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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, 2016
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
 
 
 flagstara09a01a01a07a01a10.jpg
(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 4, 2016, 56,606,499 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, 2016
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Item 1.
 
 
Consolidated Statements of Financial Condition – September 30, 2016 (unaudited) and December 31, 2015
 
Consolidated Statements of Operations – For the three and nine months ended September 30, 2016 and 2015 (unaudited)
 
Consolidated Statements of Comprehensive Income – For the three and nine months ended September 30, 2016 and 2015 (unaudited)
 
Consolidated Statements of Stockholders’ Equity – For the nine months ended September 30, 2016 and 2015 (unaudited)
 
Consolidated Statements of Cash Flows – For the nine months ended September 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.


2
Table of Contents

FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
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, 2016
 
December 31, 2015
 
(Unaudited)
 
 
Assets
 
 
 
Cash
$
76

 
$
54

Interest-earning deposits
98

 
154

Total cash and cash equivalents
174

 
208

Investment securities available-for-sale
1,115

 
1,294

Investment securities held-to-maturity
1,156

 
1,268

Loans held-for-sale ($3,352 and $2,541 measured at fair value, respectively)
3,393

 
2,576

Loans held-for-investment ($80 and $111 measured at fair value, respectively)
6,290

 
6,352

Loans with government guarantees
404

 
485

Less: allowance for loan losses
(143
)
 
(187
)
Total loans held-for-investment and loans with government guarantees, net
6,551

 
6,650

Mortgage servicing rights
302

 
296

Federal Home Loan Bank stock
172

 
170

Premises and equipment, net
271

 
250

Net deferred tax asset
305

 
364

Other assets
834

 
639

Total assets
$
14,273

 
$
13,715

Liabilities and Stockholders’ Equity
 
 
 
Noninterest bearing deposits
$
2,544

 
$
1,574

Interest bearing deposits
6,827

 
6,361

Total deposits
9,371

 
7,935

Short-term Federal Home Loan Bank advances and other
905

 
2,116

Long-term Federal Home Loan Bank advances
1,577

 
1,425

Other long-term debt
493

 
247

Representation and warranty reserve
32

 
40

Other liabilities ($60 and $84 measured at fair value, respectively)
609

 
423

Total liabilities
12,987

 
12,186

Stockholders’ Equity
 
 
 
Preferred stock $0.01 par value, liquidation value $1,000 per share, 25,000,000 shares authorized; 0 and 266,657 issued and outstanding, respectively
—

 
267

Common stock $0.01 par value, 70,000,000 shares authorized; 56,597,271 and 56,483,258 shares issued and outstanding, respectively
1

 
1

Additional paid in capital
1,494

 
1,486

Accumulated other comprehensive (loss) income
(20
)
 
2

Accumulated deficit
(189
)
 
(227
)
Total stockholders’ equity
1,286

 
1,529

Total liabilities and stockholders’ equity
$
14,273

 
$
13,715


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

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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,
 
2016
 
2015
 
2016
 
2015
Interest Income
(Unaudited)
Loans
$
90

 
$
77

 
$
256

 
$
216

Investment securities
16

 
14

 
50

 
43

Interest-earning deposits and other
—

 
—

 
—

 
1

Total interest income
106

 
91

 
306

 
260

Interest Expense
 
 
 
 
 
 
 
Deposits
12

 
10

 
34

 
30

Short-term debt
1

 
2

 
4

 
2

Long-term debt
7

 
4

 
22

 
11

Other debt
6

 
2

 
10

 
6

Total interest expense
26

 
18

 
70

 
49

Net interest income
80

 
73

 
236

 
211

Provision (benefit) for loan losses
7

 
(1
)
 
(9
)
 
(18
)
Net interest income after provision (benefit) for loan losses
73

 
74


245

 
229

Noninterest Income
 
 
 
 
 
 
 
Net gain on loan sales
94

 
68

 
259

 
242

Loan fees and charges
22

 
17

 
56

 
53

Deposit fees and charges
5

 
7

 
17

 
19

Loan administration income
4

 
8

 
14

 
19

Net (loss) return on mortgage servicing rights
(11
)
 
12

 
(21
)
 
19

Net (loss) gain on sale of assets
—

 
1

 
(2
)
 
(1
)
Representation and warranty benefit
6

 
6

 
12

 
13

Other noninterest income
36

 
9

 
54

 
9

Total noninterest income
156

 
128

 
389

 
373

Noninterest Expense
 
 
 
