~~0001033012 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember fbc:ContingentConsiderationMember 2020-01-01 2020-03-31~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM~~ ~~10-Q~~

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 ~~March 31,~~September 30, 2020



☐			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

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

As of ~~May 10,~~November 8, 2020, ~~56,729,797~~52,564,331 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 ~~MARCH 31,~~SEPTEMBER 30, 2020

TABLE OF CONTENTS




PART I. – FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Statements of Financial Condition – ~~March 31,~~September 30, 2020 (unaudited) and December 31, 2019	4143
	Consolidated Statements of Operations – For the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 (unaudited)	4244
	Consolidated Statements of Comprehensive Income – For the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 (unaudited)	4345
	Consolidated Statements of Stockholders’ Equity – For the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 (unaudited)	4446
	Consolidated Statements of Cash Flows – For the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019 (unaudited)	4547
	Notes to the Consolidated Financial Statements (unaudited)
	Note 1 - Basis of Presentation	4648
	Note 2 - Investment Securities	4648
	Note 3 - Loans Held-for-Sale	4950
	Note 4 - Loans Held-for-Investment	4951
	Note 5 - Loans With Government Guarantees	5759
	Note 6 - Variable Interest Entities	5759
	Note 7 - Mortgage Servicing Rights	5759
	Note 8 - Derivative Financial Instruments	5961
	Note 9 - Borrowings	6365
	Note 10 - Accumulated Other Comprehensive Income (Loss)	6567
	Note 11 - Earnings Per Share	6567
	Note 12 - Stock-Based Compensation	6567
	Note 13 - Income Taxes	6668
	Note 14 - Regulatory Matters	6668
	Note 15 - Legal Proceeding, Contingencies, and Commitments	6769
	Note 16 - Fair Value Measurements	6971
	Note 17 - Segment Information	7880
	Note 18 - Recently Issued Accounting Pronouncements	8084
	Note 19 - Subsequent Events	84
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	8286
Item 4.	Controls and Procedures	8286

PART II. – OTHER INFORMATION
Item 1.	Legal Proceedings	8387
Item 1A.	Risk Factors	8387
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8590
Item 3.	Defaults upon Senior Securities	8591
Item 4.	Mine Safety Disclosures	8591
Item 5.	Other Information	8591
Item 6.	Exhibits	8692

SIGNATURES		8793

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

ACL

Allowance for Credit Losses

~~HELOAN~~Home equity

~~Home Equity Loan~~Second Mortgages, HELOANs, HELOCs

AFS

Available for Sale

~~HOLA~~HTM

~~Home Owners Loan Act~~Held to Maturity

Agencies

Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association, Collectively

~~Home equity~~HPI

~~Second Mortgages, HELOANs, HELOCs~~Housing Price Index

ALCO

Asset Liability Committee

~~HTM~~LIBOR

~~Held to Maturity~~London Interbank Offered Rate

ALLL

Allowance for Loan ~~Loss~~Losses

~~HPI~~LGG

~~Housing Price Index~~Loans with Government Guarantees

AOCI

Accumulated Other Comprehensive Income (Loss)

~~LIBOR~~LHFI

~~London Interbank Offered Rate~~Loans Held-for-Investment

ASU

Accounting Standards Update

~~LHFI~~LHFS

Loans ~~Held-for-Investment~~Held-for-Sale

Basel III

Basel Committee on Banking Supervision Third Basel Accord

~~LHFS~~LTV

~~Loans Held-for-Sale~~Loan-to-Value Ratio

C&I

Commercial and Industrial

~~LTV~~Management

~~Loan-to-Value Ratio~~Flagstar Bancorp’s Management

CDARS

Certificates of Deposit Account Registry Service

~~Management~~MBS

~~Flagstar Bancorp’s Management~~Mortgage-Backed Securities

CECL

Current Expected Credit Losses

~~MBS~~MD&A

~~Mortgage-Backed Securities~~Management's Discussion and Analysis

CET1

Common Equity Tier 1

~~MD&A~~MSR

~~Management's Discussion and Analysis~~Mortgage Servicing Rights

CLTV

Combined Loan to Value Ratio

~~MSR~~N/A

~~Mortgage Servicing Rights~~Not Applicable

Common Stock

Common Shares

N/AM

Not ~~Applicable~~Meaningful

CRE

Commercial Real Estate

~~N/M~~NBV

~~Not Meaningful~~Net Book Value

~~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~~NYSE

New York Stock Exchange

DOJ

United States Department of Justice

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~~OCI

~~Other-Than-Temporary-Impairment~~Other Comprehensive Income (Loss)

~~DTA~~

OTTI

Other-Than-Temporary-Impairment

DTA

Deferred Tax Asset

~~QTL~~PPP

~~Qualified Thrift Lending~~Paycheck Protection Program

EVE

Economic Value of Equity

QTL

Qualified Thrift Lending

Fannie Mae

Federal National Mortgage Association

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~~FASB

~~Federal National Mortgage Association~~

~~FASB~~

Financial Accounting Standards Board

~~REO~~

FDIC

Federal Deposit Insurance Corporation

Federal Reserve

Board of Governors of the Federal Reserve System

REO

Real estate owned and other nonperforming assets, net

~~FDIC~~FHA

Federal ~~Deposit Insurance Corporation~~Housing Administration

RMBS

Residential Mortgage-Backed Securities

FHLB

Federal ~~Reserve~~Home Loan Bank

~~Board of Governors of the Federal Reserve System~~RWA

~~RWA~~

Risk Weighted Assets

~~FHA~~FICO

~~Federal Housing Administration~~Fair Isaac Corporation

SEC

Securities and Exchange Commission

~~FHLB~~FRB

Federal ~~Home Loan~~Reserve Bank

SNC

Shared National Credit

~~FICO~~

~~Fair Isaac Corporation~~

~~SOFR~~

~~Secured Oversight Financing Rate~~

~~FRB~~

~~Federal Reserve Bank~~

~~TDR~~

~~Trouble Debt Restructuring~~

Freddie Mac

Federal Home Loan Mortgage Corporation

~~TPO~~SOFR

~~Third Party Originator~~Secured Oversight Financing Rate

FTE

Full Time Equivalent Employees

~~UPB~~TDR

~~Unpaid Principal Balance~~Troubled Debt Restructuring

GAAP

United States Generally Accepted Accounting Principles

TPO

Third Party Originator

GNMA

Government National Mortgage Association

UPB

Unpaid Principal Balance

HELOC

Home Equity Lines of Credit

U.S. Treasury

United States Department of Treasury

~~GNMA~~HELOAN

~~Government National Mortgage Association~~Home Equity Loan

VIE

Variable Interest Entities

~~HELOC~~HOLA

Home ~~Equity Lines of Credit~~Owners Loan Act

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 ~~first~~third quarter of 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 2019 Annual Report on Form 10-K for the year ended December 31, 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 3841 of this Form 10-Q, Part II, Item 1A, Risk Factors of this Form 10-Q and Part I, Item 1A, Risk Factors of Flagstar Bancorp, Inc.'s 2019 Annual Report on Form 10-K for the year ended December 31, 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 6th largest bank mortgage originator in the nation and the 6th largest subservicer of mortgage loans nationwide. At ~~March��31,~~September 30, 2020, we had ~~4,415~~4,871 full-time equivalent employees. Our common stock is listed on the NYSE under the symbol ~~"FBC."~~"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 ~~March 31,~~September 30, 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 network of brokers and correspondents in all 50 states and our own loan officers, which includes our direct lending team, from 87 retail locations in 2829 states and ~~two~~3 call centers. We are also a leading national servicer of mortgage loans and provide complementary ancillary offerings including MSR lending, servicing advance lending and MSR recapture services.

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~~


	Three Months Ended,						Nine Months Ended,
	September 30, 2020			June 30, 2020			September 30, 2020			September 30, 2019
	(In millions and percentages)
Selected Mortgage Statistics: (1)
Mortgage rate lock commitments (fallout-adjusted) (2)	$	15,000		$	13,800		$	40,000		$	24,100
Mortgage loans originated	$	14,400		$	12,200		$	35,200		$	23,400
Mortgage loans sold and securitized	$	14,500		$	12,900		$	34,900		$	22,200
Selected Ratios:
Interest rate spread (3)	2.44		%	2.52		%	2.41		%	2.57		%
Net interest margin	2.78		%	2.86		%	2.81		%	3.07		%
Adjusted net interest margin (4)	2.94		%	2.88		%	2.88		%	3.07		%
Return on average assets	3.15		%	1.77		%	1.97		%	1.08		%
Return on average common equity	41.54		%	23.47		%	25.71		%	12.90		%
Return on average tangible common equity (4)	45.42		%	26.16		%	28.58		%	15.30		%
Efficiency ratio	48.3		%	54.3		%	56.4		%	75.0		%
Effective tax provision rate	24.7		%	21.5		%	23.0		%	18.6		%
Average Balances:
Average interest-earning assets	$	25,738		$	23,692		$	23,535		$	17,693
Average interest-paying liabilities	$	14,281		$	15,119		$	14,625		$	12,767
Average stockholders' equity	$	2,141		$	1,977		$	1,991		$	1,658


	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019
	(In millions, except per share data and percentages)
Selected Statistics:
Book value per common share	$	38.41		$	34.62		$	32.46		$	31.57		$	30.69
Tangible book value per share (4)	$	35.60		$	31.74		$	29.52		$	28.57		$	27.62
Number of common shares outstanding	57,150,470			56,943,979			56,729,789			56,631,236			56,510,341
Common equity-to-assets ratio	7.45		%	7.18		%	6.87		%	7.68		%	7.88		%
Tangible common equity to assets ratio (4)	6.90		%	6.58		%	6.25		%	6.95		%	7.08		%
Capitalized value of mortgage servicing rights	0.85		%	0.87		%	0.95		%	1.21		%	1.14		%
Bancorp total capital (to adjusted risk weighted assets)	11.29		%	11.32		%	11.18		%	11.52		%	11.54		%
Bank total capital (to adjusted risk weighted assets)	11.09		%	11.05		%	11.30		%	11.73		%	12.06		%
Number of bank branches	160			160			160			160			160
Number of FTE employees	4,871			4,641			4,415			4,453			4,171

(1)Rounded to nearest hundred million.

(2)Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in ~~millions, except share data)~~the pipeline that are not expected to close based on previous historical experience and the impact of changes in interest rates.

(3)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.

(4)See Non-GAAP reconciliation for further information.

Three Months Ended,
March 31, 2020 December 31, 2019 March 31, 2019
(In millions and percentages)
Selected Mortgage Statistics:
Mortgage rate lock commitments (fallout-adjusted) (1) $ 11,154
$ 8,179
$ 6,602
Mortgage loans originated $ 8,591
$ 9,303
$ 5,513
Mortgage loans sold and securitized $ 7,487
$ 8,135
$ 5,170
Selected Ratios:
Interest rate spread (2) 2.31 % 2.39 % 2.69 %
Net interest margin 2.81 % 2.91 % 3.09 %
Return on average assets 0.78 % 0.99 % 0.79 %
Return on average common equity 9.82 % 12.69 % 9.16 %
Return on average tangible common equity (3) 11.46 % 14.76 % 11.33 %
Efficiency ratio 77.1 % 78.2 % 81.3 %
Effective tax provision rate 18.5 % 18.1 % 18.4 %
Average Balances:
Average interest-earning assets $ 21,150
$ 20,708
$ 16,294
Average interest-paying liabilities $ 14,480
$ 14,208
$ 12,505
Average stockholders' equity $ 1,854
$ 1,803
$ 1,583

March 31, 2020 December 31, 2019 March 31, 2019
(In millions, except per share data and percentages)
Selected Statistics:
Book value per common share $ 32.46
$ 31.57
$ 27.86
Tangible book value per share (4) $ 29.52
$ 28.57
$ 24.65
Number of common shares outstanding 56,729,789
56,631,236
56,480,086
Common equity-to-assets ratio 6.87 % 7.68 % 8.09 %
Tangible common equity to assets ratio (4) 6.25 % 6.95 % 7.16 %
Capitalized value of mortgage servicing rights 0.95 % 1.21 % 1.27 %
Bancorp Tier 1 leverage (to adjusted avg. total assets) 8.09 % 7.57 % 8.37 %
Bank Tier 1 leverage (to adjusted avg. total assets) 8.19 % 7.71 % 9.04 %
Number of bank branches 160
160
160
Number of FTE employees 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 $167 million, $170 million, and $182 million at March 31, 2020, December 31, 2019, and 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,						Nine Months Ended,
	September 30, 2020		June 30, 2020		Change		September 30, 2020		September 30, 2019		Change
	(Dollars in millions, except per share data)
Net interest income	$	180	$	168	$	12	$	496	$	410	$	86
Provision for credit losses	32		102		(70)		148		18		130
Total noninterest income	452		378		74		988		448		540
Total noninterest expense	305		296		9		837		643		194
Provision for income taxes	73		32		41		115		37		78
Net income	$	222	$	116	$	106	$	384	$	160	$	224
Income per share
Basic	$	3.90	$	2.04	$	1.86	$	6.76	$	2.83	$	3.93
Diluted	$	3.88	$	2.03	$	1.85	$	6.71	$	2.80	$	3.91

Three Months Ended March 31, 1Q20 vs. 4Q19 1Q20 vs. 1Q19
March 31, 2020 December 31, 2019 March 31, 2019 Change Change
(Dollars in millions, except per share data)
Net interest income $ 148
$ 152
$ 126
$ (4 ) $ 22
Provision for credit losses 14
—
—
14
14
Total noninterest income 157
162
109
(5 ) 48
Total noninterest expense 235
245
191
(10 ) 44
Provision for income taxes 10
11
8
(1 ) 2
Net income $ 46
$ 58
$ 36
$ (12 ) $ 10
Adjusted net income (1)
$ 46
$ 58
$ 37
$ (12 ) $ 9
Income per share
Basic $ 0.80
$ 1.01
$ 0.64
$ (0.21 ) $ 0.16
Diluted $ 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

Net income was ~~$46~~$222 million, or ~~$0.80~~$3.88 per diluted share for the quarter ended ~~March 31, 2020. These results compare~~ September 30, 2020 compared

to ~~fourth~~second quarter ~~2019~~2020 net income of ~~$58~~$116 million, or ~~$1.00~~$2.03 per diluted share. For the nine months ended September 30, 2020, net income was $384 million, or $6.71 per diluted share ~~first quarter 2019~~as compared to net income of ~~$36~~$160 million, or ~~$0.63~~$2.80 per diluted share for same period a year ago.

Net interest income increased $12 million for the quarter ended September 30, 2020 as compared to the quarter ended June 30, 2020, driven by a $2.0 billion increase in average earning assets led by growth in our warehouse business. The net interest margin in the third quarter 2020 was 2.78 percent, an 8 basis point decrease from the prior quarter. This was driven by an increase in LGG loans in forbearance which we have not repurchased and ~~first quarter 2019~~which do not accrue interest. Excluding the impact from these loans, adjusted net ~~income~~interest margin expanded 6 basis points to 2.94 percent in the third quarter, compared to adjusted net interest margin of ~~$37 million, or $0.64 per diluted share, when excluding acquisition expenses of $1 million~~2.88 percent in the prior quarter. The increase in the adjusted net ~~of taxes.~~interest margin was primarily driven by an increase in higher spread warehouse loans and lower rates on deposit and borrowing costs.

Compared to the fourth quarter 2019, net interest income in the first quarter of 2020 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 partial impact of the March interest rate cuts in response to COVID-19. Margin compression was partially offset by growth in interest earnings 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~~second quarter 2020, ~~provision was $14~~noninterest income increased $74 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 a 36 percent~~while noninterest expense only increased $9 million. The increase in ~~fallout adjusted locks and a $9 million increase in return on our mortgage servicing rights. Our~~noninterest income was primarily due to higher net gain on loan sales and net return on mortgage servicing rights. Gain on sale margin ~~was 80~~increased 12 basis points, ~~which~~to 2.31 percent as compared to 2.19 percent for the second quarter 2020. The increase was ~~reduced 43 basis points as a result~~primarily driven by improved execution in secondary marketing and the gain associated with the RMBS transaction we executed during the quarter. The increase in noninterest expense was primarily due to the capitalization of ~~hedge ineffectiveness~~direct origination costs in the ~~final two weeks~~second quarter for the PPP loans which did not reoccur and the accelerated vesting of ~~March caused by market disruption~~certain components of executive compensation that resulted from ~~Federal Reserve purchases~~the most recent secondary share offering. Despite increased volume, mortgage expenses were flat quarter over quarter due to certain expenses in the second quarter that did not reoccur this quarter and are not expected to reoccur in the future, including certain performance-related incentives related to our Opes Advisors division.

Our provision for credit losses for the quarter ended September 30, 2020 was $32 million, compared to $102 million for the second quarter 2020. We have continued to add to our reserve balance as we believe the economic recovery will continue to be challenged due to the COVID-19 pandemic for an extended period of ~~agency mortgage-backed securities during that period.~~time, especially as it relates to consumer loans in forbearance and commercial real estate loans.

