EX-99.4 5 e66118ex99-4.htm UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF IMB HOLDCO LLC

Exhibit 99.4

IMB HoldCo LLC

and Subsidiaries

Financial Statements

For the Quarter and Six Months Ended June 30, 2015

(Unaudited)

 

 

IMB HoldCo LLC and Subsidiaries

Index

 

   
 

Page(s)

 

   
Condensed Consolidated Financial Statements  
   
Condensed Consolidated Statements of Financial Position 1
   
Condensed Consolidated Statements of Operations 2
   
Condensed Consolidated Statements of Comprehensive Income 3
   
Condensed Consolidated Statements of Changes in Members’ Equity 4
   
Condensed Consolidated Statements of Cash Flows        5-6 
   
Notes to Condensed Consolidated Financial Statements 7-77 

 

 

 

 

IMB HoldCo LLC and Subsidiaries

 

Condensed Consolidated Statements of Financial Position

As of June 30, 2015 and December 31, 2014

(Unaudited)

(Dollars in thousands)  

 

   June 30,  December 31,
   2015  2014
Assets          
Cash and cash equivalents  $4,496,827   $4,024,732 
Restricted cash   17,692    16,157 
Securities classified as trading   6,603    7,383 
Securities classified as available-for-sale   1,154,939    1,141,697 
Loans receivable:          
Loans held for sale (includes $7,028 and $21,321 measured at fair value)   26,518    59,363 
Loans held for investment (includes $4,364,048 and $4,526,596 measured at fair value)   13,850,834    14,161,483 
Total loans receivable   13,877,352    14,220,846 
Indemnification assets (includes $598,527 and $766,588 measured at fair value)   689,099    867,070 
Investment in restricted stock   149,718    213,404 
Other real estate owned   140,356    158,358 
Goodwill and other intangible assets   103,423    106,099 
Deferred taxes asset, net   14,235    - 
Other assets (includes $68,505 and $68,280 measured at fair value)   528,798    556,305 
Assets of operations held for sale (includes $1,941 and $2,181 measured at fair value)   528,060    559,096 
Total assets  $21,707,102   $21,871,147 
           
Liabilities and Members’ Equity          
Liabilities          
Deposits  $14,701,429   $14,125,048 
Federal Home Loan Bank advances (includes $500,358 and $500,523 measured at fair value)   2,864,775    3,365,287 
Borrowings   100,000    300,000 
Deferred taxes payable, net   -    30,803 
Other liabilities (includes and $100,504 and $98,143 measured at fair value)   274,200    305,922 
Liabilities of discontinued operations   708,993    780,501 
Total liabilities   18,649,397    18,907,561 
Members’ Equity          
Members’ capital   1,674,841    1,675,586 
Accumulated other comprehensive income   101,469    120,805 
Retained earnings   1,281,395    1,167,195 
Total members’ equity   3,057,705    2,963,586 
Total liabilities and members’ equity  $21,707,102   $21,871,147 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

1 

 

 

IMB HoldCo LLC and Subsidiaries

 

Condensed Consolidated Statements of Operations

For the Quarters Ended June 30, 2015 and 2014

(Unaudited)

(Dollars in thousands)  

 

   Quarters Ended
June 30,
  Sixth Months Ended
June 30,
   2015  2014  2015  2014
             
Interest Income                    
Loans  $191,735   $185,216   $374,208   $364,169 
Mortgage-backed and other securities   26,989    30,814    56,266    62,325 
Other   12,088    7,095    18,005    13,273 
Total interest income   230,812    223,125    448,479    439,767 
                     
Interest Expense                    
Deposits   25,130    28,058    50,370    55,908 
Federal Home Loan Bank advances   6,389    7,023    13,096    13,926 
Borrowings   36    39    75    75 
Total interest expense   31,555    35,120    63,541    69,909 
                     
Net interest income before provision for credit losses    199,257    188,005    384,938    369,858 
Provision for credit losses   2,530    14,346    3,853    20,422 
Net interest income after provision for credit losses    196,727    173,659    381,085    349,436 
                     
Noninterest Loss                    
Fee and other income   11,584    9,189    18,779    16,635 
Loss on loans and indemnification assets carried at fair value   (43,890)   (5,560)   (31,182)   (9,988)
(Loss) gain on securities, net   (3,675)   7,312    (5,032)   8,563 
Gain (loss) on derivatives, net   22,941    (24,545)   (1,225)   (35,401)
Loan servicing fees, net   1,199    1,753    2,512    3,564 
Gain from mortgage banking activities   571    250    1,164    122 
Loss on other real estate owned   (1,024)   (2,822)   (5,795)   (6,293)
Other losses   (200)   (441)   (387)   (652)
Total noninterest loss   (12,494)   (14,864)   (21,166)   (23,450)
                     
Noninterest Expense                    
Salary and benefits   51,335    50,025    102,381    101,645 
Premises and equipment   10,068    10,363    19,911    20,849 
Professional services   7,653    6,196    18,841    15,101 
Data processing   5,902    6,344    12,059    12,868 
Insurance   4,197    4,904    9,118    9,038 
Core deposits amortization   1,221    2,155    2,676    4,543 
Loan and servicing related expenses   2,907    2,567    7,075    4,993 
Office and related   2,739    2,754    5,506    5,813 
Other expenses   2,767    4,373    7,329    10,666 
Total noninterest expense   88,789    89,681    184,896    185,516 
                     
Earnings from continuing operations before income tax expense    95,444    69,114    175,023    140,470 
Income tax expense from continuing operations   36,941    27,654    68,145    54,597 
Net Income from continuing operations   58,503    41,460    106,878    85,873 
(Loss) income from discontinued operations, net of tax    (13,562)   (13,254)   7,322    (7,294)
Net Income   $44,941   $28,206   $114,200   $78,579 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2 

 

IMB HoldCo LLC and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Income

For the Quarters Ended June 30, 2015 and 2014

(Unaudited)

(Dollars in thousands)  

 

   Quarters Ended
June 30,
  Six Months Ended
June 30,
   2015  2014  2015  2014
             
Net Income  $44,941   $28,206   $114,200   $78,579 
Other comprehensive income, net of tax                    
Securities available-for-sale                    
Net unrealized (losses) gains   (13,976)   (8,021)   (22,828)   7,795 
Reclassification to earnings   3,131    (3,343)   4,585    (3,343)
Total net unrealized (losses) gains   (10,845)   (11,364)   (18,243)   4,452 
Cash flow hedging activities                    
Net unrealized gains (losses)   2,039    (1,747)   (4,138)   (1,491)
Reclassification to earnings   1,509    -    3,045    - 
Total net unrealized gains (losses)   3,548    (1,747)   (1,093)   (1,491)
Total other comprehensive (loss) income, net of tax   (7,297)   (13,111)   (19,336)   2,961 
Total comprehensive income  $37,644   $15,095   $94,864   $81,540 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3 

 

 

IMB HoldCo LLC and Subsidiaries

 

Condensed Consolidated Statement of Changes in Members’ Equity

For the Quarters Ended June 30, 2015 and 2014

(Unaudited)

(Dollars in thousands)  

 

   Members' Capital  Retained Earnings    Accumulated Other
Comprehensive
Income (Loss)
  Total Members’
Equity
Balance December 31, 2013  $1,665,615   $1,651,084 (1)   $136,098   $3,452,797 
Members’ capital contribution   6,003    -      -    6,003 
Dividends   -    (636,600)     -    (636,600)
Equity based compensation   6,926    -      -    6,926 
Net income   -    78,579      -    78,579 
Other comprehensive income, net of tax   -    -      2,961    2,961 
                       
Balance June 30, 2014  $1,678,544   $1,093,063     $139,059   $2,910,666 
                       
Balance December 31, 2014  $1,675,586   $1,167,195     $120,805   $2,963,586 
Members’ capital contribution   -    -      -    - 
Dividends   -    -      -    - 
Equity based compensation   (745)   -      -    (745)
Net income   -    114,200      -    114,200 
Other comprehensive income, net of tax   -    -      (19,336)   (19,336)
                       
Balance June 30, 2015  $1,674,841   $1,281,395     $101,469   $3,057,705 

 
(1)Includes adjustments from adoption of ASU 2014-01 related to investments in qualified affordable housing investments.

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4 

 

 

IMB HoldCo LLC and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2015 and 2014

(Unaudited)

(Dollars in thousands)

   Six Months Ended June 30
   2015  2014
Cash flows from operating activities          
Net income  $114,200   $78,579 
Adjustments to reconcile net earnings to net cash provided (used) by operating activities          
Unrealized (gain)/loss on loans and indemnification assets   18,377    (3,870)
Unrealized gain on derivatives   (1,225)   (35,401)
Unrealized (gain)/loss on securities classified as trading   (139)   (985)
Net gain on disposal of securities, loans, and other assets   (4,299)   (16,119)
Impairment loss on securities classified as available-for-sale   7,753    276 
Loss on other real estate owned   6,184    6,646 
Provision for credit losses   3,853    20,422 
Unrealized loss on liabilities held at fair value   2,833    6,190 
Impairment of assets held at lower of cost or market   9,518    20,495 
Deferred tax benefits   (33,330)   (78,194)
Noncash accretion on loans, indemnification assets, and borrowings   (5,109)   3,257 
Amortization and depreciation   7,844    15,230 
Net decrease in other liabilities   (80,494)   (72,989)
Net (increase) / decrease  in other assets   60,096    (150,715)
Originations, draws and repurchases of loans held for sale   (52,160)   (34,960)
Proceeds from repayments and sales of loans held for sale   98,139    50,109 
Other operating adjustments   11,798    6,034 
    Net cash provided (used) by operating activities   163,839    (185,995)
           
Cash flows from investing activities          
Change in restricted cash   (1,536)   (739)
Investment in equity partnership   -    (29,041)
Purchases of loans held for investment   (30,129)   (860,489)
Purchases of premises and equipment   (1,931)   (1,168)
Proceeds from the FDIC under shared-loss and participation agreements   49,824    91,514 
Payments to the FDIC under shared-loss agreements   (5,089)   (11,028)
Originations and draws of loans held for investment   (2,291,251)   (2,166,295)
Draws on reverse mortgages held for investment   (10,740)   (14,098)
Repayments/sales of loans held for investment   2,663,955    1,929,437 
Purchases of securities classified as available-for-sale   (103,990)   - 
Proceeds from repayments and sales of trading securities   919    60,272 
Purchases of restricted stocks   -    (78,309)
Proceeds from sales of servicing advances and mortgage servicing rights   1,561    167,115 
Proceeds from repayments and sales of securities available-for-sale   54,653    63,212 
Repurchases of GNMA loans held for investment   (9,003)   (5,960)
Proceeds from sale of other real estate owned, net of repurchases   81,744    68,709 
Proceeds from redemption of FHLB stock   63,685    67,195 
Net cash provided (used) by investing activities   462,672    (719,673)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5 

 

IMB HoldCo LLC and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (continued)

For the Six Months Ended June 30, 2015 and 2014

(Unaudited)

(Dollars in thousands)

 

   Six Months Ended June 30
   2015  2014
       
Cash flows from financing activities          
Payment of dividends  $-   $(636,600)
Net (increase)/decrease in federal funds purchased   (200,000)   200,000 
Net increase in deposits   998,940    623,363 
Net decrease in certificates of deposits   (423,188)   (217,868)
Payments on affordable housing investments commitments   (14,866)   (11,365)
Repayment of FHLB advances   (620,500)   (1,892,000)
Proceeds from FHLB advances   120,500    1,120,500 
Net decrease in secured borrowings   (15,302)   (9,411)
Net cash used in financing activities   (154,416)   (817,378)
           
Net increase / (decrease) in cash   472,095    (1,723,046)
Cash and cash equivalents at beginning of year   4,024,732    6,283,034 
Cash and cash equivalents at end of current period   4,496,827    4,559,988 
           
Supplemental cash flow information          
Cash paid for interest  $79,751   $87,255 
Cash paid for income taxes   61,268    304,572 
           
Supplemental disclosure of non-cash investing and financing activities          
Real estate acquired through foreclosure  $108,110   $94,388 
Real estate acquired reinstated as loans held for investment   2,939    4,137 
Mortgage loans transferred to held for investment   7,295    5,158 
Mortgage loans transferred to held for sale   -    1,314 
Servicing advances capitalized through loan modification   4,658    4,467 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.  

 

6 

 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

1. Summary of Significant Accounting Policies

Financial Statement Presentation

IMB HoldCo LLC (the “Parent”) is a Delaware Limited Liability Company, a bank holding company (“BHC”), formed on December 29, 2008. It is the parent of its wholly-owned subsidiary OneWest Bank N.A. (the “Bank” or “OneWest Bank”) a national bank. IMB HoldCo LLC and Subsidiaries (the “Company”) conducts all of its banking operations through the Bank. The Company is subject to supervision and regulation by the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve Bank of San Francisco (“FRB”).

On March 19, 2009, the Company formed its wholly-owned subsidiary OneWest Bank Group LLC (“OWBG”), which in turn was the parent of OneWest Bank, as a holding company to purchase certain assets and assume certain liabilities of IndyMac Federal Bank, FSB (“IndyMac”) from the Federal Deposit Insurance Corporation (“FDIC”) as Conservator and Receiver for IndyMac under a Master Purchase Agreement and related agreements (the “IndyMac Transaction”). In June 2015, the Company dissolved OWBG with the Secretary of State of Delaware.

On December 18, 2009, the Company purchased certain assets and assumed certain liabilities of First Federal Bank of California, FSB (“First Federal”) from the FDIC as Receiver for First Federal under a Purchase and Assumption Agreement (the “First Federal Transaction”). On February 19, 2010, the Company purchased certain assets and assumed certain liabilities of La Jolla Bank, FSB (“La Jolla”) from the FDIC as Receiver for La Jolla under a Purchase and Assumption Agreement (the “La Jolla Transaction”). On November 10, 2010, the Company purchased a multifamily and commercial real estate loan portfolio from Citibank, N.A. (“Citibank”).