 
 
 
 
Compensation and benefits
69

 
58

 
203

 
178

Commissions
16

 
10

 
40

 
31

Occupancy and equipment
21

 
20

 
64

 
60

Asset resolution
2

 
—

 
6

 
13

Federal insurance premiums
3

 
6

 
9

 
18

Loan processing expense
13

 
14

 
40

 
40

Legal and professional expense
5

 
10

 
20

 
27

Other noninterest expense
13

 
13

 
36

 
40

Total noninterest expense
142

 
131

 
418

 
407

Income before income taxes
87

 
71

 
216

 
195

Provision for income taxes
30

 
24

 
73

 
70

Net income
$
57

 
$
47

 
$
143

 
$
125

Income per share
 
 
 
 
 
 
 
Basic
$
0.98

 
$
0.70

 
$
2.21

 
$
1.82

Diluted
$
0.96

 
$
0.69

 
$
2.16

 
$
1.80

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
56,580,238

 
56,436,026

 
56,556,188

 
56,419,354

Diluted
57,933,806

 
57,207,503

 
57,727,262

 
57,050,789

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

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Table of Contents

Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
Net income
$
57

 
$
47

 
$
143

 
$
125

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Investment securities
 
 
 
 
 
 
 
Unrealized gain (loss) (net of tax effect $1, ($5), ($10) and ($5), respectively)
(1
)
 
9

 
17

 
9

Less: Reclassification of net (gain) on sale (net of tax effect $2, $0, $3 and $0, respectively)
(3
)
 
—

 
(5
)
 
—

Net change in unrealized gain (loss) on investment securities, net of tax
(4
)
 
9

 
12

 
9

Derivatives and hedging activities
 
 
 
 
 
 
 
Unrealized gain (loss) (net of tax effect $0, $2, $23 and $2, respectively)
—

 
(5
)
 
(44
)
 
(5
)
Less: Reclassification of net loss (gain) on derivative instruments (net of tax effect ($2), $0, ($6) and $0, respectively)
3

 
—

 
10

 
—

Net change in derivatives and hedging activities, net of tax
3

 
(5
)
 
(34
)
 
(5
)
Other comprehensive (loss) income, net of tax
(1
)
 
4

 
(22
)
 
4

Comprehensive income
$
56

 
$
51

 
$
121

 
$
129


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, 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
—

—

—

—

—

—

125

125

Total other comprehensive income
—

—

—

—

—

4

—

4

Stock-based compensation
—

—

103,719

—

2

—

—

2

Balance at September 30, 2015
266,657

$
267

56,436,026

$
1

$
1,484

$
12

$
(260
)
$
1,504

Balance at December 31, 2015
266,657

$
267

56,483,258

$
1

$
1,486

$
2

$
(227
)
$
1,529

(Unaudited)
 
 
 
 
 
 
 
 
Net income
—

—

—

—

—

—

143

143

Total other comprehensive loss
—

—

—

—

—

(22
)
—

(22
)
Preferred stock redemption
(266,657
)
(267
)
—

—

—

—

—

(267
)
Dividends on preferred stock
—

—

—

—

—

—

(105
)
(105
)
Stock-based compensation
—

—

114,013

—

8

—

—

8

Balance at September 30, 2016
—

$
—

56,597,271

$
1

$
1,494

$
(20
)
$
(189
)
$
1,286

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,
 
2016
 
2015
 
(Unaudited)
Operating Activities
 
 
 
Net income
$
143

 
$
125

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
(Benefit) provision for loan losses
(9
)
 
(18
)
Representation and warranty (benefit) provision
(12
)
 
(13
)
Depreciation and amortization
24

 
17

Deferred income taxes
59

 
68

Net gain on loan and asset sales
(257
)
 
(241
)
Change in fair value and other non-cash changes
(268
)
 
(231
)
Proceeds from sales of loans held-for-sale ("HFS")
14,097

 
15,247

Origination, premium paid and purchase of loans, net of principal repayments
(23,826
)
 
(22,180
)
Decrease (increase) in accrued interest receivable
1

 
(6
)
(Increase) decrease in other assets, excluding purchase of other investments
(104
)
 
155

Increase in other liabilities
24

 
10

Net cash used in operating activities
(10,128
)
 
(7,067
)
Investing Activities
 
 
 
