Q3 2019 Earnings Call
Good day, ladies and gentlemen, you're currently standing by for the Flagstar Bank third quarter 2019 earnings call.
At this time, we're assembling our audience and plan to be underway. Shortly we appreciate your patience. Please remain on the line.
Today's conference is being recorded.
Sam I would like to turn the conference over to Kinda Schellenberg head of Investor Relations. Please go ahead.
Thank you Nicole and good morning, welcome to the Flagstar third quarter 2019 earnings call before we begin I'd like to mentioned our third quarter earnings release in presentation are available on our website at Flagstar Dotcom I'd also like to remind you that any forward looking statements made during today's call. During today's call are subject to risk in uncertain.
<unk> factors that could materially change our current forward looking assumptions are described on slide two of today's presentation in our press release and in our 2018 Form 10-K , and subsequent reports on file with the FCC.
We're also disgusting GAAP and non-GAAP financial measures, what you're describing our earnings release and in the presentation. We made available for this earnings call you should refer to those document that's part of this call with that I'd like to now I'll turn the call over to sign up to now <unk>, President and Chief Executive Officer. Thank you can and good morning to everyone listening now.
I appreciate you taking the time to join us today.
Addition to Ken I'm joined this morning, but jumps Rowley, our Chief Financial Officer, Lee Smith, our Chief operating Officer, Chris.
Christy poor Koehler president of mortgage drew ottaway, our president of banking and Steve Figliuolo, our chief risk Officer.
As usual I'm going to start the call by providing a high level of view of our performance for the quarter.
Then I'll turn the call over to Jim for details on our financial results.
We will follow with a review of our business segments and strategic initiatives and I'll conclude with guidance for the fourth quarter.
Before opening up the line for questions.
Needless to say I'm very pleased with the performance of our company this quarter.
We reported net income of 63 million or $1.11 cents per diluted share for the third quarter.
22 million or 54% of the adjusted net income we achieved last quarter.
What stands out about these results is that they don't come from any one part of our business.
We built our balance sheet to be flexible in multiple interest rate environments.
Results speak for themselves.
When the mortgage business was challenging we officially adjusted costs, so that mortgage remain profitable.
And does it contributed enough to allow the company to achieve very respectable returns on assets and equity.
During that time, we continue to build both her banking and servicing businesses smartly.
Did a reasonably good job of managing overall cost and avoided mistakes on credit that we couldn't overcome.
No we find ourselves in an environment that is beneficial to our mortgage business and we're taking advantage of that in a disciplined way.
And the investments we made in people technology not to mention the expansion into the bulk correspondent business and more broadly into the retail channel through acquisitions and lift outs are paying dividends.
As we always do we are managing our volume to maintain industry, leading service levels and in doing so are producing margin and revenue levels. We haven't seen in a very long time.
In fact, our team turned a 10% increase and I am into an impressive 47% increase in revenue.
Turning to banking since you were careful about how we grew our banking business or asset sensitivity is manageable as evidenced by the stability of our net interest margin.
Top all that off with a servicing business that continues to prosper and we believe we have a strategy for success.
The balance we have worked to achieving a revenue streams is paying dividends just the way we plan to.
Having the ability to grow noninterest income and fees in the current interest rate environment is key to being able to sustain high levels of return.
We are positioned to do just that.
Finally, well there was that a lot of chatter about a possible recession, we have built flagstar for all seasons and I'm confident we'll continue to succeed no matter what the economy goes our way.
That concludes my comments now I'll turn the meeting over to Jim for more detail around the numbers.
Thanks, Andrew.
Turning to slide six our net income this quarter was 63 million worth <unk> dollar 11 for sure.
This performance is compared to the 41 million were 71 cents per share last quarter adjusted for the D.A.J. benefit.
This quarter was highlighted by adjusted revenue growth of 13% led by a higher level of mortgage revenue and net interest income.
Net interest income was up 8 million or 6% over the prior quarter.
Average, earning assets grew 1.2 billion, mostly in our loan portfolio, it's 511 million of growth occurring in warehouse lending.
All major categories of loans were up from last quarter.
Net interest margin held up well in the face of two rate cuts during the quarter. It's the community banking team did a nice job holding deposit spreads.
Mortgage revenues were strong it's all channels increased nicely over last quarter, and we were able to flex in each of the channels to optimize our revenue mix.
The combination of a 10% increase in volume combined with a 35% improvement in margin resulted in revenues that were 47% higher than last quarter.
Asset quality remains strong as net charge offs were only two basis points.
Our nonperforming loan ratio decreased to 21 basis points.
Our allowance coverage of the loan portfolio remained solid at 0.9%.
Capital also remain solid.
Our total risk based capital was 11.5% at quarter end up two basis points compared to the prior quarter. Despite nearly 2 billion period end <unk> asset growth.
For the three fourths of this period and asset growth.
As in warehouse loans and loans held for sale two portfolios that have a very low risk content. It should naturally de fleet in the next couple of quarters.
