the courtCourt dismissed Assured's claims for indemnification and reimbursement, but allowed the case to proceed on the breach of contract claims related to the Bank's repurchase obligations. The courtCourt issued a memorandum opinion onin September 25, 2012, supporting and explaining the court'sCourt's March 1 decision. In the memorandum, the courtCourt stated that the principal issue in the case iswas whether the Bank's breach of representations and warranties materially increased the risk of loss to Assured at the time of the securitization, as compared to the risk of loss that Assured reasonably should have expected. The bench trial began onin October 10, 2012 and the Company expects that it will concludeconcluded with closing arguments in November 2012. In February 2013, the Court issued a decision in favor of Assured on its claims for breach of contract against the Bank in the amount of $89.2 million, plus contractual interest and attorneys' fees and costs. On April 1, 2013, the Court issued a final judgment against the Company for a total of $106.5 million, consisting of $90.7 million in damages plus $15.9 million in pre-judgment interest. The courtBank filed a notice of appeal later that month. The Court subsequently issued a memorandum order, in which the Court reserved the decision regarding the amount of attorneys' fees to which Assured is entitled until after the appeal.

In May 2010, the Bank received repurchase demands from MBIA with respect to closed-end, fixed and adjustable second mortgage loans that were sold by the Bank in connection with its two non-agency second mortgage loan securitizations. MBIA is the note insurer of each of the two second mortgage loan securitizations completed by the Bank. On January 11, 2013, MBIA filed a complaint against the Bank in the U.S. District Court for the Southern District of New York, alleging a breach of various loan level representations and warranties and seeking relief for breach of contract, as well as full indemnification and reimbursement of amounts that it has not informedpaid and will pay under the respective insurance policies, plus interest and costs (the "MBIA Litigation"). In the MBIA Litigation, MBIA alleges damages to date of $165.0 million and unspecified future damages. In March 2013, the Bank filed a motion to dismiss, and MBIA filed a motion for partial summary judgment on the basis of collateral estoppel. The parties when they can expectare scheduled to complete a decision.briefing and make oral arguments on these motions in May 2013.

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In May 2012, the Bank and Flagstar Reinsurance Company were named as defendants in a putative class action lawsuit filed in the United StatesU.S. District Court for the Eastern District of Pennsylvania, alleging a violation of Section 8 provisions2607 of the Real Estate Settlement Procedures Act ("RESPA"). Section 82607(a) of RESPA generally prohibits anyone from accepting"accept[ing] any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business related incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." Section 82607(b) of RESPA also prohibits anyone from accepting"accept[ing] any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a federally related mortgage loan other than for services actually performed." The lawsuit specifically alleges that the Bank and Flagstar Reinsurance Company violated Section 82607 of RESPA through a captive reinsurance arrangement involving (i) allegedly illegal payments to Flagstar Reinsurance Company for the referral of private mortgage insurance business from Bank to private mortgage insurers to Flagstar Reinsurance Company and (ii) Flagstar Reinsurance Company's purported receipt of an unlawful split of private mortgage insurance premiums. In January 2013, the plaintiffs filed a First Amended Complaint identifying new plaintiffs. The Bank is inCompany has filed a motion to dismiss the beginning stagesFirst Amended Complaint based upon the statute of evaluatinglimitations and equitable tolling and awaits the allegations in the complaint, but intends to vigorously defend against such allegations.court's ruling on that motion.

Accrued ReservesLitigation Accruals and Other Possible Contingent Liabilities

When establishing a reservean accrual for contingent liabilities, the Company determines a range of potential losses for each matter that is probable to result in a loss and where the amount of the loss can be reasonably estimated. The Company then records the

60


amount it considers to be the best estimate within the range. As of September 30, 2012,March 31, 2013, the Company's accrued reservetotal accrual for contingent liabilities was $59.5247.9 million. In addition, within, which includes the representationaccruals for the Assured Litigation, the MBIA Litigation, the DOJ Agreement and warranty reserve, the Bank includes loans sold to certain non-agency securitization trusts.other pending cases. There may be further losses that could arise, but the occurrence of which is not probable (but is reasonably possible), or the amount of which is not reasonably estimable, and therefore reservesestimable; in either case, accruals for such amountslosses are not required to be accrued.required. The Company estimateshas determined based upon available information that suchthere is no loss contingency that is reasonably possible (but not probable) to result in further losses couldand where the Company can reasonably estimate the amount up to $2.0 million inof the aggregate. Notwithstandingpossible loss or the foregoing, inrange of possible loss. In the event of one or more unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, could result in a higher loss that, individually or in the aggregate, may be material to the Company's results of operations, or cash flows, for any particular period.

Contingencies and Commitments

A summary of the contractual amount of significant commitments is as follows.
September 30, 2012 December 31, 2011March 31, 2013 December 31, 2012
(Dollars in thousands)(Dollars in thousands)
Commitments to extend credit      
Mortgage loans (interest-rate lock commitments)$6,634,000
 $3,870,000
$3,740,000
 $5,150,000
HELOC trust commitments60,000
 64,000
57,000
 58,000
Standby and commercial letters of credit(1)66,000
 72,000
2,500
 66,000
(1)The decrease is primarily related to the sale of commercial loans associated with the CIT Agreement

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. Certain lending commitments for mortgage loans to be sold in the secondary market are considered derivative instruments in accordance with accounting guidance ASC Topic 815, "Derivatives and Hedging". Changes to the fair value of these commitments as a result of changes in interest rates are recorded on the Statements of Financial Condition as an other asset. The commitments related to mortgage loans are included in mortgage loansdisclosed in the above table. The Company sold $63.0 million of Northeast-based commercial letters of credit during the first quarter 2013.

The Company enters into forward contracts for the future delivery or purchase of agency and loan sale contracts. These contracts are considered to be derivative instruments under U.S. GAAP. Changes to the fair value of these forward loan sales as a result of changes in interest rates are recorded on the Consolidated Statements of Financial Condition as an other asset. Further discussion on derivative instruments is included in Note 11 –11- Derivative Financial Instruments.

The Company has unfunded commitments under its contractual arrangement with the HELOC securitization trusts to fund future advances on the underlying home equity lines of credit.HELOC. Refer to further discussion of this issue as presented in Note 9 – Private-label Securitization Activity.

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

57


and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party.

The credit risk associated with loan commitments, standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s credit assessment of the customer. The guarantee liability for standby and commercial letters of credit was less than $0.70.1 millionat September 30, 2012March 31, 2013 and $8.20.1 million at December 31, 20112012, respectively.



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Note 21 – Segment Information

The Company’sCompany's operations are generally conducted through twothree businessoperating segments: bankingCommunity Banking, Mortgage Banking and home lending.Other. The operating segments have been identified based on the Company's organizational and management structure. Each business operates under the same banking charter, but is reported on a segmented basis for this report. Each of the business linesoperating segments is complementary to each other. The banking operation includes the gathering of depositsother and investing those deposits in duration-matched assets primarily originated by the home lending operation. The banking group holds these loans in the investment portfolio in order to earn income based on the difference or "spread" between the interest earned on loans and the interest paid for deposits and other borrowed funds. The home lending operation involves the origination, packaging, and sale of loans in order to receive transaction income. The lending operation also services mortgage loans for others and sells MSRs into the secondary market. Funding for the lending operation is provided by deposits and borrowings garnered by the banking group. Allbecause of the non-bank consolidated subsidiaries are included ininterrelationships of the banking segment. No such subsidiarysegments, the information presented is materialnot indicative of how the segments would perform if they operated as independent entities. Certain prior period amounts have been reclassified to the Company’s overall operations.conform to current year presentation.

Revenues are comprised of net interest income (before the provision for loan losses) and non-interest income. Non-interest expenses are fully allocated to each operating segment. Allocation methodologies are subject to periodic adjustment as the internal management accounting system is revised and the business or product lines within the segments change. Also, because the development and application of these methodologies is a dynamic process, the financial results presented may be periodically revised.

The Community Banking segment originates loans and deposits to consumer, business and mortgage lending customers through its Branch Banking, Business and Commercial Banking, Government Banking, and Warehouse Lending groups. Products offered through these teams include checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, commercial loans and warehouse lines of credit. Other financial services available to consumer and commercial customers include lines of credit, revolving credit, customized treasury management solutions, equipment leasing, inventory and accounts receivable lending and capital markets services such as interest rate risk protection products.

The Mortgage Banking segment originates, acquires, sells and services mortgage loans. The origination and acquisition of mortgage loans is the majority of the lending activity. Mortgage loans are originated through home lending centers, national call centers, the Internet, unaffiliated banks and mortgage brokerage companies, where the net interest income and the gains from sales associated with these loans are recognized in the Mortgage Banking segment. Also, the Mortgage Banking segment services mortgage loans for others and sells mortgage servicing rights ("MSRs") into the secondary market.

The intersegment income (expense) consistsOther segment includes the funding revenue associated with stockholders' equity, the impact of interest expense incurred for intersegment borrowing.rate risk management, the impact of balance sheet funding activities, changes or credits of an unusual or infrequent nature that are not reflective of the normal operations of the operating segments and miscellaneous other expenses of a corporate nature. In addition, the Other segment includes revenue and expenses related to treasury and corporate assets, liabilities and equity not directly assigned or allocated to the Community Banking or Mortgage Banking operating segments.


58


The following table presents financial information by business segment for the periods indicated.
 At or For the Three Months Ended September 30, 2012
 
Bank
Operations
 
Home
Lending
Operations
 Elimination Combined
 (Dollars in thousands)
Net interest income$35,432
 $37,647
 $
 $73,079
Gain on sale revenue2,616
 333,332
 
 335,948
Other (expense) income13,941
 (76,152) 
 (62,211)
Total net interest income and non-interest income51,989
 294,827
 
 346,816
(Loss) income before federal income taxes(84,657) 145,387
 
 60,730
Depreciation and amortization2,498
 2,750
 
 5,248
Capital expenditures1,616
 6,234
 
 7,849
Inter-segment income (expense)23,805
 (23,805) 
 
Identifiable assets (period end)11,359,390
 6,713,832
 (3,174,000) 14,899,222
 At or For the Three Months Ended September 30, 2011
 
Bank
Operations
 
Home
Lending
Operations
 Elimination Combined
 (Dollars in thousands)
Net interest income$(20,925) $86,539
 $
 $65,614
Gain on sale revenue
 121,656
 
 121,656
Other income (expense)(6,298) (2,807) 
 (9,105)
Total net interest income and non-interest income(27,223) 205,388
 
 178,165
(Loss) income before federal income taxes(167,639) 158,423
 
 (9,216)
Depreciation and amortization1,460
 2,246
 
 3,706
Capital expenditures737
 8,947
 
 9,684
Inter-segment income (expense)22,013
 (22,013) 
 
Identifiable assets (period end)11,547,078
 5,025,395
 (2,935,000) 13,637,473
 For the Three Months Ended March 31, 2013
 Community Banking Mortgage Banking Other Total
Summary of Operations(Dollars in thousands)
Net interest income (loss)$30,122
 $45,013
 $(19,466) $55,669
Net gain on sale revenue150
 137,390
 
 137,540
Representation and warranty reserve - change in estimate
 (17,395) 
 (17,395)
Other non-interest income10,881
 50,345
 3,572
 64,798
Total net interest income and non-interest income41,153
 215,353
 (15,894) 240,612
Provision for loan losses(1,535) (18,880) 
 (20,415)
Asset resolution443
 (16,888) 
 (16,445)
Other non-interest expense(54,591) (118,060) (7,494) (180,145)
Total non-interest expense(54,148) (134,948) (7,494) (196,590)
Net income (loss)$(14,530) $61,525
 $(23,388) $23,607
        
Average balances       
Loans held-for-sale$622,196
 $2,993,999
 $
 $3,616,195
Loans held-for-investment1,556,031
 3,271,593
 7,065
 4,834,689
Total assets2,352,113
 9,045,217
 2,295,241
 13,692,571
Interest-bearing deposits6,961,067
 
 24,586
 6,985,653
        
 For the Three Months Ended March 31, 2012
 Community Banking Mortgage Banking Other Total
Summary of Operations(Dollars in thousands)
Net interest income (loss)$35,301
 $45,819
 $(6,387) $74,733
Net gain on sale revenue171
 204,682
 
 204,853
Representation and warranty reserve - change in estimate
 (60,538) 
 (60,538)
Other non-interest income9,358
 59,605
 8,099
 77,062
Total net interest income and non-interest income44,830
 249,568
 1,712
 296,110
Provision for loan losses(28,870) (85,803) 
 (114,673)
Asset resolution(5,132) (31,638) 
 (36,770)
Other non-interest expense(44,488) (91,228) (16,260) (151,976)
Total non-interest expense(49,620) (122,866) (16,260) (188,746)
Net income (loss)$(33,660) $40,899
 $(14,548) $(7,309)
        
Average balances       
Loans held-for-sale$
 $2,393,725
 $
 $2,393,725
Loans held-for-investment2,779,852
 3,957,412
 9,481
 6,746,745
Total assets2,886,737
 9,450,749
 1,869,690
 14,207,176
Interest-bearing deposits6,357,363
 
 290,680
 6,648,043


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 At or For the Nine Months Ended September 30, 2012
 
Bank
Operations
 
Home
Lending
Operations
 Elimination Combined
 (Dollars in thousands)
Net interest income$113,297
 $109,993
 $
 $223,290
Gain on sale revenue2,946
 745,291
 
 748,237
Other (expense) income42,927
 (55,716) 
 (12,789)
Total net interest income and non-interest income159,170
 799,568
 
 958,738
(Loss) income before federal income taxes(262,521) 403,828
 
 141,307
Depreciation and amortization5,313
 9,461
 
 14,774
Capital expenditures(3,132) 25,494
 
 22,362
Inter-segment income (expense)70,230
 (70,230) 
 
Identifiable assets (period end)11,359,390
 6,713,832
 (3,174,000) 14,899,222
 At or For the Nine Months Ended September 30, 2011
 
Bank
Operations
 
Home
Lending
Operations
 Elimination Combined
 (Dollars in thousands)
Net interest income$69,795
 $99,716
 $
 $169,511
Gain on sale revenue
 209,203
 
 209,203
Other income (expense)6,019
 51,673
 
 57,692
Total net interest income and non-interest income75,814
 360,592
 
 436,406
(Loss) income before federal income taxes(278,620) 172,799
 
 (105,821)
Depreciation and amortization4,437
 6,434
 
 10,871
Capital expenditures1,425
 27,713
 
 29,138
Inter-segment income (expense)68,955
 (68,955) 
 
Identifiable assets (period end)11,547,078
 5,025,395
 (2,935,000) 13,637,473


6359


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, and Flagstar Capital Markets Corporation ("FCMC"), its wholly-owned subsidiary, which we collectively refer to as the "Bank."

General

We are a Michigan basedMichigan-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.bank founded in 1987. At September 30, 2012March 31, 2013, our total assets were $14.913.1 billion, making us the largest publicly held savings bank headquartered in the MidwestMichigan and one of the top 10 largest savings banks in the United States. Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "FBC." We are considered a controlled company for New York Stock Exchange ("NYSE")NYSE purposes, because MP Thrift Investments, L.P. ("MP Thrift") held approximately 63.863.5 percent of our common stock as of September 30, 2012March 31, 2013.

As a savings and loan holding company, we are subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve (the "Federal Reserve"). The Bank is subject to regulation, examination and supervision by the Office of the Comptroller of the Currency ("OCC") of the United StatesU.S. Department of the Treasury ("U.S. Treasury"). The Bank is also subject to regulation, examination and supervision by the Federal Deposit Insurance Corporation ("FDIC") and the Bank's deposits are insured by the FDIC through the Deposit Insurance Fund ("DIF"). The Bank is also subject to the rule-making, supervision and examination authority of the Consumer Financial Protection Bureau (the "CFPB"), which is responsible for enforcing the principal federal consumer protection laws. The Bank is a member of the Federal Home Loan Bank ("FHLB") of Indianapolis.

AtOur primary business is conducted through our Mortgage Banking segment, in which we originate or purchase residential first mortgage loans throughout the country and sell them into securitization pools, primarily to Fannie Mae, Freddie Mac and Ginnie Mae (collectively, government sponsored entities or the "GSEs") or as whole loans. Approximately 99.4 percent of our total loan originations during the three months ended September 30, 2012, we operated 111March 31, 2013 banking centers (ofrepresented mortgage loans that were collateralized by residential first mortgages on single-family residences and were eligible for sale. Our revenue primarily consists of net gain on loan sales, loan fees and charges, net loan administration income, and interest income from residential first mortgage loans held-for-investment and held-for-sale, and second mortgage loans held-for-investment. We originate residential first mortgage loans through our wholesale relationships with over 1,600 mortgage brokers and over 1,100 correspondents, which15 are located in retail stores), all located in Michigan. Of the 111 banking centers, 66 facilities are owned50 states and 45 facilities are leased. Since early 2011, we have operated four commercial banking offices in the New England region. Through our banking centers, we gather deposits and offer a line of consumer and commercial financial products and services to individuals and businesses. We provide deposits and cash management services to governmental units on a relationship basis. We leverage our banking centers and internet banking to cross-sell products to existing customers and increase our customer base. At September 30, 2012, we had a total of $9.5 billion in deposits, including $6.1 billion in retail deposits, $0.9 billion in government funds and $0.3 billion in wholesale deposits.

serviced by 135 account executives. We also operate 31 loan origination41 home lending centers located in 1419 states, which primarily originate one-to-four family residential first mortgage loans as part of our retail home lending business.Mortgage Banking segment. These officesloan origination centers employ approximately 200187 loan officers. We also originate retailmortgage loans through referrals from our111 retail banking centers, consumer direct call center and our website, flagstar.com. Additionally, we have wholesale relationships with over 1,800 mortgage brokers and approximately 1,400 correspondents, which are located in all 50 states and serviced by 134 account executives.www.flagstar.com. The combination of our retail,home lending, broker and correspondent channels gives us broad access to customers across diverse geographies to originate, fulfill, sell and service our residential first mortgage loan products. Our servicing activities primarily include collecting cash for principal, interest and escrow payments from borrowers, assisting homeowners through loss mitigation activities, and accounting for and remitting principal and interest payments to investors and escrow payments to third parties.

Our revenues includebusiness also includes the activities conducted through our Community Banking segment, in which our revenue includes net interest income and fee-based income from community banking services. At March 31, 2013, we operated 111 banking centers (of which 11 are located in retail stores), all of which are located in Michigan. Of the 111 banking centers, 67 facilities are owned and 44 facilities are leased. Through our personal financial servicesbanking centers, we gather deposits and offer a line of consumer and commercial financial products and services to individuals and businesses. We provide deposit and cash management services to governmental units on a relationship basis. We leverage our banking activities, fee‑based income from services we providecenters to cross-sell loan and deposit products to existing customers and non-interest income from salesto increase our customer base by attracting new customers. At March 31, 2013, we had a total of residential first mortgage loans to the secondary market, the servicing of loans for others,$7.8 billion in deposits, including $6.2 billion in retail deposits, $0.8 billion in company controlled deposits, $0.8 billion in government deposits, and the sale of servicing rights related to mortgage loans serviced for others. Approximately 98 percent of our total loan originations during the nine months ended September 30, 2012 represented mortgage loans that were collateralized by residential first mortgages on single-family residences and were eligible for sale through the government sponsored enterprises ("GSEs") and Ginnie Mae.$0.1 billion in wholesale deposits.

At September 30, 2012March 31, 2013, we had 3,5763,778 full-time equivalent salaried employees of which 336322 were account executives and loan officers.

6460


Operating Segments

Our business is comprised of two primary operating segments: bankingsegments - Community Banking and home lending.Mortgage Banking. Our banking operationCommunity Banking segment currently offers a line of consumer and commercial financial products and services to individuals, small and middle market businesses, and large corporate borrowers.mortgage lenders. Our home lending operationMortgage Banking segment originates, acquires, sells and services residential first mortgage loans on one-to-four family residences. In addition to the two primary segments, we also have an Other segment which includes corporate treasury, tax benefits not assigned to specific operating segments, and miscellaneous other expenses of a corporate nature. Each operating segment supports and complements the operations of the other, withother. For example, funding for the home lending operationMortgage Banking segment is primarily provided by deposits and borrowings obtained through the banking operation.Community Banking segment. Financial information regarding the twothree operating segments is set forth in Note 21 of the Notes to the Consolidated Financial Statements in Item 1. Financial Statements, and Supplementary Data.herein. A more detailed discussion of our twothe three operating segments is set forth below.

Bank OperationsCommunity Banking

Our bank operation (Personal Financial Services) isCommunity Banking segment consists primarily used to gather deposits, which fund the Bank's loan portfoliosof four groups: Branch Banking, Commercial and other interest-earning assets. We gather deposits through three delivery channels: Branch Network,Business Banking, Government Banking, and Business / Commercial Banking.

Branch Network consistsWarehouse Lending. Our Community Banking segment's two strategic responsibilities are providing a stable funding source for the Mortgage Banking segment and operating as a standalone, profitable line of Branchbusiness. The groups within the Community Banking segment originate consumer loans, commercial loans and Internet Banking. warehouse loans, gather consumer, business and governmental deposits, and offer liquidity management products. The liquidity management products include customized treasury management solutions, equipment and technology leasing, international services, capital markets services such as interest rate risk protection products, foreign exchange hedging, and trading of securities. At September 30, 2012March 31, 2013, Branch Banking included 111 banking centers located throughout Michigan.

Commercial and Business Banking includes relationship and portfolio managers throughout Michigan's major markets. Government Banking provides deposit and cash management services to all sizes of government units and school districts on a relationship basis throughout Michigan and, to a much lesser degree, Georgia. We intend to exit our Government banking managesBanking operations in Georgia during 2013. Warehouse Lending offers lines of credit to other mortgage lenders, allowing those lenders to fund the closing of residential first mortgage loans.

Our Community Banking segment intends to achieve its strategic objective of becoming a standalone, profitable line of business through implementation of a number of important initiatives, including strengthening the leadership team, enhancing the sales process, improving operating efficiencies, and developing a streamlined account opening strategy. Branch Banking intends to continue optimizing its network of offices through strategic growth and relocations. Commercial and Business Banking intends to continue its focus on acquiring new customer relationships throughout Michigan, and Government Banking anticipates acquiring new and expanding existing relationships through a focus on checking accounts and treasury services.

Our Community Banking segment's mission is to build strong and lasting relationships with various smallcustomers, and large government entitiessuch relationships are intended to include the delivery of multiple financial products and school districts.services. Regardless of whether customers are first introduced to us through a deposit account, mortgage loan, or other product, the Community Banking segment's focus is to strengthen those relationships by meeting multiple additional financial needs. Our Community Banking segment also cross-sells primary products, such as checking accounts, savings accounts, investment products, and consumer loans, to new and existing customers. Historically, these efforts contributed to incrementally higher relationship profitability and improved customer retention.
Commercial loans held-for-investment. Our Commercial and Business Banking group includes relationship and portfolio managers throughout Michigan's major markets. Our commercial loans held-for-investment totaled $676.4 millionat March 31, 2013 and $737.2 million at December 31, 2012, and consists of three loan types: commercial real estate, commercial and industrial and commercial lease financing, each of which is discussed in more detail below. During the three months ended March 31, 2013, we originated $66.2 million in commercial loans. The following table identifies the commercial loan held-for-investment portfolio by loan type and selected criteria at March 31, 2013.

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Commercial Loans Held-for-Investment
March 31, 2013Unpaid Principal Balance (1)Average Note RateLoan on Non-accrual Status
 (Dollars in thousands)
Commercial real estate loans:  
Fixed rate$284,511
5.55%$27,357
Adjustable rate278,968
3.72%38,738
Total commercial real estate loans563,479
 $66,095
Net deferred fees and other(563)  
Total commercial real estate loans$562,916
  
Commercial and industrial loans:  
Fixed rate$47,904
3.09%$
Adjustable rate60,131
3.02%40
Total commercial and industrial loans108,035
 $40
Net deferred fees and other(347)  
Total commercial and industrial loans$107,688
  
Commercial lease financing loans:  
Fixed rate$5,073
6.20%$
Net deferred fees and other742
  
Total commercial lease financing loans$5,815
  
Total commercial loans:  
Fixed rate$337,488
5.21%$27,357
Adjustable rate339,099
3.60%38,778
Total commercial and industrial loans676,587
 $66,135
Net deferred fees and other(168)  
Total commercial and industrial loans$676,419
  
(1)     Unpaid principal balance does not include premiums or discounts.

Business / At March 31, 2013, our commercial real estate loans held-for-investment totaled $562.9 million, or 11.9 percent of our held-for-investment loan portfolio, our commercial and industrial held-for-investment loan portfolio was $107.7 million, or 2.3 percent of our held-for-investment loan portfolio, and our commercial lease financing loans held-for-investment totaled $5.8 million, or 0.1 percent of our held-for-investment loan portfolio. At December 31, 2012, our commercial real estate held-for-investment loan portfolio totaled $640.3 million, or 11.8 percent of our held-for-investment loan portfolio, our commercial and industrial held-for-investment loan portfolio was $90.6 million, or 1.7 percent of our held-for-investment loan portfolio, and our commercial lease financing held-for-investment loans totaled $6.3 million, or 0.1 percent of our held-for-investment loan portfolio.

The following table sets forth the unpaid principal balance of our commercial loan held-for-investment portfolio at March 31, 2013 by year of origination.
Year of Origination
2009 and
Prior
 2010 2011 2012 2013 Total
 (Dollars in thousands)
Commercial real estate$412,560
 $12,401
 $29,907
 $76,434
 $32,177
 $563,479
Commercial and industrial1,392
 675
 37,161
 43,194
 25,613
 108,035
Commercial lease financing
 
 5,073
 
 
 5,073
Total$413,952
 $13,076
 $72,141
 $119,628
 $57,790
 $676,587

The average loan balance in our total commercial held-for-investment loan portfolio was approximately $0.9 million for the three months ended March 31, 2013, with the largest loan being $39.7 million. There are approximately 25 loans with more than $5.3 million of exposure and those loans comprised approximately $243.4 million, or 36.0 percent, of the total commercial held-for-investment loan portfolio.


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Commercial Banking engagesreal 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 deposit gathering through our teamsthe normal course of business and consists of commercial banking relationship managers.real estate loans originated prior to 2011, including commercial real estate loans refinanced during 2009 and 2010 and commercial real estate loans originated during 2011 and after.

Our banking operation may also borrow fundsThe following table discloses our total unpaid principal balance of commercial real estate held-for-investment loans by obtaining advances fromgeographic concentration at March 31, 2013.
 March 31, 2013
StatePercent Amount (1)
 (Dollars in thousands)
Michigan65.1% $366,490
Indiana7.7% 43,547
Virginia5.4% 30,524
Georgia5.2% 29,372
Florida2.5% 14,272
California2.5% 13,853
Other11.6% 65,421
Total100.0% $563,479
(1)Unpaid principal balance does not include premiums or discounts.

In early 2008, we ceased the FHLB or other federally backed institutions ororigination of commercial real estate loans and allowed the amortization of our remaining commercial real estate portfolio. For the management of such loans, we replaced the previous commercial real estate management and loan officers with experienced workout officers and relationship managers. In addition, we prepared a comprehensive review, including customized workout plans for all classified loans, and risk assessments were prepared on a loan level basis for the entire commercial real estate portfolio. Such loans are managed by entering into repurchase agreements with correspondent banks using investments as collateral.our special assets group, whose primary objectives are working out troubled loans, reducing classified assets and taking pro-active steps to prevent deterioration in performance. We expect to retain a portion of these loans in our loans held-for-investment portfolio while continuing to dispose of the remainder through workouts, charge offs and payoffs.

In additionFebruary 2011, we began originating commercial real estate loans under enhanced underwriting guidelines to deposit gathering, as partestablish commercial banking relationships and provide cross-sell opportunities. Management expects to continue to originate such loans with a focused concentration on the Michigan market.
Commercial and industrial loans. Commercial and industrial held-for-investment loan facilities typically include lines of the transformationcredit to a diversified full-service bank, our bank operation provides credit products to small or middle market businesses for use in normal business operations to finance working capital needs, equipment purchases and large corporate businesses, as well as offers consumer loans, investment and insurance products, and treasury management products and services.expansion projects.

Home Lending OperationsCommercial lease financing loans. Our commercial lease financing held-for-investment loan portfolio is comprised of equipment leased to customers in a direct financing lease. The net investment in financing leases includes the aggregate amount of lease payments to be received and the estimated residual values of the equipment, less unearned income. Income from lease financing is recognized over the lives of the leases on an approximate level rate of return on the unrecovered investment. The residual value represents the estimated fair value of the leased asset at the end of the lease term. Unguaranteed residual values of leased assets are reviewed at least annually for impairment. If any declines in residual values are determined to be other-than-temporary they will be recognized in earnings in the period such determinations are made.
Warehouse lending. We also continue to offer warehouse lines of credit to other mortgage lenders. These allow the lender to fund the closing of residential first mortgage loans. Each extension or drawdown on the line is collateralized by the residential first mortgage loan being funded. During the three months ended March 31, 2013, we subsequently acquired approximately 81.9 percent of residential first mortgage loans funded through the warehouse lines. Underlying mortgage loans are predominately originated using GSE underwriting standards. These lines of credit are, in most cases, personally guaranteed by one or more principal officers of the borrower. The aggregate committed amount of adjustable rate warehouse lines of credit granted to other mortgage lenders at March 31, 2013 was $2.3 billion, of which $0.8 billion was outstanding and bearing an average interest rate of 5.3 percent, compared to $2.3 billion committed at December 31, 2012, of which $1.3 billion was outstanding with an average interest rate of 5.4 percent. The levels of outstanding balances of such warehouse lines are generally correlated to the level of our overall production levels because many of our correspondents (from whom we purchase mortgage loans) are also warehouse lending customers. During the three months ended March 31, 2013, our warehouse lines funded approximately 58 percent of the

63


loans in our correspondent channel, as compared to approximately 68 percent during the three months ended December 31, 2012. There were 299 warehouse lines of credit to other mortgage lenders with an average size of $7.7 million at March 31, 2013, compared to 311 warehouse lines of credit with an average size of $7.5 million at December 31, 2012. At March 31, 2013 and December 31, 2012 we had no warehouse lines on non-accrual status.

Mortgage Banking

Our home lending operationMortgage Banking segment originates, acquires, sells and services one-to-four family residential first mortgage loans. The origination or acquisition of residential first mortgage loans held-for-sale constitutes our most significant lending activity. At September 30, 2012, approximately 49.7 percent of interest-earning assets remained in residential first mortgage loans on single-family residences.

During third quarter 2012 and continuing into 2013, we remained one of the country's leading mortgage loan originators. ThreeWe utilize three production channels were utilized to originate or acquire mortgage loans (Retail, Brokerloans: home lending centers (also referred to as "retail"), as well as brokers and Correspondent)correspondents (also collectively referred to as "wholesale"). Each production channel produces similar mortgage loan products and applies the same underwriting standards. We expect to continue to leverage technology to streamline the mortgage origination process and bring service and convenience to brokers and correspondents. Ten salesSales support offices wereare maintained that assist brokers and correspondents nationwide. We also continue to make increasing use of the Internet as a tool to facilitate the mortgage loan origination process through each of our production channels. Brokers correspondents and retail home loan centerscorrespondents 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. Virtually allMost mortgage loans that closed in 20112012 and continuing into 20122013 utilized the Internet in the completion of the mortgage origination or acquisition process.

Retail.Home Lending Centers.  In a retailhome lending center transaction, loans are originated through a nationwide network of our stand-alone home loan origination centers, as well as referrals from our retail banking centersBanking segment and the national call center. When loans are originated on a retail basis, the origination documentation is completed internally inclusive of customer disclosures and other aspects of the lending process and the funding of the transaction is completed internally.transactions. At September 30, 2012March 31, 2013, we maintained 3141 loan origination centers. At the same time, our centralized loan processing gained efficiencies and allowed lending sales staff to focus on originations. For the nine months ended September 30, 2012, we closed $2.4 billion of loans utilizing this origination channel, which equaled 6.4 percent of total originations, compared to $1.2 billion or 7.1 percent of total originations during the nine months ended September 30, 2011.
    


65


Broker.  In a broker transaction, an unaffiliated bank or mortgage brokerage company completes 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 over 1,8001,600 banks, orcredit unions, and mortgage brokerage companies located in all 50 states. For the nine months ended September 30, 2012, we closed loans totaling $10.2 billion utilizing this origination channel, which equaled 26.6 percent of total originations, compared to $5.0 billion or 30.2 percent during the nine months ended September 30, 2011.