In June 2013, the Company announced its decision to exit third party servicing operations and the direct mortgage lending business related to servicing. In connection with its exit, the Company entered into an agreement with Ocwen Loan Servicing, LLC (“Ocwen”) on June 13, 2013 to sell the third party servicing rights of its forward residential mortgage loans and related servicing advance receivables (the “Ocwen Transaction”). On March 28, 2014, the Company entered into an agreement with Specialized Loan Servicing, LLC (“SLS”) to sell a substantial portion of the remaining third-party servicing rights of its forward residential mortgage loans and related servicing advance receivables (the “SLS Transaction”). Both the Ocwen Transaction and SLS Transaction were completed by December 31, 2014. The condensed Consolidated Statements of Operations for all periods presented and related Notes to the condensed Consolidated Financial Statements reflect these exited businesses as discontinued operations. For further discussion, see Note 2—Acquisitions and Divestitures.

In July 2014, IMB HoldCo LLC announced it had entered into a definitive agreement and plan of merger with CIT Group, Inc. (CIT) for $3.4 billion in cash and stock (the “CIT Transaction”). Under the terms of the Agreement, IMB HoldCo LLC shareholders will receive $2.0 billion in cash and 31.3 million shares of CIT common stock currently valued at $1.4 billion assuming a CIT stock price of $44.33 per share. Following the close of the CIT Transaction, CIT Bank, CIT’s commercial bank subsidiary, will merge with OneWest Bank under the “CIT Bank” name and will remain an OCC-regulated national bank headquartered in California. The combined CIT will have approximately $67 billion of assets and $28 billion in deposits. The CIT Transaction has been approved by the boards of directors of both companies and received the required regulatory approvals in July 2015. The CIT Transaction was closed on August 3, 2015.

The results for the quarter and six months ended June 30, 2015 are not necessarily indicative of the results expected for any other interim period or for the full year as a whole. The Company has not made any significant changes in its accounting policies or application of authoritative guidance since December 31, 2014.

These unaudited condensed Consolidated Financial Statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and should be read in conjunction with the audited Financial Statements and the related notes for the year ended December 31, 2014. The condensed consolidated financial information as of December 31, 2014 included herein has been derived from the audited Consolidated Financial Statements for the year ended December 31, 2014. Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by Company regulatory agencies.

Results for the three and six months ended June 30, 2015 include out of period adjustments related to prior periods, which decreased pre-tax income by $5.6 million and after-tax income by $3.5 million, respectively.  The pre-tax out of period adjustments for the three and six months ended June 30, 2015 primarily relate to (i) accretion to HECM loans,

7 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

amortization of Secured borrowing-HECM loans, and adjustments to servicing related liabilities in discontinued operations; (ii) accrued interest income related to purchased SFR mortgage loans in continuing operations; and (iii) miscellaneous taxes adjustments.  On a pre-tax basis, the impact of reflecting these amounts in the three and six months ended June 30, 2015 was an increase of income from continuing operations in the amount of $1.8 million and a reduction of income from discontinued operations in the amount of $7.4 million, respectively. Management has determined, after evaluating the quantitative and qualitative aspects of these out of period adjustments, that our current and prior period financial statements are not materially misstated.

In the opinion of management, all adjustments, consisting only of normal recurring adjustments, are necessary for a fair presentation of the Company’s financial position, results of operation and cash flows in accordance with U.S. GAAP.

Use of Estimates

Preparation of the condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and disclosures in the accompanying notes. The most significant estimates are the estimated fair values of the Company’s assets and liabilities for which active markets generally do not exist. Actual results may differ from those estimates and assumptions. Current market conditions increase the risk and complexity of the judgments in these estimates. Estimation methods have been applied consistently across all periods presented.

Accounting Pronouncements

The following is a summary of Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) that became effective during the six months ended June 30, 2015:

ASU 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure;
ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity;
ASU 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures; and
ASU 2014-14, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.

ASU 2014-04 clarifies when an in-substance repossession or foreclosure occurs that would require a transfer of the mortgage loan to Other real estate owned (“OREO”). Under the ASU, repossession or foreclosure is deemed to have occurred when (1) the creditor obtains legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The ASU is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. The Company adopted this ASU in the first quarter of 2015 under the modified retrospective method. The adoption of this ASU did not have an effect on the net results of operations or financial position as the guidance is consistent with the Company’s current practice.

ASU 2014-08 narrows the definition of a qualifying discontinued operation by requiring a discontinued operation to represent a strategic shift (e.g., separate major line of business or a separate major geographical area of operations) that will have a major effect on an entity’s operations and financial results. Further, the new guidance permits entities to have continuing cash flows and significant continuing involvement with the discontinued component but requires expanded disclosures.  The Company’s third party servicing operations were classified as held for sale and reported as discontinued operations since December 31, 2013. Accordingly, the adoption of this ASU did not have a material effect on the net results of operations or financial position. The Company will evaluate any future dispositions under this adopted ASU.

ASU 2014-11 changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting and separate accounting for the initial transfer of a financial asset executed contemporaneously with a related repurchase agreement with the same counterparty. The initial transfer of the financial asset would be accounted for as a sale by the transferor only if all criteria for derecognition have been met. The ASU requires new and expanded disclosures for repurchase agreements and similar transactions accounted for as secured borrowings. The ASU is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. The Company adopted this

8 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

ASU in the first quarter of 2015. The Company currently does not have any repurchase agreements or similar transactions that would be required to be accounted for as secured borrowings. Accordingly, the adoption of this ASU did not have an effect on the net results of operations or financial position.

ASU 2014-14 requires that a mortgage loan be derecognized and a separate Other receivable be recognized upon foreclosure if the following conditions are met: (i) the loan has a government guarantee that is not separable from the loan before foreclosure; (ii) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable is measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company adopted this ASU under the modified retrospective method in the first quarter of 2015 with the related ASU 2014-04, as required, with no material effect on the net results of operations or financial position. Refer to Note 7—Other Assets for further discussion.

The following accounting pronouncements have been issued by the FASB but are not yet effective:

ASU 2014-09, Revenue from Contracts with Customers (Topic 606);
ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (a consensus of the FASB Emerging Issues Task Force);
ASU 2015-02, Consolidation (Topic 810), Amendments to the Consolidation Analysis;
ASU 2015-03, Interest–Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs;
ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date; and
ASU 2015-15, Interest–Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements.

ASU 2014-09, amended by ASU 2015-14, provides a single revenue recognition model in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The ASU outlines a five-step process for applying the new revenue model and expands required disclosures on revenue recognition. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017 using either a full or modified retrospective transition method. Early adoption is permitted beginning on or after December 15, 2016. The ASU does not apply to financial instruments. The Company is evaluating the impact of this ASU; however, the Company does not expect this ASU to have a material effect on the net results of operations or financial position.

ASU 2014-13 allows entities the option to use the more observable of the fair value of the financial assets or the fair value of the financial liabilities of the collateralized financing entity (“CFE”) to measure both. Under this update, the parent company’s earnings impact resulting from the re-measurement of a consolidated CFE’s financial assets and financial liabilities would be minimized. This ASU is effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. Early adoption is permitted as of the beginning of an annual period. The Company is currently evaluating the effect of this ASU on its net results of operations and its financial position.

ASU 2015-02 amends the consolidation requirements in ASC 810 and is intended to improve certain areas of consolidation guidance for legal entities such as limited partnerships, limited liability companies, and securitization structures. The guidance eliminates the deferral issued by the FASB in February 2010 of the accounting guidance for variable interest entities (“VIEs”) for certain investment funds, including mutual funds, private equity funds and hedge funds. In addition, the guidance amends the evaluation of fees paid to a decision maker or a service provider, and exempts certain money market funds from consolidation. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The ASU can be adopted using either a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or retrospective approach. The Company is currently evaluating the impact on the net results of operations or financial position.

ASU 2015-03 requires debt issuance costs to be presented in the Consolidated Statement of Financial Position as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The ASU is limited to the presentation on the financial position, and does not affect the recognition and measurement for debt

9 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

issuance costs. This ASU is effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the effect of this ASU; however, the Company does not expect this ASU to have a material effect on its financial statements as the ASU reclassifies the presentation of debt issuance costs with no impact to the net results of operations.

ASU 2015-15 clarifies the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03. The SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. The Company is currently evaluating the effect of this ASU; however, the Company does not expect this ASU to have a material effect on the net results of operations or financial position.

 

2. Acquisitions and Divestitures

Acquisitions

The Company did not enter into any acquisitions during the quarters and six months ended June 30, 2015 and 2014.

Discontinued Operations Held for Sale

The Company reports a component of operations that has been sold or classified as held for sale as discontinued operations when the operations and cash flows have been or will be eliminated from ongoing operations and the Company does not expect to retain any significant continuing involvement in the operations. Assets and liabilities of the component to be sold are classified as held for sale when management commits to a plan to sell; the asset is available for immediate sale; an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; and the sale is probable and expected to qualify for sale recognition within one year. The Company accrues for exit or disposal cost obligations associated with the discontinued operations at estimated fair value in the period in which the liability is incurred, except for one-time termination benefits that are incurred over time. For costs that will be incurred under a contract for its remaining term without economic benefit, the Company accrues the estimated fair value of such liability at the cease-use date.

As of June 30, 2015 and December 31, 2014, the Company’s exit of third party (forward and reverse mortgage) servicing operations and the direct mortgage lending business qualify as discontinued operations and are classified as Assets of operations held for sale and Liabilities of discontinued operations.

Forward Mortgage Servicing

In connection with its exit strategy, the Company has substantially sold all of its third-party servicing rights for forward residential mortgage loans as of June 30, 2015 with the completed transfers related to the Ocwen Transaction (completed in 2013 and 2014) and the SLS Transaction (completed in 2014).

The service fee income and servicing related reserves have been included in Loss from discontinued operations. The Company has also agreed to indemnify the purchasers Ocwen and SLS against certain claims that may arise which are deemed attributable to the period prior to servicing transfer date. No contingent obligation was recognized for the SLS Transaction associated with private label securities. For further discussion, see Note 13—Commitments and Contingencies.

As part of exiting the direct mortgage lending business related to servicing, $1.9 million and $2.2 million of non- purchased credit-impaired (“PCI”) SFR mortgage loans have been included in Assets of operations held for sale carried under the fair value option at June 30, 2015 and December 31, 2014, respectively.

Reverse Mortgage Servicing

The Company acquired servicing rights associated with Home Equity Conversion Mortgage (“HECM”) loans previously securitized in the form of Ginnie Mae (“GNMA”) HECM Mortgage-Backed Securities (“HMBS”) in connection with the IndyMac Transaction (under Financial Freedom). Refer to Note 8—Variable Interest Entities for further discussion.

10 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

Subsequent to acquiring the servicing right assets, the Company funded new draws and originated new HECM loans, which were pooled and then securitized in the form of GNMA HMBS and sold into the secondary market with servicing retained. The HECM loans are insured by the Federal Housing Administration (“FHA”). Based upon the structure of the GNMA HMBS securitization program, the Company determined that it has not met all of the requirements for sale accounting; therefore, the Company accounted for these transfers as a financing transaction. Under a financing transaction, the transferred HECM loans remain on the Company’s statement of financial position and the proceeds received for the transferred HECM loans are recorded as a secured borrowing. At June 30, 2015 and December 31, 2014, the Company has a HECM loan balance of $463.3 million and $481.2 million included in Assets of operations held for sale and secured borrowing of $455.9 million and $467.6 million included in Liabilities of discontinued operations. Refer to Note 10—Borrowings for further discussion.

Upon completion of disposition of operations, the Company will assess any continuing involvement or risks and obligations retained associated with the HECM loans and servicing. To the extent the Company no longer has any continuing involvement or maintains risks or obligations as servicer, the HECM loans and secured borrowings will be derecognized.

Concurrently, the Company has been actively identifying potential purchasers of its third-party reverse mortgage servicing operations. During the quarter and six months ended June 30, 2015, the Company had write-downs of $8.7 million and $10.0 million, respectively, which primarily related to the reverse mortgage servicing rights associated with this business. During the quarter and six months ended June 30, 2014, the Company had write-downs of $20.5 million (including $19.6 million write-down in reverse mortgage servicing rights, and $0.9 million write-down in servicing advances and GNMA unsecuritized interest receivables). The impairment write-downs were recognized in Noninterest Income included in Loss from discontinued operations. Refer to Note 12—Fair Value for further discussion regarding the estimated fair value.

Summarized Assets of operations held for sale and Liabilities of discontinued operations is as follows:

Discontinued operations      
       
(Dollars in thousands)  June 30, 2015  December 31, 2014
       
HECM loans (1)  $463,335   $481,220 
Single family residential loans   1,941    2,181 
Servicing advances, net   39,305    55,562 
Mortgage servicing rights   370    446 
Other assets (2)    23,109    19,687 
           
Assets of operations held for sale  $528,060   $559,096 
           
           
Secured borrowings - HECM loans  $455,914   $467,584 
Deposits (3)     5,923    6,553 
Other liabilities (4)     247,156    306,364 
           
Liabilities of discontinued operations  $708,993   $780,501 

 
(1)Amount includes $453.6 million and $470.1 million of securitized balances and $9.7 million and $11.1 million of additional draws awaiting securitization as of June 30, 2015 and December 31, 2014, respectively.
(2)Amount includes servicing receivables, derivatives and property and equipment, net of accumulated depreciation. There was no depreciation or amortization during the six months ended June 30, 2015. Accumulated depreciation and amortization related to these assets was $188 thousand and $375 thousand for the quarter and six months ended June 30, 2014.
(3)Amount comprised of non interest-bearing checking—loan servicing accounts.
(4)Other liabilities include amounts accrued for severance related costs and contingent liabilities. As of June 30, 2015, balance also includes a servicing obligation of $10.0 million due to impairment recorded for the reverse mortgage servicing rights. Refer to Note 12—Fair Value for further discussion.