Well go through a more extensive analysis or capital later, so let's turn to slide seven and dive deeper into the income statement.
Net interest income grew 8 million to 146 million for the third quarter.
Which was 6% higher compared to last quarter.
The results primarily reflect the 7% increase in average, earning assets led by 12% growth in average commercial lows.
With a loan growth and to rate cuts in the quarter, we were able to hold the net interest margin relatively flat.
This was the result of higher escrow deposits, which displaced at the margin or expensive wholesale borrowings.
We're pleased with the relatively modest impact that the two rate cuts had our net interest margin. So let's take a look at this relationship more closely.
We have approximately 7.7 billion of loans the reactor movements in short term rates that is most of our commercial loans, including all of our warehouse loans and our home equity loans, which are mostly prime based.
Well the liability side.
There are about 6.4 billion up rate sensitive liabilities about 80% of ACA. So the deposits all of our short term FHLB borrowings our trust preferred securities at approximately 600 million of our non custodial deposits.
As a result of that high degree of natural offset the task of managing the cost of the remaining interest bearing deposits is quite manageable.
[noise] noninterest income increased 3 million or 2% to 171 million.
Excluding last quarter's DLJ benefit noninterest income increased 28 million.
The increase was led by mortgage related activity is mortgage revenues increased 28 billion and loan fees and charges increased 5 million.
Our gain on sale revenue of 110 billion, representing an increase of 35 million were 47% from last quarter.
The improved gala sale revenue was driven by a 31 basis point increase gain on sale margin all sales channels were up and double digit revenue growth.
Once again, demonstrating the value of our multichannel capabilities.
Refinance volume was 56% of our lock volume this quarter as you'd expect the increased refinance activity accelerated prepayments, creating a net loss on mortgage servicing rights of 2 million compared to a net return to 5 million last quarter.
Non interest expense was 238 million.
Up 24 million from last quarter.
The increase was primarily related to mortgage volume driven expenses, such as commissions loan processing expenses.
In compensation due to higher levels of production and a shift in mix toward the retail channel.
Our mortgage line of business accounted for 20 million of the 24 million in quarter over quarter expense growth.
The remaining expense categories were relatively flat for the prior quarter, demonstrating the scalability of our business in cost discipline of our people.
Let's now turn to slide eight which highlights our average balance sheet this quarter.
Average loans held for investment grew 1.1 billion driven by an increase in average warehouse loans and diversified loan growth across our remaining loan portfolios.
We saw more opportunities in the quarter to put high quality loans on the balance sheet, especially in the warehouse see Ari and non auto indirect businesses and fund those assets at the margin with core deposits, while keeping the net interest margin relatively flat to last quarter.
The non auto indirect loan portfolio continued its growth as average balances increased $111 million or 27% compared to last quarter.
Average deposits increased 4.7 billion or 12% in the quarter driven by higher Christodoulou in community banking deposits average custodial deposits Rose 1.1 billion EUR, 31% due to higher level of loan prepayments from our servicing business.
Most of the number of accounts serviced.
And seasonally higher levels for T. lie escrow payments total retail deposits grew 125 million or 1% for the quarter.
Finally, our tangible book value per share increased adult 46 to $27 at 62 cents per share.
So, let's now turn to asset quality on slide nine.
Credit quality in the loan portfolio remained strong early stage delinquencies continue to be negligible only 12 million of total loads for over 30 days delinquent still accruing as of September Thirtyth.
Our allowance coverage ratio was 0.9% of total HFI loans.
I'd point out that this coverage reflects 26% of these loans being warehouse loans, so excluding warehouse loans for the denominator, given they're relatively clean credit loss history.
Our coverage ratio would stand at 1.1% relatively strong in the industry.
We believe we're in good shape for implementing Cecil at the beginning of next year.
Based on our current models and using a reasonable forecast of the future.
We would estimate that the impact of adopting Cecil would be to increase our reserves, including our reserve for unfunded loan commitments.
30% to 40% pretax.
Well, we don't think that Cecil will have a meaningful impact on our loan growth strategies.
It does have an additional capital cost.
Which could impact how we optimize our balance sheet for profitability.
We're continuing to evaluate these estimates for reasonableness.
Turning to slide 10, despite balance sheet growth, our capital ratios improved, albeit slightly.
Total risk based capital was 11.5% at September Thirtyth up two basis points, while our tier one leverage ratio of 8.0% NRC tier one ratio of 9.3%.
Both up a bit more.
As you're aware these ratios are based on existing capital rules under capital simplification.
The risk based capital ratios would increase 20 to 30 basis points in the tier one leverage ratio would improve 46 basis points.
It might be helpful to look more closely at the quarter to quarter change in our total risk based capital ratio.
Would you still are tightest capital ratio.
Earnings retention increased the ratio by 46 basis points balance sheet growth in just the loans held for sale and warehouse lending portfolios reduce this ratio by 34 basis points. All other activity accounted for a net 10 basis points of improvement.
