Edgar Filing: FLAGSTAR BANCORP INC

Document

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 June 30, 2016



¨	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 August 5, 2016, 56,576,203 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

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FLAGSTAR BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2016

TABLE OF CONTENTS




PART I. – FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Statements of Financial Condition – June 30, 2016 (unaudited) and December 31, 2015	4
	Consolidated Statements of Operations – For the three and six months ended June 30, 2016 and 2015 (unaudited)	5
	Consolidated Statements of Comprehensive Income – For the three and six months ended June 30, 2016 and 2015 (unaudited)	6
	Consolidated Statements of Stockholders’ Equity – For the six months ended June 30, 2016 and 2015 (unaudited)	6
	Consolidated Statements of Cash Flows – For the six months ended June 30, 2016 and 2015 (unaudited)	8
	Notes to the Consolidated Financial Statements (unaudited)
	Note 1 - Basis of Presentation	9
	Note 2 - Investment Securities	9
	Note 3 - Loans Held-for-Sale	11
	Note 4 - Loans with Government Guarantees	12
	Note 5 - Loans Held-for-Investment	12
	Note 6 - Variable Interest Entities ("VIEs")	21
	Note 7 - Mortgage Servicing Rights	21
	Note 8 - Derivative Financial Instruments	23
	Note 9 - Debt	27
	Note 10 - Representation and Warranty Reserve	28
	Note 11 - Warrants	29
	Note 12 - Accumulated Other Comprehensive Income (Loss)	29
	Note 13 - Stockholders' Equity	30
	Note 14 - Earnings Per Share	30
	Note 15 - Income Taxes	31
	Note 16 - Regulatory Matters	31
	Note 17 - Legal Proceeding, Contingencies, and Commitments	32
	Note 18 - Fair Value Measurements	34
	Note 19 - Segment Information	45
	Note 20 - Recently Issued Accounting Pronouncements	49
	Note 21 - Subsequent Events	50

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	90
Item 4.	Controls and Procedures	91

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FLAGSTAR BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2016

TABLE OF CONTENTS (continued)



PART II. – OTHER INFORMATION

Item 1.	Legal Proceedings	92
Item 1A.	Risk Factors	92
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	92
Item 3.	Defaults upon Senior Securities	92
Item 4.	Mine Safety Disclosures	92
Item 5.	Other Information	92
Item 6.	Exhibits	92

SIGNATURES		94

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Flagstar Bancorp, Inc.

Consolidated Statements of Financial Condition

(In millions, except share data)



	June 30, 2016			December 31, 2015
	(Unaudited)
Assets
Cash	$	64		$	54
Interest-earning deposits	120			154
Total cash and cash equivalents	184			208
Investment securities available-for-sale	1,145			1,294
Investment securities held-to-maturity	1,211			1,268
Loans held-for-sale ($3,071 and $2,541 measured at fair value, respectively)	3,091			2,576
Loans held-for-investment ($88 and $111 measured at fair value, respectively)	5,822			6,352
Loans with government guarantees	435			485
Less: allowance for loan losses	(150		)	(187		)
Total loans held-for-investment and loans with government guarantees, net	6,107			6,650
Mortgage servicing rights	301			296
Federal Home Loan Bank stock	172			170
Premises and equipment, net	259			250
Net deferred tax asset	333			364
Other assets	920			639
Total assets	$	13,723		$	13,715
Liabilities and Stockholders’ Equity
Noninterest bearing deposits	$	2,109		$	1,574
Interest bearing deposits	6,462			6,361
Total deposits	8,571			7,935
Short-term Federal Home Loan Bank advances	1,069			2,116
Long-term Federal Home Loan Bank advances	1,577			1,425
Other long-term debt	247			247
Representation and warranty reserve	36			40
Other liabilities ($84 and $84 measured at fair value, respectively)	624			423
Total liabilities	12,124			12,186
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; 56,575,779 and 56,483,258 shares issued and outstanding, respectively	1			1
Additional paid in capital	1,491			1,486
Accumulated other comprehensive (loss) income	(19		)	2
Accumulated deficit	(141		)	(227		)
Total stockholders’ equity	1,599			1,529
Total liabilities and stockholders’ equity	$	13,723		$	13,715

