0001033012 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:HomeEquityLoanMember 2017-12-31fbc:ContingentConsiderationMember 2020-01-01 2020-03-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019March 31, 2020
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
 flagstara09a01a14.jpg
Flagstar Bancorp, Inc.
(Exact name of registrant as specified in its charter).

Michigan  38-3150651
(State or other jurisdiction of  (I.R.S. Employer
Incorporation or organization)  Identification No.)
    
5151 Corporate Drive,Troy,Michigan  48098-2639
(Address of principal executive offices)  (Zip code)
(248) 312-2000
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes  ☒    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: 
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐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 13(a) of the Exchange Act  ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☒.
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 October 31, 2019, 56,511,717May 10, 2020, 56,729,797 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, 2019MARCH 31, 2020
TABLE OF CONTENTS
   
PART I. – FINANCIAL INFORMATION
 
   
Item 1.
Financial Statements
 
 Consolidated Statements of Financial Condition – September 30, 2019March 31, 2020 (unaudited) and December 31, 20182019
3841
 Consolidated Statements of Operations – For the three ended March 31, 2020 and nine months ended September 30, 2019 and 2018 (unaudited)
3942
 Consolidated Statements of Comprehensive Income – For the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 (unaudited)
4043
 Consolidated Statements of Stockholders’ Equity – For the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 (unaudited)
4144
 Consolidated Statements of Cash Flows – For the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 (unaudited)
4245
 
Notes to the Consolidated Financial Statements (unaudited)
 
 
Note 1 - Basis of Presentation
4346
 
Note 2 - Investment Securities
4346
 
Note 3 - Loans Held-for-Sale
4549
 
Note 4 - Loans Held-for-Investment
4549
 
Note 5 - Loans With Government Guarantees
5357
 
Note 6 - Variable Interest Entities
5357
 
Note 7 - Mortgage Servicing Rights
5357
 
Note 8 - Derivative Financial Instruments
5559
 
Note 9 - Borrowings
5863
 
Note 10 - Accumulated Other Comprehensive Income (Loss)
6065
 
Note 11 - Earnings Per Share
6065
 
Note 12 - Stock-Based Compensation
6065
 
Note 13 - Income Taxes
6166
 
Note 14 - Regulatory Matters
6166
 
Note 15 - Legal Proceeding, Contingencies, and Commitments 
6267
 
Note 16 - Fair Value Measurements
6569
 
Note 17 - Segment Information 
7478
 
Note 18 - Recently Issued Accounting Pronouncements
7780
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
4
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
8182
Item 4.
Controls and Procedures
8182
   
PART II. – OTHER INFORMATION
 
Item 1.
Legal Proceedings
8283
Item 1A.
Risk Factors
8283
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
8285
Item 3.
Defaults upon Senior Securities
8285
Item 4.
Mine Safety Disclosures
8285
Item 5.
Other Information
8285
Item 6.
Exhibits
8386
   
SIGNATURES
8487


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:
Term Definition Term Definition
ACLAllowance for Credit LossesHELOANHome Equity Loan
AFS Available for Sale HELOCHOLA Home Equity Lines of CreditOwners Loan Act
Agencies Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association, Collectively HELOANHome equity Home Equity LoanSecond Mortgages, HELOANs, HELOCs
ALCO Asset Liability Committee HOLAHTM Home Owners Loan ActHeld to Maturity
ALLL Allowance for Loan & Lease LossesLoss Home equityHPI Second Mortgages, HELOANs, HELOCsHousing Price Index
AOCI Accumulated Other Comprehensive Income (Loss) HTMLIBOR Held to MaturityLondon Interbank Offered Rate
ASU Accounting Standards Update LIBORLHFI London Interbank Offered RateLoans Held-for-Investment
Basel III Basel Committee on Banking Supervision Third Basel Accord LHFILHFS Loans Held-for-InvestmentHeld-for-Sale
C&I Commercial and Industrial LHFSLTV Loans Held-for-SaleLoan-to-Value Ratio
CDARS Certificates of Deposit Account Registry Service LTVManagement Loan-to-Value RatioFlagstar Bancorp’s Management
CECL Current Expected Credit Losses ManagementMBS Flagstar Bancorp’s ManagementMortgage-Backed Securities
CET1 Common Equity Tier 1 MBSMD&A Mortgage-Backed SecuritiesManagement's Discussion and Analysis
CLTV Combined Loan to Value Ratio MD&AMSR Management's Discussion and AnalysisMortgage Servicing Rights
Common Stock Common Shares MSRN/A Mortgage Servicing RightsNot Applicable
CRE Commercial Real Estate N/AM Not ApplicableMeaningful
DCB Desert Community Bank NYSE New York Stock Exchange
Deposit Beta The change in the annualized cost of our deposits, compared to the change in the Federal Reserve discount rate OCC Office of the Comptroller of the Currency
DOJ United States Department of Justice OCI Other Comprehensive Income (Loss)
DOJ Liability 2012 Settlement Agreement with the Department of Justice OTTI Other-Than-Temporary-Impairment
DTA Deferred Tax Asset QTL Qualified Thrift Lending
EVE Economic Value of Equity Regulatory Agencies Board 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
Fannie Mae Federal National Mortgage Association 
FASB Financial Accounting Standards Board REO Real estate owned and other nonperforming assets, net
FDIC Federal Deposit Insurance Corporation RMBS Residential Mortgage-Backed Securities
Federal Reserve Board of Governors of the Federal Reserve System RWA Risk Weighted Assets
FHA Federal Housing Administration SEC Securities and Exchange Commission
FHLB Federal Home Loan Bank SOFRSNC Secured Oversight Financing RateShared National Credit
FICO Fair Isaac Corporation TARP PreferredSOFR Troubled Asset Relief Program FixedSecured Oversight Financing Rate Cumulative Perpetual Preferred Stock, Series C
FRB Federal Reserve Bank TDR Trouble Debt Restructuring
Freddie Mac Federal Home Loan Mortgage Corporation UPBTPO Unpaid Principal BalanceThird Party Originator
FTE Full Time Equivalent EmployeesUPBUnpaid Principal Balance
GAAPUnited States Generally Accepted Accounting Principles U.S. Treasury United States Department of Treasury
GAAPGNMA United States Generally Accepted Accounting PrinciplesGovernment National Mortgage Association VIE Variable Interest Entities
GNMAHELOC Government National Mortgage AssociationHome Equity Lines of Credit XBRL eXtensible Business Reporting Language


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 2019,2020, 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 20182019 Annual Report on Form 10-K for the year ended December 31, 2018.2019.

Certain statements in this Form 10-Q, including but not limited to statements included within 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. Actual results may differ from those set forth in forward-looking statements. See Forward-Looking Statements on page 38 of this Form 10-Q and Part I, Item 1A, Risk Factors of Flagstar Bancorp, Inc.'s 20182019 Annual Report on Form 10-K for the year ended December 31, 2018.2019. 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 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 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. We provide commercial and consumer banking services and we are the 5th6th largest bank mortgage originator in the nation and the 5th6th largest subservicer of mortgage loans nationwide. At September 30, 2019,March��31, 2020, we had 4,1714,415 full-time equivalent employees. Our common stock is listed on the NYSE under the symbol "FBC."

Our relationship-based business model leverages our full-service bank’s capabilities and our national mortgage platform to create and build financial solutions for our customers. At September 30, 2019,March 31, 2020, we operated 160 full-service banking branches that 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 and our own loan officers, which includes our direct lending team, from 8887 retail locations in 2628 states and two 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.

Recent Acquisitions

On December 1, 2018, we closed on the purchase of 52 branches from Wells Fargo located in Indiana, Michigan, Wisconsin and Ohio. In the first quarter of 2018, we closed on the purchase of the mortgage loan warehouse business from Santander Bank and completed the acquisition of eight Desert Community Bank branches located in San Bernardino County, California.
Operating Segments

Our operations are conducted through our three operating segments: Community Banking, Mortgage Originations, and Mortgage Servicing. For further information, see MD&A - Operating Segments and Note 17 - Segment Information.


Selected Financial Ratios
(Dollars in millions, except share data)
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended,
2019 2018 2019 2018March 31, 2020December 31, 2019March 31, 2019
(In millions and percentages)(In millions and percentages)
Selected Mortgage Statistics:        
Mortgage rate lock commitments (fallout-adjusted) (1)
$9,197
 $8,290
 $24,143
 $25,024
$11,154
$8,179
$6,602
Mortgage loans originated
$9,262
 $9,199
 $23,416
 $26,125
$8,591
$9,303
$5,513
Mortgage loans sold and securitized$8,186
 $8,423
 $22,194
 $24,930
$7,487
$8,135
$5,170
Selected Ratios:        
Interest rate spread (2)
2.48% 2.57% 2.57% 2.57%2.31%2.39%2.69%
Net interest margin3.05% 2.93% 3.07% 2.85%2.81%2.91%3.09%
Return on average assets1.20% 1.04% 1.08% 1.00%0.78%0.99%0.79%
Return on average tangible assets (3)
1.27% 1.07% 1.16% 1.02%
Return on average common equity14.72% 12.80% 12.90% 12.10%9.82%12.69%9.16%
Return on average tangible common equity (4)
17.12% 13.67% 15.30% 12.78%
Return on average tangible common equity (3)11.46%14.76%11.33%
Efficiency ratio75.2% 74.6% 75.0% 76.2%77.1%78.2%81.3%
Effective tax provision rate18.4% 20.0% 18.6% 20.1%18.5%18.1%18.4%
Average Balances:        
Average interest-earning assets$18,997
 $16,786
 $17,693
 $16,050
$21,150
$20,708
$16,294
Average interest-paying liabilities$12,893
 $13,308
 $12,767
 $13,150
$14,480
$14,208
$12,505
Average stockholders' equity$1,722
 $1,514
 $1,658
 $1,468
$1,854
$1,803
$1,583
September 30, 2019 December 31, 2018 September 30, 2018March 31, 2020December 31, 2019March 31, 2019
(In millions, except per share data and percentages)(In millions, except per share data and percentages)
Selected Statistics:      
Book value per common share$30.69
 $27.19
 $26.34
$32.46
$31.57
$27.86
Tangible book value per share (3)(4)
$27.62
 $23.90
 $25.13
$29.52
$28.57
$24.65
Number of common shares outstanding56,510,341
 57,749,464
 57,625,439
56,729,789
56,631,236
56,480,086
Common equity-to-assets ratio7.88% 8.47% 8.12%6.87%7.68%8.09%
Tangible common equity to assets ratio (3)(4)
7.08% 7.45% 7.74%6.25%6.95%7.16%
Capitalized value of mortgage servicing rights1.14% 1.35% 1.43%0.95%1.21%1.27%
Bancorp Tier 1 leverage (to adjusted avg. total assets)7.98% 8.29% 8.36%8.09%7.57%8.37%
Bank Tier 1 leverage (to adjusted avg. total assets)8.35% 8.67% 8.77%8.19%7.71%9.04%
Number of bank branches160
 160
 108
160
160
160
Number of FTE employees4,171
 3,938
 3,496
4,415
4,453
3,996
(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 previous historical experience and the impact of changes in interest rates.
(2)Interest rate spread is the difference between the annualized yield earned on average interest-earning assets for the period and the annualized rate of interest paid on average interest-bearing liabilities for the period.
(3)Excludes goodwill and intangibles of $174$167 million, $190$170 million, and $70$182 million at September 30, 2019,March 31, 2020, December 31, 2018,2019, and September 30, 2018,March 31, 2019, respectively. See Non-GAAP Financial Measures for further information.
(4)Excludes goodwill, intangible assets and the associated amortization, net of tax. See Non-GAAP Financial Measures for further information.







Results of Operations

The following table summarizes our results of operations for the periods indicated:

Three Months Ended September 30,   Nine Months Ended September 30,  Three Months Ended March 31,1Q20 vs. 4Q191Q20 vs. 1Q19
2019 2018 Change 2019 2018 ChangeMarch 31, 2020December 31, 2019March 31, 2019Change
(Dollars in millions, except per share data)(Dollars in millions, except per share data)
Net interest income$146
 $124
 $22
 $410
 $345
 $65
$148
$152
$126
$(4)$22
Provision (benefit) for loan losses1
 (2) 3
 18
 (3) 21
Provision for credit losses14
—
—
14
14
Total noninterest income171
 107
 64
 448
 341
 107
157
162
109
(5)48
Total noninterest expense238
 173
 65
 643
 523
 120
235
245
191
(10)44
Provision for income taxes15
 12
 3
 37
 33
 4
10
11
8
(1)2
Net income$63
 $48
 $15
 $160
 $133
 $27
$46
$58
$36
$(12)$10
Adjusted net income (1)
$46
$58
$37
$(12)$9
Income per share            
Basic$1.12
 $0.84
 $0.28
 $2.83
 $2.32
 $0.51
$0.80
$1.01
$0.64
$(0.21)$0.16
Diluted$1.11
 $0.83
 $0.28
 $2.80
 $2.28
 $0.52
$0.80
$1.00
$0.63
$(0.20)$0.17
Adjusted diluted (1)
$0.80
$1.00
$0.64
$(0.20)$0.16
(1)For further information, see MD&A - Use of Non-GAAP Financial Measures.

Overview

InNet income was $46 million, or $0.80 per diluted share for the thirdquarter ended March 31, 2020. These results compare to fourth quarter 2019 net income of $58 million, or $1.00 per diluted share, first quarter 2019 net income of $36 million, or $0.63 per diluted share, and first quarter 2019 adjusted net income of $37 million, or $0.64 per diluted share, when excluding acquisition expenses of $1 million net of taxes.

Compared to the fourth quarter 2019, net interest income in the first quarter of 2019 our results demonstrated2020 fell $4 million, or 3 percent, reflecting a 10 basis point decrease in net interest margin, despite a full quarter's impact from prior interest rate cuts and the earnings potentialpartial impact of our unique business model as all three operating segments reported improved results as comparedthe March interest rate cuts in response to the same period in the prior year. Third quarter financial results were characterizedCOVID-19. Margin compression was partially offset by growth in net interest incomeearnings assets.

We also adopted CECL during the quarter, which increased our allowance for loan losses $23 million and our reserve for unfunded commitment $7 million as of January 1, 2020. Our first quarter 2020 provision was $14 million, an increase from $0 million at March 31, 2019 resulting from the forecasted impact of COVID-19 on the economy.

In the first quarter of 2020 our Mortgage business yielded mortgage revenues of $96 million driven by strong balance sheet growth, higher noninterest income driven bya 36 percent increase in fallout adjusted locks and a $9 million increase in return on our mortgage servicing rights. Our net gain on loan sales and positive credit metrics.

Through the first nine months of 2019, average loans held for investment grew $2.3 billion or 10 percent compared to the same period in 2018 led by $1.4 billion of broad based growth in our commercial portfolio and a $0.9 billion increase in our consumer portfolio driven by non-auto indirect loans, mortgage loans and HELOCs. This loan growthsale margin was supported by the low cost deposits acquired through our 2018 banking acquisitions which drove a $1.6 billion increase in average total retail deposits.

Net gain on loan sales increased $68.0 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 driven by a 3080 basis point increase in marginpoints, which was driven by our continued focus on price discipline, combined with efforts to optimize channel mix, volume and margin.

We also continued to grow our subservicing business for which we have increased the numberreduced 43 basis points as a result of loans serviced or sub-serviced by 375,000 or 61 percenthedge ineffectiveness in the 12 months ended September 30, 2019, ending the third quarterfinal two weeks of 2019 at 994,000 accounts. This business generates subservicing fee income and custodial deposits which are used to support loan growth or as an alternative funding source and have increased $1.8 billion for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.March caused by market disruption from Federal Reserve purchases of agency mortgage-backed securities during that period.


Net Interest Income

Comparison to Prior Year Quarter

The following table presents details on our net interest margin and net interest income on a consolidated basis:
Three Months Ended September 30,Three Months Ended
2019 2018March 31, 2020December 31, 2019March 31, 2019
Average
Balance
Interest
Annualized
Yield/
Rate
 
Average
Balance
Interest
Annualized
Yield/
Rate
Average
Balance
Interest
Annualized
Yield/
Rate
Average
Balance		InterestAnnualized
Yield/
Rate
Average
Balance
Interest
Annualized
Yield/
Rate
(Dollars in millions)(Dollars in millions)
Interest-Earning Assets           
Loans held-for-sale$3,786
$40
4.22% $4,393
$52
4.69%$5,248
$49
3.72%$5,199
$51
3.92%$3,266
$38
4.72%
Loans held-for-investment           
Residential first mortgage3,282
29
3.58% 3,027
27
3.63%3,062
27
3.51%3,215
30
3.60%3,044
28
3.64%
Home equity934
13
5.37% 695
9
5.12%1,019
12
4.73%989
12
4.86%745
10
5.63%
Other658
10
5.99% 128
2
5.54%816
12
5.77%728
11
5.97%356
6
7.11%
Total consumer loans4,874
52
4.24% 3,850
38
3.96%4,897
51
4.14%4,932
53
4.20%4,145
44
4.30%
Commercial real estate2,594
35
5.39% 2,106
29
5.37%2,949
34
4.61%2,763
34
4.91%2,250
33
5.66%
Commercial and industrial1,767
22
4.97% 1,330
18
5.28%1,667
19
4.52%1,726
21
4.80%1,594
21
5.39%
Warehouse lending2,508
32
5.00% 1,586
21
5.10%2,310
25
4.30%2,747
33
4.61%1,175
16
5.47%
Total commercial loans6,869
89
5.14% 5,022
68
5.26%6,926
78
4.48%7,236
88
4.77%5,019
70
5.53%
Total loans held-for-investment (1)11,743
141
4.77% 8,872
106
4.70%11,823
129
4.34%12,168
141
4.54%9,164
114
4.97%
Loans with government guarantees574
4
2.78% 292
3
4.20%811
3
1.38%678
4
2.16%455
3
2.96%
Investment securities2,713
17
2.63% 3,100
21
2.81%3,060
19
2.47%2,511
16
2.49%3,258
24
2.91%
Interest-earning deposits181
1
2.22% 129
1
2.38%208
1
1.75%152
1
2.26%151
1
2.77%
Total interest-earning assets18,997
203
4.27% 16,786
183
4.32%21,150
201
3.78%20,708
213
4.04%16,294
180
4.43%
Other assets2,200
   1,825
  2,263
  2,328
  2,144
  
Total assets$21,197
   $18,611
  $23,413
  $23,036
  $18,438
  
Interest-Bearing Liabilities           
Retail deposits           
Demand deposits$1,388
$3
0.88% $727
$3
1.62%$1,587
$3
0.75%$1,448
$3
0.70%$1,220
$2
0.68%
Savings deposits3,262
10
1.20% 3,229
7
0.90%3,384
9
1.07%3,335
10
1.19%3,089
7
0.95%
Money market deposits722
1
0.34% 252
—
0.62%687
1
0.32%700
—
0.35%778
1
0.27%
Certificates of deposit2,583
15
2.40% 2,150
10
1.78%2,254
12
2.24%2,459
15
2.37%2,488
13
2.13%
Total retail deposits7,955
29
1.45% 6,358
20
1.27%7,912
25
1.28%7,942
28
1.39%7,575
23
1.22%
Government deposits     1,131
3
1.15%1,192
4
1.39%1,170
4
1.51%
Demand deposits324
—
0.61% 283
1
0.59%
Savings deposits619
3
1.73% 564
2
1.48%
Certificates of deposit310
1
1.76% 327
1
1.52%
Total government deposits1,253
4
1.45% 1,174
4
1.28%
Wholesale deposits and other744
5
2.42% 537
3
2.03%581
4
2.39%666
4
2.36%387
2
2.23%
Total interest-bearing deposits9,952
38
1.52% 8,069
27
1.32%9,624
32
1.33%9,800
36
1.46%9,132
29
1.30%
Short-term Federal Home Loan Bank advances and other borrowings1,910
10
2.24% 3,465
18
2.10%
Long-term Federal Home Loan Bank advances536
2
1.72% 1,280
7
2.11%
Short-term FHLB advances and other3,566
12
1.35%3,262
15
1.74%2,725
17
2.54%
Long-term FHLB advances794
3
1.29%650
3
1.43%153
1
1.54%
Other long-term debt495
7
5.60% 494
7
5.62%496
6
5.33%496
7
5.45%495
7
5.90%
Total interest-bearing liabilities12,893
57
1.79% 13,308
59
1.75%14,480
53
1.46%14,208
61
1.65%12,505
54
1.75%
Noninterest-bearing deposits           
Retail deposits and other1,315
   1,298
  1,395
  1,332
  1,242
  
Custodial deposits (2)4,550
   1,969
  4,776
  4,772
  2,532
  
Total Noninterest-bearing deposits
5,865
   3,267
  
Total non-interest bearing deposits
6,171
  6,104
  3,774
  
Other liabilities717
   522
  908
  921
  576
  
Stockholders’ equity1,722
   1,514
  1,854
  1,803
  1,583
  
Total liabilities and stockholders' equity$21,197
   $18,611
  $23,413
  $23,036
  $18,438
  
Net interest-earning assets6,671
  6,500
  3,789
  
Net interest income $146
   $124
  $148
  $152
  $126
 
Interest rate spread (3) 2.48%  2.57% 2.31% 2.39% 2.69%
Net interest margin (4) 3.05%  2.93% 2.81% 2.91% 3.09%
Ratio of average interest-earning assets to interest-bearing liabilities 147.3%  126.1% 146.1% 145.8% 130.3%
Total average deposits15,795
  15,904
  12,906
  
(1)Includes nonaccrual loans. For further information on nonaccrual loans, see Note 4 - Loans Held-for-Investment.
(2)Approximately 80 percent includesIncludes noninterest-bearing custodial deposits fromthat arise due to the servicing of loans subserviced which pay interest that is recognized as an offset in net loan administration income.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.

The following table presents the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). The rate/volume mix variances are allocated to rate.
Three Months Ended September 30,
2019 Versus 2018 Increase (Decrease)
Due to:
Three Months Ended March 31, 2020 versus December 31, 2019 Increase (Decrease) Due to:Three Months Ended March 31, 2020 versus March 31, 2019 Increase (Decrease) Due to:
Rate Volume TotalRateVolumeTotalRateVolumeTotal
(Dollars in millions)(Dollars in millions)
Interest-Earning Assets      
Loans held-for-sale$(5) $(7) $(12)$(2)$—
$(2)$(12)$23
$11
Loans held-for-investment      
Residential first mortgage—
 2
 2
(2)(1)(3)(1)—
(1)
Home equity1
 3
 4
—
—
—
(2)4
2
Other1
 7
 8
—
1
1
(2)8
6
Total consumer loans2
 12
 14
(2)—
(2)(5)12
7
Commercial real estate(1) 7
 6
(2)2
—
(9)10
1
Commercial and industrial(2) 6
 4
(1)(1)(2)(3)1
(2)
Warehouse lending(1) 12
 11
(3)(5)(8)(7)16
9
Total commercial loans(4) 25
 21
(6)(4)(10)(19)27
8
Total loans held-for-investment(2) 37
 35
(8)(4)(12)(24)39
15
Loans with government guarantees(2) 3
 1
(2)1
(1)(3)3
—
Investment securities(1) (3) (4)—
3
3
(4)(1)(5)
Interest-earning deposits and other—
—
—
—
—
—
Total interest-earning assets$(10) $30
 $20
$(12)$—
$(12)$(43)$64
$21
Interest-Bearing Liabilities      
Interest-bearing deposits$5
 $6
 $11
$(3)$(1)$(4)$1
$2
$3
Short-term Federal Home Loan Bank advances and other borrowings—
 (8) (8)
Long-term Federal Home Loan Bank advances(1) (4) (5)
Short-term FHLB advances and other borrowings(4)1
(3)(10)5
(5)
Long-term FHLB advances(1)1
—
—
2
2
Other long-term debt(1)—
(1)(1)—
(1)
Total interest-bearing liabilities4
 (6) (2)(9)1
(8)(10)9
(1)
Change in net interest income$(14) $36
 $22
$(3)$(1)$(4)$(33)$55
$22

Comparison to Prior Quarter

Net interest income decreased $4 million, or 3 percent, to $148 million for the first quarter 2020 as compared to the fourth quarter 2019. The results reflect a 2 percent increase in average earning assets, driven by the purchase of investment securities. Net interest margin decreased 10 basis points, to 2.81 percent for the first quarter 2020 as compared to the fourth quarter 2019. The decrease in margin was driven by the full impact of the prior quarter rate cut and the partial impact of the March rate cuts.

Loans held-for-investment averaged $11.8 billion for the first quarter 2020, decreasing $345 million from the prior quarter. Average warehouse loans decreased $437 million, or 16 percent, consistent with the volume decline in mortgage closings and average residential mortgages decreased $153 million, or 5 percent, due to higher loan repayments.

Average total deposits were $15.8 billion in the first quarter 2020, decreasing $109 million, or 1 percent, from the fourth quarter 2019. Average time and brokered deposits decreased $282 million, or 10 percent, as these higher costs deposits matured and were replaced with less expensive funding.

Comparison to Prior Year    Quarter

Net interest income increased $22 million, or 18 percent, for the three months ended September 30, 2019,March 31, 2020, compared to the same period in 2018.2019. The 17 percent increase was driven by growth in average interest-earning assets led by the loans held-for-sale portfolio and commercial loans HFI portfolio. Net interest margin declined 28 basis points to 2.81 percent for the first quarter 2020, as compared to 3.08 percent in the first quarter of 2019. This margin compression was primarily attributable to a rate cuts that took place near the end of 2019 and in March of 2020.

Average interest-earnings assets increased $4.9 billion due to growth in the LHFS portfolio as the Bank continued to take advantage of the favorable mortgage environment due to lower rates which have led to higher refinance activity and volume in the mortgage market. Average commercial loans increased $2 billion driven by growth across CRE, C&I and warehouse portfolios. The consumer loan portfolio increased $750 million primarily driven by growth in average interest earning assets led by continued growth in the loans held-for-investment portfolio along with $1.9 billion growth in total deposits as a result of our 2018 banking acquisitionindirect lending, home equity and $2.6 billion growth in noninterest bearing custodial deposits driven by elevated refinancing activity and growth in our servicing business. This growth resulted in a 48 percent reduction of funding from FHLB advances.

Net interest margin expanded 12 basis points to 3.05 percent, as compared to 2.93 percent, primarily due to channel mix with broad-based growth across the commercial portfolios and non-auto indirect portfolio along with a reduction in funding costs driven by growth in noninterest bearing custodial balances. This was partially offset by higher average rate on total retail deposits driven by higher short term market rates compared to the same period a year ago.

Average interest-earning assets increased $2.2 billion primarily due to growth in our LHFI portfolio partially offset by a decrease in LHFS average balances. Average commercial loans increased $1.8 billion with broad-based growth across the CRE and C&I loan portfolios. Average warehouse loans increased $0.9 billion benefiting from growth in the overall mortgage market driven by a lower interest rate environment. Our consumer loan portfolio increased by $1.0 billion, as we continued to grow our non-auto indirect portfolio as well as HELOC and first mortgage loans. The LHFS portfolio decreased $607 million primarily due to managing the held for sale portfolio to lower balances to facilitate higher yielding asset growth.other consumer.

Average interest-bearing liabilities decreased $415 million. This was primarilyincreased $2 billion, due to a $2.3 billion reduction in FHLB advances which were replaced by a $1.9 billionan $841 million and $641 million increase in average interest-bearingshort-term and long-term FHLB borrowings, respectively. Average total deposits and a $2.6 billion increase in average noninterest-bearing deposits ledincreased $493 million driven by higher custodial deposits driven by elevated refinance activity andwhich result from growth in our subservicing business.


Comparison to Prior Year to Date

The following table presents details on our net interest margin and net interest income on a consolidated basis:
 Nine Months Ended September 30,
 2019 2018
 
Average
Balance
Interest
Annualized
Yield/
Rate
 
Average
Balance
Interest
Annualized
Yield/
Rate
 (Dollars in millions)
Interest-Earning Assets       
Loans held-for-sale$3,532
$119
4.48% $4,265
$142
4.44%
Loans held-for-investment       
Residential first mortgage3,158
85
3.61% 2,893
76
3.52%
Home equity832
34
5.50% 681
26
5.13%
Other512
25
6.51% 71
3
5.37%
Total consumer loans4,502
144
4.29% 3,645
105
3.86%
Commercial real estate2,414
102
5.56% 2,026
79
5.12%
Commercial and industrial1,702
67
5.20% 1,269
51
5.26%
Warehouse lending1,898
74
5.17% 1,312
51
5.08%
Total commercial loans6,014
243
5.34% 4,607
181
5.15%
Total loans held-for-investment (1)10,516
387
4.89% 8,252
286
4.58%
Loans with government guarantees511
11
2.88% 288
8
3.86%
Investment securities2,957
61
2.77% 3,127
64
2.74%
Interest-earning deposits177
3
2.38% 118
2
1.95%
Total interest-earning assets17,693
581
4.37% 16,050
502
4.15%
Other assets2,184
   1,784
  
Total assets$19,877
   $17,834
  
Interest-Bearing Liabilities       
Retail deposits       
Demand deposits$1,311
$8
0.80% $660
$4
0.89%
Savings deposits3,181
26
1.10% 3,376
21
0.85%
Money market deposits748
2
0.31% 235
1
0.54%
Certificates of deposit2,561
44
2.29% 1,927
24
1.64%
Total retail deposits7,801
80
1.37% 6,198
50
1.09%
Government deposits       
Demand deposits298
1
0.62% 256
1
0.54%
Savings deposits582
8
1.76% 512
5
1.29%
Certificates of deposit304
4
1.81% 369
4
1.34%
Total government deposits1,184
13
1.49% 1,137
10
1.14%
Wholesale deposits and other518
9
2.35% 325
5
1.99%
Total interest-bearing deposits9,503
102
1.44% 7,660
65
1.13%
Short-term Federal Home Loan Bank advances and other borrowings2,420
44
2.45% 3,713
50
1.81%
Long-term Federal Home Loan Bank advances349
4
1.71% 1,283
21
2.15%
Other long-term debt495
21
5.76% 494
21
5.53%
Total interest-bearing liabilities12,767
171
1.80% 13,150
157
1.58%
Noninterest-bearing deposits       
Retail deposits and other1,278
   1,043
  
Custodial deposits (2)3,524
   1,678
  
      Total Noninterest-bearing deposits4,802
   2,721
  
Other liabilities650
   495
  
Stockholders’ equity1,658
   1,468
  
Total liabilities and stockholders' equity$19,877
   $17,834
  
Net interest income $410
   $345
 
Interest rate spread (3)  2.57%   2.57%
Net interest margin (4)  3.07%   2.85%
Ratio of average interest-earning assets to interest-bearing liabilities  138.6%   122.1%
(1)Includes nonaccrual loans. For further information on nonaccrual loans, see Note 4 - Loans Held-for-Investment.
(2)Approximately 80 percent includes custodial deposits from loans subserviced which pay interest that is recognized as an offset in net loan administration income.
(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.


The following table presents the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities consistent with the quarter to date table above.
 Nine Months Ended September 30,
 
2019 Versus 2018 Increase (Decrease)
Due to:
 Rate Volume Total
 (Dollars in millions)
Interest-Earning Assets     
Loans held-for-sale$1
 $(24) $(23)
Loans held-for-investment     
Residential first mortgage2
 7
 9
Home equity2
 6
 8
Other4
 18
 22
Total consumer loans8
 31
 39
Commercial real estate8
 15
 23
Commercial and industrial(1) 17
 16
Warehouse lending1
 22
 23
Total commercial loans8
 54
 62
Total loans held-for-investment16
 85
 101
Loans with government guarantees(3) 6
 3
Investment securities—
 (3) (3)
Interest-earning deposits and other—
 1
 1
Total interest-earning assets$14
 $65
 $79
Interest-Bearing Liabilities     
Interest-bearing deposits$21
 $16
 $37
Short-term Federal Home Loan Bank advances and other borrowings12
 (18) (6)
Long-term Federal Home Loan Bank advances(2) (15) (17)
Other long-term debt—
 —
 —
Total interest-bearing liabilities31
 (17) 14
Change in net interest income$(17) $82
 $65

Net interest income increased $65 million, or 18.8 percent, for the nine months ended September 30, 2019, compared to the same period in 2018. The increase was primarily driven by growth in average interest earning assets led by continued growth in the loans held-for-investment portfolio which was supported by a $2.1 billion increase in noninterest bearing deposits and $1.8 billion growth in custodial deposits which resulted in 45 percent lower FHLB advances.

Net interest margin expanded 22 basis points to 3.07 percent, as compared to 2.85 percent, primarily due to growth in our higher yielding commercial loan portfolio and a reduction in funding costs driven by growth in noninterest bearing deposits and custodial balances.

