10-K 1 fbc-20131231x10k.htm 10-K FBC-2013.12.31-10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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 incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5151 Corporate Drive, Troy, Michigan
 
48098-2639
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (248) 312-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes        No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes        No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer 
o
 
Accelerated Filer  
x 
 
Non-Accelerated Filer  
o
 
Smaller Reporting Company  
o 
 
(Do not check if a smaller reporting company)   
 
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes        No  ý

The estimated aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing sale price ($13.96 per share) as reported on the New York Stock Exchange on June 30, 2013, was approximately $277.7 million. The registrant does not have any non-voting common equity shares.
As of March 3, 2014, 56,221,056 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to the 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report on Form 10-K.




 
 
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
 
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
 
 
ITEM 15.

2


FORWARD-LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements, 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)
General business and economic conditions, including unemployment rates, movements in interest rates, the slope of the yield curve, any increase in mortgage fraud and other related activity and the further decline of asset values in certain geographic markets, that affect us or our counterparties;

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

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

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

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

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

(7)
Changes in, or expansion of, the regulation of financial services companies and government-sponsored housing enterprises, including new legislation, regulations, rulemaking and interpretive guidance, enforcement actions, the imposition of fines and other penalties by our regulators, the impact of existing laws and regulations, new or changed roles or guidelines of government-sponsored entities, changes in regulatory capital ratios, and increases in deposit insurance premiums and special assessments of the Federal Deposit Insurance Corporation;

(8)
Our ability to comply with the terms and conditions of the Supervisory Agreement with the Board of Governors of the Federal Reserve and the Bank’s ability to comply with the Consent Order with the Office of Comptroller of the Currency, and our ability to address matters raised by our regulators, including Matters Requiring Attention and Matters Requiring Immediate Attention, if any;

(9)
The Bank’s ability to make capital distributions and our ability to pay dividends on our capital stock or interest on our trust preferred securities;

(10)
Our ability to attract and retain senior management and other qualified personnel to execute our business strategy, including our entry into new lines of business, our introduction of new products and services and management of risks relating thereto, and our competing in the mortgage loan originations and servicing and commercial and retail banking lines of business;

(11)
Our ability to satisfy our servicing and subservicing obligations and manage repurchases and indemnity demands by mortgage loan purchasers, guarantors and insurers;


3


(12)
The outcome and cost of defending current and future legal or regulatory litigation, proceedings or investigations;

(13)
Our ability to create and maintain an effective risk management framework and effectively manage risk, including, among other things, market, interest rate, credit and liquidity risk, including risks relating to the cyclicality and seasonality of our mortgage banking business, litigation and regulatory risk, operational risk, counterparty risk and reputational risk;

(14)
The control by, and influence of, our majority stockholder;

(15)
A failure of, interruption in or cybersecurity attack on our network or computer systems, which could impact our ability to properly collect, process and maintain personal data and system integrity with respect to funds settlement;

(16)
Our ability to meet our forecasted earnings such that we are able to realize the benefits of reversing our deferred tax allowance, or the need to increase the valuation allowance in future periods;

(17)
Our compliance with the terms and conditions of the agreement with the U.S. Department of Justice and the impact of compliance with that agreement and our ability to accurately estimate the financial impact of that agreement, including the fair value and timing of the future payments; and

(18)
The downgrade 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.

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 Part I, Item 1A of this Annual Report on Form 10-K, which is incorporated by reference herein, for further information on these and other factors affecting us.

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.


4



PART I
ITEM 1.
BUSINESS

Where we say "we," "us," or "our," we usually mean Flagstar Bancorp, Inc. However, in some cases, a reference to "we," "us," or "our" will include our wholly-owned subsidiary Flagstar Bank, FSB (the "Bank").

General

We are a Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. At December 31, 2013, our total assets were $9.4 billion, making us the largest bank headquartered in Michigan and one of the top ten largest savings banks in the United States. Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "FBC." We are considered a controlled company for NYSE purposes, because MP Thrift Investments, L.P. ("MP Thrift") held approximately 63.4 percent of our common stock as of December 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 U.S. Department of the Treasury ("U.S. Treasury"). The Bank is also subject to regulation, examination and supervision by the Federal Deposit Insurance Corporation ("FDIC") and the Bank's deposits are insured by the FDIC through the Deposit Insurance Fund. 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.

Our 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, Federal Home Loan Mortgage Corporation ("Freddie Mac") and Government National Mortgage Association ("Ginnie Mae") (collectively, the "Agencies") or as whole loans. Approximately 99.2 percent of our total loan originations during the year ended December 31, 2013 represented mortgage loans that were collateralized by residential first mortgages on single-family residences and were eligible for sale to the Agencies. Our revenue primarily consists of net gain on loan sales, loan fees and charges, 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. At December 31, 2013, we originated residential first mortgage loans through our wholesale relationships with approximately 1,100 mortgage brokers and approximately 1,000 correspondents, which were located in all 50 states. At December 31, 2013, we also operated 39 home loan centers located in 19 states, which primarily originate one-to-four family residential first mortgage loans as part of our Mortgage Banking segment. We also originate mortgage loans through referrals from our banking centers, consumer direct call center and our website, www.flagstar.com. The combination of our home lending, broker and correspondent channels gives us broad access to customers across diverse geographies to originate, fulfill, sell and service our residential 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 mortgage-backed securities investors and escrow payments to third parties.

Our business 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 December 31, 2013, we operated 111 banking centers in Michigan (of which 12 were located in retail stores). Of the 111 banking centers, 68 facilities were owned and 43 facilities were leased. During the first quarter 2014, we relocated one and closed five banking centers to better align the branch structure with the Company's focus on key market areas and to improve banking center efficiencies. 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 deposit and cash management services to governmental units on a relationship basis. We leverage our banking centers to cross-sell loans, deposit products and insurance and investment services to existing customers and to increase our customer base by attracting new customers. At December 31, 2013, we had a total of $6.1 billion in deposits, including $4.9 billion in retail deposits, $0.6 billion in company controlled deposits and $0.6 billion in government deposits.

At December 31, 2013, we had 3,253 full-time equivalent salaried employees of which 359 were account executives and loan officers.


5



Reversal of Valuation Allowance on Deferred Tax Asset

During the fourth quarter 2013, we reversed 100 percent of the valuation allowance on our federal deferred tax asset ("DTA") and a portion of our state DTA, which had been previously established as of September 30, 2009 and which had increased since that time due to subsequently incurred operating losses. As a result of the DTA reversal, net income was increased due to the recording of a $416.3 million benefit for income taxes during the year ended December 31, 2013. As of January 1, 2013, this benefit was comprised of a $355.8 million DTA valuation allowance reversal, or $6.29 per diluted share, and the current period benefit for income taxes of $60.5 million during the year ended December 31, 2013.

Settlements with Fannie Mae and Freddie Mac

During the fourth quarter 2013, we announced that we had entered into and executed separate settlement agreements with each of Fannie Mae and Freddie Mac to resolve substantially all of the repurchase requests and obligations associated with loans originated between January 1, 2000 and December 31, 2008 and sold to Fannie Mae and Freddie Mac. The Fannie Mae total resolution amount was $121.5 million, and after paid claim credits and other adjustments, we paid $93.5 million to Fannie Mae. The Freddie Mac total resolution amount was $10.8 million, and after paid claim credits and other adjustments, we paid $8.9 million to Freddie Mac. As a result of these settlements, we released approximately $24.9 million of previously accrued reserves.

Sale of Mortgage Servicing Rights

On December 18, 2013, we entered into a definitive agreement to sell $40.7 billion unpaid principal balance of our MSR portfolio to Matrix Financial Services Corporation ("Matrix"), a wholly owned subsidiary of Two Harbors Investment Corp. Covered under the agreement are certain mortgage loans serviced for both Fannie Mae and Ginnie Mae, originated primarily after 2010. Simultaneously, we entered into an agreement with Matrix to subservice the residential mortgage loans covered under the agreement to sell. The sales transaction closed on December 18, 2013 and the MSRs were thereafter transferred on that date.

Agreement with U.S. Department of Justice

On February 24, 2012, we 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 its 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, 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. The Additional Payments will occur if and only if each of the following events happen:

we generate positive income for a sustained period, such that part or all of our DTA, which was previously offset by a valuation allowance, is more likely than not to be realized, as evidenced by the reversal of the DTA valuation allowance in accordance with U.S. GAAP;
we are able to include capital derived from the reversal of the DTA valuation allowance in our Tier 1 capital, as limited by the regulatory capital requirements administered by the U.S. bank regulatory agencies; 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 for purposes of calculating the Tier 1 capital ratio as described in the paragraph below.