Correspondent.  In a correspondent transaction, an unaffiliated bank or mortgage company completes the loan paperwork and also supplies the funding for the loan at closing. After the bank or mortgage company has funded the transaction, we purchase the loan is acquired, usually by us paying the mortgage companyat a market price for the loan.price. We do not acquire loans in "bulk" amounts from correspondents but ratheron a bulk basis without prior review. Instead, we acquireperform a full review of each loan, on a loan-level basis and each loan is required to bepurchasing only those that were originated toin accordance with our underwriting guidelines. We have active correspondent relationships with approximately 1,400over 1,100 companies, including banks, credit unions, and mortgage companies located in all 50 states. Over the years, we have developed a competitive advantage as a warehouse lender, wherein lines

64


The following tables disclose residential first mortgage companies are provided to fund loans. We believe warehouse lending is not only a profitable, stand-alone businessloan originations by channel, type and mix for us, but also provides valuable synergies within our correspondent channel. We believe that offering warehouse lines has provided a competitive advantage in the small to midsize correspondent channel and has helped grow and build the correspondent business in a profitable manner. For example, for the nine months ended September 30, 2012, warehouse lines funded over 66.0 percent of the loans in our correspondent channel. We plan to continue to leverage warehouse lending as a customer retention and acquisition tool for the remainder of 2012. For the nine months ended September 30, 2012, we closed loans totaling $25.6 billion utilizing the correspondent origination channel, which equaled 67.0 percent of total originations, compared to $10.3 billion or 62.7 percent originated during the nine months ended September 30, 2011.each respective period.
 For the Three Months Ended
 March 31, 2013 December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012
 (Dollars in thousands)
Home Lending Centers$697,340
 $998,804
 $961,591
 $751,075
 $729,369
Broker3,201,371
 4,524,775
 4,117,742
 3,156,949
 2,909,446
Correspondent8,524,540
 9,833,218
 9,434,287
 8,638,977
 7,530,594
Total$12,423,251
 $15,356,797
 $14,513,620
 $12,547,001
 $11,169,409
          
Purchase originations$2,339,269
 $2,915,724
 $3,267,788
 $3,324,501
 $2,188,508
Refinance originations10,083,982
 12,441,073
 11,245,832
 9,222,500
 8,980,901
Total$12,423,251
 $15,356,797
 $14,513,620
 $12,547,001
 $11,169,409
          
Conventional$8,591,784
 $10,427,131
 $10,020,863
 $8,762,268
 $7,859,960
Government2,799,000
 3,363,134
 3,178,563
 3,085,247
 2,611,691
Jumbo1,032,467
 1,566,532
 1,314,194
 699.486
 694,758
Total$12,423,251
 $15,356,797
 $14,513,620
 $12,547,001
 $11,166,409

Underwriting

During the ninethree months ended September 30, 2012March 31, 2013, we primarily originated residential first mortgage loans for sale that conformed to the respectiveGSEs, each of which has its particular underwriting guidelines established by Fannie Mae, Freddie Mac and Ginnie Mae.guidelines.

Residential first mortgage loans

At September 30, 2012March 31, 2013, most of our held-for-investment residential first mortgage loans represented loans that werehad been originated in 2008 or prior to 2009 andyears with underwriting criteria that varied by product and with the standards in place at the time of origination. Loans originated after 2008 are loans that generally satisfy specific criteria for sale into securitization pools insured by the GSEs or were repurchased from the GSEs subsequent to such sales.

Set forth below is a table describing the characteristics of the residential first mortgage loans in our held-for-investment portfolio at September 30, 2012March 31, 2013, by year of origination.
Year of Origination
2008 and
Prior
 2009 2010 2011 2012 Total2009 and Prior 2010 2011 2012 2013 Total / Weighted Average
(Dollars in thousands)(Dollars in thousands)
Unpaid principal balance (1)
$2,870,427
 $61,086
 $23,974
 $44,989
 $29,931
 $3,030,407
$2,835,002
 $31,714
 $53,103
 $38,084
 $5,941
 $2,963,844
Average note rate4.17% 4.99% 4.88% 4.30% 3.99% 4.20%4.04% 4.65% 4.46% 3.83% 3.80% 4.05%
Average original FICO score713
 691
 713
 738
 752
 713
712
 719
 737
 748
 754
 712
Average current FICO score (2)
689
 655
 702
 734
 750
 690
697
 723
 744
 752
 750
 699
Average original loan-to-value ratio75.8% 85.5% 77.8% 75.8% 74.3% 76.0%
Average original LTV ratio76.0% 76.3% 77.5% 73.1% 72.6% 76.0%
Housing Price Index LTV, as recalculated (3)
95.9% 93.5% 86.7% 77.8% 72.6% 95.3%91.6% 76.6% 75.2% 69.7% 72.4% 91.0%
Underwritten with low or stated income documentation38.0% 2.0% 2.0% % % 36.0%37.0% % 1.0% % % 35.0%
(1)Unpaid principal balance does not include premiums or discounts.
(2)
Current FICO scores obtained at various times during the current quarter.three months ended March 31, 2013
(3)
The housing price index ("HPI") LTV is updated from the original LTV based on Metropolitan Statistical Area-level Office of Federal Housing Enterprise Oversight ("OFHEO") data as of June 30,December 31, 2012.


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Average original loan-to-value ("LTV") represents the loan balance at origination, as a percentage of the original appraised value of the property. Loan-to-valuesLTVs are refreshed quarterly based on estimates of home prices using the most current OFHEO data, and are reflective of a deteriorationreflect the modest recovery in housinghome prices as a result of the economic conditions over the last several years.past 18 months.

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Residential first mortgage loans are underwritten on a loan-by-loan basis rather than on a pool basis. Generally, residential first mortgage loans produced through our production channels in the held-for-investment loan portfolio arewere initially reviewed by one of our in-house loan underwriters or by a contract underwriter. In all cases, loans must be underwritten to our underwriting standards.

Our current criteria for underwriting generally includes, but are not limited to, full documentation of borrower income and other relevant financial information, fully indexed rate consideration for variable rate loans, and for agencyGSE loans, the specific agency'sGSEs eligible loan-to-valueLTV ratios with full appraisals when required. Variances from any of these standards are permitted only to the extent allowable under the specific program requirements. These includedspecific program requirements include the ability to originate loans with less than full documentation and variable rate loans with an initial interest rate less than the fully indexed rate. Mortgage loans are collateralized by a first or second mortgage on a one-to-four family residential property.

In general, for loans in the portfolio originated in years 2008 and prior, loan balancesthe loans with a balance under $1,000,000 requiredrequire a valid agencyGSE automated underwriting system ("AUS") response for approval consideration. Documentation and ratio guidelines are driven by the AUS response. A FICO credit score for the borrower is required and a full appraisal of the underlying property that would serve as collateral is obtained.

For loan balances over $1,000,000, traditional manual underwriting documentation and ratio requirements are required as are two years plus year to date of income documentation and two months of bank statements. Income documentation based solely on a borrower's statement iswas an available underwriting option for each loan category. Even so, in these cases employment of the borrower iswas verified under the vast majority of loan programs, and income levels are usuallywere typically checked against third party sources to confirm validity.

We believe that our underwriting process, which relies on the electronic submission of data and images and is based on an award-winning imaging workflow process, allows for underwriting at a higher level of accuracy and with more timeliness than exists with processes whichthat rely on paper submissions. We also provide our underwriters with integrated quality control tools, such as automated valuation models, multiple fraud detection engines and the ability to electronically submit IRS Form 4506 to ensure underwriters have the information that they need to make informed decisions. The process begins with the submission of an electronic application and an initial determination of eligibility. The application and required documents are then uploaded to our corporate underwriting department and all documents are identified by optical character recognition or our underwriting staff. The underwriter is responsible for checking the data integrity and reviewing credit. The file is then reviewed in accordance with the applicable guidelines established by us for the particular product. Quality control checks are performed by the underwriting department using the tools outlined above, as necessary, and a decision is then made and communicated to the prospective borrower.


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The following table identifies our held-for-investment mortgages by major category, at September 30, 2012March 31, 2013. Loans categorized as subprime were initially originated for sale and comprised only 0.1 percent of the portfolio of first liens.lien mortgage loans.

September 30, 2012
Unpaid Principal Balance (1)
 Average Note Rate Average Original FICO Score 
Average Current FICO Score (2)
 Weighted Average Maturity Average Original Loan-to-Value Ratio 
Housing Price Index LTV, as recalculated (3)
March 31, 2013
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 thousands)(Dollars in thousands)  
Residential first mortgage loans                          
Amortizing                          
3/1 ARM$179,035
 3.50% 691
 671
 291
 74.3% 90.8%$157,025
 3.49% 688
 689
 262
 81.3% 84.7%
5/1 ARM483,234
 3.74% 713
 688
 309
 73.8% 86.6%383,989
 3.70% 718
 722
 278
 74.0% 79.5%
7/1 ARM47,499
 4.08% 730
 720
 345
 76.8% 88.5%31,321
 4.30% 732
 744
 304
 73.2% 73.4%
Other ARM114,823
 3.96% 689
 664
 311
 78.1% 94.3%52,933
 3.25% 678
 685
 252
 82.2% 79.8%
Fixed mortgage loans (4)
832,320
 4.70% 703
 662
 309
 81.1% 99.8%1,092,624
 4.35% 702
 660
 336
 77.5% 96.1%
Total amortizing1,717,892
 4.09% 704
 700
 313
 77.6% 86.8%
Interest only                          
3/1 ARM224,472
 3.84% 722
 708
 275
 73.0% 94.2%193,614
 3.64% 721
 717
 269
 74.4% 89.0%
5/1 ARM804,164
 3.74% 724
 715
 278
 73.6% 93.2%753,714
 3.48% 724
 732
 270
 75.0% 89.4%
7/1 ARM53,289
 5.83% 727
 717
 299
 73.7% 105.9%46,656
 6.26% 733
 724
 292
 74.2% 99.4%
Other ARM39,538
 4.37% 723
 715
 275
 72.3% 99.8%41,858
 3.50% 726
 721
 272
 75.9% 94.8%
Other interest only190,941
 5.95% 730
 703
 293
 74.6% 105.8%164,074
 6.35% 724
 714
 292
 73.9% 100.4%
Total interest only1,199,916
 4.01% 724
 722
 274
 74.6% 91.5%
Option ARMs60,375
 3.69% 718
 687
 313
 76.3% 111.6%42,774
 3.27% 717
 704
 306
 69.5% 101.7%
Subprime             
Subprime (5)
             
3/1 ARM50
 10.30% 685
 687
 278
 91.0% 73.3%49
 10.30% 685
 701
 271
 95.0% 71.7%
Other ARM246
 9.93% 531
 646
 282
 84.7% 110.3%506
 9.50% 624
 641
 289
 72.9% 86.0%
Other subprime421
 8.71% 618
 612
 290
 71.0% 93.3%2,707
 8.37% 594
 661
 290
 72.6% 100.0%
Total subprime$3,262
 8.57% 620
 668
 290
 80.1% 97.4%
Total residential first mortgage loans$3,030,407
 4.20% 713
 690
 296
 76.0% 95.3%$2,963,844
 4.05% 712
 699
 297
 76.0% 91.0%
Second mortgage loans (5) (6)
$122,359
 7.76% 733
 733
 134
 18.3% 23.8%
HELOC loans (5) (6)
$184,362
 5.15% 735
 735
 45
 22.5% 29.4%
Second mortgage loans (6)
$112,367
 7.59% 732
 732
 133
 20.7% 23.3%
HELOC loans (6)
$160,632
 5.11% 735
 735
 44
 26.9% 28.6%
(1)Unpaid principal balance does not include premiums or discounts.
(2)
Current FICO scores obtained at various times during the current quarter.three months ended March 31, 2013.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of June 30,December 31, 2012.
(4)Includes substantially fixed rate mortgage loans.
(5)Subprime loans are defined asin accordance with the FDIC's assessment regulations definitions for subprime loans, which includes loans with FICO scores below 620 or similar characteristics.
(6)Reflects lower LTV only as to second liens because these are second liens.information regarding the first liens is not available.     

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The following table sets forth characteristics of those loans in our held-for-investment mortgage portfolio as of September 30, 2012March 31, 2013 that were originated with less documentation than is currently required.now required by the GSEs. Loans as to which underwriting information was accepted from a borrower without validating that particular item of information are referred to as "low doc" or "stated." Substantially all of those loans were underwritten with verification of employment but with the related job income or personal assets, or both, stated by the borrower without verification of actual amount. Those loans may have additional elements of risk because information provided by the borrower in connection with the loan was limited. Loans as to which underwriting information was supported by third party documentation or procedures are referred to as "full doc," and the information therein is referred to as "verified." Also set forth are different types of loans that may have a higher risk of non-collection than other loans.

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Low DocLow Doc
September 30, 2012% of Held-for-Investment % of Residential First Mortgage Loans 
Unpaid Principal Balance (1)
March 31, 2013% of Held-for-Investment loans % of Residential First Mortgage loans Unpaid Principal Balance (1)
(Dollars in thousands)(Dollars in thousands)
Characteristics          
SISA (stated income, stated asset)1.56% 3.35% $101,480
2.08% 3.35% $99,216
SIVA (stated income, verified assets)9.86% 21.22% 642,939
12.95% 20.63% 610,401
High LTV (i.e., at or above 95% at origination)0.11% 0.25% 7,429
0.18% 0.28% 8,347
Second lien products (HELOCs, second mortgages)1.35% 2.90% 87,786
1.63% 2.60% 76,975
Loan types          
Option ARM loans0.60% 1.29% $39,087
0.54% 0.86% 25,423
Interest only loans7.45% 16.03% 485,661
Interest-only loans9.25% 14.74% 435,987
Subprime (2)
% % 351
0.04% 0.06% 1,832
(1)Unpaid principal balance does not include premiums or discounts.
(2)Subprime loans are defined asin accordance with the FDIC's assessment regulations definitions for subprime loans, which includes loans with FICO scores below 620 or similar characteristics.

Adjustable-rate mortgages loans. 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 AUS guidelines. Our underwriting guidelines were designed with the intent to minimize layered risk.

At September 30, 2012, we had $60.4 million of option ARM loans in our held-for-investment loan portfolio. Option ARM loans permit a borrower to vary the monthly payment, including paying an amount that excludes interest otherwise due which is then added to the unpaid principal balance of the loan (a process referred to as "negative amortization"). The amount of negative amortization reflected in such loan balances for the nine months ended September 30, 2012 was $3.9 million. The maximum balanceratios allowable for purposes of both the LTV ratio and the combined loan-to-value ("CLTV") ratio, which includes second mortgages on the same collateral, was 100 percent, but subordinate (i.e., second mortgage) financing was not allowed over a 90 percent LTV ratio. At a 100 percent LTV ratio with private mortgage insurance, the minimum acceptable FICO score, or the "floor," was 700, and at lower LTV ratio levels, the FICO floor was 620. All occupancy and specific-purpose loan types were allowed at lower LTVs. At times ARMs were underwritten at an initial rate, also known as the "start rate," that all optionwas lower than the fully indexed rate but only for loans with lower LTV ratios and higher FICO scores. Other ARMs could reach cumulatively is $92.4 millionwere either underwritten at September 30, 2012.the note rate if the initial fixed term was two years or greater, or at the note rate plus two percentage points if the initial fixed rate term was six months to one year.

Set forth below is a table describing the characteristics of our ARM loans in our residential first mortgage held-for-investment mortgageloan portfolio at September 30, 2012March 31, 2013, by year of origination.
2008 and
Prior
 2009 2010 2011 2012 Total
Year of Origination(Dollars in thousands)2009 and Prior 2010 2011 2012 2013 Total / Weighted Average
(Dollars in thousands)
Unpaid principal balance (1)
$1,928,717
 $12,305
 $9,563
 $25,263
 $23,552
 $1,999,400
$1,650,291
 $9,057
 $19,766
 $21,171
 $4,154
 $1,704,439
Average note rate3.80% 4.73% 4.55% 4.06% 3.95% 3.82%3.62% 4.15% 4.18% 3.76% 3.76% 3.63%
Average original FICO score715
 671
 723
 748
 762
 716
717
 735
 744
 765
 757
 718
Average current FICO score (2)
699
 648
 709
 745
 760
 700
720
 752
 757
 765
 752
 721
Average original loan-to-value ratio75.5% 85.8% 69.4% 71.2% 71.0% 75.4%
Average original LTV ratio75.4% 71.6% 73.3% 64.9% 72.0% 75.2%
Housing Price Index LTV, as recalculated (3)
93.0% 98.9% 83.7% 70.9% 69.5% 92.5%87.5% 72.4% 70.3% 63.0% 71.9% 86.8%
Underwritten with low or stated income documentation36.0% 8.0% 2.0% 1.0% % 35.0%35.0% % 1.0% % % 34.0%
(1)Unpaid principal balance does not include premiums or discounts.
(2)Current FICO scores obtained at various times during the current quarter.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of June 30,December 31, 2012.

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Option ARMs. We previously offered option ARMs, which are adjustable rate mortgage loans that permit a borrower to select one of three monthly payment options when the loan is first originated: (i) a principal and interest payment that would fully repay the loan over its stated term, (ii) an interest-only payment that would require the borrower to pay only the interest due each month but would have a period (usually 10 years) after which the entire amount of the loan would need to be repaid or refinanced, and (iii) a minimum payment amount selected by the borrower and which might exclude principal and some interest, with the unpaid interest added to the balance of the loan (i.e., a process known as "negative amortization").

Set forth below is a table describing specific characteristics of option power ARMs in our held-for-investment mortgage portfolio at September 30, 2012March 31, 2013, which were originated in 2008 or prior.
2008 and Prior
Year of Origination(Dollars in thousands)2008 and Prior
(Dollars in thousands)
Unpaid principal balance (1)
$60,375
$42,774
Average note rate3.69%3.27%
Average original FICO score718
717
Average current FICO score (2)
687
704
Average original loan-to-value ratio70.6%
Average original combined loan-to-value ratio79.0%
Average original LTV ratio69.5%
Average original CLTV ratio76.2%
Housing Price Index LTV, as recalculated (3)
111.6%101.7%
Underwritten with low or stated income documentation$39,087
$25,423
Total principal balance with any accumulated negative amortization$41,944
$26,875
Percentage of total ARMS with any accumulated negative amortization2.1%1.6%
Amount of net negative amortization (i.e., deferred interest) accumulated as interest income during the nine months ended September 30, 2012$3,910
Amount of net negative amortization (i.e., deferred interest) accumulated as interest income during the three months ended March 31, 2013$2,553
(1)Unpaid principal balance does not include premiums or discounts.
(2)
Current FICO scores obtained at various times during the current quarter.three months ended March 31, 2013.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of June 30,December 31, 2012.

Set forth below are the accumulated amounts of interest income arising from the net negative amortization portion of loans during the ninethree months ended September 30,March 31, 2013 and 2012 and 2011.  
Unpaid Principal Balance of Loans in Negative Amortization At Period End (1)
 Amount of Net Negative Amortization Accumulated as Interest Income During PeriodUnpaid Principal Balance of Loans in Negative Amortization At Year-End (1) 
Amount of Net Negative
Amortization Accumulated as
Interest Income During Period
(Dollars in thousands)(Dollars in thousands)
2013$26,875
 $2,553
2012$41,944
 $3,910
$54,898
 $5,340
2011$81,376
 $7,665
$83,497
 $7,655
(1)Unpaid principal balance does not include premiums or discounts.

Set forth below are the frequencies at which the interest rate on ARM loans outstanding at September 30, 2012March 31, 2013, will reprice.reset.
# of Loans Balance % of the Total
Reset frequency(Dollars in thousands)# of Loans Balance % of the Total
(Dollars in thousands)
Monthly80
 $15,636
 0.8%114
 $22,598
 1.3%
Semi-annually3,392
 1,050,621
 52.5%3,255
 1,008,701
 59.2%
Annually2,926
 453,210
 22.7%2,734
 413,027
 24.2%
No reset – non-performing loans1,679
 479,933
 24.0%
No reset — non-performing loans1,066
 260,113
 15.3%
Total8,077
 $1,999,400
 100.0%7,169
 $1,704,439
 100.0%

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Set forth below as of September 30, 2012March 31, 2013, 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 non-performing loans do not reset while in the non-performing status. Accordingly, the table below may include the same loans in more than one period.
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 (Dollars in thousands)
2012 (1)
N/A
 N/A
 N/A
 $610,897
2013$625,589
 $651,224
 $631,741
 652,309
2014647,879
 683,254
 678,601
 671,466
Later years (2)
670,981
 717,918
 735,771
 721,335
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 (Dollars in thousands)
2013 (1)
N/A
 $581,564
 $604,162
 $600,171
2014603,086
 637,285
 650,367
 626,061
2015644,289
 659,604
 677,726
 648,633
Later years (2)
672,583
 675,902
 705,392
 672,508
(1)
ReflectsReflect loans that have reset through September 30, 2012.
March 31, 2013
(2)Later years reflect one reset period per loan.

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Interest only mortgages.Both We offered adjustable andrate, fixed term loans were offered with a 10-year, interest only option.options. These loans were originated using Fannie Mae and Freddie Mac guidelines as a base framework. We generally applied the debt-to-income ratio guidelines and documentation using the AUSautomated underwriting Approve/Reject response requirements.requirements of Fannie Mae and Freddie Mac.

Set forth below is a table describing the characteristics of the interest only mortgage loans at the dates indicated in our held-for-investment mortgage portfolio at September 30, 2012March 31, 2013, by year of origination.
2008 and Prior 2009 2010 2011 2012 

Total
Year of Origination  (Dollars in thousands)2009 and Prior 2010 2011 2012 2013 Total / Weighted Average
Unpaid principal balance (1)
$1,310,446
 $350
 $1,609
 N/A N/A $1,312,405
(Dollars in thousands)
Unpaid principal balance (1) (2)$1,198,971
 $945
 $
 $
 $
 $1,199,916
Average note rate (2)
4.18% 3.00% 5.25% N/A N/A 4.18%4.00% 5.16% % % % 4.01%
Average original FICO score724
 613
 727
 N/A N/A 724
724
 688
 
 
 
 722
Average current FICO score (3)
712
 561
 682
 N/A N/A 712
726
 719
 
 
 
 726
Average original loan-to-value ratio74.8% 100.0% 63.8% N/A N/A 74.8%
Average original LTV ratio74.6% 57.5% % % % 74.6%
Housing Price Index LTV, as recalculated (4)
96.0% 85.2% 67.3% N/A N/A 95.3%91.5% 58.6% % % % 91.5%
Underwritten with low or stated Income documentation37.0% % % N/A N/A 37.0%
Underwritten with low or stated income documentation36.0% % % % % 36.0%
(1)Unpaid principal balance does not include premiums or discounts.
(2)As described earlier, interestInterest only loans placed in portfolio in 2010 comprise loans that were initially originated for sale. There are two loans in this population.
(3)
Current FICO scores obtained at various times during the current quarter.three months ended March 31, 2013.
(4)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of June 30,December 31, 2012.

Set forth below is a table describing the amortization date and payment shock of current interest only mortgage loans at the dates indicated in our held-for-investment mortgage portfolio at March 31, 2013.
 2013 2014 2015 2016 2017 Thereafter Total / Weighted Average
 (Dollars in thousands)
Unpaid principal balance (1)$21,756
 $322,282
 $393,257
 $70,084
 $331,764
 $13,372
 $1,152,515
Weighted average rate3.62% 3.59% 3.55% 3.76% 4.83% 5.45% 3.85%
Average original monthly payment per loan (dollars)$1,295
 $1,368
 $1,404
 $1,705
 $2,722
 $1,923
 $1,674
Average current monthly payment per loan (dollars)$919
 $939
 $836
 $1,066
 $2,117
 $1,683
 $1,144
Average amortizing payment per loan (dollars)$1,687
 $2,158
 $1,615
 $1,845
 $3,197
 $2,126
 $2,108
Loan count75
 1,039
 1,416
 228
 679
 42
 3,479
Payment shock (dollars)$768
 $1,219
 $779
 $779
 $1,079
 $443
 $965
Payment shock (percent)83.6% 129.8% 93.2% 73.1% 51.0% 26.3% 84.3%
(1)Unpaid principal balance does not include premiums or discounts.

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Second mortgage loans. The majority of second mortgages we originated were closed in conjunction with the closing of the residential first mortgages originated by us. We generally required the same levels of documentation and ratios as with our residential first mortgages. For second mortgages closed in conjunction with a residential first mortgage loan that was not being originated by us, our allowable debt-to-income ratios for approval of the second mortgages were capped at 40 percent to 45 percent. In the case of a loan closing in which full documentation was required and the loan was being used to acquire the borrower's primary residence, we allowed a combined loan-to-value ("CLTV")CLTV ratio of up to 100 percent; for similar loans that also contained higher risk elements, we limited the maximum CLTV to 90 percent. FICO floors ranged from 620 to 720, and fixed and adjustable rate loans were available with terms ranging from five to 20 years.

Set forth below is a table describing the characteristics of the second mortgage loans in our held-for-investment portfolio at September 30, 2012March 31, 2013, by year of origination.
2008 and prior 2009 2010 2011 2012 Total
Year of Origination(Dollars in thousands)2009 and Prior 2010 2011 2012 2013 Total / Weighted Average
(Dollars in thousands)
Unpaid principal balance (1)
$120,332
 $1,478
 $387
 $72
 $89
 $122,358
$111,545
 $365
 $46
 $299
 $112
 $112,367
Average note rate7.77% 6.93% 6.86% 7.33% 2.30% 7.76%7.61% 6.86% 7.00% 4.29% 5.2% 7.59%
Average original FICO score733
 718
 694
 706
 752
 733
732
 692
 664
 763
 757
 732
Average original loan-to-value ratio20.3% 18.0% 14.6% 14.9% 15.0% 20.2%
Average original combined loan-to-value ratio81.2% 87.0% 67.4% 92.5% 31.2% 81.2%
Average original LTV ratio (2)
20.7% 14.4% 17.6% 21.0% 14.7% 20.7%
Average original CLTV ratio66.0% 29.5% 94.3% 24.7% 14.7% 66.0%
Housing Price Index LTV, as recalculated (2)(3)
23.9% 19.0% 14.3% 13.8% 14.8% 23.8%23.3% 13.7% 15.7% 17.0% 14.7% 23.3%
(1)Unpaid principal balance does not include premiums or discounts.
(2)Reflects lower LTV only as to second liens because information regarding the first liens is not available.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of June 30,December 31, 2012.

Home Equity Line of Credit ("HELOC") loans. We originated HELOC loans from 2002 to mid-2009. The majority of these HELOC loans were closed in conjunction with the closing of related first mortgage loans originated and serviced by us. Documentation requirements for HELOC applications were generally the same as those required of borrowers for the first mortgage loans originated by us, and debt-to-income ratios were capped at 50 percent. For HELOCs closed in conjunction with the closing of a first mortgage loan that was not being originated by us, our

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debt-to-income ratio requirements were capped at 40 percent to 45 percent and the LTV was capped at 80 percent. The qualifying payment varied over time and included terms such as either 0.75 percent of the line amount or the interest only payment due on the full line based on the current rate plus 0.5 percent. HELOCs were available in conjunction with primary residence transactions that required full documentation, and the borrower was allowed a CLTV ratio of up to 100 percent. For similar loans that also contained higher risk elements, we limited the maximum CLTV to 90 percent. FICO floors ranged from 620 to 720. The HELOC terms called for monthly interest only payments with a balloon principal payment due at the end of 10 years. At times, initial teaser rates were offered for the first three months.

HELOC loan originations were re-launched in June 2011 as a banking center originated portfolio product. Current HELOC guidelines and pricing parameters have been established to attract high credit quality loans with long term profitability. The minimum FICO is 680, maximum CLTV is 80 percent, and the maximum debt-to-income ratio is 45 percent.

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Set forth below is a table describing the characteristics of the HELOCs in our held-for-investment portfolio at September 30, 2012March 31, 2013, by year of origination.
2008 and
Prior
 2009 2010 2011 2012 Total
Year of Origination(Dollars in thousands)2009 and Prior 2010 2011 2012 2013 Total / Weighted Average
(Dollars in thousands)
Unpaid principal balance (1)
$173,167
 $700
 N/A $2,359
 $8,136
 $184,362
$145,044
 $
 $2,038
 $10,808
 $2,742
 $160,632
Average note rate (2)
5.23% 5.59% N/A 3.93% 3.72% 5.15%5.25% % 3.89% 3.78% 4.05% 5.11%
Average original FICO score733
 
 N/A 756
 765
 735
733
 
 754
 764
 736
 735
Average original loan-to-value ratio25.3% 30.7% N/A 41.1% 45.9% 26.4%
Average original LTV ratio25.0% % 41.9% 45.9% 39.2% 26.9%
Housing Price Index LTV, as recalculated (3)
29.0% 26.0% N/A 33.2% 37.0% 29.4%27.9% % 32.7% 36.6% 31.0% 28.6%
(1)Unpaid principal balance does not include premiums or discounts.
(2)Average note rate reflects the rate that is currently in effect. As these loans adjust on a monthly basis, the average note rate could increase, but would not decrease, as incurrently the current market, the floorminimum rate on virtually all of the loans is in effect.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of June 30,December 31, 2012. Reflects lower LTV because these are second liens and information regarding the first lien is not available.     

Warehouse lending. We also continue to offer warehouse lines of credit to other mortgage lenders. These allow the lender to fund the closing of residential first mortgage loans. Each extension or drawdown on the line is collateralized by the residential first mortgage loan being funded, and in many cases, we subsequently acquire that loan. Underlying mortgage loans are predominately originated using GSE underwriting standards. These lines of credit are, in most cases, personally guaranteed by one or more qualified principal officers of the borrower. The aggregate amount of adjustable rate warehouse lines of credit granted to other mortgage lenders at September 30, 2012 was $2.3 billion, of which $1.3 billion was outstanding and had an average rate of 5.43 percent, compared to $2.1 billion granted at December 31, 2011, of which $1.2 billion was outstanding and had an average rate of 5.50 percent. As of September 30, 2012 and December 31, 2011, our warehouse lines funded over 65 percent of the loans in our correspondent channel. There were 309 warehouse lines of credit to other mortgage lenders with an average size of $7.5 million at September 30, 2012, compared to 293 warehouse lines of credit with an average size of $7.0 million at December 31, 2011. Loans on non-accrual status totaled $28,000 at both September 30, 2012 and December 31, 2011.



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Commercial Loans

In early 2011, we formally launched our commercial banking division, which includes the origination of commercial loans, including real estate loans, middle market and small business lending, asset based lending and lease financing. This launch was subsequent to ceasing our origination of commercial real estate loans in 2008 using prior lending management and philosophies. See "Commercial real estate loans" below. We offer these loans throughout Michigan and through our four commercial banking offices. Through the expansion into commercial banking, management believes it can leverage the existing personal financial services network and banking franchise, providing a complement to existing operations and contributing to the establishment of a diversified mix of revenue streams.

In commercial lending, ongoing credit management is dependent upon the type and nature of the loan, and we monitor significant exposures on a regular basis. Internal risk ratings are assigned at the time of each loan approval and are assessed and updated with each monitoring event. The frequency of the monitoring event is dependent upon the size and complexity of the individual credit, but in no case less frequently than every 12 months. Current commercial real estate collateral values are updated more frequently if deemed necessary as a result of impairments of specific loan or other credit or borrower specific issues. We continually review and adjust our risk rating criteria and rating determination process based on actual experience. This review and analysis process also contributes to the determination of an appropriate allowance for loan loss amount for our commercial loan portfolio.

Our commercial loan portfolio totaled $1.8 billionat September 30, 2012 and $1.7 billion at December 31, 2011, and consists of three loan types, commercial real estate, commercial and industrial and commercial lease financing, each of which is discussed in more detail below. During the nine months ended September 30, 2012, we originated $621.2 million in commercial loans. The following table identifies the commercial loan portfolio by loan type and selected criteria at September 30, 2012.

September 30, 2012
Unpaid
Principal
Balance
 
Average
Note Rate
 
Loans on
Non-accrual Status
 (Dollars in thousands)
Commercial real estate loans     
Fixed rate$647,414
 5.18% $60,553
Adjustable rate360,042
 4.09% 62,033
Total commercial real estate loans1,007,456
   $122,586
Net deferred fees and other(1,958)    
Total commercial real estate loans$1,005,498
    
Commercial and industrial loans     
Fixed rate$102,753
 3.57% $
Adjustable rate496,368
 2.68% 43
Total commercial and industrial loans599,121
   $43
Net deferred fees and other(1,848)    
Total commercial and industrial loans$597,273
    
Commercial lease financing loans     
Fixed rate$186,481
 4.02% $
Net deferred fees and other2,168
    
Total commercial lease financing loans$188,649
    

At September 30, 2012, our commercial real estate loan portfolio totaled $1.0 billion, or 15.3 percent of our investment loan portfolio, our commercial and industrial loan portfolio was $597.3 million, or 9.1 percent of our investment loan portfolio, and our commercial lease financing totaled $188.6 million, or 2.9 percent of our investment loan portfolio. At December 31, 2011, our commercial real estate loan portfolio totaled $1.2 billion, or 17.7 percent of our investment loan portfolio, our commercial and industrial loan portfolio was $328.9 million, or 4.7 percent of our investment loan portfolio, and our commercial lease financing totaled $114.5 million, or 1.6 percent of our investment loan portfolio.