Average interest-earning assets increased $1.6 billion primarily due to growth in our LHFI portfolio partially offset by a decrease in LHFS average balances. Average commercial loans increased $1.4 billion with broad based growth across the CRE, C&I and warehouse portfolios. Our consumer loan portfolio increased by $0.9 billion, as we continued to grow our high quality non-auto indirect portfolio as well as HELOC and first mortgage loans. The LHFS portfolio decreased $0.7 billion primarily due to managing the held for sale portfolio to lower balances to facilitate higher yielding asset growth.

Average interest-bearing liabilities decreased $383 million. This was primarily due to a $2.2 billion reduction in FHLB advances, partially offset by a $1.8 billion increase in average interest-bearing deposits driven by deposits acquired from the Wells Fargo in December of 2018. Further supporting asset growth, our noninterest bearing liabilities increased $2.1 billion, driven by higher custodial and noninterest bearing deposits.refinance activity.



Provision for LoanCredit Losses

The provision for loancredit losses and unfunded commitments was $1 million and $18$14 million for the three and nine months ended September 30, 2019, respectively.March 31, 2020. Net charge-offs during the period were $2 million. The low level of provision and net charge offs over the most recent three month period reflects our strong asset quality, low delinquencies and no nonperforming commercial loans at September 30, 2019. For the most recent nine month period, the higher provision of $14 million was primarilydriven by changes in the economic forecast which assumed a sudden sharp and severe recession, only partially recovering later in the year due to the $29 million net charge offeconomic distress caused by COVID-19. In this scenario, United States gross domestic product ("GDP") contracts 18 percent in the second quarter of 2020, the HPI decreases 3 percent by the end of the Live Well loan which has been fully resolved partially offsetyear and unemployment spikes to 9 percent before moderating to 7 percent by a reduction in the allowance balance due to reduced inherent risk inend of the consumer portfolio.

The provision for loan losses was a benefit of $2 million and $3 million for the three and nine months ended September 30, 2018, respectively. These benefits were driven by favorable asset quality trends partially offset by provisioning to support interest earning asset growth.year.

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

Noninterest Income

The following tables provide information on our noninterest income along withand other mortgage metrics:
Three Months Ended September 30,   Nine Months Ended September 30,  Three months ended1Q20 vs. 4Q191Q20 vs. 1Q19
2019 2018 Change 2019 2018 ChangeMarch 31, 2020December 31, 2019March 31, 2019Change
(Dollars in millions) 
Net gain on loan sales$110
 $43
 $67
 $234
 $166
 $68
$90
$101
$49
$(11)$41
Loan fees and charges29
 23
 6
 70
 67
 3
26
30
17
$(4)$9
Net return on mortgage servicing rights(2) 13
 (15) 9
 26
 (17)
Net return (loss) on mortgage servicing rights6
(3)6
$9
$—
Loan administration income5
 5
 —
 22
 15
 7
12
8
11
$4
$1
Deposit fees and charges10
 5
 5
 28
 15
 13
9
10
8
$(1)$1
Other noninterest income19
 18
 1
 85
 52
 33
14
16
18
$(2)$(4)
Total noninterest income$171
 $107
 $64
 $448
 $341
 $107
$157
$162
$109
$(5)$48
Three Months Ended September 30,   Nine Months Ended September 30,  Three months ended1Q20 vs. 4Q191Q20 vs. 1Q19
2019 2018 Change 2019 2018 ChangeMarch 31, 2020December 31, 2019March 31, 2019Change
(Dollars in millions)  (Dollars in millions)
Mortgage rate lock commitments (fallout-adjusted) (1)
$9,197
 $8,290
 $907
 $24,143
 $25,024
 $(881)$11,154
$8,179
$6,602
$2,975
$4,552
Mortgage loans originated8,591
9,303
5,513
$(712)$3,078
Net margin on mortgage rate lock commitments (fallout-adjusted) (1)(2)
1.20% 0.51% 0.69% 0.96% 0.66% 0.30%0.80%1.23%0.72%(0.43)%0.08%
Mortgage loans sold and securitized$8,186
 $8,423
 $(237) $22,194
 $24,930
 $(2,736)7,487
8,135
5,170
$(648)$2,317
(1)Fallout-adjusted refers to mortgage rate lock commitments which are adjusted by estimates of the percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and impact of changes in interest rates.
(2)Gain on sale margin is based on net gain on loan sales (excludes net gain on loan sales of $2 million from loans transferred from LHFI during the ninethree months ended September 30, 2019)March 31, 2020) to fallout-adjusted mortgage rate lock commitments.




Comparison to Prior Quarter

Noninterest income decreased $5 million for the three months ended March 31, 2020, compared to the three months ended December 31, 2019, primarily due to the following:

Net gain on loan sales decreased $11 million, or 11 percent, to $90 million, as compared to $101 million in the fourth quarter 2019. Fallout-adjusted locks increased $3.0 billion, or 36 percent, to $11.2 billion, primarily driven by the robust refinance market. The net gain on loan sale margin decreased 43 basis points, to 0.80 percent for the first quarter 2020, as compared to 1.23 percent for the fourth quarter 2019 reflecting $45 million of hedge ineffectiveness caused by the Federal Reserve’s purchases of agency mortgage-backed securities in the last two weeks of March 2020.
Loan fees and charges decreased $4 million driven by lower originations and lower boarding of new subserviced loans in the first quarter 2020 as compared to the fourth quarter 2019.
Net return on mortgage servicing rights increased $9 million, to $6 million for the first quarter of 2020, compared to a $3 million net loss for the fourth quarter 2019 reflecting favorable hedge performance.

Comparison to Prior Year Quarter

Noninterest income increased $64$48 million for the three months ended September 30, 2019,March 31, 2020, compared to the three months ended September 30, 2018,March 31, 2019, primarily due to the following:

Net gain on loan sales increased $67$41 million, primarily due to $4.6 billion higher fallout adjusted locks driven by the favorable mortgage environment and a 69 basis point improvement in gain on sale margin resulting from improved market conditions, a focus on price discipline, combined with effortsshift to optimize volume and marginretail mix in the currentfirst quarter in addition to $907 million higher fallout-adjusted locks.of 2020.
Loan fees and charges increased $6$9 million primarily driven by higher subservicing ancillary fees from an increase of 330,000as total loans being subserviced. Net loan administrationserviced increased by 121 thousand along with higher mortgage fee income was flat as higher subservicing fees were offset by higher interest credits on custodial deposits which were elevated in the third quarter of 2019 due to higher refinance activity.
Deposit fees and charges increased $5 million, driven by growth in our customer and deposit base as a result of our 2018 branch acquisitions.
Net return on MSRs, including the impact of hedges, decreased $15 million compared to the prior period, primarily due toan increase in originations and higher prepayments driven by higher refinance activity in the third quarter of 2019 as compared to the third quarter of 2018.

Comparison to Prior Year to Date

Noninterest income increased $107 million for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, primarily due to the following:

Net gain on loan sales increased $68 million, primarily due to a 30 basis point improvement in gain on sale margin resulting from improved market conditions, a focus on price discipline, combined with efforts to optimize volume and margin, despite $881 million lower fallout-adjusted locks.retail mix.
Other noninterest income increased $33declined $4 million primarily due to the DOJ Liability fair value adjustment of $25 million in the second quarter of 2019. The remaining increase was primarily driven by higher fee based income generated on our commercial loan portfolio.the lower rate environment which yielded lower FHLB dividends and other miscellaneous income.
Deposit fees and charges increased $13 million, driven by growth in our customer and deposit base as a result of our 2018 branch acquisitions.
Loan administration income increased $7 million, primarily due to growth in the average number of subserviced loans by 515,292, partially offset by an increase in refinancing activity driving higher interest on custodial deposits.
Loan fees and charges increased $3 million, primarily due to $2.7 billion lower mortgage originations.
Net return on MSRs, including the impact of hedges, decreased $17 million, primarily due to higher prepayments as long-term market rates have declined in 2019 driving higher refinance activity.


Noninterest Expense

The following table sets forth the components of our noninterest expense:
Three Months Ended September 30,   Nine Months Ended September 30,  Three Months Ended March 31,1Q20 vs. 4Q191Q20 vs. 1Q19
2019 2018 Change 2019 2018 ChangeMarch 31, 2020December 31, 2019March 31, 2019Change
(Dollars in millions)(Dollars in millions)
Compensation and benefits$98
 $76
 $22
 $275
 $236
 $39
$102
$102
$87
$—
$15
Occupancy and equipment40
 31
 9
 118
 91
 27
41
43
38
$(2)$3
Commissions38
 21
 17
 76
 64
 12
29
35
13
$(6)$16
Loan processing expense22
 14
 8
 60
 43
 17
20
20
17
$—
$3
Legal and professional expense6
 7
 (1) 18
 19
 (1)6
9
6
$(3)$—
Federal insurance premiums5
 6
 (1) 14
 18
 (4)6
6
4
$—
$2
Intangible asset amortization3
 1
 2
 11
 —
 11
3
4
4
$(1)$(1)
Other noninterest expense26
 17
 9
 71
 52
 19
28
26
22
$2
$6
Total noninterest expense$238
 $173
 $65
 $643
 $523
 $120
$235
$245
$191
$(10)$44
Efficiency ratio75.2% 74.6% 0.6% 75.0% 76.2% (1.2)%77.1%75.2%81.3%1.9%1.9%
Average number of FTE4,163
 3,570
 593
 4,071
 3,617
 454
4,415
4,453
3,996
(38)419

Comparison to Prior Quarter

Noninterest expense increased $65decreased $10 million and $120 million, respectively, for the three and nine months ended September 30, 2019,March 31, 2020, compared to the three and ninemonths three months ended September 30, 2018. The increase for both periods has been December 31, 2019 primarily driven by growth in our community banking business as a result of our 2018 banking acquisitions, growth in our servicing business and a shift toward our retail mortgage origination channel which results in higher commission expense.due to the following:

The following provides further information relatedCommissions decreased $6 million, primarily due to the increase in noninterest expense:lower closings and favorable channel commission rates.
Legal and professional expense decreased $3 million primarily due to lower IT consulting and external litigation costs.



Comparison to Prior Year Quarter

Noninterest expense increased $44 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019 primarily due to the following:

Compensation and benefits increased $22$15 million, or 29 percent, primarily due to higher average FTE as a result of our December 2018 banking acquisition and growth in our servicing business along with higher compensation expense driven by our recent performance.bringing default servicing in house and adding mortgage origination volume over the last year. Compensation and benefits costs were also impacted by seasonal payroll taxes, and overall wage inflation.
•
Commissions increased $1716 million, or 81 percent, primarily driven by higher originations along with a shift in channel mix from an increase inTPO to direct retail mortgage originations supportingwhich supports a higher gain on sale and the achievement of performance hurdles resulting inbut also has higher payoutcommission rates.
Occupancy and equipment and otherincreased $3 million due to the increase in IT software expenses.
Other noninterest expense both increased $9$6 million primarily driven by growth in our businesses as a result of acquisitions.
Loan processing expense increased $8 million, primarilyhigher mortgage related expenses due to higher subservicing expenses resulting from a 67 percent growth in number of loans subserviced for others.
Intangible asset amortization increased $2 million, due to intangible assets associated with our December 2018 acquisition.

Comparison to Prior Year to Date

Compensation and benefits increased $39 million, or 17 percent, primarily due to higher average FTE driven by our 2018 banking acquisitions.
Commissions increased $12 million primarily from an increase in retailthe favorable mortgage originations supporting higher gain on sale and the achievement of performance hurdles resulting in higher payout rates.
Occupancy and equipment and other noninterest expense increased $27 million and $19 million, respectively, primarily driven by strategic acquisitions.
Loan processing expense increased $17 million, primarily due to higher subservicing expenses resulting from growth in our subservicing business.
Intangible asset amortization increased $11 million, due to intangible assets associated with our 2018 acquisitions.environment.



Provision for Income Taxes

Our provision for income taxes for the three and nine months ended September 30, 2019March 31, 2020, was $15$10 million and $37 million, respectively, compared to a provision of $12 million and $33 million for the three and nine months ended September 30, 2018, respectively.

Ourour effective tax rate for the three and nine months ended September 30, 2019 was 18.4 percent and 18.6 percent, respectively, compared to 20.0 percent and 20.1 percent for the three and nine months ended September 30, 2018, respectively.18.5 percent. Our effective tax rate differs from the combined federal and state statutory tax rate primarily due to non-taxable bank owned life insurance and other tax-exempt earnings, partially offset by nondeductible expenses.



Operating Segments

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

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

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

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 providing financing of working capital, capital investments, and equipment. Additionally, our commercial real estate business supports income producing real estate and home builders. The Community Banking segment also offers warehouse lines of credit to non-bank mortgage lenders.

Our Community Banking segment has seen continued growth both organically and throughthat has been further boosted by strategic acquisitions. In the last 12 months, our commercial and consumer loan portfolios have grown 5160 percent and 1112 percent to $7.6$8.9 billion and $4.9 billion, respectively. Average deposits for the ninethree months ended September 30, 2019 haveMarch 31, 2020 increased to $10.2$10.4 billion, compared to $8.6$10.0 billion for the same period in 20182019 driven primarily by branch acquisitions in 2018 which expanded our banking footprint.organic growth.


Three Months Ended September 30,   Nine Months Ended September 30,  Three months ended1Q20 vs. 4Q191Q20 vs. 1Q19
Community Banking2019 2018 Change 2019 2018 ChangeMarch 31, 2020December 31, 2019March 31, 2019Change
(Dollars in millions) 
Summary of Operations            
Net interest income$115
 $81
 $34
 $326
 $231
 $95
$104
$113
$93
$(9)$11
(Provision) benefit for loan losses—
 (1) 1
 (18) (2) (16)
Net interest income after (provision) benefit for loan losses115
 80
 35
 308
 229
 79
Net (loss) on loan sales(8) (3) (5) (23) (10) (13)
Provision for credit losses8
2
1
6
7
Net interest income after provision for credit losses96
111
92
(15)4
Net loss on loan sales—
(4)(3)4
3
Loan fees and charges—
—
—
—
—
Loan administration expense(1)(1)(1)—
—
Net return on mortgage servicing rights—
—
—
—
—
Other noninterest income17
 10
 7
 44
 27
 17
16
16
12
—
4
Total noninterest income9
 7
 2
 21
 17
 4
15
11
8
4
7
Compensation and benefits(26) (17) (9) (74) (51) (23)27
26
24
1
3
Other noninterest expense and directly allocated overhead(44) (27) (17) (131) (81) (50)
Commissions1
1
—
—
1
Loan processing expense2
1
1
1
1
Other noninterest expense44
42
40
2
4
Total noninterest expense(70) (44) (26) (205) (132) (73)74
70
66
4
8
Income before indirect overhead allocations and income taxes54
 43
 11
 124
 114
 10
37
52
34
(15)3
Indirect overhead allocations(10) (9) (1) (30) (29) (1)
Provision (benefit) for income taxes9
 7
 2
 20
 18
 2
Indirect overhead allocation(9)(11)(10)2
1
Provision for income taxes6
9
5
(3)1
Net income$35
 $27
 $8
 $74
 $67
 $7
$22
$32
$19
$(10)$3
 
Key Metrics            
Efficiency Ratio56.6% 51.2% 5.4 % 59.0% 53.5% 5.5 %61.6%56.4%65.3%5.2 %(3.7)%
Return on average assets1.1% 1.2% (0.1)% 0.9% 1.1% (0.2)%1.6%2.2%2.1%(0.6)%(0.5)%
Average number of FTE employees1,330
 846
 484
 1,325
 811
 514
1,274
1,316
1,308
(42)(34)

Comparison to Prior Quarter

The Community Banking segment reported net income of $22 million for the three months ended March 31, 2020, compared to $32 million for the three months ended December 31, 2019. The $10 million decrease was driven by the following:

Net interest income declined $9 million primarily due to margin compression
Provision for credit losses was $6 million higher driven by loan growth.

Comparison to Prior Year Quarter

The Community Banking segment reported net income of $35$22 million for the three months ended September 30, 2019,March 31, 2020, compared to $27$19 million for the three months ended September 30, 2018.March 31, 2019. The increase in netwas driven by the following:

Net interest income increased $11 million driven by higher average asset balances partially offset by lower margins due to rate cuts that have occurred over the past year.
Provision for credit losses was $7 million higher primarily due to $34loan growth.
Noninterest expense increased $8 million growth in net interest income attributed to strong growth in both our commercial and consumer portfolios as supporteddriven by deposits acquired from our 2018 branch acquisitions. Growthgrowth in our operations also caused noninterest expense to increase $26 million for the three months ended September 30, 2019.and loan portfolios.

Comparison to Prior Year to Date

The Community Banking segment reported net income of $74 million for the nine months ended September 30, 2019, compared to $67 million for the nine months ended September 30, 2018. The increase in net income was primarily due to $95 million growth in net interest income attributed to growth in both our commercial and consumer loan portfolios, enhanced by our 2018 banking acquisitions. In addition, noninterest income increased, attributable to deposit fees from our expanded branch network as well as stronger commercial loan fees. Provision for loan losses increased $16 million primarily due to the $29 million net charge off of the Live Well loan which has been fully resolved. To support our investments relating to organic growth, acquisitions, and the diversification of our product offerings, our operating costs increased $73 million.     



Mortgage Originations

We are a leading national originator of residential first mortgages. Our Mortgage Origination segment utilizes multiple distribution channels to originate or acquire one-to-four family residential mortgage loans on a national scale, primarily to sell. We originate and retain certain mortgage loans including certain jumbo and non-conforming loans, forin our LHFI portfolio which generate interest income in the Community Banking segment. The Community Banking segment purchases these loans from the Mortgage Origination segment which results in the recognition of a gain on loan sales by the Mortgage Origination segment and a loss on loan sales in the Community BankingOriginations segment.
Three Months Ended September 30,   Nine Months Ended September 30,  Three months ended1Q20 vs. 4Q191Q20 vs. 1Q19
Mortgage Originations2019 2018 Change 2019 2018 ChangeMarch 31, 2020December 31, 2019March 31, 2019Change
(Dollars in millions)(Dollars in millions)
Summary of Operations            
Net interest income$27
 $36
 $(9) $73
 $100
 $(27)$42
$43
$33
$(1)$9
(Provision) benefit for loan losses(1) —
 (1) (1) (1) —
Net interest income after (provision) benefit for loan losses26
 36
 (10) 72
 99
 (27)
Provision (benefit) for credit losses(3)1
—
(4)(3)
Net interest income after provision for credit losses45
42
33
3
12
Net gain on loan sales118
 46
 72
 257
 176
 81
90
105
52
(15)38
Loan fees and charges17
21
10
(4)7
Loan administration expense(7)(8)(4)1
(3)
Net return on mortgage servicing rights6
(3)6
9
—
Other noninterest income15
 30
 (15) 49
 76
 (27)1
2
4
(1)(3)
Total noninterest income133
 76
 57
 306
 252
 54
107
117
68
(10)39
Compensation and benefits(30) (26) (4) (83) (83) —
31
31
24
—
7
Other noninterest expense and directly allocated overhead(72) (41) (31) (161) (129) (32)
Commissions28
35
12
(7)16
Loan processing expense10
12
5
(2)5
Other noninterest expense26
25
19
1
7
Total noninterest expense(102) (67) (35) (244) (212) (32)95
103
60
(8)35
Income before indirect overhead allocations and income taxes57
 45
 12
 134
 139
 (5)57
56
41
1
16
Indirect overhead allocation(10) (16) 6
 (30) (51) 21
(12)(12)(10)—
(2)
Provision (benefit) for income taxes10
 6
 4
 22
 18
 4
Provision for income taxes9
9
7
—
2
Net income$37
 $23
 $14
 $82
 $70
 $12
$36
$35
$24
$1
$12
 
Key Metrics            
Mortgage rate lock commitments (fallout-adjusted) (1)$9,197
 $8,290
 $907
 $24,143
 $25,024
 $(881)$11,145
$8,169
$6,602
$2,976
$4,543
Efficiency Ratio64.3% 59.8% 4.5% 65.0% 60.9% 4.1%63.8%64.3%58.5%(0.5)%5.3%
Return on average assets2.7% 1.6% 1.1% 1.7% 1.3% 0.4%1.4%1.5%1.3%(0.1)%0.1%
Average number of FTE employees1,429
 1,464
 (35) 1,358
 1,575
 (217)1,513
1,506
1,294
7
219
(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.

Comparison to Prior Year Quarter

The Mortgage Originations segment reported net income of $37$36 million for the three months ended September 30, 2019March 31, 2020 and $23$35 million for the three months ended September 30, 2018. December 31, 2019. The increase was driven by the following:

The benefit for credit losses was lower as changes in allowance related to volume are recorded at the segment level and our HFI residential loan portfolio declined due to higher prepayments.
Net gain on loan sales decreased $15 million, to $90 million, as compared to $105 million in the fourth quarter 2019. Fallout-adjusted locks increased $3.0 billion, or 36 percent, to $11.2 billion, primarily driven by the robust refinance market. The net gain on loan sale margin decreased 43 basis points, to 0.80 percent for the first quarter 2020, as compared to 1.23 percent for the fourth quarter 2019 reflecting $45 million of hedge ineffectiveness caused by the Federal Reserve’s purchases of agency mortgage-backed securities in the last two weeks of March 2020. The first quarter of 2020 also generated $4 million lower intersegment revenue from the sale of mortgages to Community Banking.
Loan fees and charges, commissions and loan processing expense all decreased due to $712 million lower closings in the first quarter of 2020.




Comparison to Prior Year Quarter
The Mortgage Originations segment reported net income of $36 million for the three months ended March 31, 2020 and $24 million for the three months ended March 31, 2019. The increase was driven by the following:

Net interest income increased $9 million primarily due to $1.7 billion higher average LHFS balances resulting from increased mortgage production.
The benefit for credit losses was lower as changes in allowance related to volume are recorded at the segment level and our HFI residential loan portfolio declined due to higher prepayments.
Net gain on loan sales increased $72$38 million driven by $907 million$4.5 billion higher fallout adjusted mortgage rate locks and 698 basis points higher margin resulting from improved market conditions and a shift in channel mix toward higher margin retail channels. Higher net gain on
•
Compensation increased $7 million reflecting 219 higher FTE, with approximately 60 percent being driven by growth in the retail channel and 40 percent within mortgage fulfillment as capacity has been adjusted in response to growth in the overall mortgage market.
Loan fees and charges, loan sales were partially offset by higher other noninterest expense of $31 million driven by higheradministration income, commissions and increasedloan processing expense related to the channel mix shift towards retail along with a $9 million decrease in net interest income primarilyall increased due to a decrease of $607 million in average LHFS balances which supported$3.1 billion higher yielding asset growth in the community banking segment and a $15 million decrease in net return on MSRs primarily due to increased runoff as a result of higher refinance activity driven by lower interest rates.




Comparison to Prior Year to Date

The Mortgage Originations segment reported net income of $82 million for the nine months ended September 30, 2019, compared to $70 million for the nine months ended September 30, 2018. Net gain on loan sales increased $81 million, driven by higher margin resulting from improved market conditionsclosings and a shift in channelto retail mix toward higher margin retail channels. Higher net gain on loan sales were partially offset by a $27 million decrease in net interest income resulting from $733 million lower average LHFS balances which supported higher yielding asset growth in the community banking segment. Other noninterest income decreased $27 million primarily driven by a $2.7 billion decline in origination volume and $17 million decrease in net return on MSRs primarily related to increased runoff as a resultfirst quarter of higher refinance activity driven by lower interest rates. In addition, noninterest expense increased $32 million driven by higher commissions due to volume and increased expense related to the channel mix shift towards retail.2020.

Mortgage Servicing
    
The Mortgage Servicing segment services loans when we hold the MSR asset, and subservices mortgage loans for others through a scalable servicing platform on a fee for service basis. We may also collect other ancillary fees on loans serviced and earn income through the use of noninterest-bearingnoninterest bearing escrows. The loans we service generate custodial deposits which provide a stable funding source which supports interest-earning asset generation in the Community BankBanking and Mortgage Origination segments. Custodial deposits arise due toRevenue for serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our servicing or subservicing of loans for othersresponsibilities and represent the portiondelinquency status of the investor custodial accounts on deposit with the Bank. For certain subservice agreements, these deposits require us to credit the MSR owner interest against subservicing fees we charge. This cost is a component of net loan administration income.underlying loans. The Mortgage Servicing segment also services loansresidential mortgages for our LHFI portfolio in the Community Banking segment and our own MSR portfolio in the Mortgage Originations segment for which it earns intersegment revenue on a fee per loan basis.

Three Months Ended September 30,   Nine Months Ended September 30,  Three months ended1Q20 vs. 4Q191Q20 vs. 1Q19
Mortgage Servicing2019 2018 Change 2019 2018 ChangeMarch 31, 2020December 31, 2019March 31, 2019ChangeChange
(Dollars in millions)(Dollars in millions)
Summary of Operations            
Net interest income after (provision) for loan losses$5
 $2
 $3
 $11
 $5
 $6
Net interest income$4
$5
$3
$(1)$1
Net interest income after provision for credit losses4
5
3
(1)1
Loan fees and charges9
10
7
(1)2
Loan administration income36
34
29
2
7
Total noninterest income40
 24
 16
 113
 65
 48
45
43
36
2
9
Compensation and benefits(7) (4) (3) (19) (13) (6)10
10
6
—
4
Other noninterest expense and directly allocated overhead(24) (18) (6) (73) (49) (24)
Loan processing expense7
6
10
1
(3)
Other noninterest expense19
16
15
3
4
Total noninterest expense(31) (22) (9) (92) (62) (30)36
32
31
4
5
Income before indirect overhead allocations and income taxes14
 4
 10
 32
 8
 24
13
16
8
(3)5
Indirect overhead allocations(4) (5) 1
 (13) (15) 2
Provision (benefit) for income taxes2
 —
 2
 4
 (2) 6
Net income (loss)$8
 $(1) $9
 $15
 $(5) $20
Indirect overhead allocation(5)(5)(5)—
—
Provision for income taxes2
2
—
—
2
Net income$6
$9
$3
$(3)$3
 
Key Metrics            
Average number of loans serviced and subserviced988,251
 591,769
 396,482
 979,353
 515,292 464,061
Efficiency Ratio68.9% 86.9 % (18.0)% 74.2% 88.6 % (14.4)%73.8%66.6%81.9%7.2 %(8.1)%
Return on average assets80.7% (14.5)% 95.2 % 41.8% (24.5)% 66.3 %52.1%76.1%13.1%(24.0)%39.0 %
Average number of residential loans serviced1,082,412
1,042,105
906,271
40,307
176,141
Average number of FTE employees300
 238
 62
 286 221 65
478
480
271
(2)207



The following table presents loans serviced and the number of accounts associated with those loans.
September 30, 2019 December 31, 2018 September 30, 2018March 31, 2020December 31, 2019March 31, 2019
Unpaid Principal Balance (1)
 Number of accounts 
Unpaid Principal Balance (1)
 Number of accounts 
Unpaid Principal Balance (1)
 Number of accounts
Unpaid Principal Balance (1)
Number of accounts
Unpaid Principal Balance (1)
Number of accounts
Unpaid Principal Balance (1)
Number of accounts
(Dollars in millions)(Dollars in millions)
Loan servicing                 
Subserviced for others (2)
$171,145
 826,472
 $146,040
 705,149
 $106,297
 494,950
$193,037
916,989
$194,638
918,662
$170,476
814,248
Serviced for others25,039
 106,992
 21,592
 88,434
 21,835
 88,410
23,439
102,338
24,003
105,469
21,925
90,622
Serviced for own loan portfolio (3)
8,058
 60,088
 7,438
 57,401
 8,033
 35,185
8,539
63,085
9,536
66,526
7,631
56,687
Total loans serviced$204,242
 993,552
 $175,070
 850,984
 $136,165
 618,545
$225,015
1,082,412
$228,177
1,090,657
$200,032
961,557
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.
(3)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets.

Comparison to Prior Quarter

The Mortgage Servicing segment reported net income of $6 million for the three months ended March 31, 2020, compared to net income of $9 million for the three months ended December 31, 2019. The $3 million decrease in net income was primarily driven by a $2 million servicing advance write off related to a legacy sale along with higher occupancy, administrative and software expenses on a relatively flat volume of loans serviced.

Comparison to Prior Year Quarter

The Mortgage Servicing segment reported net income of $8$6 million for the three months ended September 30, 2019,March 31, 2020, compared to net lossincome of $1$3 million for the three months ended September 30, 2018.March 31, 2019. The $9$3 million increase in net income was primarily driven by a 64 percentan increase in the average number of loans serviced, or sub-serviced, during the three months ended September 30, 2019, compared to the three months ended September 30, 2018. This drove a $16 million increase in noninterest income and a $3 million increase in net interest income after provision for loan losses as a result of higherwhich increased average custodial balances, partially offset by $9 million higher noninterest expense to support business growth.

Comparison to Prior Year to Date

subservicing fees, late fee income as well as loan administration income. The Mortgage Servicing segment reported net income of $15 million for the nine months ended September 30, 2019, compared to a net loss of $5 million for the nine months ended September 30, 2018. The $20 million improvementincrease in net income was primarily drivenpartially offset by a 78 percent increase in the average number of loans serviced or sub-serviced, during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. This drove a $44 million increase in loan administration income and a $4 million increase in other ancillary income, partially offset by a $30 million increase in noninterest expenseexpenses due to support business growth.the acquisition of the Jacksonville default service center.

Other

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


Three Months Ended September 30,   Nine Months Ended September 30,  Three months ended1Q20 vs. 4Q191Q20 vs. 1Q19
Other2019 2018 Change 2019 2018 ChangeMarch 31, 2020December 31, 2019March 31, 2019Change
(Dollars in millions)(Dollars in millions)
Summary of Operations            
Net interest income (1)$(1) $5
 $(6) $—
 $9
 $(9)$(2)$(9)$(3)$7
$1
(Provision) benefit for loan losses—
 3
 (3) 1
 6
 (5)
Net interest income (expense) after (provision) benefit for loan losses(1) 8
 (9) 1
 15
 (14)
Total noninterest income (1)(11) —
 (11) 8
 7
 1
Provision (benefit) for credit losses9
(3)(1)12
10
Net interest income after provision for credit losses(11)(6)(2)(5)(9)
Loan administration (expense) income(16)(16)(13)—
(3)
Other noninterest income6
8
10
(2)(4)
Total noninterest income(10)(9)(3)(1)(7)
Compensation and benefits(35) (29) (6) (99) (89) (10)34
36
33
(2)1
Other noninterest expense and directly allocated overhead (1)—
 (11) 11
 (3) (28) 25
Commissions—
(1)1
1
(1)
Loan processing expense1
1
1
—
—
Other noninterest expense(5)5
—
(10)(5)
Total noninterest expense(35) (40) 5
 (102) (117) 15
30
41
35
(11)(5)
Income (loss) before indirect overhead allocations and income taxes(47) (32) (15) (93) (95) 2
Indirect overhead allocations24
 30
 (6) 73
 95
 (22)
Provision (benefit) for income taxes(6) (1) (5) (9) (1) (8)
Income before indirect overhead allocations and income taxes(51)(56)(40)5
(11)
Indirect overhead allocation26
27
25
(1)1
Provision for income taxes(7)(10)(4)3
(3)
Net income (loss)$(17) $(1) $(16) $(11) $1
 $(12)$(18)$(19)$(11)$1
$(7)
 
Key Metrics            
Average number of FTE employees1,104
 1,022
 82
 1,102
 1,010
 92
1,149
1,150
1,092
(1)57
(1)Includes offsetting adjustments made to reclassify income and expenses relating to operating leases and custodial deposits for subservicing clients.

Comparison to Prior Quarter

The Other segment reported a net loss of $18 million, for the three months ended March 31, 2020, compared to a net loss of $19 million for the three months ended December 31, 2019. The $1 million decrease in losses was primarily driven by the following:

Net interest income increased $7 million. Fourth quarter 2019 interest income was more severely impacted by the rate declines throughout the year and the Bank being in an asset sensitive position as compared to the first quarter 2020.
Provision for credit losses was $12 million higher driven by COVID-19's impact to our economic forecast.

Comparison to Prior Year Quarter

The Other segment reported a net loss of $17$18 million, for the three months ended September 30, 2019,March 31, 2020, compared to a net loss of $1 million for the three months ended September 30, 2018. The $16 million decrease was primarily due to a decrease in net interest income as a result of the Bank’s overall asset sensitive position and the drop in rates relative to the rate environment in the third quarter of 2018. Additionally, there was a $3 million benefit for loan losses from ALLL estimate changes not allocated to any other segment that occurred in the three months ended September 30, 2018, which did not recur this year.

