Three Months Ended September 30,
2017 2016

Average
Balance
Interest
Annualized
Yield/
Rate

Average
Balance
Interest
Annualized
Yield/
Rate
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ 4,476
$ 45
3.99 % $ 3,416
$ 30
3.51 %
Loans held-for-investment
Residential first mortgage 2,594
22
3.32 % 2,090
17
3.17 %
Home equity 486
6
5.11 % 460
6
5.03 %
Other 26
—
4.52 % 30
—
4.59 %
Total Consumer loans 3,106
28
3.61 % 2,580
23
3.52 %
Commercial Real Estate 1,646
19
4.43 % 1,082
9
3.43 %
Commercial and Industrial 1,073
13
4.77 % 633
7
4.27 %
Warehouse Lending 978
12
4.82 % 1,553
17
4.21 %
Total Commercial loans 3,697
44
4.63 % 3,268
33
3.96 %
Total loans held-for-investment (1) 6,803
72
4.16 % 5,848
56
3.77 %
Loans with government guarantees 264
3
4.58 % 432
4
3.88 %
Investment securities 3,101
20
2.58 % 2,516
16
2.55 %
Interest-earning deposits 93
—
1.23 % 106
—
0.48 %
Total interest-earning assets 14,737
140
3.77 % 12,318
106
3.42 %
Other assets 1,702
1,830

Total assets $ 16,439
$ 14,148

Interest-Bearing Liabilities
Retail deposits
Demand deposits $ 489
$ —
0.14 % $ 509
$ —
0.20 %
Savings deposits 3,838
7
0.76 % 3,751
8
0.77 %
Money market deposits 276
—
0.57 % 250
—
0.41 %
Certificates of deposit 1,182
4
1.19 % 1,071
3
1.05 %
Total retail deposits 5,785
11
0.78 % 5,581
11
0.75 %
Government deposits
Demand deposits 250
—
0.43 % 243
—
0.39 %
Savings deposits 362
1
0.71 % 478
1
0.52 %
Certificates of deposit 329
1
0.89 % 355
—
0.52 %
Total government deposits 941
2
0.70 % 1,076
1
0.49 %
Wholesale deposits and other 35
—
1.49 % —
—
—%
Total interest-bearing deposits 6,761
13
0.78 % 6,657
12
0.71 %
Short-term Federal Home Loan Bank advances and other 3,809
11
1.17 % 1,073
1
0.44 %
Long-term Federal Home Loan Bank advances 1,234
6
1.99 % 1,576
7
1.81 %
Other long-term debt 493
7
5.09 % 467
6
4.86 %
Total interest-bearing liabilities 12,297
37
1.19 % 9,773
26
1.06 %
Noninterest-bearing deposits (2) 2,244
2,469

Other liabilities 427
527

Stockholders’ equity 1,471
1,379

Total liabilities and stockholders' equity $ 16,439
$ 14,148

Net interest-earning assets $ 2,440
$ 2,545

Net interest income $ 103
$ 80

Interest rate spread (3) 2.58 % 2.36 %
Net interest margin (4) 2.78 % 2.58 %
Ratio of average interest-earning assets to interest-bearing liabilities 119.9 % 126.0 %


~~(1)~~	~~Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 4 - Loans Held-for-Investment.~~


~~(2)~~	~~Includes noninterest-bearing company controlled deposits that arise due to the servicing of loans for others.~~


~~(3)~~	~~Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.~~


~~(4)~~	~~Net interest margin is net interest income divided by average interest-earning assets.~~

Nine Months Ended September 30,
2017 2016

Average
Balance
Interest
Annualized
Yield/
Rate

Average
Balance
Interest
Annualized
Yield/
Rate
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ 4,014
$ 119
3.96 % $ 3,071
$ 83
3.64 %
Loans held-for-investment

Residential first mortgage 2,497
62
3.34 % 2,365
56
3.14 %
Home equity 453
17
5.04 % 485
19
5.23 %
Other 26
1
4.52 % 29
1
4.82 %
Total Consumer loans 2,976
80
3.61 % 2,879
76
3.51 %
Commercial Real Estate 1,482
47
4.15 % 936
24
3.40 %
Commercial and Industrial 929
33
4.71 % 601
19
4.12 %
Warehouse Lending 840
30
4.70 % 1,279
41
4.25 %
Total Commercial loans 3,251
110
4.45 % 2,816
84
3.94 %
Total loans held-for-investment (1) 6,227
190
4.05 % 5,695
160
3.72 %
Loans with government guarantees 300
10
4.41 % 450
12
3.40 %
Investment securities 3,093
59
2.55 % 2,589
50
2.58 %
Interest-earning deposits 75
1
1.08 % 139
1
0.50 %
Total interest-earning assets 13,709
379
3.68 % 11,944
306
3.40 %
Other assets 1,697
1,767

Total assets $ 15,406
$ 13,711

Interest-Bearing Liabilities
Retail deposits
Demand deposits $ 502
$ 1
0.16 % $ 479
$ 1
0.17 %
Savings deposits 3,899
22
0.76 % 3,720
21
0.78 %
Money market deposits 264
1
0.49 % 285
1
0.44 %
Certificates of deposit 1,116
9
1.12 % 789
7
1.21 %
Total retail deposits 5,781
33
0.76 % 5,273
30
0.77 %
Government deposits
Demand deposits 228
1
0.41 % 234
1
0.39 %
Savings deposits 410
2
0.59 % 432
2
0.52 %
Certificates of deposit 314
1
0.73 % 563
1
0.35 %
Total government deposits 952
4
0.59 % 1,229
4
0.42 %
Wholesale deposits and other 16
—
1.21 % —
—
— %
Total interest-bearing deposits 6,749
37
0.74 % 6,502
34
0.70 %
Short-term Federal Home Loan Bank advances and other 3,028
23
1.01 % 1,190
4
0.41 %
Long-term Federal Home Loan Bank advances 1,211
17
1.92 % 1,587
22
1.88 %
Other long-term debt 493
19
5.06 % 321
10
4.05 %
Total interest-bearing liabilities 11,481
96
1.12 % 9,600
70
0.97 %
Noninterest-bearing deposits (2) 2,098
2,101

Other liabilities 415
495

Stockholders’ equity 1,412
1,515

Total liabilities and stockholders' equity $ 15,406
$ 13,711

Net interest-earning assets $ 2,228
$ 2,344

Net interest income $ 283
$ 236

Interest rate spread (3) 2.56 % 2.43 %
Net interest margin (4) 2.74 % 2.62 %
Ratio of average interest-earning assets to interest-bearing liabilities 119.4 % 124.4 %


~~(1)~~	~~Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 4 - Loans Held-for-Investment.~~


~~(2)~~	~~Includes noninterest-bearing company controlled deposits that arise due to the servicing of loans for others.~~


~~(3)~~	~~Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.~~


~~(4)~~	~~Net interest margin is net interest income divided by average interest-earning assets.~~

~~Rate/Volume Analysis~~

The following ~~tables present~~table presents the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). The rate/volume mix variances are allocated to rate.


	Three Months Ended,										Six Months Ended,
	June 30, 2020 versus March 31, 2020 Increase (Decrease) Due to:										June 30, 2020 versus June 30, 2019 Increase (Decrease) Due to:
	Rate		Volume		Total		Rate		Volume		Total
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	(5)	$	4	$	(1)	$	(29)	$	47	$	18
Loans held-for-investment
Residential first mortgage	(1)		(2)		(3)		(2)		(3)		(5)
Home equity	(3)		—		(3)		(7)		6		(1)
Other	(1)		1		—		(5)		14		9
Total consumer loans	(5)		(1)		(6)		(14)		17		3
Commercial real estate	(8)		2		(6)		(23)		20		(3)
Commercial and industrial	(6)		4		(2)		(13)		4		(9)
Warehouse lending	(3)		16		13		(19)		39		20
Total commercial loans	(17)		22		5		(55)		63		8
Total loans held-for-investment	(22)		21		(1)		(69)		80		11
Loans with government guarantees	1		—		1		(5)		5		—
Investment securities	—		2		2		(6)		2		(4)
Interest-earning deposits and other	(1)		—		(1)		(1)		—		(1)
Total interest-earning assets	$	(27)	$	27	$	—	$	(110)	$	134	$	24
Interest-Bearing Liabilities
Interest-bearing deposits	$	(12)	$	1	$	(11)	$	(14)	$	3	$	(11)
Short-term FHLB advances and other borrowings	(11)		1		(10)		(32)		12		(20)
Long-term FHLB advances	(1)		1		—		(2)		6		4
Other long-term debt	1		—		1		(1)		—		(1)
Total interest-bearing liabilities	(23)		3		(20)		(49)		21		(28)
Change in net interest income	$	(4)	$	24	$	20	$	(61)	$	113	$	52

Three Months Ended September 30,

2017 Versus 2016 Increase (Decrease)
Due to:
Rate Volume Total
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ 6
$ 9
$ 15
Loans held-for-investment
Residential first mortgage 1
4
5
Total Consumer loans 1
4
5
Commercial Real Estate 5
5
10
Commercial and Industrial 1
5
6
Warehouse Lending 1
(6 ) (5 )
Total Commercial loans 7
4
11
Total loans held-for-investment 8
8
16
Loans with government guarantees 1
(2 ) (1 )
Investment securities —
4
4
Total interest-earning assets $ 15
$ 19
$ 34
Interest-Bearing Liabilities
Interest-bearing deposits $ 1
$ —
$ 1
Short-term Federal Home Loan Bank advances and other 7
3
10
Long-term Federal Home Loan Bank advances 1
(2 ) (1 )
Other long-term debt —
1
1
Total interest-bearing liabilities 9
2
11
Change in net interest income $ 6
$ 17
$ 23

Nine Months Ended September 30,

2017 Versus 2016 Increase (Decrease)
Due to:
Rate Volume Total
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ 10
$ 26
$ 36
Loans held-for-investment
Residential first mortgage 3
3
6
Home equity —
(2 ) (2 )
Total Consumer loans 3
1
4
Commercial Real Estate 9
14
23
Commercial and Industrial 4
10
14
Warehouse Lending 3
(14 ) (11 )
Total Commercial loans 16
10
26
Total loans held-for-investment 19
11
30
Loans with government guarantees 2
(4 ) (2 )
Investment securities (1 ) 10
9
Total interest-earning assets $ 30
$ 43
$ 73
Interest-Bearing Liabilities
Interest-bearing deposits $ 1
$ 2
$ 3
Short-term Federal Home Loan Bank advances and other 14
5
19
Long-term Federal Home Loan Bank advances —
(5 ) (5 )
Other long-term debt 4
5
9
Total interest-bearing liabilities 19
7
26
Change in net interest income $ 11
$ 36
$ 47

Comparison to Prior ~~Year~~ Quarter

Net interest income increased ~~$23~~$20 million, or 2914 percent, to $168 million for the three months ended September 30, 2017, compared to the same period in 2016. This increase was primarily driven by growth in interest-earning assets and an increase in average rates within the LHFI and LHFS portfolios. This was partially offset by an increase in average rates and average balance on short-term FHLB advances.

Our net interest margin for the three months ended September 30, 2017 was 2.78 percent, compared to 2.58 percent for the three months ended September 30, 2016. The net 20 basis point increase was driven by an increase in higher yielding commercial loans and higher interest income on LHFS. This increase was partially offset by higher average rates on short-term FHLB advances.

~~For the three months ended September 30, 2017~~second quarter 2020 as compared to the three months ended September 30, 2016, total interest-earning assets increased $2.4 billion to $14.7 billion, led by growth in LHFS primarily due to accumulation of loans in support of residential mortgage backed securitizations. Additionally, the $955 million increase in LHFI average balance was primarily driven by a $526 million increase in consumer loans through the addition of high quality jumbo loans and HELOCs and a $429 million increase in average commercial loans was consistent with our strategy to grow the community bank. Average warehouse loans have decreased $575 million which is more than offset by increases in our C&I and CRE portfolios demonstrating our shift to higher yielding loans.

~~Average interest-bearing liabilities increased $2.5 billion for the three months ended September 30, 2017, compared to the three months ended September 30, 2016.~~first quarter 2020. The increase was primarily driven by warehouse loan growth, the impact of lower interest rates on cost of funds primarily attributed to core deposits, partially offset by lower yields on earnings assets. Average earnings assets increased $2.5 billion, reflecting increases of $2.2 billion in average total loans and $0.4 billion in average investment securities.

The net interest margin in the second quarter of 2020 was 2.86 percent, a ~~$2.7 billion~~5 basis point increase from the prior quarter. The increase in the net interest margin was primarily driven by the continued repricing of deposits into the new curve environment and the full quarter impact of pricing changes made in March when short-term rates were dropped by the FRB. This was combined with lower short-term FHLB ~~advances used~~borrowing costs which led to ~~fund~~an interest-bearing cost of funds of 86 basis points in the second quarter of 2020, a decline of 60 basis points from the prior quarter. This more than offset the impact declining interest rates and a lower yield curve had on the loans held-for-investment portfolio primarily due to rate floors on our ~~most liquid assets including LHFS.~~variable rate loans.

Loans held-for-investment averaged $13.6 billion for the second quarter of 2020, increasing $1.8 billion (15 percent) from the prior quarter, primarily driven by $1.5 billion (64 percent) higher average warehouse loan balances as we grew our business and took advantage of the strong mortgage market.

Average total deposits were $17.7 billion in the second quarter 2020, increasing $1.9 billion (12 percent) from the first quarter 2020. Average custodial deposits increased $1.4 billion (30 percent) due to higher prepayments from refinancing and average retail deposits increased $0.4 billion (4 percent) largely due to the COVID-19 pandemic impact on the behavior and spending patterns for consumers and commercial depositors carrying higher cash balances.

Comparison to Prior Year to Date

Net interest income increased ~~$47~~$52 million, for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same period in ~~2016,~~2019. The 20 percent increase was driven by growth in average interest-earning assets led by the loans held-for-sale portfolio and warehouse and CRE commercial loan portfolio. Net interest margin declined 25 basis points to 2.83 percent for the six months ended June 30, 2020, as compared to 3.08 percent for the six months ended June 30, 2019 primarily attributable to the interest rate cuts occurring in late 2019 and in March 2020.

Average interest-earnings assets increased $5.4 billion due primarily to growth in the LHFS and warehouse portfolios which have benefited from the favorable mortgage environment due to lower market rates. The non-warehouse commercial portfolios increased $870 million driven by growth across CRE and C&I in the first quarter of 2020, and the consumer loan portfolio increased $487 million primarily driven by growth in ~~interest-earning assets, led by an increase in LHFS,~~indirect lending and an increase in average rates. This was partially offset by an increase in average rates and average balances of borrowings, primarily related to short-term FHLB advances and the issuance of our Senior Noteshome equity in the ~~third~~first quarter ~~2016.~~of 2020.

Our net interest margin for the nine months ended September 30, 2017 was 2.74 percent, compared to 2.62 percent for the nine months ended September 30, 2016. The net 12 basis point increase was positively impacted by an increase in market rates, a higher yielding commercial loan portfolio and stable core deposits. This improvement was partially offset by higher rates on short-term FHLB advances driven by an increase in market rates and the issuance of our Senior Notes in the third quarter 2016.

For the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, average interest-earning assets increased $1.8 billion, led by a $943 million increase in LHFS due to extending turn times and accumulation of loans in support of residential mortgage backed securitizations. The combined $939 million increase in average investment securities and average commercial loans was consistent with our strategy to grow the community bank and enhance the yield on our interest-earning assets. Commercial loans increased 15 percent due to growth in the CRE and C&I portfolios, including growth in home builder lending all of which more than offset the decrease in warehouse lending.

Average interest-bearing liabilities increased ~~$1.9~~$2.1 billion, ~~for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase was primarily~~ driven by ~~a net $1.5 billion increase~~$820 million and $677 million increases in short-term and long-term FHLB ~~advances used to fund balance sheet growth, $247 million increase in~~borrowings, respectively. Average total deposits increased $3.2 billion driven by higher custodial deposits which resulted from growth in subservicing and ~~the issuance of our Senior Notes~~higher refinance activity, and growth in ~~the third quarter 2016.~~retail deposits.

Provision ~~(Benefit)~~ for ~~Loan~~Credit Losses

~~Comparison to Prior Year Quarter~~

The provision ~~(benefit)~~ for ~~loan~~credit losses and unfunded commitments was ~~a provision of $2~~$102 million ~~during~~for the three months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~a provision of $7~~$14 million ~~during~~for the three months ended ~~September 30, 2016. During~~March 31, 2020. The increase in the ~~three months ended September 30, 2017,~~provision is primarily driven by our forecast of economic conditions. Our forecast reflects our belief that the ~~$2 million provision reflects continued low level~~economy will continue to be challenged by the response to the COVID-19 pandemic, especially in the commercial real estate sector, for an extended period of net charge-offs and the strong credit quality of our loan portfolios. The $7 million provision during the three months ended September 30, 2016 was largely to reserve for loans with government guarantees.time.

~~Comparison to Prior Year to Date~~

The provision ~~(benefit)~~ for ~~loan~~credit losses and unfunded commitments was ~~a provision of $4~~$116 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~a benefit of $9~~$17 million ~~during~~for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2019. The ~~$4 million provision for the nine months ended September 30, 2017 reflects continued low level of net charge-offs and the strong credit quality~~increase is reflective of the ~~loan portfolio. The $9 million benefit for~~adoption of CECL in 2020 and an increase due to changes in the ~~nine months ended September 30, 2016 resulted primarily from~~economic forecast used in the ~~sale~~ACL models and judgment we applied related to those forecasts as a result of ~~$1.2 billion UPB of performing residential first mortgage loans and $110 million UPB of nonperforming, TDR and non-agency loans.~~the ongoing COVID-19 pandemic.

For further information on the provision for ~~loan~~credit losses see MD&A - ~~Allowance for Loan Losses.~~Credit Quality.

Noninterest Income

The following tables provide information on our noninterest income ~~along with additional details related~~and other mortgage metrics:


	Three Months Ended,								Six Months Ended,
	June 30, 2020		March 31, 2020		Change		June 30, 2020		June 30, 2019		Change
	(Dollars in millions)
Net gain on loan sales	$	303	$	90	$	213	$	393	$	124	$	269
Loan fees and charges	41		26		15		67		41		26
Net return (loss) on mortgage servicing rights	(8)		6		(14)		(2)		11		(13)
Loan administration income	21		12		9		33		17		16
Deposit fees and charges	7		9		(2)		16		18		(2)
Other noninterest income	14		14		—		28		66		(38)
Total noninterest income	$	378	$	157	$	221	$	535	$	277	$	258


	Three Months Ended,												Six Months Ended,
	June 30, 2020			March 31, 2020			Change			June 30, 2020			June 30, 2019			Change
	(Dollars in millions)
Mortgage rate lock commitments (fallout-adjusted) (1)(3)	$	13,800		$	11,200		$	2,600		$	25,000		$	14,900		$	10,100
Mortgage loans originated (3)	$	12,200		$	8,600		$	3,600		$	20,700		$	14,200		$	6,500
Net margin on mortgage rate lock commitments (fallout-adjusted) (1)(2)	2.19		%	0.80		%	1.39		%	1.57		%	0.81		%	0.76		%
Mortgage loans sold and securitized (3)	$	12,900		$	7,500		$	5,400		$	20,400		$	14,000		$	6,400

(1)Fallout-adjusted refers to mortgage rate lock commitments which are adjusted by estimates of the percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and impact of changes in interest rates.

(2)Gain on sale margin is based on net gain on loan sales ~~and other~~(Excludes net gain on loan sales of $2 million from loans transferred from LHFI during the six months ended June 30, 2019) to fallout-adjusted mortgage ~~metrics:~~rate lock commitments.

(3)Rounded to nearest hundred million.

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Change 2017 2016 Change
(Dollars in millions)
Net gain on loan sales $ 75
$ 94
$ (19 ) $ 189
$ 259
$ (70 )
Loan fees and charges 23
22
1
58
56
2
Deposit fees and charges 5
5
—
14
17
(3 )
Loan administration income 5
4
1
16
14
2
Net return (loss)on mortgage servicing rights 6
(11 ) 17
26
(21 ) 47
Representation and warranty benefit 4
6
(2 ) 11
12
(1 )
Other noninterest income 12
36
(24 ) 32
52
(20 )
Total noninterest income $ 130
$ 156
$ (26 ) $ 346
$ 389
$ (43 )

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(Dollars in millions)
Mortgage rate lock commitments (fallout-adjusted) (1)
$ 8,898
$ 8,291
$ 23,896
$ 23,281
Net margin on mortgage rate lock commitments (fallout-adjusted) (1) (2)
0.84 % 1.13 % 0.79 % 1.05 %
Gain on loan sales LHFS + net return (loss) on the MSR $ 81
$ 83
$ 215
$ 223
Mortgage loans sold and securitized 8,924 8,723 22,397 23,611
Net margin on loans sold and securitized 0.84 % 1.08 % 0.84 % 1.03 %


~~(1)~~	Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the level of interest rates.


~~(2)~~	~~Gain on sale margin is based on net gain on loan sales related to LHFS to fallout-adjusted mortgage rate lock commitments.~~

Comparison to Prior ~~Year~~ Quarter

~~Total noninterest~~ Noninterest income ~~decreased $26~~increased $221 million ~~during~~for the three months ended ~~September~~June 30, ~~2017, compared to the same period in 2016.~~

~~Net gain on loan sales decreased $19 million during the three months ended September 30, 2017,~~2020, compared to the three months ended ~~September 30, 2016.~~March 31, 2020, primarily due to the following:

•Net gain on loan sales increased $213 million to $303 million, as compared to $90 million in the first quarter 2020. The net gain on loan ~~sales~~sale margin ~~decreased 24 basis points with fallout adjusted lock yields decreasing 0.29~~increased 139 basis points, to ~~0.84~~2.19 percent ~~primarily~~for the second quarter 2020, as compared to 0.80 percent for the first quarter 2020. The gain on sale margin increase was driven by managing our volume level within our channels and products to fit our fulfillment capacity driven by demand due to ~~more competitive pricing. Lower margins were partially offset~~market conditions, the return of the purchase market late in the quarter and higher originations in our retail channel. In addition, the first quarter of 2020 included $45 million of hedge ineffectiveness caused by the Federal Reserve's purchase of agency mortgage-backed securities, which impacted margin by 40 basis points. Fallout-adjusted locks increased $2.6 billion, or 24 percent, to $13.8 billion, as historically low interest rates fueled a ~~7.3~~strong refinance and purchase market.

•Loan fees and charges increased $15 million, to $41 million for the second quarter of 2020, compared to $26 million for the first quarter 2020, resulting from a 41 percent increase in ~~fallout adjusted~~ mortgage ~~locks driven primarily by the Opes and Stearns acquisitions that occurred in 2017.~~closings.

•Net return (loss) on ~~MSRs (including~~mortgage servicing rights decreased $14 million, to an $8 million net loss for the ~~impact~~second quarter of ~~economic hedges) increased $17 million during the three months ended September 30, 2017,~~2020, compared to a $6 million net gain for the ~~three months ended September 30, 2016. The increase was~~first quarter 2020, primarily driven by ~~improvements in fair value due to a more stable prepayment environment~~forecast changes and ~~improvements in our hedging program, partially offset~~higher prepayments.

•Loan administration income increased $9 million largely driven by a ~~decrease in service fee income resulting from lower MSR balance due to sales that occurred throughout 2017.~~

~~Other noninterest income decreased $24 million during the three months ended September 30, 2017, compared to the three months ended September 30, 2016 due to a $24 million reduction~~decline in the ~~DOJ settlement liability that occurred in~~LIBOR-based fees paid to sub-servicing customers for the ~~third quarter of 2016.~~custodial deposits they control.

Comparison to Prior Year to Date

~~Total noninterest~~ Noninterest income ~~decreased $43~~increased $258 million ~~during~~for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the ~~same period in 2016.~~six months ended June 30, 2019, primarily due to the following:

•Net gain on loan sales ~~decreased $70~~increased $269 million, ~~during~~primarily due to $10.1 billion higher fallout adjusted locks driven by the ~~nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The net~~favorable mortgage environment fueled by historically low interest rates and a 0.76 percent increase in gain on ~~loan sales~~sale margin ~~decreased 19 basis points~~driven by managing our volume level within our channels and products to fit our fulfillment capacity made possible by demand due to market conditions and the return of the purchase market late in the quarter and higher originations in our retail channel.

•Loan fees and charges increased $26 million primarily driven by ~~more competitive pricing and our decision to extend turn times on sales~~higher subservicing ancillary fees as total loans being serviced increased by 59 thousand along with higher mortgage fee income as a result of LHFS which shifts earnings from gain on sale to net interest income. During the nine months ended September 30, 2017, turn times on sales of LHFS were an average of 52 days compared to an average of 35 days during the nine months ended September 30, 2016. As of September 30, 2017, we continue to selectively decide whether to extend turn times on sale of LHFS if, in its estimation, such extensions provide favorable economics. The decrease in net gain on loan sales was also attributed to the sale of performing LHFI that occurred during the nine months ended September 30, 2016 which resulted in a $14 million gain. The decreases in net gain on loan sales were partially offset by a shift in mix which includes an increase in ~~distributed~~originations and higher retail mix.

•Other noninterest income declined $38 million primarily due to the ~~integration~~DOJ Liability fair value adjustment at June 30, 2019 (see Note 15 - Legal Proceedings, Contingencies and Commitments for additional information). The first half of ~~Opes.~~2019 also included $7 million of AFS investment security gains which did not reoccur in 2020.

•Loan administration income increased $16 million, driven by an increase in the average number of loans being subserviced and an increase in the number of loans in default servicing which are charged a higher servicing rate. In addition, the increase was driven by a decline in LIBOR-based fees paid to sub-servicing customers on custodial deposits.

~~Deposit fees and charges~~•Net return (loss) on mortgage servicing rights decreased $3$13 million, ~~during~~to a $2 million net loss for the ~~nine~~six months ended ~~September~~June 30, 2017, compared to the nine months ended September 30, 2016. The decrease was primarily due to lower exchange fee income resulting from limitations set by the Durbin amendment, which became applicable to the Bank on July 1, 2016.

