Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
ý☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2022
OR
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from _________ to _________


Commission File Number: 001-16577
fbc-20220331_g1.jpg
 flagstara09a01a01a07a01a14.jpgFlagstar Bancorp, Inc.
(Exact name of registrant as specified in its charter).
Michigan38-3150651
(State or other jurisdiction of(I.R.S. Employer
Incorporation or organization)Identification No.)
5151 Corporate Drive, Troy, MichiganTroy,Michigan48098-2639
(Address of principal executive offices)(Zip code)
(248) 312-2000
(Registrant’s telephone number, including area code)


Not applicable
(Former name, former address and formal fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý☒    No  ¨☐.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý☒    No  ¨☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): 
Act: 
Large accelerated filer¨☒Accelerated filerý☐
Non-accelerated filer
o  (Do not check if smaller reporting company)
☐		Smaller reporting company¨☐
Emerging growth company¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act  ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨☐    No  ý☒.
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common stockFBCNew York Stock Exchange
As of November 2, 2017, 57,181,536May 9, 2022, 53,245,670 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.



FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2017March 31, 2022
TABLE OF CONTENTS
Item 1.
Consolidated Statements of Financial Condition – September 30, 2017March 31, 2022 (unaudited) and December 31, 2016 (unaudited)2021
3942
Consolidated Statements of Operations – For the three and nine months ended September 30, 2017March 31, 2022 and 20162021 (unaudited)
4043
Consolidated Statements of Comprehensive Income – For the three and nine months ended September 30, 2017March 31, 2022 and 20162021 (unaudited)
4144
Consolidated Statements of Stockholders’ Equity – For the ninethree months ended September 30, 2017March 31, 2022 and 20162021 (unaudited)
4145
Consolidated Statements of Cash Flows – For the ninethree months ended September 30, 2017March 31, 2022 and 20162021 (unaudited)
4246
Notes to the Consolidated Financial Statements (unaudited)
Note 1 - Basis of Presentation
4347
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
5361
Note 6 - Variable Interest Entities
5361
Note 7 - Mortgage Servicing Rights
5361
Note 8 - Derivative Financial Instruments
5563
Note 9 - Borrowings
5867
Note 10 - Representation and Warranty Reserve
60
Note 11 - Warrants
60
Note 12 - Accumulated Other Comprehensive Income (Loss)
6069
Note 1311 - Earnings Per Share
6269
Note 12 - Stock-Based Compensation
69
Note 13 - Income Taxes
70
Note 14 - Stock-Based CompensationRegulatory Matters
Note 15 - Income Taxes
6370
Note 16 - Regulatory Matters
63
Note 1715 - Legal Proceeding, Contingencies, and Commitments
6571
Note 1816 - Fair Value Measurements
6773
Note 1917 - Segment Information
7881
Note 2018 - Recently Issued Accounting Pronouncements
8183
Item 2.
4
Item 3.
84
Item 4.
84
Item 1.
85
Item 1A.
85
Item 2.
85
Item 3.
85
Item 4.
85
Item 5.
85
Item 6.
8586
8687

2

GLOSSARY OF ABBREVIATIONS AND ACRONYMS


The following list of abbreviations and acronyms are provided as a tool for the reader and may be used throughout this Report, including the Consolidated Financial Statements and Notes:
TermDefinitionTermDefinition
AFSACLAvailableAllowance for SaleCredit LossesHELOCHELOANHome Equity Lines of CreditLoan
AgenciesAFSAvailable-for-SaleHFIHeld-for-Investment
AgenciesFederal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association, CollectivelyHELOANHFSHome Equity LoanHeld-for-Sale
ALCOHOLAHome Owners' Loan Act
ALCOAsset Liability CommitteeHome equitysecond mortgages,Second Mortgages, HELOANs, HELOCs
ALLLAllowance for Loan & Lease LossesHTMHPIHeld to MaturityHousing Price Index
AOCIAccumulated Other Comprehensive Income (Loss)LIBORHTMLondon Interbank Offered RateHeld-to-Maturity
ASUAccounting Standards UpdateLHFILGGLoans Held-for-Investmentwith Government Guarantees
Basel IIIBasel Committee on Banking Supervision Third Basel AccordLHFSLHFILoans Held-for-SaleHeld-for-Investment
C&ICommercial and IndustrialLTVLHFSLoan-to-ValueLoans Held-for-Sale
CDARSCARES ActCoronavirus Aid, Relief and Economic Security ActLIBORLondon Interbank Offered Rate
CDARSCertificates of Deposit Account Registry ServiceManagementLTVLoan-to-Value Ratio
CDCertificates of DepositManagementFlagstar Bancorp’s Management
CFPBCECLConsumer Financial Protection BureauCurrent Expected Credit LossesMBIAMBSMBIA Insurance CorporationMortgage-Backed Securities
CLTVCET1Combined Loan to ValueCommon Equity Tier 1MBSMD&AMortgage-Backed Securities
Common StockCommon SharesMD&AManagement's Discussion and Analysis
CRECLTVCombined Loan-to-Value RatioMSRMortgage Servicing Rights
Common StockCommon SharesN/ANot Applicable
CRECommercial Real EstateMSRN/MMortgage Servicing RightsNot Meaningful
DFASTDeposit BetaDodd-Frank Stress TestThe change in the annualized cost of our deposits, compared to the change in the Federal Reserve discount rateN/ANBVNot ApplicableNet Book Value
DOJUnited States Department of JusticeNYSENPLNonperforming Loan
DOJ Liability2012 Settlement Agreement with the Department of JusticeNYSENew York Stock Exchange
DTADeferred Tax AssetOCCOCCOffice of the Comptroller of the Currency
EVEDTADeferred Tax AssetOCIOther Comprehensive Income (Loss)
EVEEconomic Value of EquityOTTIQTLOther-Than-Temporary-ImpairmentQualified Thrift Lending
Fannie Mae/FNMAMaeFederal National Mortgage AssociationQTLRegulatory AgenciesQualified Thrift LendingBoard of Governors of the Federal Reserve, Office of the Comptroller of the Currency, U.S. Department of the Treasury, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Securities and Exchange Commission
FASBFinancial Accounting Standards BoardRWARisk Weighted Assets
FDICFBCFlagstar Bancorp
FDICFederal Deposit Insurance CorporationSECREOReal estate owned and other nonperforming assets, net
Federal ReserveBoard of Governors of the Federal Reserve SystemRMBSResidential Mortgage-Backed Securities
FHAFederal Housing AdministrationRWARisk Weighted Assets
FHLBFederal Home Loan BankSECSecurities and Exchange Commission
FEMAFICOFederal Emergency Management AgencySFRSingle Family Residence
FHAFederal Housing AdministrationTARP PreferredTroubled Asset Relief Program Fixed Rate Cumulative Perpetual Preferred Stock, Series C
FHLBFederal Home Loan BankTDRTrouble Debt Restructuring
FICOFair Isaac CorporationUPBSNCUnpaid Principal BalanceShared National Credit Loans
FRBFOALFallout-Adjusted LocksSOFRSecured Oversight Financing Rate
FRBFederal Reserve BankU.S. TreasuryTDRUnited States Department of TreasuryTroubled Debt Restructuring
Freddie MacFederal Home Loan Mortgage CorporationVIETPOVariable Interest EntitiesThird Party Originator
FTEFull Time Equivalent EmployeesXBRLUPBeXtensible Business Reporting LanguageUnpaid Principal Balance
GAAPUnited States Generally Accepted Accounting PrinciplesU.S. TreasuryUnited States Department of Treasury
GNMAGovernment National Mortgage AssociationVIEVariable Interest Entities
HELOCHome Equity Lines of CreditXBRLeXtensible Business Reporting Language

3


PART I. FINANCIAL INFORMATION
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations


The following is Management's Discussion and Analysis of the financial condition and results of operations of Flagstar Bancorp, Inc. for the thirdfirst quarter of 2017,2022, which should be read in conjunction with the financial statements and related notes set forth in Part I, Item 1 of this Form 10-Q and Part II, Item 8 of Flagstar Bancorp, Inc.'s 20162021 Annual Report on Form 10-K for the year ended December 31, 2016.2021.


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. These statements are based on the current beliefs and expectations of our management.Management. Actual results may differ from those set forth in forward-looking statements. See Forward-Looking Statements on page 3841 of this Form 10-Q, Part II, Item 1A, Risk Factors of this Form 10-Q and Part I, Item 1A, Risk Factors of Flagstar Bancorp, Inc.'s 20162021 Annual Report oron Form 10-K for the year ended December 31, 2016.2021. Additional information about Flagstar can be found on our website at www.flagstar.com.


Where we say "we," "us," "our," the "Company," "Bancorp" or "Flagstar," we usually mean Flagstar Bancorp, Inc. However, in some cases, a reference to "we," "us," "our," the "Company" or "Flagstar" will include our wholly-owned subsidiary Flagstar Bank, FSB (the "Bank"). See the Glossary of Abbreviations and Acronyms on page 3 for definitions used throughout this Form 10-Q.    


Introduction


We are a leading Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. Based on our assets at September 30, 2017, we are one of the largest banks headquartered in Michigan, providingWe provide commercial small business, and consumer banking services, and we are the 5th6th largest bank mortgage originator in the nation.nation and the 5th largest subservicer of mortgage loans nationwide. At September 30, 2017,March 31, 2022, we had 3,4955,341 full-time equivalent employees inclusive of account executives and loan officers.employees. Our common stock is listed on the NYSE under the symbol "FBC." As of September 30, 2017, we are considered a controlled company for NYSE purposes, because approximately 62.3 percent of our common stock is owned by MP Thrift Investments, L.P. which is managed by MatlinPatterson, a leading global alternative asset manager."FBC".


We have a unique,    Our relationship-based business model which leverages our full-service bank’s capabilities withand our national mortgage customer baseplatform to create and build enduring commercial relationships with growth opportunities. Our banking network emphasizes the delivery of a complete set of banking and mortgage products and services and we distinguish ourselves by crafting specializedfinancial solutions for our customers, local delivery, high quality customer service and competitive product pricing. Our community bank growth model has focused on attracting seasoned bankers with larger, regional bank lending experience who can bring their long-term customer relationships to Flagstar.customers. At September 30, 2017,March 31, 2022, we operated 99 full service158 full-service banking branches throughout Michigan's major markets where wethat offer a full set of banking products to consumer, commercial, and government customers. Our banking footprint spans Michigan, Indiana, California, Wisconsin, Ohio and contiguous states.


We originate mortgages through a wholesale network of brokers and correspondents in all 50 states as well as 95and our own loan officers, which includes our direct lending team, from 82 retail locations in 2728 states representing the combined retail branchesand 3 call centers. We are also a leading national servicer of mortgage loans and provide complementary ancillary offerings including MSR lending, servicing advance lending and MSR recapture services.

Strategic Merger with New York Community Bancorp, Inc.

On April 26, 2021, it was announced that New York Community Bancorp, Inc. ("NYCB") and Flagstar and Opes Advisors' mortgage division. The Bank has the opportunity to expand these relationships by providing warehouse lending, mortgage servicing and other services to our third party originators. Servicing and subservicing of loans provides fee income and generates a stable long-term source of funding through company controlled deposits.

We believe our transformationhad entered into a strong commercialdefinitive merger agreement (the "Merger Agreement") under which the two companies will combine in an all stock merger. Under the terms of the Merger Agreement, Flagstar shareholders will receive 4.0151 shares of NYCB common stock for each Flagstar share they own. The combined company expects to have over $85 billion in assets and operate nearly 400 traditional branches in nine states and over 80 loan production offices across a 28 state footprint. On August 4, 2021, Flagstar's and NYCB's shareholders each voted in their respective special meetings of shareholders to approve the proposed business combination. The transaction is subject to customary closing conditions, including regulatory approvals.

On April 26, 2022, NYCB and Flagstar entered into Amendment No. 1 (the "Amendment") to the Merger Agreement. Under the Amendment, the parties have agreed to: extend the termination date of the Merger Agreement to October 31, 2022; Change the structure of the merger of the subsidiary banks, so that Flagstar Bank, FSB will initially convert to a national bank our flexible mortgage servicing platform,charter and focus on service creates a significant competitive advantageNew York Community Bank will merge with and into the national bank, with the national bank as the surviving entity; and clarify that approvals of the FDIC and the New York State Department of Financial Services are no longer required but that the approval of the OCC will be required. Other than as expressly modified by the Amendment, the Merger Agreement, remains in full force and effect.

Completion of the markets in which we compete. The management team we have assembledtransaction is focused on developing substantial and attractive growth opportunities that generate profitable results from operations. We believe our lower risk profile and strong capital level position ussubject to take advantagecustomary closing conditions, including receipt of opportunities to deliver attractive shareholder returns over the long term.regulatory approvals.


4

Operating Segments


Our operations are conducted through our three operating segments: Community Banking, Mortgage Originations, and Mortgage Servicing. Additionally, our Other segment includes the remaining reported activities. For additionalfurther information, please see MD&A - Operating Segments and Note 1917 - Segment Information.

Selected Financial Ratios
(Dollars in millions, except share data)
5
 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 securitized8,924
 8,723
 22,397
 23,611
Selected Ratios:       
Interest rate spread2.58% 2.36% 2.56% 2.43%
Net interest margin2.78% 2.58% 2.74% 2.62%
Return on average assets0.99% 1.61% 0.94% 1.40%
Return on average equity11.10% 16.53% 10.23% 12.59%
Return on average common equity11.10% 17.45% 10.23% 14.52%
Equity/assets ratio (average for the period)8.95% 9.75% 9.16% 11.05%
Efficiency ratio73.5% 59.9% 73.9% 66.9%
Effective tax provision rate32.4% 34.3% 32.3% 33.8%
Average Balances:       
Average common shares outstanding57,162,025
 56,580,238
 57,062,696
 56,556,188
Average fully diluted shares outstanding58,186,593
 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 outstanding57,181,536
 56,824,802
 56,597,271
Equity-to-assets ratio8.60% 9.50% 9.01%
Common equity-to-assets ratio8.60% 9.50% 9.01%
Capitalized value of MSRs1.15% 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 centers99
 99
 99
Number of FTE3,495
 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.
(2)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 previous historical experience and the level of interest rates.
(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.
(4)Basel III transitional.

Results of Operations



Executive Overview


The third quarter 2017 resulted in solid earningsfollowing table summarizes our results of $40operations for the periods indicated:

Three Months Ended,1Q22 vs. 4Q211Q22 vs. 1Q21
 March 31, 2022December 31, 2021March 31, 2021ChangeChange
(Dollars in millions, except share data)
Net interest income$165 $181 $189 $(16)$(24)
(Benefit) provision for credit losses(4)(17)(28)13 24 
Total noninterest income160 202 324 (42)(164)
Total noninterest expense261 291 347 (30)(86)
Provision for income taxes15 24 45 (9)(30)
Net income$53 $85 $149 $(32)$(96)
Income per share
Basic$0.99 $1.62 $2.83 $(0.63)$(1.84)
Diluted$0.99 $1.60 $2.80 $(0.61)$(1.81)
Weighted average shares outstanding:
Basic53,219,866 52,867,138 52,675,562 352,728 544,304 
Diluted53,578,001 53,577,832 53,297,803 169 280,198 

The following table summarizes our adjusted results of operations(1):

Three Months Ended,1Q22 vs. 4Q211Q22 vs. 1Q21
 March 31, 2022December 31, 2021March 31, 2021ChangeChange
(Dollars in millions, except share data)
Net interest income$165 $181 $189 $(16)$(24)
(Benefit) provision for credit losses(4)(17)(28)13 24 
Total noninterest income160 202 324 (42)(164)
Total noninterest expense258 285 312 (27)(54)
Provision for income taxes16 25 53 (9)(37)
Net income$55 $90 $176 $(35)$(121)
Income per share
Basic$1.03 $1.71 $3.34 $(0.68)$(2.31)
Diluted$1.02 $1.69 $3.31 $(0.67)$(2.29)
(1)See Use of Non-GAAP Financial Measures for further information.


6

The following table summarizes certain selected ratios and statistics for the periods indicated:
Three Months Ended,
March 31, 2022December 31, 2021March 31, 2021
Selected Ratios:
Interest rate spread (1)2.91 %2.79 %2.55 %
Net interest margin3.11 %2.96 %2.82 %
Adjusted net interest margin (2)3.12 %2.98 %3.02 %
Return on average assets0.89 %1.28 %1.98 %
Adjusted return on average assets (2)0.92 %1.35 %2.34 %
Return on average common equity7.87 %12.74 %25.73 %
Return on average tangible common equity (2)8.61 %13.79 %27.99 %
Adjusted return on average tangible common equity (2)9.10 %14.90 %32.97 %
Common equity-to-assets ratio11.75 %10.67 %8.01 %
Common equity-to-assets ratio (average for the period)11.12 %10.08 %7.71 %
Efficiency ratio80.4 %75.9 %67.7 %
Adjusted efficiency ratio (2)79.6 %74.4 %60.8 %
Selected Statistics:
Book value per common share$51.33 $51.09 $44.71 
Tangible book value per share (2)$48.61 $48.33 $41.77 
Number of common shares outstanding53,236,067 53,197,650 52,752,600 
(1)Interest rate spread is the difference between the yield earned on average interest-earning assets for the period and the rate of interest paid on average interest-bearing liabilities.
(2) See Use of Non-GAAP Financial Measures for further information.

Overview

Net income for the quarter-ended March 31, 2022 was $53 million, or $0.70$0.99 per diluted share compared to fourth quarter 2021 net income of $85 million, or $1.60 per diluted share. Our transformation into a strong commercial bank continued this quarter. InWhen adjusting for the nine months ended September 30, 2017,pre-tax impact of merger related expenses, first quarter 2022 net interest income was $47 million on average earning asset growth of $1.8 billion, or 15 percent led by increases in our commercial loan portfolio. The expansion of our commercial loan portfolio has generated net interest income growth and provides earnings stability in a challenging mortgage environment. We also continued to maintain solid liquidity and disciplined deposit growth, which saw total average deposits increase $244$55 million, or 3 percent$1.02 per diluted share as compared to $90 million, or $1.69 per diluted share in the fourth quarter of 2021.

Net interest income in the first nine months of 2017 driven by higher retail deposits.

Even in the currently challenging mortgage market, our mortgage closings increased 3quarter declined $16 million, or 9 percent in the nine months ended September 30, 2017as compared to the first nine months ended September 30, 2016 driven by our 2017 acquisitions of Opes Advisors (Opes) and the delegated correspondent business of Stearns Lending (Stearns). Our gain on loan sale margin was 84 basis points at September 30, 2017 reflecting the increase in distributed retail due to the integration of Opes. We believe this shift in mix should positively impact our gain on sale margin going forward.

Our noninterest expense increased $47 million in the first nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 largely due to our ongoing growth initiatives and operating expenses from Opes. The remaining expenses, associated with balance sheet expansion and growing Community Bank revenues, reflected our cost discipline and had a very low, incremental efficiency ratio. Credit costs were negligible, as net charge-offs, nonperforming loans and delinquencies remain at very low levels.

The federal banking agencies issued a notice of proposed rulemaking (NPR) regarding several proposed simplifications of the Basel III capital rules. If enacted as proposed, these changes would accelerate the capital formation necessary to support further balance sheet growth, improve our capital flexibility to better manage the uncertainties of the MSR market and allow us to hold more MSRs which are a high yielding asset that we fund efficiently and hedge well. We believe this should improve our position to continue to execute on our business strategy, matching superior asset generation capabilities, supported by the capital and liquidity to grow the Bank prudently, thereby creating value for our shareholders.

Earnings Performance
 Three Months Ended September 30,   Nine Months Ended September 30,  
 2017 2016 Change 2017 2016 Change
 (Dollars in millions, except share data)
Net interest income$103
 $80
 $23
 $283
 $236
 $47
Provision (benefit) for loan losses2
 7
 (5) 4
 (9) 13
Total noninterest income (1)
130
 156
 (26) 346
 389
 (43)
Total noninterest expense171
 142
 29
 465
 418
 47
Provision for income taxes20
 30
 (10) 52
 73
 (21)
Net income$40
 $57
 $(17) $108
 $143
 $(35)
Income per share           
Basic$0.71
 $0.98
 $(0.27) $1.90
 $2.21
 $(0.31)
Diluted$0.70
 $0.96
 $(0.26) $1.86
 $2.16
 $(0.30)
(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.

Net income decreased $17 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. Net interest income increased $23 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016 primarilyprior quarter driven by a $2.4$2.7 billion, increaseor 11 percent, reduction in interest-earning assets led by strong commercial loan growth and higher LHFS along with an increase in average rates. The improvement in net interest income was more than offset by a $29 million increase in noninterest expense primarily driven by ongoing growth initiatives and operating expenses associated with the recent acquisition of Opes and a $26 milliondecrease in noninterest income primarily resulting from a $24 million decrease in the fair value of the DOJ settlement liability we recognized in the third quarter of 2016.
Net income decreased $35 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. Net interest income increased $47 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily driven by growth in interest-earning assets partially offset by a $9 million

increase in interest expense related to our Senior Notes which were issued in the third quarter 2016 to fund the redemption of our TARP Preferred. The15 basis points increase in net interest income wasmargin. In the first quarter, a smaller mortgage market and seasonality drove declines in our HFS and warehouse loan portfolios compared to the prior quarter, which were partially offset by ana $360 million increase in noninterest expenseour commercial and industrial loan portfolio. The margin expansion was largely attributable to the impact of $47income recognized from the payoff of loans with government guarantees in forbearance and higher rates on newly originated loans held-for-sale.

Net return on mortgage servicing rights increased $10 million, primarilyto $29 million for the first quarter 2022, compared to a $19 million net return for the fourth quarter 2021. The increase in interest rates during the quarter resulted in improved valuations and hedging results as we reduced our hedge ratio on this portfolio to help mitigate the impact of higher mortgage rates on our mortgage origination revenue.

Net gain on sales decreased $46 million, or 51 percent compared to the prior quarter driven by an increase in operating expenses associated with our 2017 acquisitions of Opes and Stearns. In addition, we had a decrease in noninterest income of $43 million, primarily due to lower net gain on loan salessale margins which declined 44 basis points, to 58 basis points for the first quarter 2022, as compared to 102 basis points for the fourth quarter 2022. The decrease was largely the result of $21 million fewer re-securitization gains from cured LGG loans and a $24 million decreasesecondary marketing, which were impacted by the speed of rate changes in the fair value ofquarter and volatility. Fallout adjusted lock volume declined to $7.7 billion from $8.9 billion for the DOJ settlement liability recognized in the thirdfourth quarter of 2016. In the nine months ended September 30, 2017, our provision for loan losses of $4 million reflects the strong credit quality of our loan portfolios and the sustained low level of net charge-offs. The $9 million2021, reflecting lower refinance volumes due to increasing interest rates.

Our benefit for loancredit losses for the nine monthsquarter ended September 30, 2016 resulted primarily fromMarch 31, 2022 was $4 million, compared to a benefit of $17 million in the salefourth quarter 2021. Our benefit for credit losses in the first quarter was driven by the reduction in our ACL reserve reflecting one non-accrual commercial loan, no commercial delinquencies and low levels of $1.2 billion UPBconsumer delinquencies while forbearance loans continue to decrease as of performing residential first mortgage loans and $110March 31, 2022.

We subserviced 1.3 million UPBaccounts as of nonperforming, TDR and non-agency loans.March 31, 2022, a 2 percent increase compared to December 31, 2021 as we continued to grow this business.

7

Net Interest Income


The following tables present,table presents details on our net interest margin and net interest income on a consolidated basis,basis:
 Three Months Ended,
 March 31, 2022December 31, 2021March 31, 2021
Average
Balance		InterestAnnualized
Yield/
Rate		Average
Balance		InterestAnnualized
Yield/
Rate		Average
Balance		InterestAnnualized
Yield/
Rate
 (Dollars in millions)
Interest-Earning Assets
Loans held-for-sale$4,833 $40 3.31 %$6,384 $49 3.10 %$7,464 $53 2.83 %
Loans held-for-investment
Residential first mortgage1,500 13 3.35 %1,569 13 3.22 %2,132 17 3.20 %
Home equity598 6 4.05 %635 6 3.93 %820 7 3.50 %
Other1,253 15 4.86 %1,229 16 4.80 %1,040 12 4.79 %
Total consumer loans3,351 34 4.04 %3,433 35 3.92 %3,992 36 3.68 %
Commercial real estate3,226 29 3.60 %3,260 29 3.45 %3,042 26 3.36 %
Commercial and industrial1,834 16 3.52 %1,473 14 3.69 %1,486 13 3.53 %
Warehouse lending3,973 32 3.25 %5,148 47 3.54 %6,395 64 4.00 %
Total commercial loans9,033 77 3.43 %9,881 90 3.53 %10,923 103 3.76 %
Total loans held-for-investment (1)12,384 111 3.59 %13,314 125 3.63 %14,915 139 3.73 %
Loans with government guarantees1,402 15 4.40 %1,742 11 2.62 %2,502 4 0.56 %
Investment securities2,021 11 2.19 %2,104 11 2.09 %2,210 12 2.21 %
Interest-earning deposits929 — 0.16 %747 — 0.15 %87 — 0.14 %
Total interest-earning assets$21,569 $177 3.30 %$24,291 $196 3.18 %$27,178 $208 3.06 %
Other assets2,592 2,408 2,887 
Total assets$24,161 $26,699 $30,065 
Interest-Bearing Liabilities
Retail deposits
Demand deposits$1,626 $— 0.09 %$1,692 $— 0.05 %$1,852 $— 0.07 %
Savings deposits4,253 2 0.14 %4,211 2 0.14 %3,945 1 0.14 %
Money market deposits887 — 0.09 %927 — 0.09 %685 — 0.06 %
Certificates of deposit929 1 0.35 %973 1 0.44 %1,293 4 0.96 %
Total retail deposits7,695 3 0.15 %7,803 3 0.15 %7,775 5 0.25 %
Government deposits1,879 1 0.17 %1,998 1 0.17 %1,773 1 0.22 %
Wholesale deposits and other1,071 2 0.89 %1,238 3 0.93 %1,031 4 1.59 %
Total interest-bearing deposits10,645 6 0.23 %11,039 7 0.25 %10,579 10 0.38 %
Short-term FHLB advances and other658 — 0.22 %1,258 1 0.19 %2,779 1 0.17 %
Long-term FHLB advances1,260 3 0.98 %1,400 4 0.88 %1,200 3 1.03 %
Other long-term debt396 3 3.23 %396 3 3.16 %453 5 4.11 %
Total interest-bearing liabilities$12,959 $12 0.39 %$14,093 $15 0.39 %$15,011 $19 0.51 %
Noninterest-bearing deposits
Retail deposits and other2,474 2,468 2,270 
Custodial deposits (2)4,970 6,309 7,194 
Total noninterest bearing deposits7,444 8,777 9,464 
Other liabilities1,071 1,137 3,271 
Stockholders’ equity2,687 2,692 2,319 
Total liabilities and stockholders' equity$24,161 $26,699 $30,065 
Net interest-earning assets$8,610 $10,198 $12,167 
Net interest income$165 $181 $189 
Interest rate spread (3)2.91 %2.79 %2.55 %
Net interest margin (4)3.11 %2.96 %2.82 %
Ratio of average interest-earning assets to interest-bearing liabilities166.4 %172.4 %181.1 %
Total average deposits$18,089 $19,816 $20,043 
(1)Includes nonaccrual loans. For further information on nonaccrual loans, see Note 4 - Loans Held-for-Investment.
(2)Includes noninterest-bearing custodial 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 fromdivided by average assets and liabilities, expressed in dollars and yields:interest-earning assets.
8

 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 mortgage2,594
22
3.32% 2,090
17
3.17%
Home equity486
6
5.11% 460
6
5.03%
Other26
—
4.52% 30
—
4.59%
Total Consumer loans3,106
28
3.61% 2,580
23
3.52%
Commercial Real Estate1,646
19
4.43% 1,082
9
3.43%
Commercial and Industrial1,073
13
4.77% 633
7
4.27%
Warehouse Lending978
12
4.82% 1,553
17
4.21%
Total Commercial loans3,697
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 guarantees264
3
4.58% 432
4
3.88%
Investment securities3,101
20
2.58% 2,516
16
2.55%
Interest-earning deposits93
—
1.23% 106
—
0.48%
Total interest-earning assets14,737
140
3.77% 12,318
106
3.42%
Other assets1,702
   1,830
  
Total assets$16,439
   $14,148
  
Interest-Bearing Liabilities       
Retail deposits       
Demand deposits$489
$—
0.14% $509
$—
0.20%
Savings deposits3,838
7
0.76% 3,751
8
0.77%
Money market deposits276
—
0.57% 250
—
0.41%
Certificates of deposit1,182
4
1.19% 1,071
3
1.05%
Total retail deposits5,785
11
0.78% 5,581
11
0.75%
Government deposits       
Demand deposits250
—
0.43% 243
—
0.39%
Savings deposits362
1
0.71% 478
1
0.52%
Certificates of deposit329
1
0.89% 355
—
0.52%
Total government deposits941
2
0.70% 1,076
1
0.49%
Wholesale deposits and other35
—
1.49% —
—
—%
Total interest-bearing deposits6,761
13
0.78% 6,657
12
0.71%
Short-term Federal Home Loan Bank advances and other3,809
11
1.17% 1,073
1
0.44%
Long-term Federal Home Loan Bank advances1,234
6
1.99% 1,576
7
1.81%
Other long-term debt493
7
5.09% 467
6
4.86%
Total interest-bearing liabilities12,297
37
1.19% 9,773
26
1.06%
Noninterest-bearing deposits (2)2,244
   2,469
  
Other liabilities427
   527
  
Stockholders’ equity1,471
   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 mortgage2,497
62
3.34% 2,365
56
3.14%
Home equity453
17
5.04% 485
19
5.23%
Other26
1
4.52% 29
1
4.82%
Total Consumer loans2,976
80
3.61% 2,879
76
3.51%
Commercial Real Estate1,482
47
4.15% 936
24
3.40%
Commercial and Industrial929
33
4.71% 601
19
4.12%
Warehouse Lending840
30
4.70% 1,279
41
4.25%
Total Commercial loans3,251
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 guarantees300
10
4.41% 450
12
3.40%
Investment securities3,093
59
2.55% 2,589
50
2.58%
Interest-earning deposits75
1
1.08% 139
1
0.50%
Total interest-earning assets13,709
379
3.68% 11,944
306
3.40%
Other assets1,697
   1,767
  
Total assets$15,406
   $13,711
  
Interest-Bearing Liabilities       
Retail deposits       
Demand deposits$502
$1
0.16% $479
$1
0.17%
Savings deposits3,899
22
0.76% 3,720
21
0.78%
Money market deposits264
1
0.49% 285
1
0.44%
Certificates of deposit1,116
9
1.12% 789
7
1.21%
Total retail deposits5,781
33
0.76% 5,273
30
0.77%
Government deposits       
Demand deposits228
1
0.41% 234
1
0.39%
Savings deposits410
2
0.59% 432
2
0.52%
Certificates of deposit314
1
0.73% 563
1
0.35%
Total government deposits952
4
0.59% 1,229
4
0.42%
Wholesale deposits and other16
—
1.21% —
—
—%
Total interest-bearing deposits6,749
37
0.74% 6,502
34
0.70%
Short-term Federal Home Loan Bank advances and other3,028
23
1.01% 1,190
4
0.41%
Long-term Federal Home Loan Bank advances1,211
17
1.92% 1,587
22
1.88%
Other long-term debt493
19
5.06% 321
10
4.05%
Total interest-bearing liabilities11,481
96
1.12% 9,600
70
0.97%
Noninterest-bearing deposits (2)2,098
   2,101
  
Other liabilities415
   495
  
Stockholders’ equity1,412
   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 presenttable 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 variances are allocated to rate. Rate and volume variances are calculated on each line separate as an indication of the magnitude. Line items may not aggregate to the totals due to mix changes.
Three Months Ended,Three Months Ended,
March 31, 2022 versus December 31, 2021 Increase (Decrease) Due to:March 31, 2022 versus March 31, 2021 Increase (Decrease) Due to:
 RateVolumeTotalRateVolumeTotal
 (Dollars in millions)
Interest-Earning Assets
Loans held-for-sale$4 $(13)$(9)$6 $(19)$(13)
Loans held-for-investment
Residential first mortgage1 (1)— 1 (5)(4)
Home equity— — — 1 (2)(1)
Other(1)— (1)— 3 3 
Total consumer loans— (1)(1)4 (6)(2)
Commercial real estate— — — 1 2 3 
Commercial and industrial(1)3 2 — 3 3 
Warehouse lending(5)(10)(15)(8)(24)(32)
Total commercial loans(6)(7)(13)(8)(18)(26)
Total loans held-for-investment(6)(8)(14)(4)(24)(28)
Loans with government guarantees8 (4)4 13 (2)11 
Investment securities— — — — (1)(1)
Interest-earning deposits and other— — — — — — 
Total interest-earning assets$3 $(22)$(19)$12 $(43)$(31)
Interest-Bearing Liabilities
Interest-bearing deposits$(1)$— $(1)$(4)$— $(4)
Short-term FHLB advances and other borrowings(1)— (1)— (1)(1)
Long-term FHLB advances(1)— (1)— — — 
Other long-term debt— — — (1)(1)(2)
Total interest-bearing liabilities(2)(1)(3)(4)(3)(7)
Change in net interest income$5 $(21)$(16)$16 $(40)$(24)

Comparison to Prior Quarter

Net interest income for the three months ended March 31, 2022 was $165 million, a decrease of $16 million, or 9 percent as compared to the fourth quarter 2021. The results primarily reflect a $2.7 billion, or 11 percent, net decrease in average earning assets primarily from lower mortgage loans held-for-sale and warehouse loans due to seasonality and a smaller mortgage origination market. These decreases were partially offset by $360 million higher balances in our commercial and industrial loan portfolio and a higher net interest margin.

The net interest margin increased 15 basis points to 3.11 percent for the quarter ended March 31, 2022, as compared to 2.96 percent for the quarter ended December 31, 2021. The increase in net interest margin was largely attributable to the impact from the Federal Reserve's March rate increase, income recognition resulting from the payoff of LGG in forbearance, and higher yields on newly originated LHFS.

Average total deposits were $18.1 billion in the first quarter 2022, decreasing $1.7 billion, or 9 percent, from the fourth quarter 2021. The decrease was primarily driven by a decrease of $1.3 billion, or 21 percent, in average custodial deposits due to a reduction in mortgage refinance activity driven by the higher rate environment.

9
 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 mortgage1
 4
 5
Total Consumer loans1
 4
 5
Commercial Real Estate5
 5
 10
Commercial and Industrial1
 5
 6
Warehouse Lending1
 (6) (5)
Total Commercial loans7
 4
 11
Total loans held-for-investment8
 8
 16
Loans with government guarantees1
 (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 other7
 3
 10
Long-term Federal Home Loan Bank advances1
 (2) (1)
Other long-term debt—
 1
 1
Total interest-bearing liabilities9
 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 mortgage3
 3
 6
Home equity—
 (2) (2)
Total Consumer loans3
 1
 4
Commercial Real Estate9
 14
 23
Commercial and Industrial4
 10
 14
Warehouse Lending3
 (14) (11)
Total Commercial loans16
 10
 26
Total loans held-for-investment19
 11
 30
Loans with government guarantees2
 (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 other14
 5
 19
Long-term Federal Home Loan Bank advances—
 (5) (5)
Other long-term debt4
 5
 9
Total interest-bearing liabilities19
 7
 26
Change in net interest income$11
 $36
 $47

Comparison to Prior Year    Quarter


Net interest income increased $23 million or 29 percent for the three months ended September 30, 2017, compared to the same period in 2016. This increaseMarch 31, 2022 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$165 million, a decrease of $24 million 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 balanceMarch 31, 2021. The 13 percent decrease 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 increasedecline in average commercialearning assets, primarily from mortgage loans was consistent with our strategy to grow the community bank. Averageheld-for-sale and warehouse loans havedue to a smaller mortgage origination market. In addition, average LGG decreased $575 million which is more than offset$1.1 billion driven by increases in our C&Iloans exiting forbearance and CRE portfolios demonstrating our shiftbeing resold.