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The following table describes the unpaid principal balance of our commercial loan portfolio at September 30, 2012 by year of origination.
 
2009 and
Prior
 2010 2011 2012 Total
Year of Origination(Dollars in thousands)
Commercial real estate loans (1)
$606,317
 $21,377
 $290,171
 $89,591
 $1,007,456
Commercial and industrial loans1,307
 698
 260,414
 336,702
 599,121
Commercial lease financing loans
 
 74,827
 111,654
 186,481
(1)
During the nine months ended September 30, 2012, we had no sales of non-performing commercial real estate loans and charged off $102.8 million of the same loans.

At September 30, 2012, our total commercial loans were geographically concentrated, with approximately $508.3 million (28.4 percent) of unpaid principal balance on commercial loans located in Michigan, $302.1 million (16.9 percent) located in the New England region, $188.0 million (10.5 percent) located in New York, $137.6 million (7.7 percent) located in Texas, $123.6 million (6.9 percent) located in California and $73.3 million (4.1 percent) located in Georgia.

The average loan balance in our total commercial portfolio was approximately $1.3 million for the nine months ended September 30, 2012, with the largest loan being $50 million. There are approximately 34 loans with more than $10 million of exposure and those loans comprised approximately 36.8 percent of the total commercial portfolio.

Commercial real estate loans. Our commercial real estate loan portfolio is comprised of loans that are collateralized by real estate properties intended to be income-producing in the normal course of business and consists of loans originated prior to 2011, including loans refinanced during 2009 and 2010 ("Legacy CRE") and loans originated during 2011 and into 2012 ("New CRE"). We distinguish between Legacy CRE and New CRE portfolios given their respective differences in management objectives, performance and credit philosophy.

In early 2008, we ceased the origination of commercial real estate loans and made a decision to run-off the Legacy CRE portfolio. Since that time we replaced the previous commercial real estate management and loan officers with experienced workout officers and relationship managers. In addition, we prepared a comprehensive review, including customized workout plans for all classified loans, and risk assessments were prepared on a loan level basis for the entire commercial real estate portfolio. Legacy CRE loans are managed by our special assets group, whose primary objectives are working out troubled loans, reducing classified assets and taking pro-active steps to prevent deterioration in performing Legacy CRE loans.

    In February 2011, we began originating New CRE loans under our new management team in our commercial banking area. The primary objective of this portfolio is to establish commercial banking relationships, which will add interest and fee income and provide us with cross-sell opportunities.

The following table sets forth the performance of the Legacy CRE and New CRE loan portfolios at September 30, 2012.
New CRE (1)
Property Type
30 Days
Past Due
60 Days
Past Due
90+ Days Past Due (2)
BalanceTotal Reserves
                                                                (Dollars in thousands)
Land$
$
$
$156
$3
Services


303
5
Commercial and industrial loans


6,447
298
One-to-four family conventional


1,645
28
Multi-family conventional


136,873
2,292
Commercial non-owner occupied


148,626
2,504
Secured by nonfarm, nonresidential


45,144
448
Other


50,755
848
Negative escrow


2

Net deferred fees and other


(3,238)
     Total$
$
$
$386,713
$6,426
(1)Includes commercial real estate loans originated during 2011 and into 2012.
(2)Greater than 90 days past due includes performing non-accrual loans.


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Credit standards on the origination of New CRE loans are underwritten by experienced commercial real estate relationship manager's in each market, under much tighter policies and procedures than those of the Legacy CRE loans. In addition, our New CRE loans are originated by experienced commercial lenders, primarily in markets they understand well based on prior experience. The primary factors considered in commercial real estate credit approvals are the financial strength of the borrower, assessment of the borrower's management capabilities, industry sector trends, type of exposure, transaction structure, and the general economic outlook. Commercial real estate loans are made on a secured, or in limited cases, on an unsecured basis, with a vast majority also being refined by personal guarantees of the principals of the borrowing business. Assets used as collateral for secured commercial real estate loans required an appraised value sufficient to satisfy our LTV ratio requirements. We also generally require a minimum debt-service-coverage ratio, other than for development loans, and consider the enforceability and collectability of any relevant guarantees and the quality of the collateral.
Legacy CRE (1)
Property Type
30 Days
Past Due
60 Days
Past Due
90+ Days Past Due (2)
BalanceTotal Reserves
                                                            (Dollars in thousands)
Construction one-to-four family$
$
$387
$387
$
Land

2,130
5,230
255
Commercial and industrial loans


215
151
One-to-four family conventional103

241
648
46
One-to-four family closed end mortgage


294
24
Multi-family conventional8,902

1,233
48,496
3,883
Commercial non-owner occupied130
397
112,864
510,064
34,185
Secured by nonfarm, nonresidential428

5,731
52,174
3,865
Negative escrow


2,596

Net deferred fees and other


(1,319)
     Total$9,563
$397
$122,586
$618,785
$42,409
(1)Includes commercial real estate loans originated prior to 2011.
(2)Greater than 90 days past due includes performing non-accrual loans.

Commercial and industrial loans. Commercial and industrial loan facilities typically include lines of credit to our small or middle market businesses for use in normal business operations to finance working capital needs, equipment purchases and other expansion projects. We also participate, with other lenders, in syndicated deals to well known larger companies. Commercial and industrial loans include those loan facilities previously described, as well as asset based lending and auto dealer floor plan financing.

Commercial lease financing loans. Our commercial lease financing portfolio is comprised of equipment leased to customers in a direct financing lease. The net investment in financing leases includes the aggregate amount of lease payments to be received and the estimated residual values of the equipment, less unearned income. Income from lease financing is recognized over the lives of the leases on an approximate level rate of return on the unrecovered investment. The residual value represents the estimated fair value of the leased asset at the end of the lease term. Unguaranteed residual values of leased assets are reviewed at least annually for impairment. If any declines in residual values are determined to be other-than-temporary they will be recognized in earnings in the period such determinations are made.

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Summary of Operations

Our net income applicable to common stock for the three months ended September 30, 2012March 31, 2013 was $79.722.2 million ($1.360.33 per diluted share), compared to a loss of $(14.2)(8.7) million (loss of loss ($(0.26)(0.22) per diluted share) for the three months ended September 30, 2011. For the nine months ended September 30,March 31, 2012, our net income applicable to common stock was $156.9 million ($2.61 per diluted share), as compared to a net loss of $(120.8) million (loss of $(2.18) per diluted share) during nine months ended September 30, 2011. All per share amounts and share counts have been adjusted to reflect the one-for-ten reverse stock split which began trading on a post-split basis on October 11, 2012 following receipt of stockholder approval at the Company'sour annual meeting of stockholders. The increase during the ninethree months ended September 30, 2012March 31, 2013, compared to the ninethree months ended September 30, 2011March 31, 2012, was affected by the following factors:

Net interest margin improved to 2.28 percent, as compared to 1.96 percentProvision for loan losses decreased by $94.3 million from the ninethree months ended September 30, 2011March 31, 2012, to $20.4 million, primarily due to a decrease in our cost of funds and an increasethe refinements in the average balances in our residential first mortgage loans held-for-sale loan portfolio;

Net interest income increased by $53.8 million to $223.3 million for the nine months ended September 30, 2012, primarily due to a decrease in FHLB advances rate of 66 basis points and in deposit rates of 42 basis points;

Provision for loan losses increased by $112.3 million from the nine months ended September 30, 2011, to $225.7 million, primarily as a result of refinements to existing loss modelsestimation process that occurred during the first quarter 2012;

Net gain on2012, lower quarterly loss rates and a decrease in loan sales increased $558.1 million from the nine months ended September 30, 2011, to $751.9 million, primarily due to an increase in volume of loan sales and margins;held-for-investments;

Representation and warranty reserve - change in estimate increased $150.3decreased $43.1 million to $231.1$17.4 million for the ninethree months ended September 30,March 31, 2013 from $60.5 million for the three months ended March 31, 2012,, which primarily due toincluded the first quarter 2012 refinements in the estimation process and an increase in forecasted demands of repurchase requests from GSEs; andprocess;

Net gain on loan sales decreased $67.3 million from the three months ended March 31, 2013, to $137.5 million, primarily due to lower residential first mortgage rate lock commitments and a lower base gain on sale margin;

Net interest income decreased by $19.1 million to $55.7 million for the three months ended March 31, 2013, primarily due to lower average balances of residential first mortgage loans held-for-sale and warehouse and residential first mortgage loans held-for-investment, as well as a lower rate environment. Net interest margin decreased to 1.83 percent, as compared to 2.35 percent for the three months ended March 31, 2012;

Net servicing revenue, which is the combination of net loan administration income (including the off-balance sheet hedges of MSRs) and the gain (loss) on trading securities, decreased by $12.5 million to $20.4 million for the three months ended March 31, 2013, primarily due to significant interest rate volatility in the market; and

GeneralLegal and administrativeprofessional expense increased $88.9$12.0 million to $156.0$28.8 million for the ninethree months ended September 30, 2012March 31, 2013, primarily due to an assessment of overall litigation exposure from pending and threatened litigation resulting in a $40.0 million increase in the reserve for such matters and a $31.5 million increase in consulting fees from our continuing efforts to address a changing regulatory and legal fee expenses.compliance environment.

See "Results of Operations" below.


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Selected Financial Ratios
(Dollars in thousands, except share data) 
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
Return on average assets2.10% (0.43)% 1.43% (1.23)%0.65% (0.25)%
Return on average equity25.78% (4.90)% 18.04% (13.39)%7.55% (3.07)%
Efficiency ratio67.3% 84.6 % 61.7% 98.3 %81.7% 63.7 %
Efficiency ratio (credit-adjusted) (1)
46.9% 53.5 % 43.8% 64.4 %69.8% 42.6 %
Equity/assets ratio (average for the period)8.16% 8.80 % 7.93% 9.20 %8.57% 8.00 %
Mortgage loans originated (2)
$14,513,635
 $6,926,451
 $38,230,061
 $16,425,699
$12,423,364
 $11,169,409
Other loans originated$165,668
 $322,558
 $640,697
 $506,430
$74,739
 $271,445
Mortgage loans sold and securitized$13,876,626
 $6,782,795
 $37,483,736
 $16,974,821
$12,822,879
 $10,829,798
Interest rate spread – bank only (3)
1.84% 2.02 % 2.02% 1.75 %1.64% 2.15 %
Net interest margin – bank only (4)
2.21% 2.30 % 2.33% 2.01 %1.89% 2.41 %
Interest rate spread – consolidated (3)
1.81% 2.01 % 2.00% 1.74 %1.61% 2.13 %
Net interest margin – consolidated (4)
2.16% 2.25 % 2.28% 1.96 %1.83% 2.35 %
Average common shares outstanding (5)
55,801,692
 55,448,945
 55,735,095
 55,400,025
55,973,888
 55,662,305
Average fully diluted shares outstanding (5)
56,233,165
 55,448,945
 56,083,757
 55,400,025
56,415,057
 55,662,305
Average interest earning assets$13,476,917
 $11,677,994
 $13,021,941
 $11,483,759
$12,075,212
 $12,640,668
Average interest paying liabilities$10,737,734
 $10,337,645
 $10,943,347
 $10,365,972
$10,338,644
 $10,994,258
Average stockholders' equity$1,236,411
 $1,159,825
 $1,160,031
 $1,202,923
$1,173,982
 $1,136,618
Charge-offs to average investment loans2.12% 1.83 % 4.83% 2.36 %2.93% 8.99 %
September 30,
2012
 December 31,
2011
 September 30,
2011
March 31, 2013 December 31, 2012 March 31, 2012
Equity-to-assets ratio8.39% 7.92% 8.44%9.04% 8.23% 7.74%
Tier 1 capital ratio (to adjusted total assets) (6)
9.31% 8.95% 9.31%
Tier 1 leverage ratio (to adjusted total assets) (6)
10.14% 9.26% 8.64%
Total risk-based capital ratio (to risk-weighted assets) (6)
17.58% 16.64% 17.64%22.53% 17.18% 16.06%
Book value per common share (5)
$17.76
 $14.80
 $16.30
$16.46
 $16.12
 $14.92
Number of common shares outstanding (5)
55,828,470
 55,577,564
 55,501,511
56,033,204
 55,863,053
 55,713,281
Mortgage loans serviced for others$82,414,799
 $63,770,676
 $56,772,598
$73,933,296
 $76,821,222
 $68,207,554
Weighted average service fee (basis points)30.1
 30.8
 30.5
29.3
 29.2
 28.7
Capitalized value of mortgage servicing rights0.83% 0.80% 0.77%0.98% 0.93% 0.88%
Ratio of allowance for loan losses to non-performing loans held-for-investment (7)
76.5% 65.1% 63.4%78.5% 76.3% 69.1%
Ratio of allowance for loan losses to loans held-for-investment (7)
4.65% 4.52% 4.13%6.11% 5.61% 4.22%
Ratio of non-performing assets to total assets (bank only)3.48% 4.43% 4.09%3.70% 3.70% 3.67%
Number of bank branches111
 113
 162
Number of banking centers111
 111
 113
Number of loan origination centers31
 27
 29
41
 31
 28
Number of employees (excluding loan officers and account executives)3,240
 2,839
 2,993
3,456
 3,328
 2,970
Number of loan officers and account executives336
 297
 306
322
 334
 311
(1)See Non-GAAP reconciliation.
(2)Includes residential first mortgage and second mortgage loans.
(3)Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period and the annualized average rate of interest paid on average interest-bearing liabilities for the period.
(4)Net interest margin is the annualized effect of the net interest income divided by that period's average interest-earning assets.
(5)Restated for a one-for-ten reverse stock split announced September 27, 2012 and trading began on October 11, 2012.
(6)Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of risk-based capital and total risk-based capital. These ratios are applicable to the Bank only.
(7)Bank only and does not include non-performing loans held-for-sale.

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Results of Operations
         Net income applicable to common stockholders for the three months ended September 30, 2012 was $79.7 million, $1.36 per diluted share, a $93.9 million increase from the loss of $14.2 million, $(0.26) per diluted share, during the three months ended September 30, 2011. The increase in net income resulted from a $161.2 million increase in non-interest income, a $7.5 million increase in net interest income, offset by a $82.3 million increase in non-interest expense and a $15.9 million increase in provision for loan losses.

Net income applicable to common stockholders for the nine months ended September 30, 2012 was $156.9 million, $2.61 per diluted share, a $277.7 million increase from the loss of $120.8 million, $(2.18) per diluted share, during the nine months ended September 30, 2011. The overall increase resulted from a $468.6 million increase in non-interest income and a $53.8 million increase in net interest income, offset by a $112.3 million increase in provision for loan losses and a $163.2 million increase in non-interest expense.

Net Interest Income

We recognized $73.1 million in net interest income for the three months ended September 30, 2012, which represented an increase of 11.4 percent, compared to $65.6 million reported for the three months ended September 30, 2011. The $7.5 million increase for three months ended September 30, 2012 is primarily due to a decrease in overall cost of funds to 1.73 percent from 2.09 percent in the three months ended September 30, 2011. Net interest income represented 21.1 percent of our total revenue during the three months ended September 30, 2012, compared to 36.8 percent for the three months ended September 30, 2011.

For the nine months ended September 30, 2012, we recognized $223.3 million in net interest income, which represented an increase of 31.7 percent, compared to $169.5 million reported for the nine months ended September 30, 2011. The $53.8 million increase for nine months ended September 30, 2012, is primarily due to a decrease in overall cost of funds to 1.74 percent from 2.19 percent in the nine months ended September 30, 2011. Net interest income represented 23.3 percent of our total revenue during the nine months ended September 30, 2012, compared to 38.8 percent for the nine months ended September 30, 2011.

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

For theWe recognized three$55.7 million months ended September 30, 2012, we had average interest-earning assets of $13.5 billion, compared to $11.7 billionin net interest income for the three months ended September 30, 2011March 31, 2013. The increase in average interest-earning assets reflects, which represented a $1.3 billion increase in average loans held-for-sale and a $0.2 billion increase in average loans held-for-investment. Average-interest-bearing liabilities totaled $10.7 billiondecrease of 25.5 percent, compared to $74.7 million reported for the three months ended September 30,March 31, 2012, compared to $10.3 billion. The $19.1 million decrease for the three months ended September 30, 2011March 31, 2013. The increase of $0.4 billion reflects is primarily due to a $0.4 billion increasedecrease in average depositsyield on interest-earning assets and a decrease in average balances of loans held-for-investment. Net interest income represented 23.1 percent of our total revenue during the three months ended March 31, 2013, compared to 25.2 percent for the three months ended September 30,March 31, 2012, compared to.

During the three months ended September 30, 2011March 31, 2013., we closed on the sales of commercial loans that had an average balance for the three months ended March 31, 2013 of $622.2 million. The proceeds from the sales were invested in interest earning deposits, which only earn interest at a rate of 0.26 percent during the three months ended March 31, 2013, which contributed to the decrease in overall yield on interest-earning assets, as well as a lower interest rate environment.

The increase in interest income was primarily driven by an increase in the average balance of available-for-sale residential first mortgage loans due to the increase in residential first mortgage originations during the three months ended September 30, 2012, and an increase in commercial loans held-for-investment driven by new commercial relationships. Interest expense for the three months ended September 30, 2012March 31, 2013 decreased to $46.739.3 million, compared to $54.448.2 million for three months ended September 30, 2011March 31, 2012. The average cost of interest-bearing liabilities decreased 3622 basis points from 2.091.76 percent for the three months ended September 30, 2011March 31, 2012 to 1.731.54 percent for the three months ended September 30, 2012March 31, 2013 and the average yield on interest-earning assets decreased 5574 basis points, from 4.093.89 percent for the three months ended September 30, 2011March 31, 2012 to 3.543.15 percent for the three months ended September 30, 2012March 31, 2013. The decrease was a result of lower levels of market interest rates. As a result, our interest rate spread was 1.811.61 percent for the three months ended September 30, 2012March 31, 2013, compared to 2.012.13 percent for the three months ended September 30, 2011March 31, 2012. The decline in our interest rate spread was primarily due to a decrease in variable yields and yields on shorter-duration assets, without any corresponding decline in overall funding costs.

Our consolidated net interest margin for the three months ended September 30, 2012March 31, 2013 was 2.161.83 percent, compared to 2.252.35 percent for the three months ended September 30, 2011March 31, 2012. The Bank recordedhad a net interest margin of 2.211.89 percent for the three months ended September 30, 2012March 31, 2013, compared to 2.302.41 percent for the three months ended September 30, 2011March 31, 2012.      

For the nine months ended September 30, 2012, we had average interest-earning assets of $13.0 billion, compared to $11.5 billion for the nine months ended September 30, 2011. The increase in average interest-earning assets reflects a $1.1 billion increase in average loans available-for-sale and a $0.6 billion increase in average loans held-for-investment. Average interest-bearing liabilities totaled $10.9 billion for the nine months ended September 30, 2012, compared to $10.4 billion for the nine months ended September 30, 2011. The increase reflects a $0.4 billion increase in average FHLB advances and a $0.2 billion

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increase in average deposits for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011.

Interest income for the nine months ended September 30, 2012 was $365.6 million, an increase of 7.7 percent from the $339.3 million recorded for the nine months ended September 30, 2011. The increase in interest income was primarily driven by an increase in the average balance of available-for-sale residential first mortgage loans due to the increase in mortgage originations during the nine months ended September 30, 2012, and an increase in commercial loans held-for-investment driven by new commercial relationships. Interest expense for the nine months ended September 30, 2012 was $142.3 million, a 16.2 percent decrease, compared to $169.8 million for the nine months ended September 30, 2011. The average cost of interest-bearing liabilities decreased 45 basis points from 2.19 percent for the nine months ended September 30, 2011 to 1.74 percent for the nine months ended September 30, 2012 and the average yield on interest-earning assets decreased 19 basis point, from 3.93 percent for the nine months ended September 30, 2011 to 3.74 percent for the nine months ended September 30, 2012. As a result, our interest rate spread was 2.00 percent for the nine months ended September 30, 2012, compared to 1.74 percent for the nine months ended September 30, 2011.

Our consolidated net interest margin was positively impacted by the expansion of our interest rate spread during the nine months ended September 30, 2012 . The result was a net interest margin for the nine months ended September 30, 2012 of 2.28 percent, compared to 1.96 percent the nine months ended September 30, 2011. The Bank recorded a net interest margin of 2.33 percent for the nine months ended September 30, 2012, compared to 2.01 percent for the nine months ended September 30, 2011.

The following tables present on a consolidated basis (rather than on a Bank-only basis)table presents interest income from average earning assets, expressed in dollars and yields, and (on a consolidated basis, rather than on a Bank-only basis) interest expense on average interest-bearing liabilities, expressed in dollars and rates. Interest income recorded on our loans is adjusted by the amortization of net premiums, net deferred loan origination costs and the amount of negative amortization (i.e., capitalized interest) arising from our option power ARM loans. These adjustments to interest income during the three and nine months ended September 30,March 31, 2013 and 2012 wasresulted in a net reduction of $1.0$1.1 million and $3.1$2.1 million, respectively, compared to an increase of $1.8 million and a net increase of $1.0 million during the three and nine months ended September 30, 2011, respectively. Non-accruing loans wereare included in the average loans outstanding.balance.



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For the Three Months Ended September 30,For the Three Months Ended
March 31,
2012 20112013 2012
Average
Balance
 Interest 
Annualized
Yield/
Rate
 
Average
Balance
 Interest 
Annualized
Yield/
Rate
Average
Balance
 Interest 
Annualized
Yield/
Rate
 
Average
Balance
 Interest 
Annualized
Yield/
Rate
(Dollars in thousands)(Dollars in thousands)
Interest-Earning Assets                      
Loans held-for-sale$3,301,860
 $30,578
 3.70% $2,041,173
 $22,187
 4.35%$3,616,195
 $26,807
 2.97% $2,393,725
 $24,242
 4.05%
Loans repurchased with government guarantees2,070,813
 15,450
 2.98% 1,790,464
 14,966
 3.34%1,774,235
 15,005
 3.38% 2,022,338
 17,074
 3.38%
Loans held-for-investment                      
Consumer loans (1)
4,717,672
 51,078
 4.32% 4,857,771
 55,215
 4.54%4,136,420
 42,685
 4.15% 4,990,828
 53,915
 4.33%
Commercial loans (1)
1,815,897
 17,052
 3.67% 1,429,449
 17,598
 4.82%698,269
 7,453
 4.27% 1,755,917
 18,677
 4.21%
Loans held-for-investment6,533,569
 68,130
 4.14% 6,287,220
 72,813
 4.60%4,834,689
 50,138
 4.16% 6,746,745
 72,592
 4.30%
Securities classified as available-for-sale or trading505,361
 4,912
 3.89% 840,490
 9,626
 4.58%348,525
 2,094
 2.41% 786,275
 8,571
 4.36%
Interest-earning deposits and other1,065,314
 672
 0.25% 718,647
 433
 0.24%1,501,568
 946
 0.26% 691,585
 412
 0.24%
Total interest-earning assets13,476,917
 119,742
 3.54% 11,677,994
 120,025
 4.09%12,075,212
 94,990
 3.15% 12,640,668
 122,891
 3.89%
Other assets1,680,208
     1,503,828
    1,617,359
     1,566,508
    
Total assets$15,157,125
     $13,181,822
    $13,692,571
     $14,207,176
    
Interest-Bearing Liabilities                      
Demand deposits (2)
$364,612
 $246
 0.27% $401,647
 $311
 0.31%$388,466
 $239
 0.25% $346,542
 $221
 0.26%
Savings deposits (2)
1,768,897
 2,886
 0.65% 1,250,844
 2,288
 0.73%2,316,859
 4,280
 0.75% 1,610,197
 3,305
 0.83%
Money market deposits457,425
 530
 0.46% 580,508
 946
 0.65%387,699
 330
 0.35% 486,907
 649
 0.54%
Certificates of deposit (2)
3,227,201
 9,847
 1.21% 2,811,458
 12,178
 1.72%2,931,558
 6,507
 0.90% 3,084,884
 10,330
 1.35%
Total retail deposits5,818,135
 13,509
 0.92% 5,044,457
 15,723
 1.24%6,024,582
 11,356
 0.76% 5,528,530
 14,505
 1.06%
Demand deposits107,944
 130
 0.48% 84,114
 114
 0.54%98,442
 106
 0.44% 98,724
 121
 0.49%
Savings deposits291,046
 404
 0.55% 485,815
 796
 0.65%308,811
 357
 0.47% 270,601
 386
 0.57%
Certificates of deposit375,922
 601
 0.64% 289,063
 396
 0.54%471,842
 694
 0.60% 392,656
 647
 0.66%
Total government deposits774,912
 1,135
 0.58% 858,992
 1,306
 0.60%879,095
 1,157
 0.53% 761,981
 1,154
 0.61%
Wholesale deposits334,595
 3,175
 3.77% 657,557
 5,650
 3.41%81,976
 995
 4.92% 357,532
 3,327
 3.74%
Total deposits6,927,642
 17,819
 1.02% 6,561,006
 22,679
 1.37%6,985,653
 13,508
 0.78% 6,648,043
 18,986
 1.15%
FHLB advances3,561,532
 27,091
 3.03% 3,528,054
 30,121
 3.39%3,105,556
 24,161
 3.16% 4,097,630
 27,394
 2.69%
Other248,560
 1,753
 2.81% 248,585
 1,611
 2.57%247,435
 1,652
 2.71% 248,585
 1,778
 2.88%
Total interest-bearing liabilities10,737,734
 46,663
 1.73% 10,337,645
 54,411
 2.09%10,338,644
 39,321
 1.54% 10,994,258
 48,158
 1.76%
Other liabilities (3)(2)
3,182,980
     1,684,352
    2,179,945
     2,076,300
    
Stockholders’ equity1,236,411
     1,159,825
    1,173,982
     1,136,618
    
Total liabilities and stockholders equity$15,157,125
     $13,181,822
    
Total liabilities and stockholders' equity$13,692,571
     $14,207,176
    
Net interest-earning assets$2,739,183
     $1,340,349
    $1,736,568
     $1,646,410
    
Net interest income  $73,079
     $65,614
    $55,669
     $74,733
  
Interest rate spread (4)(3)
    1.81%     2.01%    1.61%     2.13%
Net interest margin (5)(4)
    2.16%     2.25%    1.83%     2.35%
Ratio of average interest-earning assets to interest-bearing liabilities    125.5%     113.0%    116.8%     115.0%
(1)Consumer loans include: residential first mortgage, second mortgage, warehouse lending, HELOC and other consumer loans. Commercial loans include: commercial real estate, commercial and industrial, and commercial lease financing loans.
(2)
The three months ended September 30, 2011 includes $565.4 million of average demand deposits accounts, savings accounts and certificates of deposit that relate to the Georgia and Indiana sale.
(3)Includes company controlled deposits that arise due to the servicing of loans for others, which do not bear interest.
(4)(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.
(5)Net interest margin is net interest income divided by average interest-earning assets.

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 For the Nine Months Ended September 30,
 2012 2011
 
Average
Balance
 Interest 
Annualized
Yield/
Rate
 
Average
Balance
 Interest 
Annualized
Yield/
Rate
 (Dollars in Thousands)
Interest-Earning Assets           
Loans held-for-sale$2,892,439
 $83,912
 3.87% $1,746,202
 $58,695
 4.48%
Loans repurchased with government guarantees2,053,455
 49,910
 3.24% 1,763,055
 41,002
 3.10%
Loans held-for-investment           
Consumer loans (1)
4,781,021
 155,705
 4.35% 4,675,795
 163,199
 4.66%
Commercial loans (1)
1,802,619
 54,150
 3.95% 1,290,474
 47,338
 4.84%
Loans held-for-investment6,583,640
 209,855
 4.24% 5,966,269
 210,537
 4.70%
Securities classified as available-for-sale or trading644,166
 20,333
 4.21% 732,316
 26,673
 4.86%
Interest-earning deposits and other848,241
 1,546
 0.24% 1,275,917
 2,358
 0.25%
Total interest-earning assets13,021,941
 365,556
 3.74% 11,483,759
 339,265
 3.93%
Other assets1,606,255
     1,593,237
    
Total assets$14,628,196
     $13,076,996
    
Interest-Bearing Liabilities           
Demand deposits (2)
$357,715
 $687
 0.26% $403,236
 $1,035
 0.34%
Savings deposits (2)
1,736,348
 9,609
 0.74% 1,170,057
 7,023
 0.80%
Money market deposits475,477
 1,766
 0.50% 572,041
 3,081
 0.72%
Certificates of deposit (2)
3,142,051
 29,992
 1.28% 2,998,440
 40,891
 1.82%
Total retail deposits5,711,591
 42,054
 0.98% 5,143,774
 52,030
 1.35%
Demand deposits100,850
 369
 0.49% 76,160
 309
 0.54%
Savings deposits277,970
 1,171
 0.56% 425,998
 2,071
 0.65%
Certificates of deposit376,628
 1,843
 0.65% 259,573
 1,221
 0.63%
Total government deposits755,448
 3,383
 0.60% 761,731
 3,601
 0.63%
Wholesale deposits343,682
 9,689
 3.77% 745,879
 18,972
 3.40%
Total Deposits6,810,721
 55,126
 1.08% 6,651,384
 74,603
 1.50%
FHLB advances3,884,049
 81,870
 2.82% 3,465,986
 90,317
 3.48%
Other248,577
 5,270
 2.83% 248,602
 4,834
 2.60%
Total interest-bearing liabilities10,943,347
 142,266
 1.74% 10,365,972
 169,754
 2.19%
Other liabilities (3)
2,524,818
     1,508,101
    
Stockholders’ equity1,160,031
     1,202,923
    
Total liabilities and stockholders equity$14,628,196
     $13,076,996
    
Net interest-earning assets$2,078,594
     $1,117,787
    
Net interest income  $223,290
     $169,511
  
Interest rate spread (4)
    2.00%     1.74%
Net interest margin (5)
    2.28%     1.96%
Ratio of average interest-earning assets to interest-bearing liabilities    119.0%     110.8%
(1)Consumer loans include: residential first mortgage, second mortgage, warehouse lending, HELOC and other consumer loans. Commercial loans include: commercial real estate, commercial and industrial, and commercial lease financing loans.
(2)
The nine months ended September 30, 2011 includes $583.0 million of average demand deposits accounts, savings accounts and certificates of deposit that relate to the Georgia and Indiana sale.
(3)Includes company controlled deposits that arise due to the servicing of loans for others, which do not bear interest.
(4)Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.
(5)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). Changes attributable to both a change in volume and a change in rates were included as changes in rate.  
For the Three Months Ended September 30,For the Three Months Ended
March 31,
2012 Versus 2011 Increase (Decrease)
Due to:
2013 Versus 2012 Increase (Decrease)
Due to:
Rate Volume TotalRate Volume Total
(Dollars in thousands)(Dollars in thousands)
Interest-Earning Assets          
Loans held-for-sale$(5,319) $13,710
 $8,391
$(9,816) $12,381
 $2,565
Loans repurchased with government guarantees(1,857) 2,341
 484
26
 (2,095) (2,069)
Loans held-for-investment          
Consumer loans (1)
(2,547) (1,590) (4,137)(1,984) (9,246) (11,230)
Commercial loans (2)
(5,203) 4,657
 (546)(99) (11,125) (11,224)
Total loans held-for-investment(7,750) 3,067
 (4,683)(2,083) (20,371) (22,454)
Securities available-for-sale or trading(877) (3,837) (4,714)(1,700) (4,777) (6,477)
Interest-earning deposits and other(20,561) 20,800
 239
50
 484
 534
Total other interest-earning assets$(36,364) $36,081
 $(283)$(13,523) $(14,378) $(27,901)
Interest-Bearing Liabilities          
Demand deposits$(37) $(28) $(65)$(9) $27
 $18
Savings deposits(342) 940
 598
(483) 1,458
 975
Money market deposits(217) (199) (416)(186) (133) (319)
Certificates of deposit(4,117) 1,786
 (2,331)(3,307) (516) (3,823)
Total retail deposits(4,713) 2,499
 (2,214)(3,985) 836
 (3,149)
Demand deposits(16) 32
 16
(15) 
 (15)
Savings deposits(76) (316) (392)(84) 55
 (29)
Certificates of deposit87
 118
 205
(85) 132
 47
Total government deposits(5) (166) (171)(184) 187
 3
Wholesale deposits277
 (2,752) (2,475)246
 (2,578) (2,332)
Total deposits(4,441) (419) (4,860)(3,923) (1,555) (5,478)
FHLB advances(3,313) 283
 (3,030)3,437
 (6,670) (3,233)
Other142
 
 142
(117) (9) (126)
Total interest-bearing liabilities$(7,612) $(136) $(7,748)$(603) $(8,234) $(8,837)
Change in net interest income$(28,752) $36,217
 $7,465
$(12,920) $(6,144) $(19,064)
(1)Consumer loans include residential first mortgage, second mortgage, warehouse lending, HELOC and other consumer loans.
(2)Commercial loans include commercial real estate, commercial and industrial, and commercial lease financing loans.