Net Interest Income

~~Comparison to Prior Year Quarter~~

The following ~~table presents~~tables present details on our net interest margin and net interest income on a consolidated basis:


	Three Months Ended,
	September 30, 2020						June 30, 2020
	Average Balance		Interest		Annualized Yield/ Rate		Average Balance		Interest		Annualized Yield/ Rate
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	5,602	$	45	3.21	%	$	5,645	$	48	3.42	%
Loans held-for-investment
Residential first mortgage	2,584		21		3.24	%	2,822		24		3.41	%
Home equity	951		9		3.77	%	1,001		9		3.78	%
Other	950		13		5.28	%	881		12		5.42	%
Total consumer loans	4,485		43		3.78	%	4,704		45		3.87	%
Commercial real estate	3,007		27		3.47	%	3,101		28		3.64	%
Commercial and industrial	1,650		14		3.25	%	2,006		17		3.34	%
Warehouse lending	5,697		56		3.92	%	3,785		38		3.88	%
Total commercial loans	10,354		97		3.68	%	8,892		83		3.67	%
Total loans held-for-investment (1)	14,839		140		3.71	%	13,596		128		3.74	%
Loans with government guarantees	2,122		5		0.89	%	858		4		1.97	%
Investment securities	2,807		16		2.29	%	3,417		21		2.42	%
Interest-earning deposits	368		—		0.11	%	176		—		0.11	%
Total interest-earning assets	25,738		206		3.16	%	23,692		201		3.38	%
Other assets	2,539						2,569
Total assets	$	28,277					$	26,261
Interest-Bearing Liabilities
Retail deposits
Demand deposits	$	1,824	$	—	0.09	%	$	1,800	$	1	0.22	%
Savings deposits	3,675		3		0.34	%	3,476		4		0.52	%
Money market deposits	733		—		0.09	%	716		—		0.12	%
Certificates of deposit	1,672		8		1.62	%	1,987		10		2.00	%
Total retail deposits	7,904		11		0.53	%	7,979		15		0.78	%
Government deposits	1,403		1		0.35	%	1,088		2		0.63	%
Wholesale deposits and other	953		4		1.77	%	738		4		2.07	%
Total interest-bearing deposits	10,260		16		0.62	%	9,805		21		0.86	%
Short-term FHLB advances and other	2,328		2		0.20	%	3,753		2		0.26	%
Long-term FHLB advances	1,200		3		1.03	%	1,068		3		1.13	%
Other long-term debt	493		5		4.52	%	493		7		4.99	%
Total interest-bearing liabilities	14,281		26		0.72	%	15,119		33		0.86	%
Noninterest-bearing deposits
Retail deposits and other	1,954						1,687
Custodial deposits (2)	7,347						6,223
Total non-interest bearing deposits	9,301						7,910
Other liabilities	2,554						1,255
Stockholders’ equity	2,141						1,977
Total liabilities and stockholders' equity	$	28,277					$	26,261
Net interest-earning assets	11,457						8,573
Net interest income			$	180					$	168
Interest rate spread (3)					2.44	%					2.52	%
Net interest margin (4)					2.78	%					2.86	%
Ratio of average interest-earning assets to interest-bearing liabilities					180.2	%					156.7	%
Total average deposits	19,561						17,715

(1)Includes nonaccrual loans. For further information on nonaccrual loans, see Note 4 - Loans Held-for-Investment.

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

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

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

Three Months Ended
March 31, 2020 December 31, 2019 March 31, 2019

Average
Balance
Interest
Annualized
Yield/
Rate
Average
Balance Interest Annualized
Yield/
Rate
Average
Balance
Interest
Annualized
Yield/
Rate
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ 5,248
$ 49
3.72 % $ 5,199
$ 51
3.92 % $ 3,266
$ 38
4.72 %
Loans held-for-investment
Residential first mortgage 3,062
27
3.51 % 3,215
30
3.60 % 3,044
28
3.64 %
Home equity 1,019
12
4.73 % 989
12
4.86 % 745
10
5.63 %
Other 816
12
5.77 % 728
11
5.97 % 356
6
7.11 %
Total consumer loans 4,897
51
4.14 % 4,932
53
4.20 % 4,145
44
4.30 %
Commercial real estate 2,949
34
4.61 % 2,763
34
4.91 % 2,250
33
5.66 %
Commercial and industrial 1,667
19
4.52 % 1,726
21
4.80 % 1,594
21
5.39 %
Warehouse lending 2,310
25
4.30 % 2,747
33
4.61 % 1,175
16
5.47 %
Total commercial loans 6,926
78
4.48 % 7,236
88
4.77 % 5,019
70
5.53 %
Total loans held-for-investment (1) 11,823
129
4.34 % 12,168
141
4.54 % 9,164
114
4.97 %
Loans with government guarantees 811
3
1.38 % 678
4
2.16 % 455
3
2.96 %
Investment securities 3,060
19
2.47 % 2,511
16
2.49 % 3,258
24
2.91 %
Interest-earning deposits 208
1
1.75 % 152
1
2.26 % 151
1
2.77 %
Total interest-earning assets 21,150
201
3.78 % 20,708
213
4.04 % 16,294
180
4.43 %
Other assets 2,263
2,328
2,144

Total assets $ 23,413
$ 23,036
$ 18,438

Interest-Bearing Liabilities
Retail deposits
Demand deposits $ 1,587
$ 3
0.75 % $ 1,448
$ 3
0.70 % $ 1,220
$ 2
0.68 %
Savings deposits 3,384
9
1.07 % 3,335
10
1.19 % 3,089
7
0.95 %
Money market deposits 687
1
0.32 % 700
—
0.35 % 778
1
0.27 %
Certificates of deposit 2,254
12
2.24 % 2,459
15
2.37 % 2,488
13
2.13 %
Total retail deposits 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 %
Wholesale deposits and other 581
4
2.39 % 666
4
2.36 % 387
2
2.23 %
Total interest-bearing deposits 9,624
32
1.33 % 9,800
36
1.46 % 9,132
29
1.30 %
Short-term FHLB advances and other 3,566
12
1.35 % 3,262
15
1.74 % 2,725
17
2.54 %
Long-term FHLB advances 794
3
1.29 % 650
3
1.43 % 153
1
1.54 %
Other long-term debt 496
6
5.33 % 496
7
5.45 % 495
7
5.90 %
Total interest-bearing liabilities 14,480
53
1.46 % 14,208
61
1.65 % 12,505
54
1.75 %
Noninterest-bearing deposits
Retail deposits and other 1,395
1,332
1,242

Custodial deposits (2) 4,776
4,772
2,532

Total non-interest bearing deposits
6,171
6,104
3,774

Other liabilities 908
921
576

Stockholders’ equity 1,854
1,803
1,583

Total liabilities and stockholders' equity $ 23,413
$ 23,036
$ 18,438

Net interest-earning assets 6,671
6,500
3,789

Net interest income $ 148
$ 152
$ 126

Interest rate spread (3) 2.31 % 2.39 % 2.69 %
Net interest margin (4) 2.81 % 2.91 % 3.09 %
Ratio of average interest-earning assets to interest-bearing liabilities 146.1 % 145.8 % 130.3 %
Total average deposits 15,795
15,904
12,906


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


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


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


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


	Nine Months Ended,
	September 30, 2020						September 30, 2019
	Average Balance		Interest		Annualized Yield/ Rate		Average Balance		Interest		Annualized Yield/ Rate
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	5,499	$	142	3.44	%	$	3,532	$	119	4.48	%
Loans held-for-investment
Residential first mortgage	2,822		72		3.40	%	3,158		85		3.61	%
Home equity	990		30		4.10	%	832		34		5.50	%
Other	882		36		5.47	%	512		25		6.51	%
Total consumer loans	4,694		138		3.94	%	4,502		144		4.29	%
Commercial real estate	3,019		90		3.90	%	2,414		102		5.56	%
Commercial and industrial	1,774		50		3.68	%	1,702		67		5.20	%
Warehouse lending	3,937		119		3.98	%	1,898		74		5.17	%
Total commercial loans	8,730		259		3.89	%	6,014		243		5.34	%
Total loans held-for-investment (1)	13,424		397		3.91	%	10,516		387		4.89	%
Loans with government guarantees	1,267		12		1.23	%	511		11		2.88	%
Investment securities	3,094		56		2.40	%	2,957		61		2.77	%
Interest-earning deposits	251		1		0.56	%	177		3		2.38	%
Total interest-earning assets	23,535		608		3.42	%	17,693		581		4.37	%
Other assets	2,457						2,184
Total assets	$	25,992					$	19,877
Interest-Bearing Liabilities
Retail deposits
Demand deposits	$	1,737	$	4	0.33	%	$	1,311	$	8	0.80	%
Savings deposits	3,513		17		0.63	%	3,181		26		1.10	%
Money market deposits	712		1		0.17	%	748		2		0.31	%
Certificates of deposit	1,970		29		1.98	%	2,561		44		2.29	%
Total retail deposits	7,932		51		0.86	%	7,801		80		1.37	%
Government deposits	1,208		6		0.68	%	1,184		13		1.49	%
Wholesale deposits and other	758		12		2.03	%	518		9		2.35	%
Total interest-bearing deposits	9,898		69		0.93	%	9,503		102		1.44	%
Short-term FHLB advances and other	3,212		16		0.65	%	2,420		44		2.45	%
Long-term FHLB advances	1,021		9		1.13	%	349		4		1.71	%
Other long-term debt	494		18		4.94	%	495		21		5.84	%
Total interest-bearing liabilities	14,625		112		1.01	%	12,767		171		1.80	%
Noninterest-bearing deposits
Retail deposits and other	1,680						1,278
Custodial deposits (2)	6,120						3,524
Total non-interest bearing deposits	7,800						4,802
Other liabilities	1,576						650
Stockholders’ equity	1,991						1,658
Total liabilities and stockholders' equity	$	25,992					$	19,877
Net interest-earning assets	8,910						4,926
Net interest income			$	496					$	410
Interest rate spread (3)					2.41	%					2.57	%
Net interest margin (4)					2.81	%					3.07	%
Ratio of average interest-earning assets to interest-bearing liabilities					160.9	%					138.6	%
Total average deposits	17,698						14,305

(1)Includes nonaccrual loans. For further information on nonaccrual loans, see Note 4 - Loans Held-for-Investment.

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

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

(4)Net interest margin is net interest income 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,						Nine Months Ended,
	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:										September 30, 2020 versus June 30, 2020 Increase (Decrease) Due to:						September 30, 2020 versus September 30, 2019 Increase (Decrease) Due to:
	Rate			Volume			Total			Rate			Volume			Total				Rate		Volume		Total		Rate		Volume		Total
	(Dollars in millions)																			(Dollars in millions)
Interest-Earning Assets																			Interest-Earning Assets
Loans held-for-sale	$	(2	)	$	—		$	(2	)	$	(12	)	$	23		$	11		Loans held-for-sale	$	(3)	$	—	$	(3)	$	(43)	$	66	$	23
Loans held-for-investment																			Loans held-for-investment
Residential first mortgage	(2		)	(1		)	(3		)	(1		)	—			(1		)	Residential first mortgage	(1)		(2)		(3)		(4)		(9)		(13)
Home equity	—			—			—			(2		)	4			2			Home equity	—		—		—		(11)		7		(4)
Other	—			1			1			(2		)	8			6			Other	—		1		1		(7)		18		11
Total consumer loans	(2		)	—			(2		)	(5		)	12			7			Total consumer loans	(1)		(1)		(2)		(22)		16		(6)
Commercial real estate	(2		)	2			—			(9		)	10			1			Commercial real estate	—		(1)		(1)		(37)		25		(12)
Commercial and industrial	(1		)	(1		)	(2		)	(3		)	1			(2		)	Commercial and industrial	—		(3)		(3)		(20)		3		(17)
Warehouse lending	(3		)	(5		)	(8		)	(7		)	16			9			Warehouse lending	(1)		19		18		(34)		79		45
Total commercial loans	(6		)	(4		)	(10		)	(19		)	27			8			Total commercial loans	(1)		15		14		(91)		107		16
Total loans held-for-investment	(8		)	(4		)	(12		)	(24		)	39			15			Total loans held-for-investment	(2)		14		12		(113)		123		10
Loans with government guarantees	(2		)	1			(1		)	(3		)	3			—			Loans with government guarantees	(5)		6		1		(15)		16		1
Investment securities	—			3			3			(4		)	(1		)	(5		)	Investment securities	(1)		(4)		(5)		(8)		3		(5)
Interest-earning deposits and other	—			—			—			—			—			—			Interest-earning deposits and other	—		—		—		(3)		1		(2)
Total interest-earning assets	$	(12	)	$	—		$	(12	)	$	(43	)	$	64		$	21		Total interest-earning assets	$	(11)	$	16	$	5	$	(182)	$	209	$	27
Interest-Bearing Liabilities																			Interest-Bearing Liabilities
Interest-bearing deposits	$	(3	)	$	(1	)	$	(4	)	$	1		$	2		$	3		Interest-bearing deposits	$	(6)	$	1	$	(5)	$	(37)	$	4	$	(33)
Short-term FHLB advances and other borrowings	(4		)	1			(3		)	(10		)	5			(5		)	Short-term FHLB advances and other borrowings	1		(1)		—		(43)		15		(28)
Long-term FHLB advances	(1		)	1			—			—			2			2			Long-term FHLB advances	—		—		—		(4)		9		5
Other long-term debt	(1		)	—			(1		)	(1		)	—			(1		)	Other long-term debt	(2)		—		(2)		(3)		—		(3)
Total interest-bearing liabilities	(9		)	1			(8		)	(10		)	9			(1		)	Total interest-bearing liabilities	(7)		—		(7)		(87)		28		(59)
Change in net interest income	$	(3	)	$	(1	)	$	(4	)	$	(33	)	$	55		$	22		Change in net interest income	$	(4)	$	16	$	12	$	(95)	$	181	$	86

Three months ended 1Q20 vs. 4Q19 1Q20 vs. 1Q19
Other March 31, 2020 December 31, 2019 March 31, 2019 Change Change
(Dollars in millions)
Summary of Operations
Net interest income $ (2 ) $ (9 ) $ (3 ) $ 7
$ 1
Provision (benefit) for credit losses 9
(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 income 6
8
10
(2 ) (4 )
Total noninterest income (10 ) (9 ) (3 ) (1 ) (7 )
Compensation and benefits 34
36
33
(2 ) 1
Commissions —
(1 ) 1
1
(1 )
Loan processing expense 1
1
1
—
—
Other noninterest expense (5 ) 5
—
(10 ) (5 )
Total noninterest expense 30
41
35
(11 ) (5 )
Income before indirect overhead allocations and income taxes (51 ) (56 ) (40 ) 5
(11 )
Indirect overhead allocation 26
27
25
(1 ) 1
Provision for income taxes (7 ) (10 ) (4 ) 3
(3 )
Net income (loss) $ (18 ) $ (19 ) $ (11 ) $ 1
$ (7 )

Key Metrics
Average number of FTE employees 1,149
1,150
1,092
(1 ) 57

Comparison to Prior Quarter

The Other segment reported a net loss of ~~$18~~$47 million, for the three months ended ~~March 31,~~September 30, 2020, compared to a net loss of ~~$19~~$32 million for the three months ended ~~December 31, 2019.~~June 30, 2020. The $1$15 million ~~decrease in losses~~higher loss was primarily driven by ~~the following:~~

~~Net~~a decrease in net interest income ~~increased $7 million. Fourth quarter 2019 interest income was more severely impacted by~~as a result of the ~~rate declines throughout the year and the Bank being in an~~Bank’s overall asset sensitive position ~~as compared to~~and the ~~first quarter 2020.~~

~~Provision~~lower average rates throughout the third quarter. The provision for credit losses ~~was $12~~decreased $70 million ~~higher driven by COVID-19's impact~~as a result of the significant provision taken in second quarter of 2020 due to our forecast of economic ~~forecast.~~and credit conditions as impacted by COVID-19. The additional provision in the third quarter of 2020 reflects our belief that the economy will continue to be challenged by the response to the COVID-19 pandemic for an extended period of time, especially as it relates to consumer loan forbearance and the commercial real estate sector. The provision for credit losses is directly allocated to the other applicable segments through other noninterest expense. The majority of all other activity within the Other segment largely offsets and is allocated back to the operating segments, recorded as contra other noninterest expense.

Comparison to Prior Year ~~Quarter~~to Date

The Other segment reported a net loss of ~~$18~~$98 million, for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, compared to a net loss of ~~$11~~$16 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019. The $7$82 million ~~increase in losses~~decrease was primarily due to a ~~higher~~$60 million decrease in net interest income as a result of the Bank’s overall asset sensitive position and the lower average rates during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. The nine months ended September 30, 2019 also includes a $25 million benefit from the DOJ Liability fair value adjustment. The provision for credit losses ~~driven by COVID-19's impact~~increased $149 million primarily due to ~~our~~changes in the forecasts of economic ~~forecast.~~conditions and impacts of COVID-19. With the adoption of CECL on January 1, 2020, the difference between the consolidated provision for credit losses and the sum of total net charge-offs and the change in loan balances is still assigned to the Other segment. However, this amount now includes changes related to the economic forecasts, model changes, qualitative adjustments and credit downgrades. The provision for credit losses is then directly allocated to the other applicable segments through other noninterest expense. The majority of all other activity within the Other segment largely offsets and is allocated back to the operating segments, recorded as contra other noninterest expense.

Risk Management

Certain risks are inherent in our business and include, but are not limited to, operational, strategic, credit, regulatory compliance, legal, reputational, liquidity, market and ~~cyber.~~cybersecurity. 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 Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. Some of the more significant processes used to manage and control credit, market, liquidity 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),~~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~~plus Tier 2 capital ~~plus~~and any portion of the allowance for credit losses not included in the Tier 2 capital. This limit was ~~$300~~$371 million as of ~~March 31,~~September 30, 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~~million. During 2020, the Board approved the extension of short-term “overlines” to certain warehouse borrowers as all advances are fully collateralized by residential mortgage loans and this asset class has had very low levels of historical ~~loss.~~loss, resulting in a temporary increase of the warehouse borrower limit to $175 million. We have a tracking and reporting process to monitor lending concentration levels, and all credit exposures to a single or related borrower that exceed $50 million must be approved by the Board of Directors.

Our commercial loan portfolio has been built on our relationship-based lending strategy. We provide financing and banking products to our commercial customers in our core banking footprint and will follow those established customer relationships to meet their financing needs in areas outside of our footprint. We have also formed relationship lending on a national scale through our home builder finance and warehouse lending businesses. At ~~March 31,~~September 30, 2020, we had $9$12.1 billion in our commercial loan portfolio with our warehouse lending and home builder finance businesses accounting for 5863 percent of the total. Of the remaining commercial loans in our portfolio, the majority of CRE and C&I loans were with customers who have established relationships within our 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 guidelines detailed in credit policies, ongoing loan level reviews, monitoring of the concentration limits and continuous portfolio risk management reporting. The commercial credit policy outlines the risks and underwriting requirements and provides a framework for all credit and lending activities. Our commercial loan credit policies consider maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pro-forma analysis requirements and thresholds for product specific advance rates.