Comparison to Prior Year to Date

The Other segment reported a net loss of $11 million for the ninethree months ended September 30, 2019, compared to net income of $1March 31, 2019. The $7 million for the nine months ended September 30, 2018. The decreaseincrease in net incomelosses was primarily due to a reduction in net interest income as a result of the Bank’s overall asset sensitive position and the drop in rates relativehigher provision for credit losses driven by COVID-19's impact to the rate environment in the third quarter of 2018. Additionally, the benefit for loan losses from ALLL estimate changes not allocated to any other segment were $5 million higher in the nine month period ended September 30, 2018 as compared to the current year.our economic forecast.


Risk Management

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

A comprehensive discussion of risks affecting us can be found in the Risk Factors section included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.2019 and in Item 1A of this Quarterly Report on Form 10-Q. Some of the more significant processes used to manage and control credit, market, liquidity 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, 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 credit limits in compliance with regulatory requirements. Under the Home Owners Loan Act (HOLA), the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 and Tier 2 capital plus any portion of the allowance for credit losses not included in the Tier 2 capital. This limit was $267.2$300 million as of September 30, 2019.March 31, 2020. We maintain a more conservative maximum internal Bank credit limit than required by HOLA of $100 million to any one borrower/obligor relationship, with the exception of warehouse borrower/obligor relationships which have a higher internal Bank limit of $125 million as all advances are fully collateralized by residential 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 credit exposures to a single or related borrower that exceed $50 million must be approved by the Board of Directors.

Our commercial loan portfolio has been built on our relationship-based lending strategy. We provide financing and banking products to our commercial customers in our core banking footprint and will follow those established customer relationships to meet their financing needs in areas outside of our footprint. We have also formed relationship lending on a national scale through our home builder finance and warehouse lending businesses. For all ofAt March 31, 2020, we had $9 billion in our commercial loan portfolio with our warehouse lending and home builder finance businesses accounting for 58 percent of the total. Of the remaining commercial loans wein our portfolio, the majority of CRE and C&I loans were with customers who have established relationships within our core banking footprint.

Credit risk within the commercial loan portfolio is managed using concentration limits based on line of business, industry, geography, and product type. This is managed through the use of strict underwriting standards and adhere to granularguidelines detailed in credit policies, ongoing loan level reviews, monitoring of the concentration limits to manageand continuous portfolio risk management reporting. The commercial credit policy outlines the risks and underwriting requirements and provides a framework for all credit risk in our portfolio.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 builtlow 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 consumerinternal commercial credit and appraisal policies and regulatory requirements.

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

Our commercial loan portfolio also includes loans that are part of the Shared National Credit ("SNC") Program. A SNC is defined as any loan or loan commitment of at least $100 million that is shared by three or more supervised institutions. On an annual basis, a joint regulatory task force performs a risk assessment of all SNCs. When completed, these risk ratings are


shared and our risk rating must be no better than the risk rating listed in the SNC assessment. Exposure and credit quality first mortgage loans tofor SNCs are carefully monitored and reported internally.

For our balance sheet making up 66 percentcommercial real estate portfolio, including owner and nonowner-occupied-properties and home builder finance lending, we obtain independent appraisals as part of our total consumer loan portfolio at September 30, 2019.underwriting and monitoring process. These appraisals are reviewed by an internal appraisal group that is independent from our sales and credit teams.

The home builder finance group is a national relationship-based lending platform that focuses on markets with strong housing fundamentals and higher population growth potential. The team primarily originates construction and development loans. We havegenerally lend in metropolitan areas or counties where verifiable market statistics and data are readily available to support underwriting and ongoing monitoring. We also grownevaluate the jurisdictions & laws, demographic trends (age, population and income), housing characteristics and economic indicators (unemployment, economic growth, household income trends) for the geographies where our home equity loansborrowers primarily operate. We engage independent licensed professionals to supply market studies and lines of credit as well as our other consumer loan portfolio, led by our non-auto indirect lending business, which makes up 75%feasibility reports, environmental assessments and project site inspections to complement the procedures we perform internally. Further, we perform ongoing monitoring of the 'other consumer' loan portfolio. 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 profile. We have built our consumer loan portfolio by adding high quality first mortgage loans to our balance sheet making up 61.1 percent of our total consumer loan portfolio at March 31, 2020. We have also grown our home equity loans and lines of credit as well as our other consumer loan portfolio.

Loans held-for-investment

The following table summarizes loans held-for-investment by category:
Three months ended1Q20 vs. 4Q191Q20 vs. 1Q19
September 30, 2019 December 31, 2018 ChangeMarch 31, 2020December 31, 2019March 31, 2019Change
(Dollars in millions)(Dollars in millions)
Consumer loans      
Residential first mortgage$3,258
 $2,999
 $259
$2,964
$3,154
$3,100
$(190)$(136)
Home equity (1)
985
 731
 254
$1,028
$1,024
$796
$4
$232
Other693
 314
 379
$858
$729
$433
$129
$425
Total consumer loans4,936
 4,044
 892
4,850
4,907
4,329
(57)521
Commercial loans    
 
Commercial real estate2,697
 2,152
 545
$3,092
$2,828
$2,324
264
768
Commercial and industrial1,700
 1,433
 267
$1,880
$1,634
$1,651
246
229
Warehouse lending3,215
 1,459
 1,756
$3,973
$2,760
$1,632
1,213
2,341
Total commercial loans7,612
 5,044
 2,568
8,945
7,222
5,607
1,723
3,338
Total loans held-for-investment$12,548
 $9,088
 $3,460
$13,795
$12,129
$9,936
$1,666
$3,859
(1)Includes second mortgages, HELOCs and HELOANs.

We continuePrior to COVID-19 we had continued to strengthen our Community Banking segment by growing interest earning assets.LHFI. Our commercial loan portfolio has grown $2.6grew $1.7 billion, or 5113 percent, from December 31, 20182019 to September 30, 2019,March 31, 2020, led by growth in our warehouse lending portfolio due to increased refinance activity in the mortgage industry. In addition, our consumer loan portfolio has increased $892decreased $57 million, or 224 percent, from December 31, 20182019 to September 30, 2019, led by a $379March 31, 2020. A $129 million increase in other consumer loans primarily due to growth in our non-auto indirect lending business, andwas more than offset by a $259$190 million increasedecrease in residential first mortgage loans.loans due to higher refinance activity and lower originations to the HFI portfolio. Since COVID-19 began, we are focusing on our lower-risk, higher return warehouse lending portfolio while shifting to a credit management focus, rather than growth, on our remaining commercial portfolio due to economic conditions. At the present time, new relationships require approval of our CEO, Chief Credit Officer and Chief Lending Officer.
    
Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. We typically hold certain mortgage loans in LHFI that do not qualify for sale to


the Agencies and that have an acceptable yield and risk profile. The LTV requirements on our residential first mortgage loans vary depending on occupancy, property type, loan amount, and FICO scores. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. As of September 30, 2019,March 31, 2020, loans in this portfolio had an average FICO score of 756737 and an average LTV of 7067 percent.



The following table presents our total residential first mortgage LHFI by major category:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
(Dollars in millions)(Dollars in millions)
Estimated LTVs (1)
    
Less than 80% and refreshed FICO scores (2):
    
Equal to or greater than 660$2,397
 $2,462
2,053
2,263
Less than 66089
 54
110
93
80% and greater and refreshed FICO scores (2):
   
Equal to or greater than 660672
 448
672
687
Less than 66096
 29
129
111
U.S. government guaranteed4
 6
Total$3,258
 $2,999
$2,964
$3,154
Geographic region    
California$1,274
 $1,238
1,096
1,205
Michigan433
 314
443
442
Florida199
214
Texas221
 193
194
205
Washington211
 195
156
181
Florida188
 195
Illinois100
 103
85
95
New York84
84
Arizona76
79
Colorado84
 72
64
68
Arizona78
 72
New York68
 73
Maryland52
 57
49
49
Others549
 487
518
532
Total$3,258
 $2,999
$2,964
$3,154
(1)LTVs reflect loan balance at the date reported, as a percentage of property values as appraised at loan origination.
(2)FICO scores are updated at least on a quarterly basis or more frequently, if available.
        
The following table presents our total residential first mortgage LHFI as of September 30, 2019,March 31, 2020, by year of origination:
2019 2018 2017 2016 2015 and Prior Total20202019201820172016 and PriorTotal
(Dollars in millions)  (Dollars in millions) 
Residential first mortgage loans$825
 $498
 $587
 $486
 $862
 $3,258
97
819
410
502
$1,136
$2,964
Percent of total25.3% 15.3% 18.0% 14.9% 26.5% 100.0%3.3%27.6%13.8%16.9%38.3%100.0%

Home equity. Our home equity portfolio includes HELOANs, second mortgage loans, and HELOCs. These loans require full documentation and are underwritten and priced in an effort to ensure credit quality and loan profitability. Our debt-to-income ratio on HELOANs and HELOCs is capped at 43 percent and 45 percent, respectively. We currently limit the maximum CLTV to 89.99 percent and FICO scores to a minimum of 660 for primary residences and 680 for second homes. Second mortgage loans and HELOANs are fixed rate loans and are available with terms up to 20 years. HELOC loans are variable-rate loans that contain a 10-year interest only draw period followed by a 20-year amortizing period. At September 30, 2019,March 31, 2020, HELOCs and HELOANs in a first lien position totaled $148$194 million. As of September 30, 2019,March 31, 2020, loans in this portfolio had an average FICO score of 750740 and an average CLTV of 6871 percent.



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



The following table presents our other consumer loan portfolio by purchase type.type:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
Balance % of Portfolio Balance % of PortfolioBalance% of PortfolioBalance% of Portfolio
(Dollars in millions)(Dollars in millions)
Indirect Lending$519
 74.9% $153
 48.7%
Indirect lending619
72%577
79%
Point of Sale58
 8.4% 28
 8.9%159
19%63
9%
Other116
 16.7% 133
 42.4%80
9%89
12%
Total other consumer loans$693
 100% $314
 100%858
100%729
100%

At September 30, 2019,March 31, 2020, other consumer loans increased to $693$858 million compared to $314$729 million at December 31, 2018.2019. The increase is primarily due to growth in our high quality, dealer relationship based, non-auto indirect lending business drivenof which 65 percent is secured by our established relationships with dealers for the originationboats and 35 percent secured by recreational vehicles and point of boat and recreational vehicle consumersale loans. As of September 30, 2019,March 31, 2020, loans in our indirect portfolio had an average FICO score of 765.764. Point of sale loans include loans originated in conjunction with third-party financial technology companies.

Commercial real estate loans. The commercial real estate portfolio contains loans collateralized by diversified property types which are primarily income producing in the normal course of business. The majority of our retail exposure is to neighborhood strip centers and single tenant locations, which include drug stores. Generally, the maximum LTV is 80 percent, or 90 percent for owner-occupied real estate, and the minimum debt service coverage is 1.20. At September 30, 2019,March 31, 2020, our average LTV and average debt service coverage for our CRE portfolio was 4951 percent and 2.552.36 times, respectively. Our CRE loans primarily earn interest at a variable rate.

We have established a national home builder finance program and at September 30, 2019,March 31, 2020, our commercial portfolio contained $2.0$2.1 billion in commitments with $911$1.15 million in outstanding loans. The majority of theseThese loans are collateralized and included in our CRE portfolio while the remaining loans are unsecured and included in our C&I portfolio.

As of March 31, 2020, our CRE portfolio included $240 million of SNCs and one leveraged lending loan of $4 million. The SNC portfolio had seventeen borrowers with an average UPB of $14 million and an average commitment of $20 million. There were no nonperforming loans as of March 31, 2020, and no SNC or leveraged loans outstanding were rated as special mention or substandard.



The following table presents our total CRE LHFI by collateral location and collateral type:
 MI TX CA CO FL Other Total % by collateral type
 (Dollars in millions)  
September 30, 2019               
Home Builder$1
 $223
 $104
 $161
 $99
 $161
 $749
 27.8%
Owner Occupied312
 4
 25
 —
 5
 64
 410
 15.3%
Retail202
 —
 6
 4
 —
 119
 331
 12.3%
Multi family134
 58
 9
 1
 32
 115
 349
 12.9%
Office136
 18
 16
 —
 2
 53
 225
 8.3%
Hotel/motel98
 17
 22
 —
 —
 46
 183
 6.8%
Senior Living facility47
 26
 —
 —
 —
 68
 141
 5.2%
Industrial45
 —
 10
 —
 1
 28
 84
 3.1%
Parking garage/Lot10
 9
 1
 —
 1
 34
 55
 2.0%
Land - Residential4
 —
 13
 —
 12
 6
 35
 1.3%
Single family residence26
 —
 —
 —
 —
 2
 28
 1.0%
Shopping Mall4
 —
 14
 —
 —
 —
 18
 0.7%
Non Profit1
 —
 2
 1
 3
 3
 10
 0.4%
All Other (1)8
 22
 7
 2
 7
 33
 79
 2.9%
Total$1,028
 $377
 $229
 $169
 $162
 $732
 $2,697
 100.0%
Percent by state38.1% 14.0% 8.5% 6.3% 6.0% 27.1% 100.0%  
 MITXCACOFLOtherTotal% by collateral type
 (Dollars in millions) 
March 31, 2020        
Home builder$27
$263
$148
$168
$124
$205
$935
30.2%
Owner occupied356
4
24
—
10
55
449
14.5%
Multi family173
60
21
6
7
146
413
13.4%
Retail (1)190
—
6
4
—
115
315
10.2%
Office175
19
16
—
2
55
267
8.6%
Hotel/motel117
—
24
—
—
65
206
6.7%
Senior living facility65
26
—
—
1
51
143
4.6%
Industrial51
4
19
—
1
28
103
3.3%
Parking garage/lot26
9
1
—
1
34
71
2.3%
Land-residential (2)3
—
4
—
16
5
28
0.9%
Shopping mall (3)4
—
14
—
—
—
18
0.6%
Non-profit1
—
2
1
3
3
10
0.2%
Single family residence4
—
—
—
—
—
4
0.1%
All other (4)12
48
13
2
5
50
130
4.3%
Total$1,204
$433
$292
$181
$170
$812
$3,092
100.0%
Percent by state38.9%14.0%9.4%5.9%5.5%26.3%100.0% 
(1)Loans secured by SFR 1-4 properties
(2)Includes home builder loans secured by land. Land residential includes development and unimproved vacant land.
(3)Includes multipurpose retail space, neighborhood centers, strip centers and single-use retail space
(4)All other primarily includes: parking garage, non-profit, mini-storage facilities, data centers, movie theater, etc.



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

As of March 31, 2020, our C&I portfolio included $974 million of SNCs, of which we were the lead bank of 15 percent. The services sector and the financial and insurance sector comprised the majority of the portfolio's unpaid principal balance with 38 and 32 percent of the balance, respectively. The SNC portfolio had seventy-five borrowers with an average UPB of $13 million and an average commitment of $18 million. There were no nonperforming loans as of March 31, 2020, and no borrowers with loans outstanding were rated as special mention or substandard.

As of March 31, 2020, our C&I portfolio included $377 million of leveraged lending, of which $257 million were SNCs. The manufacturing sector comprised 52 percent of the portfolio, the financial and insurance sector comprised 23 percent. There were no nonperforming loans as of March 31, 2020, and loans totaling $35 million of UPB were rated as special mention or substandard. Included in Financial & Insurance within our C&I portfolio, are $154 million in loans outstanding to 3 borrowers that are collateralized by MSR assets. Our amounts outstanding to those borrowers range from $30 million to $94 million and the ratio of the loan outstanding to the fair market value of the collateral ranges from 38 percent to 53 percent.




The following table presents our total C&I LHFI by borrower's geographic location and industry type as defined by North American Industry Classification System (NAICS):
MI CA OH WI IN TX NY SC LA CT Other Total % by industryMIOHNYFLINWICATXSCCOOtherTotal% by industry
     
September 30, 2019                         
March 31, 2020  
Financial & Insurance$26
 $20
 $24
 $3
 $15
 $31
 $73
 $74
 $22
 $6
 $104
 $398
 23.4%$37
$21
$66
$94
$15
$19
$19
$52
$99
$3
$83
$508
27.0%
Services154
 42
 2
 —
 10
 32
 —
 —
 23
 43
 87
 $393
 23.1%109
2
—
2
9
—
41
29
—
—
163
$355
18.9%
Manufacturing156
 5
 43
 8
 1
 13
 —
 —
 —
 —
 60
 $286
 16.8%172
32
—
—
1
8
6
16
—
6
67
$308
16.4%
Home Builder Finance—
 29
 9
 —
 —
 78
 2
 —
 27
 —
 14
 $159
 9.4%—
—
—
1
—
—
31
112
—
24
72
$240
12.8%
Rental & Leasing107
16
5
—
—
—
—
—
—
23
17
$168
8.9%
Distribution139
 11
 2
 —
 2
 —
 —
 —
 —
 —
 16
 $170
 10.0%91
1
—
—
2
—
18
—
—
—
16
$128
6.8%
Rental & Leasing74
 —
 9
 —
 1
 —
 —
 —
 —
 —
 35
 $119
 7.0%
Healthcare2
 13
 —
 18
 1
 9
 1
 —
 —
 —
 33
 $77
 4.5%2
1
—
—
1
18
15
8
—
—
33
$78
4.1%
Government & Education30
 6
 —
 —
 22
 —
 —
 —
 —
 22
 —
 $80
 4.7%29
—
—
—
20
—
6
—
—
—
13
$68
3.6%
Servicing Advances—
 —
 —
 —
 —
 —
 —
 —
 —
 —
 10
 $10
 0.6%—
—
—
—
—
—
—
—
—
17
—
$17
0.9%
Commodities3
 —
 —
 —
 1
 —
 —
 —
 —
 —
 4
 $8
 0.5%4
—
—
—
1
—
—
—
—
—
5
$10
0.5%
Total$584
 $126
 $89
 $29
 $53
 $163
 $76
 $74
 $72
 $71
 $363
 $1,700 100.0%$551
$73
$71
$97
$49
$45
$136
$217
$99
$73
$469
$1,880100.0%
Percent by state34.4% 7.4% 5.2% 1.7% 3.1% 9.6% 4.5% 4.4% 4.2% 4.2% 21.4% 100.0%  29.3%3.9%3.8%5.2%2.6%2.4%7.2%11.5%5.3%3.9%24.9%100.0% 

Warehouse lending. We have a national platform with 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. In response to COVID-19, we have increased credit requirements for government loans and lowered the advance rate for loans that we believe have higher risk, as well as not accepting jumbo or non-qualified mortgage loans as collateral.

Underlying mortgage loans are predominantly originated using the Agencies' underwriting standards. The guideline for debt to tangible net worth is 15 to 1. The aggregate committed amount of adjustable-rate warehouse lines of credit granted to other mortgage lenders at September 30, 2019March 31, 2020 was $4.8$6.3 billion, of which $3.2$4.0 billion was outstanding, compared to $3.8$3.9 billion at DecemberMarch 31, 2018,2019, of which $1.5$1.6 billion was outstanding.

Credit Quality

Trends in certain credit quality characteristics in our loan portfolios, remain strong and are a result of our focus on effectively managing credit risk through our careful underwriting standards and processes. The credit quality of our loan portfolios is demonstrated by low delinquency levels, minimal charge-offs and low levels of nonperforming loans over an extended period.loans.

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


Nonperforming assets    

The following table sets forth our nonperforming assets:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
(Dollars in millions)(Dollars in millions)
LHFI    
Consumer loans    
Residential first mortgage$14
 $11
$16
$13
Home equity1
 1
1
2
Other Consumer1
 —
2
1
Total nonperforming LHFI16
 12
19
16
TDRs    
Consumer loans   
Residential first mortgage8
 8
$8
$8
Home equity2
 2
2
2
Total nonperforming TDRs10
 10
10
10
Total nonperforming LHFI and TDRs (1)
26
 22
29
26
Real estate and other nonperforming assets, net9
 7
10
10
LHFS17
 10
5
5
Total nonperforming assets$52
 $39
$44
$41
Nonperforming assets to total assets (2)
0.16% 0.16 %
0.14%0.15%
Nonperforming LHFI and TDRs to LHFI0.21% 0.24 %
0.21%0.21%
Nonperforming assets to LHFI and repossessed assets (2)
0.29% 0.32 %
0.28%0.30%
(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, which are recorded at fair value.

The following table sets forth activity related to our total nonperforming LHFI and TDRs:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2019 2018 2019 201820202019
(Dollars in millions)(Dollars in millions)
Beginning balance$63
 $27
 $22
 $29
26
22
Additions4
 1
 82
 9
10
5
Reductions       
Principal payments(39) (1) (41) (5)(6)(1)
Charge-offs(1) —
 (34) (1)(1)(1)
Returned to performing status(1) (1) (1) (4)
Transfers to REO—
 (1) (2) (3)
(1)
Total nonperforming LHFI and TDRs (1)
$26
 $25
 $26
 $25
$29
$24
(1)Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.

During the nine months ended September 30, 2019 and September 30, 2018, we did not have any sales of nonperforming loans. In the third quarter of 2019, we received proceeds in exchange for the collateral related to Live Well Financial, Inc. and we have no further exposure related to this borrower in our financial statements.




Delinquencies

The following table sets forth loans 30-89 days past due in our LHFI portfolio:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
(Dollars in millions)(Dollars in millions)
Performing loans past due 30-89:    
Consumer loans    
Residential first mortgage$7
 $6
$11
$9
Home equity2
 1
3
1
Other3
 —
5
4
Total consumer loans$19
$14
Commercial Real Estate6
—
Commercial and Industrial1
—
Total commercial loans$7
$—
Total performing loans past due 30-89 days$12
 $7
$26
$14

Early stage delinquencies increased at September 30, 2019,March 31, 2020, as loans 30 to 89 days past due were $12$26 million, or 0.100.19 percent of total LHFI, compared to $7$14 million, or 0.080.12 percent of total LHFI, at December 31, 2018.2019. For further information, see Note 4 - Loans Held-for-Investment.

Payment Deferrals

In March 2020, as a response to COVID-19, consumer and commercial customers were offered 90-day principal and interest payment deferrals.

The table below summarizes borrowers in our loan portfolios that have requested payment deferral:
 As of April 30, 2020
 Number of BorrowersUPBPercent
 (Dollars in millions)
Loans Held-For-Investment   
Consumer loans   
Residential first mortgage943$305
10.3%
Home equity113696
9.3%
Other consumer1128
43
5.0%
Total consumer loans3,207
$444
9.2%
Commercial loans   
Commercial real estate132
$378
12.2%
Commercial and industrial169
174
9.3%
Warehouse lending—
—
—%
Total commercial loans301
$552
6.2%
Total consumer and commercial loans3,508
$996
7.2%
    
Loans Held-For-Sale   
Residential first mortgage524
$205
4.7%












The table below summarizes the percent of our residential loan servicing portfolio that has requested and received forbearance:
 Total PopulationForbearance Requested  
 As of March 31, 2020As of April 30, 2020Percent of UPBPercent of Accounts
 Unpaid Principal Balance (1)Number of accountsUnpaid Principal Balance (1)Number of accounts
 (Dollars in millions)
Loan servicing      
Subserviced for others (2)$193,037
916,989
$23,330
100,950
12.1%11.0%
Serviced for others23,439
102,338
4,333
17,055
18.5%16.7%
Serviced for own loan portfolio (3)8,539
63,085
788
4,002
9.2%6.3%
Total loans serviced$225,015
1,082,412
$28,451
122,007
12.6%11.3%
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.
(3)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets.

As the MSR owner for loans serviced for others, we are required to advance principal and interest for a period of up to four months and tax and insurance payments until the Agencies make us whole. We anticipate servicing advances for these loans in forbearance to increase throughout the remainder of 2020. We believe that we have ample liquidity to handle the increase in servicing advances. We initially provide advances on a short-term basis for loans we subservice and 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") 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. 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 collected.

Beginning in March 2020, as a response to COVID-19, we have offered our consumer and commercial customer’s principal and interest payment deferrals and extensions. We considered these programs in the context of whether or not the restructuring of these contracts would constitute a Troubled Debt Restructuring (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. We believe that the extension and deferral programs, including forbearance specified by the Agencies, and 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:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
(Dollars in millions)(Dollars in millions)
Performing TDRs    
Consumer Loans    
Residential first mortgage$20
 $22
$20
$20
Home equity19
 22
17
18
Commercial Loans   
Total performing TDRs39
 44
37
38
Nonperforming TDRs     
Nonperforming TDRs3
 3
4
3
Nonperforming TDRs, performing for less than six months7
 7
6
7
Total nonperforming TDRs10
 10
10
10
Total TDRs$49
 $54
$47
$48
ALLL on consumer TDR loans$8
 $10



At September 30, 2019March 31, 2020 our total TDR loans decreased $5$1 million compared to December 31, 20182019, primarily due to principal payments and payoffs out-pacing new additions. Of our total TDR loans, 79 percent and 82 percent were in performing status at September 30, 2019March 31, 2020 and December 31, 2018, respectively.2019. For further information, see Note 4 - Loans Held-for-Investment.


Allowance for Credit Losses

AllowanceIn June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the incurred loss methodology with a lifetime expected loss methodology that is referred to as the current expected credit loss methodology. We adopted the requirements of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) and all related amendments on January 1, 2020 using the modified retrospective method for Loan Losses

The ALLL represents management's estimate of probable losses that are inherent in our LHFI portfolio but which have not yet been realized.all financial assets measured at amortized cost and unfunded commitments. We establish an allowance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. For further information, see Note 4 - Loans Held-for-Investment.Held-for-Investment and Note 18 - Recently Issued Accounting Pronouncements. Concurrent with the adoption of ASU 2016-13, we have implemented dual risk rating models which use probability of default, loss given default and exposure at default, leveraging an industry leading third party vendor.

The ALLL was $110 million at September 30, 2019,Under ASC 326 we are required to record our estimate of the expected lifetime losses related to the loans. In general, the provision should be higher for portfolios where the average ‘lifetime' is longer than the loss emergence period under the previous standard.

Additionally, the new standard requires us to forecast economic conditions and apply those forecasts, which we model, to determine our expectation of lifetime credit loss. This could have a significant impact and could cause volatility as compared to $128 million at December 31, 2018. The ALLLthe previous standard, which did not include management’s forecasts of economic conditions as a percentage of LHFI was 0.9 percent at September 30, 2019 compared to 1.4 percent at December 31, 2018. The decline in ALLL as a percentage of LHFI is reflective of strong credit quality, as loan growth in both the consumer and commercial loan portfolios consists of high credit quality assets, combined with sustained low delinquency and charge-off levels. At September 30, 2019, we had a 0.9 percent allowance coverage on both our consumer loan portfolio and our commercial loan portfolio.economic forecasts are inherently uncertain.

The following table sets forth certain information regardingpresents the allocationimpact of our ALLL to eachadopting the standard by loan category:portfolio:
 September 30, 2019
 Investment Loan Portfolio Percent of Portfolio Allowance Amount Allowance as a Percent of Loan Portfolio
 (Dollars in millions)
Consumer loans       
Residential first mortgage$3,250
 25.9% $28
 0.9%
Home Equity982
 7.8% 16
 1.6%
Other693
 5.5% 6
 0.9%
Total consumer loans4,925
 39.3% 50
 1.0%
Commercial loans       
Commercial real estate2,697
 21.5% 33
 1.2%
Commercial and industrial1,701
 13.6% 22
 1.3%
Warehouse lending3,215
 25.6% 5
 0.2%
Total commercial loans7,613
 60.7% 60
 0.8%
Total consumer and commercial loans (1)
$12,538
 100.0% $110
 0.9%
 Residential
First
Mortgage		Home EquityOther
Consumer		Commercial
Real Estate		Commercial
and Industrial		Warehouse
Lending		Total LHFI PortfolioUnfunded Commitments
 (Dollars in millions)
Balance as of December 31, 2019$22
$14
$6
$38
$22
$5
$107
$3
Impact of adopting ASC 32625
12
10
(14)(6)(4)23
7
Adjusted balance as of January 1, 2020$47
$26
$16
$24
$16
$1
$130
$10
(1)Excludes loans carried under the fair value option.

 December 31, 2018
 Investment Loan Portfolio Percent of Portfolio Allowance Amount Allowance as a Percentage of Loan Portfolio
 (Dollars in millions)
Consumer loans       
Residential first mortgage$2,991
 32.9% $38
 1.3%
Home equity729
 8.0% 15
 2.1%
Other consumer314
 3.5% 3
 1.0%
Total consumer loans4,034
 44.4% 56
 1.4%
Commercial loans       
Commercial real estate2,152
 23.7% 48
 2.2%
Commercial and industrial1,433
 15.8% 18
 1.3%
Warehouse lending1,459
 16.1% 6
 0.4%
Total commercial loans5,044
 55.6% 72
 1.4%
Total loans held-for-investment (1)
$9,078
 100.0% $128
 1.4%
(1) ExcludesThe impact of adopting ASC 326 was primarily driven by moving to a lifetime loss methodology. The lifetime loss methodology considers a reasonable and supportable economic forecast period before reverting economic variables over a one-year period to its long-term historical averages on a straight-line basis. The residential first mortgage, home equity and other consumer portfolios experienced an increase in allowance due to the weighted average life of these instruments being longer than their loss emergence period in the legacy incurred loss methodology. The commercial real estate and commercial and industrial portfolios experienced a decrease primarily due to the shorter duration of these loans carriedas compared to the loss emergence period under the fair value option.previous incurred loss method. Additionally, the look-back period for these portfolios utilized in the incurred loss methodology of ten years, which was heavily impacted by the previous recession, as compared to the estimated ASC 326 reserve as of January 1, 2020, which included a more favorable economic forecast compared to the ten-year average performance. The warehouse lending portfolio experienced a decrease due to their collateral, very short duration and history of very low credit losses. The unfunded commitment reserve was increased primarily due to the life of loan concept under the ASC 326 methodology.



The following table presents changesthe change in ALLL:the allowance balance for the quarter ended March 31, 2020:
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 (Dollars in millions)
Beginning balance$110
 $137
 $128
 $140
Provision (benefit) for loan losses1
 (2) 18
 (3)
Charge-offs       
Consumer loans       
Residential first mortgage(1) (2) (3) (3)
Home equity(1) —
 (1) (2)
Other consumer(2) —
 (5) (1)
Commercial loans       
Commercial and industrial—
 —
 (31) —
Total charge offs(4) (2) (40) (6)
Recoveries       
Consumer loans       
Residential first mortgage1
 1
 1
 1
Home equity1
 —
 2
 2
Other consumer—
 —
 —
 —
Total consumer loans2
 1
 3
 3
Commercial loans       
Commercial real estate—
 —
 —
 —
Commercial and industrial1
 —
 1
 —
Warehouse lending—
 —
 —
 —
Total commercial loans1
 —
 1
 —
Total recoveries3
 1
 4
 3
Charge-offs, net of recoveries(1) (1) (36) (3)
Ending balance$110
 $134
 $110
 $134
Net charge-off to LHFI ratio (annualized) (1)
0.02% 0.05% 0.52% 0.05%
 Three Months Ended March 31, 2020 
 Residential First MortgageHome EquityOther ConsumerCommercial Real EstateCommercial and IndustrialWarehouse LendingTotal LHFI Portfolio (1)Unfunded CommitmentsTotal ACL
 (Dollars in millions)
Adjusted beginning allowance balance$47
$26
$16
$24
$16
$1
$130
$10
$140
Provision (benefit) for credit losses:      
  
Loan volume(2)—
1
2
2
—
3
—
3
Economic forecast and credit4
2
—
2
—
—
8
10
18
Other (2)(2)(4)(1)—
—
—
(7)—
(7)
Charge-offs(1)(1)(1)—
—
—
(3)—
(3)
Recoveries—
—
1
—
—
—
1
—
1
Ending allowance balance$46
$23
$16
$28
$18
$1
$132
$20
$152
(1)Excludes loans carried at fair value.
(1) Excludes loans carried under the fair value option
(2) Includes changes in the individual evaluated reserve

The allowance for credit losses was $152 millionat March 31, 2020, compared to $140 million at January 1, 2020, adjusted for the impact of adopting ASC 326. The increase in the allowance is reflective of changes in the economic forecast used in the ACL models between January 1, 2020 and March 31, 2020. We utilized the Moody’s March 27 base scenario in our forecast which included an immediate, severe and sharp recession driven by COVID-19 that assumed second quarter GDP to decline at an annualized rate of 18 percent, unemployment (adjusted for the impact of the government stimulus) of 9 percent and HPI decreasing 3 percent by the end of the year. These actions drove an increase in our reserves of approximately $18 million, which includes an increase in our reserves for unfunded commitments of $10 million. This was partially offset by a reduction in reserves on specifically identified loans and the low levels of delinquencies in the various LHFI portfolios through March 31, 2020.