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 For the Nine Months Ended September 30,
 
2012 Versus 2011 Increase (Decrease)
Due to:
 Rate Volume Total
 (Dollars in thousands)
Interest-Earning Assets     
Loans held-for-sale$(13,312) $38,529
 $25,217
Loans repurchased with government guarantees2,154
 6,754
 8,908
Loans held-for-investment     
Consumer loans (1)
(11,169) 3,675
 (7,494)
                Commercial loans (2)
(11,769) 18,581
 6,812
Total loans held-for-investment(22,938) 22,256
 (682)
Securities available-for-sale or trading(3,129) (3,211) (6,340)
Interest-earning deposits and other(20) (792) (812)
Total other interest-earning assets$(37,245) $63,536
 $26,291
Interest-Bearing Liabilities     
Demand deposits$(231) $(117) $(348)
Savings deposits(823) 3,409
 2,586
Money market deposits(794) (521) (1,315)
Certificates of deposit(12,863) 1,964
 (10,899)
Total retail deposits(14,711) 4,735
 (9,976)
Demand deposits(40) 100
 60
Savings deposits(178) (722) (900)
Certificates of deposit70
 552
 622
Total government deposits(148) (70) (218)
Wholesale deposits975
 (10,258) (9,283)
Total deposits(13,884) (5,593) (19,477)
FHLB advances(19,373) 10,926
 (8,447)
Other436
 
 436
Total interest-bearing liabilities$(32,821) $5,333
 $(27,488)
Change in net interest income$(4,424) $58,203
 $53,779

(1)Consumer loans include residential first mortgage, second mortgage, warehouse lending, HELOC and other consumer loans.
(2)Commercial loans include commercial real estate, commercial and industrial, and commercial lease financing loans.

Provision for Loan Losses

The provision reflects our estimate to maintain the allowance for loan losses at a level to cover probable losses inherent in the portfolio for each of the respective periods.

The provision for loan losses was $52.620.4 million for the three months ended September 30, 2012March 31, 2013, an increasea decrease from $36.7114.7 million for the three months ended September 30, 2011March 31, 2012. Loan loss provision expense increasedProvision for loan losses decreased for the three months ended September 30, 2012March 31, 2013, as compared to the three months ended September 30, 2011March 31, 2012, primarily due to the refinements to existing loss models adoptedin the estimation process that occurred during the first quarter 2012, as well as higher levels of loan modifications, compared to the lower quarterly loss rates and a decrease in loans held-for-investment balances.

three months ended September 30, 2011. Net charge-offs for three months ended September 30, 2012 totaled $34.6 million, compared to $28.7 million for the three months ended September 30, 2011March 31, 2013 totaled $35.4 million, compared to $151.7 for the three months ended March 31, 2012. As a percentage of the average loans held-for-investment, net charge-offs for the three months ended September 30, 2012March 31, 2013 increaseddecreased to 2.122.93 percent from 1.838.99 percent for the three months ended September 30, 2011March 31, 2012. The increasedecrease in the provision coupled with an increase in net charge-offs during the three months ended September 30, 2012March 31, 2013, increased the allowance for loan losses to $305.0 million at September 30, 2012. During the three months ended September 30, 2012, we also increased the portion of the reserve related to troubled debt restructurings ("TDRs") to reflect management's view of higher probable losses within that portfolio of modified loans.


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During the nine months ended September 30, 2012, we recorded a provision for loan losses of $225.7 million as compared to $113.4 million recorded during the nine months ended September 30, 2011. The increase in the provision during the nine months ended September 30, 2012 resulted in an allowance for loan losses of $305.0 million at September 30, 2012 and $318.0 million at December 31, 2011. Net charge-offs for nine month period ended September 30, 2012 totaled $238.7 million, compared to $105.4 million during the nine months ended September 30, 2011. The increase was primarily due to the refinements in our loss models implemented inthe estimation process that occurred during the first quarter 2012 and continued elevated levelsfrom the write-off of loan modifications. As a percentageall specific valuation allowances to conform with the OCC's application of regulatory guidance as the Bank transitioned to Call Report requirements for March 31, 2012. The impact of the average loans held-for-investment, net charge-offs for the nine months ended June 30, 2011increased to 4.83 percent from 2.36 percentrefinements adopted during the nine months ended September 30, 2011.first quarter of 2012 resulted in an increase to our allowance for loan loss of $59.0 million in the consumer portfolio and $11.0 million in the commercial portfolio.

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

Non-Interest Income

The following table sets forth the components of our non-interest income. 

For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
(Dollars in thousands)(Dollars in thousands)
Loan fees and charges$37,359
 $18,383
 $102,116
 $49,233
$33,360
 $29,973
Deposit fees and charges5,255
 7,953
 15,216
 23,297
5,146
 4,923
Loan administration income (loss)11,099
 (3,478) 74,997
 66,308
Loan administration20,356
 38,885
Net gain (loss) on trading securities237
 20,385
 (2,023) 20,414
51
 (5,971)
Loss on transferors’ interest(118) (186) (1,771) (4,825)(174) (409)
Net gain on loan sales334,427
 103,858
 751,945
 193,869
137,540
 204,853
Net loss on sales of mortgage servicing rights(1,332) (2,587) (4,631) (5,080)(4,219) (2,317)
Net gain on securities available-for-sale2,616
 
 2,946
 

 310
Net gain on sale of assets
 1,041
 
 1,297
958
 27
Total other-than-temporary impairment gain
 51,003
 2,810
 35,993

 3,872
Loss recognized in other comprehensive income before taxes
 (52,325) (5,002) (52,899)
 (5,047)
Net impairment losses recognized in earnings
 (1,322) (2,192) (16,906)
 (1,175)
Representation and warranty reserve – change in estimate(124,492) (38,985) (231,058) (80,776)(17,395) (60,538)
Other fees and charges8,686
 7,489
 29,903
 20,064
Other fees and charges, net9,320
 12,816
Total non-interest income$273,737
 $112,551
 $735,448
 $266,895
$184,943
 $221,377

Total non-interest income was $273.7184.9 million during the three months ended September 30, 2012March 31, 2013, which was a $161.1$36.5 million increasedecrease from $112.6221.4 million of non-interest income during the three months ended September 30, 2011March 31, 2012. The increasedecrease during the three months ended September 30, 2012March 31, 2013, was primarily due to an increasea decrease in net gain on loan sales net loan fees and charges and net loan administration income, both resulting from changing dynamics in the housing finance markets and interest rate environment, partially offset by an increasea decrease in representation and warranty provisionreserve - change in estimate and a decrease in net gain on trading securities. During the nine months ended September 30, 2012, total non-interest income increased to $735.4 million, from $266.9 million of non-interest income during the nine months ended September 30, 2011. The changes during the nine months ended September 30, 2012, were primarily due to the same reasons stated above. Factors affecting the comparability of the primary components of non-interest income are discussed in the following paragraphs.estimate.

Loan fees and charges. Our lending operationCommunity Banking and banking operationMortgage Banking segments both earn loan origination fees and collect other charges in connection with originating residential first mortgages, commercial loans and other consumer loans. For

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the three months ended September 30, 2012March 31, 2013, we recorded loan fees and charges of $37.433.4 million, an increase of $19.0$3.4 million from the $18.430.0 million recorded during the three months ended September 30, 2011. Loan fees and charges during the nine months ended September 30,March 31, 2012 were $102.1 million, compared to $49.2 million recorded during the nine months ended September 30, 2011. The increase in loan fees is related to the increase in the residential first mortgage loan originationsand charges during the ninethree months ended September 30, 2011March 31, 2013, is primarily due to an increase in loan production of $1.1 billion, compared to the three months ended March 31, 2012. Commercial loan origination fees are capitalized and added as an adjustment to the basis of the individual loans originated. These fees are accreted into income as an adjustment to the loan yield over the life of the loan or when the loan

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is sold. We account for substantially all residential first mortgage originations as held-for-sale using the fair value method and no longer apply deferral of non-refundable fees and costs to those loans.

Deposit fees and charges. Our banking operation collects deposit fees and other charges such as fees for non-sufficient funds checks, cashier check fees, ATM fees, overdraft protection, and other account fees for services we provide to our banking customers. Our total number of customer checking accounts decreased 16.9increased 3.8 percent from approximately 129,922106,000 on September 30, 2011March 31, 2012 to 107,986110,000 as of September 30, 2012. The divestiture of the Georgia and Indiana banking centers in December 2011 included the sale of approximately 22,000 customer checking accounts and represented most of the decrease.

Total deposit fees and charges decreased 33.9 percent during the three months ended September 30, 2012 to $5.3 million, compared to $8.0 million during the three months ended September 30, 2011. The primary reason for the decrease in deposit fees and charges was the divestiture of the Georgia and Indiana banking centers in December 2011. Georgia and Indiana combined provided $2.0 million of the deposit fees and charges during the three months ended September 30, 2011 and an average balance for the three months ended September 30, 2011 of $565.4 million in average demand deposit accounts, savings accounts and certificates of deposit. The Federal Reserve final ruling regarding interchange fees had a negative impact on debit card fee income beginning October 1, 2011, with the average fee per transaction dropping from 50 cents during the three months ended September 30, 2011 to 24 cents during the three months ended September 30, 2012March 31, 2013.

Total deposit fees and charges decreased $8.1 million to $15.2 million, or 34.7 percent,increased during the ninethree months ended September 30, 2012March 31, 2013 from $23.3 million duringcompared to the ninethree months ended September 30, 2011. The primary reason for the decrease in deposit fees and charges was the divestiture of the Georgia and Indiana banking centers in December 2011. Georgia and Indiana combined provided $5.9 million of the deposit fees and charges during the nine months ended September 30, 2011 and an average balance for the nine months ended September 30, 2011 of $583.0 million in average demand deposit accounts, savings accounts and certificates of deposit. Debit card fee income decreased to $1.9 million during the nine months ended September 30,March 31, 2012 from $5.5 million during the nine months ended September 30, 2011, due to the Federal Reserve final ruling regarding interchange fees.growth in personal and business checking accounts.

Loan administration. When our home lending operationMortgage Banking segment sells mortgage loans in the secondary market, it usually retains the right to continue to service these loans and earn a servicing fee, also referred to herein as loan administration income. Our mortgage servicing rights ("MSRs")MSRs are accounted for on the fair value method. See Note 10 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein.

The following table summarizes net loan administration income (loss).income. 
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
(Dollars in thousands)(Dollars in thousands)
Servicing income on residential first mortgage servicing          
Servicing fees, ancillary income and charges (1)
$53,636
 $40,524
 $152,878
 $126,906
$54,276
 $48,499
Fair value adjustments(74,314) (162,804) (165,897) (207,598)(15,641) (6,927)
Gain on hedging activity31,777
 118,802
 88,016
 147,000
Total net loan administration income (2)
$11,099
 $(3,478) $74,997
 $66,308
Loss on hedging activity(18,279) (2,687)
Total loan administration (2)
$20,356
 $38,885
(1)Includes the servicing fees, ancillary income and charges on other consumer mortgage servicing.
(2)
Loan administration income does not reflect the impact of securities deployed as economic hedges of MSR assets. These positions, recorded as securities - trading, provided $0.2$0.1 million in gains and $2.0 million in losses induring the three and nine months ended September 30, 2012March 31, 2013, respectively, compared to $20.4$6.0 million in gainslosses for both the three and nine months ended September 30, 2011March 31, 2012. These positions, which are on the balance sheet, also contributed $0.1 million and $1.9 million in interest income for the three and nine months ended September 30, 2012March 31, 2013, respectively, compared to $1.4 million and $2.5 million during the three and nine months ended September 30, 2011March 31, 2012, respectively..     

The loan administration income increasedecrease was due to favorableunfavorable fair value adjustments to our MSRs and market volatility in our hedging activity, partially offset by increases in servicing fees, ancillary income and charges on our residential first mortgage servicing due to an increase in the average balance in the portfolio of loans serviced for others during the three months ended September 30, 2012March 31, 2013, compared to the three months ended September 30, 2011March 31, 2012. The total unpaid principal balance of loans serviced for others at September 30, 2012 was $82.4 billion, compared to $56.8 billion at September 30, 2011.


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Loan administration income was $75.0 million forDuring the ninethree months ended September 30, 2012March 31, 2013, compared to $66.3 million during the nine months ended September 30, 2011. The increase was primarily due to favorable fair value adjustments to our MSRs and increases in servicing fees, ancillary income and charges on our residential first mortgage servicing due to an increase in the average balance in the portfolio of loans serviced for others. During the nine months ended September 30, 2012 and 2011, we sold servicing rights on a bulk basis associated with underlying mortgage loans totaling $3.6$10.7 billion. The total unpaid principal balance of loans serviced for others at March 31, 2013 was $73.9 billion, and $9.2compared to $68.2 billion respectively.at March 31, 2012.

Gain (loss) on trading securities. Securities classified as trading are comprised of U.S. Treasury bonds. U.S. Treasury bonds held in trading are distinguished from available-for-sale based upon the intent of management to use them as an economic hedge against changes in the valuation of the MSR portfolio, however, these do not qualify as an accounting hedge as defined in current accounting guidance for derivatives and hedges.

For U.S. Treasury bonds held, we recorded a gain of $0.2 million for the three months ended September 30, 2012March 31, 2013, we recorded a loss of $0.1 million on U.S. Treasury bonds held, all of which was related to an unrealized gainloss on U.S. Treasury bonds held at September 30, 2012March 31, 2013. For the three months ended September 30, 2011, we recorded a gain of $20.4 million for the three months ended September 30, 2011, all of which was related to an unrealized gain on U.S. Treasury bonds held at September 30, 2011.

For the nine months ended September 30,March 31, 2012, we recorded a loss of $2.06.0 million on U.S. Treasury bonds held,all of which $21.5 million was related to an unrealized loss on U.S. Treasury bonds and $19.5 million was related to a realized gain on the sale of U.S. Treasury bonds held at September 30,March 31, 2012. For the nine months ended September 30, 2011, we recorded a gain of $20.4 million, all of which was related to an unrealized gain on U.S. Treasury bonds held at September 30, 2011.

Loss on transferor interests. Losses on transferor's interest are a result of a reduction in the estimated fair value of our beneficial interests resulting from private securitizations. The loss during the three and nine months ended September 30, 2012 are primarily due to continued increases in expected credit losses on the assets underlying the securitizations. We have not engaged in any private-label securitization activity since 2007.

We recognized losses of $0.1 million and $0.2 million for the three months ended September 30, 2012 and September 30, 2011, respectively, all of which was related to a reduction in the transferor's interest related to our HELOC securitizations. At September 30, 2012, our expected liability was $0.5 million, compared to $2.1 million at September 30, 2011.

For the nine months ended September 30, 2012 and September 30, 2011, we recognized a losses of $1.8 million and $4.8 million, respectively, all of which was related to a reduction in the transferor’s interest related to our HELOC securitizations.

Net gain on loan sales. Our home lending operation, or our mortgage banking business,Mortgage Banking segment records the transaction fee income it generates from the origination, securitization and sale of mortgage loans in the secondary market.origination. The amount of net gain on loan sales recognized is a function of the volume of mortgage loans originated for sale and the fair value of these loans, net of related selling expenses. Net gain on loan sales is increased or decreased by any mark to

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market pricing adjustments on loan commitments and forward sales commitments, increases to the representation and warranty reserve (formerly known as secondary market reserve) related to loans sold during the period, and related administrative expenses. The volatility in the gain on sale spread is attributable to market pricing, which changes with demand and the general level of interest rates. Historically, pricing competition on mortgage loans is lower in periods of low or decreasing interest rates, due to higher consumer demand as usually evidenced by higher loan origination levels, resulting in higher spreads on origination. Conversely, pricing competition increases when interest rates rise, which generally reducereduces consumer demand, thus decreasing spreads on origination and compressing gain on sale. During 2012,Increases or decreases in competition may also arise as competitors enter and/or leave the net gain was favorably impacted by the significant volume of mortgage activity due to the attractive rate environment and associated spreads available from securities sold that are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.loan origination market.

The following table provides information on our net gain on loan sales reported in our consolidated financial statements and loans sold within the period. 
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
2012 2011 2012 2011March 31, 2013 December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012
(Dollars in thousands)(Dollars in thousands)  
Net gain on loan sales$334,427
 $103,858
 $751,945
 $193,869
$137,540
 $238,953
 $344,426
 $212,666
 $204,853
Mortgage rate lock commitments$18,089,000
 $13,097,000
 $50,489,000
 $25,051,000
Mortgage rate lock commitments (gross)$12,142,000
 $16,242,000
 $18,089,000
 $17,534,000
 $14,867,000
Loans sold or securitized$13,876,626
 $6,782,795
 $37,483,736
 $16,974,821
$12,822,879
 $15,610,590
 $13,876,627
 $12,777,311
 $10,829,798
Net margin on loan sales2.42% 1.53% 2.01% 1.14%1.07% 1.53% 2.42% 1.66% 1.89%
Mortgage rate lock commitments (fallout adjusted) (1)
$9,848,417
 $12,587,980
 $13,972,922
 $13,346,568
 $10,725,618
Net margin on mortgage rate lock commitments (fallout adjusted) (1)
1.40% 1.90% 2.39% 1.59% 1.91%
(1)Fallout adjusted are mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on previous historical experience and the level of interest rates.


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Net gain on loan sales increaseddecreased for the three months ended September 30, 2012March 31, 2013, compared to the three months ended September 30, 2011March 31, 2012, asprimarily due to a resultlower volume of increased residential first mortgage originationsrate lock commitments and continued strong marginsa lower gain on sales of the originations,sale margin, reflecting lower base production margin, as well as a reduction in overallhigher hedging costs.costs, loan level pricing adjustments, and the impact from guarantee fee changes from the GSEs. For the three months ended September 30, 2012March 31, 2013, the mortgage rate-lock commitments on residential first mortgages of $18.112.1 billion increased,decreased, compared to $13.114.9 billion in the three months ended September 30, 2011March 31, 2012, and loan. Loan sales of $13.912.8 billion in loans for the three months ended September 30, 2012March 31, 2013 also increased, compared to $6.810.8 billion sold during the three months ended September 30, 2011March 31, 2012. The increasedecrease in the mortgage rate-lock commitments during the three months ended September 30, 2012, which was reflective of strong demand in mortgage rate-lock commitments due to a low-interest rate environment and a concurrent increase in overall pricing.
Net gain on loan sales increased during the nine months ended September 30, 2012, from the nine months ended September 30, 2011. The increase included the sale of $37.5 billion in loans during the nine months ended September 30, 2012, compared to $17.0 billion sold in the nine months ended September 30, 2011. For the nine months ended September 30, 2012, the mortgage rate-lock commitments on residential first mortgages increased to $50.5 billion, compared to $25.1 billion in the nine months ended September 30, 2011. The increase in gain on loan sales was primarily due to increases in both residential first mortgage rate lock commitments and salesduring the three months ended March 31, 2013, as compared to the three months ended March 31, 2012 was reflective of residential firstlower volume in mortgage loans,rate lock commitments, primarily due to an increase in mortgage interest rates, as well as increased competition in the mortgage market. The lower interest rates and attractive margins available in the third and fourth quarters of 2012 caused an increase in competitors and capacity in the mortgage origination market decreasing margins and origination volumes as rates rose early in the year.

The net gain on loan sale margin. In late 2011, we executed a number of mortgage banking initiatives designed to leverage nationwide distribution and longstanding customer relationships and grow wholesale customer relationships and increase mortgage market share. Specifically, we added staff to facilitate loan growth, including reworking process flows for improved efficiency, as well as increasing underwriting and fulfillment staffing levels, while simultaneously implementing more robust quality control measures. As a result of these initiatives and the continued dislocation in the mortgage market space, we have been able to gain market share as we continue our emphasis as a top national mortgage lender.

Our calculation of net gain on loan sales reflects adoption of fair value accounting for the majority of mortgage loans held-for-sale beginning January 1, 2009. The change of method was made on a prospective basis; therefore, only mortgage loans held-for-sale that were originated after 2009 have been affected. In addition, we also hadincludes changes in amounts related to derivatives, lower of cost or market adjustments on loans transferred to held-for-investment and provisions to representation and warranty reserve. Changes in amounts related to loan commitments and forward sales commitments amounted to a gainloss of $5.8 million and $64.0$39.7 million for the three and nine months ended September 30, 2012March 31, 2013, respectively,as compared to a gain of $26.5 million and a loss of $21.0$41.1 million during the three and nine months ended September 30, 2011March 31, 2012, respectively.. The portion of the gain on sale that is allocated to theprovision for representation and warranty reserve which representsincluded in net gain on loan sales reflects our initial estimate of losses on probable mortgage repurchases arising from current loan sales and amounted to $6.4$5.8 million and $17.1$5.1 million for the three and nine months ended September 30,March 31, 2013 and 2012, respectively, compared to $1.8 million and $5.5 million during the three and nine months ended September 30, 2011, respectively.

Net loss on sales of mortgage servicing rights. As part of our business model, our mortgage banking operationMortgage Banking segment occasionally sells MSRs in transactions separate from the sale of the underlying loans. Because weWe carry our MSRs at fair value,value. Therefore, we would not expect to realize significant gains or losses at the time of the sale. Instead, oursale, because we recorded gains and losses on an ongoing basis as a change in the fair market value. Our income or loss on changes in the valuation of MSRs would beis recorded through our loan administration income. The gain or loss recognized is the transaction costs and the reserves on the sales completed during the period or adjustments to transaction costs or reserves from prior sales.

For the three months ended September 30, 2012March 31, 2013, we recorded losses on sales of MSRs of $1.34.2 million, compared to $2.62.3 million for the three months ended September 30, 2011March 31, 2012. During the three months ended September 30, 2012March 31, 2013, we sold $1.2 billion of servicing rights on a bulk basis associated

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servicing rights with respect to $10.7 billion of underlying mortgage loans, and sold servicing rights with respect to $0.1 billion of mortgage loans when we sold the underlying loans on a servicing released basis (i.e., sold together with the sale of the underlying loans).basis. During the three months ended September 30, 2011, we sold servicing rights on a bulk basis associated with underlying mortgage loans totaling $4.6 billion and on a servicing released basis (i.e., sold together with the sale of the underlying loans) totaling $0.2 billion.

We recorded losses on sales of MSRs of $4.6 million for the nine months ended September 30, 2012, compared to $5.1 million recorded for the nine months ended September 30, 2011. During the nine months ended September 30,March 31, 2012, we sold $3.6 billion of servicing rights on a bulk basis associatedservicing rights with underlyingrespect to $2.4 billion of mortgage loans, and $0.4sold servicing rights with respect to $0.1 billion of mortgage loans when we sold the underlying loans on a servicing released basis (i.e., sold together with the sale of the underlying loans). During the nine months ended September 30, 2011, we sold servicing rights on a bulk basis associated with underlying mortgage loans totaling $9.2 billion and on a servicing released basis (i.e., sold together with the sale of the underlying loans) totaling $0.9 billion.

Net gain on securities available-for-sale. Securities classified as available-for-sale are comprised of U.S. government sponsored agencies, non-agency collateralized mortgage obligations ("CMOs"), mortgage securitization and municipal obligations.

Gains on the sale of U.S. government sponsored agency securities available-for-sale that are booked with underlying mortgage products originated by the Bank, are reported within net gain on loan sales. Securities in U.S. government sponsored agency securities available-for-sale typically have remained in the portfolio less than 90 days before sale. Gains on sale for all other available-for-sale securities types are reported in net gain on sale of available-for-sale securities.

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During the three months ended September 30, 2012, we sold $4.6 million of purchased U.S. government sponsored agencies resulting in a net gain of $0.5 million, compared to no sales of purchased U.S. government sponsored agencies during the three months ended September 30, 2011. During the three months ended September 30, 2012 we sold $210.9 million of purchased non-agency CMOs, which included a net gain of $2.2 million. During the three months ended September 30, 2011 there were no sales of non-agency CMOs. The sale of the remaining non-agency CMOs and seasoned agency securities completed during the three months ended September 30, 2012. As a result of the sale of these securities, the Company also recognized $19.9 million of tax benefits representing the recognition of the residual tax effect associated with previously unrealized losses on these securities recorded in other comprehensive income.

During the nine months ended September 30, 2012, we sold $4.6 million of purchased U.S. government sponsored agencies resulting in a gain of $0.5 million, compared to no sales during the nine months ended September 30, 2011. During the nine months ended September 30, 2012, we sold $210.9 million of purchased non-agency CMOs, which included a net gain on sale of $2.6 million. During the nine months ended September 30, 2011, there were no sales of purchased non-agency CMOs.

Net impairment loss recognized through earnings. We recognize other-than-temporary impairments ("OTTI") related to credit losses through operations with any remainder recognized through other comprehensive income (loss). During the three month period ending September 30, 2012, we sold our remaining portfolio of non-agency CMOs and as of September 30, 2012 we no longer carry any OTTI associated with the non-agency CMOs. For the nine months ended September 30, 2012, there was $2.2 million of credit losses recognized with respect to the non-agency CMOs, as the result of forecasted continued depreciation in home values which serve as collateral for these securities. In the three and nine months ended September 30, 2011, there were $1.3 million and $16.9 million, respectively, of credit losses recognized with respect to the non-agency CMOs. All OTTI due to credit losses were recognized as expense in current operations. For further information on impairment losses, see Note 4 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein.basis.

Representation and warranty reserve - change in estimate. We maintain a representation and warranty reserve to account for the expected losses related to loans we might be required to repurchase (or the indemnity payments we may have to make to purchasers). The representation and warranty reserve takes into account both our estimate of expected losses on loans sold during the current accounting period, as well as adjustments due to our change in estimate of expected losses from probable repurchase obligations related to loans sold in prior periods.

Estimating the balance of the representation and warranty reserve involves using assumptions regarding future repurchase request volumes, expected loss severity on these requests and claims appeal success rates. The assumptions used to estimate the representation and warranty reserve contain a level of uncertainty and risk that could have a material impact on the reserve balance if they differ from actual results. For instance, to illustrate the sensitivity, among other factors, of the reserve to adverse changes, if the expected levels of demands in the model assumptions increased or decreased by 20.0 percent at September 30, 2012March 31, 2013, the result would be a $26.0 million increase or decrease in the representation and warranty reserve balance. If our loss severity rate increased or decreased by 20.0 percent at September 30, 2012March 31, 2013, the result would be a $38.0$32.0 million increase or decrease in the representation and warranty reserve balance. In order to estimate the sensitivity of the representation and warranty reserve to a particular factor, the factors varied within the model while keeping the other variables constant. For example, when estimating the impact to the representation and warranty reserve due to a change in expected levels of demands, the level of expected demands for vintages within the model varied by the percentages, holding other factors constant.

During the three months ended September 30, 2012March 31, 2013, we recorded an expense of $124.517.4 million which is an increaseand a corresponding decrease in our representation and warranty reserve due to our change in estimate of expected losses from probable repurchase obligations related to loans sold in prior periods, compared to the $39.060.5 million expense recorded in the three months ended September 30, 2011March 31, 2012. The increasedecrease from the three months ended September 30, 2011 reflects two major components. First, recent changes in behavior by and enhanced transparency from the GSEs, primarily related to loans originated prior to 2009 (i.e., pre-2009 vintages), caused an increase in forecasted demands. Second, during the three months ended September 30,March 31, 2012 we made a number of enhancements to the repurchase operations, including installing new leadership, adding full time employees and increasing processing capacity. Part of our enhancements included a significant effort during the three months ended September 30, 2012 to reduce the size and improve the aging of our current repurchase demand pipeline. As a result of these efforts, net-charge offs of loans repurchases increased, which had a negative impact on our loss rates in the model, driving an increase in reserves.

During the nine months ended September 30, 2012, we recorded an expense of $231.1 million which is an increase in our representation and warranty reserveprimarily due to our change in estimate of expected losses from probable repurchase obligations related to loans sold in prior periods, compared to the $80.8 million recorded in the nine months ended September 30, 2011.

During late 2011 and throughout 2012, we continued to see an increase in demand request activity from mortgage investors. As a result of the increased demand request activity and communications with mortgage investors, during the first quarter 2012 we refined the representation and warranty reserve methodology to more effectively incorporate the most recent observable data and trends. This is consistent with the improved risk segmentation and qualitative analysis and modeling performed for other

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similar reserve estimates, and consistent with expectations of the Bank's primary regulator and the continuing evaluation of the performance dynamics within the mortgage industry. Our enhanced first quarter 2012 methodology added granularity to the model by segmenting the sold portfolio by vintage years and investor to assign assumptions specific to each segment. Key assumptionsrefinements in the model include investor audits, demand requests, appeal loss rates, loss severity and recoveries. See “Liabilities - Representation and warranty reserve" below.estimation process.
    
Other fees and charges. Other fees and charges include certain miscellaneous fees, including dividends received on FHLB stock and income generated by our subsidiaries, Douglas Insurance Agency, Inc. and Paperless Office Solutions, Inc.stock.

During the three months ended September 30, 2012March 31, 2013, we recorded $2.2$2.7 million in dividends on an average outstanding balance of FHLB stock of $301.7 million, compared to $2.1$2.3 million in dividends on an average balance of FHLB stock outstanding of $301.7 million for the three months ended September 30, 2011.

During the nine months ended September 30,March 31, 2012, we recorded $6.8 million in dividends on an average outstanding balance of FHLB stock of $301.7 million, compared to $6.4 million in dividends on an average balance of FHLB stock outstanding of $321.4 million for the nine months ended September 30, 2011.


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Non-Interest Expense

The following table sets forth the components of our non-interest expense, along with the allocation of expenses related to loan originations that are deferred pursuant to accounting guidance for receivables, non-refundable fees and other costs. Mortgage loan fees and direct origination costs (principally compensation and benefits) are capitalized as an adjustment to the basis of the loans originated during the period and amortized to expense over the lives of the respective loans rather than immediately expensed. Other expenses associated with loan origination, however, are not required or allowed to be capitalized and are, therefore, expensed when incurred. We account for substantially all of our mortgage loans held-for-sale using the fair value method and, therefore, immediately recognize loan origination fees and direct origination costs in the period incurred rather than defer the cost.expense.

NON-INTEREST EXPENSE
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
(Dollars in thousands)(Dollars in thousands)
Compensation and benefits$67,439
 $55,464
 $199,122
 $164,954
$77,208
 $65,989
Commissions19,982
 10,575
 53,806
 25,628
17,462
 15,466
Occupancy and equipment18,833
 17,090
 54,490
 50,676
19,375
 16,950
Asset resolution12,487
 34,515
 70,108
 95,906
16,445
 36,770
Federal insurance premiums12,643
 10,665
 37,071
 30,180
11,240
 12,324
Other taxes2,037
 660
 3,372
 2,193
897
 946
Warrant (income) expense1,516
 (4,202) 3,513
 (7,027)(3,500) 2,549
Loss on extinguishment of debt15,246
 
 15,246
 
Loan processing expense17,111
 10,686
Legal and professional expense28,839
 16,817
General and administrative83,460
 26,569
 155,996
 67,058
11,513
 10,249
Total233,643
 151,336
 592,724
 429,568
Less: capitalized direct costs of loan closings(152) (645) (989) (724)
Total, net$233,491
 $150,691
 $591,735
 $428,844
Total non-interest expense$196,590
 $188,746
Efficiency ratio (1)
67.3% 84.6% 61.7% 98.3%81.7% 63.7%
Efficiency ratio (credit-adjusted) (2)
46.9% 53.5% 43.8% 64.4%69.8% 42.6%
(1)Total operating and administrative expenses divided by the sum of net interest income and non-interest income.
(2)Based on efficiency ratios as calculated, less representation and warranty reserve - change in estimate and asset resolution expense, see "Use of Non-GAAP Financial Measures."

The 54.94.2 percent increase in non-interest expense during the three months ended September 30, 2012March 31, 2013, compared to the three months ended September 30, 2011March 31, 2012, was primarily due to increases in generallegal and administrative expensesprofessional expense (primarily due to the assessment of our overall exposure from pending and threatened litigation)consulting fees), loss on extinguishment of debt,loan processing expense, compensation and benefits and commissions, partially offset by a decrease in asset resolution expense. The 38.0 percent increase in non-interest

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expense during the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, was primarily due to an increase in general and administrative expenses (primarily due to the assessment of our overall exposure from pending and threatened litigation), compensation and benefits, commissions and loss on extinguishment of debt.

Compensation and benefits. The $11.9$11.2 million increase in gross compensation and benefits expense for the three months ended September 30, 2012March 31, 2013, compared to the three months ended September 30, 2011March 31, 2012 is primarily attributable to a $7.4$5.8 million increase in compensation and benefits payable and a $2.1$2.0 million increase in general incentive compensation accruals, primarily related to an increase in employees needed to facilitate increased underwriting and loan origination volume. In addition, temporary staffing increased $1.4 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011.