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

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

Our commercial loan portfolio also includes loans that are part of the ~~Shared National Credit ("SNC")~~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~~federally regulated institutions. On an annual basis, a joint regulatory task force performs a risk assessment of all SNCs. When completed, these risk ratings are

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

For our commercial real estate portfolio, including owner and ~~nonowner-occupied-properties~~nonowner-occupied properties and home builder finance lending, we obtain independent appraisals as part of our 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 generally lend in metropolitan areas or counties where verifiable market statistics and data are readily available to

support underwriting and ongoing monitoring. We also evaluate the jurisdictions &and laws, demographic trends (age, population and income), housing characteristics and economic indicators (unemployment, economic growth, household income trends) for the geographies where our borrowers primarily operate. We engage independent licensed professionals to supply market studies and feasibility reports, environmental assessments and project site inspections to complement the procedures we perform internally. Further, we perform ongoing monitoring of the projects including periodic inspections of collateral and annual portfolio and individual credit reviews.

The consumer loan portfolio has been built on strong underwriting criteria and within concentration limits intended to diversify our risk profile. We have built our consumer loan portfolio by adding high quality first mortgage loans to our balance sheet making up ~~61.1~~57 percent of our total consumer loan portfolio at ~~March 31,~~September 30, 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 amortized cost of our loans held-for-investment by category:


	September 30, 2020		% of Total		December 31, 2019		% of Total		Change
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,472	15.0	%	$	3,154	26.0	%	$	(682)
Home equity (1)	924		5.6	%	1,024		8.4	%	(100)
Other	973		5.9	%	729		6.0	%	244
Total consumer loans	4,369		26.5	%	4,907		40.5	%	(538)
Commercial loans
Commercial real estate	2,996		18.2	%	2,828		23.3	%	168
Commercial and industrial	1,520		9.2	%	1,634		13.5	%	(114)
Warehouse lending	7,591		46.1	%	2,760		22.8	%	4,831
Total commercial loans	12,107		73.5	%	7,222		59.5	%	4,885
Total loans held-for-investment	$	16,476	100.0	%	$	12,129	100.0	%	$	4,347

Three months ended 1Q20 vs. 4Q19 1Q20 vs. 1Q19
March 31, 2020 December 31, 2019 March 31, 2019 Change Change
(Dollars in millions)
Consumer loans
Residential first mortgage $ 2,964
$ 3,154
$ 3,100
$ (190 ) $ (136 )
Home equity (1)
$ 1,028
$ 1,024
$ 796
$ 4
$ 232
Other $ 858
$ 729
$ 433
$ 129
$ 425
Total consumer loans 4,850
4,907
4,329
(57 ) 521
Commercial loans
Commercial real estate $ 3,092
$ 2,828
$ 2,324
264
768
Commercial and industrial $ 1,880
$ 1,634
$ 1,651
246
229
Warehouse lending $ 3,973
$ 2,760
$ 1,632
1,213
2,341
Total commercial loans 8,945
7,222
5,607
1,723
3,338
Total loans held-for-investment $ 13,795
$ 12,129
$ 9,936
$ 1,666
$ 3,859


~~(1)~~	~~Includes second mortgages, HELOCs and HELOANs.~~

(1)Includes second mortgages, HELOCs and HELOANs.

Prior to ~~COVID-19~~March 2020 we had continued to strengthen our Community Banking segment by growing our consumer and commercial real estate LHFI. ~~Our~~Due to the COVID-19 pandemic, subsequent to March 2020 we have focused on managing credit in our CRE and C&I portfolios while growing our lower-risk, higher return warehouse lending portfolio. This drove growth in our commercial loan portfolio ~~grew $1.7~~of $4.9 billion, or 1368 percent, from December 31, 2019 to ~~March 31, 2020, led by growth in our warehouse lending portfolio due to increased refinance activity in the mortgage industry. In addition, our~~September 30, 2020. Our consumer loan portfolio decreased ~~$57~~$538 million, or 411 percent, from December 31, 2019 to ~~March 31, 2020. A $129~~September 30, 2020 as a $244 million increase in other consumer loans was more than offset by a ~~$190~~$682 million decrease in residential first mortgage loans due to higher refinance activity and lower ~~originations~~new closings 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 ~~March 31,~~September 30, 2020, loans in this portfolio had an average current FICO score of ~~737~~738 and an average LTV of 6752 percent.

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


	March 31, 2020		December 31, 2019			September 30, 2020		December 31, 2019
	(Dollars in millions)					(Dollars in millions)
Estimated LTVs (1)					Estimated LTVs (1)
Less than 80% and refreshed FICO scores (2):
Less than 80% and current FICO scores (2):					Less than 80% and current FICO scores (2):
Equal to or greater than 660	2,053		2,263		Equal to or greater than 660	$	1,676	$	2,263
Less than 660	110		93		Less than 660	92		93
80% and greater and refreshed FICO scores (2):
80% and greater and current FICO scores (2):					80% and greater and current FICO scores (2):
Equal to or greater than 660	672		687		Equal to or greater than 660	624		687
Less than 660	129		111		Less than 660	80		111
Total	$	2,964	$	3,154	Total	$	2,472	$	3,154
Geographic region					Geographic region
California	1,096		1,205		California	$	908	$	1,205
Michigan	443		442		Michigan	420		442
Florida	199		214
Texas	194		205		Texas	169		205
Washington	156		181		Washington	148		181
Florida					Florida	116		214
Colorado					Colorado	69		68
Arizona					Arizona	61		79
Illinois	85		95		Illinois	59		95
New York	84		84		New York	56		84
Arizona	76		79
Colorado	64		68
Maryland	49		49
Others	518		532
New Jersey					New Jersey	38		49
Other					Other	428		532
Total	$	2,964	$	3,154	Total	$	2,472	$	3,154

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.~~Affairs ("VA"). In the event of a government guaranteed loan borrower default, the Bank has a unilateral option to repurchase loans sold to GNMA that are 90 days past due and 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 the ~~three~~nine months ended ~~March 31,~~September 30, 2020, we had less than $1$2.2 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 allowance 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 ~~$814 million~~$2.5 billion at ~~March 31,~~September 30, 2020, as compared to ~~$736 million~~$0.7 billion at December 31, 2019. ~~The increase~~GNMA has granted borrowers with an option to seek forbearances on their mortgage repayments. $2.9 billion of GNMA loans are in forbearance as of September 30, 2020. When a GNMA loan is ~~primarily~~ due, but unpaid, for three consecutive months (typically referred to ~~holding more GNMA mortgage servicing rights which have historically~~as 90 days past due) the loan is required to be re-recognized on the balance sheet by the MSR owner. These loans are recorded in loans with government guarantees, and the liability to repurchase the loans is recorded in other liabilities on the consolidated statements of financial condition. This resulted in ~~higher repurchases.~~$1.8 billion of repurchase options as of September 30, 2020, a $1.7 billion increase from December 31, 2019. We have elected not to exercise these repurchase options as of September 30, 2020 because loans are not able to be modified and re-sold during the forbearance period. Our right to repurchase these loans continues as long as they remain unpaid for three consecutive months. At the prudent time, we intend to repurchase the loans which we believe will be accretive to net income by modifying and re-selling the loans or utilizing the partial claims process.

For further information, see Note 5 - Loans with Government ~~Guarantees.~~Guarantees and the Credit Risk - Payment Deferrals section of the MD&A.

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 $7 million and $5 million at ~~March 31,~~September 30, 2020 and December 31, ~~2019.~~2019, respectively.

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 ~~8.09~~8.04 percent at ~~March 31,~~September 30, 2020 providing a ~~309~~853 basis ~~points~~point stress buffer above the minimum level needed to be considered “well-capitalized.” Additionally, total risk-based capital to RWA was ~~11.18~~11.29 percent at ~~March 31,~~September 30, 2020 providing a ~~118~~283 basis point buffer above the minimum level needed to be considered "well-capitalized".

Dodd-Frank Act Section 171, commonly known as the Collins Amendment, established minimum Tier 1 leverage and

risk-based capital requirements for insured depository institutions, depository institution holding companies, and non-bank financial companies that 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 increased the individual limit on MSRs and temporary difference DTAs to 25 percent of CET1 and eliminated the aggregate 15 percent CET1 deduction threshold for MSRs and temporary difference DTAs.

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

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


Flagstar Bancorp	Actual			Well-Capitalized Under Prompt Corrective Action Provisions			Excess Capital Over Well-Capitalized Minimum (1)
	Amount	Ratio		Amount	Ratio		Capital Simplification
	(Dollars in millions)
September 30, 2020
Tier 1 leverage capital (to adjusted avg. total assets)	2,256	8.04	%	1,403	5.0	%	$	853
Common equity Tier 1 capital (to RWA)	2,016	9.21	%	1,422	6.5	%	594
Tier 1 capital (to RWA)	2,256	10.31	%	1,751	8.0	%	505
Total capital (to RWA)	2,471	11.29	%	2,188	10.0	%	283

Flagstar Bancorp Actual Well-Capitalized Under Prompt Corrective Action Provisions
Excess Capital Over
Well-Capitalized Minimum (1)
Amount Ratio Amount Ratio Capital Simplification
(Dollars in millions)
March 31, 2020
Tier 1 leverage capital
(to adjusted avg. total assets)
1,879
8.09 % 1,161
5.0 % $ 718
Common equity Tier 1 capital (to RWA) 1,639
9.17 % 1,161
6.5 % 478
Tier 1 capital (to RWA) 1,879
10.52 % 1,429
8.0 % 450
Total capital (to RWA) 1,997
11.18 % 1,786
10.0 % 211
(1)Excess capital is the difference between the actual capital ratios under current simplification rules and the well-capitalized minimum ratio, multiplied by the relevant asset base.


~~(1)~~	~~Excess capital is the difference between the actual capital ratios under current 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 ~~11.18~~11.29 percent. It would take a ~~$211~~$283 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".

As of ~~March 31,~~September 30, 2020, we had ~~$223~~$323 million in MSRs, ~~$78~~$89 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. For additional information on our capital requirements, see Note 14 - Regulatory ~~Capital~~ Matters.

~~Use~~Allowance for Credit Losses

The following tables present the changes in the allowance for credit losses balance for the three and nine months ended September 30, 2020:


	Three Months Ended September 30, 2020
	Residential First Mortgage		Home Equity		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total LHFI Portfolio (1)		Unfunded Commitments		Total ACL
	(Dollars in millions)
Beginning allowance balance	$	60	$	28	$	34	$	83	$	23	$	1	$	229	$	21	$	250
Provision (benefit) for credit losses:
Loan volume	(4)		(1)		3		—		(4)		1		(5)		4		(1)
Economic forecast (2)	(3)		(3)		(1)		—		—		—		(7)		—		(7)
Credit (3)	(7)		1		(4)		13		12		—		15		—		15
Qualitative factor adjustments (4)	6		3		5		(7)		11		3		21		—		21
Charge-offs	(2)		(1)		(1)		—		—		—		(4)		—		(4)
Provision for charge-offs	2		1		1		—		—		—		4		—		4
Recoveries	—		1		1		—		—		—		2		—		2
Ending allowance balance	$	52	$	29	$	38	$	89	$	42	$	5	$	255	$	25	$	280
(1) Excludes loans carried under the fair value option. (2) Includes changes in the lifetime loss rate based on current economic forecasts as compared to forecasts used in the prior quarter. (3) Includes changes in the probability of default and severity of default based on current borrower and guarantor characteristics, as well as individually evaluated reserves. (4) Includes $10 million of unallocated reserve attributed to various portfolios for presentation purposes.


	Nine Months Ended September 30, 2020
	Residential First Mortgage		Home Equity		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total LHFI Portfolio (1)		Unfunded Commitments		Total ACL
	(Dollars in millions)
Beginning balance ALLL	$	22	$	14	$	6	$	38	$	22	$	5	$	107	$	3	$	110
Impact of adopting ASC 326	25		12		10		(14)		(6)		(4)		23		7		30
Beginning allowance balance	47		26		16		24		16		1		130		10		140
Provision (benefit) for credit losses:
Loan volume	(8)		(2)		8		2		(1)		1		—		4		4
Economic forecast (2)	11		—		5		15		(3)		—		28		11		39
Credit (3)	(4)		(1)		2		23		12		—		32		—		32
Qualitative factor adjustments (4)	6		3		5		25		18		3		60		—		60
Charge-offs	(5)		(3)		(4)		—		—		—		(12)		—		(12)
Provision for charge-offs	5		3		4		—		—		—		12		—		12
Recoveries	—		3		2		—		—		—		5		—		5
Ending allowance balance	$	52	$	29	$	38	$	89	$	42	$	5	$	255	$	25	$	280

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

(2) Includes changes in the lifetime loss rate based on current economic forecasts as compared to forecasts used in the prior quarter.

(3) Includes changes in the probability of ~~Non-GAAP Financial Measures~~default and severity of default based on current borrower and guarantor characteristics, as well as individually evaluated reserves.

(4) Includes $10 million of unallocated reserve attributed to various portfolios for presentation purposes.

~~In addition~~

The allowance for credit losses was $280 millionat September 30, 2020, compared to ~~results presented~~$250 million at June 30, 2020. The increase in the allowance is primarily reflective of changes in our economic forecast and judgment we applied related to those forecasts and underlying borrower credit as a result of the ongoing COVID-19 pandemic between June 30, 2020 and September 30, 2020. We utilized the Moody’s September scenarios in our forecast: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. The resulting composite forecast for the third quarter 2020 was roughly equivalent to the scenario used in the second quarter 2020. Unemployment ends the year at 10 percent and recovers only slightly in 2021. GDP recovers only slightly by the end of the year from current levels and does not return to near pre-COVID level until 2024. HPI decreases 2 percent from mid-2020 through 2021. We judgmentally increased the qualitative reserves by $21 million, guided by the model output from Moody's adverse scenario, our judgment relating to industries and borrowers we believe could be more exposed to the stressful conditions in our forecast, uncertainty related to loans in forbearance and our judgment regarding economic uncertainty including the impact from the upcoming national election and additional government stimulus.

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


	September 30, 2020
	LHFI Portfolio (1)		Percent of Portfolio		Allowance Amount (2)		Allowance as a Percent of Loan Portfolio		Weighted Average Loan Life
Consumer loans
Residential first mortgage	$	2,459	14.9	%	$	52	2.1	%	4
Home equity	922		5.6	%	29		3.1	%	3
Other consumer	973		5.9	%	39		4.0	%	3
Total consumer loans	4,354		26.5	%	120		2.8	%
Commercial loans
Commercial real estate	$	2,996	18.2	%	$	106	3.5	%	2
Commercial and industrial	1,520		9.2	%	47		3.1	%	2
Warehouse lending	7,591		46.1	%	7		0.1	%	—
Total commercial loans	12,107		73.5	%	160		1.3	%
Total consumer and commercial loans	$	16,461	100.0	%	$	280	1.7	%
Total consumer and commercial loans excluding warehouse	$	8,870	53.9	%	$	273	3.1	%

(1) Excludes loans carried under the fair value option

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


	December 31, 2019
	LHFI Portfolio (1)		Percent of Portfolio		Allowance Amount (2)		Allowance as a Percent of Loan Portfolio		Weighted Average Loan Life
Consumer loans
Residential first mortgage	$	3,145	26.0	%	$	22	0.7	%	5
Home equity	1,021		8.4	%	14		1.4	%	3
Other consumer	729		6.0	%	6		0.8	%	2
Total consumer loans	4,895		40.4	%	42		0.9	%
Commercial loans
Commercial real estate	$	2,828	23.3	%	$	40	1.4	%	2
Commercial and industrial	1,634		13.5	%	23		1.4	%	1
Warehouse lending	2,760		22.8	%	5		0.2	%	—
Total commercial loans	7,222		59.6	%	68		0.9	%
Total consumer and commercial loans	$	12,117	100.0	%	$	110	0.9	%
Total consumer and commercial loans excluding warehouse	$	9,357	77.2	%	$	105	1.1	%

(1) Excludes loans carried under the fair value option

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

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 closing 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 ALCO, which is composed of our executive officers and certain members of other management, monitors interest rate risk on an ongoing basis in accordance with ~~GAAP,~~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 ~~report includes non-GAAP~~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, 2020
Scenario	Net interest income		$ Change		% Change
	(Dollars in millions)
100	$	677	$	80	13.5	%
Constant	$	596	$	—	—	%
(100)	N/M		N/M		N/M
December 31, 2019
Scenario	Net interest income		$ Change		% Change
	(Dollars in millions)
100	$	592	$	34	6.0	%
Constant	$	559	$	—	—	%
(100)	$	520	$	(39)	(6.9)	%

In the net interest income simulations, our balance sheet exhibits asset sensitivity. When interest rates rise our net interest income increases. Conversely, when interest rates fall our net interest income decreases. At September 30, 2020, the $37 million increase in net interest income in the constant scenario as compared to that at December 31, 2019 was primarily driven by the growth in our interest earning assets partially offset by lower short-term market rates.

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

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, 2020									December 31, 2019
Scenario	EVE		EVE %		$ Change		% Change		Scenario	EVE		EVE %		$ Change		% Change		Policy Limits
(Dollars in millions)
300	$	3,643	12.4	%	$	710	24.2	%	300	$	3,147	13.6	%	$	150	5.0	%	22.5	%
200	$	3,495	11.9	%	$	562	19.2	%	200	$	3,152	13.7	%	$	155	5.2	%	15.0	%
100	$	3,287	11.2	%	$	354	12.1	%	100	$	3,103	13.5	%	$	106	3.5	%	7.5	%
Current	$	2,933	10.0	%	$	—	—	%	Current	$	2,997	13.0	%	$	—	—	%	—	%
(100)	N/M		N/M		N/M		N/M		(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. This increased as of September 30, 2020 compared to December 31, 2019 due to the addition of pay fixed interest rate swaps. At September 30, 2020 and December 31, 2019, for each scenario shown, the percentage change in our EVE is within our Board policy limits.

Derivative financial ~~measures such~~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 closing 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 closing 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 ~~tangible book~~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. 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, operating expenses and the payment of cash dividends which were increased to $0.05 per share ~~tangible common equity~~in the first quarter 2020. The Company holds $246 million of senior notes which are scheduled to ~~assets ratio, return~~mature on ~~average tangible common equity, adjusted net income~~July 15, 2021. At September 30, 2020, the Company held $305 million of cash on deposit at the Bank, for future cash outflows for an

amount sufficient to service the senior notes, repay the senior notes at maturity, pay dividends 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~~cover the ~~underlying performance and trends~~operating expenses of the Company.