We're quite comfortable.
With the capital use and growing these two portfolios in warehouse lending we've had under 5 million of losses cumulatively over the last 12 years a period that includes the great recession.
As held for sale are carried at fair value and that portfolio turns over on a regular basis.
Absolutely 450 basis points of our total risk based capital.
Dedicated to these two asset categories.
Higher balances in these two categories, therefore, do not meaningfully change the outputs.
From our capital stress testing models, and we remain comfortable with our capital levels at September Thirtyth.
I'll now turn to leave from more inside each of our business. Thanks, Jim Good morning, everyone.
We're very pleased with our net income of $1.11 cents per diluted share. The Q3 and believe this quarter in particular has demonstrated the strength of our business model.
We've said before that the different business slowing to act as a natural hedge meaning we can be successful and deliver stronger earnings in a variety of interest rate environments.
That's declining interest rates have put pressure on interest income so many banks, our mortgage and servicing businesses continue to thrive and provide solly non interest fee income, which more than offsets any net interest margin compression.
During the third quarter, 46% about revenues came from net interest income while 54% came from non interest all fee income.
We have intentionally created a balance between interest income on fee income generating businesses in order to fortify the model.
We are unique in this regard I'm confident that we have the ability to continue to deliver value for shareholders going forward.
That was several of the notable developments during the quarter, which included average earning assets increased 7% or 1.2 billion as we saw good growth across all commercial and consumer loan categories. While we were able to keep our net interest margin relatively flat a 3.0 point.
Same despite two rate cuts during the quarter.
Mortgage banking had its most successful quarter from a gain on sale revenue points of view over six years.
We ended the quarter service single Subservicing No 194000 loans I was asked Subservicing business continues to go from strength the strength generating consistent non interest fee income.
We also closed and successfully integrating the default servicing operation, we acquired an announced last quarter.
Let's see if PB consent order expired on September 30, the last remaining legacy regulatory issue.
Capital remained strong, particularly when you consider we will be accelerating capsule simplification adoption. So the first quarter of 2020 .
Asset quality slowly and we have the necessary liquidity to fund our anticipated future growth.
It was another exciting quarter as we continue to execute on our business strategy.
I will now outlawing some of the key operating metrics from each of our major business segments during the third quarter.
Please turn to slide 12.
Operating highlights for the community banking segment include average commercial and industrial and commercial real estate loans increased 223 million will follow the same with the growth being driven predominantly by a home builder finance team within our commercial real estate Division.
Average consumer loans held for investment increased 396 million or 9% during the quarter as we continue to add high quality nano whats going direct loans he looks firstly in mortgages to our portfolio.
We've added over 1 billion of consumer loans to the balance sheet over the last 12 months with most of that growth coming from non what's selling direct loans and he logs.
Average warehouse lending increased 500, an $11 million, 26% to 2.5 billion.
Growth was due to the increased activity in the mortgage industry results at the lower interest rate environment.
Overall this means average loans held for investment increased 1.1 billion during the quarter, which has a significant driver of the 9 million increasing net interest income quarter over quarter.
Furthermore, given our relationship based approach and expanded footprint following last year's warehouse lending Bank branch acquisitions. We believe we will continue to originate high quality consumer commercial and warehouse loan balances going forward.
Average demand and savings deposits increased 136 million, while average wholesale deposits increased 327 million.
As a result of increased number of lung subserviced on the lower writing parliament, increasing refinance activity.
Rich custodial and escrow deposits increased 1.1 billion well, 31% during the quarter.
We've always talked about how our servicing business provides liquidity for our balance sheet through these escrow deposits and we averaged 4.5 billion of such the policies throughout Q3.
We're very pleased with the performance of our community Bank as it continues to grow provides predictable and stable earnings for the bank.
Please turn to slide 13 operating highlights for the mortgage origination business include.
I will answer just the loan volume increased 10%, so no 1.2 billion quarter over quarter, while the net gain on loan sale margin rose 31 basis points or 35% to 120 basis points.
As a result gain on sale revenues increased an impressive 35 million. So 110 million in Q3 versus 75 million in Q2.
The increasing fallout adjusted locks volume was due to the continuation of low interest rates dropping increased refinance activity, which accounted for 56% about volume during the quarter.
Because of the variable nature of our mortgage operations, we expanded capacity and optimized earnings from our mortgage business without compromising service quality to our customers.
We also maintained disciplined pricing approach to ensure we focused on generating business in the most profitable channels.
We want to maximize revenues I need this discipline that enabled us to increase that gain on sale margins, 35% to 120 basis points quarter over quarter.
We have a diversified mortgage business given we originate loans in all six mortgage channels. This affords us the ability to look across all verticals and focus attention, where we can maximize revenues and earnings for the bank.
We will continue to take advantage of the slower rate environment, given a nimble model and disciplined approach.
Moving to servicing.