For the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, the $34.2 million increase in gross compensation and benefits expense is primarily attributable to a $21.2 million increase in compensation and benefits payable and a $6.6 million increase in general incentive compensation accruals. Temporary staffing increased $3.2 million for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. Our full-time equivalent non-commissionednon commissioned salaried employees increased overall by 247486 from September 30, 2011March 31, 2012 to a total of 3,2403,456 at September 30, 2012.March 31, 2013.

Commissions. Commission expense, which is a variable cost associated with loan originations, totaled $20.0$17.5 million,, equal to 14 basis points of total loan originations during the three months ended September 30, 2012March 31, 2013, compared to $10.6$15.8 million,, equal to 1514 basis points of total loan originations in the three months ended September 30, 2011March 31, 2012. The increase in commissions was primarily due to the increase in loan originations for the three months ended September 30, 2012March 31, 2013. Loan originations increased to $14.7$12.5 billion for the three months ended September 30, 2012March 31, 2013 from $7.2$11.4 billion for the three months ended September 30, 2011.

During the nine months ended September 30,March 31, 2012, commission expense totaled $53.8 million, equal to 14 basis points of total loan originations, compared to $25.6 million, equal to 15 basis points of total loan originations in the nine months ended September 30, 2011. The increase in commissions is primarily due to an increase in loan originations during the nine months ended September 30, 2012. Loan originations increased to $38.9 billion for the nine months ended September 30, 2012 from $16.9 billion in the nine months ended September 30, 2011.

Asset resolution. Asset resolution expenses consist of expenses associated with foreclosed properties (including the foreclosure claims in process with respect to government insured loans for which we file claims with the U.S. Department of Housing and Urban Development ("HUD"))Development) and other disposition and carrying costs, loss provisions, and gains and losses on the sale of real estate owned properties that we have obtained through foreclosure or other proceedings.

For the three months ended September 30, 2012March 31, 2013 asset resolution expenses decreased $22.0$20.4 million to $12.516.4 million, as compared to $34.536.8 million during the three months ended September 30, 2011March 31, 2012. The decrease was primarily due to a $2.9 million decreasedecreases in foreclosure expenses related to commercial loans, compared to a $2.6 million in foreclosure expenses during the three months ended September 30, 2011. During the three months ended September 30, 2012, net repurchase expenses related todebenture interest expense on government insured loans, decreased $18.1 million to $4.0 million, compared to $22.1 million during the three months ended September 30, 2011. During the three months ended September 30, 2012, we participated in a HUD-coordinated market auction of loans repurchased with government guarantees, which is expected to result in the conveyance in an accelerated fashion of $302.4 million (claims proceeds of $127.7 million received during the three months ended September 30, 2012 with the remainder expected to be received during fourth quarter 2012) of such loans at par value. As a result, the Company recognized a reduction in otherwise expected curtailments of debenture interest income, resulting in a decrease of $7.8 million benefit applied against asset resolution expense during the three months ended September 30, 2012. During the three months ended September 30, 2012, net foreclosure cost related toagency fee accruals and commercial and residential real estate owned and agency fees related to our loans serviced for others portfolio decreased $1.0 million to $8.8 million, compared to $9.8 million for the three months ended September 30, 2011.

For the nine months ended September 30, 2012, asset resolution expense decreased $25.8 million to $70.1 million compared to $95.9 million for the nine months ended September 30, 2011. The decrease wasvaluations, primarily due to a $27.0 million decreaseimprovement in net repurchase expense related to government insured loans to $31.3 million for the nine months ended September 30, 2012, compared to $58.3 million for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, a $6.9 million decrease in net foreclosure expense related to commercial loans to $6.2 million, compared to $13.1 million for the nine months ended September 30, 2011. The Company recognized a reduction in otherwise expected curtailments of debenture interest income from the HUD-coordinated market auction, resulting in a decrease of $7.8 million benefit applied against asset resolution expense during the nine months ended September 30, 2012. The decreases were partially offset by a $8.1 million increase in net foreclosure expense related to residential real estate owned and agency fees related to our loans serviced for others to $32.6 million for the nine months ended September 30, 2012, compared to $24.5 million for the nine months ended September 30, 2011.home prices.


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Federal insurance premiums. Our FDIC insurance expense increaseddecreased for the three months ended September 30, 2012March 31, 2013, compared to the three months ended September 30, 2011March 31, 2012. The increasedecrease was primarily due to an increasea decrease in our average net total consolidated assets which is used to determinein the calculation of our assessment base.base for our expense accrual and a reduction in our assessment rate, primarily due to a decrease in brokered deposits. During the three months ended September 30, 2012March 31, 2013, federal insurance premiums totaled $12.611.2 million, compared to $10.712.3 million for the three months ended September 30, 2011March 31, 2012.


For the nine months ended September 30, 2012, our FDIC insurance premiums were $37.1 million, compared to $30.2 million for the nine months ended September 30, 2011. The increase was primarily due to the average reported deposits in the calculation
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Warrant (income) expense. Warrant income decreased to an expense ofwas $1.53.5 million for the three months ended September 30, 2012March 31, 2013, compared to incomeexpense of $4.22.5 million for the three months ended September 30, 2011March 31, 2012. The increasedecrease in warrant expense for the three months ended September 30, 2012March 31, 2013, was primarily due to the increasedecrease in the market price of our common stock.

For the nine months ended September 30, 2012 warrant income decreased $10.5 million to an expense of $3.5 million, compared to an income of $7.0 million during the nine months ended September 30, 2011. At September 30, 2012,March 31, 2013, warrants to purchase 0.7 million shares of our common stock withhad a fair value of $5.9$7.8 million, were outstanding, compared to warrants to purchase 0.7 million shares of our common stock with a fair value of $2.4$11.3 million outstanding at December 31, 2011. The overall increase in warrant expense is attributable to the increase in the market price of our common stock since December 31, 2011.2012.

Loss on extinguishment of debt.Loan processing expense. The $15.2Loan processing expense increased to $17.1 million increase in loss on extinguishment of debt for both the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011 is the result of the penalties paid for the prepayment of $500.0 million of FHLB advances, as part of our ongoing balance sheet management strategies.

General and administrative. General and administrative expense increased $56.9 million during the three months ended September 30, 2012March 31, 2013, as compared to $10.7 million for the three months ended September 30, 2011March 31, 2012. The increase was primarily due to a $51.9 million increase in our outside consulting, audit, reflecting the increased loan origination volume and legalincreased underwriting expenses which increased from $5.3 million for the three months ended September 30, 2011 to $57.2 million for the three months ended September 30, 2012. The increase primarily reflects our assessment of overall litigation exposure from pending and threatened litigation, and a resulting $40.0 million increase in the reserve for such matters. In addition, our loan processing expenses increased $6.3 million during the three months ended September 30, 2012 from the three months ended September 30, 2011, reflecting the increased loan origination volume for the three months ended September 30, 2012, compared to the three months ended September 30, 2011March 31, 2013.

GeneralLegal and administrativeprofessional expense. Legal and professional expense increased $88.9 million during the ninethree months ended September 30,March 31, 2013, as compared to the three months ended March 31, 2012, from the nine months ended September 30, 2011. The increase was primarily due to a $72.1 millionan increase in our outside consulting, audit and legal expensesconsultant fee expense. Consultant fee expense increased to $16.2 million for the ninethree months ended September 30, 2012 and a $14.5March 31, 2013, compared to $6.4 million for the three months ended March 31, 2012. The increase in loan processing expenses forconsulting fees during the ninethree months ended September 30, 2012 asMarch 31, 2013, was primarily attributable to various initiatives to improve our management of operational and regulatory risk with a result of increased loan origination volume. The increase reflects our assessment of overall litigation exposure from pending and threatened litigation, and a resulting $40.0 million increase in the reservefocus on improving underlying processes for such matters.sustainable long term solutions.

Provision (Benefit) for Federal Income Taxes

For the three and nine months ended September 30,March 31, 2013 and March 31, 2012, our benefitprovision for federal income taxes as a percentage of pretax income was (33.6) percent and (14.1) percent, respectively, as compared to a provision for federal income taxes of 2.9 percent and 0.7 percent for the three and nine months ended September 30, 2011.zero percent. For each year, the provision (benefit) for federal income taxes varies from statutory rates primarily because of a change in balance to our valuation allowance for net deferred tax assets.

Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, a deferred tax asset is recorded for net operating loss carry forwards and unused tax credits. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

We periodically review the carrying amount of our deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of our deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to all positive and negative evidence related to the realization of the deferred tax assets.
    

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In evaluating this available evidence, we consider historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Our evaluation is based on current tax laws as well as our expectations of future performance.

During the three months ended September 30, 2012, we sold our remaining non-agency CMOs and seasoned agency securities. As a result of the sale of these securities, the Company also recognized $19.9 million of tax benefit representing the recognition of the residual tax effect associated with previously unrealized losses on these securities recorded in other comprehensive income.

We had a $309.1$334.2 million and $383.8$341.9 million valuation allowance against deferred tax assets as of September 30, 2012March 31, 2013 and December 31, 20112012, respectively. See Note 19 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements, herein.


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OPERATING SEGMENTS

Overview

For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction Note 21 of the Notes to Consolidated Financial Statements, in Item 1. Financial Statements, herein, and other sections for a full understanding of our consolidated financial performance.

The operating segments are based on an internally-aligned segment leadership structure, which is how the results are monitored and performance assessed. We have three major operating segments: Community Banking, Mortgage Banking and Other. The Community Banking segment originates loans to and collects deposits from consumer and business customers through Commercial, Business, Government and Branch Banking groups. Products offered through these groups include checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans and commercial loans. Other financial services available to consumer and commercial customers include lines of credit, revolving credit, customized treasury management solutions, equipment leasing, inventory and accounts receivable lending and capital markets services such as interest rate risk protection products. The Mortgage Banking segment originates, acquires, sells and services mortgage loans. The origination and acquisition of mortgage loans is the majority of the lending activity. Mortgage loans are originated through home lending centers, national call centers, the Internet, unaffiliated banks and mortgage brokerage companies, where the net interest income and the gains from sales associated with these loans are recognized in the Mortgage Banking segment. Also, the Mortgage Banking segment services mortgage loans for others and sells MSRs into the secondary market. The Other segment includes corporate treasury, 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 impact of interest rate risk management, the impact of balance sheet funding activities, charges or credits of unusual or infrequent nature that are not reflective of the normal operations of the operating segments and miscellaneous other expenses of a corporate nature. Each operating segment supports and complements the operations of the other, with funding for the Mortgage Banking segment primarily provided by deposits obtained through Community Banking and with the Community Banking segment providing warehouse lines of credit to mortgage originators, most of which sell loans to the Mortgage Banking segment. A discussion of our three operating segments is set forth below.

The operating segment results are generated utilizing our management reporting system, which assigns balance sheet and income statement items to each of the operating segments. The process is designed around our organizational and management structure and, accordingly, the results derived may not be directly comparable with similar information published by other financial institutions. Revenue is recorded in the operating segment responsible for the related product or service.

The management accounting process that develops the operating segment reporting utilizes various estimates and allocation methodologies to measure the performance of the operating segments. Expenses are allocated to operating segments using a two-phase approach. The first phase consists of measuring and assigning costs to activities within each operating area to create a driver-based cost. These driver-based costs are then allocated, with the resulting amount allocated to operating segments that own the related products. The second phase consists of the allocation of overhead costs to all three operating segments from the Other segment.

The net income (loss) by operating segment is presented in the following table.
 
For the Three Months Ended
March 31,
 2013 2012
 (Dollars in thousands)
Community Banking$(14,530) $(33,660)
Mortgage Banking61,525
 40,899
Other(23,388) (14,548)
    Total net income (loss)$23,607
 $(7,309)


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The selected average balances by operating segment is presented in the following table.
 
For the Three Months Ended
March 31,
 2013 2012
 (Dollars in thousands)
Average loans held-for-sale   
Community Banking$622,196
 $
Mortgage Banking2,993,999
 2,393,725
Average loans held-for-investment   
Community Banking$1,556,031
 $2,779,852
Mortgage Banking3,271,593
 3,957,412
Other7,065
 9,481
Average total assets   
Community Banking$2,352,113
 $2,886,737
Mortgage Banking9,045,217
 9,450,749
Other2,295,241
 1,869,690
Average interest-bearing deposits   
Community Banking$6,961,067
 $6,357,363
Other24,586
 290,680

Community Banking

Our Community Banking segment's two strategic responsibilities are providing a stable funding source for the Mortgage Banking segment and operating as a standalone, profitable line of business. The groups within the Community Banking segment originate consumer loans, commercial loans and warehouse loans, gather consumer, business and governmental deposits, and offer liquidity management products. The liquidity management products include customized treasury management solutions, equipment and technology leasing, international services, capital markets services such as interest rate risk protection products, foreign exchange hedging, and trading of securities.

For the Three Months Ended
March 31,
2013 2012
(Dollars in thousands)
Net interest income$30,122
 $35,301
Provision for loan losses(1,535) (28,870)
Non-interest income11,031
 9,529
Non-interest expense(54,148) (49,620)
Net loss$(14,530) $(33,660)
Average balances   
Total loans held-for-investment$1,556,031
 $2,779,852
Total assets2,352,113
 2,886,737
Total interest-bearing deposits6,961,067
 6,357,363

The Community Banking segment reported a $19.1 million decrease in net loss. This improvement was largely driven by a $27.3 million decrease in provision for loan losses, primarily related to the refinements in the estimation process that occurred during the first quarter 2012. The decrease in provision for loan losses was partially offset by a decrease in net interest income, primarily the result of the average loans held-for-investment portfolio declining during the three months ended March 31, 2013, as compared to March 31, 2012. Non-interest expense increased $4.5 million for the three months ended March 31, 2013, as compared to the three months ended March 31, 2012, reflecting an increase in consulting fees.

Mortgage Banking

Our Mortgage Banking segment originates, acquires, sells and services one-to-four family residential first mortgage loans. The Mortgage Banking segment also services mortgage loans on a fee basis for others and sells MSRs into the secondary

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market. Funding for our Mortgage Banking segment is provided primarily by deposits and borrowings obtained by our Community Banking segment.
 
For the Three Months Ended
March 31,
2013 2012
(Dollars in thousands)
Net interest income$45,013
 $45,819
Provision for loan losses(18,880) (85,803)
Net gain on loan sales137,390
 204,682
Representation and warranty reserve - change in estimate(17,395) (60,538)
Other non-interest income50,345
 59,605
Asset resolution(16,888) (31,638)
Other non-interest expense(118,060) (91,228)
Net income$61,525
 $40,899
Average balances   
Total loans held-for-sale$2,993,999
 $2,393,725
Total loans held-for-investment3,271,593
 3,957,412
Total assets9,045,217
 9,450,749

The Mortgage Banking segment income increased $20.6 million primarily due to a $66.9 million decrease in provision for loan losses and a $43.1 million decrease in representation and warranty reserve - change in estimate, partially offset by a decrease of $67.3 million in the net gain on loan sales. The decreases in the provision for loan losses and representation and warranty reserve - change in estimate for the three months ended March 31, 2013, as compared to the three months ended March 31, 2012, were primarily due to the refinements in the estimation process that occurred during the first quarter 2012. The decrease in gain on loan sales was primarily due to lower residential first mortgage rate lock commitments and a lower base gain on sale margin, as well as higher hedging costs, loan level pricing adjustments, and the impact from guarantee fee changes from the GSEs during the three months ended March 31, 2013. For the three months ended March 31, 2013, net loan fees and charges increased to $31.0 million, as compared to $27.3 million for the three months ended March 31, 2012.

Net servicing revenue, which is the combination of net loan administration income (including the off-balance sheet hedges of MSRs) and the gain (loss) on trading securities (i.e., the on-balance sheet hedges of MSRs), decreased to $20.3 million for the three months ended March 31, 2013, as compared to $33.1 million for the three months ended March 31, 2012, primarily due to unfavorable fair value adjustments to our MSRs and market volatility in our hedging activity, partially offset by increases in servicing fees, ancillary income and charges on our residential first mortgage servicing due to an increase in the average balance in the portfolio of loans serviced for others during the three months ended March 31, 2013, compared to the three months ended March 31, 2012.


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Other

The Other segment includes the treasury, 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 shareholders' equity, the impact of interest rate risk management, the impact of balance sheet funding activities, and changes or credit of an unusual or infrequent nature that are not reflective of the normal operations of the operating segments and miscellaneous other expenses of a corporate nature.
 
For the Three Months Ended
March 31,
2013 2012
(Dollars in thousands)
Net interest expense$(19,466) $(6,387)
Non-interest income3,572
 8,099
Non-interest expense(7,494) (16,260)
Net loss$(23,388) $(14,548)
Average balances   
Total assets$2,295,241
 $1,869,690

Net interest income includes the impact of administering our investment securities portfolios and the net impact of derivatives used to hedge interest rate sensitivity. Non-interest income includes insurance income, miscellaneous fee income not allocated to other operating segments, such as bank owned life insurance income and any Treasury related items and trading asset gains or losses.

Non-interest expense includes certain corporate administrative and other miscellaneous expenses. The provision for income taxes is not allocated to the operating segments as new corporate income tax liability will not occur until after the utilization of the existing deferred tax assets.

The Other segment net loss increased $8.8 million primarily due to a $13.1 million increase in net interest expense, partially offset by a $8.8 million decrease in non-interest expenses. The decrease in net interest expenses is primarily due to lower average balances of interest-earning assets.
Analysis of Items on Statements of Financial Condition

Assets

Interest-earning deposits. Interest-earning deposits, on which we earn a minimal interest rate, increased $268.2 million$1.3 billion at September 30, 2012March 31, 2013 compared to December 31, 20112012, primarily due to on-going strategic initiativesthe sale of the Northeast-based commercial loans related to increase lending.the CIT Agreement and Customers Agreement, which were substantially completed during the three months ended March 31, 2013. Our interest-earning deposits allow the flexibility to fund our on-going initiatives to increase commercial lending, as well as other mortgage related initiatives.

Securities classified as trading. Securities classified as trading are comprised of AAA-rated U.S. Treasury bonds. Changes to the fair value of trading securities are recorded in the Consolidated Statements of Operations. At both September 30,March 31, 2013 and December 31, 2012 there were $170.1 million securities classified as trading, compared to $313.4 million at December 31, 2011.trading. U.S. Treasury bonds held in trading are distinguished from those classified as available-for-sale based upon the intent of management to use them as an offset against changes in the valuation of the MSR portfolio, however, these do not qualify as an accounting hedge. See Note 4 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements, herein.

Securities classified as available-for-sale. Securities classified as available-for-sale, which are comprised of U.S. government sponsored agencies, non-agency CMOs, mortgage securitization and municipal obligations, decreased from $481.4184.4 million at December 31, 20112012, to $198.9169.8 million at September 30, 2012March 31, 2013. This decrease was due to the sale of the remaining non-agency CMOsprincipal reductions during the ninethree months ended September 30, 2012March 31, 2013. As a result of the sale of these securities, we also recognized $19.9 million of tax benefit representing the recognition of the residual tax effect associated with previously unrealized losses on these securities recorded in other comprehensive income. See Note 4 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements, herein.

Loans held-for-sale. A majorityEssentially all of our mortgage loans produced are sold into the secondary market on a whole loan basis or by securitizing the loans into securities. At September 30, 2012March 31, 2013, we held loans held-for-sale of $3.32.7 billion, which was an increasea decrease of $1.5$1.2 billion from $1.83.9 billion held at December 31, 20112012. Loan origination is typically inversely related to the level of long-term interest rates. As long-term ratesThe decrease we tend to originate an increasing number of mortgage loans. A significant amount of the loan origination activity during periods of falling interest rates is derived from refinancing of existing mortgage loans. The increase in the balance of loans held-for-sale was principally attributableprimarily due to the timingfourth quarter 2012 agreements to sell the Northeast-based commercial loan portfolio. During the three months

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ended March 31, 2013, we sold $859.0 million of commercial loans in the held-for-sale category related to the fourth quarter 2012 agreements. For further information on loans held-for-sale, see Note 5 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements, herein.

Loans repurchased with government guarantees. Pursuant to Ginnie Mae servicing guidelines, we have the unilateral option to repurchase certain delinquent loans securitized in Ginnie Mae pools, if the loans meet defined criteria. As a result of this unilateral option, once the delinquency criteria have been met and regardless of whether the repurchase option has been exercised. Weexercised, we must treat the loans as having been repurchased and recognize the loans on the Consolidated Statements of Financial Condition and also recognize a corresponding deemed liability for a similar amount. If the loans are actually repurchased, we eliminate the corresponding liability. At September 30, 2012March 31, 2013, the amount of such loans actually repurchased totaled $1.91.6 billion and were classified as loans repurchased with government guarantees. These loans which we have not yet repurchased but had the unilateral right to repurchase totaled $91.4$58.4 million and were classified as loans held-for-sale.


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At December 31, 20112012, the amount of such loans actually repurchased totaled $1.91.8 billion and were classified as loans repurchased with government guarantees, and those loans which we have not yet repurchased but had the unilateral right to repurchase totaled $117.2$72.4 million and were classified as loans held-for-sale.

During the three months ended September 30, 2012, we participated in a HUD-coordinated market auction of loans purchased with government guarantees, which is expected to result in the conveying in an accelerated fashion of $302.4 million of such loans at par value to HUD within prescribed time frames (claims proceeds of $127.7 million received during third quarter with the remainder to be received in fourth quarter). The terms of such conveyance process resulted in $7.8 million of default servicing cost avoidance, which was reflected as a reduction to asset resolution expense during the three months ended September 30, 2012.

Substantially all of these remaining loans continue to be insured or guaranteed by the Federal Housing Administration (“FHA”("FHA") and management believes that the reimbursement process is proceeding appropriately. On average, claims have historically been filed and paid within approximately 18 months from the date of the initial delinquency. However, increasing volumes throughout the country, as well as changes in the foreclosure process in states throughout the country and other forms of government intervention may result in changes to the historical norm. 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 9060 days past due.delinquent. This interest is recorded as interest income and the related claims settlement expenses are recorded in asset resolution expense on the Consolidated Statements of Operations. For further information on loans repurchased with government guarantees, see Note 6 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements, herein.

Loans held-for-investment. Our largest category of earning assets consists of loans held-for-investment. Loans held-for-investment consist of residential first mortgage loans that are not held for resale (usually shorter duration and adjustable rate loans and second mortgages), warehouse loans to other mortgage lenders, HELOC, other consumer loans, commercial real estate loans, commercial and industrial loans, and commercial lease financing loans. Loans held-for-investment decreased from $7.05.4 billion at December 31, 20112012, to $6.64.7 billion at September 30, 2012March 31, 2013, primarily due to residentialwarehouse loans declining $597.0 million to $750.8 million at March 31, 2013, compared to $1.3 billion at December 31, 2012. Residential first mortgage loans declining 17.7 percent to $3.1 billionstayed consistent at September 30, 2012, compared to December 31, 2011.$3.0 billion. Commercial real estate loans decreased to $1.0 billion$562.9 million at September 30, 2012March 31, 2013 from $1.2 billion$640.3 million at December 31, 2011. Commercial2012. These decreases were partially offset by an increase in commercial and industrial loans increased $268.4to $107.7 million to $597.3at March 31, 2013 from $90.6 million at September 30, 2012 from $328.9 million at December 31, 2011. Commercial lease financing increased to $188.6 million at September 30, 2012, compared to $114.5 million at December 31, 2011.2012. For information relating to the concentration of credit of our loans held for investment, see Note 7 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statement, and Supplementary Data, herein.


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Quality of Earning Assets

Management considers a number of qualitative and quantitative factors in assessing the level of its collectively evaluated reserves, in accordance with ASC Topic 310-10, Receivablesand individually evaluated reserves, in accordance with ASC Topic 450-20, reserves."Loss Contingencies." See the section captioned "Allowance for Loan Losses" following.in this discussion. As illustrated in the tables following, trends in certain credit quality characteristics such as non-performing loans and delinquency statistics have recently stabilized or even begun to show signs of improvement. This is predominantly a result of the run off of the legacy portfolios combined with the addition of new commercial loans with betterstrong credit characteristics.

A breakout of the components of our allowance for loan losses, by loan portfolio type, is provided in Note 7 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements, herein. The total allowance for loan losses for residential first mortgage, second mortgage and HELOC loans increased from December 31, 2011 to September 30, 2012 despite a lower level of past due loans and a lower ending UPB over the same period. The increase was primarily attributable to an increase in the consumer allowance for loan losses, reflecting in part the recognition of potential emerging risks associated with the residential first mortgage portfolio and the refinements to existing loss models adopted during the first quarter 2012. The total allowance for loan losses for commercial real estate loans decreased from December 31, 2011 to September 30, 2012. Ending UPB for commercial loans increased as of September 30, 2012, as compared to December 31, 2011, reflecting the origination of "new" commercial loans, which are originated under an enhanced underwriting structure and therefore have a lower associated loss rate applied to them.


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

NON-PERFORMING LOANS AND ASSETS 
September 30,
2012
 June 30,
2012
 March 31,
2012
 December 31, 2011 
September 30,
2011

March 31, 2013 December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012
(Dollars in thousands)(Dollars in thousands)
Non-performing loans$398,948
 $431,599
 $406,583
 $488,367
 $444,887
$369,303
 $399,825
 $398,948
 $431,599
 $406,583
Real estate and other non-performing assets, net119,468
 107,235
 108,686
 114,715
 113,365
114,356
 120,732
 119,468
 107,235
 108,686
Non-performing assets held-for-investment, net518,416
 538,834
 515,269
 603,082
 558,252
483,659
 520,557
 518,416
 538,834
 515,269
Non-performing loans held-for-sale2,086
 2,430
 2,842
 4,573
 3,331
394
 1,835
 2,086
 2,430
 2,842
Total non-performing assets including loans held-for-sale$520,502
 $541,264
 $518,111
 $607,655
 $561,583
$484,053
 $522,392
 $520,502
 $541,264
 $518,111
Ratio of non-performing assets to total assets (bank only)3.48% 3.75% 3.67% 4.43% 4.09%3.70% 3.70% 3.48% 3.75% 3.67%
Ratio of non-performing loans held-for-investment to loans held-for-investment6.09% 6.59% 6.11% 6.94% 6.52%7.79% 7.35% 6.09% 6.59% 6.11%
Ratio of allowance to non-performing loans held-for-investment76.5% 66.5% 69.1% 65.1% 63.4%78.5% 76.3% 76.5% 66.5% 69.1%
Ratio of allowance to loans held-for-investment4.65% 4.38% 4.22% 4.52% 4.13%
Ratio of net charge-offs to average loans held-for- investment0.53% 0.81% 2.25% 0.40% 0.46%
Ratio of allowance for loan losses to loans held-for-investment6.11% 5.61% 4.65% 4.38% 4.22%
Ratio of net charge-offs to average loans held-for-investment (annualized)2.93% 3.18% 2.12% 3.24% 8.99%
Ratio of non-performing assets to loans held-for-investment and repossessed assets9.96% 9.36% 7.77% 8.09% 7.61%
 

The following table providessets forth the activity for unpaid principal balance, which does not include premiums or discounts, of non-performing commercial assets, which includesprimarily commercial real estate and commercial and industrial loans.
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
(Dollars in thousands)(Dollars in thousands)
Beginning balance$183,738
 $156,252
 $145,006
 $253,934
$139,128
 $145,006
Additions55,870
 10,612
 239,720
 74,509
48,619
 65,777
Returned to performing(241) (403) (11,411) (19,104)
 (11,168)
Principal payments(28,038) (3,752) (50,008) (14,399)(35,236) (1,864)
Sales(22,702) (12,088) (39,839) (94,568)(23,215) (13,083)
Charge-offs, net of recoveries(11,050) (9,944) (97,548) (54,057)(11,356) (44,617)
Valuation write-downs(1,351) (2,250) (9,694) (7,888)(1,154) (5,630)
Ending balance$176,226
 $138,427
 $176,226
 $138,427
$116,786
 $134,421


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Past due loans held-for-investment

Loans are considered to be past due when any payment of principal or interest is 30 days past due. While it is the goal of management to work out a satisfactory repayment schedule or modification with a past due borrower, we will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our procedurespractices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations.obligations and minimize losses incurred by the bank. We customarily mail several notices of past due payments to the borrower within 30 days after the due date and late charges are assessed in accordance with certain parameters. Our collection department makes telephone or personal contact with borrowers after loans are 30 days past due. In certain cases, we recommend that the borrower seek credit-counseling assistance and may grant forbearance if it is determined that the borrower is likely to correct a past due loan within a reasonable period of time. We cease the accrual of interest on loans that we classify as "non-performing" once they are greater thanbecome 90 days past due or earlier when concerns exist as to the ultimate collection of principal or interest. Such interest is recognized as income only when it is actually collected.

At September 30, 2012March 31, 2013, we had $489.6$456.0 million of loans held-for-investment that were determined to be past due loans. Of those past due loans, $398.9$369.3 million of loans were non-performing held-for-investment, of which $273.6$296.4 million, or 68.680.3 percent, were single-family residential mortgage loans. At December 31, 20112012, we had $633.5$499.1 million of loans held-for-investment that were determined to be past due loans. Of those past due loans, $488.4$399.8 million of loans were non-performing held-for-investment,

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of which $378.8$306.5 million, or 77.676.7 percent, were single-family residential first mortgage loans. At September 30, 2012, non-performing loans held-for-sale totaled $2.1 million, compared to $4.6 million at December 31, 2011. The $2.5 million decrease from December 31, 20112012 to September 30, 2012March 31, 2013 in non-performing loans held-for-sale, was primarily due to the sale of non-performingcontinued work-outs and individual note sales targeted around residential first mortgage loans at a sale price which approximated carrying value.    and commercial real estate loans.

Residential first mortgage loans. As of September 30, 2012March 31, 2013, non-performing residential first mortgages of $268.2totaled $296.4 million, a decrease of $104.3$10.1 million from $372.5$306.5 million at December 31, 20112012. This decrease resulted from the charge-down of all specific valuations allowances due to conform with the OCC's application of regulatory guidance as the Bank transitioned to Call Report requirements in the first quarter 2012. Although our portfolio is diversified throughout the United States, the largest concentrations ofcontinued work-outs before loans are in California, Florida and Michigan. Each of those real estate markets has experienced steep declines in real estate values beginning in 2007 and continuing through 2012.reach non-accrual status. Net charge-offs within the residential first mortgage portfolio totaled $18.1 million and $129.0$20.3 million for the three and nine months ended September 30, 2012March 31, 2013, respectively, compared to $10.5 million and $21.3$94.6 million for the three and nine months ended September 30, 2011March 31, 2012, respectively. As discussed above,primarily due to the increaserefinements in net charge-offs was largely driven by the elimination of specific valuation allowances.estimation process that occurred during the first quarter 2012.

Commercial real estate loans. TheAs of March 31, 2013, non-performing commercial real estate portfolio experienced some deterioration in credit beginning in mid-2007loans totaled $66.1 million, a decrease of $20.3 million from $86.4 million at December 31, 2012, primarily in the commercial land residential development loans. Credit deterioration in this segment has slowed in 2011 and into 2012.due to continued work-outs. Non-performing commercial real estate loans have as a percentpercentage of the commercial real estate portfolio increasedloans, decreased to 12.29.8 percent in September 30, 2012March 31, 2013 from 8.013.5 percent at December 31, 20112012., primarily due to continued progress in working out the portfolio. Net charge-offs within the commercial real estate portfolio totaled $11.1 million and $83.0$11.3 million for the three and nine months ended September 30, 2012March 31, 2013, respectively, which was ana decrease from $9.4 million and $53.5$43.0 million for the three and nine months ended September 30, 2011March 31, 2012, respectively.primarily due to the refinements in the estimation process that occurred during the first quarter 2012.

Troubled debt restructurings (held-for-investment)

TDRsTroubled debt restructurings ("TDRs") are modified loans in which a concession not otherwise available is provided to a borrower experiencing financial difficulties. Our ongoing loan modification efforts to assist homeowners and other borrowers continued to increase our overall balance of TDRs. Non-performing TDRs were 27.439.5 percent and 40.336.3 percent of total non-performing loans at September 30, 2012March 31, 2013 and December 31, 20112012, respectively.

TDRs can be classified as either performing or non-performing. Non-performing TDRs are included in non-accrual loans and performing TDRs are excluded from non-accrual loans because it is probable that all contractual principal and interest due under the restructured terms will be collected. At September 30, 2012, TDRs included in non-performing loans were $109.5 million, compared to $196.6 million as of December 31, 2011. Within consumer non-performing loans, residential first mortgage TDRs were 38.647.8 percent of residential first mortgage non-performing loans at September 30, 2012March 31, 2013, compared to 44.445.9 percent at December 31, 20112012. The level of modifications that were determined to be TDRs in these portfolios is expected to result in elevated non-performing loan levels for longer periods, because TDRs remain in non-performing status until a borrower has made at least six consecutive months of payments under the modified terms, or ultimate resolution occurs. TDRs primarily reflect our loss mitigation efforts to proactively work with borrowers having difficulty making their payments. Although many of the TDRs continue to be performing, we have increased our reserve on TDRs, which also increased the allowance for loan losses.