Upon the occurrence of each of the 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 $25.0 million or the portion of the Additional Payments that remains outstanding after deducting prior payments, and (ii) no obligation arises until our 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, after excluding any un-extinguished portion of the preferred stock issued in connection with our participation in the TARP Capital Purchase Program, of 11 percent (or higher ratio if required by regulators).

As noted above, as part of the settlement, we agreed to make payments totaling $118.0 million, contingent upon the occurrence of certain future events, including the reversal of the valuation allowance on the DTA. As a result of the fourth

6



quarter 2013 reversal of the DTA valuation allowance and our view that the other conditions had been satisfied or would be satisfied in the near future upon the passage of time, we determined that the fair value liability associated with the DOJ settlement had increased by $61.0 million, in addition to the quarterly management estimates. The total fair value of the DOJ settlement liability was $93.0 million at December 31, 2013, as compared to $19.1 million at December 31, 2012. The fair value of the Additional Payments could increase or decrease in the future, depending on certain factors, and therefore, may affect earnings in future quarters. See Note 4 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein, for the key assumptions used in valuing the litigation settlement.

Preferred Stock and Warrant

On December 18, 2012, the U.S. Treasury announced its intention to auction, during 2013, the preferred stock of a number of institutions, including us, which the U.S. Treasury had purchased in 2009 under the Troubled Asset Relief Program ("TARP") Capital Purchase Program. The auction of our Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "Series C Preferred Stock"), closed on March 28, 2013. The U.S. Treasury also auctioned the warrant to purchase up to approximately 645,138 shares of our common stock, par value $0.01 per share (the "Common Stock") at an exercise price of $62.00 per share (the "Warrant"). That auction closed on June 5, 2013. As a result of the auctions, the Series C Preferred Stock and the Warrant, which previously was acquired under the TARP Capital Purchase Program, are now held by third party investors unaffiliated with the U.S. government.

Commercial Loan Sales

In late 2012, we made a strategic decision to exit our New England based commercial loan production offices. In connection with this decision, we entered into two agreements to sell our New England commercial loan portfolios.

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 for a purchase price of $779.2 million. We recognized a gain of $1.0 million recorded in net gain on sale of assets on the Consolidated Statement of Operations. 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 to the allowance for loan loss associated with such loans and which the reversal was recognized at December 31, 2012.

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 a purchase price of $148.5 million.

We transferred the loans sold pursuant to both the CIT Agreement and the Customers Agreement from the loans held-for investment portfolio to the loans held-for-sale portfolio at December 31, 2012.

Litigation Settlements

In 2009 and 2010, the Bank received repurchase demands from Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Inc. ("Assured") with respect to HELOCs that were sold by the Bank in connection with the two non-agency HELOC securitizations. In 2011, Assured filed a lawsuit related to these repurchase demands. 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. The Court found 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 us 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 reversed the decision regarding attorneys' fees until after the appeal. On June 21, 2013, the Bank entered into an agreement with Assured (the "Assured Settlement Agreement") to settle the litigation and the Bank's pending appeal. Pursuant to the terms of the Assured Settlement Agreement, Assured's judgment against the Bank has been deemed fully satisfied, the Bank's appeal has been dismissed, and, among other consideration and transaction provisions, the Bank has paid Assured $105.0 million. In addition, the Bank has assumed responsibility for future payments due by Assured to noteholders in the Flagstar non-agency HELOC securitization trust (the "FSTAR 2005-1") and Flagstar non-agency HELOC securitization trust (the "FSTAR 2006-2"), (collectively the "HELOC securitization trusts"), and will receive future reimbursements for claims paid to which Assured would otherwise have been entitled. As a result, the Bank recorded a $49.1 million gain during the second quarter 2013, arising

7



from the reconsolidation of the assets and liabilities of the HELOC securitization trusts at fair value and the reversal of related reserves for pending and threatened litigation. Due to the Assured Settlement Agreement, we reconsolidated the FSTAR 2005-1 and FSTAR 2006-2 HELOC securitization trusts assets and liabilities at June 30, 2013. We subsequently became the primary beneficiary of the FSTAR 2005-1 and FSTAR 2006-2 HELOC securitization trusts, which is reflected in the Consolidated Financial Statements as a variable interest entity ("VIE").

In May 2010, the Bank received repurchase demands from MBIA Insurance Corporation ("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. On January 11, 2013, MBIA 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 has paid and would pay under the respective insurance policies, plus interest and costs. In the litigation, MBIA alleged 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 estoppels. On May 2, 2013, the Bank entered into an agreement with MBIA (the "MBIA Settlement Agreement") to settle the litigation. Pursuant to the terms of the MBIA Settlement Agreement, MBIA dismissed its lawsuit against the Bank and in exchange, among other consideration and transaction provisions, the Bank paid MBIA $110.0 million. Following the MBIA Settlement Agreement, the Flagstar non-agency second mortgage securitization trust (the "FSTAR 2006-1") which was recorded as available-for-sale investment securities, was dissolved and we then transferred the loans associated with the securitization to our loans held-for-investment portfolio at fair value, approximately $73.3 million of second mortgage loans, and dissolved the FSTAR 2006-1 mortgage securitization trust. As a result, we recognized a $4.9 million loss during the second quarter 2013. In addition, the MBIA Settlement Agreement also noted that MBIA will be required to satisfy all of its obligation under the Flagstar non-agency second mortgage securitization trust (the "FSTAR 2007-1") insurance policy and related FSTAR 2007-1 obligations without further recourse to us.

For further information, see Notes 10 and 28 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.

Reverse Stock Split

Our board of directors authorized a one-for-ten reverse stock split on September 24, 2012 following the annual meeting of stockholders on that date at which the reverse stock split was approved by our stockholders. Our common stock 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 stock for every ten shares held at the effective time. The reverse stock split reduced the number of outstanding shares of common stock from approximately 558.3 million to 55.8 million. The number of authorized shares of common stock was reduced from 700 million to 70 million. Proportional adjustments were made to our outstanding options, warrants and other securities entitling holders to purchase or receive shares of common stock. In lieu of fractional shares, stockholders received cash payments based on the common 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 our outstanding options, warrants and other securities entitling holders to purchase or receive shares of common stock, except to adjust the number of shares relating thereto accordingly. For further information on the reverse stock split, see Note 21 and Note 22 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.

Consent Order

Effective October 23, 2012, the Bank's board of directors executed a Stipulation and Consent (the "Stipulation"), accepting the issuance of a Consent Order (the "Consent Order") by the OCC. The Consent Order replaces the supervisory agreement entered into between the Bank and the Office of Thrift Supervision (the "OTS") on January 27, 2010, which the OCC terminated simultaneous with issuance of the Consent Order. We are still subject to the Supervisory Agreement with the Board of Governors of the Federal Reserve (the "Supervisory Agreement").
Under the Consent Order, the Bank is required to adopt or review and revise various plans, policies and procedures related to, among other things, regulatory capital, enterprise risk management and liquidity. Specifically, under the terms of the Consent Order, the Bank's board of directors has agreed to, among other things, which include but are not limited to the following:


8



Review, revise, and forward to the OCC a written capital plan for the Bank covering at least a three-year period and establishing projections for the Bank's overall risk profile, earnings performance, growth expectations, balance sheet mix, off-balance sheet activities, liability and funding structure, capital and liquidity adequacy, as well as a contingency capital funding process and plan that identifies alternative capital sources should the primary sources not be available;
Adopt and forward to the OCC a comprehensive written liquidity risk management policy that systematically requires the Bank to reduce liquidity risk; and
Develop, adopt, and forward to the OCC a written enterprise risk management program that is designed to ensure that the Bank effectively identifies, monitors, and controls its enterprise-wide risks, including by developing risk limits for each line of business.

Each of the plans, policies and procedures referenced above in the Consent Order, as well as any subsequent amendments or changes thereto, must be submitted to the OCC for a determination that the OCC has no supervisory objection to them. Upon receiving a determination of no supervisory objection from the OCC, the Bank must implement and adhere to the respective plan, policy or procedure. The foregoing summary of the Consent Order does not purport to be a complete description of all of the terms of the Consent Order, and is qualified in its entirety by reference to the copy of the Consent Order filed with the SEC as an exhibit to our Current Report on Form 8-K filed on October 24, 2012.