Proceeds from sale of available for sale securities including loans that have been securitized
10,876

 
6,603

Collection of principal on investment securities available-for-sale ("AFS")
116

 
185

Purchase of investment securities available-for-sale and other
(203
)
 
(783
)
Collection of principal on investment securities held-to-maturity ("HTM")
126

 
38

Purchase of investment securities HTM
(15
)
 
(10
)
Proceeds received from the sale of held-for-investment loans ("HFI")
228

 
788

Origination and purchase of loans HFI, net of principal repayments
(1,297
)
 
(2,249
)
Purchase of bank owned life insurance
(85
)
 
(175
)
Proceeds from the disposition of repossessed assets
14

 
19

Net (purchase) redemption of Federal Home Loan Bank stock
(2
)
 
42

Acquisitions of premises and equipment, net of proceeds
(44
)
 
(28
)
Proceeds from the sale of mortgage servicing rights
35

 
183

Net cash provided by investing activities
9,749

 
4,613

Financing Activities
 
 
 
Net increase in deposit accounts
1,436

 
1,068

Net change in short-term FHLB borrowings and other short-term debt
(1,211
)
 
—

Proceeds from long-term Federal Home Loan Bank advances and other debt
395

 
22,235

Repayment of long-term Federal Home Loan Bank advances
—

 
(20,725
)
Repayment of long-term debt
—

 
(55
)
Net receipt (disbursement) of payments of loans serviced for others
91

 
(23
)
Preferred stock dividends
(105
)
 
—

Redemption of preferred stock
(267
)
 
—

Net receipt of escrow payments
6

 
13

Net cash provided by financing activities
345

 
2,513

Net (decrease) increase in cash and cash equivalents
(34
)
 
59

Beginning cash and cash equivalents
208

 
136

Ending cash and cash equivalents
$
174

 
$
195

Supplemental disclosure of cash flow information
 
 
 
Interest paid on deposits and other borrowings
$
89

 
$
42

Income tax payments
$
3

 
$
3

 Non-cash reclassification of investment securities AFS to HTM
$
—

 
$
1,136

Non-cash reclassification of loans originated HFI to loans HFS
$
1,331

 
$
1,113

Non-cash reclassification of mortgage loans originated HFS to HFI
$
2

 
$
30

Non-cash reclassification of mortgage loans HFS to AFS securities
$
10,588

 
$
6,617

Mortgage servicing rights resulting from sale or securitization of loans
$
173

 
$
220

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. 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 ("SEC"). 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 September 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)
September 30, 2016
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
Agency - Commercial
 
$
500

 
$
10

 
$
—

 
$
510

Agency - Residential
 
563

 
10

 
—

 
573

Municipal obligations
 
32

 
—

 
—

 
32

Total available-for-sale securities (1)
 
$
1,095

 
$
20

 
$
—

 
$
1,115

Held-to-maturity securities
 
 
 
 
 
 
 
 
Agency - Commercial
 
$
619

 
$
9

 
$
—

 
$
628

Agency - Residential
 
537

 
12

 
—

 
549

Total held-to-maturity securities (1)
 
$
1,156

 
$
21

 
$
—

 
$
1,177

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 September 30, 2016 or December 31, 2015.

    

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Table of Contents

Credit related declines in the available-for-sale and held-to-maturity securities that are determined to be other than temporary 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 nine months ended September 30, 2016 and September 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 and unrealized losses, to the extent they are temporary in nature, reported as a component of other comprehensive income.

We purchased $136 million and $203 million, of available-for-sale securities, which included U.S. government sponsored agency mortgage-backed securities and municipal obligations, during the three and nine months ended September 30, 2016, respectively. We purchased $59 million and $783 million, of available-for-sale securities, which included U.S. government sponsored agencies 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 2015, we subsequently transferred $462 million of the securities purchased to held-to-maturity investments.

Gains (losses) on sales of available-for-sale securities are reported in other noninterest income in the Consolidated Statements of Operations. During the three and nine months ended September 30, 2016, there were $115 million and $290 million, respectively, 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 $3 million and $4 million during the three and nine months ended September 30, 2016, respectively. During both the three and nine months ended September 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 nine months ended September 30, 2016, respectively. During both the three and nine months ended September 30, 2015, we purchased $10 million of held-to-maturity securities.