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TDRs Held-for-InvestmentTDRs Held-for-Investment
Performing Non-performing TotalPerforming Non-performing Total
(Dollars in thousands)(Dollars in thousands)
September 30, 2012     
March 31, 2013     
Consumer loans (1)
$612,956
 $106,250
 $719,206
$598,041
 $144,469
 $742,510
Commercial loans (2)
1,329
 3,230
 4,559

 1,446
 1,446
Total TDRs$614,285
 $109,480
 $723,765
$598,041
 $145,915
 $743,956
December 31, 2011     
December 31, 2012     
Consumer loans (1)
$499,438
 $167,076
 $666,514
$588,475
 $143,188
 $731,663
Commercial loans (2)
17,737
 29,509
 47,246
1,287
 2,056
 3,343
Total TDRs$517,175
 $196,585
 $713,760
$589,762
 $145,244
 $735,006
(1)
Consumer loans include: residential first mortgage, second mortgage, warehouse lending, HELOC and other consumer loans. The allowance for loan losses on consumer TDR loans totaled $138.1$159.9 million and $85.2$159.0 million at September 30, 2012March 31, 2013 and December 31, 20112012, respectively.
(2)
Commercial loans include: commercial real estate, commercial and industrial and commercial lease financing loans. The allowance for loan losses on commercial TDR loans totaled $0.4 millionzero and $32.2$0.3 million at September 30, 2012March 31, 2013 and December 31, 20112012, respectively.

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TableThe following table sets forth the activity during each of Contents


Total TDRs increased to $723.8 million at September 30, 2012 from $713.8 million at December 31, 2011. Of the total TDRs at September 30, 2012, non-performing TDRs totaled $109.5 million, which represents approximately 27.4 percent of total non-performing loans. TDRs that have returnedperiods presented with respect to performing (accrual) status are excluded fromTDRs and non-performing loans. These loans have demonstrated a period of at least six months of consecutive performance under the modified terms. Performing TDRs increased $97.1 million at September 30, 2012 to $614.3 million, compared to $517.2 million at December 31, 2011.TDRs.
TDRs Held-for-InvestmentTDRs Held-for-Investment
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended
March 31,
2012 2011 2012 20112013 2012
Performing(Dollars in thousands)(Dollars in thousands)
Beginning balance$576,097
 $547,479
 $517,176
 $605,099
$589,762
 $517,175
Additions26,035
 13,191
 105,175
 268,465
11,771
 39,409
Transfer to non-performing TDR(14,495) (35,325) (68,079) (108,612)(14,678) (27,934)
Transfer from non-performing TDR34,290
 10,787
 95,460
 39,873
23,527
 22,473
Principal repayments(5,376) (20,860) (20,865) (287,775)(9,079) (6,767)
Reductions (1)
(2,266) (1,468) (14,582) (3,246)(3,262) (7,119)
Ending balance$614,285
 $513,804
 $614,285
 $513,804
$598,041
 $537,237
Non-performing          
Beginning balance$133,088
 $133,975
 $196,585
 $124,535
$145,244
 $196,585
Additions14,322
 16,767
 54,294
 86,648
21,097
 21,701
Transfer from performing TDR14,495
 35,325
 68,079
 108,612
14,678
 27,934
Transfer to performing TDR(34,290) (10,787) (95,460) (39,873)(23,527) (22,473)
Principal repayments(17,153) (9,045) (73,619) (107,107)(8,122) (31,653)
Reductions (1)
(982) (1,432) (40,399) (8,012)(3,455) (32,965)
Ending balance$109,480
 $164,803
 $109,480
 $164,803
$145,915
 $159,129
(1)Includes loans paid in full or otherwise settled, sold or charged off.

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The following table sets forth information regarding past due loans at the dates listed. At September 30, 2012March 31, 2013, 69.680.3 percent of all past due loans were loans in which we had a first lien position on residential real estate, compared to 76.677.3 percent at December 31, 20112012.
PAST DUE LOANS HELD-FOR-INVESTMENT 
Days Past DueSeptember 30,
2012
 December 31,
2011
March 31,
2013
 December 31,
2012
(Dollars in thousands)(Dollars in thousands)
30 – 59 days      
Consumer loans      
Residential first mortgage$48,263
 $74,934
$56,341
 $62,445
Second mortgage1,388
 1,887
996
 1,171
HELOC3,459
 5,342
684
 2,484
Other809
 1,507
347
 587
Commercial loans      
Commercial real estate9,563
 7,453
Commercial and industrial
 11
Commercial real estate (1)
1,465
 6,979
Total 30-59 days past due63,482
 91,134
59,833
 73,666
60 – 89 days      
Consumer loans      
Residential first mortgage24,085
 37,493
18,754
 16,693
Second mortgage606
 1,527
836
 727
HELOC1,869
 2,111
876
 910
Other137
 471
15
 248
Commercial loans      
Commercial real estate397
 12,323
Commercial and industrial35
 62
Commercial real estate (1)
6,400
 6,990
Total 60-89 days past due27,129
 53,987
26,881
 25,568
Greater than 90 days      
Consumer loans      
Residential first mortgage268,210
 372,514
Second mortgage4,406
 6,236
Warehouse lending28
 28
HELOC3,435
 7,973
Residential first mortgage (2)
296,395
 306,486
Second mortgage (2)
4,298
 3,724
HELOC (2)
2,343
 3,025
Other240
 611
132
 183
Commercial loans      
Commercial real estate122,586
 99,335
Commercial real estate (1) (2)
66,095
 86,367
Commercial and industrial43
 1,670
40
 41
Total greater than 90 days past due398,948
 488,367
369,303
 399,826
Total past due loans$489,559
 $633,488
$456,017
 $499,060

(1)The past due commercial real estate loans are handled by the loan workout group and represent loans in a run-off portfolio, which are not part of the new business that began in early 2011.
(2)Includes loans that are secured by real estate.

    

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

NON-ACCRUAL LOANS HELD-FOR-INVESTMENT 
At September 30, 2012At March 31, 2013
Investment
Loan
Portfolio
 
Non-
Accrual
Loans
 
As a % of
Loan
Specified
Portfolio
 
As a % of
Non-
Accrual
Loans
Investment
Loan
Portfolio
 
Non-
Accrual
Loans
 
As a % of
Loan
Specified
Portfolio
 
As a % of
Non-
Accrual
Loans
(Dollars in thousands)(Dollars in thousands)
Consumer loans              
Residential first mortgage$3,086,096
 $268,210
 8.7% 67.2%$2,991,394
 $296,395
 9.9% 80.3%
Second mortgage122,286
 4,406
 3.6% 1.1%112,385
 4,298
 3.8% 1.2%
Warehouse lending1,307,292
 28
 % %750,765
 
 % %
HELOC192,117
 3,435
 1.8% 0.9%167,815
 2,343
 1.4% 0.6%
Other consumer53,188
 240
 0.5% 0.1%44,488
 132
 0.3% %
Total consumer loans4,760,979
 276,319
 5.8% 69.3%4,066,847
 303,168
 7.5% 82.1%
Commercial loans              
Commercial real estate(1)1,005,498
 122,586
 12.2% 30.7%562,916
 66,095
 11.7% 17.9%
Commercial and industrial597,273
 43
 % %107,688
 40
 % %
Commercial lease financing188,649
 
 % %5,815
 
 % %
Total commercial loans1,791,420
 122,629
 6.8% 30.7%676,419
 66,135
 9.8% 17.9%
Total loans6,552,399
 $398,948
 6.1% 100.0%$4,743,266
 $369,303
 7.8% 100.0%
Less allowance for loan losses(305,000)      (290,000)      
Total loans held-for-investment, net$6,247,399
      $4,453,266
      
(1)The non-accrual commercial real estate loans are handled by the loan workout group and represent loans in a run-off portfolio, which are not part of the new business that began in early 2011.

The following table sets forth the non-performing loans (i.e., greater than 90 days past due loans)performing and non-accrual residential first mortgage loans by year of origination (i.e., vintage) and the total amount of unpaid principal balance loans outstanding at September 30, 2012March 31, 2013.

RESIDENTIAL FIRST MORTGAGE LOANS HELD-FOR-INVESTMENT
At September 30, 2012At March 31, 2013
VintagePerforming Loans Non-Accrual Loans 
Unpaid Principal
Balance
Performing Loans Non-Accrual Loans 
Unpaid Principal
Balance (1)
(Dollars in thousands)(Dollars in thousands)
Pre-2003$69,735
 $6,406
 $76,141
2003177,109
 7,553
 184,662
2004549,688
 23,537
 573,225
Pre-2005$750,140
 $44,269
 $794,409
2005604,060
 26,954
 631,014
569,184
 33,571
 602,755
2006238,573
 20,621
 259,194
227,929
 29,907
 257,836
2007890,999
 102,104
 993,103
867,752
 117,681
 985,433
200877,423
 43,335
 120,758
88,386
 47,568
 135,954
200945,069
 14,199
 59,268
45,636
 12,979
 58,615
201022,212
 4,649
 26,861
27,199
 4,515
 31,714
201153,894
 6,085
 59,979
48,190
 4,913
 53,103
201259,485
 12,767
 72,252
37,435
 649
 38,084
20135,598
 343
 5,941
Total loans$2,788,247
 $268,210
 3,056,457
$2,667,449
 $296,395
 $2,963,844
Net deferred fees and other    29,639
    27,550
Total residential first mortgage loans    $3,086,096
    $2,991,394


(1)     Unpaid principal balance does not include net deferred fee, premiums or discounts, and other.


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Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable losses in our loans held-for-investment portfolio as of the date of the Consolidated Financial Statements. The allowance provides for probable losses that have been identified with specific customer relationships, individually evaluated, and for probable losses believed to be inherent in the loan portfolio but that have not been specifically identified, collectively evaluated.
As part of our ongoing risk assessment process which remains focused on the impact of the current economic environment and the related borrower repayment behavior on our credit performance, management has been working with an industry expert to improve credit risk modeling process and continue to back test and validate the results of quantitative and qualitative modeling of the risk in its loans held-for-investment portfolio. This is consistent with the expectations of our primary regulator and with the continuing evolution of the performance dynamics within the mortgage industry. As a result of an analysis completed during the first quarter 2012, we determined it was appropriate to make refinements to the allowance for The consumer loan loss methodology and related model. The first quarter 2012 refinements included improved risk segmentation and quantitative analysis, and enhancements to and alignment of the qualitative risk factors.

We maintain an allowance for loan losses at a level that management determines is appropriate to absorb estimated losses in our loan portfolio. The impact of the refinements adopted during the first quarter 2012 resulted in an increase to the level of allowance for loan losses management deemed appropriate to absorb losses, which totaled $59.0 million in the consumer portfolio and $11.0 million in the commercial portfolio.

The following key refinements were made:

First, we utilized refined segmentation and more formal qualitative factors during the first quarter 2012, which resulted in an increase in the adjusted historical factors used to calculate the ASC 450-20 allowance related to the consumer portfolio. Historically, we segmented the population of consumer loans held-for-investment by product type and by delinquency status for purposes of estimating an adequate allowance for loan losses. Management performed a thorough analysis of the largest product type,includes residential first mortgage loans, to assess the relative reliability of its risk segmentation in connection with the ability to detect losses inherent in the portfolio, and determined that there was a higher correlation of loan losses to LTV ratios than to delinquency status. As a result, management refined its process to use LTV segmentation, rather than product and delinquency segmentation, as the more appropriate consumer residential loan characteristic in determining the related allowance for loan losses.

Additionally, we created a more formal process and framework surrounding the qualitative factors and better aligned the factors with regulatory guidance and the changes in the mortgage environment. Management formally implemented a qualitative factor matrix related to each loan class in the consumer portfolio in the first quarter 2012, which includes the following factors: changes inmortgages, second mortgages, construction, warehouse lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes in the value of underlying collateral for collateral-dependent loans, changes in concentrations of credit, and other external factor changes. These factors are used to reflect changes in the collectability of the portfolio not captured by the historical loss rates. As such, the qualitative factors supplement actual loss experience and allow us to better estimate the loss within the loan portfolios based upon market and other indicators. Qualitative factors are analyzed to determine a quantitative impact of each factor which adjusts the historical loss rate. Adjusted historical loss rates are then used in the calculation of the allowance for loan losses. The adjusted historical loss rates in 2012 were higher than those used in the calculation of the consumer allowance for loan losses in prior years, thereby resulting in an increase to the 2012 level of allowance for loan losses.

Second, to allow us the appropriate amount of time to analyze portfolio statistics and allow for the appropriate validation of the reasonableness of the new qualitative factors, management adjusted the historical look back period for loss rates to lag a quarter (as compared to the previous policy of a month). This adjustment resulted in a decrease to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses, partially offsetting the increase resulting from the refined segmentation.

Third, the commercial loan portfolio was segmented into commercial "legacy" loans (loans originated prior to January 1, 2011) and commercial "new" loans (loans originated on or after January 1, 2011) while still retaining the segmentation by product type. Due to the changes in our strategy and to changes in underwriting and origination practices and controls related to that strategy, management determined the refined segmentation better reflected the dynamics in the two portfolios. The loss rates attributed to the "legacy" portfolio are based on historical losses of this segment. Due to the brief period of time that loans in the "new" portfolio were outstanding, and thus the absence of a sufficient loss history for that portfolio, we had used loss data from a third party data aggregation firm (adjusting for our qualitative factors) as a proxy for estimating an allowance for loan losses on the "new" portfolio. As a refinement in the first quarter 2012, we separately identified a population of commercial banks with

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similar size balance sheets (and loan portfolios) to serve as our peer group. We now use this peer group's publicly available historical loss data (adjusted for our qualitative factors) as a new proxy for loss rates used to determine the allowance for loan losses on our "new" commercial portfolio. This refined segmentation resulted in an increase to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses.

Fourth, as a result of these refinements (in addition to the refinements noted below), management has determined that it no longer requires an unallocated portion of allowance for loan losses. Management expects to review these models on an ongoing basis and update them as appropriate to reflect then-current industry conditions, heightened access to enhanced loss data, and refinements based upon continuous back testing of the allowance for loan losses model. This change to the unallocated reserve resulted in a decrease to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses.

Lastly, part of the increase in allowance for loan losses was a result of the TDR refinement. Historically, we performed impairment analysis on TDRs by using the discounted cash flows method on a portfolio or pooled approach when the TDRs were not deemed collateral dependent. During the fourth quarter 2011, management adopted a strategic focus that improved loss mitigation processes so that we could continue the rate of loan modifications and other loss mitigation activities. Due to the emphasis on loss mitigation activities, management implemented new procedures relating to "new" TDRs (loans that were designated TDRs generally beginning on or after October 1, 2011) to capture the necessary data to perform the impairment analysis on a portfolio level. Such data was not previously available and currently continues to not be available for loans designated as TDRs prior to September 30, 2011. This data is now being captured in part due to our loan servicing system conversion in late 2011. As such, for a significant percentage of "new" TDRs, management was able to perform the impairment calculation on a portfolio basis. Given data constraints the "old" TDR portfolio as of December 31, 2011, is still utilizing the pooled approach. This refinement resulted in an increase to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses. Management expects to continue to refine this process for operational efficiency purposes that will allow for periodic review and updates of impairment data of all TDRs grouped by similar risk characteristics.

Accounting standards require a reserve to be established as a component of the allowance for loan losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan and the recorded investment in the loan exceeds its fair value. Fair value is measured using either the present value of the expected future cash flows discounted at the loan's effective interest rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent, reduced by estimated disposal costs.

Non-performing commercial and commercial real estate loans are considered to be impaired and typically have an allowance allocated based on the underlying collateral's appraised value, less management's estimates of costs to sell. In estimating the fair value of collateral, we utilize outside fee-based appraisers to evaluate various factors such as occupancy and rental rates in our real estate markets and the level of obsolescence that may exist on assets acquired from commercial business loans. Appraisals are updated at least annually but may be obtained more frequently if changes to the property or market conditions warrant.

Impaired residential loans include loan modifications considered to be TDRs and certain non-performing loans that have been charged down to collateral value. Fair value of non-performing residential mortgage loans, including re-defaulted TDRs and certain other severely past due loans, is based on the underlying collateral's value obtained through appraisals or broker's price opinions, updated at least semi-annually, less management's estimates of cost to sell. The allowance allocated to TDRs performing under the terms of their modification is typically based on the present value of the expected future cash flows discounted at the loan's effective interest rate, either on a loan level or pooled basis, as these loans are not considered to be collateral dependent.

Once a commercial loan (greater than $250,000) that is secured principally by real estate is risk rated special mention or more negative, an updated appraisal is ordered. (Commercial loans less than $250,000 that are secured principally by real estate follow the same process, but a broker price opinion ("BPO") is obtained instead of an appraisal.) The appraisal received is reviewed by our Commercial Appraisal and Risk Management Group ("CARM") for reasonableness. CARM has the authority to adjust the appraised value if deemed warranted or request a new or revised appraisal if needed. CARM has the responsibility for establishing and maintaining appraisal guidelines and procedures to ensure compliance with the Bank's policies and applicable regulations. As part of its responsibilities, CARM reviews the qualifications of appraisers and establishes, reevaluates, and monitors a list of approved real estate appraisers. As long as a loan continues to be risk rated special mention or more negative, the Bank requires, at a minimum, that an updated appraisal be obtained on the underlying collateral at least annually. Based on the specific facts and circumstances of each loan, an appraisal may be obtained more frequently if warranted.

To determine the amount of impairment to record on an impaired commercial loan that is deemed collateral dependent, the Bank uses the "as is" market value from the appraisal as a starting point. Appraisals that are less than 180 days old are discounted 10 percent to determine the adjusted appraised value or net realizable value of the collateral. This discount reflects the passage of time and includes estimated costs to sell the underlying collateral. Appraisals that are greater than 180 days old but less than one

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year old are discounted by 15 percent. Lastly, appraisals that are greater than one year old are discounted by 25 percent. Additionally, impaired commercial loans are reviewed at a minimum of a quarterly basis to ensure the appropriateness of the calculated impairment that has been recorded. Periodically, these discounts and adjusted appraised values are validated by back-testing against the actual proceeds received from the sale of collateral.

Additionally, throughout the life of the loan, the credit risk management area performs portfolio reviews to validate the risk ratings provided by the loan officers. Also, the Bank’s independent internal loan review department and/or its third party loan review firm reviews loans and validates the risk ratings, with more active oversight and monitoring for higher risk and high dollar relationships and loan balances. Based upon the results of such oversight and monitoring, updated appraisals may be ordered.

For consumer loans secured by residential real estate (which are not government insured nor designated as troubled debt restructurings), our policy is to request a BPO when the loan is 150 days delinquent. Once the BPO is obtained, it is reviewed for reasonableness. Our policy is to discount the BPO by 20 percent, which the Bank believes is appropriate so that the BPO, as adjusted, generally approximates the fair value of the underlying residential real-estate collateral. An additional 10-15 percent discount is taken to estimate the selling costs of the property. Such estimates of the fair value less estimated selling costs (i.e., to determine net realizable value) are used to determine the applicable charge-off against the allowance for loan losses. Additionally, once the loan moves to repossessed assets and we begin to market the property, we request an appraisal and at least one BPO. While the property is being marketed, we are provided with a new BPO every 30 to 60 days until liquidation. If the property does not sell within 12 months of the date it was moved to real estate owned, we obtain an appraisal.

For consumer TDRs secured by residential real estate, our policy is to request a BPO when the loan is 60 days delinquent. When a consumer TDR is 90 days delinquent, it is deemed to have re-defaulted and becomes collateral-dependent and an appraisal rather than a BPO is ordered.

For those loans not individually evaluated for impairment, management sub-divided the commercial and consumer loans into homogeneous portfolios.

loans. The commercial loan portfolio is segmented intoincludes commercial "legacy" loans (loans originated prior to January 1, 2011)real estate, commercial and industrial, and commercial "new" loans (loans originated on or after January 1, 2011) while still retaining the segmentation by product type. Due to the changes in our strategy and to changes in underwriting and origination practices and controls related to that strategy, management determined the refinement was added to better reflect the dynamics in the two portfolios. The loss rates attributed to the "legacy" portfolio is based on historical losses of this segment. Due to the lack of seasoning in the "new" portfolio, we were previously utilizing loss data from a third party (adjusting for our qualitative factors) as a proxy for estimating an allowance on its "new" portfolio. As a refinement in the first quarter 2012, we identified a population of commercial banks with similar size balance sheets (and loan portfolios) to serve as a peer group. We now uses this peer group's publicly available historical loss data (adjusted for our qualitative factors) as a new proxy for their loss rates.lease financing loans.

Historically, we segmented the population of consumer loans by product type and by past due status for purposes of determining an appropriate allowance for loan loss. Management performed a thorough analysis of its largest product type, residential mortgage loans, and its risk segmentation in connection with its model's ability to predict losses inherent in the portfolio, and determined it would segment the portfolio by LTV rather than past due loan status. This is consistent with a shift in the mortgage market as to the relevance of various indicators. The portion of the allowance allocated to other consumer and residential mortgage loans is determined by applying projected loss ratios to various segments of the loan portfolio. Projected loss ratios are qualitatively adjusted for certain past due statistics, loss severity trends, economic and regulatory considerations, etc.

As the process for determining the adequacy of the allowance requires subjective and complex judgment by management about the effect of matters that are inherently uncertain, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses. In estimating the amount of credit losses inherent in our loan portfolio various assumptions are made. For example, when assessing the condition of the overall economic environment assumptions are made regarding current economic trends and their impact on the loan portfolio. If the anticipated recovery is not as strong or timely as management's expectations, it may affect the estimate of the allowance for loan losses. For impaired loans that are collateral dependent, the estimated fair value of the collateral may deviate significantly from the net proceeds received when the collateral is sold.

Determination of the probable losses inherent in the loan portfolio, which is not necessarily captured by the allocation methodology discussed above, involves the exercise of judgment. In addition, the OCC, as part of its supervisory function, periodically reviews our allowance for loan losses. The OCC may require us to increase our provision for loan losses or to recognize further losses, based on judgment, which may be different from that of our management. The results of such reviews could have a material effect on the Bank's loan classifications and allowances.

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The allowance for loan losses was $305.0290.0 million and $318.0305.0 million at September 30, 2012March 31, 2013 and December 31, 20112012, respectively. The decrease in the allowance for loan losses was largely driven by a release of reserves associated with commercial loans sold as part of CIT Agreement and Customers Agreement and a decrease in the consumer allowance for loan losses driven by portfolio run-off and lower loss rates.

The allowance for loan losses as a percentage of non-performing loans increased to 76.578.5 percent at September 30, 2012March 31, 2013 from 65.176.3 percent at December 31, 20112012, which was driven by lower non-performing loan balances. In addition, a mix of the loans held-for-investment portfolio changed to reflect a higher percentage of newly originated loans with better credit characteristics.

The allowance for loan losses as a percentage of investment loans held-for-investment increased to 4.656.11 percent as of September 30, 2012March 31, 2013 from 4.525.61 percent as of December 31, 20112012.

, primarily due a 12.8 percent decrease in the loans held-for-investment portfolio. The following tables set forth certain information regardingdecrease in the loans held-for-investment was primarily due to a decrease in the warehouse loans, which historically have required a lesser allocation of our allowance forthan other loan losses to each loan category.
ALLOWANCE FOR LOAN LOSSESportfolios.
 At September 30, 2012
 
Investment
Loan
Portfolio
 
Percent
of
Portfolio
 
Allowance
Amount
 
Percentage to
Total
Allowance
 (Dollars in thousands)
Consumer loans       
Residential first mortgage$3,086,096
 47.1% $204,852
 67.2%
Second mortgage122,286
 1.9% 18,888
 6.2%
Warehouse lending1,307,292
 20.0% 1,038
 0.3%
HELOC192,117
 2.9% 17,556
 5.8%
Other53,188
 0.8% 2,229
 0.7%
Total consumer loans4,760,979
 72.7% 244,563
 80.2%
Commercial loans       
Commercial real estate1,005,498
 15.3% 48,835
 16.0%
Commercial and industrial597,273
 9.1% 8,877
 2.9%
Commercial lease financing188,649
 2.9% 2,725
 0.9%
Total commercial loans1,791,420
 27.3% 60,437
 19.8%
Total consumer and commercial loans$6,552,399
 100.0% $305,000
 100.0%

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

The following table sets forth information regarding non-performing loans (i.e., greater than 90 days past due loans).
Non-performing loansSeptember 30, 2012December 31, 2011
 (Dollars in thousands)
Loans secured by real estate    
Consumer loans  
    Home loans - secured by first lien$268,210
$372,514
    Home loans - secured by second lien4,406
6,236
    Home equity lines of credit3,435
7,973
    Warehouse lending28
28
Commercial loans  
    Commercial real estate122,586
99,335
    Total non-performing loans secured by real estate398,665
486,086
Consumer loans  
     Other consumer240
611
Commercial loans  
     Commercial and industrial43
1,670
Total non-performing loans held in portfolio$398,948
$488,367

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In response to increasing ratesThe following tables set forth certain information regarding the allocation of past due loans and steeply declining market values, management implemented a program to modify the terms of existing loans in an effort to mitigate losses and keep borrowers in their homes. These modification programs began in the latter months of 2008 and increased substantially in 2009 and 2010. As of September 30, 2012, we had $723.8 million in restructured loans in the loans held-for-investment portfolio, of which $109.5 million were included in non-performing loans.  

Allowance for Unfunded Lending Commitments

The liability for credit losses inherent in lending-related commitments, such as letters of credit and unfunded loan commitments is included in other liabilities on the Consolidated Statements of Financial Condition. We establish the amount of this reserve by considering both historical trends and current market conditions quarterly, or more often if deemed necessary. Our liability for credit losses on unfunded lending commitments decreased by $7.3 million from December 31, 2011 to $0.7 million at September 30, 2012. When combined with our allowance for loan and lease losses our total allowance for credit losses represented 4.7 percent of loans at September 30, 2012, compared to 4.6 percent at each loan category.
ALLOWANCE FOR LOAN LOSSESDecember 31, 2011.
 At March 31, 2013
 
Investment
Loan
Portfolio
 
Percent
of
Portfolio
 
Allowance
Amount
 
Percentage to
Total
Allowance
 (Dollars in thousands)
Consumer loans       
Residential first mortgage$2,991,394
 63.1% $214,076
 73.9%
Second mortgage112,385
 2.4% 20,683
 7.1%
Warehouse lending750,765
 15.8% 532
 0.2%
HELOC167,815
 3.5% 18,118
 6.2%
Other44,488
 0.9% 2,215
 0.8%
Total consumer loans4,066,847
 85.7% 255,624
 88.2%
Commercial loans       
Commercial real estate562,916
 11.9% 32,720
 11.3%
Commercial and industrial107,688
 2.3% 1,572
 0.5%
Commercial lease financing5,815
 0.1% 84
 %
Total commercial loans676,419
 14.3% 34,376
 11.8%
Total consumer and commercial loans$4,743,266
 100.0% $290,000
 100.0%


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The following table shows the activity in the allowance for credit losses (include bothset forth certain information regarding our allowance for loan losses and the reserve for unfunded commitments) during the indicated periods.losses.

ACTIVITY WITHIN THE ALLOWANCE FOR CREDITLOAN LOSSES 
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2012 2011 2012 2011
 (Dollars in thousands)
Allowance for Loan Losses       
Balance, beginning of period$287,000
 $274,000
 $318,000
 $274,000
Provision charged to operations52,595
 36,690
 225,696
 113,383
Charge-offs(45,908) (31,259) (263,758) (112,643)
Recoveries11,313
 2,569
 25,062
 7,260
Balance, end of period$305,000
 $282,000
 $305,000
 $282,000
Reserve for Unfunded Commitments       
Balance, beginning of period$1,400
 $3,300
 $8,200
 $3,750
Provision charged to operations(700) 4,700
 (298) 4,250
Charge-offs
 
 (7,202) 
Recoveries
 
 
 
Balance, end of period$700
 $8,000
 $700
 $8,000
 For the Three Months Ended
March 31,
 2013 2012
 (Dollars in thousands)
Beginning balance$305,000
 $318,000
Provision for loan losses20,415
 114,673
Charge-offs   
Consumer loans   
Residential first mortgage(25,692) (95,432)
Second Mortgage(1,955) (5,283)
HELOC(2,061) (6,419)
Other consumer(699) (1,190)
Total consumer loans(30,407) (108,324)
Commercial loans   
Commercial real estate(13,162) (45,033)
Commercial and industrial
 (1,581)
Total commercial loans(13,162) (46,614)
Total charge offs(43,569) (154,938)
Recoveries   
Consumer loans   
Residential first mortgage5,353
 550
Second mortgage390
 249
HELOC105
 257
Other consumer454
 212
Total consumer loans6,302
 1,268
Commercial loans   
Commercial real estate1,843
 1,992
Commercial and industrial9
 5
Total commercial loans1,852
 1,997
Total recoveries8,154
 3,265
Charge-offs, net of recoveries(35,415) (151,673)
Ending balance$290,000
 $281,000
Net charge-off ratio 
2.93% 8.99%

Accrued interest receivable. Accrued interest receivable increased $1.3decreased $10.9 million from December 31, 20112012 to September 30, 2012March 31, 2013. This was primarily due to our earninginterest-earning assets increasing $0.8declining by $0.9 billion to $12.7$11.3 billion at September 30, 2012March 31, 2013, as compared to $11.9$12.2 billion at December 31, 20112012., primarily due to the commercial loan sales related to the CIT Agreement and Customers Agreement, which was substantially completed during the first quarter 2013. During the three and nine months ended September 30,March 31, 2013 and 2012, $1.4$1.3 million and $5.8$2.4 million of accrued interest on non-performing loans was reversed against interest income.income, respectively. We typically collect interest in the month following the month in which it is earned.

Repossessed assets. Real property we acquire as a result of the foreclosure process is classified as real estate owned until it is sold. It is transferred from the loans held-for-investment portfolio at the lower of cost or market value, less disposal costs. Management decides whether to rehabilitate the property or sell it "as is" and whether to list the property with a broker. The decrease in repossessed assets from December 31, 2011 to September 30, 2012, was primarily due to $84.4 million in disposals during the nine months ended September 30, 2012.



10396


The following schedule provides the activity for repossessed assets during each of the past five quarters.

NET REPOSSESSED ASSET ACTIVITY 
For the Three Months EndedFor the Three Months Ended
September 30,
2012
 June 30,
2012
 
March 31,
2012
 
December 31,
2011

 September 30,
2011
March 31, 2013 December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012
(Dollars in thousands)(Dollars in thousands)
Beginning balance$107,235
 $108,686
 $114,715
 $113,365
 $110,050
$120,732
 $119,468
 $107,235
 $108,686
 $114,715
Additions41,259
 24,734
 23,198
 26,237
 21,312
30,952
 35,688
 41,259
 24,734
 23,198
Disposals(29,026) (26,185) (29,227) (24,887) (17,997)(37,328) (34,424) (29,026) (26,185) (29,227)
Ending balance$119,468
 $107,235
 $108,686
 $114,715
 $113,365
$114,356
 $120,732
 $119,468
 $107,235
 $108,686

FHLB stock. At September 30, 2012March 31, 2013, holdings of FHLB stock remained unchanged from $301.7 million at December 31, 20112012. Once purchased, FHLB shares must be held for five years before they can be redeemed. As a member of the FHLB, we are required to hold shares of FHLB stock in an amount equal to at least 1.0 percent of aggregate unpaid principal balance of our mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5.0 percent of our FHLB advances, whichever is greater.

Premises and equipment. Premises and equipment, net of accumulated depreciation increased $8.4$4.2 million from $203.6219.1 million at December 31, 20112012 to $212.0223.3 million at September 30, 2012March 31, 2013. The increase was primarily due to system upgrades.

Mortgage servicing rights. At September 30, 2012March 31, 2013, MSRs included residential MSRs at fair value amounting to $686.8727.2 million, compared to $510.5710.8 million at December 31, 20112012. During the ninethree months ended September 30,March 31, 2013 and 2012 and 2011, we recorded additions to our residential MSRs of $370.0$126.5 million and $153.4$111.5 million, respectively, primarily due to an increase in loan sales orand securitizations. Also, during the ninethree months ended September 30, 2012March 31, 2013, we reduced the amount of MSRs by $27.8$94.4 million related to bulk servicing sales, $101.5$37.5 million related to loans that paid off during the period and a decreasean increase in the fair value of MSRs of $64.4$21.8 million resulting from the realization of expected cash flows and market driven changes, primarily as a result of decreasesincreases in mortgage loan rates that led to an expected increasedecrease in prepayment speeds. During the three months ended March 31, 2012, we reduced the amount of MSRs by $18.2 million related to bulk servicing sales, $26.8 million related to loans that paid off during the period, and an increase in the fair value of MSRs of $19.9 million resulting from the realization of expected cash flows and market driven changes, primarily as a result of increases in mortgage loan rates that led to an expected decrease in prepayment speeds. Once fully phased in, the Basel III capital rules will significantly reduce the allowable amount of the fair value of MSRs included in Tier 1 capital. We will consider the amount of MSRs we maintain in future periods as it relates to the exclusion from our allowable capital levels under Basel III. See Note 10 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein.