We intend to address the banking issues identified by the OCC in the manner required for compliance by the OCC. There can be no assurance that the OCC will not provide substantive comments on the capital plan or other submissions that the Bank makes pursuant to the Consent Order that will have a material impact on us. We believe that the actions taken, or to be taken, to address the banking issues set forth in the Consent Order should, over time, improve our enterprise risk management practices and risk profile. For further information regarding the risks related to the Consent Order, please also refer to Item 1A to Part I of this Annual Report on Form 10-K, herein.

Supervisory Agreement

We are subject to the Supervisory Agreement, dated January 27, 2010, which will remain in effect until terminated, modified, or suspended in writing by the Federal Reserve. The failure to comply with the Supervisory Agreement could result in the initiation of further enforcement action by the Federal Reserve, including the imposition of further operating restrictions, and could result in additional enforcement actions against us. We have taken actions which we believe are appropriate to comply with, and intend to maintain compliance with, all of the requirements of the Supervisory Agreement.

Pursuant to the Supervisory Agreement, we submitted a capital plan to the OTS, predecessor in interest to the Federal Reserve. In addition, we agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital distributions; purchase, repurchase or redeem certain securities; and incur, issue, renew, roll over or increase any debt; and enter into certain affiliate transactions. We also agreed to comply with restrictions on the payment of severance and indemnification payments, director and management changes and employment contracts and compensation arrangements. The foregoing summary of the Supervisory Agreement does not purport to be a complete description of all of the terms of the Supervisory Agreement and is qualified in its entirety by reference to the copy of the Supervisory Agreement filed with the SEC as an exhibit to our Current Report on Form 8-K filed on January 28, 2010. For further information regarding the risks related to the Supervisory Agreement, please also refer to Item 1A to Part I of this Annual Report, herein.

Payment of Dividend and Interest Payments

We are a legal entity separate and distinct from the Bank and our non-banking subsidiaries. In 2008, we discontinued the payment of dividends on common stock. On January 27, 2012, we provided notice to the U.S. Treasury exercising our contractual right to defer regularly scheduled quarterly payments of dividends, beginning with the February 2012 payment, on preferred stock issued and outstanding. Beginning after January 30, 2014, the rate will increase to 9.0 percent from the December 31, 2013 rate of 5.0 percent. Under the terms of the preferred stock, we may defer payments of dividends for up to six quarters in total without default or penalty. Since we have exceeded six quarters of interest deferrals, the holders of such preferred stock have the right to elect two directors to our board of directors but have advised us that they currently do not intend to do so. Concurrently, we also exercised our contractual rights to defer interest payments with respect to trust preferred securities. We may not recommence payments on either the preferred stock or trust preferred securities without commencing payments on the other as well. Under the terms of the indentures related to the trust preferred securities, we may defer interest payments for up to 20 consecutive quarters without default or penalty. These payments will be periodically evaluated and reinstated when appropriate, subject to provisions of the Consent Order and Supervisory Agreement.


9



In addition, we are generally prohibited from making any dividend payments on stock except pursuant to the prior non-objection of the Federal Reserve as set forth in the Consent Order and Supervisory Agreement. Our principal sources of funds are cash dividends paid by the Bank and other subsidiaries, investment income and borrowings. Federal laws and regulations limit the amount of dividends or other capital distributions that the Bank may pay us. The Bank has an internal policy to remain "well-capitalized" under OCC capital adequacy regulations. The Bank does not currently expect to pay dividends to us and, even if it determined to do so, would not make payments if the Bank was not well-capitalized at the time or if such payment would result in the Bank not being well-capitalized. In addition, the Bank must seek prior approval from the OCC at least 30 days before it may make a dividend payment or other capital distribution to us.

Business and Strategy

We, as well as the rest of the mortgage industry and most other lenders, were negatively affected in recent years by increased credit losses from the prolonged and unprecedented economic recession. There have been moderate improvements beginning in 2012 and throughout 2013 in a number of macroeconomic factors which impact our business. However, near term concerns remain over unemployment, the U.S. mortgage market, access to credit and liquidity markets, energy costs and global political issues such as sovereign debt defaults. Financial institutions also continue to face heightened levels of scrutiny from regulators regarding capital and liquidity requirements, credit risk and other matters.     
    
We believe that despite the increased scrutiny and heightened capital and liquidity requirements, regulated financial institutions should benefit from reduced competition from unregulated entities that lack the access to and breadth of significant funding sources as well as the capital to meet the financing needs of their customers and the ability to satisfy compliance requirements.
    
We believe that our management team has the necessary experience to appropriately manage through the credit and operational challenges that are present in today's markets. Our Mortgage Banking and Community Banking segments complement each other and contribute to the establishment of a diversified mix of revenue streams.
    
We intend to continue to seek ways to maximize the value of our Mortgage Banking segment while effectively managing and mitigating risk, with a critical focus on expense management, improving asset quality, increasing profitability, and preserving capital. We expect to pursue opportunities to build our core deposit base through our existing branch banking structure and to serve the credit and non-credit needs of the business customers in our markets, as we diversify our businesses and risk through executing our business plan and transitioning to a full-service and diversified community banking model.

The segments are based on an internally-aligned segment leadership structure, which is also how the results are monitored and performance assessed. We expect that the combination of our business model and the services that our operating segments provide will result in a competitive advantage that supports revenue and earnings. Our business model emphasizes the delivery of a complete set of mortgage and banking products and services, including originating, acquiring, selling and servicing one-to-four family residential first mortgage loans, which we believe is distinguished by timely processing and customer service.

Operating Segments

Our business is comprised of three operating segments - Mortgage Banking, Community Banking and Other. Our Mortgage Banking segment originates, acquires, sells and services residential first mortgage loans on one-to-four family residences. Our Community Banking segment currently offers a line of financial products and services to individuals, small and middle market businesses, and mortgage lenders. Our Other segment 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. For example, funding for the Mortgage Banking segment is primarily provided by deposits obtained through the Community Banking segment. Financial information regarding the three operating segments is set forth in Note 29 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, herein. A more detailed discussion of the three operating segments is set forth below.

Mortgage Banking

Our Mortgage Banking segment originates, acquires, sells and services one-to-four family residential first mortgage loans. Throughout 2013, we remained one of the country's leading mortgage loan originators. We utilize three production channels to originate or acquire mortgage loans: home lending (also referred to as "retail"), as well as brokers and correspondents (also collectively referred to as "wholesale"). Each production channel originates mortgage loan products which are underwritten to the same standards. We expect to continue to leverage technology to streamline the mortgage origination

10



process, thereby bringing service and convenience to brokers and correspondents. Sales support offices are maintained to assist brokers and correspondents nationwide. We also continue to make available to our customers various web-based tools that facilitate the mortgage loan origination process through each of our production channels. Brokers and correspondents are able to register and lock loans, check the status of inventory, deliver documents in electronic format, generate closing documents, and request funds through the Internet.

During the year ended December 31, 2013, 34.3 percent of our residential first mortgage originations were purchase mortgages, as compared to 21.8 percent in the year ended December 31, 2012. Historically, the purchase and refinance mix of our mortgage originations has generally tracked the mix of the overall mortgage industry. This is also the case in each of our production channels.

Home Lending .  In a home lending transaction, loans are originated through a nationwide network of stand-alone home loan centers, as well as referrals from our Community Banking segment and the national call center. When loans are originated on a retail basis, most aspects of the lending process are completed internally including the origination documentation (inclusive of customer disclosures) as well as the funding of the transactions. At December 31, 2013 we maintained 39 home loan centers. At the same time, our centralized loan processing gains efficiencies and allows lending sales staff to focus on originations.
    
Broker. In a broker transaction, an unaffiliated bank or mortgage brokerage company completes several steps of the loan origination process including the loan paperwork, but the loans are underwritten on a loan-level basis to our underwriting standards and we supply the funding for the loan at closing (also known as "table funding") thereby becoming the lender of record. Currently, we have active broker relationships with approximately 1,100 banks, credit unions and mortgage brokerage companies located in all 50 states.
  
Correspondent. In a correspondent transaction, an unaffiliated bank or mortgage company completes the loan paperwork and also supplies the funding for the loan at closing. After the bank or mortgage company has funded the transaction, we purchase the loan at a market price. We do not acquire loans from correspondents on a bulk basis without prior review. Instead, we perform a full review of each loan, purchasing only those that were originated in accordance with our underwriting guidelines. We have active correspondent relationships with approximately 1,000 companies, including banks, credit unions and mortgage companies located in all 50 states.