The allowance as a percentage of LHFI was 1.1 percent at March 31, 2020 compared to 0.9 percent at December 31, 2019. The increase in the allowance as a percentage of LHFI is reflective of the additional increases in the reserve to reflect the change in economic forecast used in the ACL models between January 1, 2020 and March 31, 2020, including increases in unemployment and decreases in GDP and HPI as a result of the ongoing COVID-19 pandemic. At March 31, 2020, we had a 1.8 percent and 0.7 percentallowance coverage on our consumer loan portfolio and our commercial loan portfolio, respectively.
The following tables set forth certain information regarding the allocation of our allowance to each loan category:

March 31, 2020
 LHFI PortfolioPercent of
Portfolio		Allowance Amount (1)Allowance as a Percent of Loan Portfolio
Consumer loans







Residential first mortgage$2,964
21.5%$46
1.6%
Home equity1,028
7.5%23
2.2%
Other consumer858
6.2%17
2.0%
Total consumer loans4,850
35.2%86
1.8%
Commercial loans







Commercial real estate$3,092
22.4%$43
1.4%
Commercial and industrial1,880
13.6%22
1.2%
Warehouse lending3,973
28.8%1
—%
Total commercial loans8,945
64.8%66
0.7%
Total consumer and commercial loans (2) (3)$13,795
100.0%$152
1.1%
(1) Includes allowance for loan losses and reserve for unfunded commitments
(2) Excludes loans carried under the fair value option
(3) Information reflects the impact of ASC 326 adoption



 December 31, 2019
 LHFI Portfolio
Percent of
Portfolio
Allowance Amount (1)Allowance as a Percent of Loan Portfolio
Consumer loans    
Residential first mortgage$3,154
26.0%$22
0.7%
Home equity1,024
8.4%14
1.4%
Other consumer729
6.0%6
0.8%
Total consumer loans4,907
40.4%42
0.9%
Commercial loans   

Commercial real estate$2,827
23.3%$40
1.4%
Commercial and industrial1,634
13.5%23
1.4%
Warehouse lending2,760
22.8%5
0.2%
Total commercial loans7,221
59.6%68
0.9%
Total consumer and commercial loans (2) (3)$12,128
100.0%$110
0.9%
(1) Includes allowance for loan losses and reserve for unfunded commitments
(2) Excludes loans carried under the fair value option
(3) Information reflects the impact of ASC 326 adoption

The following table presents additional information on each class of loans in our LHFI portfolio, including average loan life:
 March 31, 2020December 31, 2019
 Investment Loan PortfolioWeighted Average Loan LifeInvestment Loan PortfolioWeighted Average Loan Life
Consumer loans    
Residential first mortgage$2,964
5
$3,154
5
Home equity1,028
3
1,024
3
Other consumer858
1
729
2
Total consumer loans4,850
 4,907
 
Commercial loans    
Commercial real estate$3,092
2
$2,828
2
Commercial and industrial1,880
1
1,634
1
Warehouse lending3,973
—
2,760
—
Total commercial loans8,945
 7,222
 
Total consumer and commercial loans (1)$13,795
 $12,129
 
(1) Excludes loans carried under the fair value option

Market Risk

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

We are subject to interest rate risk due to:

The maturity or repricing of assets and liabilities at different times or for different amounts
Differences in short-term and long-term market interest rate changes
The remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change

Our Asset/Liability Committee ("ALCO"), which is composed of our executive officers and certain members of other management, monitors interest rate risk on an on-goingongoing basis in accordance with policies approved by our board of directors. The ALCO reviews interest rate positions and considers the impact projected interest rate scenarios have on earnings, capital, liquidity, business strategies, and other factors. However, management has the latitude to change interest rate positions within certain limits if, in management's judgment, the change will enhance profitability 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,” for interest-bearing deposits, wherein the rates paid to customers change relative to changes in benchmark interest rates. The effect on net interest income over a 12 month time horizon due to hypothetical changes in market interest rates is presented in the table below. In this interest rate shock simulation, as of the periods presented, interest rates have been adjusted by instantaneous parallel changes rather than in a ramp simulation which applies interest rate changes over time. All rates, short-term and long-term, are changed by the same amount (e.g. plus or minus 100 basis points) resulting in the shape of the yield curve remaining unchanged.

September 30, 2019
March 31, 2020March 31, 2020
Scenario Net interest income $ Change % ChangeNet interest income$ Change% Change
 (Dollars in millions) (Dollars in millions) 
100 $581 $38 7.0%$648
$39
6.5 %
Constant $543 $— —%608
—
— %
(100) $500 $(43) (7.9)%538
(70)(11.6)%
December 31, 2018
December 31, 2019December 31, 2019
Scenario Net interest income $ Change % ChangeNet interest income$ Change% Change
 (Dollars in millions)  (Dollars in millions) 
100 $491 $13 2.7%$592
$34
6.0 %
Constant $478 $— —%559
—
— %
(100) $465 $(13) (2.7)%520
(39)(6.9)%

In the net interest income 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. Due to the historically low interest rate environment experienced in the first quarter of 2020, we executed approximately $1.5 billion of interest rate swaps and long-term FHLB advances in the first quarter of 2020. These transactions lock in lower rate funding between 3 and 7 years at an average cost of 61 basis points, well below our cost of funds in the first quarter. At September 30, 2019,March 31, 2020, the $65$49 million increase in net interest income in the constant scenario as compared to that at December 31, 20182019 was primarily driven by the growth in our interest earning assets partially offset by lower short term market rates compared to the same period a year ago.three months ended December 31, 2019.

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. Future interest rates not moving in a parallel manner across the yield curve, how the balance sheet will respond and shift based on a change in future interest rates and how the Company will respond are not included in this analysis and limit the predictive value of these scenarios.

Economic value of equity

Management also utilizes Economic Value of Equity (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 provide a more comprehensive analysis of interest rate risk exposure.
 
There are assumptions and inherent limitations in any methodology used to estimate the exposure to changes in market interest rates and as such, sensitivity calculations used in this analysis are hypothetical and should not be considered to be predictive of future results. This analysis evaluates risks to the current balance sheet only and does not incorporate future


growth assumptions. Additionally, the analysis assumes interest rate changes are instantaneous and the new rate environment is constant but does not include actions management may undertake to manage risk in response to interest rate changes. Each rate scenario reflects unique prepayment and repricing assumptions. Management derives these assumptions by considering published market prepayment expectations, repricing characteristics, our historical experience, and our asset and liability management strategy. This analysis assumes that changes in interest rates may not affect or could partially affect certain instruments based on their characteristics.



The following table is a summary of the changes in our EVE that are projected to result from hypothetical changes in market interest rates 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 increases and decreases as indicated in the scenarios shown in the table below.
September 30, 2019 December 31, 2018  
March 31, 2020March 31, 2020December 31, 2019 
Scenario EVE EVE% $ Change % Change Scenario EVE EVE% $ Change % Change Policy LimitsEVEEVE%$ Change% ChangeScenarioEVEEVE%$ Change% ChangePolicy Limits
(Dollars in millions)(Dollars in millions)  (Dollars in millions) 
300 $2,768
 12.5% $25
 0.9 % 300 $1,617
 8.8% $(223) (12.1)% 22.5%$3,092
11.6%$514
20.0 %300$3,147
13.6%$150
5.0 %22.5%
200 $2,811
 12.7% $68
 2.5 % 200 $1,720
 9.4% $(120) (6.5)% 15.0%2,961
11.1%383
14.9 %2003,152
13.7%155
5.2 %15.0%
100 $2,811
 12.7% $68
 2.5 % 100 $1,794
 9.8% $(46) (2.5)% 7.5%2,803
10.5%225
8.8 %1003,103
13.5%106
3.5 %7.5%
Current $2,743
 12.4% $—
 — % Current $1,840
 10.0% $—
 — % —%2,578
9.7%—
— %Current2,997
13.0%—
— %—%
(100) $2,621
 11.8% $(122) (4.4)% (100) $1,849
 10.1% $9
 0.5 % 7.5%2,401
9.0%(177)(6.9)%(100)2,832
12.3%(165)(5.5)%7.5%

Our balance sheet exhibits asset sensitivity in various interest rate scenarios. The increase in EVE as rates raise is the result of the amount of assets that would be expected to reprice exceeding the amount of liabilities repriced inrepriced. This increased as of March 31, 2020 compared to December 31, 2019 due to the +200 scenario.long term fixed rate funding actions discussed above. At September 30, 2019March 31, 2020 and December 31, 2018,2019, for each scenario shown, the percentage change in our EVE is within our Board policy limits.

Derivative financial instruments

As a part of our risk management strategy, we use derivative financial instruments to minimize fluctuation in earnings caused by market risk. We use forward sales commitments to hedge our unclosed mortgage origination pipeline and funded mortgage LHFS. All of our derivatives and mortgage loan production originated for sale are accounted for at fair market value. Changes to our unclosed mortgage origination pipeline are based on changes in fair value of the underlying loan, which is impacted most significantly by changes in interest rates and changes in the probability that the loan will not fund within the terms of the commitment, referred to as a fallout factor or, inversely, a pull-through rate. Market risk on interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments. The adequacy of these hedging strategies, and the ability to fully or partially hedge market risk, rely on various assumptions or projections, including a fallout factor, which is based on a statistical analysis of our actual rate lock fallout history. In the first quarter, gain-on-sale margins increased significantly as primary-secondary spreads widened to historic levels and lenders worked to manage capacity. However, in the second half of March, we experienced $45 million of hedge losses due to the Federal Reserve’s purchases of agency mortgage-backed securities in the last two weeks of March 2020. For further information, see Note 8 - Derivative Financial Instruments and Note 16 - Fair Value Measurements.

Mortgage Servicing Rights (MSRs)

Our MSRs are sensitive to interest rate volatility and are highly susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve. We utilize derivatives, including interest rate swaps and swaptions, as part of our overall hedging strategy to manage the impact of changes in the fair value of the MSRs, however these risk management strategies do not completely eliminate repricing risk. Our hedging strategies rely on assumptions and projections regarding assets and general market factors, many of which are outside of our control. For further information, see Note 7 - Mortgage Servicing Rights, Note 8 - Derivative Financial 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 dividends from the Bank. The primary uses of the Company's liquidity are debt service, external dividend payments and operating expenses, the repurchase of common stock and the payment of cash dividends which include compensation and benefits, legal and professional expense and general administrative expenses.were increased to $0.05 per share in the first quarter 2020. The Company holds $250 million of senior notes which are scheduled to mature in approximately 1 year on July 15, 2021. At September 30, 2019,March 31, 2020, the Company held $179$232 million of cash on deposit at the Bank, or 3.7 years offor future cash outflows externalfor debt interest payments, dividend payments and debt service coverage when excluding the redemption of $250 million of senior notes which mature on July 15, 2021.


operating expense.

The OCC and the FRB regulate all capital distributions made by the Bank, directly or indirectly, to the holding company, including dividend payments. A subsidiary of a savings and loan holding company, such as the Bank, is required to file a notice with the FRB and, in certain circumstances, application with the OCC at least 30 days prior to each proposed capital distribution. Pursuant to Federal Banking regulations, whetherWhether an application to the OCCor notice is required is based on a number of factors including whether the institution qualifies as an eligible associationfor expedited treatment under the OCC rules and regulations the institution would not be at least adequately capitalized following the distribution 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, a 30-day notice fromyears, or the Bank mustwould not be provided toat least adequately capitalized following the FRB prior to declaring or paying any dividend to the holding company.dividend. Additional restrictions on dividends apply if the Bank fails the QTL test. As of September 30, 2019,March 31, 2020, the bank is in compliance with the QTL test.

At September 30, 2019,March 31, 2020, the Bank is able to pay dividends to the holding company of approximately $305$227 million without submitting an application to the OCC and remain well capitalized.

Bank Liquidity
    
Our primary sources of funding are deposits from retail and government customers, custodial deposits related to loans we service and FHLB borrowings. We use the FHLB of Indianapolis as a significant source for funding our residential mortgage origination business due to the flexibility in terms which allows us to borrow or repay borrowings as daily cash needs require. The amount we can borrow, or the value we receive for the assets pledged to our liquidity providers, varies based on the amount and type of pledged collateral, as well as the perceived market value of the assets and the "haircut" of the market value of the assets. That value is sensitive to the pricing and policies of our liquidity providers and can change with little or no notice.

Further, other sources of liquidity include our LHFS portfolio and unencumbered investment securities. We primarily originate agency-eligible LHFS and therefore the majority of new residential first mortgage loan originations are readily convertible to cash, either by selling them as part of our monthly agency sales, RMBS, private party whole loan sales, or by pledging them to the FHLB and borrowing against them. In addition, we have the ability to sell unencumbered investment securities or use them as collateral. At September 30, 2019,March 31, 2020, we had $2,152 million$4.9 billion available in unencumbered investment securities.

Our primary measure of liquidity is a ratio 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 Bank’s funding identified as being at a higher risk of runoff in times of stress. Ready liquidity consists of cash on reserve at the Federal Reserve and unused borrowing capacity provided by the loan and investments portfolios. The VFCR is calculated, reported, and forecasted daily as part of our liquidity management framework.
Our liquidity position is continuously monitored and adjustments are made to the 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 primarily 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 repaidpaid 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 manage our liquidity position, how much liquidity we have and the agility of our balance sheet. The Company's HFI loan-to-deposit ratio, was 74%75 percent for the three months ended September 30, 2019.as of March 31, 2020. Excluding warehouse loans, which have draws that typically pay off within a few weeks, and custodial deposits, which represent mortgage escrow accounts on deposit with the Bank, the HFI loan-to-deposit ratio was 82%86 percent for the three months ended September 30, 2019.as of March 31, 2020.

Management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity.
As governed and defined by our Board liquidity policy, we maintain adequate excess liquidity levels appropriate to cover unanticipated liquidity needs. In addition to this liquidity, we also maintain targeted minimum levels of unused borrowing capacity as another cushion against unexpected liquidity needs. Each business day, we forecast 90 days of daily cash needs. This allows us to determine our projected near term daily cash fluctuations and also to plan and adjust, if necessary, future activities. As a result, in an adverse environment, we believe we would be able to make adjustments to operations as required to meet the liquidity needs of our business, including adjusting deposit rates to increase deposits, planning for


additional FHLB borrowings, accelerating sales of LHFS (agencies and/or private), selling LHFI or investment securities, borrowing through the use of repurchase agreements, reducing originations, making changes to warehouse funding facilities, or borrowing from the discount window.


Management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity.

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

Liquidity Table
September 30, 2019 December 31, 2018 ChangeThree months endedQ120 vs. 4Q191Q20 vs. 1Q19
(Dollars in millions)March 31, 2020December 31, 2019March 31, 2019Change
Deposits     
(Dollars in millions)
Retail deposits$9,318
 $8,854
 $464
9,145
9,164
9,015
(19)130
Government deposits1,414
 1,202
 212
1,164
1,213
1,202
(49)(38)
Wholesale deposits635
 583
 52
561
633
467
(72)94
Custodial deposits4,378
 1,741
 2,637
5,182
4,136
2,784
1,046
2,398
Total deposits$15,745
 $12,380
 $3,365
$16,052
$15,146
$13,468
$906
$2,584
Borrowed Funds     
Federal Home Loan Bank advances and other short-term debt$2,979
 $3,394
 $(415)
FHLB advances and other short-term debt6,841
4,815
3,351
2,026
3,490
Other long-term debt496
 495
 1
493
496
495
(3)(2)
Total borrowed funds$3,475
 $3,889
 $(414)$7,334
$5,311
$3,846
$2,023
$3,488
Total funding$23,386
$20,457
$17,314
$2,929
$6,072

The following table presents certain liquidity sources and borrowing capacity as of the dates indicated:
Three months endedQ120 vs. 4Q191Q20 vs. 1Q19
September 30, 2019 December 31, 2018 ChangeMarch 31, 2020December 31, 2019March 31, 2019Change
(Dollars in millions)(Dollars in millions)
Federal Home Loan Bank advances      
Outstanding Advances$2,975
 $3,143
 $(168)6,336
4,345
3,080
1,991
3,256
Line of credit—
 —
 —
—
—
22
—
(22)
Total used borrowing capacity$2,975
 $3,143
 $(168)6,336
4,345
3,102
1,991
3,234
Borrowing capacity      
Line of credit30
30
8
—
22
Collateralized borrowing capacity$2,959
 $2,810
 $149
429
2,345
2,976
(1,916)(2,547)
Line of credit available30
 30
 —
Total unused borrowing capacity$2,989
 $2,840
 $149
459
2,375
2,984
(1,916)(2,525)
 
FRB discount window      
Collateralized borrowing capacity$251
 $409
 $(158)727
758
194
(31)533
Unencumbered investment securities
 
   
Agency - Commercial$1,280
 $737
 $543
Agency - Residential779
 475
 304
Securitized HFS loans not sold (1)2,058
—
—
2,058
2,058
Agency - Commercial (1)1,595
1,257
498
338
1,097
Agency - Residential (1)1,149
1,180
466
(31)683
Municipal obligations28
 28
 —
26
26
28
—
(2)
Corporate debt obligations64
 41
 23
67
77
53
(10)14
Other1
 1
 —
1
1
1
—
—
Total unencumbered investment securities$2,152
 $1,282
 $870
$4,896
$2,541
$1,046
$2,355
$3,850
(1) These are not currently pledged to the FHLB but are eligible to be pledged, at our discretion.



Deposits

The following table presents a composition of our deposits:
September 30, 2019 December 31, 2018  March 31, 2020December 31, 2019 
Balance % of Deposits Balance % of Deposits ChangeBalance% of DepositsBalance% of DepositsChange
(Dollars in millions)(Dollars in millions)
Retail deposits             
Branch retail deposits             
Savings accounts2,990
18.6%3,030
20.0%$(40)
Certificates of deposit/CDARS (1)2,138
13.3%2,353
15.5%(215)
Demand deposit accounts$1,249
 7.9% $1,297
 10.5% $(48)1,372
8.5%1,318
8.7%54
Savings accounts2,913
 18.5% 2,812
 22.7% 101
Money market demand accounts520
 3.3% 628
 5.1% (108)473
2.9%495
3.3%(22)
Certificates of deposit/CDARS (1)
2,558
 16.2% 2,387
 19.3% 171
Total branch retail deposits7,240
 46.0% 7,124
 57.6% 116
6,973
43.4%7,196
47.5%(223)
Commercial deposits (2)
  

   

   

 

 
Demand deposit accounts1,503
 9.5% 1,243
 10.0% 260
1,587
9.9%1,438
9.5%149
Savings accounts380
 2.4% 314
 2.5% 66
343
2.1%342
2.3%1
Money market demand accounts195
 1.2% 173
 1.4% 22
241
1.5%188
1.2%53
Total commercial retail deposits2,078
 13.2% 1,730
 13.9% 348
2,172
13.5%1,968
13.0%204
Total retail deposits$9,318
 59.2% $8,854
 71.5% $464
9,145
57.0%$9,164
60.5%$(19)
Government deposits  

   

   

 

 
Savings accounts461
2.9%495
3.3%$(34)
Demand deposit accounts$336
 2.1% $326
 2.6% $10
325
2.0%360
2.4%(35)
Savings accounts751
 4.8% 567
 4.6% 184
Certificates of deposit/CDARS (1)
327
 2.1% 309
 2.5% 18
379
2.4%358
2.4%21
Total government deposits1,414
 9.0% 1,202
 9.7% 212
1,164
7.3%1,213
8.0%(49)
Custodial deposits (3)5,182
32.3%4,136
27.3%1,046
Wholesale deposits635
 4.0% 583
 4.7% 52
561
3.5%633
4.2%(72)
Custodial deposits (3)
4,378
 27.8% 1,741
 14.1% 2,637
Total deposits (4)
$15,745
 100.0% $12,380
 100.0% $3,365
16,052
100.0%$15,146
100.0%$906
(1)The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $2.0$1.6 billion and $1.9$1.7 billion at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
(2)Contains deposits from commercial and business banking customers.
(3)Represents investor custodial accounts and escrows controlled by us in connection with loans serviced or subserviced for others that have been placed on deposit with the Bank.
(4)Total exposure related to uninsured deposits over $250,000 was approximately $3.9 billion and $3.6 billion and $2.8 billion at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.

Total deposits increased $3.4 billion,$906 million, or 276.0 percent at September 30, 2019March 31, 2020 compared to December 31, 2018,2019, driven by growth in our servicing business which resulted in a $2.6$1.0 billion increase in custodial deposits.

We utilize local governmental agencies and other public units as an additional source for deposit funding. We are not required to hold collateral against our government deposits from Michigan government entities as they are covered by the Michigan Business and Growth Fund. At September 30, 2019,March 31, 2020, we were required to hold collateral for our government deposits in California that were in excess of $250,000. The total of collateral held for California at March 31, 2020 was $125 million. In Indiana, Wisconsin and Ohio, we may be required to hold collateral against our government deposits based on a variety of factors including, but not limited to, the size of individual deposits and external bank ratings. At September 30, 2019,March 31, 2020, collateral held on government deposits in these states were de minimis.was $1.6 million. Government deposit accounts include $327$379 million of certificates of deposit with maturities typically less than one year and $1 billion$785 million in checking and savings accounts at September 30, 2019.March 31, 2020.

Custodial deposits arise due to our servicing or subservicing of loans for others and represent the portion of the investor custodial accounts on deposit with the Bank. For certain subservice agreements, these deposits require us to credit the MSR owner interest against subservicing income. This cost is a component of net loan administration income.

We participate in the CDARS program, through which certain customer CDs are exchanged for CDs of similar amounts from other participating banks and customers may receive FDIC insurance up to $50 million. This program helps the Bank secure larger deposits and attract and retain customers. At September 30, 2019,March 31, 2020, we had $146$113 million of total CDs enrolled in the CDARS program, a decrease of $31$20 million from December 31, 2018.2019.



FHLB Advances

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

We rely upon advances from the FHLB as a source of funding for the origination or purchase of loans for sale in the secondary market and for providing duration specific short-term and long-term financing. The outstanding balance of FHLB advances fluctuates from time to time depending on our current inventory of mortgage LHFS and the availability of lower cost funding sources. Our portfolio includes short-term fixed rate advances and long-term fixed rate advances.

We are currently authorized through a resolution of our Board of Directors to apply for advances from the FHLB using approved loan types as collateral, which includes residential first mortgage loans, home equity lines of credit, and commercial real estate loans. As of September 30, 2019,March 31, 2020, our Board of Directors authorized and approved a line of credit with the FHLB of up to $10.0 billion, which is further limited based on our total assets and qualified collateral, as determined by the FHLB. At September 30, 2019,March 31, 2020, we had $3.0$6.3 billion of advances outstanding and an additional $3.0 billion$429 million 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, 2019,March 31, 2020, we pledged collateral, which included commercial loans, municipal bonds, and agency bonds, to the FRB of Chicago amounting to $268$733 million with a lendable value of $251$727 million. At December 31, 2018,2019, we pledged collateral to the FRB of Chicago amounting to $448$788 million with a lendable value of $409$758 million. We do not typically utilize this available funding source and at March 31, 2020 and December 31, 2019, 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, 2020 and December 31, 2019, we had $0.5 billion of borrowings outstanding under this source of funding. Additional borrowing capacity under this and other sources of funding can vary depending on market conditions.

Debt

As part of our overall capital strategy, we previously raised capital through the issuance of junior subordinated notes to our special purpose trusts formed for the offerings, which issued Tier 1 qualifying preferred stock ("trust preferred 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, 2019,March 31, 2020, we are current on all interest payments. Additionally, we have $250$246 million of senior debt outstanding at September 30, 2019March 31, 2020 (“Senior Notes”) which matures on July 15, 2021. For further information, see Note 9 - Borrowings.

Operational Risk

Operational risk is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules and regulations, prescribed practices, or ethical standards, and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to adapt our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk.

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




Loans with government guarantees

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

In both the three and nine months ended September 30, 2019,March 31, 2020, we had less than $1 million in net charge-offs related to loans with government guarantees and have reserved for the remaining risks within other assets and as a component of our ALLLallowance for loan losses on residential first mortgages. These additional expenses or charges arise due to insurance limits on VA insured loans and FHA property foreclosure and preservation requirements that may result in a loss in excess of all, or part of, the guarantee.

Our loans with government guarantees portfolio totaled $607$814 million at September 30, 2019,March 31, 2020, as compared to $392$736 million at December 31, 2018.2019. The increase is primarily due to holding more Ginnie MaeGNMA mortgage servicing rights which naturally resultshave historically resulted in higher repurchases.

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). An estimate of the fair value of the guarantee associated with the mortgage loans is recorded in other liabilities in the Consolidated Statements of Financial Condition, which was $5 million at September 30, 2019, as compared to $7 million atMarch 31, 2020 and December 31, 2018.2019.

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

The capital standards we are subject to include requirements contemplated by the Dodd-Frank Act as well as guidelines reached by Basel III. These risk-based capital adequacy guidelines are intended to measure capital adequacy with regard to a banking organization’s balance sheet, including off-balance sheet exposures such as unused portions of loan commitments, letters of credit, and recourse arrangements. Our capital ratios are maintained at levels in excess of those considered to be "well-capitalized" by regulators. Tier 1 leverage was 7.988.09 percent at September 30, 2019March 31, 2020 providing a 298309 basis pointpoints stress buffer above the minimum level needed to be considered “well-capitalized.” Additionally, total risk-based capital to RWA was 11.5411.18 percent at September 30, 2019March 31, 2020 providing a 154118 basis point stress 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 are supervised under the Federal Reserve. Under the amendment, certain hybrid securities, such as trust preferred securities, may be included in Tier 1 capital for bank holding companies that had total assets below $15 billion as of December 31, 2009. As we were below $15 billion in assets as of December 31, 2009, the trust preferred securities classified as long term debt on our balance sheet will be included as Tier 1 capital, unless we complete an acquisition of a depository institution holding company or a depository institution and we report total assets greater than $15 billion in the


quarter in which the acquisition occurs. Should that event occur, our trust preferred securities would be included in Tier 2 capital.



Regulatory Capital Simplification

The Bank and Flagstar have been subject to the capital requirements of the Basel III rules since January 1, 2015. On July 9, 2019, the Agencies issued the Final Capital Simplification Rule (the "New Rule") which simplifies certain requirements in the Agencies’ current regulatory capital rules. We implemented capital simplification on January 1, 2020. The New Rule increasesincreased the CET1 capital threshold deductions from 10 percentindividual limit on MSRs and temporary difference DTAs to 25 percent for MSRs, temporary difference DTAsof CET1 and investments in the capital of unconsolidated financial institutions. Further, the New Rule eliminateseliminated the aggregate 15 percent CET1 deduction threshold for MSRs and temporary difference DTAs and investmentsDTAs.

On March 27, 2020, U.S. banking regulators issued an interim final rule to delay for two years the initial adoption impact of CECL on regulatory capital in response to COVID-19 followed by a three-year transition period. During the two-year delay we will add back to CET1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the capital of unconsolidated financial institutions effectiveallowance for periods after April 1, 2020. On September 17, 2019 the FDIC finalized an additional rule that permits non-advanced approaches banking organizations to early adopt the New Rule for periods beginning January 1, 2020. Flagstar intends on implementing capital simplificationcredit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, 2020 and we are currently managing our2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital in anticipation of such date.over the three-year period.

For the period presented, the following table sets forth our capital ratios under the current rules and the New Rule, as well as our excess capital over well-capitalized minimums under both rules.minimums.
Flagstar BancorpActual Well-Capitalized Under Prompt Corrective Action Provisions Under New Rule 
Excess Capital Over
Well-Capitalized Minimum (1)
ActualWell-Capitalized Under Prompt Corrective Action Provisions
Excess Capital Over
Well-Capitalized Minimum (1)
AmountRatio AmountRatio AmountRatio Current Rule Capital Simplification RulesAmountRatioAmountRatioCapital Simplification
(Dollars in millions)(Dollars in millions)
September 30, 2019            
March 31, 2020  
Tier 1 leverage capital
(to adjusted avg. total assets)
$1,668
7.98% $1,045
5.0% $1,773
8.44% $623
 $728
1,879
8.09%1,161
5.0%$718
Common equity Tier 1 capital (to RWA)1,428
9.25% 1,003
6.5% 1,533
9.56% 425
 530
1,639
9.17%1,161
6.5%478
Tier 1 capital (to RWA)1,668
10.81% 1,235
8.0% 1,773
11.06% 433
 538
1,879
10.52%1,429
8.0%450
Total capital (to RWA)1,781
11.54% 1,543
10.0% 1,886
11.76% 238
 343
1,997
11.18%1,786
10.0%211
(1)Excess capital is the difference between the actual capital ratios under either the current rule or the proposed capital simplification rules and the well-capitalized minimum ratio, multiplied by the relevant asset base.
     
As presented in the table above, our constraining capital ratio is our total capital to risk weighted assets at 11.5411.18 percent. It would take a $238$211 million after-tax loss, with the balance sheet remaining constant, for our total risk-based capital ratio to fall below the level considered to be "well-capitalized" under the current rule and an after-tax loss of $343 million, under the New Rule..

     As of September 30, 2019,March 31, 2020, we had $285$223 million in MSRs, $49$78 million in DTAs arising from temporary differences and no material investments in unconsolidated financial institutions or minority interest which drive differences between our current capital ratios and what would be reported under the New Rule.ratios. For additional information on our capital requirements, see Note 14 - Regulatory Capital.Capital Matters.

Use of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures such as tangible book value per share, tangible common equity to assets ratio, return on average assets and return on average tangible common equity.equity, adjusted net income and adjusted net income per diluted share. We believe these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying performance and trends of the Company.

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


financial measures prepared in accordance with GAAP. Where non-GAAP financial measures are used, the most directly comparable GAAP or regulatory financial measure, as well as the reconciliation to the most directly comparable GAAP or regulatory financial measure, can be found in this report.



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

The following table provides a reconciliation of non-GAAP financial measures.
September 30, 2019 December 31, 2018 September 30, 2018March 31, 2020December 31, 2019March 31, 2019
(Dollars in millions)  (Dollars in millions)
Total stockholders' equity$1,734
 $1,570
 $1,518
$1,842
$1,788
$1,574
Less: Goodwill and intangible assets174
 190
 70
167
170
182
Tangible book value/Tangible common equity$1,560
 $1,380
 $1,448
$1,675
$1,618
$1,392
      
Number of common shares outstanding56,510,341
 57,749,464
 57,625,439
56,729,789
56,631,236
56,480,086
Tangible book value per share$27.62
 $23.90
 $25.13
$29.52
$28.57
$24.65
      
Total assets$22,048
 $18,531
 $18,697
$26,805
$23,266
$19,445
Tangible common equity to assets ratio7.08% 7.45% 7.74%6.25%6.95%7.16%
      
Total average assets$21,197
 $19,966
 $18,611
$21,150
$20,708
$16,294
Less: Average goodwill and intangible assets176
 129
 71
169
172
187
Total average tangible assets$21,021
 $19,837
 $18,540
$20,981
$20,536
$16,107
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2019 2018 2019 201820202019
(Dollars in millions, except share data)(Dollars in millions, except share data)
Net income$63
 $48
 $160
 $133
$58
$36
Plus: Intangible asset amortization (after-tax)2
 1
 10
 —
3
3
Tangible net income65
 49
 170
 133
$61
$39
        
Total average equity$1,722
 $1,514
 $1,658
 $1,468
$1,803
$1,583
Less: Average goodwill and intangible assets176
 71
 184
 54
172
187
Total average tangible equity1,546
 1,443
 1,474
 1,414
$1,631
$1,396
        
Return on average assets1.20% 1.04% 1.08% 1.00%0.78%0.79%
Return on average tangible assets1.27% 1.07% 1.16% 1.02%0.78%0.80%
        
Return on average common equity14.72% 12.80% 12.90% 12.10%9.82%9.16%
Return on average tangible common equity17.12% 13.67% 15.30% 12.78%11.46%11.56%



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 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 ALLLACL 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.