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Interest Income	(Unaudited)
Loans	$	82		$	74		$	166		$	139
Investment securities	17			15			34			29
Interest-earning deposits and other	—			1			—			1
Total interest income	99			90			200			169
Interest Expense
Deposits	11			11			22			20
Short-term debt	1			—			3			—
Long-term debt	8			4			15			7
Other debt	2			2			4			4
Total interest expense	22			17			44			31
Net interest income	77			73			156			138
Provision (benefit) for loan losses	(3		)	(13		)	(16		)	(17		)
Net interest income after provision (benefit) for loan losses	80			86			172			155
Noninterest Income
Net gain on loan sales	90			83			165			174
Loan fees and charges	19			19			34			36
Deposit fees and charges	6			6			12			12
Loan administration income	4			7			10			11
Net (loss) return on mortgage servicing rights	(4		)	9			(10		)	7
Net loss on sale of assets	—			(2		)	(2		)	(2		)
Representation and warranty benefit	4			5			6			7
Other noninterest income (loss)	9			(1		)	18			—
Total noninterest income	128			126			233			245
Noninterest Expense
Compensation and benefits	66			59			134			120
Commissions	14			11			24			21
Occupancy and equipment	21			20			43			40
Asset resolution	1			5			4			13
Federal insurance premiums	3			6			6			12
Loan processing expense	15			14			27			26
Legal and professional expense	6			8			15			17
Other noninterest expense	13			15			23			27
Total noninterest expense	139			138			276			276
Income before income taxes	69			74			129			124
Provision for income taxes	22			28			43			46
Net income	$	47		$	46		$	86		$	78
Income per share
Basic	$	0.67		$	0.69		$	1.23		$	1.12
Diluted	$	0.66		$	0.68		$	1.21		$	1.11
Weighted average shares outstanding
Basic	56,574,796			56,436,026			56,544,256			56,410,880
Diluted	57,751,230			57,165,072			57,623,081			56,971,133

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

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Flagstar Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(In millions)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(Unaudited)
Net income	$	47		$	46		$	86		78
Other comprehensive income, net of tax
Investment securities
Unrealized gain (loss) (net of tax effect $1, $9, $10 and $1, respectively)	1			(16		)	16			—
Net change in unrealized gain (loss) on investment securities, net of tax	1			(16		)	16			—
Derivatives and hedging activities
Unrealized loss (net of tax effect $3, $0, $19 and $0, respectively)	(12		)	—			(44		)	—
Less: Reclassification of net loss on derivative instruments	3			—			7			—
Net change in derivatives and hedging activities, net of tax	(9		)	—			(37		)	—
Other comprehensive (loss) income, net of tax	(8		)	(16		)	(21		)	—
Comprehensive income	$	39		$	30		$	65		$	78

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

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Flagstar Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

(In millions, except share data)



	Preferred Stock			Common Stock
	Number of Shares Outstanding	Amount of Preferred Stock		Number of Shares Outstanding	Amount of Common Stock		Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
Balance at December 31, 2014	266,657	$	267	56,332,307	$	1	$	1,482	$	8		$	(385	)	$	1,373
(Unaudited)
Net income	—	—		—	—		—		—			78			78
Stock-based compensation	—	—		103,719	—		—		—			—			—
Balance at June 30, 2015	266,657	$	267	56,436,026	$	1	$	1,482	$	8		$	(307	)	$	1,451
Balance at December 31, 2015	266,657	$	267	56,483,258	$	1	$	1,486	$	2		$	(227	)	$	1,529
(Unaudited)
Net income	—	—		—	—		—		—			86			86
Total other comprehensive loss	—	—		—	—		—		(21		)	—			(21		)
Stock-based compensation	—	—		92,521	—		5		—			—			5
Balance at June 30, 2016	266,657	$	267	56,575,779	$	1	$	1,491	$	(19	)	$	(141	)	$	1,599

