Q4 2019 Earnings Call

Average deposits increased 0.1 billion driven by higher custodial balances, which rose zero point two billion or 5% due to an increase in the number of accounts serviced home. Finally. We continue to grow a tangible book value per share which end of the year at $28.57 up $0.95 from last quarter in so let's now turn to asset quality of life had nine credit quality of the loan portfolio remain strong early-stage delinquencies continue to be negligible only 14 million of total loans were over 30 days delinquent and still a it December 31st or allowance coverage was 0.9% of total HFI loans I point out that this coverage reflects 23% of these loans being Warehouse loans. So excuse Warehouse loans for the denominator given the relatively clean credit loss history. Our coverage ratio is stand at 1.1% among the strongest in the industry.

Turn on this light.

Ten. I'd also like to give an update on Cecil.

We now expect our reserves will increase approximately twenty-five to Thirty 5% This includes the impact on our reserve for unfunded commitments. As you know, the impact of adoption does not affect income at implementation the Cecil impacts each of our portfolios quite differently depending on the life of the loan and the collapse type including whether the loan is secured or unsecured considering our current economic Outlook in the mix and credit characteristics of our loan portfolio the day one change breaks down by portrayed as follows. We expect our Residential Mortgage portfolio, excluding loans with government guarantees to be reserved at 0.8 to 1.0% off.

A consumer loan portfolio to be between 1.9 and 2.2% are commercial loans excluding Warehouse loans to be between 0.6 + 0.8% in our warehouse loan portfolio to be minimally impacted by Cecil Additionally. The reserve for unfunded commitments is expected to increase by approximately three times a month largely due to existing lines with our non Warehouse commercial customers. We also continue to maintain reserves for our loans with government guarantees and for specifically measured loans whose amounts are not impact the Cecil methodology change give it a forecasts for growth in each of these portfolios. We'd expect our first quarter loan-loss provision to be between three and five million jobs. It's a replacement of net charge-offs.

our expectations from

Makes another changes on our loan portfolio and no changes to our economic Outlook.

Turning to slide eleven despite balance sheet growth. Our Capital ratios remained relatively unchanged total risk-based Capital was 11.5% at December 31st down. The only two choices points while RCT one ratio of 9.3% was up 7 basis points our Tier 1 leverage ratio of 7.6% was down as we allowed the balance sheet to flex off this quarter as you're aware. These ratios are based on Old Capitol rules under new capitalist simplification rules, which were now subject to our Tier 1 leverage ratio at December 31st would have been 8.0% 43 basis points higher and our total risk-based Capital ratio would be 11.7% 22 basis points higher.

It might be helpful to look more closely at the quarter-to-quarter change and our total risk-based Capital ratio, which is still are Titus Capital ratio earnings retention increase the ratio by 31 basis points off balance sheet growth in the loans held-for-sale portfolio alone reduced this ratio by twenty five basis points all other activity accounted for a net decrease of only eight basis points. We're quite comfortable with the ratio compression that is coming from growing loans held for sale loans held for sale are carried at fair value in that portfolio turns over on a regular basis between loans held for sale and our warehouse and Loan portfolios Thursday. We have approximately four hundred fifty basis points total risk-based Capital dedicated to to asset categories that have very little risk content.

in Warehouse lending, which has a

10% risk wait, we've had under five million of losses humans of Lee over the last Twelve Years a. That includes the Great Recession higher or lower balances in these two categories did not meaningfully change the outputs from our Capital stress testing models. So this is why we remain comfortable with our Capital levels in December 31st.

And I'll turn to lie for more insight into each of our business. Thanks, Jim and good morning everyone. We're very pleased with our net income of $1 per diluted share for the fourth quarter and adjusted net income at $3.46 per diluted share for fiscal 2019 these earnings resulted in a return on Equity at 12.7% for the quarter and adjusted return on Equity of 11.7% for the full year. The last twelve months have seen declining interest rates put pressure on net interest margin for many banks that are unique business model, which is well-balanced between interest income and non-interest income revenues has delivered outstanding results.

to further illustrate this

During the year 49% of our revenues came from net interest income while 51% came from non-interest or fee income as a result of we believe in our ability to deliver predictable and sustainable earnings in any interest rate environment and continue to generate strong returns for our shareholders.