As of December 31, 2013, we ranked in the top ten mortgage lenders nationwide based on our residential first mortgage loan originations. The following tables disclose residential first mortgage loan originations by channel, type and mix for each respective period.
 
2013
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Year to
Date
 
(Dollars in thousands)
Home Lending
$
697,340

 
$
575,016

 
$
411,940

 
$
296,123

 
$
1,980,419

Broker
3,201,371

 
2,974,555

 
1,845,465

 
1,591,372

 
9,612,763

Correspondent
8,524,540

 
7,332,558

 
5,478,385

 
4,548,166

 
25,883,649

Total
$
12,423,251

 
$
10,882,129

 
$
7,735,790

 
$
6,435,661

 
$
37,476,831

 
 
 
 
 
 
 
 
 
 
Purchase originations
$
2,339,269

 
$
3,146,501

 
$
3,682,411

 
3,672,538

 
$
12,840,719

Refinance originations
10,083,982

 
7,735,628

 
4,053,379

 
2,763,123

 
24,636,112

Total
$
12,423,251

 
$
10,882,129

 
$
7,735,790

 
$
6,435,661

 
$
37,476,831

 
 
 
 
 
 
 
 
 
 
Conventional
$
8,591,784

 
$
7,681,337

 
$
5,247,910

 
$
4,130,976

 
$
25,652,007

Government
2,799,000

 
2,535,378

 
1,930,538

 
1,560,059

 
8,824,975

Jumbo
1,032,467

 
665,414

 
557,342

 
744,626

 
2,999,849

Total
$
12,423,251

 
$
10,882,129

 
$
7,735,790

 
$
6,435,661

 
$
37,476,831


11



 
2012
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Year to
Date
 
(Dollars in thousands)
Home Lending
$
729,369

 
$
751,075

 
$
961,591

 
$
998,804

 
$
3,440,839

Broker
2,909,446

 
3,156,949

 
4,117,742

 
4,524,775

 
14,708,912

Correspondent
7,530,594

 
8,638,977

 
9,434,287

 
9,833,218

 
35,437,076

Total
$
11,169,409

 
$
12,547,001

 
$
14,513,620

 
$
15,356,797

 
$
53,586,827

 
 
 
 
 
 
 
 
 
 
Purchase originations
$
2,188,508

 
$
3,324,501

 
$
3,267,788

 
2,915,724

 
$
11,696,521

Refinance originations
8,980,901

 
9,222,500

 
11,245,832

 
12,441,073

 
41,890,306

Total
$
11,169,409

 
$
12,547,001

 
$
14,513,620

 
$
15,356,797

 
$
53,586,827

 
 
 
 
 
 
 
 
 
 
Conventional
$
7,859,960

 
$
8,762,268

 
$
10,020,863

 
$
10,427,131

 
$
37,070,222

Government
2,611,691

 
3,085,247

 
3,178,563

 
3,363,134

 
12,238,635

Jumbo
697,758

 
699,486

 
1,314,194

 
1,566,532

 
4,277,970

Total
$
11,169,409

 
$
12,547,001

 
$
14,513,620

 
$
15,356,797

 
$
53,586,827

 
2011
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Year to
Date
 
(Dollars in thousands)
Home Lending
$
329,973

 
$
354,359

 
$
481,057

 
$
616,765

 
$
1,782,154

Broker
1,341,973

 
1,436,632

 
2,178,801

 
2,931,106

 
7,888,512

Correspondent
3,184,364

 
2,851,716

 
4,266,593

 
6,639,229

 
16,941,902

Total
$
4,856,310

 
$
4,642,707

 
$
6,926,451

 
$
10,187,100

 
$
26,612,568

 
 
 
 
 
 
 
 
 
 
Purchase originations
$
1,702,041

 
$
2,347,212

 
$
2,538,925

 
$
2,148,300

 
$
8,736,478

Refinance originations
3,154,269

 
2,295,495

 
4,387,526

 
8,038,800

 
17,876,090

Total
$
4,856,310

 
$
4,642,707

 
$
6,926,451

 
$
10,187,100

 
$
26,612,568

 
 
 
 
 
 
 
 
 
 
Conventional
$
2,965,986

 
$
2,726,979

 
$
4,431,229

 
$
7,180,349

 
$
17,304,543

Government
1,645,232

 
1,680,766

 
1,759,984

 
2,135,840

 
7,221,822

Jumbo
245,092

 
234,962

 
735,238

 
870,911

 
2,086,203

Total
$
4,856,310

 
$
4,642,707

 
$
6,926,451

 
$
10,187,100

 
$
26,612,568


Underwriting

During the year ended December 31, 2013, we primarily originated residential first mortgage loans for sale to the Agencies, each of which has its particular underwriting guidelines.

Residential first mortgage loans are underwritten on a loan-by-loan basis. Generally, residential first mortgage loans in the held-for-investment loan portfolio were 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. We also originate jumbo adjustable-rate mortgage loans held-for-investment and the underwriting criteria is similar to lenders originating for securitization.

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 adjustable-rate loans, and for Agency loans, the specific Agency eligible LTV ratios with full appraisals when required. Variances from any of these standards are permitted only to the extent allowable under the specific investor program requirements. Mortgage loans are collateralized by a first or second mortgage on a one-to-four family residential property.

In general, for loans originated in 2008 and prior, those loans with a balance under $1,000,000 required a valid Agency automated underwriting system ("AUS") response for approval consideration. Documentation and ratio guidelines were driven by the AUS response. A FICO credit score for the borrower was required and a full appraisal of the underlying property that serve as collateral was obtained. For loans over $1,000,000 originated in 2008 and prior, traditional manual underwriting documentation and ratio requirements were required as were two years plus year to date income documentation and two months

12



of bank statements. Income documentation based solely on a borrower's statement was an available underwriting option for each loan category. Even so, in these cases employment of the borrower was verified under the vast majority of loan programs, and income levels were typically checked against third party sources to confirm validity.

We believe our underwriting process, which relies on the electronic submission of data and images and is based on an imaging workflow process, allows for underwriting at a higher level of accuracy and with more timeliness than exists with processes that 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 the Agencies 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.

Loans held-for-investment

Residential first mortgage loans. At December 31, 2013, most of our held-for-investment residential first mortgage loans had been originated in 2008 or prior years with underwriting criteria that varied by product and with the standards in place at the time of origination. Loans originated after 2008 are loans that generally satisfy specific criteria for sale into securitization pools insured by the Agencies or were repurchased from the Agencies subsequent to such sales. During the year ended December 31, 2013, we originated amortizing jumbo adjustable-rate mortgages (adjustable-rate mortgages with loan balances above the Agencies limits) for our held-for-investment portfolio. During the year ended December 31, 2013, we increased the amount of jumbo mortgage loans held-for-investment originations and further volume growth in originations is planned for 2014.

At December 31, 2013, the largest geographic concentrations of our residential first mortgage loans in our held-for investment portfolio were in California, Florida and Michigan, and the aggregate unpaid principal balance of which represented 52.5 percent of total unpaid principal balance of such loans.


13



The following table identifies our held-for-investment mortgages by major category, at December 31, 2013 and December 31, 2012.
 
Unpaid Principal Balance (1)
 
Average Note Rate
 
Average Original FICO Score
 
Average Current FICO Score (2)
 
Weighted Average Maturity
 
Average Original LTV Ratio
 
Housing Price Index LTV, as recalculated (3)
December 31, 2013
(Dollars in thousands)
 
 
Residential first mortgage loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortizing
1,392,778

 
4.03
%
 
707

 
695

 
302

 
75.3
%
 
78.9
%
Interest only
1,051,157

 
3.76
%
 
724

 
733

 
264

 
74.6
%
 
83.7
%
Option ARMs
37,159

 
2.94
%
 
717

 
708

 
297

 
69.2
%
 
92.0
%
Subprime (4)
3,230

 
8.16
%
 
628

 
643

 
282

 
70.2
%
 
92.0
%
Total residential first mortgage loans
$
2,484,324

 
3.90
%
 
714

 
711

 
286

 
74.9
%
 
81.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential first mortgage loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortizing
1,662,753

 
4.15
%
 
704

 
669

 
311

 
77.5
%
 
92.7
%
Interest only
1,251,658

 
4.11
%
 
724

 
709

 
276

 
74.4
%
 
93.2
%
Option ARMs
55,848

 
3.54
%
 
717

 
684

 
309

 
70.4
%
 
108.9
%
Subprime (4)
3,755

 
8.37
%
 
616

 
650

 
295

 
73.4
%
 
100.4
%
Total residential first mortgage loans
$
2,974,014

 
4.13
%
 
712

 
686

 
296

 
76.1
%
 
93.2
%
(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2)
Current FICO scores obtained at various times during the year ended December 31, 2013.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2013.
(4)
Subprime loans are defined in accordance with the FDIC's assessment regulations definitions for subprime loans, which includes loans with FICO scores below 620 or similar characteristics.