~~Non-GAAP financial measures~~ The OCC and the FRB regulate all capital distributions made by the Bank, directly or indirectly, to the holding company, including dividend payments. Whether an application or notice is required is based on a number of factors including whether the institution qualifies for expedited treatment under the OCC rules and regulations or if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years, or the Bank would not be at least adequately capitalized following the dividend. Additional restrictions on dividends apply if the Bank fails the QTL test. As of September 30, 2020, the Bank is in compliance with the QTL test. At September 30, 2020, the Bank is able to pay dividends to the holding company of approximately $249 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 closings are readily convertible to cash, either by selling them as part of our monthly agency sales, RMBS, private party whole loan sales, or by pledging them to the FHLB and borrowing against them. In addition, we have ~~inherent limitations,~~the ability to sell unencumbered investment securities or use them as collateral. At September 30, 2020, we had $2.5 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 and was 59 percent as of September 30, 2020.

Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. We balance the liquidity of our loan assets to our available funding sources. Our LHFI portfolio is funded with stable core deposits whereas our warehouse loans and LHFS may be funded with FHLB borrowings and custodial deposits. Warehouse loans are typically more liquid than other loan assets, as loans are paid within a short amount of time, when the lender sells the loan to an outside investor or, in some instances, to the Bank. As not all asset categories require the same level of liquidity, our loan-to-deposit ratio shows how we manage our liquidity position, how much liquidity we have and the agility of our balance sheet. The Company's average HFI loan-to-deposit ratio, was 75.9 percent for the three months ended September 30, 2020. Excluding warehouse loans, which have draws that typically pay off within a few weeks, and custodial deposits, which represent mortgage escrow accounts on deposit with the Bank, the average HFI loan-to-deposit ratio was 74.8 percent for the three months ended September 30, 2020.

As governed and defined by our 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 closings, 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:


	September 30, 2020		December 31, 2019		Change
	(Dollars in millions)
Retail deposits	$	9,747	$	9,164	$	583
Government deposits	1,748		1,213		535
Wholesale deposits	1,034		633		401
Custodial deposits	7,416		4,136		3,280
Total deposits	19,945		15,146		4,799
FHLB advances and other short-term debt	3,426		4,815		(1,389)
Other long-term debt	493		496		(3)
Total borrowed funds	3,919		5,311		(1,392)
Total funding	$	23,864	$	20,457	$	3,407

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


	September 30, 2020		December 31, 2019		Change
	(Dollars in millions)
Federal Home Loan Bank advances
Outstanding advances	$	2,755	$	4,345	$	(1,590)

Total used borrowing capacity	$	2,755	$	4,345	$	(1,590)
Borrowing capacity:
Collateralized borrowing capacity	$	3,057	$	2,345	$	712
Line of credit	30		30		—
Total unused borrowing capacity	$	3,087	$	2,375	$	712

FRB discount window
Collateralized borrowing capacity	$	1,745	$	758	$	987

Unencumbered investment securities
Agency - Commercial (1)	$	1,399	$	1,257	$	142
Agency - Residential (1)	956		1,180		(224)
Municipal obligations	25		26		(1)
Corporate debt obligations	70		77		(7)
Other	1		1		—
Total unencumbered investment securities	$	2,451	$	2,541	$	(90)

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

Deposits

The following table presents the composition of our deposits:


	September 30, 2020				December 31, 2019
	Balance		% of Deposits		Balance		% of Deposits		Change
	(Dollars in millions)
Retail deposits
Branch retail deposits
Savings accounts	$	3,347	16.8	%	$	3,030	20.0	%	$	317
Certificates of deposit/CDARS (1)	1,525		7.6	%	2,353		15.5	%	(828)
Demand deposit accounts	1,573		7.9	%	1,318		8.7	%	255
Money market demand accounts	487		2.4	%	495		3.3	%	(8)
Total branch retail deposits	6,932		34.8	%	7,196		47.5	%	(264)
Commercial deposits (2)
Demand deposit accounts	2,185		11.0	%	1,438		9.5	%	747
Savings accounts	432		2.2	%	342		2.3	%	90
Money market demand accounts	198		1.0	%	188		1.2	%	10
Total commercial retail deposits	2,815		14.1	%	1,968		13.0	%	847
Total retail deposits	$	9,747	48.9	%	$	9,164	60.5	%	$	583
Government deposits
Savings accounts	$	830	4.2	%	$	495	3.3	%	$	335
Demand deposit accounts	518		2.6	%	360		2.4	%	158
Certificates of deposit/CDARS (1)	400		2.0	%	358		2.4	%	42
Total government deposits	1,748		8.8	%	1,213		8.0	%	535
Custodial deposits (3)	7,416		37.2	%	4,136		27.3	%	3,280
Wholesale deposits	1,034		5.2	%	633		4.2	%	401
Total deposits (4)	$	19,945	100.0	%	$	15,146	100.0	%	$	4,799

(1)The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.2 billion and $1.7 billion at September 30, 2020 and December 31, 2019, respectively.

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

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

(4)Total exposure related to uninsured deposits over $250,000 was approximately $5.6 billion and $3.6 billion at September 30, 2020 and December 31, 2019, respectively.

Total deposits increased $4.8 billion, or 32 percent, at September 30, 2020 compared to December 31, 2019, primarily driven by growth in our servicing business which resulted in a $3.3 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, 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 September 30, 2020 was $100 million. In Indiana, Wisconsin and Ohio, we may be ~~uniformly applied~~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, 2020, collateral held on government deposits in these states was $10 million. At September 30, 2020, government deposit accounts included $0.4 billion of certificates of deposit with maturities typically less than one year and $1.3 billion of checking and savings accounts.

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, 2020, we had $123 million of total CDs enrolled in the CDARS program, a decrease of $10 million from December 31, 2019.

FHLBAdvances

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

We rely upon advances from the FHLB as a source of funding for the closing 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, 2020, our Board of Directors authorized and approved a line of credit with the FHLB of up to $10 billion, which is further limited based on our total assets and qualified collateral, as determined by the FHLB. At September 30, 2020, we had $2.8 billion of advances outstanding and an additional $3.1 billion of collateralized borrowing capacity available at the FHLB.

Federal Reserve Discount Window

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

At September 30, 2020, we pledged collateral, which included commercial loans, municipal bonds, and agency bonds, to the FRB of Chicago amounting to $2.6 billion with a lendable value of $1.7 billion. At December 31, 2019, we pledged collateral to the FRB of Chicago amounting to $788 million with a lendable value of $758 million. We do not typically utilize this available funding source, and at September 30, 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 September 30, 2020 we had $671 million of borrowings outstanding under this source of funding. Additional borrowing capacity under this and other sources of funding can vary depending on market conditions.

Debt

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

Operational Risk

Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events which may include vendor failures, 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 ("VA"). In the event of a government guaranteed loan borrower default, the Bank has a unilateral option to repurchase loans sold to GNMA that are 90 days past due and 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 the nine months ended September 30, 2020, we had less than $2.2 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 allowance 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 $2.5 billion at September 30, 2020, as compared to $0.7 billion at December 31, 2019. GNMA has granted borrowers with an option to seek forbearances on their mortgage repayments. $2.9 billion of GNMA loans are in forbearance as of September 30, 2020. When a GNMA loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) the loan is required to be re-recognized on the balance sheet by the MSR owner. These loans are recorded in loans with government guarantees, and the liability to repurchase the loans is recorded in other liabilities on the consolidated statements of financial condition. This resulted in $1.8 billion of repurchase options as of September 30, 2020, a $1.7 billion increase from December 31, 2019. We have elected not to exercise these repurchase options as of September 30, 2020 because loans are not ~~audited. Readers should~~able to be ~~aware~~modified and re-sold during the forbearance period. Our right to repurchase these loans continues as long as they remain unpaid for three consecutive months. At the prudent time, we intend to repurchase the loans which we believe will be accretive to net income by modifying and re-selling the loans or utilizing the partial claims process.

For further information, see Note 5 - Loans with Government Guarantees and the Credit Risk - Payment Deferrals section of ~~these limitations~~the MD&A.

Representation and ~~should be cautious with respect~~warranty reserve

When we sell mortgage loans, we make customary representations and warranties to the ~~use~~purchasers, including sponsored securitization trusts and their insurers (primarily Fannie Mae and Freddie Mac). An estimate of ~~such measures. To mitigate these limitations, we have practices~~the fair value of the guarantee associated with the mortgage loans is recorded in ~~place~~other liabilities in the Consolidated Statements of Financial Condition, which was $7 million and $5 million at September 30, 2020 and December 31, 2019, respectively.

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 ~~ensure that these measures are calculated using~~help management and the ~~appropriate GAAP or~~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 ~~components in their entirety~~requirements and the flexibility to support future growth. We prudently manage our capital position and work with our regulators to ensure that our ~~performance is properly reflected~~capital levels are appropriate considering our risk profile.

The capital standards we are subject to ~~facilitate consistent period-to-period comparisons. Our method of calculating these non-GAAP measures may differ from methods used~~include requirements contemplated 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,~~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 8.04 percent at September 30, 2020 providing a 853 basis point stress buffer above the ~~reconciliation~~minimum level needed to be considered “well-capitalized.” Additionally, total risk-based capital to RWA was 11.29 percent at September 30, 2020 providing a 283 basis point buffer above the minimum level needed to be considered "well-capitalized".

Dodd-Frank Act Section 171, commonly known as the Collins Amendment, established minimum Tier 1 leverage and

Regulatory Capital

The Bank and Flagstar have been subject 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 tangible common 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 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 performancecapital requirements of the ~~Company against its peers~~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 increased the individual limit on MSRs and ~~evaluate overall performance. The Company believes these non-GAAP financial measures provide useful information~~temporary difference DTAs to 25 percent of CET1 and eliminated the aggregate 15 percent CET1 deduction threshold for ~~investors, securities analysts~~MSRs and ~~others because they provide~~temporary difference DTAs.

On March 27, 2020, U.S. banking regulators issued an interim final rule to delay for two years the initial adoption impact of CECL on regulatory capital in response to COVID-19 followed by a ~~tool~~three-year transition period. During the two-year delay we will add back to ~~evaluate~~CET1 capital 100 percent of the ~~Company’s performance~~initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on ~~an ongoing basis and compared to its peers.~~January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period.

~~The~~ For the period presented, the following table ~~provides a reconciliation of non-GAAP financial measures.~~sets forth our capital ratios as well as our excess capital over well-capitalized minimums.


Flagstar Bancorp	Actual			Well-Capitalized Under Prompt Corrective Action Provisions			Excess Capital Over Well-Capitalized Minimum (1)
	Amount	Ratio		Amount	Ratio		Capital Simplification
	(Dollars in millions)
September 30, 2020
Tier 1 leverage capital (to adjusted avg. total assets)	2,256	8.04	%	1,403	5.0	%	$	853
Common equity Tier 1 capital (to RWA)	2,016	9.21	%	1,422	6.5	%	594
Tier 1 capital (to RWA)	2,256	10.31	%	1,751	8.0	%	505
Total capital (to RWA)	2,471	11.29	%	2,188	10.0	%	283

March 31, 2020 December 31, 2019 March 31, 2019
(Dollars in millions)
Total stockholders' equity $ 1,842
$ 1,788
$ 1,574
Less: Goodwill and intangible assets 167
170
182
Tangible book value/Tangible common equity $ 1,675
$ 1,618
$ 1,392

Number of common shares outstanding 56,729,789
56,631,236
56,480,086
Tangible book value per share $ 29.52
$ 28.57
$ 24.65

Total assets $ 26,805
$ 23,266
$ 19,445
Tangible common equity to assets ratio 6.25 % 6.95 % 7.16 %

Total average assets $ 21,150
$ 20,708
$ 16,294
Less: Average goodwill and intangible assets 169
172
187
Total average tangible assets $ 20,981
$ 20,536
$ 16,107

Three Months Ended March 31,
2020 2019
(Dollars in millions, except share data)
Net income $ 58
$ 36
Plus: Intangible asset amortization (after-tax) 3
3
Tangible net income $ 61
$ 39

Total average equity $ 1,803
$ 1,583
Less: Average goodwill and intangible assets 172
187
Total average tangible equity $ 1,631
$ 1,396

Return on average assets 0.78 % 0.79 %
Return on average tangible assets 0.78 % 0.80 %

Return on average common equity 9.82 % 9.16 %
Return on average tangible common equity 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~~(1)Excess capital is the ~~judgment, estimates and assumptions are critical to an understanding of our Consolidated Financial Statements~~difference between the actual capital ratios under current simplification rules and the ~~Notes, are described in Item 1. These policies relate to: (a)~~well-capitalized minimum ratio, multiplied by the ~~determination of our ACL and (b) fair value measurements. We believe the judgment, estimates and assumptions used~~relevant asset base.

As presented in the ~~preparation~~table above, our constraining capital ratio is our total capital to risk weighted assets at 11.29 percent. It would take a $283 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".

As of September 30, 2020, we had $323 million in MSRs, $89 million in DTAs arising from temporary differences and no material investments in unconsolidated financial institutions or minority interest which drive differences between our ~~Consolidated Financial Statements and the Notes are appropriate given the factual circumstances at the time. However, given the sensitivity of~~current capital ratios. For additional information on 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.capital requirements, see Note 14 - Regulatory Matters.

Allowance for Credit Losses

~~On January 1,~~The following tables present the changes in the allowance for credit losses balance for the three and nine months ended September 30, 2020:


	Three Months Ended September 30, 2020
	Residential First Mortgage		Home Equity		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total LHFI Portfolio (1)		Unfunded Commitments		Total ACL
	(Dollars in millions)
Beginning allowance balance	$	60	$	28	$	34	$	83	$	23	$	1	$	229	$	21	$	250
Provision (benefit) for credit losses:
Loan volume	(4)		(1)		3		—		(4)		1		(5)		4		(1)
Economic forecast (2)	(3)		(3)		(1)		—		—		—		(7)		—		(7)
Credit (3)	(7)		1		(4)		13		12		—		15		—		15
Qualitative factor adjustments (4)	6		3		5		(7)		11		3		21		—		21
Charge-offs	(2)		(1)		(1)		—		—		—		(4)		—		(4)
Provision for charge-offs	2		1		1		—		—		—		4		—		4
Recoveries	—		1		1		—		—		—		2		—		2
Ending allowance balance	$	52	$	29	$	38	$	89	$	42	$	5	$	255	$	25	$	280
(1) Excludes loans carried under the fair value option. (2) Includes changes in the lifetime loss rate based on current economic forecasts as compared to forecasts used in the prior quarter. (3) Includes changes in the probability of default and severity of default based on current borrower and guarantor characteristics, as well as individually evaluated reserves. (4) Includes $10 million of unallocated reserve attributed to various portfolios for presentation purposes.


	Nine Months Ended September 30, 2020
	Residential First Mortgage		Home Equity		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total LHFI Portfolio (1)		Unfunded Commitments		Total ACL
	(Dollars in millions)
Beginning balance ALLL	$	22	$	14	$	6	$	38	$	22	$	5	$	107	$	3	$	110
Impact of adopting ASC 326	25		12		10		(14)		(6)		(4)		23		7		30
Beginning allowance balance	47		26		16		24		16		1		130		10		140
Provision (benefit) for credit losses:
Loan volume	(8)		(2)		8		2		(1)		1		—		4		4
Economic forecast (2)	11		—		5		15		(3)		—		28		11		39
Credit (3)	(4)		(1)		2		23		12		—		32		—		32
Qualitative factor adjustments (4)	6		3		5		25		18		3		60		—		60
Charge-offs	(5)		(3)		(4)		—		—		—		(12)		—		(12)
Provision for charge-offs	5		3		4		—		—		—		12		—		12
Recoveries	—		3		2		—		—		—		5		—		5
Ending allowance balance	$	52	$	29	$	38	$	89	$	42	$	5	$	255	$	25	$	280

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

(2) Includes changes in the lifetime loss rate based on current economic forecasts as compared to forecasts used in the prior quarter.

(3) Includes changes in the probability of default and severity of default based on current borrower and guarantor characteristics, as well as individually evaluated reserves.

(4) Includes $10 million of unallocated reserve attributed to various portfolios for presentation purposes.

The allowance for credit losses was $280 millionat September 30, 2020, compared to $250 million at June 30, 2020. The increase in the allowance is primarily reflective of changes in our economic forecast and judgment we applied related to those forecasts and underlying borrower credit as a result of the ongoing COVID-19 pandemic between June 30, 2020 and September 30, 2020. We utilized the Moody’s September scenarios in our forecast: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. The resulting composite forecast for the third quarter 2020 was roughly equivalent to the scenario used in the second quarter 2020. Unemployment ends the year at 10 percent and recovers only slightly in 2021. GDP recovers only slightly by the end of the year from current levels and does not return to near pre-COVID level until 2024. HPI decreases 2 percent from mid-2020 through 2021. We judgmentally increased the qualitative reserves by $21 million, guided by the model output from Moody's adverse scenario, our judgment relating to industries and borrowers we believe could be more exposed to the stressful conditions in our forecast, uncertainty related to loans in forbearance and our judgment regarding economic uncertainty including the impact from the upcoming national election and additional government stimulus.

The allowance as a percentage of LHFI was 1.7 percent at September 30, 2020 compared to 0.9 percent at December 31, 2019. Excluding warehouse, the allowance as a percentage of LHFI was 3.1 percent at September 30, 2020 compared to 1.1 percent at December 31, 2019. The increase in the allowance, as a percentage of LHFI is reflective of the additional increases to the allowance to reflect the change in economic and credit forecast used during that period. At September 30, 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 requireshad a ~~reserve to be recorded for lifetime expected losses~~2.8 percent and 1.3 percentallowance coverage on our ~~unfunded commitments. Therefore, we record an~~consumer loan portfolio and our commercial loan portfolio, respectively.