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

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

	Six Months Ended June 30,
	2016			2015
	(Unaudited)
Operating Activities
Net income	$	86		$	78
Adjustments to reconcile net income to net cash used in operating activities:
(Benefit) provision for loan losses	(16		)	(17		)
Representation and warranty (benefit) provision	(6		)	(7		)
Depreciation and amortization	16			11
Deferred income taxes	31			43
Net gain on loan and asset sales	(163		)	(171		)
Change in fair value and other non-cash changes	(197		)	(334		)
Proceeds from sales of loans held-for-sale ("HFS")	9,761			9,764
Origination, premium paid and purchase of loans, net of principal repayments	(14,639		)	(14,458		)
Decrease (increase) in accrued interest receivable	1			(4		)
(Increase) decrease in other assets	(58		)	43
Increase in other liabilities	31			6
Net cash used in operating activities	(5,153		)	(5,046		)
Investing Activities
Proceeds from sale of available for sale securities including loans that have been securitized	5,943			4,558
Collection of principal on investment securities available-for-sale	68			124
Purchase of investment securities available-for-sale and other	(68		)	(724		)
Collection of principal on investment securities held-to-maturity ("HTM")	72			—
Purchase of investment securities HTM	(15		)	—
Proceeds received from the sale of held-for-investment loans ("HFI")	228			710
Origination and purchase of loans HFI, net of principal repayments	(812		)	(1,717		)
Purchase of bank owned life insurance	(85		)	(150		)
Proceeds from the disposition of repossessed assets	9			13
Net (purchase) redemption of Federal Home Loan Bank stock	(2		)	42
Acquisitions of premises and equipment, net of proceeds	(25		)	(19		)
Proceeds from the sale of mortgage servicing rights	21			100
Net cash provided by investing activities	5,334			2,937
Financing Activities
Net increase in deposit accounts	636			580
Net change in short-term borrowings	(1,047		)	—
Proceeds from long-term Federal Home Loan Bank advances	150			14,480
Repayment of long-term Federal Home Loan Bank advances	—			(12,796		)
Repayment of long-term debt	—			(50		)
Net receipt (disbursement) of payments of loans serviced for others	52			(3		)
Net receipt of escrow payments	4			8
Net cash (used in) provided by financing activities	(205		)	2,219
Net (decrease) increase in cash and cash equivalents	(24		)	110
Beginning cash and cash equivalents	208			136
Ending cash and cash equivalents	$	184		$	246
Supplemental disclosure of cash flow information
Interest paid on deposits and other borrowings	$	37		$	26
Income tax payments	$	2		$	3
Non-cash reclassification of loans originated HFI to loans HFS	$	1,331		$	775
Non-cash reclassification of mortgage loans originated HFS to HFI	$	—		$	27
Non-cash reclassification of mortgage loans HFS to AFS securities	$	5,768		$	4,566
Mortgage servicing rights resulting from sale or securitization of loans	$	122		$	146
Non-cash reclassification of loans with government guarantee to other assets	$	—		$	373

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

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Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

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 our opinion, all adjustments necessary for a fair statement 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 our Annual Report on Form 10-K for the year ended December 31, 2015, which is available on our 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 June 30, 2016 and December 31, 2015, investment securities were comprised of the following:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in millions)
June 30, 2016
Available-for-sale securities
Agency - Commercial	$	626	$	14	$	—		$	640
Agency - Residential	461		12		—			473
Municipal obligations	31		1		—			32
Total available-for-sale securities (1)	$	1,118	$	27	$	—		$	1,145
Held-to-maturity securities
Agency - Commercial	$	635	$	12	$	—		$	647
Agency - Residential	576		14		—			590
Total held-to-maturity securities (1)	$	1,211	$	26	$	—		$	1,237
December 31, 2015
Available-for-sale securities
Agency - Commercial	$	766	$	3	$	(3	)	$	766
Agency - Residential	514		2		(2		)	514
Municipal obligations	14		—		—			14
Total available-for-sale securities (1)	$	1,294	$	5	$	(5	)	$	1,294
Held-to-maturity securities
Agency - Commercial	$	634	$	—	$	(2	)	$	632
Agency - Residential	634		—		(4		)	630
Total held-to-maturity securities (1)	$	1,268	$	—	$	(6	)	$	1,262


(1)	There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10 percent of stockholders’ equity at June 30, 2016 or December 31, 2015.