Set forth below is a table describing the characteristics of the residential first mortgage loans in our held-for-investment portfolio at December 31, 2013, by year of origination. 
Year of Origination
2009 and Prior
 
2010
 
2011
 
2012
 
2013
 
Total / Weighted Average
 
(Dollars in thousands)
Unpaid principal balance (1)
$
2,250,018

 
$
22,401

 
$
29,951

 
$
28,014

 
$
153,940

 
$
2,484,324

Average note rate
3.92
%
 
4.67
%
 
4.48
%
 
3.90
%
 
3.39
%
 
3.90
%
Average original FICO score
710

 
717

 
735

 
736

 
764

 
714

Average current FICO score (2)
706

 
723

 
744

 
752

 
767

 
711

Average original LTV ratio
75.4
%
 
79.7
%
 
78.8
%
 
72.6
%
 
66.5
%
 
74.9
%
Housing Price Index LTV, as recalculated (3)
82.7
%
 
71.4
%
 
71.2
%
 
63.8
%
 
65.2
%
 
81.2
%
Underwritten with low or stated income documentation
35.0
%
 
%
 
1.0
%
 
%
 
%
 
31.0
%
(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2)
Current FICO scores obtained at various times during the year ended December 31, 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 September 30, 2013.

Average original LTV represents the loan balance at origination, as a percentage of the original appraised value of the property. LTVs are refreshed quarterly based on estimates of home prices using the most current FHFA data, and the refreshed LTVs reflect the modest recovery in home prices over the past 18 months.


14



The following table identifies our held-for-investment mortgages by major category, at December 31, 2013.
December 31, 2013
Unpaid Principal Balance (1)
 
Average Note Rate
 
Average Original FICO Score
 
Average Current FICO Score (2)
 
Weighted Average Maturity
 
Average Original LTV Ratio
 
Housing Price Index LTV, as recalculated (3)
 
(Dollars in thousands)
 
 
Residential first mortgage loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortizing
 
 
 
 
 
 
 
 
 
 
 
 
 
3/1 ARM
$
125,463

 
3.30
%
 
691

 
700

 
254

 
80.2
%
 
76.8
%
5/1 ARM
335,424

 
3.49
%
 
720

 
731

 
274

 
73.4
%
 
70.2
%
7/1 ARM
132,084

 
3.49
%
 
758

 
764

 
347

 
68.3
%
 
66.8
%
Other ARM
53,934

 
3.16
%
 
676

 
687

 
246

 
83.2
%
 
72.9
%
Fixed mortgage loans (4)
745,873

 
4.56
%
 
696

 
666

 
320

 
75.9
%
 
85.9
%
Total amortizing
1,392,778

 
4.03
%
 
707

 
695

 
302

 
75.3
%
 
78.9
%
Interest only
 
 
 
 
 
 
 
 
 
 
 
 
 
3/1 ARM
172,949

 
3.44
%
 
722

 
724

 
259

 
74.5
%
 
81.8
%
5/1 ARM
668,717

 
3.25
%
 
723

 
737

 
261

 
75.0
%
 
82.0
%
7/1 ARM
38,061

 
5.81
%
 
732

 
732

 
282

 
74.5
%
 
93.8
%
Other ARM
42,253

 
3.25
%
 
730

 
734

 
275

 
73.5
%
 
81.3
%
Other interest only
129,177

 
6.41
%
 
728

 
723

 
279

 
73.6
%
 
93.3
%
Total interest only
1,051,157

 
3.76
%
 
724

 
733

 
264

 
74.6
%
 
83.7
%
Option ARMs
37,159

 
2.94
%
 
717

 
708

 
297

 
69.2
%
 
92.0
%
Subprime (5)
 
 
 
 
 
 
 
 
 
 
 
 
 
3/1 ARM
48

 
10.30
%
 
685

 
734

 
262

 
95.0
%
 
62.1
%
Other ARM
72

 
9.75
%
 
572

 
593

 
270

 
95.0
%
 
79.3
%
Other subprime
3,110

 
8.09
%
 
629

 
643

 
282

 
69.4
%
 
92.7
%
Total subprime
$
3,230

 
8.16
%
 
628

 
643

 
282

 
70.2
%
 
92.0
%
Total residential first mortgage loans
$
2,484,324

 
3.90
%
 
714

 
711

 
286

 
74.9
%
 
81.2
%
Second mortgage loans (6) (7)
$
169,680

 
7.07
%
 
729

 
729

 
116

 
20.6
%
 
20.9
%
HELOC loans (6) (7)
$
289,303

 
5.53
%
 
728

 
728

 
50

 
26.5
%
 
27.0
%
(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2)
Current FICO scores obtained at various times during the year ended December 31, 2013.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2013.
(4)
Includes substantially fixed rate mortgage loans.
(5)
Subprime loans are defined in accordance with the FDIC's assessment regulations definitions for subprime loans, which includes loans with FICO scores below 620 or similar characteristics.
(6)
Reflects lower LTV only as to second liens because information regarding the first liens is not available.
(7)
Includes $64.7 million and $155.0 million of second mortgage and HELOC loans, respectively, that are accounted for under the fair value option at December 31, 2013. The combined LTV information is not available for these loans.    


15



The following table sets forth characteristics of those loans in our held-for-investment mortgage portfolio as of December 31, 2013 that were originated with less documentation than is now required by the Agencies. 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, personal assets, or both, stated by the borrower without verification of actual amount. The lack of verification of borrower provided information may increase the risk profile of those loans. 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.
 
Low Doc
December 31, 2013
% of Held-for-Investment loans
 
% of Residential First Mortgage loans
 
Unpaid Principal Balance (1)
 
(Dollars in thousands)
Characteristics
 
 
 
 
 
SISA (stated income, stated asset)
1.85
%
 
2.93
%
 
$
74,420

SIVA (stated income, verified assets)
10.53
%
 
16.73
%
 
424,284

High LTV (i.e., at or above 95 percent at origination)
0.18
%
 
0.29
%
 
7,389

Second lien products (HELOCs, second mortgages)
3.41
%
 
5.43
%
 
137,591

Loan types
 
 
 
 
 
Option ARM loans (2)
0.54
%
 
0.86
%
 
21,929

Interest-only loans (2)
9.43
%
 
14.98
%
 
379,933

Subprime (2) (3)
0.05
%
 
0.08
%
 
2,017

(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2)
For additional information regarding the orginal and current FICO scores and LTV ration, please see the table on the preceding page.
(3)
Subprime loans are defined in accordance with the FDIC's assessment regulations definitions for subprime loans, which includes loans with FICO scores below 620 or similar characteristics.

Adjustable-rate mortgage loans.  Adjustable rate mortgage ("ARM") loans held-for-investment were originated using Fannie Mae and Freddie Mac guidelines as a base framework, and the debt-to-income ratio guidelines and documentation typically followed the AUS guidelines. Our underwriting guidelines were designed with the intent to minimize layered risk. The maximum ratios allowable for purposes of both the LTV ratio and the combined loan-to-value ("CLTV") ratio, which includes second mortgages on the same collateral, was 100 percent, but subordinate (or second mortgage) financing was not allowed over a 90 percent LTV ratio. At a 100 percent LTV ratio with private mortgage insurance, the minimum acceptable FICO score, or the "floor," was 700, and at lower LTV ratio levels, the FICO floor was 620. 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 was lower than the fully indexed rate but only for loans with lower LTV ratios and higher FICO scores. Other ARMs were either underwritten at 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.


16



Set forth below is a table describing the characteristics of our ARM loans in our residential first mortgage held-for-investment loan portfolio at December 31, 2013, by year of origination. 
Year of Origination
2009 and
Prior
 
2010
 
2011
 
2012
 
2013
 
Total / Weighted Average
 
(Dollars in thousands)
Unpaid principal balance (1)
$
1,424,808

 
$
9,661

 
$
15,614

 
$
13,462

 
$
142,619

 
$
1,606,164

Average note rate
3.38
%
 
4.29
%
 
4.21
%
 
3.88
%
 
3.34
%
 
3.39
%
Average original FICO score
717

 
730

 
743

 
756

 
766

 
722

Average current FICO score (2)
727

 
739

 
758

 
769

 
768

 
731

Average original LTV ratio
75.4
%
 
75.5
%
 
74.9
%
 
62.4
%
 
66.4
%
 
74.5
%
Housing Price Index LTV, as recalculated (3)
79.7
%
 
69.9
%
 
67.3
%
 
55.9
%
 
65.3
%
 
78.0
%
Underwritten with low or stated income documentation
35.0
%
 
%
 
1.0
%
 
%
 
%
 
31.0
%
(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2)
Current FICO scores obtained at various times during the year ended December 31, 2013.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2013.