~~Net return on MSRs was $26 million for the nine months ended September 30, 2017, compared to a loss of $21 million during the nine months ended September 30, 2016. The $47 million increase was~~2020, primarily driven by higher prepayments and a ~~more stable prepayment environment and improvements~~reduction in our hedging program, partially offset by lower servicing fee income resulting from a lower MSR balance and higher transaction costs driven by MSR sales that occurred in the first nine months of 2017. During the nine months ended September 30, 2017, we sold MSRs with a fair value of $260 million.

~~Other noninterest income decreased $20 million during the nine months ended September 30, 2017, compared~~valuation due to the ~~nine months ended September 30, 2016. The decrease was primarily due to a $24 million reduction in the DOJ settlement liability that occurred in the third quarter of 2016.~~current market.

Noninterest Expense

The following table sets forth the components of our noninterest expense:


	Three Months Ended,												Six Months Ended,
	June 30, 2020			March 31, 2020			Change			June 30, 2020			June 30, 2019			Change
	(Dollars in millions)
Compensation and benefits	$	116		$	102		$	14		$	218		$	177		$	41
Occupancy and equipment	44			41			3			85			78			7
Commissions	61			29			32			90			38			52
Loan processing expense	25			20			5			45			38			7
Legal and professional expense	5			6			(1)			11			12			(1)
Federal insurance premiums	7			6			1			13			9			4
Intangible asset amortization	4			3			1			7			8			(1)
Other noninterest expense	34			28			6			63			45			18
Total noninterest expense	$	296		$	235		$	61		$	532		$	405		$	127
Efficiency ratio	54.3		%	77.1		%	(22.8)		%	62.5		%	74.8		%	(12.3)		%
Average number of FTE	4,451			4,427			24			4,489			4,026			463

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Change 2017 2016 Change
(Dollars in millions)
Compensation and benefits $ 76
$ 69
$ 7
$ 219
$ 203
$ 16
Commissions 23
16
7
49
40
9
Occupancy and equipment 28
21
7
75
64
11
Loan processing expense 15
13
2
41
40
1
Legal and professional expense 7
5
2
22
20
2
Other noninterest expense 22
18
4
59
51
8
Total noninterest expense $ 171
$ 142
$ 29
$ 465
$ 418
$ 47
Efficiency ratio 73.5 % 59.9 % 13.6 % 73.9 % 66.9 % 7.0 %

September 30, 2017 June 30, 2017 Change September 30, 2017 December 31, 2016 Change
Number of FTE 3,495
3,432
63
3,495
2,886
609

Comparison to Prior ~~Year~~ Quarter

Noninterest expense increased ~~$29~~$61 million ~~to $171 million during~~for the three months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$142 million during~~ the three months ended ~~September 30, 2016. The increase is driven by growth initiatives~~March 31, 2020 primarily due to the following:

•Commissions and ~~operating expenses associated with the recent acquisition of Opes which will support future revenue growth. Increases in those related expenses include an increase in compensation~~loan processing increased $32 million and ~~benefits~~$5 million, respectively, due to higher ~~headcount, an increase in commissions attributable~~mortgage volumes.

•Compensation and benefits expense increased $14 million from the prior quarter, primarily driven by higher variable compensation attributed to ~~increased loan production, and an increase in occupancy and equipment costs to support the capital needs of our expanded business.~~stronger financial results.

Comparison to Prior Year to Date

Noninterest expense increased ~~$47~~$127 million ~~to $465 million during~~for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$418 million during~~ the ~~nine~~six months ended ~~September~~June 30, ~~2016. The increase was~~2019 primarily ~~driven by higher operating expenses associated with growth initiatives~~due to the following:

•Compensation and ~~our 2017 acquisitions of Opes and Stearns, including an increase in compensation and~~ benefits increased $41 million, primarily due to an increase in ~~headcount~~incentive compensation attributed to stronger financial results, higher average FTE driven by bringing default servicing in house and adding variable mortgage origination capacity in response to the robust mortgage environment.

•Commissions and loan processing increased $52 million and $7 million, respectively, primarily driven by higher ~~commissions. Additionally,~~originations along with a shift in channel mix from TPO to retail which supports a higher gain on sale but also has higher commission rates and costs.

•Other noninterest expense increased ~~as a result of~~$18 million primarily driven by higher ~~occupancy~~mortgage related expenses due to higher closings resulting from the favorable mortgage environment.

•Occupancy and equipment increased $7 million primarily due to ~~support the capital needs of our expanded business~~increases in IT software expenses and ~~an increase in advertising related to a direct mail and brand awareness campaign.~~depreciation expense.

Provision ~~(benefit)~~ for Income Taxes

Our provision for income taxes for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020, was ~~$20~~$32 million and ~~$52~~$42 million, ~~respectively, compared to a provision of $30 million and $73 million during the three and nine months ended September 30, 2016,~~ respectively.

Our effective tax ~~provision~~ rate ~~for the three and nine months ended September 30, 2017~~ was ~~32.4 percent and 32.3 percent, respectively, compared to 34.3 percent and 33.8~~21.5 percent for the three ~~and nine~~ months ended ~~September~~June 30, ~~2016, respectively.~~

~~Our~~2020, compared to an effective tax ~~provision~~ rate of 18.5 percent for the ~~three and nine months ended September 30, 2017 differs from the combined federal and state statutory tax~~first quarter 2020. The higher rate ~~primarily due to a benefit from tax-exempt earnings, partially offset by nondeductible expenses.~~

~~For further information, see Note 15 - Income Taxes.~~

~~Loan Originations, Sales and Servicing~~

The majority of our total loan originations during the nine months ended September 30, 2017 represented mortgage loans that were collateralized by residential first mortgages on single-family residences and were eligible for sale to the Agencies. During the nine months ended September 30, 2017, sales of loans totaled $22.4 billion, or 90.8 percent of originations compared to $23.6 billion, or 99.0 percent of originations during the nine months ended September 30, 2016, with the decrease primarily due to the accumulation of loans in support of our residential mortgage backed securitizations. As of September 30, 2017, we had outstanding commitments to sell $6.6 billion of mortgage loans. Generally, these commitments are funded within 120 days. At September 30, 2017 and December 31, 2016, consumer LHFS totaled $4.9 billion and $3.2 billion, respectively, which are primarily residential mortgage loans. The $1.7 billion increase iswas the result of ~~seasonally~~our higher level of income in the second quarter, which is taxed at higher marginal tax rates. Also contributing to the higher rate is a greater percentage of earnings in higher state tax jurisdictions, lower tax benefits for stock-based compensation and higher FDIC expenses, which are not deductible.

Operating Segments

Our operations are conducted through three operating segments: Community Banking, Mortgage Originations, and Mortgage Servicing. The Other segment includes the remaining reported activities. The operating segments have been determined based on the products and services offered and reflect the manner in which financial information is currently evaluated by management. Each of the operating segments is complementary to each other and because of the interrelationships of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

As a result of management's evaluation of our segments, effective January 1, 2020, certain departments have been re-aligned between the Community Banking and Mortgage Originations segments. Specifically, a majority of the residential mortgage ~~activity~~HFI portfolio is now part of the Mortgage Originations segment. The income and expenses relating to these changes are reflected in our financial statements and all prior period segment financial information has been recast to conform to the current presentation.

Before the adoption of CECL on January 1, 2020, we charged the lines of business for the net charge-offs that occurred during the period. The difference between total net charge-offs and the ~~accumulation~~consolidated provision for credit losses was assigned to the “Other” segment. This amount assigned to the “Other” segment was then allocated back to the lines of ~~loans in support~~business through other noninterest expense.

This year, with the adoption of ~~our next residential mortgage backed securitization.~~

~~On October 31, 2017,~~CECL, we still charge the ~~Company closed on a securitization~~lines of ~~$576 million of residential mortgage-backed certificates (RMBS) issued by Flagstar Mortgage Trust 2017-2 (FSMT 2017-2). On July 31, 2017,~~business for the Company closed on a securitization of $444 million of RMBS issued by Flagstar Mortgage Trust 2017-1 (FSMT 2017-1). Both loan sales are comprised of loans Flagstar originated through our retail, broker and correspondent channels. The collateral consists of high-quality 15 to 30 year, fully amortizing conforming and jumbo fixed-rate loans.

net charge-offs that occur. In addition to this amount, we ~~originate or purchase residential first mortgage loans, other consumer loans,~~charge them for the change in loan balances during the period, applied at the budgeted credit loss factor. The difference between the consolidated provision for credit losses and ~~commercial loans for our LHFI portfolios. Our revenues include noninterest income from sales~~the sum of ~~residential first mortgages~~total net charge-offs and the change in loan balances is still assigned to the ~~Agencies, net interest income,~~“Other” segment, although now that amount includes the changes related to the economic forecasts, model changes, qualitative adjustments and ~~revenue from servicing~~credit downgrades. As in the prior methodology, the amount assigned to the “Other” segment continues to be allocated back to the lines of ~~loans for others.~~business through other noninterest expense.

We utilize multiple production channels to originate or acquire mortgage loans on a national scale to generate high returns on capital. This helps grow the servicing business and provides stable, low cost funding for the Community Bank segment. We continue to leverage technology to streamline the mortgage origination process, thereby bringing service and

convenience to borrowers and correspondents. We also continue to make available to our customers various web-based tools that facilitate the mortgage loan process through each of our production channels. We intend to continue to seek new ways to expand our relationships with borrowers and correspondents to provide the necessary capital and liquidity to grow the Mortgage Servicing and the Community Bank segments.

~~The following table presents loan originations by portfolio:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(Dollars in millions)
Consumer loans
Residential first mortgage $ 9,572
$ 9,192
$ 24,659
$ 23,856
Home equity (1)
94
50
225
137
Total consumer loans 9,666
9,242
24,884
23,993
Commercial loans (2)
265
248
932
496
Total loan originations $ 9,931
$ 9,490
$ 25,816
$ 24,489


~~(1)~~	~~Includes second mortgage loans, HELOC loans, and other consumer loans.~~


~~(2)~~	~~Includes commercial real estate and commercial and industrial loans.~~

Additionally, our Mortgage Servicing segment provides servicing of residential mortgages for our own LHFI portfolio and may service or subservice loans which we have sold or securitized. Mortgage loans are serviced and subserviced for others on a fee for service basis and we may also collect ancillary fees and earn income through the use of noninterest-bearing escrows. Revenue for those serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the status of the underlying loans.

~~The following table presents the UPB (net of write downs) of residential loans serviced and subserviced and the number of accounts associated with those loans.~~

September 30, 2017 December 31, 2016
Amount Number of accounts Amount Number of accounts
(Dollars in millions)
Residential loan servicing
Serviced for own loan portfolio (1)
$ 7,376
31,135
$ 5,816
29,244
Serviced for others 21,342
87,215
31,207
133,270
Subserviced for others (2)
62,351
296,913
43,127
220,075
Total residential loans serviced $ 91,069
415,263
$ 80,150
382,589


~~(1)~~	~~Includes LHFI (residential first mortgage and home equity), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets.~~


~~(2)~~	~~Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.~~

~~OPERATING SEGMENTS~~

~~Overview~~

For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 1917 - Segment ~~Information, and other sections of this report for a full understanding of our consolidated financial performance.~~Information.

~~The following table presents net income (loss) by operating segment:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Change 2017 2016 Change
(Dollars in millions)
Community Banking $ 10
$ 7
$ 3
$ 26
$ 34
$ (8 )
Mortgage Originations 31
39
(8 ) 87
99
(12 )
Mortgage Servicing (4 ) (3 ) (1 ) (12 ) (9 ) (3 )
Other 3
14
(11 ) 7
19
(12 )
Total net income $ 40
$ 57
$ (17 ) $ 108
$ 143
$ (35 )

Community Banking

Our Community Banking segment serves commercial, governmental and consumer customers in our banking footprint which spans throughout Michigan, Indiana, California, Wisconsin, Ohio and contiguous states. We also serve home builders, correspondents, and commercial customers on a national basis. The Community Banking segment originates and purchases loans, while also providing deposit and fee based services to consumer, business, and mortgage lending customers.

Our commercial customers operate in a diversified range of industries including financial, insurance, service, manufacturing, and distribution. We offer financial products to these customers for use in their normal business operations, as well as provide financing of working capital, capital investments, and equipment. Additionally, our commercial real estate business supports income producing real estate and home builders. The Community Banking segment also offers warehouse lines of credit to non-bank mortgage lenders.

Our Community Banking segment has seen continued growth. In the last 12 months, our commercial loan portfolio has grown 48 percent to $10.2 billion while our consumer loan portfolio has decreased 3 percent to $4.6 billion. Average deposits for the six months ended June 30, 2020 increased to $10.6 billion, compared to $10.1 billion for the same period in 2019 driven primarily by higher customer balances.


	Three Months Ended,								Six Months Ended,
Community Banking	June 30, 2020		March 31, 2020		Change		June 30, 2020		June 30, 2019		Change
	(Dollars in millions)
Summary of Operations
Net interest income	$	133	$	104	$	29	$	237	$	191	$	46
Provision (benefit) for credit losses	(3)		8		(11)		5		16		(11)
Net interest income after provision for credit losses	136		96		40		232		175		57
Net loss on loan sales	—		—		—		—		(6)		6
Loan fees and charges	—		—		—		—		1		(1)
Loan administration expense	(1)		(1)		—		(2)		(2)		—
Other noninterest income	12		16		(4)		28		28		—
Total noninterest income	11		15		(4)		26		21		5
Compensation and benefits	24		27		(3)		51		50		1
Commissions	—		1		(1)		1		—		1
Loan processing expense	1		2		(1)		3		4		(1)
Other noninterest expense	124		44		80		168		83		85
Total noninterest expense	149		74		75		223		137		86
Income before indirect overhead allocations and income taxes	(2)		37		(39)		35		59		(24)
Indirect overhead allocation	(11)		(9)		(2)		(20)		(20)		—
Provision (benefit) for income taxes	(3)		6		(9)		3		8		(5)
Net income	$	(10)	$	22	$	(32)	$	12	$	31	$	(19)

Key Metrics
Average number of FTE employees	1,266		1,274		(8)		1,282		1,353		(71)

Comparison to Prior Quarter

The Community Banking segment reported net loss of $10 million for the three months ended June 30, 2020, compared to net income of $22 million for the three months ended March 31, 2020. The $32 million decrease was driven by the following:

•Net interest income increased $29 million primarily driven by warehouse loan growth and the impact of lower interest rates on borrowing costs, especially core deposits, partially offset by lower yields on earning assets.

•Provision (benefit) for credit losses is recorded at the segment level for changes in volume at the budgeted credit loss factor and replenishment of net charge-offs. The $11 million reduction was driven primarily by lower ending loan balances.

•Deposit fees and other noninterest income were lower $4 million driven by COVID-19 impacts including waived deposit fees, higher compensating deposit balances and lower commercial loan syndication fees.

•Other noninterest expense increased $80 million primarily driven by higher intersegment expense allocations related to the impact of the degradation in the economic forecasts and credit downgrades on the provision for credit losses.

Comparison to Prior Year ~~Quarter~~to Date

~~During the three months ended September 30, 2017, the~~ The Community Banking segment reported net income of ~~$10 million, compared to $7~~$12 million for the ~~three~~six months ended ~~September~~June 30, ~~2016.~~2020, compared to $31 million for the six months ended June 30, 2019. The ~~increase in net~~decrease was driven by the following:

•Net interest income increased $46 million driven by higher average loan and deposit balances partially offset by lower margins due to rate cuts that have occurred over the past year.

•Provision (benefit) for credit losses was $11 million lower primarily due to a $9prior year charge-off of the Live Well commercial loan.

•Noninterest income increased $5 million ~~increase in net interest income from higher average loan balances, led by growth in commercial loans and higher average loan yields as well as a $6 million improvement in provision for loan losses~~primarily due to ~~improved credit quality.~~not purchasing any new residential loans from the Mortgage Originations segment in 2020. These ~~increases were partially offset by a $7~~purchases resulted in upfront losses in 2019.

•Noninterest expense increased $86 million ~~increase in noninterest expense~~primarily driven by higher ~~volume-driven expenses~~intersegment expense allocations related to the impact of degradation in the economic forecasts and ~~growth initiatives which will support future revenue growth.~~

~~Comparison to Prior Year to Date~~

~~During~~credit downgrades on the nine months ended September 30, 2017, the Community Banking segment reported net income of $26 million, compared to $34 million for the nine months ended September 30, 2016. The $8 million decrease in net income was primarily due to a $15 million decrease in net gain on loans sales and a $12 million increase in provision for loan losses, primarily resulting from the sale of performing residential loans out of the LHFI portfolio during the nine months ended September 30, 2016. These decreases were partially offset by a $21 million increase in net interest income due to loan growth, led by an increase in commercial loans and higher average loan yields.credit losses.

Mortgage Originations

We are a leading national originator of residential first mortgages. Our Mortgage Originations segment utilizes multiple distribution channels to originate or acquire one-to-four family residential mortgage loans on a national scale, primarily to sell. We originate and retain certain mortgage loans in our LHFI portfolio which generate interest income in the Mortgage Originations segment.


	Three Months Ended,								Six Months Ended,
Mortgage Originations	June 30, 2020		March 31, 2020		Change		June 30, 2020		June 30, 2019		Change
	(Dollars in millions)
Summary of Operations
Net interest income	$	56	$	42	$	14	$	98	$	66	$	32
Provision (benefit) for credit losses	(2)		(3)		1		(5)		1		(6)
Net interest income after provision for credit losses	58		45		13		103		65		38
Net gain on loan sales	303		90		213		393		129		264
Loan fees and charges	22		17		5		39		27		12
Loan administration expense	(8)		(7)		(1)		(15)		(10)		(5)
Net return (loss) on mortgage servicing rights	(8)		6		(14)		(2)		11		(13)
Other noninterest income	1		1		—		2		7		(5)
Total noninterest income	310		107		203		417		164		253
Compensation and benefits	38		31		7		69		50		19
Commissions	61		28		33		89		38		51
Loan processing expense	14		10		4		24		13		11
Other noninterest expense	56		26		30		82		38		44
Total noninterest expense	169		95		74		264		139		125
Income before indirect overhead allocations and income taxes	199		57		142		256		90		166
Indirect overhead allocation	(15)		(12)		(3)		(27)		(20)		(7)
Provision for income taxes	39		9		30		48		15		33
Net income	$	145	$	36	$	109	$	181	$	55	$	126

Key Metrics
Mortgage rate lock commitments (fallout-adjusted) (1)(2)	$	13,800	$	11,200	$	2,600	$	25,000	$	14,900	$	10,100
Average number of FTE employees	1,599		1,513		86		1,570		1,323		247

(1)Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the impact of changes in interest rates.

(2)Rounded to nearest hundred million.

Comparison to Prior ~~Year~~ Quarter

The Mortgage Originations ~~segment's~~segment reported net income ~~decreased $8~~of $145 million ~~to $31 million during~~for the three months ended ~~September~~June 30, ~~2017,~~2020 as compared to ~~$39~~$36 million infor the three months ended ~~September 30, 2016.~~March 31, 2020. The ~~decrease~~increase was driven by the following:

•Net interest income increased $14 million primarily due to $397 million higher average LHFS balances resulting from increased mortgage production and a ~~$24~~139 basis point higher net spread.

•Net return (loss) on mortgage servicing rights decreased $14 million, ~~increase in noninterest expense during~~to an $8 million net loss for the ~~three months ended September 30, 2017,~~second quarter of 2020, compared to a $6 million net gain for the first quarter 2020, primarily driven by higher ~~compensation~~prepayments and ~~benefits due~~model changes reflecting current economic conditions.

•Net gain on loan sales increased $213 million, to ~~growth initiatives~~$303 million, as compared to $90 million in the first quarter 2020. Fallout-adjusted locks increased $2.6 billion, or 24 percent, to $13.8 billion, primarily driven by low interest rates that fueled a strong refinance market and ~~higher commissions resulting from higher loan production. Additionally,~~ the return of the purchase market late in the quarter. The net gain on ~~loans sales decreased $16~~loan sale margin increased 139 basis points, to 2.19 percent for the second quarter 2020, as compared to 0.80 percent for the first quarter 2020 reflecting our management of volume levels to fit our fulfillment capacity, in addition to a higher mix of retail originations.

•Loan fees and charges, commissions and loan processing expense all increased due to $3.6 billion higher closings in the second quarter of 2020.

•Other noninterest expense increased $30 million primarily driven by ~~a 29 basis point decrease in margin resulting from a more competitive market and product mix. These decreases in net income were partially offset by a $17 million increase~~higher intersegment expense allocations related to the impact of degradation in the ~~net return~~economic forecasts and credit downgrades on ~~MSRs driven by increases in~~ the interest rate environment experienced during the third quarter of 2017 which resulted in lower prepayments and favorable fair value adjustments, as well as a $10 million increase in net interest income primarily due to an increase in mortgage volume and the benefit of extended turn times which shifts earnings from gain on sale to net interest income.provision for credit losses.

Comparison to Prior Year to Date

The Mortgage Originations ~~segment's~~segment reported net income of $181 million for the six months ended June 30, 2020 and $55 million for the six months ended June 30, 2019. The increase was driven by the following:

•Net interest income increased $32 million primarily due to $2.0 billion higher average LHFS balances resulting from increased mortgage production.

•Net return (loss) on mortgage service rights decreased ~~$12~~$13 million, to ~~$87~~a $2 million ~~during~~net loss for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$99~~an $11 million net gain for the same period of 2019, primarily driven by higher prepayments.

•Net gain on loan sales increased $264 million, to $393 million, as compared to $129 million in the ~~nine~~first six months ~~ended September 30, 2016.~~of 2019. Fallout adjusted locks increased $10.0 billion, or 67 percent, to $25 billion, primarily driven by low interest rates that fueled a strong refinance market and the return of the purchase market late in the quarter. The ~~decrease was primarily due to~~

~~a $55 million decrease in~~ net gain on loan ~~sales~~sale margin increased 76 basis points to 1.57 percent for the first six months of 2020, as compared to 0.81 percent for the first six months of 2019 reflecting our management of volume level to fit our fulfillment capacity driven by demand due to market conditions, in addition to a ~~26 basis point decrease~~higher mix of retail originations.

•Loan fees and charges, loan administration income, commissions and loan processing expense all increased due to $6.6 billion higher closings and the increasing retail mix in ~~margin resulting from product mix and a more competitive market.~~ the first half of 2020.

•Other noninterest expense increased ~~$39~~$44 million primarily ~~due~~driven by higher intersegment expense allocations related to higher operating expenses associated with growth initiatives, which include an increase in compensation and benefits and higher commissions resulting from an increase in mortgage volume. These decreases in net income were partially offset by a $47 million increase in net return on MSRs primarily due to an increasethe impact of degradation in the ~~interest rate environment in~~economic forecasts and credit downgrades on the first nine months of 2017 which resulted in lower prepayments and favorable fair value adjustments. Net interest income increased $29 million primarily resulting from an increase in mortgage activity and the benefit of extending turn times.provision for credit losses.

Mortgage Servicing

The Mortgage Servicing segment services loans when we hold the MSR asset, and subservices mortgage loans for others through a scalable servicing platform on a fee for service basis. We may also collect ancillary fees and earn income through the use of noninterest bearing escrows. The loans we service generate custodial deposits which provide a stable funding source which supports interest-earning asset generation in the Community Banking and Mortgage Originations segments. Revenue for serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the delinquency status of the underlying loans. The Mortgage Servicing segment also services residential mortgages for our LHFI portfolio in the Community Banking segment and our own MSR portfolio in the Mortgage Originations segment for which it earns intersegment revenue on a fee per loan basis.


	Three Months Ended,								Six Months Ended,
Mortgage Servicing	June 30, 2020		March 31, 2020		Change		June 30, 2020		June 30, 2019		Change
	(Dollars in millions)
Summary of Operations
Net interest income	$	4	$	4	$	—	$	8	$	6	$	2

Net interest income after provision for credit losses	4		4		—		8		6		2

Loan fees and charges	19		9		10		28		14		14
Loan administration income	36		36		—		72		59		13


Total noninterest income	55		45		10		100		73		27
Compensation and benefits	11		10		1		21		12		9

Loan processing expense	9		7		2		16		20		(4)
Other noninterest expense	17		19		(2)		36		29		7
Total noninterest expense	37		36		1		73		61		12
Income before indirect overhead allocations and income taxes	22		13		9		35		18		17
Indirect overhead allocation	(6)		(5)		(1)		(11)		(9)		(2)
Provision for income taxes	3		2		1		5		2		3
Net income	$	13	$	6	$	7	$	19	$	7	$	12

Key Metrics
Average number of residential loans serviced (1)	1,062,000		1,087,000		(25,000)		1,066,000		917,000		149,000
Average number of FTE employees	520		478		42		507		297		210

(1)Rounded to nearest thousand.

The following table presents loans serviced and the number of accounts associated with those loans:


	June 30, 2020					March 31, 2020				December 31, 2019				September 31, 2019			June 30, 2019
	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts		Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts
	(Dollars in millions)
Loan servicing
Subserviced for others (2)	$	174,384	854,216	$	193,037	916,989	$	194,638	918,662		$	171,145	826,472	$	170,139	816,743
Serviced for others	29,979		123,256	23,439		102,338	24,003		105,469		25,039		106,992	25,774		106,334
Serviced for own loan portfolio (3)	9,211		64,142	8,539		63,085	9,536		66,526		8,058		60,088	7,264		59,873
Total loans serviced	$	213,574	1,041,614	$	225,015	1,082,412	$	228,177	1,090,657		$	204,242	993,552	$	203,177	982,950

(1)UPB, net of write downs, does not include premiums or discounts.

(2)Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.

(3)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets.