	September 30, 2020
	LHFI Portfolio (1)		Percent of Portfolio		Allowance Amount (2)		Allowance as a Percent of Loan Portfolio		Weighted Average Loan Life
Consumer loans
Residential first mortgage	$	2,459	14.9	%	$	52	2.1	%	4
Home equity	922		5.6	%	29		3.1	%	3
Other consumer	973		5.9	%	39		4.0	%	3
Total consumer loans	4,354		26.5	%	120		2.8	%
Commercial loans
Commercial real estate	$	2,996	18.2	%	$	106	3.5	%	2
Commercial and industrial	1,520		9.2	%	47		3.1	%	2
Warehouse lending	7,591		46.1	%	7		0.1	%	—
Total commercial loans	12,107		73.5	%	160		1.3	%
Total consumer and commercial loans	$	16,461	100.0	%	$	280	1.7	%
Total consumer and commercial loans excluding warehouse	$	8,870	53.9	%	$	273	3.1	%

(1) Excludes loans carried under the fair value option

(2) Includes allowance for loan losses ~~on relevant financial assets~~ and a reserve for unfunded commitments


	December 31, 2019
	LHFI Portfolio (1)		Percent of Portfolio		Allowance Amount (2)		Allowance as a Percent of Loan Portfolio		Weighted Average Loan Life
Consumer loans
Residential first mortgage	$	3,145	26.0	%	$	22	0.7	%	5
Home equity	1,021		8.4	%	14		1.4	%	3
Other consumer	729		6.0	%	6		0.8	%	2
Total consumer loans	4,895		40.4	%	42		0.9	%
Commercial loans
Commercial real estate	$	2,828	23.3	%	$	40	1.4	%	2
Commercial and industrial	1,634		13.5	%	23		1.4	%	1
Warehouse lending	2,760		22.8	%	5		0.2	%	—
Total commercial loans	7,222		59.6	%	68		0.9	%
Total consumer and commercial loans	$	12,117	100.0	%	$	110	0.9	%
Total consumer and commercial loans excluding warehouse	$	9,357	77.2	%	$	105	1.1	%

(1) Excludes loans carried under the fair value option

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

Market Risk

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 ALCO, which is composed of our executive officers and certain members of other management, monitors interest rate risk on an ongoing basis in accordance with policies approved by our ~~consolidated statements~~board of ~~financial position, collectively~~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.

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 ~~allowance~~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, 2020
Scenario	Net interest income		$ Change		% Change
	(Dollars in millions)
100	$	677	$	80	13.5	%
Constant	$	596	$	—	—	%
(100)	N/M		N/M		N/M
December 31, 2019
Scenario	Net interest income		$ Change		% Change
	(Dollars in millions)
100	$	592	$	34	6.0	%
Constant	$	559	$	—	—	%
(100)	$	520	$	(39)	(6.9)	%

Economic value of equity

Management also utilizes 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 ~~credit losses.~~the market value of off-balance sheet instruments. The assessment of both the short-term earnings (Net Interest Income Sensitivity) and long-term valuation (EVE) approaches, rather than Net Interest Income Sensitivity alone provides a more comprehensive analysis of interest rate risk exposure.


September 30, 2020									December 31, 2019
Scenario	EVE		EVE %		$ Change		% Change		Scenario	EVE		EVE %		$ Change		% Change		Policy Limits
(Dollars in millions)
300	$	3,643	12.4	%	$	710	24.2	%	300	$	3,147	13.6	%	$	150	5.0	%	22.5	%
200	$	3,495	11.9	%	$	562	19.2	%	200	$	3,152	13.7	%	$	155	5.2	%	15.0	%
100	$	3,287	11.2	%	$	354	12.1	%	100	$	3,103	13.5	%	$	106	3.5	%	7.5	%
Current	$	2,933	10.0	%	$	—	—	%	Current	$	2,997	13.0	%	$	—	—	%	—	%
(100)	N/M		N/M		N/M		N/M		(100)	$	2,832	12.3	%	$	(165)	(5.5)	%	7.5	%

Our ~~estimate~~balance sheet exhibits asset sensitivity in various interest rate scenarios. The increase in EVE as rates raise is the result of ~~lifetime~~the amount of assets that would be expected ~~credit losses includes~~to reprice exceeding the amount of liabilities repriced. This increased as of September 30, 2020 compared to December 31, 2019 due to the addition of pay fixed interest rate swaps. At September 30, 2020 and December 31, 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 closing 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 closing 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. For further information, see Note 8 - Derivative Financial Instruments and Note 16 - Fair Value Measurements.

Mortgage Servicing Rights (MSRs)

Liquidity Risk

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, operating expenses and the payment of cash dividends which were increased to $0.05 per share in the first quarter 2020. The Company holds $246 million of senior notes which are scheduled to mature on July 15, 2021. At September 30, 2020, the Company held $305 million of cash on deposit at the Bank, for future cash outflows for an

amount sufficient to service the senior notes, repay the senior notes at maturity, pay dividends and cover the operating expenses of the Company.

The OCC and the FRB regulate all capital distributions made by the Bank, directly or indirectly, to the holding company, including dividend payments. Whether an application or notice is required is based on a number of factors including whether the institution qualifies for expedited treatment under the OCC rules and regulations or if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years, or the Bank would not be at least adequately capitalized following the dividend. Additional restrictions on dividends apply if the Bank fails the QTL test. As of September 30, 2020, the Bank is in compliance with the QTL test. At September 30, 2020, the Bank is able to pay dividends to the holding company of approximately $249 million without submitting an application to the OCC and remain well capitalized.

Bank Liquidity

Further, other sources of liquidity include our LHFS portfolio and unencumbered investment securities. We primarily originate agency-eligible LHFS and therefore the majority of new residential first mortgage loan closings are readily convertible to cash, either by selling them as part of our monthly agency sales, RMBS, private party whole loan sales, or by pledging them to the FHLB and borrowing against them. In addition, we have the ability to sell unencumbered investment securities or use them as collateral. At September 30, 2020, we had $2.5 billion available in unencumbered investment securities.

As governed and defined by our 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 ~~quantitative models~~repurchase agreements, reducing closings, making changes to warehouse funding facilities, or borrowing from the discount window.

Management is not aware of any events that ~~incorporate forward looking macroeconomic scenarios applied over~~are reasonably likely to have a ~~reasonable~~material adverse effect on our liquidity.

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


	September 30, 2020		December 31, 2019		Change
	(Dollars in millions)
Retail deposits	$	9,747	$	9,164	$	583
Government deposits	1,748		1,213		535
Wholesale deposits	1,034		633		401
Custodial deposits	7,416		4,136		3,280
Total deposits	19,945		15,146		4,799
FHLB advances and other short-term debt	3,426		4,815		(1,389)
Other long-term debt	493		496		(3)
Total borrowed funds	3,919		5,311		(1,392)
Total funding	$	23,864	$	20,457	$	3,407

The following table presents certain liquidity sources and ~~supportable forecast period before reverting~~borrowing capacity as of the dates indicated:


	September 30, 2020		December 31, 2019		Change
	(Dollars in millions)
Federal Home Loan Bank advances
Outstanding advances	$	2,755	$	4,345	$	(1,590)

Total used borrowing capacity	$	2,755	$	4,345	$	(1,590)
Borrowing capacity:
Collateralized borrowing capacity	$	3,057	$	2,345	$	712
Line of credit	30		30		—
Total unused borrowing capacity	$	3,087	$	2,375	$	712

FRB discount window
Collateralized borrowing capacity	$	1,745	$	758	$	987

Unencumbered investment securities
Agency - Commercial (1)	$	1,399	$	1,257	$	142
Agency - Residential (1)	956		1,180		(224)
Municipal obligations	25		26		(1)
Corporate debt obligations	70		77		(7)
Other	1		1		—
Total unencumbered investment securities	$	2,451	$	2,541	$	(90)

(1) These are not currently pledged to ~~historical averages over~~ the ~~remaining contractual life, adjusted~~FHLB but are eligible to be pledged, at our discretion.

Deposits

The following table presents the composition of our deposits:


	September 30, 2020				December 31, 2019
	Balance		% of Deposits		Balance		% of Deposits		Change
	(Dollars in millions)
Retail deposits
Branch retail deposits
Savings accounts	$	3,347	16.8	%	$	3,030	20.0	%	$	317
Certificates of deposit/CDARS (1)	1,525		7.6	%	2,353		15.5	%	(828)
Demand deposit accounts	1,573		7.9	%	1,318		8.7	%	255
Money market demand accounts	487		2.4	%	495		3.3	%	(8)
Total branch retail deposits	6,932		34.8	%	7,196		47.5	%	(264)
Commercial deposits (2)
Demand deposit accounts	2,185		11.0	%	1,438		9.5	%	747
Savings accounts	432		2.2	%	342		2.3	%	90
Money market demand accounts	198		1.0	%	188		1.2	%	10
Total commercial retail deposits	2,815		14.1	%	1,968		13.0	%	847
Total retail deposits	$	9,747	48.9	%	$	9,164	60.5	%	$	583
Government deposits
Savings accounts	$	830	4.2	%	$	495	3.3	%	$	335
Demand deposit accounts	518		2.6	%	360		2.4	%	158
Certificates of deposit/CDARS (1)	400		2.0	%	358		2.4	%	42
Total government deposits	1,748		8.8	%	1,213		8.0	%	535
Custodial deposits (3)	7,416		37.2	%	4,136		27.3	%	3,280
Wholesale deposits	1,034		5.2	%	633		4.2	%	401
Total deposits (4)	$	19,945	100.0	%	$	15,146	100.0	%	$	4,799

(1)The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.2 billion and $1.7 billion at September 30, 2020 and December 31, 2019, respectively.

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

(3)Represents investor custodial accounts and escrows controlled by us in connection with loans serviced or subserviced for ~~expected prepayments and borrower controlled extension options. These macroeconomic scenarios include variables~~others that have ~~historically~~ been ~~key drivers of increases~~placed on deposit with the Bank.

(4)Total exposure related to uninsured deposits over $250,000 was approximately $5.6 billion and ~~decreases~~$3.6 billion at September 30, 2020 and December 31, 2019, respectively.

Total deposits increased $4.8 billion, or 32 percent, at September 30, 2020 compared to December 31, 2019, primarily driven by growth in ~~credit losses. These variables include, but~~our servicing business which resulted in a $3.3 billion increase in custodial deposits.

We utilize local governmental agencies and other public units as an additional source for deposit funding. We are not ~~limited~~required to ~~unemployment rates, real estate prices,~~hold collateral against our government deposits from Michigan government entities as they are covered by the Michigan Business and ~~gross domestic product levels.~~Growth Fund. At September 30, 2020, we were required to hold collateral for our government deposits in California that were in excess of $250,000. The ~~scenarios that are chosen each quarter~~total of collateral held for California at September 30, 2020 was $100 million. In Indiana, Wisconsin and ~~the amount of weighting given~~Ohio, we may be required to ~~each scenario depend~~hold collateral against our government deposits based 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~~the size of individual deposits and external bank ratings. At September 30, 2020, collateral held on government deposits in ~~risk rating changes~~these states was $10 million. At September 30, 2020, government deposit accounts included $0.4 billion of certificates of deposit with maturities typically less than one year and $1.3 billion of checking and savings accounts.

FHLBAdvances

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 ~~portfolio, borrower delinquencies, changes in FICO scores~~real estate loans. As of September 30, 2020, our Board of Directors authorized and approved a line of credit with the FHLB of up to $10 billion, which is further limited based on our total assets and qualified collateral, as determined by the FHLB. At September 30, 2020, we had $2.8 billion of advances outstanding and an additional $3.1 billion of collateralized borrowing capacity available at the FHLB.

Federal Reserve Discount Window

We have arrangements with the FRB of Chicago to borrow from its discount window. The discount window is a borrowing facility that we may utilize for short-term liquidity needs arising from special or ~~changes in LTVs in~~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.

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 ~~consumer portfolio. In addition, while~~other funding sources. At September 30, 2020 we had $671 million of borrowings outstanding under this source of funding. Additional borrowing capacity under this and other sources of funding can vary depending on market conditions.

Debt

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

Operational Risk

Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events which may include vendor failures, fraudulent activities, disasters, and security risks. We continuously strive to adapt our ~~estimated impact~~system of ~~COVID-19 into~~internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk.

Loans with government guarantees

Our loans with government guarantees portfolio totaled $2.5 billion at September 30, 2020, as compared to $0.7 billion at December 31, 2019. GNMA has granted borrowers with an option to seek forbearances on their mortgage repayments. $2.9 billion of GNMA loans are in forbearance as of September 30, 2020. When a GNMA loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) the loan is required to be re-recognized on the balance sheet by the MSR owner. These loans are recorded in loans with government guarantees, and the liability to repurchase the loans is recorded in other liabilities on the consolidated statements of financial condition. This resulted in $1.8 billion of repurchase options as of September 30, 2020, a $1.7 billion increase from December 31, 2019. We have elected not to exercise these repurchase options as of September 30, 2020 because loans are not able to be modified and re-sold during the forbearance period. Our right to repurchase these loans continues as long as they remain unpaid for three consecutive months. At the prudent time, we intend to repurchase the loans which we believe will be accretive to net income by modifying and re-selling the loans or utilizing the partial claims process.

For further information, see Note 5 - Loans with Government Guarantees and the Credit Risk - Payment Deferrals section of the MD&A.

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 $7 million and $5 million at September 30, 2020 and December 31, 2019, respectively.

Capital

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, ~~losses,~~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 8.04 percent at September 30, 2020 providing a 853 basis point stress buffer above the ~~ultimate~~minimum level needed to be considered “well-capitalized.” Additionally, total risk-based capital to RWA was 11.29 percent at September 30, 2020 providing a 283 basis point buffer above the minimum level needed to be considered "well-capitalized".

Dodd-Frank Act Section 171, commonly known as the Collins Amendment, established minimum Tier 1 leverage and

Regulatory Capital

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 ~~is still unknown, including how long economic activities~~followed by a three-year transition period. During the two-year delay we will ~~be impacted and what effect~~add back to CET1 capital 100 percent of the ~~unprecedented levels~~initial adoption impact of ~~government fiscal and monetary actions will have on~~CECL plus 25 percent of 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 significantcumulative quarterly changes in the allowance for credit ~~losses. Our process for determining~~losses (i.e., quarterly transitional amounts). After two years, starting on January 1, 2022, the ~~allowance for credit losses~~quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period.

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


Flagstar Bancorp	Actual			Well-Capitalized Under Prompt Corrective Action Provisions			Excess Capital Over Well-Capitalized Minimum (1)
	Amount	Ratio		Amount	Ratio		Capital Simplification
	(Dollars in millions)
September 30, 2020
Tier 1 leverage capital (to adjusted avg. total assets)	2,256	8.04	%	1,403	5.0	%	$	853
Common equity Tier 1 capital (to RWA)	2,016	9.21	%	1,422	6.5	%	594
Tier 1 capital (to RWA)	2,256	10.31	%	1,751	8.0	%	505
Total capital (to RWA)	2,471	11.29	%	2,188	10.0	%	283

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

As presented in the ~~Credit Risk section~~table above, our constraining capital ratio is our total capital to risk weighted assets at 11.29 percent. It would take a $283 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".

As of September 30, 2020, we had $323 million in MSRs, $89 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. For additional information on our capital requirements, see Note 14 - Regulatory Matters.

Use of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this report includes certain non-GAAP financial measures. 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 ~~MD&A~~Company.

Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and ~~Note 4 - Loans Held~~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 ~~Investment.~~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 tangible common equity and adjusted net interest margin. The Company believes that tangible book value per share, tangible common equity to assets ratio, return on average tangible common equity and adjusted net interest margin 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 they 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, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019
	(Dollars in millions)
Total stockholders' equity	$	2,195		$	1,971		$	1,842		$	1,788		$	1,734
Less: Goodwill and intangible assets	160			164			167			170			174
Tangible book value/Tangible common equity	$	2,035		$	1,807		$	1,675		$	1,618		$	1,560

Number of common shares outstanding	57,150,470			56,943,979			56,729,789			56,631,236			56,510,341
Tangible book value per share	$	35.60		$	31.74		$	29.52		$	28.57		$	27.62

Total assets	$	29,476		$	27,468		$	26,805		$	23,266		$	22,048
Tangible common equity to assets ratio	6.90		%	6.58		%	6.25		%	6.95		%	7.08		%


	Three Months Ended,						Nine Months Ended,
	September 30, 2020			June 30, 2020			September 30, 2020			September 30, 2019
	(Dollars in millions, except share data)
Net income	$	222		$	116		$	384		$	160
Plus: Intangible asset amortization, net of tax	3			3			7			10
Tangible net income	$	225		$	119		$	391		$	170

Total average equity	$	2,141		$	1,977		$	1,991		$	1,658
Less: Average goodwill and intangible assets	162			165			165			184
Total average tangible equity	$	1,979		$	1,812		$	1,826		$	1,474

Return on average common equity	41.54		%	23.47		%	25.71		%	12.90		%
Return on average tangible common equity	45.42		%	26.16		%	28.58		%	15.30		%

Net interest margin	2.78		%	2.86		%	2.81		%	3.07		%
Adjustment to LGG loans available for repurchase	0.16		%	0.02		%	0.07		%	—		%
Adjusted net interest margin	2.94		%	2.88		%	2.88		%	3.07		%

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 ACL and (b) fair value measurements. We believe the judgment, estimates and assumptions used in the preparation of our Consolidated Financial Statements and the Notes are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements and the Notes to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations and/or financial condition.

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

Forward – Looking Statements

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 to Part I, of our Annual Report on Form 10-K for the year ended December 31, 2019, which are incorporated by reference herein, and Item 1A. to Part II, of this Quarterly Report on Form 10-Q ~~which are incorporated by reference herein.~~for the quarter ended September 30, 2020.

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.