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Credit related declines in the available-for-sale and held-to-maturity securities are classified as other than temporary impairments 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) we intend to sell the security; (2) it is more likely than not we 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.

We evaluate our securities portfolio each quarter to determine if any security is considered to be other than temporarily impaired. In making this evaluation, management considers its ability and intent to hold securities to recover current market losses. During the three and six months ended June 30, 2016 and June 30, 2015, we had no other-than-temporary impairments.

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.

We purchased $40 million and $68 million, respectively, of available-for-sale securities, which included U.S. government sponsored agency mortgage-backed securities and municipal obligations, during the three and six months ended June 30, 2016. We purchased $72 million and $724 million, respectively, of available-for-sale securities, which included U.S. government sponsored agencies comprised of mortgage-backed securities and collateralized mortgage obligations during the three and six months ended June 30, 2015.

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 six months ended June 30, 2016, there were $175 million in sales of available-for-sale securities, which did not include those related to mortgage loans that had been securitized for sale in the normal course of business. These sales resulted in a realized gain of $1 million during both the three and six months ended June 30, 2016. During the three and six months ended June 30, 2015, there were no sales of available-for-sale securities, except those related to mortgage loans that had been securitized for sale in the normal course of business.

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. Unrealized losses are not recorded to the extent they are temporary in nature.

Transfers of investment securities into the held-to-maturity category from the available-for-sale category are accounted for at fair value on the date of transfer. The related unrealized gain, net of tax that was included in the transfer is retained in other comprehensive income amortizing as an adjustment to interest income over the remaining life of the securities. During the third quarter 2015, we transferred $1.1 billion of available-for-sale securities to held-to-maturity securities at a premium of $8 million, reflecting our intent and ability to hold those securities to maturity. 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.

We purchased zero and $15 million of held-to-maturity securities, which included U.S. government sponsored agency mortgage-backed securities during the three and six months ended June 30, 2016, respectively. During the three and six months ended June 30, 2015, we had no purchases of held-to-maturity securities.

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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)
June 30, 2016
Available-for-sale securities
Agency - Commercial	$	7	1	$	—	$	13	2	$	—
Held-to-maturity securities
Agency - Commercial	$	—	—	$	—	$	57	4	$	—
December 31, 2015
Available-for-sale securities
Agency - Commercial	$	—	—	$	—	$	482	27	$	(3	)
Agency - Residential	$	8	2	$	—	$	224	15	$	(2	)
Held-to-maturity securities
Agency - Commercial	$	—	—	$	—	$	471	27	$	(2	)
Agency - Residential	$	—	—	$	—	$	547	50	$	(4	)

The amortized cost and estimated fair value of securities at June 30, 2016, are presented below by contractual maturity:



	Investment Securities Available-for-Sale						Investment Securities Held-to-maturity
	Amortized Cost		Fair Value		Weighted Average Yield		Amortized Cost		Fair Value		Weighted Average Yield
June 30, 2016	(Dollars in millions)						(Dollars in millions)
Due after one year through five years	$	18	$	18	3.97	%	$	—	$	—	—	%
Due after five years through 10 years	7		7		2.66	%	61		64		2.50	%
Due after 10 years	1,093		1,120		2.59	%	1,150		1,173		2.40	%
Total	$	1,118	$	1,145			$	1,211	$	1,237

We pledge investment securities, primarily municipal taxable and agency collateralized mortgage obligations, to collateralize lines of credit and/or borrowings. At June 30, 2016, we pledged $234 million of investment securities, compared to $14 million at December 31, 2015.