 

Of the $247.2 million reported in Other liabilities at June 30, 2015, $214.2 million represents contingent liabilities related to specified servicing related exposure to loss. Of the $306.4 million reported in Other liabilities at December 31, 2014, $287.9 million represents contingent liabilities related to specified servicing related exposure to loss. For further discussion, see Note 13—Commitments and Contingencies.

11 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

 

The results from discontinued operations for the quarters and six months ended June 30, 2015 and 2014 are as follows:

Results from discontinued operations
   Quarters Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)  2015  2014  2015  2014
             
Interest income  $589   $5,059   $5,320   $10,284 
Interest expense (1)   (5,541)   (4,025)   (9,556)   (10,146)
                     
Net interest income   (4,952)   1,034    (4,236)   138 
Noninterest income   1,382    (9,628)   10,714    6,003 
Noninterest expense   (19,066)   (20,570)   5,450    (26,994)
                     
(Loss) income before income tax   (22,636)   (29,164)   11,928    (20,853)
Net gain on sale   440    5,709    440    7,415 
Income tax benefit (expense) (2)   8,634    10,201    (5,046)   6,144 
Loss (income) from discontinued                    
operations, net of tax  $(13,562)  $(13,254)  $7,322   $(7,294)

 
(1)For the quarter and six months ended June 30, 2015, amount includes $978 thousand and $294 thousand, respectively, in accretion for the premium associated with the secured borrowing – HECM loans. For the quarter and six months ended June 30, 2014, amount includes $1.0 million and $2.2 million, respectively, in amortization for the premium associated with the secured borrowing – HECM loans.
(2)The Company’s tax rate for discontinuing operations is 38.9% and 43.5% for the quarters ended June 30, 2015 and 2014, respectively. The Company’s tax rate for discontinuing operations is 40.8% and 45.7% for six months ended June 30, 2015 and 2014, respectively. Refer to Note 14—Income Taxes for further discussion.

 

The following table sets for the components of Noninterest expense for the quarters and six months ended June 30, 2015 and 2014:

   Quarters Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)  2015  2014  2015  2014
 Salaries  $7,087   $9,063   $14,809   $21,658 
 Professional services   3,676    5,040    6,905    8,235 
 Contingent servicing related expenses   4,595    2,516    (32,187)   (12,378)
 Other expenses   3,708    3,951    5,023    9,479 
 Noninterest expense  $19,066   $20,570   $(5,450)  $26,994 

 

The reduction in contingent servicing-related expenses for the six months ended June 30, 2015 and 2014 was primarily due to a release of $37.4 million and $22.1 million of the contingent obligation recorded during the first quarter of fiscal 2015 and 2014, respectively, as management considered information available prior to the issuance of the interim condensed consolidated financial statements. Refer to Note 13-Commitments and Contingencies for further discussion.

 

The following summarizes the Net gain on sale from discontinued operations for the quarters and six months ended June 30, 2015 and 2014:

Net gain on sale
 
   Quarters Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)  2015  2014  2015  2014
             
Servicing advances  $1,031   $113,378   $1,031   $143,667 
Mortgage Servicing rights   -    5,721    -    9,050 
Servicing fee receivables   90    5,116    90    6,983 
                     
Book value of assets   1,121    124,215    1,121    159,700 
Less: Consideration received   (1,561)   (129,924)   (1,561)   (167,115)
                     
Net gain on sale from discontinued operations  $440   $5,709   $440   $7,415 

12 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

As of June 30, 2015, the Company’s restructuring liability is $8.5 million with $3.4 million included in Other liabilities and the remaining $5.1 million included in Liabilities of discontinued operations on the condensed Consolidated Statements of Financial Position. The $8.5 million restructuring liability as of June 30, 2015 covers 359 impacted positions in the remainder of 2015 and 2016 for the planned sale of third party servicing operations. As of December 31, 2014, the Company’s restructuring liability totaled $8.3 million with $2.7 million included in Other liabilities and the remaining $5.6 million included in Liabilities of discontinued operations on the condensed Consolidated Statements of Financial Position. The $8.3 million restructuring liability as of December 31, 2014 covers 389 impacted positions.

The following table summarizes the activity related to the restructuring charges for the quarters and six months ended June 30, 2015 and 2014:

 

   Quarter Ended June 30, 2015  Six Months Ended June 30, 2015
(Dollars in thousands)  Severance (1)  Transaction
Costs (2)
  Total  Severance (1)  Transaction
Costs (2)
  Total
                   
Balance, beginning  of period  $8,592   $-   $8,592   $8,302   $-   $ 8,302  
Additions    45    250    295    541    763    1,304 
Utilization    (168)   (250)   (418)   (374)   (763)   (1,137)
                               
Balance, end of period  $8,469   $-   $8,469   $8,469   $-   $ 8,469  
   Quarter Ended June 30, 2014  Six Months Ended June 30, 2014
(Dollars in thousands)  Severance (1)  Transaction
Costs (2)
  Total  Severance (1)  Transaction
Costs (2)
  Total
                   
Balance, beginning  of period  $7,428   $-   $7,428   $11,480   $697   $ 12,177  
Additions    2,284    780    3,064    4,630    3,153    7,783 
Utilization    (886)   (780)   (1,666)   (7,284)   (3,850)   (11,134)
                               
Balance, end of period  $8,826   $-   $8,826   $8,826   $-   $ 8,826  
 
(1)Severance amounts represent one-time termination and retention bonuses provided to impacted employees, which is recognized ratably over the required service period.
(2)Transaction costs represent external costs incurred directly related to the exit of servicing operations.

 

The Company has engaged advisors in connection with its planned sale of third party reverse mortgage servicing operations in 2015. Contingent upon closing of the third party reverse mortgage servicing operations, the Company will incur approximately $2 million in transaction costs related to advisory services.

 

3. Securities

Securities consist of mortgage backed securities (“MBS”) including senior securities, investment and non-investment grade MBS, interest-only stripped securities and government sponsored enterprise (“Agencies” or “GSEs”) securities. Securities are classified based on management’s intent on the date of purchase and recorded on the condensed Consolidated Statement of Financial Position as of trade date. Securities consist of residential MBS classified as trading or available-for-sale (“AFS”) securities. The Company does not have any securities classified as held-to-maturity.

Trading securities

Securities consisting of non-investment grade MBS and interest-only securities are classified as trading securities. Trading securities are carried at their estimated fair value with changes in estimated fair value and realized gains or losses reported in Noninterest loss. Interest income is recognized using a yield consistent with the estimated market discount rate used to discount expected future cash flows for valuation purposes.

13 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

The following table summarizes the estimated fair values of the components of trading securities:

(Dollars in thousands)  June 30, 2015   December 31, 2014
           
Securities—Trading           
Residential mortgage-backed securities:         
AA-rated agency interest-only MBS   $65   $ 69
Other non-investment grade MBS     6,538     7,314
           
Total securities—Trading  $6,603   $ 7,383

During the quarter and six months ended June 30, 2015, there were no transacted sales of trading securities. Company recognized an unrealized gain of $345 thousand and $139 thousand during the quarter and six months ended June 30, 2015, respectively.

During the quarter ended June 30, 2014, there were no transacted sales of trading securities. During the six months ended June 30, 2014, the Company sold 79 trading securities for $57.1 million, with a net realized loss of $0.3 million recorded as Noninterest loss. In addition, the Company recognized $230 thousand and $693 thousand in realized gain from cash proceeds received from charged-off trading securities during the quarter and six months ended June 30, 2014, respectively. The Company recognized an unrealized gain of $591 thousand and $984 thousand during the quarter and six months ended June 30, 2014, respectively. Realized and unrealized gains/losses of trading securities are recognized in (Loss) gain on securities, net.

AFS securities

Securities that the Company does not intend to hold until maturity are classified as AFS securities and carried at their estimated fair value with unrealized gains and losses resulting from changes in estimated fair value excluded from earnings and reported as a separate component of other comprehensive income (“OCI”), net of taxes, in Members’ Equity.

14 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

The following table summarizes the amortized cost, gross unrealized gains and losses in OCI and estimated fair value of AFS securities:

   June 30, 2015
(Dollars in thousands)  Amortized
Cost
  Gross Unrealized Gains  Gross Unrealized Losses  Estimated
Fair Value
             
Securities—AFS (1)          
AAA-rated non-agency MBS  $11,006  $19 $ (183)  $ 10,842
AA-rated agency MBS   151,227   3,010   (1,600)    152,637
Other investment grade MBS   22,766   14,989   -    37,755
Non-investment grade MBS   792,504   161,201   -    953,705
Total securities—AFS    $977,503  $179,219 $ (1,783)  $ 1,154,939
                
                
  December 31, 2014
(Dollars in thousands)  Amortized
Cost
 Gross Unrealized Gains  Gross Unrealized Losses Estimated
Fair Value
                
Securities—AFS (1)          
AAA-rated non-agency MBS  $13,283  $16 $ (185)  $ 13,114
AA-rated agency MBS   53,842   3,755   -    57,597
Other investment grade MBS   29,549   20,328   -    49,877
Non-investment grade MBS   836,744   184,365   -    1,021,109
Total securities—AFS  $933,418  $208,464 $ (185)  $ 1,141,697
 
(1)Available-for-sale securities are carried at estimated fair value with unrealized net gains or losses reported within Other comprehensive income (loss) in Members’ Equity.

During the quarter and six months ended June 30, 2015, the Company transferred $10.2 million and $27.7 million of mortgage loans from loans held for sale in exchange for Agency (AA-rated) mortgage-backed securities with an initial fair value of $10.2 million and $27.7 million and backed by those same loans.

During the quarter and six months ended June 30, 2015, the Company purchased five AA-rate Agency securities totaling $76.4 million ($76.3 million at par and $0.1 million in interest). There was no similar AFS purchase during the quarter and six months ended June 30, 2014.

15 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

 

The following table summarizes the gross unrealized losses and estimated fair value of AFS securities aggregated by investment category and length of time that the securities have been in a continuous unrealized loss position due to interest rate fluctuations:

   June 30, 2015
   Less than 12 months  12 months or greater  Total
(Dollars in thousands)  Estimated
Fair Value
  Gross Unrealized Loss  Estimated
Fair Value
  Gross Unrealized Loss  Estimated
Fair Value
  Gross Unrealized Loss
                   
AA-rated non-agency MBS  $101,409   $(1,600)  $-   $-   $101,409   $(1,600)
AAA-rated non-agency MBS   -    -    8,111    (183)   8,111    (183)
                               
    Total  $101,409   $(1,600)  $8,111   $(183)  $109,520   $(1,783)
   December 31, 2014
   Less than 12 months  12 months or greater  Total
(Dollars in thousands)  Estimated
Fair Value
  Gross Unrealized Loss  Estimated
Fair Value
  Gross Unrealized Loss  Estimated
Fair Value
  Gross Unrealized Loss
                   
AAA-rated non-agency MBS  $-   $-   $8,715   $(185)  $8,715   $(185)
                               
    Total  $-   $-   $8,715   $(185)  $8,715   $(185)

Contractual maturities of the securities generally range from 10 to 30 years. Expected weighted average lives of these securities generally range from two months to more than ten years due to anticipated borrower prepayments occurring prior to the contractual maturity. The following table summarizes information regarding the remaining contractual maturities of the Company’s AFS and trading securities portfolio as of June 30, 2015 and December 31, 2014:

(Dollars in thousands)  One Year
or Less
  More than
One Year to
Five Years
  More than
Five Years to
Ten Years
  More than
Ten Years
  Total
                
Balance at June 30, 2015:               
AAA-rated non-agency securities  $-   $-   $-   $10,842   $10,842 
AA-rated MBS                         
AA-rated agency MBS   10    95    -    152,532    152,637 
AA-rated agency interest-only MBS   -    -    -    65    65 
                          
Total AA-rated MBS   10    95    -    152,597    152,702 
Other investment grade MBS   -    -    -    37,755    37,755 
Non-investment grade MBS   -    -    29,776    930,467    960,243 
                          
Total securities at estimated fair value  $10   $95   $29,776   $1,131,661   $1,161,542 
                          
Amortized cost of AFS debt securities  $10   $95   $25,003   $952,395   $977,503 

16 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

(Dollars in thousands)  One Year
or Less
  More than
One Year to
Five Years
  More than
Five Years to
Ten Years
  More than
Ten Years
  Total
                
Balance at December 31, 2014:               
AAA-rated non-agency securities  $-   $-   $-   $13,113   $13,113 
AA-rated MBS                         
AA-rated agency MBS   8    147    -    57,442    57,597 
AA-rated agency interest-only MBS   -    -    -    69    69 
                          
Total AA-rated MBS   8    147    -    57,511    57,666 
Other investment grade MBS   -    -    -    49,877    49,877 
Non-investment grade MBS   -    -    21,945    1,006,479    1,028,424 
                          
Total securities at estimated fair value  $8   $147   $21,945   $1,126,980   $1,149,080 
                          
Amortized cost of AFS debt securities  $8   $147   $19,891   $913,372   $933,418 

At June 30, 2015 and December 31, 2014, $112 thousand and $128 thousand, respectively, of these securities are pledged to secure borrowed funds, government and trust deposits and for other purposes. For further discussion, see Note 10—Borrowings.