There were several other notable developments during the year and quarter which included average interest-earning assets increased and impressive 4.3 billion or 26% in 2019 with 1.7 billion or 9% occurring in the fourth quarter. We saw good growth across all commercial and consumer loan categories while our net interest margin increased from 2.89% in 2018 to 3.05% in 2019. Despite there being three rate Cuts during fiscal 2090 average retail deposits increased 1.5 billion year-over-year in large part a result of the fifty two branches. We acquired at the end of 2018 month average custodial deposits also increased two billion in 2019 as we continue to successfully grow our sub service in business and add more loans to our servicing platform.

mortgage

Banking revenues increased $105 million or 44% to 341 million in 2019 versus 236 million in 2018, Is that mortgage origination business was able to stay disciplined and take advantage of the lower interest rate environment during the year as subservicing business group 28 / 6 in 2019, and we ended the year servicing or sub service in approximately 1.1 million loans which generates consistent non-interest being for the bank off the integration of the default service operation. We are quite at the beginning of the fourth quarter has also gone very smoothly during the year. We closed out the last remaining Legacy regulatory issue with the expiration of the cfpb consent order on September 30th. Finally Capital remains solid and we just announced an increase in our quarterly dividend. Yep.

Which cents per share after we reached?

Salty that dividend program at the beginning of 2019 which is enabled our shareholders to further benefit from our success. It's been another exciting year for Flagstar and I'm proud of what we've accomplished furthermore given our business model. We believe we can continue to grow and reward our shareholders with even higher returns in the future. I will now take some of the key operating metrics from each of our major business segments during the fourth quarter, please turn to slide 13 quarterly operating highlights for the community banking segment include average commercial and Industrial and Commercial Real Estate loans increased 128 million or 3% with the growth being driven predominantly by home builder Finance Loans within our commercial real estate division average Consumer loans held for investment increased $58 million or 1% in the quarter as we continue to add high-quality non Auto in Direct Loans, and he locks dead.

portfolio we've added

Almost nine hundred million of Consumer loans to the balance sheet over the last 12 months with most of that growth coming from non Auto in Direct Loans, and he locks.

Average Warehouse lending loans increased $239 million or 10% to 2.7 billion in the quarter as the lower interest rate environment increased refinance activity that industry overall. This means average loans held for investment increased $425 million during the quarter which drove the Six Million or 4% increase in their interest income Palm Coast over quarter, given our expanded footprint and relationship based approach to lending. We will continue to originate high-quality consumer commercial and Warehouse loan balances going off.

Average demand in savings deposits increased 133 million while average custodial in escrow deposits increased 222 million as a result of the increased number of language sub service on the lower rate environment increasing refinance activity as we look ahead we will continue to grow the Community Bank given it produces predictable and stable life for the bank. Please turn to slide 14 causing the operating highlights for the mortgage origination business include Fallout adjusted lot volume decreased 11% to 8.2 billion quarter-over-quarter while the net gain on loan sale margin increased three basis points to 123 basis points, as a result gain-on-sale revenues decreased 101 million in the fourth quarter the slight decrease in Fallout adjusted lock volume was due to the usual seasonal slowdown in the mortgage industry, but the continuation of birth

interest rates driving in

Kris refinance activity offset some of this decline refinance activity accounted for 56% of our lot volume during the quarter mortgage closings of 9.3 billion in the fourth quarter were consistent with loan closings in the third quarter and this is Testament to our mortgage operations team and how they optimize our available capacity without compromising service quality to our customers. We continue to maintain our discipline pricing approach to ensure we focused on originating the right loans. Am always in revenues with a capacity we have available. It's this approach that enabled us to increase gain-on-sale. Margin three basis points to 123 basis points in the club were very pleased with how we've been able to take advantage of the lower interest rate environment in the mortgage business. It has generated significant non-interest being during the call log.

and yeah, and

It's a natural hedge to some of our other businesses in a declining interest rate environment as we have seen throughout 2019.

Moving to servicing quarterly operating highlights for the mortgage servicing segment on slide fifteen include we ended the quarter service in our sub service in approximately 1.1 million loan which over $918,000 or 84% a sub service for others. We increase the number of loans serviced or sub service by 97000 month 10% in the quarter and 240000 or 28% in the last 12 months and have been one of the fastest-growing sub services in the industry during that time today. We have the capacity to service or sub service two million loans as well as provide. Ancillary offerings such as recapture services and financing solutions to MSR owners.