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 (3) (4)
	(Dollars in millions)
September 30, 2020
Consumer loans
Residential first mortgage	$	5	$	3	$	30	$	38	$	2,434	$	2,472
Home equity	1		0		4		5		919		924
Other	3		1		2		6		967		973
Total consumer loans	9		4		36		49		4,320		4,369
Commercial loans
Commercial real estate	0		0		0		0		2,996		2,996
Commercial and industrial	0		0		10		10		1,510		1,520
Warehouse lending	0		0		0		0		7,591		7,591
Total commercial loans	0		0		10		10		12,097		12,107
Total loans (2)	$	9	$	4	$	46	$	59	$	16,417	$	16,476
December 31, 2019
Consumer loans
Residential first mortgage	$	5	$	4	$	21	$	30	$	3,124	$	3,154
Home Equity	1		0		4		5		1,019		1,024
Other	3		1		1		5		724		729
Total consumer loans	9		5		26		40		4,867		4,907
Commercial loans
Commercial real estate	0		0		0		0		2,828		2,828
Commercial and industrial	0		0		0		0		1,634		1,634
Warehouse lending	0		0		0		0		2,760		2,760
Total commercial loans	0		0		0		0		7,222		7,222
Total loans (2)	$	9	$	5	$	26	$	40	$	12,089	$	12,129

30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
Greater Past
Due (1)
Total
Past Due
Current Total LHFI
(Dollars in millions)
March 31, 2020
Consumer loans
Residential first mortgage $ 8
$ 3
$ 24
$ 35
$ 2,929
$ 2,964
Home equity 2
1
3
6
1,022
1,028
Other 4
1
2
7
851
858
Total consumer loans 14
5
29
48
4,802
4,850
Commercial loans
Commercial real estate 6
—
—
6
3,086
3,092
Commercial and industrial (1)
1
—
—
1
1,879
1,880
Warehouse lending —
—
—
—
3,973
3,973
Total commercial loans 7
—
—
7
8,938
8,945
Total loans (2)
$ 21
$ 5
$ 29
$ 55
$ 13,740
$ 13,795
December 31, 2019
Consumer loans
Residential first mortgage $ 5
$ 4
$ 21
$ 30
$ 3,124
$ 3,154
Home Equity 1
—
4
5
1,019
1,024
Other 3
1
1
5
724
729
Total consumer loans 9
5
26
40
4,867
4,907
Commercial loans
Commercial real estate —
—
—
—
2,828
2,828
Commercial and industrial —
—
—
—
1,634
1,634
Warehouse lending —
—
—
—
2,760
2,760
Total commercial loans —
—
—
—
7,222
7,222
Total loans (2)
$ 9
$ 5
$ 26
$ 40
$ 12,089
$ 12,129
(1)Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.


~~(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 of past due loans accounted for under the fair value option for both March 31, 2020 and December 31, 2019, respectively.~~

(2)Includes $8 million and $4 million of past due loans accounted for under the fair value option as of September 30, 2020 and December 31, 2019, respectively.

(3)Collateral dependent loans totaled $74 million at September 30, 2020 and $54 million at December 31, 2019, respectively. The majority of these loans are secured by real estate.

(4)The interest income recognized on impaired loans was $2 million and less than $1 million at September 30, 2020 and December 31, 2019, respectively.

Interest income is recognized on nonaccrual loans using a cash basis method. ~~Interest~~The interest that would have been accrued on impaired loans was $2 million and less than $1 million ~~during both the three months and twelve months ended March 31,~~at September 30, 2020 and December 31, 2019, respectively. At ~~March 31,~~September 30, 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~~Consolidated Statements of Financial Condition and was ~~$20~~$25 million as of ~~March 31,~~September 30, 2020, compared to $3 million as of ~~March~~December 31, 2019. The increase in the reserve is reflective of the adoption of CECL which ~~requires~~required us to record an allowance for our estimate of lifetime losses and an increase due to changes in the economic ~~forecast~~forecasts 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")~~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, 2019 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~~customers principal and interest payment deferrals and extensions. We considered these programs in the context of whether or not the ~~restructuring~~short-term modifications of these ~~contracts~~loans would constitute a ~~Troubled Debt Restructuring (TDR).~~TDR. We considered the CARES Act, interagency guidance and related guidance from the FASB, which provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not required to be accounted for as TDRs. As a result, we have determined that these loans are not TDRs.

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


	TDRs
	Performing		Nonperforming		Total
	(Dollars in millions)
September 30, 2020
Consumer loans
Residential first mortgage	$	20	$	7	$	27
Home equity	14		2		16
Commercial Real Estate	5		0		5
Total TDRs (1)(2)	$	39	$	9	$	48
December 31, 2019
Consumer loans
Residential first mortgage	$	20	$	8	$	28
Home Equity	18		2		20
Total TDRs (1)(2)	$	38	$	10	$	48

TDRs
Performing Nonperforming Total
(Dollars in millions)
March 31, 2020
Consumer loans
Residential first mortgage $ 20
$ 8
$ 28
Home equity 17
2
19
Total TDRs (1)(2)
$ 37
$ 10
$ 47
December 31, 2019
Consumer loans
Residential first mortgage $ 20
$ 8
$ 28
Home Equity 18
2
20
Total TDRs (1)(2)
$ 38
$ 10
$ 48
(1)Allowance for loan losses on TDR loans totaled $5 million and $8 million at September 30, 2020 and December 31, 2019, respectively.

(2)Includes $2 million of TDR loans accounted for under the fair value option at September 30, 2020 and December 31, 2019.


~~(1)~~	~~Allowance for loan losses on TDR loans totaled $5 million and $8 million at March 31, 2020 and December 31, 2019, respectively.~~


~~(2)~~	~~Includes $2 million of TDR loans accounted for under the fair value option at March 31, 2020 and December 31, 2019.~~

The following table provides a summary of newly modified TDRs:


	New TDRs
	Number of Accounts	Pre-Modification Unpaid Principal Balance		Post-Modification Unpaid Principal Balance (1)
	(Dollars in millions)
Three Months Ended September 30, 2020
Residential first mortgages	1	$	0	$	0
Home equity (2)(3)	1	0		0
Consumer	1	0		0

Total TDR loans	3	$	0	$	0
Three Months Ended September 30, 2019
Residential first mortgages	4	$	1	$	1
Total TDR loans	4	$	1	$	1

Nine Months Ended September 30, 2020
Residential first mortgages	6	$	1	$	1
Home equity (2)(3)	3	0		0
Consumer	2	0		0
Commercial Real Estate	1	5		5
Total TDR loans	12	$	6	$	6
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

(1)

New TDRs
Number of Accounts Pre-Modification Unpaid Principal Balance Post-Modification Unpaid Principal Balance (1)
(Dollars in millions)
Three Months Ended March 31, 2020
Residential first mortgages 5
$ 1
$ 1
Home equity (2)(3)
2
—
—
Consumer 1
—
—
Total TDR loans 8
$ 1
$ 1
Three Months Ended March 31, 2019
Residential first mortgages 2
$ —
$ —
Home equity (2)(3)
2
—
—
Total TDR loans 4
$ —
$ —

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


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


~~(2)~~	~~Home equity post-modification UPB reflects write downs.~~


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

(2)Home equity post-modification UPB reflects write downs.

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

There ~~was 1 residential first mortgage~~were no loans modified in the previous 12 months that subsequently defaulted during the three and nine months ended March 31, 2020. There were 0 residential first mortgage loans modified in the previous 12 months that subsequently defaulted during the three months ended March 31, 2019. The increase in allowance at modification was less than $1 million for the three months ended March 31,September 30, 2020 ~~and March 31,~~or September 30, 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 interest income recognized on impaired loans was less than $1 million for the three months ended March 31, 2020 and 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. 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~~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:



													Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis		Total		December 31, 2019
	Term Loans
	Amortized Cost Basis by Closing Year
As of September 30, 2020	2020		2019		2018		2017		2016		Prior
Consumer Loans	(Dollars in millions)
Residential First Mortgage
Pass	$	256	$	630	$	272	$	348	$	308	$	483	$	105	$	8	$	2,410	$	3,107
Watch	0		1		0		2		0		16		0		0		19		23
Substandard	0		4		6		2		0		17		0		1		30		15
Home Equity
Pass	6		37		16		7		2		12		799		29		908		1,002
Watch	0		0		0		0		0		12		0		0		12		16
Substandard	0		0		0		0		0		1		1		0		2		3
Other Consumer
Pass	226		345		165		4		2		7		218		5		972		727
Watch	0		0		0		0		0		0		0		0		0		1
Substandard	0		0		1		0		0		0		0		0		1		1
Total Consumer Loans (1)	$	488	$	1,017	$	460	$	363	$	312	$	548	$	1,123	$	43	$	4,354	$	4,895

(1)Excludes loans carried under the fair value option

Term Loans Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis Total
Amortized Cost Basis by Origination Year
As of March 31, 2020 2020 2019 2018 2017 2016 Prior
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

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

—
Pass 68
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:


															Revolving Loans Converted to Term Loans Amortized Cost Basis
	FICO Band												Revolving Loans Amortized Cost Basis				Total
	Amortized Cost Basis by Closing Year
As of September 30, 2020	2020		2019		2018		2017		2016		Prior
Consumer Loans	(Dollars in millions)
Residential First Mortgage
>750	$	151	$	323	$	141	$	241	$	228	$	272	$	61	$	2	$	1,419
700-750	79		212		106		95		73		148		30		5		748
<700	26		100		31		16		7		96		14		2		292
Home Equity
>750	2		11		6		3		0		7		358		4		391
700-750	2		14		5		3		1		9		319		14		367
<700	2		12		5		1		1		9		123		11		164
Other Consumer
>750	160		220		87		1		0		5		200		5		678
700-750	61		114		65		3		2		2		18		0		265
<700	5		11		14		0		0		0		0		0		30
Total Consumer Loans (1)	$	488	$	1,017	$	460	$	363	$	312	$	548	$	1,123	$	43	$	4,354

(1)Excludes loans carried under the fair value option

FICO Band Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis Total
Amortized Cost Basis by Origination Year
As of March 31, 2020 2020 2019 2018 2017 2016 Prior
Consumer Loans
Residential first mortgage
>750 $ 40
$ 412
$ 202
$ 337
$ 316
$ 399
$ 68
$ 2
$ 1,776
700-750 35
257
146
132
92
192
35
1
890
<700 9
109
34
17
8
105
14
2
298
Home Equity
>750 1
15
9
4
1
10
400
3
443
700-750 2
18
8
5
1
14
348
7
403
<700 2
13
7
2
1
10
144
3
182
Other Consumer
>750 46
250
104
3
2
3
93
1
502
700-750 20
128
75
2
1
1
59
1
287
<700 2
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:


															Revolving Loans Converted to Term Loans Amortized Cost Basis
	LTV Band												Revolving Loans Amortized Cost Basis				Total
	Amortized Cost Basis by Closing Year
As of September 30, 2020	2020		2019		2018		2017		2016		Prior
Consumer Loans	(Dollars in millions)
Residential first mortgage
>90	$	53	$	286	$	142	$	39	$	3	$	21	$	0	$	0	$	544
71-90	122		213		77		123		82		267		0		0		884
55-70	64		78		29		99		121		140		0		0		531
<55	17		58		30		91		102		88		105		9		500
Home Equity
>90	0		0		0		2		1		11		1		0		15
71-90	4		29		12		4		1		10		612		21		693
<=70	2		8		4		1		0		4		187		8		214
Total (1)	$	262	$	672	$	294	$	359	$	310	$	541	$	905	$	38	$	3,381

LTV Band Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis Total
Amortized Cost Basis by Origination Year
As of March 31, 2020 2020 2019 2018 2017 2016 Prior
Consumer Loans
Residential first mortgage
>90 $ 22
$ 321
$ 189
$ 49
$ 4
$ 23
$ —
$ —
$ 608
71-90 37
275
112
170
110
326
—
—
1,030
55-70 18
109
41
146
158
209
—
—
681
<55 8
73
40
121
144
137
117
5
645
Home Equity

>90 —
—
—
1
1
15
—
—
17
71-90 3
35
17
8
2
13
478
5
561
<=70 1
11
6
2
1
7
414
8
450
Total $ 89
$ 824
$ 405
$ 497
$ 420
$ 730
$ 1,009
$ 18
$ 3,992
(1)Excludes loans carried under the fair value option

Commercial Loans

Risk 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.

Based on the most recent analysis performed, the amortized cost basis, by risk category for each class of loans within the commercial portfolio is as follows:

Term Loans Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis Total
Amortized Cost Basis by Origination Year
As of March 31, 2020 2020 2019 2018 2017 2016 Prior
Commercial Loans
Commercial real estate
Pass $ 166
$ 999
$ 519
$ 546
$ 355
$ 278
$ (1 ) $ —
$ 2,862
Watch 20
13
71
42
38
34
—
—
218
Special mention —
—
7
—
—
—
—
—
7
Substandard —
—
—
5
—
—
—
—
5
Commercial and industrial
Pass 236
614
277
332
184
114
24
—
1,781
Watch 1
6
6
42
—
1
1
—
57
Special mention —
11
18
9
—
—
—
—
38
Substandard —
—
—
4
—
—
—
—
4
Warehouse
Pass —
—
—
—
—
—
3,720
—
3,720
Watch —
—
—
—
—
—
222
—
222
Special mention —
—
—
—
—
—
31
—
31
Substandard —
—
—
—
—
—
—
—
—
Total commercial loans $ 423
$ 1,643
$ 898
$ 980
$ 577
$ 427
$ 3,997
$ —
$ 8,945



	Term Loans												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis		Total		December 31, 2019
	Amortized Cost Basis by Closing Year
As of September 30, 2020	2020		2019		2018		2017		2016		Prior
Commercial Loans	(Dollars in million)
Commercial real estate
Pass	$	249	$	978	$	466	$	452	$	325	$	239	$	(1)	$	0	$	2,708	$	2,794
Watch	20		14		81		44		28		31		0		0		218		24
Special mention	4		9		16		0		10		0		0		0		39		5
Substandard	0		3		3		25		0		0		0		0		31		5
Commercial and industrial
Pass	212		494		185		188		107		116		20		0		1,322		1,533
Watch	2		46		26		25		0		1		0		0		100		72
Special mention	2		13		13		17		0		5		0		0		50		24
Substandard	21		1		16		10		0		0		0		0		48		5
Warehouse
Pass	0		0		0		0		0		0		7,381		0		7,381		2,556
Watch	0		0		0		0		0		0		195		0		195		189
Special mention	0		0		0		0		0		0		15		0		15		15
Substandard	0		0		0		0		0		0		0		0		0		0
Total commercial loans	$	510	$	1,558	$	806	$	761	$	470	$	392	$	7,610	$	0	$	12,107	$	7,222

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. When a GNMA loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) the loan is required to be re-recognized on the balance sheet by the MSR owner. These loans are recorded in loans with government guarantees, and the liability to repurchase the loans is recorded in other liabilities on the consolidated statements of financial condition. This resulted in $1.8 billion of repurchase options as of September 30, 2020, a $1.7 billion increase from December 31, 2019. 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 allowance 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 ~~$40~~$22 million and $45 million, at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.

Note 6 - Variable Interest Entities

We have 0 consolidated VIEs as of ~~March 31,~~September 30, 2020 and December 31, 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,
	2020		2019		2020		2019
	(Dollars in millions)
Balance at beginning of period	$	261	$	316	$	291	$	290
Additions from loans sold with servicing retained	85		39		209		203
Reductions from sales	0		(12)		(46)		(57)
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other (1)	(25)		(30)		(74)		(60)
Changes in estimates of fair value due to interest rate risk (1) (2)	2		(28)		(57)		(91)
Fair value of MSRs at end of period	$	323	$	285	$	323	$	285

Three Months Ended March 31,
2020 2019
(Dollars in millions)
Balance at beginning of period $ 291
$ 290
Additions from loans sold with servicing retained 40
67
Reductions from sales (36 ) (45 )
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 $ 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.~~

(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, 2020							December 31, 2019
				Fair value							Fair value
	Actual			10% adverse change		20% adverse change		Actual			10% adverse change		20% adverse change
	(Dollars in millions)
Option adjusted spread	7.61		%	$	316	$	310	5.34		%	$	284	$	280
Constant prepayment rate	11.36		%	$	300	$	279	10.59		%	$	271	$	257
Weighted average cost to service per loan	$	81.68		$	320	$	316	$	84.41		$	285	$	282

March 31, 2020 December 31, 2019
Fair value Fair value
Actual 10% adverse change 20% adverse change Actual 10% adverse change 20% adverse change
(Dollars in millions)
Option adjusted spread 5.56 % $ 220
$ 217
5.34 % $ 284
$ 280
Constant prepayment rate 12.04 % 206
191
10.59 % 271
257
Weighted average cost to service per loan $ 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,
	2020		2019		2020		2019
	(Dollars in millions)
Net return (loss) on mortgage servicing rights
Servicing fees, ancillary income and late fees (1)	$	30	$	25	$	75	$	70
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other	(25)		(30)		(74)		(60)
Changes in fair value due to interest rate risk	2		(28)		(57)		(91)
Gain on MSR derivatives (2)	4		31		68		92
Net transaction costs	1		0		(2)		(2)
Total return (loss) included in net return on mortgage servicing rights	$	12	$	(2)	$	10	$	9

Three Months Ended March 31,
2020 2019
(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.


~~(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.~~

(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,
	2020		2019		2020		2019
	(Dollars in millions)
Loan administration income on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1)	$	33	$	27	$	94	$	77
Charges on subserviced custodial balances (2)	(3)		(20)		(26)		(50)
Other servicing charges	(4)		(2)		(9)		(5)
Total income on mortgage loans subserviced, included in loan administration	$	26	$	5	$	59	$	22

(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.

Three Months Ended March 31,
2020 2019
(Dollars in millions)
Loan administration income on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1) $ 31
$ 24
Charges on subserviced custodial balances (2) (16 ) (12 )
Other servicing charges (3 ) (1 )
Total income on mortgage loans subserviced, included in loan administration $ 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~~our 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 investment securities available for sale and residential first mortgage loans held for investment 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,~~September 30, 2020, we had $4$10 million (net-of-tax) of

unrealized losses on derivatives classified as cash flow hedges recorded in accumulated other comprehensive ~~income (loss).~~income. 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$4 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 ~~March 31,~~September 30, 2020.