Gains (losses) on sales of held-to-maturity securities are reported in other noninterest income in the Consolidated Statements of Operations. During both the three and nine months ended September 30, 2016 and September 30, 2015, there were no sales of held-to-maturity securities. During both the three and nine months ended September 30, 2016 and September 30, 2015, there were no maturities and $25 million of maturities in held-to-maturity securities, respectively.


    

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Table of Contents

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, 2016
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
Agency - Commercial
$
6

 
1

 
$
—

 
$
—

 
—

 
$
—

Agency - Residential
—

 
—

 
—

 
75

 
6

 
—

Municipal obligations
—

 
—

 
$
—

 
1

 
1
 
—

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
 
Agency - Commercial
$
—

 
—

 
$
—

 
$
20

 
2

 
$
—

Agency - Residential
—

 
—

 
—

 
19

 
2

 
—

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 September 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
September 30, 2016
(Dollars in millions)
 
(Dollars in millions)
Due after one year through five years
$
18

 
$
18

 
3.94
%
 
$
—

 
$
—

 
—
%
Due after five years through 10 years
7

 
7

 
2.64
%
 
61

 
63

 
2.50
%
Due after 10 years
1,070

 
1,090

 
2.45
%
 
1,095

 
1,114

 
2.40
%
Total
$
1,095

 
$
1,115

 
 
 
$
1,156

 
$
1,177

 
 

We pledge investment securities, primarily municipal taxable and agency collateralized mortgage obligations, to collateralize lines of credit and/or borrowings. At September 30, 2016, we had pledged investment securities of $918 million 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 September 30, 2016 and December 31, 2015, loans held-for-sale totaled $3.4 billion and $2.6 billion, respectively. For the three and nine months ended September 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 $94 million and $244 million, respectively, as compared to $68 million and $242 million during the three and nine months ended September 30, 2015, respectively.
    
At September 30, 2016 and December 31, 2015, $40 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 Held-for-Investment

Loans held-for-investment are summarized as follows:
 
September 30,
2016
 
December 31,
2015
 
(Dollars in millions)
Consumer loans
 
 
 
Residential first mortgage
$
2,136

 
$
3,100

Second mortgage
127

 
135

HELOC
326

 
384

Other
30

 
31

Total consumer loans
2,619

 
3,650

Commercial loans
 
 
 
Commercial real estate (1)
1,168

 
814

Commercial and industrial
708

 
552

Warehouse lending
1,795

 
1,336

Total commercial loans
3,671

 
2,702

Total loans held-for-investment
$
6,290

 
$
6,352

(1)
Includes $252 million and $188 million of owner occupied commercial real estate loans at September 30, 2016 and December 31, 2015, respectively.

During the nine months ended September 30, 2016 and September 30, 2015, we transferred $2 million and $30 million, respectively, of loans held-for-sale to loans held-for-investment, based upon a change in our intent.

During the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2016.

Also, during the nine months ended September 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 nine months ended September 30, 2015, we sold or transferred interest-only residential first mortgage loans with unpaid principal balances totaling $600 million, along with $420 million of nonperforming troubled debt restructuring ("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 net loss on sale of less than $1 million during the nine months ended September 30, 2015. The loans sold also resulted in a charge-off of $67 million.

During the nine months ended September 30, 2016, we purchased jumbo residential first mortgage loans with an unpaid principal balance of $150 million and a premium of $1 million. During the nine months ended September 30, 2015, we purchased $197 million of home equity lines of credit ("HELOC") loans with a premium of $7 million.

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 September 30, 2016 and December 31, 2015, we had pledged loans of $5.6 billion and $5.8 billion, respectively.

Allowance for Loan Losses

We determine the appropriate estimate of the allowance for loan losses 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 all

12
Table of Contents

owance 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 September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance allowance for loan losses
$
81

 
$
10

 
$
20

 
$
1

 
$
19

 
$
11

 
$
8

 
$
150

Charge-offs (2)
(7
)
 
—

 
(1
)
 
(1
)
 
—

 
—

 
—

 
(9
)
Recoveries
—

 
—

 
1

 
1

 
—

 
—

 
—

 
2

Provision (benefit) (3)
(4
)
 
(1
)
 
(4
)
 
—

 
6

 
3

 
—

 
—

Ending balance allowance for loan losses
$
70

 
$
9

 
$
16

 
$
1

 
$
25

 
$
14

 
$
8

 
$
143

Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance allowance for loan losses
$
151

