10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 001-16577
 
 
 
(Exact name of registrant as specified in its charter).
 
 
Michigan
  
38-3150651
(State or other jurisdiction of
  
(I.R.S. Employer
Incorporation or organization)
  
Identification No.)
 
 
5151 Corporate Drive, Troy, Michigan
  
48098-2639
(Address of principal executive offices)
  
(Zip code)
(248) 312-2000
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and formal fiscal year, if changed since last report)
 
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
o  (Do not check if smaller reporting company)
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý.
As of November 3, 2015, 56,441,157 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

Table of Contents

FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Item 1.
 
 
Consolidated Statements of Financial Condition – September 30, 2015 (unaudited) and December 31, 2014
 
Consolidated Statements of Operations – For the three and nine months ended September 30, 2015 and 2014 (unaudited)
 
Consolidated Statements of Comprehensive Income (Loss) – For the three and nine months ended September 30, 2015 and 2014 (unaudited)
 
Consolidated Statements of Stockholders’ Equity – For the nine months ended September 30, 2015 and 2014 (unaudited)
 
Consolidated Statements of Cash Flows – For the nine months ended September 30, 2015 and 2014 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.


2
Table of Contents

FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
TABLE OF CONTENTS (continued)

 
 
 
 
Item 1.
    Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 


3
Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In millions, except share data)
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
 
 
 
Cash
$
65

 
$
47

Interest-earning deposits
130

 
89

Total cash and cash equivalents
195

 
136

Investment securities available-for-sale
1,150

 
1,672

Investment securities held-to-maturity
1,108

 
—

Loans held-for-sale ($2,164 and $1,196 measured at fair value, respectively)
2,408

 
1,244

Loans with government guarantees
509

 
1,128

Loans held-for-investment, net


 
 
Loans held-for-investment ($132 and $211 measured at fair value, respectively)
5,514

 
4,448

Less: allowance for loan losses
(197
)
 
(297
)
Total loans held-for-investment, net
5,317

 
4,151

Mortgage servicing rights
294

 
258

Federal Home Loan Bank stock
113

 
155

Premises and equipment, net
243

 
238

Net deferred tax asset
372

 
442

Other assets
810

 
416

Total assets
$
12,519

 
$
9,840

Liabilities and Stockholders’ Equity
 
 
 
Deposits
 
 
 
Noninterest bearing
$
1,749

 
$
1,209

Interest bearing
6,388

 
5,860

Total deposits
8,137

 
7,069

Federal Home Loan Bank advances (includes both short-term and long-term)
2,024

 
514

Long-term debt ($32 and $84 measured at fair value, respectively)
279

 
331

Representation and warranty reserve
45

 
53

Other liabilities ($84 and $82 measured at fair value, respectively)
530

 
500

Total liabilities
11,015

 
8,467

Stockholders’ Equity
 
 
 
Preferred stock $0.01 par value, liquidation value $1,000 per share, 25,000,000 shares authorized; 266,657 issued and outstanding, respectively
267

 
267

Common stock $0.01 par value, 70,000,000 shares authorized; 56,436,026 and 56,332,307 shares issued and outstanding, respectively
1

 
1

Additional paid in capital
1,484

 
1,482

Accumulated other comprehensive income
12

 
8

Accumulated deficit
(260
)
 
(385
)
Total stockholders’ equity
1,504

 
1,373

Total liabilities and stockholders’ equity
$
12,519

 
$
9,840


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

4
Table of Contents

Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest Income
(Unaudited)
Loans
$
77

 
$
64

 
$
216

 
$
185

Investment securities
14

 
11

 
43

 
28

Interest-earning deposits and other
—

 
—

 
1

 
—

Total interest income
91

 
75

 
260

 
213

Interest Expense
 
 
 
 
 
 
 
Deposits
10

 
8

 
30

 
21

Federal Home Loan Bank advances
6

 
1

 
13

 
2

Other
2

 
2

 
6

 
5

Total interest expense
18

 
11

 
49

 
28

Net interest income
73

 
64

 
211

 
185

(Benefit) provision for loan losses
(1
)
 
8

 
(18
)
 
127

Net interest income after provision for loan losses
74

 
56


229

 
58

Noninterest Income
 
 
 
 
 
 
 