Quarterly operating highlights for the mortgage servicing segment on Slide 14 include we certainly saw Subservice, approximately 994000 loans of which over 826000 or 83% subservice for both us making us the fixed largely subservice during the nation.
We've increased the number of long service still Subserviced by 375000 was 61% in the last 12 months of being one of the fastest growing sub services in the industry during that sewing.
Given our Q4 Subservicing Onboarding schedule, we expect to win 2019 with approximately 1.1 million loans on our servicing platform.
For the first time last quarter. We include you the slide in the earnings today outlining the profitability of our servicing business.
If you look at slide 36, you will see that we're achieving a four to 6 million about pricing profit before tax revenue 100000 loans, we add to the platform.
Of the 5.4 billion NMS saw us we sold during the third quarter 4.4 billion or 81% would be a flow sales, which gives you an indication of the strong relationships, we have with MSR bias on the confidence site happening the underlying quality of our originations and seamless transfer to west subs.
Seeing model.
Today, we have the capacity to service those sub service 2 million loans as well as provide on syllabary offerings, such as recapture services and financing solutions to MSR around us.
During the quarter, we successfully closed and integrated the default servicing transaction and operation we announced in June .
With the rapid growth about subservicing portfolio, it made sense to strengthen our capabilities on the default solid and bring the operation back in house.
This transaction further leverages, our industry, leading oversight monitoring while providing clients the risk and compliance infrastructure benefits flagstar has to walk up.
Our welcome the new employees in Jacksonville, Florida, No. They are committed to delivering the best in class service that clients expect from us.
With thrilled with how we've grown our subservicing business the benefits. It creates another area. So the bank and you will continue to see flourish as we move forward.
Moving onto expenses on slide 15, and noninterest expenses increased 11% or 24 million to 238 million quarter over quarter, while revenues increased 13% 35 million during the same period.
This led to positive operating leverage as our variable cost structure allows us to take advantage of market opportunities, particularly in the mortgage business.
The majority of the increasing noninterest expense was due to additional mortgage activity with 84% 20 million of the 24 million increase quarter over quarter being because of higher mortgage production.
Our efficiency ratio was 75% for the third quarter, which was an improvement of 1% from the prior quarter.
Mortgage revenues, including net return on the MSR asset fees and charges increased 33 million in the quarter well costs related to this business increased 20 million.
We estimate noninterest expense will be approximately 230 to 235 million during the fourth quarter.
The slight decrease in expenses being the results of slightly less mortgage activity given the seasonality of the business.
It's been an outstanding quarter. The community Bank was able to exercise strong margin management, while adding high quality commercial consumer and warehouse loans to the balance sheet.
The mortgage origination team took advantage of market opportunity a 40 for the lower interest rate environment.
The servicing business continues to grow and provide the stable source of noninterest fee income and funding to the bank.
Given our unique business model, which can throw it in multiple interest rate environments. So courted by our robust risk and compliance infrastructure. We believe we're well positioned to continue to add value for shareholders going forward.
With that I'll hand, it back to Sandra Thank you really going to close our prepared remarks now with some guidance for Q4, and then open the call for questions and answers.
Please turn to slide 17.
We expect net interest income to be flat with the net interest margin declining five to 10 basis points and interest earning assets growing slightly.
We anticipate mortgage revenue, including gain on sale and that return on MSR will decrease 15% to 20% due to the seasonality of the mortgage market.
All other non interest income was expected to be slightly higher.
As we noted we anticipate non interest expense will fall to 230 to 235 million, primarily reflecting lower mortgage related expenses. This concludes our prepared remarks, and we'll now take your questions.
Thank you, ladies and gentlemen, if you'd like to ask a question today. Please press star and then one on your Touchtone phone.
If you are using a speaker phone it might be necessary for you to pick up the home center depressed the mute function. So the signal can reach our equipment again that is star and then one.
We'll take our first question from Scott Siefers with Sandler O'neill.
Good morning, Scott.
Hey, how are you done. Thank you for taking my question Center I was hoping you could just sort of expand upon your thoughts on fourth quarter on the mortgage side, specifically, how you see the origination environment holding up overall I mean, obviously, there's some some seasonality that will impact things, but overall I used the environment holding up the longevity of it.
And then how long do you see gain on sale margin is holding up.
Well I think our guidance suggests.
We'll give you that answer I mean, we think that we're going to see normal seasonality and the purchase business. So that accounts for the decline than locks that we're guiding to I think on income side, where we're guiding to.
A little lower but related to volume not so much margin.
Chris anything you like to add to the yet the only thing I'd add is.
That the forecast in September avid, yes season, India increase their forecast over to try and for the first time that year with 39% of anything from refinancing so given our refinance share runs about seven to 10 per se.
The industry average, we think outlook will continue to.
Present, an opportunity for us as we go into Q4.
So were.
Optimistic about it.
Okay perfect. Thank you and then just on the the cost side, just curious as to your thoughts on.
<unk> expenses wouldn't come down more as originations normalize given that virtually all the cost increase in the third quarter is related to mortgage volume. So and then maybe beyond that if they don't come down in the fourth quarter would they.