Allowance for Credit Losses

On January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires financial assets to be presented at the net amount expected to be collected (i.e. net of expected credit losses). In addition, the standard requires a reserve to be recorded for lifetime expected losses on our unfunded commitments. Therefore, we record an allowance for loan losses on relevant financial assets and a reserve for unfunded commitments on our consolidated statements of financial position, collectively referred to as the allowance for credit losses.
Our estimate of lifetime expected credit losses includes the use of quantitative models that incorporate forward looking macroeconomic scenarios applied over a reasonable and supportable forecast period before reverting to historical averages over the remaining contractual life, adjusted for expected prepayments and borrower controlled extension options. These macroeconomic scenarios include variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, unemployment rates, real estate prices, and gross domestic product levels. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of third-party economists and industry trends.
We also perform a qualitative assessment to determine if the reserve is appropriate in our judgment and is adequate, but not excessive, to cover losses that are expected but, in our assessment, not adequately represented in the economic assumptions or modeling described above. We consider the following factors in our qualitative assessment: changes in lending policies and procedures, economic and business conditions, the nature and volume of the portfolio, experience of lending staff, the volume and severity of past due loans and nonaccrual loans, changes in quality of loan review, changes in value of underlying collateral, portfolio concentrations, the effect of external factors such as competition and legal and regulatory requirements, and prepayment rate.
The allowance for credit losses can also be impacted by unanticipated 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 estimated impact of COVID-19 into our allowance for credit losses, the ultimate impact of COVID-19 is still unknown, including how long economic activities will be impacted and what effect the unprecedented levels of government fiscal and monetary actions will have on the economy and our credit losses.
As described above, the process to determine the allowance for credit losses requires numerous estimates and assumptions, some of which require a high degree of judgment and are often interrelated. Changes in the estimates and assumptions can result in significant changes in the allowance for credit losses. Our process for determining the allowance for credit losses is further discussed in the Credit Risk section of the MD&A and Note 4 - Loans Held for Investment.
For further information on our critical accounting policies, please refer to our Form 10-K for the year ended December 31, 2018,2019, 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.



Forward – Looking Statements

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

Generally, forward-looking statements are not based on historical facts but instead represent management’s current beliefs and expectations regarding future events and are subject to significant risks and uncertainties. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other than as required under United States securities laws, Flagstar does not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements. Such statements may be identified by words such as believe, expect, anticipate, intend, plan, estimate, may increase, may fluctuate, and similar expressions or future or conditional verbs such as will, should, would, and could. Our actual results and capital and other financial conditions may differ materially from those described in the forward-looking statements depending upon a variety of factors, including without limitation the precautionary statements included within each individual business’ discussion and analysis of our results of operations and the risk factors listed and described in Item 1A.1A to Part I, of our Annual Report on Form 10-K for the year ended December 31, 20182019 and Item 1A. to Part II, of this Quarterly Report on Form 10-Q, which are incorporated by reference herein.

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


Item 1. Financial Statements

Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In millions, except share data)
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
(Unaudited)  (Unaudited) 
Assets    
Cash$234
 $260
$216
$220
Interest-earning deposits119
 148
126
206
Total cash and cash equivalents353
 408
342
426
Securitized HFS loans not sold2,058
—
Investment securities available-for-sale1,697
 2,142
2,446
2,116
Investment securities held-to-maturity635
 703
554
598
Loans held-for-sale ($4,122 and $3,732 measured at fair value, respectively)4,196
 3,869
Loans held-for-investment ($10 and $10 measured at fair value, respectively)12,548
 9,088
Loans held-for-sale ($4,365 and $5,219 measured at fair value, respectively)4,389
5,258
Loans held-for-investment ($12 and $12 measured at fair value, respectively)13,795
12,129
Loans with government guarantees607
 392
814
736
Less: allowance for loan losses(110) (128)(132)(107)
Total loans held-for-investment and loans with government guarantees, net13,045
 9,352
14,477
12,758
Mortgage servicing rights285
 290
223
291
Net deferred tax asset68
 103
Federal Home Loan Bank stock303
 303
306
303
Premises and equipment, net417
 390
413
416
Goodwill and intangible assets174
 190
167
170
Other assets875
 781
1,430
930
Total assets$22,048
 $18,531
$26,805
$23,266
Liabilities and Stockholders’ Equity    
Noninterest-bearing deposits$5,649
 $2,989
Interest-bearing deposits10,096
 9,391
Noninterest bearing deposits$6,551
$5,467
Interest bearing deposits9,501
9,679
Total deposits15,745
 12,380
16,052
15,146
Short-term Federal Home Loan Bank advances and other2,329
 3,244
5,841
4,165
Long-term Federal Home Loan Bank advances650
 150
1,000
650
Other long-term debt496
 495
493
496
Other liabilities ($35 and $60 measured at fair value, respectively)1,094
 692
Other liabilities ($35 and $35 measured at fair value, respectively)1,577
1,021
Total liabilities20,314
 16,961
24,963
21,478
Stockholders’ Equity    
Common stock $0.01 par value, 80,000,000 and 80,000,000 shares authorized; 56,510,341 and 57,749,464 shares issued and outstanding, respectively1
 1
Common stock $0.01 par value, 80,000,000 and 80,000,000 shares authorized; 56,729,789 and 56,631,236 shares issued and outstanding, respectively1
1
Additional paid in capital1,481
 1,522
1,487
1,483
Accumulated other comprehensive income (loss)5
 (47)
Accumulated other comprehensive income31
1
Retained earnings247
 94
323
303
Total stockholders’ equity1,734
 1,570
1,842
1,788
Total liabilities and stockholders’ equity$22,048
 $18,531
$26,805
$23,266

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


Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2019 2018 2019 201820202019
(Unaudited)(Unaudited)
Interest Income  
Loans$185
 $161
 $517
 $436
$181
$155
Investment securities17
 21
 61
 64
19
24
Interest-earning deposits and other1
 1
 3
 2
1
1
Total interest income203
 183
 581
 502
201
180
Interest Expense        
Deposits38
 27
 102
 65
32
29
Short-term Federal Home Loan Bank advances and other10
 18
 44
 50
12
17
Long-term Federal Home Loan Bank advances2
 7
 4
 21
3
1
Other long-term debt7
 7
 21
 21
6
7
Total interest expense57
 59
 171
 157
53
54
Net interest income146
 124
 410
 345
148
126
Provision (benefit) for loan losses1
 (2) 18
 (3)
Net interest income after provision (benefit) for loan losses145
 126

392
 348
Provision for credit losses14
—
Net interest income after provision for credit losses134
126
Noninterest Income        
Net gain on loan sales110
 43
 234
 166
90
49
Loan fees and charges29
 23
 70
 67
26
17
Net return on mortgage servicing rights(2) 13
 9
 26
6
6
Loan administration income5
 5
 22
 15
12
11
Deposit fees and charges10
 5
 28
 15
9
8
Other noninterest income19
 18
 85
 52
14
18
Total noninterest income171
 107
 448
 341
157
109
Noninterest Expense        
Compensation and benefits98
 76
 275
 236
102
87
Occupancy and equipment40
 31
 118
 91
41
38
Commissions38
 21
 76
 64
29
13
Loan processing expense22
 14
 60
 43
20
17
Legal and professional expense6
 7
 18
 19
6
6
Federal insurance premiums5
 6
 14
 18
6
4
Intangible asset amortization3
 1
 11
 —
3
4
Other noninterest expense26
 17
 71
 52
28
22
Total noninterest expense238
 173
 643
 523
235
191
Income before income taxes78
 60
 197
 166
56
44
Provision for income taxes15
 12
 37
 33
10
8
Net income$63
 $48
 $160
 $133
$46
$36
Net income per share        
Basic$1.12
 $0.84
 $2.83
 $2.32
$0.80
$0.64
Diluted$1.11
 $0.83
 $2.80
 $2.28
$0.80
$0.63
Weighted average shares outstanding        
Basic56,484,499
 57,600,360
 56,607,944
 57,483,802
56,655,865
56,897,799
Diluted57,110,796
 58,332,598
 57,252,540
 58,301,920
57,189,923
57,590,272


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


Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2019 2018 2019 201820202019
(Unaudited)(Unaudited)
Net income$63
 $48
 $160
 $133
$46
$36
Other comprehensive income (loss), net of tax       
Other comprehensive income, net of tax 
Investment securities13
 (9) 52
 (47)34
16
Derivatives and hedging activities—
 (1) —
 21
(4)—
Other comprehensive income (loss), net of tax13
 (10) 52
 (26)
Other comprehensive income, net of tax30
16
Comprehensive income$76
 $38
 $212
 $107
$76
$52

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



Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
(In millions, except share data)
(unaudited)
 Common Stock    
 Number of SharesAmountAdditional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained Earnings (Accumulated
Deficit)
Total
Stockholders’
Equity
Balance at December 31, 201757,321,228
$1
$1,512
$(16)$(98)$1,399
(Unaudited)      
Net income—
—
—
—
133
133
Total other comprehensive income (loss)—
—
—
(21)—
(21)
Shares issued from Employee Stock Purchase Plan88,566
—
—
—
—
—
Reclassification of certain income tax effects (1)—
—
—
(5)5
—
Stock-based compensation215,645
—
7
—
—
7
Balance at September 30, 201857,625,439
$1
$1,519
$(42)$40
$1,518
       
Balance at December 31, 201857,749,464
$1
$1,522
$(47)$94
$1,570
(Unaudited)      
Net income—
—
—
—
160
160
Total other comprehensive income (loss)—
—
—
52
—
52
Shares issued from Employee Stock Purchase Plan84,036
—
—
—
—
—
Dividends declared and paid @ .04/share280
—
—
—
(7)(7)
Stock-based compensation194,266
—
9
—
—
9
Repurchase of shares (2)(1,517,705)—
(50)—
—
(50)
Balance at September 30, 201956,510,341
$1
$1,481
$5
$247
$1,734
 Common Stock    
 Number of SharesAmountAdditional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained Earnings (Accumulated
Deficit)
Total
Stockholders’
Equity
Balance at December 31, 201857,749,464
$1
$1,522
$(47)$94
$1,570
Net income—
—
—
—
36
36
Total other comprehensive income—
—
—
16
—
16
Shares issued from Employee Stock Purchase Plan32,878
—
—
—
—
—
Stock-based compensation27,401
—
4
—
—
4
Dividends declared and paid—
—
—
—
(2)(2)
Repurchase of shares(1,329,657)—
(50)—
—
(50)
Balance at March 31, 201956,480,086
$1
$1,476
$(31)$128
$1,574
       
Balance at December 31, 201956,631,236
$1
$1,483
$1
$303
$1,788
Net income—
—
—
—
46
46
Total other comprehensive income—
—
—
30
—
30
Shares issued from Employee Stock Purchase Plan59,252
—
—
—
—
—
Stock-based compensation39,081
—
4
—
—
4
Dividends declared and paid220
—
—
—
(3)(3)
CECL ASU Adjustment to RE—
—
—
—
(23)(23)
Balance at March 31, 202056,729,789
$1
$1,487
$31
$323
$1,842
(1)Income tax effects of the Tax Cuts and Jobs Act are reclassified from AOCI to retained earnings due to the adoption of ASU 2018-02.
(2)Includes dividend reinvestment shares

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


Flagstar Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
Flagstar Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
Flagstar Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
Nine Months Ended September 30,Three Months Ended March 31,
2019 201820202019
(Unaudited)(Unaudited)
Operating Activities    
Net cash used in operating activities$(15,700) $(19,002)$(1,515)$(4,716)
Investing Activities    
Proceeds from sale of AFS securities including loans that have been securitized$15,631
 $18,362
$104
$4,501
Collection of principal on investment securities AFS129
 152
77
38
Purchase of investment securities AFS and other(39) (48)(350)(16)
Collection of principal on investment securities HTM68
 72
44
21
Proceeds received from the sale of LHFI167
 4
39
105
Net origination, purchase, and principal repayments of LHFI(3,575) (695)(1,706)(845)
Acquisition of premises and equipment, net of proceeds(48) (50)(17)(18)
Net purchase of FHLB stock(3)—
Proceeds from the sale of MSRs56
 267
36
41
Other, net(8) (14)—
(4)
Net cash provided by investing activities$12,381
 $18,050
Net cash (used in) provided by investing activities$(1,776)$3,823
Financing Activities    
Net change in deposit accounts$3,365
 $2,040
$906
$1,073
Net change in short-term FHLB borrowings and other short-term debt(913) (1,061)1,676
(141)
Proceeds from increases in FHLB long-term advances and other debt550
 200
350
100
Repayment of FHLB long-term advances(50) (325)
Repayment of long-term debt(3)—
Net receipt of payments of loans serviced for others366
 140
298
(104)
Accelerated share repurchase(50) —
Stock repurchase—
(50)
Dividends declared and paid(7) —
(3)(2)
Other14
 19
(3)3
Net cash provided by financing activities$3,275
 $1,013
$3,221
$879
Net increase in cash, cash equivalents and restricted cash (1)
(44) 61
Net change in cash, cash equivalents and restricted cash (1)
(70)(14)
Beginning cash, cash equivalents and restricted cash (1)
432
 223
456
432
Ending cash, cash equivalents and restricted cash (1)
$388
 $284
$386
$418
Supplemental disclosure of cash flow information    
Interest paid on deposits and other borrowings$173
 $—
Non-cash reclassification of investment securities HTM to AFS$—
 $144
Non-cash reclassification of loans originated LHFI to LHFS$101
 $6
Non-cash reclassification of mortgage loans originated LHFS to LHFI$—
 $—
Non-cash reclassification of LHFS to AFS securities$15,198
 $18,360
Beneficial interest retained in securitization$—
 $—
Non-cash reclassification of LHFI to LHFS$39
$—
Non-cash reclassification of LHFS to securitized HFS loans not sold$2,170
$4,501
MSRs resulting from sale or securitization of loans$203
 $283
$40
$67
Operating section supplemental disclosures    
Cash proceeds from sales of LHFS$7,714
 $7,028
Proceeds from sales of LHFS$7,674
$832
Origination, premium paid and purchase of LHFS, net of principal repayments$(23,249) $(26,038)$(8,786)$(5,479)
(1)For further information on restricted cash, see Note 8 - Derivatives.

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


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 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, 2018,2019, which is available on our website, flagstar.com, and on the SEC website, at sec.gov.

Note 2 - Investment Securities

Securitized HFS loans not sold

Trading securities arise as mortgage loans are securitized for sale in the normal of business. Trading securities are carried at fair value. Changes in fair value on trading securities are recorded in current period earnings. At March 31, 2020, we held $2,058 million of these securities at fair value, which were comprised of U.S. government sponsored agency MBS. We had 0 trading securities at December 31, 2019.



The following table presents our AFS and HTM investment securities:
Amortized Cost 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 Fair ValueAmortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
(Dollars in millions)(Dollars in millions)
September 30, 2019       
March 31, 2020 
Available-for-sale securities        
Agency - Commercial$964
 $7
 $(2) $969
$1,269
$17
$(1)$1,285
Agency - Residential604
 3
 (3) 604
971
33
—
1,004
Municipal obligations30
—
—
30
Corporate debt obligations63
 1
 —
 64
67
1
(1)67
Municipal obligations31
 —
 —
 31
Other MBS28
 —
 —
 28
58
1
—
59
Certificate of deposits1
 —
 —
 1
1
—
—
1
Total available-for-sale securities (1)
$1,691
 $11
 $(5) $1,697
$2,396
$52
$(2)$2,446
Held-to-maturity securities        
Agency - Commercial$325
 $1
 $(1) $325
$279
$3
$—
$282
Agency - Residential310
 4
 —
 314
275
12
—
287
Total held-to-maturity securities (1)
$635
 $5
 $(1) $639
$554
$15
$—
$569
December 31, 2018       
December 31, 2019 
Available-for-sale securities        
Agency - Commercial$1,413
 $4
 $(43) $1,374
$948
$2
$(3)$947
Agency - Residential686
 —
 (24) 662
1,015
4
(4)$1,015
Corporate debt obligations41
 —
 —
 41
76
1
—
$77
Municipal obligations33
 —
 (1) 32
31
—
—
$31
Other MBS32
 —
 —
 32
44
1
—
$45
Certificate of Deposits1
 —
 —
 1
1
—
—
$1
Total available-for-sale securities (1)
$2,206
 $4
 $(68) $2,142
$2,115
$8
$(7)$2,116
Held-to-maturity securities        
Agency - Commercial$349
 $—
 $(13) $336
$306
$—
$(1)$305
Agency - Residential354
 —
 (9) 345
292
3
(1)294
Total held-to-maturity securities (1)
$703
 $—
 $(22) $681
$598
$3
$(2)$599

(1)
There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10 percent of stockholders’ equity at September 30, 2019March 31, 2020 or December 31, 2018.2019.

We evaluate AFS debt securities where the value has declined below amortized cost for impairment. If we intend to sell or believe it is more likely than not that we will be required to sell the debt security, it is written down to fair value through earnings. For AFS debt securities 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 zero credit loss assumptionand represented 95 percent of our AFS portfolio as of March 31, 2020. For the remaining AFS securities, credit losses are recognized as an increase to the allowance for credit losses through the credit loss provision.  If any of the decline in fair value is related to market factors, that amount is recognized in accumulated other comprehensive income (OCI). We have no unrealized credit losses as of March 31, 2020 and December 31, 2019.

We separately evaluate our HTM debt securities for any credit losses. As of March 31, 2020 and December 31, 2019, our entire HTM portfolio qualified for the zero loss assumption as all securities are guaranteed by the U.S. Treasury, U.S. government agencies or sovereign entities of high credit quality.

Investment securities transactions are recorded on the trade date for purchases and sales. Interest earned on investment securities, including the amortization of premiums and the accretion of discounts, are 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$7 million and $6 million at March 31, 2020 and December 31, 2019, and was reported in Other Assets on the Consolidated Statements of Financial Condition.






We evaluate AFS and HTM investment securities for OTTI on a quarterly basis. An OTTI is considered to have occurred when the fair value of a debt security is below its amortized costs and we (1) have the intent to sell the security, (2) will more likely than not be required to sell the 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 are written down through a charge to earnings for the amount representing the credit loss on the security. Gains and losses related to all other factors are recognized in other comprehensive income. Agency securities, which are either explicitly or implicitly backed by the federal government, comprised 95 percent of our total securities at September 30, 2019. This factor is considered when evaluating our investment securities for OTTI. During the three and nine months ended September 30, 2019 and September 30, 2018, we had 0 OTTI.

Available-for-sale securities

Securities available-for-sale are carried at fair value. Unrealized gains and losses on AFS securities to the extent they are temporary in nature, are reported as a component of other comprehensive income.
    
We purchased $16$350 million and $39$16 million of AFS securities, which were comprised of U.S. government sponsored agency MBS, certificate of deposits, and corporate debt obligations during the three and nine months ended September 30,March 31, 2020, and March 31, 2019 respectively. We purchased $43 million and $48In addition, we retained $18 million of AFS securities, which included U.S. government sponsored agencypassive interests in our own private MBS corporate debt obligations, and municipal obligations during the three and nine months ended September 30, 2018, respectively.March 31, 2020. We did 0t retain any interest in our own private MBS during the three months ended March 31, 2019.

There were $0 and $432 million0 in sales of AFS securities during both the three and nine months ended September 30,March 31, 2020, and March 31, 2019 respectively. These sales resulted in a realized gain of $7 million, reported in other noninterest income in the Consolidated Statements of Operations. These sales did not includethan those related to mortgage loans that had been securitized for sale in the normal course of business. There were 0 sales of AFS securities during the three and nine months ended September 30, 2018.

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 0 purchases or sales of HTM securities during both the three and nine months ended September 30, 2019March 31, 2020 and September 30, 2018.March 31, 2019.

The following table summarizes available-for-sale and held-to-maturity securities, by duration, the unrealized loss positions on investment securities: 

 
Unrealized Loss Position with
Duration 12 Months and Over
Unrealized Loss Position with
Duration Under 12 Months
 Fair ValueNumber of SecuritiesUnrealized Loss
Fair
Value
Number of
Securities
Unrealized
Loss
 (Dollars in millions)
March 31, 2020      
Available-for-sale securities      
Agency - Commercial$35
4
$—
$91
9
$(1)
Municipal obligations$—
1
$—
$—
—
$—
Corporate debt obligations$—
—
$—
$21
5
$(1)
Held-to-maturity securities      
Agency - Commercial$3
1
$—
$5
1
$—
December 31, 2019      
Available-for-sale securities      
Agency - Commercial$148
17
$(3)$303
19
$—
Agency - Residential$266
26
$(3)$148
14
$(1)
Municipal obligations$8
3
$—
$—
—
$—
Held-to-maturity securities      
Agency - Commercial$148
13
$(1)$85
6
$—
Agency - Residential$35
7
$(1)$38
10
$—


Unrealized losses on available-for-sale 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 available-for-sale 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.
 
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, 2019           
Available-for-sale securities           
Agency - Commercial$204
 22
 $(2) $21
 3
 $—
Agency - Residential280
 27
 (3) 61
 9
 —
Municipal obligations8
 3
 —
 1
 1
 —
Corporate debt obligations—
 —
 —
 —
 —
 —
Other MBS—
 —
 —
 13
 2
 —
Held-to-maturity securities           
Agency - Commercial$159
 13
 $(1) $—
 —
 $—
Agency - Residential46
 9
 —
 9
 5
 —
December 31, 2018           
Available-for-sale securities           
Agency - Commercial$1,025
 74
 $(43) $1
 1
 $—
Agency - Residential647
 79
 (24) 14
 5
 —
Municipal obligations28
 16
 (1) 1
 2
 —
Corporate debt obligations—
 —
 —
 7
 2
 —
Held-to-maturity securities           
Agency - Commercial$336
 26
 $(13) $—
 —
 $—
Agency - Residential345
 60
 (9) —
 —
 —



The following table shows the amortized cost and estimated fair value of securities by contractual maturity:
Investment Securities Available-for-Sale Investment Securities Held-to-maturityInvestment Securities Available-for-SaleInvestment Securities Held-to-maturity
Amortized
Cost
 
Fair
Value
 
Weighted Average
Yield
 
Amortized
Cost
 
Fair
Value
 
Weighted Average
Yield
Amortized
Cost
Fair
Value
Weighted Average
Yield
Amortized
Cost
Fair
Value
Weighted Average
Yield
(Dollars in millions)(Dollars in millions)
September 30, 2019           
March 31, 2020    
Due in one year or less$2
 $2
 1.83% $—
 $—
 —%$3
$3
2.04%$—
$—
—%
Due after one year through five years12
 12
 2.63% 10
 10
 2.55%11
11
2.68%9
9
2.49%
Due after five years through 10 years90
 92
 4.33% 9
 9
 2.26%102
104
4.03%8
9
2.28%
Due after 10 years1,587
 1,591
 2.40% 616
 620
 2.45%2,280
2,328
2.42%537
551
2.44%
Total$1,691
 $1,697
   $635
 $639
  $2,396
$2,446
 $554
$569
 


We pledge investment securities, primarily agency collateralized and municipal taxable mortgage obligations, to collateralize lines of credit and/or borrowings. At both September 30, 2019March 31, 2020 and December 31, 2018,2019, we had pledged investment securities of $0.4 billion$828 million and $1.9 billion,$874 million, 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, government, or private label mortgage-backed securities. LHFS totaled $4.2$4.4 billion and $3.9$5.3 billion at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. For the three and nine months ended September 30, 2019March 31, 2020 we had net gain on loan sales associated with LHFS of $110$89 million, and $232 million, respectively, as compared to $43 million and $166$47 million for the three and nine months ended September 30, 2018, respectively.March 31, 2019.
    
At September 30, 2019March 31, 2020 and December 31, 2018, $742019, $24 million and $137$39 million, respectively, of LHFS were recorded at lower of cost or fair value. We elected the fair value option for the remainder of the loans in the 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 loans held-for-investment totaled $36.1 million at March 31, 2020 and $36.9 million at December 31, 2019 and was reported in Other assets on the Consolidated Statements of Financial Condition.

The following table presents our loans held-for-investment:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
(Dollars in millions)(Dollars in millions)
Consumer loans    
Residential first mortgage$3,258
 $2,999
$2,964
$3,154
Home equity985
 731
1,028
1,024
Other693
 314
858
729
Total consumer loans4,936
 4,044
4,850
4,907
Commercial loans    
Commercial real estate2,697
 2,152
3,092
2,828
Commercial and industrial1,700
 1,433
1,880
1,634
Warehouse lending3,215
 1,459
3,973
2,760
Total commercial loans7,612
 5,044
8,945
7,222
Total loans held-for-investment$12,548
 $9,088
$13,795
$12,129

    


The following table presents the UPB of our loan sales and purchases in the loans held-for-investment portfolio:
Nine Months Ended September 30,Three Months Ended March 31,
2019 201820202019
(Dollars in millions)(Dollars in millions)
Loans Sold (1)
    
Performing loans$166
 $4
$38
$102
Total loans sold$166
 $4
$38
$102
Net gain associated with loan sales (2)
$2
 $—
$—
$2
Loans Purchased    
Home equity199
 —
$—
$49
Other consumer (3)
51
 —
63
51
Total loans purchased$250
 $—
$63
$100
Premium associated with loans purchased$9
 $—
$—
$3
(1)Upon a change in our intent, the loans were transferred to LHFS and subsequently sold.
(2)Recorded in net gain on loan sales on Consolidated Statements of Operations.    
(3)Does not include Greensky flow consumer loans.

We have pledged certain LHFI, LHFS, and loans with government guarantees to collateralize lines of credit and/or borrowings with the FHLB of Indianapolis and the FRB of Chicago. At September 30, 2019March 31, 2020 we had pledged loans of $7.9$8.3 billion, compared to $6.8$9.1 billion at December 31, 2018.2019.

Allowance for Loan Losses

We determine the estimate of the ALLLallowance for loan losses on at least a quarterly basis. ReferThe allowance for loan losses represents management's estimate of lifetime losses in our LHFI portfolio, excluding loans carried under the fair value option. We establish an allowance using relevant available information, from internal and external sources, relating to Note 1- Descriptionpast events, current conditions, and reasonable and supportable forecasts. The allowance uses a loan-level, model-based approach, to estimate the expected lifetime credit losses. For non-performing loans, we've elected to use the collateral dependent practical expedient. The reserve for collateral dependent loans is established as the difference between fair value of Business, Basisthe collateral less cost to sell and the amortized cost of Presentation,the loan. Management applies judgment and Summaryassigns qualitative factors to each loan portfolio segment or the portfolio as a whole based upon the consideration of Significant Accounting Standardsthe following factors: levels of and trends in delinquencies and performance of loans, levels of and trends in write-offs and recoveries collected, changes in the nature and volume of the portfolio, changes in reasonable and supportable economic forecasts, changes in lending policies and procedures, changes in economic and business conditions, changes in lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes in prepayment expectations or other factors affecting assessments of loan contractual term, changes in concentrations of credit, industry conditions and other internal or external factor changes.

A specific allowance is established on impaired loans when it is probable all amounts due will not be collected pursuant to the consolidated financial statementsoriginal contractual terms of the loan and the recorded investment in the Annual Reportloan exceeds its fair value. The required allowance is measured using either the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.
A general allowance is established for lifetime losses inherent on Form 10-K fornon-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, 2020, we estimated losses over a two-year reasonable and supportable forecast period using a macroeconomic scenario before reverting economic variables over a one-year period to its long-term historical averages on a straight-line basis. As of March 31, 2020, we forecasted that we are in a sudden, sharp and severe downturn as a result of the COVID-19 pandemic, only partially recovering later in the year. Our forecast includes an annualized GDP contraction of 18 percent during the second quarter, a 3 percent decrease in HPI throughout the remainder of the year, ended December 31, 2018 forand a description9 percent spike in unemployment during the second quarter before moderating to 7 percent at the end of the methodology. The ALLL, other than for loans that have been identified for individual evaluation for impairment, is determined on a loan pool basis by grouping loan types with common risk characteristics to determine our best estimate of incurred losses.year.



The following table presents changes in ALLL,the allowance for loan losses, by class of loan:
Residential
First
Mortgage (1)
 Home Equity 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and Industrial
 
Warehouse
Lending
 Total
Residential
First
Mortgage (1)
Home Equity
Other
Consumer
Commercial
Real Estate
Commercial
and Industrial
Warehouse
Lending
Total
(Dollars in millions)(Dollars in millions)
Three Months Ended September 30, 2019             
Beginning balance ALLL$26
 $16
 $5
 $35
 $23
 $5
 $110
Three Months Ended March 31, 2020 
Beginning balance, prior to adoption of ASC 326$22
$14
$6
$38
$22
$5
$107
Impact of adopting ASC 32625
12
10
(14)(6)(4)23
Provision (benefit)—
(2)—
4
2
—
4
Charge-offs(1) (1) (2) —
 —
 —
 (4)(1)(1)(1)—
—
—
(3)
Recoveries1
 1
 —
 —
 1
 —
 3
—
—
1
—
—
—
1
Ending allowance balance$46
$23
$16
$28
$18
$1
$132
Three Months Ended March 31, 2019 
Beginning balance$38
$15
$3
$48
$18
$6
$128
Provision (benefit)2
 —
 3
 (2) (2) —
 1
(2)—
2
(12)12
—
—
Ending balance ALLL$28
 $16
 $6
 $33
 $22
 $5
 $110
Three Months Ended September 30, 2018             
Beginning balance ALLL$45
 $19
 $1
 $45
 $21
 $6
 $137
Charge-offs(2) —
 —
 —
 —
 —
 (2)(1)—
(1)—
—
—
(2)
Recoveries1
 —
 —
 —
 —
 —
 1
—
1
—
—
—
—
1
Provision (benefit)(4) 1
 1
 1
 (1) —
 (2)
Ending balance ALLL$40
 $20
 $2
 $46
 $20
 $6

$134
             
Nine Months Ended September 30, 2019             
Beginning balance ALLL$38
 $15
 $3
 $48
 $18
 $6
 $128
Charge-offs(3) (1) (5) —
 (31) —
 (40)
Recoveries1
 2
 —
 —
 1
 —
 4
Provision (benefit)(8) —
 8
 (15) 34
 (1) 18
Ending balance ALLL$28
 $16
 $6
 $33
 $22
 $5
 $110
Nine Months Ended September 30, 2018             
Beginning balance ALLL$47
 $22
 $1
 $45
 $19
 $6
 $140
Charge-offs(3) (2) (1) —
 —
 —
 (6)
Recoveries1
 2
 —
 —
 —
 —
 3
Provision (benefit)(5) (2) 2
 1
 1
 —
 (3)
Ending balance ALLL$40
 $20
 $2
 $46
 $20
 $6
 $134
Ending allowance balance$35
$16
$4
$36
$30
$6
$127
(1)Includes loans with government guarantees.

The ALLLallowance for loan losses was $110$132 million at September 30, 2019March 31, 2020 and $134$127 million at September 30, 2018.March 31, 2019. The decreaseincrease in the allowance is attributablereflective of the adoption of CECL and an increase due to our strong asset quality,changes in the economic forecast used in the ACL models as loan growth in botha result of the consumer and commercial loan portfolios consists of high credit quality assets, combined withongoing COVID-19 pandemic, partially offset by sustained low delinquencydelinquencies and charge-off levels outside of the $29 million net charge off of the Live Well loan which has been fully resolved.








The following table sets forth the method of evaluation, by class of loan:
 
Residential
First
Mortgage (1)
 Home Equity 
Other
Consumer
 
Commercial
Real Estate
 
Commercial
and Industrial
 
Warehouse
Lending
 Total
 (Dollars in millions)
September 30, 2019             
Loans held-for-investment (2)
             
Individually evaluated$33
 $21
 $1
 $—
 $—
 $—
 $55
Collectively evaluated3,217
 961
 692
 2,697
 1,701
 3,215
 12,483
Total loans$3,250
 $982

$693

$2,697

$1,701

$3,215

$12,538
Allowance for loan losses (2)
             
Individually evaluated$5
 $8
 $1
 $—
 $—
 $—
 $14
Collectively evaluated23
 8
 5
 33
 22
 5
 96
Total allowance for loan losses$28
 $16

$6

$33

$22

$5

$110
December 31, 2018             
Loans held-for-investment (2)
             
Individually evaluated$32
 $23
 $—
 $—
 $—
 $—
 $55
Collectively evaluated2,959
 706
 314
 2,152
 1,433
 1,459
 9,023
Total loans$2,991
 $729
 $314
 $2,152
 $1,433
 $1,459
 $9,078
Allowance for loan losses (2)
             
Individually evaluated$4
 $7
 $—
 $—
 $—
 $—
 $11
Collectively evaluated34
 8
 3
 48
 18
 6
 117
Total allowance for loan losses$38
 $15
 $3
 $48
 $18
 $6
 $128
(1)Includes allowance related to loans with government guarantees.
(2)Excludes loans carried under the fair value option.

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

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 when we believe they will be able to fulfill all of their contractual commitments.
We cease the accrual of interest on all classes of consumer and commercial loans upon the earlier of, becoming 90 days past due, or when doubt exists as to the ultimate collection of principal or interest (classified as nonaccrual or nonperforming loans). When a loan is placed on nonaccrual status, the accrued interest income is reversed and the loan may only return to accrual status when principal and interest become current and are anticipated to be fully collectible. We do not measure an allowance for credit losses for accrued interest receivables as accrued interest is written off in a timely manner. 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.