Net interest margin increased 29 basis points to higher yielding loans.

Average interest-bearing liabilities increased $2.5 billion3.11 percent for the three months ended September 30, 2017,March 31, 2022, as compared to 2.82 percent for the three months ended September 30, 2016. The increase wasMarch 31, 2021 primarily due to higher interest rates, income recognition resulting from the payoff of LGG in forbearance as a majority of these loans were not earning interest in the first quarter of 2021 and higher rates on newly originated LHFS.

Average interest-bearing liabilities decreased $2.1 billion, primarily driven by a $2.7decrease of $2.1 billion increase in short-termshort term FHLB advances usedborrowings due to funda reduction in our most liquid assets including LHFS.overall asset base.


Provision for Credit Losses

Comparison to Prior Year to DateQuarter


Net interest income increased $47The benefit for credit losses was $4 million for the ninethree months ended September 30, 2017, compared to the same period in 2016, primarily driven by growth in interest-earning assets, led by an increase in LHFS, 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 Notes in the third quarter 2016.

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, 2017March 31, 2022, as compared to a $17 million benefit for credit losses for the ninethree 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 growthDecember 31, 2021. Our benefit for credit losses 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 billion for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increasefirst quarter was primarily driven by a net $1.5 billion increasereduction in FHLB advances used to fund balance sheet growth, $247 million increase in total deposits andour ACL reserve that reflects the issuancecredit quality of our Senior Notes inoutstanding portfolio with a low number of non-accrual loans and no commercial delinquencies as of March 31, 2022. During the thirdfirst quarter 2016.2022, we had $21 million of net charge-offs, primarily all from the $20 million charge-off of a commercial credit that had an $18 million specific reserve at December 31, 2021. The prior quarter benefit contained qualitative reserve reductions reflecting strong portfolio performance and asset quality.

Provision (Benefit) for Loan Losses


Comparison to Prior Year Quarter


The provision (benefit)benefit for loancredit losses was a provision of $2$4 million duringfor the three months ended September 30, 2017, compared to a provision of $7 million during the three months ended September 30, 2016. During the three months ended September 30, 2017, the $2 million provision reflects continued low level 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.

Comparison to Prior Year to Date

The provision (benefit) for loan losses was a provision of $4 million for the nine months ended September 30, 2017,March 31, 2022, as compared to a benefit of $9$28 million duringfor the ninethree months ended September 30, 2016. The $4 million provision forMarch 31, 2021 which was driven by improved economic forecasts in the nine months ended September 30, 2017 reflects continued low level of net charge-offs and the strong credit quality of the loan portfolio. The $9 million benefit for the nine months ended September 30, 2016 resulted primarily from the sale of $1.2 billion UPB of performing residential first mortgage loans and $110 million UPB of nonperforming, TDR and non-agency loans.prior year.


For further information on the provision for loancredit losses, see MD&A - Allowance for Loan Losses.Credit Quality.


10

Noninterest Income


The following tables provide information on our noninterest income along with additional details relatedand other mortgage metrics:
 Three Months Ended,1Q22 vs. 4Q211Q22 vs. 1Q21
 March 31, 2022December 31, 2021March 31, 2021ChangeChange
 (Dollars in millions)
Net gain on loan sales$45 $91 $227 $(46)$(182)
Loan fees and charges27 29 42 (2)(15)
Net return on mortgage servicing rights29 19 — 10 29 
Loan administration income33 36 27 (3)6 
Deposit fees and charges9 8 8 1 1 
Other noninterest income17 19 20 (2)(3)
Total noninterest income$160 $202 $324 $(42)$(164)

 Three Months Ended,1Q22 vs. 4Q211Q22 vs. 1Q21
 March 31, 2022December 31, 2021March 31, 2021ChangeChange
 (Dollars in millions)
Mortgage rate lock commitments (fallout-adjusted) (1)(3)$7,700 $8,900 $12,300 $(1,200)$(4,600)
Mortgage loans closed (3)$8,200 $10,700 $13,800 $(2,500)$(5,600)
Mortgage loans sold and securitized (3)$9,900 $12,100 $13,700 $(2,200)$(3,800)
Net margin on mortgage rate lock commitments (fallout-adjusted) (1)(2)0.58 %1.02 %1.84 %(0.44)%(1.26)%
Net margin on loans sold and securitized0.45 %0.75 %1.65 %(0.30)%(1.20)%
(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 the impact of changes in interest rates.
(2)Gain on sale margin is based on net gain on loan sales to fallout-adjusted mortgage rate lock commitments.
(3)Rounded to nearest hundred million.

Comparison to Prior Quarter

    Noninterest income decreased $42 million for the quarter ended March 31, 2022, compared to the quarter ended December 31, 2021, primarily due to the following:

•Net gain on loan sales decreased $46 million as compared to the fourth quarter 2021. Gain on sale margins decreased 44 basis points, to 58 basis points for the first quarter 2022, as compared to 102 basis points for the fourth quarter 2021. The decrease was largely the result of $21 million fewer re-securitization gains from the LGG portfolio and othersecondary marketing performance, which was impacted by the speed of interest rate changes in the quarter. FOALs decreased $1.2 billion, or 13 percent, to $7.7 billion, reflecting lower refinance volumes due to increasing interest rates.

•Net return on mortgage metrics:servicing rights was $29 million in the first quarter of 2022, an increase of $10 million compared to the fourth quarter of 2021. The increase in interest rates during the quarter resulted in improved valuations and hedging results as we reduced our hedge ratio on this portfolio to help mitigate the impact of higher mortgage rates on our mortgage origination revenue.

•Loan administration income decreased $3 million, to $33 million for the first quarter 2022, compared to $36 million for the fourth quarter 2021, driven by a decline in the average number of subserviced loans in forbearance which earn a higher rate.

•Loan fees and charges decreased $2 million to $27 million for the first quarter of 2022, compared to $29 million for the fourth quarter 2021, primarily due to a 23 percent decrease in mortgage loans closed partially offset by higher ancillary fee income in our servicing business.

11
 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 charges23
 22
 1
 58
 56
 2
Deposit fees and charges5
 5
 —
 14
 17
 (3)
Loan administration income5
 4
 1
 16
 14
 2
Net return (loss)on mortgage servicing rights6
 (11) 17
 26
 (21) 47
Representation and warranty benefit4
 6
 (2) 11
 12
 (1)
Other noninterest income12
 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 securitized8,924 8,723 22,397 23,611
Net margin on loans sold and securitized0.84% 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$164 million duringfor the three months ended September 30, 2017,March 31, 2022, compared to the same period in 2016.three months ended March 31, 2021, primarily due to the following:


•Net gain on loan sales decreased $19$182 million, during the three months ended September 30, 2017, compared to the three months ended September 30, 2016. The net gain on loan sales margin decreased 24 basis points with fallout adjusted lock yields decreasing 0.29 basis points to 0.84 percent primarily due to more competitive pricing. Lower margins were partially offset$4.6 billion lower FOALs and a 126 basis points decrease in our gain on sale margin driven by a 7.3 percentthe reduction in mortgage origination market, reduced refinance activity due to higher mortgage rates and the resulting increased competition.

•Net return on mortgage servicing rights increased $29 million, primarily driven by the increase in fallout adjustedinterest rates which resulted in improved valuations and hedging results as we reduced our hedge ratio on this portfolio in the first quarter of 2022 to help mitigate the impact of higher mortgage locksrates on our mortgage origination revenue.

•Loan administration income increased $6 million, driven primarily by the Opes and Stearns acquisitions that occurreda decline in 2017.

Net returnLIBOR-based credits paid to sub-servicing customers on MSRs (including the impact of economic hedges) increased $17 million during the three months ended September 30, 2017, compared to the three months ended September 30, 2016. The increase was primarily drivencustodial deposits controlled by improvements in fair value due to a more stable prepayment environment and improvements in our hedging program, partially offset by a decrease in servicethem which declined $2.2 billion along with higher overall subservicing 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 in the DOJ settlement liability that occurred in the third quarter of 2016.

Comparison to Prior Year to Date

Total noninterest income decreased $43 million during the nine months ended September 30, 2017, compared to the same period in 2016.

Net gain on loan sales decreased $70 million during the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The net gain on loan sales margin decreased 19 basis points primarily driven by more competitive pricing and our decision to extend turn times on sales 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 retail due to the integrationaverage number of Opes.loans being subserviced.


Deposit•Loan fees and charges decreased $3$15 million during the nine months ended September 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 primarily driven by a more stable prepayment environment and improvements40 percent decrease in our hedging program,mortgage loans closed. This decrease was partially offset by lower servicinghigher ancillary 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.our servicing business.


Other noninterest income decreased $20 million during the nine months ended September 30, 2017, compared 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.

Noninterest Expense


The following table sets forth the components of our noninterest expense:
 Three Months Ended,1Q22 vs. 4Q211Q22 vs. 1Q21
 March 31, 2022December 31, 2021March 31, 2021ChangeChange
 (Dollars in millions)
Compensation and benefits$127 $137 $144 $(10)$(17)
Occupancy and equipment45 47 46 (2)(1)
Commissions26 38 62 (12)(36)
Loan processing expense21 21 21 — — 
Legal and professional expense11 13 8 (2)3 
Federal insurance premiums4 4 6 — (2)
Intangible asset amortization2 3 3 (1)(1)
General, administrative and other25 28 57 (3)(32)
Total noninterest expense$261 $291 $347 $(30)$(86)
Efficiency ratio80.4 %75.9 %67.7 %4.5 %12.7 %
Number of FTE employees5,341 5,395 5,418 (54)(77)

Comparison to Prior Quarter

Noninterest expense decreased to $261 million for the quarter ended March 31, 2022, compared to $291 million for the quarter ended December 31, 2021. Excluding $3 million of merger costs in the first quarter of 2022 and $6 million of merger costs in the fourth quarter 2021, noninterest expense decreased $27 million, or 9 percent. The decrease in noninterest expense primarily reflects lower commissions as mortgage loan closings decreased 23 percent compared to the prior quarter and a decrease in incentive compensation partially offset by seasonally higher payroll taxes and benefits.

12
 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
Commissions23
 16
 7
 49
 40
 9
Occupancy and equipment28
 21
 7
 75
 64
 11
Loan processing expense15
 13
 2
 41
 40
 1
Legal and professional expense7
 5
 2
 22
 20
 2
Other noninterest expense22
 18
 4
 59
 51
 8
Total noninterest expense$171
 $142
 $29
 $465
 $418
 $47
Efficiency ratio73.5% 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 FTE3,495
 3,432
 63
 3,495
 2,886
 609



Comparison to Prior Year    Quarter


Noninterest expense increased $29decreased $86 million for the three months ended March 31, 2022, compared to $171the three months ended March 31, 2021 primarily due to the following:

•Mortgage commissions decreased $36 million primarily driven by a 40 percent reduction in mortgage loan closings.

•Compensation and benefits decreased $17 million, primarily due to a decrease in incentive compensation and slightly lower average FTE.

•General, administrative and other noninterest expense decreased $32 million primarily driven by the $35 million DOJ final settlement expense recognized during the three months ended September 30, 2017,March 31, 2021. The quarter ended March 31, 2021 includes $3 million of merger expenses.

Provision for Income Taxes

    The first quarter provision for income taxes totaled $15 million, as compared to $142a provision for income taxes of $24 million for the fourth quarter 2021, with an effective tax rate of 22 percent, in-line with the effective tax rate for the fourth quarter 2021.

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.

    We charge the lines of business for the net charge-offs that occur. In addition to this amount, we charge them for the change in loan balances during the three monthsperiod, applied at the budgeted credit loss factor. The difference between the consolidated provision (benefit) for credit losses and the sum of total net charge-offs and the change in loan balances is assigned to the “Other” segment, which includes the changes related to the economic forecasts, model changes, qualitative adjustments and credit downgrades. The amount assigned to “Other” is allocated back to the lines of business through general, administrative and other noninterest expense.

    For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 17 - Segment Information.

13

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 CRE business supports income producing real estate and home builders. The Community Banking segment also offers warehouse lines of credit to non-bank mortgage lenders.

 Three Months Ended,1Q22 vs. 4Q211Q22 vs. 1Q21
Community BankingMarch 31, 2022December 31, 2021March 31, 2021ChangeChange
(Dollars in millions)
Summary of Operations
Net interest income$122 $147 $156 $(25)$(34)
(Benefit) provision for credit losses22 9 (14)13 36 
Net interest income after (benefit) provision for credit losses100 138 170 (38)(70)
Other noninterest income18 16 18 2 — 
Total noninterest income18 16 18 2 — 
Compensation and benefits28 26 31 2 (3)
Commissions1 1 1 — — 
Loan processing expense2 1 1 1 1 
General, administrative and other18 21 25 (3)(7)
Total noninterest expense49 49 58 — (9)
Income before indirect overhead allocations and income taxes69 105 130 (36)(61)
Indirect overhead allocation(10)(9)(10)(1)— 
Provision for income taxes12 20 25 (8)(13)
Net income$47 $76 $95 $(29)$(48)
Key Metrics
Number of FTE employees1,173 1,123 1,273 50 (100)
Number of bank branches158 158 158 — — 

Comparison to Prior Quarter

    The Community Banking segment reported net income of $47 million for the quarter ended September 30, 2016.March 31, 2022, compared to net income of $76 million for the quarter ended December 31, 2021. The $29 million decrease was driven by the following:

•Net interest income decreased $25 million primarily due to a $1.2 billion decline in our warehouse portfolio as a result of the reduction in the mortgage origination market and a higher intercompany funding rate.

•General, administrative and other noninterest expense decreased $3 million due to lower intersegment expense allocations from the Other segment. This is primarily due to the decrease in ACL during the first quarter 2022 resulting in a provision benefit and higher net charge-offs which resulted in a benefit to the Other segment.

•The provision for credit losses was $22 million in the first quarter 2022, compared to a $9 million provision in the prior quarter. The increase is driven by growth initiatives and operating expenseswas primarily all from the $20 million charge-off associated with the recent acquisition of Opes which will support future revenue growth. Increases in those related expenses include an increase in compensation and benefits due to higher headcount, an increase in commissions attributable to increased loan production, and an increase in occupancy and equipment costs to support the capital needs of our expanded business.one commercial credit.


Comparison to Prior Year to DateQuarter


Noninterest expense increased    The Community Banking segment reported net income of $47 million to $465 million duringfor the ninethree months ended September 30, 2017,March 31, 2022, compared to $418$95 million duringfor the ninethree months ended September 30, 2016.March 31, 2021. The increasedecrease was driven by the following:
14


•Net interest income decreased $34 million primarily due to a $2.4 billion decline in our warehouse portfolio as a result of the reduction in the mortgage origination market and higher intercompany funding rate charges on our assets.

•The provision for credit losses of $22 million for the three months ended March 31, 2022 was primarily driven by higher operating expenses associated with growth initiatives and our 2017 acquisitions of Opes and Stearns, including an increase in compensation and benefits duea charge-off relating to an increase in headcount and higher commissions. Additionally, noninterest expense increased as a result of higher occupancy and equipment to support the capital needs of our expanded business and an increase in advertising related to a direct mail and brand awareness campaign.

Provision (benefit)one commercial borrower. The $14 million benefit for Income Taxes

Our provision for income taxescredit losses for the three and nine months ended September 30, 2017March 31, 2021 was $20 million and $52 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 percent for 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 differs from the combined federal and state statutory tax rate primarily due to a benefit$16 million recovery on a previously charged-off loan.

•General, administrative and other noninterest expense decreased $7 million due to lower intersegment expense allocations 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 decreaseOther segment. This is primarily due to the accumulationdecrease in ACL during the first quarter of loans2022, resulting in support of our residential mortgage backed securitizations. As of September 30, 2017, we had outstanding commitmentsa provision benefit and higher net charge-offs, which caused a benefit to sell $6.6 billion of mortgage loans. Generally, these commitmentsthe Other segment.

Mortgage Originations

    We 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 is the result of seasonally higher mortgage activity and the accumulation of loans in support of our next residential mortgage backed securitization.

On October 31, 2017, the Company closed on a securitization of $576 million of residential mortgage-backed certificates (RMBS) issued by Flagstar Mortgage Trust 2017-2 (FSMT 2017-2). On July 31, 2017, 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.

In addition, we originate or purchase residential first mortgage loans, other consumer loans, and commercial loans for our LHFI portfolios. Our revenues include noninterest income from salesleading national originator of residential first mortgages to the Agencies, net interest income, and revenue from servicing of loans for others.

We utilizemortgages. Our Mortgage Originations segment utilizes multiple productiondistribution channels to originate or acquire one-to-four family residential mortgage loans on a national scale, primarily to generate high returns on capital. This helps grow thesell. Subsequent to sale, we retain certain mortgage servicing rights which are reported at their fair value. The fair value includes service fee revenues, a cost to service which is an intercompany allocation paid to our servicing business, and provides stable, low cost fundingother financial line impacts. We originate and retain certain mortgage loans in our LHFI portfolio which generate interest income in the Mortgage Originations segment.
 Three Months Ended,1Q22 vs. 4Q211Q22 vs. 1Q21
Mortgage OriginationsMarch 31, 2022December 31, 2021March 31, 2021ChangeChange
(Dollars in millions)
Summary of Operations
Net interest income$56 $62 $56 $(6)$— 
Provision (benefit) for credit losses3 (3)(2)6 5 
Net interest income after provision (benefit) for credit losses53 65 58 (12)(5)
Net gain on loan sales45 91 227 (46)(182)
Loan fees and charges6 10 24 (4)(18)
Loan administration expense(7)(7)(10)— 3 
Net return on mortgage servicing rights29 19 — 10 29 
Other noninterest income1 5 3 (4)(2)
Total noninterest income74 118 244 (44)(170)
Compensation and benefits45 49 54 (4)(9)
Commissions25 37 61 (12)(36)
Loan processing expense9 11 11 (2)(2)
General, administrative and other11 23 22 (12)(11)
Total noninterest expense90 120 148 (30)(58)
Income before indirect overhead allocations and income taxes37 63 154 (26)(117)
Indirect overhead allocation(15)(17)(19)2 4 
Provision for income taxes4 9 28 (5)(24)
Net income$18 $37 $107 $(19)$(89)
Key Metrics
Mortgage rate lock commitments (fallout-adjusted) (1)(2)$7,700 $8,900 $12,300 $(1,200)$(4,600)
Noninterest expense to closing volume1.11 %1.13 %1.07 %(0.02)%0.04 %
Number of FTE employees2,044 2,109 2,083 (100)(39)
(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 Quarter

    The Mortgage Originations segment reported net income of $18 million for the Community Bank segment. We continuequarter ended March 31, 2022 as compared to leverage technology$37 million for the quarter ended December 31, 2021. The $19 million decrease was driven by the following:
15


•Net gain on loan sales decreased $46 million as compared to streamlinethe fourth quarter 2021. Gain on sale margins decreased by 44 basis points to 58 basis points for the first quarter 2022, as compared to 102 basis points for the fourth quarter 2021. The decrease was largely the result of fewer re-securitization gains from the LGG portfolio and secondary marketing performance, which was impacted by the speed of interest rate changes in the quarter. Channel margins were down slightly due to competitive factors. FOALs decreased $1.2 billion, or 13 percent, to $7.7 billion.

•Net interest income decreased $6 million primarily due to a $1.6 billion, or 24 percent, decline in the LHFS portfolio driven by the reduction in the mortgage origination process, thereby bringing servicemarket, partially offset by higher interest rates.
•Net return on mortgage servicing rights increased $10 million, to $29 million for the first quarter 2022, compared to a $19 million net return for the fourth quarter 2021. The increase in interest rates during the quarter resulted in improved valuations and hedging results as we reduced our hedge ratio on this portfolio to help mitigate the impact of higher mortgage rates on our mortgage origination revenue.


convenience•Commissions decreased $12 million, primarily due to borrowers and correspondents. We also continue to make available to our customers various web-based tools that facilitate thea 23 percent reduction in mortgage loan process through each of our production channels. We intendclosings.

•General, administrative and other noninterest expense decreased $12 million primarily due to continuelower intersegment expense allocations from the Other segment. This is primarily due to seek new waysthe decrease in ACL during the quarter resulting in a provision benefit and higher net charge-offs which resulted in a benefit to expand our relationships with borrowers and correspondentsthe Other segment.

Comparison to provide the necessary capital and liquidity to grow the Mortgage Servicing and the Community Bank segments.Prior Year Quarter
    
The following table presentsMortgage Originations segment reported net income of $18 million for the three months ended March 31, 2022 and $107 million for the three months ended March 31, 2021. The decrease was driven by the following:

•Net gain on loan originationssales decreased $182 million primarily due to $4.6 billion lower FOALs and a 126 basis points decrease in our gain on sale margin driven by portfolio:the challenging mortgage market and competitive factors relative to the prior year.

•Commissions decreased $36 million and loan fees and charges decreased $18 million primarily due to reduction in mortgage closings.

•Compensation and benefits decreased $9 million primarily due to lower incentive compensation and lower FTE.

•General, administrative and other noninterest expense decreased $11 million primarily due to lower intersegment expense allocations from the Other segment. This is primarily due to the decrease in ACL during the quarter resulting in a provision benefit and higher net charge-offs which resulted in a benefit to the Other segment.
•Net return on mortgage servicing rights, including the impact of economic hedges, increased $29 million primarily driven by reduced hedge ratio in this portfolio and increased interest rates during quarter ended March 31, 2021.

Mortgage Servicing
 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 loans9,666
 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    The Mortgage Servicing segment providesservices loans when we hold the MSR asset, and subservices mortgage loans for others through a scalable 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 othersplatform on a fee for service basisbasis. The loans we service generate custodial deposits which provide a stable funding source supporting interest-earning asset generation in the Community Banking and we may also collect ancillary fees andMortgage Originations segments. We earn income throughfrom other segments for 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 delinquency or payment status of the underlying loans. Along with these contractual fees, we may also collect ancillary fees related to these 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. Our continued growth in our subservicing business and the strength of our platform has made us the 6th largest subservicer in the nation.


16

 Three Months Ended,1Q22 vs. 4Q211Q22 vs. 1Q21
Mortgage ServicingMarch 31, 2022December 31, 2021March 31, 2021ChangeChange
(Dollars in millions)
Summary of Operations
Net interest income$3 $4 $4 $(1)$(1)
Loan fees and charges21 18 18 3 3 
Loan administration income43 45 40 (2)3 
Total noninterest income64 63 58 1 6 
Compensation and benefits16 16 16 — — 
Loan processing expense9 8 8 1 1 
General, administrative and other21 22 22 (1)(1)
Total noninterest expense46 46 46 — — 
Income before indirect overhead allocations and income taxes21 19 16 2 5 
Indirect overhead allocation(6)(5)(6)(1)— 
Provision for income taxes3 3 2 — 1 
Net income$12 $11 $8 $1 $4 
Key Metrics
Average number of residential loans serviced (1)1,245,000 1,218,000 1,117,000 27,000 128,000 
Number of FTE employees736 729 721 7 15 
(1)Rounded to nearest thousand.

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.loans:
March 31, 2022December 31, 2021March 31, 2021
Unpaid Principal Balance (1)Number of accountsUnpaid Principal Balance (1)Number of accountsUnpaid Principal Balance (1)Number of accounts
(Dollars in millions)
Loan Servicing
Subserviced for others (2)$253,013 1,041,251 $246,858 1,032,923 $197,053 921,126 
Serviced for others (3)40,065 154,404 35,074 137,243 40,402 160,511 
Serviced for own loan portfolio (4)7,215 60,167 8,793 63,426 9,965 66,363 
Total loans serviced$300,293 1,255,822 $290,725 1,233,592 $247,420 1,148,000 
 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 others21,342
 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.

(1)UPB, net of write downs, does not include premiums or discounts.
OPERATING SEGMENTS(2)Loans subserviced for a fee for non-Flagstar owned loans or MSRs. Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs.

(3)Loans for which Flagstar owns the MSR.
Overview

For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 19 - Segment Information,(4)Includes LHFI (residential first mortgage, home equity and other sections of this report for a full understanding of our consolidated financial performance.consumer), LHFS (residential first mortgage), LGG (residential first mortgage), and repossessed assets.


Comparison to Prior Quarter

The following table presentsMortgage Servicing segment reported net income (loss)of $12 million for the quarter ended March 31, 2022, compared to net income of $11 million for the quarter ended December 31, 2021 as a result of a slightly higher number of loans serviced and subserviced. Loan administration income declined $2 million driven by operating segment:lower monthly subservicing fees due to a lower number of loans being in forbearance. LIBOR-based fees paid to sub-servicing customers on custodial deposits controlled by them were flat as a $1.3 billion decline in the average balance of custodial deposits was offset by a higher variable rate.
 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 Originations31
 39
 (8) 87
 99
 (12)
Mortgage Servicing(4) (3) (1) (12) (9) (3)
Other3
 14
 (11) 7
 19
 (12)
Total net income$40
 $57
 $(17) $108
 $143
 $(35)

Community Banking


Comparison to Prior Year Quarter


During the three months ended September 30, 2017, the Community BankingThe Mortgage Servicing segment reported net income of $10 million, compared to $7$12 million for the three months ended September 30, 2016.March 31, 2022, compared to net income of $8 million for the three months ended March 31, 2021. The $4 million increase in net income was driven by a $6 million increase in noninterest income primarily duedriven by a $2.2 billion decline in LIBOR-based fees paid to sub-servicing customers on custodial deposits controlled by them and higher ancillary fee income.

17

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. The Other segment charges each operating segment a daily funds transfer pricing rate on their average assets which resets more rapidly than the underlying borrowing costs resulting in an asset sensitive position. 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,1Q22 vs. 4Q211Q22 vs. 1Q21
OtherMarch 31, 2022December 31, 2021March 31, 2021ChangeChange
(Dollars in millions)
Summary of Operations
Net interest income$(16)$(32)$(27)$16 $11 
(Benefit) provision for credit losses(29)(23)(12)(6)(17)
Net interest income after (benefit) provision for credit losses13 (9)(15)22 28 
Net gain on loan sales— — — — — 
Loan fees and charges— 1 — (1)— 
Loan administration expense(3)(2)(3)(1)— 
Other noninterest income7 6 7 1 — 
Total noninterest income4 5 4 (1)— 
Compensation and benefits38 44 43 (6)(5)
Commissions— — — — — 
Loan processing expense1 1 1 — — 
General, administrative and other37 29 51 8 (14)
Total noninterest expense76 74 95 2 (19)
Income before indirect overhead allocations and income taxes(59)(78)(106)19 47 
Indirect overhead allocation31 31 35 — (4)
Provision for income taxes(4)(8)(10)4 6 
Net loss$(24)$(39)$(61)$15 $37 
Key Metrics
Number of FTE employees1,388 1,484 1,340 (96)48 

Comparison to Prior Quarter

    The Other segment reported a net loss of $24 million, for the quarter ended March 31, 2022, compared to a $9net loss of $39 million for the quarter ended December 31, 2021. The $15 million improvement was primarily driven by a $16 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 improvementresult of the net impact that higher interest rates in provision for loan losses due to improved credit quality. These increases were partially offset by a $7 million increase in noninterest expense driven by higher volume-driven expenses and growth initiatives which will support future revenue growth.the first quarter 2022 had on our overall asset sensitive position.


Comparison to Prior Year to DateQuarter


During the nine months ended September 30, 2017, the Community Banking    The Other segment reported a net incomeloss of $26 million, compared to $34$24 million for the ninethree months ended September 30, 2016. The $8 million decrease in net income was primarily dueMarch 31, 2022, compared to a $15net loss of $61 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 ninethree months ended September 30, 2016. These decreases were partially offsetMarch 31, 2021. The $37 million improvement was driven by a $21an $11 million increase in net interest income due to loan growth, led by an increase in commercial loans and higher average loan yields.

Mortgage Originations

Comparison to Prior Year Quarter

The Mortgage Originations segment's net income decreased $8 million to $31 million during the three months ended September 30, 2017, compared to $39 million in the three months ended September 30, 2016. The decrease was primarily due toas a $24 million increase in noninterest expense during the three months ended September 30, 2017, primarily driven by higher compensation and benefits due to growth initiatives and higher commissions resulting from higher loan production. Additionally,result of the net gain on loans sales decreased $16 million 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 in the net return on MSRs driven by increases in theimpact that higher 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.

Comparison to Prior Year to Date

The Mortgage Originations segment's net income decreased $12 million to $87 million during the nine months ended September 30, 2017, compared to $99 million in the nine months ended September 30, 2016. The decrease was primarily due to

a $55 million decrease in net gain on loan sales driven by a 26 basis point decrease in margin resulting from product mix and a more competitive market. Other noninterest expense increased $39 million primarily due 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 increase in the interest rate environmentrates in the first nine months of 2017 which resultedquarter 2022 had on our overall asset sensitive position. Additionally, in lower prepayments and favorable fair value adjustments. Net interest income increased $29the first quarter 2021 we recorded a $35 million primarily resulting from an increase in mortgage activity and the benefit of extending turn times.

Mortgage Servicing

Comparison to Prior Year Quarter

The Mortgage Servicing segment reported a net loss of $4 millionfinal settlement expense for the three months ended September 30, 2017, compared to a net loss of $3 million for the three months ended September 30, 2016. The increaseDOJ Liability which did not reoccur.

Risk Management

    Certain risks are inherent in net losses is primarily due to a decrease in loan administration income, partially offset by higher subservicing fees driven by an increase in average portfolio volumeour business and an improvement in other noninterest expenses.

Comparison to Prior Year to Date

The Mortgage Servicing segment reported a net loss of $12 million for the nine months ended September 30, 2017, 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 million for the three months ended September 30, 2016. The $11 million decrease is primarily due to 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 average investment balances due to the pulling ahead of planned purchases of investments to take advantage of a higher market return.

Comparison to Prior Year to Date

For the nine months ended September 30, 2017, the Other segment's net income was $7 million, compared to net income of $19 million for the nine months ended September 30, 2016. The $12 million decrease was primarily due a $24 million decrease in the fair value of the DOJ settlement liability which was recorded in the third quarter of 2016, partially offset by decrease in noninterest expense.

RISK MANAGEMENT

Like all financial services companies, we engage in 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 investmentscontinuously 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.

18


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, 2016.2021 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 andplus Tier 2 capital plusand any portion of the allowance for loan lossesACL not included in Tier 2 capital. This lending limit was $249$466 million as of September 30, 2017. Flagstar maintainsMarch 31, 2022. We maintain a more conservative maximum internal Bank credit limit ofthan required by HOLA, generally not exceeding $100 million (commitment level) to any one borrower/obligor relationship, with the exception of warehouse borrower/obligor relationships, which is more conservative than thehave a higher internal Bank limit requiredof $200 million. All warehouse advances are fully collateralized by HOLA. Allresidential mortgage loans and this asset class has had very low levels of historical loss. We have a tracking and reporting process to monitor lending concentration levels, and all new commercial credit exposures to a single or related borrower that exceed $50 million and all new warehouse credit exposures to a single or related borrower that exceed $75 million must be approved by the Board of Directors. Exceptions to these levels are made to strong borrowers on a case by case basis, with the approval of the Board of Directors.

    
TheOur 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 we 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 March 31, 2022, we had $9.9 billion UPB in our commercial loan portfolio with our warehouse lending and home builder finance businesses accounting for 59 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 creditcore banking footprint.

Credit risk within the commercial loan portfolio is associated with lending activities, asmanaged using concentration limits based on line of business, industry, geography and product type. This is managed through the acceptance and managementuse of credit risk is central to profitable lending. We manage our credit risk by establishing soundstrict 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.

19

    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) the borrower has 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 considered to be SNCs. A SNC is defined as any loan or loan commitment totaling at least $100 million that is shared by three or more federally regulated 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 CRE portfolio, including owner and nonowner-occupied properties and home builder finance lending, we obtain independent appraisals as part of our underwriting and adheringmonitoring 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 variousalso 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 managementprofile. Our consumer loan portfolio includes high credit quality residential first and monitoring activities to mitigate risks associated withsecond lien mortgage loans, that we hold, acquire,non-auto boat and originate.recreational vehicle indirect lending loans and other unsecured consumer loans.


Loans held-for-investmentHeld-for-Investment


The following table summarizes loans held-for-investmentthe amortized cost of our LHFI by category:
March 31, 2022% of TotalDecember 31, 2021% of TotalChange
 (Dollars in millions)
Consumer loans
Residential first mortgage$1,499 11.3 %$1,536 11.5 %$(37)
Home equity (1)596 4.5 %613 4.5 %(17)
Other1,267 9.6 %1,236 9.2 %31 
Total consumer loans3,362 25.4 %3,385 25.2 %(23)
Commercial loans
Commercial real estate3,254 24.6 %3,223 24.0 %31 
Commercial and industrial1,979 15.0 %1,826 13.6 %153 
Warehouse lending4,641 35.1 %4,974 37.1 %(333)
Total commercial loans9,874 74.6 %10,023 74.8 %(149)
Total loans held-for-investment$13,236 100.0 %$13,408 100.0 %$(172)
 September 30, 2017 December 31, 2016 Change
 (Dollars in millions)
Consumer loans     
Residential first mortgage$2,665
 $2,327
 $338
Home equity496
 443
 53
Other26
 28
 (2)
Total consumer loans3,187
 2,798
 389
Commercial loans    
Commercial real estate (1)
1,760
 1,261
 $499
Commercial and industrial1,097
 769
 328
Warehouse lending1,159
 1,237
 (78)
Total commercial loans4,016
 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
    The decrease in our commercial loan portfolio of $149 million, or 1 percent, is mainly due to warehouse repayments outpacing advances from December 31, 2016. This increase was due2021 to March 31, 2022, partially offset by $184 million higher balances in our continued effort to grow both thecommercial and industrial and commercial real estate loan portfolios. Our consumer loan portfolio and commercial loan portfolio.


The commercial loan portfolio growth strengthens our Community Banking segment by improving margins through the additions of higher yielding loans. As a result, the commercial loan portfolio has grown $749decreased $23 million, or 23 1
20

percent, sincefrom December 31, 2016. During the nine months ended September 30, 2017, our CRE portfolio grew $4992021 to March 31, 2022 as a $31 million increase in other consumer loans was more than offset by a $37 million decrease in residential first mortgage loans and C&I $328 million.

For further information, see Note 4 - Loans Held-for-Investment.a $17 million decrease in home equity loans due to higher prepayments due to refinance activity.
    
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 yieldingAs of March 31, 2022, loans in this portfolio had an average current FICO score of 731 and loans that will diversify or enhance the interest rate characteristicsan average current LTV of our balance sheet.         51 percent.