If you look at slide thirty-eight, you will see that we are achieving the high end of our 46 million of operating profit before tax guidance for every hundred thousand loans. We add to the platform of fiscal 2019 our servicing business generated $49 million of operating profit before in direct allocations and tax.

During the quarter we sold 4.9 billion of Ms. Ours all the airflow sales and 88% of the loan Soul was servicing retained which gives you an indication of the strong relationships with have with Ms. Our buyers and the and the confidence they have in the underlying quality of our origination and seamless transferred to our subservicing model the integration of the defaults operation in Jacksonville that we're quite at the beginning of the quarter has gone very smoothly indeed and gives us full control over the lifecycle of any loan custodial deposits average 4.8 billion in the fourth quarter an increase of two hundred twenty two million or 5% from last quarter. This is an illustration of one of the additional benefits we get from our sub service in business as it provides liquidity the helps fund that balance sheet.

We couldn't be more pleased with the growth and results of our sub service in business and believe we have the right team platform and offering to continue its success in the future.

We hope to expenses on slide sixteen a total non-interest expenses increased 3% or 7 million to $245 million quarter-over-quarter, while total revenues decreased slightly by 3 million to $340 million during the same. The main drivers of the increase in expenses were as follows. There were five million a balance sheet cleaner and discretionary expenses in the fourth quarter and investment in our mortgage business of two million during the quarter as we continue to take advantage of the loan. No rights environment.

If you look at slide 17, our core non-mortgage non-interest expenses will 136 million in Q4 after excluding the previous mentioned five million, which is flat when compared to Q3 expenses tied directly to the mortgage origination business will 104 million an increase of two million versus Q3 given mortgage closings, which Drive mortgage expenses with flat quarter-over-quarter and we continue to invest in this business off approximately 75% of expenses tied to the mortgage origination business are variably nature and paid on a per-unit basis or semi very wage which means they are just quickly and easily if mortgage volumes decline mortgage revenues, which are a function of mortgage locks decreased ten million dead.

the quarter and we were

Expect this to translate to lower mortgage closings and therefore costs associated with the mortgage business in the first quarter. Our efficiency ratio was 75% for the fourth quarter, which was a worsening of 3% from the prior quarter for the reasons are just outlined going forward. We will continue to include this granularity to our systems reporting and with focused on optimizing our court non-interest expenses in 2020. We estimate non-interest expense will be between 225 and 233 million during the first quarter the decreasing expenses being the result of less mortgage activity given the seasonality of the business.

It's been another strong quarter an outstanding Year all three of our major businesses the Community Bank mortgage originations and servicing have made significant contributions to the bottom line. We believe we have a diversified business model where the different businesses complement each other, but also act as a natural hedge meaning we can be successful and generate consistent and predictable earnings in any interest rate environment given this unique business model and seasoned management seen. We believe we will continue to create value for our shareholders not going forward with that. I'll hand it back to Sandra. Thank you Lee going to close our prepared remarks with some guidance for q1 and then open the call for questions and answers. Please turn to slide 19.

We expect net interest income to decline.

To 10% due to a seasonal decline in interest earning assets together with a narrower net interest. Margin. It's Jim noted. We expect a provision expense of three to five million wage. We anticipate mortgage Revenue including gain-on-sale and that returned on MSR will decrease ten to fifteen percent due to the seasonality of the mortgage Market all other non-interest income is expected to decline slightly ugly noted. We anticipate non-interest expenses to be $228 to $233 million reflecting lower mortgage related expenses as well as the elimination of the discretionary expenses that he noted and finally we expect the effective tax rate to be consistent with Q4 2019.

Finally, I'd like to expand on expenses a bit when the mortgage environment is favorable. We have the ability to quickly scale up to take advantage of Revenue growth opportunities and because of the way we have built this busy we can just as quickly ratchet down costs when the demand for origination falls off. We did this not only in 2018 but consistently in the past with the ebb and flow of the mortgage Market that's not to say that we can't become more efficient improving efficiency is a major Focus for our team this year and we are determined to make progress as a start this quarter as you've seen we introduced regular T in our expense numbers to help you model more accurately. This concludes our prepared remarks and will now open the call to questions from our listeners, Emma.