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 include principal and some interest, with the unpaid interest added to the balance of the loan (i.e., a process known as "negative amortization").
    
Set forth below is a table describing specific characteristics of option ARMs in our held-for-investment mortgage portfolio at December 31, 2013, which were originated in 2008 or prior.
Year of Origination
2008 and Prior
 
(Dollars in thousands)
Unpaid principal balance (1)
$
37,159

Average note rate
2.94
%
Average original FICO score
717

Average current FICO score (2)
708

Average original LTV ratio
69.2
%
Average original CLTV ratio
73.9
%
Housing Price Index LTV, as recalculated (3)
92.0
%
Underwritten with low or stated income documentation
$
21,929

Total principal balance with any accumulated negative amortization
$
23,254

Percentage of total ARMS with any accumulated negative amortization
1.6
%
Amount of net negative amortization (i.e., deferred interest) accumulated as interest income during the year ended December 31, 2013
$
2,368

(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2)
Current FICO scores obtained at various times during the year ended December 31, 2013.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2013.


17



Set forth below are the accumulated amounts of interest income arising from the net negative amortization portion of loans during the years ended December 31.  
 
Unpaid Principal Balance of Loans in Negative Amortization At Year-End (1)
 
Amount of Net Negative
Amortization Accumulated as
Interest Income During Period
 
(Dollars in thousands)
2013
$
23,254

 
$
2,368

2012
$
37,747

 
$
3,513

2011
$
82,536

 
$
7,847

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

Set forth below are the frequencies at which the interest rate on ARM loans outstanding at December 31, 2013, will reset.
Reset frequency
# of Loans
 
Balance
 
% of the Total
 
(Dollars in thousands)
Monthly
98

 
$
19,332

 
1.2
%
Semi-annually
2,988

 
916,705

 
57.0
%
Annually
2,427

 
351,117

 
21.9
%
No reset — nonperforming loans
1,079

 
319,010

 
19.9
%
Total
6,592

 
$
1,606,164

 
100.0
%
    
Set forth below as of December 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 nonperforming loans do not reset while in the nonperforming 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)
2014
$
503,580

 
$
576,346

 
$
576,514

 
$
569,927

2015
574,462

 
591,631

 
597,872

 
584,983

2016
588,106

 
600,376

 
605,169

 
592,749

Later years (1)
684,296

 
610,615

 
709,105

 
634,067

(1)
Later years reflect one reset period per loan.

Interest-only mortgages. We offer, on a limited basis, adjustable-rate, fixed term loans with 10-year, interest-only options. These loans were originated using Fannie Mae and Freddie Mac guidelines as a base framework. We generally applied the debt-to-income ratio guidelines and documentation using the automated underwriting Approve/Reject response requirements of Fannie Mae and Freddie Mac. During 2013, we began originating interest-only home equity line of credit loans that were secured by first lien mortgages. These loans have a 10-year interest-only draw period followed by a 20-year fixed fully amortizing period.

18



Set forth below is a table describing the characteristics of the interest-only mortgage loans at the dates indicated in our held-for-investment mortgage portfolio at December 31, 2013, by year of origination.
Year of Origination
2009 and
Prior
 
2010
 
2011
 
2012
 
2013
 
Total / Weighted Average
 
(Dollars in thousands)
Unpaid principal balance (1)
$
1,045,555

 
$
270

 
$

 
$

 
$
5,332

 
$
1,051,157

Average note rate
3.77
%
 
3.38
%
 
%
 
%
 
3.00
%
 
3.76
%
Average original FICO score
724

 
755

 

 

 
773

 
724

Average current FICO score (2)
733

 
751

 

 

 
777

 
733

Average original LTV ratio
74.7
%
 
51.4
%
 
%
 
%
 
54.0
%
 
74.6
%
Housing Price Index LTV, as recalculated (3)
83.9
%
 
51.4
%
 
%
 
%
 
41.8
%
 
83.7
%
Underwritten with low or stated income documentation
36.0
%
 
%
 
%
 
%
 
%
 
36.0
%
(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2)
Current FICO scores obtained at various times during the year ended December 31, 2013.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2013.

Set forth below is a table describing the amortization date and payment shock of current interest-only mortgage loans at the dates indicated in our held-for-investment mortgage portfolio at December 31, 2013.
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total / Weighted Average
 
(Dollars in thousands)
Unpaid principal balance (1)
$
281,278

 
$
361,037

 
$
60,558

 
$
282,158

 
$
7,911

 
$
7,265

 
$
1,000,207

Weighted average rate
3.39
%
 
3.35
%
 
3.46
%
 
4.52
%
 
4.92
%
 
3.07
%
 
3.59
%
Average original monthly payment per loan (dollars)
$
1,367

 
$
1,407

 
$
1,682

 
$
2,689

 
$
2,103

 
$
294

 
$
1,613

Average current monthly payment per loan (dollars)
$
902

 
$
791

 
$
924

 
$
1,972

 
$
1,589

 
$
193

 
$
1,033

Average amortizing payment per loan (dollars)
$
1,776

 
$
1,609

 
$
1,780

 
$
3,180

 
$
2,098

 
$
383

 
$
1,916

Loan count
906

 
1,284

 
198

 
569

 
23

 
113

 
3,093

Payment shock (dollars)
$
874

 
$
818

 
$
855

 
$
1,208

 
$
509

 
$
190

 
$
789

Payment shock (percent)
96.9
%
 
103.4
%
 
92.5
%
 
61.2
%
 
32.1
%
 
98.0
%
 
76.4
%
(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.

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


19



Set forth below is a table describing the characteristics of the second mortgage loans in our held-for-investment portfolio at December 31, 2013, by year of origination.
Year of Origination
Prior to
2009
 
2010
 
2011
 
2012
 
2013
 
Total / Weighted Average
 
(Dollars in thousands)
Unpaid principal balance (1)
$
167,285

 
$
662

 
$
119

 
$
237

 
$
1,377

 
$
169,680

Average note rate
7.10
%
 
6.92
%
 
7.06
%
 
5.24
%
 
4.42
%
 
7.07
%
Average original FICO score
729

 
710

 
692

 
763

 
757

 
729

Average original LTV ratio (2) (3)
20.5
%
 
17.1
%
 
18.7
%
 
21.0
%
 
43.8
%
 
20.6
%
Average original CLTV ratio
51.1
%
 
80.3
%
 
73.5
%
 
94.8
%
 
60.7
%
 
51.3
%
Housing Price Index LTV, as recalculated (4)
20.8
%
 
14.7
%
 
15.6
%
 
19.1
%
 
43.3
%
 
20.9
%
(1)
Unpaid principal balance, net of write downs, 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)
Includes $64.7 million of second mortgage loans at December 31, 2013 that are accounted for under the fair value option. The LTV information is not yet available for these loans.
(4)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2013. The HPI LTV is not available for the loans associated with the MBIA Settlement.

Home Equity Line of Credit loans. HELOC loan originations were re-launched in June 2011 as a banking center originated portfolio product. Current HELOC guidelines and pricing parameters have been established to attract high credit quality loans with long term profitability. The minimum FICO is 680, maximum CLTV is 80 percent, and the maximum debt-to-income ratio is 45 percent. For HELOC loans originated in 2009 and prior, the majority were closed in conjunction with the closing of related first mortgage loans originations. Documentation requirements for HELOC applications were generally the same as those required of borrowers for the first mortgage loans originated by us, and debt-to-income ratios were capped at 50 percent. For HELOCs closed in conjunction with the closing of a first mortgage loan that was not being originated by us, our debt-to-income ratio requirements were capped at 40 percent to 45 percent and the LTV was capped at 80 percent. The qualifying payment varied over time and included terms such as either 0.75 percent of the line amount or the interest only payment due on the full line based on the current rate plus 0.5 percent. HELOCs were available in conjunction with primary residence transactions that required full documentation, and the borrower was allowed a CLTV ratio of up to 100 percent. For similar loans that also contained higher risk elements, we limited the maximum CLTV to 90 percent. FICO floors ranged from 620 to 720. The HELOC terms called for monthly interest only payments with a balloon principal payment due at the end of 10 years. At times, initial teaser rates were offered for the first three months.

