Loans Held-for-Investment

Loans held-for-investment are summarized as follows:



	June 30, 2017		December 31, 2016
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,538	$	2,327
Home equity	459		443
Other	27		28
Total consumer loans	3,024		2,798
Commercial loans
Commercial real estate (1)	1,557		1,261
Commercial and industrial	1,040		769
Warehouse lending	1,155		1,237
Total commercial loans	3,752		3,267
Total loans held-for-investment	$	6,776	$	6,065


(1)	Includes $253 million and $245 million of owner occupied commercial real estate loans at June 30, 2017 and December 31, 2016, respectively.

During the six months ended June 30, 2017, we sold performing and nonperforming loans with UPB of $103 million, of which $25 million were nonperforming. Upon a change in our intent, the loans were transferred to LHFS and subsequently sold resulting in a gain of $1 million during the six months ended June 30, 2017, which is recorded in net gain on loan sales on the Consolidated Statements of Operations.

During the six months ended June 30, 2016, we sold performing and nonperforming loans with UPB totaling $1.3 billion, of which $110 million were nonperforming. Upon a change in our intent, the loans were transferred to LHFS and subsequently sold resulting in a net gain on sale of $12 million, during the six months ended June 30, 2016, which is recorded in net gain on loan sales on the Consolidated Statements of Operations.

During the six months ended June 30, 2017, we purchased HELOC loans with an UPB of $75 million. During the six months ended June 30, 2016, we purchased jumbo residential first mortgage loans with an UPB of $150 million, with a premium of $1 million.

We have pledged certain LHFI, LHFS, and loans with government guarantees to collateralize lines of credit and/or borrowings with the FHLB of Indianapolis and the FRB of Chicago. At June 30, 2017 and December 31, 2016, we had pledged loans of $6.8 billion and $5.3 billion, respectively.

Allowance for Loan Losses

We determine the estimate of the ALLL 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, 2016, for a description of the methodology. The ALLL, 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 changes in ALLL, by class of loan, are summarized in the following table:



	Residential First Mortgage (1)			Home Equity			Other Consumer			Commercial Real Estate		Commercial and Industrial			Warehouse Lending			Total
	(Dollars in millions)
Three Months Ended June 30, 2017
Beginning balance ALLL	$	61		$	21		$	1		$	32	$	20		$	6		$	141
Charge-offs (2)	(1		)	(1		)	—			—		—			—			(2		)
Recoveries	1			1			—			—		—			—			2
Provision (benefit)	(5		)	(2		)	—			5		1			—			(1		)
Ending balance ALLL	$	56		$	19		$	1		$	37	$	21		$	6		$	140
Three Months Ended June 30, 2016
Beginning balance ALLL	$	95		$	30		$	2		$	19	$	10		$	6		$	162
Charge-offs (2)	(8		)	(1		)	(1		)	—		—			—			(10		)
Recoveries	1			—			—			—		—			—			1
Provision (benefit)	(7		)	1			—			—		1			2			(3		)
Ending balance ALLL	$	81		$	30		$	1		$	19	$	11		$	8		$	150

Six Months Ended June 30, 2017
Beginning balance ALLL	$	65		$	24		$	1		$	28	$	17		$	7		$	142
Charge-offs (2)	(5		)	(1		)	(1		)	—		—			—			(7		)
Recoveries	1			1			1			—		—			—			3
Provision (benefit)	(5		)	(5		)	—			9		4			(1		)	2
Ending balance ALLL	$	56		$	19		$	1		$	37	$	21		$	6		$	140
Six Months Ended June 30, 2016
Beginning balance ALLL	$	116		$	32		$	2		$	18	$	13		$	6		$	187
Charge-offs (2)	(19		)	(3		)	(2		)	—		—			—			(24		)
Recoveries	1			1			1			—		—			—			3
Provision (benefit)	(17		)	—			—			1		(2		)	2			(16		)
Ending balance ALLL	$	81		$	30		$	1		$	19	$	11		$	8		$	150


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

(2)

Includes charge-offs of zero and $2 million related to the transfer and subsequent sale of loans during the three months ended June 30, 2017 and June 30, 2016, respectively, and $1 million and $8 million during the six months ended June 30, 2017 and June 30, 2016, respectively. Also includes charge-offs related to loans with government guarantees of zero and $4 million during the three months ended June 30, 2017 and June 30, 2016, respectively, and $2 million and $7 million during the six months ended June 30, 2017 and June 30, 2016, respectively.