Net gain on loan sales
68

 
52

 
242

 
152

Loan fees and charges
17

 
19

 
53

 
56

Deposit fees and charges
7

 
6

 
19

 
16

Loan administration income
8

 
6

 
19

 
19

Net return on the mortgage servicing asset
12

 
1

 
19

 
22

Net gain (loss) on sale of assets
1

 
5

 
(1
)
 
11

Representation and warranty benefit (provision)
6

 
(13
)
 
13

 
(16
)
Other noninterest income
9

 
9

 
9

 
3

Total noninterest income
128

 
85

 
373

 
263

Noninterest Expense
 
 
 
 
 
 
 
Compensation and benefits
58

 
54

 
178

 
174

Commissions
10

 
10

 
31

 
26

Occupancy and equipment
20

 
20

 
60

 
60

Asset resolution
—

 
14

 
13

 
43

Federal insurance premiums
6

 
6

 
18

 
17

Loan processing expense
14

 
10

 
40

 
26

Legal and professional expense
10

 
15

 
27

 
40

Other noninterest expense
13

 
50

 
40

 
53

Total noninterest expense
131

 
179

 
407

 
439

Income (loss) before income taxes
71

 
(38
)
 
195

 
(118
)
Provision (benefit) for income taxes
24

 
(10
)
 
70

 
(38
)
Net income (loss)
47

 
(28
)
 
125

 
(80
)
Preferred stock accretion
—

 
—

 
—

 
(1
)
Net income (loss) from continuing operations
$
47

 
$
(28
)
 
$
125

 
$
(81
)
Income (loss) per share
 
 
 
 
 
 
 
Basic
$
0.70

 
$
(0.61
)
 
$
1.82

 
$
(1.79
)
Diluted
$
0.69

 
$
(0.61
)
 
$
1.80

 
$
(1.79
)
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
56,436,026

 
56,249,300

 
56,419,354

 
56,224,850

Diluted
57,207,503

 
56,249,300

 
57,050,789

 
56,224,850

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

5
Table of Contents

Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
 
Three Months Ended September 30,
 
2015
 
2014
 
(Unaudited)
Net income (loss)
$
47

 
$
(28
)
Other comprehensive income (loss), net of tax
 
 
 
Unrealized gain (loss) on investment securities available-for-sale
 
 
 
Unrealized gain (loss) (net of ($5) and $4 tax effect, respectively)
9

 
(5
)
Less: Reclassification of net loss on the sale (net of zero and zero tax effect, respectively)
—

 
(2
)
Net change in unrealized gain (loss) on investment securities available-for-sale, net of tax
9

 
(7
)
Unrealized (loss) on derivative instruments designated to cash flow hedges
 
 
 
Unrealized (loss) (net of $2 tax effect and zero respectively)
(5
)
 
—

Less: Reclassification of net loss on derivative instruments
—

 
—

Net change in unrealized (loss) on derivative instruments, net of tax
(5
)
 
—

Other comprehensive income (loss), net of tax
4

 
(7
)
Comprehensive income (loss)
$
51

 
$
(35
)
 
Nine Months Ended September 30,
 
2015
 
2014
 
(Unaudited)
Net income (loss)
$
125

 
$
(80
)
Other comprehensive income (loss), net of tax
 
 
 
Unrealized gain on investment securities available-for-sale
 
 
 
Unrealized gain (net of ($5) and ($1) tax effect, respectively)
9

 
11

Less: Reclassification of net loss on the sale (net of zero and ($4) tax effect, respectively)
—

 
(7
)
Net change in unrealized gain on investment securities available-for-sale, net of tax
9

 
4

Unrealized (loss) on derivative instruments designated to cash flow hedges
 
 
 
Unrealized (loss) (net of $2 tax effect and zero respectively)
(5
)
 
—

Less: Reclassification of net loss on derivative instruments
—

 
—

Net change in unrealized (loss) on derivative instruments, net of tax
(5
)
 
—

Other comprehensive income, net of tax
4

 
4

Comprehensive income (loss)
$
129

 
$
(76
)
The accompanying notes are an integral part of these Consolidated Financial Statements.