Set forth below is a table describing the characteristics of the HELOCs in our held-for-investment portfolio at December 31, 2013, by year of origination.
Year of Origination
2009 and
Prior
 
2010
 
2011
 
2012
 
2013
 
Total / Weighted Average
 
(Dollars in thousands)
Unpaid principal balance (1)
$
260,142

 
$

 
$
1,644

 
$
9,117

 
$
18,400

 
$
289,303

Average note rate (2)
5.75
%
 
%
 
3.88
%
 
3.74
%
 
3.48
%
 
5.53
%
Average original FICO score
724

 

 
750

 
763

 
765

 
728

Average original LTV ratio (3)
25.1
%
 
%
 
42.2
%
 
45.5
%
 
36.4
%
 
26.5
%
Housing Price Index LTV, as recalculated (4)
26.8
%
 
%
 
31.3
%
 
33.5
%
 
26.9
%
 
27.0
%
(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2)
Average note rate reflects the rate that is currently in effect. As these loans adjust on a monthly basis, the average note rate could increase, but would not decrease, as currently the minimum rate on virtually all of the loans is in effect.
(3)
Includes $155.0 million of HELOC loans at December 31, 2013 that are accounted for under the fair value option. The LTV information is not yet available for these loans.
(4)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2013. Reflects lower LTV because these are second liens and information regarding the first lien is not available. The HPI LTV is not available for the loans reconsolidated as part of the Assured Settlement Agreement.     


20



Loan Sales and Securitizations

We sell substantially all of the residential mortgage loans we produce into the secondary market on a whole loan basis or by first securitizing the loans into mortgage-backed securities. Our securitizations are with Fannie Mae, Ginnie Mae and to a lesser extent Freddie Mac.

The following table indicates the breakdown of our loan sales/securitizations for the period as indicated.
 
For the Years Ended December 31,
 
2013 Principal Sold %
 
2012 Principal Sold %
 
2011 Principal Sold %
Agency securitizations
99.3
%
 
99.0
%
 
96.1
%
Whole loan sales
0.7
%
 
1.0
%
 
3.9
%
Total
100.0
%
 
100.0
%
 
100.0
%

Upon our sale of mortgage loans, we may retain the servicing of the mortgage loans, or sell the servicing rights ("MSRs") to other secondary market investors. In general, we do not sell the servicing rights to mortgage loans that we originate for our own portfolio. When we retain MSRs, we are entitled to receive a servicing fee equal to a specified percentage of the outstanding principal balance of the loans. We may also be entitled to receive additional servicing compensation, such as late payment fees and earn additional income through the use of noninterest bearing escrows.

We previously participated in four private-label securitizations of financial assets involving two HELOC loan transactions and two second mortgage loan transactions. The private-label securitizations (excluding one) have been reconsolidated or dissolved as a result of the settlement agreements with MBIA and Assured. We previously acted as the principal underwriter of the beneficial interests that were sold to investors. The financial assets were derecognized when they were transferred to the securitization trusts, which then issued and sold mortgage-backed securities to third party investors. We relinquished control over the loans at the time the financial assets were transferred to the securitization trusts. We have not engaged in any private-label securitization activity except for these four securitizations completed from 2005 to 2007. See Notes 10 and 28 of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, herein.

As a result of the settlement agreement with Assured, we became the primary beneficiary of the FSTAR 2005-1 and FSTAR 2006-2 HELOC securitization trusts because we obtained the power to direct the activities that most significantly impact the economic performance of the trusts (power to select or remove the servicer) and the obligation to absorb probable losses and receive residual returns (support of the guarantor and holder of residual interests in trusts). Accordingly, as noted above, the assets and liabilities of these securitization trusts have been reconsolidated on to our balance sheet and are carried at fair value.

Loan servicing.  The Mortgage Banking segment also services mortgage loans for others. Servicing residential mortgage loans for third parties generates fee income and represents a significant business activity. At December 31, 2013 and 2012, we serviced portfolios of mortgage loans of $25.7 billion and $76.8 billion, respectively. We had an average balance of serviced mortgage loans of $70.3 billion and $74.2 billion, respectively, which generated gross revenue of $190.7 million and $209.6 million, respectively, during the years ended December 31, 2013 and 2012. The fair value estimate uses a valuation model that calculates the present value of estimated future net servicing cash flows by taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions.

As part of our business model, we periodically sell MSRs, in transactions separate from the sale of the underlying loans, principally for capital management, balance sheet management or interest rate risk purposes. MSRs created in a lower interest rate environment generally will have a higher market value because the underlying loan is less likely to be prepaid. Conversely, an MSR created in a higher interest rate environment will generally sell at a market price below the original fair value recorded because of the increased likelihood of prepayment of the underlying loans, resulting in a loss. MSRs can be sold on a bulk basis or a flow basis. MSRs sold on a bulk basis are reflected in our financial statements after the completion of loan sales and later sold to a third party as the opportunity arises. MSRs sold on a flow basis are completed when we sell the servicing rights shortly after the servicing rights are acquired pursuant to an existing arrangement, generally with no gain realized on the sale. The majority of our MSR sales were completed on a bulk basis.


21



On December 18, 2013, we sold $40.7 billion unpaid principal balance of our MSR portfolio to Matrix, a wholly owned subsidiary of Two Harbors Investment Corp. Covered under the agreement are certain mortgage loans serviced for both Fannie Mae and Ginnie Mae, originated primarily after 2010. Simultaneously, we entered into an agreement with Matrix to subservice the residential mortgage loans covered under the agreement to sell. As a result, we will receive subservicing income and retain a portion of the ancillary fees to be paid as the subservicer of the loans.

Over the past three years, we sold MSRs related to $101.6 billion of loans serviced for others on a bulk basis, including $74.9 billion during the year ended December 31, 2013, which includes the $40.7 billion sold to Matrix. We incurred $19.2 million of transaction costs on the sale of our MSRs during the year ended December 31, 2013.

The following table presents the unpaid principal balance of residential loans serviced and the number of accounts associated with those loans.
 
December 31, 2013
 
December 31, 2012
 
Amount
Number of accounts
 
Amount
Number of accounts
Residential loan servicing
 
 
 
 
 
Serviced for own loan portfolio (1)
$
4,375,009

28,069

 
$
6,078,758

32,597

Serviced for others
25,743,396

131,413

 
76,821,222

377,210

Subserviced for other (2)
40,431,867

198,256

 


Total residential loans serviced for others (2)
$
70,550,272

357,738

 
$
82,899,980

409,807

(1)
Includes both loans held-for-investment (residential first mortgage, second mortgage and HELO) and loans held-for-sale (residential first mortgage).
(2)
Does not include temporary short-term subservicing performed as a result of some sales of servicing.
    
Set forth below is a table describing the characteristics of the mortgage loans serviced for others at December 31, 2013, by year of origination.
Year of Origination
2009 and Prior
 
2010
 
2011
 
2012
 
2013
 
Total / Weighted Average
 
(Dollars in thousands)
Unpaid principal balance (1)
$
3,726,665

 
$
2,163,316

 
$
2,568,144

 
$
9,806,352

 
$
7,478,919

 
$
25,743,396

Average unpaid principal balance per loan
$
144,080

 
$
164,223

 
$
176,021

 
$
218,916

 
$
226,661

 
$
195,898

Weighted average service fee (basis points)
0.31
%
 
0.29
%
 
0.27
%
 
0.28
%
 
0.27
%
 
0.28
%
Weighted average rate
5.19
%
 
4.66
%
 
4.24
%
 
3.61
%
 
4.27
%
 
4.18
%
Weighted average original maturity (months)
349

 
337

 
309

 
327

 
324

 
329

Weighted average age (months)
69

 
41

 
29

 
18

 
3

 
24

Average current FICO score (2)
692

 
732

 
745

 
749

 
747

 
739

Average original LTV ratio
75.8
%
 
75.2
%
 
69.0
%
 
73.0
%
 
75.2
%
 
73.8
%
Housing Price Index LTV, as recalculated (3)
81.8
%
 
72.6
%
 
63.0
%
 
66.7
%
 
74.2
%
 
71.2
%
Loan count
25,859

 
13,173

 
14,590

 
44,795

 
32,996

 
131,413

(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2)
Average note rate reflects the rate that is currently in effect. As these loans adjust on a monthly basis, the average note rate could increase, but would not decrease, as in the current market, the floor rate on virtually all of the loans is in effect.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2013.