    
The following table presents amortized cost of our total residential first mortgage LHFI by major category:
March 31, 2022December 31, 2021
(Dollars in millions)
Estimated LTVs (1)
Less than 80% and current FICO scores (2):
Equal to or greater than 660$962 $988 
Less than 66055 50 
80% and greater and current FICO scores (2):
Equal to or greater than 660369 385 
Less than 660113 113 
Total$1,499 $1,536 
Geographic region
California$444 $441 
Michigan438 400 
Florida80 68 
Texas73 83 
Washington57 59 
New York42 38 
Indiana40 34 
Colorado31 30 
Illinois27 31 
New Jersey22 24 
Other245 328 
Total$1,499 $1,536 
 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 66076
 95
80% and greater and refreshed FICO scores (1):
   
Equal to or greater than 660132
 78
Less than 6608
 9
U.S. government guaranteed60
 68
Total$2,665
 $2,327
Geographic region   
California$1,059
 $858
Michigan267
 236
Florida193
 193
Texas174
 138
Washington160
 136
Illinois97
 84
Arizona73
 65
New York72
 68
Colorado66
 60
Maryland65
 59
Others439
 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 appraised property value at loan closing.
(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 March 31, 2022, by year of closing:
20222021202020192018 and PriorTotal
(Dollars in millions)
Residential first mortgage loans$114 $352 $189 $257 $587 $1,499 
Percent of total7.6 %23.5 %12.6 %17.1 %39.2 %100.0 %

Home equity. Our home equity portfolio includes first andHELOANs, second lien positions for HELOANsmortgage 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 mortgagesHELOANs 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 second700. Second mortgage loans/HELOANSloans and HELOANs are fixed rate loans and are available with terms up to 1520 years. HELOC loans are adjustable-ratevariable-rate loans that contain a 10-year interest-onlyinterest only draw period followed by a 20-year amortizing period. As of March 31, 2022, loans in this portfolio had an average current FICO score of 753 and an average CLTV of 54 percent. At March 31, 2022, HELOCs and HELOANs in a first lien position totaled $63 million.

21


    Other consumer loans. Our other consumer loan portfolio consists of secured and unsecured loans originated through our indirect lending business, third party closings and our Community Banking segment.
The following table presents amortized cost of our other consumer loan portfolio by purchase type:
March 31, 2022December 31, 2021
Balance% of PortfolioBalance% of Portfolio
 (Dollars in millions)
Indirect lending$935 74 %$926 75 %
Point of sale295 23 %272 22 %
Other37 3 %38 3 %
Total other consumer loans$1,267 100 %$1,236 100 %

    Other consumer loans totaled $1.3 billion as of March 31, 2022, compared to $1.2 billion at December 31, 2021. The increase in other consumer loans was primarily due to the ongoing growth in our non-auto, boat and recreational vehicle indirect lending businesses, which began in late 2018, of which 66 percent is secured by boats and 34 percent is secured by recreational vehicles and growth in our point of sale portfolio. As of March 31, 2022, loans in our indirect portfolio had an average current FICO score of 747. Point of sale loans consist of unsecured consumer installment loans originated primarily for home improvement purposes through a third-party financial technology company who also provides us a level of credit loss protection.

    Commercial real estate loans. The CRE 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. Our CRE loans primarily earn interest at a variable rate.

Our national home builder finance program within our commercial portfolio contained $3.0 billion in commitments with $1.2 billion in outstanding loans as of March 31, 2022. Of these outstanding loans $861 million are collateralized and included in our CRE portfolio while $334 million are unsecured and included in our C&I portfolio.

As of March 31, 2022, our CRE portfolio included $158 million of SNCs and no leveraged lending loans compared to $186 million of SNCs and no leveraged lending loans as of December 31, 2021. As of March 31, 2022, the SNC portfolio had ten borrowers with an average amortized cost of $16 million and an average commitment of $19 million. There were no nonperforming SNC or leveraged loans as of March 31, 2022 and there was no SNC that was rated as substandard. There was one special mention SNC loan for $22 million as of March 31, 2022. There were no leveraged loans outstanding that were rated as special mention or substandard as of March 31, 2022.

22

    The following table presents amortized cost of our total CRE LHFI by collateral location and collateral type:
MITXCAOHFLOtherTotal% by collateral type
(Dollars in millions)
March 31, 2022
Home builder$27 $169 $100 $— $186 $379 $861 26.6 %
Multi family209 44 66 50 22 77 468 14.4 %
Owner occupied300 4 24 8 — 59 395 12.1 %
Hotel159 — 26 30 — 180 395 12.1 %
Retail (1)203 — 2 55 3 33 296 9.1 %
Senior living facility122 24 — 68 — 56 270 8.3 %
Office173 — 20 4 — 55 252 7.7 %
Industrial55 — — — — 21 76 2.3 %
Parking garage/lot46 — — — — 20 66 2.0 %
Shopping Mall— — 16 — — — 16 0.5 %
Land-residential (2)5 — 7 — — — 12 0.4 %
Single family residence (3)6 — — — — 1 7 0.2 %
All other (4)15 48 — 5 — 72 140 4.3 %
Total$1,320 $289 $261 $220 $211 $953 $3,254 100.0 %
Percent by state40.6 %8.9 %8.0 %6.8 %6.5 %29.2 %100.0 %
(1)Includes multipurpose retail space, neighborhood centers, shopping centers and single-use retail space.
(2)Loans secured by land. Land residential includes development and unimproved vacant land.
(3)Loans secured by 1-4 single family residence properties.
(4)All other primarily includes: mini-storage facilities, data centers, movie theaters, etc.

Commercial and industrial loans. Commercial and industrialC&I 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 of1.20 times. Of our C&I loans, 96 percent earn interest at a variable rate.



    As of March 31, 2022, our C&I portfolio included $1.0 billion of SNCs. The finance and insurance sector and the services sector comprised the majority of the portfolio's NBV with 39 and 28 percent of the balance, respectively. The SNC portfolio had forty-nine borrowers with an average amortized book value of $21 million and an average commitment of $37 million. There were no NPLs, no loans were rated as special mention, and loans totaling $23 million of amortized cost were rated as substandard as of March 31, 2022.

    As of March 31, 2022, our C&I portfolio included $327 million of leveraged lending, of which $232 million were SNCs, which were also included in the SNC portfolio discussed in the prior paragraph. The manufacturing sector comprised 50 percent of the leveraged lending portfolio, and the financial and insurance sector comprised 20 percent. There were $9 million in NPLs as of March 31, 2022, and loans totaling $25 million were rated substandard and loans totaling $9 million were rated as special mention. Included in the financial and insurance sector within our C&I portfolio are $342 million in loans outstanding to 8 borrowers that are collateralized by MSR assets with an average amortized cost of $43 million and an average commitment of $72 million. The ratio of the loan outstanding to the fair market value of the collateral ranges from 12 percent to 69 percent.

23

The following table presents amortized cost of our total C&I LHFI by borrower's geographic location and industry type:type as defined by the North American Industry Classification System:
MINYFLSCCANJTXOHWIINOtherTotal% by industry
(Dollars in millions)
March 31, 2022
Financial & Insurance$27 $232 $47 $103 $22 $98 $43 $41 $22 $— $82 $717 36.2 %
Services131 1 16 — 10 11 — 1 — 3 99 272 13.7 %
Manufacturing238 4 — — — — — — 7 — 47 296 15.0 %
Home Builder Finance— — 122 39 82 — 52 — — — 39 334 16.9 %
Rental & Leasing156 27 30 — — — — — — 8 24 245 12.4 %
Distribution35 — — — 13 — — 1 — 1 3 53 2.7 %
Healthcare3 — — — — — — 18 — — 12 33 1.7 %
Government & Education2 — — — 2 — — — — — 12 16 0.8 %
Commodities— — — — 5 — — — — 1 7 13 0.7 %
Total$591 $263 $214 $141 $133 $108 $94 $61 $29 $13 $325 $1,979 100.0 %
Percent by state30.0 %13.0 %11.0 %7.0 %7.0 %6.0 %5.0 %3.0 %1.0 %1.0 %16.0 %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%
Manufacturing61
 5
 —
 23
 —
 87
 176
 16.0%
Healthcare29
 7
 1
 1
 44
 27
 109
 9.9%
Distribution57
 —
 —
 2
 —
 —
 59
 5.4%
Servicing advances—
 —
 21
 —
 —
 25
 46
 4.2%
Rental & leasing44
 —
 —
 —
 —
 2
 46
 4.2%
Government & education9
 —
 —
 —
 —
 36
 45
 4.1%
Commodities5
 —
 —
 —
 —
 6
 11
 1.0%
Total$299
 $85
 $72
 $60
 $56
 $525
 $1,097
 100.0%
Percent by state27.3% 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.


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
Apartments125
 23
 —
 7
 —
 47
 39
 241
Industrial155
 —
 35
 —
 —
 —
 4
 194
Office164
 —
 19
 —
 —
 —
 —
 183
Land - Residential (4)
11
 21
 32
 24
 11
 —
 31
 130
Hotel/motel79
 —
 —
 —
 —
 —
 35
 114
Senior Living facility50
 —
 —
 —
 —
 12
 10
 72
Parking garage/Lot68
 —
 —
 —
 —
 —
 —
 68
Non Profit37
 —
 —
 —
 —
 —
 10
 47
Shopping Mall (5)
27
 —
 —
 —
 —
 —
 —
 27
Marina23
 —
 —
 —
 —
 —
 —
 23
Movie Theater20
 —
 —
 —
 —
 —
 —
 20
All other (6)
21
 —
 1
 —
 —
 —
 6
 28
Total$1,019
 $152
 $122
 $111
 $92
 $64
 $200
 $1,760
Percent by state57.9% 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 the three months ended September 30, 2017, the warehouse advance amount of loans sold to the Bank totaled $2.9 billion or 36.3 percent. For the nine months ended September 30, 2017, the warehouse advance amount of loans sold to the Bank totaled $8.0 billion or 38.5 percent.


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 30, 2017March 31, 2022 was $2.7$12.0 billion, of which $1.2$4.6 billion was outstanding, compared to $2.9$12.0 billion at December 31, 2016,2021, of which $1.2$5.0 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.NPLs.

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 managementManagement to collect on loans under their original legal terms, 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.



24

Nonperforming assets


The following table sets forth our nonperforming assets:
March 31, 2022December 31, 2021
(Dollars in millions)
LHFI
Residential first mortgage (1)$76 $38 
Home equity7 7 
Other consumer3 4 
Commercial and industrial (2)9 32 
Total nonperforming LHFI95 81 
TDRs
Residential first mortgage10 11 
Home equity2 2 
Total nonperforming TDRs12 13 
Total nonperforming LHFI and TDRs (2)107 94 
Real estate and other nonperforming assets, net4 6 
LHFS24 17 
Total nonperforming assets$135 $117 
Nonperforming assets to total assets (3)0.48 %0.39 %
Nonperforming LHFI and TDRs to LHFI0.80 %0.70 %
Nonperforming assets to LHFI and repossessed assets (3)0.84 %0.74 %
 September 30, 2017 December 31, 2016
 (Dollars in millions)
LHFI   
Consumer loans   
Residential first mortgage$14
 $18
Home equity1
 4
Commercial   
CRE1
 —
Total nonperforming LHFI16
 22
TDRs   
Consumer loans   
Residential first mortgage11
 11
Home equity4
 7
Total nonperforming TDRs15
 18
Total nonperforming LHFI and TDRs (1)
31
 40
Real estate and other nonperforming assets, net9
 14
LHFS8
 6
Total nonperforming assets$48
 $60
Nonperforming assets to total assets (2)
0.24% 0.39%
Nonperforming LHFI and TDRs to LHFI0.44% 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.

At September 30, 2017, we had $48(1)Includes $33 million of nonperforming assets comparedfirst residential mortgage loans that are current in accordance with their forbearance exit plan and have not yet returned to $60 millionaccrual status as of nonperforming assetsMarch 31, 2022.
(2)Includes one commercial loan less than 90 days past due in nonaccrual that is current in accordance with their forbearance plan.
(3)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,
March 31, 2022December 31, 2021
(Dollars in millions)
Beginning balance$93 $94 
Additions54 10 
Reductions— — 
Principal payments(10)(9)
Charge-offs(25)(1)
Return to performing status(5)(1)
Transfers to REO— — 
Total nonperforming LHFI and TDRs (1)$107 $93 
(1)Includes less than 90 days past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.

25
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in millions)
Beginning balance$30
 $44
 $40
 $66
Additions5
 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 dueloans 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 equity2
 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 loans decreasingin our LHFI portfolio:
March 31, 2022December 31, 2021
Amount% of LHFIAmount% of LHFI
(Dollars in millions)
Performing loans past due 30-89:
Consumer loans
Residential first mortgage$15 0.11 %$48 0.36 %
Home equity3 0.02 %9 0.07 %
Other consumer4 0.03 %5 0.04 %
Total consumer loans22 0.17 %62 0.46 %
CRE— — %— — %
C&I— — %— — %
Total commercial loans— — %— — %
Total performing loans past due 30-89 days$22 0.17 %$62 0.46 %

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

Payment Deferrals

Beginning in March 2020, as a response to $5 million at September 30, 2017, comparedCOVID-19, we offered our consumer borrowers principal and interest payment deferrals, forbearance and/or extensions up to $10 million at December 31, 2016. a maximum period of 18 months. Consumer borrowers were not required to provide proof of hardship to be granted forbearance or payment deferral. Typically, payment history is the primary tool used to identify consumer borrowers who are experiencing financial difficulty. Forbearance or payment deferrals make this determination more challenging. In addition, consumer borrowers who have requested forbearance or payment deferrals are not being aged and remain in the aging category they were in prior to forbearance or payment deferral while they remain in a forbearance or payment deferral status.

    The table below summarizes borrowers in our consumer loan portfolios that are in active forbearance or were granted a payment deferral:
As of March 31, 2022As of December 31, 2021
 Number of BorrowersUPBPercent of PortfolioNumber of BorrowersUPBPercent of Portfolio
(Dollars in millions, actual number of borrowers)
Loans Held-For-Investment
Consumer loans
Residential first mortgage178$32 2.1 %212$35 2.3 %
Home equity415 0.8 %485 0.8 %
Other consumer924 0.3 %964 0.3 %
Total consumer loan deferrals/forbearance311$41 1.2 %356$44 1.3 %
Loans Held-For-Sale
Residential first mortgage24$8 0.2 %47$13 0.3 %

There were no performing commercial borrowers in payment deferral as of March 31, 2022.


26

The table below summarizes the percent of our residential loan servicing portfolio in forbearance as of March 31, 2022:
Total PopulationLoans in Forbearance
Unpaid Principal Balance (1)Number of accountsUnpaid Principal Balance (1)Number of accountsPercent of UPBPercent of Accounts
(Dollars in millions)
Loan servicing
Subserviced for others (2)$253,970 1,044,616 $2,512 11,338 1.0 %1.1 %
Serviced for others (3)39,107 151,035 350 1,366 0.9 %0.9 %
Serviced for own loan portfolio (4)7,217 60,171 157 901 2.2 %1.5 %
Total loans serviced$300,294 1,255,822 $3,019 13,605 1.0 %1.1 %
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Loans subserviced for non-Flagstar owned loans or MSRs, in each case subserviced for a fee. Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs.
(3)Loans for which Flagstar owns the MSR.
(4)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), and LGG (residential first mortgage).

The table below summarizes the percent of our residential loan servicing portfolio in forbearance as of December 31, 2021:

Total PopulationLoans in Forbearance
Unpaid Principal Balance (1)Number of accountsUnpaid Principal Balance (1)Number of accountsPercent of UPBPercent of Accounts
(Dollars in millions)
Loan servicing
Subserviced for others (2)$247,081 1,033,711 $3,946 18,313 1.6 %1.8 %
Serviced for others (3)35,097 137,315 514 2,158 1.5 %1.6 %
Serviced for own loan portfolio (4)8,645 63,039 220 1,158 2.5 %1.8 %
Total loans serviced$290,823 1,234,065 $4,680 21,629 1.6 %1.8 %
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Loans subserviced for non-Flagstar owned loans or MSRs, in each case subserviced for a fee. Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs.
(3)Loans for which Flagstar owns the MSR.
(4)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), and LGG (residential first mortgage).

As the MSR owner for loans serviced for others, the Agencies require us to advance payments on past due commercial loans at September 30, 2017as follows:
Principal and InterestTaxes and Insurance
Fannie Mae and Freddie Mac4 monthsNo time limit
GNMANo time limitNo time limit

We believe that we have ample liquidity to handle servicing advances related to these loans. 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 fromnot considered to be nonaccrual loans because it is reasonably assuredso long as we believe that all contractual principal and interest due under the restructured terms will be collected.


    Since March 2020, as a response to COVID-19, we have offered our consumer and commercial customers principal and interest payment deferrals and extensions up to a maximum period of 18 months. We considered these programs in the context of whether or not the short-term modifications of these loans and the programs offered to return to paying status would constitute a TDR. We considered 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
27

relief are not required to be accounted for as TDRs. As a result, we have determined that loans modified under these programs 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:
March 31, 2022December 31, 2021
(Dollars in millions)
Performing TDRs
Consumer Loans
Residential first mortgage$16 $14 
Home equity7 8 
Total consumer loans23 22 
Commercial Loans
Commercial real estate— — 
Commercial and industrial— 2 
Total commercial loans— 2 
Total performing TDRs23 24 
Nonperforming TDRs
Nonperforming TDRs7 8 
Nonperforming TDRs, performing for less than six months5 5 
Total nonperforming TDRs12 13 
Total TDRs$35 $37 
 September 30, 2017 December 31, 2016
 (Dollars in millions)
Performing TDRs   
Residential first mortgage$20
 $22
Home equity26
 45
Total performing TDRs46
 67
Nonperforming TDRs4
 8
Nonperforming TDRs at inception but performing for less than six months11
 10
Total nonperforming TDRs15
 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 30, 2017March 31, 2022 our total TDR loans decreased $24$2 million to $35 million compared to $37 million at December 31, 20162021 primarily due to the sale of nonperforming loansdriven by principal payments and lower delinquency rates during the nine months ended September 30, 2017.payoffs out-pacing new additions. Of our total TDR loans, 75.566 percent and 65 percent were in performing status at September 30, 2017.    

March 31, 2022 and December 31, 2021, respectively. For further information, see Note 4 - Loans Held-for-Investment.



Allowance for LoanCredit Losses


The ALLLACL represents management'sManagement's estimate of probablelifetime losses that are inherent in our LHFI portfolio but which have not yet been realized. For further information see Note 1 - Basis of Presentation and Note 4 - Loans Held-for-Investment.


The following tables present the changes in the ACL balance for the three months ended March 31, 2022:
Three Months Ended March 31, 2022
Residential First Mortgage (1)Home EquityOther ConsumerCommercial Real EstateCommercial and IndustrialWarehouse LendingTotal LHFI Portfolio (2)Unfunded CommitmentsTotal ACL
(Dollars in millions)
Beginning allowance balance$40 $14 $36 $28 $32 $4 $154 $16 $170 
Provision (benefit) for credit losses:
Loan volume— — 1 — 3 — 4 (2)2 
Economic forecast (3)1 2 — 1 (2)— 2 — 2 
Credit (4)2 — (3)(6)2 (1)(6)— (6)
Qualitative factor adjustments— — — (1)(4)— (5)— (5)
Charge-offs(1)— (2)— (20)— (23)— (23)
Recoveries— 1 1 — — — 2 — 2 
Provision for charge-offs1 (1)1 — 2 — 3 — 3 
Ending allowance balance$43 $16 $34 $22 $13 $3 $131 $14 $145 
(1)Includes loans with government guarantees where insurance limits may result in a loss in excess of all or part of the guarantee.
(2)Excludes loans carried under the fair value option.
(3)Includes changes in the lifetime loss rate based on current economic forecasts as compared to forecasts used in the prior quarter.
(4)Includes changes in the probability of default and severity of default based on current borrower and guarantor characteristics, as well as individually evaluated reserves.

The ALLLACL was $145 million at March 31, 2022, compared to $170 million at December 31, 2021. The decrease in the allowance is primarily reflective of the $20 million charge-off of a commercial credit which was specifically reserved at $18 million at December 31, 2021. The remaining decrease is due to decreases in our collectively evaluated portfolio including our consideration of the low levels of delinquency and the performance of our commercial portfolios. This was, partially offset by a
28

slight deterioration in economic forecasts focused around consumer personal income and debt service ratios as pandemic-related stimulus comes to an end and inflation increases. We utilized the Moody’s March 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. Within our composite forecast, unemployment ends 2022 at 4 percent, slightly increasing in 2023 with a full recovery by 2024. GDP continues to recover throughout 2022 and returns to pre-COVID levels in 2023. HPI decreases by 2 percent from the first quarter of 2022 through the fourth quarter of 2022 before increasing 3 percent by the fourth quarter of 2023.
    The ACL as a percentage of LHFI decreased to 2.0was 1.1 percent as of September 30, 2017 from 2.4March 31, 2022 compared to 1.3 percent as of December 31, 2016. This decrease is attributable to the continued low levels of delinquencies and net2021. Excluding warehouse loans, where we have not experienced 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, ourseveral years, the allowance as a percentage of LHFI was 1.6 percent at March 31, 2022 compared to 2.0 percent at December 31, 2021. The decrease in the allowance as a percentage of LHFI is reflective of the credit performance of our consumer loan portfolio was 2.3 percent and our allowance as percent of ourwith no delinquent commercial loan portfolio was 1.7 percent.loans.

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 ALLLallowance to each loan category:
 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 equity492
 6.8% 20
 4.1%
Other26
 0.4% 1
 3.8%
Total consumer loans3,174
 44.1% 73
 2.3%
Commercial loans       
Commercial real estate1,760
 24.5% 42
 2.4%
Commercial and industrial1,097
 15.3% 19
 1.7%
Warehouse lending1,159
 16.1% 6
 0.5%
Total commercial loans4,016
 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 equity1
 1
 2
 2
Other consumer—
 1
 1
 2
Total recoveries1
 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 information on our charge-offs and credit quality ratios:
 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 guarantees1
 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 ofcategory, including 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. Asallowance amount as a percentage of amortized cost and average LHFI, net charge-offsloan life:
March 31, 2022
 LHFI Portfolio (1)Percent of
Portfolio		Allowance Amount (2)Allowance as a Percent of Loan PortfolioWeighted Average Loan Life
(in years)
(Dollars in millions)
Consumer loans
Residential first mortgage$1,479 11.2 %$43 2.9 %5
Home equity595 4.5 %16 2.7 %3
Other consumer1,267 9.6 %35 2.8 %3
Total consumer loans3,341 25.3 %94 2.8 %
Commercial loans
Commercial real estate$3,254 24.6 %$28 0.9 %2
Commercial and industrial1,979 15.0 %19 1.0 %2
Warehouse lending4,641 35.1 %4 0.1 %— 
Total commercial loans9,874 74.7 %51 0.5 %
Total consumer and commercial loans$13,215 100.0 %$145 1.1 %
Total consumer and commercial loans excluding warehouse$8,574 64.9 %$141 1.6 %
(1) Excludes loans carried under the fair value option.
(2) Includes ALLL and reserve for unfunded commitments.

December 31, 2021
 LHFI Portfolio (1)Percent of
Portfolio		Allowance Amount (2)Allowance as a Percent of Loan PortfolioWeighted Average Loan Life
(in years)
(Dollars in millions)
Consumer loans
Residential first mortgage$1,521 11.4 %$40 2.6 %5
Home equity611 4.6 %14 2.3 %3
Other consumer1,236 9.2 %37 3.0 %3
Total consumer loans3,368 25.2 %91 2.7 %
Commercial loans
Commercial real estate$3,223 24.1 %$38 1.2 %1
Commercial and industrial1,826 13.6 %36 2.0 %2
Warehouse lending4,974 37.1 %5 0.1 %— 
Total commercial loans10,023 74.8 %79 0.8 %
Total consumer and commercial loans$13,391 100.0 %$170 1.3 %
Total consumer and commercial loans excluding warehouse$8,417 62.9 %$165 2.0 %
(1) Excludes loans carried under the three months ended September 30, 2017 decreased to 0.08 percent from 0.51 percentfair value option.
(2) Includes ALLL and reserve for the three months ended September 30, 2016.     unfunded commitments.


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.
29

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 originationclosing 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 other members of management, monitors interest rate risk on an on-goingongoing basis in accordance with policies approved by our boardBoard of directors.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, managementManagement has the latitude to change interest rate positions within certain limits if, in management'sManagement'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,” ofbeta”, for non-maturity interest-bearing deposits, wherein the

rates paid to customers change at a different pace when comparedrelative to changes in benchmark interest rates. The effect on net interest income over a 12 month12-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 testsimulation which applies interest rate changes over time. All rates, short-term and long-term, are changed by the same amount (plus or minus 200(e.g. plus 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.

March 31, 2022
ScenarioNet interest income$ Change% Change
(Dollars in millions)
100$846$405.1%
Constant806——%
(100)738(68)(8.3)%
December 31, 2021
ScenarioNet interest income$ Change% Change
(Dollars in millions)
100$882$12216.1%
Constant760——%
(100)695(65)(8.5)%

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)%

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 30, 2017, the $132 million increaseThe reduction in the netour interest income in the constant scenariosensitivity as of March 31, 2022 compared to December 31, 2016 was2021 is primarily driven by increased size of balance sheet.changes in our hedging activities as described in Note 8 - Derivative Financial Instruments.


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 futureFuture 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, the impact of interest rate floors on certain of our commercial loans and how the Company will respond are not included in this analysis and limit the predictive value of these scenarios.


30

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 managementManagement may undertake to manage risk in response to interest rate changes. Each rate scenario reflects unique prepayment repricing, and reinvestmentrepricing 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 pointsincreases and downward (100) basis points.decreases as indicated in the scenarios shown in the table below.
March 31, 2022December 31, 2021
ScenarioEVEEVE %$ Change% ChangeScenarioEVEEVE %$ Change% ChangePolicy Limits for % Change
(Dollars in millions)
300$4,878 21.5 %$803 19.7 %300$4,579 18.2 %$1,042 29.5 %(22.5)%
2004,678 20.6 %603 14.8 %2004,232 16.8 %695 19.6 %(15.0)%
1004,400 19.4 %325 8.0 %1003,939 15.6 %402 11.4 %(7.5)%
Current4,075 18.0 %— — %Current3,537 14.0 %— — %— %
(100)N/MN/MN/MN/M(100)N/MN/MN/MN/M7.5 %
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 liabilityasset sensitivity in a risingvarious interest rate scenarioscenarios. The increase in EVE as the EVE decreases. The decrease in EVErates rise is the result of the amount of liabilitiesassets that would be expected to reprice exceeding the amount of assets repricedliabilities repriced. The amount of the change in the +200 scenario. TheEVE decreased as of March 31, 2022 compared to December 31, 2016 (100)2021 primarily driven by changes in our hedging activities as described in Note 8 - Derivative Financial Instruments. For each scenario shown, the percentage change in our EVE is effectively a flattener scenario as shorter term rates are unable to decrease 100 basis points due to the absolute level of rates. Therefore, 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 in EVE.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 ratemarket risk. We use interest rate swaps, swaptions and forward sales commitments to hedge our unclosed mortgage originationclosing 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.value and we do not apply hedge accounting related to the management of these risks. Changes to our unclosed mortgage commitmentsclosing 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 throughinversely, 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.

We have designated certain interest rate swaps as fair value hedges of investment securities AFS using the last-of-layer method. Additionally, we designated certain interest rate swaps as cash flow hedges on LIBOR-based variable interest payments on certain commercial loans. For further information, see Note 8 - Derivative Financial Instruments and Note 1816 - Fair Value Measurements.


31

Mortgage Servicing Rights (MSRs)


Our MSRs are sensitive to changes in interest rate volatilityrates 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 assetsswaptions, as part of our overall hedging strategy to manage the impact of changes in the fair value of the MSRs, buthowever these risk management strategies do not completely eliminate repricingall 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 frompaid by 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 to shareholders, which includes compensationremained at $0.06 per share in the first quarter 2022. The Company holds $150 million of subordinated debt which is scheduled to mature on November 1, 2030. The Bank did not pay any dividends to the Company in the first quarter of 2022 and benefits, legal and professional expense and general and administrative expenses. At September 30, 2017,at March 31, 2022, the Company held $200$205.4 million of cash on deposit at the Bank or 3.8 yearswhich is sufficient to cover the cash outflows needed to service the subordinated debt interest, pay dividends and cover the operating expenses of expense and debt service coverage.the Company in excess of 2 years.



The OCC regulatesand 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 fromwould 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.

Intest for more than three out of the third quarter 2017, we paid dividendsprior twelve months. As of $84 million fromMarch 31, 2022, the Bank is in compliance with the QTL test, having qualified assets above the 65 percent requirement for twelve of the prior twelve months. At March 31, 2022, 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 $1 billion 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 convertiblegovernment 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 theloans 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 bankingorigination business due to the flexibility in terms of being ablewhich 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 closings 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 March 31, 2022, we had $1.6 billion of advances outstanding and an additional $3.2 billion of collateralized borrowing capacity available at the FHLB.

Our Consolidated Statementsprimary 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 reflectionratio of ready liquidity to volatile funding, the volatile funds coverage ratio (“VFCR”). 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 mannerBank’s funding identified as being at a higher risk of runoff in which we execute certaintimes of stress. Ready liquidity consists of cash on reserve at the Federal Reserve and unused borrowing capacity provided by the loan sales for whichand investments portfolios. The VFCR is calculated, reported, and forecasted daily as
32

part of our liquidity management framework and as of March 31, 2022 was 169 percent and in compliance with our board policy limit of 90 percent.
    Our liquidity position is continuously monitored and adjustments are made to the cash outflow is considered an operating activitybalance 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 dueliquidity of our loan assets to our election to extend theavailable 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 tomanage our LHFS portfolio.liquidity position, how much liquidity we have and the agility of our balance sheet. The Company's average HFI loan-to-deposit ratio was 68.5 percent for the three months ended March 31, 2022. 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 average HFI loan-to-deposit ratio was 64.1 percent for the three months ended March 31, 2022.


As governed and defined by our internal 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,closings, 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 Table
 September 30, 2017 December 31, 2016 Change
 (Dollars in millions)
Demand deposit accounts$1,234
 $1,134
 $100
Savings accounts3,718
 3,887
 (169)
Money market demand accounts291
 247
 44
Certificates of deposit/CDARS1,297
 1,056
 241
Total retail deposits6,540
 6,324
 216
Government deposits1,068
 1,030
 38
Wholesale deposits43
 —
 43
Company controlled deposits1,510
 1,446
 64
Total deposits$9,161
 $8,800
 $361
Federal Home Loan Bank advances$5,365
 $2,980
 $2,385
Other long-term debt493
 493
 —
Total borrowed funds$5,858
 $3,473
 $2,385

Deposits

The following table presents aprimary sources of funding as of the dates indicated:
March 31, 2022December 31, 2021Change
(Dollars in millions)
Retail deposits$10,175 $10,264 $(89)
Government deposits1,886 2,000 (114)
Wholesale deposits974 1,141 (167)
Custodial deposits4,313 4,604 (291)
Total deposits17,348 18,009 (661)
FHLB advances and other short-term debt1,400 3,280 (1,880)
Other long-term debt396 396 — 
Total borrowed funds1,796 3,676 (1,880)
Total funding$19,144 $21,685 $(2,541)

33

The following table presents our borrowing capacity as of the dates indicated:
March 31, 2022December 31, 2021Change
(Dollars in millions)
FLHB Borrowing capacity
Line of credit available$30 $30 $— 
Collateralized borrowing capacity3,182 3,792 (610)
Total unused borrowing capacity$3,212 $3,822 $(610)
FRB discount window
Collateralized borrowing capacity$1,724 $1,666 $58 
Unencumbered investment securities
Agency - Commercial (1)$995 $123 $872 
Agency - Residential (1)543 55 488 
Municipal obligations17 18 (1)
Corporate debt obligations53 54 (1)
Other1 1 — 
Total unencumbered investment securities1,609 251 1,358 
Total liquidity sources and borrowing capacity$6,545 $5,739 $806 
(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:
 March 31, 2022December 31, 2021
Balance% of DepositsBalance% of DepositsChange
(Dollars in millions)
Retail deposits
Branch retail deposits
Savings accounts$3,814 22.0 %$3,751 20.8 %$63 
Certificates of deposit/CDARS (1)898 5.2 %951 5.3 %(53)
Demand deposit accounts1,962 11.3 %1,946 10.8 %16 
Money market demand accounts497 2.9 %494 2.7 %3 
Total branch retail deposits7,171 41.3 %7,142 39.7 %29 
Commercial deposits (2)
Demand deposit accounts2,106 12.1 %2,194 12.2 %(88)
Savings accounts496 2.9 %520 2.9 %(24)
Money market demand accounts402 2.3 %408 2.3 %(6)
Total commercial retail deposits3,004 17.3 %3,122 17.3 %(118)
Total retail deposits$10,175 58.7 %$10,264 57.0 %$(89)
Government deposits
Savings accounts$743 4.3 %$721 4.0 %$22 
Demand deposit accounts584 3.4 %664 3.7 %(80)
Certificates of deposit/CDARS (1)554 3.2 %609 3.4 %(55)
Money market demand accounts5 — %6 — %(1)
Total government deposits1,886 10.9 %2,000 11.1 %(114)
Custodial deposits (3)4,313 24.9 %4,604 25.6 %(291)
Wholesale deposits974 5.6 %1,141 6.3 %(167)
Total deposits (4)$17,348 100.0 %$18,009 100.0 %$(661)
(1)The aggregate amount of CD with a minimum denomination of $100,000 was approximately $1.1 billion and $1.2 billion at March 31, 2022 and December 31, 2021, 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 $5.0 billion and $6.0 billion at March 31, 2022 and December 31, 2021, respectively.
34

 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 accounts3,653
 39.9% 3,824
 43.5% (171)
Money market demand accounts214
 2.3% 138
 1.6% 76
Certificates of deposit/CDARS (1)1,295
 14.1% 1,055
 12.0% 240
Total branch retail deposits6,092
 66.5% 5,869
 66.7% 223
Commercial retail deposits  

   

  
Demand deposit accounts304
 3.3% 282
 3.2% 22
Savings accounts65
 0.7% 63
 0.7% 2
Money market demand accounts77
 0.8% 109
 1.2% (32)
Certificates of deposit/CDARS (1)2
 —% 1
 —% 1
Total commercial retail deposits448
 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 accounts414
 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 deposits43
 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.


Total deposits increased $361 million,decreased $0.7 billion, or 4.14 percent, at September 30, 2017,March 31, 2022 compared to December 31, 2016,2021, primarily due to growthdriven by a decrease in branch retailcustodial, wholesale, and government deposits. Branch retail deposits increased $223 million at September 30, 2017 compared to December 31, 2016, primarily due to an increase in retail certificates of deposit/CDARS.


We utilize local governmental agencies and other public units as an additional source for deposit funding. As a
Michigan bank,At March 31, 2022, we are notwere required to hold collateral against ourfor certain Michigan, California, Indiana, Wisconsin and Ohio government deposits from Michiganbased on a variety of factors including, but not limited to, the size of individual deposits, FDIC limits and external bank ratings. At March 31, 2022, collateral held on government entities as they are covered by the Michigan Business and Growth Fund. This results in higher margins earned on these deposits which can be used to fund loans. Governmentwas $179 million. At March 31, 2022, government deposit accounts include $382included $554 million of certificates of depositCDs with maturities typically less than one year and $686 million in$1.3 billion of checking and savings accounts at September 30, 2017.accounts.