6
Table of Contents

Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
(In millions)
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated
Deficit)
 
Total
Stockholders’
Equity
Balance at December 31, 2013
$
266

 
$
1

 
$
1,479

 
$
(5
)
 
$
(315
)
 
$
1,426

(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Net loss
—

 
—

 
—

 
—

 
(80
)
 
(80
)
Total other comprehensive income
—

 
—

 
—

 
4

 
—

 
4

Accretion of preferred stock
1

 
—

 
—

 
—

 
(1
)
 
—

Stock-based compensation
—

 
—

 
2

 
—

 
—

 
2

Balance at September 30, 2014
$
267

 
$
1

 
$
1,481

 
$
(1
)
 
$
(396
)
 
$
1,352

Balance at December 31, 2014
267

 
1

 
1,482

 
8

 
$
(385
)
 
$
1,373

(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
—

 
125

 
125

Total other comprehensive income
—

 
—

 
—

 
4

 
—

 
4

Stock-based compensation
—

 
—

 
2

 
—

 
—

 
2

Balance at September 30, 2015
$
267

 
$
1

 
$
1,484

 
$
12

 
$
(260
)
 
$
1,504

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

7
Table of Contents

Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In millions)
 
Nine Months Ended September 30,
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
 
 
 
As Restated
Operating Activities
 
 
 
Net income (loss)
$
125

 
$
(80
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
(Benefit) provision for loan losses
(18
)
 
127

Representation and warranty (benefit) provision
(13
)
 
16

Depreciation and amortization
17

 
18

Deferred income taxes
68

 
(35
)
Net gain on loan and asset sales
(241
)
 
(163
)
Change in fair value and other non-cash changes
(231
)
 
(150
)
Other changes:
 
 
 
Proceeds from sales of loans held-for-sale ("HFS")
15,247

 
12,610

Origination, premium paid and repurchase of loans, net of principal repayments
(22,180
)
 
(18,225
)
Increase in accrued interest receivable
(6
)
 
(12
)
Decrease (increase) in other assets, excludes purchase of other investments
155

 
(82
)
Net charge-offs in representation and warranty reserve
(1
)
 
(18
)
Increase in other liabilities
11

 
35

Net cash used in operating activities
(7,067
)
 
(5,959
)
Investing Activities
 
 
 
Proceeds from sale of available-for-sale securities, including loans that have been securitized
6,603

 
6,532

Collection of principal on investment securities available-for-sale ("AFS")
185

 
118

Purchase of investment securities available-for-sale and other
(783
)
 
(756
)
Collection of principal on investment securities held-to-maturity ("HTM")
38

 
—

Purchase of investment securities HTM
(10
)
 
—

Proceeds received from the sale of held-for-investment loans ("HFI")
788

 
62

Origination and purchase of loans HFI, net of principal repayments
(2,249
)
 
(623
)
Purchase of bank owned life insurance
(175
)
 
—

Proceeds from the disposition of repossessed assets
19

 
30

Redemption of Federal Home Loan Bank stock
42

 
—

Acquisitions of premises and equipment, net of proceeds
(28
)
 
(26
)
Proceeds from the sale of mortgage servicing rights
183

 
168

Net cash provided by investing activities
4,613

 
5,505

Financing Activities
 
 
 
Net increase in deposit accounts
1,068

 
1,094

Proceeds from increases in Federal Home Loan Bank advances
22,235

 
13,633

Repayment of Federal Home Loan Bank advances
(20,725
)
 
(14,471
)
Repayment of long-term debt
(55
)
 
(19
)
Net (reduction) receipt of payments of loans serviced for others
(23
)
 
39

Net receipt of escrow payments
13

 
4

Net cash provided by financing activities
2,513

 
280

Net increase (decrease) in cash and cash equivalents
59

 
(174
)
Beginning cash and cash equivalents
136

 
281

Ending cash and cash equivalents
$
195

 
$
107

Supplemental disclosure of cash flow information
 
 
 
Interest paid on deposits and other borrowings
$
42

 
$
23

Income tax payments (refund)
$
3

 
$
(1
)
Non-cash reclassification of investments AFS to HTM
$
1,136

 
$
—

Non-cash reclassification of loans HFI to loans HFS
$
1,113

 
$
384

Non-cash reclassification of loans HFS to loans HFI
$
30

 
$
15

Non-cash reclassification of loans HFS to AFS securities
$
6,617

 
$
6,234

Mortgage servicing rights resulting from sale or securitization of loans
$
220

 
$
198

Non-cash reclassification of loans with government guarantee to other assets
$
373

 
$
—


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

8
Table of Contents

Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

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

Note 2 – Investment Securities

As of September 30, 2015 and December 31, 2014, investment securities were comprised of the following.
 