The method of evaluation, by class of loan, is summarized in the following table:



	Residential First Mortgage (1)		Home Equity		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total
	(Dollars in millions)
June 30, 2017
Loans held-for-investment (2)
Individually evaluated	$	35	$	28	$	—	$	—	$	—	$	—	$	63
Collectively evaluated	2,495		426		27		1,557		1,040		1,155		6,700
Total loans	$	2,530	$	454	$	27	$	1,557	$	1,040	$	1,155	$	6,763
Allowance for loan losses (2)
Individually evaluated	$	5	$	8	$	—	$	—	$	—	$	—	$	13
Collectively evaluated	51		11		1		37		21		6		127
Total allowance for loan losses	$	56	$	19	$	1	$	37	$	21	$	6	$	140

December 31, 2016
Loans held-for-investment (2)
Individually evaluated	$	46	$	29	$	—	$	—	$	—	$	—	$	75
Collectively evaluated	2,274		349		28		1,261		769		1,237		5,918
Total loans	$	2,320	$	378	$	28	$	1,261	$	769	$	1,237	$	5,993
Allowance for loan losses (2)
Individually evaluated	$	5	$	8	$	—	$	—	$	—	$	—	$	13
Collectively evaluated	60		16		1		28		17		7		129
Total allowance for loan losses	$	65	$	24	$	1	$	28	$	17	$	7	$	142


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


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

The following table sets forth the LHFI aging analysis 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 LHFI
	(Dollars in millions)
June 30, 2017
Consumer loans
Residential first mortgage	$	1	$	3	$	25	$	29	$	2,509	$	2,538
Home equity	1		—		5		6		453		459
Other	—		—		—		—		27		27
Total consumer loans	2		3		30		35		2,989		3,024
Commercial loans
Commercial real estate	1		—		—		1		1,556		1,557
Commercial and industrial	—		—		—		—		1,040		1,040
Warehouse lending	—		—		—		—		1,155		1,155
Total commercial loans	1		—		—		1		3,751		3,752
Total loans (2)	$	3	$	3	$	30	$	36	$	6,740	$	6,776
December 31, 2016
Consumer loans
Residential first mortgage	$	6	$	—	$	29	$	35	$	2,292	$	2,327
Home equity	1		2		11		14		429		443
Other	1		—		—		1		27		28
Total consumer loans	8		2		40		50		2,748		2,798
Commercial loans
Commercial real estate	—		—		—		—		1,261		1,261
Commercial and industrial	—		—		—		—		769		769
Warehouse lending	—		—		—		—		1,237		1,237
Total commercial loans	—		—		—		—		3,267		3,267
Total loans (2)	$	8	$	2	$	40	$	50	$	6,015	$	6,065


(1)	Includes loans 90 days or greater past due and performing nonaccrual loans that are less than 90 days past due.


(2)	Includes $4 million and $13 million of loans 90 days or greater past due, accounted for under the fair value option at June 30, 2017 and December 31, 2016, respectively.

Loans are considered to be past due when any payment of principal or interest is 30 days past the scheduled payment date. While it is the goal of management to collect on loans, we attempt to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations and minimize losses incurred by the Bank.

We cease the accrual of interest on all classes of consumer and commercial loans upon the earlier of, becoming 90 days past due, or when doubt exists as to the ultimate collection of principal or interest (classified as nonaccrual or nonperforming loans). When a loan is placed on nonaccrual status, the accrued interest income is reversed and may only 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, 2017, respectively, and less than $1 million and $1 million during the three and six months ended June 30, 2016, respectively. At June 30, 2017 and December 31, 2016, we had no loans 90 days past due and still accruing interest.