The following table presents the amortized cost basis of loans for which the reserve is established based on collateral value, by class of loan:
 Balance at March 31, 2020
 Real Estate
Consumer loans 
Residential first mortgage$44
Home equity20
Other2
Total$66




As of March 31, 2020, all loans for which the reserve is established based on collateral value are secured by collateral worth equal to or in excess of amortized cost. There were no impaired commercial loans as of March 31, 2020.
The following table sets forth the LHFI aging analysis of past due and current loans:
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater Past
Due (1)
 
Total
Past Due
 Current Total LHFI
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
Greater Past
Due (1)
Total
Past Due
CurrentTotal LHFI
(Dollars in millions)(Dollars in millions)
September 30, 2019           
March 31, 2020 
Consumer loans            
Residential first mortgage$6
 $1
 $22
 $29
 $3,229
 $3,258
$8
$3
$24
$35
$2,929
$2,964
Home equity1
 1
 3
 5
 980
 985
2
1
3
6
1,022
1,028
Other2
 1
 1
 4
 689
 693
4
1
2
7
851
858
Total consumer loans9
 3
 26
 38
 4,898
 4,936
14
5
29
48
4,802
4,850
Commercial loans            
Commercial real estate—
 —
 —
 —
 2,697
 2,697
6
—
—
6
3,086
3,092
Commercial and industrial (1)
—
 —
 —
 —
 1,700
 1,700
1
—
—
1
1,879
1,880
Warehouse lending—
 —
 —
 —
 3,215
 3,215
—
—
—
—
3,973
3,973
Total commercial loans—
 —
 —
 —
 7,612
 7,612
7
—
—
7
8,938
8,945
Total loans (2)
$9
 $3
 $26
 $38
 $12,510
 $12,548
$21
$5
$29
$55
$13,740
$13,795
December 31, 2018           
December 31, 2019 
Consumer loans            
Residential first mortgage$4
 $2
 $19
 $25
 $2,974
 $2,999
$5
$4
$21
$30
$3,124
$3,154
Home Equity1
 —
 3
 4
 727
 731
1
—
4
5
1,019
1,024
Other—
 —
 —
 —
 314
 314
3
1
1
5
724
729
Total consumer loans5
 2
 22
 29
 4,015
 4,044
9
5
26
40
4,867
4,907
Commercial loans            
Commercial real estate—
 —
 —
 —
 2,152
 2,152
—
—
—
—
2,828
2,828
Commercial and industrial—
 —
 —
 —
 1,433
 1,433
—
—
—
—
1,634
1,634
Warehouse lending—
 —
 —
 —
 1,459
 1,459
—
—
—
—
2,760
2,760
Total commercial loans—
 —
 —
 —
 5,044
 5,044
—
—
—
—
7,222
7,222
Total loans (2)
$5
 $2
 $22
 $29
 $9,059
 $9,088
$9
$5
$26
$40
$12,089
$12,129
(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 $3 million of past due loans accounted for under the fair value option for September 30, 2019both March 31, 2020 and December 31, 2018,2019, respectively.

Interest income is recognized on nonaccrual loans using a cash basis method. Interest that would have been accrued on impaired loans was less than $1 million and $1 million during both the three months and ninetwelve months ended September 30, 2019 and September 30, 2018, respectively. At September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. At March 31, 2020 and December 31, 2019, we had 0 loans 90 days 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 Statement of Financial Condition and was $20 million as of March 31, 2020, compared to $3 million as of March 31, 2019. The increase in the reserve is reflective of the adoption of CECL which requires us to record an allowance for our estimate of lifetime losses and an increase due to changes in the economic forecast used in the ACL models as a result of the ongoing COVID-19 pandemic.
The following categories of off-balance sheet credit exposures have been identified: unfunded loans with available balances, new commitments to lend that are not yet funded, and standby and commercial letters of credit. For further information, see Note 15 - Legal Proceedings, Contingencies and Commitments.



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. Troubled debt restructurings ("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. 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 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, 20182019 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 have offered our consumer and commercial customer’s principal and interest payment deferrals and extensions. We considered these programs in the context of whether or not the restructuring of these contracts would constitute a Troubled Debt Restructuring (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.

The following table provides a summary of TDRs by type and performing status:
 TDRs
 PerformingNonperformingTotal
 (Dollars in millions)
March 31, 2020   
Consumer loans   
Residential first mortgage$20
$8
$28
Home equity17
2
19
Total TDRs (1)(2)
$37
$10
$47
December 31, 2019   
Consumer loans   
Residential first mortgage$20
$8
$28
Home Equity18
2
20
Total TDRs (1)(2)
$38
$10
$48
 TDRs
 Performing Nonperforming Total
 (Dollars in millions)
September 30, 2019     
Consumer loans     
Residential first mortgage$20
 $8
 $28
Home equity19
 2
 21
Total TDRs (1)(2)
$39
 $10
 $49
December 31, 2018     
Consumer loans     
Residential first mortgage$22
 $8
 $30
Home Equity22
 2
 24
Total TDRs (1)(2)
$44
 $10
 $54

(1)The ALLLAllowance for loan losses on TDR loans totaled $5 million and $8 million and $10 million at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
(2)Includes $3 million and $3$2 million of TDR loans accounted for under the fair value option at September 30, 2019March 31, 2020 and December 31, 2018, respectively.2019.


The following table provides a summary of newly modified TDRs:
New TDRsNew TDRs
Number of Accounts Pre-Modification Unpaid Principal Balance Post-Modification Unpaid Principal Balance (1) Increase in Allowance at ModificationNumber of AccountsPre-Modification Unpaid Principal BalancePost-Modification Unpaid Principal Balance (1)
  (Dollars in millions) (Dollars in millions)
Three Months Ended September 30, 2019       
Three Months Ended March 31, 2020  
Residential first mortgages5
$1
$1
Home equity (2)(3)
2
—
—
Consumer1
—
—
Total TDR loans8
$1
$1
Three Months Ended March 31, 2019  
Residential first mortgages$4
 $1
 $1
 $—
2
$—
$—
Home equity (2)(3)
—
 $—
 $—
 $—
2
—
—
Total TDR loans$4
 $1

$1
 $—
4
$—
$—
Three Months Ended September 30, 2018   
Residential first mortgages$2
 $—
 $—
 $—
Home equity (2)(3)
6
 1
 1
 —
Total TDR loans$8
 $1
 $1
 $—
       
Nine Months Ended September 30, 2019
      
Residential first mortgages$6
 $1
 $1
 $—
Home equity (2)(3)
4
 1
 1
 —
Total TDR loans$10
 $2
 $2
 $—
       
Nine Months Ended September 30, 2018
      
Residential first mortgages$13
 $2
 $2
 $—
Home equity (2)(3)
14
 1
 1
 —
Total TDR loans$27
 $3
 $3
 $—
 
(1)Post-modification balances include past due amounts that are capitalized at modification date.
(2)Home equity post-modification UPB reflects write downs.
(3)Includes loans carried at the fair value option.
    
There was 1 residential first mortgage loans modified in the previous 12 months that subsequently defaulted during the three months ended March 31, 2020. There were 0 residential first mortgage loans modified in the previous 12 months that subsequently defaulted during the three and nine months ended September 30, 2019March 31, 2019. The increase in allowance at modification was less than $1 million for the three months ended March 31, 2020 and September 30, 2018.March 31, 2019. All TDR classes within the consumer and commercial portfolios are considered subsequently defaulted when they are greater than 90 days past due within 12 months of the restructuring date.



Impaired Loans

The following table presents individually evaluatedinterest income recognized on impaired loans was less than $1 million for the three months ended March 31, 2020 and the associated allowance: 
 September 30, 2019 December 31, 2018
 
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$17
 $21
 $—
 $13
 $16
 $—
Home equity1
 5
 —
 1
 4
 —
Other consumer—
 1
 —
 —
 —
 —
Total loans with no related allowance recorded$18
 $27
 $—
 $14
 $20
 $—
With an allowance recorded           
Consumer loans           
Residential first mortgage$16
 $16
 $3
 $19
 $20
 $4
Home equity19
 19
 6
 22
 23
 7
Other consumer1
 1
 1
 —
 —
 —
Total loans with an allowance recorded$36
 $36
 $10
 $41
 $43
 $11
            
Total Impaired loans           
Consumer Loans           
Residential first mortgage$33
 $37
 $3
 $32
 $36
 $4
Home equity20
 24
 6
 23
 27
 7
Other consumer1
 2
 1
 —
 —
 —
Commercial loans           
Commercial and industrial—
 —
 —
 —
 —
 —
Total impaired loans$54
 $63
 $10
 $55
 $63
 $11


The following table presents average impaired loans and the interest income recognized: 
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 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$46
 $—
 $34
 $1
 $38
 $—
 $34
 $1
Home equity7
 —
 24
 —
 17
 —
 25
 1
Other consumer1
 —
 —
 —
 1
 —
 —
 —
Total impaired consumer loans54
 —
 58
 1
 56
 —
 59
 2
Commercial loans               
Commercial real estate—
 —
 —
 —
 —
 —
 —
 —
Commercial and industrial25
 —
 —
 —
 20
 —
 2
 —
Warehouse—
 —
 —
 —
 —
 —
 —
 —
Total impaired commercial loans25
 —
 —
 —
 20
 —
 2
 —
Total impaired loans$79
 $—
 $58
 $1
 $76
 $—
 $61
 $2



March 31, 2019.

Credit Quality

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

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

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

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

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

Loss. 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 the asset even though partial recovery may be affected in the future.

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 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 Substandard.

Payment activity, credit rating and loan-to-value ratios 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:
 Term LoansRevolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost BasisTotal
 Amortized Cost Basis by Origination Year
As of March 31, 202020202019201820172016Prior
Consumer Loans         
Residential first mortgage         
Pass$85
$775
$377
$482
$416
$658
$116
$5
$2,914
Watch—
1
1
1
1
21
1
—
26
Substandard—
2
5
3
—
14
—
—
24
Home Equity







—
Pass4
47
23
11
3
17
890
12
1,007
Watch—
—
—
—
—
15
2
—
17
Substandard—
—
—
—
—
2
1
1
4
Other Consumer







—
Pass68
391
197
6
3
8
179
3
855
Watch—
—
1
—
—
—
—
—
1
Substandard—
—
1
—
—
—
—
1
2
Total consumer loans$157
$1,216
$605
$503
$423
$735
$1,189
$22
$4,850
The following table presents the amortized cost in residential and consumer loans based on credit scores:


 FICO BandRevolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost BasisTotal
 Amortized Cost Basis by Origination Year
As of March 31, 202020202019201820172016Prior
Consumer Loans         
Residential first mortgage         
>750$40
$412
$202
$337
$316
$399
$68
$2
$1,776
700-75035
257
146
132
92
192
35
1
890
<7009
109
34
17
8
105
14
2
298
Home Equity        
>7501
15
9
4
1
10
400
3
443
700-7502
18
8
5
1
14
348
7
403
<7002
13
7
2
1
10
144
3
182
Other Consumer        
>75046
250
104
3
2
3
93
1
502
700-75020
128
75
2
1
1
59
1
287
<7002
14
20
1
1
1
28
2
69
Total consumer loans$157
$1,216
$605
$503
$423
$735
$1,189
$22
$4,850
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 based on loan-to-value ratios:
 LTV BandRevolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost BasisTotal
 Amortized Cost Basis by Origination Year
As of March 31, 202020202019201820172016Prior
Consumer Loans         
Residential first mortgage         
>90$22
$321
$189
$49
$4
$23
$—
$—
$608
71-9037
275
112
170
110
326
—
—
1,030
55-7018
109
41
146
158
209
—
—
681
<558
73
40
121
144
137
117
5
645
Home Equity        

>90—
—
—
1
1
15
—
—
17
71-903
35
17
8
2
13
478
5
561
<=701
11
6
2
1
7
414
8
450
Total$89
$824
$405
$497
$420
$730
$1,009
$18
$3,992


Commercial Loans

ManagementRisk rating and 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 an at least 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 rating for the borrowing relationship.



The following table presentsBased on the credit qualitymost recent analysis performed, the amortized cost basis, by risk category for each class of our LHFI portfolio:loans within the commercial portfolio is as follows:
September 30, 2019Term LoansRevolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost BasisTotal
Pass Watch Special Mention Substandard Total LoansAmortized Cost Basis by Origination Year
(Dollars in millions)
Consumer Loans         
Residential first mortgage$3,210
 $25
 $—
 $23
 $3,258
Home equity962
 20
 —
 3
 985
Other consumer691
 1
 —
 1
 693
Total consumer loans$4,863
 $46
 $—
 $27
 $4,936
As of March 31, 202020202019201820172016PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost BasisTotal
Commercial Loans          
Commercial real estate$2,655
 $33
 $4
 $5
 $2,697
 
Pass$166
$999
$519
$546
$355
$278
$(1)$—
$2,862
Watch20
13
71
42
38
34
—
—
218
Special mention—
—
7
—
—
—
—
—
7
Substandard—
—
—
5
—
—
—
—
5
Commercial and industrial1,624
 44
 27
 5
 1,700
 
Pass236
614
277
332
184
114
24
—
1,781
Watch1
6
6
42
—
1
1
—
57
Special mention—
11
18
9
—
—
—
—
38
Substandard—
—
—
4
—
—
—
—
4
Warehouse3,033
 165
 17
 —
 3,215
 
Pass—
—
—
—
—
—
3,720
—
3,720
Watch—
—
—
—
—
—
222
—
222
Special mention—
—
—
—
—
—
31
—
31
Substandard—
—
—
—
—
—
—
—
—
Total commercial loans$7,312
 $242
 $48
 $10
 $7,612
$423
$1,643
$898
$980
$577
$427
$3,997
$—
$8,945


 December 31, 2018
 Pass Watch Special Mention Substandard Total Loans
 (Dollars in millions)
Consumer Loans         
Residential first mortgage$2,952
 $28
 $—
 $19
 $2,999
Home equity705
 23
 —
 3
 731
Other consumer314
 —
 —
 —
 314
Total consumer loans$3,971
 $51
 $—
 $22
 $4,044
Commercial Loans         
Commercial real estate$2,132
 $14
 $5
 $1
 $2,152
Commercial and industrial1,351
 53
 29
 —
 1,433
Warehouse1,324
 120
 15
 —
 1,459
Total commercial loans$4,807
 $187
 $49
 $1
 $5,044


Note 5 - Loans with Government Guarantees
    
Substantially all loans with government guarantees are insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs. FHA loans earn interest at a rate based upon the 10-year U.S. Treasury note rate at the time the underlying loan becomes delinquent, which is not paid by the FHA or the U.S. Department of Veterans Affairs until claimed. 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 ALLLallowance for loan losses on residential first mortgages.
    
Repossessed assets and the associated claims related to government guaranteed loans are recorded in other assets and totaled $43$40 million and $50$45 million, at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.

Note 6 - Variable Interest Entities

We have 0 consolidated VIEs as of September 30, 2019March 31, 2020 and December 31, 2018.2019.

In connection with our securitization activities, we have retained a 5 percent interest in the investment securities of certain trusts ("other MBS") and are contracted as the subservicer of the underlying loans, compensated based on market rates, which constitutes a continuing involvement in these trusts. Although we have a variable interest in these securitization trusts, we are not their primary beneficiary due to the relative 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 investment in the VIE, as well as the standard representations and warranties made in conjunction with the loan transfer. See Note 2 - Investment Securities and 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. We 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 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 regarding the derivative instruments utilized to manage our MSR risks, see Note 8 - Derivative Financial Instruments.

Changes in the fair value of residential first mortgage MSRs were as follows:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2019 2018 2019 201820202019
(Dollars in millions)(Dollars in millions)
Balance at beginning of period$316
 $257
 $290
 $291
$291
$290
Additions from loans sold with servicing retained39
 100
 203
 283
40
67
Reductions from sales(12) (51) (57) (273)(36)(45)
Changes in fair value due to (1):
       
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other(30) (3) (60) (12)
Changes in estimates of fair value due to interest rate risk (2)
(28) 10
 (91) 24
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other (1)(22)(11)
Changes in estimates of fair value due to interest rate risk (1) (2)(50)(23)
Fair value of MSRs at end of period$285
 $313
 $285
 $313
$223
$278
(1)Changes in fair 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.

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:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
  Fair value   Fair value Fair value Fair value
Actual 10% adverse change 20% adverse change Actual 10% adverse change 20% adverse changeActual10% adverse change20% adverse changeActual10% adverse change20% adverse change
(Dollars in millions)(Dollars in millions)
Option adjusted spread5.41% $280
 $276
 5.42% $284
 $280
5.56%$220
$217
5.34%$284
$280
Constant prepayment rate11.24% 265
 248
 9.57% 278
 268
12.04%206
191
10.59%271
257
Weighted average cost to service per loan$84.62
 282
 279
 $85.57
 286
 283
$84.59
221
218
$84.41
285
282


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 of MSRs, see Note 16 - 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 return on mortgage 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 party subservicing costs.



The following table summarizes income and fees associated with owned mortgage servicing rights:
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 (Dollars in millions)
Net return on mortgage servicing rights       
Servicing fees, ancillary income and late fees (1)
$25
 $17
 $70
 $46
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other(30) (3) (60) (12)
Changes in estimates of fair value due to interest rate risk(28) 10
 (91) 24
Gain (loss) on MSR derivatives (2)
31
 (11) 92
 (27)
Net transaction costs on sale of MSR assets—
 —
 (2) (5)
Total return included in net return on mortgage servicing rights$(2) $13
 $9
 $26
 Three Months Ended March 31,
 20202019
 (Dollars in millions)
Net return (loss) on mortgage servicing rights  
Servicing fees, ancillary income and late fees (1)$21
$19
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other(22)(11)
Changes in fair value due to interest rate risk(50)(23)
Gain on MSR derivatives (2)58
22
Net transaction costs(1)(1)
Total return (loss) included in net return on mortgage servicing rights$6
$6
(1)Servicing fees are recorded on an 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.
        
The following table summarizes income and fees associated with our mortgage loans subserviced for others:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2019 2018 2019 201820202019
(Dollars in millions)(Dollars in millions)
Loan administration income on mortgage loans subserviced        
Servicing fees and late fees (1)
$27
 $14
 $77
 $36
Servicing fees, ancillary income and late fees (1)$31
$24
Charges on subserviced custodial balances (2)
(20) (9) (50) (20)(16)(12)
Other servicing charges(2) —
 (5) (1)(3)(1)
Total income on mortgage loans subserviced, included in loan administration$5
 $5
 $22
 $15
$12
$11
(1)Servicing fees are recorded on an accrual basis. Late fees are recorded on cash basis.
(2)Charges on subserviced custodial balances represent interest due to MSR owner.


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. Our policy is to present its derivative assets and derivative liabilities on the Consolidated Statement 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, 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. Changes in fair value of derivatives not designated as hedging instruments are recognized in the Consolidated Statements of Operations.
    
Derivatives designated as hedging instruments: We have designated certain interest rate swaps as fair value hedges of fixed rate FHLB advances and investment securities available for sale using the last-of-layer method. Cash flows and the profit 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 on LIBOR based variable interest payments on certain custodial deposits. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) on the Consolidated Statement of Financial Condition and reclassified into interest expense in the same period in which the hedge transaction is recognized in earnings. At March 31, 2020, we had $4 million (net-of-tax) of


unrealized losses on derivatives classified as cash flow hedges recorded in accumulated other comprehensive income (loss). We had 0 designated cash flow hedges at December 31, 2019. The estimated amount to be reclassified from other comprehensive income into earnings during the next 12 months represents $2 million of losses (net-of-tax).

Derivatives that are designated in hedging relationships are assessed for effectiveness using regression analysis at inception and qualitatively thereafter, unless regression analysis is deemed necessary. All designated hedge relationships were and are expected to be highly effective as of September 30, 2019. Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged item.


March 31, 2020.

The following table presents the notional amount, estimated fair value and maturity of our derivative financial instruments:
September 30, 2019 (1)March 31, 2020 (1)
Notional Amount Fair Value (2) Expiration DatesNotional AmountFair Value (2)Expiration Dates
(Dollars in millions)(Dollars in millions)
Derivatives in cash flow hedge relationships:  
Assets  
Interest rate swaps on custodial deposits$800
$2
2026-2027
Derivatives in fair value hedge relationships:      
Assets      
Interest rate swap on AFS Securities$100
 $—
 2022
Interest rate swaps on AFS securities350
—
2024-2025
Total derivative assets$1,150
$2
 
Liabilities      
Interest rate swaps on AFS securities$200
 $—
 2020100
—
2022
    
Total derivative liabilities$100
$—
 
Derivatives not designated as hedging instruments:      
Assets      
Futures$224
 $—
 2019-2023$1,103
$1
2020-2023
Mortgage-backed securities forwards3,658
 11
 2019232
39
2020
Rate lock commitments5,036
 51
 2019-20208,318
169
2020
Interest rate swaps and swaptions737
 34
 2019-2029
Interest rate swaps878
66
2020-2030
Total derivative assets$9,655
 $96
 $10,531
$275
 
Liabilities      
Futures$242
 $—
 2020-2023
Mortgage-backed securities forwards4,699
 11
 20199,548
278
2020
Rate lock commitments275
 1
 2019-202027
—
2020
Interest rate swaps1,628
 5
 2019-2049
Interest rate swaps and swaptions1,505
10
2020-2050
Total derivative liabilities$6,844
 $17
 $11,080
$288
 

(1)Variation margin pledged to or received from a Central Counterparty Clearing House is considered 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.


December 31, 2018 (1)December 31, 2019 (1)
Notional Amount Fair Value (2) Expiration DatesNotional AmountFair Value (2)Expiration Dates
(Dollars in millions)(Dollars in millions)
Derivatives in fair value hedge relationships:      
Assets      
Interest rate swaps on CDs$20
 $—
 2019
Liabilities    
Interest rate swaps on CDs$10
 $—
 2019
Interest rate swaps on FHLB advances$200
$—
2020
Interest rate swaps on AFS securities100
—
2022
Total derivative assets$300
$—
 
Derivatives not designated as hedging instruments:      
Assets      
Futures$248
 $—
 2019-2023$550
$—
2020-2023
Mortgage backed securities forwards362
 4
 2019
Mortgage-backed securities forwards1,918
2
2020
Rate lock commitments3,870
34
2020
Interest rate swaps799
26
2020-2029
Total derivative assets$7,137
$62
 
Liabilities  
Mortgage-backed securities forwards$5,749
$9
2020
Rate lock commitments2,221
 20
 2019229
1
2020
Interest rate swaps and swaptions1,662
 23
 2019-20491,662
8
2020-2050
Total derivative assets$4,493
 $47
 
Liabilities    
Futures$1,513
 $1
 2019-2023
Mortgage backed securities forwards4,625
 31
 2019
Rate lock commitments45
 —
 2019
Interest rate swaps755
 7
 2019-2028
Total derivative liabilities$6,938
 $39
 $7,640
$18
 
(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.
(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 Condition Net Amount Presented in the Statements of Financial Condition  Gross Amounts Not Offset in the Statements of Financial Condition 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 Amount Financial Instruments Cash CollateralGross AmountFinancial InstrumentsCash Collateral
(Dollars in millions)(Dollars in millions)
September 30, 2019         
Derivatives not designated as hedging instruments:         
March 31, 2020 
Derivatives designated as hedging instruments: 
Assets          
Mortgage backed securities forwards$11
 $—
 $11
 $—
 $3
Interest rate swaps and swaptions (1)34
 —
 34
 —
 —
Interest rate swaps on AFS securities$—
$—
$—
$—
$6
Interest rate swaps on custodial deposits2
—
2
—
14
Total derivative assets$45
 $—
 $45
 $—
 $3
$2
$—
$2
$—
$20
Liabilities           
Futures$—
 $—
 $—
 $—
 $—
Mortgage backed securities forwards11
 —
 11
 —
 16
Interest rate swaps (1)5
 —
 5
 —
 41
Interest rate swaps on AFS securities$—
$—
$—
$—
$2
Total derivative liabilities$16
 $—
 $16
 $—
 $57
$—
$—
$—
$—
$2
          
December 31, 2018         
Derivatives not designated as hedging instruments:          
Assets          
Mortgage-backed securities forwards$4
 $—
 $4
 $—
 $—
$39
$—
$39
$—
$—
Interest rate swaps and swaptions (1)23
 —
 23
 —
 14
Interest rate swaps66
—
66
—
3
Futures1
—
1
—
—
Total derivative assets$27
 $—
 $27
 $—
 $14
$106
$—
$106
$—
$3
Liabilities          
Futures$1
 $—
 $1
 $—
 $1
Mortgage-backed securities forwards$278
$—
$278
$—
$269
Interest rate swaps and swaptions (1)10
—
10
—
31
Total derivative liabilities$288
$—
$288
$—
$300
 
December 31, 2019 
 
Derivatives not designated as hedging instruments: 
 
Assets 
 
Mortgage-backed securities forwards$2
$—
$2
$—
$—
Interest rate swaps26
—
26
—
—
Total derivative assets$28
$—
$28
$—
$—
Liabilities 
 
Mortgage-backed securities forwards31
 —
 31
 —
 29
9
—
9
—
24
Interest rate swaps (1)7
 —
 7
 —
 23
8
—
8
—
39
Total derivative liabilities$39
 $—
 $39
 $—
 $53
$17
$—
$17
$—
$63
(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.

The 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 $293$1,403 million at September 30, 2019March 31, 2020 and 0$287 million at December 31, 20182019 of which $2$6 million and 0$1 million respectively, was due to the fair value hedge relationship. The closed portfolio of AFS securities designated in this last layer method hedge was $295 million$1.38 billion par (amortized cost of $292$1.38 billion) at March 31, 2020 and $291 million par (amortized cost of $289 million) at September 30, 2019 and 0 at December 31, 20182019 of which we have designated $450 million and $100 million.

The carrying amount of hedged FHLB advances was $200 million at September 30, 2019March 31, 2020 and 0 at December 31, 2018.2019, respectively. The fair value hedge relationship had a de minimisnet gain recognized on designated instruments, net of the impact at September 30, 2019of offsetting positions was 0 for both the three months ended March 31, 2020 and 0 at DecemberMarch 31, 2018.2019.

At September 30, 2019,March 31, 2020, we pledged a total of $57$325 million related to derivative financial instruments, consisting of $23$284 million of cash collateral on derivative liabilities and $34$41 million of maintenance margin on centrally cleared derivatives and had ana de-minimis obligation to return cash of $3 million on derivative assets at September 30, 2019.assets. We pledged a total of $53$63 million related to derivative financial instruments, consisting of $30$34 million of cash collateral on derivatives and $23$29 million of maintenance margin on centrally


cleared derivatives and had ana de-minimis obligation to return cash of $14 million on derivative assets at December 31, 2018.2019. Within the Consolidated Statements of Financial Condition, the collateral related to derivative activity is included in other assets and other liabilities and the cash pledged as maintenance margin is restricted and included in other assets.



The following table presents the net gain (loss) recognized on designated instruments, net of the impact of offsetting positions:
 Amount Recorded in Net Interest Income (1)
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 (Dollars in millions)
Gain on cash flow hedging relationships in interest contracts:       
Amount of loss reclassified from AOCI into income$—
 $1
 $—
 $—
Total loss on hedges$—
 $1
 $—
 $—
(1)The loss on fair value hedging relationships in interest contracts was de minimis for the three and nine months ended September 30, 2019, and the three and nine months ended September 30, 2018. During the second quarter of 2018, we de-designated all of our remaining cash flow hedge relationships.
The following table presents net gain (loss) recognized in income on derivative instruments, net of the impact of offsetting positions:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2019 2018 2019 2018 20202019
 (Dollars in millions) (Dollars in millions)
Derivatives not designated as hedging instruments:Location of Gain (Loss)       Location of Gain (Loss) 
FuturesNet return on mortgage servicing rights$—
 $(1) $(2) $(4)Net loss on mortgage servicing rights$1
$—
Interest rate swaps and swaptionsNet return on mortgage servicing rights28
 (8) 71
 (16)Net gain (loss) on mortgage servicing rights38
13
Mortgage-backed securities forwardsNet return on mortgage servicing rights3
 (2) 23
 (6)Net gain (loss) on mortgage servicing rights19
9
Rate lock commitments and forward agency and loan salesNet gain on loan sales27
 21
 57
 12
Net gain (loss) on loan sales(100)8
Forward commitmentsOther noninterest income—
 —
 2
 —
Other noninterest income—
1
Interest rate swaps (1)Other noninterest income2
 1
 3
 2
Other noninterest income—
1
Total derivative gain (loss) $60
 $11
 $154
 $(12)
Total derivative (loss) gain $(42)$32
(1)Includes customer-initiated commercial interest rate swaps.

Note 9 - Borrowings

Federal Home Loan Bank Advances

The following is a breakdown of our FHLB advances outstanding:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
Amount Rate Amount RateAmountRateAmountRate
(Dollars in millions)(Dollars in millions)
Short-term fixed rate term advances$2,325
 1.89% $2,993
 2.52%$5,336
0.24%$3,695
1.61%
Other short-term borrowings4
 2.32% 251
 2.87%505
0.20%470
1.64%
Total short-term Federal Home Loan Bank advances and other borrowings2,329
   3,244
  5,841
 4,165
 
Long-term Federal Home Loan Bank fixed rate advances (1)
650
 1.45% 150
 1.53%
Total Federal Home Loan Bank advances$2,979
   $3,394
  
Long-term fixed rate advances (1)1,000
1.19%650
1.45%
Total long-term Federal Home Loan Bank advances1,000
 650
 
Total Federal Home Loan Bank advances and other borrowings$6,841
 $4,815
 

(1)Includes the current portion of fixed rate advances of $0 and $50 million at September 30, 2019both March 31, 2020 and December 31, 2018.2019.
    
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,
2019 2018 2019 201820202019
(Dollars in millions)(Dollars in millions)
Maximum outstanding at any month end$2,979
 $5,085
 $3,391
 $5,740
$6,841
$3,391
Average outstanding balance2,446
 4,745
 2,769
 4,996
4,359
2,878
Average remaining borrowing capacity4,957
 2,165
 3,932
 1,830
4,977
3,314
Weighted average interest rate2.10% 2.08% 2.33% 1.88%1.32%2.45%

    


The following table outlines the maturity dates of our FHLB advances and other borrowings:
September 30, 2019March 31, 2020
(Dollars in millions)(Dollars in millions)
2019$2,329
2020—
$5,841
2021—
—
2022—
—
2023500
Thereafter650
500
Total$2,979
$6,841




Parent Company Senior Notes and Trust Preferred Securities

The following table presents long-term debt, net of debt issuance costs:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
Amount Interest Rate Amount Interest RateAmountInterest RateAmountInterest Rate
(Dollars in millions)(Dollars in millions)
Senior Notes           
Senior notes, matures 2021$249
 6.125% $248
 6.125%$246
6.125%$249
6.125%
Trust Preferred Securities           
Floating Three Month LIBOR Plus:           
3.25%, matures 2032$26
 5.36% $26
 6.07%$26
4.48%$26
5.20%
3.25%, matures 203326
 5.55% 26
 5.69%26
5.08%26
5.24%
3.25%, matures 203326
 5.57% 26
 6.05%26
4.62%26
5.21%
2.00%, matures 203526
 4.30% 26
 4.44%26
3.83%26
3.99%
2.00%, matures 203526
 4.30% 26
 4.44%26
3.83%26
3.99%
1.75%, matures 203551
 3.87% 51
 4.54%51
2.49%51
3.64%
1.50%, matures 203525
 3.80% 25
 3.94%25
3.33%25
3.49%
1.45%, matures 203725
 3.57% 25
 4.24%25
2.19%25
3.34%
2.50%, matures 203716
 4.62% 16
 5.29%16
3.24%16
4.39%
Total Trust Preferred Securities247
   247
  247
 247
 
Total other long-term debt$496
   $495
  $493
 $496
 


Senior Notes

On July 11, 2016, we issued $250 million of senior notes (“Senior Notes”) which mature on July 15, 2021. 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 notes to be redeemed or the sum of the present values of the remaining 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 caseaddition to accrued and unpaid interest. During the quarter ended March 31, 2020, we purchased $3 million of the Senior Notes on the open market. This has been accounted for as a debt extinguishment in accordance with applicable GAAP.

Trust Preferred Securities

We sponsor 9 trust subsidiaries, which issued preferred stock to third party investors. We issued junior subordinated debt securities to those trusts, which we have included in long-term debt. The junior subordinated debt securities are the sole 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, 2019,March 31, 2020, we had 0 deferred interest.