Realized gains and losses from the sale of the AFS securities are reported in Noninterest loss using the specific identification method. There were no sales of AFS securities during the quarter ended June 30, 2015. During the quarter and six months ended June 30, 2014, the Company sold ten AFS securities for $7.9 million with a net realized gain of $5.6 million recorded as Non-interest Loss, which was reclassified out of Other comprehensive income. In addition, the Company recognized $1.2 million and $2.5 million in realized gain from cash proceeds received from charged-off AFS securities for the quarter and six months ended June 30, 2015, respectively. For the quarter and six months ended June 30, 2014, the Company recognized $1.0 million and $1.8 million, respectively, in realized gain from cash proceeds received from charged-off AFS securities.

Purchased Credit-Impaired AFS Securities

In connection with the IndyMac Transaction, the Company recognized PCI mortgage-backed securities classified as AFS due to evidence of credit deterioration since issuance and for which it is probable that the Company will not collect all contractually required principal and interest payments at the time of purchase. Such PCI debt securities were recorded initially at estimated fair value. Subsequently, the accretable yield (based on the cash flows expected to be collected over the recorded investment) is accreted to interest income. Interest income shall not be recognized to the extent the recorded investment would increase to an amount greater than the contractual payoff amount.

Changes in the accretable yield for PCI securities are summarized below:

   Accretable Yield
   Quarters Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)  2015  2014  2015  2014
             
Balance, beginning of period  $510,955   $628,023   $528,745   $688,361 
Accretion into interest income   (25,370)   (28,703)   (53,408)   (57,679)
Reclassification from nonaccretable difference                    
due to improving cash flows   30,549    9,147    41,043    4,713 
Changes in expected cash flows that do not                    
affect nonaccretable difference (1)   (6,052)   (13,164)   (6,298)   (40,092)
Disposals and other   -    (8,330)   -    (8,330)
                     
Balance, end of period  $510,082   $586,973   $510,082   $586,973 
 
(1)Represents changes in cash flows expected to be collected due to changes in prepayment assumptions and changes in interest rates on variable rate PCI securities.

17 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

 

The estimated fair value of PCI securities was $1.0 billion with a par value of $1.2 billion as of June 30, 2015 and $1.1 billion with a par value of $1.3 billion as of December 31, 2014.

Other than Temporary Impairment

The Company evaluates AFS securities with an unrealized loss for potential other-than-temporary impairment (“OTTI”) on a quarterly basis or more often if a potential loss-triggering event occurs. If the Company determines that it intends to sell AFS securities, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the Company recognizes an OTTI write-down equal to the difference between the amortized cost basis and the estimated fair value of those securities. In estimating fair value, the Company’s expected cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period including, for example, for securities issued in a securitization, underlying loan-level data, and structural features of the securitization, such as subordination, excess spread, overcollateralization or other forms of credit enhancement. The Company compares the losses projected for the underlying collateral (“pool losses”) against the level of credit enhancement in the securitization structure to determine whether these features are sufficient to absorb the pool losses, or whether a credit loss on the AFS debt security exists. Refer to Note 12—Fair Value for further discussion regarding the significant unobservable inputs in measuring estimated fair value.

For AFS securities that the Company does not intend to sell or it is more likely than not that the Company will not be required to sell prior to recovery of the amortized cost basis, the Company compares the present value of expected cash flows to be received, discounted at the current effective yield, to the security’s amortized cost to determine if a credit loss exists. In the event of a credit loss, impairment for the credit loss is reported in Noninterest loss. Changes in values attributable to factors other than credit losses remain in OCI.

For the periods presented, the Company does not intend to sell and the Company believes that it will not be required to sell AFS securities prior to recovery of the amortized cost basis. During the quarter and six months ended June 30, 2015, the Company recognized $5.3 million and $7.8 million in OTTI credit-related losses, respectively. During the quarter and six months ended June 30, 2014, the Company had insignificant OTTI credit-related losses. The Company’s total recorded cumulative OTTI credit-related losses on its AFS securities since purchase (March 2009) was $9.9 million and $1.9 million through June 30, 2015 and 2014, respectively.

The following table presents a rollforward of the amounts related to the credit-related OTTI losses on its AFS securities recorded in (Loss) gain on securities, net for the quarter and six months ended June 30, 2015:

(Dollars in thousands)  Quarter Ended
June 30,
  Six Months Ended
June 30,
   2015  2015
Credit loss recognized, beginning of period  $4,633   $ 2,180  
Additions             
for securities with credit impairments   5,300     7,753  
             
Reductions             
for securities sold, matured   -     -  
            
Credit loss recognized, end of period  $9,933   $ 9,933  

18 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

4. Loans Receivable, Allowance for Loan Losses and Reserves for Off-Balance Sheet Commitments

Loans Receivable

The following tables summarize the major loan categories as of June 30, 2015 and December 31, 2014:

   June 30, 2015
(Dollars in thousands)  Covered Loans  Non-Covered Loans      
   PCI  Non-PCI  PCI  Non-PCI  Total  %
Loans HFS carried at estimated fair value                  
Residential mortgages  $-   $-   $-   $7,028   $7,028    0.1%
                               
Loans HFI carried at estimated fair value                              
Residential mortgages   -    4,014,795    -    349,252    4,364,047    31.4%
                               
Loans HFS carried at lower of cost or                              
estimated fair value (1)                               
Residential mortgages   -    -    -    14,990    14,990      
Commercial   -    -    -    4,500    4,500      
                               
Total loans HFS, at lower of cost or fair value   -    -    -    19,490    19,490    0.1%
Loans HFI carried at amortized cost or                              
Accretable Yield                              
Commercial   -    -    -    3,171,701    3,171,701      
Commercial real estate   -    -    1,298,132    2,305,706    3,603,838      
Residential mortgages   1,275,531    -    5,920    1,557,277    2,838,728      
Consumer loans   -    -    2,296    958    3,254      
                               
Loans HFI carried at amortized cost   1,275,531    -    1,306,348    7,035,642    9,617,521      
Less: Allowance for credit losses   (11,033)   -    (42,894)   (76,807)   (130,734)     
                               
Total loans HFI at amortized cost, net   1,264,498    -    1,263,454    6,958,835    9,486,787    68.4%
                               
Total loans HFI at carrying value   1,264,498    4,014,795    1,263,454    7,308,087    13,850,834      
                               
Total loans receivable at carrying value  $1,264,498   $4,014,795   $1,263,454   $7,334,605   $13,877,352    100.0%
                               
Assets of operations held for sale carried                              
at lower of cost or estimated fair value (2)                              
Residential mortgages   -    -    -    465,276    465,276      
                               
Carrying value of loans receivable pledged                              
as collateral for borrowings                      $8,935,235      
                               

 
(1)The valuation allowance of non-PCI loans to record the loans at lower of cost or estimated fair value was $0.1 million as of June 30, 2015.
(2)The valuation allowance of non-PCI loans to record loans classified as Assets of operations held for sale at lower of cost or estimated fair value was $0.5 million as of June 30, 2015.

19 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

   December 31, 2014
(Dollars in thousands)  Covered Loans  Non-Covered Loans      
   PCI  Non-PCI  PCI  Non-PCI  Total  %
Loans HFS carried at estimated fair value                  
Residential mortgages  $-   $-   $-   $21,321   $21,321    0.1%
                               
Loans HFI carried at estimated fair value                              
Residential mortgages   -    4,165,171    -    361,425    4,526,596    31.8%
                               
Loans HFS carried at lower of cost or                              
fair value (1)                               
Residential mortgages   -    -    -    38,042    38,042    0.3%
Loans HFI carried at amortized cost or                              
Accretable Yield                              
Commercial   -    -    -    2,973,761    2,973,761      
Commercial real estate   1,185,805    -    369,359    2,195,967    3,751,131      
Residential mortgages   1,372,689    -    -    1,655,701    3,028,390      
Consumer loans   2,343    -    43    1,183    3,569      
                               
Loans HFI carried at amortized cost   2,560,837    -    369,402    6,826,612    9,756,851      
Less: Allowance for credit losses   (55,436)   -    (1,709)   (64,819)   (121,964)     
                               
Total loans HFI at amortized cost, net   2,505,401    -    367,693    6,761,793    9,634,887    67.8%
                               
Total loans HFI at carrying value   2,505,401    4,165,171    367,693    7,123,218    14,161,483      
                               
Total loans receivable at carrying value  $2,505,401   $4,165,171   $367,693   $7,182,581   $14,220,846    100.0%
                               
Assets of operations held for sale carried                              
at lower of cost or fair value (2)                              
Residential mortgages   -    -    -    483,401    483,401      
                               
Carrying value of loans receivable pledged                              
as collateral for borrowings                      $9,277,403      

 
(1)The valuation allowance of non-PCI loans to record the loans at lower of cost or estimated fair value was $0.5 million as of December 31, 2014.
(2)There was no valuation allowance of non-PCI loans to record loans classified as Assets of operations held for sale at lower of cost or estimated fair value as of December 31, 2014.

Loans are classified as held for sale (“HFS”) or held for investment (“HFI”) based on management’s intent and ability to hold the loans for the foreseeable future. Loans HFS are carried at estimated fair value under the fair value option or lower of cost or estimated fair value (“LOCOM”). The Company’s HFI loans are accounted for under three accounting measurements: fair value, accretable yield method, or at amortized cost.

Fair Value Option Loans

Fair value option loans are carried at estimated fair value with subsequent changes recognized in earnings. Interest income is recognized using a yield consistent with the estimated market discount rate used for valuation purposes while the remaining change in fair value is recognized as Noninterest loss. Net loan origination fees or costs, and purchase premiums or discounts are recognized as earned or incurred through current earnings.

Loans HFS carried at estimated fair value under the fair value option represent Agency-eligible SFR mortgage loans, which totaled $7.0 million and $21.3 million as of June 30, 2015 and December 31, 2014, respectively. In addition, the Company has SFR mortgage loans included in Assets of operations held for sale carried at fair value totaling $1.9 million and $2.2 million, respectively.

Loans HFI carried at estimated fair value under the fair value option represent residential mortgage loans purchased in the IndyMac Transaction. The loans from the IndyMac Transaction include SFR mortgage loans and proprietary reverse mortgages with a small population of HECM loans (collectively referred to as “reverse mortgage loans”). As of June 30, 2015 and December 31, 2014, $4.0 billion and $4.2 billion, respectively, were “covered loans” as the Company will be

20 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

reimbursed for a substantial portion of future losses under the terms of a shared-loss agreement with the FDIC while the remaining $349.3 million and $361.4 million, respectively, are “non-covered loans.”

LOCOM Loans

For loans recorded at LOCOM, estimated fair value adjustments are measured on an individual loan basis. Gains and losses on loans HFS are recorded in Noninterest loss. Interest income is recognized based on the contractual terms of the loans. Net loan origination fees and costs, and purchase premiums or discounts are deferred but not amortized for loans HFS under LOCOM.

Loans HFS carried at LOCOM represent HECM loans awaiting assignment to the Department of Housing and Urban Development (“HUD”) and originated commercial loans at $4.5 million net of deferred fees. The Company had HECM loans totaling $478.3 million and $501.7 million, of which $463.3 million and $481.2 million were included in Assets of operations held for sale as of June 30, 2015 and December 31, 2014. During the quarter ended June 30, 2015, the Company transferred $10.2 million of mortgage Loans HFS for Agency mortgage-backed securities with an initial fair value of $10.2 million and backed by those same loans. During the six months ended June 30, 2015, the Company transferred $17.5 million of mortgage loans purchased in 2014 and $10.2 million of mortgage loans HFS purchased in 2015 for Agency mortgage-backed securities with an initial fair value of $27.7 million and backed by those same loans.

PCI Loans

Purchased credit-impaired loans (“PCI loans”) were determined as of the date of purchase to have evidence of credit quality deterioration for which it is probable that the Company will be unable to collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due status, refreshed borrower credit scores and refreshed loan-to-value ratios.

PCI loans represent loans purchased in the First Federal, La Jolla, and Citibank Transactions. At purchase, the First Federal and La Jolla Transactions are substantially covered loans as the Company may be reimbursed for a portion of future losses under the terms of the shared-loss agreements with the FDIC. The loans purchased as part of the Citibank Transaction are non-covered loans. For the First Federal and La Jolla Transactions, the loss share agreement for the commercial loans expired as of December 31, 2014 and March 19, 2015, respectively and thus, these commercial loans moved to non-covered loans as of June 30, 2015. The SFR mortgage loans from the First Federal and La Jolla Transactions were covered loans as of June 30, 2015 and December 31, 2014, respectively. Refer to Note 5—Indemnification Assets for further discussion regarding the indemnification agreement. These PCI loans are classified as loans HFI and are accounted for under the accretable yield method.

An accretable yield based on the cash flows expected to be collected (estimated fair value at acquisition date) over the recorded investment is used to recognize interest income using the effective yield method over the expected remaining life. Interest income shall not be recognized to the extent the recorded investment would increase to an amount greater than the contractual payoff amount. Decreases in expected cash flows related to further credit deterioration result in a charge to the provision for credit losses and a corresponding increase to the allowance for credit losses. Increases in expected cash flows due to credit quality result in recovery of any previously recorded allowance for credit losses, to the extent applicable, and an increase in the accretable yield applied prospectively for any remaining increase. Changes in expected cash flows caused by changes in market interest rates or by prepayments are recognized as adjustments to the accretable yield on a prospective basis.

Amortized Cost Loans

For loans carried at amortized cost, except for SBA loans, fees and incremental direct costs associated with the loan origination and pricing process as well as premiums and discounts, are deferred and generally amortized over the contractual life of the loan using the effective interest method. For SBA loans that are purchased at a premium, the premium is amortized as a reduction to interest income over the estimated life of the loans, giving consideration to expected prepayments. Any differences with the actual prepayments or from changes in the expected prepayments are reflected as an adjustment to interest income in the period of the change as if the revised estimates had been applied since the date of acquisition. The Company also originates revolving lines of credit. Fees received for originating such commitments are deferred and amortized into Noninterest loss on a straight-line basis over the commitment period.