Troubled Debt Restructurings

We may modify certain loans in both our 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 be classified as performing TDRs and begin to accrue interest. Performing and nonperforming TDRs remain impaired as interest and principal will not be received in accordance with the original contractual terms of the loan agreement.

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 nonperforming TDRs.

The following table provides a summary of TDRs by type and performing status:



	TDRs
	Performing		Nonperforming		Total
	(Dollars in millions)
June 30, 2017
Consumer loans (1)
Residential first mortgage	$	19	$	10	$	29
Home equity	27		2		29
Total TDRs (2)	$	46	$	12	$	58
December 31, 2016
Consumer loans (1)
Residential first mortgage	$	22	$	11	$	33
Home equity	45		7		52
Total TDRs (2)	$	67	$	18	$	85


(1)	The ALLL on consumer TDR loans totaled $11 million and $9 million at June 30, 2017 and December 31, 2016, respectively.


(2)	Includes $3 million and $25 million of TDR loans accounted for under the fair value option at June 30, 2017 and December 31, 2016, respectively.

The following table provides a summary of newly modified TDRs:



	New TDRs
	Number of Accounts	Pre-Modification Unpaid Principal Balance		Post-Modification Unpaid Principal Balance (1)		Increase in Allowance at Modification
		(Dollars in millions)
Three Months Ended June 30, 2017
Residential first mortgages	6	$	1	$	1	$	—
Home equity (2)	21	1		1		—
Other consumer	1	—		—		—
Total TDR loans	28	$	2	$	2	$	—

Three Months Ended June 30, 2016
Residential first mortgages	3	$	1	$	1	$	—
Home equity (2)(3)	25	2		2		—
Total TDR loans	28	$	3	$	3	$	—

Six Months Ended June 30, 2017
Residential first mortgages	8	$	1	$	1	$	—
Home equity (2)	34	2		2		—
Other consumer	1	—		—		—
Total TDR loans	43	$	3	$	3	$	—

Six Months Ended June 30, 2016
Residential first mortgages	16	$	3	$	4	$	—
Home equity (2)(3)	111	7		6		—
Commercial and industrial	1	2		1		—
Total TDR loans	128	$	12	$	11	$	—


(1)	Post-modification balances include past due amounts that are capitalized at modification date.


(2)	Home equity post-modification unpaid principal balance reflects write downs.


(3)	Includes loans carried at the fair value option.

There was one residential first mortgage loan with a UPB of less than $1 million that was modified in the previous 12 months, which has subsequently defaulted during the three and six months ended June 30, 2017 as compared to one residential first mortgage loan and four home equity loans with a UPB of less than $1 million for each class which subsequently defaulted during the three and six months ended June 30, 2016. All TDR classes within the consumer and commercial portfolios are considered subsequently defaulted when greater than 90 days past due. There was no increase or decrease in the allowance associated with these TDRs at subsequent default. Subsequent default is defined as a payment re-defaulted within 12 months of the restructuring date.

Impaired Loans

The following table presents individually evaluated impaired loans and the associated allowance:



	June 30, 2017						December 31, 2016
	Recorded Investment		Net Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in millions)
With no related allowance recorded
Consumer loans
Residential first mortgage	$	15	$	16	$	—	$	6	$	6	$	—
Total consumer loans with no related allowance recorded	$	15	$	16	$	—	$	6	$	6	$	—
With an allowance recorded
Consumer loans
Residential first mortgage	$	20	$	19	$	5	$	40	$	40	$	5
Home equity	28		28		8		29		29		8
Total consumer loans with an allowance recorded	$	48	$	47	$	13	$	69	$	69	$	13

Total Impaired Consumer loans
Residential first mortgage	$	35	$	35	$	5	$	46	$	46	$	5
Home equity	28		28		8		29		29		8
Total impaired loans	$	63	$	63	$	13	$	75	$	75	$	13

The following table presents average impaired loans and the interest income recognized:



	Three Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	36	$	—	$	47	$	—	$	39	$	—	$	60	$	1
Home equity	27		—		32		1		27		1		32		1
Commercial loans
Commercial and industrial	—		—		1		—		—		—		3		—
Total impaired loans	$	63	$	—	$	80	$	1	$	66	$	1	$	95	$	2

Credit Quality

We utilize an internal risk rating system which is applied to all consumer and commercial loans. Descriptions of our internal risk ratings as they relate to credit quality follow the ratings used by the U.S. bank regulatory agencies as listed below.