Company controlled    Custodial deposits arise due to our servicing or sub-servicingsubservicing of loans for others and represent the portion of the investor custodial accounts on deposit with the Bank. Certain deposits require us to reimburseFor certain subservice agreements, we give a LIBOR-based fee credit that reduces subservicing income from the owner forMSR owners who controls the spread on these funds.$3.6 billion custodial deposit 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 givesbanks and customers the potential tomay receive FDIC insurance up to $50 million. This program helps the Bank secure larger deposits and attract and retain customers. At September 30, 2017,March 31, 2022, we had $199$110 million of total CDs enrolled in the CDARS program. The total CDARS balances decreased $31program, a decrease of $5 million at September 30, 2017 from December 31, 2016.2021.


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 originationclosing 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 boardBoard of directorsDirectors to apply for advances from the FHLB using approved loan types as collateral, which includes residential first mortgage loans, home equity linesHELOC, CRE loans and investment securities. As of credit,March 31, 2022, our Board of Directors authorized and commercial real estate loans. At September 30, 2017, we had the authority and approval from the FHLB to utilizeapproved 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 toqualified collateral, as determined by the extent that collateral is provided.FHLB. At September 30, 2017,March 31, 2022, we had $5.4$1.2 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 30, 2017,March 31, 2022, we pledged collateral, which included commercial loans, municipal bonds, and agency bonds, to the FRB of Chicago amounting to $2.1 billion with a lendable value of $1.7 billion. At December 31, 2021, we pledged collateral to the Federal Reserve Discount WindowFRB of Chicago amounting to $435 million$2.3 billion with a lendable value of $418 million. At December$1.7 billion. We do not typically utilize this available funding source, and at March 31, 2016, we pledged collateral to the Federal Reserve Discount Window amounting to $496 million with a lendable value of $474 million. At September 30, 20172022 and December 31, 2016,2021, we had no borrowings outstanding against this line of credit.

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 March 31, 2022 we had $200 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.

35

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 30, 2017,March 31, 2022, we had no deferredare current on all interest payments.

On July 11, 2016, Additionally, we issued $250have $150 million of Senior Notessubordinated debt outstanding (the "Notes"), which mature on July 15, 2021. The proceeds from these notes were used to bring current and redeem our then outstanding TARP Preferred Stock.November 1, 2030.



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; andadverse external influences such as market conditions,events which may include vendor failures, fraudulent activities, disasters, and security risks. We continuously strive to strengthenadapt our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk.


We continuously evaluate internal systems, processes and controls to identify potential vulnerabilities and mitigate potential loss from cyber-attacks and, to date, have not experienced any material losses.cyber-attacks. 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 guaranteesGovernment Guarantees


Substantially all of our loans with government guaranteesLGG 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 if the loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) and management believes thatcan recover losses through a claims process from the reimbursement process is proceeding appropriately.guarantor. 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 60 days delinquent until the loan is conveyed to HUD (if foreclosure timelines are met), which is not paid by the FHA until claimed. Additionally, if the Bank cures the loan, it can be resold to GNMA, usually at a gain. 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 indemnificationsindemnification obligations and insurance limits which exposesexpose us to limited credit risk. In

    Additional expenses or charges may arise on LGG due to Veteran's Affairs loan insurance limits and FHA property foreclosure and preservation requirements that may result in a loss in excess of all, or part of, the guarantee. During the three and nine months ended September 30, 2017,March 31, 2022, we experiencedhad $3 million in net charge-offs of $1 million and $3 million, respectively,related to LGG and have reserved for the remaining risks within other assets and as a component of our ALLL on residential first mortgages. These charge-offs arise due to insurance limits on VA insured loans and FHA property foreclosure and preservation requirements that may result in a loss, all or in part, of the guarantee.


Our loans with government guaranteesLGG portfolio totaled $253 million$1.3 billion at September 30, 2017,March 31, 2022, as compared to $365 million$1.7 billion at December 31, 2016. The decrease2021. GNMA has granted borrowers with an option to seek forbearance on their mortgage repayments. $46 million of GNMA loans are in forbearance as of March 31, 2022. 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 MSR owner. These loans transferredare recorded in LGG, and a liability to LHFS and resold to Ginnie Mae out-pacing new purchases.repurchase the loans 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 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 repurchasesGuarantees 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 10Credit Risk - 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 termsPayment Deferrals section 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.MD&A.


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 is subject to significant uncertainty and is impacted by forecasted estimates of equity, earnings, timing 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.    


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 levelsposition 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 testsassessments which utilize internally defined scenarios thatscenarios. These analyses are designed to help managementManagement 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 regulatorycapital 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
36

commitments, letters of credit, and recourse arrangements. Our capital ratios for the Bank and the Company:
 Regulatory Minimums Regulatory Minimums to be Well-Capitalized Bank Bancorp
September 30, 2017       
Basel III Ratios (transitional)       
Common equity Tier I capital ratio4.50% 6.50% 14.61% 11.65%
Tier I leverage ratio4.00% 5.00% 9.38% 8.80%
Basel III Ratios (fully phased-in) (1)
       
Common equity Tier I capital ratio4.50% 6.50% 13.80% 10.58%
Tier I leverage ratio4.00% 5.00% 9.13% 8.43%
(1)Refer to MD&A - Use of Non-GAAP Financial Measures.


The impact under the fully phasedare maintained at levels in Basel III rulesexcess of those considered to ourbe "well-capitalized" by regulators. Tier 1 leverage ratio is mostly driven bywas 11.83 percent at March 31, 2022 providing a 683 basis point stress buffer above the treatmentminimum level needed to be considered “well-capitalized.” Additionally, total risk-based capital to RWA was 16.59 percent at March 31, 2022 providing a 659 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 receiveare supervised under Basel III. Once fully phased in, the Basel III capital rules will significantly reduceFederal Reserve. Under the allowable amount of the fair value of MSRsamendment, 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 millionwere below $15 billion in assets as of MSRs, representing 17.3 percent of Tier 1 capital. Our ratio of MSRs toDecember 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 thatFlagstar are not subject to the advanced approachesBasel III-based U.S. rules, including capital rules priorsimplification.

    On March 27, 2020, in response to COVID-19, U.S. banking regulators issued an interim final rule that allows banking organizations the Agencies’ considerationoption to delay the initial adoption impact of simplificationCECL on regulatory capital for two years followed by a three-year transition period. During the two-year delay we added back to theCET1 capital rules.
On September 27, 2017, the federal banking agencies released a Notice of Proposed Rulemaking (NPR), proposing changes to certain aspects100 percent of the bank capital rules under the “standardized approach.” The proposal is to modify the approach to the capital treatmentinitial adoption impact of acquisition, development, 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, and investments in 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 MSRs, temporary difference DTAs, and investments in the capital of unconsolidated financial institutions that individually exceedsCECL plus 25 percent of the common equity tiercumulative quarterly changes in the ACL (i.e., quarterly transitional amounts). Starting on January 1, capital deduction threshold. Consistent2022, the quarterly transitional amounts along with the initial adoption impact of CECL are phased out of CET1 capital rule, underover the proposal, a banking organization would continue to apply a 250 percent risk weight to any MSRs or temporary DTAs not deducted. Also, any investmentsthree-year transition period.

    For the period presented, the following table sets forth our capital ratios as well as our excess capital over well-capitalized minimums.
Flagstar BancorpActualWell-Capitalized Under Prompt Corrective Action ProvisionsExcess Capital Over
Well-Capitalized Minimum
 AmountRatioAmountRatioCapital Simplification
 (Dollars in millions)
March 31, 2022
Tier 1 leverage capital
(to adjusted avg. total assets)		2,843 11.83 %1,201 5.0 %$1,642 
Common equity Tier 1 capital (to RWA)2,603 13.89 %1,218 6.5 %1,385 
Tier 1 capital (to RWA)2,843 15.17 %1,499 8.0 %1,344 
Total capital (to RWA)3,110 16.59 %1,874 10.0 %1,236 
    As presented in the table above, our constraining capital of unconsolidated financial institutions that are not deducted,ratio is our total capital to risk weighted assets at 16.59 percent. It would take a $1.2 billion after-tax loss, with the balance sheet remaining constant, for our total risk-based capital ratio to fall below the level considered to be assigned a risk weight according to the exposure category of the investment."well-capitalized".


We are currently reviewing the proposed rules and the potential impact they may have     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 certain non-GAAP financial measures such as the estimated fully implemented Basel III capital levels and ratios and tangible book value per share.measures. 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
37

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 losses140
 142
Tier 1 capital + ALLL$1,563
 $1,398
Nonperforming assets / Tier 1 capital + ALLL2.6% 3.9%

    
Tangible book value per share. share, return on average tangible common equity, adjusted return on average tangible common equity, adjusted return on average assets, adjusted noninterest expense, adjusted provision for income taxes, adjusted net income, adjusted basic earnings per share, adjusted diluted earnings per share, adjusted net interest margin and adjusted efficiency ratio.

The Company believes that tangible book value per share providesthese non-GAAP financial measures provide a meaningful representation of its operating performance on an ongoing basis.basis for investors, securities analysts, and others. Management uses this measurethese measures to assess performance of the Company against its peers and evaluate overall performance.

The Company believes thisfollowing tables provide a reconciliation of non-GAAP financial measure provides useful information for investors, securities analysts and others because it provides a tool to evaluate the Company’s performance on an ongoing basis and compared to its peers.measures.

March 31, 2022December 31, 2021March 31, 2021
(Dollars in millions)
Total stockholders' equity$2,733 $2,718 $2,358 
Less: Goodwill and intangible assets145 147 155 
Tangible book value/Tangible common equity$2,588 $2,571 $2,203 
Number of common shares outstanding53,236,067 53,197,650 52,752,600 
Tangible book value per share$48.61 $48.33 $41.77 

Three Months Ended,
March 31, 2022December 31, 2021March 31, 2021
(Dollars in millions, except share data)
Net income$53 $85 $149 
Plus: Intangible asset amortization, net of tax1 2 2 
Tangible net income$54 $87 $151 
Total average equity$2,687 $2,692 $2,319 
Less: Average goodwill and intangible assets146 148 156 
Total average tangible equity$2,541 $2,544 $2,163 
Return on average tangible common equity8.61 %13.79 %27.99 %
Adjustment to remove DOJ settlement expense— %— %4.98 %
Adjustment for merger costs0.49 %1.11 %— %
Adjusted return on average tangible common equity9.10 %14.90 %32.97 %
Return on average assets0.89 %1.28 %1.98 %
Adjustment to remove DOJ— %— %0.36 %
Adjustment for merger costs0.03 %0.07 %— %
Adjusted return on average assets0.92 %1.35 %2.34 %

38

 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 intangibles21
 —
 —
Tangible book value$1,430
 $1,336
 $1,286
      
Number of common shares outstanding57,181,536
 56,824,802
 56,597,271
Tangible book value per share$25.01
 $23.50
 $22.72
Adjusted HFI loan-to-deposit ratio.

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. implementation 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.
March 31,
2022		December 31, 2021March 31,
2021
(Dollars in millions)
Average LHFI$12,384 $13,314 $14,915 
Less: Average warehouse loans3,973 5,148 6,395 
Adjusted average LHFI$8,411 $8,166 $8,520 
Average deposits$18,089 $19,816 $20,043 
Less: Average custodial deposits4,970 6,309 7,194 
Adjusted average deposits$13,119 $13,507 $12,849 
HFI loan-to-deposit ratio68.5 %67.2 %74.4 %
Adjusted HFI loan-to-deposit ratio64.1 %60.5 %66.3 %


Three Months Ended,
March 31, 2022December 31, 2021March 31, 2021
(Dollars in millions)
Noninterest expense$261 $291 $347 
Adjustment to remove DOJ settlement expense— — 35 
Adjustment for merger costs3 6 — 
Adjusted noninterest expense$258 $285 $312 
Income before income taxes$68 $109 $194 
Adjustment to remove DOJ settlement expense— — 35 
Adjustment for merger costs3 6 — 
Adjusted income before income taxes$71 $115 $229 
Provision for income taxes$15 $24 $45 
Adjustment to remove DOJ settlement expense— — (8)
Adjustment for merger costs(1)(1)— 
Adjusted provision for income taxes$16 $25 $53 
Net income$53 $85 $149 
Adjusted net income$55 $90 $176 
Weighted average common shares outstanding53,219,866 52,867,138 52,675,562 
Weighted average diluted common shares53,578,001 53,577,832 53,297,803 
Adjusted basic earnings per share$1.03 $1.71 $3.34 
Adjusted diluted earnings per share$1.02 $1.69 $3.31 
Average interest earning assets$21,569 $24,291 $27,178 
Net interest margin3.11 %2.96 %2.82 %
Adjustment for LGG loans available for repurchase0.01 %0.02 %0.20 %
Adjusted net interest margin3.12 %2.98 %3.02 %
Efficiency Ratio80.37 %75.86 %67.67 %
Adjustment to remove DOJ settlement expense— %— %(6.83)%
Adjustment for merger costs(0.79)%(1.51)%— %
Adjusted efficiency ratio79.58 %74.35 %60.84 %

39
 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 assets191
 (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 assets293
 (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, 2016,2021, which is available on our website, flagstar.com, under the Investor Relations section, or on the website of the Securities and Exchange Commission, at sec.gov.


40


FORWARDForward – LOOKING STATEMENTSLooking 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, and our managementManagement 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’sManagement’s current beliefs and expectations regarding future events.events and are subject to significant risks and uncertainties. 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. ActualOur actual results and capital and other financial conditions may differ materially from those includeddescribed in thesethe forward-looking statements due todepending upon a variety of factors, including without limitationlimitation: the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the definitive merger agreement among NYCB, 615 Corp. and Flagstar; the outcome of any legal proceedings that may be instituted against NYCB or Flagstar; the possibility that the proposed transaction will not close when expected or at all because required regulatory or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated; the ability of NYCB and Flagstar to meet expectations regarding the timing, completion and accounting and tax treatments of the proposed transaction; the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of the common stock of NYCB or Flagstar; the possibility that the anticipated benefits of the proposed transaction will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where NYCB and Flagstar do business; certain restrictions during the pendency of the proposed transaction that may impact the parties’ ability to pursue certain business opportunities or strategic transactions; the possibility that the proposed transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management’s attention from ongoing business operations and opportunities; the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the proposed transaction within the expected timeframes or at all and to successfully integrate Flagstar’s operations and those of NYCB; such integration may be more difficult, time consuming or costly than expected; revenues following the proposed transaction may be lower than expected; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the proposed transaction; NYCB’s and Flagstar’s success in executing their respective business plans and strategies and managing the risks involved in the foregoing; and the precautionary statements included within each individual business’the 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 and Item 1A to Part II of this Quarterly Report on Form 10-Q,2021, which are incorporated by reference herein.


Other than as required under United States securities laws, Flagstar Bancorp doeswe 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.

41


Item 1. Financial Statements

Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In millions, except share data)
September 30, 2017 December 31, 2016March 31, 2022December 31, 2021
(Unaudited) (Unaudited)(Unaudited)
Assets   Assets
Cash$88
 $84
Cash$174 $277 
Interest-earning deposits145
 74
Interest-earning deposits231 774 
Total cash and cash equivalents233
 158
Total cash and cash equivalents405 1,051 
Investment securities available-for-sale1,637
 1,480
Investment securities available-for-sale2,010 1,804 
Investment securities held-to-maturity977
 1,093
Investment securities held-to-maturity190 205 
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 ($3,154 and $4,920 measured at fair value, respectively)Loans held-for-sale ($3,154 and $4,920 measured at fair value, respectively)3,475 5,054 
Loans held-for-investment ($21 and $16 measured at fair value, respectively)Loans held-for-investment ($21 and $16 measured at fair value, respectively)13,236 13,408 
Loans with government guarantees253
 365
Loans with government guarantees1,256 1,650 
Less: allowance for loan losses(140) (142)Less: allowance for loan losses(131)(154)
Total loans held-for-investment and loans with government guarantees, net7,316
 6,288
Total loans held-for-investment and loans with government guarantees, net14,361 14,904 
Mortgage servicing rights246
 335
Mortgage servicing rights523 392 
Net deferred tax asset248
 286
Federal Home Loan Bank stock264
 180
Federal Home Loan Bank stock329 377 
Premises and equipment, net314
 275
Premises and equipment, net354 360 
Goodwill and intangible assetsGoodwill and intangible assets145 147 
Bank-owned life insuranceBank-owned life insurance367 365 
Other assets706
 781
Other assets1,085 824 
Total assets$16,880
 $14,053
Total assets$23,244 $25,483 
Liabilities and Stockholders’ Equity   Liabilities and Stockholders’ Equity
Noninterest bearing deposits$2,272
 $2,077
Noninterest bearing deposits$6,827 $7,088 
Interest bearing deposits6,889
 6,723
Interest bearing deposits10,521 10,921 
Total deposits9,161
 8,800
Total deposits17,348 18,009 
Short-term Federal Home Loan Bank advances4,065
 1,780
Short-term Federal Home Loan Bank advances and otherShort-term Federal Home Loan Bank advances and other200 1,880 
Long-term Federal Home Loan Bank advances1,300
 1,200
Long-term Federal Home Loan Bank advances1,200 1,400 
Other long-term debt493
 493
Other long-term debt396 396 
Representation and warranty reserve16
 27
Other liabilities ($60 and $60 measured at fair value, respectively)394
 417
Other liabilitiesOther liabilities1,367 1,080 
Total liabilities15,429
 12,717
Total liabilities20,511 22,765 
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, respectively1
 1
Common stock $0.01 par value, 80,000,000 shares authorized; 53,236,067 and 53,197,650 shares issued and outstanding, respectivelyCommon stock $0.01 par value, 80,000,000 shares authorized; 53,236,067 and 53,197,650 shares issued and outstanding, respectively1 1 
Additional paid in capital1,511
 1,503
Additional paid in capital1,357 1,355 
Accumulated other comprehensive loss(8) (7)
Accumulated deficit(53) (161)
Accumulated other comprehensive incomeAccumulated other comprehensive income(2)35 
Retained earningsRetained earnings1,377 1,327 
Total stockholders’ equity1,451
 1,336
Total stockholders’ equity2,733 2,718 
Total liabilities and stockholders’ equity$16,880
 $14,053
Total liabilities and stockholders’ equity$23,244 $25,483 
    
The accompanying notes are an integral part of these Consolidated Financial Statements.

42
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 securities20
 16
 59
 50
Interest-earning deposits and other—
 —
 1
 —
Total interest income140
 106
 379
 306
Interest Expense       
Deposits13
 12
 37
 34
Short-term Federal Home Loan Bank advances and other11
 1
 23
 4
Long-term Federal Home Loan Bank advances6
 7
 17
 22
Other long-term debt7
 6
 19
 10
Total interest expense37
 26
 96
 70
Net interest income103
 80
 283
 236
Provision (benefit) for loan losses2
 7
 4
 (9)
Net interest income after provision (benefit) for loan losses101
 73

279
 245
Noninterest Income       
Net gain on loan sales75
 94
 189
 259
Loan fees and charges23
 22
 58
 56
Deposit fees and charges5
 5
 14
 17
Loan administration income5
 4
 16
 14
Net return (loss) on mortgage servicing rights6
 (11) 26
 (21)
Representation and warranty benefit4
 6
 11
 12
Other noninterest income12
 36
 32
 52
Total noninterest income130
 156
 346
 389
Noninterest Expense       
Compensation and benefits76
 69
 219
 203
Commissions23
 16
 49
 40
Occupancy and equipment28
 21
 75
 64
Loan processing expense15
 13
 41
 40
Legal and professional expense7
 5
 22
 20
Other noninterest expense22
 18
 59
 51
Total noninterest expense171
 142
 465
 418
Income before income taxes60
 87
 160
 216
Provision for income taxes20
 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       
Basic57,162,025
 56,580,238
 57,062,696
 56,556,188
Diluted58,186,593
 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 March 31,
 20222021
(Unaudited)
Interest Income
Loans$166 $196 
Investment securities11 12 
Total interest income177 208 
Interest Expense
Deposits6 10 
Short-term Federal Home Loan Bank advances and other— 1 
Long-term Federal Home Loan Bank advances3 3 
Other long-term debt3 5 
Total interest expense12 19 
Net interest income165 189 
Benefit for credit losses(4)(28)
Net interest income after provision for credit losses169 217 
Noninterest Income
Net gain on loan sales45 227 
Loan fees and charges27 42 
Net return on mortgage servicing rights29 — 
Loan administration income33 27 
Deposit fees and charges9 8 
Other noninterest income17 20 
Total noninterest income160 324 
Noninterest Expense
Compensation and benefits127 144 
Occupancy and equipment45 46 
Commissions26 62 
Loan processing expense21 21 
Legal and professional expense11 8 
Federal insurance premiums4 6 
Intangible asset amortization2 3 
General, administrative and other25 57 
Total noninterest expense261 347 
Income before income taxes68 194 
Provision for income taxes15 45 
Net income$53 $149 
Net income per share
Basic$0.99 $2.83 
Diluted$0.99 $2.80 
Cash dividends declared$0.06 $0.06 
Weighted average shares outstanding
Basic53,219,866 52,675,562 
Diluted53,578,001 53,297,803 

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

43

Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
Three Months Ended March 31,
20222021
(Unaudited)
Net income$53 $149 
Other comprehensive income, net of tax
Investment securities(58)(15)
Derivatives and hedging activities21 22 
Other comprehensive income, net of tax(37)7 
Comprehensive income$16 $156 
 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 securities1
 (4) 3
 12
Derivatives and hedging activities—
 3
 (4) (34)
Other comprehensive income (loss), net of tax1
 (1) (1) (22)
Comprehensive income$41
 $56
 $107
 $121


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


44


Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
(In millions, except share data)
Common StockAccumulated Other Comprehensive IncomeTotal Stockholders’ Equity
Number of SharesAmountAdditional Paid in CapitalRetained Earnings
Balance at December 31, 202153,197,650 $1 $1,355 $35 $1,327 $2,718 
(Unaudited)
Net income— — — — 53 53 
Total other comprehensive income— — — (37)— (37)
Stock-based compensation38,245 — 2 — — 2 
Dividends declared and paid172 — — — (3)(3)
Balance at March 31, 202253,236,067 $1 $1,357 $(2)$1,377 $2,733 
Balance at December 31, 202052,656,067 $1 $1,346 $47 $807 $2,201 
(Unaudited)
Net income— — — — 149 149 
Total other comprehensive income— — — 7 — 7 
Shares issued from the Employee Stock Purchase Plan62,462 — — — — — 
Stock-based compensation33,957 — 4 — — 4 
Dividends declared and paid114 — — — (3)(3)
Balance at March 31, 202152,752,600 $1 $1,350 $54 $953 $2,358 
 Preferred StockCommon Stock    
 Number of Shares OutstandingAmount of Preferred
Stock		Number of Shares OutstandingAmount of Common
Stock		Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained Earnings (Accumulated
Deficit)
Total
Stockholders’
Equity
Balance at December 31, 2015266,657
$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


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

45
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 AFS158
 116
Purchase of investment securities AFS and other(593) (203)
Collection of principal on investment securities HTM116
 126
Purchase of investment securities HTM and other—
 (15)
Proceeds received from the sale of LHFI78
 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 MSRs252
 35
Other, net4
 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 debt2,285
 (1,211)
Proceeds from long term FHLB advances150
 395
Repayment of long term FHLB advances(50) —
Net receipt of payments of loans serviced for others24
 91
Preferred stock dividends—
 (105)
Redemption of preferred stock—
 (267)
Net receipt of escrow payments19
 6
Net cash provided by financing activities$2,789
 $345
Net increase (decrease) in cash and cash equivalents75
 (34)
Beginning cash and cash equivalents158
 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)

Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In millions)
 Three Months Ended March 31,
 20222021
 (Unaudited)
Operating Activities
Net cash provided by (used in) operating activities$1,231 $(320)
Investing Activities
Proceeds from sale of AFS securities including loans that have been securitized642 417 
Collection of principal on investment securities AFS97 239 
Purchase of investment securities AFS and other(233)(86)
Collection of principal on investment securities HTM15 58 
Proceeds received from the sale of LHFI— 35 
Net closings, purchases, and principal repayments of LHFI143 1,337 
Acquisition of premises and equipment, net of proceeds(12)(11)
Net sale of FHLB stock48 — 
Net proceeds from the sale of MSRs— (2)
Purchase of MSRs(13)— 
Other, net(8)(3)
Net cash provided by investing activities679 1,984 
Financing Activities
Net change in deposit accounts(661)(553)
Net change in short-term FHLB borrowings and other short-term debt(1,680)(1,155)
Repayment of long-term FHLB advances(200)— 
Repayment of long-term debt— (246)
Net receipt of payments of loans serviced for others18 113 
Dividends declared and paid(3)(3)
Other1 6 
Net cash used in financing activities(2,525)(1,838)
Net change in cash, cash equivalents and restricted cash (1)(615)(174)
Beginning cash, cash equivalents and restricted cash (1)1,092 654 
Ending cash, cash equivalents and restricted cash (1)$477 $480 
Supplemental disclosure of cash flow information
Non-cash reclassification of LHFI to LHFS$2 $14 
Non-cash reclassification of LHFS to securitized LHFS$642 $417 
MSRs resulting from sale or securitization of loans$79 $65 
Operating section supplemental disclosures
Proceeds from sales of LHFS$9,232 $13,721 
Closings, premium paid and purchase of LHFS, net of principal repayments$(8,344)$(14,109)
(1)For further information on restricted cash, see Note 8 - Derivatives.

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

46

Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation


The accompanying financial statements of Flagstar Bancorp, Inc. ("Flagstar," or the "Company"), including its wholly owned principal subsidiary, Flagstar Bank, FSB (the "Bank"), have been prepared using U.S. GAAP for interim financial statements. Where we say "we," "us," "our," the "Company," "Bancorp" or "Flagstar," we usually mean Flagstar Bancorp, Inc. However, in some cases, a reference to "we," "us," "our," the "Company" or "Flagstar" will include the Bank.


These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the SEC. These interim financial statements are unaudited and include, in our opinion, all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results for the periods indicated, which are not necessarily indicative of results which may be expected for the full year. These consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016,2021, which is available on our website, at flagstar.com, and on the SEC website at sec.gov. Certain prior period amounts

On April 26, 2021, it was announced that New York Community Bancorp, Inc. ("NYCB") and Flagstar had entered into a definitive merger agreement (the "Merger Agreement") under which the two companies will combine in an all stock merger. Under the terms of the Merger Agreement, Flagstar shareholders will receive 4.0151 shares of NYCB common stock for each Flagstar share they own. The combined company expects to have been reclassifiedover $85 billion in assets and operate nearly 400 traditional branches in 9 states and over 80 loan production offices across a 28 state footprint. On August 4, 2021, Flagstar's and NYCB's shareholders each voted in their respective special meetings of shareholders to conformapprove the proposed business combination. The transaction is subject to customary closing conditions, including regulatory approvals.

On April 26, 2022, NYCB and Flagstar entered into Amendment No. 1 (the "Amendment") to the current period presentation.Merger Agreement. Under the Amendment, the parties have agreed to: extend the termination date of the Merger Agreement to October 31, 2022; Change the structure of the merger of the subsidiary banks, so that Flagstar Bank, FSB will initially convert to a national bank charter and New York Community Bank will merge with and into the national bank, with the national bank as the surviving entity; and clarify that approvals of the FDIC and the New York State Department of Financial Services are no longer required but that the approval of the OCC will be required. Other than as expressly modified by the Amendment, the Merger Agreement, remains in full force and effect.


Completion of the transaction is subject to customary closing conditions, including receipt of regulatory approvals.




47

Note 2 - Investment Securities


The following table presents our investment securities:
Amortized CostGross Unrealized
Gains		Gross Unrealized
Losses		Fair Value
 (Dollars in millions)
March 31, 2022
Available-for-sale securities
Agency - Commercial$1,086 $— $(28)$1,058 
Agency - Residential649 — (34)615 
Corporate debt obligations71 1 — 72 
Municipal obligations19 — — 19 
Other MBS258 — (13)245 
Certificate of deposits1 — — 1 
Total available-for-sale securities (1)$2,084 $1 $(75)$2,010 
Held-to-maturity securities
Agency - Commercial$93 $— $(2)$91 
Agency - Residential97 — (2)95 
Total held-to-maturity securities (1)$190 $— $(4)$186 
December 31, 2021
Available-for-sale securities
Agency - Commercial$739 $8 $— $747 
Agency - Residential690 9 (3)696 
Corporate debt obligations70 3 — 73 
Municipal obligations20 — — 20 
Other MBS268 — (1)267 
Certificate of deposits1 — — 1 
Total available-for-sale securities (1)$1,788 $20 $(4)$1,804 
Held-to-maturity securities
Agency - Commercial$99 $1 $— $100 
Agency - Residential106 3 — 109 
Total held-to-maturity securities (1)$205 $4 $— $209 
 Amortized Cost 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 Fair Value
 (Dollars in millions)
September 30, 2017       
Available-for-sale securities       
Agency - Commercial$755
 $1
 $(6) $750
Agency - Residential818
 2
 (11) 809
Municipal obligations44
 —
 —
 44
Corporate debt obligations33
 1
 —
 34
Total available-for-sale securities (1)
$1,650
 $4
 $(17) $1,637
Held-to-maturity securities       
Agency - Commercial$542
 $1
 $(5) $538
Agency - Residential435
 —
 (2) 433
Total held-to-maturity securities (1)
$977
 $1
 $(7) $971
December 31, 2016       
Available-for-sale securities       
Agency - Commercial$551
 $2
 $(5) $548
Agency - Residential913
 1
 (16) 898
Municipal obligations34
 —
 —
 34
Total available-for-sale securities (1)
$1,498
 $3
 $(21) $1,480
Held-to-maturity securities       
Agency - Commercial$595
 $—
 $(6) $589
Agency - Residential498
 1
 (4) 495
Total held-to-maturity securities (1)
$1,093
 $1
 $(10) $1,084
(1)There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10 percent of stockholders’ equity at March 31, 2022 or December 31, 2021.
(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.


We evaluate AFS and HTM investmentdebt securities where the value has declined below amortized cost for other than temporary impairment on a quarterly basis. An OTTI is considered to have occurred when the fair value of a debt security is below its amortized costs andimpairment. If we (1) have the intentintend to sell the security, (2) willor believe it is more likely than not that we will be required to sell the debt security, before recovery of its amortized cost, or (3) do not expect to recover the entire amortized cost basis of the security. Investments that have an OTTI areit is written down to fair value through earnings. For AFS debt securities that we intend to hold, we evaluate the debt securities for expected credit losses, except for debt securities that are guaranteed by the U.S. Treasury, U.S. government agencies or sovereign entities of high credit quality for which we apply a chargezero loss assumption, and which comprised 85 percent of our AFS portfolio as of March 31, 2022. For the remaining AFS securities, credit losses are recognized as an increase to earnings for the amount representingACL through the credit loss provision. If any of the decline in fair value is related to market factors, that amount is recognized in OCI. We had no unrealized credit losses during the three months ended March 31, 2022 and the year ended December 31, 2021.

    We separately evaluate our HTM debt securities for any credit losses. As of March 31, 2022 and December 31, 2021, our entire HTM portfolio qualified for the zero loss assumption as all securities are guaranteed by the U.S. Treasury or U.S. government agencies.

Investment securities transactions are recorded on the security. Gainstrade date for purchases and losses related to all other factors are

recognizedsales. Interest earned on investment securities, including the amortization of premiums and the accretion of discounts, is determined using the effective interest method over the period of maturity and recorded in interest income in the Consolidated Statements of Operations. Accrued interest receivable on investment securities totaled $5 million at March 31, 2022 and $4 million at December 31, 2021, and was reported in other comprehensive income (loss). Duringassets on the three and nine months ended September 30, 2017 and September 30, 2016, we had no OTTI losses.Consolidated Statements of Financial Condition.


48

Available-for-sale securities


Securities available-for-saleAFS are carried at fair value, with unrealizedvalue. Unrealized gains and losses to the extent they are temporary in nature, andon AFS securities are reported as a component of other comprehensive income.

We purchased $300$393 million and $600$86 million of AFS securities, which includedwere comprised of U.S. government sponsored agency MBS, CD, and corporate debt obligations, and municipal obligations during the three and nine months ended September 30, 2017,March 31, 2022 and March 31, 2021, respectively. We purchased $136 million and $203 million of AFS securities, which included U.S. government sponsored agencies comprised ofdid not retain any passive interests in our own private MBS and municipal obligations, during the three and nine months ended September 30, 2016, respectively.March 31, 2022 and March 31, 2021.


Gains on    There were no sales of AFS securities are reported in other noninterest income in the Consolidated Statements of Operations. We sold $227 million and $289 million of AFS securities during both the three and nine months ended September 30, 2017, respectively, which did not include those AFS securities related to mortgage loans that had been securitized for sale in the normal course of business. These sales resulted in a realized gain of $2 millionMarch 31, 2022 and $3 million during the three and nine months ended September 30, 2017, respectively. During the three and nine months ended September 30, 2016, there were $115 million and $290 million, respectively, in sales of AFS securities, which did not includeMarch 31, 2021 other than those related to mortgage loans that had been securitized for sale in the normal course of business. These sales resulted in a realized gain of $3 million and $4 million during the three and nine months ended September 30, 2016, respectively.


Held-to-maturity securities


Investment securities HTM are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method. Unrealized losses are not recorded to the extent they are temporary in nature.


There were no purchases of HTM securities during the three and nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, we purchased zero and $15 million of HTM securities, respectively. There were noor sales of HTM securities during both the three and nine months ended September 30, 2017March 31, 2022 and September 30, 2016.March 31, 2021.


The following table summarizes by duration, the unrealized loss positions on AFS and HTM investment securities:securities, by duration of the unrealized loss: 
 Unrealized Loss Position with
Duration 12 Months and Over		Unrealized Loss Position with
Duration Under 12 Months
Fair ValueNumber of SecuritiesUnrealized LossFair
Value		Number of
Securities		Unrealized
Loss
(Dollars in millions)
March 31, 2022
Available-for-sale securities
Agency - Commercial$2 1 $— $895 91$(28)
Agency - Residential— — — 609 87(34)
Municipal obligations— — — 12 5— 
Corporate debt obligations— — — 11 4— 
Other mortgage-backed securities— 1 — 157 7(13)
Held-to-maturity securities
Agency - Commercial$— — $— $86 24$(2)
Agency - Residential— — — 90 43(2)
December 31, 2021
Available-for-sale securities
Agency - Commercial$4 2 $— $143 9$— 
Agency - Residential— — — 291 19(3)
Municipal obligations— — — 3 1— 
Corporate debt obligations— — — — —— 
Other mortgage-backed securities— 1 — 147 5(1)
Held-to-maturity securities
Agency - Commercial$— — $— $— 1$— 
Agency - Residential— — — — —— 

Unrealized losses on AFS securities have not been recognized into income because almost all of the portfolio held by us are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. The remaining unrealized losses on AFS securities are municipal securities and corporate debt obligations, all of which are considered investment grade or are de minimis. The fair value is expected to recover as the bonds approach maturity.
49

 
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)
September 30, 2017           
Available-for-sale securities           
Agency - Commercial$34
 3
 $(1) $582
 40
 $(5)
Agency - Residential98
 10
 (3) 501
 40
 (8)
Municipal obligations1
 1
 —
 21
 8
 —
Corporate debt obligations—
 —
 —
 3
 1
 —
Held-to-maturity securities           
Agency - Commercial$16
 2
 $—
 $395
 26
 $(5)
Agency - Residential16
 2
 —
 319
 40
 (2)
December 31, 2016           
Available-for-sale securities           
Agency - Commercial$6
 1
 $—
 $345
 29
 $(5)
Agency - Residential—
 —
 —
 748
 55
 (16)
Municipal obligations—
 —
 —
 17
 8
 —
Held-to-maturity securities           
Agency - Commercial$—
 —
 $—
 $528
 34
 $(6)
Agency - Residential—
 —
 —
 385
 43
 (4)


The following table presentsshows the amortized cost and estimated fair value of securities by contractual maturity:
 Investment Securities Available-for-SaleInvestment Securities Held-to-Maturity
Amortized
Cost		Fair
Value		Weighted Average
Yield (1)		Amortized
Cost		Fair
Value		Weighted Average
Yield (1)
(Dollars in millions)
March 31, 2022
Due in one year or less$6 $6 2.16 %$5 $5 2.21 %
Due after one year through five years9 9 4.65 %3 3 2.86 %
Due after five years through 10 years211 208 2.86 %3 3 2.01 %
Due after 10 years1,858 1,787 2.27 %179 175 2.49 %
Total$2,084 $2,010 $190 $186 
 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)
September 30, 2017           
Due after one year through five years$17
 $17
 3.37% $—
 $—
 —%
Due after five years through 10 years44
 45
 4.83% 61
 61
 2.50%
Due after 10 years1,589
 1,575
 2.34% 916
 910
 2.43%
Total$1,650
 $1,637
   $977
 $971
  
(1) Weighted-average yields are based on amortized cost weighted for the contractual maturity of each security.