21 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

Loans HFI carried at amortized cost represent loans that were originated by the Company, purchased (non-PCI) residential mortgage loans, and previously serviced loans repurchased from GNMA. Loans HFI carried at amortized cost represent 50.2% and 47.7% of the HFI portfolio as of June 30, 2015 and December 31, 2014, respectively. These loan amounts include $18.0 million and $18.2 million in unamortized fees net of unamortized direct origination costs on loans originated by the Company and $10.8 million and $14.6 million in unamortized premiums and discounts on purchased residential mortgage loans as of June 30, 2015 and December 31, 2014, respectively.

The following table summarizes the Company’s loans receivable by product, net of allowance:

   June 30, 2015  December 31, 2014
(Dollars in thousands)  Amount  %  Amount  %
Loans HFS                    
Residential mortgages  $22,018    83.0%  $59,363    100.0%
Commercial   4,500    17.0%   -    0.0%
                     
Total loans HFS, at carrying value  $26,518    100.0%  $59,363    100.0%
                     
Loans HFI                    
Commercial  $3,117,539    22.5%  $2,924,777    20.7%
Commercial real estate   3,542,684    25.6%   3,690,926    26.0%
Residential mortgages   7,187,596    51.9%   7,542,475    53.3%
Consumer   3,015    0.0%   3,305    0.0%
                     
Total loans HFI, at carrying value  $13,850,834    100.0%  $14,161,483    100.0%
                     
Assets of operations held for sale                    
Residential mortgages  $465,276    100.0%  $483,401    100.0%
                     
Total loans, at carrying value  $465,276    100.0%  $483,401    100.0%

22 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

Loan concentrations may exist when borrowers could be similarly impacted by economic or other conditions. The following table summarizes the carrying value of loans, including $465.3 million and $483.4 million of loans classified as Assets of operations held for sale as of June 30, 2015 and December 31, 2014, respectively, and excluding the allowance for loan losses, with concentrations based upon property address by geographical regions:

(Dollars in thousands)  June 30, 2015  December 31, 2014
State  Carrying
Value
  %  Carrying
Value
  %
             
California  $8,312,420    57.4%  $8,615,157    58.1%
New York   1,054,866    7.3%   1,058,412    7.1%
Texas   813,875    5.6%   739,074    5.0%
Florida   440,398    3.0%   469,467    3.2%
Maryland   321,090    2.2%   313,240    2.1%
New Jersey   314,478    2.2%   315,931    2.1%
Massachusetts   266,643    1.8%   286,356    1.9%
Arizona   256,085    1.8%   248,566    1.7%
Connecticut   239,208    1.7%   223,784    1.5%
Illinois   225,209    1.6%   209,402    1.4%
Other States and Territories (1)   2,229,090    15.4%   2,346,822    15.9%
                     
Total  $14,473,362    100.0%  $14,826,211    100.0%
 
(1)As of June 30, 2015, the balance consists of 44 states or territories, with no state or territories having total carrying value in excess of $223.0 million. As of December 31, 2014, the balance consists of 44 states or territories, with no state or territories having total carrying value in excess of $228.3 million.

 

The following table summarizes the carrying value of residential mortgage loans, including $465.3 million and $483.4 million of residential mortgages loans classified as Assets of operations held for sale as of June 30, 2015 and December 31, 2014, respectively, and excluding allowance for loan losses, with concentrations based on property address by geographical regions and the loans’ current loan-to-value (LTV) ratio:

 

June 30, 2015
   Carrying Value     Loan to Value (LTV)
(in thousands of dollars)  Amount  % of Total  0-80  81-100  100+
                
California  $4,443,167    57.8%   70.8%   15.4%   13.8%
New York   672,716    8.7%   59.8%   17.3%   22.9%
Florida   382,429    5.0%   44.3%   16.3%   39.4%
New Jersey   222,941    2.9%   33.7%   20.0%   46.3%
Massachusetts   183,095    2.4%   70.6%   10.6%   18.8%
Maryland   182,503    2.4%   31.3%   20.5%   48.2%
Virginia   131,118    1.7%   50.7%   26.3%   23.0%
Hawaii   130,027    1.7%   76.8%   12.9%   10.3%
Washington   127,101    1.7%   52.6%   24.9%   22.5%
Illinois   107,844    1.4%   38.9%   18.0%   43.1%
Other States and Territories (1)    1,107,128    14.3%   57.6%   20.6%   21.8%
Total  $7,690,069    100.0%               

23 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

December 31, 2014
   Carrying Value     Loan to Value (LTV)
(in thousands of dollars)  Amount  % of Total  0-80  81-100  100+
                
California  $4,718,593    58.3%   66.7%   16.4%   16.9%
New York   688,847    8.5%   54.6%   19.9%   25.5%
Florida   407,326    5.0%   40.9%   16.2%   42.9%
New Jersey   231,843    2.9%   31.3%   19.7%   49.0%
Maryland   190,053    2.3%   31.6%   20.1%   48.3%
Massachusetts   189,204    2.3%   70.7%   11.0%   18.3%
Virginia   134,721    1.7%   45.8%   27.6%   26.6%
Hawaii    134,720    1.7%   73.2%   12.7%   14.1%
Washington   133,046    1.6%   50.2%   24.1%   25.7%
Illinois   112,827    1.4%   33.4%   18.5%   48.1%
Other States and Territories (1)    1,156,570    14.3%   56.1%   20.3%   23.6%
Total  $8,097,750    100.0%               

 
(1)As of June 30, 2015, the balance consists of 42 states or territories, with no state or territories having total carrying value in excess of $99.7 million. As of December 31, 2014, the balance consists of 42 states or territories, with no state or territories having total carrying value in excess of $107.4 million.

Allowance for Credit Losses

The allowance for credit losses consists of the allowance for loan losses and a separate reserve for off-balance sheet commitments, such as unfunded loan commitments, standby letters of credit and commercial lines of credit. The Company maintains an allowance for loan losses for estimated credit losses in its HFI loan portfolio, excluding loans carried at estimated fair value. The allowance is adjusted through a provision for credit losses, which is charged against current period earnings, and reduced by any charge-offs for confirmed losses, net of recoveries.

The Company maintains a separate reserve for credit losses on off-balance sheet commitments, which is reported in Other liabilities. Off-balance sheet credit exposures include unfunded loan commitments, issued standby letters of credit and unfunded commercial lines of credit. The Company’s methodology for assessing the appropriateness of this reserve is similar to the allowance process for outstanding loans.

24 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

The following table summarizes the changes in allowance for loan and credit losses for quarters and six months ended June 30, 2015 and 2014:

   Quarter Ended June 30, 2015
             
(Dollars in thousands)  PCI  Collectively
Impaired
  Individually
Impaired
  Total
Balance, beginning of period  $58,013   $63,456   $6,716   $128,185 
                     
Provision for credit losses   (4,087)   5,632    1,306    2,851 
Charge-offs   -    (603)   (14)   (617)
Recoveries   -    5    310    315 
Balance, end of period  $53,926   $68,490   $8,318   $130,734 
                     
    Quarter Ended June 30, 2014
                     
(Dollars in thousands)       PCI     Collectively
Impaired 
     Individually
Impaired 
        Total 
Balance, beginning of period  $57,941   $43,346   $719   $102,006 
                     
Provision for credit losses   65    1,258    7,281    8,604 
Charge-offs   -    (148)   -    (148)
Recoveries   -    1    -    1 
Balance, end of period  $58,006   $44,457   $8,000   $110,463 
                     
                     
    Six Months Ended June 30, 2015
                     
(Dollars in thousands)       PCI     Collectively
Impaired 
     Individually
Impaired 
        Total 
Balance, beginning of period  $57,145   $58,062   $6,757   $121,964 
                     
Provision for credit losses   (3,219)   11,569    (1,710)   6,640 
Charge-offs   -    (1,146)   (14)   (1,160)
Recoveries   -    5    3,285    3,290 
Balance, end of period  $53,926   $68,490   $8,318   $130,734 
                     
    Six Months Ended June 30, 2014
                     
(Dollars in thousands)       PCI     Collectively
Impaired 
     Individually
Impaired 
        Total 
Balance, beginning of period  $59,135   $39,042   $719   $98,896 
                     
Provision for credit losses   (1,129)   5,661    7,281    11,813 
Charge-offs   -    (247)   -    (247)
Recoveries   -    1    -    1 
Balance, end of period  $58,006   $44,457   $8,000   $110,463 

For each portfolio, impairment is generally measured individually for larger non-homogeneous loans, collectively for groups of smaller loans with similar characteristics, or for designated pools of PCI loans based on decreases in cash flows expected to be collected subsequent to acquisition.

25 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

The following table summarizes the allowance for loan losses and related loan balances by portfolio, excluding loans carried at estimated fair value:

   June 30, 2015  December 31, 2014
(Dollars in thousands)  Wholesale  Consumer  Total  Wholesale  Consumer  Total
                   
Allowance for loan losses:                              
Collectively evaluated
   for impairment
  $(64,601)  $(3,889)  $(68,490)  $(54,298)  $(3,764)  $(58,062)
Individually evaluated
   for impairment
   (8,318)   -    (8,318)   (6,757)   -    (6,757)
PCI loans   (42,396)   (11,530)   (53,926)   (48,134)   (9,011)   (57,145)
                               
Total allowance for loan losses  $(115,315)  $(15,419)  $(130,734)  $(109,189)  $(12,775)  $(121,964)
                               
Loans held for investment:                              
Collectively evaluated
   for impairment
  $5,459,567   $1,558,235   $7,017,802   $5,151,418  $1,656,884   $6,808,302 
Individually evaluated
   for impairment
   17,840    -    17,840    18,310   -    18,310 
PCI loans   1,298,132    1,283,747    2,581,879    1,555,164   1,375,075    2,930,239 
                               
Total loans held for investment  $6,775,539   $2,841,982   $9,617,521   $6,724,892   $3,031,959   $9,756,851 

The Provision for credit losses reflects loss adjustments related to loans recorded at amortized cost, off-balance sheet commitments, and related reimbursements under indemnification agreements. An allowance for loan losses reduces the carrying value of the portfolio of loans receivable. Reimbursements under indemnification agreements are recorded as Indemnification assets. The provision for PCI loans covered by shared-loss agreements included provision offsets due to expected reimbursements from the FDIC. The following table shows the components of the Provision for credit losses in the condensed Consolidated Statements of Operations:

   Quarters Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)  2015  2014  2015  2014
                     
Provision for credit losses on amortized cost loans  $6,938   $8,539   $9,859   $12,942 
Provision for credit losses for non-covered loans                    
 carried at accretabled yield   9,816 (1)  81    41,184 (1)  376 
Credit loss (benefit) on covered PCI loans   (13,903)(1)  (16)   (44,403)(1)  (1,505)
Indemnification asset provision offset related                    
to credit loss benefits on covered PCI loans   (1,218)   4,844    (216)   7,711 
Provision for off-balance sheet commitments                    
(recorded in other liabilities)   897    898    (2,571)   898 
                     
Net provision for credit losses  $2,530   $14,346   $3,853   $20,422 

 
(1)During the quarter ended June 30, 2015, a provision of $15.0 million for PCI loans were reclassified from “covered” to “non-covered” due to the expiration of the loss share agreement associated with the commercial loans from the La Jolla Transaction. During the six months ended June 30, 2015, a provision totaled $45.2 million for PCI loans were reclassified from “covered” to “non-covered” due to the expiration of the loss share agreement associated with the commercial loans from both the La Jolla and the First Federal Transaction. When comparing the June 30, 2015 “covered” and “non-covered” provision amounts to the quarter ended June 30, 2014 provision amounts, this reclassification should be considered.

26 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

Credit Quality Indicators and Reserve Process, Excluding PCI Loans and Loans Held at

Estimated Fair Value

Determining an appropriate allowance for loan losses requires significant judgment that may change based on management’s ongoing process in analyzing the credit quality of the Company’s HFI loan portfolio. The allowance for loan losses has been determined primarily based on loss reserve factors for probable incurred losses inherent in the portfolio. In the absence of loss history, the loss reserve factors developed for the Wholesale loan portfolio have been derived from industry data for similar loans and primarily a third party valuation model for the Consumer portfolio. The Company will consider actual loss experience (e.g., the level of net charge-offs) as more information becomes available with loan portfolio growth and maturity.

Wholesale Portfolio

The Company closely monitors and assesses the credit quality and credit risk in commercial and commercial real estate loans (“Wholesale portfolio”) on an ongoing basis. Wholesale loans are subject to individual risk assessment based on periodic reviews of the loan’s current performance, an evaluation of the borrower’s financial condition and the value of any underlying collateral. Wholesale loans are assessed for estimated inherent losses expected to be identified within the loss emergence period (e.g. 24 months or more) by utilizing a third party model to develop probability of default and loss given default factors that are based on the credit characteristics of each loan and applied to the outstanding balances.

The following table summarizes non-PCI loans in the Wholesale portfolio, excluding the allowance for loan losses which are monitored for credit quality based on internal risk classifications:

(Dollars in thousands)  June 30, 2015
   Noncriticized  Criticized  Total
                 
Commercial  $2,893,118   $278,583   $ 3,171,701  
Commercial real estate   2,225,983    79,723     2,305,706  
                 
Total   $5,119,101   $358,306   $ 5,477,407  
                 
                 
(Dollars in thousands)  December 31, 2014
   Noncriticized  Criticized   Total
                 
Commercial  $2,849,442   $124,319   $ 2,973,761  
Commercial real estate   2,158,928    37,039     2,195,967  
                 
Total   $5,008,370   $161,358   $ 5,169,728  

Noncriticized loans generally include loans that are expected to be repaid in accordance with contractual loan terms. Criticized loans are risk rated as special mention, substandard or doubtful consistent with the regulatory guidelines and for which credit related weaknesses have been identified, which may be indicators of impairment. A loan is considered to be impaired when it is probable that the Company will be unable to collect all interest and principal payments in accordance with the contractual terms of the loan based on current information and events.