Comparison to Prior ~~Year~~ Quarter

The Mortgage Servicing segment reported a net ~~loss~~income of $4$13 million for the three months ended ~~September~~June 30, ~~2017,~~2020, compared to a net ~~loss~~income of $3$6 million for the three months ended ~~September 30, 2016. The~~March 31, 2020. A majority of the $7 million increase in net ~~losses is primarily due to~~income was a ~~decrease~~result of the increase in ~~loan administration income, partially offset by higher subservicing fees driven by~~loans entering forbearance stemming from the CARES Act and COVID-19 driving an increase in ~~average portfolio volume~~forbearance fee revenue from subservice clients, which only occurs when a loan initially enters forbearance, within loan fees and ~~an improvement in other noninterest expenses.~~charges.

Comparison to Prior Year to Date

The Mortgage Servicing segment reported net income of $19 million for the six months ended June 30, 2020, compared to net income of $7 million for the six months ended June 30, 2019. The $12 million increase in net income was driven by $2 million higher net interest income from an increase in average custodial balances due to higher average loan count and refinance activity. The higher loan count also drove an increase in servicing and subservicing fees and higher ancillary income, resulting in a $27 million increase in noninterest income. Compensation and benefits expense increased $9 million due to bringing default servicing in-house. Loan processing and other noninterest expense increased due to the increase in loan volume, partially offset by the reduction in loan processing costs due to the corresponding benefit of brining default servicing in-house. Other noninterest expense increased $7 million driven by an increase in loans services and other fees.

Other

The Other segment includes the treasury functions, which include the impact of interest rate risk management, balance sheet funding activities and the investment securities portfolios, as well as other expenses of a corporate nature, including corporate staff, risk management, and legal expenses which are charged to the line of business segments. In addition, the Other segment includes revenue and expenses not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage Servicing segments.


	Three Months Ended,								Six Months Ended,
Other	June 30, 2020		March 31, 2020		Change		June 30, 2020		June 30, 2019		Change
	(Dollars in millions)
Summary of Operations
Net interest income	$	(25)	$	(2)	$	(23)	$	(27)	$	1	$	(28)
Provision for credit losses	107		9		98		116		—		116
Net interest income after provision for credit losses	(132)		(11)		(121)		(143)		1		(144)


Loan administration income (expense)	(6)		(16)		10		(22)		(30)		8

Other noninterest income	8		6		2		14		49		(35)
Total noninterest income	2		(10)		12		(8)		19		(27)
Compensation and benefits	43		34		9		77		65		12
Loan processing expense	1		1		—		2		1		1
Other noninterest expense	(103)		(5)		(98)		(107)		2		(109)
Total noninterest expense	(59)		30		(89)		(28)		68		(96)
Income before indirect overhead allocations and income taxes	(71)		(51)		(20)		(123)		(48)		(75)
Indirect overhead allocation	32		26		6		58		49		9
Provision for income taxes	(7)		(7)		—		(14)		(3)		(11)
Net income (loss)	$	(32)	$	(18)	$	(14)	$	(51)	$	4	$	(55)

Key Metrics
Average number of FTE employees	1,142		1,149		(7)		1,143		1,150		(7)

Comparison to Prior Quarter

The Other segment reported a net loss of ~~$12~~$32 million, for the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2020, compared to a net loss of $9 million for the nine months ended September 30, 2016. The increase in net losses is primarily due to a decrease in loan administration income and a decrease in net interest income due to lower average company controlled deposits, partially offset by higher subservicing fees driven by higher average portfolio volume.

~~Other~~

~~Comparison to Prior Year Quarter~~

~~For the three months ended September 30, 2017, the Other segment's net income was $3 million, compared to net income of $14~~$18 million for the three months ended ~~September 30, 2016.~~March 31, 2020. The ~~$11~~$14 million ~~decrease is~~higher loss was primarily ~~due to~~driven by a ~~$24 million~~ decrease in ~~the fair value of the DOJ settlement liability which was recorded in the third quarter of 2016. This decrease is partially offset by an increase in~~

net interest income ~~due to higher~~as a result of the Bank’s overall asset sensitive position and the lower average ~~investment balances due~~rates throughout the second quarter. The provision for credit losses increased $98 million primarily as a result of the changes in the forecasts of economic conditions and credit downgrades. The $98 million is then directly allocated to the ~~pulling ahead~~other applicable segments through other noninterest expense. The majority of ~~planned purchases of investments~~all other activity within the Other segment largely offsets and is allocated back to ~~take advantage of a higher market return.~~the operating segments, recorded as contra other noninterest expense.

Comparison to Prior Year to Date

~~For~~ The Other segment reported a net loss of $51 million, for the ~~nine~~six months ended ~~September~~June 30, ~~2017, the Other segment's net income was $7 million,~~2020, compared to net income of ~~$19~~$4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2019. The ~~$12~~$55 million decrease was primarily due to a ~~$24~~$28 million decrease in net interest income as a result of the Bank’s overall asset sensitive position and the lower average rates during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. The six months ended June 30, 2019 also includes a $25 million benefit from the DOJ Liability fair value adjustment. The provision for credit losses increased $116 million primarily as a result of the ~~DOJ settlement liability which was recorded~~changes in the ~~third quarter~~forecasts of ~~2016, partially offset by decrease in~~economic conditions and credit downgrades. The $116 million is then directly allocated to the other applicable segments through other noninterest expense. The majority of all other activity within the Other segment largely offsets and is allocated back to the operating segments, recorded as contra other noninterest expense.

~~RISK MANAGEMENT~~

Risk Management

~~Like all financial services companies, we engage~~

Certain risks are inherent in our business ~~activities~~ and ~~assume the related risks. The risks we are subject to in the normal course of business~~ include, but are not limited to, operational, strategic, credit, regulatory compliance, legal, ~~reputation,~~reputational, liquidity, market ~~operational,~~ and ~~strategic.~~cybersecurity. We ~~have made significant investments~~continuously invest in our risk management activities which are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. We hold capital to protect us from ~~the risk of~~ unexpected ~~loss.~~loss arising from these risks.

A comprehensive discussion of risks affecting us can be found in the Risk Factors section included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. Some of the more significant processes used to manage and control credit, market, liquidity ~~market,~~ and operational risks are described in the following paragraphs.

Credit Risk

Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or performance terms. We provide loans, extend credit, ~~purchase securities,~~ and enter into financial derivative contracts, all of which have related credit risk. We manage credit risk using a thorough process designed to ensure we make prudent and consistent credit decisions. The process was developed with a focus on utilizing risk-based limits and credit concentrations while emphasizing diversification on a geographic, industry and customer level. The process utilizes documented underwriting guidelines, comprehensive documentation standards, and ongoing portfolio monitoring including the timely review and resolution of credits experiencing deterioration. These activities, along with the management of credit policies and credit officers’ delegated authority, are centrally managed by our credit risk team.

We maintain ~~a strict~~ credit ~~limit,~~limits in compliance with regulatory ~~requirements, in order to maintain a diversified loan portfolio and manage our credit exposure to any one borrower or obligor.~~requirements. Under ~~the Home Owners Loan Act ("HOLA"), savings associations are generally subject to national bank limits on loans to one borrower. Generally, per~~ HOLA, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 and Tier 2 capital plus any portion of the allowance for ~~loan~~credit losses not included in the Tier 2 capital. This ~~lending~~ limit was ~~$249~~$333 million as of ~~September~~June 30, ~~2017. Flagstar maintains~~2020. We maintain a more conservative maximum internal Bank credit limit than required by HOLA of $100 million ~~(commitment level)~~ to any one borrower/obligor relationship, with the exception of warehouse borrower/obligor relationships which ~~is more conservative than~~have a higher internal Bank limit of $125 million. As of June 30, 2020, the Board approved the extension of short-term “overlines” to certain warehouse borrowers as all advances are fully collateralized by residential mortgage loans and this asset class has had very low levels of historical loss, resulting in a temporary increase of the warehouse borrower limit ~~required by HOLA. All~~to $175 million. We have a tracking and reporting process to monitor lending concentration levels, and all credit exposures to a single or related borrower that exceed $50 million must be approved by the Board of Directors.

~~The~~ Our commercial loan portfolio has been built on our relationship-based lending strategy. We provide financing and banking products to our commercial customers in our core banking footprint and will follow those established customer relationships to meet their financing needs in areas outside of our footprint. We have also formed relationship lending on a national scale through our home builder finance and warehouse lending businesses. At June 30, 2020, we had $10.2 billion in our commercial loan portfolio with our warehouse lending and home builder finance businesses accounting for 61 percent of the total. Of the remaining commercial loans in our portfolio, the majority of CRE and C&I loans were with customers who have established relationships within our ~~credit~~core banking footprint.

Credit risk within the commercial loan portfolio is ~~associated with lending activities, as~~managed using concentration limits based on line of business, industry, geography and product type. This is managed through the ~~acceptance and management~~use of ~~credit risk is central to profitable lending. We manage our credit risk by establishing sound~~strict underwriting guidelines detailed in credit policies, ongoing loan level reviews, monitoring of the concentration limits and continuous portfolio risk management reporting. The commercial credit policy outlines the risks and underwriting requirements and provides a framework for all credit and lending activities. Our commercial loan credit policies consider maturity and amortization terms, maximum LTVs,

minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pro-forma analysis requirements and thresholds for product specific advance rates.

We typically originate loans on a recourse basis with full or partial guarantees. On a limited basis, we may approve loans without recourse if sufficient consideration is provided in the loan structure. Non-recourse loans primarily have low LTVs, strong cash flow coverage or other mitigating factors supporting the lack of a guaranty. These guidelines also require an appraisal of pledged collateral prior to closing and on an as-needed basis when market conditions justify. We contract with a variety of independent licensed professional firms to conduct appraisals that are in compliance with our internal commercial credit and appraisal policies and regulatory requirements.

Our commercial loan portfolio includes leveraged lending. The Bank defines a transaction as leveraged when two or more of the following conditions exist: 1) proceeds from the loan are used for buyouts, acquisitions, recapitalization or capital distributions, 2) the borrower's total funded debt to EBITDA ratio is greater than four or Senior Funded Debt to EBITDA ratio is greater than three, 3) borrower with a high debt to net worth ratio within its industry or sector as defined by internal limits, and 4) debt leverage significantly exceeds industry norms or historical levels for leverage as defined by internal limits. Leveraged lending transactions typically result in leverage ratios that are significantly above industry norms or historical levels. Our leveraged lending portfolio and other loan portfolios with above-average default probabilities tend to behave similarly during a downturn in the general economy or a downturn within a specific sector. Consequently, we take steps to avoid undue concentrations by setting limits consistent with our appetite for risk and our financial capacity. In addition, there are specific underwriting conditions set for our leveraged loan portfolio and there is additional emphasis on certain items beyond the standard underwriting process including synergies, collateral shortfall and projections.

Our commercial loan portfolio also includes loans that are part of the SNC Program. A SNC is defined as any loan or loan commitment of at least $100 million that is shared by three or more supervised institutions. On an annual basis, a joint regulatory task force performs a risk assessment of all SNCs. When completed, these risk ratings are shared and our risk rating must be no better than the risk rating listed in the SNC assessment. Exposure and credit quality for SNCs are carefully monitored and reported internally.

For our commercial real estate portfolio, including owner and nonowner-occupied properties and home builder finance lending, we obtain independent appraisals as part of our underwriting and ~~adhering~~monitoring process. These appraisals are reviewed by an internal appraisal group that is independent from our sales and credit teams.

The home builder finance group is a national relationship-based lending platform that focuses on markets with strong housing fundamentals and higher population growth potential. The team primarily originates construction and development loans. We generally lend in metropolitan areas or counties where verifiable market statistics and data are readily available to ~~well controlled processes.~~support underwriting and ongoing monitoring. We ~~utilize various~~also evaluate the jurisdictions and laws, demographic trends (age, population and income), housing characteristics and economic indicators (unemployment, economic growth, household income trends) for the geographies where our borrowers primarily operate. We engage independent licensed professionals to supply market studies and feasibility reports, environmental assessments and project site inspections to complement the procedures we perform internally. Further, we perform ongoing monitoring of the projects including periodic inspections of collateral and annual portfolio and individual credit reviews.

The consumer loan portfolio has been built on strong underwriting criteria and within concentration limits intended to diversify our risk ~~management and monitoring activities~~profile. We have built our consumer loan portfolio by adding high quality first mortgage loans to ~~mitigate risks associated with loans that we hold, acquire, and originate.~~our balance sheet making up 59 percent of our total consumer loan portfolio at June 30, 2020.

Loans held-for-investment

The following table summarizes amortized cost of our loans held-for-investment by category:


	June 30, 2020		% of Total		December 31, 2019		% of Total		Change
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,716	18.3	%	$	3,154	26.0	%	$	(438)
Home equity (1)	978		6.6	%	1,024		8.4	%	(46)
Other	898		6.1	%	729		6.0	%	169
Total consumer loans	4,592		31.0	%	4,907		40.5	%	(315)
Commercial loans							—	%
Commercial real estate	3,016		20.4	%	2,828		23.3	%	188
Commercial and industrial	1,968		13.3	%	1,634		13.5	%	334
Warehouse lending	5,232		35.3	%	2,760		22.8	%	2,472
Total commercial loans	10,216		69.0	%	7,222		59.5	%	2,994
Total loans held-for-investment	$	14,808	100.0	%	$	12,129	100.0	%	$	2,679

September 30, 2017 December 31, 2016 Change
(Dollars in millions)
Consumer loans
Residential first mortgage $ 2,665
$ 2,327
$ 338
Home equity 496
443
53
Other 26
28
(2 )
Total consumer loans 3,187
2,798
389
Commercial loans
Commercial real estate (1)
1,760
1,261
$ 499
Commercial and industrial 1,097
769
328
Warehouse lending 1,159
1,237
(78 )
Total commercial loans 4,016
3,267
749
Total loans held-for-investment $ 7,203
$ 6,065
$ 1,138


~~(1)~~	~~Includes $270 million and $245 million of owner occupied commercial real estate loans at September 30, 2017 and December 31, 2016, respectively.~~

(1)Includes second mortgages, HELOCs and HELOANs.

~~Loans held-for-investment increased $1.1 billion, at September 30, 2017 from December 31, 2016. This increase was due~~

Prior to ~~our~~COVID-19 we had continued ~~effort~~ to ~~grow both the consumer loan portfolio and commercial loan portfolio.~~

~~The commercial loan portfolio growth strengthens~~strengthen our Community Banking segment by ~~improving margins through the additions of higher yielding loans. As a result, the~~growing LHFI. Our commercial loan portfolio ~~has grown $749~~grew $3.0 billion, or 41 percent, from December 31, 2019 to June 30, 2020, led by growth in our warehouse lending portfolio due to increased refinance activity in the mortgage industry. Our consumer loan portfolio decreased $315 million, or 236 percent, ~~since~~from December 31, ~~2016. During~~2019 to June 30, 2020. A $169 million increase in other consumer loans was more than offset by a $438 million decrease in residential first mortgage loans due to higher refinance activity and lower originations in the ~~nine months ended September 30, 2017,~~HFI portfolio. Since COVID-19 began, we are focusing on our ~~CRE~~lower-risk, higher return warehouse lending portfolio ~~grew $499 million~~while shifting to a credit management focus, rather than growth, on our remaining commercial portfolio due to economic conditions. At the present time, new relationships require approval of our CEO, Chief Credit Officer and ~~C&I $328 million.~~

~~For further information, see Note 4 - Loans Held-for-Investment.~~Chief Lending Officer.

Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. We typically hold certain mortgage loans in LHFI that do not qualify for sale to the Agencies and that have an acceptable yield and risk profile. The LTV requirements on our residential first mortgage loans vary depending on occupancy, property type, loan amount, and FICO scores. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. ~~We hold for investment, higher yielding~~As of June 30, 2020, loans in this portfolio had an average current FICO score of 743 and ~~loans that will diversify or enhance the interest rate characteristics~~an average LTV of ~~our balance sheet.~~ 67 percent.

The following table presents amortized cost of our total residential first mortgage LHFI by major category:


	June 30, 2020		December 31, 2019
	(Dollars in millions)
Estimated LTVs (1)
Less than 80% and current FICO scores (2):
Equal to or greater than 660	$	1,493	$	2,263
Less than 660	49		93
80% and greater and current FICO scores (2):
Equal to or greater than 660	1,040		687
Less than 660	134		111
Total	$	2,716	$	3,154
Geographic region
California	$	998	$	1,205
Michigan	427		442
Texas	185		205
Washington	169		181
Florida	147		214
Colorado	77		68
Illinois	75		95
Arizona	67		79
New York	61		84
New Jersey	41		49
Other	469		532
Total	$	2,716	$	3,154

September 30, 2017 December 31, 2016
(Dollars in millions)
Current estimated LTV ratios
Less than 80% and refreshed FICO scores (1):

Equal to or greater than 660 $ 2,389
$ 2,077
Less than 660 76
95
80% and greater and refreshed FICO scores (1):

Equal to or greater than 660 132
78
Less than 660 8
9
U.S. government guaranteed 60
68
Total $ 2,665
$ 2,327
Geographic region
California $ 1,059
$ 858
Michigan 267
236
Florida 193
193
Texas 174
138
Washington 160
136
Illinois 97
84
Arizona 73
65
New York 72
68
Colorado 66
60
Maryland 65
59
Others 439
430
Total $ 2,665
$ 2,327


~~(1)~~	~~FICO scores are updated at least on a quarterly basis or sooner if available.~~

(1)LTVs reflect loan balance at the date reported, as a percentage of property values as appraised at loan origination.

(2)FICO scores are updated at least on a quarterly basis or more frequently, if available.

The following table presents amortized cost of our total residential first mortgage LHFI as of June 30, 2020, by year of origination:


	2020			2019			2018			2017			2016 and Prior			Total
	(Dollars in millions)
Residential first mortgage loans	$	167		$	754		$	360		$	437		$	998		$	2,716
Percent of total	6.1		%	27.8		%	13.3		%	16.1		%	36.7		%	100.0		%

Home equity. Our home equity portfolio includes ~~first and~~HELOANs, second ~~lien positions for HELOANs~~mortgage loans, and HELOCs. These loans require full documentation and are underwritten and priced in an effort to ensure ~~high~~ credit quality and loan profitability. Our debt-to-income ratio on ~~second mortgages~~HELOANs and HELOCs is capped at 43 percent and ~~for HELOCs is capped at~~ 45 ~~percent.~~percent, respectively. We currently limit the maximum CLTV to 89.99 percent and FICO scores to a minimum of ~~660. Current~~660 for primary residences and 680 for second homes. Second mortgage ~~loans/HELOANS~~loans and HELOANs are fixed rate loans and are available with terms up to 1520 years. HELOC loans are ~~adjustable-rate~~variable-rate loans that contain a 10-year ~~interest-only~~interest only draw period followed by a 20-year amortizing period. At June 30, 2020, HELOCs and HELOANs in a first lien position totaled $195 million. As of June 30, 2020, loans in this portfolio had an average current FICO score of 746 and an average CLTV of 78 percent.

Other consumer loans. Our other consumer loan portfolio consists of secured and unsecured loans originated through our indirect lending business, third party originations and our Community Banking segment.

The following table presents amortized cost of our other consumer loan portfolio by purchase type:


	June 30, 2020						December 31, 2019
	Balance		% of Portfolio		Balance		% of Portfolio
	(Dollars in millions)
Indirect lending	$	647	72	%	$	577	79	%
Point of Sale	181		20	%	63		9	%
Other	70		8	%	89		12	%
Total other consumer loans	$	898	100	%	$	729	100	%

At June 30, 2020, other consumer loans increased to $898 million compared to $729 million at December 31, 2019. The increase is primarily due to growth in our high quality, dealer relationship based, non-auto indirect lending business of which 67 percent is secured by boats and 33 percent secured by recreational vehicles. As of June 30, 2020, loans in our indirect portfolio had an average current FICO score of 745. Point of sale loans include loans originated in conjunction with third-party financial technology companies.

Commercial real estate loans. The commercial real estate portfolio contains loans collateralized by diversified property types which are primarily income producing in the normal course of business. The majority of our retail exposure is to neighborhood centers and single tenant locations, which include pharmacies and hardware stores. Generally, the maximum LTV is 80 percent, or 90 percent for owner-occupied real estate, and the minimum debt service coverage is 1.20. At June 30, 2020, our average LTV and average debt service coverage for our CRE portfolio was 52 percent and 2.39 times, respectively. Our CRE loans primarily earn interest at a variable rate.

We have established a national home builder finance program and at June 30, 2020, our commercial portfolio contained $2.0 billion in commitments with $957 million in outstanding loans. These loans are collateralized and included in our CRE portfolio while the remaining loans are unsecured and included in our C&I portfolio.

As of June 30, 2020, our CRE portfolio included $215 million of SNCs and one leveraged lending loan of $4 million. The SNC portfolio had seventeen borrowers with an average UPB of $13 million and an average commitment of $20 million. There were no nonperforming SNC or leveraged loans as of June 30, 2020, and no SNC or leveraged loans outstanding were rated as special mention or substandard.

The following table presents amortized cost of our total CRE LHFI by collateral location and collateral type:


	MI			TX			CA			CO			FL			Other			Total			% by collateral type
	(Dollars in millions)
June 30, 2020
Home builder	$	27		$	205		$	137		$	166		$	115		$	202		$	852		28.2	%
Owner occupied	333			4			28			—			10			53			428			14.2	%
Multi family	185			68			28			8			10			133			432			14.3	%
Retail (1)	163			—			20			4			—			116			303			10.0	%
Office	178			19			—			—			2			60			259			8.6	%
Hotel	125			—			25			—			—			82			232			7.7	%
Senior living facility	70			26			—			—			3			57			156			5.2	%
Industrial	51			7			21			—			4			18			101			3.3	%
Parking garage/lot	26			9			1			—			1			34			71			2.4	%
Land-residential (2)	3			—			7			—			18			6			34			1.1	%
Non-profit	1			—			2			—			3			3			9			0.2	%
Single family residence	1			—			—			—			—			2			3			0.1	%
All other (3)	13			48			19			2			5			49			136			4.6	%
Total	$	1,176		$	386		$	288		$	180		$	171		$	815		$	3,016		100.0	%
Percent by state	39.0		%	12.8		%	9.5		%	6.0		%	5.7		%	27.0		%	100.0		%

(1)Includes multipurpose retail space, neighborhood centers, shopping centers and single-use retail space.

(2)Includes home builder loans secured by land. Land residential includes development and unimproved vacant land.

(3)All other primarily includes: mini-storage facilities, data centers, movie theaters, etc.

Commercial and industrial loans. Commercial and industrial LHFI facilities typically include lines of credit and term loans and leases to businesses for use in normal business operations to finance working capital, equipment and capital purchases, acquisitions and expansion projects. We lend to customers with a history of profitability and a long-term business model. Generally, leverage conforms to industry standards and the minimum debt service coverage is ~~1.20. Most~~1.20 times. The majority of our C&I loans earn interest at a variable rate.

As of June 30, 2020, our C&I portfolio included $730 million of SNCs. We are the lead bank on 21 percent of the SNCs. The services sector and the financial and insurance sector comprised the majority of the portfolio's NBV with 30 and 37 percent of the balance, respectively. The SNC portfolio had fifty borrowers with an average UPB of $15 million and an average commitment of $25 million. There were no nonperforming loans or loans rated as special mention as of June 30, 2020, and loans totaling $21 million of NBV were rated as substandard.

As of June 30, 2020, our C&I portfolio included $397 million of leveraged lending, of which $252 million were SNCs. The manufacturing sector comprised 51 percent of the leveraged lending portfolio, and the financial and insurance sector comprised 21 percent. There were no nonperforming loans as of June 30, 2020, and loans totaling $27 million and $15 million were rated as special mention and substandard, respectively. Included in Financial & Insurance within our C&I portfolio, are $105 million in loans outstanding to 3 borrowers that are collateralized by MSR assets. Our amounts outstanding to those borrowers range from $29 million to $46 million and the ratio of the loan outstanding to the fair market value of the collateral ranges from 41 percent to 54 percent.

The following table presents amortized cost of our total C&I LHFI by borrower's geographic location and industry ~~type:~~type as defined by North American Industry Classification System (NAICS):


	MI			CA			OH			IN			WI			TX			NY			NJ			SC			CT			Other			Total			% by industry
	(Dollars in millions)
June 30, 2020
Financial & Insurance	$	93		$	51		$	38		$	19		$	62		$	5		$	21		$	20		$	15		$	64		$	93		$	481		24.4	%
Services	99			31			18			—			—			42			2			41			8			—			92			333			16.9	%
Manufacturing	159			14			—			8			—			—			28			6			1			—			73			289			14.7	%
Home Builder Finance	—			69			—			—			—			—			—			12			—			—			34			115			5.8	%
Rental & Leasing	86			—			7			—			—			—			15			—			—			10			16			134			6.8	%
Distribution	78			—			—			—			—			—			1			18			2			—			15			114			5.8	%
Healthcare	2			8			—			—			—			—			—			15			—			—			14			39			2.0	%
Government & Education	29			—			—			—			—			13			—			6			20			—			—			68			3.5	%
Servicing Advances	—			—			—			—			—			—			—			—			—			—			15			15			0.8	%
Commodities	3			—			—			—			—			—			—			—			1			—			3			7			0.4	%
Paycheck Protection Program (1)	218			73			11			17			3			3			14			3			—			—			31			373			19.0	%
Total	$	767		$	246		$	74		$	44		$	65		$	63		$	81		$	121		$	47		$	74		$	386		$	1,968		100.0	%
Percent by state	39.0		%	12.5		%	3.8		%	2.2		%	3.3		%	3.2		%	4.1		%	6.1		%	2.4		%	3.8		%	19.6		%	100.0		%

Michigan Texas Florida California Tennessee Other Total % by industry
(Dollars in millions)
September 30, 2017
Industry Type
Financial & Insurance $ 23
$ —
$ 50
$ —
$ 12
$ 228
$ 313
28.5 %
Services (1)
71
73
—
34
—
114
292
26.6 %
Manufacturing 61
5
—
23
—
87
176
16.0 %
Healthcare 29
7
1
1
44
27
109
9.9 %
Distribution 57
—
—
2
—
—
59
5.4 %
Servicing advances —
—
21
—
—
25
46
4.2 %
Rental & leasing 44
—
—
—
—
2
46
4.2 %
Government & education 9
—
—
—
—
36
45
4.1 %
Commodities 5
—
—
—
—
6
11
1.0 %
Total $ 299
$ 85
$ 72
$ 60
$ 56
$ 525
$ 1,097
100.0 %
Percent by state 27.3 % 7.7 % 6.6 % 5.5 % 5.1 % 47.9 % 100.0 %


~~(1)~~	~~Includes unsecured home builder loans of $98 million at September 30, 2017.~~

(1)Portfolio sold subsequent to quarter-end. See Note 19 - Subsequent Events for further information.