Note 10 - Accumulated Other Comprehensive Income (Loss)

The following table sets forth the components in accumulated other comprehensive income (loss):
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2019 2018 2019 201820202019
(Dollars in millions)(Dollars in millions)
Investment securities       
Investment Securities 
Beginning balance$1
$(47)
Unrealized gain45
21
Less: Tax provision11
5
Net unrealized gain34
16
Reclassifications out of AOCI (1)—
—
Less: Tax provision—
—
Net unrealized gain reclassified out of AOCI—
—
Other comprehensive income, net of tax34
16
Ending balance$35
$(31)
 
Cash Flow Hedges 
Beginning balance$(8) $(56) $(47) $(18)$—
$—
Unrealized gain (loss)18
 (11) 61
 (55)(5)—
Less: Tax provision (benefit)5
 (2) 15
 (13)(1)—
Net unrealized gain (loss)13
 (9) 46
 (42)(4)—
Reclassifications out of AOCI (1)
—
 —
 7
 —
—
—
Less: Tax provision—
 —
 1
 —
—
—
Net unrealized gain reclassified out of AOCI—
 —
 6
 —
Reclassification of certain income tax effects (2)
—
 —
 —
 (5)
Net unrealized gain (loss) reclassified out of AOCI—
—
Other comprehensive income (loss), net of tax13
 (9) 52
 (47)(4)—
Ending balance$5
 $(65) $5
 $(65)$(4)$—
       
Cash Flow Hedges       
Beginning balance$—
 $24
 $—
 $2
Unrealized gain—
 —
 —
 28
Less: Tax provision—
 —
 —
 7
Net unrealized gain—
 —
 —
 21
Reclassifications out of AOCI (3)
—
 (1) —
 —
Net unrealized gain reclassified out of AOCI—
 (1) —
 —
Other comprehensive income, net of tax—
 (1) —
 21
Ending balance$—
 $23
 $—
 $23

(1)Reclassifications are reported in noninterest income on the Consolidated Statements of Operations.
(2)Income tax effects of the Tax Cuts and Jobs Act are reclassified from AOCI to retained earnings due to early adoption of ASU 2018-02.
(3)Reclassifications are reported in interest expense on the Consolidated Statements of Operations.

Note 11 - 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 September 30, Nine Months Ended September 30,Three Months Ended March 31,
2019 2018 2019 201820202019
(Dollars in millions, except share data)(Dollars in millions, except share data)
Net income$63
 $48
 $160
 $133
Net income applicable to common stockholders$46
$36
Weighted Average Shares        
Weighted average common shares outstanding56,484,499
 57,600,360
 56,607,944
 57,483,802
56,655,865
56,897,799
Effect of dilutive securities        
Stock-based awards626,297
 732,238
 644,596
 818,118
534,058
692,473
Weighted average diluted common shares57,110,796
 58,332,598
 57,252,540
 58,301,920
$57,189,923
$57,590,272
Earnings per common share        
Basic earnings per common share$1.12
 $0.84
 $2.83
 $2.32
$0.80
$0.64
Effect of dilutive securities        
Stock-based awards(0.01) (0.01) (0.03) (0.04)—
(0.01)
Diluted earnings per common share$1.11
 $0.83
 $2.80
 $2.28
$0.80
$0.63






Note 12 - Stock-Based Compensation

We had stock-based compensation expense of $4 million and $9$3 million for both of the three and nine months ended September 30, 2019March 31, 2020 and $4 million and $8 million forMarch 31, 2019.

Stock Options

No stock options have been granted by the three and nine months ended September 30, 2018, respectively.Company since 2002. All remaining stock options expired January 22, 2020, unexercised.

Restricted Stock and Restricted Stock Units
    
The following table summarizes restricted stock and restricted stock units activity:
Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019Three Months Ended March 31, 2020
Shares Weighted — Average Grant-Date Fair Value per Share Shares Weighted — Average Grant-Date Fair Value per ShareSharesWeighted — Average Grant-Date Fair Value per Share
Restricted Stock and Restricted Stock Units         
Non-vested balance at beginning of period1,612,174
 $29.11
 1,620,568
 $27.27
1,399,127
$28.72
Granted—
 —
 325,209
 31.88
58,888
26.03
Vested(2,719) 33.64
 (227,818) 23.91
(45,904)29.47
Canceled and forfeited(18,140) 32.48
 (126,644) 22.58
(30,189)33.86
Non-vested balance at end of period1,591,315
 $29.06
 1,591,315
 $29.06
1,381,922
$28.47


2017 Employee Stock Purchase Plan

A total of 800,000 shares of the Company’s common stock were reserved and authorized for issuance for purchase under the Employee Stock Purchase Plan (ESPP) of which 553,547472,677 remain as of September 30, 2019.March 31, 2020. There were 24,373 and 84,03659,252 shares issued under the ESPP during the three and nine months ended September 30, 2019March 31, 2020 and the associated compensation expense was de minimis.

Note 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 discrete 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 September 30, Nine Months Ended September 30,Three Months Ended March 31,
2019 2018 2019 201820202019
(Dollars in millions)(Dollars in millions)
Provision for income taxes$15
 $12
 $37
 $33
$10
$8
Effective tax provision rate18.4% 20.0% 18.6% 20.1%18.5%18.4%


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 14 - Regulatory Matters

Regulatory Capital

We, along with the Bank, 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 included transition provisions through 2018. In preparation for the new capital simplification rules, the Basel III implementation phase-in has been halted, as the agencies issued a final rule that will maintain the capital rules’ 2017 transition provisions for several regulatory capital deductions and certain other requirements that are subject to multi-year phase-in schedules in the regulatory capital rules.



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, 2019March 31, 2020 and December 31, 2018.2019.
    
The following tables present the regulatory capital ratios as of the dates indicated:
Flagstar BancorpActual For Capital Adequacy Purposes Well-Capitalized Under Prompt Corrective Action ProvisionsActualFor Capital Adequacy PurposesWell-Capitalized Under Prompt Corrective Action Provisions
AmountRatio AmountRatio AmountRatioAmountRatioAmountRatioAmountRatio
(Dollars in millions)(Dollars in millions)
September 30, 2019        
Tier 1 leverage (to adjusted avg. total assets)$1,668
7.98% $836
4.0% $1,045
5.0%
March 31, 2020      
Tier 1 capital (to adjusted avg. total assets)$1,879
8.09%$928
4.0%$1,161
5.0%
Common equity Tier 1 capital (to RWA)1,428
9.25% 694
4.5% 1,003
6.5%1,639
9.17%804
4.5%1,161
6.5%
Tier 1 capital (to RWA)1,668
10.81% 926
6.0% 1,235
8.0%1,879
10.52%1,072
6.0%1,429
8.0%
Total capital (to RWA)1,781
11.54% 1,235
8.0% 1,543
10.0%1,997
11.18%1,429
8.0%1,786
10.0%
December 31, 2018        
Tier 1 leverage (to adjusted avg. total assets)$1,505
8.29% $726
4.0% $908
5.0%
December 31, 2019      
Tier 1 capital (to adjusted avg. total assets)$1,720
7.57%$909
4.0%$1,136
5.0%
Common equity Tier 1 capital (to RWA)1,265
10.54% 540
4.5% 780
6.5%1,480
9.32%715
4.5%1,033
6.5%
Tier 1 capital (to RWA)$1,505
12.54% $720
6.0% $960
8.0%$1,720
10.83%$953
6.0%1,271
8.0%
Total capital (to RWA)$1,637
13.63% $960
8.0% $1201
10.0%$1,830
11.52%$1271
8.0%1,589
10.0%
N/A - Not applicable
Flagstar BankActualFor Capital Adequacy PurposesWell-Capitalized Under Prompt Corrective Action Provisions
 AmountRatioAmountRatioAmountRatio
 (Dollars in millions)
March 31, 2020      
Tier 1 capital (to adjusted avg. total assets)$1,900
8.19%$928
4.0%$1160
5.0%
Common equity Tier 1 capital (to RWA)1,900
10.64%804
4.5%1,161
6.5%
Tier 1 capital (to RWA)1,900
10.64%1,071
6.0%1,429
8.0%
Total capital (to RWA)2,019
11.30%1,429
8.0%1,786
10.0%
December 31, 2019      
Tier 1 capital (to adjusted avg. total assets)$1,752
7.71%$909
4.0%$1,136
5.0%
Common equity Tier 1 capital (to RWA)1,752
11.04%714
4.5%1,032
6.5%
Tier 1 capital (to RWA)1,752
11.04%952
6.0%1,270
8.0%
Total capital (to RWA)1,862
11.73%1,270
8.0%1,587
10.0%

Flagstar BankActual For Capital Adequacy Purposes Well-Capitalized Under Prompt Corrective Action Provisions
 AmountRatio AmountRatio AmountRatio
 (Dollars in millions)
September 30, 2019        
Tier 1 leverage (to adjusted avg. total assets)$1,747
8.35% $837
4.0% $1046
5.0%
Common equity tier 1 capital (to RWA)1,747
11.33% 694
4.5% 1,002
6.5%
Tier 1 capital (to RWA)1,747
11.33% 925
6.0% 1,233
8.0%
Total capital (to RWA)1,860
12.06% 1,233
8.0% 1,542
10.0%
December 31, 2018        
Tier 1 leverage (to adjusted avg. total assets)$1,574
8.67% $726
4.0% $908
5.0%
Common equity tier 1 capital (to RWA)1,574
13.12% 540
4.5% 780
6.5%
Tier 1 capital (to RWA)1,574
13.12% 720
6.0% 960
8.0%
Total capital (to RWA)1,705
14.21% 960
8.0% 1,200
10.0%
N/A - Not applicable


Note 15 - 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, 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.



At September 30, 2019,March 31, 2020, 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 material adverse effect on our financial condition, results of operations or cash flows.

DOJ Liability

On February 24, 2012, the Bank entered into a Settlement Agreement with the DOJ under which we 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. At September 30, 2019, the Company had a Tier 1 Leverage Capital Ratio of 8.35 percent.

No payment would be required until six months after the Bank files its Call Report with the 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 most mid-size banks, our Tier 1 Leverage Capital Ratio is impacted by (a) future dividends from the Bank to Bancorp and (b) continued growth in earning assets at the Bank 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 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.

The settlement agreementSettlement Agreement meets the definition of a financial instrument for which we elected the fair value option. We consider the assumptions a market participant would make to transfer the liability and evaluate the potential ways we might be required to begin making DOJ Liability paymentssatisfy the Settlement Agreement and our estimates of the likelihood of these outcomes, which may change over time. The fair value of the liability is subject to significant uncertainty and is impacted by forecasted estimates of the timing of potential payments, some of which are impacted by inputs including 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 discount rate, and the likelihood and types of the Bank or Bancorp being a party to apotential business combination resulting in terms which would require payments to commence,combinations, or any other means by which a payment could be made.
For further information on the fair value of the liability, see Note 16 - Fair Value Measurements.
Other litigation accruals

ExcludingAt March 31, 2020 and December 31, 2019, excluding the fair value liability relating to the DOJ Liability,liability, our total accrual for contingent liabilities and settled litigation was $2 million at September 30, 2019 and December 31, 2018.


$3 million.

Commitments

The following table is a summary of the contractual amount of significant commitments:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019
(Dollars in millions)(Dollars in millions)
Commitments to extend credit    
Mortgage loans interest-rate lock commitments$5,325
 $2,293
Mortgage loan commitments including interest-rate locks$8,345
$4,099
Warehouse loan commitments1,579
 2,334
2,258
1,944
Commercial and industrial commitments1,034
 918
741
1,107
Other commercial commitments1,907
 1,260
1,817
2,015
HELOC commitments526
 429
580
558
Other consumer commitments227
 108
272
175
Standby and commercial letters of credit81
 63
94
82

    


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. Since 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'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 commitments including interest-rate lock commitments.locks. We enter into mortgage loan commitments, including interest-rate lock commitmentslocks with our customers. These interest-rate lock commitments are considered to be derivative instruments and the fair value of these commitments is recorded in 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 commercial commitments. Conditional commitments issued under various terms to lend funds to business 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. Since 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.



We maintain a reserve for the estimate of probable 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 million at both September 30, 2019 and December 31, 2018, 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. Under the plan, the former CEO was to receive a $16 million payment in August 2018. The Company fully accrued for the SERP liability during that time period and no SERP payments have been made to the former CEO. Due to the condition of the Company at the time the former CEO’s employment ended, we believe that any payment under the SERP would be deemed to be a “Golden Parachute” payment and, therefore, is subject to certain banking regulations. As a result, we would need to make an application to the regulators to make a payment and certify to certain criteria. The Company does not believe that it can make such a certification. The former CEO has filed a lawsuit to compel us to make that certification and ultimately pay the liability. Final dispensation of the "SERP" is not within our control and the liability of $16 million at September 30, 2019March 31, 2020 may be adjusted as more information is known.






Note 16 - 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'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.

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 to unobservable inputs where no active market exists, as discussed below.

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



Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value by caption on the Consolidated Statement of Financial Condition and by level in the valuation hierarchy.
September 30, 2019March 31, 2020
Level 1 Level 2 Level 3 Total Fair ValueLevel 1Level 2Level 3Total Fair Value
(Dollars in millions)(Dollars in millions)
Securitized HFS loans not sold 
Agency - Residential$—
$2,058
$—
$2,058
Investment securities available-for-sale        
Agency - Commercial$—
 $969
 $—
 $969
$—
$1,285
$—
$1,285
Agency - Residential—
 604
 —
 604
—
1,004
—
1,004
Municipal obligations—
 31
 —
 31
—
30
—
30
Corporate debt obligations—
 64
 —
 64
—
67
—
67
Other MBS—
 28
 —
 28
—
59
—
59
Certificate of Deposit—
 1
 —
 1
Certificate of deposits—
1
—
1
Loans held-for-sale        
Residential first mortgage loans—
 4,122
 —
 4,122
—
4,365
—
4,365
Commercial Loan—
 —
 —
 —
—
—
—
—
Loans held-for-investment        
Residential first mortgage loans—
 8
 —
 8
—
10
—
10
Home equity—
 —
 2
 2
—
—
2
2
Mortgage servicing rights—
 —
 285
 285
—
—
223
223
Derivative assets        
Rate lock commitments (fallout-adjusted)—
 —
 51
 51
—
—
169
169
Futures—
1
—
1
Mortgage-backed securities forwards—
 11
 —
 11
—
39
—
39
Interest rate swaps and swaptions—
 34
 —
 34
—
68
—
68
Total assets at fair value$—
 $5,872
 $338
 $6,210
$—
$8,987
$394
$9,381
Derivative liabilities        
Rate lock commitments (fallout-adjusted)$—
 $—
 $(1) $(1)$—
$—
$—
$—
Futures—
 —
 —
 —
—
—
—
—
Mortgage backed securities forwards—
 (11) —
 (11)—
(278)—
(278)
Interest rate swaps—
 (5) —
 (5)—
(10)—
(10)
DOJ Liability
—
 —
 (35) (35)—
—
(35)(35)
Contingent consideration—
 —
 (8) (8)—
—
(16)(16)
Total liabilities at fair value$—
 $(16) $(44) $(60)$—
$(288)$(51)$(339)



December 31, 2018December 31, 2019
Level 1 Level 2 Level 3 Total Fair ValueLevel 1Level 2Level 3Total Fair Value
(Dollars in millions)(Dollars in millions)
Investment securities available-for-sale        
Agency - Commercial$—
 $1,374
 $—
 $1,374
$—
$947
$—
$947
Agency - Residential—
 662
 —
 662
—
1,015
—
1,015
Municipal obligations—
 32
 —
 32
—
31
—
31
Corporate debt obligations—
 42
 —
 42
—
77
—
77
Other MBS—
 32
 —
 32
—
45
—
45
Certificate of Deposit—
1
—
1
Loans held-for-sale        
Residential first mortgage loans—
 3,732
 —
 3,732
—
5,219
—
5,219
Commercial Loan—
—
—
—
Loans held-for-investment        
Residential first mortgage loans—
 8
 —
 8
—
10
—
10
Home equity—
 —
 2
 2
—
—
2
2
Mortgage servicing rights—
 —
 290
 290
—
—
291
291
Derivative assets        
Rate lock commitments (fallout-adjusted)—
 —
 20
 20
—
—
34
34
Mortgage-backed securities forwards—
 4
 —
 4
—
2
—
2
Interest rate swaps and swaptions—
 23
 —
 23
—
26
—
26
Total assets at fair value$—
 $5,909
 $312
 $6,221
$—
$7,373
$327
$7,700
Derivative liabilities        
Rate lock commitments (fallout-adjusted)$—
$—
$(1)$(1)
Futures$—
 $(1) $—
 $(1)$—
$—
$—
—
Mortgage-backed securities forwards—
 (31) —
 (31)—
(9)—
(9)
Interest rate swaps—
 (7) —
 (7)—
(8)—
(8)
DOJ Liability
—
 —
 (60) (60)
DOJ litigation settlement—
—
(35)(35)
Contingent consideration—
 —
 (6) (6)—
—
(10)(10)
Total liabilities at fair value$—
 $(39) $(66) $(105)$—
$(17)$(46)$(63)





Fair Value Measurements Using Significant Unobservable Inputs

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

Balance at
Beginning of
Period
 Total Gains (Losses) Recorded in Earnings (1) Purchases / Originations Sales Settlement Transfers In (Out) 
Balance at
End of 
Period
Balance at
Beginning of
Period
Total Gains (Losses) Recorded in Earnings (1)Purchases / OriginationsSalesSettlementTransfers In (Out)
Balance at
End of 
Period
(Dollars in millions)(Dollars in millions)
Three Months Ended September 30, 2019             
Three Months Ended March 31, 2020 
Assets              
Loans held-for-investment              
Home equity$2
 $—
 $—
 $—
 $—
 $—
 $2
$2
$—
$—
$—
$—
$—
$2
Mortgage servicing rights (2)316
 (58) 39
 (12) —
 —
 285
291
(72)40
(36)—
—
223
Rate lock commitments (net) (2)(3)50
 20
 113
 —
 —
 (133) 50
34
105
164
—
—
(134)169
Totals$368
 $(38) $152
 $(12) $—
 $(133) $337
$327
$33
$204
$(36)$—
$(134)$394
Liabilities              
DOJ Liability$(35) $—
 $—
 $—
 $—
 $—
 $(35)$(35)$—
$—
$—
$—
$—
$(35)
Contingent consideration(7) (4) —
 —
 3
 —
 (8)(10)(6)—
—
—
—
(16)
Totals$(42) $(4) $—
 $—
 $3
 $—
 $(43)$(45)$(6)$—
$—
$—
$—
$(51)
              
Three Months Ended September 30, 2018            
Three Months Ended March 31, 2019 
Assets              
Loans held-for-investment              
Home equity$3
 $—
 $—
 $—
 $—
 $—
 $3
$2
$—
$—
$—
$—
$—
$2
Mortgage servicing rights (2)257
 7
 100
 (51) —
 —
 313
290
(34)67
(45)—
—
278
Rate lock commitments (net) (2)(3)32
 (5) 60
 —
 —
 (68) 19
20
25
50
—
—
(58)37
Totals$292
 $2
 $160
 $(51) $—
 $(68) $335
$312
$(9)$117
$(45)$—
$(58)$317
Liabilities              
DOJ Liability$(60) $—
 $—
 $—
 $—
 $—
 $(60)$(60)$—
$—
$—
$—
$—
$(60)
Contingent consideration(18) 3
 —
 —
 4
 —
 (11)(6)—
—
—
—
—
(6)
Totals$(78) $3
 $—
 $—
 $4
 $—
 $(71)$(66)$—
$—
$—
$—
$—
$(66)

(1)There were 0 unrealized gains (losses) recorded in OCI during the three months ended September 30, 2019March 31, 2020 and 2018.2019.
(2)We utilized swaptions, futures, forward agency and loan sales and interest rate swaps to manage the risk associated with mortgage servicing rights and rate lock commitments. Gains and losses for individual lines do not reflect the effect of our risk management activities related to such Level 3 instruments.
(3)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.




 
Balance at
Beginning of
Period
 Total Gains (Losses) Recorded in Earnings (1) Purchases / Originations Sales Settlement Transfers In (Out) 
Balance at
End of 
Period
 (Dollars in millions)
Nine Months Ended September 30, 2019             
Assets             
Loans held-for-investment             
Home equity$2
 $—
 $—
 $—
 $—
 $—
 $2
Mortgage servicing rights (2)290
 (151) 203
 (57) —
 —
 285
Rate lock commitments (net) (2)(3)20
 75
 245
 —
 —
 (290) 50
Totals$312
 $(76) $448
 $(57) $—
 $(290) $337
Liabilities             
DOJ Liability$(60) $25
 $—
 $—
 $—
 $—
 $(35)
Contingent consideration(6) (5) —
 —
 3
 —
 (8)
Totals$(66) $20
 $—
 $—
 $3
 $—
 $(43)
              
Nine Months Ended September 30, 2018            
Assets             
Loans held-for-investment             
Home equity$4
 $—
 $—
 $—
 $(1) $—
 $3
Mortgage servicing rights (2)291
 12
 283
 (273) —
 —
 313
Rate lock commitments (net) (2)(3)24
 (37) 191
 —
 —
 (159) 19
Totals$319
 $(25) $474
 $(273) $(1) $(159) $335
Liabilities             
DOJ Liability$(60) $—
 $—
 $—
 $—
 $—
 $(60)
Contingent consideration(25) 8
 —
 —
 6
 —
 (11)
Totals$(85) $8
 $—
 $—
 $6
 $—
 $(71)
(1)There were 0 unrealized gains (losses) recorded in OCI during the nine months ended September 30, 2019 and 2018.
(2)We utilized swaptions, futures, forward agency and loan sales and interest rate swaps to manage the risk associated with mortgage servicing rights and rate lock commitments. Gains and losses for individual lines do not reflect the effect of our risk management activities related to such Level 3 instruments.
(3)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.




The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the fair value measurements as of:
Fair Value Valuation Technique Unobservable Input Range (Weighted Average) Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average) 
(Dollars in millions) (Dollars in millions) 
September 30, 2019  
March 31, 2020  
Assets    
Loans held-for-investment    
Home equity$2
 Discounted cash flows Discount rate
Constant prepayment rate
Constant default rate		 7.2% -10.8% (9.0%)
19.3% - 29.0% (24.15%)
3.0%-4.4% (3.7%)		(1)$2
Discounted cash flowsDiscount rate
Constant prepayment rate
Constant default rate		7.2% -10.8% (9.0%)
6.2% - 9.4% (7.8%)
2.2%-3.3% (2.8%)		(1)
Mortgage servicing rights$285
 Discounted cash flows Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan		 2.6% - 20.6% (5.4%)
0% - 13.5% (11.2%)
$67 - $95 ($85)		(1)$223
Discounted cash flowsOption adjusted spread
Constant prepayment rate
Weighted average cost to service per loan		3.6% - 19.9% (5.6%)
0% - 14.8% (12.0%)
$67 - $95 ($85)		(1)
Rate lock commitments (net)$50
 Consensus pricing Origination pull-through rate 80.0% - 87.2% (81.9%)(1)$169
Consensus pricingOrigination pull-through rate80.0% - 87.2% (81.2%)(1)
Liabilities    
DOJ Liability$(35) Discounted cash flows See description below See description below $(35)Discounted cash flowsSee description below
Contingent consideration$(8) Discounted cash flows Beta
Equity volatility		 0.6 - 1.6 (1.1)
26.6% - 58.9% (40.0%)		(2)$(16)Discounted cash flowsSee description below(2)
Fair Value Valuation Technique Unobservable Input Range (Weighted Average) Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average) 
(Dollars in millions) (Dollars in millions) 
December 31, 2018  
December 31, 2019  
Assets    
Loans held-for-investment    
Home equity$2
 Discounted cash flows Discount rate
Constant prepayment rate
Constant default rate		 7.2% - 10.8% (9.0%)
13.6% - 20.3% (16.9%)
3.0% - 4.6% (3.8%)		(1)$2
Discounted cash flowsDiscount rate
Constant prepayment rate
Constant default rate		7.2% -10.8% (9.0%)
13.0% - 19.5% (16.2%)
2.7%-4.0% (3.3%)		(1)
Mortgage servicing rights$290
 Discounted cash flows Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan		 2.1% - 25.9% (5.4%)
0% - 10.7% (9.6%)
$67 - $95 ($86)		(1)$291
Discounted cash flowsOption adjusted spread
Constant prepayment rate
Weighted average cost to service per loan		2.4% - 20.4% (5.3%)
0% - 12.3% (10.6%)
$67 - $95 ($84)		(1)
Rate lock commitments (net)$20
 Consensus pricing Origination pull-through rate 75.0% - 87.2% (76.8%)(1)$34
Consensus pricingOrigination pull-through rate80.0% - 87.2% (81.5%)(1)
Liabilities  


DOJ Liability$(60) Discounted cash flows See description below See description below $(35)Discounted cash flowsSee description below
Contingent consideration$(6) Discounted cash flows Beta
Equity volatility		 0.6 - 1.6 (1.1)
26.6% - 58.9% (40.0%)		(2)$(10)Discounted cash flowsSee description below(2)

(1)Unobservable inputs were weighted by their relative fair value of the instruments.
(2)Unobservable inputs were not weighted as only one instrument exists.

Recurring Significant Unobservable Inputs

Home equity. The most significant unobservable inputs used in the fair value measurement of the home equity loans 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 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.

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 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, 2019March 31, 2020 and December 31, 2018,2019, the weighted average life (in years) for the entire MSR portfolio was 3.73.3 and 5.2,4.1, respectively.

DOJ Liability. The significant unobservable inputs used in the fair value measurement of the DOJ Liability are the discount rate, asset growth rate, return on assets, dividend rate and the potential ways we might be required to begin making DOJ Liability payments and our estimates of the likelihood of these outcomes, as further discussed in Note 15 - Legal Proceedings, Contingencies and Commitments. The DOJ Liability had a fair value adjustment of $0 and $25 million forduring the three and nine monthsyear ended September 30, 2019, respectively.December 31, 2019. This reduced the liability to $35 million based on changes in the probability of potential ways we might be required to begin making DOJ Liability payments and our estimates of the likelihood of these outcomes. Our assessment of these outcomes reflect a reduced likelihood, and longer timing, for potential future payments.


payments. Significant increases (decreases) in the discount rate, asset growth rate and dividend rate in isolation may result in a marginally lower (higher) fair value measurement. Significant increases (decreases) in the return on assets rate in isolation may result in a marginally higher (lower) fair value measurement. Additionally, significant changes in the probability of potential payment outcomes could also impact the fair value. For further information on the fair value inputs related to the DOJ Liability, see Note 15 - 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 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 forecasted profitability of the division. An increase or decrease to these inputs results in an increase or decrease of the liability.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
    
We also have assets that are subject to measurement at fair value on a nonrecurring basis under certain conditions. The following table presents assets measured at fair value on a nonrecurring basis:
Total (1) Level 2 Level 3 Gains (Losses)Total (1)Level 2Level 3Gains (Losses)
(Dollars in millions)(Dollars in millions)
September 30, 2019   
March 31, 2020  
Loans held-for-sale (2)
$6
 $6
 $—
 $(1)$6
$6
$—
$(1)
Impaired loans held-for-investment (2)
        
Residential first mortgage loans14
 —
 14
 (5)15
—
15
(3)
Repossessed assets (3)
9
 —
 9
 (3)10
—
10
(4)
Totals$29
 $6
 $23
 $(9)$31
$6
$25
$(8)
December 31, 2018       
December 31, 2019 
Loans held-for-sale (2)
$5
 $5
 $—
 $(1)$6
$6
$—
$(1)
Impaired loans held-for-investment (2)
        
Residential first mortgage loans12
 —
 12
 (4)14
—
14
(5)
Repossessed assets (3)
7
 —
 7
 (3)10
—
10
(3)
Totals$24
 $5
 $19
 $(8)$30
$6
$24
$(9)

(1)The fair values are determined at various dates during the three months ended September 30, 2019March 31, 2020 and the year ended December 31, 2018,2019, 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.

The following table presents the quantitative information about nonrecurring Level 3 fair value financial instruments and the fair value measurements:
Fair Value Valuation Technique Unobservable Input Range (Weighted Average) Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average) 
(Dollars in millions)(Dollars in millions)
September 30, 2019  
March 31, 2020  
Impaired loans held-for-investment    
Loans held-for-investment$14
 Fair value of collateral Loss severity discount 25% - 30% (26.1%)(1)$15
Fair value of collateralLoss severity discount0% - 40% (6.3%)(1)
Repossessed assets$9
 Fair value of collateral Loss severity discount 0% - 100% (21.1%)(1)$10
Fair value of collateralLoss severity discount0% - 100% (20.1%)(1)
December 31, 2018  
December 31, 2019  
Impaired loans held-for-investment    
Loans held-for-investment$12
 Fair value of collateral Loss severity discount 25% - 30% (28.3%)(1)$14
Fair value of collateralLoss severity discount25% - 30% (25.9%)(1)
Repossessed assets$7
 Fair value of collateral Loss severity discount 0% - 100% (25.8%)(1)$10
Fair value of collateralLoss severity discount0% - 100% (17.1%)(1)

(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.

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:

 September 30, 2019
   Estimated Fair Value
 Carrying Value Total Level 1 Level 2 Level 3
 (Dollars in millions)
Assets         
Cash and cash equivalents$353
 $353
 $353
 $—
 $—
Investment securities available-for-sale1,697
 1,697
 —
 1,697
 —
Investment securities held-to-maturity635
 639
 —
 639
 —
Loans held-for-sale4,196
 4,196
 —
 4,196
 —
Loans held-for-investment12,548
 12,707
 —
 8
 12,699
Loans with government guarantees607
 583
 —
 583
 —
Mortgage servicing rights285
 285
 —
 —
 285
Federal Home Loan Bank stock303
 303
 —
 303
 —
Bank owned life insurance346
 346
 —
 346
 —
Repossessed assets9
 9
 —
 —
 9
Other assets, foreclosure claims43
 43
 —
 43
 —
Derivative financial instruments, assets96
 96
 —
 45
 51
Liabilities         
Retail deposits         
Demand deposits and savings accounts$(6,760) $(6,054) $—
 $(6,054) $—
Certificates of deposit(2,558) (2,577) —
 (2,577) —
Wholesale deposits(635) (641) —
 (641) —
Government deposits(1,414) (1,350) —
 (1,350) —
Custodial deposits(4,378) (4,316) —
 (4,316) —
Federal Home Loan Bank advances(2,979) (2,979) —
 (2,979) —
Long-term debt(496) (458) —
 (458) —
DOJ Liability(35) (35) —
 —
 (35)
Contingent consideration(8) (8) —
 —
 (8)
Derivative financial instruments, liabilities(17) (17) —
 (17) —

 March 31, 2020
  Estimated Fair Value
 Carrying ValueTotalLevel 1Level 2Level 3
 (Dollars in millions)
Assets     
Cash and cash equivalents$342
$342
$342
$—
$—
Securitized HFS loans not sold

2,058
$2,058
—
2,058
—
Investment securities available-for-sale2,446
2,446
—
2,446
—
Investment securities held-to-maturity554
569
—
569
—
Loans held-for-sale4,389
4,390
—
4,390
—
Loans held-for-investment13,795
13,801
—
10
13,791
Loans with government guarantees814
788
—
788
—
Mortgage servicing rights223
223
—
—
223
Federal Home Loan Bank stock306
306
—
306
—
Bank owned life insurance351
351
—
351
—
Repossessed assets10
10
—
—
10
Other assets, foreclosure claims40
40
—
40
—
Derivative financial instruments, assets277
277
—
108
169
Liabilities     
Retail deposits     
Demand deposits and savings accounts$(7,007)$(6,570)$—
$(6,570)$—
Certificates of deposit(2,138)(2,161)—
(2,161)—
Wholesale deposits(561)(575)—
(575)—
Government deposits(1,164)(1,160)—
(1,160)—
Custodial deposits(5,182)(5,165)—
(5,165)—
Federal Home Loan Bank advances(6,841)(6,870)—
(6,870)—
Long-term debt(493)(452)—
(452)—
DOJ Liability(35)(35)—
—
(35)
Contingent consideration(16)(16)—
—
(16)
Derivative financial instruments, liabilities(288)(288)—
(288)—



December 31, 2018December 31, 2019
  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          
Cash and cash equivalents$408
 $408
 $408
 $—
 $—
$426
$426
$426
$—
$—
Investment securities available-for-sale2,142
 2,142
 —
 2,142
 —
2,116
2,116
—
2,116
—
Investment securities held-to-maturity703
 681
 —
 681
 —
598
599
—
599
—
Loans held-for-sale3,869
 3,870
 —
 3,870
 —
5,258
5,258
—
5,258
—
Loans held-for-investment9,088
 8,966
 —
 8
 8,958
12,129
12,031
—
10
12,021
Loans with government guarantees392
 374
 —
 374
 —
736
707
—
707
—
Mortgage servicing rights290
 290
 —
 —
 290
291
291
—
—
291
Federal Home Loan Bank stock303
 303
 —
 303
 —
303
303
—
303
—
Bank owned life insurance340
 340
 —
 340
 —
349
349
—
349
—
Repossessed assets7
 7
 —
 —
 7
10
10
—
—
10
Other assets, foreclosure claims50
 50
 —
 50
 —
45
45
—
45
—
Derivative financial instruments, assets47
 47
 —
 27
 20
62
88
—
54
34
Liabilities          
Retail deposits          
Demand deposits and savings accounts$(6,467) $(5,475) $—
 $(5,475) $—
$(6,811)$(6,050)$—
$(6,050)$—
Certificates of deposit(2,387) (2,379) —
 (2,379) —
(2,353)(2,368)—
(2,368)—
Wholesale deposits(583) (585) —
 (585) —
(633)(640)—
(640)—
Government deposits(1,202) (1,145) —
 (1,145) —
(1,213)(1,156)—
(1,156)—
Custodial deposits(1,741) (1,664) —
 (1,664) —
(4,136)(4,066)—
(4,066)—
Federal Home Loan Bank advances(3,394) (3,383) —
 (3,383) —
(4,815)(4,816)—
(4,816)—
Long-term debt(495) (463) —
 (463) —
(496)(462)—
(462)—
DOJ Liability(60) (60) —
 —
 (60)(35)(35)—
—
(35)
Contingent consideration(6) (6) —
 —
 (6)(10)(10)—
—
(10)
Derivative financial instruments, liabilities(39) (39) —
 (39) —
(18)(44)—
(43)(1)

Fair Value Option

We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements to more closely align the accounting method 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 September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 (Dollars in millions)
Assets       
Loans held-for-sale       
Net gain (loss) on loan sales$97
 $7
 $272
 $(61)
Loans held-for-investment       
Other noninterest income$1
 $—
 $1
 $—
Liabilities       
DOJ Litigation Settlement       
Other noninterest income$—
 $—
 $25
 $—
 Three Months Ended March 31,
 20202019
 (Dollars in millions)
Assets  
Loans held-for-sale  
Net gain (loss) on loan sales$234
$79



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:
September 30, 2019 December 31, 2018March 31, 2020December 31, 2019


UPB Fair Value Fair Value Over / (Under) UPB UPB
 Fair Value Fair Value Over / (Under) UPBUPBFair ValueFair Value Over / (Under) UPBUPB
Fair ValueFair Value Over / (Under) UPB
(Dollars in millions)(Dollars in millions)
Assets            
Nonaccrual loans            
Loans held-for-sale$11
 $12
 $1
 $6
 $6
 $—
$4
$3
$(1)$3
$3
$—
Loans held-for-investment5
 5
 —
 4
 3
 (1)5
4
(1)5
4
(1)
Total nonaccrual loans$16
 $17
 $1
 $10
 $9
 $(1)$9
$7
$(2)$8
$7
$(1)
Other performing loans            
Loans held-for-sale$3,976
 $4,110
 $134
 $3,601
 $3,726
 $125
$4,151
$4,362
$211
$5,057
$5,216
$159
Loans held-for-investment7
 5
 (2) 8
 7
 (1)8
8
—
8
8
—
Total other performing loans$3,983
 $4,115
 $132
 $3,609
 $3,733
 $124
$4,159
$4,370
$211
$5,065
$5,224
$159
Total loans            
Loans held-for-sale$3,987
 $4,122
 $135
 $3,607
 $3,732
 $125
$4,155
$4,365
$210
$5,060
$5,219
$159
Loans held-for-investment12
 10
 (2) 12
 10
 (2)13
12
(1)13
12
(1)
Total loans$3,999
 $4,132
 $133
 $3,619
 $3,742
 $123
$4,168
$4,377
$209
$5,073
$5,231
$158
Liabilities            
DOJ Liability (1)
$(118) $(35) $83
 $(118) $(60) $58
$(118)$(35)$83
$(118)$(35)$83

(1)We are obligated to pay $118 million in installment payments upon meeting certain performance conditions, as described in Note 15 - Legal Proceedings, Contingencies and Commitments.
 