The following ~~table presents~~tables present the notional amount, estimated fair value and maturity of our derivative financial instruments:


	September 30, 2020 (1)
	Notional Amount		Fair Value (2)		Expiration Dates
	(Dollars in millions)
Derivatives in cash flow hedge relationships:
Assets
Interest rate swaps on custodial deposits	$	800	$	1	2026-2027
Derivatives in fair value hedge relationships:
Assets
Interest rate swaps on AFS securities	$	450	$	0	2022-2025
Interest rate swaps on HFI residential first mortgages	100		0		2024
Total derivative assets	$	550	$	0
Derivatives not designated as hedging instruments:
Assets
Futures	$	1,132	$	0	2020-2023
Mortgage-backed securities forwards	3,471		9		2020
Rate lock commitments	12,015		257		2020-2021
Interest rate swaps	724		65		2020-2030
Total derivative assets	$	17,342	$	331
Liabilities
Mortgage-backed securities forwards	$	8,008	$	37	2020
Rate lock commitments	169		0		2020-2021
Interest rate swaps and swaptions	2,030		9		2020-2050
Total derivative liabilities	$	10,207	$	46

March 31, 2020 (1)
Notional Amount Fair Value (2) Expiration Dates
(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 swaps on AFS securities 350
—
2024-2025
Total derivative assets $ 1,150
$ 2

Liabilities
Interest rate swaps on AFS securities 100
—
2022
Total derivative liabilities $ 100
$ —

Derivatives not designated as hedging instruments:
Assets
Futures $ 1,103
$ 1
2020-2023
Mortgage-backed securities forwards 232
39
2020
Rate lock commitments 8,318
169
2020
Interest rate swaps 878
66
2020-2030
Total derivative assets $ 10,531
$ 275

Liabilities
Mortgage-backed securities forwards 9,548
278
2020
Rate lock commitments 27
—
2020
Interest rate swaps and swaptions 1,505
10
2020-2050
Total derivative liabilities $ 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.


~~(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, 2019 (1)
	Notional Amount		Fair Value (2)		Expiration Dates
	(Dollars in millions)
Derivatives in fair value hedge relationships:
Assets
Interest rate swaps on FHLB advances	$	200	$	0	2020
Interest rate swaps on AFS securities	100		0		2022
Total derivative assets	$	300	$	0
Derivatives not designated as hedging instruments:
Assets
Futures	$	550	$	0	2020-2023
Mortgage-backed securities forwards	1,918		2		2020
Rate lock commitments	3,870		34		2020
Interest rate swaps	799		26		2020-2029
Total derivative assets	$	7,137	$	62
Liabilities
Mortgage-backed securities forwards	$	5,749	$	9	2020
Rate lock commitments	229		1		2020
Interest rate swaps and swaptions	1,662		8		2020-2050
Total derivative liabilities	$	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.

December 31, 2019 (1)
Notional Amount Fair Value (2) Expiration Dates
(Dollars in millions)
Derivatives in fair value hedge relationships:
Assets
Interest rate swaps on FHLB advances $ 200
$ —
2020
Interest rate swaps on AFS securities 100
—
2022
Total derivative assets $ 300
$ —

Derivatives not designated as hedging instruments:
Assets
Futures $ 550
$ —
2020-2023
Mortgage-backed securities forwards 1,918
2
2020
Rate lock commitments 3,870
34
2020
Interest rate swaps 799
26
2020-2029
Total derivative assets $ 7,137
$ 62

Liabilities
Mortgage-backed securities forwards $ 5,749
$ 9
2020
Rate lock commitments 229
1
2020
Interest rate swaps and swaptions 1,662
8
2020-2050
Total derivative liabilities $ 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 Amount Financial Instruments Cash Collateral
(Dollars in millions)
March 31, 2020
Derivatives designated as hedging instruments:
Assets
Interest rate swaps on AFS securities $ —
$ —
$ —
$ —
$ 6
Interest rate swaps on custodial deposits 2
—
2
—
14
Total derivative assets $ 2
$ —
$ 2
$ —
$ 20
Liabilities
Interest rate swaps on AFS securities $ —
$ —
$ —
$ —
$ 2
Total derivative liabilities $ —
$ —
$ —
$ —
$ 2

Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards $ 39
$ —
$ 39
$ —
$ —
Interest rate swaps 66
—
66
—
3
Futures 1
—
1
—
—
Total derivative assets $ 106
$ —
$ 106
$ —
$ 3
Liabilities
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 swaps 26
—
26
—
—
Total derivative assets $ 28
$ —
$ 28
$ —
$ —
Liabilities

Mortgage-backed securities forwards 9
—
9
—
24
Interest rate swaps (1) 8
—
8
—
39
Total derivative liabilities $ 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.


			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 Amount						Financial Instruments		Cash Collateral
	(Dollars in millions)
September 30, 2020
Derivatives designated as hedging instruments:
Assets
Interest rate swaps on AFS securities	$	0	$	0	$	0	$	0	$	4
Interest rate swaps on custodial deposits	1		0		1		0		7
Interest rate swaps on HFI residential first mortgages	0		0		0		0		1
Total derivative assets	$	1	$	0	$	1	$	0	$	12
Liabilities
Interest rate swaps on AFS securities	$	0	$	0	$	0	$	0	$	0
Total derivative liabilities	$	0	$	0	$	0	$	0	$	0

Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards	$	9	$	0	$	9	$	0	$	0
Interest rate swaps	65		0		65		0		0
Futures	0		0		0		0		0
Total derivative assets	$	74	$	0	$	74	$	0	$	0
Liabilities
Mortgage-backed securities forwards	$	37	$	0	$	37	$	0	$	39
Interest rate swaps and swaptions (1)	9		0		9		0		31
Total derivative liabilities	$	46	$	0	$	46	$	0	$	70

December 31, 2019
Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards	$	2	$	0	$	2	$	0	$	0
Interest rate swaps	26		0		26		0		0
Total derivative assets	$	28	$	0	$	28	$	0	$	0
Liabilities
Mortgage-backed securities forwards	$	9	$	0	$	9	$	0	$	24
Interest rate swaps and swaptions (1)	8		0		8		0		39
Total derivative liabilities	$	17	$	0	$	17	$	0	$	63

Losses of $1 million on fair value hedging relationships of AFS securities were recorded in interest income for three and nine months ended September 30, 2020

Losses of $1 million and $2 million on cash flow hedging relationships of custodial deposits were reclassified from AOCI into loan administration income during the three and nine months ended September 30, 2020.

Gains and losses on fair value hedging relationships of HFI residential first mortgages for the three and nine months ended September 30, 2020 were de-minimis.

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 ~~$1,403~~$1,878 million at ~~March 31,~~September 30, 2020 and $287 million at December 31, 2019 of which $6$8 million and $1 million, respectively, ~~was~~were due to the fair value hedge relationship. The closed portfolio of AFS securities designated in this last layer method hedge was ~~$1.38 billion~~$1,808 million par (amortized cost of ~~$1.38 billion)~~$1,805 million) at ~~March 31,~~September 30, 2020 and $291 million par (amortized cost of $289 million) at

December 31, 2019 of which we have designated $450 million and $100 million at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.

The ~~net gain recognized~~fair value basis adjustment on ~~designated instruments, net~~our hedged fair HFI residential first mortgages is included in loans held-for-investment on our Consolidated Statements of Financial Condition. The carrying amount of our hedged loans was $255 million at September 30, 2020 of which $1 million was due to the ~~impact of offsetting positions was~~fair value hedge relationship. There were 0 ~~for both the three months ended March 31, 2020 and March~~hedged HFI residential first mortgages at December 31, 2019. We have designated $100 million of this closed portfolio of loans in a hedging relationship as of September 30, 2020.

At ~~March 31,~~September 30, 2020, we pledged a total of ~~$325~~$82 million related to derivative financial instruments, consisting of ~~$284~~$56 million of cash collateral on derivative liabilities and ~~$41~~$26 million of maintenance margin on centrally cleared derivatives and had a de-minimis obligation to return cash on derivative assets. We pledged a total of $63 million related to derivative financial instruments, consisting of $34 million of cash collateral on derivatives and $29 million of maintenance margin on centrally

cleared derivatives and had a de-minimis obligation to return cash on derivative assets at December 31, 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 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,
		2020		2019		2020		2019
		(Dollars in millions)
Derivatives not designated as hedging instruments:	Location of gain (loss)
Futures	Net loss on mortgage servicing rights	$	0	$	0	$	1	$	(2)
Interest rate swaps and swaptions	Net gain (loss) on mortgage servicing rights	(2)		28		39		71
Mortgage-backed securities forwards	Net gain (loss) on mortgage servicing rights	5		3		28		23
Rate lock commitments and MSR forwards	Net gain (loss) on loan sales	70		27		190		57
Forward commitments	Other noninterest income	0		0		0		2
Interest rate swaps (1)	Other noninterest income	0		2		1		3
Total derivative (loss) gain		$	73	$	60	$	259	$	154

(1)Includes customer-initiated commercial interest rate swaps.

Three Months Ended March 31,
2020 2019
(Dollars in millions)
Derivatives not designated as hedging instruments: Location of Gain (Loss)
Futures Net loss on mortgage servicing rights $ 1
$ —
Interest rate swaps and swaptions Net gain (loss) on mortgage servicing rights 38
13
Mortgage-backed securities forwards Net gain (loss) on mortgage servicing rights 19
9
Rate lock commitments and forward agency and loan sales Net gain (loss) on loan sales (100 ) 8
Forward commitments Other noninterest income —
1
Interest rate swaps (1) Other noninterest income —
1
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, 2020				December 31, 2019
	Amount		Rate		Amount		Rate
	(Dollars in millions)
Short-term fixed rate term advances	$	1,555	0.20	%	$	3,695	1.61	%
Other short-term borrowings (1)	671		0.11	%	470		1.64	%
Total short-term Federal Home Loan Bank advances and other borrowings	2,226				4,165
Long-term fixed rate advances (2)	1,200		1.03	%	650		1.45	%
Total long-term Federal Home Loan Bank advances	1,200				650
Total Federal Home Loan Bank advances and other borrowings	$	3,426			$	4,815

March 31, 2020 December 31, 2019
Amount Rate Amount Rate
(Dollars in millions)
Short-term fixed rate term advances $ 5,336
0.24 % $ 3,695
1.61 %
Other short-term borrowings 505
0.20 % 470
1.64 %
Total short-term Federal Home Loan Bank advances and other borrowings 5,841
4,165

Long-term fixed rate advances (1) 1,000
1.19 % 650
1.45 %
Total long-term Federal Home Loan Bank advances 1,000
650

Total Federal Home Loan Bank advances and other borrowings $ 6,841
$ 4,815

(1)Includes borrowings under overnight federal funds purchased lines with other Federal Reserve member institutions.

(2)There was 0 current portion of fixed rate advances at both September 30, 2020 and December 31, 2019.


~~(1)~~	~~Includes the current portion of fixed rate advances of $0 million at both March 31, 2020 and December 31, 2019.~~

The following table contains detailed information on our FHLB advances and other borrowings:

Three Months Ended March 31,
2020 2019
(Dollars in millions)
Maximum outstanding at any month end $ 6,841
$ 3,391
Average outstanding balance 4,359
2,878
Average remaining borrowing capacity 4,977
3,314
Weighted average interest rate 1.32 % 2.45 %


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(Dollars in millions)
Maximum outstanding at any month end	$	4,388		$	2,979		$	6,841		$	3,391
Average outstanding balance	$	3,528		$	2,446		$	4,234		$	2,769
Average remaining borrowing capacity	$	5,494		$	4,957		$	5,249		$	3,932
Weighted average interest rate	0.48		%	2.10		%	0.76		%	2.33		%

The following table outlines the maturity dates of our FHLB advances and other borrowings:


	September 30, 2020
	(Dollars in millions)
2020	$	2,226
2021	0
2022	200
2023	500
Thereafter	500
Total	$	3,426

March 31, 2020
(Dollars in millions)
2020 $ 5,841
2021 —
2022 —
2023 500
Thereafter 500
Total $ 6,841



Standard			~~Description~~Descriptions	Effective Date
~~2020-04~~ASU 2020-06			~~Reference Rate Reform (Topic 848)~~Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): ~~Facilitation of the Effects of Reference Rate Reform on Financial Reporting~~Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity	~~March 12, 2020~~
~~2020-03~~	~~Codification Improvements to Financial Instruments~~	~~January~~September 1, 2020
~~2020-02~~	Financial 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)	~~February 6, 2020~~
~~2018-15~~	Intangibles-Goodwill and Other-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~~
~~2018-13~~	~~Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement~~	~~January 1, 2020~~
~~2017-04~~	~~Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~	~~January 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:~~



~~Standard~~	~~Description~~	~~Effective Date~~
~~2019-12~~	~~Simplifying the Accounting for Income Taxes~~	~~January 1, 2021~~

Note 19 - Subsequent Events

Subordinated Notes

On October 28, 2020, we issued $150 million of Subordinated Debt (the "Notes") with a maturity date of November 1, 2030. The Notes bear interest at a fixed rate of 4.125% through October 31, 2025, and a variable rate tied to SOFR thereafter until maturity. We have the option to redeem all or a part of the Notes beginning on November 1, 2025 and on any subsequent interest payment date. The Notes will qualify as Tier 2 capital for regulatory purposes.

Share Repurchase

On October 28, 2020, we completed a share repurchase of 4,587,647 shares of common stock worth $150 million from MP Thrift Investments L.P. at a purchase price per share of $32.70.

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 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 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 March 31,~~

(a)Evaluation of Disclosure Controls and Procedures. As of September 30, 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, 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, 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

We are reviewing and updating our risk factors to contemplate the current pandemic resulting from COVID-19, including the following material changes from the risk factors reported in the Company's Annual Report on Form 10-K for the period ended December 31, 2019:

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 or permanent closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. Some states and communities have re-opened and may be at risk of restrictions again in the future. As a result, the demand for our products and services may be significantly negatively impacted. ~~How we respond~~Our ongoing response to ~~the~~ COVID-19, ~~pandemic, include~~including standing up new programs specified in the Coronavirus Aid, Relief and Economic Security Act (the ~~"CARES Act"~~“CARES Act”), such as the ~~Paycheck Protection Program (“PPP”)~~PPP, and our long-term 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. WeWhile almost all of our lobbies have ~~limited~~re-opened, we have enhanced our ~~bank branches to drive-up services~~cleaning protocols, installed plexiglass shields, and ~~closed~~we require that our ~~lobbies.~~employees wear face protection. 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~~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.~~Act or future acts taken by Congress. 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~~these programs may not ~~clear that the programs are~~be broad or specific enough to mitigate the economic ~~risks-both~~risks of COVID-19, 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~~have and may continue to experience unemployment and a loss of revenue, leading to a lack of cash flows. ~~These~~As a result of these lower cash flows, ~~could have~~ our customers are drawing on the lines of credit we have extended to them and withdrawing their deposits from the Bank. Both of these actions ~~would~~could 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 have and may continue to be adversely impacted by ~~the COVID-19 pandemic.~~COVID-19. 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~~resulting in disruptions to the ~~MBS~~mortgage-backed securities market. There is a risk that the Federal Reserve may take ~~other~~additional 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 at times, 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,~~September 30, 2020, we had ~~$223~~$323 million of mortgage servicing rights which equated to ~~13.6~~16.0 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~~waived fees for an extended time period as customers deal with the ~~crisis.~~crisis, which we may continue to do in the future. 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. Furthermore, we have provided forbearance to certain of our commercial customers. 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.

The following table details borrowers currently participating in a forbearance program:


				Forbearance Requested
				Borrowers making July, August and September Payments			Remaining Borrowers
	Total Population									Percent of UPB		Percent of Accounts
	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts
	(Dollars in millions)
Loan servicing
Subserviced for others (2)	$	180,981	893,559	$	5,654	26,529	$	15,103	67,192	11.5	%	10.5	%
Serviced for others (3)	37,908		148,868	950		3,908	3,081		12,217	10.6	%	10.8	%
Serviced for own loan portfolio (4)	8,469		62,486	196		1,792	468		1,886	7.8	%	5.9	%
Total loans serviced	$	227,358	1,104,913	$	6,800	32,229	$	18,652	81,295	11.2	%	10.3	%

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

(2)Loans subserviced for a fee for non-Flagstar owned loans or MSRs. Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs.

(3)Loans for which Flagstar owns the MSR.

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

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~~closing 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~~loans held-for-investment 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


	As of September 30, 2020
	Loan Exposure
	(Dollars in millions)
Retail	$	300
Hotel	$	261
Leisure & Entertainment	$	131
Senior Housing	$	118
Automotive	$	87
Healthcare	$	40

Our ACL calculations include a forecast for a reasonable and supportable time period. AsWe utilized the Moody’s September scenarios in our forecast: a growth forecast, weighted at 30 percent; a baseline forecast, weighted at 40 percent; and an adverse forecast, weighted at 30 percent. The resulting composite forecast for the third quarter 2020 was roughly equivalent to the scenario we used in the second quarter of ~~March 31, 2020 that forecast assumed a Q2 2020~~2020. Unemployment ends the year at 10 percent and recovers only slightly in 2021. GDP ~~decrease of 18 percent, HPI decreasing 3 percent~~recovers only slightly by the end of the year from current levels and ~~unemployment, adjusted for government stimulus, of 8 percent.~~ ~~Subsequent~~does not return to ~~March 31, 2020 leading economic indicators demonstrate a worsening in~~near pre-COVID levels until 2024. HPI drops about 2 percent from mid-2020 through 2021. Changing economic conditions ~~which~~ could cause a material difference in future forecasts used in our ~~calculations~~.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 ~~March 31,~~September 30, 2020.