~~Commercial real estate loans.~~ Flagstar has a well-diversified commercial real estate portfolio, largely based in Michigan. Generally, the maximum LTV is 80 percent, or 85 percent for owner-occupied real estate, and debt service coverage of 1.20 to 1.35 times. This portfolio also includes owner occupied real estate loans and secured home builder loans.

~~In 2016, we launched~~ Warehouse lending. We have a national home builder finance program to grow our balance sheet, increase commercial deposits and develop incremental revenue through our retail purchase mortgage channel. We finance and have active relationshipsplatform with homebuilders nationwide. At September 30, 2017, home builder loans totaled $516 million. Of that $98 million is unsecured which is included in our C&I portfolio and $418 million is collateralized which is included in our CRE portfolio. We had an additional $505 million of unused home builder lending commitments at September 30, 2017.

~~The following table presents our total CRE LHFI by borrower's geographic location and collateral type:~~

Michigan Florida California Colorado Texas Ohio Other Total (1)
(Dollars in millions)
September 30, 2017
Collateral Type
Single family residence (2)
$ 54
$ 78
$ 28
$ 80
$ 81
$ —
$ 51
$ 372
Retail (3)
185
30
7
—
—
5
14
241
Apartments 125
23
—
7
—
47
39
241
Industrial 155
—
35
—
—
—
4
194
Office 164
—
19
—
—
—
—
183
Land - Residential (4)
11
21
32
24
11
—
31
130
Hotel/motel 79
—
—
—
—
—
35
114
Senior Living facility 50
—
—
—
—
12
10
72
Parking garage/Lot 68
—
—
—
—
—
—
68
Non Profit 37
—
—
—
—
—
10
47
Shopping Mall (5)
27
—
—
—
—
—
—
27
Marina 23
—
—
—
—
—
—
23
Movie Theater 20
—
—
—
—
—
—
20
All other (6)
21
—
1
—
—
—
6
28
Total $ 1,019
$ 152
$ 122
$ 111
$ 92
$ 64
$ 200
$ 1,760
Percent by state 57.9 % 8.6 % 6.9 % 6.3 % 5.2 % 3.6 % 11.4 % 100.0 %


~~(1)~~	~~Includes $270 million of commercial owner occupied real estate loans at September 30, 2017.~~


~~(2)~~	~~Includes home builder loans secured by SFR 1-4 properties whether under construction or completed.~~


~~(3)~~	~~Includes multipurpose retail space, neighborhood centers, strip centers and single-use retail space.~~


~~(4)~~	~~Land residential includes development and unimproved vacant land.~~


~~(5)~~	~~Comprised of one shopping mall with an anchor store.~~


~~(6)~~	~~All other primarily includes: condominium, mini storage facilities, ice arena, golf course, gas station, car wash, etc.~~

~~Warehouse lending.~~ relationship managers across the country. We offer warehouse lines of credit to other mortgage lenders which allow the lender to fund the closing of residential mortgage loans. Each extension, advance, or draw-down on the line is fully collateralized by residential mortgage loans and is paid off when the lender sells the loan to an outside investor or, in some instances, to the Bank. ~~For~~In response to COVID-19, we have increased credit requirements for government loans and lowered the ~~three months ended September 30, 2017, the warehouse~~ advance ~~amount of~~rate for loans ~~sold to the Bank totaled $2.9 billion~~that we believe have higher risk, as well as not accepting jumbo or ~~36.3 percent. For the nine months ended September 30, 2017, the warehouse advance amount of~~non-qualified mortgage loans ~~sold to the Bank totaled $8.0 billion or 38.5 percent.~~as collateral.

Underlying mortgage loans are predominantly originated using the Agencies' underwriting standards. The guideline for debt to tangible net worth is 15 to 1. Despite the contraction in warehouse lending which occurred in the first quarter 2017, we are continuing to focus on increasing market share in the warehouse lending market through our strategic initiative to increase lending to customers who originate loans they then sell to outside third party investors. We have a national platform with relationship managers covering both coasts and a large Michigan-based sales team. The aggregate committed amount of adjustable-rate warehouse lines of credit granted to other mortgage lenders at ~~September~~June 30, ~~2017~~2020 was ~~$2.7~~$8.1 billion, of which ~~$1.2~~$5.2 billion was outstanding, compared to ~~$2.9~~$4.2 billion at ~~December 31, 2016,~~June 30, 2019, of which ~~$1.2~~$2.6 billion was outstanding.

Credit Quality

~~Trends~~ Our focus on effectively managing credit risk through our careful underwriting standards and processes has resulted in

strong trends in certain credit quality characteristics such as nonperforming loans and past due statistics remain very strong and continue to show improvement. This is predominantly a result of effectively managing credit risks and sales of legacy portfolios that included nonperforming and TDR loans which have been replaced by new loans with strong credit characteristics.in our loan portfolios. The credit quality of our loan portfolios is demonstrated by low delinquency levels, minimal charge-offs and low levels of nonperforming loans.

For all loan categories within the consumer and commercial loan portfolio, loans are placed on nonaccrual status when any portion of principal or interest is 90 days past due (or nonperforming), or earlier when we become aware of information indicating that collection of principal and interest is in doubt. While it is the goal of management to collect on loans, we attempt to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations and minimize losses incurred by the Bank. When a loan is placed on nonaccrual status, the accrued interest income is reversed. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Nonperforming assets

The following table sets forth our nonperforming assets:


	June 30, 2020			December 31, 2019
	(Dollars in millions)
LHFI
Consumer loans
Residential first mortgage	$	19		$	13
Home equity	3			2
Other Consumer	1			1
Total nonperforming LHFI	23			16
TDRs
Residential first mortgage	8			8
Home equity	2			2
Total nonperforming TDRs	10			10
Total nonperforming LHFI and TDRs (1)	33			26
Real estate and other nonperforming assets, net	7			10
LHFS	7			5
Total nonperforming assets	$	47		$	41
Nonperforming assets to total assets (2)	0.14		%	0.15		%
Nonperforming LHFI and TDRs to LHFI	0.22		%	0.21		%
Nonperforming assets to LHFI and repossessed assets (2)	0.27		%	0.30		%

September 30, 2017 December 31, 2016
(Dollars in millions)
LHFI
Consumer loans
Residential first mortgage $ 14
$ 18
Home equity 1
4
Commercial
CRE 1
—
Total nonperforming LHFI 16
22
TDRs
Consumer loans
Residential first mortgage 11
11
Home equity 4
7
Total nonperforming TDRs 15
18
Total nonperforming LHFI and TDRs (1)
31
40
Real estate and other nonperforming assets, net 9
14
LHFS 8
6
Total nonperforming assets $ 48
$ 60
Nonperforming assets to total assets (2)
0.24 % 0.39 %
Nonperforming LHFI and TDRs to LHFI 0.44 % 0.67 %
Net charge-offs to LHFI ratio (annualized) (1)
0.08 % 0.13 %
Nonperforming assets to LHFI and repossessed assets (2)
0.58 % 0.90 %
Nonperforming assets to Tier 1 capital (to adjusted total assets) + ALLL (2)(3)
2.57 % 3.93 %


~~(1)~~	~~Includes less than 90 day past due performing loans placed on nonaccrual. Interest is not being accrued on these loans.~~


~~(2)~~	~~Ratio excludes LHFS.~~


~~(3)~~	~~Refer to MD&A - Use of Non-GAAP Financial Measures for calculation of ratio.~~

(1)Includes less than 90 day past due performing loans placed on nonaccrual. Interest is not being accrued on these loans.

~~At September 30, 2017, we had $48 million of nonperforming assets compared to $60 million of nonperforming assets~~(2)Ratio excludes LHFS, which are recorded at December 31, 2016. This decrease was primarily due to a $7 million decrease in nonperforming consumer LHFI offset by a $1 million increase in nonperforming commercial LHFI at September 30, 2017 compared to December 31, 2016. Additionally, nonperforming TDRs decreased $3 million at September 30, 2017 compared to December 31, 2016. The overall improvement in our nonperforming assets is due to our continued effort to grow our loan portfolio with strong credit quality loans combined with a slowing emergence of nonperforming loans driven by decreased levels of delinquencies.fair value.

The ratio of nonperforming assets, excluding LHFS, to total assets decreased to 0.24 percent at September 30, 2017 from 0.39 percent at December 31, 2016. Net charge-offs in the third quarter 2017 were 0.08 percent of LHFI compared to 0.13 percent at December 31, 2016.

The following table sets forth activity related to our total nonperforming LHFI and TDRs:


	Three Months Ended,						Six Months Ended,
	June 30, 2020		March 31, 2020		June 30, 2020		June 30, 2019
	(Dollars in millions)
Beginning balance	$	29	$	26	$	26	$	22
Additions	12		10		22		78
Reductions
Principal payments	(1)		(6)		(7)		(2)
Charge-offs	(1)		(1)		(2)		(33)
Return to Performing Status	(6)		—		(6)		—
Transfers to REO	—		—		—		(2)
Total nonperforming LHFI and TDRs (1)	$	33	$	29	$	33	$	63

(1)Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(Dollars in millions)
Beginning balance $ 30
$ 44
$ 40
$ 66
Additions 5
7
19
30
Reductions
Principal payments and loan sales (2 ) (2 ) (6 ) (9 )
Charge-offs —
—
(2 ) (4 )
Returned to performing status (1 ) (8 ) (1 ) (15 )
Transfers to REO (1 ) (1 ) (19 ) (28 )
Total nonperforming LHFI and TDRs (1)
$ 31
$ 40
$ 31
$ 40


~~(1)~~	~~Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.~~

As of September 30, 2017, nonperforming consumer loans decreased $9 million from December 31, 2016, due to the sale of nonperforming loans and improvements to the overall credit quality of our loan portfolios. We had a decrease in additions to nonperforming LHFI and TDRs along with an increase in loans returning to performing status during both the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016, respectively. During the three months ended September 30, 2017, we had no charge-offs.

Delinquencies

The following table sets forth ~~our performing LHFI which are past due~~loans 30-89 ~~days:~~

September 30, 2017 December 31, 2016
(Dollars in millions)
Performing loans past due 30-89:
Consumer loans
Residential first mortgage $ 3
$ 6
Home equity 2
3
Other —
1
Total performing loans past due 30-89 days $ 5
$ 10

~~Early stage delinquencies remained low with the 30 to 89~~ days past due in our LHFI portfolio:


	June 30, 2020						December 31, 2019
	Amount		% of LHFI		Amount		% of LHFI
	(Dollars in millions)
Performing loans past due 30-89:
Consumer loans
Residential first mortgage	$	11	0.41	%	$	9	0.29	%
Home equity	1		0.10	%	1		0.10	%
Other	3		0.33	%	4		0.55	%
Total consumer loans	15		0.33	%	14		0.29	%
Commercial Real Estate	—		—	%	—		—	%
Commercial and Industrial	—		—	%	—		—	%
Total commercial loans	—		—	%	—		—	%
Total performing loans past due 30-89 days	$	15	0.10	%	$	14	0.12	%

For further information, see Note 4 - Loans Held-for-Investment.

Payment Deferrals

Beginning in March 2020, as a response to COVID-19, we offered our consumer customers principal and interest payment deferrals and extensions. Consumer customers were not required to provide proof of hardship to be granted a payment deferral. Typically payment history is the primary tool used to identify consumer borrowers who are experiencing financial difficulty. Forbearance makes this determination more challenging. In addition, consumer customers who have requested payment deferrals are not being aged and remain in the aging category they were in prior to payment deferral.

The table below summarizes borrowers in our consumer loan portfolios that are in forbearance:


	As of June 30, 2020
	Number of Borrowers	UPB		Percent of Portfolio
	(Dollars in millions)
Loans Held-For-Investment
Consumer loans
Residential first mortgage	885	$	292	10.8	%
Home equity	1,015	87		9.0 %
Other consumer	1,408	50		5.8	%
Total consumer loan deferrals	3,308	$	429	9.5	%

Loans Held-For-Sale
Residential first mortgage	302	$	126	4.0 %

As of June 30, 2020, commercial customers requested and were granted $549 million of payment deferrals, and, of that amount, $333 million are deferrals of both principal and interest payments, $110 million are deferrals of principal only, and $106 million are deferrals of interest only. Commercial customers who have requested payment deferrals are not being aged and remain in the aging category they were in prior to payment deferral. The table below summarizes borrowers in our commercial loan portfolios that have requested and received payment deferral:


	As of June 30, 2020
	Number of Borrowers	UPB		Percent of Portfolio
	(Dollars in millions)
Loans Held-For-Investment
Automotive	8	$	44	28.4	%
Leisure & entertainment	13	15		12.1	%
Healthcare	14	4		9.0	%
Other	70	108		6.6	%
Total C&I deferrals	105	171		13.3	%
Hotel	12	132		56.3	%
Retail	24	91		29.1	%
Senior housing	1	7		5.0	%
Other	98	148		6.4	%
Total CRE deferrals	135	378		12.5	%
Warehouse deferrals	—	—		—	%
Total commercial loan deferrals (1)	240	$	549	11.0	%

(1)Percent shown excludes warehouse loans.

The table below summarizes the percent of our residential loan servicing portfolio in forbearance as of June 30, 2020:


				Loans in Forbearance
				Borrowers making April, May and June Payments					Remaining Borrowers					Total Loans in Forbearance
	Total Population
	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts	Percent of UPB		Percent of Accounts
	(Dollars in millions)
Loan servicing
Subserviced for others (2)	$	174,384	854,216	$	7,145	32,403	$	13,808	59,692	12.0	%	10.8	%
Serviced for others (4)	29,979		123,256	1,261		5,058	3,018		11,661	14.3	%	13.6	%
Serviced for own loan portfolio (3)	9,211		64,142	237		1,895	473		1,850	7.7	%	5.8	%
Total loans serviced	$	213,574	1,041,614	$	8,643	39,356	$	17,299	73,203	12.1	%	10.8	%

(1)UPB, net of write downs, does not include premiums or discounts.

(2)Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.

(3)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), loans ~~decreasing~~with government guarantees (residential first mortgage), and repossessed assets.

(4)Remaining borrowers includes $1.1 million of GNMA repurchase obligations

As the MSR owner for loans serviced for others, we are required to ~~$5 million at September 30, 2017, compared~~advance principal and interest for a period of up to ~~$10 million at December 31, 2016. There were no past due commercial~~four months and tax and insurance payments until the Agencies make us whole. We anticipate servicing advances for these loans ~~at September 30, 2017~~in forbearance to increase throughout the remainder of 2020. We believe that we have ample liquidity to handle the increase in servicing advances. We initially provide advances on a short-term basis for loans we subservice and ~~December 31, 2016.~~are reimbursed by the MSR owner. Our advance receivable for our subserviced loans is therefore insignificant.

Troubled debt restructurings (held-for-investment)

~~Troubled debt restructurings ("TDRs")~~ TDRs are modified loans in which a borrower demonstrates financial difficulties and for which a concession has been granted as a result. Nonperforming TDRs are included in nonaccrual loans. TDRs remain in nonperforming status until a borrower has made payments and is current for at least six consecutive ~~months of payments under the modified terms.~~months. Performing TDRs are ~~excluded from~~not considered to be nonaccrual ~~loans because it is reasonably assured~~so long as we believe that all contractual principal and interest due under the restructured terms will be collected.

Beginning in March 2020, as a response to COVID-19, we offered our consumer and commercial customers principal and interest payment deferrals and extensions. We considered these programs in the context of whether or not the short-term modifications of these loans would constitute a TDR. We considered the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), interagency guidance and related guidance from the FASB, which provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not required to be accounted for as TDRs. As a result, we have determined that these loans are not TDRs. We believe our application of the referenced guidance and accounting for these programs is appropriate.

The following table sets forth a summary of TDRs by performing status:


	June 30, 2020		December 31, 2019
	(Dollars in millions)
Performing TDRs
Consumer Loans
Residential first mortgage	$	20	$	20
Home equity	15		18
Commercial Real Estate	5		—
Total performing TDRs	40		38
Nonperforming TDRs
Nonperforming TDRs	4		3
Nonperforming TDRs, performing for less than six months	6		7
Total nonperforming TDRs	10		10
Total TDRs	$	50	$	48

September 30, 2017 December 31, 2016
(Dollars in millions)
Performing TDRs
Residential first mortgage $ 20
$ 22
Home equity 26
45
Total performing TDRs 46
67
Nonperforming TDRs 4
8
Nonperforming TDRs at inception but performing for less than six months 11
10
Total nonperforming TDRs 15
18
Total TDRs (1)
$ 61
$ 85


~~(1)~~	~~The ALLL on consumer TDR loans totaled $12 million and $9 million at September 30, 2017 and December 31, 2016.~~

At ~~September~~June 30, ~~2017~~2020 our total TDR loans ~~decreased $24~~increased $2 million compared to December 31, ~~2016~~2019, primarily due to ~~the sale~~an addition of ~~nonperforming loans~~a commercial real estate loan offset by principal payments and ~~lower delinquency rates during the nine months ended September 30, 2017.~~payoffs. Of our total TDR loans, ~~75.5~~80 percent and 79 percent were in performing status at ~~September~~June 30, ~~2017.~~

2020 and December 31, 2019. For further information, see Note 4 - Loans Held-for-Investment.

Allowance for ~~Loan~~Credit Losses

The ~~ALLL represents management's estimate~~following tables present the changes in the allowance for credit losses balance for the three and six months ended June 30, 2020:


	Three Months Ended June 30, 2020
	Residential First Mortgage		Home Equity		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total LHFI Portfolio (1)		Unfunded Commitments		Total ACL
	(Dollars in millions)
Beginning allowance balance	$	46	$	23	$	16	$	28	$	18	$	1	$	132	$	20	$	152
Provision (benefit) for credit losses:
Loan volume	(2)		(1)		4		—		1		—		2		—		2
Economic forecast	9		3		6		14		(2)		—		30		1		31
Credit (2)	5		2		7		10		—		—		24		—		24
Qualitative factor adjustments	2		—		—		31		6		—		39		—		39
Charge-offs	(2)		(1)		(2)		—		—		—		(5)		—		(5)
Provision for charge-offs	2		1		2		—		—		—		5		—		5
Recoveries	—		1		1		—		—		—		2		—		2
Ending allowance balance	$	60	$	28	$	34	$	83	$	23	$	1	$	229	$	21	$	250
(1) Excludes loans carried under the fair value option (2) Includes changes in the individual evaluated reserve
	Six Months Ended June 30, 2020
	Residential First Mortgage		Home Equity		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total LHFI Portfolio (1)		Unfunded Commitments		Total ACL
	(Dollars in millions)
Beginning Balance ALLL	$	22	$	14	$	6	$	38	$	22	$	5	$	107	$	3	$	110
Impact of adopting ASC 326	25		12		10		(14)		(6)		(4)		23		7		30
Beginning allowance balance	47		26		16		24		16		1		130		10		140
Provision (benefit) for credit losses:
Loan volume	(4)		(1)		5		2		3		—		5		—		5
Economic forecast	14		3		6		15		(3)		—		35		11		46
Credit (2)	3		(2)		6		10		—		—		17		—		17
Qualitative factor adjustments	—		—		—		32		7		—		39		—		39
Charge-offs	(3)		(2)		(3)		—		—		—		(8)		—		(8)
Provision for charge-offs	3		2		3		—		—		—		8		—		8
Recoveries	—		2		1		—		—		—		3		—		3
Ending allowance balance	$	60	$	28	$	34	$	83	$	23	$	1	$	229	$	21	$	250

(1) Excludes loans carried under the fair value option

(2) Includes changes in the individual evaluated reserve

The allowance for credit losses was $250 millionat June 30, 2020, compared to $152 million at March 31, 2020, The increase in the allowance is primarily reflective of ~~probable losses that are inherent~~changes in our ~~LHFI portfolio but which have~~economic forecast between March 31, 2020 and June 30, 2020. We utilized the Moody’s June scenarios in our forecast: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. The resulting composite forecast for the second quarter 2020 was worse than the scenario used in the first quarter 2020. Unemployment ends the year at 10 percent and recovers only slightly in 2021. GDP recovers only slightly by the end of the year from current levels and does not ~~yet been realized. For further information, see Note 4 - Loans Held-for-Investment.~~return to the pre-COVID level until mid-2022. HPI decreases 2 percent from early 2020 through 2021.

The ~~ALLL~~worsening of our economic forecast increased the ACL by $31 million from March 31, 2020. In addition to this increase, we judgmentally increased the qualitative reserves by $39 million primarily in our CRE and C&I portfolios, guided by the model output from Moody's adverse scenario and our judgment relating to industries and borrowers we believe could be more exposed to the stressful conditions in our forecast. In addition, we reviewed our loans in deferral status and proactively downgraded loans totaling approximately $180 million UPB from "pass" status during the quarter, resulting in an increase of $24 million to the ACL. This resulted in an increase to our reserves of approximately $98 million, which includes an increase in our reserves for unfunded commitments of $1 million.

The allowance as a percentage of LHFI ~~decreased~~was 1.7 percent at June 30, 2020 compared to ~~2.0~~0.9 percent ~~as of September 30, 2017 from 2.4 percent as of~~at December 31, ~~2016. This decrease is attributable to~~2019. The increase in the continued low levels of delinquencies and net charge-offs in our portfolio. Additionally, our loan growth has been in high credit quality assets across both our consumer and commercial portfolios. At September 30, 2017, our allowance as a percentage of LHFI is reflective of the additional increases to the allowance to reflect the change in economic forecast used between December 31, 2019 and June 30, 2020. At June 30, 2020, we had a 2.7 percent ofand 1.2 percentallowance coverage on our consumer loan portfolio ~~was 2.3 percent~~ and ~~our allowance as percent of~~ our commercial loan portfolio, ~~was 1.7 percent.~~respectively.

~~The percentage of ALLL to LHFI and loans with government guarantees (excluding fair value loans), decreased to 1.9 percent as of September 30, 2017 from 2.2 percent as of December 31, 2016.~~

The following tables set forth certain information regarding the allocation of our ~~ALLL~~allowance to each loan ~~category:~~category, including the allowance amount as a percentage of amortized cost:


	June 30, 2020
	LHFI Portfolio (2)		Percent of Portfolio		Allowance Amount (1)		Allowance as a Percent of Loan Portfolio
Consumer loans
Residential first mortgage	$	2,702	18.3	%	$	60	2.2	%
Home equity	976		6.6	%	28		2.9	%
Other consumer	898		6.1	%	36		4.0	%
Total consumer loans	4,576		30.9	%	124		2.7	%
Commercial loans
Commercial real estate	$	3,016	20.4	%	$	99	3.3	%
Commercial and industrial	1,968		13.3	%	26		1.3	%
Warehouse lending	5,232		35.4	%	1		—	%
Total commercial loans	10,216		69.1	%	126		1.2	%
Total consumer and commercial loans	$	14,792	100.0	%	$	250	1.7	%

(1) Includes allowance for loan losses and reserve for unfunded commitments

(2) Excludes loans carried under the fair value option


	December 31, 2019
	LHFI Portfolio (2)		Percent of Portfolio		Allowance Amount (1)		Allowance as a Percent of Loan Portfolio
Consumer loans
Residential first mortgage	$	3,145	26.0	%	$	22	0.7	%
Home equity	1,021		8.4	%	14		1.4	%
Other consumer	729		6.0	%	6		0.8	%
Total consumer loans	4,895		40.4	%	42		0.9	%
Commercial loans
Commercial real estate	$	2,828	23.3	%	$	40	1.4	%
Commercial and industrial	1,634		13.5	%	23		1.4	%
Warehouse lending	2,760		22.8	%	5		0.2	%
Total commercial loans	7,222		59.6	%	68		0.9	%
Total consumer and commercial loans	$	12,117	100.0	%	$	110	0.9	%

(1) Includes allowance for loan losses and reserve for unfunded commitments

(2) Excludes loans carried under the fair value option

September 30, 2017
Loans
Held-for-Investment Percent
of
Portfolio Allowance
Amount Allowance as a Percent of Loan Portfolio
(Dollars in millions)
Consumer loans
Residential first mortgage $ 2,656
36.9 % $ 52
2.0 %
Home equity 492
6.8 % 20
4.1 %
Other 26
0.4 % 1
3.8 %
Total consumer loans 3,174
44.1 % 73
2.3 %
Commercial loans
Commercial real estate 1,760
24.5 % 42
2.4 %
Commercial and industrial 1,097
15.3 % 19
1.7 %
Warehouse lending 1,159
16.1 % 6
0.5 %
Total commercial loans 4,016
55.9 % 67
1.7 %
Total consumer and commercial loans (1)
$ 7,190
100.0 % $ 140
1.9 %


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

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(Dollars in millions)
Beginning balance $ 140
$ 150
$ 142
$ 187
Provision (benefit) for loan losses (1)
2
—
4
(16 )
Charge-offs
Consumer loans
Residential first mortgage (1 ) (7 ) (6 ) (26 )
Home equity (2 ) (1 ) (3 ) (4 )
Other consumer —
(1 ) (1 ) (3 )
Total charge offs (3 ) (9 ) (10 ) (33 )
Recoveries
Consumer loans
Residential first mortgage —
—
1
1
Home equity 1
1
2
2
Other consumer —
1
1
2
Total recoveries 1
2
4
5
Charge-offs, net of recoveries (2 ) (7 ) (6 ) (28 )
Ending balance $ 140
$ 143
$ 140
$ 143


~~(1)~~	Does not include $7 million provision for loan losses recorded in the Consolidated Statements of Operations to reserve for repossessed loans with government guarantees during the three and nine months ended September 30, 2016.