We pledge investment securities, primarily agency collateralized and municipal taxable mortgage obligations, to collateralize lines of credit and/or borrowings. At September 30, 2017,March 31, 2022 and December 31, 2021, we had pledged investment securities of $1.3$228 million and $1.5 billion, compared to $879 million at December 31, 2016.respectively.


Note 3 - Loans Held-for-Sale


The majority of our mortgage loans originated as LHFS are ultimately sold into the secondary market on a whole loan basis or by securitizing the loans into agency, mortgage backed securities, through retail mortgage-backed securitizationsgovernment, or on a whole loan basis.private label MBS. At September 30, 2017March 31, 2022 and December 31, 2016,2021, LHFS totaled $4.9$3.5 billion and $3.2$5.1 billion, respectively. For the three and nine months ended September 30, 2017,March 31, 2022, we had net gains on loan sales associated with LHFS of $75$45 million as compared to $227 million for the three months ended March 31, 2021, respectively.
    At March 31, 2022 residential LHFS of $293 million, commercial LHFS of $18 million and $189corporate advances of $10 million respectively. During the three and nine months ended September 30, 2016, excluding the gains from the sale of mortgage loans transferred from loans held-for-investment, we had $94 million and $244 million, respectively, of net gains on loan sales associated with LHFS.
At both September 30, 2017 and December 31, 2016, $32 million of LHFS were recorded at the lower of cost or fair value. TheAt December 31, 2021, we recorded $116 million residential LHFS and commercial LHFS of $18 million at the lower of cost or fair value. We elected the fair value option for the remainder of the loans in the portfolio are recorded at fair value as we have elected the fair value option for such loans.portfolio.


Note 4 - Loans Held-for-Investment


    We classify loans that we have the intent and ability to hold for the foreseeable future or until maturity as LHFI. We
report LHFI at their amortized cost, which includes the outstanding principal balance adjusted for any unamortized premiums,
discounts, deferred fees and costs. The accrued interest receivable on LHFI totaled $33 million at March 31, 2022 and $35 million at December 31, 2021 and was reported in other assets on the Consolidated Statements of Financial Condition.

The following table presents our loans held-for-investment:LHFI:
March 31, 2022December 31, 2021
 (Dollars in millions)
Consumer loans
Residential first mortgage$1,499 $1,536 
Home equity596 613 
Other1,267 1,236 
Total consumer loans3,362 3,385 
Commercial loans
Commercial real estate3,254 3,223 
Commercial and industrial1,979 1,826 
Warehouse lending4,641 4,974 
Total commercial loans9,874 10,023 
Total loans held-for-investment$13,236 $13,408 
50

 September 30, 2017 December 31, 2016
 (Dollars in millions)
Consumer loans   
Residential first mortgage$2,665
 $2,327
Home equity496
 443
Other26
 28
Total consumer loans3,187
 2,798
Commercial loans   
Commercial real estate (1)
1,760
 1,261
Commercial and industrial1,097
 769
Warehouse lending1,159
 1,237
Total commercial loans4,016
 3,267
Total loans held-for-investment$7,203
 $6,065
(1)Includes $270 million and $245 million of owner occupied commercial real estate loans at September 30, 2017 and December 31, 2016, respectively.

During    The following table presents the nine months ended September 30, 2017, we sold performing and nonperforming consumer loans with UPB of $103 million, of which $25 million were nonperforming. our loan sales and purchases in the LHFI portfolio:
Three Months Ended March 31,
20222021
 (Dollars in millions)
Loans Sold (1)
Performing loans$— $36 
Total loans sold$— $36 
(1)Upon a change in our intent, the loans were transferred to LHFS and subsequently sold resulting in a gain of $1 million during the nine months ended September 30, 2017, which is recorded in net gain on loan sales on the Consolidated Statements of Operations.sold.



During the nine months ended September 30, 2016, we sold performing and nonperforming consumer loans with UPB totaling $1.3 billion, of which $110 million were nonperforming. Upon a change in our intent, the loans were transferred to LHFS and subsequently sold resulting in a net gain on sale of $12 million, during the nine months ended September 30, 2016, which is recorded in net gain on loan sales on the Consolidated Statements of Operations.
During the nine months ended September 30, 2017, we purchased residential first mortgage loans with a UPB of $6 million and HELOC loans with a UPB of $100 million. A premium of $4 million was associated with these loan purchases. During the nine months ended September 30, 2016, we purchased jumbo residential first mortgage loans with a UPB of $150 million and a premium of $1 million.


We have pledged certain LHFI, LHFS, and loans with government guaranteesLGG to collateralize lines of credit and/or borrowings with the FRB of Chicago and the FHLB of Indianapolis and the FRB of Chicago.Indianapolis. At September 30, 2017March 31, 2022 and December 31, 2016,2021, we had pledged loans of $7.7$7.8 billion and $5.3$9.9 billion, respectively.


Allowance for LoanCredit Losses on Loans


We determine the estimate of the ALLLACL on at least a quarterly basis. ReferThe ACL represents Management's estimate of expected lifetime losses in our LHFI portfolio, excluding loans carried under the fair value option. In addition, we record a reserve for expected lifetime losses on our unfunded commitments - see Reserve for Unfunded Commitments section below. Therefore, we record ALLL on relevant financial assets and a reserve for unfunded commitments on our Consolidated Statements of Financial Condition, collectively referred to Note 1 - Descriptionas the ACL.

Expected credit losses are estimated over the contractual term of Business, Basis of Presentation,the loans, adjusted for expected prepayments when appropriate. The contractual terms exclude expected extensions, renewals, and Summary of Significant Accounting Policies tomodifications unless the consolidated financial statementsfollowing applies: Management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the Annual Reportoriginal or modified contract at the reporting date and are not unconditionally cancellable by us.

The ACL is impacted by changes in asset quality of the portfolio, including but not limited to increases in risk rating changes in our commercial portfolio, borrower delinquencies, changes in FICO scores or changes in LTVs in our consumer portfolio. In addition, while we have incorporated our forecasted impact of COVID-19 into our ACL, the ultimate impact of COVID-19 is still uncertain, including how long economic activity will be impacted by the pandemic and what effect the unprecedented levels of government fiscal and monetary actions will have on Form 10-Kthe economy and our credit losses.

Specifically identified component. The specifically identified component of ACL related to performing TDR loans is generally measured as the difference between the recorded investment in the specific loan and the present value of the cash flows expected to be collected, discounted at the loan's original effective interest rate. Estimating the timing and amounts of future cash flow projections is highly judgmental and based upon assumptions including default rates, prepayment probability and loss severities. All of these estimates and assumptions require significant management judgment and certain assumptions are highly subjective.

Specifically identified collateral dependent NPL loans are generally measured as the difference between the recorded investment in the impaired loan and the underlying collateral value less estimated costs to sell. These estimates are dependent on third-party property valuations which may be influenced by factors such as the current and future level of home prices, the duration of current overall economic conditions, and other macroeconomic and portfolio-specific factors.

Model-based component. A general allowance is established for lifetime losses inherent on non-impaired loans by segmenting the portfolio based upon common risk characteristics. Our consumer loan portfolio is segmented into Residential First Mortgage, Home Equity and Other Consumer. Loan characteristics impacting these segments include lien position, credit quality, and loan structure. At a high-level, our commercial loans are segmented into Commercial Real Estate, Commercial and Industrial, and Warehouse Lending. Loan characteristics impacting these segments include credit quality and loan structure.

We measure the allowance using the applicable dual risk rating model which measures probability of default, loss given default and exposure at default. As of March 31, 2022, we utilized the Moody’s March 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. Within our composite forecast, unemployment ends 2022 at 4 percent, slightly increasing in 2023 with a full recovery by 2024. GDP continues to recover throughout 2022 and returns to pre-COVID levels in 2023. HPI decreases by 2 percent from the first quarter of 2022 through the fourth quarter of 2022 before increasing 3 percent by the fourth quarter of 2023.
51


Qualitative adjustments. The specifically identified component analysis and the output of the model provide a reasonable starting point for our analysis, but do not, by themselves, form a sufficient basis to determine the appropriate level for the year ended December 31, 2016 for a descriptionACL. We therefore consider the qualitative factors that are likely to cause the ACL associated with our existing portfolio to differ from the output of the methodology.model. The ALLL, other than for loansmost significant qualitative factors considered include changes in economic and business conditions, changes in nature and volume of portfolio and changes in the volume and severity of past due loans. The application of different inputs into the model calculation and the assumptions used by Management to adjust the model calculation are subject to significant management judgment and may result in actual credit losses that have been identified for individual evaluation for impairment, is determined on a loan pool basis by grouping loan types with common risk characteristics to determine our best estimate of incurred losses.differ from the originally estimated amounts.

    

The following table presents changes in the ALLL, by class of loan:
Residential
First
Mortgage (1)		Home EquityOther
Consumer		Commercial
Real Estate		Commercial
and Industrial		Warehouse
Lending		Total
 (Dollars in millions)
Three Months Ended March 31, 2022
Beginning balance$40 $14 $36 $28 $32 $4 $154 
(Benefit) provision4 1 (1)(6)1 (1)(2)
Charge-offs(1)— (2)— (20)— (23)
Recoveries— 1 1 — — — 2 
Ending allowance balance$43 $16 $34 $22 $13 $3 $131 
Three Months Ended March 31, 2021
Beginning balance$49 $25 $39 $84 $51 $4 $252 
Benefit(2)(5)(6)— (11)— (24)
Charge-offs(2)— (1)— (1)— (4)
Recoveries— — 1 — 16 — 17 
Ending allowance balance$45 $20 $33 $84 $55 $4 $241 
 
Residential
First
Mortgage (1)
 Home Equity 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and Industrial
 
Warehouse
Lending
 Total
 (Dollars in millions)
Three Months Ended September 30, 2017             
Beginning balance ALLL$56
 $19
 $1
 $37
 $21
 $6
 $140
Charge-offs (2)(1) (2) —
 —
 —
 —
 (3)
Recoveries—
 1
 —
 —
 —
 —
 1
Provision (benefit)(3) 2
 —
 5
 (2) —
 2
Ending balance ALLL$52
 $20
 $1
 $42
 $19
 $6
 $140
Three Months Ended September 30, 2016             
Beginning balance ALLL$81
 $30
 $1
 $19
 $11
 $8
 $150
Charge-offs (2)(7) (1) (1) —
 —
 —
 (9)
Recoveries—
 1
 1
 —
 —
 —
 2
Provision (benefit)(3)(4) (5) —
 6
 3
 —
 —
Ending balance ALLL$70
 $25
 $1
 $25
 $14
 $8

$143
              
Nine Months Ended September 30, 2017             
Beginning balance ALLL$65
 $24
 $1
 $28
 $17
 $7
 $142
Charge-offs (2)(6) (3) (1) —
 —
 —
 (10)
Recoveries1
 2
 1
 —
 —
 —
 4
Provision (benefit)(8) (3) —
 14
 2
 (1) 4
Ending balance ALLL$52
 $20
 $1
 $42
 $19
 $6
 $140
Nine Months Ended September 30, 2016             
Beginning balance ALLL$116
 $32
 $2
 $18
 $13
 $6
 $187
Charge-offs (2)(26) (4) (3) —
 —
 —
 (33)
Recoveries1
 2
 2
 —
 —
 —
 5
Provision (benefit)(3)(21) (5) —
 7
 1
 2
 (16)
Ending balance ALLL$70
 $25
 $1
 $25
 $14
 $8
 $143
(1)Includes allowance and charge-offs related to loans with government guarantees.
(2)
Includes charge-offs of zero related to the transfer and subsequent sale of loans during the three months ended September 30, 2017 and September 30, 2016, respectively, and $1 million and $8 million during the nine months ended September 30, 2017 and September 30, 2016, respectively. Also includes charge-offs related to loans with government guarantees of $1 million and $6 million during the three months ended September 30, 2017 and September 30, 2016, respectively, and $3 million and $13 million during the nine months ended September 30, 2017 and September 30, 2016, respectively.
(3)
Does not include $7 million provision for loan losses recorded in the Consolidated Statements of Operations to reserve for repossessed loans with government guarantees during the three and nine months ended September 30, 2016.

(1)Includes LGG.


The following table sets forthALLL was $131 million at March 31, 2022 and $154 million at December 31, 2021. The decrease in the methodallowance is primarily reflective of evaluation, by classchanges in our economic forecast and judgment we applied related to those forecasts and underlying borrower credit as a result of loan:the ongoing COVID-19 pandemic.
 
Residential
First
Mortgage (1)
 Home Equity 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and Industrial
 
Warehouse
Lending
 Total
 (Dollars in millions)
September 30, 2017             
Loans held-for-investment (2)             
Individually evaluated$35
 $29
 $—
 $1
 $—
 $—
 $65
Collectively evaluated2,621
 463
 26
 1,759
 1,097
 1,159
 7,125
Total loans$2,656
 $492
 $26

$1,760

$1,097

$1,159

$7,190
Allowance for loan losses (2)             
Individually evaluated$6
 $9
 $—
 $—
 $—
 $—
 $15
Collectively evaluated46
 11
 1
 42
 19
 6
 125
Total allowance for loan losses$52
 $20
 $1

$42

$19

$6

$140
              
December 31, 2016             
Loans held-for-investment (2)             
Individually evaluated$46
 $29
 $—
 $—
 $—
 $—
 $75
Collectively evaluated2,274
 349
 28
 1,261
 769
 1,237
 5,918
Total loans$2,320
 $378
 $28
 $1,261
 $769
 $1,237
 $5,993
Allowance for loan losses (2)             
Individually evaluated$5
 $8
 $—
 $—
 $—
 $—
 $13
Collectively evaluated60
 16
 1
 28
 17
 7
 129
Total allowance for loan losses$65
 $24
 $1
 $28
 $17
 $7
 $142
(1)Includes allowance related to loans with government guarantees.
(2)Excludes loans carried under the fair value option.


Loans are considered to be past due when any payment of principal or interest is 30 days past the scheduled payment date. While it is the goal of managementManagement 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.


    Beginning in March 2020, as a response to COVID-19, customers facing COVID-19 related difficulties were offered forbearance in an effort to help our borrowers get to the other side of the health crisis. As these loans reach the end of their forbearance period, we have been working with each customer to modify or refinance the outstanding loan to fit their new circumstances. Refer to payment deferral information in the Credit Risk Section of the MD&A for additional details.

We cease the accrual of interest on all classes of consumer and commercial loans upon the earlier of becoming 90 days past due, or when doubt exists as to the ultimate collection of principal or interest (classified as nonaccrual or nonperforming loans)NPLs). When a loan is placed on nonaccrual status, the accrued interest income is reversed and the loan may only return to accrual status when principal and interest become current and are anticipated to be fully collectible. We do not consider accrued interest receivable in our measurement of the ACL as accrued interest is written-off in a timely manner when the loan is placed on nonaccrual. We are not aging receivables for customers who have been granted a payment deferral in response to COVID-19 which remain in the aging category they were in at the time of payment deferral. We continue to accrue interest on these loans, consistent with our forbearance programs.


52

The following table sets forth the LHFI aging analysis of past due and current loans:
30-59 Days
Past Due		60-89 Days
Past Due		90 Days or
Greater Past
Due (1)		Total
Past Due		CurrentTotal LHFI (3) (4) (5)
 (Dollars in millions)
March 31, 2022
Consumer loans
Residential first mortgage$7 $8 $86 $101 $1,398 $1,499 
Home equity2 1 9 12 584 596 
Other3 1 3 7 1,260 1,267 
Total consumer loans12 10 98 120 3,242 3,362 
Commercial loans
Commercial real estate— — — — 3,254 3,254 
Commercial and industrial— — — — 1,979 1,979 
Warehouse lending— — — — 4,641 4,641 
Total commercial loans— — — — 9,874 9,874 
Total loans (2)$12 $10 $98 $120 $13,116 $13,236 
December 31, 2021
Consumer loans
Residential first mortgage$14 $34 $49 $97 $1,439 $1,536 
Home equity8 1 9 18 595 613 
Other4 1 4 9 1,227 1,236 
Total consumer loans26 36 62 124 3,261 3,385 
Commercial loans
Commercial real estate— — — — 3,223 3,223 
Commercial and industrial— — 32 32 1,794 1,826 
Warehouse lending— — — — 4,974 4,974 
Total commercial loans— — 32 32 9,991 10,023 
Total loans (2)$26 $36 $94 $156 $13,252 $13,408 
(1)Includes less than 90 days past due performing loans which are placed in nonaccrual. Interest is not being accrued on these loans.
(2)Includes $9 million of past due loans accounted for under the fair value option as of March 31, 2022 and December 31, 2021.
(3)Collateral dependent loans totaled $145 million and $108 million at March 31, 2022 and December 31, 2021, respectively. The majority of these loans are secured by real estate.
(4)The interest income recognized on impaired loans was less than $1 million for the three months ended March 31, 2022 and December 31, 2021.
(5)The delinquency status for loans in forbearance is frozen for loans at inception of the forbearance period and will resume when the borrower's forbearance period ends.

Interest income is recognized on nonaccrual loans using a cash basis method. Interest that would have been accrued on impaired loans totaled zero and $1 million duringfor the three and nine months ended September 30, 2017, respectively, andMarch 31, 2022 was $1 million and $2 million during the three and nine months ended September 30, 2016, respectively.million. At September 30, 2017March 31, 2022 and December 31, 2016,2021, we had no loans 90 days or greater past due and still accruing interest.



Reserve for Unfunded Commitments

We estimated expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The reserve for unfunded commitments is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

The reserve for unfunded commitments is reflected in other liabilities on the Consolidated Statements of Financial Condition and was $14 million as of March 31, 2022, compared to $16 million as of December 31, 2021. The decrease in the reserve is due to improvements in the economic forecasts as a result of the continued vaccine rollout and the lifting of most COVID-19 restrictions.
The following table sets forth the LHFI aging analysiscategories of past dueoff-balance sheet credit exposures have been identified: unfunded loans with available balances, new commitments to lend that are not yet funded, and current loans:standby and commercial letters of credit. For further information, see Note 15 - Legal Proceedings, Contingencies and Commitments.

53
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater Past
Due (1)
 
Total
Past Due
 Current Total LHFI
 (Dollars in millions)
September 30, 2017           
Consumer loans           
Residential first mortgage$3
 $1
 $24
 $28
 $2,637
 $2,665
Home equity1
 —
 6
 7
 489
 496
Other—
 —
 —
 —
 26
 26
Total consumer loans4
 1
 30
 35
 3,152
 3,187
Commercial loans           
Commercial real estate—
 —
 1
 1
 1,759
 1,760
Commercial and industrial—
 —
 —
 —
 1,097
 1,097
Warehouse lending—
 —
 —
 —
 1,159
 1,159
Total commercial loans—
 —
 1
 1
 4,015
 4,016
Total loans (2)
$4
 $1
 $31
 $36
 $7,167
 $7,203
December 31, 2016           
Consumer loans           
Residential first mortgage$6
 $—
 $29
 $35
 $2,292
 $2,327
Home equity1
 2
 11
 14
 429
 443
Other1
 —
 —
 1
 27
 28
Total consumer loans8
 2
 40
 50
 2,748
 2,798
Commercial loans           
Commercial real estate—
 —
 —
 —
 1,261
 1,261
Commercial and industrial—
 —
 —
 —
 769
 769
Warehouse lending—
 —
 —
 —
 1,237
 1,237
Total commercial loans—
 —
 —
 —
 3,267
 3,267
Total loans (2)
$8
 $2
 $40
 $50
 $6,015
 $6,065

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

Troubled Debt Restructurings
    
We may modify certain loans in both our consumer and commercial loan portfolios to retain customers or to maximize collection of the outstanding loan balance. We have programs designed to assist borrowers by extending payment dates or reducing the borrower's contractual payments. All loan modificationsTDRs are made on a case-by-case basis. Our standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. TDRs result in those instancesmodified loans in which a borrower demonstrates financial difficultydifficulties and for which a concession has been granted which includes reductions of interest rate, extensions of amortization period, principal and/or interest forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. These loansas a result. Nonperforming TDRs are classified asincluded in nonaccrual loans. TDRs remain in nonperforming TDRs if the loan was nonperforming prior to the restructuring, or based upon the results of a contemporaneous credit evaluation. Such loans will continue on nonaccrual status until thea borrower has established a willingnessmade payments and ability to make the restructured paymentsis current for at least six months, after which theyconsecutive months. Performing TDRs are not considered to be nonaccrual so long as we believe that all contractual principal and interest due under the restructured terms will be classified as performing TDRs and begin to accrue interest.collected. Performing and nonperforming TDRs remain impaired as interest and principal will not be received in accordance with the original contractual terms of the loan agreement. Refer to Note 1- Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2021 for a description of the methodology used to determine TDRs.


Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, but may give rise to potential incremental losses. We measure impairments using a discounted cash flow method for performing TDRs and measure impairment based on collateral values for nonperforming TDRs.


    Beginning in March 2020, as a response to COVID-19, we offered our consumer borrowers principal and interest payment deferrals, forbearance and/or extensions up to a maximum period of 18 months. We considered these programs in the context of whether or not the short-term modifications of these loans and the programs offered to return to payment status would constitute a TDR. We considered 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 loans modified under these programs are not TDRs.


The following table provides a summary of TDRs by type and performing status:
 TDRs
 PerformingNonperformingTotal
(Dollars in millions)
March 31, 2022
Consumer loans
Residential first mortgage$16 $10 $26 
Home equity7 2 9 
Total TDRs (1)(2)$23 $12 $35 
December 31, 2021
Consumer loans
Residential first mortgage$14 $11 $25 
Home equity8 2 10 
Total consumer TDR loans (1)(2)22 13 35 
Commercial loans
Commercial and industrial2 — 2 
Total commercial TDR loans2 — 2 
Total TDRs (1)(2)$24 $13 $37 
(1)The ALLL on TDR loans totaled $4 million at both March 31, 2022 and December 31, 2021.
(2)Includes $3 million and $5 million of TDR loans accounted for under the fair value option at March 31, 2022 and December 31, 2021, respectively.
54

 TDRs
 Performing Nonperforming Total
 (Dollars in millions)
September 30, 2017     
Consumer loans (1)
     
Residential first mortgage$20
 $11
 $31
Home equity26
 4
 30
Total TDRs (2)
$46
 $15
 $61
December 31, 2016     
Consumer loans (1)
     
Residential first mortgage$22
 $11
 $33
Home equity45
 7
 52
Total TDRs (2)
$67
 $18
 $85
(1)The ALLL on consumer TDR loans totaled $12 million and $9 million at September 30, 2017 and December 31, 2016, respectively.
(2)Includes $3 million and $25 million of TDR loans accounted for under the fair value option at September 30, 2017 and December 31, 2016, respectively.
The following table provides a summary of newly modified TDRs:
New TDRs
New TDRs Number of AccountsPre-Modification Unpaid Principal BalancePost-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)
  (Dollars in millions)
Three Months Ended September 30, 2017       
Residential first mortgages9
 $3
 $3
 $—
Home equity (2)
37
 2
 2
 1
Other consumer—
 —
 —
 —
Total TDR loans46
 $5

$5
 $1
       
Three Months Ended September 30, 2016   
Three Months Ended March 31, 2022Three Months Ended March 31, 2022
Residential first mortgages1
 $—
 $—
 $—
Residential first mortgages9 $2 $2 
Home equity (2)(3)
17
 1
 1
 —
Home equity (2)(3)1 — — 
Commercial Real EstateCommercial Real Estate— — — 
Total TDR loans18
 $1
 $1
 $—
Total TDR loans10 $2 $2 
       
Nine Months Ended September 30, 2017
      
Three Months Ended March 31, 2021Three Months Ended March 31, 2021
Residential first mortgages17
 $4
 $4
 $—
Residential first mortgages6 $3 $3 
Home equity (2)
71
 5
 5
 2
Other consumer1
 —
 —
 —
Total TDR loans89
 $9
 $9
 $2
Total TDR loans6 $3 $3 
       
Nine Months Ended September 30, 2016
      
Residential first mortgages17
 $3
 $4
 $—
Home equity (2)(3)
128
 8
 7
 —
Commercial and industrial1
 2
 1
 —
Total TDR loans146
 $13
 $12
 $—
(1)Post-modification balances include past due amounts that are capitalized at modification date.
(1)Post-modification balances include past due amounts that are capitalized at modification date.
(2)Home equity post-modification unpaid principal balance reflects write downs.
(3)Includes loans carried at the fair value option.
(2)Home equity post-modification UPB reflects write downs.
(3)Includes loans carried at the fair value option.
    
There was one residential first mortgage loan with a UPB of less than $1 million that waswere no loans modified in the previous 12 months which has subsequently defaulted during the three and nine months ended September 30, 2017 as compared to three home equity loans with a UPB of less than $1 million for each class whichthat subsequently defaulted during the three months ended September 30, 2016 and one residential first mortgage loan and seven home equity loans with a UPB of less than $1

million for each class which subsequently defaulted during the nine months ended September 30, 2016. There was no increase or decrease in the allowance associated with these TDRs at subsequent default.March 31, 2022. All TDR classes within the consumer and commercial loan portfolios are considered subsequently defaulted when they are greater than 90 days past due. Subsequent default is defined as a payment re-defaulteddue within 12 months of the restructuring date.

Impaired Loans

The following table presents individually evaluated impaired loans and the associated allowance: 
 September 30, 2017 December 31, 2016
 
Recorded
Investment
 
Net Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Net Unpaid
Principal
Balance
 
Related
Allowance
 (Dollars in millions)
With no related allowance recorded           
Consumer loans           
Residential first mortgage$15
 $15
 $—
 $6
 $6
 $—
Total consumer loans with no related allowance recorded$15
 $15
 $—
 $6
 $6
 $—
With an allowance recorded           
Consumer loans           
Residential first mortgage$20
 $20
 $6
 $40
 $40
 $5
Home equity28
 29
 9
 29
 29
 8
Commercial loans           
Commercial real estate1
 1
 —
 —
 —
 —
Total consumer loans with an allowance recorded$49
 $50
 $15
 $69
 $69
 $13
            
Total Impaired loans           
Residential first mortgage$35
 $35
 $6
 $46
 $46
 $5
Home equity28
 29
 9
 29
 29
 8
Commercial real estate1
 1
 —
 —
 —
 —
Total impaired loans$64
 $65
 $15
 $75
 $75
 $13

The following table presents average impaired loans and the interest income recognized: 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
 (Dollars in millions)
Consumer loans               
Residential first mortgage$37
 $1
 $43
 $—
 $39
 $1
 $55
 $1
Home equity28
 —
 30
 —
 28
 1
 31
 1
Commercial loans               
Commercial real estate1
 —
 —
 —
 —
 —
 —
 —
Commercial and industrial—
 —
 1
 —
 —
 —
 2
 —
Total impaired loans$66
 $1
 $74
 $—
 $67
 $2
 $88
 $2


Credit Quality


We utilize ana combination of internal and external risk rating systemsystems which isare applied to all consumer and commercial loans.loans which are used as loan-level inputs to our ACL models. Descriptions of our internal risk ratings as they relate to credit quality follow the ratings used by the U.S. bank regulatory agencies as listed below.


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



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


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


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


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


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

55


Consumer Loans

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

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

•Consumer loans are classified as Watch once the loan becomes 60 days past due.
•Open and closed-end consumer loans 90 days or more past due are classified as Substandard.

Payment activity, credit rating and LTVs have the most significant impact on the ACL for consumer loans. The following table presents the amortized cost in residential and consumer loans based on payment activity:
Revolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost BasisTotalDecember 31, 2021
 Term Loans
Amortized Cost Basis by Closing Year
As of March 31, 202220222021202020192018Prior
Consumer Loans(Dollars in millions)
Residential First Mortgage
Pass$107 $340 $169 $204 $74 $408 $77 $10 $1,389 $1,444 
Watch— — 1 1 3 4 — — 9 34 
Substandard— 1 3 24 12 38 — 3 81 43 
Home Equity
Pass1 4 3 12 5 15 490 57 587 604 
Watch— — — — — — — 1 1 1 
Substandard— — — — — 1 2 4 7 6 
Other Consumer
Pass68 362 211 209 95 4 306 8 1,263 1,229 
Watch— — — 1 — — — — 1 2 
Substandard— — 1 1 1 — — — 3 5 
Total Consumer Loans (1)(2)$176 $707 $388 $452 $190 $470 $875 $83 $3,341 $3,368 
(1)Excludes loans carried under the fair value option.
(2)The delinquency status for loans in forbearance are frozen for loans at inception of the forbearance period and will resume when the borrower's forbearance period ends.
56

Revolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost BasisTotalDecember 31, 2020
 Term Loans
Amortized Cost Basis by Closing Year
As of December 31, 202120212020201920182017Prior
Consumer Loans(Dollars in millions)
Residential First Mortgage
Pass$318 $197 $233 $89 $108 $407 $82 $10 $1,444 $2,205 
Watch— 1 12 3 4 11 — 3 34 21 
Substandard1 3 7 8 2 21 — 1 43 25 
Home Equity
Pass4 4 15 6 3 15 508 49 604 838 
Watch— — — — — — — 1 1 13 
Substandard— — — — — 1 2 3 6 3 
Other Consumer
Pass380 227 226 101 1 5 284 5 1,229 1,000 
Watch— — 1 1 — — — — 2 1 
Substandard1 1 2 1 — — — — 5 3 
Total Consumer Loans (1)(2)$704 $433 $496 $209 $118 $460 $876 $72 $3,368 $4,109 
(1)Excludes loans carried under the fair value option.
(2)The delinquency status for loans in forbearance are frozen for loans at inception of the forbearance period and will resume when the borrower's forbearance period ends.
The following table presents the amortized cost in residential and consumer loans based on credit scores:
Revolving Loans Converted to Term Loans Amortized Cost Basis
FICO BandRevolving Loans Amortized Cost BasisTotal
 Amortized Cost Basis by Closing Year
As of March 31, 202220222021202020192018Prior
Consumer Loans(Dollars in millions)
Residential First Mortgage
>750$18 $155 $78 $95 $37 $246 $46 $4 $679 
700-75086 121 50 62 29 132 21 6 507 
<7003 65 45 72 23 72 10 3 293 
Home Equity
>750— 2 1 3 2 4 234 16 262 
700-7501 2 1 5 2 6 205 26 248 
<700— — 1 4 1 6 53 20 85 
Other Consumer
>75068 362 212 211 96 4 203 5 1,161 
700-750— — — — — — 84 2 86 
<700— — — — — — 19 1 20 
Total Consumer Loans (1)$176 $707 $388 $452 $190 $470 $875 $83 $3,341 
(1)Excludes loans carried under the fair value option.
57


Revolving Loans Converted to Term Loans Amortized Cost Basis
FICO BandRevolving Loans Amortized Cost BasisTotal
 Amortized Cost Basis by Closing Year
As of December 31, 202120212020201920182017Prior
Consumer Loans(Dollars in millions)
Residential First Mortgage
>750$139 $94 $107 $40 $70 $212 $49 $5 $716 
700-750117 58 69 36 36 161 22 6 505 
<70063 49 76 24 8 66 11 3 300 
Home Equity
>7502 2 4 2 1 4 238 13 266 
700-7502 1 6 2 1 6 210 22 250 
<700— 1 5 2 1 6 62 18 95 
Other Consumer
>750251 162 142 56 1 4 273 3 892 
700-750128 62 79 39 — 1 7 — 316 
<7002 4 8 8 — — 4 2 28 
Total Consumer Loans (1)$704 $433 $496 $209 $118 $460 $876 $72 $3,368 
(1)    Excludes loans carried under the fair value option.

Loan-to-value ratios primarily impact the allowance on mortgages within the consumer loan portfolio. The following table presents the amortized cost in residential first mortgages and home equity loans based on loan-to-value ratios:
Revolving Loans Converted to Term Loans Amortized Cost Basis
LTV BandRevolving Loans Amortized Cost BasisTotal
 Amortized Cost Basis by Closing Year
As of March 31, 202220222021202020192018Prior
Consumer Loans(Dollars in millions)
Residential First Mortgage
>90$3 $88 $67 $129 $51 $28 $— $— $366 
71-9021 107 64 51 21 199 — — 463 
55-7069 79 23 26 8 131 2 — 338 
<5514 67 19 23 9 92 75 13 312 
Home Equity
>90— 1 — — — 6 — 1 8 
71-901 2 2 9 4 7 355 41 421 
<=70— 1 1 3 1 3 137 20 166 
Total (1)$108 $345 $176 $241 $94 $466 $569 $75 $2,074 
(1)Excludes loans carried under the fair value option.

58

Revolving Loans Converted to Term Loans Amortized Cost Basis
LTV BandRevolving Loans Amortized Cost BasisTotal
 Amortized Cost Basis by Closing Year
As of December 31, 202120212020201920182017Prior
Consumer Loans(Dollars in millions)
Residential first mortgage
>90$88 $74 $142 $53 $16 $16 $— $— $389 
71-90109 78 58 29 31 185 — — 490 
55-7069 26 27 9 36 163 2 — 332 
<5553 23 25 9 31 75 80 14 310 
Home Equity
>90— — — — 1 7 — — 8 
71-903 3 11 4 1 6 369 35 432 
<=701 1 4 2 1 3 141 18 171 
Total (1)$323 $205 $267 $106 $117 $455 $592 $67 $2,132 
(1)Excludes loans carried under the fair value option.

Commercial Loans


ManagementRisk rating and the average loan duration have the most significant impact on the ACL for commercial loans. Additional factors which impact the ACL are debt-service-coverage ratio, loan-to-value ratio, interest-coverage ratio and leverage ratio.