Thank you.

Like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment back again, press * 1. Ask a question will pause for just a moment to allow everyone opportunity to signal for questions.

Our first question comes from Georgia Josie with KBW morning. I wanted to ask just about the office first to just going forward, you know, you noted in 1/4. Your guidance is the 5 to 10 basis-point decline have driven, you know, just by the December rate cut, you know, can you just talk about any impact from home at the changing asset mix, you know, you get loans help for sales will decline. You know how that plays into it as well.

Sure Bose. So let me first say that I'm really not too concerned with the name compression that we've seen and what we projected projecting and then a couple of factors that come into play here the two billion of deposits. We purchased through the the branch Acquisitions are very low cost as I'm sure you recall correctly. They can't get any cheaper and q1 will be the first quarter where commercial book feels the full impact of the last fed move second. The average balance of our loans hold for sale grew 1.1 billion in Q4 and at an average of about I think it's 3.9 to while in while that's a great are baptized. It's spread is relatively narrow.

So while we see loans helpful.

So shrinking a bit in q1, the average yield will still be.

We're probably decline a little bit actually and while it's still a good arm still a negative impact on overall men plus we expect Warehouse will probably shrink a bit down to one and as you know, that's a very high-yielding asset. So when you you know, really look deep I think you can see that the name compression is a function of the make up of the balance sheet wage is different than most other mid-sized Banks but something we're very comfortable with and I think when you see that this happening to Nim the Dynamics that are causing that to happen are actually the same dynamics that are causing our mortgage business to see better revenues.

Okay, that makes sense. But and and just I know you don't sort of give guidance, you know sort of more further out. But you know, if you look at past the first quarter the impact of the you know, the choice cuts are over, you know, is it sort of should we think about more stable margins after that? Well that all depends on what happens to the interest rate market, right? So it's very difficult for me to answer that question with a high degree of certainty, but you would think for everybody If the Fed doesn't change the position that stability in margin more likely but you know, we're we're not I can't be specific about that. Okay makes sense. And then if you just switching over to the mortgage, so I just wanted to ask a a regulatory question is just with the you know proposed changes to the cfpb's, you know, suggesting to the qm patch potentially reduce taking removing the 43 DTI. You just wanted to get your thoughts of birth.

you know how that plays out whether you know, you you feel like that's going to have its going to be booed bad, you know, just

Your thoughts on that would be great, you know Chrissy comment on it, but I think generally we do that is is positive.

Yeah, we do. I I think one of the first things that would happen. I'm sorry both. This is Christy. One of the first things that would happen is you know, they would look to potentially do an extension of that. But I think their proposals on the table looking at kind of the APR at 1:50. If something that we feel very comfortable with and wage will actually be pretty easy to manage to so I think you know, the one thing everybody's committed to is ensuring a smooth transition and no disruption to the market. And so I think whatever thoughts ultimate decision gets made and certainly all the proposals that are on the table today. We feel very comfortable with and we'll be able to adjust quite easily.

Okay, great. Thanks. Thank you. Our next question comes from Scott ciphers with Piper Sandler Morning Star home gym. Maybe first question is for you just regarding the overall size of the balance sheet site. Sounds like we'll get some relief in in the first quarter, but just curious for your thoughts on our appetite to you know, they're after grow the balance sheet of the same kind of pace. You've been doing just given where you are with with existing Capital levels even under the the boss not methods.

Let me give you some thoughts first time.

Scott then I'll let uh-huh Jim chime in here. You know, we've always been able to optimize the growth opportunities and will continue to do that. I think, you know, you've been following us a long time, you know that they're pretty good success doing that in the past. We know the the return on Equity of every loan that we put on our books. And so if it doesn't Hertel our return expectations, I just don't make it. So we'll do as much as we can given that requirement while not compromising credit at all, depending on what those opportunities are whether they might be in seeing a Rebuilder Warehouse or even consumer non-mortgage will determine just how much help for sale We Carry in the mortgage business.

So all of that all of that in mind, we still have to make sure that we keep our Capital levels where they need to be. So I think with this this is the real name of our balance sheet that it gives us the flexibility to adjust our helper sale to offset either greater or less growth in our commercial lines of business. So it's just overall. That's how I view the growth of the company going forward which isn't any different than the way we manage it in the past. Jim can get into the more, you know County related issues here than I'll let them do that. Yes. Yeah, so I was going to go right there and I'm glad that's under I did because he he made those comments in his prepared remarks that we have someone and we've said this for a few years now unparalleled flexibility in our balance sheet. So what you saw this past quarter was that we increased our loans held for sale because we had that opportunity and we we took we did that. I'll be at Birth.