The following table ~~provides~~presents additional information on each class of loans in our ~~charge-offs~~LHFI portfolio, including amortized cost and ~~credit quality ratios:~~average loan life:


	June 30, 2020					December 31, 2019
	LHFI Portfolio		Weighted Average Loan Life	LHFI Portfolio		Weighted Average Loan Life
Consumer loans
Residential first mortgage	$	2,702	5	$	3,145	5
Home equity	976		3	1,021		3
Other consumer	898		3	729		2
Total consumer loans	4,576			4,895
Commercial loans
Commercial real estate	3,016		2	2,828		2
Commercial and industrial	1,968		2	1,634		1
Warehouse lending	5,232		—	2,760		—
Total commercial loans	10,216			7,222
Total consumer and commercial loans (1)	$	14,792		$	12,117

(1) Excludes loans carried under the fair value option

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Change 2017 2016 Change
(Dollars in millions)
Charge-offs, net of recoveries $ 2
$ 7
$ (5 ) $ 6
$ 28
$ (22 )
Charge-offs associated with loans with government guarantees 1
6
(5 ) 3
13
(10 )
Charge-offs associated with the sale or transfer of nonperforming loans and TDRs —
—
—
1
8
(7 )
Charge-offs, net of recoveries, adjusted (1)
$ 1
$ 1
$ —
$ 2
$ 7
$ (5 )
Net charge-offs to LHFI ratio (annualized) (2)
0.08 % 0.51 % (0.43 )% 0.12 % 0.66 % (0.54 )%
Net charge-off ratio, adjusted (annualized)(1)(2)
0.06 % 0.15 % (0.09 )% 0.05 % 0.15 % (0.10 )%


~~(1)~~	~~Excludes charge-offs associated with loans with government guarantees and charge-offs associated with the sale or transfer of nonperforming loans and TDRs.~~


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

As a result of the strong credit quality throughout our loan portfolios, net charge-offs for the three months ended September 30, 2017 decreased to $2 million, compared to $7 million for the three months ended September 30, 2016. As a percentage of average LHFI, net charge-offs for the three months ended September 30, 2017 decreased to 0.08 percent from 0.51 percent for the three months ended September 30, 2016.

Net charge-offs for the nine months ended September 30, 2017 decreased to $6 million, compared to $28 million for the nine months ended September 30, 2016, primarily from the sale of $110 million UPB of nonperforming, TDR and non-agency loans and net charge-offs associated with loans with government guarantees. As a percentage of average LHFI, net charge-offs for the nine months ended September 30, 2017 decreased to 0.12 percent from 0.66 percent for the nine months ended September 30, 2016, partially driven by sales of nonperforming loans which occurred in the first nine months of 2016.

~~There were no net charge-offs of commercial loans for the nine months ended September 30, 2017 and September 30, 2016.~~

Market Risk

Market risk is the risk of reduced earnings and/or declines in the net market value of the balance sheet due to changes in market rates. Our primary market risk is interest rate risk which impacts our net interest income, fee income related to interest sensitive activities such as mortgage origination and servicing income, and loan and deposit demand.

We are subject to interest rate risk due to:

•The maturity or repricing of assets and liabilities at different times or for different amounts

•Differences in short-term and long-term market interest rate changes

•The remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change

~~The Asset/Liability Committee ("ALCO"),~~ Our ALCO, which is composed of our executive officers and certain members of other management, monitors interest rate risk on an ~~on-going~~ongoing basis in accordance with policies approved by our board of directors. The ALCO reviews interest rate positions and considers the impact projected interest rate scenarios have on earnings, capital, liquidity, business strategies, and other factors. However, management has the latitude to change interest rate positions within certain limits if, in management's judgment, the change will enhance ~~profitability.~~profitability or minimize risk.

To assess and manage interest rate risk, sensitivity analysis is used to determine the impact on earnings and the net market value of the balance sheet across various interest rate scenarios, balance sheet trends, and strategies.

Net interest income sensitivity

Management uses a simulation model to analyze the sensitivity of net interest income to changes in interest rates across various interest rate scenarios which demonstrates the level of interest rate risk inherent in the existing balance sheet. The analysis holds the current balance sheet values constant and does not take into account management intervention. In addition, we assume certain correlation rates, often referred to as a “deposit beta,” offor interest-bearing deposits, wherein the

rates paid to customers change ~~at a different pace when compared~~relative to changes in benchmark interest rates. The effect on net interest income over a 12 month time horizon due to hypothetical changes in market interest rates is presented in the table below. In this interest rate shock ~~test,~~simulation, as of the periods presented, interest rates have been adjusted by instantaneous parallel changes rather than in a ramp ~~test~~simulation which applies interest rate changes over time. All rates, short-term and long-term, are changed by the same amount ~~(plus~~(e.g. plus or minus ~~200~~100 basis points) resulting in the shape of the yield curve remaining unchanged. ~~The minus 200 basis point shock scenario is effectively a flattener scenario as rates are floored at zero given the current interest rate levels.~~

September 30, 2017
Scenario Net interest income $ Change % Change
(Dollars in millions)
200 $ 458
$ 25
5.9 %
Constant 433
—
— %
(200) 373
(60 ) (14.0 )%
December 31, 2016
Scenario Net interest income $ Change % Change
(Dollars in millions)
200 $ 321
$ 19
6.3 %
Constant 301
—
— %
(200) 245
(57 ) (18.9 )%


June 30, 2020
Scenario	Net interest income		$ Change		% Change
	(Dollars in millions)
100	$	640	$	62	10.6	%
Constant	$	578	$	—	—	%
(100)	N/M		N/M		N/M
December 31, 2019
Scenario	Net interest income		$ Change		% Change
	(Dollars in millions)
100	$	592	$	34	6.0	%
Constant	$	559	$	—	—	%
(100)	$	520	$	(39)	(6.9)	%

In the net interest income ~~simulation,~~simulations, our balance sheet exhibits ~~slight~~ asset sensitivity. When interest rates rise our net interest income increases. Conversely, when interest rates fall our net interest income decreases. At ~~September~~June 30, ~~2017,~~2020, the ~~$132~~$19 million increase in ~~the~~ net interest income in the constant scenario as compared to that at December 31, ~~2016~~2019 was primarily driven by ~~increased size of balance sheet.~~the growth in our interest earning assets partially offset by lower short term market rates.

As of September 30, 2017, we have also projected the potential impact to net interest income in a hypothetical "bear flattener" interest rate scenario, in which short-term interest rates have been instantaneously increased by 100 basis points while holding the longer term interest rates constant. Over a 12-month and 24-month period, based on our existing balance sheet, the simulation resulted in a loss of $39 million and $52 million, respectively.

The net interest income sensitivity analysis has certain limitations and makes various assumptions. Key elements of this interest rate risk exposure assessment include maintaining a static balance sheet and parallel rate shocks. ~~The direction of future~~Future interest rates not moving in a parallel manner across the yield curve, how the balance sheet will respond and shift based on a change in future interest rates and how the Company will respond are not included in this analysis and limit the predictive value of these scenarios.

Economic value of equity

Management also utilizes ~~(EVE),~~EVE, a point in time analysis of the economic value of our current balance sheet position, which measures interest rate risk over a longer term. The EVE calculation represents a hypothetical valuation of equity, and is defined as the market value of assets, less the market value of liabilities, adjusted for the market value of off-balance sheet instruments. The assessment of both the short-term earnings (Net Interest Income Sensitivity) and long-term valuation (EVE) approaches, rather than Net Interest Income Sensitivity alone provides a more comprehensive analysis of interest rate risk ~~exposure than Net Interest Income Sensitivity alone.~~exposure.

There are assumptions and inherent limitations in any methodology used to estimate the exposure to changes in market interest rates and as such, sensitivity calculations used in this analysis are hypothetical and should not be considered to be predictive of future results. This analysis evaluates risks to the current balance sheet only and does not incorporate future growth assumptions. Additionally, the analysis assumes interest rate changes are instantaneous and the new rate environment is constant but does not include actions management may undertake to manage risk in response to interest rate changes. Each rate scenario reflects unique prepayment ~~repricing,~~ and ~~reinvestment~~repricing assumptions. Management derives these assumptions by considering published market prepayment expectations, repricing characteristics, our historical experience, and our asset and liability management strategy. This analysis assumes that changes in interest rates may not affect or could partially affect certain instruments based on their characteristics.

The following table is a summary of the changes in our EVE that are projected to result from hypothetical changes in market interest ~~rates.~~rates as well as our internal policy limits for changes in our EVE based on the different scenarios. The interest rates, as of the dates presented, are adjusted by instantaneous parallel rate ~~changes upward to +300 basis points~~increases and ~~downward (100) basis points.~~decreases as indicated in the scenarios shown in the table below.


June 30, 2020																December 31, 2019
Scenario	EVE		EVE%		$ Change		% Change		Scenario	EVE		EVE%		$ Change		% Change		Policy Limits
(Dollars in millions)
300	$	3,991	14.6	%	$	602	17.7	%	300	$	3,147	13.6	%	$	150	5.0	%	22.5	%
200	$	3,851	14.1	%	$	461	13.6	%	200	$	3,152	13.7	%	$	155	5.2	%	15.0	%
100	$	3,672	13.5	%	$	282	8.3	%	100	$	3,103	13.5	%	$	106	3.5	%	7.5	%
Current	$	3,390	12.4	%	$	—	—	%	Current	$	2,997	13.0	%	$	—	—	%	—	%
(100)	N/M		N/M		N/M		N/M		(100)	$	2,832	12.3	%	$	(165)	(5.5)	%	7.5	%

September 30, 2017 December 31, 2016
Scenario EVE EVE% $ Change % Change Scenario EVE EVE% $ Change % Change
(Dollars in millions) (Dollars in millions)
300 $ 2,109
12.6 % $ (155 ) (6.9 )% 300 $ 1,927
13.9 % $ (173 ) (8.2 )%
200 2,185
13.0 % (79 ) (3.5 )% 200 2,005
14.4 % (95 ) (4.5 )%
100 2,250
13.4 % (14 ) (0.6 )% 100 2,073
14.9 % (28 ) (1.3 )%
Current 2,264
13.5 % —
— % Current 2,100
15.1 % —
— %
(100) 2,233
13.3 % (31 ) (1.4 )% (100) 2,067
14.9 % (33 ) (1.6 )%

Our balance sheet exhibits ~~liability~~asset sensitivity in ~~a rising~~various interest rate ~~scenario~~scenarios. The increase in EVE as ~~the EVE decreases. The decrease in EVE~~rates raise is the result of the amount of ~~liabilities~~assets that would be expected to reprice exceeding the amount of ~~assets repriced in the +200 scenario. The~~liabilities repriced. This increased as of June 30, 2020 compared to December 31, ~~2016 (100) is effectively a flattener scenario as shorter term rates are unable to decrease 100 basis points~~2019 due to the ~~absolute level of rates. Therefore,~~long term fixed rate funding actions discussed above. At June 30, 2020 and December 31, 2019, for each scenario shown, the ~~yields of the longer term variable rate assets decrease by the full 100 basis points, but the liabilities repricing to shorter term rates decrease to less than 100 basis points, leading to a reduction~~percentage change in ~~EVE.~~our EVE is within our Board policy limits.

Derivative financial instruments

As a part of our risk management strategy, we use derivative financial instruments to minimize fluctuation in earnings caused by ~~interest rate~~market risk. We use ~~interest rate swaps, swaptions and~~ forward sales commitments to hedge our unclosed mortgage origination pipeline and funded mortgage ~~LHFS and MSRs.~~LHFS. All of our derivatives and mortgage loan production originated for sale are accounted for at fair market value. Changes to our unclosed mortgage ~~commitments~~origination pipeline are based on changes in fair value of the underlying loan, which is impacted most significantly by changes in interest rates and changes in the probability that the loan will not fund within the terms of the commitment, referred to as a fallout factor or, ~~pull through~~inversely, a pull-through rate. Market risk on interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments. The adequacy of these hedging strategies, and the ability to fully or partially hedge market risk, rely on various assumptions or projections, including a fallout ~~factor.~~factor, which is based on a statistical analysis of our actual rate lock fallout history. For further information, see Note 8 - Derivative Financial Instruments and Note 1816 - Fair Value Measurements.

Mortgage Servicing Rights (MSRs)

Our MSRs are sensitive to interest rate volatility and are highly susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve. We utilize derivatives, including interest rate swaps and ~~other fair value assets~~swaptions, as part of our overall hedging strategy to manage the impact of changes in the fair value of the MSRs, ~~but~~however these risk management strategies do not completely eliminate repricing risk. Our hedging strategies rely on assumptions and projections regarding assets and general market factors, many of which are outside of our control. If one or more of these assumptions or projections proves to be incorrect our hedging strategies may not adequately mitigate the impact of changes in interest rates or prepayment speeds, and as a result may negatively impact earnings. For further information, see Note 7 - Mortgage Servicing Rights, ~~and~~ Note 8 - Derivative Financial ~~Instruments.~~Instruments and Note 16 - Fair Value Measurements.

Liquidity Risk

Liquidity risk is the risk that we will not have sufficient funds, at a reasonable cost, to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects the ability to, at a reasonable cost, meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate and market opportunities. The ability of a financial institution to meet current financial obligations is a function of the balance sheet structure, the ability to liquidate assets, and access to various sources of funds.

Parent Company Liquidity

The Company currently obtains its liquidity primarily from ~~multiple sources, including~~ dividends from the ~~Bank and the issuance of debt and equity securities.~~Bank. The primary uses of the Company's liquidity are debt service, ~~and~~ operating expenses and the payment of cash dividends which ~~includes compensation and benefits, legal and professional expense and general and administrative expenses.~~were increased to $0.05 per share in the first quarter 2020. The Company holds $246 million of senior notes which are scheduled to mature on July 15, 2021. At ~~September~~June 30, ~~2017,~~2020, the Company held ~~$200~~$315 million of cash on deposit at the Bank, ~~or 3.8 years~~for future cash outflows for an amount sufficient to service the senior notes, repay the senior notes at maturity, pay dividends and cover the operating expenses of ~~expense and debt service coverage.~~the Company.

The OCC ~~regulates~~and the FRB regulate all capital distributions made by the Bank, directly or indirectly, to the holding company, including dividend payments. ~~A subsidiary of a savings and loan holding company, such as the Bank, must file a notice or application with the OCC at least 30 days prior to each proposed capital distribution.~~ Whether an application or notice is required is based on a number of factors including whether the institution qualifies for expedited treatment under the OCC rules and regulations or if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two ~~years. In addition, as a subsidiary of~~

~~a savings and loan holding company,~~years, or the Bank ~~must receive approval from~~would not be at least adequately capitalized following the ~~FRB before declaring any dividends.~~dividend. Additional restrictions on dividends apply if the Bank fails the QTL test.

In As of June 30, 2020, the ~~third quarter 2017, we paid dividends of $84 million from~~Bank is in compliance with the QTL test. At June 30, 2020, the Bank is able to pay dividends to the Bancorp. To support the on-going debt service and other Bancorp expenses, we also intend to reduce our Bancorp double leverage and debt to equity ratios to be more consistent with such ratios at other mid-sized banks, which would likely require further dividend payments from the Bankholding company of approximately $217 million without submitting an application to the ~~Bancorp for the foreseeable future.~~OCC and remain well capitalized.

~~For further information and restrictions related to the Bank's payment of dividends, see MD&A - Capital and Regulatory Risk.~~

Bank Liquidity

~~We primarily originate agency-eligible LHFS~~ Our primary sources of funding are deposits from retail and ~~therefore the majority of new residential first mortgage loan originations are readily convertible~~government customers, custodial deposits related to ~~cash, either by selling them as part of our monthly agency sales, private party whole loan sales, or by pledging them to the~~loans we service and FHLB ~~of Indianapolis and borrowing against them.~~borrowings. We use the FHLB of Indianapolis as a significant source for funding our residential mortgage ~~banking~~origination business due to the flexibility in terms ~~of being able~~which allows us to borrow or repay borrowings as daily cash needs require.

We have arrangements with the FRB of Chicago to borrow as appropriate from its discount window. The discount window is also a borrowing facility that is intended to be used only for short-term liquidity needs arising from special or unusual circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we provide. To collateralize the line, we pledge investment securities and loans that are eligible based on FRB of Chicago guidelines. At September 30, 2017 and December 31, 2016, we had no borrowings outstanding against this line of credit.

The amount we can borrow, or the value we receive for the assets pledged to our liquidity providers, varies based on the amount and type of pledged collateral, as well as the perceived market value of the assets and the "haircut" of the market value of the assets. That value is sensitive to the pricing and policies of our liquidity providers and can change with little or no notice.

Further, other sources of liquidity include our LHFS portfolio and unencumbered investment securities. We primarily originate agency-eligible LHFS and therefore the majority of new residential first mortgage loan originations are readily convertible to cash, either by selling them as part of our monthly agency sales, RMBS, private party whole loan sales, or by pledging them to the FHLB and borrowing against them. In addition, we have the ability to sell unencumbered investment securities or use them as collateral. At June 30, 2020, we had $2.7 billion available in unencumbered investment securities.

Our ~~Consolidated Statements~~primary measure of Cash Flows shows cash used in operating activities of $19.2 billion and $10.1 billion for the nine months ended September 30, 2017 and 2016, respectively. This primarily reflects our mortgage operations andliquidity is a ~~reflection~~ratio of ready liquidity to volatile funding, the volatile funds coverage ratio (“VFCR”), which was 76.88 percent as of June 30, 2020. The VFCR is a liquidity coverage ratio that is customized to our business and ensures we have adequate coverage to meet our liquidity needs during times of liquidity stress. Volatile funds are the portion of the ~~manner~~Bank’s funding identified as being at a higher risk of runoff in ~~which we execute certain~~times of stress. Ready liquidity consists of cash on reserve at the Federal Reserve and unused borrowing capacity provided by the loan ~~sales for which~~and investments portfolios. The VFCR is calculated, reported, and forecasted daily as part of our liquidity management framework.

Our liquidity position is continuously monitored and adjustments are made to the ~~cash outflow is considered an operating activity~~balance between sources and uses of funds as deemed appropriate. We balance the ~~corresponding cash inflow is considered an investing activity. For the period ending September 30, 2017, operating cash flows declined primarily due~~liquidity of our loan assets to our ~~election to extend the~~available funding sources. Our LHFI portfolio is funded with stable core deposits whereas our warehouse loans and LHFS may be funded with FHLB borrowings and custodial deposits. Warehouse loans are typically more liquid than other loan assets, as loans are paid within a short amount of time, when the lender sells the loan to an outside investor or, in some instances, to the Bank. As not all asset categories require the same level of liquidity, our loan-to-deposit ratio shows how we ~~hold mortgage-backed securities related to~~manage our ~~LHFS portfolio.~~liquidity position, how much liquidity we have and the agility of our balance sheet. The Company's HFI loan-to-deposit ratio, was 77 percent as of June 30, 2020. Excluding warehouse loans, which have draws that typically pay off within a few weeks, and custodial deposits, which represent mortgage escrow accounts on deposit with the Bank, the HFI loan-to-deposit ratio was 85 percent as of June 30, 2020.

As governed and defined by our ~~internal~~Board liquidity policy, we maintain adequate excess liquidity levels appropriate to cover unanticipated liquidity needs. In addition to this liquidity, we also maintain targeted minimum levels of unused ~~collateralized~~ borrowing capacity as another cushion against unexpected liquidity needs. Each business day, we forecast 90 days of daily cash needs. This allows us to determine our projected near term daily cash fluctuations and also to plan and adjust, if necessary, future activities. As a result, in an adverse environment, we believe we would be able to make adjustments to operations as required to meet the liquidity needs of our business, including adjusting deposit rates to increase deposits, planning for additional FHLB borrowings, accelerating sales of LHFS (agencies and/or private), selling LHFI or investment securities, borrowing through the use of repurchase agreements, reducing originations, making changes to warehouse funding facilities, or borrowing from the discount window.

Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. We balance the liquidity of our loan assets to our available funding sources. Our LHFI portfolio is funded with stable core deposits whereas our warehouse and LHFS may be funded with FHLB borrowings.

Management is not aware of any events that are reasonably likely to have a material adverse effect on our ~~liquidity, capital resources or operations.~~liquidity.

~~Liquidity Table~~

September 30, 2017 December 31, 2016 Change
(Dollars in millions)
Demand deposit accounts $ 1,234
$ 1,134
$ 100
Savings accounts 3,718
3,887
(169 )
Money market demand accounts 291
247
44
Certificates of deposit/CDARS 1,297
1,056
241
Total retail deposits 6,540
6,324
216
Government deposits 1,068
1,030
38
Wholesale deposits 43
—
43
Company controlled deposits 1,510
1,446
64
Total deposits $ 9,161
$ 8,800
$ 361
Federal Home Loan Bank advances $ 5,365
$ 2,980
$ 2,385
Other long-term debt 493
493
—
Total borrowed funds $ 5,858
$ 3,473
$ 2,385

~~Deposits~~

The following table presents aprimary sources of funding as of the dates indicated:


	June 30, 2020		December 31, 2019		Change
	(Dollars in millions)
Retail deposits	$	9,770	$	9,164	$	606
Government deposits	1,193		1,213		(20)
Wholesale deposits	867		633		234
Custodial deposits	6,068		4,136		1,932
Total deposits	17,898		15,146		2,752
FHLB advances and other short-term debt	4,554		4,815		(261)
Other long-term debt	493		496		(3)
Total borrowed funds	5,047		5,311		(264)
Total funding	$	22,945	$	20,457	$	2,488

The following table presents certain liquidity sources and borrowing capacity as of the dates indicated:


	June 30, 2020		December 31, 2019		Change
	(Dollars in millions)
Federal Home Loan Bank advances
Outstanding advances	$	3,560	$	4,345	$	(785)
Line of credit	4		—		4
Total used borrowing capacity	$	3,564	$	4,345	$	(781)
Borrowing capacity:
Collateralized borrowing capacity	$	3,244	$	2,345	$	899
Line of credit	26		30		(4)
Total unused borrowing capacity	$	3,270	$	2,375	$	895

FRB discount window
Collateralized borrowing capacity	$	1,623	$	758	$	865

Paycheck Protection Program liquidity facility
Outstanding advances	$	325	$	—	$	325
Borrowing capacity:
Collateralized borrowing capacity	$	55	$	—	$	55

Unencumbered investment securities
Agency - Commercial (1)	$	1,512	$	1,257	$	255
Agency - Residential (1)	1,068		1,180		(112)
Municipal obligations	26		26		—
Corporate debt obligations	76		77		(1)
Other	1		1		—
Total unencumbered investment securities	$	2,683	$	2,541	$	142

(1) These are not currently pledged to the FHLB but are eligible to be pledged, at our discretion.

Deposits

The following table presents the composition of our deposits:


	June 30, 2020						December 31, 2019
	Balance		% of Deposits		Balance		% of Deposits		Change
	(Dollars in millions)
Retail deposits
Branch retail deposits
Savings accounts	$	3,166	17.7	%	$	3,030	20.0	%	$	136
Certificates of deposit/CDARS (1)	1,826		10.2	%	2,353		15.5	%	(527)
Demand deposit accounts	1,606		9.0	%	1,318		8.7	%	288
Money market demand accounts	492		2.7	%	495		3.3	%	(3)
Total branch retail deposits	7,090		39.6	%	7,196		47.5	%	(106)
Commercial deposits (2)
Demand deposit accounts	2,013		11.2	%	1,438		9.5	%	575
Savings accounts	425		2.4	%	342		2.3	%	83
Money market demand accounts	242		1.4	%	188		1.2	%	54
Total commercial retail deposits	2,680		15.0	%	1,968		13.0	%	712
Total retail deposits	9,770		54.6	%	$	9,164	60.5	%	$	606
Government deposits
Savings accounts	$	528	3.0	%	$	495	3.3	%	$	33
Demand deposit accounts	347		1.9	%	360		2.4	%	(13)
Certificates of deposit/CDARS (1)	318		1.8	%	358		2.4	%	(40)
Total government deposits	1,193		6.7	%	1,213		8.0	%	(20)
Custodial deposits (3)	6,068		33.9	%	4,136		27.3	%	1,932
Wholesale deposits	867		4.8	%	633		4.2	%	234
Total deposits (4)	$	17,898	100.0	%	$	15,146	100.0	%	$	2,752

September 30, 2017 December 31, 2016
Balance % of Deposits Balance % of Deposits Change
(Dollars in millions)
Retail deposits
Branch retail deposits
Demand deposit accounts $ 930
10.2 % $ 852
9.7 % $ 78
Savings accounts 3,653
39.9 % 3,824
43.5 % (171 )
Money market demand accounts 214
2.3 % 138
1.6 % 76
Certificates of deposit/CDARS (1) 1,295
14.1 % 1,055
12.0 % 240
Total branch retail deposits 6,092
66.5 % 5,869
66.7 % 223
Commercial retail deposits

Demand deposit accounts 304
3.3 % 282
3.2 % 22
Savings accounts 65
0.7 % 63
0.7 % 2
Money market demand accounts 77
0.8 % 109
1.2 % (32 )
Certificates of deposit/CDARS (1) 2
— % 1
— % 1
Total commercial retail deposits 448
4.9 % 455
5.2 % (7 )
Total retail deposits $ 6,540
71.4 % $ 6,324
71.9 % $ 216
Government deposits

Demand deposit accounts $ 272
3.0 % $ 250
2.8 % $ 22
Savings accounts 414
4.5 % 451
5.1 % (37 )
Certificates of deposit/CDARS (1) 382
4.2 % 329
3.7 % 53
Total government deposits (2) 1,068
11.7 % 1,030
11.7 % 38
Wholesale deposits 43
0.5 % —
— % —
Company controlled deposits (3) 1,510
16.5 % 1,446
16.4 % 64
Total deposits (4) $ 9,161
100.0 % $ 8,800
100.0 % $ 361


~~(1)~~	~~The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately~~ ~~$1.3 billion~~ ~~and $1.0 billion at September 30, 2017 and December 31, 2016.~~


~~(2)~~	~~Government deposits include funds from municipalities and schools.~~


~~(3)~~	~~These accounts represent a portion of the investor custodial accounts and escrows controlled by us in connection with loans serviced for others and that have been placed on deposit with the Bank.~~


~~(4)~~	~~The aggregate amount of deposits with a balance over $250,000 was approximately $4.2 billion and $4.0 billion at September 30, 2017 and December 31, 2016.~~

(1)The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.3 billion and $1.7 billion at June 30, 2020 and December 31, 2019, respectively.