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 and selling the securities. At June 30, 2016 and December 31, 2015, loans held-for-sale totaled $3.1 billion and $2.6 billion, respectively. For the three and six months ended June 30, 2016, we had net gains on loan sales associated with loans held-for-sale, excluding the gains from the sale of mortgage loans transferred from loans held-for-investment, of $85 million and $151 million, respectively, as compared to $83 million and $174 million during the three and six months ended June 30, 2015, respectively.

At June 30, 2016 and December 31, 2015, $20 million and $35 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 we have elected the fair value option for such loans.

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Note 4 – Loans with Government Guarantees

The majority of loans with government guarantees are insured or guaranteed by the Federal Housing Administration ("FHA") and U.S. Department of Veterans Affairs. FHA 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. Certain loans within our portfolio may be subject to indemnifications and insurance limits which exposes us to limited credit risk. We have reserved for this risk as a component of our allowance for loan losses on residential first mortgages.

At June 30, 2016 and December 31, 2015, loans with government guarantees totaled $435 million and $485 million, respectively. At June 30, 2016, repossessed assets and the associated claims recorded in other assets totaled $178 million and $210 million at December 31, 2015.

Note 5 – Loans Held-for-Investment

Loans held-for-investment are summarized as follows:



	June 30, 2016		December 31, 2015
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,075	$	3,100
Second mortgage	127		135
HELOC	346		384
Other	32		31
Total consumer loans	2,580		3,650
Commercial loans
Commercial real estate (1)	976		814
Commercial and industrial	615		552
Warehouse lending	1,651		1,336
Total commercial loans	3,242		2,702
Total loans held-for-investment	$	5,822	$	6,352


(1)	Includes $221 million and $188 million, respectively, of commercial owner occupied real estate loans at June 30, 2016 and December 31, 2015.

During the six months ended June 30, 2016 and June 30, 2015, we transferred zero and $27 million, respectively, of loans held-for-sale to loans held-for-investment, based upon a change in our intent.

During the six months ended June 30, 2016, we sold nonperforming, TDR and non-agency loans with unpaid principal balances of $110 million. Upon a change in our intent, the loans were transferred to held-for-sale and subsequently sold resulting in a loss on sale of $2 million during the six months ended June 30, 2016, which is recorded in net loss on sale of assets on the Consolidated Statements of Operations. The loans sold also resulted in a charge-off of $8 million during the six months ended June 30, 2016.

Also, during the six months ended June 30, 2016, we sold performing residential first mortgage loans with unpaid principal balances of $1.2 billion. Upon a change in our intent, the loans were transferred to held-for-sale and subsequently sold resulting in a gain of $14 million, which is recorded in net gain on loan sales on the Consolidated Statements of Operations.

During the six months ended June 30, 2015, we sold interest-only residential first mortgage loans with unpaid principal balances totaling $386 million, along with $401 million of nonperforming, TDR and non-agency first mortgage loans. Upon a change in our intent, the loans were transferred to held-for-sale and subsequently sold resulting in a loss on sale of $1 million during the six months ended June 30, 2015. The loans sold also resulted in a charge-off of $51 million during the six months ended June 30, 2015.

During the six months ended June 30, 2016, we purchased jumbo residential first mortgage loans with an unpaid principal balance of $150 million with a premium of $1 million. During the six months ended June 30, 2015, we purchased $197 million of HELOC loans with a premium of $7 million.

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We have 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 June 30, 2016 and December 31, 2015, we pledged $4.9 billion and $5.8 billion, respectively.

Allowance for Loan Losses

We determine the appropriate level of the allowance on at least a quarterly basis. Refer to Note 1, "Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies" to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2015, for a description of the methodology. 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 common risk characteristics to determine our best estimate of incurred losses.