The principal balance of the loans underlying our total MSRs was $82.4$73.9 billion at September 30, 2012March 31, 2013, compared to $63.8$76.8 billion at December 31, 20112012, with the increasedecrease primarily attributable to loan origination activity for 2012 partially offset by our bulk servicing sales of $3.6$10.7 billion in underlying loans.loans during the three months ended March 31, 2013 partially offset by loan origination activity for the three months ended March 31, 2013.

Derivatives. During the third quarter 2011, we began toWe write and purchase interest rate swaps to accommodate the needs of customers requesting such services. Customer-initiated activity represented 100.0 percent of total interest rate swap contracts at September 30, 2012March 31, 2013 and December 31, 20112012. Customer-initiated trading derivatives are used primarily to focus on providing derivative products to customers that enables them to manage interest rate risk exposure. Market risk from unfavorable movements in interest rates is generally economically hedged by concurrently entering into offsetting derivative contracts resulting in no net exposure to us, outside of counterparty performance. The offsetting derivative contracts generally have nearly identical notional values, terms and indices. See Note 11 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein.


97


CUSTOMER-INITIATED DERIVATIVE FINANCIAL INSTRUMENTS 
Interest Rate Contracts (Notional Amount)
Interest Rate Contracts (Notional Amount)Interest Rate Contracts (Notional Amount) 
For the Three Months Ended September 30,For the Nine Months Ended September 30,For the Three Months Ended
March 31,
20122011201220112013 2012
( Dollars in thousands)( Dollars in thousands)
Beginning balance$117,293
$
$64,720
$
$202,492
 $64,720
Additions57,753
58,000
111,457
58,000
5,943
 4,553
Maturities/amortizations(1,395)
(2,526)
(1,901) (319)
Terminations(71,853) 
Ending balance$173,651
$58,000
$173,651
$58,000
$134,681
 $68,954




104


Liabilities

Deposits. Our deposits consist of four primary categories: branch banking,retail deposits, government banking,deposits, wholesale deposits and company controlled deposits. Total retail bankingdeposit accounts increased $0.6 billion,decreased $447.0 million, or 10.55.4 percent to $6.1 billion at September 30, 2012March 31, 2013, from $5.5 billion at December 31, 2011. Retail saving and checking accounts totaled 38.9 percent of total deposits at September 30, 2012. In addition, at September 30, 2012, retailprimarily due to a decrease in certificates of deposit totaled $3.3 billion, with an average balance of $42,732 and a weighted average cost of 1.1 percent. Money market deposits totaled $434.8 million, with an average cost of 0.5 percent. Overall, retail deposits had an average cost of deposits of 0.8 percent at September 30, 2012, compared to 1.1 percent at December 31, 2011, reflecting increases in demand, savings and money market account balances.deposits.

We call on local governmental agencies, and other public units, as an additional source for deposit funding. Government banking deposits increased $195.3 million, or 27.5 percent, to $906.4 million at September 30, 2012, from $711.1 million at December 31, 2011. These deposit accounts include $433.0$458.9 million of certificates of deposit with maturities typically less than one year and $456.4$316.4 million in checking and savings accounts at September 30,March 31, 2013.

We generate deposits from our retail banking network and no longer purchase wholesale deposits. Wholesale deposits continued to run-off during the three months ended March 31, 2013 and decreased by $24.9 million from December 31, 2012.

Beginning in 2010, we began focusing on generating deposits from our retail banking and stopped generating wholesale deposits. During the nine months ended September 30, 2012 wholesale deposit accounts decreased by $69.7 million, or 18.1 percent, to $315.2 million at September 30, 2012, from $384.9 million at December 31, 2011. These deposits had a weighted average cost of 3.4 percent at September 30, 2012 and 3.5 percent at December 31, 2011.

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 currently bear interest. Company controlled deposits increased $1.1 billion from December 31, 2011 to $2.2 billion at September 30, 2012.

We participate in the Certificates of Deposit Account Registry Service ("CDARS") program, through which certain customer certificates of deposit ("CD") are exchanged for CDs of similar amounts from other participating banks. This gives customers the potential to receive FDIC insurance up to $50.0 million. At September 30, 2012March 31, 2013, $890.8$893.7 million of total CDs were enrolled in the CDARS program, with $836.9$865.2 million originating from public entities and $98.9$41.2 million originating from retail customers. In exchange, we received reciprocal CDs from other participating banks totaling $184.0$174.6 million from public entities and $706.8$719.1 million from retail customers at September 30, 2012March 31, 2013. We reduced our reliance on CDARS deposits at March 31, 2013, with total CDARS balances declining $254.1 million from December 31, 2012.
    

98


The composition of our deposits werewas as follows. 
Deposit Portfolio 
September 30, 2012 December 31, 2011March 31, 2013 December 31, 2012
Balance 
Month End Rate (1)
 Percent Of Balance Balance 
Month End Rate (1)
 Percent Of Balance(Dollars in thousands)
(Dollars in thousands)Balance Yield/Rate % of Deposits Balance Yield/Rate % of Deposits
Retail deposits           
Demand accounts$650,209
 0.2% 6.9% $566,817
 0.2% 7.4%$728,225
 0.13% 9.3% $681,983
 0.16% 8.2%
Savings accounts1,710,435
 0.6% 18.0% 1,462,185
 0.9% 19.0%2,512,705
 0.78% 32.0% 2,108,170
 0.72% 25.4%
MMDA434,832
 0.5% 4.6% 491,708
 0.6% 6.4%
Certificates of deposit (2)
3,271,501
 1.1% 34.5% 2,972,258
 1.4% 38.6%
Money market demand accounts370,113
 0.29% 4.7% 401,853
 0.41% 4.8%
Certificates of deposit (1)
2,613,046
 0.89% 33.4% 3,175,481
 0.93% 38.3%
Total retail deposits6,066,977
 0.8% 64.0% 5,492,968
 1.1% 71.4%6,224,089
 0.72% 79.4% 6,367,487
 0.74% 76.7%
Government deposits           
Demand accounts103,059
 0.4% 1.1% 102,911
 0.4% 1.3%103,206
 0.37% 1.3% 98,890
 0.38% 1.2%
Savings accounts353,305
 0.5% 3.7% 205,663
 0.6% 2.7%213,166
 0.29% 2.7% 263,841
 0.53% 3.2%
Certificates of deposit450,067
 0.6% 4.7% 402,523
 0.7% 5.3%458,519
 0.53% 5.8% 456,347
 0.57% 5.5%
Total government deposits (3)
906,431
 0.6% 9.5% 711,097
 0.6% 9.3%
Total government deposits (2)
774,891
 0.44% 9.8% 819,078
 0.53% 9.9%
Wholesale deposits315,229
 3.4% 3.3% 384,910
 3.5% 5.0%74,465
 4.80% 0.9% 99,338
 4.41% 1.2%
Company controlled deposits (4)
2,200,532
 % 23.2% 1,101,013
 % 14.3%
Total deposits (5)
$9,489,169
 0.7% 100.0% $7,689,988
 1.0% 100.0%
Company controlled deposits (3)
773,846
 % 9.9% 1,008,392
 % 12.2%
Total deposits (4)
$7,847,291
 0.66% 100.0% $8,294,295
 0.68% 100.0%
(1)This rate reflects the average rate for the deposit portfolio at the end of the noted month.
(2)
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $2.3$1.9 billion and $2.1$2.3 billion at September 30, 2012March 31, 2013 and December 31, 20112012, respectively.
(3)(2)Government accountsdeposits include funds from municipalities and schools.
(4)(3)These accounts represent a portion of the investor custodial accounts and escrows controlled by the Companyus in connection with loans serviced for others and that have been placed on deposit with the Bank.
(5)(4)
The aggregate amount of deposits with a balance over $250,000 was approximately $2.6$1.8 billion and $1.6$1.9 billion at September 30, 2012March 31, 2013 and December 31, 20112012, respectively.

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FHLB advances. FHLB advances decreased $0.9$0.3 billion to 3.1$2.9 billion at September 30, 2012March 31, 2013 from December 31, 20112012. The decrease was due, in part, to the prepayment of $0.5 billion in higher cost advances at the end of the second quarter. We incurred a penalty of $15.2 million to prepay these advances, which is recorded as loss on extinguishment of debt on the Consolidated Statement of Earnings. We rely upon advances from the FHLB 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 FHLB advances fluctuates from time to time depending on our current inventory of mortgage loans held-for-sale and the availability of lower cost funding sources such as repurchase agreements.sources. During the ninethree months ended September 30, 2012March 31, 2013, we had an increase in funds available from other sources, including an increaseproceeds from the sale of deposits,commercial loans related to the CIT Agreement and Customer Agreement, which reduced the need for the short-term borrowings from FHLB.

Long-term debt. As part of our overall capital strategy, we previously raised capital through the issuance of trust-preferred securities by our special purpose financing entities formed for the offerings. The outstanding trust preferred securities mature 30 years from issuance, are callable by us after five years, and pay interest quarterly. The majority of the net proceeds from these offerings has been contributed to us as additional paid in capital and subject to regulatory limitations, and is includable as Tier 1 regulatory capital. Under these trust preferred arrangements, we have the right to defer dividendinterest payments to the trust preferred security holders for up to five years.

On January 27, 2012, we provided notice to holders of the U.S. Treasurytrust preferred securities exercising the contractual right to defer regularly scheduled quarterly payments of dividends,interest, beginning with the February 2012 payment, on preferred stock issued and outstanding in connection with participation in the TARP Capital Purchase Program. Under the terms of the preferred stock, we may defer payments of dividends for up to six quarters in total without default or penalty. Concurrently, we also exercised contractual rights to defer interest payments with respect to trust preferred securities. Under the terms of the related indentures, we may defer interest payments for up to 20 consecutive quarters without default or penalty. We believe in prudent capital stewardship and will refrain from making further payments until the financial condition improves. These payments will be periodically evaluated and reinstated when appropriate, subject to provisions of the BancorpConsent Order and Supervisory Agreement.

Accrued interest payable. Accrued interest payable increased to $12.5 million at September 30, 2012 from $8.7 million at December 31, 2011. This balance represents interest payments that are payable to depositors and other entities from which we borrowed funds. The balance fluctuates with the size of our interest-bearing liability portfolio and the average cost of our interest-bearing liabilities. Accrued interest payable increased to $15.4 million at March 31, 2013 from $13.4 million at December 31, 2012. The increase during the ninethree months ended September 30, 2012March 31, 2013, was primarily a result of an increase in accrued interest on statutory trust accounts due to deferred interest payments on the balance of our interest-bearing liabilities of $0.9 billion, or 7.6 percent, from $11.9 billion attrusts during the three months ended DecemberMarch 31, 2011 to $12.8 billion at September 30, 20122013. During the ninethree months ended September 30, 2012March 31, 2013, the average overall rate on our deposits decreased 4237 basis points to 1.10.78 percent, from 1.51.15 percent during the ninethree months ended September 30, 2011March 31, 2012. We also experienced a 6647 basis point decreaseincrease in our cost of advances from the FHLB to an average rate of 2.83.16 percent during the ninethree months ended September 30, 2012March 31, 2013, from 3.52.69 percent

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during the ninethree months ended September 30, 2011March 31, 2012, principally due to the restructuring of $1.0 billiona decrease in FHLB advances during the third quarter 2011.short term borrowings which accrue at a lower average interest rate.
    
Representation and warranty reserve (formerly known as "secondary market 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), about various characteristics of each loan, such as the manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided. Typically, these representations and warranties are in place for the life of the loan. If a defect in the origination process is identified, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no such defects, generally we have no liability to the purchaser for losses it may incur on such loan.

We maintain a representation and warranty reserve to account for the expected losses related to loans we might be required to repurchase (or the indemnity payments we may have to make to purchasers). The representation and warranty reserve takes into account both our estimate of expected losses on loans sold during the current accounting period, as well as adjustments to our previous estimates of expected losses on loans sold. In addition, the OCC, as part of its supervisory function, periodically reviews our representation and warranty reserve. The OCC may require us to increase our representation and warranty reserve or to recognize further losses, based on its judgment, which may be different from that of our management. The results of such reviews could have an effect on our reserves. In each case, these estimates are based on the most recent data available to us, including data from third parties, regarding demands for loan repurchases, actual loan repurchases, and actual credit losses on repurchased loans, among other factors. Provisions added to the representation and warranty reserve for current loan sales reduce our net gain on loan sales. Adjustments to our previous estimates are recorded under non-interest income in the income statement as an increase or decrease to representation and warranty reserve - change in estimate. The amount of the representation and warranty reserve was $202.0 million at September 30, 2012 and $120.0 million at December 31, 2011.

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REPRESENTATION AND WARRANTY RESERVE
 For the Three Months Ended
March 31, 2013 December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012
(Dollar in thousands)
Beginning balance$193,000
 $202,000
 $161,000
 $142,000
 $120,000
Provision for new loans sales5,817
 7,285
 6,432
 5,643
 5,051
Provision adjustment for previous estimates17,396
 25,231
 124,492
 46,028
 60,538
Charge-offs, net of recoveries(31,213) (41,516) (89,924) (32,671) (43,589)
Ending balance$185,000
 $193,000
 $202,000
 $161,000
 $142,000
A significant factor in the estimate of expected losses is the activity of the GSEs, including the number of loan files they review or intend to review, as well as the number of subsequent repurchase demands made by the GSEs and the percentage of those repurchase demands that are actually repurchasedresult in a repurchase by the Bank. The majority of our loan sales have been to GSEs, which are a significant source of our current repurchase demands. These demands are concentrated in the post-2006 and pre-2009 origination years. While we have an established history of GSE demands, this pattern has recently changed, becoming more volatile in the level of demands from period to period and also increasing in the number of demands overall, thereby increasing our loss estimates. For

The decrease in the nineoverall reserve balance during the three months ended September 30, 2012,March 31, 2013, primarily reflects the continued decline in the aggregate amount of pending repurchase demands, as well as lower loss rates resulting from declining levels of net charge-offs of loan repurchases in the prior quarters.

The following table summarizes the amount of newquarterly Fannie Mae and Freddie Mac audit file review requests by number of accounts. Such requests precede the repurchase demands increased to $845.5 million, compared to $600.6 million for the nine months ended September 30, 2011.that Fannie Mae and Freddie Mac may make thereafter.
 For the Three Months Ended
 March 31, 2013 December 31, 2012 September 30, 2012
 June 30, 2012 March 31, 2012
Fannie Mae2,572
 1,659
 1,224
 2,910
 2,785
Freddie Mac803
 1,595
 1,664
 1,502
 1,202
Total3,375
 3,254
 2,888
 4,412
 3,987

During the three months ended September 30, 2012March 31, 2013, we had $211.2$208.7 million in Fannie Mae new repurchase demands and $48.2$40.7 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.

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 For the Three Months Ended
 September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011
 (Dollars in thousands)
2005 and prior$15,649
 $25,505
 $18,310
 $13,228
 $13,242
200623,462
 33,481
 27,743
 32,249
 31,478
2007113,280
 135,888
 93,410
 86,993
 87,146
200857,230
 89,780
 63,494
 45,170
 45,094
2009-201249,767
 62,153
 36,320
 15,353
 23,597
Total$259,388
 $346,807
 $239,277
 $192,993
 $200,557
Number of accounts1,316
 1,780
 1,134
 969
 973
The following table summarizes the amount of quarterly Fannie Mae and Freddie Mac audit file review requests by number of accounts.
 For the Three Months Ended
 September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011
 (Dollars in thousands)
Fannie Mae1,224
 2,910
 2,785
 2,776
 3,911
Freddie Mac1,664
 1,502
 1,202
 996
 598
Total2,888
 4,412
 3,987
 3,772
 4,509
 For the Three Months Ended
 March 31, 2013 December 31, 2012 September 30, 2012
 June 30, 2012 March 31, 2012
 (Dollars in thousands)
2005 and prior$22,926
 $13,927
 $15,649
 $25,505
 $18,310
200627,945
 31,851
 23,462
 33,481
 27,743
2007120,478
 84,612
 113,280
 135,888
 93,410
200852,461
 38,048
 57,230
 89,780
 63,494
2009-201325,574
 34,509
 49,767
 62,153
 36,320
Total$249,384
 $202,947
 $259,388
 $346,807
 $239,277
Number of accounts1,239
 1,025
 1,316
 1,780
 1,134
        
The following table summarizes the aggregate amount of pending repurchase demands at the end of each quarterly period noted.
 For the Three Months Ended
 September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011
 (Dollars in thousands)
Period end balance$425,570


$469,800


$357,377


$343,295
 $349,514
Percent non-agency (approximately)0.1% 0.6% 1.1% 1.9% 2.0%


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The following table summarizes the amount of the 2009 to 2012 vintage quarterly new repurchase demands by number of accounts.
 For the Three Months Ended
 September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011
 (Dollars in thousands)
Indemnification10
 31
 12
 5
 3
Repurchase - performing149
 145
 91
 39
 80
Repurchase - past due49
 85
 29
 22
 16
Total208
 261
 132
 66
 99

For the nine months ended September 30, 2012, we increased the reserve by $17.1 million for new loan sales and $231.1 million for adjustments to previous estimates of expected losses. During the nine months ended September 30, 2012, we charged off $166.2 million, net of recoveries for realized losses. The increase during the nine months ended September 30, 2012, was primarily due to refinements in the estimation process, changes in behavior of GSEs and efforts to incorporate more predictive analysis into the forecasted repurchase process. For the nine months ended September 30, 2011, we increased the provision $5.5 million for new loan sales and $80.8 million for adjustments to previous estimates of expected losses. During the nine months ended September 30, 2011, we charged off $80.7 million, net of recoveries for realized losses.
The following table summarizes changes in the representation and warranty reserve over the last five quarters.
 For the Three Months Ended
 September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011
 (Dollars in thousands)
Beginning balance$161,000
 $142,000
 $120,000
 $85,000
 $79,400
Additions130,924
 51,670
 65,589
 72,761
 40,781
Charge-offs(89,924) (32,670) (43,589) (37,761) (35,181)
Ending balance$202,000
 $161,000
 $142,000
 $120,000
 $85,000

Our enhanced first quarter 2012 model refines our previous estimates by adding granularity to the model through segmenting of the sold portfolio by vintage years and investor (generally, the GSEs) in order to assign assumptions specific to each segment. Key assumptions in the model include the number of investor audits, demand requests, appeal loss rates, loss severity, and recoveries.
 For the Three Months Ended
March 31, 2013 December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012
(Dollars in thousands)
Period end balance$186,970


$224,182


$425,570


$469,800
 $357,377
Percent non-agency (approximately)0.2% 0.3% 0.1% 0.6% 1.1%

The following table summarizes the trends over the last two quarters with respect to key model attributes and assumptions for estimating the representation and warranty reserve.
September 30, 2012 December 31, 2011 March 31, 2013 December 31, 2012
(Dollars in Thousands) (Dollars in Thousands)
UPB of loans sold(1)UPB of loans sold(1)$210,000,000
 $175,000,000
UPB of loans sold(1)$224,600,000
 $215,000,000
Loan file review as percentage of UPBLoan file review as percentage of UPB12.5% 5.0%Loan file review as percentage of UPB12.4% 12.5%
Repurchase demand rateRepurchase demand rate14.6% 16.0%Repurchase demand rate13.1% 14.4%
Actual repurchase rate (win/loss) (2)
40.4% 42.0%
Actual repurchase rate (2)
Actual repurchase rate (2)
37.0% 38.6%
Loss severity rate (2)
Loss severity rate (2)
33.3% 44.0%
Loss severity rate (2)
34.3% 35.0%
(1)Includes servicing sold with recourse.
(2)Weighted average.average of the appeals loss rate. See Note 4 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements, herein.

Other liabilities. Other liabilities primarily consist of a reserve for possible contingent liabilities, undisbursed payments, escrow accounts, forward agency and derivative liability and the Ginnie Mae liability resulting from the recognition of our unilateral right to repurchase certain mortgage loans currently included in Ginnie Mae securities. Other liabilities increaseddecreased at September 30, 2012March 31, 2013, from December 31, 20112012, primarily due to a $95.1$234.8 million increasedecrease in derivativeundisbursed payments liability from $43.0$365.2 million at December 31, 20112012 to $138.1$130.3 million at September 30, 2012March 31, 2013. These amounts represent payments received from borrowers for interest, principal and related loan charges which have not been remitted to investors. Escrow accounts totaled $55.3$43.6 million and $26.3$39.7 million at September 30, 2012March 31, 2013 and December 31, 20112012, respectively. Escrow accounts are maintained on behalf of mortgage customers and include funds collected for real estate taxes, homeowners insurance and other insured product liabilities. The increases were offset by decreases in undisbursed payments on

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loans serviced for others liability and the Ginnie Mae liability. Undisbursed payments on loans serviced for others liability totaled $149.1 million at December 31, 2011 to $55.1 million at September 30, 2012, respectively. These amounts represent payments received from borrowers for interest, principal and related loan charges which have not been remitted to investors. The Ginnie Mae liability totaled $91.4$58.4 million and $117.2$72.4 million at September 30, 2012March 31, 2013 and December 31, 20112012, respectively. These amounts are for certain loans sold to Ginnie Mae, as to which we have not yet repurchased, but have the unilateral right to do so. With respect to such loans sold to Ginnie Mae, a corresponding asset was included in loans held-for-sale. For further information on our loans held-for-sale, see Note 5 of the Notes to the Consolidated Financial Statements, in Item 8.1. Financial Statements, and Supplementary Data, herein.

Other liabilities also include the fair value of the litigation settlement with the U.S. Department of Justice ("DOJ"). On February 24, 2012, we entered intoincluded an agreement (the "DOJ Agreement") with the DOJ relating to certain underwriting practices associated with loans insured by the FHA. 

Pursuant to the material terms of the settlement with the DOJ, we made an initial payment of $15.0 million within 30 business days of the effective date of the DOJ Agreement. Upon the occurrence of certain future events (as further described below), we become obligated to make payments of approximately $118.0 million (the "Additional Payments"). The Additional Payments will occur if and only if each of the following events happen:

We generate positive incomeaccrual for a sustained period, such that part or all of our Deferred Tax Asset ("DTA"),possible contingent liabilities, which has been offset by a valuation allowance (the "DTA Valuation Allowance"), is likely to be realized, as evidenced by the reversal of the DTA Valuation Allowance in accordance with accounting principles generally accepted in the United States ("GAAP");

We are able to include capital derived from the reversal of the DTA Valuation Allowance in our Tier 1 capital (to adjusted total assets); and

Our obligation to repay the $266.7 million in preferred stock held by the U.S. Treasury under the TARP Capital Purchase Program has been either extinguished or excluded from Tier 1 capital (to adjusted total assets) for purposes of calculating the Tier 1 capital (to adjusted total assets) ratio as described in the paragraph below.

Upon the occurrence of each of the future events described above, and provided doing so would not violate any banking regulatory requirement or the OCC does not otherwise object, we will begin making Additional Payments provided that (i) each annual payment would be equal to the lesser of $25 million or the portion of the Additional Payments that remains outstanding after deducting prior payments; and (ii) no obligation arises until our call report is filed with the OCC, including any amendments thereto, for the period ending at least six months prior to the making of such Additional Payments, reflects a minimum Tier 1 capital (to adjusted total assets) ratio of 11 percent (or higher if required by regulators), after excluding any unextinguished portion of the preferred stock held by U.S. Treasury under the TARP Capital Purchase Program.

We had a total liability of $19.1increased $0.1 million at September 30, 2012March 31, 2013, as compared to $18.3 million at December 31, 20112012. As of March 31, 2013, our total accrual for contingent liabilities was $247.9 million, which representsincludes the fair valuelitigation accrual discussed in Note 20 of the Additional Payments as measured in accordance with ASC 820. We have elected the fair value option for the financial liability representing the future payment obligations established in the DOJ Agreement. We valued our contractual obligationNotes to pay, utilizing a discounted cash flow model that incorporates our current estimate of the most likely timing and amount of the cash flows necessary to satisfy the obligation. These cash flow estimates are reflective of our detailed financial and operating projections for the next three years, as well as more general growth earnings and capital assumptions for subsequent periods. We discounted the cash flows using a 15.6 percent at September 30, 2012, discount rate that is inclusive of the risk free rate based on the expected duration of the liability, and an adjustment for non-performance risk that represents our own credit risk. The recorded liability, at fair value, represents the present value of these estimated cash flows and is included in "other liabilities" on the Consolidated Financial Statements. We estimate the fair value of this liability at each measurement date and record any changesStatements, in that estimate, as well as the effect of the accretion of the fact amount of the liability, during the period in which these changes occur. The timing and value of payments to be made under the liability is largely based on our financial performance and forecasted growth assumptions. If our actual financial results, future growth rate assumptions, or our credit risks materially change, the value of the liability will also change. Changes in the regulatory environment could impact the calculation of the capital ratio.Item 1. Financial Statements, herein.


109101


Capital Resources and Liquidity

Our principal uses of funds include loan originations and operating expenses. At September 30, 2012March 31, 2013, we had outstanding rate-lock commitments to lend $6.6$4.8 billion in mortgage loans, compared to $5.3$6.6 billion at December 31, 20112012. These commitments may expire without being drawn upon and therefore, do not necessarily represent future cash requirements. Total commercial and consumer unused collateralized lines of credit totaled $1.7$1.8 billion at September 30, 2012March 31, 2013 and $1.5$1.6 billion at December 31, 20112012.

Capital. We had net income of $156.9$22.2 million during the ninethree months ended September 30, 2012March 31, 2013. We did not pay any cash dividends on our common stock during the ninethree months ended September 30, 2012March 31, 2013 or during the year ended December 31, 20112012. On February 19, 2008, our board of directors suspended future dividends payable on our common stock. Under the capital distribution regulations, a savings bank that is a subsidiary of a savings and loan holding company must either notify or seek approval from the OCC of an association capital distribution at least 30 days prior to the declaration of a dividend or the approval by our board of directors of the proposed capital distribution. The 30-day period allows the OCC to determine whether or not the distribution would not be advisable. We currently must seek approval from the OCC prior to making a capital distribution from the Bank. In addition, we are prohibited from increasing dividends on our common stock above $0.05 per share without the consent of U.S. Treasury pursuant to the terms of the TARP.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings and other factors.

At September 30, 2012March 31, 2013, the Bank was considered "well-capitalized" for regulatory purposes at September 30, 2012, and hadpurposes. The table following table represents the regulatory capital ratios of 9.31 percent for the Tier 1 capital ratio (to adjusted total assets) and 17.58 percent for the total risk-based capital ratio (to risk-weighted assets). At September 30, 2012, the Company had a Tier 1 common capital ratio (to risk-weighted assets) of 10.32 percent (see "Non-GAAP Reconciliation") and an equity-to-assets ratio of 8.39 percent.ratios.

We are growing our core deposits, which includes checking, savings and money market deposit accounts, base. Core deposits are a more stable funding source and their growth allows us to replace maturing brokered CDs and other potentially less stable funding sources.
 March 31, 2013 December 31, 2012 March 31, 2012
 AmountRatio AmountRatio AmountRatio
Tier 1 leverage (to adjusted tangible assets)$1,318,770
10.14% $1,295,841
9.26% $1,207,237
8.64%
Total adjusted tangible asset base$13,007,694
  $13,999,636
  $13,964,948
 
Tier 1 capital (to risk weighted assets)$1,318,770
21.24% $1,295,841
15.90% $1,207,237
14.78%
Total capital (to risk weighted assets)$1,398,914
22.53% $1,400,126
17.18% $1,311,568
16.06%
Risk weighted asset base$6,208,327
  $8,146,771
  $8,168,050
 
(1)Based on adjusted total assets for purposes of core capital and risk-weighted assets for purposes of total risk-based capital. These ratios are applicable to the Bank only.

Liquidity. Liquidity measures the ability 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 rates and market opportunities. The ability of a financial institution to meet current financial obligations is a function of the balance sheet structure, the ability to liquidate assets, and the access to various sources of funds.
    
We primarily originate agency eligible loans 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 FHLB and borrowing against them. We use the FHLB as our primary source for funding our residential mortgage business due to its flexibility in terms of being able to borrow or repay borrowings as daily cash needs require. We have been successful in increasing the amount of assets that qualify as eligible collateral at the FHLB and are continually workingcontinue to add more. Warehouse loans, where we are the takeout investor, were the latest assets to be approved as eligible collateral.review such opportunities on an on-going basis. Adding eligible collateral pools gives us added capacity and flexibility to manage our funding requirements.

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”"haircut" off the market value of the assets. That value is sensitive to the pricing and policies of our liquidity providers and can change with little or no notice.

In addition to operating expenses at a particular level of mortgage originations, our cash flows are fairly predictable and relate primarily to the funding cash outflows of residential first mortgages (outflows) and then the securitization and sales cash inflows of those mortgages (inflows).residential first mortgages. Our mortgage warehouse funding line of business also generates cash flows as funds are extended to correspondent relationships to close new loans. Those loans are repaid when the correspondent sells the loan. Other material

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cash flows relate to growing our commercial lines of business and the loans we service for others (primarily the agencies)GSEs) and consist primarily of principal, interest, taxes and insurance. Those monies come in over the course of the month and are paid out based on predetermined schedules. TheseThose flows are largely a function of the size of the servicing book and the volume of refinancing activity of the loans serviced. In general, monies received in one month are paid during the following month with the exception of taxes and insurance monies that are held until such are due.


110


As governed and defined by our internal liquidity policy, we maintain adequate excess liquidity levels appropriate to cover both unanticipated operational and regulatory requirements. In addition to this standby liquidity, we also maintain targeted minimum levels of unused borrowing capacity as an additional cushion against unexpected liquidity needs. Each business day, we forecast 90 days of daily cash needs. This allows us to determine our projected near term daily cash fluctuations and also to plan and adjust, if necessary, future activities. As a result, we would be able to make adjustments to operations as required to meet the liquidity needs of our business, including adjusting deposit rates to increase deposits, planning for additional FHLB borrowings, accelerateaccelerating sales of loans held-for-sale loan sales (agency(GSEs and or private), sellselling loans held-for-investment or securities, borrow usingborrowing through the use of repurchase agreements, reducereducing originations, makemaking changes to warehouse funding facilities, or borrowing from the discount window.

Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

Borrowings. The FHLB 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 FHLB using approved loan types as collateral. At September 30, 2012March 31, 2013, we had an authorized line of credit of $7.0 billion that could be utilized to the extent we provide sufficient collateral. At September 30, 2012March 31, 2013, we had available collateral sufficient to access $4.3$3.8 billion of the line and as to which we had $3.1$2.9 billion of advances outstanding.

We have arrangements with the Federal Reserve Bank of Chicago to borrow as appropriate from its discount window. The discount window is a borrowing facility that is intended to be used only for short-term liquidity needs arising from special or unusual circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we provide. To collateralize the line, we pledge commercial and industrial loans that are eligible based on Federal Reserve Bank of Chicago guidelines. At September 30,March 31, 2013, we had pledged commercial and industrial loans amounting to $39.2 million with a lendable value of $26.2 million. At December 31, 2012, we had pledged commercial and industrial loans amounting to $111.3$122.1 million with a lendable value of $58.3$77.9 million. The decrease in the available loan collateral was due to the sale of the loans associated with the CIT Agreement and Customers Agreement. At DecemberMarch 31, 2011, we had pledged commercial and industrial loans amounting to $69.7 million with a lendable value of $32.6 million. At September 30, 20122013 and December 31, 20112012, we had no borrowings outstanding against this line of credit.


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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. 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.reserve; and (d) the determination of the accrual for pending and threatened litigation. We believe the judgment, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements 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, 2011,2012, which is available on our website, www.flagstar.com, under the Investor Relations section, or on the website of the Securities and Exchange Commission, at www.sec.gov.

Derivative instruments are carried at fair value in either "other assets" or "other liabilities" on the Consolidated Statements of Financial Condition. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship and, further, by the type of hedging relationship. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. See Note 11 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein.

Allowance for Loan Losses
As part of our ongoing risk assessment process which remains focused on the impacts of the current economic environment and the related borrower repayment behavior on our credit performance, management continues to back test and validate the results of quantitative and qualitative modeling of the risk in loans held-for-investment portfolio in efforts to utilize the best quality information available. Such is consistent with the expectations of the Bank's primary regulator and a continuing evaluation of the performance dynamics within the mortgage industry. As a result of an analysis completed during the first quarter 2012, we determined it was necessary to make refinements to our allowance for loan loss methodology and related model. Such refinements included improved risk segmentation and quantitative analysis and modeling, and enhancements and alignment of the qualitative risk factors.    