Note 17 - Segment Information

Our operations are conducted through 3 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. 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.

As a result of Management's evaluation of our segments, effective January 1, 2019,2020, certain departments have been re-aligned between the Community Banking and OtherMortgage Originations. Specifically, a majority of the residential mortgage HFI portfolio is now part of the Mortgage Origination segment. The income and expenses relating to these changes are reflected in our financial statements and all prior period segment financial information has been recast to conform to the current presentation.

The Community Banking segment originates loans, provides deposits and fee based services to consumer, business, and mortgage lending customers through its Branch Banking, Business Banking and Commercial Banking, Government Banking, Warehouse Lending and LHFI Portfolio groups. Products offered through these groups include checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, commercial loans, commercial real estate 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, and investment and insurance products and services.
    


Within the Community Banking segment, revenue from contracts with customers includes deposit account and other banking income, interchange fees and investment and insurance income. During the three and nine months ended September 30, 2019, respectively, deposit account and other banking income, which includes fees for outgoing wires, overdrafts, stop payments and ATM fees totaled $7 million and $20 million, interchange fees totaled $3 million and $8 million, and investment and insurance income totaled $1 million and $4 million. These fees are recognized when obligations, under the terms of the contract with our customer, are satisfied, which generally occurs when services are performed. Revenue is measured as the amount of consideration we expect to receive in exchange for providing services. At September 30, 2019 and December 31, 2018, we had no significant revenue related receivables or contract liabilities.

The Mortgage Originations segment originates and acquires one-to-four family residential mortgage loans to sell or hold on our balance sheet. Loans originated-to-sell comprise the majority of the lending activity. These loans are originated through mortgage branches, call centers, the Internet and third party counterparties. The Mortgage Origination segment recognizes interest income on loans that are held for sale and the gains from sales associated with these loans, whereasalong with the interest income on residential mortgages within LHFI. The interest income on LHFI, excluding residential first mortgages,


newly originated home equity products, and a loss on sales for the purchase of these loans is recognized in the Community Banking segment.

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 also services loans for our LHFI portfolio in the Community Banking segment and our own LHFS portfolio in the Mortgage Originations segment, for which it earns revenue via an intercompany service fee allocation.

The Other segment includes the treasury functions, which include the impact of interest rate risk management, balance sheet funding activities and the administration of the investment securities portfolios, as well as miscellaneous other expenses of a corporate nature. In addition, the Other segment includes revenue and expenses related to treasury and corporate assets and liabilities and equity not directly assigned or allocated to the Community Banking, Mortgage Originations or Mortgage Servicing operating segments.

Revenues are comprised of net interest income (before the provision (benefit) for loancredit losses) and noninterest income. Noninterest expenses and provision (benefit) for income taxes, are fully allocated to each operating 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 September 30, 2019
 Community Banking Mortgage Originations Mortgage Servicing Other (1) Total
 (Dollars in millions)
Summary of Operations         
Net interest income$115
 $27
 $5
 $(1) $146
Net gain (loss) on loan sales(8) 118
 —
 —
 110
Other noninterest income (loss)17
 15
 40
 (11) 61
Total net interest income and noninterest income (loss)124
 160
 45
 (12) 317
(Provision) benefit for loan losses—
 (1) —
 —
 (1)
Compensation and benefits(26) (30) (7) (35) (98)
Other noninterest expense and directly allocated overhead(44) (72) (24) —
 (140)
Total noninterest expense(70) (102) (31) (35) (238)
Income (loss) before indirect overhead allocations and income taxes54
 57
 14
 (47) 78
Overhead allocations(10) (10) (4) 24
 —
Provision (benefit) for income taxes9
 10
 2
 (6) 15
Net income (loss)$35
 $37
 $8
 $(17) $63
Intersegment (expense) revenue$(6) $8
 $6
 $(8) $—
          
Average balances         
Loans held-for-sale$20
 $3,766
 $—
 $—
 $3,786
Loans with government guarantees—
 574
 —
 —
 574
Loans held-for-investment (2)11,710
 33
 —
 —
 11,743
Total assets12,184
 5,378
 38
 3,597
 21,197
Deposits10,513
 —
 4,556
 748
 15,817
(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 loans held-for-investment.
Three Months Ended September 30, 2018Three Months Ended March 31, 2020
Community Banking Mortgage Originations Mortgage Servicing Other (1) TotalCommunity BankingMortgage OriginationsMortgage ServicingOther (1)Total
(Dollars in millions)(Dollars in millions)
Summary of Operations          
Net interest income$81
 $36
 $2
 $5
 $124
$104
$42
$4
$(2)$148
Net gain (loss) on loan sales(3) 46
 —
 —
 43
Provision (benefit) for credit losses8
(3)—
9
$14
Net interest income after provision (benefit) for credit losses96
45
4
(11)134
Net gain on loan sales—
90
—
—
90
Loan fees and charges—
17
9
—
26
Loan administration (expense) income(1)(7)36
(16)12
Net return on mortgage servicing rights—
6
—
—
6
Other noninterest income10
 30
 24
 —
 64
16
1
—
6
23
Total net interest income and noninterest income88
 112
 26
 5
 231
(Provision) benefit for loan losses(1) —
 —
 3
 2
Total noninterest income15
107
45
(10)157
Compensation and benefits(17) (26) (4) (29) (76)27
31
10
34
102
Other noninterest expense and directly allocated overhead(27) (41) (18) (11) (97)
Commissions1
28
—
—
29
Loan processing expense2
10
7
1
20
Other noninterest expense44
26
19
(5)84
Total noninterest expense(44) (67) (22) (40) (173)74
95
36
30
235
Income (loss) before indirect overhead allocations and income taxes43
 45
 4
 (32) 60
Overhead allocations(9) (16) (5) 30
 —
Income before indirect overhead allocations and income taxes37
57
13
(51)56
Indirect overhead allocation Income (expense)(9)(12)(5)26
—
Provision (benefit) for income taxes7
 6
 —
 (1) $12
6
9
2
(7)10
Net income (loss)$27
 $23
 $(1) $(1) $48
$22
$36
$6
$(18)$46

 
Intersegment (expense) revenue$1
 $4
 $5
 $(10) $—
$(6)$1
$8
$(3)$—
          
Average balances          
Loans held-for-sale$10
 $4,383
 $—
 $—
 $4,393
$—
$5,248
$—
$—
$5,248
Loans with government guarantees—
 292
 —
 —
 292
—
811
—
—
$811
Loans held-for-investment (2)8,868
 11
 —
 29
 8,908
8,898
2,895
—
30
$11,823
Total assets9,028
 5,676
 29
 3,878
 18,611
9,387
9,817
48
4,161
$23,413
Deposits9,170
 —
 2,072
 94
 11,336
10,434
—
4,777
584
$15,795
(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 loans held-for-investment.


 Nine Months Ended September 30, 2019
 Community Banking Mortgage Originations Mortgage Servicing Other (1) Total
 (Dollars in millions)
Summary of Operations         
Net interest income$326
 $73
 $11
 $—
 $410
Net gain (loss) on loan sales(23) 257
 —
 —
 234
Other noninterest income44
 49
 113
 8
 214
Total net interest income and noninterest income347
 379
 124
 8
 858
(Provision) benefit for loan losses(18) (1) —
 1
 (18)
Compensation and benefits(74) (83) (19) (99) (275)
Other noninterest expense and directly allocated overhead(131) (161) (73) (3) (368)
Total noninterest expense(205) (244) (92) (102) (643)
Income (loss) before indirect overhead allocations and income taxes124
 134
 32
 (93) 197
Overhead allocations(30) (30) (13) 73
 —
Provision (benefit) for income taxes20
 22
 4
 (9) 37
Net income (loss)$74
 $82
 $15
 $(11) $160
Intersegment (expense) revenue$(18) $24
 $19
 $(25) $—
          
Average balances         
Loans held-for-sale$37
 $3,495
 $—
 $—
 $3,532
Loans with government guarantees—
 511
 —
 —
 511
Loans held-for-investment (2)10,495
 21
 —
 —
 10,516
Total assets10,950
 5,018
 47
 3,862
 19,877
Deposits10,247
 —
 3,536
 522
 14,305
(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 loans held-for-investment.
Nine Months Ended September 30, 2018Three Months Ended March 31, 2019
Community Banking Mortgage Originations Mortgage Servicing Other (1) TotalCommunity BankingMortgage OriginationsMortgage ServicingOther (1)Total
(Dollars in millions)(Dollars in millions)
Summary of Operations          
Net interest income$231
 $100
 $5
 $9
 $345
$93
$33
$3
$(3)$126
Net gain (loss) on loan sales(10) 176
 —
 —
 166
Provision (benefit) for credit losses1
—
—
(1)—
Net interest income after provision (benefit) for credit losses92
33
3
(2)126
Net gain on loan sales(3)52
—
—
49
Loan fees and charges—
10
7
—
17
Loan administration (expense) income(1)(4)29
(13)11
Net return on mortgage servicing rights—
6
—
—
6
Other noninterest income27
 76
 65
 7
 175
12
4
—
10
26
Total net interest income and noninterest income248
 352
 70
 16
 686
(Provision) benefit for loan losses(2) (1) —
 6
 3
Total noninterest income8
68
36
(3)109
Compensation and benefits(51) (83) (13) (89) (236)24
24
6
33
87
Other noninterest expense and directly allocated overhead(81) (129) (49) (28) (287)
Commissions—
12
—
1
13
Loan processing expense1
5
10
1
17
Other noninterest expense40
19
15
—
74
Total noninterest expense(132) (212) (62) (117) (523)66
60
31
35
191
Income (loss) before indirect overhead allocations and income taxes114
 139
 8
 (95) 166
Overhead allocations(29) (51) (15) 95
 —
Income before indirect overhead allocations and income taxes34
41
8
(40)44
Indirect overhead allocation Income (expense)(10)(10)(5)25
—
Provision (benefit) for income taxes18
 18
 (2) (1) 33
5
7
—
(4)8
Net income (loss)$67
 $70
 $(5) $1
 $133
$19
$24
$3
$(11)$36

  
Intersegment (expense) revenue$(1) $6
 $14
 $(19) $—
$—
$3
$6
$(9)$—
          
Average balances          
Loans held-for-sale$11
 $4,254
 $—
 $—
 $4,265
$—
$3,266
$—
$—
$3,266
Loans with government guarantees—
 288
 —
 —
 288
—
455
—
—
$455
Loans held-for-investment (2)8,250
 9
 —
 29
 8,288
6,234
2,901
—
29
$9,164
Total assets8,425
 5,477
 30
 3,902
 17,834
6,589
7,612
56
4,181
$18,438
Deposits8,581
 —
 1,800
 —
 10,381
9,983
—
2,528
395
$12,906
(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 loans held-for-investment.



Note 18 - Recently Issued Accounting Pronouncements
    
Adoption of New Accounting Standards

The following ASUs have been adopted which impact our significant accounting policies and/or have a significant financial impact:

Leases - Effective January 1, 2019, we adopted the requirements of ASU 2016-02, Leases (Topic 842) and all related amendments. The Company elected to apply the practical expedient of forgoing the restatement of comparative periods. In addition, we elected the practical expedients permitted under transition guidance to not reassess leases entered into prior to adoption. As permitted under ASC 842, the Company made an accounting policy election to exempt leases with an initial term of twelve months or less from balance sheet recognition. Instead, short-term leases are expensed over the lease term with no impact to the balance sheet.
    
At September 30, 2019, our inventory of leases included various bank branches, ATM locations and retail home lending offices. Many of our leases contain options to extend or terminate early and we consider these options when evaluating the lease term to determine if they are reasonably certain to be exercised based on all relevant economic and financial factors. All leases are classified as operating leases based on their terms.

The following table reflects information relating to our operating leases:
 September 30, 2019
 (Dollars in millions)
Operating Leases (1)
 
Weighted-average remaining lease term (years)3.9
Weighted-average discount rate2.86%
Right-of-use asset (2)
$21
Lease liability (3)
$22
(1)For the three and nine months ended September 30, 2019, the lease expense on operating leases was $3 million and $9 million, respectively, which includes a de-minimis amount of short-term lease expense and variable lease expense.
(2)Recorded in premises and equipment on the Consolidated Statements of Financial Condition
(3)Recorded in other liabilities on the Consolidated Statements of Financial Condition.

The following table presents our undiscounted cash flows on our operating lease liabilities as of September 30, 2019 and our minimum contractual obligations on our operating leases as of December 31, 2018:
 September 30, 2019 December 31, 2018
 (Dollars in millions)
Within one year$9
 $9
After one year and within two years7
 6
After two years and within three years5
 4
After three years and within four years2
 2
After four years and within five years1
 1
After five years2
 3
Total (1)
$26
 $25
(1)The difference between the total undiscounted cash payments on operating leases and the lease liability is solely the effect of discounting.












We adopted the following accounting standard updates (ASU) during 2019, none of which had a material impact to our financial statements:
StandardDescriptionEffective Date
ASU 2019-07SEC Final Rule Releases: Codification UpdatesJuly 26, 2019
ASU 2019-01Leases (Topic 842): Codification ImprovementsJanuary 1, 2019
ASU 2018-20Leases (Topic 842): Narrow-Scope Improvements for LessorsJanuary 1, 2019
ASU 2018-16Derivatives and hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting PurposesJanuary 1, 2019
ASU 2018-11Leases (Topic 842): Targeted ImprovementsJanuary 1, 2019
ASU 2018-10Codification Improvements to Topic 842, LeasesJanuary 1, 2019
ASU 2018-07Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment AccountingJanuary 1, 2019
ASU 2017-11Earnings 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) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope.January 1, 2019
ASU 2017-08Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt SecuritiesJanuary 1, 2019
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
Significant Accounting Standard Issued But Not Yet Adopted

Credit Losses- In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU, which alters the current method for recognizing credit losses within the reserve account. Currently, we use the incurred loss method, whereas theThe new guidance requires financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit losses). The measurement of current 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.

Effective January 1, 2020, we have adopted the requirements of ASU 2016-13, is effectiveFinancial Instruments - Credit Losses (Topic 326) and all related amendments using the modified retrospective method for fiscal yearsall financial assets measured at amortized cost, net investments in leases and unfunded commitments. Results for reporting periods beginning after December 15, 2019, for which the initial impact is recorded in equity and any adverse effects may be phased into regulatory capital over a three year transition period.
Our cross-functional implementation team continues to execute on its project plan to adopt this standard in the first quarter of 2020. We designed and implemented our credit loss models using an industry leading vendor. These modelsJanuary 1, 2020 are fully functional and we began running a parallel production process in the third quarter of 2019 which will continue through implementation. We have identified and designed our internal controls over financial reporting which are in place as part of our parallel runs. The new or modified controls are primarily focused on our new models, forecasting and data integrity. Wepresented under ASC 326 while prior period amounts continue to review, challenge and refine our models and process as we complete our implementation.
Based on our current results and economic forecastsbe reported in accordance with previously applicable GAAP. We recorded a net decrease to retained earnings of $23 million as of September 30, 2019,January 1, 2020 for the estimated impact including our reserve for unfunded loan commitments is a pre-tax increasecumulative effect of 30 to 40 percent of our allowance for credit losses and reserve for unfunded commitments. We continue to evaluate our models, the qualitative framework, assumptions and judgment applied which could have an impact on our final CECL estimates at implementation. Additionally, that estimate may be impacted by economic conditions, credit characteristics of our portfolio and final asset balances at the time of adoption.
We do not expect any material allowance on held to maturity securities since the majority of this portfolio consists of agency-backed securities that have an immaterial risk of credit loss.







adopting ASC 326.




Insignificant Accounting Standards Issued But Not Yet Adopted
The following ASUs have been issued and are not expected to havetable illustrates the impact of ASC 326:
 January 1, 2020
 As Reported Under ASC 326Pre-ASC 326 AdoptionImpact of ASC 326 Adoption
 (Dollars in millions)
Assets:   
Allowance for loan losses$130
$107
$23
Liabilities:   
Reserve for unfunded commitments$10
$3
$7

We adopted the following accounting standard updates (ASU) during 2020, none of which had a material impact onto our Consolidated Financial Statements and/or significant accounting policies outside of what has been disclosed in the prior section:financial statements:
StandardDescriptionEffective Date
ASU 2019-052020-04Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial ReportingMarch 12, 2020
2020-03Codification Improvements to Financial Instruments—Credit Losses (Topic 326): Targeted Transition ReliefInstrumentsJanuary 1, 2020
ASU 2019-042020-02Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842)-Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial InstrumentsJanuary 1,February 6, 2020
ASU 2018-19Codification Improvements to Topic 326, Financial Instruments—Credit LossesJanuary 1, 2020
ASU 2018-18Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606January 1, 2020
ASU 2018-17Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest EntitiesJanuary 1, 2020
ASU 2018-15Intangibles—GoodwillIntangibles-Goodwill and Other—Internal-UseOther-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)January 1, 2020
2018-13Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value MeasurementJanuary 1, 2020
ASU 2017-04Intangibles - GoodwillIntangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill ImpairmentJanuary 1, 2020
Insignificant Accounting Standards Issued But Not Yet Adopted
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:
StandardDescriptionEffective Date
2019-12Simplifying the Accounting for Income TaxesJanuary 1, 20202021




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, 2019,March 31, 2020, 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, 2019.March 31, 2020.
(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, 2019,March 31, 2020, 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 Note 15 - Legal Proceedings, Contingencies and Commitments.

Item 1A. Risk Factors

The Company believes that there have been noWe are reviewing and updating our risk factors to contemplate the current pandemic resulting from COVID-19, including the following material changes tofrom the risk factors previously disclosedreported in response to Item 1A. to Part I, of ourthe Company's Annual Report on Form 10-K for the fiscal yearperiod ended December 31, 20182019:

Adverse Economic Conditions

We are currently in the midst of a health crisis as a result of the pandemic, COVID-19. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services may be significantly negatively impacted. How we respond to the COVID-19 pandemic, include standing up new programs specified in the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") such as the Paycheck Protection Program (“PPP”) and our effectiveness while working remotely, could have a significant, lasting impact on our operations, financial condition and reputation. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

The Bank has instituted a work-from-home policy for all staff that are able to work remotely. Working remotely creates new challenges and the pace of change required to address government programs and forbearance increases the risk of internal control failure. In addition, consumers affected by the changed economic and market conditions as a result of a pandemic may continue to demonstrate changed behavior even after the crisis is over, including decreases in discretionary spending on a permanent or long-term basis. We have limited our bank branches to drive-up services and closed our lobbies. This change in business could also result in changes in consumer behavior for which we may not be prepared.

The response to the pandemic resulted in a strong contraction in our economy, increased market volatility and uncertainty in our capital markets-most notably impacting workers and small businesses. The economic health of these businesses may depend upon the fiscal assistance provided by the CARES Act. The CARES Act is the largest deployment of capital ever authorized by Congress with several provisions designed to ensure banks are able to provide assistance and relief to consumers and businesses. Although government intervention is intended to mitigate economic uncertainties, it is not clear that the programs are broad or specific enough to mitigate the economic risks-both of which may lead to adverse results.

Additionally, the CARES Act was passed quickly and regulators rapidly issued clarifying guidance and operationalized certain programs, such as the PPP. As a result, there is risk that there are subsequent interpretations of guidance or aggressive assertions of wrongdoing in regards to laws, regulations or applications of guidance which could cause an adverse impact to our financial results or our internal controls. We also face an increased risk of client disputes, litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19 on economic and market conditions.

The adverse economic conditions will have an impact on our customers. Many of these customers will experience unemployment and a loss of revenue, leading to a lack of cash flows. These lower cash flows could have our customers drawing on the lines of credit we have extended to them and withdrawing their deposits from the Bank. Both of these actions would have an adverse impact on our liquidity position. Additionally, the ability of our borrowers to make payments timely on outstanding loans, the value of collateral securing those loans, and demand for loans and other products and services that we offer may be adversely impacted by the COVID-19 pandemic. Until the effects of the pandemic subside, we expect continued draws on lines of credit, reduced revenues in our businesses, and increased loan defaults and losses.

Even after the pandemic subsides, the U.S. economy may continue to experience a recession, and we anticipate our business would be materially and adversely affected by a prolonged recession in the U.S.



Interest Rates

In response to COVID-19, the Federal Reserve reduced the Federal Funds Rate to zero percent in March 2020. The outlook for the remainder of 2020 is uncertain, and there is a possibility that the Federal Reserve keeps interest rates low or even uses negative interest rates if economic conditions warrant. Although many of our commercial loans have floors, approximately half of our revenue is tied to interest rates, and an extended period of operations in a zero- or negative-rate environment could negatively impact profitability.

In addition, the Federal Reserve has initiated new quantitative easing programs, buying securities at various points in time which results in disruptions to the MBS market. There is a risk that the Federal Reserve may take other actions in the future or elect to stop their current actions which could disrupt the market and have an adverse impact on our mortgage gain on sale or other financial results. Further, the impact of these actions has caused the financial instruments we use to manage our interest rate and market risks to be less effective, which, in turn, could have a material, adverse impact on our operations and financial condition.

There has also been disruption in the market for mortgage backed securities resulting from overall low level of rates across the yield curve, the high level of volatility of interest rates, and the financial weakness of some traditional buyers of mortgage servicing rights. This has caused uncertainty with respect to our ability to sell mortgage servicing rights. At March 31, 2020, we had $223 million of mortgage servicing rights which equated to 13.6 percent of common equity tier one capital. Should the level of mortgage servicing rights exceed 25 percent of common equity tier one capital, we are required to deduct the excess in determining our regulatory capital levels. If we have the inability to sell mortgage servicing rights on a timely basis, there could be negative impacts to our regulatory capital or an impact on our pricing for mortgage loans which could negatively impact our mortgage origination business and our financial condition.

Customer and Lending Relief Actions

As a result of recent federal legislation, we are required to provide mortgage forbearances to individuals with single-family, federally backed mortgages, such as those that we service which underlie our mortgage servicing rights, due to COVID-19 related difficulties. In addition, we are waiving all fees for an extended time period as customers deal with the crisis. This could result in a reduction in servicing fee income and a higher cost to service as customers do not pay their mortgages and we cover their payments for a temporary time period until the investors make us whole. Additionally, MSR transactions customarily contain early payment default provisions. If a customer requests forbearance on the residential mortgage loans underlying the MSRs we have sold, generally within 90 days following the sale, we may be contractually obligated to refund the purchase price of the MSR or pay a fee to the purchaser. The result of these actions could result in financial, operational, credit and compliance risk as we navigate government requirements and our ability to modify our systems to account for these changes while maintaining an adequate internal control structure.
Our application of forbearance, any loan payment deferrals that we grant, the servicing advances we are required to make and any escrow advances we are required to make while a loan is in forbearance could result in us carrying significant asset balances. This could result in a reduction in our liquidity and cause a reduction in our capital ratios. We are unsure, at this time, what, if any, additional liquidity facilities might be provided by the federal government. The combination of these impacts along with other impacts, could cause us to not have sufficient liquidity or capital.

We also have a concentration of customers in the mortgage finance business. We make warehouse and MSR loans to these customers, and often originate through them in the correspondent channel of our mortgage originations business. The implications of federally mandated forbearance is expected to have a detrimental impact on the liquidity position of these companies that may have already been experiencing financial stress. It is not clear what, if any, programs will be available to these customers to provide liquidity. As a consequence, some of these companies could fail. A failure of one of our customers could be a loss of mortgage origination volume and could also lead to credit losses, should the collateral underlying their loans prove insufficient to repay the amount of the loan outstanding.

Furthermore, we are not aging receivables for customers who have been granted a payment holiday, payment deferral or forbearance. Therefore, there is a risk that subsequently, customers may still be unable to make their payments, resulting in delinquencies at a higher rate than what is typical and a higher percentage of loans in nonaccrual status. Additionally, for consumer loans, current payments typically provide the primary evidence of a borrower’s ability and intent to repay the loan. Therefore, during the forbearance, deferral or payment holiday period, we may not be able to discern which loans can be repaid and which require timely action to manage the potential for loss to a lower level. Consequently, when a borrower is unable to repay the loan, our losses could be higher than we have experienced in the past. In addition, newly originated or acquired


mortgage loans could potentially request forbearance prior to us selling the loan, resulting in a higher carrying cost for us as we may not be able to sell them into the market at all or at prices we would accept.

Allowance for Credit Losses

Our ACL, which reflects our estimate of lifetime losses inherent in the LHFI portfolio and our reserve for unfunded commitment, may not be sufficient to cover actual credit losses. We have loan exposures to industries that have been impacted more severely by COVID-19 including:
 As of March 31, 2020
 Loan Exposure
 (Dollars in millions)
Automotive$161
Leisure & Entertainment$119
Healthcare$48
Retail$302
Hotel$209
Senior Housing$136

Our ACL calculations include a forecast for a reasonable and supportable time period. As of March 31, 2020 that forecast assumed a Q2 2020 GDP decrease of 18 percent, HPI decreasing 3 percent by the end of the year and unemployment, adjusted for government stimulus, of 8 percent. Subsequent to March 31, 2020 leading economic indicators demonstrate a worsening in economic conditions which could cause a material difference in future forecasts used in our calculations. If actual results differ materially from the forecast used in our calculations, our credit loss provision may increase and our ACL may not be sufficient to cover losses sustained, particularly for the impacted industries. The current pandemic has resulted in the environment changing rapidly which increases the risk of inaccurate forecasts because they depend upon significant judgments and estimates, which can be even more challenging in an environment of uncertainty. The calculation for ACL is complex and the associated risk, could impact our results of operations and may place stress on our internal controls over financial reporting.

Cybersecurity Risk

The COVID-19 pandemic has resulted in the Bank instituting a work-from-home policy for all staff that are able to work remotely. This exposes us to increased cybersecurity risk. Increased levels of remote access may create additional opportunities for cyber criminals to exploit vulnerabilities. We have observed an increase in attempted malicious activity from third parties directed at the Bank and employees may be more susceptible to phishing and social engineering attempts due to increased stress caused by the crisis and from balancing family and work responsibilities at home, such as attempts to obtain personally identifiable information. Cybercriminals may be opportunistic about fears about COVID-19 and the higher number of people accessing the network remotely, by including malware in emails that appear to include documents providing legitimate information for protecting oneself from COVID-19. The Bank may also be exposed to this risk if the operations of any of its vendors that provide critical services to the Bank are adversely impacted by cyberattacks. Furthermore, with the increased use of virtual private network (“VPN”) servers, there is a risk of security misconfiguration in VPNs resulting in exposing sensitive information to the internet. A significant and sustained malware or other cybersecurity attack targeted at the Bank or any of its vendors that provide critical services to the Bank could have a material adverse impact on our ability to conduct our overall operations and on our financial condition.

Loss or Extended Absence of Key Personnel

We are and will continue to be dependent upon our management team and other key personnel. Losing the services of one or more key members of our management team or other key personnel could adversely affect our operations. In addition, COVID-19 increases the risk that certain senior executive officers or a member of the board of directors could become ill, causing them to be incapacitated or otherwise unable to perform their duties for an extended absence. Furthermore, because of the nature of the disease, multiple people working in close proximity could also become ill simultaneously which could result in the same department having extended absences. This could negatively impact the efficiency and effectiveness of processes and internal controls throughout the Bank.




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, 2019.March 31, 2020.
 
Issuer Purchases of Equity Securities

The Company made no purchases of its equity securities during the quarter ended September 30, 2019.March 31, 2020.




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.



Item 6. Exhibits 
Exhibit No. Description
3.1* 
Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc. (previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q, for the period ended June 30, 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 Quarterly Report on Form 10-Q, for the period ended September 30, 2016, and incorporated herein by reference).
   
4.1* 
Indenture, dated July 11, 2016, between Flagstar Bancorp, Inc. as Issuers and Wilmington Trust, National Association, as Trustee and Collateral Agent, including the form of 6.125% senior secured note due 2021 (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated July 11, 2016, and incorporated herein by reference).
   
4.3* 
Form of 6.125% Global Note due 2021 (previously filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4, dated October 7, 2016, and incorporated herein by reference).
   
10.1
Change in Control Agreement, dated March 17, 2020, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Kristy Fercho

  
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
  
101 Financial statements from Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019,March 31, 2020, 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
+ Constitutes a management contract or compensation plan or arrangement



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 4, 2019May 11, 2020 /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

87
Exhibit No.Description
3.1*
Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc. (previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q, for the period ended June 30, 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 Quarterly Report on Form 10-Q, for the period ended September 30, 2016, and incorporated herein by reference).
4.1*
Indenture, dated July 11, 2016, between Flagstar Bancorp, Inc. as Issuers and Wilmington Trust, National Association, as Trustee and Collateral Agent, including the form of 6.125% senior secured note due 2021 (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated July 11, 2016, and incorporated herein by reference).
4.3*
Form of 6.125% Global Note due 2021 (previously filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4, dated October 7, 2016, and incorporated herein by reference).
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, 2019, 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
+ Constitutes a management contract or compensation plan or arrangement


85