Issuer Purchases of Equity Securities

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


	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019
	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts
	(Dollars in millions)
Loan servicing
Subserviced for others (2)	$	180,981	893,559	$	174,517	854,693	$	193,037	916,989	$	194,638	918,662	$	171,145	826,472
Serviced for others (3)	37,908		148,868	29,846		122,779	23,439		102,338	24,003		105,469	25,039		106,992
Serviced for own loan portfolio (4)	8,469		62,486	9,211		64,142	8,539		63,085	9,536		66,526	8,058		60,088
Total loans serviced	$	227,358	1,104,913	$	213,574	1,041,614	$	225,015	1,082,412	$	228,177	1,090,657	$	204,242	993,552



	March 31, 2020			December 31, 2019			March 31, 2019
	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts
	(Dollars in millions)
Loan servicing
Subserviced for others (2)	$	193,037	916,989	$	194,638	918,662	$	170,476	814,248
Serviced for others	23,439		102,338	24,003		105,469	21,925		90,622
Serviced for own loan portfolio (3)	8,539		63,085	9,536		66,526	7,631		56,687
Total loans serviced	$	225,015	1,082,412	$	228,177	1,090,657	$	200,032	961,557


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



	Three Months Ended March 31,						1Q20 vs. 4Q19			1Q20 vs. 1Q19
	March 31, 2020		December 31, 2019		March 31, 2019		Change			Change
	(Dollars in millions, except per share data)
Net interest income	$	148	$	152	$	126	$	(4	)	$	22
Provision for credit losses	14		—		—		14			14
Total noninterest income	157		162		109		(5		)	48
Total noninterest expense	235		245		191		(10		)	44
Provision for income taxes	10		11		8		(1		)	2
Net income	$	46	$	58	$	36	$	(12	)	$	10
Adjusted net income (1)	$	46	$	58	$	37	$	(12	)	$	9
Income per share
Basic	$	0.80	$	1.01	$	0.64	$	(0.21	)	$	0.16
Diluted	$	0.80	$	1.00	$	0.63	$	(0.20	)	$	0.17
Adjusted diluted (1)	$	0.80	$	1.00	$	0.64	$	(0.20	)	$	0.16



	Three Months Ended
	March 31, 2020						December 31, 2019						March 31, 2019
	Average Balance		Interest		Annualized Yield/ Rate		Average Balance		Interest		Annualized Yield/ Rate		Average Balance		Interest		Annualized Yield/ Rate
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	5,248	$	49	3.72	%	$	5,199	$	51	3.92	%	$	3,266	$	38	4.72	%
Loans held-for-investment
Residential first mortgage	3,062		27		3.51	%	3,215		30		3.60	%	3,044		28		3.64	%
Home equity	1,019		12		4.73	%	989		12		4.86	%	745		10		5.63	%
Other	816		12		5.77	%	728		11		5.97	%	356		6		7.11	%
Total consumer loans	4,897		51		4.14	%	4,932		53		4.20	%	4,145		44		4.30	%
Commercial real estate	2,949		34		4.61	%	2,763		34		4.91	%	2,250		33		5.66	%
Commercial and industrial	1,667		19		4.52	%	1,726		21		4.80	%	1,594		21		5.39	%
Warehouse lending	2,310		25		4.30	%	2,747		33		4.61	%	1,175		16		5.47	%
Total commercial loans	6,926		78		4.48	%	7,236		88		4.77	%	5,019		70		5.53	%
Total loans held-for-investment (1)	11,823		129		4.34	%	12,168		141		4.54	%	9,164		114		4.97	%
Loans with government guarantees	811		3		1.38	%	678		4		2.16	%	455		3		2.96	%
Investment securities	3,060		19		2.47	%	2,511		16		2.49	%	3,258		24		2.91	%
Interest-earning deposits	208		1		1.75	%	152		1		2.26	%	151		1		2.77	%
Total interest-earning assets	21,150		201		3.78	%	20,708		213		4.04	%	16,294		180		4.43	%
Other assets	2,263						2,328						2,144
Total assets	$	23,413					$	23,036					$	18,438
Interest-Bearing Liabilities
Retail deposits
Demand deposits	$	1,587	$	3	0.75	%	$	1,448	$	3	0.70	%	$	1,220	$	2	0.68	%
Savings deposits	3,384		9		1.07	%	3,335		10		1.19	%	3,089		7		0.95	%
Money market deposits	687		1		0.32	%	700		—		0.35	%	778		1		0.27	%
Certificates of deposit	2,254		12		2.24	%	2,459		15		2.37	%	2,488		13		2.13	%
Total retail deposits	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	%
Wholesale deposits and other	581		4		2.39	%	666		4		2.36	%	387		2		2.23	%
Total interest-bearing deposits	9,624		32		1.33	%	9,800		36		1.46	%	9,132		29		1.30	%
Short-term FHLB advances and other	3,566		12		1.35	%	3,262		15		1.74	%	2,725		17		2.54	%
Long-term FHLB advances	794		3		1.29	%	650		3		1.43	%	153		1		1.54	%
Other long-term debt	496		6		5.33	%	496		7		5.45	%	495		7		5.90	%
Total interest-bearing liabilities	14,480		53		1.46	%	14,208		61		1.65	%	12,505		54		1.75	%
Noninterest-bearing deposits
Retail deposits and other	1,395						1,332						1,242
Custodial deposits (2)	4,776						4,772						2,532
Total non-interest bearing deposits	6,171						6,104						3,774
Other liabilities	908						921						576
Stockholders’ equity	1,854						1,803						1,583
Total liabilities and stockholders' equity	$	23,413					$	23,036					$	18,438
Net interest-earning assets	6,671						6,500						3,789
Net interest income			$	148					$	152					$	126
Interest rate spread (3)					2.31	%					2.39	%					2.69	%
Net interest margin (4)					2.81	%					2.91	%					3.09	%
Ratio of average interest-earning assets to interest-bearing liabilities					146.1	%					145.8	%					130.3	%
Total average deposits	15,795						15,904						12,906


~~(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 three months ended March 31, 2020) to fallout-adjusted mortgage rate lock commitments.


•	~~Commissions increased~~ ~~$16 million, primarily driven by higher originations along with a shift in channel mix from TPO to direct retail which supports a higher gain on sale but also has higher commission rates.~~


	Three Months Ended,						Nine Months Ended,
Community Banking	September 30, 2020		June 30, 2020		Change		September 30, 2020		September 30, 2019		Change
	(Dollars in millions)
Summary of Operations
Net interest income	$	158	$	133	$	25	$	395	$	296	$	99
Provision (benefit) for credit losses	(2)		(3)		1		3		17		(14)
Net interest income after provision for credit losses	160		136		24		392		279		113
Net gain (loss) on loan sales	2		—		2		2		(10)		12
Loan fees and charges	—		—		—		1		1		—
Loan administration expense	(1)		(1)		—		(2)		(3)		1
Other noninterest income	15		12		3		43		46		(3)
Total noninterest income	16		11		5		44		34		10
Compensation and benefits	28		24		4		79		77		2
Commissions	1		—		1		2		1		1
Loan processing expense	1		1		—		4		5		(1)
Other noninterest expense	63		124		(61)		231		125		106
Total noninterest expense	93		149		(56)		316		208		108
Income before indirect overhead allocations and income taxes	83		(2)		85		120		105		15
Indirect overhead allocation	(11)		(11)		—		(31)		(30)		(1)
Provision (benefit) for income taxes	15		(3)		18		19		16		3
Net income	$	57	$	(10)	$	67	$	70	$	59	$	11

Key Metrics
Average number of FTE employees	1,253		1,266		(13)		1,282		1,316		(34)


	Three Months Ended,						Nine Months Ended,
Mortgage Originations	September 30, 2020		June 30, 2020		Change		September 30, 2020		September 30, 2019		Change
	(Dollars in millions)
Summary of Operations
Net interest income	$	49	$	56	$	(7)	$	147	$	103	$	44
Provision (benefit) for credit losses	(3)		(2)		(1)		(8)		(3)		(5)
Net interest income after provision for credit losses	52		58		(6)		155		106		49
Net gain on loan sales	344		303		41		737		243		494
Loan fees and charges	29		22		7		68		47		21
Loan administration expense	(10)		(8)		(2)		(25)		(16)		(9)
Net return (loss) on mortgage servicing rights	12		(8)		20		10		9		1
Other noninterest income	3		1		2		5		9		(4)
Total noninterest income	378		310		68		795		292		503
Compensation and benefits	42		38		4		111		79		32
Commissions	71		61		10		160		75		85
Loan processing expense	15		14		1		39		23		16
Other noninterest expense	32		56		(24)		114		63		51
Total noninterest expense	160		169		(9)		424		240		184
Income before indirect overhead allocations and income taxes	270		199		71		526		158		368
Indirect overhead allocation	(18)		(15)		(3)		(45)		(30)		(15)
Provision for income taxes	53		39		14		101		26		75
Net income	$	199	$	145	$	54	$	380	$	102	$	278

Key Metrics
Mortgage rate lock commitments (fallout-adjusted) (1)(2)	$	15,000	$	13,800	$	1,200	$	40,000	$	24,100	$	15,900
Average number of FTE employees	1,758		1,599		159		1,675		1,406		269


•	~~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.


~~(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.~~


~~(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.~~



	MI			TX			CA			CO			FL			Other			Total			% by collateral type
	(Dollars in millions)
March 31, 2020
Home builder	$	27		$	263		$	148		$	168		$	124		$	205		$	935		30.2	%
Owner occupied	356			4			24			—			10			55			449			14.5	%
Multi family	173			60			21			6			7			146			413			13.4	%
Retail (1)	190			—			6			4			—			115			315			10.2	%
Office	175			19			16			—			2			55			267			8.6	%
Hotel/motel	117			—			24			—			—			65			206			6.7	%
Senior living facility	65			26			—			—			1			51			143			4.6	%
Industrial	51			4			19			—			1			28			103			3.3	%
Parking garage/lot	26			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-profit	1			—			2			1			3			3			10			0.2	%
Single family residence	4			—			—			—			—			—			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 state	38.9		%	14.0		%	9.4		%	5.9		%	5.5		%	26.3		%	100.0		%


~~(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.~~



	MI			OH			NY			FL			IN			WI			CA			TX			SC			CO			Other			Total			% by industry

March 31, 2020
Financial & Insurance	$	37		$	21		$	66		$	94		$	15		$	19		$	19		$	52		$	99		$	3		$	83		$	508		27.0	%
Services	109			2			—			2			9			—			41			29			—			—			163			$	355		18.9	%
Manufacturing	172			32			—			—			1			8			6			16			—			6			67			$	308		16.4	%
Home Builder Finance	—			—			—			1			—			—			31			112			—			24			72			$	240		12.8	%
Rental & Leasing	107			16			5			—			—			—			—			—			—			23			17			$	168		8.9	%
Distribution	91			1			—			—			2			—			18			—			—			—			16			$	128		6.8	%
Healthcare	2			1			—			—			1			18			15			8			—			—			33			$	78		4.1	%
Government & Education	29			—			—			—			20			—			6			—			—			—			13			$	68		3.6	%
Servicing Advances	—			—			—			—			—			—			—			—			—			17			—			$	17		0.9	%
Commodities	4			—			—			—			1			—			—			—			—			—			5			$	10		0.5	%
Total	$	551		$	73		$	71		$	97		$	49		$	45		$	136		$	217		$	99		$	73		$	469		$1,880			100.0	%
Percent by state	29.3		%	3.9		%	3.8		%	5.2		%	2.6		%	2.4		%	7.2		%	11.5		%	5.3		%	3.9		%	24.9		%	100.0		%


~~(2)~~	~~Ratio excludes LHFS, which are recorded at fair value.~~


	As of September 30, 2020					As of June 30, 2020
	Number of Borrowers	UPB		Percent of Portfolio		Number of Borrowers	UPB		Percent of Portfolio
	(Dollars in millions)
Loans Held-For-Investment
Consumer loans
Residential first mortgage	819	$	255	10.4	%	885	$	292	10.8	%
Home equity	821	62		6.9	%	1,015	87		9.0	%
Other consumer	887	40		4.2	%	1,408	50		5.8	%
Total consumer loan deferrals/forbearance	2,527	$	357	8.3	%	3,308	$	429	9.5	%

Loans Held-For-Sale
Residential first mortgage	142	$	71	1.6	%	302	$	126	4.0	%



	As of April 30, 2020
	Number of Borrowers	UPB		Percent
	(Dollars in millions)
Loans Held-For-Investment
Consumer loans
Residential first mortgage	943	$	305	10.3	%
Home equity	1136	96		9.3	%
Other consumer	1128	43		5.0	%
Total consumer loans	3,207	$	444	9.2	%
Commercial loans
Commercial real estate	132	$	378	12.2	%
Commercial and industrial	169	174		9.3	%
Warehouse lending	—	—		—	%
Total commercial loans	301	$	552	6.2	%
Total consumer and commercial loans	3,508	$	996	7.2	%

Loans Held-For-Sale
Residential first mortgage	524	$	205	4.7	%



	Total Population			Forbearance Requested
	As of March 31, 2020			As of April 30, 2020			Percent of UPB		Percent of Accounts
	Unpaid Principal Balance (1)		Number of accounts	Unpaid Principal Balance (1)		Number of accounts	Percent of UPB		Percent of Accounts
	(Dollars in millions)
Loan servicing
Subserviced for others (2)	$	193,037	916,989	$	23,330	100,950	12.1	%	11.0	%
Serviced for others	23,439		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	%


	Principal and Interest	Taxes and Insurance
Fannie Mae and Freddie Mac	4 months	No time limit
GNMA	No time limit	No time limit



	Residential First Mortgage		Home Equity		Other Consumer		Commercial Real Estate			Commercial and Industrial			Warehouse Lending			Total LHFI Portfolio		Unfunded Commitments
	(Dollars in millions)
Balance as of December 31, 2019	$	22	$	14	$	6	$	38		$	22		$	5		$	107	$	3
Impact of adopting ASC 326	25		12		10		(14		)	(6		)	(4		)	23		7
Adjusted balance as of January 1, 2020	$	47	$	26	$	16	$	24		$	16		$	1		$	130	$	10


																									Nine Months Ended September 30, 2020
	Three Months Ended March 31, 2020																								Residential First Mortgage		Home Equity		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total LHFI Portfolio (1)		Unfunded Commitments		Total ACL
	Residential First Mortgage			Home Equity			Other Consumer			Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total LHFI Portfolio (1)			Unfunded Commitments		Total ACL				(Dollars in millions)
	(Dollars in millions)
Adjusted beginning allowance balance	$	47		$	26		$	16		$	24	$	16	$	1	$	130		$	10	$	140
Beginning balance ALLL																								Beginning balance ALLL	$	22	$	14	$	6	$	38	$	22	$	5	$	107	$	3	$	110
Impact of adopting ASC 326																								Impact of adopting ASC 326	25		12		10		(14)		(6)		(4)		23		7		30
Beginning allowance balance																								Beginning allowance balance	47		26		16		24		16		1		130		10		140
Provision (benefit) for credit losses:																								Provision (benefit) for credit losses:
Loan volume	(2		)	—			1			2		2		—		3			—		3			Loan volume	(8)		(2)		8		2		(1)		1		—		4		4
Economic forecast and credit	4			2			—			2		—		—		8			10		18
Other (2)	(2		)	(4		)	(1		)	—		—		—		(7		)	—		(7		)
Economic forecast (2)																								Economic forecast (2)	11		—		5		15		(3)		—		28		11		39
Credit (3)																								Credit (3)	(4)		(1)		2		23		12		—		32		—		32
Qualitative factor adjustments (4)																								Qualitative factor adjustments (4)	6		3		5		25		18		3		60		—		60
Charge-offs	(1		)	(1		)	(1		)	—		—		—		(3		)	—		(3		)	Charge-offs	(5)		(3)		(4)		—		—		—		(12)		—		(12)
Provision for charge-offs																								Provision for charge-offs	5		3		4		—		—		—		12		—		12
Recoveries	—			—			1			—		—		—		1			—		1			Recoveries	—		3		2		—		—		—		5		—		5
Ending allowance balance	$	46		$	23		$	16		$	28	$	18	$	1	$	132		$	20	$	152		Ending allowance balance	$	52	$	29	$	38	$	89	$	42	$	5	$	255	$	25	$	280


	March 31, 2020									September 30, 2020
	LHFI Portfolio		Percent of Portfolio		Allowance Amount (1)		Allowance as a Percent of Loan Portfolio			LHFI Portfolio (1)		Percent of Portfolio		Allowance Amount (2)		Allowance as a Percent of Loan Portfolio		Weighted Average Loan Life
Consumer loans									Consumer loans
Residential first mortgage	$	2,964	21.5	%	$	46	1.6	%	Residential first mortgage	$	2,459	14.9	%	$	52	2.1	%	4
Home equity	1,028		7.5	%	23		2.2	%	Home equity	922		5.6	%	29		3.1	%	3
Other consumer	858		6.2	%	17		2.0	%	Other consumer	973		5.9	%	39		4.0	%	3
Total consumer loans	4,850		35.2	%	86		1.8	%	Total consumer loans	4,354		26.5	%	120		2.8	%
Commercial loans									Commercial loans
Commercial real estate	$	3,092	22.4	%	$	43	1.4	%	Commercial real estate	$	2,996	18.2	%	$	106	3.5	%	2
Commercial and industrial	1,880		13.6	%	22		1.2	%	Commercial and industrial	1,520		9.2	%	47		3.1	%	2
Warehouse lending	3,973		28.8	%	1		—	%	Warehouse lending	7,591		46.1	%	7		0.1	%	—
Total commercial loans	8,945		64.8	%	66		0.7	%	Total commercial loans	12,107		73.5	%	160		1.3	%
Total consumer and commercial loans (2) (3)	$	13,795	100.0	%	$	152	1.1	%
Total consumer and commercial loans									Total consumer and commercial loans	$	16,461	100.0	%	$	280	1.7	%
Total consumer and commercial loans excluding warehouse									Total consumer and commercial loans excluding warehouse	$	8,870	53.9	%	$	273	3.1	%



	March 31, 2020			December 31, 2019
	Investment Loan Portfolio		Weighted Average Loan Life	Investment Loan Portfolio		Weighted Average Loan Life
Consumer loans
Residential first mortgage	$	2,964	5	$	3,154	5
Home equity	1,028		3	1,024		3
Other consumer	858		1	729		2
Total consumer loans	4,850			4,907
Commercial loans
Commercial real estate	$	3,092	2	$	2,828	2
Commercial and industrial	1,880		1	1,634		1
Warehouse lending	3,973		—	2,760		—
Total commercial loans	8,945			7,222
Total consumer and commercial loans (1)	$	13,795		$	12,129



	Three months ended						Q120 vs. 4Q19			1Q20 vs. 1Q19
	March 31, 2020		December 31, 2019		March 31, 2019		Change			Change
	(Dollars in millions)
Retail deposits	9,145		9,164		9,015		(19		)	130
Government deposits	1,164		1,213		1,202		(49		)	(38		)
Wholesale deposits	561		633		467		(72		)	94
Custodial deposits	5,182		4,136		2,784		1,046			2,398
Total deposits	$	16,052	$	15,146	$	13,468	$	906		$	2,584
FHLB advances and other short-term debt	6,841		4,815		3,351		2,026			3,490
Other long-term debt	493		496		495		(3		)	(2		)
Total borrowed funds	$	7,334	$	5,311	$	3,846	$	2,023		$	3,488
Total funding	$	23,386	$	20,457	$	17,314	$	2,929		$	6,072


~~(1)~~	~~The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.6 billion and $1.7 billion at March 31, 2020 and December 31, 2019, respectively.~~


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