Continue to flex down afterward.
Environment sort of normalizes from this elevated level.
Yes, Hi, Scott sleeve is a bit of a timing issue here gain on sale is recognized log.
There is mortgage expenses commissions and long processing fees in particular are recognized the closing.
So that results in a bit of a timing issue.
So that's what you're seeing when were looking at Golden seen Q4.
I would say ease we will continue to be diligent cost management across all expense categories as we always happy.
Yes, Scott as we grow retail and retail to slightly bigger share of our total that dynamic that lead just talked about gets emphasize a little bit more so I think that's the explanation to your question.
Okay.
I guess beyond the I, just sort of looking at the second half run rate.
Fourth quarter guidance relative to where you were in a in the first half you know sort of.
Around 200 million, maybe 200 into a five in the first half and then we're going to average you know probably to 30 to 35 in that in the second half.
A lot of.
Yeah, maybe between those two like could we could we ever get back down to the first half level or we had structurally a higher higher well.
No well, we could but we wouldn't want to because that would mean that the mortgage business is slowing down quite a bit. So this is almost entirely related to.
Mortgage activity, it's not a.
Based cost increase.
Alright, perfect. Thank you very much.
You're welcome.
And we'll take our next question from Bose George with KBW.
Hi Bose.
Okay.
Can't hear you both maybe Ron.
Sorry, good morning, yet I was on mute.
Yes, just a follow up first on the expenses. It looks like you commissions increased as a percentage of the volume is that also being driven by the retail mix.
Yes, yes, yes totally.
Okay, well then straightforward thanks, and then I could just going back to your comments on C. So the.
Does that go through the PNM was that the first quarter of 2020, and then prospectively I guess, presumably there is no loss provision unless your assumption changes that right.
So the 30% to 40% that we guided would be the day, one impact which is going to be to capital to kind of retained earnings.
Anything subsequent to that you're right would go through earnings, but the 30% to 40% that I'm talking about is.
Is going through capital and of course that gets kind of amortized for three year period.
Did you catch that last part goes because the regulatory the.
The regulators are allowing that capital hit to be deferred over a three year period.
Okay. So the the impact the capital impact is going to be over three years.
Correct, it's amortized over a three year period.
Okay, and then just to understand the PNM impact going the provision going forward will there.
Is there a provision or is that only based on the change in assumptions.
Well, we'll be both right. So as we grow when we book and new low you've got to put the expected credit losses that you're going to have over the life of that loan.
Take that one day, one so any we'll have a provision that's related to loan growth and then is that overall credit quality and I would say, even the economics and the economic environment. The external factors that could impact the quality of our portfolio change and are reasonable and supportable forecast change that will also have.
At impact to the loan loss provision.
Well I think we all have still have a lot to learn about the Cecil thing as we go forward, we're giving you our best estimates based on what we know today, we're still refining all of this and we'll be able to top more more intelligently about it at the end of Q4 of course.
Okay, great. Thank you just one more for me the just the relationship with Green Sky given that the headlines out there any update on that on the agreement there.
Yes, no update I mean, if you look in the.
Releases, we we've got about 58 million of those loans on our balance sheet at the end of Q3.
Program has been going for about a year now as you know so we're originating four to 5 million a month not huge amounts.
And the launch of performing as expected.
Okay, great. Thanks.
Youre welcome.
And I have a question from Evan Barker with Piper Jaffray.
Kevin.
Good morning, Yes, Hello.
So sandra or Jim could you just give us an idea or maybe.
How are you changing.
Sure.
Working capital levels, you're going to mean.
Given the impact of Cecil on capital I understand it amortizes over three years and stick a little while but your rents are going to have to target.
Regulatory capital ratios when it's fully implemented so could you just are you thinking about adjusting your capital targets just given seasonal.
No.
Look if we have enough capital today nothing's changed the the loans that are still the same loans capitals. Good today at at 12% number.
And some.
Accounting change some book change causes that to now be 11 at a half.
I don't think that I don't think that really impacts how much capital you have I think it just impacts.
It's two different measuring system. So you still have adequate capital on both situations.
Greg your losses Orbi capital hasn't changed at all just words located on the balance sheet.
And when you recognize it.
Right right and as I don't I don't expect aspect the regulators to change our expectations relative to capital and I don't see us change in our targets relative to capital.
Okay.
And then the follow up on similar Scott's questions regarding the mortgage outlook.
Are you.
Expecting you to be near capacity.
The fourth quarter, given the demand that's it's out there for for refinances today.
We're always near capacity, that's the way we run the business.
So I mean.
To sum.
Flippant flippant, but I mean, that's a serious answer we always run to capacity.
That's why we've been able to manage this the way that we've managed to.
Okay.
Good day.
Implies that you're able to ramp up retail originations like you have in the third quarter, just definitely helping out margin.
Yes, Thats right.
And then.
Follow up on loan administration fees they have been under.