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



	Residential First Mortgage (1)			Second Mortgage			HELOC			Other Consumer			Commercial Real Estate			Commercial and Industrial			Warehouse Lending		Total
	(Dollars in millions)
Three Months Ended June 30, 2016
Beginning balance allowance for loan losses	$	95		$	10		$	20		$	2		$	19		$	10		$	6	$	162
Charge-offs (2)	(8		)	(1		)	—			(1		)	—			—			—		(10		)
Recoveries	1			1			(1		)	—			—			—			—		1
(Benefit) provision	(7		)	—			1			—			—			1			2		(3		)
Ending balance allowance for loan losses	$	81		$	10		$	20		$	1		$	19		$	11		$	8	$	150
Three Months Ended June 30, 2015
Beginning balance allowance for loan losses	$	188		$	12		$	21		$	—		$	16		$	12		$	4	$	253
Charge-offs (2)	(19		)	(1		)	—			(1		)	—			—			—		(21		)
Recoveries	1			1			—			1			—			—			—		3
(Benefit) provision	(19		)	2			4			1			(1		)	—			—		(13		)
Ending balance allowance for loan losses	$	151		$	14		$	25		$	1		$	15		$	12		$	4	$	222

Six Months Ended June 30, 2016
Beginning balance allowance for loan losses	$	116		$	11		$	21		$	2		$	18		$	13		$	6	$	187
Charge-offs (2)	(19		)	(2		)	(1		)	(2		)	—			—			—		(24		)
Recoveries	1			1			—			1			—			—			—		3
Provision (benefit)	(17		)	—			—			—			1			(2		)	2		(16		)
Ending balance allowance for loan losses	$	81		$	10		$	20		$	1		$	19		$	11		$	8	$	150
Six Months Ended June 30, 2015
Beginning balance allowance for loan losses	$	234		$	12		$	19		$	1		$	17		$	11		$	3	$	297
Charge-offs (2)	(60		)	(2		)	(1		)	(1		)	—			—			—		(64		)
Recoveries	2			1			—			1			2			—			—		6
Provision (benefit)	(25		)	3			7			—			(4		)	1			1		(17		)
Ending balance allowance for loan losses	$	151		$	14		$	25		$	1		$	15		$	12		$	4	$	222


(1)	Includes allowance and charge-offs related to loans with government guarantees.

(2)

Includes charge-offs of $2 million and $15 million related to the sale or transfer of loans during the three months ended June 30, 2016 and June 30, 2015, respectively, and $8 million and $51 million related to the sale of loans during the six months ended June 30, 2016 and June 30, 2015, respectively. Also includes charge-offs related to loans with government guarantees of $4 million and $7 million during the three and six months ended June 30, 2016, respectively.

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



	Residential First Mortgage (1)		Second Mortgage		HELOC		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total
	(Dollars in millions)
June 30, 2016
Loans held-for-investment
Individually evaluated	$	43	$	27	$	6	$	—	$	—	$	1	$	—	$	77
Collectively evaluated (2)	2,027		61		296		32		976		614		1,651		5,657
Total loans	$	2,070	$	88	$	302	$	32	$	976	$	615	$	1,651	$	5,734
Allowance for loan losses
Individually evaluated	$	7	$	6	$	3	$	—	$	—	$	—	$	—	$	16
Collectively evaluated (2)	74		4		17		1		19		11		8		134
Total allowance for loan losses	$	81	$	10	$	20	$	1	$	19	$	11	$	8	$	150

December 31, 2015
Loans held-for-investment
Individually evaluated	$	87	$	28	$	3	$	—	$	—	$	2	$	—	$	120
Collectively evaluated (2)	3,007		65		318		31		814		550		1,336		6,121
Total loans	$	3,094	$	93	$	321	$	31	$	814	$	552	$	1,336	$	6,241
Allowance for loan losses
Individually evaluated	$	12	$	6	$	1	$	1	$	—	$	—	$	—	$	20
Collectively evaluated (2)	104		5		20		1		18		13		6		167
Total allowance for loan losses	$	116	$	11	$	21	$	2	$	18	$	13	$	6	$	187


(1)	Includes allowance related to loans with government guarantees.