(2)Contains deposits from commercial and business banking customers.

(3)Represents investor custodial accounts and escrows controlled by us in connection with loans serviced or subserviced for others that have been placed on deposit with the Bank.

(4)Total exposure related to uninsured deposits over $250,000 was approximately $4.6 billion and $3.6 billion at June 30, 2020 and December 31, 2019, respectively.

Total deposits increased ~~$361 million,~~$2.8 billion, or ~~4.1~~18 percent, at ~~September~~June 30, ~~2017,~~2020 compared to December 31, ~~2016,~~2019, primarily ~~due to~~driven by growth in ~~branch retail deposits. Branch retail deposits increased $223 million at September 30, 2017 compared to December 31, 2016, primarily due to an~~our servicing business which resulted in a $1.9 billion increase in ~~retail certificates of deposit/CDARS.~~custodial deposits.

We utilize local governmental agencies and other public units as an additional source for deposit funding. ~~As a~~

~~Michigan bank, we~~We are not required to hold collateral against our government deposits from Michigan government entities as they are covered by the Michigan Business and Growth Fund. ~~This results~~At June 30, 2020, we were required to hold collateral for our government deposits in ~~higher margins earned~~California that were in excess of $250,000. The total of collateral held for California at June 30, 2020 was $115 million. In Indiana, Wisconsin and Ohio, we may be required to hold collateral against our government deposits based on a variety of factors including, but not limited to, the size of individual deposits and external bank ratings. At June 30, 2020, collateral held on government deposits in these ~~deposits which can be used to fund loans. Government~~states was $2 million. At June 30, 2020, government deposit accounts ~~include $382~~included $318 million of certificates of deposit with maturities typically less than one year and ~~$686~~$876 million inof checking and savings ~~accounts at September 30, 2017.~~accounts.

~~Company controlled~~ Custodial deposits arise due to our servicing or ~~sub-servicing~~subservicing of loans for others and represent the portion of the investor custodial accounts on deposit with the Bank. ~~Certain~~For certain subservice agreements, these deposits require us to ~~reimburse~~credit the MSR owner ~~for the spread on these funds.~~interest against subservicing income. This cost is a component of net loan administration income. ~~During the nine months ended September 30, 2017, these deposits increased $64 million, primarily due to the increase in subservicing and taxes and insurance.~~

Company controlled deposits are used to fund our most liquid assets including LHFS and warehouse loans. As not all asset categories require the same level of liquidity, our loan-to-deposit ratio shows how we manage our liquidity position, how much liquidity we have and the agility of our balance sheet. The Company's HFI loan-to-deposit ratio, which excludes warehouse loans and company controlled deposits, was 78 percent at September 30, 2017, which provides substantial liquidity for continued growth.

We participate in the CDARS program, through which certain customer CDs are exchanged for CDs of similar amounts from other participating ~~banks. This gives~~banks and customers ~~the potential to~~may receive FDIC insurance up to $50 million. This program helps the Bank secure larger deposits and attract and retain customers. At ~~September~~June 30, ~~2017,~~2020, we had ~~$199~~$124 million of total CDs enrolled in the CDARS ~~program. The total CDARS balances decreased $31~~program, a decrease of $8 million ~~at September 30, 2017~~ from December 31, ~~2016.~~2019.

~~FHLBAdvances~~

FHLBAdvances

The FHLB provides loans, also referred to as advances, on a fully collateralized basis, to savings banks and other member financial institutions. We are required to maintain a minimum amount of qualifying collateral securing FHLB advances. In the event of default, the FHLB advance is similar to a secured borrowing, whereby the FHLB has the right to sell the pledged collateral to settle the fair value of the outstanding advances.

We rely upon advances from the FHLB as a source of funding for the origination or purchase of loans for sale in the secondary market and for providing duration specific short-term and long-term financing. The outstanding balance of FHLB advances fluctuates from time to time depending on our current inventory of mortgage LHFS and the availability of lower cost funding sources. Our portfolio includes short-term fixed rate advances ~~long-term LIBOR adjustable advances,~~ and long-term fixed rate advances. Interest rates on the LIBOR index advances reset every three months and the advances may be prepaid without penalty, with notification, at scheduled three-month intervals after an initial 12-month lockout period.

~~The FHLB provides loans, also referred to as advances, on a fully collateralized basis, to savings banks and other member financial institutions.~~ We are currently authorized through a resolution of our ~~board~~Board of ~~directors~~Directors to apply for advances from the FHLB using approved loan types as collateral, which includes residential first mortgage loans, home equity lines of credit, and commercial real estate loans. ~~At September~~As of June 30, ~~2017, we had the authority~~2020, our Board of Directors authorized and ~~approval from the FHLB to utilize~~approved a line of credit with the FHLB of up to ~~$7.0~~$10 billion, which is further limited based on our total assets and ~~we may access that line to~~qualified collateral, as determined by the ~~extent that collateral is provided.~~FHLB. At ~~September~~June 30, ~~2017,~~2020, we had ~~$5.4~~$3.6 billion of advances outstanding and an additional ~~$1.1~~$3.2 billion of collateralized borrowing capacity available at the FHLB.

Federal Reserve Discount Window

We have arrangements with the FRB of Chicago to borrow from its discount window. The discount window is a borrowing facility that we may utilize for short-term liquidity needs arising from special or unusual circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we provide. To collateralize the line, we pledge investment securities and loans that are eligible based on FRB of Chicago guidelines.

At ~~September~~June 30, ~~2017,~~2020, we pledged collateral, which included commercial loans, municipal bonds, and agency bonds, to the FRB of Chicago amounting to $2.9 billion with a lendable value of $1.6 billion. At December 31, 2019, we pledged collateral to the ~~Federal Reserve Discount Window~~FRB of Chicago amounting to ~~$435~~$788 million with a lendable value of ~~$418~~$758 million. ~~At December 31, 2016, we pledged collateral to the Federal Reserve Discount Window amounting to $496 million with a lendable value of $474 million. At September~~We do not typically utilize this available funding source, and at June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, we had no borrowings outstanding against this line of credit.

Paycheck Protection Program Liquidity Facility

In conjunction with the Paycheck Protection Program administered by the Small Business Administration, the Federal Reserve has extended credit to eligible financial institutions that originate PPP loans. At June 30, 2020, we had $325 million outstanding under the Paycheck Protection Program Liquidity Facility.

Other Unsecured Borrowings

We have access to overnight federal funds purchased lines with other Federal Reserve member institutions. We utilize this source of funding for short-term liquidity needs, depending on the availability and cost of our other funding sources. At June 30, 2020 we had $655 million of borrowings outstanding under this source of funding. Additional borrowing capacity under this and other sources of funding can vary depending on market conditions.

Debt

As part of our overall capital strategy, we previously raised capital through the issuance of junior subordinated notes to our special purpose trusts formed for the offerings, which issued Tier 1 qualifying preferred stock ~~(trust~~("trust preferred ~~securities)~~securities"). The trust preferred securities are callable by us at any time. Interest is payable on a quarterly basis; however, we may defer interest payments for up to 20 quarters without default or penalty. At ~~September~~June 30, ~~2017,~~2020, we ~~had no deferred~~are current on all interest payments.

~~On July 11, 2016,~~ Additionally, we ~~issued $250~~have $246 million of senior debt outstanding at June 30, 2020 (“Senior ~~Notes~~Notes”) which ~~mature~~matures on July 15, 2021. ~~The proceeds from these notes were used to bring current and redeem our then outstanding TARP Preferred Stock.~~

Prior to June 15, 2021, we may redeem some or all of the Senior Notes at a redemption price equal to the greater of 100 percent of the aggregate principal amount of the Senior Notes to be redeemed or the sum of the present values of the remaining scheduled payments plus, in each case, accrued and unpaid interest.

For further information, see Note 9 - Borrowings.

Operational Risk

Operational risk is the risk ~~of loss due~~ to ~~human error;~~current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, ~~and controls; violations of,~~human errors or ~~noncompliance with, laws, rules and regulations, prescribed practices,~~misconduct, or ~~ethical standards; and~~adverse external ~~influences such as market conditions,~~events which may include vendor failures, fraudulent activities, disasters, and security risks. We continuously strive to ~~strengthen~~adapt our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk.

We evaluate internal systems, processes and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses. The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational and fraud losses, and enhance our overall performance.

Natural disasters or other catastrophic events may cause damage or disruption to our operations. We have a nationwide mortgage lending presence through a network of brokers, correspondents and retail locations, as well as employees, customers and loans collateralized by properties across the country. As such, events like Hurricanes Harvey and Irma, as well as the recent California wildfires have the potential to impact our business.

During the third quarter of 2017, Hurricanes Harvey and Irma made landfall in Texas and Florida which represent our second and third largest markets for mortgage originations, respectively. These hurricanes could potentially affect credit losses, our ability to close mortgages and generate new loans, or cause us to incur greater losses when repurchasing FHA loans. While our assessment of the impact of these events is still ongoing, our LHFI portfolio contains approximately $279 million loans at risk within the counties which have been deemed disaster areas by FEMA. Based on our initial assessment, we believe damages and any credit impact from the hurricanes will not be significant and that our allowance coverage levels established at September 30, 2017 are adequate to cover any exposure we might have to further credit risk. In accordance with investor guidelines, homeowners within FEMA counties in Texas, Florida, Puerto Rico and the U.S. Virgin Islands have been offered a 90 day forbearance on their mortgage payments and we are working with borrowers on repayment plans in order to allow them extra time for payments to ease their financial burden.

Loans with government guarantees

Substantially all of our loans with government guarantees continue to be insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs ("VA"). In the event of a government guaranteed loan borrower default, the Bank has a unilateral option to repurchase loans sold to GNMA that are 90 days past due and ~~management believes that~~recover losses through a claims process from the ~~reimbursement process is proceeding appropriately.~~insurer. Nonperforming repurchased loans in this portfolio earn interest at a rate based upon the 10-year U.S. Treasury note rate from the time the underlying loan becomes delinquent, which is not paid by the FHA until claimed. Additionally, if the Bank cures the loan, it can be re-sold to GNMA. If not, the Bank can begin the process of collecting the government guarantee by filing a claim in accordance with established guidelines. Certain loans within our portfolio may be subject to indemnifications and insurance limits which ~~exposes~~expose us to limited credit risk.

In the ~~three and nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we ~~experienced~~had less than $2 million in net charge-offs ~~of $1 million and $3 million, respectively,~~related to loans with government guarantees and have reserved for the remaining risks within other assets and as a component of our ~~ALLL~~allowance for loan losses on residential first mortgages. These ~~charge-offs~~additional expenses or charges arise due to insurance limits on VA insured loans and FHA property foreclosure and preservation requirements that may result in a loss in excess of all, or in part of, the guarantee.

Our loans with government guarantees portfolio totaled ~~$253 million~~$1.8 billion at ~~September~~June 30, ~~2017,~~2020, as compared to ~~$365 million~~$0.7 billion at December 31, ~~2016. The decrease~~2019. GNMA has granted borrowers with an option to seek forbearances on their mortgage repayments. $3.0 billion of GNMA loans are in forbearance as of June 30, 2020. When a GNMA loan is ~~primarily~~ due, but unpaid, for three consecutive months (typically referred to as 90 days past due) the loan is required to be re-recognized on the balance sheet by the servicer. This resulted in $1.1 billion of repurchase obligations as of June 30, 2020, a $1.0 billion increase from December 31, 2019. These loans ~~transferred~~are recorded in loans with government guarantees, and the liability to ~~LHFS and resold to Ginnie Mae out-pacing new purchases.~~repurchase is recorded in other liabilities on the consolidated statements of financial condition.

For further information, see Note 5 - Loans with Government Guarantees.

Representation and warranty reserve

When we sell mortgage loans, we make customary representations and warranties to the purchasers, including sponsored securitization trusts and their insurers (primarily Fannie Mae and Freddie Mac).

~~The representation and warranty benefit~~ An estimate of ~~$4 million and $11 million during~~ the three and nine months ended September 30, 2017, respectively, was primarily due to lower loss severities for agency repurchases, and sustained lower volumes of repurchases and the continued reduction in our repurchase demand pipeline.

During the nine months ended September 30, 2017, we had $12 million in Fannie Mae new repurchase demands and $6 million in Freddie Mac new repurchase demands. These amounts are down as compared to the nine months ended September 30, 2016 when we had $14 million in Fannie Mae new repurchase demands and $10 million in Freddie Mac new repurchase demands. The total UPB of 2009 and later vintage loans, which are subject to the representation and warranty reserve, sold to Fannie Mae and Freddie Mac was $195 million and $177 million at September 30, 2017 and September 30, 2016, respectively.

~~For further information on Representation and Warranty Reserve, see Note 10 - Representation and Warranty Reserve.~~

~~Regulatory Risks~~

~~Consent Orders~~

On September 29, 2014, the Bank entered into a Consent Order with the CFPB. The Consent Order relates to alleged violations of federal consumer financial laws arising from the Bank’s residential first mortgage loan loss mitigation practices and default servicing operations dating back to 2011. Under the terms of the Consent Order, the Bank paid $28 million for borrower remediation and $10 million in civil money penalties. The settlement does not involve any admission of wrongdoing on the part of the Bank or our employees, directors, officers, or agents. For further information and a complete description of all of the terms of the Consent Order, please refer to our Current Report on Form 8-K filed on September 29, 2014.

~~Supervisory Agreement~~

On January 28, 2010, we became subject to the Supervisory Agreement, which will remain in effect until terminated, modified, or suspended in writing by the Federal Reserve. The failure to comply with the Supervisory Agreement could result in the initiation of further enforcement action by the Federal Reserve, including the imposition of further operating restrictions, and could result in additional enforcement actions against us. We have taken actions which we believe are appropriate to comply with, and intend to maintain compliance with, all of the requirements of the Supervisory Agreement. For further information and a complete description of all of the terms of the Supervisory Agreement, please refer to the copy of the Supervisory Agreement filed with the SEC as an exhibit to our 2016 Form 10-K for the year ended December 31, 2016.

~~Department of Justice Settlement Agreement~~

On February 24, 2012, the Bank entered into a Settlement Agreement with the DOJ under which we made an initial payment of $15 million and agreed to make future payments totaling $118 million in annual increments of up to $25 million upon meeting all of the following conditions which are evaluated quarterly and include: (a) the reversal of the DTA valuation allowance, which occurred at the end of 2013; (b) the repayment of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "TARP Preferred"), which occurred in July 2016; and (c) the Bank having a Tier 1 Leverage Capital Ratio of 11 percent or greater as filed in the Call Report with the OCC.

No payment would be required until six months after the Bank files its Call Report first reporting that its Tier 1 Leverage Capital Ratio was 11 percent or greater. If all other conditions were then satisfied, an initial annual payment of $25 million would be due at that time. The next annual payment is only made if all conditions continue to be satisfied otherwise payments are delayed until all such conditions are met. Further, making such a payment must not violate any material banking regulatory requirement, and the OCC must not object in writing.

The combination of (a) future dividends from the Bank to Bancorp and (b) continued growth in earning assets at the Bank are expected to continue to limit the growth rate of the Bank’s Tier 1 Leverage Capital Ratio, which could have an impact on the timing of expected cash flows under the Settlement Agreement.

Consistent with our business and regulatory requirements, Flagstar shall seek in good faith to fulfill the conditions, and will not undertake any conduct or fail to take any action the purpose of which is to frustrate or delay our ability to fulfill any of the conditions.

Additionally, if the Bank or Bancorp become party to a business combination in which the Bank and Bancorp represent less than 33.3 percent of the resulting company’s assets, annual payments would commence twelve months after the date of that business combination.

~~The Settlement Agreement meets the definition of a financial instrument for which we elected the fair value option. The~~ fair value of the ~~liability~~guarantee associated with the mortgage loans is ~~subject to significant uncertainty~~recorded in other liabilities in the Consolidated Statements of Financial Condition, which was $7 million and ~~is impacted by forecasted estimates of equity, earnings, timing~~$5 million at June 30, 2020 and amount of dividends and growth of the balance sheet and their related impacts on forecasted Tier 1 Leverage Capital Ratio. We consider the assumptions a market participant would make to transfer the liability and evaluate multiple possible outcomes and our estimates of the likelihood of these outcomes, which may change over time. December 31, 2019, respectively.

Capital

~~Under the OCC's capital distribution regulations, a savings bank that is a subsidiary of a savings~~ Management actively reviews and loan holding company must either notify or seek approval from the OCC of a capital distribution at least 30 days prior to the declaration of a dividend or the approval by the board of directors of the proposed capital distribution. The 30-day period allows the OCC to determine whether the distribution would not be advisable. Also, under Federal Reserve requirements, the Bank must provide a 30-day notice to the Federal Reserve prior to declaring or paying dividends. In addition, under the Supervisory Agreement, the Company agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital distributions. We seek to managemanages our capital ~~levels~~position and overall business in a manner which we consider to be prudent and work with our regulators to ensure that our capital levels are appropriate considering our risk profile and evaluation of the capital levels maintained by peer institutions.

~~Regulatory Capital Composition - Transition~~

~~The maintenance of appropriate levels of capital is monitored by management on a regular basis.~~strategy. We ~~manage our funding and capital positions by making adjustments to our balance sheet size and composition and hold capital to protect liability holders from the risk of loss.~~

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. We are currently subject to regulatory capital rules issued by U.S. banking regulators.

Effective January 1, 2015, we became subject to the Basel III rules, which include certain transition provisions. Capital deductions to the Company's MSRs and deferred tax assets are recognized in 20 percent annual increments, and will be fully recognized as of January 1, 2018. When presented on a fully phased-in basis, capital, risk-weighted assets, and the capital ratios assume all regulatory capital adjustments and deductions are fully recognized. At September 30, 2017, the Company and the Bank were subject to the transitional phase-in limitation on deductions related to MSRs and certain deferred tax assets. The annual incremental change in the deductions due to the increase in the transitional phase-in from 60 percent in 2016 to 80 percent in 2017 reduced our regulatory capital ratios. These transitional phase in amounts increase to 100 percent in 2018.

Effective January 1, 2016, we became subject to the capital conservation buffer under the Basel III rules, subjecting a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer above the minimum risk based capital requirements. The capital conservation buffer for 2017 must be greater than 1.25 percent in order to not be subject to limitations. The Company and the Bank had a capital conservation buffer of 7.0 percent and 7.9 percent, respectively, as of September 30, 2017. When fully phased-in on January 1, 2019, the capital conservation buffer must be greater than 2.5 percent.

Dodd-Frank Act Section 171, commonly known as the Collins Amendment, grandfathered the regulatory capital treatment of hybrid securities, such as trust preferred securities issued prior to May 9, 2010, for banks or holding companies with less than $15 billion in total consolidated assets as of December 31, 2009.

~~At September 30, 2017, we were considered "well-capitalized" for regulatory purposes.~~

~~The following tables show the regulatory capital ratios as of the dates indicated:~~

September 30, 2017 December 31, 2016
Amount Ratio Amount Ratio
(Dollars in millions)
Bancorp
Tier 1 leverage (to adjusted avg. total assets) $ 1,423
8.80 % $ 1,256
8.88 %
Total adjusted avg. total asset base (1)
16,165
14,149

Tier 1 capital (to RWA) $ 1,423
13.72 % $ 1,256
15.12 %
Common equity Tier 1 (to RWA) 1,208
11.65 % 1,084
13.06 %
Total capital (to RWA) 1,554
14.99 % 1,363
16.41 %
Risk-weighted asset base (1)
$ 10,371
$ 8,305

September 30, 2017 December 31, 2016
Amount Ratio Amount Ratio
(Dollars in millions)
Bank
Tier 1 leverage (to adjusted avg. total assets) $ 1,519
9.38 % $ 1,491
10.52 %
Total adjusted avg. total asset base (1)
16,191
14,177

Tier 1 capital (to RWA) $ 1,519
14.61 % $ 1,491
17.90 %
Common equity Tier 1 (to RWA) 1,519
14.61 % 1,491
17.90 %
Total capital (to RWA) 1,651
15.88 % 1,598
19.18 %
Risk-weighted asset base (1)
$ 10,396
$ 8,332


~~(1)~~	~~Based on adjusted total assets for purposes of Tier 1 leverage capital and RWA for purposes Tier 1, common equity Tier 1, and total risk-based capital.~~

Our Bancorp Tier 1 leverage ratio decreased at September 30, 2017, compared to December 31, 2016, primarily as a result of an increase in average assets during the nine months ended September 30, 2017.

Banks with assets greater than $10 billion are required to submit a DFAST under the final rules established by their primary regulator. DFAST requires banks to project results over a nine-quarter planning horizon under three scenarios (baseline, adverse, and severely adverse) published by the Federal Reserve and to show that the bank would exceed regulatory minimum capital standards for the Tier 1 leverage ratio, Tier 1 common ratio, Tier 1 risk-based capital ratio, and the Total risk-based capital ratio under all of these scenarios. We are not subject to the Federal Reserve’s Comprehensive Capital Analysis and Review program.

~~Additionally, we~~ conduct quarterly capital stress tests and capital adequacy ~~assessments. These quarterly capital stress tests~~assessments which utilize internally defined ~~scenarios that~~scenarios. These analyses are designed to help management and the Board better understand the integrated sensitivity of various risk exposures through quantifying the potential financial and capital impacts of hypothetical stressful events and scenarios. We make adjustments to our balance sheet composition taking into consideration potential business risks, regulatory requirements and the flexibility to support future growth. We prudently manage our capital position and work with our regulators to ensure that our capital levels are appropriate considering our risk profile.

The ~~following table contains certain regulatory~~capital standards we are subject to include requirements contemplated by the Dodd-Frank Act as well as guidelines reached by Basel III. These risk-based capital adequacy guidelines are intended to measure capital adequacy with regard to a banking organization’s balance sheet, including off-balance sheet exposures such as unused portions of loan commitments, letters of credit, and recourse arrangements. Our capital ratios ~~for the Bank and the Company:~~are maintained at levels in excess of those

Regulatory Minimums Regulatory Minimums to be Well-Capitalized Bank Bancorp
September 30, 2017
Basel III Ratios (transitional)
Common equity Tier I capital ratio 4.50 % 6.50 % 14.61 % 11.65 %
Tier I leverage ratio 4.00 % 5.00 % 9.38 % 8.80 %
Basel III Ratios (fully phased-in) (1)

Common equity Tier I capital ratio 4.50 % 6.50 % 13.80 % 10.58 %
Tier I leverage ratio 4.00 % 5.00 % 9.13 % 8.43 %


~~(1)~~	~~Refer to MD&A - Use of Non-GAAP Financial Measures.~~

~~The impact under the fully phased in Basel III rules~~considered to ~~our~~be "well-capitalized" by regulators. Tier 1 leverage ~~ratio is mostly driven by~~was 7.76 percent at June 30, 2020 providing a 276 basis point stress buffer above the ~~treatment~~minimum level needed to be considered “well-capitalized.” Additionally, total risk-based capital to RWA was 11.32 percent at June 30, 2020 providing a 132 basis point buffer above the minimum level needed to be considered "well-capitalized".

Dodd-Frank Act Section 171, commonly known as the Collins Amendment, established minimum Tier 1 leverage and risk-based capital requirements for insured depository institutions, depository institution holding companies, and non-bank financial companies that ~~MSRs receive~~are supervised under ~~Basel III. Once fully phased in,~~ the ~~Basel III capital rules will significantly reduce~~Federal Reserve. Under the ~~allowable amount of the fair value of MSRs~~amendment, certain hybrid securities, such as trust preferred securities, may be included in Tier 1 ~~capital. At September 30, 2017,~~capital for bank holding companies that had total assets below $15 billion as of December 31, 2009. As we ~~had $246 million~~were below $15 billion in assets as of ~~MSRs, representing 17.3 percent of Tier 1 capital. Our ratio of MSRs to~~December 31, 2009, the trust preferred securities classified as long term debt on our balance sheet will be included as Tier 1 capital, ~~was 26.7 percent at December 31, 2016. During the nine months ended September 30, 2017,~~unless we ~~had $260 million in bulk MSR sales. Over the long term,~~complete an acquisition of a depository institution holding company or a depository institution and we ~~plan to continue to reduce our MSRs to Tier 1 ratio, taking into consideration market conditions to guide our pace of MSR reduction.~~

On August 22, 2017, in preparation for a forthcoming proposal that would simplify regulatory capital requirements, the federal banking regulators proposed a rule that would extend the existing transitional capital treatment for certain regulatory capital deductions and risk weights. The Agencies are proposing to extend the existing transition provisions for a targeted set of items: MSRs, certain DTAs, investmentsreport total assets greater than $15 billion in the ~~capital instruments of unconsolidated financial institutions,~~quarter in which the acquisition occurs. Should that event occur, our trust preferred securities would be included in Tier 2 capital.