Similar pressure.
Even though you're growing your sub servicing portfolio is there some offset there just because of higher prepay speeds or is there something else that's impacting diminished running ministers, yes, yes, it's a from a gap a point of view the interest on the gross that we paid to the MX saw romano's runs through that loan at mean income loss.
And that's why we've laid out on slide 36 of the day the servicing profitability.
So you can really get an idea or the profitability of that makes me slowing so the disconnect tool what youre getting in the low not ATMI income loin for GAAP purposes is the interests on those escrows that pie.
Yes, the slide as it really nice job of laying all that out.
Okay. Thanks for taking questions.
You're welcome to.
And we have a question from Chris.
Hi, My Tony with Compass point.
Hello, Good morning, everyone Hi.
Thank you somewhat thank you for the additional disclosure on C. So I was wondering if you could give us any sense of you know which portfolios you're seeing the most inflation.
In which a loan categories.
Yes, I don't I don't think we're ready to get into that detail, yet, Chris where there's there's a lot of.
Inside of that.
Range that Jim gave you there's ranges for each piece of the puzzle and I think would be dangerous for us to try to give you more specific guidance on that at this point, maybe next quarter, we'll see but we're not ready to to be that granular.
Okay.
And then on the custodial deposit base do you have any sense of maybe the near term outlook for that portfolio. They sell field, where you see with your customers.
No I mean, as we said in the prepared remarks, the jolla custodial by seats because of the highest subservicing loan count we're close to a million loans.
The wilhoit payoffs during the quarter, which create you'd more piano.
Then just given the was how are you seeing all my balance sheet. That's a seasonal thing so as long as the interest rate environment stays low and we continue to grow asked subservicing business.
I think the balances that you saw marine in Q3 will probably hold relatively the site Chris the biggest factor. There is is the revised and so thats expanded just because of the refi volume that's flowing through the escrows and so it really depends on what's your view on.
The mortgage market is going to be into the future. So what's the size of the that custodial balance is going to be.
Right.
And just trying to look at as a mortgage guide and taking into account normal seasonality theirs.
I'd say being a pull back in the correspondent business would you would you expect that to maybe pick up a little bit in the fourth quarter or just kind of your guidance based off of a similar call channel mix quarter over quarter.
Yeah, what I see Chris is yes are we going to continue to fly the strategy that we have our year, which is evaluating the opportunities that they present themselves. Then we'll look at channel will look at product and determine where we can most take advantage of that market. So that will continue to be our strategies and location.
Sure I.
I think as we try to highlight that's the that's an advantage that we have with the scale and the and the broad.
Delivery channels that we can.
Choose from allows us to shift move take advantage of the opportunities where they might be and that does change at times and sometimes service is more important than other times and so I think what we've been able to do this year is very reflective of the nimbleness that we have any and our ability to.
Adjust to the business opportunities that present themselves.
Alright, Thank you Sir.
Thank you Chris.
I will take our next question from Steve Moss with B. Riley.
Good morning.
Hi.
I wanted to ask about mortgage warehouse pretty big increase in commitments here. This quarter, just wondering the drivers of commitment growth, there and where you're seeing pricing in that segment.
I'll make some introductory comments and then I'll let drew.
And then as well well, obviously the mortgage businesses the stronger and so for that reason, we have more opportunities in warehouse and so you've seen the outstandings as well as the commitments.
So quite a bit there is definitely pricing pressure out there and.
Our resolve is being tested but our resolve hold strong up to this point and I expect that it will continue to.
We I think we told you last quarter that we passed on close to half a billion dollars of opportunities because of price that dynamic continues and so.
I think one of the reasons why we're able to continue to grow the income other companies because we are disciplined about price across all of our lines of business.
Yes, just.
Modest amount to add to that I mean, I do think that as the Rifai market has picked up you've seen more volume coming through that part of the warehouse business since to be some of the larger players and so more pronounced pressure on rate as sandro alluded to but we're sticking to our guns were not layman's into credit were not leading into the pricing.
We have a really diversified book of business.
Away from the smaller.
Smaller firms up through the larger ones and so we're able to be very I think disciplines in terms of where that growth coming from I.
I think you can see that we've had really good growth even relative to the market sizing and we expect that to continue its really a function of our lenders and the the service we provide to our clients just I'll just add I mean, you mentioned commitments. It's really the outstanding stood have increased and the thing will most pleased about used the utilization right the utilized.
Question right for our warehouse space, maybe using the mid Sixtys, which were thrilled about and I think you're also seeing the benefit of the the acquisition, we did last year as well on the warehouse solid which he is also.
Having a good impact for us.
Okay. That's helpful. And then feel like commitments were also up pretty good quarter over quarter I know some of that was homebuilder, just wondering where else you saw that [laughter].
Yes, no we saw some pretty good growth in commercial and the balances as of that was really split primarily between our commercial real estate book at our home builder Finance book I think as Jim alluded to Homebuilder finance, let that led the charge does a really solid originations as well as some fundings under new some of the originations.