Accounting standards require a reserve to be established as a component of the allowance for loan losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan and the recorded investment in the loan exceeds its fair value. Fair value is measured using either the present value of the expected future cash flows discounted at the loan's effective interest rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent, reduced by estimated disposal costs.

Non-performing commercial and commercial real estate loans are considered to be impaired and typically have an allowance allocated based on the underlying collateral's appraised value, less management's estimates of costs to sell. In estimating the fair value of collateral, we utilize outside fee-based appraisers to evaluate various factors such as occupancy and rental rates in our real estate markets and the level of obsolescence that may exist on assets acquired from commercial business loans. Appraisals are updated at least annually but may be obtained more frequently if changes to the property or market conditions warrant.

Impaired residential loans include loan modifications considered to be TDRs and certain non-performing loans that have been charged down to collateral value. Fair value of non-performing residential mortgage loans, including redefaulted TDRs and certain other severely past due loans, is based on the underlying collateral's value obtained through appraisals or broker's price opinions, updated at least semi-annually, less management's estimates of cost to sell. The allowance allocated to TDRs performing under the terms of their modification is typically based on the present value of the expected future cash flows discounted at the loan's effective interest rate, either on a loan level or pooled basis, as these loans are not considered to be collateral dependent.

For those loans not individually evaluated for impairment, management has sub-divided the commercial and consumer loans into homogeneous portfolios.

The following key refinements were made:

First, we utilized refined segmentation and more formal qualitative factors during the first quarter 2012, which resulted in an increase in the adjusted historical factors used to calculate the ASC 450-20 allowance related to the consumer portfolio. Historically, we segmented the population of consumer loans held-for-investment by product type and by delinquency status for purposes of estimating an adequate allowance for loan losses. Management performed a thorough analysis of the largest product

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type, residential first mortgage loans, to assess the relative reliability of its risk segmentation in connection with the ability to detect losses inherent in the portfolio, and determined that there was a higher correlation of loan losses to LTV ratios than to delinquency status. As a result, management refined its process to use LTV segmentation, rather than product and delinquency segmentation, as the more appropriate consumer residential loan characteristic in determining the related allowance for loan losses.

Additionally, we created a more formal process and framework surrounding the qualitative factors and better aligned the factors with regulatory guidance and the changes in the mortgage environment. Management formally implemented a qualitative factor matrix related to each loan class in the consumer portfolio in the first quarter 2012, which includes the following factors: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes in the value of underlying collateral for collateral-dependent loans, changes in concentrations of credit, and other external factor changes. These factors are used to reflect changes in the collectability of the portfolio not captured by the historical loss rates. As such, the qualitative factors supplement actual loss experience and allow us to better estimate the loss within the loan portfolios based upon market and other indicators. Qualitative factors are analyzed to determine a quantitative impact of each factor which adjusts the historical loss rate. Adjusted historical loss rates are then used in the calculation of the allowance for loan losses. The adjusted historical loss rates during 2012 were higher than those used in the calculation of the consumer allowance for loan losses at December 31, 2011, thereby resulting in an increase to the 2012 level of allowance for loan losses.

Second, to allow us the appropriate amount of time to analyze portfolio statistics and allow for the appropriate validation of the reasonableness of the new qualitative factors, management adjusted the historical look back period for loss rates to lag a quarter (as compared to the previous policy of a month). This adjustment resulted in a decrease to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses, partially offsetting the increase resulting from the refined segmentation.

Third, the commercial loan portfolio was segmented into commercial "legacy" loans (loans originated prior to January 1, 2011) and commercial "new" loans (loans originated on or after January 1, 2011) while still retaining the segmentation by product type. Due to the changes in our strategy and to changes in underwriting and origination practices and controls related to that strategy, management determined the refined segmentation better reflected the dynamics in the two portfolios. The loss rates attributed to the "legacy" portfolio are based on historical losses of this segment. Due to the brief period of time that loans in the "new" portfolio were outstanding, and thus the absence of a sufficient loss history for that portfolio, we had used loss data from a third party data aggregation firm (adjusting for our qualitative factors) as a proxy for estimating an allowance for loan losses on the "new" portfolio. As a refinement in the first quarter 2012, we separately identified a population of commercial banks with similar size balance sheets (and loan portfolios) to serve as our peer group. We now use this peer group's publicly available historical loss data (adjusted for our qualitative factors) as a new proxy for loss rates used to determine the allowance for loan losses on our "new" commercial portfolio. This refined segmentation resulted in an increase to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses.

Fourth, as a result of these refinements (in addition to the refinements noted below), management has determined that it no longer requires an unallocated portion of allowance for loan losses. Management expects to review these models on an ongoing basis and update them as appropriate to reflect then-current industry conditions, heightened access to enhanced loss data, and refinements based upon continuous back testing of the allowance for loan losses model. This change to the unallocated reserve resulted in a decrease to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses.

Lastly, part of the increase in allowance for loan losses was a result of the TDR refinement. Historically, we performed impairment analysis on TDRs by using the discounted cash flows method on a portfolio or pooled approach when the TDRs were not deemed collateral dependent. During the fourth quarter 2011, management adopted a strategic focus that improved loss mitigation processes so that we could continue the rate of loan modifications and other loss mitigation activities. Due to the emphasis on loss mitigation activities, management implemented new procedures relating to "new" TDRs (loans that were designated TDRs generally beginning on or after October 1, 2011) to capture the necessary data to perform the impairment analysis on a portfolio level. Such data was not previously available and currently continues to not be available for loans designated as TDRs prior to September 30, 2011. This data is now being captured in part due to our loan servicing system conversion in late 2011. As such, for a significant percentage of "new" TDRs, management was able to perform the impairment calculation on a portfolio basis. Given data constraints the "old" TDR portfolio as of December 31, 2011, is still utilizing the pooled approach. This refinement resulted in an increase to the 2012 level of allowance for loan losses, as compared to the 2011 level of allowance for loan losses. Management expects to continue to refine this process for operational efficiency purposes that will allow for periodic review and updates of impairment data of all TDRs grouped by similar risk characteristics.




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Use of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures such as pre-tax pre-credit-cost income, the efficiency ratio and the ratio of total non-performing assets to Tier 1 capital (to adjusted total assets) and general reserves. 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 our unique business model. Such measures also help investors to facilitate performance comparisons and benchmarks with other bank and thrift peers in our industry.

Non-GAAP financial measures have inherent limitations, thatwhich 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 procedurespractices 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.

Pre-tax pre-credit-cost income. Pre-tax pre-credit-cost income, as defined by our management, represents net income before taxes, and excludes credit related expenses (defined by management as provision for loan losses, asset resolution expense, other than temporary impairment, representation and warranty reserve provision and the write down of residual and transferors' interest). While these items represent an integral part of our banking operations, in each case, the excluded items are items that management believes are particularly impacted or increased due to economic stress or significant changes in the credit cycle and are therefore likely to make it more difficult to understand our underlying performance trends and our ability to generate income from our mortgageCommunity Banking and banking operations.Mortgage Banking segments. Net interest income, non-interest income and non-interest expense are all calculated in accordance with GAAP and are presented in the Consolidated Statements of Operations. Net income is adjusted only for the specific items listed above in the calculation of pre-tax pre-credit-cost income, and these adjustments represent the excluded items in their entirety for each period presented to better facilitate period to period comparisons.

Viewed together with our GAAP results, management believes pre-tax pre-credit cost income provides investors and stakeholders with a functional measurement to evaluate and better understand trends in our period to period ability to generate income and capital to offset credit related expenses, in each case exclusive of the effects of past and current economic stress and the credit cycle. As recent results for the banking industry demonstrate, provisions for loan losses, increases in representation and warranty reserve, asset impairments and mark-downs and expenses related to the resolution and disposition of assets can vary significantly from period to period, making a measure that helps isolate the impact of those credit related expenses on profitability integral to helping investors understand the business model. The "Asset Resolution," "Quality of Earning Assets," and "Representation and Warranty Reserve" sections of this report isolate the different credit quality challenges and issues and the impact of the associated credit related expenses on our income statement.

Like all non-GAAP measurements, pre-tax pre-credit-cost income usefulness is inherently limited. Because our calculation of pre-tax pre-credit-cost income may differ from the calculation of similar measures used by other bank and thrift holding companies, pre-tax pre-credit-cost income should be used to determine and evaluate period to period trends in our performance, rather than in comparison to other similar non-GAAP measurements utilized by other companies. In addition, investors should keep in mind that income tax expense (benefit), the provision for loan losses, and the other items excluded from income and expenses in the pre-tax pre-credit cost income calculation are recurring and integral expenses to our operations, and that these expenses will still accrue under GAAP, thereby reducing GAAP earnings and, ultimately, shareholders'stockholders' equity.


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Efficiency ratio and efficiency ratio (credit-adjusted). The efficiency ratio, which generally measures the productivity of a bank, is calculated as non-interest expense divided by total operating income. Total operating income includeincludes net interest income and total non-interest income. Management utilizes the efficiency ratio to monitor its own productivity and believes the ratio provides investors with a meaningful tool to monitor period to period productivity trends.

Under the efficiency ratio (credit adjusted), non-interest expense (GAAP) is presented excluding asset resolution expense to arrive at adjusted non-interest expense (non-GAAP), which is the numerator for the efficiency ratio. Non-interest income (GAAP) is presented excluding representation and warranty reserve - change in estimate to arrive at adjusted non-interest income (non-GAAP), which is included in the denominator for the efficiency ratio. As the provision for loan losses is already excluded by the ratio's own definition, we believe that the exclusion of asset resolution expense and representation and warranty reserve - change in estimate provides investors with a more complete picture of our productivity and ability to generate operating income. The efficiency ratio (credit adjusted) provides investors with a meaningful base for period to period comparisons, which management believes will assist investors in analyzing our operating results and predicting future performance. These non-GAAP financial measures are also utilized internally by management to assess the performance of our own business.

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Our calculations of the efficiency ratio may differ from the calculation of similar measures used by other bank and thrift holding companies, and should be used to determine and evaluate period to period trends in our performance, rather than in comparison to other similar non-GAAP measurements utilized by other companies. In addition, investors should keep in mind that the items excluded from income and expenses in the efficiency ratio (credit adjusted) are recurring and integral expenses to our operations, and that these expenses will still accrue under similar GAAP measures.

Non-performing assets / Tier 1 + Allowance for Loan Losses. The ratio of non-performing assets to Tier 1 and allowance for loan losses divides the total level of non-performing 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 in the industry.

Tier 1 Common. The ratio of Tier 1 common (to risk-weighted assets) is a financial measure utilized by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews Tier 1 common (to risk-weighted assets) along with other measures of capital as part of financial analysis and has included the non-GAAP measurement, and the corresponding reconciliation to Tier 1 capital (to adjusted total assets) because of current interest in such information on the part of market participants. Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.

    

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The following table displays the calculation for the non-GAAP measures.

Non-GAAP Reconciliation
(Dollars in thousands)
(Unaudited)
For the Three Months Ended For the Nine Months EndedFor the Three Months Ended
September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011 September 30, 2012 September 30, 2011March 31, 2013 December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012
Pre-tax, pre-credit-cost income                      
Income (loss) before tax provision$60,730
 $87,887
 $(7,309) $(74,901) $(9,216) $141,307
 $(105,821)$23,607
 $(88,577) $60,730
 $87,887
 $(7,309)
Add back                      
Provision for loan losses52,595
 58,428
 114,673
 63,548
 36,690
 225,696
 113,383
20,415
 50,351
 52,595
 58,428
 114,673
Asset resolution12,487
 20,851
 36,770
 32,408
 34,515
 70,108
 95,906
16,445
 21,241
 12,487
 20,851
 36,770
Other than temporary impairment on available-for-sale investments
 1,017
 1,175
 7,132
 1,322
 2,192
 16,906

 
 
 1,017
 1,175
Representation and warranty reserve - change in estimate124,492
 46,028
 60,538
 69,279
 38,985
 231,058
 80,776
17,395
 25,231
 124,492
 46,028
 60,538
Write down of residual interest118
 1,244
 409
 847
 186
 1,771
 4,825
Write down of transferors' interest174
 780
 118
 1,244
 409
Total credit-related-costs189,692
 127,568
 213,565
 173,214
 111,698
 530,825
 311,796
$54,429
 $97,603
 $189,692
 $127,568
 $213,565
Pre-tax, pre-credit-cost income$250,422
 $215,455
 $206,256
 $98,313
 $102,482
 $672,132
 $205,975
$78,036
 $9,026
 $250,422
 $215,455
 $206,256
                      
Efficiency ratio (credit-adjusted)                      
Net interest income (a)
$73,079
 $75,478
 $74,733
 $75,863
 $65,614
 $223,290
 $169,511
$55,669
 $73,941
 $73,079
 $75,478
 $74,733
Non-interest income (b)
273,737
 240,334
 221,377
 118,621
 112,551
 735,448
 266,895
184,943
 285,795
 273,737
 240,334
 221,377
Representation and warranty reserve - change in estimate (c)
124,492
 46,028
 60,538
 69,279
 38,985
 231,058
 80,776
17,395
 25,231
 124,492
 46,028
 60,538
Adjusted income$471,308
 $361,840
 $356,648
 $263,763
 $217,150
 $1,189,796
 $517,182
$258,007
 $384,967
 $471,308
 $361,840
 $356,648
Non-interest expense (d)
233,491
 169,497
 188,746
 205,837
 150,691
 591,735
 428,844
196,590
 397,962
 233,491
 169,497
 188,746
Asset resolution expense (e)
(12,487) (20,581) (36,770) (32,408) (34,515) (70,108) (95,906)(16,445) (21,241) (12,487) (20,581) (36,770)
Adjusted non-interest expense$221,004
 $148,916
 $151,976
 $173,429
 $116,176
 $521,627
 $332,938
$180,145
 $376,721
 $221,004
 $148,916
 $151,976
Efficiency ratio (d/(a+b))(1)
67.3% 53.7% 63.7% 105.8% 84.6% 61.7% 98.3%81.7% 110.6% 67.3% 53.7%��63.7%
Efficiency ratio (credit-adjusted) ((d-e)/((a+b)+c)))
46.9% 41.2% 42.6% 65.8% 53.5% 43.8% 64.4%
Efficiency ratio (credit-adjusted) ((d-e)/((a+b)+c))) (1) (2)
69.8% 97.9% 46.9% 41.2% 42.6%
September 30, 2012 December 31, 2011 September 30, 2011March 31, 2013 December 31, 2012 March 31, 2012
Non-performing assets / Tier 1 capital + allowance for loan losses          
Non-performing assets$518,416
 $603,082
 $558,252
$483,659
 $520,557
 $515,269
Tier 1 capital (to adjusted total assets) (1)
$1,379,701
 $1,215,220
 $1,273,929
1,318,770
 1,295,841
 1,207,237
Allowance for loan losses305,000
 318,000
 282,000
290,000
 305,000
 281,000
Tier 1 capital + allowance for loan losses$1,684,701
 $1,533,220
 $1,555,929
$1,608,770
 $1,600,841
 $1,488,237
Non-performing assets / Tier 1 capital + allowance for loan losses30.8% 39.3% 35.9%30.1% 32.5% 34.6%
          
Tier 1 common (to risk-weighted assets)     
Tier 1 capital (to adjusted total assets) (1)
$1,379,701
 $1,215,220
 $1,273,929
Adjustments     
Preferred stock(266,657) (266,657) (266,657)
Qualifying trust preferred securities(240,000) (240,000) (240,000)
Tier 1 common$873,044
 $708,563
 $767,272
Total risk-weighted assets (2)
$8,461,130
 $7,905,062
 $7,782,666
Tier 1 common (to risk-weighted assets) ratio10.32% 8.96% 9.86%

(1)Represents Tier 1 capitalDuring the three months ended March 31, 2013, we had lower revenue, primarily due to a decrease in net gain on loan sale. During the three months ended December 31, 2012, expenses related to the legal accruals for Bank.pending and threatened litigation, including amounts paid in anticipation of a future settlement, of $188.5 million were included in the ratios.
(2)UnderRepresents Tier 1 capital for the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.Bank.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments 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 managed by the asset liability committee ("ALCO"), which is composed of several of our executive officers and other members of management, in accordance with policies approved by our board of directors. The ALCO formulates strategies based on appropriate levels of interest rate risk. 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 financial derivative products 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 4 and 11 of the Notes to Consolidated Financial Statements, in Item 1 Financial Statements, and Supplementary Data, herein. All of our derivatives are accounted for at fair market value. All mortgage loan production originated for sale is accounted for on a fair value basis.

To effectively measure and manage interest rate risk, sensitivity analysis is used to determine the impact on net market value of various interest rate scenarios, balance sheet trends, and strategies. From these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. Additionally, duration and net interest income sensitivity measures are utilized when they provide added value to the overall interest rate risk management process. The overall interest rate risk position and strategies are reviewed by executive management and the board of directors on an ongoing basis. Business is traditionally managed to reduce overall exposure to changes in interest rates. However, management has the latitude to increase interest rate sensitivity position within certain limits if, in management's judgment, the increase will enhance profitability.

In the past, the savings and loan industry measured interest rate risk using gap analysis. Gap analysis is one indicator of interest rate risk; however it only provides a glimpse into expected asset and liability repricing in segmented time frames. Today the banking industry utilizes the concept of Net Portfolio Value ("NPV"). NPV analysis provides a fair value of the balance sheet in alternative interest rate scenarios. The NPV 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 NPV that are projected to result from hypothetical changes in market interest rates. NPV 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, 2012March 31, 2013 and December 31, 20112012 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, 2012March 31, 2013 and December 31, 20112012, and does not contemplate any actions that we might undertake in response to changes in market interest rates, which could impact NPV. Further, as this framework evaluates risks to the current statement of financial condition only, changes to the volumes and pricing of new business opportunities that can be expected in the different interest rate outcomes are not incorporated in this analytical framework. For instance, analysis of our history suggests that declining interest rate levels are associated with higher loan production volumes at higher levels of profitability. While this "natural business hedge" historically offset most, if not all, of the identified risks associated with declining interest rate scenarios, these factors fall outside of the net portfolio valueNPV framework. Further, there can be no assurance that this natural business hedge would positively affect the net portfolio value 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

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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.

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While each analysis involves a static model approach to a dynamic operation, the NPV model is the preferred method. If NPV 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 NPV, no matter what the rate scenario. The following table presents the NPV in the stated interest rate scenarios (dollars in millions).
September 30, 2012 December 31, 2011
March 31, 2013March 31, 2013 December 31, 2012
Scenario NPV NPV% $ Change % Change Scenario NPV NPV% $ Change % Change NPV NPV% $ Change % Change Scenario NPV NPV% $ Change % Change
300 $830
 5.9% $(263) (24.1)% 300 $896
 7.0% $(184) (17.0)% $988
 8.1% $18
 1.9% 300 $1,006
 7.5% $(223) (18.1)%
200 $981
 6.9% $(111) (10.2)% 200 $1,004
 7.6% $(76) (7.0)% $1,022
 8.2% $52
 5.4% 200 $1,139
 8.4% $(91) (7.4)%
100 $1,086
 7.5% $(6) (0.6)% 100 $1,082
 8.1% $1
 0.1 % $1,023
 8.1% $53
 5.5% 100 $1,228
 8.9% $(2)  %
Current $1,092
 7.5% $
  % Current $1,080
 8.0% $
  % $970
 7.6% $
 % Current��$1,230
 8.8% $
  %
(100) $1,035
 7.1% $(57) (5.2)% (100) $964
 7.1% $(116) 10.7 % $885
 6.9% $(85) 8.8% (100) $1,150
 8.3% $(80) (6.5)%

Our balance sheet exhibits minimal sensitivity for fairly small rate movements.movements with a slightly positive benefit for a 100 basis point increase. The positive effect generally arises because the amount of assets that would be expected to re-price in the near term would exceed the amount of liabilities that could similarly re-price over the same time period because such liabilities may have longer maturities or re-pricing terms. However, the negative convexity of our balance sheet leads more sensitivity in larger rate movements.takes over as interest rates continue to rise. The amount of price sensitivity tends to decrease as rates rise and increase as rates fall. Negative convexity is a measure of the sensitivity of the duration to changes in interest rates.

Item 4. Controls and Procedures

(a)
Disclosure Controls and Procedures. A review and evaluation was performed by our principal executive and financial officers regarding the effectiveness of our disclosure controls and procedures as of September 30, 2012March 31, 2013 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended. Based on that review and evaluation, the principal executive and financial officers have concluded that our current disclosure controls and procedures, as designed and implemented, are operating effectively.

(b)
Changes in Internal Controls. During the quarter ended September 30, 2012March 31, 2013, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934, as amended, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II
Item 1. Legal Proceedings

In 2009 and 2010, the Bank received repurchase demands from Assured, with respect to HELOCs that were sold by the Bank in connection with the HELOC securitizations. Assured is the note insurer for each of the two HELOC securitizations completed by the Bank. In April 2011, Assured filed a lawsuit against the Bank in the U.S. District Court for the Southern District of New York, alleging a breach of various loan level representations and warranties and seeking relief for breach of contract, as well as full indemnification and reimbursement of amounts that it had paid under the respective insurance policy, plus interest and costs. Assured is seeking $111.0 million in damages. On March 1, 2012, the court dismissed Assured's claims for indemnification and reimbursement, but allowed the case to proceed on the breach of contract claims related to the Bank's repurchase obligations. The court issued a memorandum opinion, on September 25, 2012, supporting and explaining the court's March 1 decision. In the memorandum, the court stated that the principal issue in the case is whether the Bank's breach of representations and warranties materially increased the risk of loss to Assured at the time of the securitization as compared to the risk of loss that Assured reasonably should have expected. The bench trial began on October 10, 2012, and the Company expects that it will conclude in November 2012. The court has not informed the parties when they can expect a decision.

From time to time, the Company is party to legal proceedings incident to its business. See Note 20 of the Notes to Consolidated Financial Statements, in Item 1 Financial Statements, and Supplementary Data, which is incorporated herein by reference herein.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, 20112012, except the following risk factors that update and supplement the risk factors in that report..

The Bank has entered into a Consent Order with the OCC, which requires the Bank to adopt or review and revise various plans, policies and procedures related to, among other things, regulatory capital, enterprise risk management and liquidity. While subject to the Consent Order, the Bank's management and Board of Directors will be required to focus a substantial amount of time on complying with its terms, which could adversely affect the Company's financial performance. Non-compliance with the Consent Order may lead to additional corrective actions by the OCC which could negatively impact our operations and financial performance.

Effective October 23, 2012, the Bank entered into a Consent Order with the OCC. Under the Consent Order, the Bank will adopt or review and revise various plans, policies and procedures related to, among other things, regulatory capital, enterprise risk management and liquidity. Specifically, under the terms of the Consent Order, the Bank has agreed to, among other things, take the following actions:
Within 120 days of the date of the Consent Order, the Board of Directors of the Bank (the “Board”) must review, revise, and forward to the OCC a written capital plan for the Bank covering at least a three-year period and establishing projections for the Bank's overall risk profile, earnings performance, growth expectations, balance sheet mix, off-balance sheet activities, liability and funding structure, capital and liquidity adequacy, as well as a contingency capital funding process and plan that identifies alternative capital sources should the primary sources not be available;

Within 60 days of the date of the Order, the Board shall adopt and forward to the OCC a comprehensive written liquidity risk management policy that systematically requires the Bank to reduce liquidity risk; and

Within 90 days of the date of the Order, the Board shall develop, adopt, and forward to the OCC a written enterprise risk management program that is designed to ensure that the Bank effectively identifies, monitors, and controls its enterprise-wide risks, including by developing risk limits for each line of business;

The Bank will submit these plans, policies and procedures to the OCC for a written determination that the OCC has no supervisory objection to them. Upon the Bank's receipt of no supervisory objection from the OCC, the Consent Order requires the Bank to implement and ensure adherence to the plans, policies and procedures. The foregoing summary of the Consent Order does not purport to be a complete description of all of its terms, and is qualified in its entirety by reference to the copy of the Consent Order filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on October 24, 2012.

While subject to the Consent Order, the Bank's management and Board of Directors will be required to focus a substantial amount of time on complying with its terms, which could adversely affect the Company's financial performance. There is also no

119


guarantee that the Bank will be able to fully comply with the Consent Order. In the event the Bank is in material non-compliance with the terms of the Consent Order, the OCC has the authority to subject the Bank to additional corrective actions. In particular, if the Bank fails to submit a capital plan within 120 days of the date of the Consent Order, or fails to implement a written capital plan for which the OCC has provided a written determination of no supervisory objection, then at the sole discretion of the OCC, the Bank may be deemed undercapitalized for purposes of the Consent Order. If the OCC determines that the Bank is undercapitalized for purposes of the Consent Order, it may at its discretion impose additional certain corrective actions on the Bank's operations that are applicable to undercapitalized institutions. These corrective actions could negatively impact the Bank's operations and financial performance.

Since we have new members of our executive team, our ability to execute our revised business strategy may not prove successful.

Some of our executive officers, including our President, have been employed by us for a relatively short period of time. In addition, several of our non-employee directors have been appointed to the board of directors for a relatively short period of time. Since joining us, the newly constituted management team has devoted substantial efforts to significantly change our business strategy and operational activities. There is no assurance that these efforts will prove successful or that the management team will be able to successfully execute upon the revised business strategy and operational activities.

Certain hedging strategies that we use to manage investment in MSRs may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.

We invest in MSRs to support mortgage banking strategies and to deploy capital at acceptable returns. We also deploy derivatives and other fair value assets as economic hedges to offset changes in fair value of the MSRs resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments. The primary risk associated with MSRs is that they will lose a substantial portion of their value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates. Conversely, 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, but we do not believe such risk can be sufficiently quantified to effectively hedge. Our hedging strategies are highly susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors. If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates or prepayment speeds, we may incur losses that would adversely impact earnings.

We are subject to heightened regulatory scrutiny with respect to bank secrecy and anti-money laundering statutes and regulations.

In recent years, regulators have intensified their focus on bank secrecy and anti-money laundering, statutes, regulations and compliance requirements, as well as compliance with the rules enforced by OFAC, and we have been required to revise policies and procedures and install new systems in order to comply with regulations, guidelines and examination procedures in this area. More recently, the Bank agreed in the Consent Order to review and revise the Bank's bank secrecy and anti-money laundering risk assessment and written program of policies and procedures adopted in accordance with the Bank Secrecy Act and update the status of the Bank's plan and timeline for the implementation of enhanced bank secrecy and anti-money laundering internal controls. We cannot be certain that the policies, procedures and systems we have in place or may in the future put in place are or will be successful. Therefore, there is no assurance that in every instance we are and will be in full compliance with these requirements or the Consent Order.

We may not be able to resume making future payments of dividends on our capital stock and interest on trust preferred securities.

In early 2012, we provided notice to the U.S. Treasury exercising our contractual right to defer our regularly scheduled quarterly payments of dividends, beginning with the February 2012 payment, on preferred stock issued and outstanding in connection with our participation in the TARP Capital Purchase Program. We also exercised our contractual right to defer interest payments with respect to our trust preferred securities. As a result of such deferrals, we are prohibited from making dividend payments on our capital stock, because the terms of the preferred stock and the trust preferred securities prohibit dividend payments and repurchases or redemptions of certain equity securities until all accrued and unpaid dividends and interest are paid, subject to limited exceptions. There can be no assurances that we will be able to resume making these dividend and interest payments in the future, and our inability to do so after a number of quarters may cause us to default on those obligations.


120


In addition, our ability to make dividend payments is subject to the limitations set forth in the Supervisory Agreement, which provides that we must receive the prior written non-objection of the Federal Reserve in order to pay dividends, and to the receipt of dividends from the Bank, which are restricted by the Consent Order. Also, under Michigan law, we are prohibited from paying dividends on our capital stock if, after giving effect to the dividend, (i) we would not be able to pay our debts as they become due in the usual course of business or (ii) our total assets would be less than the sum of our total liabilities plus the preferential rights upon dissolution of stockholders with preferential rights on dissolution which are superior to those receiving the dividend.

We are a holding company and therefore dependent on the Bank for funding of obligations and dividends.

As a holding company without significant assets other than the capital stock of the Bank, our ability to service our debt or preferred stock obligations, including interest payments on debentures underlying the trust preferred securities, the obligation to make payments under the DOJ litigation settlement and dividend payments on the preferred stock we issued to the U.S. Treasury, is dependent upon available cash on hand and the receipt of dividends from the Bank on such capital stock. The declaration and payment of dividends by the Bank on all classes of its capital stock is subject to the discretion of the Bank Board and to applicable regulatory and legal limitations, including the prior written non-objection of the OCC as a result of the Consent Order. If the Bank does not make dividend payments to us, we may not be able to service our debt or preferred stock obligations, which could have a material adverse effect of our financial condition and results of operations. Furthermore, the Federal Reserve has the authority, and under certain circumstances the duty, to prohibit or to limit the payment of dividends by the holding companies they supervise, including us.




121


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, 2012March 31, 2013.
 
Issuer Purchases of Equity Securities

The Company made no purchases of its equity securities common stock during the quarter ended September 30, 2012March 31, 2013.

Item 3. Defaults upon Senior Securities

The following sets forth defaults on senior securities and/or arrearage of the payment of dividends on preferred stock.

Under the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "Series C Preferred Stock"), issued and outstanding in connection with the TARP Capital Purchase Program, the Company may defer payments of dividends for up to six quarters without default or penalty. 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, 2012March 31, 2013, the amount of the arrearage on the dividend payments of the Series C Preferred Stock is $12.0$18.9 million.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.


122109


Item 6. Exhibits 
Exhibit No.  Description
10.38 + 
3.1AmendedRetention Agreement, dated February 28, 2013, by and Restated Articles of Incorporation of the Companybetween Flagstar Bank, FSB and Steven P. Issa
   
10.34 +*10.39 + Employment Agreement,Offer Letter, dated as of October 1, 2012,February 3, 2011, executed by Joseph P. Campanelli and between Flagstar Bancorp, Inc. and Michael J. Tierney (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated as of October 3, 2012, and incorporated hereinaccepted by reference)Daniel Landers
   
10.35 *10.40 + Stipulation to the Issuance of a Consent Order, effective as of October 23, 2012,Retention Agreement, dated February 14, 2013, by and between the Office of the Comptroller of the Currency and Flagstar Bank, FSB (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated as of October 24, 2012, and incorporated herein by reference)Daniel Landers
   
10.36 *10.41 + Consent Order,Retention Agreement, dated October 23, 2012,February 21, 2013, by and between Flagstar Bank, FSB and the Office of the Comptroller of the Currency (previously filed as Exhibit 10.2 to the Company's Current Report on Form 8-K, dated as of October 24, 2012, and incorporated herein by reference)Salvatore A. Rinaldi
   
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, 2012,March 31, 2013, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

* Incorporated herein by reference.

+ Constitutes a management contract or compensation plan or arrangement.

** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.





123110


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: OctoberApril 30, 20122013  /s/ Joseph P. CampanelliMichael J. Tierney
   Joseph P. CampanelliMichael J. Tierney
   President and Chief Executive Officer
   (Principal Executive Officer)
    
   /s/ Paul D. Borja
   Paul D. Borja
   
Executive Vice President and
Chief Financial Officer
   (Principal Financial and Accounting Officer)

124111



EXHIBIT INDEX

Exhibit No.  Description
10.38 + 
3.1AmendedRetention Agreement, dated February 28, 2013, by and Restated Articles of Incorporation of the Companybetween Flagstar Bank, FSB and Steven P. Issa
   
10.34 +*10.39 + Employment Agreement,Offer Letter, dated as of October 1, 2012,February 3, 2011, executed by Joseph P. Campanelli and between Flagstar Bancorp, Inc. and Michael J. Tierney (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated as of October 3, 2012, and incorporated hereinaccepted by reference)Daniel Landers
   
10.35 *10.40 + Stipulation to the Issuance of a Consent Order, effective as of October 23, 2012,Retention Agreement, dated February 14, 2013, by and between the Office of the Comptroller of the Currency and Flagstar Bank, FSB (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated as of October 24, 2012, and incorporated herein by reference)Daniel Landers
   
10.36 *10.41 + Consent Order,Retention Agreement, dated October 23, 2012,February 21, 2013, by and between Flagstar Bank, FSB and the Office of the Comptroller of the Currency (previously filed as Exhibit 10.2 to the Company's Current Report on Form 8-K, dated as of October 24, 2012, and incorporated herein by reference)Salvatore A. Rinaldi
   
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, 2012,March 31, 2013, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

* Incorporated herein by reference.

+ Constitutes a management contract or compensation plan or arrangement.

** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.




125112