Consumer Portfolio

The Company monitors the credit quality for its consumer portfolio comprised of residential mortgage loans and unsecured credit cards on a pool basis.

For residential mortgages, the Company develops a loss reserve factor by deriving the projected lifetime losses derived from a valuation model and then adjusting for losses expected to be identified within the next 12 months (i.e., the loss emergence period). The key drivers of the projected lifetime losses include the type of product, delinquency status of the underlying loans, the borrower’s FICO, loan-to-value, debt-to-income ratio, geographic location, and any guarantees.

27 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

For unsecured credit cards, the Company develops a loss reserve factor from industry loss data adjusted to reflect the characteristics of the Company’s portfolio to determine the losses expected to be identified within the next 12 months (i.e., the loss emergence period).

Loan reserve factors used in determining the allowance for the Consumer portfolio are reviewed and adjusted on a quarterly basis or more frequently, as needed, for changes in trends, conditions and other relevant factors that affect the repayment of the loans.

Other Factors

While the specific and pool allowances provide the quantitative portion of the allowance that reflects most of the relevant risk factors, the Company believes there are other broad influences affecting the collectability of the outstanding loans that cannot be attributed to a specific loan or pool of loans. The allowance for both portfolios (Wholesale and Consumer) includes an amount for imprecision and uncertainty that may change from period to period. To provide coverage for inherent losses attributable to such factors, the Company has a judgmental component of the allowance for loan losses that represents management’s evaluation of risks inherent in the processes and assumptions used in establishing the allowance based on evaluation of internal and external qualitative factors. Such factors include change in value of underlying collateral, change in economic and business conditions, change in nature and volume of portfolio, experience and depth of loan management and staff, changes in the trend and severity of problem loans, effectiveness of internal loan review system, credit concentrations, effectiveness of lending policies, standards and procedures and other external factors.

Nonaccrual Status Loans

Loans are placed on nonaccrual status when management determines that there is significant uncertainty as to the full and timely collection of principal and/or interest. Any outstanding accrued interest is reversed from current period earnings and the amortization of deferred fees or costs is suspended, unless the loan is both well secured and in the process of collection. Commercial and commercial real estate loans are placed on nonaccrual status when full collection of principal and/or interest is not expected or when principal and/or interest becomes contractually 90 days past due, unless the loan is well secured and in the process of collection. These delinquent loans are generally placed on nonaccrual status under the cost recovery method, whereby all payments received are applied against the recorded investment. Residential mortgage loans are placed on nonaccrual status when they are 90 days past due or earlier due to a triggering event such as bankruptcy or foreclosure. Subsequent to being placed on nonaccrual status, interest income is recognized as payments are received. Consumer credit card loans are not placed on nonaccrual status; rather they are charged off at 180 days delinquent. Generally, a loan may be returned to accrual status when the delinquent principal and interest are brought current in accordance with the terms of the loan agreement and full collection of the remaining contractual principal and interest is no longer in doubt or the loan becomes well secured and is in the process of collection.

A nonaccrual loan that has been formally restructured continues to be reported on nonaccrual status until the loan has a demonstrated period of performance, including full collection of at least six consecutive payments under the restructured terms and full recovery of any prior charge-offs. The loan remains classified as a nonaccrual loan if the borrower’s performance under the new terms is not reasonably assured.

There were $73.6 million and $93.0 million of nonaccrual loans as of June 30, 2015 and December 31, 2014, respectively.

Impaired Loans

Loans are classified as impaired when it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement based on current information and events. Once a loan is deemed impaired, the amount of impairment is primarily measured based on the shortfall between the present value of the future cash flows expected to be collected, discounted at the loan’s effective interest rate, when compared to the recorded investment in the loan. Alternatively, the Company may use observable market prices (if available), or for loans that are solely dependent on the collateral for repayment, the estimated fair value of the collateral less estimated costs to sell. A specific allowance is established and used to absorb credit losses only related to that impaired loan and is not used to cover losses sustained on any other loan. Generally, impaired loans are placed on nonaccrual status under the cost recovery method, whereby

28 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

all payments received are applied against the recorded investment. No interest income is recognized unless payments are received after the recorded investment has been reduced to zero.

As of June 30, 2015, the Company determined there were no new impaired loans and the impaired loans represent the previously identified individually impaired loans as of December 31, 2014. As of December 31, 2014, the Company had three commercial loans determined to be individually impaired and placed them on non-accrual status with no concessions granted. All three impaired loans are collateral dependent as repayment is expected to be provided substantially through liquidation of the underlying collateral. For one of these impaired loans, the Company determined the collateral dependent loan to be uncollectible and charged-off the entire recorded investment as of December 31, 2014. As of June 30, 2015, the Company continues to accrue $1.5 million for the unfunded commitment balance for this impaired loan. For the remaining two impaired loans, the Company increased the specific allowance to $8.3 million from $6.4 million, which was measured based on the estimated fair value of the underlying collateral. The loans are secured by a pledge of all equity interests owned by the borrowers and guarantors and the Company’s first priority security interest to the tangible assets of the borrowers and guarantors. As of June 30, 2015, the unpaid principal balance, recorded investment, and allowance for loan losses for the two impaired loans were $19.0 million, $9.5 million and $8.3 million, respectively. As of December 31, 2014, the unpaid principal balance, recorded investment, and allowance for loan losses for the three impaired loans were $19.5 million, $11.6 million, and $6.8 million, respectively. The average recorded investment for the quarters ended June 30, 2015 and 2014 was $11.0 million and $27.4 million, respectively. The average recorded investment for the six months ended June 30, 2015 and 2014 was $11.3 million and $25.1 million, respectively. The Company did not recognize any interest income once the loan was deemed impaired.

Troubled Debt Restructurings

Troubled debt restructurings (“TDRs”) are loans the Company has modified in such a way so as to have granted a concession to the borrower that it would not otherwise consider. Such concessions are considered to be unavailable to the borrower through normal channels or other lending sources because of the borrower’s financial difficulties. A TDR typically involves a modification of terms such as forgiveness of principal and/or interest, a reduction of the interest rate below the current market rate for a loan with similar risk characteristics or extending the maturity date of the loan without corresponding compensation or additional support.

The Company measures impairment of a TDR using the methodology described for individually impaired loans. TDRs are initially placed on nonaccrual and typically a minimum of six consecutive months of sustained performance is required before returning to accrual status.

Loans accounted for as PCI loans or carried at estimated fair value under the fair value option that the Company may from time to time modify as TDRs are not within the scope of the accounting guidance for TDRs. TDR recognition is therefore limited to non-PCI loans accounted for at amortized cost.

There were no TDRs or other individually impaired loans as of June 30, 2015 and December 31, 2014, respectively.

29 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

Past-Due Loans

Past due loans are loans that are past their contractual interest or principal due date. The following table summarizes the delinquency status of non-PCI loans HFI carried at amortized cost, excluding the allowance for loan losses:

(Dollars in thousands)  June 30, 2015
   Less than
30 days
past due (1) 
 Past due
30 to 89 days 
 Past due
90+ days 
  Total
                      
Commercial  $3,162,566   $-   $9,135   $ 3,171,701  
Commercial real estate   2,305,706    -    -     2,305,706  
Residential mortgages (2)    1,505,566    7,338    44,373     1,557,277  
Other consumer   935    14    9     958  
                      
Total   $6,974,773   $7,352   $ 53,517  $ 7,035,642  
                      
                      
(Dollars in thousands)  December 31, 2014
   Less than
30 days
past due (1) 
 Past due
30 to 89 days 
   Past due
90+ days 
  Total
                      
Commercial  $2,973,701   $60   $-   $ 2,973,761  
Commercial real estate   2,194,522    1,445    -     2,195,967  
Residential mortgages (2)    1,583,270    10,052    62,379     1,655,701  
Other consumer   1,082    36    65     1,183  
                      
Total   $6,752,575   $11,593   $ 62,444  $ 6,826,612  

 
(1)Amounts include current loans.
(2)For residential mortgage loans, the balance in “Less than 30 days past due” status includes HECM loans totaling $84.8 million and $76.9 million as of June 30, 2015 and December 31, 2014, respectively due to the nature of HECM loans as there is no requirement for monthly mortgage payments.

Charge-off Policy

PCI and non-PCI loans are charged off in whole or in part when they are determined to be uncollectible. For Wholesale and similar PCI loans, they are determined to be uncollectible based on delinquency status, evaluation of the borrower’s financial condition and future ability to pay, any guarantees and the expected net realizable value of collateral. Generally, Wholesale and similar PCI loans are charged off when the loan is delinquent, it is determined that advances to the borrower are in excess of the calculated current estimated fair value of the collateral and the borrower is deemed to be incapable of repayment of the debt. For Consumer and similar non-PCI loans, charge-offs are based on delinquency status, an evaluation of borrower creditworthiness and the value of any collateral. Recoveries of amounts previously charged off are recorded as a recovery to the allowance for non-PCI loans and for PCI loans depending on the circumstance, either a recovery to the allowance or a decrease in the recorded investment.

30 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

 

Loans in Process of Foreclosure

Below summarizes the residential mortgage loans in the process of foreclosure and OREO as of June 30, 2015 and December 31, 2014:

(Dollars in thousands)  June 30, 2015   December 31, 2014
Loans in process of foreclosure (1)               
PCI  $44,764   $ 59,282  
Non-PCI   450,704     490,225  
   $495,468   $ 549,507  
            
Other Real Estate Owned (OREO)  $135,458   $ 153,429  

 
(1)Includes non-PCI loans in process of suspended and active foreclosure with carrying value of $15.8 million and $14.3 million from Assets of operations held for sale.

Credit Quality Indicators and Reserve Process for PCI Loans

As of the acquisition date, PCI loans were initially recorded at estimated fair value with no allowance for loan losses carried over since the initial fair values reflected credit losses expected to be incurred over the remaining lives of the loans. The acquired loans are and continue to be subject to the Company’s internal credit review.

When it is probable that cash flows expected to be collected are significantly lower than the previous estimate, other than for changes in contractual interest rates (e.g., for adjustable rate loans) or explicit changes in expected prepayments, an allowance for loan losses is recognized for that decrease and a provision for credit loss is recorded as a charge to earnings. Subsequently, the allowance for loan losses on PCI loans is reduced for any probable and significant increases in expected cash flows.

The Company generally updates its expected cash flows quarterly, based on management’s review of the credit quality of the PCI loans and the analysis of the loan performance data since acquisition date, such as delinquency status and internal risk classification.

Regardless of delinquency status, interest income is accreted based on an estimated effective yield over the estimated life of the loans, which is derived from all projected cash flows expected to be collected. Further, if a loan within a pool of loans is modified, the modified loan remains part of the pool of loans and the modified terms are reflected in the updated cash flows.

The following table summarizes the PCI loans, excluding the allowance for loan losses, in the Wholesale portfolio monitored for credit quality based on internal risk classification:

(Dollars in thousands)  June 30, 2015
   Noncriticized  Criticized   Total
                
Commercial real estate  $1,164,874   $133,258   $ 1,298,132  
                
Total    $1,164,874   $133,258   $ 1,298,132  
                
                
(Dollars in thousands)  December 31, 2014
   Noncriticized   Criticized    Total
                
Commercial real estate  $1,371,027   $184,137   $ 1,555,164  
                
Total    $1,371,027   $184,137   $ 1,555,164  

31 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

As of June 30, 2015 and December 31, 2014, the carrying value of PCI wholesale and consumer loans were $2.5 billion and $2.9 billion, respectively, with an unpaid principal balance of $3.0 billion and $3.4 billion, respectively.

Accretable Yield

The excess of cash flows expected to be collected over the recorded investment of the PCI loans represents the accretable yield. The accretable yield is affected by changes in interest rate indices for variable rate PCI loans, changes in prepayment assumptions and changes in expected principal and interest payments and property values.

Changes in the accretable yield for PCI loans are summarized below:

(Dollars in thousands)  Accretable Yield
   Quarters Ended
June 30,
  Six Months Ended
June 30,
   2015  2014  2015  2014
             
Balance, beginning of period  $1,428,530   $1,826,951   $1,550,229   $1,981,935 
Accretion into interest income   (59,831)   (62,839)   (114,925)   (126,871)
Reclassification from nonaccretable difference                    
for loans due to improving cash flows   78,082    49,113    75,569    34,313 
Changes in expected cash flows that do not                    
affect nonaccretable difference (1)   (41,769)   (82,766)   (105,861)   (158,918)
                     
Balance, end of period  $1,405,012   $1,730,459   $1,405,012   $1,730,459 
 
(1)Represents changes in cash flows expected to be collected due to the impact of modifications, changes in prepayment assumptions and changes in interest rates on variable rate PCI loans.

Purchased Loans

During the quarter and six months ended June 30, 2015, the Company purchased SFR mortgage loans, multifamily loans, and repurchased HECM loans. During the quarter and six months ended June 30, 2014, the Company purchased SFR mortgage loans and repurchased HECM loans.

SFR mortgage loans

During the quarter and six months ended June 30, 2015, the Company purchased SFR mortgage loans totaling $2.9 million and $10.2 million at a premium and classified them as HFS carried at LOCOM. No similar purchases were made during the quarter and six months ended June 30, 2014.