We've had throughout the year.
I think if you look at that market. Despite some affordability issues I think just the interest rate environment that we're in.
The book that we've developed relationships that we have we really feel like we got good runway there.
I would add it wasn't really anything unusual although the growth in commercial if you add all of them together cnine carry homebuilder warehouse I mean, we've been doing that quarter after quarter for a number of years now so I don't view it as anything unusual I think thats, what we were a key.
Some too and that's what I'm hopeful we can continue to see yes, I think that's exactly right I think much like Christy your remarks about mortgage each quarter, we were able to take advantage of what the market's offerings. This mark this quarter it happened to be more in warehouse than some other ones, but we're seeing good growth across all those lines of business to your point.
Okay. That's helpful. And then one last question on the margin here just wondering what your what your great assumptions are for the fourth quarter, if you're assuming additional rate cod and where are you seeing deposit pricing cost as well.
So we're seeing it got.
We expect the federal cut next week.
They may or may not cut in December , but that's not really going to have an impact on the other fourth quarter. If they do so let's just.
We assume that they're going to cut at the end of October .
Regarding how that impacts I made some remarks in my prepared.
Part of the speech to talk about what the natural offset in our balance sheet was.
And when you go back and look at the administratively price deposits.
I think there is I think there's some.
Attainable level of administratively price movements that are going to have to do in order to.
Outperform or be at the lower into that range the range that we guided to though.
Is not all deposit beta driven I'd say part of its just the natural mix driven component of our balance sheet as we go from.
The third quarter with more mortgage volume to a fourth quarter, where some of the portfolios kind of naturally contract and then they expand again in the second and third quarter. So some of its that mix component, just mixing down especially out of warehouse loans.
And some of it is just that.
Positive.
Costs, we're assuming a pretty low.
Modest beta of around.
40% to 50%.
And then we challenge ourselves to get to that level I think we raised to that challenge in the third quarter.
Yes, I understand that I would add.
As an embellishment of Jeff let Jim just said is that we're going to continue to be very resolute on deposit pricing similar to what I commented on a few moments go regarding loan pricing. That's what you have to do to manage a margin in a declining interest rate environment and.
Because we have a lot of funding that isn't directly retail driven we have the ability or we will see those funding cost come down pretty quickly.
Hi bore the fed changes so.
It's a challenge for sure, but we do think that were more resilient and many relative to managing our ability to manage that margin.
Alright, Thank you very much.
Welcome.
And our next question comes from Daniel to my all with Raymond James.
Hi, Dan.
Hey, guys good morning.
So let me just follow up if I can on on the margin questions.
On the.
On the net interest bearing.
The deposit beta your 40, 50%, but.
And there was a component of that margin pressure.
Posit caused does that assume that noninterest bearing come down at all and the fourth quarter or.
Or are you assuming those kind of stay flat and then the second part being.
Thank you hit an inflection point in and interest bearing deposit costs in the third quarter in that those can start to come down now.
Noninterest brand was your question relative to the balance of noninterest bearing deposits you right right. They got yes.
Yes, I don't think the interest rate environment really impacts that very much those are real core deposits and they don't change much if anything perhaps of grow a little bit as opposed to decline and yeah. I think I think that we're now clearly everybody believes in a declining interest rate environment, including including the retail customer base. So I think.
Theres more now there is an acceptance so thats the world we're in and so that does.
Allow us to maybe be a little bit more aggressive, though I'll say our team was very aggressive in the third quarter on reducing rates already so I don't know if that will change a whole lot for us, but yeah, I think the mental dynamic of where we stand in the market. There probably was an inflection point of the third quarter.
Okay and can you remind me the the custodial deposits the those fit into the non interest bearing category are those.
We've broken them out in the press release.
Currently for you so that should help but mostly there noninterest bearing.
Let me be clear, though they're non interest bearing and have no cost if we own the MSR correct. If we don't on the MSR than we do pay for those deposits and we do disclose that and that is that is part of the.
Profitability that we show on slide 30 to 36 for the servicing business, which flows through the net loan admin income line when you're looking at a gap PNM.
But those are largely the cost of those funds are largely tied to LIBOR almost entirely off yes. So in LIBOR goes down those costs go down as will immediately.
Got it okay. That's very helpful. That's all I have thank you.
You're welcome.
And we'll take a question from Henry Coffey with Wedbush.
Yes, Andrew good morning.
Morning, everyone and thank you for taking my questions just some more detailed sort of stuff on the servicing business breakout which is very helpful.
Do you include.
The the revenue and related costs from your own servicing or is this just subservicing business no vcs, including our own sub assemblies me the reason being.
The MX saw a flagstar just think of it being owned by Treasury, an asset servicing fees Macy's the manufacturing company that Subservice sees those loans Frac Treasury group. So those economics are in page 36 goodwill of Henry is about 80% of those deposits are controlled by external party.
It's about 20% or our own MSR.