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

Consumer Loans

The same rating principles are used for consumer and commercial loans, but the principles are applied differently for consumer loans. Consumer loans consist of open and closed end loans extended to individuals for household, family, and other personal expenditures, and includes consumer loans, and loans to individuals secured by their personal residence, including first mortgage, home equity, and home improvement loans. Because consumer loans are usually relatively small-balance, homogeneous exposures, consumer loans are rated primarily on payment performance. Payment performance is a proxy for the strength of repayment capacity and loans are generally classified based on their payment status rather than by an individual review of each loan.
In accordance with regulatory guidance, we assign risk ratings to consumer loans in the following manner:
•Consumer loans are classified as Watch once the loan becomes 60 days past due.
•Open and closed-end consumer loans 90 days or more past due are classified Substandard.


59

 September 30, 2017
 Pass Watch Special Mention Substandard Total Loans
 (Dollars in millions)
Consumer Loans         
Residential First Mortgage$2,614
 $24
 $—
 $27
 $2,665
Home equity465
 26
 —
 5
 496
Other Consumer26
 —
 —
 —
 26
Total Consumer Loans$3,105
 $50
 $—
 $32
 $3,187
    
Commercial Loans         
Commercial Real Estate$1,727
 $30
 $—
 $3
 $1,760
Commercial and Industrial1,003
 82
 —
 12
 1,097
Warehouse1,119
 40
 —
 —
 1,159
Total Commercial Loans$3,849
 $152
 $—
 $15
 $4,016
Based on the most recent credit analysis performed, the amortized cost basis, by risk category for each class of loans within the commercial portfolio, is as follows:

Revolving Loans Converted to Term Loans Amortized Cost BasisDecember 31, 2021
Term LoansRevolving Loans Amortized Cost BasisTotal
 Amortized Cost Basis by Closing Year
As of March 31, 202220222021202020192018Prior
Commercial Loans(Dollars in million)
Commercial real estate
Pass$63 $546 $256 $437 $290 $633 $869 $— $3,094 $3,071 
Watch— — 7 1 13 83 32 — 136 128 
Special mention— — — 2 — 22 — — 24 2 
Substandard— — — — — — — — — 22 
Commercial and industrial
Pass7 265 75 163 26 93 1,254 — 1,883 1,685 
Watch— 4 12 — 9 — 14 — 39 71 
Special mention— 9 — — — — — — 9 — 
Substandard— — — — 18 2 28 — 48 70 
Warehouse
Pass4,496 — — — — — — — 4,496 4,834 
Watch145 — — — — — — — 145 140 
Special mention— — — — — — — — — — 
Substandard— — — — — — — — — — 
Total commercial loans$4,711 $824 $350 $603 $356 $833 $2,197 $— $9,874 $10,023 

Revolving Loans Converted to Term Loans Amortized Cost BasisDecember 31, 2020
Term LoansRevolving Loans Amortized Cost BasisTotal
 Amortized Cost Basis by Closing Year
As of December 31, 202120212020201920182017Prior
Commercial Loans(Dollars in million)
Commercial real estate
Pass$518 $257 $558 $313 $238 $402 $785 $— $3,071 $2,805 
Watch2 5 1 13 64 35 8 — 128 166 
Special mention— — 2 — — — — — 2 53 
Substandard— — — — 22 — — — 22 37 
Commercial and industrial
Pass257 81 156 30 95 7 1,059 — 1,685 1,200 
Watch4 4 10 9 — — 44 — 71 106 
Special mention— — — — — — — — — 24 
Substandard— — 17 18 2 — 33 — 70 52 
Warehouse
Pass4,834 — — — — — — — 4,834 7,398 
Watch140 — — — — — — — 140 260 
Special mention— — — — — — — — — — 
Substandard— — — — — — — — — — 
Total commercial loans$5,755 $347 $744 $383 $421 $444 $1,929 $— $10,023 $12,101 
60
 December 31, 2016
 Pass Watch Special Mention Substandard Total Loans
 (Dollars in millions)
Consumer Loans         
Residential First Mortgage$2,273
 $23
 $—
 $31
 $2,327
Home equity386
 46
 —
 11
 443
Other Consumer28
 —
 —
 —
 28
Total Consumer Loans$2,687
 $69
 $—
 $42
 $2,798
    
Commercial Loans         
Commercial Real Estate$1,225
 $27
 $3
 $6
 $1,261
Commercial and Industrial678
 59
 21
 11
 769
Warehouse1,168
 16
 53
 —
 1,237
Total Commercial Loans$3,071
 $102
 $77
 $17
 $3,267


Note 5 - Loans with Government Guarantees
    
Substantially all loans with government guaranteesLGG are insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs. FHANonperforming repurchased loans in this portfolio earn interest at a rate based upon the 10-year U.S. Treasury note rate atfrom the time the underlying loan becomes 60 days delinquent until the loan is conveyed to HUD (if foreclosure timelines are met), which is not paid by the FHA until claimed. The Bank has a unilateral option to repurchase loans sold to GNMA if the loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) and can recover losses through a claims process from the guarantor. These loans are recorded in LGG and the liability to repurchase the loans is recorded in Other liabilities on the Consolidated Statements of Financial Condition. As of March 31, 2022 this liability was $63 million, as compared to a balance of $200 million as of December 31, 2021. Certain loans within our portfolio may be subject to indemnifications and insurance limits which expose us to limited credit risk. We have reserved for these risks within other assets and as a component of our ALLLACL on residential first mortgages.


At September 30, 2017March 31, 2022 and December 31, 2016, respectively, loans with government guarantees2021, LGG totaled $253 million$1.3 billion and $365 million.$1.7 billion, respectively.

    
At September 30, 2017 and December 31, 2016, respectively, repossessedRepossessed assets and the associated claims related to government guaranteed loans are recorded in other assets and totaled $92$11 million and $135 million.$7 million, at March 31, 2022 and December 31, 2021, respectively.


Note 6 - Variable Interest Entities


We have no consolidated VIEs as of September 30, 2017March 31, 2022 and December 31, 2016.2021.


We    In connection with our non-qualified mortgage securitization activities, we have retained a 5 percent interest in the investment securities of certain trusts ("other MBS") and are contracted as the servicer of the underlying loans, compensated based on market rates, which constitutes a continuing involvement butin these trusts. Although we have a variable interest in these securitization trusts, we are not thetheir primary beneficiary for one unconsolidated VIE relateddue to the FSTAR 2007-1 mortgage securitization trust. In accordancerelative size of our investment in comparison to the total amount of securities issued by the VIE and our inability to direct activities that most significantly impact the VIE’s economic performance. As a result, we have not consolidated the assets and liabilities of the VIE in our Consolidated Statements of Financial Condition. The Bank’s maximum exposure to loss is limited to our 5 percent retained interest in the investment securities that had a fair value of $245 million as of March 31, 2022 as well as the standard representations and warranties made in conjunction with the settlement agreement with MBIA, there is no further recourse to us related to FSTAR 2007-1, unless MBIA fails to meet their obligations. At September 30, 2017loan transfers. See Note 2 - Investment Securities and December 31, 2016, the FSTAR 2007-1 mortgage securitization trust included 2,035 loans and 2,453 loans, respectively, with an aggregate principal balance of $70 million and $89 million, respectively.Note 16 - Fair Value Measurements, for additional information.



Note 7 - Mortgage Servicing Rights


We have investments in MSRs that result from the sale of loans to the secondary market for which we retain the servicing. TheWe account for MSRs at their fair value. A primary risk associated with MSRs is the potential reduction in fair value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates or government intervention. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than previously anticipated. We utilize derivatives as economic hedges to offset changes in the fair value of the MSRs resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments. There is also a risk of valuation decline due to higher than expected increases in default rates, which we do not believe can be effectively managed using derivatives. For further information See Note 8 - Derivative Financial Instruments, regarding the derivative instruments utilized to manage our MSR risks.risks, see Note 8 - Derivative Financial Instruments.


The following table presents changes    Changes in the carryingfair value of residential first mortgage MSRs accounted for atwere as follows:
 Three Months Ended March 31,
 20222021
(Dollars in millions)
Balance at beginning of period$392 $329 
Additions from loans sold with servicing retained79 65 
Purchases13 — 
Reductions from sales— — 
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other (1)(8)(39)
Changes in estimates of fair value due to interest rate risk (1) (2)47 73 
Fair value of MSRs at end of period$523 $428 
(1)Changes in fair value:value are included within net return on mortgage servicing rights on the Consolidated Statements of Operations.
(2)Represents estimated MSR value change resulting primarily from market-driven changes which we manage through the use of derivatives.
61

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in millions)
Balance at beginning of period$184
 $301
 $335
 $296
Additions from loans sold with servicing retained75
 51
 178
 173
Reductions from sales(4) (17) (260) (41)
Changes in fair value due to (1)
       
Decrease in MSR due to payoffs, pay-downs and run-off(5) (19) (15) (45)
Changes in estimates of fair value (2)
(4) (14) 8
 (81)
Balance at end of period$246
 $302
 $246
 $302
(1)Changes in fair value are included within net return (loss) on MSRs on the Consolidated Statements of Operations.
(2)Represents estimated MSR value change resulting primarily from market-driven changes.


The following table summarizes the hypothetical effect on the fair value of servicing rights using adverse changes of 10 percent and 20 percent to the weighted average of certain significant assumptions used in valuing these assets. The significant assumptions used in the fair value measurement of the MSRs are option adjusted spread and prepayment rate. Significant increases (decreases) in both of these assumptions in isolation would result in a significantly lower (higher) fair value measurement.assets:
March 31, 2022December 31, 2021
Fair valueFair value
Actual10% adverse change20% adverse changeActual10% adverse change20% adverse change
(Dollars in millions)
Option adjusted spread6.59 %$513 $503 7.12 %$383 $374 
Constant prepayment rate8.69 %506 490 9.24 %373 355 
Weighted average cost to service per loan$79.25 518 512 $79.38 387 383 
 September 30, 2017 December 31, 2016
   Fair value after   Fair value after
 Actual 10% adverse change 20% adverse change Actual 10% adverse change 20% adverse change
 (Dollars in millions)
Option adjusted spread5.81% $242
 $238
 7.78% $326
 $318
Constant prepayment rate9.64% 238
 231
 16.68% 322
 311
Weighted average annual cost to service per loan$71.00
 244
 241
 $68.18
 330
 326


The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. To isolate the effect of the specified change, the fair value shock analysis is consistent with the identified adverse change, while holding all other assumptions constant. In practice, a change in one assumption generally impacts other assumptions, which may either magnify or counteract the effect of the change. For further information on the fair value disclosures relating toof MSRs, see Note 1816 - Fair Value Measurements.


Contractual servicing and subservicing fees. Contractual servicing and subservicing fees, including late fees and other ancillary income are presented below. Contractual servicing fees are included within net (loss) return on MSRsmortgage servicing rights on the Consolidated Statements of Operations. Contractual subservicing fees including late fees and other ancillary income are included within loan administration income on the Consolidated Statements of Operations. Subservicing fee income is recorded for fees earned on subserviced loans, net of third partythird-party subservicing costs, for loans subserviced.costs.

    

The following table summarizes income and fees associated with contractual servicing rights:owned MSRs:
 Three Months Ended March 31,
 20222021
(Dollars in millions)
Net return (loss) on mortgage servicing rights
Servicing fees, ancillary income and late fees (1)$30 $31 
Decreases in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other(8)(39)
Changes in fair value due to interest rate risk47 73 
Loss on MSR derivatives (2)(41)(65)
Net transaction costs1 — 
Total return included in net return on mortgage servicing rights$29 $— 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in millions)
Net return (loss) on mortgage servicing rights       
Servicing fees, ancillary income and late fees (1)
$14
 $22
 $43
 $60
Changes in fair value(9) (33) (7) (126)
Net return (loss) on MSR derivatives (2)
—
 (1) (3) 44
Net transaction costs1
 1
 (7) 1
Total net return (loss) on mortgage servicing rights$6
 $(11) $26
 $(21)
(1)Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on a cash basis.
(1)Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on a cash basis.
(2)Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs.
(2)Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs.
        
The following table summarizes income and fees associated with our mortgage loans subserviced:subserviced for others:
 Three Months Ended March 31,
 20222021
 (Dollars in millions)
Loan administration income on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1)$37 $32 
Charges on subserviced custodial balances (2)(2)(3)
Other servicing charges(2)(3)
Total income on mortgage loans subserviced, included in loan administration$33 $26 
(1)Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on cash basis.
(2)Charges on subserviced custodial balances represent interest due to the MSR owner.


62
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in millions)
Loan administration income on mortgage loans subserviced       
Servicing fees, ancillary income and late fees (1)
$9
 $7
 $26
 $21
Other servicing charges(4) (3) (10) (7)
Total income on mortgage loans subserviced, included in loan administration$5
 $4
 $16
 $14
(1)Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on cash basis.


Note 8 - Derivative Financial Instruments


Derivative financial instruments are recorded at fair value in other assets and other liabilities on the Consolidated Statements of Financial Condition. The Company'sOur policy is to present itsour derivative assets and derivative liabilities on the Consolidated StatementStatements of Financial Condition on a gross basis, even when provisions allowing for set-off are in place. However, for derivative contracts cleared through certain central clearing parties, variation margin payments are recognized as settlements. We are exposed to non-performance risk by the counterparties to our various derivative financial instruments. A majority of our derivatives are centrally cleared through a Central Counterparty Clearing House or consist of residential mortgage interest rate lock commitments further limiting our exposure to non-performance risk. We believe that the non-performance risk inherent in our remaining derivative contracts is minimal based on credit standards and the collateral provisions of the derivative agreements.


Derivatives not designated as hedging instruments:We maintain a derivative portfolio of interest rate swaps, futures and forward commitments used to manage exposure to changes in interest rates and MSR asset values and to meet the needs of customers. We also enter into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Market risk on interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments.commitments and U.S. Treasury futures. Changes in the fair value of derivatives not designated as hedging instruments are recognized inon the Consolidated Statements of Income.Operations.


Derivatives designated as hedging instruments: We have designated certain interest rate swaps as fair value hedges of investment securities AFS using the last-of-layer method. Cash flows and the income impact associated with designated hedges are reported in the same category as the underlying hedged item.

    We have also designated certain interest rate swaps as cash flow hedges ofon LIBOR-based variable interest payments on certain interest rate payments of our variable-rate FHLB advances.

commercial loans. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss)OCI on the Consolidated StatementStatements of Financial Condition and reclassified into interest expenseincome in the same period in which the hedge transaction is recognized in earnings. At September 30, 2017,

During the first quarter of 2022, we de-designated all of our cash flow hedges of custodial deposits. We evaluate the probability of hedged forecasted transactions on at least a quarterly basis relating to amounts deferred in OCI. Amounts recorded in OCI related to de-designated cash flow hedges of forecasted transactions, which remain probable to occur, are reclassified into net loan administration income in the same period in which the hedged transaction is recognized into earnings.

We had $346 million (net-of-tax) of unrealized gains on de-designated cash flow hedges recorded in AOCI as of March 31, 2022. The estimated amount to be reclassified from OCI into earnings on de-designated hedging relationships during the next 12 months represents $10 million (net-of-tax) of gains. We had $5 million (net-of-tax) of unrealized losses on derivatives designated in a hedge relationship as cash flow hedges recorded in accumulated other comprehensive income (loss), compared to $1 million of unrealized gains at DecemberMarch 31, 2016.2022. The estimated amount to be reclassified from other comprehensive incomeOCI into earnings during the next 12 months beginning March 31, 2022 represents $3$9 million of lossesgains (net-of-tax). At December 31, 2021, we had $20 million (net-of-tax) of unrealized gains on derivatives classified as cash flow hedges recorded in AOCI.


Derivatives that are designated in hedging relationships are assessed for effectiveness using regression analysis at inception and throughout the hedge period.qualitatively thereafter, unless regression analysis is deemed necessary. All designated hedge relationships were and are expected to be highly effective as of September 30, 2017. Cash flows and the profit impact associated with designated hedges are reported in the same line item as the underlying hedged item.March 31, 2022.

63

    
The following table presentstables present the notional amount, estimated fair value and maturity of our derivative financial instruments:
March 31, 2022 (1)
Notional AmountFair Value (2)Expiration Dates
 (Dollars in millions)
Derivatives in cash flow hedge relationships:
Assets
Interest rate swaps on commercial loans$2,000 $2 2025
Derivatives in fair value hedge relationships:
Assets
Interest rate swaps on AFS securities$100 $— 2022
Interest rate swaps on subordinated debt150 — 2025
Total$250 $— 
Derivatives not designated as hedging instruments:
Assets
Futures$1,053 $2 2022-2023
Mortgage-backed securities forwards11,684 200 2022
Rate lock commitments3,259 23 2022
Interest rate swaps and swaptions5,064 105 2022-2052
Total$21,060 $330 
Liabilities
Mortgage-backed securities forwards$4,629 $45 2022
Rate lock commitments2,112 27 2022
Interest rate swaps1,771 22 2022-2032
Total$8,512 $94 
(1)Variation margin pledged to, or received from, a Central Counterparty Clearing House to cover the prior day's fair value of open positions is considered a settlement of the derivative position for accounting purposes.
(2)Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.
64

December 31, 2021 (1)
September 30, 2017 (1)Notional AmountFair Value (2)Expiration Dates
Notional Amount Fair Value (2) Expiration Dates (Dollars in millions)
(Dollars in millions)
Derivatives designated as hedging instruments:    
Derivatives in cash flow hedge relationships:Derivatives in cash flow hedge relationships:
LiabilitiesLiabilities
Interest rate swaps on custodial depositsInterest rate swaps on custodial deposits$800 — 2026-2027
Derivatives in fair value hedge relationships:Derivatives in fair value hedge relationships:
Assets    Assets
Interest rate swaps on FHLB advances$830
 $1
 2023-2026
Interest rate swaps on AFS securitiesInterest rate swaps on AFS securities$85 $— 2022
Total derivative assetsTotal derivative assets$85 $— 
LiabilitiesLiabilities
Interest rate swaps on HFI residential first mortgagesInterest rate swaps on HFI residential first mortgages$100 $— 2024
Interest rate swaps on AFS securitiesInterest rate swaps on AFS securities350 — 2024-2025
Total derivative liabilitiesTotal derivative liabilities$450 $— 
Derivatives not designated as hedging instruments:    Derivatives not designated as hedging instruments:
Assets    Assets
Futures$1,091
 $—
 2017-2022Futures$1,117 $— 2022-2023
Mortgage backed securities forwards4,740
 12
 2017
Mortgage-backed securities forwardsMortgage-backed securities forwards4,008 11 2022
Rate lock commitments4,478
 33
 2017Rate lock commitments5,169 54 2022
Interest rate swaps and swaptions1,331
 14
 2017-2047Interest rate swaps and swaptions4,070 76 2022-2031
Total derivative assets$11,640
 $59
 
TotalTotal$14,364 $141 
Liabilities    Liabilities
Futures$671
 $3
 2017-2022
Mortgage backed securities forwards2,089
 4
 2017
Mortgage-backed securities forwardsMortgage-backed securities forwards$4,023 $14 2022
Rate lock commitments326
 1
 2017Rate lock commitments370 1 2022
Interest rate swaps920
 2
 2017-2032
Total derivative liabilities$4,006
 $10
 
Interest rate swaps and swaptionsInterest rate swaps and swaptions1,493 5 2022-2031
TotalTotal$5,886 $20 
(1)Variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day's fair value of open positions, is considered a settlement of the derivative position for accounting purposes.
(2)Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.

65

 December 31, 2016
 Notional Amount Fair Value (2) Expiration Dates
 (Dollars in millions)
Derivatives designated as hedging instruments:     
Assets     
Interest rate swaps on FHLB advances$600
 $20
 2023-2026
Liabilities     
Interest rate swaps on FHLB advances$230
 $1
 2025-2026
Derivatives not designated as hedging instruments:     
Assets     
Futures$4,621
 $2
 2017-2020
Mortgage backed securities forwards3,776
 43
 2017
Rate lock commitments3,517
 24
 2017
Interest rate swaps and swaptions2,231
 35
 2017-2033
Total derivative assets$14,145
 $104
  
Liabilities     
Futures$134
 $—
 2017
Mortgage backed securities forwards1,893
 11
 2017
Rate lock commitments598
 6
 2017
Interest rate swaps1,129
 37
 2017-2047
Total derivative liabilities$3,754
 $54
  
(1)At September 30, 2017, variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day’s fair value of open positions is considered settlement of the derivative position for accounting purposes. At December 31, 2016, variation margin was not recognized as settlement.
(2)Derivative assets and liabilities are included in other assets and other liabilities on the Consolidated Statements of Financial Condition, respectively.

The following tables present the derivatives subject to a master netting arrangement, including the cash pledged as collateral:
Gross Amounts Netted in the Statements of Financial ConditionNet Amount Presented in the Statements of Financial Condition Gross Amounts Not Offset in the Statements of Financial Condition
Gross AmountFinancial InstrumentsCash Collateral
(Dollars in millions)
March 31, 2022
Derivatives designated as hedging instruments:
Assets
Interest rate swaps on AFS securities$— $— $— $— $2 
Interest rate swaps on subordinated debt— — — — 3 
Interest rate swaps on commercial loans2— 2 — 31
Total derivative assets$2 $— $2 $— $36 
Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards$200 $— $200 $— $142 
Interest rate swaps and swaptions (1)105— 105 — 52 
Total derivative assets$305 $— $305 $— $194 
Liabilities
Mortgage-backed securities forwards$45 $— $45 $— $11 
Interest rate swaps22— 22 — 30
Total derivative liabilities$67 $— $67 $— $41 
December 31, 2021
Derivatives designated as hedging instruments:
Assets
Interest rate swaps on AFS securities$— $— $— $— $1 
Total derivative assets$— $— $— $— $1 
Liabilities
Interest rate swaps on AFS securities$— $— $— $— $4 
Interest rate swaps on HFI residential first mortgages— — — — 1 
Interest rate swaps on custodial deposits— — — — 9
Total derivative liabilities$— $— $— $— $14 
Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards$10 $— $10 $— $12 
Interest rate swaptions (1)77 — 77 — 17 
Total derivative assets$87 $— $87 $— $29 
Liabilities
Mortgage-backed securities forwards$14 $— $14 $— $9 
Interest rate swaps6 — 6 — 24 
Total derivative liabilities$20 $— $20 $— $33 
(1)Variation margin pledged to, or received from, a Central Counterparty Clearing House to cover the prior day's fair value of open positions is considered settlement of the derivative position for accounting purposes.

Losses of $1 million on fair value hedging relationships of AFS securities were recorded in interest income for the three months ended both March 31, 2022 and March 31, 2021.

Losses of $1 million on cash flow hedging relationships of custodial deposits were reclassified from AOCI into loan administration income during the three months ended March 31, 2022 and March 31, 2021.

Gains and losses on fair value hedging relationships of HFI residential first mortgages for the three months ended March 31, 2022 and March 31, 2021 were de-minimis.
66

   Gross Amounts Netted in the Statement of Financial Position Net Amount Presented in the Statement of Financial Position  Gross Amounts Not Offset in the Statement of Financial Position
 Gross Amount  Financial Instruments Cash Collateral
 (Dollars in millions)
September 30, 2017         
Derivatives designated as hedging instruments:         
Assets         
Interest rate swaps on FHLB advances (1)
$1
 $—
 $1
 $—
 $23
          
Derivatives not designated as hedging instruments:         
Assets         
Mortgage backed securities forwards$12
 $—
 $12
 $—
 $2
Interest rate swaps and swaptions (1)
14
 —
 14
 —
 11
Total derivative assets$26
 $—
 $26
 $—
 $13
         
Liabilities         
Futures$3
 $—
 $3
 $—
 $4
Mortgage backed securities forwards4
 —
 4
 —
 10
Interest rate swaps (1)
2
 —
 2
 —
 9
Total derivative liabilities$9
 $—
 $9
 $—
 $23
          
December 31, 2016         
Derivatives designated as hedging instruments:         
Assets         
Interest rate swaps on FHLB advances (1)
$20
 $1
 $19
 $—
 $—
Liabilities         
Interest rate swaps on FHLB advances (1)
$1
 $1
 $—
 $—
 $33
          
Derivatives not designated as hedging instruments:         
Assets         
Futures$2
 $—
 $2
 $—
 $—
Mortgage-backed securities forwards43
 —
 43
 —
 44
Interest rate swaps and swaptions (1)
35
 —
 35
 —
 30
Total derivative assets$80
 $—
 $80
 $—
 $74
          
Liabilities         
Futures$—
 $—
 $—
 $—
 $1
Mortgage-backed securities forwards11
 —
 11
 —
 —
Interest rate swaps (1)
37
 —
 37
 —
 20
Total derivative liabilities$48
 $—
 $48
 $—
 $21
(1)At September 30, 2017, variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day’s fair value of open positions is considered settlement of the derivative position for accounting purposes. At December 31, 2016, variation margin was not recognized as settlement and we had an additional $15 million in variation margin in excess of the amounts disclosed above.


WeThe fair value basis adjustment on our hedged AFS securities is included in investment securities available-for-sale on our Consolidated Statements of Financial Condition. The carrying amount of our hedged securities was $83 million at March 31, 2022 and $1.0 billion at December 31, 2021 of which a de-minimis amount and unrealized losses of $5 million, respectively, were due to the fair value hedge relationships. The closed portfolio of AFS securities designated in this last-of-layer method hedge was $86 million par (amortized cost of $85 million) at March 31, 2022 and $1.0 billion par (amortized cost of $1.0 billion) at December 31, 2021, of which $86 million and $435 million were designated in active hedge relationships at March 31, 2022 and December 31, 2021, respectively. The fair value basis adjustment associated with de-designated last-of-layer hedges of AFS securities is $17 million at March 31, 2022. The basis adjustment is allocated to individual securities recorded in available-for-sale securities within the Consolidated Statements of Financial Condition and will be accreted into interest income over the remaining life of those securities.

At March 31, 2022, we pledged a total of $23$99 million related to derivative financial instruments, consisting of $28 million of cash collateral on derivative liabilities and $23$71 million of maintenance margin on derivative assets to counterparties andcentrally cleared derivatives. We had an obligation to return a total of $173 million of cash of $13 millioncollateral on derivative assets at September 30, 2017.March 31, 2022. We pledged a total of $54$66 million related to derivative financial instruments, consisting of $28 million of cash collateral to counterpartieson derivative liabilities and $38 million of maintenance margin on centrally cleared derivatives and had ana $12 million obligation to return cash of $74 millionon derivative assets at December 31, 2016 for2021. Within the Consolidated Statements of Financial Condition, the collateral related to derivative activities. The net cash pledgedactivity is included in other assets onand other liabilities and the Consolidated Statements of Financial Condition.cash pledged as maintenance margin is restricted and included in other assets.


The following table presents net gain (loss) recognized in income on derivative instruments, net of the impact of offsetting positions:
 Three Months Ended March 31,
20222021
(Dollars in millions)
Derivatives not designated as hedging instruments:Location of gain (loss)
FuturesNet return on mortgage servicing rights$3 $— 
Interest rate swaps and swaptionsNet return on mortgage servicing rights(13)(47)
Mortgage-backed securities forwardsNet return on mortgage servicing rights(31)(18)
Rate lock commitments and MSR forwardsNet gain on loan sales104 162 
Interest rate swaps (1)Other noninterest income2 1 
Total derivative gain (loss)$65 $98 
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
  (Dollars in millions)
Derivatives not designated as hedging instruments:Location of Gain/(Loss)       
FuturesNet return (loss) on mortgage servicing rights$(1) $4
 $(1) $8
Interest rate swaps and swaptionsNet return (loss) on mortgage servicing rights(2) (7) (7) 21
Mortgage-backed securities forwardsNet return (loss) on mortgage servicing rights2
 2
 5
 15
Rate lock commitments and forward agency and loan salesNet gain (loss) on loan sales(8) 15
 (16) 14
Rate lock commitmentsOther noninterest income—
 —
 —
 1
Interest rate swaps (1)
Other noninterest income—
 2
 1
 3
Total derivative gain (loss) $(9) $16
 $(18) $62
(1)Includes customer-initiated commercial interest rate swaps.
(1)Includes customer-initiated commercial interest rate swaps.


Note 9 - Borrowings


Federal Home Loan Bank Advances and Other Borrowings


The following table presentsis a breakdown of our FHLB advances and other borrowings outstanding:
  
September 30, 2017 December 31, 2016
 Amount Rate Amount Rate
 (Dollars in millions)
Short-term fixed rate term advances$4,065
 1.14% $1,780
 0.62%
Total Short-term Federal Home Loan Bank advances4,065
   1,780
  
Long-term LIBOR adjustable advances1,025
 1.49% 1,025
 1.12%
Long-term fixed rate advances (1)
275
 1.41% 175
 1.12%
Total Long-term Federal Home Loan Bank advances1,300
   1,200
  
Total Federal Home Loan Bank advances$5,365
   $2,980
  
(1)
Includes the current portion of fixed rate advances of $125 million and $50 millionat September 30, 2017 and December 31, 2016, respectively.

We are required to maintain a minimum amount of qualifying collateral. 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.

At September 30, 2017, we had the authority and approval from the FHLB to utilize a line of credit of up to $7.0 billion and we may access that line to the extent that collateral is provided. At September 30, 2017, we had $5.4 billion of advances outstanding and an additional $1.1 billion of collateralized borrowing capacity available at the FHLB. The advances can be collateralized by non-delinquent single-family residential first mortgage loans, loans with government guarantees, certain other loans and investment securities.

At September 30, 2017, $1.0 billion of the outstanding advances were long-term adjustable rate, with interest rates that reset every three months and are based on the three-month LIBOR index. The advances may be prepaid without penalty, with notification at scheduled three month intervals after an initial 12 month lockout period which is based on the settlement date of each advance. The outstanding advances included $830 million in a cash flow hedge relationship as discussed in Note 8 - Derivative Financial Instruments.

  March 31, 2022December 31, 2021
AmountRateAmountRate
 (Dollars in millions)
Short-term fixed rate term advances$— — %$1,600 0.19 %
Other short-term borrowings2000.42 %280 0.11 %
Total short-term Federal Home Loan Bank advances and other borrowings200 1,880 
Long-term fixed rate advances1,200 1.03 %1,400 0.90 %
Total Federal Home Loan Bank advances and other borrowings$1,400 $3,280 
    
67

The following table contains detailed information on our FHLB advances and other borrowings:
Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
2017 2016 2017 2016 20222021
(Dollars in millions) (Dollars in millions)
Maximum outstanding at any month end$5,365
 $3,182
 $5,365
 $3,557
Maximum outstanding at any month end$2,200 $4,737 
Average outstanding balance5,043
 2,649
 4,239
 2,777
Average outstanding balance1,918 3,979 
Average remaining borrowing capacity1,182
 1,626
 1,297
 1,106
Average remaining borrowing capacity4,451 5,484 
Weighted average interest rate1.36% 1.26% 1.26% 1.25%Weighted average interest rate0.72 %0.43 %
    
The following table outlines the maturity dates of our FHLB advances and other borrowings:
 March 31, 2022
 (Dollars in millions)
2022$400
2023500
2024100
2025—
Thereafter400
Total$1,400
 September 30, 2017
 (Dollars in millions)
2017$4,065
2018125
201950
2020—
Thereafter1,125
Total$5,365


Parent Company Senior Notes, Subordinated Notes and Trust Preferred Securities


The following table presents long-term debt, net of debt issuance costs:
 March 31, 2022December 31, 2021
AmountInterest RateAmountInterest Rate
 (Dollars in millions)
Senior Notes
Senior notes, settled 2021$— — %$— — %
Subordinated Notes
Notes, matures 2030149 4.125 %149 4.125 %
Trust Preferred Securities
Floating Three Month LIBOR Plus:
3.25%, matures 2032264.22 %26 3.47 %
3.25%, matures 2033263.49 %26 3.37 %
3.25%, matures 2033264.25 %26 3.47 %
2.00%, matures 2035262.24 %26 2.12 %
2.00%, matures 2035262.24 %26 2.12 %
1.75%, matures 2035512.58 %51 1.95 %
1.50%, matures 2035251.74 %25 1.62 %
1.45%, matures 2037252.28 %25 1.65 %
2.50%, matures 203716 3.33 %16 2.70 %
Total Trust Preferred Securities247 247 
Total other long-term debt$396 $396 
 September 30, 2017 December 31, 2016
 Amount Interest Rate Amount Interest Rate
 (Dollars in millions)
Senior Notes       
Senior notes, matures 2021$246
 6.125% $246
 6.125%
Trust Preferred Securities       
Floating Three Month LIBOR       
Plus 3.25%, matures 2032$26
 4.58% $26
 4.25%
Plus 3.25%, matures 203326
 4.55% 26
 4.13%
Plus 3.25%, matures 203326
 4.55% 26
 4.25%
Plus 2.00%, matures 203526
 3.30% 26
 2.88%
Plus 2.00%, matures 203526
 3.30% 26
 2.88%
Plus 1.75%, matures 203551
 3.07% 51
 2.71%
Plus 1.50%, matures 203525
 2.80% 25
 2.38%
Plus 1.45%, matures 203725
 2.77% 25
 2.41%
Plus 2.50%, matures 203716
 3.82% 16
 3.46%
Total Trust Preferred Securities247
   247
  
Total other long-term debt$493
   $493
  


SeniorSubordinated Notes


On July 11, 2016,October 28, 2020, we issued $250$150 million of senior notes (“Senior Notes”Subordinated Debt (the "Notes") which mature on July 15, 2021.with a maturity date of November 1, 2030. The proceeds from these notes were usedNotes bear interest at a fixed rate of 4.125 percent through October 31, 2025, and a variable rate tied to bring dividends current andSOFR thereafter until maturity. We have the option to redeem our outstanding TARP Preferred. The notes are unsecured and rank equally and ratably with the unsecured senior indebtedness of Flagstar Bancorp, Inc.

Prior to June 15, 2021, we may redeem someall or alla part of the Senior Notes at a redemption price equal to the greater of 100 percent of the aggregate principal amount of the notes to be redeemed or the sum of the present values of the remainingbeginning on November 1, 2025, and on any subsequent interest payment date. The Notes qualify as Tier 2 capital for regulatory purposes.

scheduled payments discounted to the redemption date on a semi-annual basis using a discount rate equal to the Treasury Rate plus 0.50 percent, plus, in each case accrued and unpaid interest.

Trust Preferred Securities


We sponsor nine9 trust subsidiaries, which issued preferred stock to third party investors. We issued trust preferredjunior subordinated debt securities to those trusts, which we have included in long-term debt. The trust preferredjunior subordinated debt securities are the sole
68

assets of those trusts.

The trust preferred securities are callable by us at any time. Interest is payable quarterly; however, we may defer interest payments for up to 20 quarters without default or penalty. As of September 30, 2017,March 31, 2022, we had no deferred interest.


Note 10 - Representation and Warranty Reserve
At the time a loan is sold, an estimate of the fair value of the guarantee associated with the mortgage loans is recorded in the representation and warranty reserve in the Consolidated Statements of Financial Condition which reduces the net gain on loan sales in the Consolidated Statements of Operations.

The following table shows the activity impacting the representation and warranty reserve:
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in millions)
Balance at beginning of period$20
 $36
 $27
 $40
Provision (benefit)       
Gain on sale reduction for representation and warranty liability1
 1
 3
 4
Representation and warranty provision (benefit)(4) (6) (11) (12)
Total(3) (5) (8) (8)
(Charge-offs) recoveries, net(1) 1
 (3) —
Balance at end of period$16
 $32
 $16
 $32

Note 11 - Warrants

May Investor Warrant

We granted warrants (the "May Investor Warrants") on January 30, 2009 under anti-dilution provisions applicable to certain investors (the "May Investors") in our May 2008 private placement capital raise.