It it hurt him a little bit but improved the returns that we had on Equity cuz we were able to flex that up.

And and fully invest the balance sheet as we move through the quarter. I think you're reading our guide right which is the we'll expect that portfolio and and likely Warehouse loans depending on where the mortgage goes in the in the first quarter those will Flex down a bit. So I think I think that you'll see that spin down but I wouldn't think anything of that and to the extent that we may have the capacity just know that we always have the ability to flex up the loans held for sale if we don't find the growth opportunities that we like in commercial lending or in commercial lending. We always have that capacity to flex that that one category up like we did this past quarter to maximize our early and we've been we've been saying over the past five years and I know we have a slide in in the deck that talks about our age or Over a four-year time period of of growing earning assets, I wouldn't expect the future Pace to be as brisk wage.

Has in the past because four years ago. We had a situation where we are underinvested from a

Capital standpoint and now we're no longer in that position. So I would imagine just like this past quarter where we were able to add a billion to of assets but keep our our Capital ratios flat-pack. Our Capital retention is going to really influence the amount of balance sheet growth that we have and if I could just emphasize this concept of flexing the balance sheet to take advantage of our ability to home mortgages longer it and and therefore get the Arbonne that that's always going to have a negative impact on the Nim because while they are both solid and and has absolutely no risk. It's narrower than our than the than the name in our banking business. So when you see that Nim compress not necessarily a bad thing. I mean, we we showed an increase in net interest income an increase in that interest income produces more earnings more earnings produces a better return on Equity that should turn into shareholder value. So, you know, I consider and I can yep.

so we can decide not to grow mortgages help for sales by a billion dollars so we don't have

Mortgages that have a yield under 4% going on the books for 30 days and and I can report an M Improvement. But is that better for the company? I don't think so. Okay. I appreciate all that color. And then if I could ask a follow-up just want to move to the cost. I'd appreciate the extra detail. You guys given the mortgage first non-mortgage. Maybe just a couple of things in there. Is there anything that would prevent you guys from getting back down to the that sort of fifty-five to sixty million per quarter in mortgage-related cost, you know changes made to the mix and then is there any opportunity to reduce costs apps and more of a decline in origination? I guess the context in which I asked Thursday it is we sort of know what the aggregate cost base will be in the first quarter given your guidance, but they're after you know, presumably origination pop back up in the club.

Of the year, so just just wondering if there's an opportunity to pair back any of the cost based apps and something more productive. So to speak in the origination side.

Scott it's Lee. So a couple of things on the mortgage side and I mentioned this in the prepared remarks approximately 75% of the mortgage expenses a variable or semi variable in nature off. So they will adjust quickly if mortgage volumes were to decline and we feel very good about the variable cost model. We put in place on the mortgage side, We'd giving you the additional granularity so you can now see the the cost for the non-mortgage businesses and both Sandra and I mentioned are focusing 20-25 get more efficient as an organization so that 136 million in Q4, we will be focused on that particular number I can add to Scott when you talk about the efficiency and we talked about some of the technology Investments that we made in mortgage that kind of additional 2 million, you know some of those efficiency or some of those dead.

Allergy investments will actually help.

Drive additional efficiency in some of our businesses. And so um, you know, so we'll continue to look for and it's under you know talked about the efficiency exercising or going was definitely looking at where we can get more efficient and continue to take costs out of the business to get back to a $55 million dollars in mortgage expense, which is what it was back and forth quarter of 18. That wouldn't be a good thing. Right? They would mean that the market is is small little small little what we've tried to lay out here by giving you this granularity is to show you a job while well, there's been this increase in mortgage expenses. The increase in the revenues have been more more and at a really nice leverage and so off the back down to $55 as quickly as we need to if the revenue isn't there, that's the point we're trying to make here and that's why we're trying to show you the difference between the core expenses and the mortgage expenses but wage

If we're going to do the volume that we did.