 
Amortized
Cost (1)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
(Dollars in millions)
September 30, 2015
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
Agency
 
$
463

 
$
7

 
$
(1
)
 
$
469

Agency-collateralized mortgage obligations
 
657

 
11

 
—

 
668

Municipal obligations
 
13

 
—

 
—

 
13

Total available-for-sale securities
 
$
1,133

 
$
18

 
$
(1
)
 
$
1,150

Held-to-maturity securities
 
 
 
 
 
 
 
 
Agency
 
$
445

 
$
4

 
$
—

 
$
449

Agency-collateralized mortgage obligations
 
663

 
6

 
—

 
669

Total held-to-maturity securities
 
$
1,108

 
$
10

 
$
—

 
$
1,118

December 31, 2014 (2)
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
Agency
 
$
925

 
$
6

 
$
(2
)
 
$
929

Agency-collateralized mortgage obligations
 
734

 
8

 
(1
)
 
741

Municipal obligations
 
2

 
—

 
—

 
2

Total available-for-sale securities
 
$
1,661

 
$
14

 
$
(3
)
 
$
1,672

(1)
Includes the investment securities that were transfered to held-to-maturity at fair value.
(2)
The Company did not have any held-to-maturity securities at December 31, 2014.

Credit related declines in the available-for-sale and held-to-maturity securities are classified as other-than-temporary impairments ("OTTI") and are reported as a separate component of noninterest income within the Consolidated Statement of Operations. An impaired investment security is considered to be other than temporary if (1) the Company intends to sell the security; (2) it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover all contractually required principal and interest payments.


9
Table of Contents

Available-for-sale securities

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

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

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

Held-to-maturity securities

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

During the third quarter 2015, the Company transferred $1.1 billion of available-for-sale securities to held-to-maturity securities at a premium of $8 million, reflecting the Company’s intent and ability to hold those securities to maturity. Transfers of investment securities into the held-to-maturity category from the available-for-sale category are accounted for at fair value at the date of transfer. The related $5 million of unrealized holding gain, net of tax, that was included in the transfer is retained in other comprehensive income (loss) and is being amortized as an adjustment to interest income over the remaining life of the securities. There were no gains or losses recognized as a result of this transfer. The Company did not classify investment securities as held-to-maturity at December 31, 2014.

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

The following table summarizes by duration the unrealized loss positions on investment securities: 
 
Unrealized Loss Position with
Duration 12 Months and Over
 
Unrealized Loss Position with
Duration Under 12 Months
  
Fair Value
 
Number of
Securities
 
Unrealized
Loss
 
Fair
Value
 
Number of
Securities
 
Unrealized
Loss
Type of Security
(Dollars in millions)
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
Agency
$
8

 
2

 
$
—

 
$
87

 
7
 
$
(1
)
Agency-collateralized mortgage obligations
—

 
—

 
—

 
42

 
3
 
—

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
 
Agency
$
—

 
—

 
$
—

 
$
10

 
1
 
$
—

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
Agency
$
53

 
6

 
$
—

 
$
305

 
21
 
$
(2
)
Agency-collateralized mortgage obligations
98

 
10

 
(1
)
 
38

 
4
 
—



10
Table of Contents

The amortized cost and estimated fair value of securities at September 30, 2015, are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
 
Investment Securities
Available-for-Sale
 
Investment Securities
Held-to-maturity
 
Amortized
Cost
 
Fair
Value
 
Weighted-Average
Yield
 
Amortized
Cost
 
Fair
Value
 
Weighted-Average
Yield
September 30, 2015
(Dollars in millions)
 
(Dollars in millions)
Due in one year or less
$
—

 
$
—

 
—
%
 
$
—

 
$
—

 
—
%
Due after one year through five years
—

 
—

 
—
%
 
—

 
—

 
—
%
Due after five years through 10 years
13

 
13

 
4.60
%
 
69

 
69

 
2.43
%
Due after 10 years
1,120

 
1,137

 
2.50
%
 
1,039

 
1,049

 
2.44
%
Total
$
1,133

 
$
1,150

 
 
 
$
1,108

 
$
1,118

 
 

Management evaluates its securities portfolio each quarter to determine if any security is considered to be other than temporarily impaired. In making this evaluation, management considers its ability and intent to hold securities to recover current market losses. The Company did not recognize any other than temporary impairment losses on its investment securities during the third quarter or nine months ended September 2015 and 2014.