During the quarter and six months ended June 30, 2015, there was $9.7 million of SFR mortgage loans that were purchased and classified as HFI carried at amortized cost. During the quarter and six months ended June 30, 2014, the Company purchased SFR mortgage loans at a premium totaling $720 million and $870 million and classified these loans as HFI carried at amortized cost. These loans were purchased at a premium and were not deemed credit impaired at the time of acquisition.

Multifamily loans

During the quarter and six months ended June 30, 2015, the Company purchased multifamily mortgage loans totaling $20.3 million at a premium and classified them as HFI carried at amortized cost. No similar purchases were made during the quarter and six months ended June 30, 2014.

32 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

 

HECM loans

As servicer of HECM loans, the Company either chooses to repurchase the loan upon reaching a maturity event or is required to repurchase the loan once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount. These HECM loans were repurchased at a price equal to the unpaid principal balance outstanding on the loan plus accrued interest. Upon acquisition, the loans were recorded at estimated fair value and classified as HFS or HFI carried at amortized cost based on loan status. Loans classified as HFS are carried at LOCOM pending assignment to HUD with the initial loss recorded against the valuation allowance. Loans classified as HFI carried at amortized cost are not assignable to HUD and the initial loss is recorded against the discount charged against an existing secondary market reserve established for such losses.

During the quarters ended June 30, 2015 and 2014, the Company repurchased $24.9 million and $17.9 million (unpaid principal balance), respectively, of additional HECM loans of which $15.5 million and $12.3 million, respectively, were classified as HFS and the remaining $9.4 million and $5.6 million, respectively, were classified as HFI carried at amortized cost.

During the six months ended June 30, 2015 and 2014, the Company repurchased $52.5 million and $32.8 million (unpaid principal balance), respectively, of additional HECM loans of which $32.1 million and $23.4 million, respectively, were classified as HFS and the remaining $20.4 million and $9.4 million, respectively, were classified as HFI carried at amortized cost

Sales and Transfers of Loans

During the quarter and six months ended June 30, 2015, the Company sold $9.5 million and $29.5 million in unpaid principal balance of SFR mortgage loans from the loans HFS portfolio to the Agency (FNMA) for $9.7 million and $30.7 million, with a net realized gain of $261 thousand and $1.2 million, respectively. During the quarter ended June 30, 2014, there were no sales in SFR mortgage loans. For the six months ended June 30, 2014, the Company sold $17.7 million in unpaid principal balance of SFR mortgage loans from the loans HFS portfolio to the Agency (FNMA) for $18.6 million with a net realized gain of $945 thousand, respectively.

During the quarter and six months ended June 30, 2015, the Company transferred $10.2 million and $27.7 million of mortgage loans from the loans HFS in exchange for Agency mortgage-backed securities with an initial fair value of $10.2 million and $27.7 million and backed by those same loans. Refer to Note 3—Securities for further discussion regarding the purchased securities. In presenting the condensed Consolidated Statement of Cash Flows, the Company recognized the transfer of loans HFS as Operating inflow and the receipt of securities as Investing outflow.

5. Indemnification Assets

The Company recognized indemnification assets from shared-loss agreements with the FDIC from the IndyMac Transaction in March 2009, First Federal Transaction in December 2009 and La Jolla Transaction in February 2010. For the IndyMac Transaction, the shared-loss agreement covering SFR mortgage loans is set to expire March 2019 (ten years from the acquisition date). For the First Federal Transaction, the loss share agreement for SFR mortgage loans is set to expire December 2019 ten years from the acquisition date) while the commercial loans expired as of December 2014 (five years from acquisition date). For the La Jolla Transaction, the shared-loss agreements pertaining to commercial loans expired effective March 2015 (five years from acquisition date) while the SFR mortgage loans remain in effect through February 2020 (ten years from acquisition date). The shared-loss agreements generally require the Company to obtain FDIC approval prior to transferring or selling loans and related indemnification assets.

In connection with the lndyMac, First Federal and La Jolla Transactions, the FDIC indemnified the Company against certain future losses. Eligible losses are submitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., charge-off of loan balance or liquidation of collateral). Reimbursements approved by the FDIC are received usually within 60 days of submission.

33 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

 

The carrying value of the indemnification assets are summarized below:

(Dollars in thousands)  June 30, 2015
   IndyMac
Transaction
   First Federal
Transaction
   La Jolla
Transaction
  Total
Loan indemnification (1)   $589,373   $11,409   $16,604 $ 617,386  
Reverse mortgage indemnification   9,155    -    -   9,155  
Agency claims indemnification   62,558    -    -   62,558  
                    
Total   $661,086   $11,409   $16,604 $ 689,099  
                    
                    
(Dollars in thousands)  December 31, 2014
   IndyMac
Transaction
   First Federal
Transaction
   La Jolla
Transaction
  Total
Loan indemnification (2)   $755,896   $14,825   $23,872 $ 794,593  
Reverse mortgage indemnification   10,692    -    -   10,692  
Agency claims indemnification   61,785    -    -   61,785  
                    
Total   $828,373   $14,825   $23,872 $ 867,070  

 

 
(1)Includes single family loans.
(2)Includes single family, multifamily, commercial and industrial loans.

 

For the quarters ended June 30, 2015 and 2014, the Company reduced the carrying value of the indemnification assets for all three covered portfolios by $28.3 million and $43.9 million, respectively, based on net payments received from FDIC. For the six months ended June 30, 2015 and 2014, the Company reduced the carrying value of the indemnification assets for all three covered portfolios by $55.2 million and $86.7 million, respectively, based on net payments received from FDIC.

The carrying amounts of the loans receivable associated with the indemnification assets recognized as a result of the shared-loss agreements are summarized below:

(Dollars in thousands)  June 30, 2015
   IndyMac Transaction   First Federal Transaction    La Jolla Transaction   Total
                    
Loans Receivable               
Residential Mortgages  $4,014,795   $1,184,335   $80,163 $ 5,279,293  
                    
Total   $4,014,795   $1,184,335   $80,163 $ 5,279,293  
                    
                    
(Dollars in thousands)  December 31, 2014
   IndyMac Transaction   First Federal Transaction    La Jolla Transaction   Total
                    
Loans Receivable               
Commercial real estate  $-   $751,120   $388,254 $ 1,139,374  
Residential Mortgages   4,165,171    1,268,736    95,088   5,528,995  
Consumer   -    2,203    -   2,203  
                    
Total   $4,165,171   $2,022,059   $483,342 $ 6,670,572  

The indemnified IndyMac SFR mortgage loans and reverse mortgage loans and the related indemnification assets are recorded at estimated fair value. Interest income is recognized on indemnification assets carried at fair value using a yield consistent with the estimated market discount rate used for valuation purposes. Subsequent changes in the estimated fair

34 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

value of the indemnification assets are recorded in Loss on loans and indemnification assets carried at fair value. Fair value is estimated by discounting the expected cash flows to be received from the FDIC at an estimated market discount rate. The difference between the present value and the undiscounted cash flows the Company expects to collect from the FDIC is accreted into interest income on loans over the lesser of the contractual term of the indemnification agreement or the remaining life of the indemnified assets based on a yield consistent with the market discount rate. For further discussion, see Note 12—Fair Value.

 

The amount of accretion recognized on the indemnification assets from the IndyMac Transaction was $1.9 million and $3.3 million for the quarters ended June 30, 2015 and 2014, respectively. The amount of accretion recognized on the indemnification assets from the IndyMac Transaction was $4.2 million and $6.7 million for the six months ended June 30, 2015 and 2014, respectively.

 

In addition, the Company reduced the estimated fair value of the indemnification asset associated with the IndyMac Transaction by approximately $56.8 million and $114.5 million in unrealized losses for the quarters ended June 30, 2015 and 2014, respectively. For the six months ended June 30, 2015 and 2014, the Company reduced the estimated fair value of the indemnification asset associated with the IndyMac Transaction by approximately $131.1 million and $191.1 million in unrealized losses, respectively.

 

As part of the First Federal and La Jolla Transactions, the Company entered into shared-loss agreements with the FDIC to obtain protection from certain losses related to the purchased assets, specifically the SFR, commercial and other loans HFI. These shared-loss agreements are accounted for as indemnification assets. The indemnification assets acquired in the First Federal and La Jolla Transactions were initially recognized at estimated fair value as of the acquisition date similar to the indemnified loans. Subsequently, the indemnification asset is measured on the same basis of accounting as the indemnified loans (e.g., as PCI loans under the effective yield method). A yield is determined based on the cash flows expected to be collected over the recorded investment and used to recognize interest income on loans over the lesser of the contractual term of the indemnification agreement or the remaining life of the indemnified assets.

The expected cash flows are generally reviewed and updated on a quarterly basis. A decrease in the cash flows expected to be collected from the indemnified loans results in an increase in the allowance for credit losses. An increase is recorded in the indemnification asset for the portion of the loss that is expected to be reimbursed from the FDIC and a decrease is recorded to the Provision for credit losses. An increase in the cash flows expected to be collected from the indemnified loans results in a reversal of a previously recorded allowance for credit losses, if applicable. A decrease is recorded in the indemnification asset for the portion that previously was expected to be reimbursed from the FDIC resulting in an increase in the Provision for credit losses.

 

Changes in expected cash flows caused by changes in market interest rates or by prepayments are recognized as adjustments to the accretable yield on a prospective basis in interest income. In some cases, the cash flows expected to be collected from the indemnified loans may improve to the extent that the related indemnification asset is no longer expected to be fully recovered. For PCI loans with an associated indemnification asset, if the increase in expected cash flows is recognized through a higher yield, a negative yield is applied to the related indemnification asset to mirror an accounting offset for the indemnified loans. Any negative yield is determined based on the remaining term of the indemnification agreement. Both accretion (positive yield) and amortization (negative yield) of the indemnification asset are recognized in interest income on loans.

 

The table below summarizes the amortization (negative yield) recognized on indemnification assets from the FFB and LJB Transactions:

   Amortization Recognized on Indem Assets
    Quarters Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)   2015  2014  2015  2014
First Federal Bank  $1,612   $2,741   $3,453   $ 5,870  
La Jolla Bank   3,743    8,940    8,938   19,131  

In connection with the La Jolla Transaction, the Company records a separate FDIC true-up liability for an estimated payment due to the FDIC as the actual and estimated cumulative losses of the acquired covered assets are projected to

35 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

be lower than the cumulative losses originally estimated at the time of acquisition. As of June 30, 2015 and December 31, 2014, an obligation of $54.3 million and $51.9 million, respectively, has been recorded as a FDIC true-up liability for the contingent payment measured at estimated fair value. There is no FDIC true-up liability recorded in connection with the First Federal Transaction based on the projected loss estimates at this time. The FDIC true-up liability represents contingent consideration to the FDIC that is re-measured at estimated fair value using the discounted cash flow model with the changes in fair value recognized in Noninterest expense. For further discussion, refer to Note 12-Fair Value.

In presenting the condensed Consolidated Statement of Cash Flows, the Company first allocates cash receipts to Operating activities based on earned interest income, with the remaining allocated to Investing activities. Because of substantial increases in expected cash flow from acquired covered loans and other assets, the Company will not fully recover the initial allocated investment in FDIC indemnification assets and accordingly, does not reflect any actual cash receipts as Operating activity on the condensed Consolidated Statement of Cash Flows related to these assets.

6. Servicing Advances

Servicing advances are made by the Company in the normal course of its loan servicing business. These advances include customary, reasonable and necessary out-of-pocket costs incurred in the performance of its servicing obligation. They include advances related to foreclosure activities, funding of principal and interest with respect to mortgage loans held in connection with a securitized transaction and taxes and other assessments which are or may become a lien upon the mortgage property. The Company’s loan servicing activities require the Company to hold cash in custodial accounts that are not included in its financial statements in the amount of $91.4 million and $99.3 million at June 30, 2015 and December 31, 2014, respectively.

Generally all advances are collected from the borrower or from the investor. Advances not collected are generally due to payments made in excess of the limits established by the investor or as a result of servicing errors. For loans serviced for others, servicing advances are accrued through liquidation regardless of delinquency status. Any accrued amounts that are deemed uncollectible at liquidation are written off. Any amounts outstanding 180 days post liquidation are written off. During the quarters ended June 30, 2015 and 2014, the Company recognized losses of $573 thousand and a loss credit adjustment of $260 thousand, respectively, on SFR servicing advances deemed uncollectible. During the six months ended June 30, 2015 and 2014, the Company recognized losses of $1.1 million and $331 thousand, respectively, on SFR servicing advances deemed uncollectible.

The Company’s allowance for servicing advances on HECM loans owned by Agencies is calculated based on management’s quarterly analysis. Servicing advances on HECM loans owned by private investors are charged off when the outstanding advance balance is 90 days past due. The following table summarizes activity in the allowance related to HECM loan servicing advances:

   Quarters Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)  2015  2014  2015  2014
             
Balance, beginning of period  $15,452   $13,387   $15,900   $13,169 
Provisions   705    935    2,777    1,420 
Charge-offs   (2,258)   (259)   (4,778)   (526)
                     
Balance, end of period  $13,899   $14,063   $13,899   $14,063 

As of June 30, 2015 and December 31, 2014, $39.3 million and $55.6 million, respectively, of servicing advances were designated as Assets of operations held for sale. The significant decrease in servicing advances during the six months ended June 30, 2015 was primarily due to a one-time reimbursement of $23.1 million from FNMA pertaining to mostly advances aged more than 6 months as of December 31, 2014. In addition, during the quarter and six months ended June 30, 2015, $1.0 million of outstanding servicing advances were sold in the SLS Transaction. For further discussion, see Note 2—Acquisitions and Divestitures.