This past quarter in in the mix that we had this past quarter, which we think we're optimizing we can't do that with half of the mortgage expenses that we have today off. Okay. I appreciate I got to tell you I couldn't be more pleased with the way this Mortgage business is being run. I mean, we could have originated forty fifty billion dollars of mortgages last year wage, but the margin would have been narrower expenses would have been a lot higher in our exposure to MSR risk would have grown exponentially know twenty Billion Dollar Bank in the country is average as as Iraq over thirty billion dollars of mortgages and I think the way we've managed is business keeping it profitable no matter what's going on with interest rates managing MSR risk expertly avoiding consumer compliance. It's just I don't know how we could do it much better.

Yeah, all right. That's perfect. I appreciate it.

Thank you. Our next question comes from Daniel Raymond James. Well, you just said you just touched on the question. I was going to ask which was on the if you're passing on on mortgage origination opportunities, which it sounds like you are. So so I guess given that is sustainable in the game of sale again on sale. Margin is really really high. You guys didn't expect it to stay up as high as it was last quarter and it Rose. So I guess the question again is off. If you are passing on these opportunities. Can you do you think you can continue to to see again on sale margins at at an elevated rate for the near-term at least? Yeah, I mean life is really important. And and what what what the fhfa makes Freddie and Fannie do with pricing issues and there's a lot of things that that come into play here. So it's dead.

difficult to predict

With a a tremendous amount of accuracy. We try to give you the best guess we can based on what we know today in the in the first quarter guidance. I think that we've been uh, pretty darn good at being able to manage the margins at levels that are that compare very nicely to what's going on in with our peers in terms of what's available publicly. It's really hard to compare us to others because wage, you know mix is different in every and every company and and we put a little bit more emphasis on the retail business where where we think we've been able to attract some very very strong people. So, you know, I think in terms of total revenue, I think that we're going to be able to keep the the profitability of the business where it's been and and you know, maybe we can make it better or certainly always trying to do that. So I'm I'm pretty confident in our ability to continue to execute but there's just so many factors that come into play here. It's hard to to be, you know real to predict out for any real length of time and what name?

Danny just a follow-up on that the strength Escape.

Well, we have it all of our channels is somewhat unparalleled and we try to message the optionality that the strength and scale and those channels gives us life. It's hard to predict where Market forces might take that gas Revenue, but I can assure you we're doing what we need to do to optimize the revenue versus the contribution that that Revenue makes to the bottom line and Danny were very aware of what our capacity is and we want to give our customers a great experience and certainty and I think they appreciate that way. We don't want to overshoot capacity and have our customers having a a bad experience. That's not what Flagstar is about. And if you look at slide 17 wage, which is really more of a cost slide, but the third bully just from a mixed point of view year-over-year. So in Q4 this Q4 22.7 a

Scent of closings came from our retail channels versus 14.3% a year ago. And and obviously the retail business is typically the higher-margin business office.

That's all.

Appreciate that color. All right. I'm going to switch gears here the the tax rate guidance you gave lower than what we've seen in the past obviously in line with the fourth quarter, but what are the Investments you're making that are driving the tax rate lower and then I know you called out the benefit from the state net operating losses. But how much of that is is the the tax rate guidance and how long would you expect to benefit from that can't give you all our secrets here. But any chance to have a little more maybe he can give you a little more color. Yeah you so, you know, we we look up what the larger institutions are doing to to do put in place tax planning and dissatisfied rcra requirements. So, of course, we're investing in things like low income housing and other tax credits needed items. We are also as we as we talked about in the release we're now, you know at this point fully utilized on all of our net operating loss.

This is both of we're in a position where where taxpayer so we're we're utilized on our net Opera.

Lost at the federal level. We have some still that are are limited. And by being in that position. Now these tax planning strategies start to make Financial sense. And so as they as they've come in to change the The Horizon for us to implement those we've done them but it's it's things that you'd see it larger, you know more Regional type Banks, but just typical things that those Thursday so it's fair to say that the the benefit from the the state net operating losses is minimal and most of the new guidance is based on the investment. You're making in the new guy, Yes. All right, that's all I had. Thank you.