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

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The following table sets forth the loans held-for-investment aging analysis as of June 30, 2016 and December 31, 2015, 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)
June 30, 2016
Consumer loans
Residential first mortgage	$	3	$	1	$	32	$	36	$	2,039	$	2,075
Second mortgage	—		—		3		3		124		127
HELOC	2		1		9		12		334		346
Other	—		—		—		—		32		32
Total consumer loans	5		2		44		51		2,529		2,580
Commercial loans
Commercial real estate	—		—		—		—		976		976
Commercial and industrial	—		—		—		—		615		615
Warehouse lending	—		—		—		—		1,651		1,651
Total commercial loans	—		—		—		—		3,242		3,242
Total loans (2)	$	5	$	2	$	44	$	51	$	5,771	$	5,822
December 31, 2015
Consumer loans
Residential first mortgage	$	7	$	3	$	53	$	63	$	3,037	$	3,100
Second mortgage	—		—		2		2		133		135
HELOC	2		1		9		12		372		384
Other	1		—		—		1		30		31
Total consumer loans	10		4		64		78		3,572		3,650
Commercial loans
Commercial real estate	—		—		—		—		814		814
Commercial and industrial	—		—		2		2		550		552
Warehouse lending	—		—		—		—		1,336		1,336
Total commercial loans	—		—		2		2		2,700		2,702
Total loans (2)	$	10	$	4	$	66	$	80	$	6,272	$	6,352


(1)	Includes loans that are less than 90 days past due, which have been placed on nonaccrual.


(2)	Includes $10 million of loans 90 days or greater past due, accounted for under the fair value option at both June 30, 2016 and December 31, 2015.

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 are determined to be nonperforming), or earlier when we become aware of information indicating that collection of principal and interest is in doubt. When a loan is placed on nonaccrual status, the accrued interest income is reversed. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Interest income is recognized on nonaccrual loans using a cash basis method. Interest that would have been accrued on impaired loans totaled less than $1 million and $1 million during the three and six months ended June 30, 2016, respectively, and $1 million and $3 million during the three and six months ended June 30, 2015, respectively. At June 30, 2016 and December 31, 2015, we had no loans 90 days past due and still accruing.

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Troubled Debt Restructuring

We may modify certain loans in both consumer and commercial loan portfolios to retain customers or to maximize collection of the outstanding loan balance. We have 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. Our 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 contemporaneous 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
June 30, 2016	(Dollars in millions)
Consumer loans
Residential first mortgage	$	21	$	13	$	34
Second mortgage	30		1		31
HELOC	21		7		28
Total consumer loans	72		21		93
Commercial loans
Commercial and industrial	1		—		1
Total commercial loans	1		—		1
Total TDRs (1)(2)	$	73	$	21	$	94

December 31, 2015
Consumer loans
Residential first mortgage	$	49	$	27	$	76
Second mortgage	32		1		33
HELOC	20		7		27
Total TDRs (1)(2)	$	101	$	35	$	136


(1)	The allowance for loan losses on consumer TDR loans totaled $12 million and $15 million at June 30, 2016 and December 31, 2015, respectively.


(2)	Includes $30 million and $32 million of TDR loans accounted for under the fair value option at June 30, 2016 and December 31, 2015, 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. We measure impairments using a discounted cash flow method for performing TDRs and measure impairment based on collateral values for re-defaulted TDRs.

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The following table provides a summary of newly modified TDRs during the three and six months ended June 30, 2016 and 2015.



	New TDRs
	Number of Accounts	Pre-Modification Unpaid Principal Balance		Post-Modification Unpaid Principal Balance (1)		Increase in Allowance at Modification
Three Months Ended June 30, 2016		(Dollars in millions)
Residential first mortgages	3	$	1	$	1	$	—
Second mortgages	5	—		—		—
HELOC (2)(3)	20	2		2		—
Total TDR loans	28	$	3	$	3	$	—

Three Months Ended June 30, 2015
Residential first mortgages	77	$	23	$	22	$	(2	)
Second mortgages	35	1		1		—
HELOC (2)	122	8		7