Note 3 – Loans Held-for-Sale

The majority of our mortgage loans originated as loans held-for-sale are sold into the secondary market on a whole loan basis or by securitizing the loans into securities. At September 30, 2015 and December 31, 2014, loans held-for-sale totaled $2.4 billion and $1.2 billion, respectively. For the three and nine months ended September 30, 2015, the Company reported net gain on loan sales of $68 million and $242 million, respectively, compared to $52 million and $152 million net gain on loan sales during the three and nine months ended September 30, 2014, respectively.
    
At September 30, 2015 and December 31, 2014, $243 million and $48 million, respectively, of loans held-for-sale were recorded at lower of cost or fair value. The remainder of the loans in the portfolio are recorded at fair value as the Company elected the fair value option.

Note 4 – Loans with Government Guarantees
    
The majority of loans with government guarantees continue to be insured or guaranteed by the Federal Housing Administration. These loans earn interest at a rate based upon the 10-year U.S. Treasury note rate at the time the underlying loan becomes delinquent, which is not paid by the FHA until claimed.

At September 30, 2015, loans with government guarantees actually repurchased totaled $509 million and were classified as loans with government guarantees. At December 31, 2014, loans with government guarantees actually repurchased totaled $1.1 billion and were classified as loans with government guarantees.

The Company adopted ASU Update No. 2014-14, Receivables - Troubled Debt Restructuring by Creditors (Subtopic 310-40) in the first quarter 2015 at which time repossessed assets and the associated claims were recorded separately from the associated loans. At September 30, 2015, repossessed assets and the associated claims recorded in other assets totaled $231 million and at December 31, 2014 repossessed assets and the associated claims were $373 million and included in loans with government guarantees.


11
Table of Contents

Note 5 – Loans Held-for-Investment

Loans held-for-investment are summarized as follows.
 
September 30,
2015
 
December 31,
2014
 
(Dollars in millions)
Consumer loans
 
 
 
Residential first mortgage
$
2,726

 
$
2,193

Second mortgage
140

 
149

HELOC
405

 
257

Other
32

 
31

Total consumer loans
3,303

 
2,630

Commercial loans
 
 
 
Commercial real estate
707

 
620

Commercial and industrial
493

 
429

Warehouse lending
1,011

 
769

Total commercial loans
2,211

 
1,818

Total loans held-for-investment
5,514

 
4,448

Less allowance for loan losses
(197
)
 
(297
)
Loans held-for-investment, net
$
5,317

 
$
4,151


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

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

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

During the first quarter 2014, the Company sold nonperforming, troubled debt restructured residential first mortgage and residential first mortgage jumbo loans with unpaid principal balances totaling $313 million. A portion of the allowance for loan losses associated with these loans was reduced, resulting in a $2 million reduction in allowance. Upon a change in the Company’s intent, the loans were transferred to held-for-sale and subsequently sold resulting in a gain on sale of $1 million.

During the second quarter 2014, the Company sold nonperforming, troubled debt restructured residential first mortgage and residential first mortgage jumbo loans with unpaid principal balances totaling $234 million. Upon a change in the Company’s intent, the loans were transferred to held-for-sale and subsequently sold resulting in a gain on sale of $4 million.

During the third quarter 2014, the Company sold nonperforming, troubled debt restructured residential first mortgage and residential first mortgage jumbo loans with unpaid principal balances totaling $81 million. A portion of the allowance for loan losses associated with these loans was reduced, resulting in a $5 million reduction in allowance. Upon a change in the Company’s intent, the loans were transferred to held-for-sale and subsequently sold resulting in a gain on sale of $5 million.

12
Table of Contents


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

The Company has pledged certain loans held-for-investment, loans held-for-sale, and loans with government guarantees to collateralize lines of credit and/or borrowings with the Federal Reserve Bank of Chicago and the Federal Home Loan Bank of Indianapolis. At September 30, 2015 and December 31, 2014, the Company pledged $5.2 billion and $4.1 billion, respectively.

The allowance for loan losses by class of loan are summarized in the following table.
 