Thank you. Our next question comes from Henry coffee with wedbush morning. Good morning everyone and thank you for taking my questions. I know you don't like to talk about future borders, but given the the shocking level of provision based on Cecil know, you know, given the fact that you're actually going to start booking a somewhat Cecil related provision expense. We assumed that something around three to five million is The New Normal or wage, you know, given that we've we've you've had no loan quality issues bear one or two over the last five years and

We we we we just sort of plugging in a number which is usually 0 so yeah, is it should that new new number instead of being zero in my model be three to five million or what? What is the thought process going forward Well, it can't be zero if you're growing the balance sheet, right? Cuz you've got to provide for any anything new. So that's all function of how much the balance sheet grows and off and then what category is it grows and in gym included in his prepared remarks some pretty specific information on how it impacts the various different buckets. So Thursday, we're not we we don't know where the growth is going to come. So I can't even answer that question. I don't even if I wanted to I couldn't cuz I don't know where the growth is going to come but I can tell you this, you know, it's not my one of my comments. I I think and maybe an answer to one of the questions. I have referenced the fact that every loan asked to Hurdle from an hourly point of view. And so we're going to take into consideration the wage.

so impact on the growth at any particular law and what would cause and if it if it doesn't have the return

Including that Cecil impact then we're not booking the loan. So at the end of the day, I don't think it matters. I think I think It ultimately we're going to be just as profitable as it would have been without Cecil but it will impact a little bit in terms of how we make decisions on where we grow to balance sheet. I mean, that's how you think about these issues because frankly you run a damn good thing off are your competitors also sort of thinking in the same terms that you know, you have a new they have a new cost element to put into the equation and therefore they need to be more discipline pricing or you still waiting for the market to kind of wake up. I was going to ask you already analyzed. Yeah. I don't know, you know, I mean, obviously we looked at we look at what everybody reports, you know, and we want to make sure that we're we're not crazy in the way we're thinking about things but I don't know, you know, I think we all we all are learning as we go along here on Cecil.

And so we'll just you know, quarter-by-quarter get a little bit smarter about it.

And be able to be more precise. Um, what I would say Henry is it's not a cost. It's not numerator its capital. It's denominator numerator is going to be the same we look at we look at these lower profitability perspective the same way economically that we do but Cecil definitely forces a higher Capital cost. Not sure how other people are going to look at it. That way we're going to do we're going to stay true to our our return objectives on those loans. And you know, if if those returned if we can find good opportunities will make those Investments and but we can't you know, again, we have balance sheet flexibility where we can find net interest income without having to rely too much on growing loans held for investment, you know, we've always liked the warehouse business now. Like the warehouse business cuz it has very little Cecil impact and so we'll keep looking for opportunities to to grow that as much as we as much as we can within our concentration limits, but those are things you look at now you age

That you might have looked at a little differently before.

We can talk about that offline trying to cover some rationalization preferably over a really nice dinner someplace wage. So look at the businesses absolutely proven itself, but your and and and you do have a a good a good level of capital but I think about returned Dynamics, you know, what's preventing you all from taking a more aggressive stance towards either dividend or BuyBacks, you know, however you pronounce, you know, bump up the payout what what other restraints to doing that what are the what are the the opportunities that would encourage you to to be more aggressive or simply what are your thoughts on where you are today? And where you'd like to be with return-on-capital measures? Yeah. Well that I'll just I'll just go back into the queue.

It's all about our ability to get return on our investments if we can get the return on the investment, so as opposed to a buyback or dividend if we can do it just through the normal business office. We think that is long term in the better interest of the shareholders because it grows earnings it grows the the strength of the organization. It opens up other job opportunities for potentially Acquisitions and such. So I think that growing the company and and getting the return that way is certainly my preference now, if we don't think we can do that or or we think we need to support the stock in some fashion then a buyback and or increased dividend is appropriate and of course we've done both right. We we instituted a dividend a year ago. Just increase it a little bit we did do some buyback last year. So we are looking for those opportunities and I think that if I say is is dead.

Maybe that's what the whole point of the thing is.

Value I think the the way we did it last year the combination of the divot.

Then a little bit of a buyback and then growing earnings almost $5 per share on tangible Book value created a 45% increase in our stock value. And I know that the market forces whole lot to do with that but it was the best amongst all mid-sized banks in the country. So I think that's you know evidence that the choices we've made at least historically have been pretty good and we'll try to balance both in the same way going forward it keep in mind Henry just to re-emphasize the growth preference.