Regulatory Capital

The Bank and ~~minority interests. This proposal would postpone the implementation of the fully phased-in requirements for these items by banking organizations that are not~~Flagstar have been subject to the ~~advanced approaches~~ capital requirements of the Basel III rules ~~prior to~~since January 1, 2015. On July 9, 2019, the Agencies issued the Final Capital Simplification Rule (the "New Rule") which simplifies certain requirements in the Agencies’ ~~consideration of~~current regulatory capital rules. We implemented capital simplification toon January 1, 2020. The New Rule increased the ~~capital rules.~~

On September 27, 2017, the federal banking agencies released a Notice of Proposed Rulemaking (NPR), proposing changes to certain aspects of the bank capital rules under the “standardized approach.” The proposal is to modify the approach to the capital treatment of acquisition, development,individual limit on MSRs and construction (ADC) loans characterized under the current capital rules as high volatility commercial real estate (HVCRE) exposures. The rule is intended to simplify the capital treatment of ADC loans and broaden the number ADC loans subject to a higher risk weighting, while reducing the risk weight for covered loans from 150% to 130%.

~~In addition, the new proposal would simplify the threshold deduction treatment for MSRs,~~ temporary difference DTAs ~~not realizable through carryback,~~to 25 percent of CET1 and ~~investments in~~eliminated the ~~capital of unconsolidated financial institutions. The proposal would require that non-advanced approaches banking organizations deduct from common equity tier 1 capital any amount of~~aggregate 15 percent CET1 deduction threshold for MSRs and temporary difference ~~DTAs, and investments~~DTAs.

On March 27, 2020, U.S. banking regulators issued an interim final rule to delay for two years the initial adoption impact of CECL on regulatory capital in response to COVID-19 followed by a three-year transition period. During the two-year delay we will add back to CET1 capital 100 percent of ~~unconsolidated financial institutions that individually exceeds~~the initial adoption impact of CECL plus 25 percent of the ~~common equity tier~~cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, ~~capital deduction threshold. Consistent~~2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital ~~rule,~~over the three-year period.

For the period presented, the following table sets forth our capital ratios as well as our excess capital over well-capitalized minimums.


Flagstar Bancorp	Actual				Well-Capitalized Under Prompt Corrective Action Provisions				Excess Capital Over Well-Capitalized Minimum (1)
	Amount	Ratio		Amount	Ratio		Capital Simplification
	(Dollars in millions)
June 30, 2020
Tier 1 leverage capital (to adjusted avg. total assets)	2,021	7.76	%	1,301	5.0	%	$	720
Common equity Tier 1 capital (to RWA)	1,781	9.11	%	1,272	6.5	%	509
Tier 1 capital (to RWA)	2,021	10.33	%	1,565	8.0	%	456
Total capital (to RWA)	2,214	11.32	%	1,956	10.0	%	258

(1)Excess capital is the difference between the actual capital ratios under current simplification rules and the ~~proposal,~~well-capitalized minimum ratio, multiplied by the relevant asset base.

As presented in the table above, our constraining capital ratio is our total capital to risk weighted assets at 11.32 percent. It would take a ~~banking organization would continue~~$258 million after-tax loss, with the balance sheet remaining constant, for our total risk-based capital ratio to ~~apply a 250 percent risk weight~~fall below the level considered to ~~any~~be "well-capitalized".

As of June 30, 2020, we had $261 million in MSRs, or$98 million in DTAs arising from temporary ~~DTAs not deducted. Also, any~~differences and no material investments in ~~the capital of~~ unconsolidated financial institutions ~~that are not deducted, would be assigned a risk weight according to the exposure category of the investment.~~

~~We are currently reviewing the proposed rules and the potential impact they may have~~or minority interest which drive differences between our current capital ratios. For additional information on our ~~regulatory capital. If enacted as proposed, we believe the rules should accelerate the~~ capital formation necessary to support further balance sheet growth and, under a limit of 25 percent of capital, give us the flexibility to better manage the uncertainties that may exist within the MSR market at any given time. This will allow us to hold more MSRs which are a high yielding asset that we fund efficiently and for which we hedge exposure to changes in interest rates, convexity and implied future volatility. Flagstar Bancorp's Tier 1 Leverage ratio should increase approximately 70 basis points after applying the simplified capital rules under the NPR.requirements, see Note 14 - Regulatory Matters.

Use of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this report includes the following non-GAAP financial ~~measures such as the estimated fully implemented Basel III capital levels and ratios and~~measures: tangible book value per ~~share.~~share, tangible common equity to assets ratio, and return on average tangible common

equity. We believe these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying performance and trends of the Company.

Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To mitigate these limitations, we have practices in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that our performance is properly reflected to facilitate consistent period-to-period comparisons. Our method of calculating these non-GAAP measures may differ from methods used by other companies. Although we believe the non-GAAP financial measures disclosed in this report enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for those financial measures prepared in accordance with GAAP. Where non-GAAP financial measures are used, the most directly comparable GAAP or regulatory financial measure, as well as the reconciliation to the most directly comparable GAAP or regulatory financial measure, can be found in this report.

~~Nonperforming assets / Tier 1 + Allowance for Loan Losses.~~ The ratio of nonperforming assets to Tier 1 and ALLL divides the total level of nonperforming LHFI assets by Tier 1 capital (to adjusted total assets), as defined by bank regulations, plus ALLL. We believe these measurements are meaningful measures of capital adequacy used by investors, regulators, management and others to evaluate the adequacy of capital in comparison to other companies within the industry.

September 30, 2017 December 31, 2016
(Dollars in millions)
Nonperforming assets $ 40
$ 54
Tier 1 capital (to adjusted total assets) 1,423
1,256
Allowance for loan losses 140
142
Tier 1 capital + ALLL $ 1,563
$ 1,398
Nonperforming assets / Tier 1 capital + ALLL 2.6 % 3.9 %

Tangible book value per ~~share.~~ share, tangible common equity to assets ratio and return on average tangible common equity. The Company believes that tangible book value per share, ~~provides~~tangible common equity to assets ratio, and return on average tangible common equity provide a meaningful representation of its operating performance on an ongoing basis. Management uses ~~this measure~~these measures to assess performance of the Company against its peers and evaluate overall performance. The Company believes ~~this~~these non-GAAP financial ~~measure provides~~measures provide useful information for investors, securities analysts and others because ~~it provides~~they provide a tool to evaluate the Company’s performance on an ongoing basis and compared to its peers.

September 30, 2017 December 31, 2016 September 30, 2016
(Dollars in millions, except share data)
Total stock holders' equity $ 1,451
$ 1,336
$ 1,286
Preferred stock —
—
—
Goodwill and intangibles 21
—
—
Tangible book value $ 1,430
$ 1,336
$ 1,286

Number of common shares outstanding 57,181,536
56,824,802
56,597,271
Tangible book value per share $ 25.01
$ 23.50
$ 22.72

~~Basel III (transitional) to Basel III (fully phased-in) reconciliation.~~ On January 1, 2015, the Basel III rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity Tier 1 capital and Tier 1 capital. When fully phased-in, Basel III, will increase capital requirements through higher minimum capital levels as well as through increases in risk-weights for certain exposures. Additionally, the final Basel III rules place greater emphasis on common equity. In October 2013, the OCC and Federal Reserve released final rules detailing the U.S. implementationThe following table provides a reconciliation of Basel III and the application of the risk-based and leverage capital rules to top-tier savings and loan holding companies. We have transitioned to the Basel III framework beginning in January 2015 and are subject to a phase-in period extending through 2018. Accordingly, the calculations provided below and on the previous page, are estimates. These measures are considered to be non-GAAP financial measures because they are not formally defined by GAAP and the Basel III implementation regulations. The Common Equity Tier 1, Tier 1, Total Capital and Leverage ratios will not be fully phased-in until January 1, 2018 and the Capital Conservation buffer will not be fully phased-in until January 1, 2019. The regulations are subject to change as clarifying guidance becomes available and the calculations currently include our interpretations of the requirements including informal feedback received through the regulatory process. The federal banking regulators have issued a series of new proposals regarding regulatory capital which may freeze or eliminate the transitional rules. See MD&A -Regulatory Capital Composition - Transition section for further information. Other entities may calculate the Basel III ratios differently from ours based on their interpretation of the guidelines. Since analysts and banking regulators may assess our capital adequacy using the Basel III framework, we believe that it is useful to provide investors information enabling them to assess our capital adequacy on the same basis.measures.


	June 30, 2020			March 31, 2020			December 31, 2019			September 31, 2019			June 30, 2019
	(Dollars in millions)
Total stockholders' equity	$	1,971		$	1,842		$	1,788		$	1,734		$	1,656
Less: Goodwill and intangible assets	164			167			170			174			178
Tangible book value/Tangible common equity	$	1,807		$	1,675		$	1,618		$	1,560		$	1,478

Number of common shares outstanding	56,943,979			56,729,789			56,631,236			56,510,341			56,483,937
Tangible book value per share	$	31.74		$	29.52		$	28.57		$	27.62		$	26.16

Total assets	$	27,468		$	26,805		$	23,266		$	22,048		$	20,206
Tangible common equity to assets ratio	6.58		%	6.25		%	6.95		%	7.08		%	7.31		%


	Three Months Ended,									Six Months Ended,
	June 30, 2020			March 31, 2020			June 30, 2020			June 30, 2019
	(Dollars in millions, except share data)
Net income	$	116		$	46		$	161		$	97
Plus: Intangible asset amortization, net of tax	3			2			6			6
Tangible net income	$	119		$	48		$	167		$	103

Total average equity	$	1,977		$	1,854		$	1,915		$	1,626
Less: Average goodwill and intangible assets	165			169			167			184
Total average tangible equity	$	1,812		$	1,685		$	1,748		$	1,442

Return on average common equity	23.47		%	9.82		%	16.86		%	11.94		%
Return on average tangible common equity	26.16		%	11.46		%	19.07		%	14.33		%

Common Equity Tier 1 (to RWA) Tier 1 leverage (to adjusted avg. total assets) Tier 1 Capital (to RWA)
Total Risk-Based Capital
(to RWA)
(Dollars in millions)
September 30, 2017
Flagstar Bancorp
Regulatory capital – Basel III (transitional) to Basel III (fully phased-in)
Basel III (transitional) $ 1,208
$ 1,423
$ 1,423
$ 1,554
Increased deductions related to deferred tax assets, MSRs, and other capital components (90 ) (65 ) (65 ) (62 )
Basel III (fully phased-in) capital $ 1,118
$ 1,358
$ 1,358
$ 1,492
Risk-weighted assets – Basel III (transitional) to Basel III (fully phased-in)
Basel III assets (transitional) $ 10,371
$ 16,165
$ 10,371
$ 10,371
Net change in assets 191
(65 ) 191
191
Basel III (fully phased-in) assets $ 10,562
$ 16,100
$ 10,562
$ 10,562
Capital ratios
Basel III (transitional) 11.65 % 8.80 % 13.72 % 14.99 %
Basel III (fully phased-in) 10.58 % 8.43 % 12.86 % 14.13 %

Common Equity Tier 1 (to RWA) Tier 1 leverage (to adjusted avg. total assets) Tier 1 Capital (to RWA)
Total Risk-Based Capital
(to RWA)
(Dollars in millions)
September 30, 2017
Flagstar Bank
Regulatory capital – Basel III (transitional) to Basel III (fully phased-in)
Basel III (transitional) $ 1,519
$ 1,519
$ 1,519
$ 1,651
Increased deductions related to deferred tax assets, MSRs, and other capital components (44 ) (44 ) (44 ) (41 )
Basel III (fully phased-in) capital $ 1,475
$ 1,475
$ 1,475
$ 1,610
Risk-weighted assets – Basel III (transitional) to Basel III (fully phased-in)
Basel III assets (transitional) $ 10,396
$ 16,191
$ 10,396
$ 10,396
Net change in assets 293
(45 ) 293
293
Basel III (fully phased-in) assets $ 10,689
$ 16,146
$ 10,689
$ 10,689
Capital ratios
Basel III (transitional) 14.61 % 9.38 % 14.61 % 15.88 %
Basel III (fully phased-in) 13.80 % 9.13 % 13.80 % 15.06 %

Critical Accounting Estimates

Various elements of our accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain accounting policies that, due to the judgment, estimates and assumptions ~~in those policies~~ are critical to an understanding of our Consolidated Financial Statements and the Notes, are described in Item 1. These policies relate to: (a) the determination of our ~~ALLL;~~ACL and (b) fair value measurements. We believe the judgment, estimates and assumptions used in the preparation of our Consolidated Financial Statements and the Notes are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements and the Notes to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations and/or financial condition.

For further information on our critical accounting policies, please refer to our Form 10-K for the year ended December 31, ~~2016,~~2019 and our Form 10-Q for the quarter ended March 31, 2020, which isare available on our website, flagstar.com, under the Investor Relations section, or on the website of the Securities and Exchange Commission, at sec.gov.

Forward – Looking Statements

~~FORWARD – LOOKING STATEMENTS~~

Certain statements in this Form 10-Q, including but not limited to statements included within the Management’s Discussion and Analysis of Financial Condition and Results of Operations, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. In addition, ~~Flagstar Bancorp, Inc.~~we may make forward-looking statements in our other documents filed with or furnished to the ~~SEC,~~Security and Exchange Commission (SEC), and our management may make forward-looking statements orally to analysts, investors, representatives of the media, and others.

Generally, forward-looking statements are not based on historical facts but instead represent management’s current beliefs and expectations regarding future ~~events.~~events and are subject to significant risks and uncertainties. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other than as required under United States securities laws, Flagstar does not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements. Such statements may be identified by words such as believe, expect, anticipate, intend, plan, estimate, may increase, may fluctuate, and similar expressions or future or conditional verbs such as will, should, would, and could. ~~Such statements are based on management’s current expectations and are subject to risks, uncertainties and changes in circumstances. Actual~~Our actual results and capital and other financial conditions may differ materially from those ~~included~~described in ~~these~~the forward-looking statements ~~due to~~depending upon a variety of factors, including without limitation the precautionary statements included within each individual business’ discussion and analysis of our results of operations and the risk factors listed and described in Item 1A to Part I, of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019, which are incorporated by reference herein, and Item 1A1A. to Part II, of this Quarterly Report on Form 10-Q ~~which are incorporated by reference herein.~~for the quarter ended June 30, 2020.

Other than as required under United States securities laws, ~~Flagstar Bancorp does~~we do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

Item 1. Financial Statements

Flagstar Bancorp, Inc.

Consolidated Statements of Financial Condition

(In millions, except share data)


	September 30, 2017			December 31, 2016				June 30, 2020		December 31, 2019
	(Unaudited)			(Unaudited)				(Unaudited)
Assets							Assets
Cash	$	88		$	84		Cash	$	204	$	220
Interest-earning deposits	145			74			Interest-earning deposits	23		206
Total cash and cash equivalents	233			158			Total cash and cash equivalents	227		426
Investment securities available-for-sale	1,637			1,480			Investment securities available-for-sale	2,348		2,116
Investment securities held-to-maturity	977			1,093			Investment securities held-to-maturity	496		598
Loans held-for-sale ($4,907 and $3,145 measured at fair value, respectively)	4,939			3,177
Loans held-for-investment ($13 and $72 measured at fair value, respectively)	7,203			6,065
Loans held-for-sale ($5,598 and $5,219 measured at fair value, respectively)							Loans held-for-sale ($5,598 and $5,219 measured at fair value, respectively)	5,615		5,258
Loans held-for-investment ($12 and $12 measured at fair value, respectively)							Loans held-for-investment ($12 and $12 measured at fair value, respectively)	14,808		12,129
Loans with government guarantees	253			365			Loans with government guarantees	1,791		736
Less: allowance for loan losses	(140		)	(142		)	Less: allowance for loan losses	(229)		(107)
Total loans held-for-investment and loans with government guarantees, net	7,316			6,288			Total loans held-for-investment and loans with government guarantees, net	16,370		12,758
Mortgage servicing rights	246			335			Mortgage servicing rights	261		291
Net deferred tax asset	248			286
Federal Home Loan Bank stock	264			180			Federal Home Loan Bank stock	377		303
Premises and equipment, net	314			275			Premises and equipment, net	410		416
Goodwill and intangible assets							Goodwill and intangible assets	164		170
Other assets	706			781			Other assets	1,200		930
Total assets	$	16,880		$	14,053		Total assets	$	27,468	$	23,266
Liabilities and Stockholders’ Equity							Liabilities and Stockholders’ Equity
Noninterest bearing deposits	$	2,272		$	2,077		Noninterest bearing deposits	$	7,921	$	5,467
Interest bearing deposits	6,889			6,723			Interest bearing deposits	9,977		9,679
Total deposits	9,161			8,800			Total deposits	17,898		15,146
Short-term Federal Home Loan Bank advances	4,065			1,780
Short-term Federal Home Loan Bank advances and other							Short-term Federal Home Loan Bank advances and other	3,354		4,165
Long-term Federal Home Loan Bank advances	1,300			1,200			Long-term Federal Home Loan Bank advances	1,200		650
Other long-term debt	493			493			Other long-term debt	493		496
Representation and warranty reserve	16			27
Other liabilities ($60 and $60 measured at fair value, respectively)	394			417
Other liabilities ($35 and $35 measured at fair value, respectively)							Other liabilities ($35 and $35 measured at fair value, respectively)	2,552		1,021
Total liabilities	15,429			12,717			Total liabilities	25,497		21,478
Stockholders’ Equity							Stockholders’ Equity
Common stock $0.01 par value, 80,000,000 and 70,000,000 shares authorized; 57,181,536 and 56,824,802 shares issued and outstanding, respectively	1			1
Common stock $0.01 par value, 80,000,000 and 80,000,000 shares authorized; 56,943,979 and 56,631,236 shares issued and outstanding, respectively							Common stock $0.01 par value, 80,000,000 and 80,000,000 shares authorized; 56,943,979 and 56,631,236 shares issued and outstanding, respectively	1		1
Additional paid in capital	1,511			1,503			Additional paid in capital	1,488		1,483
Accumulated other comprehensive loss	(8		)	(7		)
Accumulated deficit	(53		)	(161		)
Accumulated other comprehensive income							Accumulated other comprehensive income	46		1
Retained earnings							Retained earnings	436		303
Total stockholders’ equity	1,451			1,336			Total stockholders’ equity	1,971		1,788
Total liabilities and stockholders’ equity	$	16,880		$	14,053		Total liabilities and stockholders’ equity	$	27,468	$	23,266

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

Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(Unaudited)
Interest Income
Loans $ 120
$ 90
$ 319
$ 256
Investment securities 20
16
59
50
Interest-earning deposits and other —
—
1
—
Total interest income 140
106
379
306
Interest Expense
Deposits 13
12
37
34
Short-term Federal Home Loan Bank advances and other 11
1
23
4
Long-term Federal Home Loan Bank advances 6
7
17
22
Other long-term debt 7
6
19
10
Total interest expense 37
26
96
70
Net interest income 103
80
283
236
Provision (benefit) for loan losses 2
7
4
(9 )
Net interest income after provision (benefit) for loan losses 101
73

279
245
Noninterest Income
Net gain on loan sales 75
94
189
259
Loan fees and charges 23
22
58
56
Deposit fees and charges 5
5
14
17
Loan administration income 5
4
16
14
Net return (loss) on mortgage servicing rights 6
(11 ) 26
(21 )
Representation and warranty benefit 4
6
11
12
Other noninterest income 12
36
32
52
Total noninterest income 130
156
346
389
Noninterest Expense
Compensation and benefits 76
69
219
203
Commissions 23
16
49
40
Occupancy and equipment 28
21
75
64
Loan processing expense 15
13
41
40
Legal and professional expense 7
5
22
20
Other noninterest expense 22
18
59
51
Total noninterest expense 171
142
465
418
Income before income taxes 60
87
160
216
Provision for income taxes 20
30
52
73
Net income $ 40
$ 57
$ 108
$ 143
Net income per share
Basic $ 0.71
$ 0.98
$ 1.90
$ 2.21
Diluted $ 0.70
$ 0.96
$ 1.86
$ 2.16
Weighted average shares outstanding
Basic 57,162,025
56,580,238
57,062,696
56,556,188
Diluted 58,186,593
57,933,806
58,133,296
57,727,262

Flagstar Bancorp, Inc.

Consolidated Statements of Operations

(In millions, except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(Unaudited)
Interest Income
Loans	$	180	$	177	$	361	$	332
Investment securities	21		20		40		44
Interest-earning deposits and other	—		1		1		2
Total interest income	201		198		402		378
Interest Expense
Deposits	21		35		53		64
Short-term Federal Home Loan Bank advances and other	2		17		14		34
Long-term Federal Home Loan Bank advances	3		1		6		2
Other long-term debt	7		7		13		14
Total interest expense	33		60		86		114
Net interest income	168		138		316		264
Provision for credit losses	102		17		116		17
Net interest income after provision for credit losses	66		121		200		247
Noninterest Income
Net gain on loan sales	303		75		393		124
Loan fees and charges	41		24		67		41
Net return on mortgage servicing rights	(8)		5		(2)		11
Loan administration income	21		6		33		17
Deposit fees and charges	7		10		16		18
Other noninterest income	14		48		28		66
Total noninterest income	378		168		535		277
Noninterest Expense
Compensation and benefits	116		90		218		177
Occupancy and equipment	44		40		85		78
Commissions	61		25		90		38
Loan processing expense	25		21		45		38
Legal and professional expense	5		6		11		12
Federal insurance premiums	7		5		13		9
Intangible asset amortization	4		4		7		8
Other noninterest expense	34		23		63		45
Total noninterest expense	296		214		532		405
Income before income taxes	148		75		203		119
Provision for income taxes	32		14		42		22
Net income	$	116	$	61	$	161	$	97
Net income per share
Basic	$	2.04	$	1.08	$	2.85	$	1.71
Diluted	$	2.03	$	1.06	$	2.83	$	1.69
Weighted average shares outstanding
Basic	56,790,642		56,446,077		56,723,254		56,670,690
Diluted	57,123,706		57,061,822		57,156,815		57,322,513

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

Flagstar Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(In millions)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(Unaudited)
Net income	$	116	$	61	$	161	$	97
Other comprehensive income, net of tax
Investment securities	21		23		55		39
Derivatives and hedging activities	(6)		—		(10)		—
Other comprehensive income, net of tax	15		23		45		39
Comprehensive income	$	131	$	84	$	206	$	136

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(Unaudited)
Net income $ 40
$ 57
$ 108
$ 143
Other comprehensive income (loss), net of tax
Investment securities 1
(4 ) 3
12
Derivatives and hedging activities —
3
(4 ) (34 )
Other comprehensive income (loss), net of tax 1
(1 ) (1 ) (22 )
Comprehensive income $ 41
$ 56
$ 107
$ 121

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

Flagstar Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

(In millions, except share data)


	Common Stock
	Number of Shares	Amount		Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total Stockholders’ Equity
Balance at December 31, 2019	56,631,236	$	1	$	1,483	$	1	$	303	$	1,788
(Unaudited)
Net income	—	—		—		—		46		46
Total other comprehensive income	—	—		—		30		—		30
Shares issued from Employee Stock Purchase Plan	59,252	—		—		—		—		—
Stock-based compensation	39,081	—		4		—		—		4
Dividends declared and paid	220	—		—		—		(3)		(3)
CECL ASU Adjustment to RE	—	—		—		—		(23)		(23)
Balance at March 31, 2020	56,729,789	1		1,487		31		323		1,842
(Unaudited)
Net income	—	—		—		—		116		116
Total other comprehensive income	—	—		—		15		—		15
Shares issued from Employee Stock Purchase Plan	46,591	—		—		—		—		—
Stock-based compensation	167,410	—		1		—		—		1
Dividends declared and paid	189	—		—		—		(3)		(3)
Repurchase of shares (1)	—	—		—		—		—		—
Balance at June 30, 2020	56,943,979	$	1	$	1,488	$	46	$	436	$	1,971

Balance at December 31, 2018	57,749,464	$	1	$	1,522	$	(47)	$	94	$	1,570
(Unaudited)
Net income	—	—		—		—		36		36
Total other comprehensive income	—	—		—		16		—		16
Shares issued from Employee Stock Purchase Plan	32,878	—		—		—		—		—
Stock-based compensation	27,401	—		4		—		—		4
Dividends declared and paid	—	—		—		—		(2)		(2)
Repurchase of shares (1)	(1,329,657)	—		(50)		—		—		(50)
Balance at March 31, 2019	56,480,086	1		1,476		(31)		128		1,574
(Unaudited)
Net income	—	—		—		—		61		61
Total other comprehensive income	—	—		—		23		—		23
Shares issued from Employee Stock Purchase Plan	26,785	—		—		—		—		—
Stock-based compensation	164,926	—		1		—		—		1
Dividends declared and paid	188	—		—		—		(3)		(3)
Repurchase of shares (1)	(188,048)	—		—		—		—		—
Balance at June 30, 2019	56,483,937	$	1	$	1,477	$	(8)	$	186	$	1,656

Preferred Stock Common Stock
Number of Shares Outstanding Amount of Preferred
Stock Number of Shares Outstanding Amount of Common
Stock Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained Earnings (Accumulated
Deficit)
Total
Stockholders’
Equity
Balance at December 31, 2015 266,657
$ 267
56,483,258
$ 1
$ 1,486
$ 2
$ (227 ) $ 1,529
(Unaudited)
Net income —
—
—
—
—
—
143
143
Total other comprehensive income (loss) —
—
—
—
—
(22 ) —
(22 )
Preferred stock redemption (266,657 ) (267 ) —
—
—
—
—
(267 )
Dividends on preferred stock —
—
—
—
—
—
(105 ) (105 )
Stock-based compensation —
—
114,013
—
8
—
—
8
Balance at September 30, 2016 —
$ —
56,597,271
$ 1
$ 1,494
$ (20 ) $ (189 ) $ 1,286
Balance at December 31, 2016 —
$ —
56,824,802
$ 1
$ 1,503
$ (7 ) $ (161 ) $ 1,336
(Unaudited)
Net income —
—
—
—
—
—
108
108
Total other comprehensive income (loss) —
—
—
—
—
(1 ) —
(1 )
Shares issued from Employee Stock Purchase Plan —
—
19,897
—
—
—
—
—
Warrant exercise —
—
154,313
—
4
—
—
4
Stock-based compensation —
—
182,524
—
4
—
—
4
Balance at September 30, 2017 —
$ —
57,181,536
$ 1
$ 1,511
$ (8 ) $ (53 ) $ 1,451
(1)Includes dividend reinvestment shares