 
$
14

 
$
25

 
$
1

 
$
15

 
$
12

 
$
4

 
$
222

Charge-offs (2)
(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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance allowance for loan losses
$
116

 
$
11

 
$
21

 
$
2

 
$
18

 
$
13

 
$
6

 
$
187

Charge-offs (2)
(26
)
 
(2
)
 
(2
)
 
(3
)
 
—

 
—

 
—

 
(33
)
Recoveries
1

 
1

 
1

 
2

 
—

 
—

 
—

 
5

Provision (benefit) (3)
(21
)
 
(1
)
 
(4
)
 
—

 
7

 
1

 
2

 
(16
)
Ending balance allowance for loan losses
$
70

 
$
9

 
$
16

 
$
1

 
$
25

 
$
14

 
$
8

 
$
143

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

 
$
12

 
$
19

 
$
1

 
$
17

 
$
11

 
$
3

 
$
297

Charge-offs (2)
(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

(1)
Includes allowance and charge-offs related to loans with government guarantees.
(2)
Includes charge-offs of zero and $16 million related to the transfer and subsequent sale of loans during the three months ended September 30, 2016 and September 30, 2015, respectively, and $8 million and $67 million related to the sale of loans during the nine months ended September 30, 2016 and September 30, 2015, respectively. Also includes charge-offs related to loans with government guarantees of $6 million and $13 million during the three and nine months ended September 30, 2016, respectively.
(3)
Does not include $7 million provision for loan losses recorded in the Consolidated Statements of Operations to reserve for repossessed loans with government guarantees during the three and nine months ended September 30, 2016.



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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 (1)
 
Second
Mortgage
 
HELOC
 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and Industrial
 
Warehouse
Lending
 
Total
 
(Dollars in millions)
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held-for-investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
42

 
$
26

 
$
4

 
$
—

 
$
—

 
$
1

 
$
—

 
$
73

Collectively evaluated (2)
2,087

 
60

 
291

 
30

 
1,168

 
707

 
1,795

 
6,138

Total loans
$
2,129

 
$
86


$
295


$
30


$
1,168


$
708


$
1,795


$
6,211

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
7

 
$
6

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
14

Collectively evaluated (2)
63

 
3

 
15

 
1

 
25

 
14

 
8

 
129

Total allowance for loan losses
$
70

 
$
9


$
16


$
1


$
25


$
14


$
8


$
143

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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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Table of Contents

The following table sets forth the loans held-for-investment aging analysis as of September 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)
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Residential first mortgage
$
4

 
$
1

 
$
29

 
$
34

 
$
2,102

 
$
2,136

Second mortgage
—

 
—

 
4

 
4

 
123

 
127

HELOC
1

 
—

 
7

 
8

 
318

 
326

Other
1

 
1

 
—

 
2

 
28

 
30

Total consumer loans
6

 
2

 
40

 
48

 
2,571

 
2,619

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
—

 
—

 
1,168

 
1,168

Commercial and industrial
—

 
—

 
—

 
—

 
708

 
708

Warehouse lending
—

 
—

 
—

 
—

 
1,795

 
1,795

Total commercial loans
—

 
—

 
—

 
—

 
3,671

 
3,671

Total loans (2)
$
6

 
$
2

 
$
40

 
$
48

 
$
6,242

 
$
6,290

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 $12 million and $10 million of loans 90 days or greater past due, accounted for under the fair value option at September 30, 2016 and December 31, 2015, 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 are determined to be impaired), 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 $1 million and $2 million during the three and nine months ended September 30, 2016, respectively, and $1 million and $4 million during the three and nine months ended September 30, 2015, respectively. At September 30, 2016 and December 31, 2015, we had no loans 90 days past due and still accruing.


15
Table of Contents

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.

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.

The following table provides a summary of TDRs outstanding by type and performing status:
 
TDRs
 
Performing
 
Nonperforming
 
Total
September 30, 2016
(Dollars in millions)
Consumer loans
 
 
 
 
 
Residential first mortgage
$
23

 
$
10

 
$
33

Second mortgage
33

 
3

 
36

HELOC
14

 
4

 
18

Total consumer loans
70

 
17

 
87

Commercial loans
 
 
 
 
 
Commercial and industrial
1

 
—

 
1

Total commercial loans
1

 
—

 
1

Total TDRs (1)(2)
$
71

 
$
17

 
$
88

 
 
 
 
 
 
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