Residential
First
Mortgage
 
Second
Mortgage
 
HELOC
 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and Industrial
 
Warehouse
Lending
 
Total
 
(Dollars in millions)
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance allowance for loan losses
$
151

 
$
14

 
$
25

 
$
1

 
$
15

 
$
12

 
$
4

 
$
222

Charge-offs (1)
(21
)
 
(1
)
 
(1
)
 
(1
)
 
—

 
(3
)
 
—

 
(27
)
Recoveries
1

 
1

 
—

 
1

 
—

 
—

 
—

 
3

Provision (benefit)
(2
)
 
(1
)
 
(1
)
 
—

 
(2
)
 
5

 
—

 
(1
)
Ending balance allowance for loan losses
$
129

 
$
13

 
$
23

 
$
1

 
$
13

 
$
14

 
$
4

 
$
197

Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance allowance for loan losses
$
249

 
$
14

 
$
14

 
$
2

 
$
19

 
$
5

 
$
3

 
$
306

Charge-offs (1)
(12
)
 
(1
)
 
(1
)
 
(1
)
 
—

 
—

 
—

 
(15
)
Recoveries
1

 
—

 
—

 
1

 
—

 
—

 
—

 
2

Provision (benefit)
2

 
(1
)
 
6

 
—

 
2

 
—

 
(1
)
 
8

Ending balance allowance for loan losses
$
240

 
$
12


$
19


$
2


$
21


$
5


$
2


$
301

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance allowance for loan losses
$
234

 
$
12

 
$
19

 
$
1

 
$
17

 
$
11

 
$
3

 
$
297

Charge-offs (1)
(80
)
 
(2
)
 
(2
)
 
(3
)
 
—

 
(3
)
 
—

 
(90
)
Recoveries
3

 
1

 
—

 
2

 
2

 
—

 
—

 
8

Provision (benefit)
(28
)
 
2

 
6

 
1

 
(6
)
 
6

 
1

 
(18
)
Ending balance allowance for loan losses
$
129

 
$
13

 
$
23

 
$
1

 
$
13

 
$
14

 
$
4

 
$
197

Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance allowance for loan losses
$
162

 
$
12

 
$
8

 
$
2

 
$
19

 
$
3

 
$
1

 
$
207

Charge-offs (1)
(29
)
 
(3
)
 
(5
)
 
(2
)
 
(2
)
 
—

 
—

 
(41
)
Recoveries
3

 
—

 
—

 
2

 
3

 
—

 
—

 
8

Provision (benefit)
104

 
3

 
16

 
—

 
1

 
2

 
1

 
127

Ending balance allowance for loan losses
$
240

 
$
12

 
$
19

 
$
2

 
$
21

 
$
5

 
$
2

 
$
301

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

13
Table of Contents

The loans held-for-investment and allowance for loan losses by class of loan is summarized in the following table.
 
Residential
First
Mortgage
 
Second
Mortgage
 
HELOC
 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and Industrial
 
Warehouse
Lending
 
Total
 
(Dollars in millions)
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held-for-investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
77

 
$
29

 
$
3

 
$
—

 
$
—

 
$
3

 
$
—

 
$
112

Collectively evaluated (1)
2,642

 
66

 
322

 
32

 
707

 
490

 
1,011

 
5,270

Total loans
$
2,719

 
$
95


$
325


$
32


$
707


$
493


$
1,011


$
5,382

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
21

 
$
7

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
29

Collectively evaluated (1)
108

 
6

 
22

 
1

 
13

 
14

 
4

 
168

Total allowance for loan losses
$
129

 
$
13


$
23


$
1


$
13


$
14


$
4


$
197

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held-for-investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
385

 
$
31

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
417

Collectively evaluated (1)
1,782

 
65

 
124

 
31

 
620

 
429

 
769

 
3,820

Total loans
$
2,167

 
$
96

 
$
125

 
$
31

 
$
620

 
$
429

 
$
769

 
$
4,237

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
82

 
$
5

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
88

Collectively evaluated (1)
152

 
7

 
18

 
1

 
17

 
11

 
3

 
209

Total allowance for loan losses
$
234

 
$
12

 
$
19

 
$
1

 
$
17

 
$
11

 
$
3

 
$
297

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

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

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


14
Table of Contents

The following table sets forth the loans held-for-investment aging analysis as of September 30, 2015 and December 31, 2014, of past due and current loans.
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater Past
Due (1)
 
Total
Past Due
 
Current
 
Total
Investment
Loans
 
(Dollars in millions)
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Residential first mortgage
$
8