As I said in my prepared remarks are marginal efficiency ratio in that growth in servicing and Community banking is sub 40% That's a pretty good Dynamic month. So we'd like to continue growing. But if if I mean the important thing of having that tool in the toolbox is that we don't have two over rely on growth to deliver earnings per share growth.

No, I agree. It just helpful to hear your perspective on it. So, thank you again. Okay. Thanks, Anna.

Thank you. Once again, if you would like to ask a question, please press star one. We'll take our next question from Chris. Give it to me with good morning guys wage. Quick question. I just wanted to get your thoughts on loan growth 1020 and what area is you envisioned might you know might be adding the most balances.

I don't know. I really don't it all depends on where the opportunity is. You know, I've talked a couple of times here in Jim has as well about the importance of of getting the right return package the loans that we grow here. And so we're going to keep doing that and historically I've answered this question the same way every quarter. Somebody always asks it and I just don't know we're prepared for whatever the opportunity is c r e c n i home builder Warehouse non-qm mortgage Helix indirect nine Auto all those things are all categories that were comfortable with keeping within our relatively conservative concentration limits making sure that the hurdles on every single lone we put on the books. So, you know, we'll just see where the opportunities are. I think the only thing called out and Sandra

I mean, we you can we have a very Diversified.

Model Chris, so I mean it can come from commercial consumer Warehouse multiple different sources and we have all of those in-house so, you know, we'll be ready for the opportunities that present themselves. All right, go ahead. Thank you so much.

Thank you. Our next question comes from Steve Moss with FBR.

Good morning, guys. Just you know, we talked a lot about mortgage expenses here, but just on the revenue side, I mean, we've had a pretty good move in rates in the last couple of days and just kind of wondering what are the underlying assumptions to your mortgage Revenue guidance for the quarter and you know, maybe a little color think about if longer-term rates hold here for the remainder of the court or what maybe some of the upside could be well from a class perspective. We've always said that we you know, we we look at the average expectations of the MBA Fannie and Freddie as a basic guideline and then try to file that through all of our our entire company whether it's Warehouse originated or you know, Warehouse originations or M. S r p payments and all those Thursday, so, you know right now we expect that the volume for 2020 is going to be a little less than 2019 and that's just because that's what the majority of the experts think dead.

Has that view changes?

We'll begin to adjust our business and and that's how we've always done it. And as I said in my prepared remarks, there's a lot of ebb and flow in the mortgage business and faith in our ability to stay profitable no matter what so, you know, we we were very comfortable with with that.

All right, that's that's helpful. And then in terms of just the other Consumer loans here, you know, basically more than double year-over-year just kind of wondering the types of loans are doing I see growth is an indirect lending in any color you can give there would be well and In fairness doubling is off of a small number so it's not like it grew really a lot. Yeah. I think I mentioned my prepared remarks. We grew the consumer loan base about nine hundred million year-over-year. Most of that was in direct lending as you say and he locks all of it was indirectly off.

Any other consumer portfolio?

And it's are those purchase loans from other institutions. I take it, you know, Steve for hundreds of the 300 growth was in indirect. So that was the choice. We just started from scratch a couple of years ago and it just continues to kind of mature into the its equilibrium point and these are V. These are RV and Marine life.

Great. Thank you very much. Yeah, there's more detail in the press release on that.

Thank you. I would now like to turn the conference back over to Saint Joe. Danelo for closing my mind, Overall. 2019 was a very good year for Thursday. In fact Flagstar was the number one performing Bank stock as I mentioned earlier in the mid-size space in 2019 with our stock price increasing 45% We're here to create shareholder value in.

No midsize Bank. Did it better than Flagstar in 2019. And that's a great tribute to the Flagstar family an important point that I think Bears repeating is the consistency of our earnings quarter-over-quarter for the year are adjusted. Our Ali was 11.7% in Q4 and even better 12.7% the knock-on Flagstar by many has been concerned with how the volatility of his business will impact our earnings and my humble opinion the markedly different mortgage markets. We've seen over the last 24 months and the consistency in the returns. We've generated during that period wage should lay that concern to rest for the Flagstar folks listening you made as possible my deepest thanks to you for your continued commitment to move our company from good to grade or Journey continues.

Thanks, once more to everyone listening in I look forward to speaking to you again in three months.

Thank you. Ladies and gentlemen.

Today's teleconference. You may now disconnect.

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