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



Large accelerated filer	¨☒	Accelerated filer	ý☐
Non-accelerated filer	o ~~(Do not check if smaller reporting company)~~ ☐	Smaller reporting company	¨☐
		Emerging growth company	¨☐


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock	FBC	New York Stock Exchange




PART I. – FINANCIAL INFORMATION

Item 1.			Financial Statements
			Consolidated Statements of Financial Condition – ~~September~~June 30, ~~2017~~2020 (unaudited) and December 31, ~~2016 (unaudited)~~2019	3943
			Consolidated Statements of Operations – For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (unaudited)	4044
			Consolidated Statements of Comprehensive Income – For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (unaudited)	4145
			Consolidated Statements of Stockholders’ Equity – For the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (unaudited)	4146
			Consolidated Statements of Cash Flows – For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (unaudited)	4247
			Notes to the Consolidated Financial Statements (unaudited)
			Note 1 - Basis of Presentation	4348
			Note 2 - Investment Securities	4348
			Note 3 - Loans Held-for-Sale	4550
			Note 4 - Loans Held-for-Investment	4550
			Note 5 - Loans With Government Guarantees	5359
			Note 6 - Variable Interest Entities	5359
			Note 7 - Mortgage Servicing Rights	5359
			Note 8 - Derivative Financial Instruments	5561
			Note 9 - Borrowings	5865
			Note 10 ~~- Representation and Warranty Reserve~~	60
	~~Note 11 - Warrants~~	60
	~~Note 12~~ - Accumulated Other Comprehensive Income (Loss)	6067
			Note 1311 - Earnings Per Share	6267
			Note 12 - Stock-Based Compensation	68
			Note 13 - Income Taxes	68
			Note 14 - ~~Stock-Based Compensation~~Regulatory Matters
	~~Note 15 - Income Taxes~~	6369
			Note ~~16 - Regulatory Matters~~	63
	~~Note 17~~15 - Legal Proceeding, Contingencies, and Commitments	6570
			Note 1816 - Fair Value Measurements	6772
			Note 1917 - Segment Information	7881
			Note 2018 - Recently Issued Accounting Pronouncements	8186
			Note 19 - Subsequent Events	86
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3.			Quantitative and Qualitative Disclosures about Market Risk	8487
Item 4.			Controls and Procedures	8487

PART II. – OTHER INFORMATION
Item 1.			Legal Proceedings	8588
Item 1A.			Risk Factors	8588
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds	8591
Item 3.			Defaults upon Senior Securities	8592
Item 4.			Mine Safety Disclosures	8592
Item 5.			Other Information	8592
Item 6.			Exhibits	8593

SIGNATURES					8694


	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
	(In millions, except per share data and percentages)
Selected Statistics:
Book value per common share	$	34.62		$	32.46		$	31.57		$	30.69		$	29.31
Tangible book value per share (4)	$	31.74		$	29.52		$	28.57		$	27.62		$	26.16
Number of common shares outstanding	56,943,979			56,729,789			56,631,236			56,510,341			56,483,937
Common equity-to-assets ratio	7.18		%	6.87		%	7.68		%	7.88		%	8.19		%
Tangible common equity to assets ratio (4)	6.58		%	6.25		%	6.95		%	7.08		%	7.31		%
Capitalized value of mortgage servicing rights	0.87		%	0.95		%	1.21		%	1.14		%	1.23		%
Bancorp total capital (to adjusted risk weighted assets)	11.32		%	11.18		%	11.52		%	11.54		%	11.51		%
Bank total capital (to adjusted risk weighted assets)	11.05		%	11.30		%	11.73		%	12.06		%	12.00		%
Number of bank branches	160			160			160			160			160
Number of FTE employees	4,641			4,415			4,453			4,171			4,026



ý☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



¨☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016 (1)			2017			2016 (1)
Selected Mortgage Statistics:
Mortgage rate lock commitments (fallout-adjusted) (2)	$	8,898		$	8,291		$	23,896		$	23,281
Mortgage loans sold and securitized	8,924			8,723			22,397			23,611
Selected Ratios:
Interest rate spread	2.58		%	2.36		%	2.56		%	2.43		%
Net interest margin	2.78		%	2.58		%	2.74		%	2.62		%
Return on average assets	0.99		%	1.61		%	0.94		%	1.40		%
Return on average equity	11.10		%	16.53		%	10.23		%	12.59		%
Return on average common equity	11.10		%	17.45		%	10.23		%	14.52		%
Equity/assets ratio (average for the period)	8.95		%	9.75		%	9.16		%	11.05		%
Efficiency ratio	73.5		%	59.9		%	73.9		%	66.9		%
Effective tax provision rate	32.4		%	34.3		%	32.3		%	33.8		%
Average Balances:
Average common shares outstanding	57,162,025			56,580,238			57,062,696			56,556,188
Average fully diluted shares outstanding	58,186,593			57,933,806			58,133,296			57,727,262
Average interest-earning assets	$	14,737		$	12,318		$	13,709		$	11,944
Average interest paying liabilities	$	12,297		$	9,773		$	11,481		$	9,600
Average stockholders' equity	$	1,471		$	1,379		$	1,412		$	1,515



	September 30, 2017			December 31, 2016			September 30, 2016 (1)
Selected Statistics:
Book value per common share	$	25.38		$	23.50		$	22.72
Tangible book value per share (3)	$	25.01		$	23.50		$	22.72
Number of common shares outstanding	57,181,536			56,824,802			56,597,271
Equity-to-assets ratio	8.60		%	9.50		%	9.01		%
Common equity-to-assets ratio	8.60		%	9.50		%	9.01		%
Capitalized value of MSRs	1.15		%	1.07		%	0.96		%
Bancorp Tier 1 leverage (to adjusted avg. total assets) (4)	8.80		%	8.88		%	8.88		%
Bank Tier 1 leverage (to adjusted avg. total assets)	9.38		%	10.52		%	10.55		%
Number of banking centers	99			99			99
Number of FTE	3,495			2,886			2,881


~~(1)~~	Includes redemption of TARP Preferred occurring on July 29, 2016, which resulted in a reduction of $372 million in stockholder's equity. Also, includes $250 million issuance of 6.125% Senior Note occurring on July 11, 2016, which was used to redeem and bring current the dividends on the TARP Preferred.


~~(3)~~	Excludes goodwill and intangibles of $21 million, zero, and zero at September 30, 2017, December 31, 2016, and September 30, 2016, respectively, included in Other Assets on the Consolidated Statement of Financial Condition. See Non-GAAP Financial Measures for further information.


~~(1)~~	Included in both the three and nine months ended September 30, 2016 is a $24 million benefit ($16 million after tax benefit) related to a decrease in the fair value of the Department of Justice ("DOJ") settlement liability.



	Three Months Ended September 30,
	2017						2016
	Average Balance		Interest		Annualized Yield/ Rate		Average Balance		Interest		Annualized Yield/ Rate
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	4,476	$	45	3.99	%	$	3,416	$	30	3.51	%
Loans held-for-investment
Residential first mortgage	2,594		22		3.32	%	2,090		17		3.17	%
Home equity	486		6		5.11	%	460		6		5.03	%
Other	26		—		4.52	%	30		—		4.59	%
Total Consumer loans	3,106		28		3.61	%	2,580		23		3.52	%
Commercial Real Estate	1,646		19		4.43	%	1,082		9		3.43	%
Commercial and Industrial	1,073		13		4.77	%	633		7		4.27	%
Warehouse Lending	978		12		4.82	%	1,553		17		4.21	%
Total Commercial loans	3,697		44		4.63	%	3,268		33		3.96	%
Total loans held-for-investment (1)	6,803		72		4.16	%	5,848		56		3.77	%
Loans with government guarantees	264		3		4.58	%	432		4		3.88	%
Investment securities	3,101		20		2.58	%	2,516		16		2.55	%
Interest-earning deposits	93		—		1.23	%	106		—		0.48	%
Total interest-earning assets	14,737		140		3.77	%	12,318		106		3.42	%
Other assets	1,702						1,830
Total assets	$	16,439					$	14,148
Interest-Bearing Liabilities
Retail deposits
Demand deposits	$	489	$	—	0.14	%	$	509	$	—	0.20	%
Savings deposits	3,838		7		0.76	%	3,751		8		0.77	%
Money market deposits	276		—		0.57	%	250		—		0.41	%
Certificates of deposit	1,182		4		1.19	%	1,071		3		1.05	%
Total retail deposits	5,785		11		0.78	%	5,581		11		0.75	%
Government deposits
Demand deposits	250		—		0.43	%	243		—		0.39	%
Savings deposits	362		1		0.71	%	478		1		0.52	%
Certificates of deposit	329		1		0.89	%	355		—		0.52	%
Total government deposits	941		2		0.70	%	1,076		1		0.49	%
Wholesale deposits and other	35		—		1.49	%	—		—		—%
Total interest-bearing deposits	6,761		13		0.78	%	6,657		12		0.71	%
Short-term Federal Home Loan Bank advances and other	3,809		11		1.17	%	1,073		1		0.44	%
Long-term Federal Home Loan Bank advances	1,234		6		1.99	%	1,576		7		1.81	%
Other long-term debt	493		7		5.09	%	467		6		4.86	%
Total interest-bearing liabilities	12,297		37		1.19	%	9,773		26		1.06	%
Noninterest-bearing deposits (2)	2,244						2,469
Other liabilities	427						527
Stockholders’ equity	1,471						1,379
Total liabilities and stockholders' equity	$	16,439					$	14,148
Net interest-earning assets	$	2,440					$	2,545
Net interest income			$	103					$	80
Interest rate spread (3)					2.58	%					2.36	%
Net interest margin (4)					2.78	%					2.58	%
Ratio of average interest-earning assets to interest-bearing liabilities					119.9	%					126.0	%



	Three Months Ended September 30,
	2017 Versus 2016 Increase (Decrease) Due to:
	Rate		Volume			Total
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	6	$	9		$	15
Loans held-for-investment
Residential first mortgage	1		4			5
Total Consumer loans	1		4			5
Commercial Real Estate	5		5			10
Commercial and Industrial	1		5			6
Warehouse Lending	1		(6		)	(5		)
Total Commercial loans	7		4			11
Total loans held-for-investment	8		8			16
Loans with government guarantees	1		(2		)	(1		)
Investment securities	—		4			4
Total interest-earning assets	$	15	$	19		$	34
Interest-Bearing Liabilities
Interest-bearing deposits	$	1	$	—		$	1
Short-term Federal Home Loan Bank advances and other	7		3			10
Long-term Federal Home Loan Bank advances	1		(2		)	(1		)
Other long-term debt	—		1			1
Total interest-bearing liabilities	9		2			11
Change in net interest income	$	6	$	17		$	23



	September 30, 2017
	Loans Held-for-Investment		Percent of Portfolio		Allowance Amount		Allowance as a Percent of Loan Portfolio
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,656	36.9	%	$	52	2.0	%
Home equity	492		6.8	%	20		4.1	%
Other	26		0.4	%	1		3.8	%
Total consumer loans	3,174		44.1	%	73		2.3	%
Commercial loans
Commercial real estate	1,760		24.5	%	42		2.4	%
Commercial and industrial	1,097		15.3	%	19		1.7	%
Warehouse lending	1,159		16.1	%	6		0.5	%
Total commercial loans	4,016		55.9	%	67		1.7	%
Total consumer and commercial loans (1)	$	7,190	100.0	%	$	140	1.9	%



	Regulatory Minimums		Regulatory Minimums to be Well-Capitalized		Bank		Bancorp
September 30, 2017
Basel III Ratios (transitional)
Common equity Tier I capital ratio	4.50	%	6.50	%	14.61	%	11.65	%
Tier I leverage ratio	4.00	%	5.00	%	9.38	%	8.80	%
Basel III Ratios (fully phased-in) (1)
Common equity Tier I capital ratio	4.50	%	6.50	%	13.80	%	10.58	%
Tier I leverage ratio	4.00	%	5.00	%	9.13	%	8.43	%



	September 30, 2017		December 31, 2016		September 30, 2016
	(Dollars in millions, except share data)
Total stock holders' equity	$	1,451	$	1,336	$	1,286
Preferred stock	—		—		—
Goodwill and intangibles	21		—		—
Tangible book value	$	1,430	$	1,336	$	1,286

Number of common shares outstanding	57,181,536		56,824,802		56,597,271
Tangible book value per share	$	25.01	$	23.50	$	22.72



	Common Equity Tier 1 (to RWA)			Tier 1 leverage (to adjusted avg. total assets)			Tier 1 Capital (to RWA)			Total Risk-Based Capital (to RWA)
	(Dollars in millions)
September 30, 2017
Flagstar Bancorp
Regulatory capital – Basel III (transitional) to Basel III (fully phased-in)
Basel III (transitional)	$	1,208		$	1,423		$	1,423		$	1,554
Increased deductions related to deferred tax assets, MSRs, and other capital components	(90		)	(65		)	(65		)	(62		)
Basel III (fully phased-in) capital	$	1,118		$	1,358		$	1,358		$	1,492
Risk-weighted assets – Basel III (transitional) to Basel III (fully phased-in)
Basel III assets (transitional)	$	10,371		$	16,165		$	10,371		$	10,371
Net change in assets	191			(65		)	191			191
Basel III (fully phased-in) assets	$	10,562		$	16,100		$	10,562		$	10,562
Capital ratios
Basel III (transitional)	11.65		%	8.80		%	13.72		%	14.99		%
Basel III (fully phased-in)	10.58		%	8.43		%	12.86		%	14.13		%



	Preferred Stock					Common Stock
	Number of Shares Outstanding		Amount of Preferred Stock			Number of Shares Outstanding	Amount of Common Stock		Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
Balance at December 31, 2015	266,657		$	267		56,483,258	$	1	$	1,486	$	2		$	(227	)	$	1,529
(Unaudited)
Net income	—		—			—	—		—		—			143			143
Total other comprehensive income (loss)	—		—			—	—		—		(22		)	—			(22		)
Preferred stock redemption	(266,657	)	(267		)	—	—		—		—			—			(267		)
Dividends on preferred stock	—		—			—	—		—		—			(105		)	(105		)
Stock-based compensation	—		—			114,013	—		8		—			—			8
Balance at September 30, 2016	—		$	—		56,597,271	$	1	$	1,494	$	(20	)	$	(189	)	$	1,286
Balance at December 31, 2016	—		$	—		56,824,802	$	1	$	1,503	$	(7	)	$	(161	)	$	1,336
(Unaudited)
Net income	—		—			—	—		—		—			108			108
Total other comprehensive income (loss)	—		—			—	—		—		(1		)	—			(1		)
Shares issued from Employee Stock Purchase Plan	—		—			19,897	—		—		—			—			—
Warrant exercise	—		—			154,313	—		4		—			—			4
Stock-based compensation	—		—			182,524	—		4		—			—			4
Balance at September 30, 2017	—		$	—		57,181,536	$	1	$	1,511	$	(8	)	$	(53	)	$	1,451

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

	Nine Months Ended September 30,
	2017			2016
	(Unaudited)
Operating Activities
Net cash used in operating activities	$	(19,239	)	$	(10,128	)
Investing Activities
Proceeds from sale of AFS securities including loans that have been securitized	$	17,949		$	10,876
Collection of principal on investment securities AFS	158			116
Purchase of investment securities AFS and other	(593		)	(203		)
Collection of principal on investment securities HTM	116			126
Purchase of investment securities HTM and other	—			(15		)
Proceeds received from the sale of LHFI	78			228
Net Origination, purchase, and principal repayments of LHFI	(1,231		)	(1,297		)
Purchase of bank owned life insurance	(50		)	(85		)
Net purchase of FHLB stock	(84		)	(2		)
Acquisition of premises and equipment, net of proceeds	(74		)	(44		)
Proceeds from the sale of MSRs	252			35
Other, net	4			14
Net cash provided by investing activities	$	16,525		$	9,749
Financing Activities
Net change in deposit accounts	$	361		$	1,436
Net change in short term FHLB borrowings and other short term debt	2,285			(1,211		)
Proceeds from long term FHLB advances	150			395
Repayment of long term FHLB advances	(50		)	—
Net receipt of payments of loans serviced for others	24			91
Preferred stock dividends	—			(105		)
Redemption of preferred stock	—			(267		)
Net receipt of escrow payments	19			6
Net cash provided by financing activities	$	2,789		$	345
Net increase (decrease) in cash and cash equivalents	75			(34		)
Beginning cash and cash equivalents	158			208
Ending cash and cash equivalents	$	233		$	174
Supplemental disclosure of cash flow information
Non-cash reclassification of loans originated LHFI to LHFS	$	106		$	1,331
Non-cash reclassification of LHFS to AFS securities	$	17,657		$	10,588
MSRs resulting from sale or securitization of loans	$	178		$	173
Operating section supplemental disclosures
Cash proceeds from sales of LHFS	$	5,547		$	14,097
Origination, premium paid and purchase of LHFS, net of principal repayments	$	(24,518	)	$	(23,826	)


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in millions)
June 30, 2020
Available-for-sale securities
Agency - Commercial	$	1,208	$	46	$	—	$	1,254
Agency - Residential	899		33		—		932
Municipal obligations	30		1		—		31
Corporate debt obligations	76		1		(1)		76
Other MBS	54		—		—		54
Certificate of deposits	1		—		—		1
Total available-for-sale securities (1)	$	2,268	$	81	$	(1)	$	2,348
Held-to-maturity securities
Agency - Commercial	$	244	$	8	$	—	$	252
Agency - Residential	252		12		—		264
Total held-to-maturity securities (1)	$	496	$	20	$	—	$	516
December 31, 2019
Available-for-sale securities
Agency - Commercial	$	948	$	2	$	(3)	$	947
Agency - Residential	1,015		4		(4)		1,015
Corporate debt obligations	76		1		—		77
Municipal obligations	31		—		—		31
Other MBS	44		1		—		45
Certificate of Deposits	1		—		—		1
Total available-for-sale securities (1)	$	2,115	$	8	$	(7)	$	2,116
Held-to-maturity securities
Agency - Commercial	$	306	$	—	$	(1)	$	305
Agency - Residential	292		3		(1)		294
Total held-to-maturity securities (1)	$	598	$	3	$	(2)	$	599


~~(1)~~	~~There were~~ no ~~securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10 percent of stockholders’ equity at September 30, 2017 or December 31, 2016.~~


	Unrealized Loss Position with Duration 12 Months and Over								Unrealized Loss Position with Duration Under 12 Months
	Fair Value		Number of Securities	Unrealized Loss		Fair Value		Number of Securities	Unrealized Loss
	(Dollars in millions)
June 30, 2020
Available-for-sale securities
Agency - Commercial	$	4	1	$	—	$	8	1	$	—
Municipal obligations	$	—	1	$	—	$	—	—	$	—
Corporate debt obligations	$	—	—	$	—	$	23	7	$	(1)
Other mortgage-backed securities	$	—	—	$	—	$	—	1	$	—
Held-to-maturity securities
Agency - Residential	$	—	—	$	—	$	9	2	$	—
December 31, 2019
Available-for-sale securities
Agency - Commercial	$	148	17	$	(3)	$	303	19	$	—
Agency - Residential	$	266	26	$	(3)	$	148	14	$	(1)
Municipal obligations	$	8	3	$	—	$	—	—	$	—
Held-to-maturity securities
Agency - Commercial	$	148	13	$	(1)	$	85	6	$	—
Agency - Residential	$	35	7	$	(1)	$	38	10	$	—


	Investment Securities Available-for-Sale										Investment Securities Held-to-maturity
	Amortized Cost		Fair Value		Weighted Average Yield		Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in millions)
June 30, 2020
Due in one year or less	$	4	$	4	2.07	%	$	—	$	—	—	%
Due after one year through five years	10		10		2.73	%	8		9		2.51	%
Due after five years through 10 years	110		112		4.19	%	8		8		2.30	%
Due after 10 years	2,144		2,222		2.38	%	480		499		2.38	%
Total	$	2,268	$	2,348			$	496	$	516


	Residential First Mortgage (1)		Home Equity		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total
	(Dollars in millions)
Three Months Ended June 30, 2020
Beginning balance	$	46	$	23	$	16	$	28	$	18	$	1	$	132
Provision	16		5		19		55		5		—		100
Charge-offs	(2)		(1)		(2)		—		—		—		(5)
Recoveries	—		1		1		—		—		—		2
Ending allowance balance	$	60	$	28	$	34	$	83	$	23	$	1	$	229
Three Months Ended June 30, 2019
Beginning balance	$	35	$	16	$	4	$	36	$	30	$	6	$	127
Provision (benefit)	(8)		—		3		(1)		24		(1)		17
Charge-offs	(1)		—		(3)		—		(31)		—		(35)
Recoveries	—		—		1		—		—		—		1
Ending allowance balance	$	26	$	16	$	5	$	35	$	23	$	5	$	110

Six Months Ended June 30, 2020
Beginning balance, prior to adoption of ASC 326	$	22	$	14	$	6	$	38	$	22	$	5	$	107
Impact of adopting ASC 326	25		12		10		(14)		(6)		(4)		23
Provision	16		2		20		59		7		—		104
Charge-offs	(3)		(2)		(3)		—		—		—		(8)
Recoveries	—		2		1		—		—		—		3
Ending allowance balance	$	60	$	28	$	34	$	83	$	23	$	1	$	229
Six Months Ended June 30, 2019
Beginning balance	$	38	$	15	$	3	$	48	$	18	$	6	$	128
Provision (benefit)	(10)		—		5		(13)		36		(1)		17
Charge-offs	(2)		—		(4)		—		(31)		—		(37)
Recoveries	—		1		1		—		—		—		2
Ending allowance balance	$	26	$	16	$	5	$	35	$	23	$	5	$	110


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


~~(3)~~	~~Does not include $7 million provision for loan losses recorded in the Consolidated Statements of Operations to reserve for repossessed loans with government guarantees during the~~ ~~three and nine~~ ~~months ended September 30, 2016.~~


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


	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due (1)		Total Past Due		Current		Total LHFI (3) (4)
	(Dollars in millions)
June 30, 2020
Consumer loans
Residential first mortgage	$	6	$	5	$	27	$	38	$	2,678	$	2,716
Home equity	1		—		5		6		972		978
Other	2		1		1		4		894		898
Total consumer loans	9		6		33		48		4,544		4,592
Commercial loans
Commercial real estate	—		—		—		—		3,016		3,016
Commercial and industrial (1)	—		—		—		—		1,968		1,968
Warehouse lending	—		—		—		—		5,232		5,232
Total commercial loans	—		—		—		—		10,216		10,216
Total loans (2)	$	9	$	6	$	33	$	48	$	14,760	$	14,808
December 31, 2019
Consumer loans
Residential first mortgage	$	5	$	4	$	21	$	30	$	3,124	$	3,154
Home Equity	1		—		4		5		1,019		1,024
Other	3		1		1		5		724		729
Total consumer loans	9		5		26		40		4,867		4,907
Commercial loans
Commercial real estate	—		—		—		—		2,828		2,828
Commercial and industrial	—		—		—		—		1,634		1,634
Warehouse lending	—		—		—		—		2,760		2,760
Total commercial loans	—		—		—		—		7,222		7,222
Total loans (2)	$	9	$	5	$	26	$	40	$	12,089	$	12,129


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


	TDRs
	Performing		Nonperforming		Total
	(Dollars in millions)
June 30, 2020
Consumer loans
Residential first mortgage	$	20	$	8	$	28
Home equity	15		2		17
Commercial Real Estate	5		—		5
Total TDRs (1)(2)	$	40	$	10	$	50
December 31, 2019
Consumer loans
Residential first mortgage	$	20	$	8	$	28
Home Equity	18		2		20
Total TDRs (1)(2)	$	38	$	10	$	48


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


									New TDRs
	New TDRs								Number of Accounts	Pre-Modification Unpaid Principal Balance		Post-Modification Unpaid Principal Balance (1)
	Number of Accounts	Pre-Modification Unpaid Principal Balance		Post-Modification Unpaid Principal Balance (1)		Increase in Allowance at Modification			(Dollars in millions)
Three Months Ended June 30, 2020								Three Months Ended June 30, 2020
		(Dollars in millions)
Three Months Ended September 30, 2017
Residential first mortgages	9	$	3	$	3	$	—
Home equity (2)	37	2		2		1
Other consumer	—	—		—		—

Commercial Real Estate								Commercial Real Estate	1	$	5	$	5
Total TDR loans								Total TDR loans	1	$	5	$	5
Three Months Ended June 30, 2019								Three Months Ended June 30, 2019
Home equity (2)(3)								Home equity (2)(3)	2	—		—
Total TDR loans	46	$	5	$	5	$	1	Total TDR loans	2	$	—	$	—

Three Months Ended September 30, 2016
Six Months Ended June 30, 2020								Six Months Ended June 30, 2020
Residential first mortgages								Residential first mortgages	5	$	1	$	1
Home equity (2)(3)								Home equity (2)(3)	2	—		—
Consumer								Consumer	1	—		—
Commercial Real Estate								Commercial Real Estate	1	$	5	$	5
Total TDR loans								Total TDR loans	9	6		6
Six Months Ended June 30, 2019								Six Months Ended June 30, 2019
Residential first mortgages	1	$	—	$	—	$	—	Residential first mortgages	2	$	—	$	—
Home equity (2)(3)	17	1		1		—		Home equity (2)(3)	4	1		1
Total TDR loans	18	$	1	$	1	$	—	Total TDR loans	6	$	1	$	1

Nine Months Ended September 30, 2017
Residential first mortgages	17	$	4	$	4	$	—
Home equity (2)	71	5		5		2
Other consumer	1	—		—		—
Total TDR loans	89	$	9	$	9	$	2

Nine Months Ended September 30, 2016
Residential first mortgages	17	$	3	$	4	$	—
Home equity (2)(3)	128	8		7		—
Commercial and industrial	1	2		1		—
Total TDR loans	146	$	13	$	12	$	—


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


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