During the quarter ended June 30, 2014, $113.4 million of outstanding servicing advances were sold in the SLS transaction. During the six months ended June 30, 2014, $30.3 million and $113.4 million of outstanding servicing advances were sold in the Ocwen and SLS transactions, respectively. The Company has agreed to indemnify Ocwen and SLS against nonrecoverable servicing advances which are deemed attributable to the period prior to servicing transfer date associated with servicing of GSEs owned loans. No contingent obligation was recognized for the servicing advances

36 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

sold in the SLS Transaction associated with private label securities. Such contingent obligations are included in Liabilities of discontinued operations on the condensed Consolidated Statements of Financial Position. For further information, see Note 13—Commitments and Contingencies.

The following table summarizes servicing advances by loan and investor type:

   June 30, 2015
    SFR    HECM Loans      
(Dollars in thousands)   Agencies    Non-Agencies    Agencies     Non-Agencies     Total  
                          
Principal and Interest  $-   $257   $29,267   $5,975(1)  $35,499 
Taxes and Insurance   1,445    203    -    -    1,648 
Foreclosure Costs   963    1,195    -    -    2,158 
                          
Total  $2,408   $1,655   $29,267   $5,975   $39,305 
                          
                          
                          
    December 31, 2014
    SFR    HECM Loans
(Dollars in thousands)   Agencies    Non-Agencies    Agencies     Non-Agencies     Total  
                          
Principal and Interest  $-   $203   $43,084   $7,502(1)  $50,789 
Taxes and Insurance   1,402    322    -    -    1,724 
Foreclosure Costs   1,027    2,022    -    -    3,049 
                          
Total  $2,429   $2,547   $43,084   $7,502   $55,562 

 
(1)Balance includes $1.1 million and $1.5 million associated with non-HECM reverse mortgages at June 30, 2015 and December 31, 2014, respectively.

 

As of June 30, 2015 and December 31, 2014, the Company had servicing advances of $12.2 million and $14.0 million associated with loans repurchased from GNMA. Advances related to the Company’s owned loans for residential mortgage loans are written off when the underlying loan becomes 90 days or more delinquent. Once a loan is liquidated and advance balances are deemed not recoverable, any outstanding advance balance is written off. However, an exception is made for advances on Home Affordable Modification Program (“HAMP”) loans and GNMA forward repurchased loans. If a servicing advance receivable is deemed uncollectible, an allowance and an offsetting impairment loss are recognized.

 

The following table summarizes activity in the allowance related to advance receivables on HFI loans:

   Quarters Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)  2015  2014  2015  2014
             
Balance, beginning of period  $27,937   $16,785   $23,665   $15,926 
Provisions   10,680    8,417    21,467    16,046 
Charge-offs   (10,562)   (6,402)   (17,077)   (13,172)
Balance, end of period  $28,055   $18,800   $28,055   $18,800 

37 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

7. Other Assets

The following table summarizes the major components of Other assets as of June 30, 2015 and December 31, 2014:

(Dollars in thousands)  June 30, 2015  December 31, 2014
       
Affordable Housing Investments (1)  $105,365   $113,221 
FDIC receivable (1)   55,437    58,896 
Equity Investments (1)   28,353    28,476 
Property and Equipment, net of accumulated depreciation          
of $54,857 and $52,597  (2)   37,227    39,791 
Net Advances on owned loans(1)   25,857    26,857 
Interest receivable   21,949    21,691 
Other Receivable - GNMA (3)   25,973    - 
Prepaid expenses   2,583    3,720 
Derivative financial instruments (Note 11—Derivative           
Instruments   13,068    9,381 
Current tax receivable   89,190    124,278 
Other  (4)   123,796    129,994 
           
Total Other Assets   $528,798   $556,305 

 
(1)These items were eligible for fair value option election with an aggregate balance of $215.0 million and $227.5 million as of June 30, 2015 and December 31, 2014 respectively. Of these eligible items, the Company elected to measure the FDIC receivable at fair value under the fair value option.
(2)Depreciation and amortization costs related to these assets were $1.8 million and $2.2 million for the quarters ended June 30, 2015 and 2014, and $3.6 million and $4.5 million for the six months ended June 30, 2015 and 2014, respectively.
(3)As of June 30, 2015, GNMA mortgage loans represent loans insured by the FHA and VA that met the criteria specified by ASU 2014-14. This ASU requires that certain government guaranteed residential real estate mortgage loans that meet specific criteria be recognized as Other receivables upon foreclosure; previously, these assets were included in OREO. Refer to Note 1- Summary of Significant Accounting Policies for further discussion.
(4)Included a receivable for cash collateral posted to counterparties in excess of derivative exposure, totaling $80.3 million and $77.1 million, as of June 30, 2015 and December 31, 2014, respectively.

 

8. Variable Interest Entities

The Company has been involved with certain trusts, partnerships, limited partnerships, limited liability partnerships and corporations and similar entities that represent VIEs. VIEs are those in which there is insufficient equity at risk to finance the operations of the entity without additional subordinated financial support; where the equity interest holders, as a group, do not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance; or where the equity investors as a group do not have rights that are in proportion to their obligations to absorb losses or rights to receive residual returns of the entity.

When the Company holds a variable interest in a VIE, it must determine whether its variable interest makes it the primary beneficiary. If the Company is determined to be the primary beneficiary, it must consolidate all of the assets and liabilities and results of operations of the VIE in its financial statements. A primary beneficiary is a variable interest holder in a VIE that has both (1) the power to direct the activities of the trust that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. There can be no more than one, although there can be no, primary beneficiary for any given VIE.

In assessing whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Company considers all the facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In assessing whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the

38 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

VIE that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity investments, servicing fees, and derivative or other arrangements deemed to be variable interests in the VIE. The assessment involves significant judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. The reassessment process, performed at least annually, involves both a qualitative and quantitative analysis. The Company’s qualitative analysis considers the Company’s involvement with the VIEs and the design and purpose of the VIEs. It also assesses whether there has been a significant change in the structure of the VIE, or in the activities of the VIE based on changes in governing documents or other circumstances. The Company’s quantitative analysis assesses whether there has been a significant change in the economic performance of the VIE that would change the total potential amount of losses the Company might absorb or residual returns the Company might receive. Accordingly, the consolidation status of the VIEs with which the Company is involved may change from period-to-period as a result of such reassessments.

Below describes the results of the Company’s assessment of its variable interests to determine its current status with regards to being the primary beneficiary of a VIE.

Consolidated VIEs

There were no VIEs for which the Company was deemed the primary beneficiary and consolidated as of June 30, 2015 and December 31, 2014.

Unconsolidated VIEs

The unconsolidated VIEs represent securitization trusts and structures in which the Company has involvement but does not consolidate because it is not deemed to be the primary beneficiary. These unconsolidated VIEs include GSE securitization structures, private-label securitizations where the Company is not the servicer (involvement limited to an investor interest), and private label securitizations where the Company is the servicer but does not also have the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE and limited partnership interests.

As a result of funding FHA-insured HECM reserve mortgage loans through securitizations in the form of GNMA HMBS, the Company has certain contractual obligations related to the loans and the securitizations. The Company, as issuer of HECM loans, is obligated to fund future borrower advances, which include fees paid to taxing authorities for borrowers' unpaid taxes and insurance, mortgage insurance premiums and payments made to borrowers for line of credit draws on these HECM loans. In addition, the Company capitalizes the servicing fees and interest income earned for servicing as reverse mortgage interests and is obligated to fund guarantee fees associated with the GNMA HMBS. The Company periodically pools and securitizes certain of these funded advances through issuance of HMBS to third-party security holders, which do not qualify for sale accounting and rather, are treated as financing transactions. As a financing transaction, the HECM loans remain on the Company’s condensed Consolidated Statement of Financial Position with the proceeds from the issuance of the HMBS recognized as secured borrowings. As servicer, the Company is required to repurchase the HECM loans once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount or when the property forecloses to OREO, which reduces the secured borrowing balance. Due to the Company’s planned exit of third party servicing, the Company’s HECM loans of $463.3 million and $481.2 million are included in Assets of operations held for sale and the associated secured borrowing – HECM loans of $455.9 million and $467.6 million (including an unamortized premium balance of $4.7 million and $4.1 million) in Liabilities of discontinued operations at June 30, 2015 and December 31, 2014, respectively. Additionally the Company services $218.6 million and $248.7 million of HMBS outstanding principal balance for transferred loans securitized by IndyMac for which the Company purchased the mortgage servicing rights (“MSRs”) in connection with the IndyMac Transaction at June 30, 2015 and December 31, 2014, respectively. The carrying value of the MSR was insignificant at June 30, 2015 and $696 thousand at December 31, 2014, which were reported in Assets of operations held for sale. As the HECM loans are federally insured by the FHA and the secured borrowings guaranteed to the investors by GNMA, the Company does not believe maximum loss exposure as a result of its involvement is material or quantifiable given the nature of government guarantees.

For Agency and private label securitizations where the Company is not the servicer, the maximum exposure to loss represents the recorded investment. For private label securitizations where the Company is the servicer but not the primary beneficiary, the Company’s maximum exposure to loss is based on the Company’s beneficial interests held in the securitized assets and MSRs. These interests are not expected to absorb losses or receive benefits that are significant to the VIE. The table below presents estimated losses that would be incurred under hypothetical circumstances, for which

39 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

the Company believes the possibility is remote, such that the value of its interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss.

The nature of the Company’s ownership interest in affordable housing investments and equity investments, as a limited partner, is limited in its ability to direct the activities that drive the economic performance of the entity, as these entities are managed by the general or managing partner. As a result, the Company was not deemed the primary beneficiary of these VIEs.

The following table summarizes the carrying values of the assets and liabilities and the maximum exposure to loss related to the Company’s variable interests in unconsolidated VIEs:

   June 30, 2015
   VIEs Carrying value
(Dollars in thousands)  Securities  MSR  Partnership
Investment
          
Agency securities  $152,702   $-   $- 
Non agency securities—OWB serviced   -    -    - 
Non agency securities—Other servicer   1,008,840    -    - 
Affordable Housing Investments   -    -    105,365 
Equity Investments   -    -    28,353 
                
Total Assets    1,161,542    -    133,718 
                
Commitments to Affordable Housing Investments  $-   $-   $20,599 
                
Total Liabilities   $-   $-   $20,599 
                
Maximum loss exposure (1)   $1,161,542   $-   $133,718 
                
                
                
    December 31, 2014
    VIEs Carrying value
(Dollars in thousands)   Securities    MSR    Partnership
Investment 
 
Agency securities  $57,666   $-   $- 
Non agency securities—OWB serviced   -    234    - 
Non agency securities—Other servicer   1,091,414    -    - 
Affordable Housing Investments   -    -    113,221 
Equity Investments   -    -    28,476 
                
Total Assets    1,149,080    234    141,697 
                
Commitments to Affordable Housing Investments  $-   $-   $35,465 
                
Total Liabilities   $-   $-   $35,465 
                
Maximum loss exposure (1)   $1,149,080   $234   $141,697 
 
(1)Maximum loss exposure to the VIEs excludes the liability for representations and warranties, corporate guarantees and also excludes servicing advances. Refer to Note 13—Commitments and Contingencies for further discussion regarding the Company’s exposed contingent obligations arising from servicing obligations.

40 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

9. Deposits

The following table summarizes the carrying value of deposits, interest rates, and remaining contractual maturities of certificates of deposit:

   June 30, 2015  December 31, 2014
(Dollars in thousands)  Amount  Rate  Amount  Rate
             
Core deposits                    
Noninterest-bearing checking  $978,952    0.0%  $856,523    0.0%
Noninterest-bearing checking—loan servicing                    
accounts (1)    24,170    0.0%   31,804    0.0%
Interest-bearing checking   3,089,141    0.5%   2,428,048    0.6%
Money market   3,568,045    0.6%   3,369,981    0.6%
Savings   793,887    0.5%   768,270    0.5%
                     
Total core deposits   8,454,195    0.5%   7,454,626    0.5%
                     
Certificates of deposit, remaining contractual maturity:                    
Within one year   4,899,465    0.9%   5,259,686    0.9%
One to two years   723,144    1.1%   917,033    1.2%
Two to three years   326,938    1.3%   206,651    1.3%
Three to four years   182,113    1.5%   157,551    1.4%
Four to five years   115,029    1.6%   128,462    1.5%
Over five years   545    3.2%   1,039    2.7%
                     
Total certificates of deposit   6,247,234    1.0%   6,670,422    1.0%
                     
Total Deposits  $14,701,429    0.7%  $14,125,048    0.7%
 
(1)At June 30, 2015 and December 31, 2014, $5.9 million and $6.6 million, respectively, of Noninterest-bearing checking—loan servicing accounts were included in Liabilities of discontinued operations. For further discussion, see Note 2—Acquisitions and Divestitures.

Accrued interest payable of $1.1 million as of both periods, June 30, 2015 and December 31, 2014, for interest-bearing checking, savings and certificates of deposit was included in Other Liabilities on the condensed Consolidated Statements of Financial Position.

The following table summarizes interest expense by deposit type for the quarters ended June 30, 2015 and 2014:

   Quarters Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)  2015  2014  2015  2014
             
Interest-bearing checking  $3,759   $2,888   $7,298   $5,468 
Money market   5,313    4,992    10,302    9,892 
Savings   867    996    1,764    2,013 
Certificates of deposit   15,191    19,182    31,006    38,535 
                     
Total interest expense on deposits  $25,130   $28,058   $50,370   $55,908 

41 

IMB HoldCo LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

For the Quarters and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

The following table summarizes certificates of deposit in amounts of more than $100,000 by remaining contractual maturity as of June 30, 2015 and December 31, 2014:

(Dollars in thousands)  June 30, 2015  December 31, 2014