No actually I'm looking at the the servicing revenue so.
There's a transfer costs I mean, basically what we're looking at is the profitability of a sub servicing business.
Are we looking at the.
And so there's a transfer price between.
Treasury and.
The servicing business, yes, correct, we the servicing business just treats.
The Treasury group like any other Remy saw Rona.
And so if we were to look at the total equation, we could also fold in the.
The whatever you're getting the whatever the Treasury group is earning and then we'd have a full.
Sort of a complete picture of what's going on yeah, you're trying to get an external picture.
Yeah, and if we were going to.
Use the transfer prices.
Can you disclose that or is that are we going to can we pick that up into Q.
No, but what I, what I did say earlier when you look at these numbers. It is a whole so it's 100% both what we service for ourselves and what we service for others and it's about an 80 20 split 80% serviced for others, 20% surface for ourselves.
Actually 83, seven see not to get to following up with it so.
Let's say was 83 point, what [laughter], saying, yes.
Maybe if you like Henry no no. Thank you.
But yeah, that's helpful and we'll we'll dig into that a little bit more when when you look at.
Your Cecil guidance, you're basically should we enter if we're going to put together a pro forma.
Should we assume basically that your loss reserve goes from 0.9 to something in the 1.2 range is that the way to think about it today.
And then the related question.
Well, you said, 30% to 40%.
That's probably going to let the coverage ratio, yes, yes, that's probably the right way to think about it but also I want to point out Henry one of my remarks was they said that we are also including the impact of the unfunded loan commitments, which would be sitting in the liability sections. So.
You're thinking about it right, it's just not going to show up exactly that way because the liability or the reserve we have.
Credit losses on the unfunded loan commitments is technically a liability sits in the liability section of our balance sheet and this is an area. This unfunded loan commitment piece, where there's more credible change from the past I think.
Developing area.
We've done a lot of work on Cecil and to be perfectly blunt solving a problem that doesn't exist.
But it is what it is and we're all going to would just.
A lot of heads nodding over here.
[laughter] so that the obvious question that comes from all this.
Around C.. So you don't lose any money you're losses artists that are really low so how do you come up with lifetime losses on a business that doesn't lose money.
Just have to assume a.
Once in a recession and nothing new.
We are using external information to help guide us here I guess.
Yes, we are we're using just kind of like average we're using moodys and so we're going back to a reference set of credit losses on our our portfolio. So I think we've proven that we can outperform what those expectations are were better than average and managing credit.
But for now I don't think we get credit I think we'll get credit for that over time in our accounting numbers.
And then finally given.
That you've got this cross when from C.. So you could halt obviously alter your whole loans held for sale and some other things.
How does the green Skype business fit into any of this I mean is there a franchise value that comes from that or is it just.
Financial return, that's not going to have a much higher reserve content to it.
Actually I don't think it changes much at all the the reserve content on the on Greens, guys will be unchanged as we view it and.
You know its $50 million so the impact on a $22 billion a company is just.
Nothing.
What's the benefit of it.
Well, it's part of diversification right. There's a lot of things that we have that don't have billions of dollars that we don't have billions of dollars invested in but if you're if you can find something that that and then this case all the expenses are pretty much borne by a third party that brings you some loans and it brings you some.
But we started that hurdles that why not so.
There's a lot a little pieces that don't get the attention that Greens Guy does a lot of bigger pieces the don't get the attention the.
True right.
Tenths of a percent of our balance sheet.
Great guys just come into the news because it's.
Got a lot of controversy around the stock, but you know that's helpful. Thank you very much.
You're welcome.
Sure.
And there are no further questions in the queue at this point I would like to turn the call back over to our speakers for any concluding remarks.
Q.
As we highlighted flagstar is a unique company a $20 billion bank with a $30 billion mortgage business.
Well most banks society that mortgage is not a good business to be in we had a different view, it's a business that started to our bank that said, our DNA and we understand the challenges better than anyone volatility expense management MSR management compliance the politics, the regulation and how to mess.
Manage all of these things so let's look at where we are we've proven we can manage volatility has anyone manage mortgage profitability through volatility better than flagstone.
We've proven we can manage expenses did anyone adjust more quickly when volumes declined.
We met the challenge that Basel three presented us with respect to investments in MSR ours has anyone had a better track record managing their emmis ours.
And we've built a risk and compliance framework that I will put up against any ones in the industry.
And one more thing has any bank built the servicing business post recession not to mention one that stands on its own is growing and is making money.
Lay a well balanced and diversified banking business on top of all that and yes, you have a unique company. That's why we like the model. It's one that works in any market and one we will continue to invest in to keep delivering solid operating results quarter after quarter.
Finally, none of our success would have been possible without the selfless contributions for the flagstar team my sincere thanks, everyone and reflects our family for the important contributions they have made to our success.
Thanks again for spending some time with US this morning to hear a story I hope you have a great fall and holiday season.
[noise] and once again that does conclude today's conference. We appreciate your participation today.