 
$
5

 
$
51

 
$
64

 
$
2,662

 
$
2,726

Second mortgage
1

 
—

 
1

 
2

 
138

 
140

HELOC
4

 
3

 
7

 
14

 
391

 
405

Other
—

 
—

 
1

 
1

 
31

 
32

Total consumer loans
13

 
8

 
60

 
81

 
3,222

 
3,303

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
—

 
—

 
707

 
707

Commercial and industrial
—

 
—

 
3

 
3

 
490

 
493

Warehouse lending
—

 
—

 
—

 
—

 
1,011

 
1,011

Total commercial loans
—

 
—

 
3

 
3

 
2,208

 
2,211

Total loans (2)
$
13

 
$
8

 
$
63

 
$
84

 
$
5,430

 
$
5,514

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Residential first mortgage
$
29

 
$
8

 
$
115

 
$
152

 
$
2,041

 
$
2,193

Second mortgage
1

 
1

 
2

 
4

 
145

 
149

HELOC
4

 
1

 
3

 
8

 
249

 
257

Other
—

 
—

 
—

 
—

 
31

 
31

Total consumer loans
34

 
10

 
120

 
164

 
2,466

 
2,630

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
—

 
—

 
620

 
620

Commercial and industrial
—

 
—

 
—

 
—

 
429

 
429

Warehouse lending
—

 
—

 
—

 
—

 
769

 
769

Total commercial loans
—

 
—

 
—

 
—

 
1,818

 
1,818

Total loans (2)
$
34

 
$
10

 
$
120

 
$
164

 
$
4,284

 
$
4,448

(1)
Includes performing nonaccrual loans that are less than 90 days delinquent and for which interest can not be accrued.
(2)
Includes $9 million and $5 million of loans 90 days or greater past due accounted for under the fair value option at September 30, 2015 and December 31, 2014, respectively.

For all classes within the consumer and commercial loan portfolio, loans are placed on nonaccrual status when any portion of principal or interest is 90 days past due (or nonperforming), or earlier when the Company becomes aware of information indicating that collection of principal and interest is in doubt. When a loan is placed on nonaccrual status, the accrued interest income is reversed. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

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


15
Table of Contents

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

The following table provides a summary of TDRs outstanding by type and performing status. 
 
TDRs
 
Performing
 
Nonperforming
 
Total
September 30, 2015
(Dollars in millions)
Consumer loans
 
 
 
 
 
Residential first mortgage
$
41

 
$
20

 
$
61

Second mortgage
34

 
1

 
35

HELOC
22

 
5

 
27

Total consumer loans
97

 
26

 
123

Commercial loans
 
 
 
 
 
Commercial real estate
—

 
—

 
—

Commercial and industrial
—

 
—

 
—

Total commercial loans
—

 
—

 
—

Total TDRs (1)(2)
$
97

 
$
26

 
$
123

 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
Consumer loans 
 
 
 
 
 
Residential first mortgage
$
306

 
$
44

 
$
350

Second mortgage
35

 
1

 
36

HELOC
20

 
1

 
21

Total consumer loans
361

 
46

 
407

Commercial loans
 
 
 
 
 
Commercial real estate
1

 
—

 
1

Total TDRs (1)(2)
$
362

 
$
46

 
$
408

(1)
The allowance for loan losses on consumer TDR loans totaled $16 million and $81 million at September 30, 2015 and December 31, 2014, respectively.
(2)
Includes $31 million and $30 million of TDR loans accounted for under the fair value option at September 30, 2015 and December 31, 2014, respectively.
Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, but may give rise to potential incremental losses. The Company measures impairment using the discounted cash flow method for performing TDRs and measures impairment based on collateral values for re-defaulted TDRs.
    

16
Table of Contents

The following table provides a summary of newly modified TDRs and TDR loans that subsequently defaulted in the previous 12 months during the three and nine months ended September 30, 2015 and 2014. All TDR classes within consumer and commercial loan portfolios are considered subsequently defaulted when they are greater than 90 days past due.
 
Number of Accounts
 
Pre-Modification Unpaid Principal Balance
 
Post-Modification Unpaid Principal Balance (1)
 
Increase (Decrease) in Allowance at Modification
Three Months Ended September 30, 2015
 
 
(Dollars in millions)
    Residential first mortgages
48

 
$
13

 
$
14

 
$
—

    Second mortgages
15

 
1

 
1

 
—

    HELOC (2)
46

 
4

 
4

 
—

           Total TDR loans
109

 
$
18


$
19

 
$
—