22



Set forth below is a table of the past due trends in mortgage loans serviced for others at December 31, 2013, by year of origination.
Year of Origination
2009 and Prior
 
2010
 
2011
 
2012
 
2013
 
Total
 
(Dollars in thousands)
30-59 days past due
$
251,895

 
$
51,085

 
$
35,147

 
$
80,823

 
$
14,843

 
$
433,793

60-89 days past due
118,986

 
16,653

 
11,148

 
18,717

 
250

 
165,754

90 days or greater past due
480,993

 
35,526

 
18,449

 
14,197

 
762

 
549,927

Total past due
851,874

 
103,264

 
64,744

 
113,737

 
15,855

 
1,149,474

Current
2,874,791

 
2,060,051

 
2,503,400

 
9,692,615

 
7,463,065

 
24,593,922

Unpaid principal balance (1)
$
3,726,665

 
$
2,163,315

 
$
2,568,144

 
$
9,806,352

 
$
7,478,920

 
$
25,743,396

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

Set forth below is a table describing the characteristics of the residential mortgage loans subserviced for others at December 31, 2013, by year of origination.
Year of Origination
2009 and Prior
 
2010
 
2011
 
2012
 
2013
 
Total / Weighted Average
 
(Dollars in thousands)
Unpaid principal balance (1)
$
3,986,560

 
$
2,596,713

 
$
4,083,155

 
$
16,524,344

 
$
13,241,095

 
$
40,431,867

Average unpaid principal balance per loan
$
126

 
$
164

 
$
183

 
$
230

 
$
233

 
$
204

Weighted average service fee (basis points)
0.40
%
 
0.31
%
 
0.27
%
 
0.28
%
 
0.27
%
 
0.29
%
Weighted average rate
5.59
%
 
4.67
%
 
4.21
%
 
3.61
%
 
3.58
%
 
3.92
%
Weighted average original maturity (months)
335

 
334

 
305

 
322

 
327

 
324

Weighted average age (months)
59

 
41

 
28

 
18

 
8

 
21

Average current FICO score (2)
664

 
734

 
753

 
758

 
753

 
747

Average original LTV ratio
90.8
%
 
82.5
%
 
71.8
%
 
71.7
%
 
74.8
%
 
75.3
%
Housing Price Index LTV, as recalculated (3)
91.5
%
 
74.7
%
 
61.2
%
 
62.4
%
 
70.3
%
 
68.5
%
Loan count
31,606

 
15,822

 
22,344

 
71,699

 
56,785

 
198,256

(1)
Unpaid principal balance, net of write downs, does not include premiums or discounts.
(2)
Average note rate reflects the rate that is currently in effect. As these loans adjust on a monthly basis, the average note rate could increase, but would not decrease, as in the current market, the floor rate on virtually all of the loans is in effect.
(3)
The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2013.

Set forth below is a table of the past due trends in residential mortgage loans subserviced for others at December 31, 2013, by year of origination.
Year of Origination
2009 and Prior
 
2010
 
2011
 
2012
 
2013
 
Total
 
(Dollars in thousands)
30-59 days past due
$
372,331

 
$
59,416

 
$
48,792

 
$
89,309

 
$
42,429

 
$
612,277

60-89 days past due
181,296

 
27,173

 
18,034

 
18,874

 
7,832

 
253,209

90 days or greater past due
109,011

 
16,549

 
10,037

 
15,765

 
4,197

 
155,559

Total past due
662,638

 
103,138

 
76,863

 
123,948

 
54,458

 
1,021,045

Current
3,323,922

 
2,493,574

 
4,006,291

 
16,400,397

 
13,186,638

 
39,410,822

Unpaid principal balance (1)
$
3,986,560

 
$
2,596,712

 
$
4,083,154

 
$
16,524,345

 
$
13,241,096

 
$
40,431,867

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



23



Representation and warranty reserve

We sell most of the residential first mortgage loans that we originate into the secondary mortgage market. When we sell mortgage loans, we make customary representations and warranties to the purchasers, including sponsored securitization trusts and their insurers (primarily Fannie Mae and Freddie Mac), 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 probable losses inherent in 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 probable losses inherent in loans sold during the current accounting period, as well as adjustments to our previous estimates of probable losses inherent in loans sold. 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 noninterest income in the income statement as an increase or decrease to representation and warranty reserve - change in estimate. The amount of our representation and warranty reserve equaled $54.0 million and $193.0 million at December 31, 2013 and 2012, respectively.

During the fourth quarter 2013, we entered into agreements with both Fannie Mae and Freddie Mac to resolve substantially all of the repurchase requests and obligations associated with loans originated between January 1, 2000 and December 31, 2008. The settlement with Fannie Mae, reached on November 6, 2013, was for a total resolution amount of $121.5 million and, after paid claim credits and other adjustments, we paid $93.5 million. We settled with Freddie Mac on December 30, 2013 for a total resolution amount of $10.8 million and, after paid claim credits and other adjustments, we paid $8.9 million. As a result of these settlements, we released approximately $24.9 million of previously accrued reserves.

Community Banking

Our Community Banking segment consists primarily of three groups: Branch Banking, Commercial and Business Banking and Warehouse Lending. The groups within the Community Banking segment originate consumer loans, commercial loans and warehouse loans, accept consumer, business and governmental deposits, offer investments and insurance services and offer liquidity management products. The liquidity management products include customized treasury management solutions, equipment leasing, international services and capital markets services such as interest rate risk protection products. At December 31, 2013, Branch Banking included 111 banking centers located throughout Michigan. During the first quarter 2014, we relocated one and closed five banking centers to better align the branch structure with the Company's focus on key market areas and to improve banking center efficiencies. Commercial and Business Banking includes relationship and portfolio managers throughout Michigan's major markets. Warehouse Lending offers lines of credit to other mortgage lenders, allowing those lenders to fund the closing of residential first mortgage loans.

Our Community Banking segment intends to achieve our 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 our network of offices through strategic growth and relocations. Commercial and Business Banking intends to continue our focus on acquiring new customer relationships throughout Michigan.

Our Community Banking segment's mission is to build strong and lasting relationships with customers, and such relationships are intended to include the delivery of multiple financial products and 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.
    
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 $626.4 million at December 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 year ended December 31, 2013, we originated $239.5 million in commercial loans, compared to $727.1 million during the year

24



ended December 31, 2012. The decrease in commercial loan originations is primarily due to the strategic decision, made in late 2012, to exit our New England based commercial loan production offices. The following table identifies the commercial loan held-for-investment portfolio by loan type and selected criteria.
Commercial Loans Held-for-Investment
December 31, 2013
Balance
Average Note Rate
Loan on Non-accrual Status
 
(Dollars in thousands)
Commercial real estate loans:
 
 
Fixed rate
$
172,598

5.4
%
$
1,500

Adjustable rate
237,071

3.0
%

Total commercial real estate loans
409,669

 
$
1,500

Net deferred fees and other
(799
)
 
 
Total commercial real estate loans
$
408,870

 
 
Commercial and industrial loans:
 
 
Fixed rate
$
12,782

4.3
%
$

Adjustable rate
195,500

2.7
%

Total commercial and industrial loans
208,282

 
$

Net deferred fees and other
(1,095
)
 
 
Total commercial and industrial loans
$
207,187

 
 
Commercial lease financing loans:
 
 
Fixed rate
$
10,613

3.5
%
$

Net deferred fees and other
(272
)
 
 
Total commercial lease financing loans
$
10,341

 
 
Total commercial loans:
 
 
Fixed rate
$
195,993

5.2
%
$
1,500

Adjustable rate
432,571

2.9
%

Total commercial loans held-for-investment
628,564

 
$
1,500

Net deferred fees and other
(2,166
)
 
 
Total commercial loans held-for-investment
$
626,398

 
 


25



Commercial Loans Held-for-Investment
December 31, 2012
Balance
Average Note Rate
Loan on Non-accrual Status
 
(Dollars in thousands)
Commercial real estate loans:
 
 
Fixed rate
$
342,296

5.5
%
$
38,909

Adjustable rate
299,489

4.1
%
47,458

Total commercial real estate loans
641,785

 
$
86,367

Net deferred fees and other
(1,470
)
 
 
Total commercial real estate loans
$
640,315

 
 
Commercial and industrial loans:
 
 
Fixed rate
$
33,124

3.5