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

Watch. Watch assets are defined as pass rated assets that exhibit elevated risk characteristics or other factors that deserve management’s close attention and increased monitoring. However, the asset does not exhibit a potential or well-defined weakness that would warrant a downgrade to criticized or adverse classification.

Special mention. Assets identified as special mention possess credit deficiencies or potential weaknesses deserving management's close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk that, if not corrected, could weaken the assets and increase risk in the future. Special mention assets are criticized, but do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Assets identified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the full collection or liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. For home equity loans and other consumer loans, we evaluate credit quality based on the aging and status of payment activity and any other known credit characteristics that call into question full repayment of the asset. Nonperforming loans are classified as either substandard, doubtful or loss.

Doubtful. An asset classified as doubtful has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. A doubtful asset has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Because of high probability of loss, non-accrual accounting treatment is required for doubtful assets.

Loss. An asset classified as loss is considered uncollectible and of such little value that the continuance as a bankable asset is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Commercial Loans

Management conducts periodic examinations which serve as an independent verification of the accuracy of the ratings assigned. Loan grades are based on different factors within the borrowing relationship: entity sales, debt service coverage, debt/total net worth, liquidity, balance sheet and income statement trends, management experience, business stability, financing structure, and financial reporting requirements. The underlying collateral is also rated based on the specific type of collateral and corresponding LTV. The combination of the borrower and collateral risk ratings results in the final rating for the borrowing relationship.

Consumer Loans

The same rating principles are used for consumer and commercial loans, but the principles are applied differently for consumer loans. Consumer loans consist of open and closed end loans extended to individuals for household, family, and other personal expenditures, and includes consumer loans, and loans to individuals secured by their personal residence, including first mortgage, home equity, and home improvement loans. Because consumer loans are usually relatively small-balance, homogeneous exposures, consumer loans are rated primarily on payment performance. Payment performance is a proxy for the strength of repayment capacity and loans are generally classified based on their payment status rather than by an individual review of each loan.

In accordance with regulatory guidance, we assign risk ratings to consumer loans in the following manner:

•Consumer loans are classified as Watch once the loan becomes 60 days past due.

•Open and closed-end consumer loans 90 days or more past due are classified Substandard.



	June 30, 2017
	Pass		Watch		Special Mention		Substandard		Total Loans
	(Dollars in millions)
Consumer Loans
Residential First Mortgage	$	2,486	$	26	$	—	$	26	$	2,538
Home equity	428		26		—		5		459
Other Consumer	27		—		—		—		27
Total Consumer Loans	$	2,941	$	52	$	—	$	31	$	3,024

Commercial Loans
Commercial Real Estate	$	1,525	$	24	$	—	$	8	$	1,557
Commercial and Industrial	967		61		—		12		1,040
Warehouse	1,115		40		—		—		1,155
Total Commercial Loans	$	3,607	$	125	$	—	$	20	$	3,752



	December 31, 2016
	Pass		Watch		Special Mention		Substandard		Total Loans
	(Dollars in millions)
Consumer Loans
Residential First Mortgage	$	2,273	$	23	$	—	$	31	$	2,327
Home equity	386		46		—		11		443
Other Consumer	28		—		—		—		28
Total Consumer Loans	$	2,687	$	69	$	—	$	42	$	2,798

Commercial Loans
Commercial Real Estate	$	1,225	$	27	$	3	$	6	$	1,261
Commercial and Industrial	678		59		21		11		769
Warehouse	1,168		16		53		—		1,237
Total Commercial Loans	$	3,071	$	102	$	77	$	17	$	3,267