During the nine months ended September 30, 2017, a total of 237,627 May Investor Warrants were exercised, resulting in the net issuance of 154,313 shares of Common Stock. As of September 30, 2017, there are no remaining May Investor Warrants outstanding and the related liability is reduced to zero.

At December 31, 2016, the liability was $4 million. For further information, see Note 18 - Fair Value Measurements.

TARP Warrant

On January 30, 2009, in conjunction with the sale of 266,657 shares of TARP Preferred, we issued a warrant to purchase up to approximately 645,138 shares of Common Stock at an exercise price of $62.00 per share (the "Warrant").

The Warrant is exercisable through January 30, 2019 and remains outstanding.     


Note 12 - Accumulated Other Comprehensive Income (Loss)


The following table sets forth the components in accumulated other comprehensiveAOCI:
Three Months Ended March 31,
20222021
(Dollars in millions)
Investment Securities
Beginning balance$15 $52 
Unrealized loss(77)(20)
Less: Tax benefit(19)(5)
Net unrealized loss(58)(15)
Other comprehensive loss, net of tax(58)(15)
Ending balance$(43)$37 
Cash Flow Hedges
Beginning balance$20 $(5)
Unrealized gain29 26 
Less: Tax provision8 5 
Net unrealized gain21 21 
Reclassifications out of AOCI (1)— 1 
Other comprehensive income, net of tax21 22 
Ending balance$41 $17 
(1)Reclassifications are reported in noninterest income (loss):on the Consolidated Statements of Operations.
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in millions)
Investment securities       
Beginning balance$(6) $21
 $(8) $5
Unrealized gain—
 1
 2
 27
 Less: Tax provision—
 —
 1
 10
Net unrealized gain—
 1
 1
 17
Reclassifications out of AOCI (1)
1
 (8) 3
 (8)
Less: Tax (benefit) provision—
 (3) 1
 (3)
Net unrealized gain (loss) reclassified out of AOCI1
 (5) 2
 (5)
Other comprehensive income/(loss), net of tax1
 (4) 3
 12
Ending balance$(5) $17
 $(5) $17
        
Cash Flow Hedges       
Beginning balance$(3) $(40) $1
 $(3)
Unrealized gain (loss)—
 2
 (2) (61)
 Less: Tax (benefit) provision—
 2
 (1) (17)
Net unrealized (loss)—
 —
 (1) (44)
Reclassifications out of AOCI (1)
—
 3
 (5) 10
Less: Tax (benefit)—
 —
 (2) —
Net unrealized gain (loss) reclassified out of AOCI—
 3
 (3) 10
Other comprehensive income/(loss), net of tax—
 3
 (4) (34)
Ending balance$(3) $(37) $(3) $(37)

(1)Reclassifications are reported in other noninterest income on the Consolidated Statement of Operations.

Note 1311 - Earnings Per Share


Basic earnings per share, excluding dilution, is computed by dividing earnings applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that could then share in our earnings.


The following table sets forth the computation of basic and diluted earnings per share of common stock:
 Three Months Ended March 31,
 20222021
(Dollars in millions, except share data)
Net income applicable to common shareholders$53 $149 
Weighted Average Shares
Weighted average common shares outstanding53,219,86652,675,562
Effect of dilutive securities
Stock-based awards358,135 622,241 
Weighted average diluted common shares$53,578,001 $53,297,803 
Earnings per common share
Basic earnings per common share$0.99 $2.83 
Effect of dilutive securities
Stock-based awards— (0.03)
Diluted earnings per common share$0.99 $2.80 

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in millions, except share data)
Net income$40
 $57
 $108
 $143
Deferred cumulative preferred stock dividends—
 (2) —
 (18)
Net income applicable to common stockholders$40
 $55
 $108
 $125
Weighted average shares       
Weighted average common shares outstanding57,162,025
 56,580,238
 57,062,696
 56,556,188
Effect of dilutive securities       
May Investor Warrants—
 364,791
 16,383
 339,893
Stock-based awards1,024,568
 988,777
 1,054,217
 831,181
Weighted average diluted common shares58,186,593
 57,933,806
 58,133,296
 57,727,262
Earnings per common share       
Basic earnings per common share$0.71
 $0.98
 $1.90
 $2.21
Effect of dilutive securities       
May Investor Warrants—
 —
 —
 (0.02)
Stock-based awards(0.01) (0.02) (0.04) (0.03)
Diluted earnings per common share$0.70
 $0.96
 $1.86
 $2.16

Under the terms of the TARP Preferred, the Company elected to defer payments of preferred stock dividends beginning with the February 2012 dividend. Although, while being deferred, the impact was not included in quarterly net income from continuing operations, the deferral did impact net income applicable to common stock for the purpose of calculating earnings per share, as shown above. On July 29, 2016, we completed the $267 million redemption of our TARP Preferred.

Note 1412 - Stock-Based Compensation


We had stock-based compensation expense of $2 million and $8$4 million for the three and nine months ended September 30, 2017.March 31, 2022 and March 31, 2021, respectively.


69

Restricted Stock and Restricted Stock Units
    
The following table summarizes restricted stock and restricted stock units activity:
Three Months Ended March 31, 2022
SharesWeighted — Average Grant-Date Fair Value per Share
Restricted Stock and Restricted Stock Units
Non-vested balance at beginning of period600,573 $36.61 
Granted134,066 36.62 
Vested(43,756)40.46 
Canceled and forfeited(19,493)33.16 
Non-vested balance at end of period671,390 $36.47 

 Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
 Shares Weighted — Average Grant-Date Fair Value per Share Shares Weighted — Average Grant-Date Fair Value per Share
Restricted Stock       
Non-vested balance at beginning of period1,455,327
 $19.88
 1,461,910
 $17.68
Granted28,750
 23.57
 355,088
 28.02
Vested(298) 16.77
 (214,239) 18.95
Canceled and forfeited(15,952) 23.31
 (134,932) 18.57
Non-vested balance at end of period1,467,827
 $19.92
 1,467,827
 $19.92


2017 Employee Stock Purchase Plan

The Employee Stock Purchase Plan ("2017 ESPP") was approved on March 20, 2017 by our Board of Directors ("the Board") and on May 23, 2017 by our shareholders. The 2017 ESPP became effective July 1, 2017 and will remain effective until terminated by the Board. A total of 800,000 shares of the Company’s common stock are reserved and authorized for issuance for purchase under the 2017 ESPP. During the three months ended September 30, 2017, 19,897 shares were issued under the 2017 ESPP and our associated compensation expense was de minimis.

Note 15Note 13 - Income Taxes


The provision for income taxes in interim periods requires us to make a best estimate of the effective tax rate expected to be applicable for the full year, adjusted for any discreetdiscrete items for the applicable period. This estimated effective tax rate is then applied to interim consolidated pre-tax operating income to determine the interim provision for income taxes.


The following table presents our provision for income tax and effective tax provision rate:
Three Months Ended March 31,
20222021
(Dollars in millions)
Income before income taxes$68 $194 
Provision for income taxes15 45 
Effective tax provision rate22.0 %23.0 %
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in millions)
Provision for income taxes$20
 $30
 $52
 $73
Effective tax provision rate32.4% 34.3% 32.3% 33.8%


We believe that it is unlikely that our unrecognized tax benefits will change by a material amount during the next 12 months. We recognize interest and penalties related to unrecognized tax benefits in provision for income taxes.


Note 1614 - Regulatory Matters


Regulatory Capital


We, along with the Bank, are subject to the Basel III based U.S. capital rules, including capital simplification in 2020. Under these requirements, we must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional, discretionary actions by regulators that could have a material effect on the Consolidated Financial Statements. On January 1, 2015, the Basel III rules became effective and include transition provisions through 2018.


To be categorized as "well-capitalized," the Company and the Bank must maintain minimum tangible capital, Tier 1 capital, common equity Tier 1 and total capital ratios as set forth in the table below. We, along with the Bank, are considered "well-capitalized" at both September 30, 2017March 31, 2022 and December 31, 2016.

2021.
    

70

The following tables present the regulatory capital ratios as ofrequirements under the dates indicated:applicable Basel III based U.S. capital rules:
Flagstar BancorpActualFor Capital Adequacy PurposesWell-Capitalized Under Prompt Corrective Action Provisions
 AmountRatioAmountRatioAmountRatio
 (Dollars in millions)
March 31, 2022
Tier 1 capital (to adjusted avg. total assets)$2,843 11.83 %$961 4.0 %$1,201 5.0 %
Common equity Tier 1 capital (to RWA)2,603 13.89 %843 4.5 %1,218 6.5 %
Tier 1 capital (to RWA)2,843 15.17 %1,124 6.0 %1,499 8.0 %
Total capital (to RWA)3,110 16.59 %1,499 8.0 %1,874 10.0 %
December 31, 2021
Tier 1 capital (to adjusted avg. total assets)$2,798 10.54 %$1,062 4.0 %$1,327 5.0 %
Common equity Tier 1 capital (to RWA)2,558 13.19 %873 4.5 %1,261 6.5 %
Tier 1 capital (to RWA)2,798 14.43 %1,164 6.0 %1,552 8.0 %
Total capital (to RWA)3,080 15.88 %1,552 8.0 %1,940 10.0 %
Flagstar BankActualFor Capital Adequacy PurposesWell-Capitalized Under Prompt Corrective Action Provisions
 AmountRatioAmountRatioAmountRatio
 (Dollars in millions)
March 31, 2022
Tier 1 capital (to adjusted avg. total assets)$2,758 11.50 %$959 4.0 %$1,199 5.0 %
Common equity Tier 1 capital (to RWA)2,758 14.73 %843 4.5 %1,217 6.5 %
Tier 1 capital (to RWA)2,758 14.73 %1,124 6.0 %1,498 8.0 %
Total capital (to RWA)2,875 15.35 %1,498 8.0 %1,873 10.0 %
December 31, 2021
Tier 1 capital (to adjusted avg. total assets)$2,706 10.21 %$1,060 4.0 %$1,325 5.0 %
Common equity Tier 1 capital (to RWA)2,706 13.96 %872 4.5 %1,260 6.5 %
Tier 1 capital (to RWA)2,706 13.96 %1,163 6.0 %1,551 8.0 %
Total capital (to RWA)2,839 14.65 %1,551 8.0 %1,938 10.0 %

BancorpActual For Capital Adequacy Purposes Well Capitalized Under Prompt��Corrective Action Provisions
 AmountRatio AmountRatio AmountRatio
 (Dollars in millions)
September 30, 2017        
Tangible capital (to adjusted avg. total assets)$1,423
8.80% 
N/A
N/A
 
N/A
N/A
Tier 1 leverage (to adjusted avg. total assets)1,423
8.80% $647
4.00% $808
5.00%
Common equity Tier 1 capital (to RWA)1,208
11.65% 467
4.50% 674
6.50%
Tier 1 capital (to RWA)1,423
13.72% 622
6.00% 830
8.00%
Total capital (to RWA)1,554
14.99% 830
8.00% 1,037
10.00%
December 31, 2016        
Tangible capital (to adjusted avg. total assets)$1,256
8.88% N/A
N/A
 N/A
N/A
Tier 1 leverage (to adjusted avg. total assets)1,256
8.88% $566
4.0% $707
5.0%
Common equity Tier 1 capital (to RWA)1,084
13.06% 374
4.5% 540
6.5%
Tier 1 capital (to RWA)1,256
15.12% 498
6.0% 664
8.0%
Total capital (to RWA)1,363
16.41% 664
8.0% 830
10.0%
N/A - Not applicable
BankActual For Capital Adequacy Purposes Well Capitalized Under Prompt Corrective Action Provisions
 AmountRatio AmountRatio AmountRatio
 (Dollars in millions)
September 30, 2017        
Tangible capital (to adjusted avg. total assets)$1,519
9.38% 
N/A
N/A
 
N/A
N/A
Tier 1 leverage (to adjusted avg. total assets)1,519
9.38% $648
4.00% $810
5.00%
Common equity tier 1 capital (to RWA)1,519
14.61% 468
4.50% 676
6.50%
Tier 1 capital (to RWA)1,519
14.61% 624
6.00% 832
8.00%
Total capital (to RWA)1,651
15.88% 832
8.00% 1,040
10.00%
December 31, 2016        
Tangible capital (to adjusted avg. total assets)$1,491
10.52% N/A
N/A
 N/A
N/A
Tier 1 leverage (to adjusted avg. total assets)1,491
10.52% $567
4.0% $709
5.0%
Common equity tier 1 capital (to RWA)1,491
17.90% 375
4.5% 542
6.5%
Tier 1 capital (to RWA)1,491
17.90% 500
6.0% 667
8.0%
Total capital (to RWA)1,598
19.18% 667
8.0% 833
10.0%
N/A - Not applicable

Note 1715 - Legal Proceedings, Contingencies and Commitments


Legal Proceedings


We and our subsidiaries are subject to various pending or threatened legal proceedings arising out of the normal course of business operations. In addition, the Bank is routinely named in civil actions throughout the country by borrowers and former borrowers relating to the origination,closing, purchase, sale and servicing of mortgage loans. From time to time, governmental agencies also conduct investigations or examinations of various practices of the Bank. In the course of such investigations or examinations, the Bank cooperates with such agencies and provides information as requested.


We assess the liabilities and loss contingencies in connection with pending or threatened legal and regulatory proceedings on at least a quarterly basis and establish accruals when we believe it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, litigation accruals are adjusted, as appropriate, in light of additional information. Payments made to settle our liabilities may differ from the contingency or fair value recorded due to factors that differ from our assumptions.


At September 30, 2017,March 31, 2022, we do not believe that the amount of any reasonably possible losses in excess of any amounts accrued with respect to ongoing proceedings or any other known claims will be material to our financial statements or that the ultimate outcome of these actions will have a materialmaterially adverse effect on our financial condition, results of operations or cash flows.

DOJ litigation settlement

In 2012, the Bank entered into a Settlement Agreement with the DOJ which meets the definition of a financial liability (the "DOJ Liability").

In accordance with the Settlement Agreement, we made an initial payment of $15 million and agreed to make future annual payments totaling $118 million in annual increments of up to $25 million upon meeting all 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 the third quarter of 2016; and (c) the Bank’s Tier 1 Leverage Capital Ratio equals 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 OCC 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 would be due at that time. The next annual payment is only made if such other 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.

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 above conditions.

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

We elected to account for the DOJ Liability under the fair value option. To determine the fair value, we utilize a discounted cash flow model. Key assumptions for the discounted cash flow model include using a discount rate as of September 30, 2017 of 9.4 percent; probability weightings of multiple cash flow scenarios and possible outcomes which contemplate the above conditions and estimates of forecasted net income, size of the balance sheet, capital levels, dividends and their impact on the timing of cash payments and the assumptions we believe a market participant would make to transfer the liability. The fair value of the DOJ Liability was $60 million at both September 30, 2017 and December 31, 2016.    


Other litigation accruals


At September 30, 2017March 31, 2022 and December 31, 2016, excluding the fair value liability relating to the DOJ litigation settlement,2021, our total accrual for contingent liabilities and settled litigation and regulatory matters was $2 million and $3 million, respectively.$9 million.



71

Commitments


    In the normal course of business, we have various commitments outstanding which are not included on our Consolidated Statements of Financial Condition. The following table is a summary of the contractual amount of significant commitments:
March 31, 2022December 31, 2021
 (Dollars in millions)
Commitments to extend credit
Mortgage loan commitments including interest rate locks$5,371 $5,539 
Warehouse loan commitments7,675 6,840 
Commercial and industrial commitments1,764 1,582 
Other construction commitments2,877 2,719 
HELOC commitments727 631 
Other consumer commitments349 273 
Standby and commercial letters of credit102 107 
 September 30, 2017 December 31, 2016
 (Dollars in millions)
Commitments to extend credit   
Mortgage loans interest-rate lock commitments$4,804
 $4,115
Warehouse loan commitments1,560
 1,670
Commercial and industrial commitments692
 424
Other commercial commitments955
 651
HELOC commitments241
 179
Other consumer commitments51
 57
Standby and commercial letters of credit46
 30

Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. SinceBecause many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. Commitments generally have fixed expiration dates or other termination clauses. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us, upon extension of credit is based on management'sManagement's credit evaluation of the counterparties.


These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the Consolidated Statements of Financial Condition. Our exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We utilize the same credit policies in making commitments and conditional obligations as we do for balance sheet instruments. The types of credit we extend are as follows:


Mortgage loan interest-rate lock commitments.commitments including interest rate locks. We enter into mortgage interest-rate lockloan commitments, including interest rate locks with our customers. These interest rate lock commitments are considered to be derivative instruments and the fair value of these commitments is recorded inon the Consolidated Statements of Financial Condition in other assets. For further information, see Note 8 - Derivative Financial Instruments.


Warehouse loan commitments. Lines of credit provided to mortgage originators to fund loans they originate and then sell. The proceeds of the sale of the loans are used to repay the draw on the line used to fund the loans.


Commercial and industrial and other commercialconstruction commitments. Conditional commitments issued under various terms to lend funds to businessbusinesses and other entities. These commitments include revolving credit agreements, term loan commitments and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination clauses and may require payment of a fee. SinceBecause many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.


HELOC commitments. Commitments to extend, originate or purchase credit are primarily lines of credit to consumers and have specified rates and maturity dates. Many of these commitments also have adverse change clauses, which allow us to cancel the commitment due to deterioration in the borrowers’ creditworthiness or a decline in the collateral value.


Other consumer commitments. ConditionalConditional commitments issued to accommodate the financial needs of customers. The commitments are made under various terms to lend funds to consumers, which include revolving credit agreements, term loan commitments and short-term borrowing agreements.


Standby and commercial letters of credit. Conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. These financial standby letters of credit irrevocably obligate the bank to pay a third-party beneficiary when a customer fails to repay an outstanding loan or debt instrument.


72

We maintain a reserve for the estimate of probableestimated lifetime credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unfunded loans with available balances, new commitments to lend that are not

yet funded and standby and commercial letters of credit. A reserve balance of $3$14 million at both September 30, 2017March 31, 2022 and $16 million at December 31, 20162021, respectively, is reflected in other liabilities on the Consolidated Statements of Financial Condition. See Note 4 - Loans Held-for-Investment for additional information.


    Supplemental executive retirement plan with former CEO.The Company entered into a supplemental executive retirement plan (“SERP”) with a former CEO in 2009. In the second quarter of 2021, we entered into a settlement agreement with the former CEO that terminates the SERP and all other prior employment agreements in exchange for a maximum payment of $6 million which remains subject to regulatory approval as of March 31, 2022.

Note 1816 - Fair Value Measurements


We utilize fair value measurements to record or disclose the fair value on certain assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability through an orderly transaction between market participants at the measurement date. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves or credit spreads. Unobservable inputs may be based on management'sManagement's judgment, assumptions and estimates related to credit quality, our future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Refer to Note 22 - Fair Value Measurements to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2016 for a description of our valuation methodologies and information about the fair value hierarchy.


Valuation Hierarchy


U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active markets and the lowest priority given to unobservable inputs where no active market exists, as discussed below.below:


Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which we can participate as of the measurement date;date,


Level 2 - Quoted prices for similar instruments in active markets and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;instrument, and


Level 3 - Unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.


A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.



73

Assets and Liabilities Measured at Fair Value on a Recurring Basis.Basis


The following tables present the financial instruments carried at fair value by caption on the Consolidated StatementStatements of Financial Condition and by level in the valuation hierarchy.

March 31, 2022
Level 1Level 2Level 3Total Fair Value
(Dollars in millions)
Investment securities available-for-sale
Agency - Commercial$— $1,058 $— $1,058 
Agency - Residential— 615 — 615 
Municipal obligations— 19 — 19 
Corporate debt obligations— 72 — 72 
Other MBS— 245 — 245 
Certificate of deposit— 1 — 1 
Loans held-for-sale
Residential first mortgage loans— 3,154 — 3,154 
Loans held-for-investment
Residential first mortgage loans— 21 — 21 
Mortgage servicing rights— — 523 523 
Derivative assets
Rate lock commitments (fallout-adjusted)— — 23 23 
Futures— 2 — 2 
Mortgage-backed securities forwards— 200 — 200 
Interest rate swaps and swaptions— 105 — 105 
Total assets at fair value$— $5,492 $546 $6,038 
Derivative liabilities
Rate lock commitments (fallout-adjusted)$— $— $(27)$(27)
Mortgage backed securities forwards— (45)— (45)
Interest rate swaps— (22)— (22)
Total liabilities at fair value$— $(67)$(27)$(94)
74

December 31, 2021
September 30, 2017 Level 1Level 2Level 3Total Fair Value
Level 1 Level 2 Level 3 
Total Fair
Value
(Dollars in millions)
(Dollars in millions)
Loans held-for-saleLoans held-for-sale
Residential first mortgage loansResidential first mortgage loans$— $4,920 $— $4,920 
Investment securities available-for-sale       Investment securities available-for-sale
Agency - Commercial$—
 $750
 $—
 $750
Agency - Commercial— 747 — 747 
Agency - Residential—
 809
 —
 809
Agency - Residential— 696 — 696 
Other MBSOther MBS— 267 — 267 
Corporate debt obligationsCorporate debt obligations— 73 — 73 
Municipal obligations—
 44
 —
 44
Municipal obligations— 20 — 20 
Corporate debt obligations—
 34
 —
 34
Loans held-for-sale       
Residential first mortgage loans—
 4,907
 —
 4,907
Certificate of depositCertificate of deposit— 1 — 1 
Derivative assetsDerivative assets
Interest rate swaps and swaptionsInterest rate swaps and swaptions— 77 — 77 
Rate lock commitments (fallout-adjusted)Rate lock commitments (fallout-adjusted)— — 54 54 
Mortgage-backed securities forwardsMortgage-backed securities forwards— 10 — 10 
Loans held-for-investment       Loans held-for-investment
Residential first mortgage loans—
 9
 —
 9
Residential first mortgage loans— 15 — 15 
Home equity—
 —
 4
 4
Home equity— — 1 1 
Mortgage servicing rights—
 —
 246
 246
Mortgage servicing rights— — 392 392 
Derivative assets       
Rate lock commitments (fallout-adjusted)—
 —
 33
 33
Total assets at fair valueTotal assets at fair value$— $6,826 $447 $7,273 
Derivative liabilitiesDerivative liabilities
Mortgage-backed securities forwards—
 12
 —
 12
Mortgage-backed securities forwards$— $(14)$— $(14)
Interest rate swaps and swaptions—
 14
 —
 14
Interest rate swaps and swaptions— (5)— (5)
Interest rate swap on FHLB advances (net)—
 1
 —
 1
Total assets at fair value$—
 $6,580
 $283
 $6,863
Derivative liabilities       
Rate lock commitments (fallout-adjusted)$—
 $—
 $(1) $(1)Rate lock commitments (fallout-adjusted)— — (1)(1)
Futures(3) —
 —
 (3)
Mortgage backed securities forwards—
 (4) —
 (4)
Interest rate swaps—
 (2) —
 (2)
DOJ litigation settlement—
 —
 (60) (60)
Contingent consideration—
 —
 (26) (26)
DOJ LiabilityDOJ Liability— — — — 
Total liabilities at fair value$(3) $(6) $(87) $(96)Total liabilities at fair value$— $(19)$(1)$(20)

On May 15, 2017, the Company closed on the acquisition of certain assets of Opes Advisors (“Opes”), a California based retail mortgage originator and wealth management service provider. Although the acquired assets of Opes were not significant, the addition of Opes positions us to increase our distributed retail lending channel. Consideration in the acquisition of Opes consisted of upfront cash and contingent cash in the form of an earn-out. The earn-out is based on future target production volumes and profitability of the division which were significant inputs to the preliminary fair value. We deem the initial valuation of the assets and liabilities to be provisional and have left the measurement period open. These fair values may be adjusted in a future period, not to exceed one year after the acquisition date, to reflect new facts and circumstances which existed as of the acquisition date. During the third quarter of 2017, an adjustment was made to the initial fair value of the acquisition earn-out that was the result of facts and circumstances in existence at the acquisition date.





75
 December 31, 2016
  
Level 1 Level 2 Level 3 Total Fair
Value
 (Dollars in millions)
Investment securities available-for-sale       
Agency - Commercial$—
 $548
 $—
 $548
Agency - Residential—
 898
 —
 898
Municipal obligations—
 34
 —
 34
Loans held-for-sale       
Residential first mortgage loans—
 3,145
 —
 3,145
Loans held-for-investment       
Residential first mortgage loans—
 7
 —
 7
Home equity—
 —
 65
 65
Mortgage servicing rights—
 —
 335
 335
Derivative assets       
Rate lock commitments (fallout-adjusted)—
 —
 24
 24
Futures2
 —
 —
 2
Mortgage backed securities forwards—
 43
 —
 43
Interest rate swaps and swaptions—
 35
 —
 35
Interest rate swaps on FHLB advances (net)—
 19
 —
 19
Total assets at fair value$2
 $4,729
 $424
 $5,155
Derivative liabilities       
Rate lock commitments (fallout-adjusted)$—
 $—
 $(6) $(6)
Mortgage backed securities forwards—
 (11) —
 (11)
Interest rate swaps—
 (37) —
 (37)
Warrant liabilities—
 (4) —
 (4)
DOJ litigation settlement—
 —
 (60) (60)
Total liabilities at fair value$—
 $(52) $(66) $(118)


There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2017.


Fair Value Measurements Using Significant Unobservable Inputs


The following tables includetable includes a roll forward of the Consolidated Statements of Financial Condition amounts (including the change in fair value) for financial instruments classified by us within levelLevel 3 of the valuation hierarchy:

Balance at
Beginning of
Period		Total Gains (Losses) Recorded in EarningsPurchases / ClosingsSalesSettlementTransfers OutBalance at
End of 
Period
(Dollars in millions)
Three Months Ended March 31, 2022
Assets
Mortgage servicing rights (1)$392 $39 $92 $— $— $— $523 
Rate lock commitments (net) (1)(2)53 (174)101 — — 16 (4)
Totals$445 $(135)$193 $— $— $16 $519 
Three Months Ended March 31, 2021
Assets
Loans held-for-investment
Home equity$2 $— $— $— $— $— $2 
Mortgage servicing rights (1)329 34 65 — — — 428 
Rate lock commitments (net) (1)(2)208 (169)205 — — (170)74 
Totals$539 $(135)$270 $— $— $(170)$504 
Liabilities
DOJ Liability$(35)$(35)$— $— $— $— $(70)
Totals$(35)$(35)$— $— $— $— $(70)
  Recorded in Earnings Recorded in OCI     
 
Balance at
Beginning of
Period
Total Unrealized Gains / (Losses)Total Realized Gains / (Losses) Total Unrealized Gains / (Losses)Purchases / OriginationsSalesSettlementsTransfers In (Out)
Balance at
End of 
Period
 (Dollars in millions)
Three Months Ended September 30, 2017         
Assets          
Loans held-for-investment          
Home equity$5
$—
$—
 $—
$—
$—
$(1)$—
$4
Mortgage servicing rights184
(9)—
 —
75
(4)—
—
246
Rate lock commitments (net) (1)26
21
—
 —
82
—
—
(97)32
Totals$215
$12
$—
 $—
$157
$(4)$(1)$(97)$282
Liabilities          
DOJ litigation settlement$(60)$—
$—
 $—
$—
$—
$—
$—
$(60)
Contingent consideration(23)(1)—
 —
(2)—
—
—
(26)
Totals$(83)$(1)$—
 $—
$(2)$—
$—
$—
$(86)
           
Three Months Ended September 30, 2016         
Assets          
Loans held-for-investment          
Home equity$82
$4
$—
 $—
$—
$—
$(14)$—
$72
Mortgage servicing rights301
(33)—
 —
51
(17)—
—
302
Rate lock commitments (net) (1)82
33
—
 —
116
(150)(18)—
63
Totals$465
$4
$—
 $—
$167
$(167)$(32)$—
$437
Liabilities          
DOJ litigation settlement$(84)$24
$—
 $—
$—
$—
$—
$—
$(60)
(1)Rate lock commitments are reported on a fallout adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are transferred to LHFS, which are classified as Level 2 assets.


  Recorded in Earnings Recorded in OCI     
 Balance at
Beginning of
Period		Total Unrealized Gains / (Losses)Total Realized Gains / (Losses) Total Unrealized Gains / (Losses)Purchases / OriginationsSalesSettlementsTransfers In (Out)Balance at
End of 
Period
 (Dollars in millions)
Nine Months Ended September 30, 2017         
Assets          
Loans held-for-sale          
Home equity$—
$1
$—
 $—
$—
$(52)$(1)$52
$—
Loans held-for-investment          
Home equity65
1
—
—
—
—
—
(7)(55)4
Mortgage servicing rights335
(7)—
 —
178
(260)—
—
246
Rate lock commitments (net) (1)18
55
—
 —
199
—
—
(240)32
Totals$418
$50
$—
 $—
$377
$(312)$(8)$(243)$282
Liabilities          
DOJ litigation settlement$(60)$—
$—
 $—
$—
$—
$—
$—
$(60)
Contingent consideration—
(1)—
 —
(25)—
—
—
(26)
Totals$(60)$(1)$—
 $—
$(25)$—
$—
$—
$(86)
           
Nine Months Ended September 30, 2016         
Assets          
Loans held-for-investment          
Home equity$106
$2
$—
 $—
$—
$—
$(36)$—
$72
Mortgage servicing rights296
(126)—
 —
173
(41)—
—
302
Rate lock commitments (net) (1)26
153
—
 —
303
(371)(48)—
63
Totals$428
$29
$—
 $—
$476
$(412)$(84)$—
$437
Liabilities          
DOJ litigation settlement$(84)$24
$—
 $—
$—
$—
$—
$—
$(60)
(1)Rate lock commitments are reported on a fallout adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are transferred to LHFS, which are classified as Level 2 assets.

(1)We utilized swaptions, futures, forward agency and loan sales and interest rate swaps to manage the risk associated with MSRsmortgage servicing rights and rate lock commitments. Gains and losses for individual lines in the tables do not reflect the effect of our risk management activities related to such levelLevel 3 instruments.

(2)Rate lock commitments are reported on a fallout-adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are transferred to LHFS, which are classified as Level 2 assets.

76

The following tables present the quantitative information about recurring levelLevel 3 fair value financial instruments and the fair value measurements as of:
Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average)
(Dollars in millions)
March 31, 2022
Assets
Loans held-for-investment
Mortgage servicing rights$523 Discounted cash flowsOption adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
3.8% - 21.6% (6.6%)
0% - 10.3% (8.7%)
$67 - $90 ($80)
(1)
Rate lock commitments (net)$(4)Consensus pricingOrigination pull-through rate77.2%(1)
 Fair Value Valuation Technique Unobservable Input Range (Weighted Average)
 (Dollars in millions)
September 30, 2017 
Assets 
Loans held-for-investment       
Home equity$4
 Discounted cash flows Discount rate
Constant prepayment rate
Constant default rate		 7.2% - 10.8% (9.0%)
5.2% - 7.7% (6.5%)
3.0% - 4.5% (3.4%)
Mortgage servicing rights$246
 Discounted cash flows Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan		 4.7% - 7.0% (5.8%)
7.8% - 11.4% (9.6%)
$57 - $85 ($71)
Rate lock commitments (net)$32
 Consensus pricing Origination pull-through rate 63.9% - 95.9% (79.9%)
Liabilities       
DOJ litigation settlement$60
 Discounted cash flows Discount rate
Asset growth rate		 7.5% - 11.3% (9.4%)
5.6% - 16.8% (6.5%)
Contingent consideration$26
 Discounted cash flows Beta
Equity volatility		 0.6 - 1.6 (1.1)
26.6% - 58.9% (40.5%)
(1)Unobservable inputs were weighted by their relative fair value of the instruments.

Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average)
Fair Value Valuation Technique Unobservable Input Range (Weighted Average)(Dollars in millions)
(Dollars in millions)
December 31, 2016 
December 31, 2021December 31, 2021
Assets Assets
Loans held-for-investment  Loans held-for-investment
Home equity$65
 Discounted cash flows Discount rate
Constant prepayment rate
Constant default rate		 6.0% - 12.2% (9.3%)
16.3% - 24.4% (20.3%)
2.7% - 4.1% (3.7%)
Mortgage servicing rights$335
 Discounted cash flows Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan		 6.2% - 9.3% (7.8%)
13.9% - 19.2% (16.7%)
$55 - $82 ($68)		Mortgage servicing rights$392 Discounted cash flowsOption adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
3.9% - 21.6% (7.1%)
0% - 11.1% (9.2%)
$67 - $90 ($80)
(1)
Rate lock commitments (net)$18
 Consensus pricing Origination pull-through rate 66.9% - 100.0% (83.6%)Rate lock commitments (net)$53 Consensus pricingOrigination pull-through rate72.8%(1)
Liabilities  
DOJ litigation settlement$60
 Discounted cash flows Discount rate
Asset growth rate		 6.6% - 9.8% (8.2%)
4.2% - 11.6% (7.9%)

(1)Unobservable inputs were weighted by their relative fair value of the instruments.

Recurring Significant Unobservable Inputs


Home equity. The most significant unobservable inputs used in the fair value measurement of the home equity loansHELOANs are discount rates, constant prepayment rates and default rates. The constant prepayment and default rates are based on a 12 month historical average. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases (decreases) in prepay rates in isolation result in a higher (lower) fair value and increases (decreases) in default rates in isolation result in a lower (higher) fair value. HELOC loans formerly included in the FSTAR 2005-1 and FSTAR 2006-1 securitization trusts, also classified as home equity loans, were valued utilizing a loan-level discounted cash flow model which projects expected cash flows given three potential outcomes: (1) paid-in-full at scheduled maturity, (2) default at scheduled maturity (foreclosure), and (3) modification at scheduled maturity into an amortizing HELOC. Loans are placed into the potential outcome buckets based on their underlying current delinquency, FICO scores and property CLTV all of which are unobservable inputs. These loans were sold in the second quarter of 2017.


MSRs. The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads, prepayment rates and cost to service. Significant increases (decreases) in all three assumptions in isolation would result in a significantly lower (higher) fair value measurement. Weighted average life (in years) is used to determine the change in fair value of MSRs. For September 30, 2017March 31, 2022 and December 31, 20162021, the weighted average life (in years) for the entire MSRsMSR portfolio was 6.06.7 and 6.6,5.8, respectively.



DOJ litigation settlement. Liability.The DOJ Liability was settled for $70 million in the second quarter of 2021, fully satisfying the Amendment and reducing the liability to $0 at March 31, 2022. Prior to settlement, the significant unobservable inputinputs used in the fair value measurement of the DOJ litigation settlement isLiability were the discount rate, and asset growth rate, in additionreturn on assets, dividend rate and potential ways we might be required to thosebegin making DOJ Liability payments and our estimates of the likelihood of these outcomes, as further discussed in Note 1715 - Legal Proceedings, Contingencies and Commitments. Significant increases (decreases) in the discount rate or asset growth rate in isolation would result in a marginally lower (higher) fair value measurement. For further information on the fair value inputs related to the DOJ litigation, see Note 17 - Legal Proceedings, Contingencies, and Commitments.


Rate lock commitments. The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull through rate. The pull through rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation would result in a significantly higher (lower) fair value measurement.

Contingent consideration. The significant unobservable input used in the fair value of the contingent consideration is future forecasted target production volumes and profitability of the division. An increase or decrease to these inputs results in an increase or decrease of the liability. Other unobservable inputs include Beta and volatility which drive the risk adjusted discount rate utilized in a Monte Carlo simulation. An increase or decrease in these inputs results in a decrease or increase to the liability.


Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
    
We also have assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis.

basis under certain conditions. The following table presents assets measured at fair value on a nonrecurring basis:
77

Total (1)Level 2Level 3Losses
Total (1) Level 2 Level 3 Gains/(Losses) (Dollars in millions)
(Dollars in millions)
September 30, 2017   
March 31, 2022March 31, 2022
Loans held-for-sale (2)
$6
 $6
 $—
 $(1)Loans held-for-sale (2)$293 $293 $— $(1)
Impaired loans held-for-investment (2)
       
Loans held-for-investment23
 —
 23
 (8)
Repossessed assets (3)
9
 —
 9
 —
Totals$38
 $6
 $32
 $(9)
December 31, 2016       
Loans held-for-sale (2)
$9
 $9
 $—
 $(2)
Commercial loansCommercial loans18 — 18 — 
Impaired loans held-for-investment (2)
       Impaired loans held-for-investment (2)
Residential first mortgage loans25
 —
 25
 (28)Residential first mortgage loans72 — 72 (8)
Repossessed assets (3)
14
 —
 14
 (2)Repossessed assets (3)4 — 4 (1)
Totals$48
 $9
 $39
 $(32)Totals$387 $293 $94 $(10)
December 31, 2021December 31, 2021
Loans held-for-sale (2)Loans held-for-sale (2)$116 $116 $— $(1)
Commercial loansCommercial loans18 — 18 — 
Impaired loans held-for-investment (2)Impaired loans held-for-investment (2)
Residential first mortgage loansResidential first mortgage loans36 — 36 (5)
Repossessed assets (3)Repossessed assets (3)6 — 6 (1)
TotalsTotals$176 $116 $60 $(7)
(1)The fair values are determined at various dates during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
(2)Gains/(losses) reflect fair value adjustments on assets for which we did not elect the fair value option.
(3)Gains/(losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets.
(1)The fair values are determined at various dates dependent upon when certain conditions were met requiring fair value measurement.
(2)Gains (losses) reflect fair value adjustments on assets for which we did not elect the fair value option.
(3)Gains (losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets.

    

The following tables presenttable presents the quantitative information about nonrecurring levelLevel 3 fair value financial instruments and the fair value measurements:
Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average)
(Dollars in millions)
March 31, 2022
Commercial loans$18 Fair value of collateralMarket priceN/A
Impaired loans held-for-investment
Residential first mortgage loans (1)$72 Fair value of collateralLoss severity discount0% - 100% (9.8%)
Repossessed assets (1)$4 Fair value of collateralLoss severity discount0% - 98.0% (25.4%)
December 31, 2021
Impaired loans-held-for sale
Commercial loans HFS$18 Fair value of collateralMarket priceN/A
Impaired loans held-for-investment
Residential first mortgage loans (1)$36 Fair value of collateralLoss severity discount0% - 100% (12.7%)
Repossessed assets (1)$6 Fair value of collateralLoss severity discount0% - 96.3% (19.8%)
 Fair Value Valuation Technique Unobservable Input Range (Weighted Average)
 (Dollars in millions)
September 30, 2017       
Impaired loans held-for-investment       
Loans held-for-investment$23
 Fair value of collateral Loss severity discount 28% - 31% (29.6%)
Repossessed assets$9
 Fair value of collateral Loss severity discount 29% - 100% (75.3%)
December 31, 2016       
Impaired loans held-for-investment       
Residential first mortgage loans$25
 Fair value of collateral Loss severity discount 22% - 40% (29.5%)
Repossessed assets$14
 Fair value of collateral Loss severity discount 22% - 100% (69.5%)
(1)Unobservable inputs were weighted by their relative fair value of the instruments.


Nonrecurring Significant Unobservable Inputs


The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties.



78

Fair Value of Financial Instruments


The following table presents the carrying amount and estimated fair value of financial instruments that are carried either at fair value, cost, or amortized cost:
 March 31, 2022
 Estimated Fair Value
Carrying ValueTotalLevel 1Level 2Level 3
 (Dollars in millions)
Assets
Cash and cash equivalents$405 $405 $405 $— $— 
Investment securities available-for-sale2,010 2,010 — 2,010 — 
Investment securities held-to-maturity190 186 — 186 — 
Loans held-for-sale3,475 3,475 — 3,475 — 
Loans held-for-investment13,236 13,197 — 21 13,176 
Loans with government guarantees1,256 1,256 — 1,256 — 
Mortgage servicing rights523 523 — — 523 
Federal Home Loan Bank stock329 329 — 329 — 
Bank owned life insurance367 367 — 367 — 
Repossessed assets4 4 — — 4 
Other assets, foreclosure claims11 11 — 11 — 
Derivative financial instruments, assets330 330 — 307 23 
Liabilities
Retail deposits
Demand deposits and savings accounts$(9,277)$(7,972)$— $(7,972)$— 
Certificates of deposit(898)(901)— (901)— 
Wholesale deposits(974)(952)— (952)— 
Government deposits(1,886)(1,748)— (1,748)— 
Company controlled deposits(4,313)(4,264)— (4,264)— 
Federal Home Loan Bank advances(1,400)(1,395)— (1,395)— 
Long-term debt(396)(346)— (346)— 
Derivative financial instruments, liabilities(94)(94)— (67)(27)
79

September 30, 2017 December 31, 2021
  Estimated Fair Value Estimated Fair Value
Carrying
Value
 Total Level 1 Level 2 Level 3Carrying ValueTotalLevel 1Level 2Level 3
(Dollars in millions) (Dollars in millions)
Assets         Assets
Cash and cash equivalents$233
 $233
 $233
 $—
 $—
Cash and cash equivalents$1,051 $1,051 $1,051 $— $— 
Investment securities available-for-sale1,637
 1,637
 —
 1,637
 —
Investment securities available-for-sale1,804 1,804 — 1,804 — 
Investment securities held-to-maturity977
 971
 —
 971
 —
Investment securities held-to-maturity205 209 — 209 — 
Loans held-for-sale4,939
 4,940
 —
 4,940
 —
Loans held-for-sale5,054 5,054 — 5,054 — 
Loans held-for-investment7,203
 7,181
 —
 9
 7,172
Loans held-for-investment13,408 13,453 — 14 13,439 
Loans with government guarantees253
 245
 —
 245
 —
Loans with government guarantees1,650 1,650 — 1,650 — 
Mortgage servicing rights246
 246
 —
 —
 246
Mortgage servicing rights392 392 — — 392 
Federal Home Loan Bank stock264
 264
 —
 264
 —
Federal Home Loan Bank stock377 377 — 377 — 
Bank owned life insurance328
 328
 —
 328
 —
Bank owned life insurance365 365 — 365 — 
Repossessed assets9
 9
 —
 —
 9
Repossessed assets6 6 — — 6 
Other assets, foreclosure claims92
 92
 —
 92
 —
Other assets, foreclosure claims7 7 — 7 — 
Derivative financial instruments, assets60
 60
 —
 27
 33
Derivative financial instruments, assets141 141 — 87 54 
Liabilities         Liabilities
Retail deposits         Retail deposits
Demand deposits and savings accounts$(5,243) $(4,845) $—
 $(4,845) $—
Demand deposits and savings accounts$(9,313)$(8,469)$— $(8,469)$— 
Certificates of deposit(1,297) (1,304) —
 (1,304) —
Certificates of deposit(951)(952)— (952)— 
Wholesale deposits(43) (43) —
 (43) —
Wholesale deposits(1,141)(1,137)— (1,137)— 
Government deposits(1,068) (1,045) —
 (1,045) —
Government deposits(2,000)(1,904)— (1,904)— 
Company controlled deposits(1,510) (1,473) —
 (1,473) —
Company controlled deposits(4,604)(4,580)— (4,580)— 
Federal Home Loan Bank advances(5,365) (5,252) —
 (5,252) —
Federal Home Loan Bank advances and otherFederal Home Loan Bank advances and other(3,280)(3,288)— (3,288)— 
Long-term debt(493) (382) —
 (382) —
Long-term debt(396)(340)— (340)— 
DOJ litigation settlement(60) (60) —
 —
 (60)
Contingent consideration(26) (26) —
 —
 (26)
Derivative financial instruments, liabilities(10) (10) (3) (6) (1)Derivative financial instruments, liabilities(20)(20)— (19)(1)


 December 31, 2016
   Estimated Fair Value
 
Carrying
Value
 Total Level 1 Level 2 Level 3
 (Dollars in millions)
Assets         
Cash and cash equivalents$158
 $158
 $158
 $—
 $—
Investment securities available-for-sale1,480
 1,480
 —
 1,480
 —
Investment securities held-to-maturity1,093
 1,084
 —
 1,084
 —
Loans held-for-sale3,177
 3,178
 —
 3,178
 —
Loans held-for-investment6,065
 5,998
 —
 7
 5,991
Loans with government guarantees365
 354
 —
 354
 —
Mortgage servicing rights335
 335
 —
 —
 335
Federal Home Loan Bank stock180
 180
 —
 180
 —
Bank owned life insurance271
 271
 —
 271
 —
Repossessed assets14
 14
 —
 —
 14
Other assets, foreclosure claims135
 135
 —
 135
 —
Derivative financial instruments, assets123
 123
 45
 54
 24
Liabilities         
Retail deposits         
Demand deposits and savings accounts$(5,268) $(4,956) $—
 $(4,956) $—
Certificates of deposit(1,056) (1,062) —
 (1,062) —
Government deposits(1,030) (1,011) —
 (1,011) —
Company controlled deposits(1,446) (1,371) —
 (1,371) —
Federal Home Loan Bank advances(2,980) (2,964) —
 (2,964) —
Long-term debt(493) (277) —
 (277) —
Warrant liabilities(4) (4) —
 (4) —
DOJ litigation settlement(60) (60) —
 —
 (60)
Derivative financial instruments, liabilities(54) (54) (11) (37) (6)

The methods and assumptions used by us in estimating fair value of financial instruments which are required for disclosure only, are as follows:

Cash and cash equivalents. Due to their short-term nature, the carrying amount of cash and cash equivalents approximates fair value.
Investment securities held-to-maturity. Fair values are generated using market inputs, where possible, including quoted prices (the closing price in an exchange market), bid prices (the price at which a buyer stands ready to purchase), and other market information.

Loans held-for-investment. The fair value is estimated using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.

Loans with government guarantees. The fair value is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Federal Home Loan Bank stock. No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. Management believes that the recorded value equals the fair value.

Bank owned life insurance. The fair value of bank owned life insurance policies is based on the cash surrender values of the policies as reported by the insurance companies.

Other assets, foreclosure claims. The fair value of foreclosure claims with government guarantees approximates the carrying amount.

Deposit accounts. The fair value of deposits with no defined maturity is estimated based on a discounted cash flow model that incorporates current market rates for similar products and expected attrition. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for certificates of deposit with similar remaining maturities.
Federal Home Loan Bank advances. Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.

Long-term debt. The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates current borrowing rates for similar types of borrowing arrangements.


Fair Value Option


We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements to mitigate a divergence betweenmore closely align the accounting losses andmethod with the underlying economic exposure. Interest income on LHFS is accrued on the principal outstanding primarily using the "simple-interest" method.


The following table reflects the change in fair value included in earnings of financial instruments for which the fair value option has been elected:
Three Months Ended March 31,
20222021
(Dollars in millions)
Assets
Loans held-for-sale
Net gain on loan sales$(294)$87 
Liabilities
DOJ Liability
Other noninterest expense$— $35 




80
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (Dollars in millions)
Assets       
Loans held-for-sale       
Net gain on loan sales$92
 $151
 $260
 $440
Loans held-for-investment       
Other noninterest income$—
 $—
 $1
 $(2)
Liabilities       
Other noninterest income$—
 $24
 $—
 $24


The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding for assets and liabilities for which the fair value option has been elected:
March 31, 2022December 31, 2021

UPBFair ValueFair Value Over / (Under) UPBUPBFair ValueFair Value Over / (Under) UPB
(Dollars in millions)
Assets
Nonaccrual loans
Loans held-for-sale$25 $23 $(2)$18 $16 $(2)
Loans held-for-investment14 11 (3)15 13 (2)
Total nonaccrual loans$39 $34 $(5)$33 $29 $(4)
Other performing loans
Loans held-for-sale$3,188 $3,131 $(57)$4,790 $4,904 $114 
Loans held-for-investment12 10 (2)5 3 (2)
Total other performing loans$3,200 $3,141 $(59)$4,795 $4,907 $112 
Total loans
Loans held-for-sale$3,213 $3,154 $(59)$4,808 $4,920 $112 
Loans held-for-investment26 21 (5)20 16 (4)
Total loans$3,239 $3,175 $(64)$4,828 $4,936 $108 

 September 30, 2017 December 31, 2016


Unpaid Principal Balance Fair Value Fair Value Over / (Under) Unpaid Principal Balance Unpaid Principal Balance Fair Value Fair Value Over / (Under) Unpaid Principal Balance
 (Dollars in millions)
Assets           
Nonaccrual loans           
Loans held-for-sale$4
 $4
 $—
 $2
 $2
 $—
Loans held-for-investment6
 4
 (2) 19
 13
 (6)
Total nonaccrual loans$10
 $8
 $(2) $21
 $15
 $(6)
Other performing loans           
Loans held-for-sale$4,742
 $4,903
 $161
 $3,103
 $3,143
 $40
Loans held-for-investment11
 9
 (2) 72
 59
 (13)
Total other performing loans$4,753
 $4,912
 $159
 $3,175
 $3,202
 $27
Total loans           
Loans held-for-sale$4,746
 $4,907
 $161
 $3,105
 $3,145
 $40
Loans held-for-investment17
 13
 (4) 91
 72
 (19)
Total loans$4,763
 $4,920
 $157
 $3,196
 $3,217
 $21
Liabilities           
Litigation settlement (1)
$(118) $(60) $58
 $(118) $(60) $58
(1)We are obligated to pay $118 million in installment payments upon meeting certain performance conditions, as described in Note 17 - Legal Proceedings, Contingencies and Commitments.

Note 1917 - Segment Information


Our operations are conducted through three3 operating segments: Community Banking, Mortgage Originations and
Mortgage Servicing. The Other segment includes the remaining reported activities. Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses are incurred for which discrete financial information is available that is evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. 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.Management. Each segment operates under the same banking charter, but is reported on a segmented basis for this report. 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.
Effective January 1, 2017, activity related to Loans with Government Guarantees, was moved from the Mortgage Servicing segment to the Mortgage Originations segment and we began to allocate the tax provision at a segment level. Prior to this change, the tax provision was reflected in the Other segment. The statutory federal tax rate is used for Community Banking, Mortgage Originations, and Mortgage Servicing segments with the difference between the statutory rate and the effective tax rate held in the Other segment. Prior period segment financial information, related to both changes, has been recast to conform to the current presentation. 


The Community Banking segment originates loans, provides deposits and fee basedfee-based services to consumer, business, and mortgage lending customers through its Branch Banking, Business Banking and Commercial Banking, Government Banking and Warehouse Lending and LHFI Portfolio groups.Lending. Products offered through these groups include checking accounts, savings accounts, money market accounts, certificates of deposit,CD, consumer loans, commercial loans, commercial real estateCRE loans, equipment finance and leasing, home builder finance loans and warehouse lines of credit. Other financial services available include consumer and corporate card services, customized treasury management solutions, merchant services and capital markets services such as loan syndications. In addition, wealth managementsyndications, and investment and insurance products and services are provided through Opes as ofservices. The interest income on LHFI is recognized in the acquisition date of May 15, 2017.Community Banking segment, excluding residential first mortgages and newly originated home equity products within the Mortgage Originations segment.



The Mortgage Originations segment originates acquires and sellsacquires one-to-four family residential mortgage loans. The origination and acquisition of mortgage loans comprisesto sell or hold on our balance sheet. Loans originated-to-sell comprise the majority of the lending activity. MortgageThese loans are originated through home loan centers, nationalmortgage branches, call centers, the Internet and unaffiliated banks and mortgage banking and brokerage companies, where the netthird-party counterparties. The Mortgage Originations segment recognizes interest income on loans that are held-for-sale and the gains from sales associated with these loans, are recognized inalong with the Mortgage Originations segment.interest income on residential mortgages and newly originated home equity products within LHFI.


The Mortgage Servicing segment services and subservices mortgage and other consumer loans for others on a fee for service basis and 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 Mortgage Servicing segment provides servicing of residential mortgagesalso services loans for our LHFI portfolio and our own LHFILHFS portfolio in the Community BankingMortgage Originations segment, for which it earns revenue via an intercompany service fee allocation.


The Other segment includes the treasury functions, funding revenue associated with stockholders' equity,which include the impact of interest rate risk management, the impact of balance sheet funding activities and the administration of the investment securities portfolios, as well as miscellaneous other expenses of a corporate nature. Treasury functions include administering the investment securities portfolios, balance sheet funding, and interest rate risk management. In addition, the Other segment includes revenue and expenses related to treasury and corporate assets and
81

liabilities and equity not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage Servicing or Community Banking operating segments.

Revenues are comprised of net interest income (before the provision (benefit) for loancredit losses) and noninterest income. Noninterest expenses and a majority of provision (benefit) for income taxes, are fully allocated to each operating segment. Provision for credit losses is allocated to segments based on net charge-offs and changes in outstanding balances. In contrast, the level of the consolidated provision for credit losses is determined based on an allowance model using the methodologies described in Item 2 – MD&A. The net effect of the credit provision is recorded in the Other segment. Allocation methodologies may be subject to periodic adjustment as the internal management accounting system is revised and the business or product lines within the segments change.


The following tables present financial information by business segment for the periods indicated:
 Three Months Ended March 31, 2022
 Community BankingMortgage OriginationsMortgage ServicingOther (1)Total
(Dollars in millions)
Summary of Operations
Net interest income$122 $56 $3 $(16)$165 
Provision (benefit) for credit losses22 3 — (29)(4)
Net interest income after benefit for credit losses100 53 3 13 169 
Net gain on loan sales— 45 — — 45 
Loan fees and charges— 6 21 — 27 
Net return on mortgage servicing rights— 29 — — 29 
Loan administrative (expense) income— (7)43 (3)33 
Other noninterest income18 1 — 7 26 
Total noninterest income18 74 64 4 160 
Compensation and benefits28 45 16 38 127 
Commissions1 25 — — 26 
Loan processing expense2 9 9 1 21 
General, administrative and other18 11 21 37 87 
Total noninterest expense49 90 46 76 261 
Income (loss) before indirect overhead allocations and income taxes69 37 21 (59)68 
Indirect overhead allocation (expense) income(10)(15)(6)31 — 
Provision (benefit) for income taxes12 4 3 (4)15 
Net income (loss)$47 $18 $12 $(24)$53 
Intersegment revenue (expense)$22 $9 $9 $(40)$— 
Average balances
Loans held-for-sale$18 $4,815 $— $— $4,833 
Loans with government guarantees— 1,404 (2)— 1,402 
Loans held-for-investment (2)10,942 1,442 — — 12,384 
Total assets11,326 8,695 167 3,973 24,161 
Deposits12,006 42 5,016 1,025 18,089 
(1)Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
(2)    Includes adjustment made to reclassify operating lease assets to LHFI.
82

Three Months Ended September 30, 2017Three Months Ended March 31, 2021
Community Banking Mortgage Originations Mortgage Servicing Other Total Community BankingMortgage OriginationsMortgage ServicingOther (1)Total
(Dollars in millions)(Dollars in millions)
Summary of Operations         Summary of Operations
Net interest income$63
 $34
 $7
 $(1) $103
Net interest income$156 $56 $4 $(27)$189 
Net gain (loss) on loan sales(4) 79
 —
 —
 75
Representation and warranty benefit—
 4
 —
 —
 4
Benefit for credit lossesBenefit for credit losses(14)(2)— (12)(28)
Net interest income after benefit for credit lossesNet interest income after benefit for credit losses170 58 4 (15)217 
Net gain on loan salesNet gain on loan sales— 227 — — 227 
Loan fees and chargesLoan fees and charges— 24 18 — 42 
Net return on mortgage servicing rightsNet return on mortgage servicing rights— — — — — 
Loan administrative (expense) incomeLoan administrative (expense) income— (10)40 (3)27 
Other noninterest income9
 23
 11
 8
 51
Other noninterest income18 3 — 7 28 
Total net interest income and noninterest income68
 140
 18
 7
 233
(Provision) benefit for loan losses(1) (1) —
 —
 (2)
Depreciation and amortization expense(2) (2) (1) (5) (10)
Other noninterest expense(49) (90) (22) —
 (161)
Total noninterest incomeTotal noninterest income18 244 58 4 324 
Compensation and benefitsCompensation and benefits31 54 16 43 144 
CommissionsCommissions1 61 — — 62 
Loan processing expenseLoan processing expense1 11 8 1 21 
General, administrative and otherGeneral, administrative and other25 22 22 51 120 
Total noninterest expense(51) (92) (23) (5) (171)Total noninterest expense58��148 46 95 347 
Income (loss) before income taxes16
 47
 (5) 2
 60
Income (loss) before indirect overhead allocations and income taxesIncome (loss) before indirect overhead allocations and income taxes130 154 16 (106)194 
Indirect overhead allocation (expense) incomeIndirect overhead allocation (expense) income(10)(19)(6)35 — 
Provision (benefit) for income taxes6
 16
 (1) (1) 20
Provision (benefit) for income taxes25 28 2 (10)45 
Net income (loss)$10
 $31
 $(4) $3
 $40
Net income (loss)$95 $107 $8 $(61)$149 
Intersegment revenue$(4) $2
 $5
 $(3) $—
Intersegment revenue (expense)Intersegment revenue (expense)$14 $(2)$12 $(24)$— 
         
Average balances         Average balances
Loans held-for-sale$14
 $4,462
 $—
 $—
 $4,476
Loans held-for-sale$— $7,464 $— $— $7,464 
Loans with government guarantees—
 264
 —
 —
 264
Loans with government guarantees— 2,502 — — 2,502 
Loans held-for-investment6,764
 10
 —
 29
 6,803
Loans held-for-investment (2)Loans held-for-investment (2)12,806 2,079 — 30 14,915 
Total assets6,843
 5,743
 30
 3,823
 16,439
Total assets13,168 13,015 390 3,492 30,065 
Deposits7,498
 —
 1,507
 —
 9,005
Deposits11,804 15 7,157 1,067 20,043 

(1)Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.
(2)    Includes adjustment made to reclassify operating lease assets to LHFI.

 Three Months Ended September 30, 2016
 Community Banking Mortgage Originations Mortgage Servicing Other Total
 (Dollars in millions)
Summary of Operations         
Net interest income$54
 $24
 $7
 $(5) $80
Net gain (loss) on loan sales(1) 95
 —
 —
 94
Representation and warranty benefit—
 6
 —
 —
 6
Other noninterest income8
 4
 13
 31
 56
Total net interest income and noninterest income61
 129
 20
 26
 236
(Provision) for loan losses(7) —
 —
 —
 (7)
Depreciation and amortization expense(1) (2) —
 (5) (8)
Other noninterest expense(43) (66) (25) —
 (134)
Total noninterest expense(44) (68) (25) (5) (142)
Income (loss) before income taxes10
 61
 (5) 21
 87
Provision (benefit) for income taxes3
 22
 (2) 7
 30
Net income (loss)$7
 $39
 $(3) $14
 $57
Intersegment revenue$(1) $(1) $6
 $(4) $—
          
Average balances         
Loans held-for-sale$16
 $3,400
 $—
 $—
 $3,416
Loans with government guarantees—
 432
 —
 —
 432
Loans held-for-investment5,843
 5
 —
 —
 5,848
Total assets5,904
 4,835
 26
 3,383
 14,148
Deposits7,273
 —
 1,853
 —
 9,126
 Nine Months Ended September 30, 2017
 Community Banking Mortgage Originations Mortgage Servicing Other Total

(Dollars in millions)
Summary of Operations         
Net interest income$171
 $96
 $16
 $—
 $283
Net gain (loss) on loan sales(7) 196
 —
 —
 189
Representation and warranty benefit—
 11
 —
 —
 11
Other noninterest income23
 66
 40
 17
 146
Total net interest income and noninterest income187
 369
 56
 17
 629
(Provision) benefit for loan losses(3) (3) —
 2
 (4)
Depreciation and amortization expense(6) (5) (3) (14) (28)
Other noninterest expense(138) (227) (71) (1) (437)
Total noninterest expense(144) (232) (74) (15) (465)
Income (loss) before income taxes40
 134
 (18) 4
 160
Provision (benefit) for income taxes14
 47
 (6) (3) 52
Net income (loss)$26
 $87
 $(12) $7
 $108
Intersegment revenue$(5) $3
 $14
 $(12) $—
          
Average balances         
Loans held-for-sale$16
 $3,998
 $—
 $—
 $4,014
Loans with government guarantees—
 300
 —
 —
 300
Loans held-for-investment6,191
 7
 —
 29
 6,227
Total assets6,262
 5,307
 36
 3,801
 15,406
Deposits7,438
 —
 1,409
 —
 8,847

 Nine Months Ended September 30, 2016
 Community Banking Mortgage Originations Mortgage Servicing Other Total
 (Dollars in millions)
Summary of Operations         
Net interest income$150
 $67
 $17
 $2
 $236
Net gain (loss) on loan sales8
 251
 —
 —
 259
Representation and warranty benefit—
 12
 —
 —
 12
Other noninterest income21
 15
 41
 41
 118
Total net interest income and noninterest income179
 345
 58
 43
 625
(Provision) benefit for loan losses9
 —
 —
 —
 9
Depreciation and amortization expense(5) (4) (2) (12) (23)
Other noninterest expense(131) (188) (70) (6) (395)
Total noninterest expense(136) (192) (72) (18) (418)
Income (loss) before income taxes52
 153
 (14) 25
 216
Provision (benefit) for income taxes18
 54
 (5) 6
 73
Net income (loss)$34
 $99
 $(9) $19
 $143
Intersegment revenue$(2) $(1) $18
 $(15) $—
          
Average balances         
Loans held-for-sale$83
 $2,988
 $—
 $—
 $3,071
Loans with government guarantees—
 450
 —
 —
 450
Loans held-for-investment5,689
 6
 —
 —
 5,695
Total assets5,798
 4,328
 36
 3,549
 13,711
Deposits7,080
 —
 1,523
 —
 8,603

Note 2018 - Recently Issued Accounting Pronouncements
    
Adoption of New Accounting Standards

We adopted the following accounting standard updates (ASU)ASU during 2017, none of which hadthe quarter ended March 31, 2022. This ASU did not have a material impact to our financial statements:
StandardDescriptionDescriptionEffective Date
ASU 2016-172022-01Consolidation (Topic 810): Interests Held Through Related Parties That are Under Common ControlJanuary 1, 2017
ASU 2016-09Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment AccountingJanuary 1, 2017
ASU 2016-07Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of AccountingJanuary 1, 2017
ASU 2016-06Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt InstrumentsFair Value Hedging—Portfolio Layer MethodJanuary 1, 2017
ASU 2016-05Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge RelationshipsJanuary 1, 2017December 15, 2022


83

Accounting Standards Issued But Not Yet Adopted


The following ASUs have beenexpected impact of applicable material accounting pronouncements recently issued and are expected to result in a significant change to our significant accounting policies and/or have a significant financial impact:
Derivatives and Hedging - In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments were designed to more closely align hedge accounting requirements with users’ risk management strategies. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. We doproposed but not expect adoption of this guidance to have a material impact on our Consolidated Financial Statements. However, the guidance is expected to provide a broader range of hedge accounting opportunities and simplify the internal documentation requirements for our existing cash flow hedge relationships.


Credit Losses - In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU alters the current method for recognizing credit losses within the reserve account. Currently, an institution uses the incurred loss method, whereas the new guidance requires financial assetsyet required to be presented at the net amount expected to be collected (i.e., net of expected credit losses). The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. We have established an internal steering committee to lead the implementation efforts. The steering committee isadopted are discussed in the process of evaluating control and process framework, data, model, and resource requirements and areas where modifications will be required. We are currently evaluating the impact adoption of the guidance will have on our Consolidated Financial Statements, and highlight that any impact will be contingent upon the underlying characteristics of the affected portfolio and macroeconomic and internal forecasts at adoption date.table below.

Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Section A - Leases: Amendments to the FASB Accounting Standards Codification, Section B - Conforming Amendments Related to Leases: Amendment to the FASB Accounting Standards Codification, Section C - Background Information and Basis For Conclusions. Lessees will need to recognize substantially all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting. ASU 2016-02 is effective retrospectively for fiscal years beginning after December 15, 2018 and early adoption is permitted. The guidance in ASU 2016-02 supersedes Topic 840, Leases. Upon adoption and implementation, we expect to gross up assets and liabilities due to the recognition of lease liabilities and right of use assets associated with the underlying lease contracts. While we do not expect the adoption of the guidance to have a material impact on our Consolidated Statements of Operations given our current inventory of leases, review is ongoing and we will continue to evaluate the impact to the Consolidated Statements of Financial Condition and to capital.

Revenue from Contracts with Customers - In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under the amended guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration in exchange for those goods or services. The FASB has voted to approve a year deferral of the effective date from January 1, 2017 to January 1, 2018. In April 2016, the FASB clarified the following two aspects: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, to provide a limited number of changes to its revenue recognition standard. The amendments clarify the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. The amendment also specifies that a contract should be considered complete if all, or substantially all, of its revenue has been collected prior to making the transition to the new standard. In addition, the update clarifies the disclosure requirements for transition to the new standard by adjusting amounts from prior reporting periods. In December 2016, the FASB issued ASU 2016-20 Technical Corrections and Improvement to Topic 606, Revenue from Contracts with Customers. We will implement the revenue recognition guidance in the first quarter of 2018 utilizing the cumulative-effect approach. Our implementation of the guidance includes creating an inventory of revenue contracts and assessing whether the recognition of revenue associated with each contract will be impacted by the new guidance, particularly related to certain fees. Lease contracts and financial instruments, which include loans and securities, are excluded from the scope of this standard. Therefore, we do not anticipate the implementation of the revenue recognition guidance to have a material impact on our Consolidated Financial Statements. The initial scoping has been completed and the amount of in scope revenue is less than 3% of total revenue. Additionally, the recognition of revenue for in scope items is not anticipated to materially change such that we do not expect implementation of the revenue recognition guidance to have a material impact on our Consolidated Financial Statements or associated disclosures.


The following ASUs have been issued and are not expected to have a material impact on our Consolidated Financial Statements and/or significant accounting policies:

StandardDescriptionDescriptionEffective Date
ASU 2017-112022-02
Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures		ASU 2022-02 eliminates prior accounting guidance for TDRs, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The standard also requires that an entity disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases.

The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. An entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption is permitted in any interim period.		Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) ReplacementAdoption of the Indefinite Deferral for Mandatorily Redeemable Financial Instrumentsthis amendment is not expected to have a
material impact on our results of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope.		January 1, 2019
ASU 2017-10Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force)January 1, 2018
ASU 2017-09Update 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification AccountingJanuary 1, 2018
ASU 2017-08Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt SecuritiesJanuary 1, 2019
ASU 2017-07Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit CostJanuary 1, 2018
ASU 2017-06Plan Accounting - Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust ReportingJanuary 1, 2019
ASU 2017-05Other Income - Gains and Losses from the De-recognition of Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset De-recognition Guidance and Accounting for Partial Sales of Non-financial AssetsJanuary 1, 2018
ASU 2017-04Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill ImpairmentJanuary 1, 2020
ASU 2017-01Business Combinations (Topic 805): Clarifying the Definition of a BusinessJanuary 1, 2018
ASU 2016-18Statement of Cash Flows (Topic 230): Restricted CashJanuary 1, 2018
ASU 2016-16Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than InventoryJanuary 1, 2018
ASU 2016-15Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash PaymentsJanuary 1, 2018
ASU 2016-04Liabilities - Extinguishment of Liabilities (Subtopic 504-20): Recognition of Breakage for Certain Prepaid Stored-Value ProductsJanuary 1, 2018
ASU 2016-01Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial LiabilitiesJanuary 1, 2018operations or
financial position, but is expected to result in additional disclosure requirements.




Item 3. Quantitative and Qualitative Disclosures about Market Risk


A discussion regarding our management of market risk is included in "Market Risk" in this report in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" which is incorporated herein by reference.


Item 4. Controls and Procedures


(a)
Evaluation of Disclosure Controls and Procedures. As of September 30, 2017, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), an evaluation was performed by the Company’s management, including our principal executive and financial officers, regarding the design and effectiveness of our disclosure controls and procedures. Based upon that evaluation, the principal executive and financial officers have concluded that our current disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms as of September 30, 2017.
(a)Evaluation of Disclosure Controls and Procedures. As of March 31, 2022, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), an evaluation was performed by the Company’s Management, including our principal executive and financial officers, regarding the design and effectiveness of our disclosure controls and procedures. Based upon that evaluation, the principal executive and financial officers have concluded that our current disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms as of March 31, 2022.
(b)Changes in Internal Controls. There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(d) of the Exchange Act) during the three months ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
84


(b)
Changes in Internal Controls. There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(d) of the Exchange Act) during the three months ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings


From time to time, the Company is party to legal proceedings incidental to its business. For further information, see    See Legal Proceedings in Note 1715 - Legal Proceedings, Contingencies and Commitments.Commitments to the Consolidated Financial Statements, which is incorporated herein by reference.


Item 1A. Risk Factors


The Company believes that there have been no material changes to the risk factors previously disclosed in response to Item 1A1A. to Part I, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2021.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


Sale of Unregistered Securities


The Company made no sales of unregistered securities during the quarter ended September 30, 2017.March 31, 2022.
Issuer Purchases of Equity Securities


The Company made no purchases of its equity securities during the quarter ended September 30, 2017.March 31, 2022.


Item 3. Defaults upon Senior Securities


The Company had no defaults on senior securities.     


Item 4. Mine Safety Disclosures


None.


Item 5. Other Information


None.
85


Item 6. Exhibits
Exhibit No.Description
2.1*
2.2*Description2.1 to the Company's Current Report on Form 8-K dated April 26, 2022, and incorporated herein by reference).
3.13.1*
3.23.2*
114.1*
31.14.2*
4.3*
31.1
31.2
32.1
32.2
101Financial statements from Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2017,March 31, 2022, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.


*Incorporated herein by reference
86

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FLAGSTAR BANCORP, INC.
Registrant
Date:November 6, 2017May 10, 2022/s/ Alessandro DiNello
Alessandro DiNello
President and Chief Executive Officer
(Principal Executive Officer)
/s/ James K. Ciroli
James K. Ciroli
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

EXHIBIT INDEX

Exhibit No.Description
3.1
Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc., as amended (previously filed as Exhibit 3.1 to the Company's Current Report on Form 10-Q dated August 7, 2017, and incorporated herein by reference).
3.2
Sixth Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the Company’s Current Report on Form 10-Q, dated November 7, 2016, and incorporated herein by reference).
11
Statement regarding computation of per share earnings is incorporated by reference to Note 13 of the Notes to the Consolidated(Principal Financial Statements, in Item 1. Financial Statements.
31.1
Section 302 Certification of Chief Executive Officer
31.2
Section 302 Certification of Chief Financial Officer
32.1
Section 906 Certification, as furnished by the Chief Executive Officer
32.2
Section 906 Certification, as furnished by the Chief Financial Officer
101Financial statements from Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2017, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.Officer)





87