Q4 2020 Flagstar Bancorp Inc Earnings Call
[music].
Please standby.
Good day and welcome to the Flagstar Bank fourth quarter 2020 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Ken Schellenberg. Please go ahead Sir.
Thank you Bob and good morning, welcome to the Flagstar fourth quarter 2020 earnings call before we begin I would like to mentioned on our fourth quarter earnings release and presentation are available on our web site at Flagstar Dot com.
Also like to remind you that any forward looking statements made during today's call are subject to risks and uncertainty.
Factors that could materially change aircraft forward looking assumptions are described on slide two of today's presentation in our press release and in our 2019 form 10-K, and subsequent reports on file with the I T. G I.
Also discussing GAAP and non-GAAP financial measures, which are described on our earnings release and on the presentation. We made available for this earnings call.
Refer to these documents as part of this call with that I would like to now turn the call over to Sandra to narrow, our president and Chief Executive Officer.
Thanks, Alan and good morning to everyone listening net.
I hope that with you on your loved ones have been able to stay safe and healthy share of these most unusual times.
I'm joined this morning by James <unk>, Our Chief Financial Officer, Lee Smith, our president of mortgage loans.
That's our President's day. Thank you.
I'll start by providing a high level view of our performance for the quarter and the year.
I'll turn the call over to Jim for details on our financial results.
Followed with an update on the community bank debt.
He will handle the mortgage starting on putting servicing and then we'll open up the line for questions.
That's right Brad many challenges and few companies ended the year stronger.
Yes.
Blackstone, it's the opposite.
Kept getting better throughout the year as we adapted to a new goggle and finished the year extremely strong.
So how we built our business model.
This revenue strength.
The balance sheet debt provides us optionality and less volatile earnings during changing economic environments.
You'll recall in 2018 mortgage business was challenging.
Grow earnings at the rest of the company stepped up to contribute.
And in 2019 declining interest rates put pressure on our spread income.
Were able to temper that by capitalizing on favorable conditions in the mortgage market that was carried into 2020 today. We're looking at an exceptionally strong fourth quarter capping off what I consider to be the most successful year in our history.
As reported we posted net income of 154 million or $2.33 per share.
On the phenomena on 183% for the same quarter last year.
The first quarter, we achieved net income by private equity.
Or $9.52 per diluted share.
And the result for the full year 2019, 151%.
Our earnings this quarter alone our roughly three quarters of what we earned in all of 2019.
Mortgage continued to lead the way in the fourth quarter as it has.
That's where most of the year, but the contribution is from our banking on servicing businesses should not be overlooked.
Hi, Charlie the range relationships, or perhaps et cetera, and strengthened through adversity.
Couldn't be true in our banking business is that channel focus on.
We are on supporting our borrowers and helping them navigate the challenging conditions brought on by the pandemic.
So remember that we stood by that every step of the way.
So the recipe that growth of kind of long lasting relationships, we want to be a hallmark at <unk>.
Thank you produced steady results again led by the warehouse business, which is now the third largest elimination.
On to mortgage what an incredible year.
Average team delivered amazing results throughout the year as they took advantage of an extraordinary mortgage market, while maintaining pricing and expense discipline.
As always we manage their volume to maintain industry, leading service levels, while producing margin on revenue we haven't seen in a very long time.
And on servicing business kept delivering consistent results supporting our mortgage business, providing efficient funding.
Net income and keeping the number of loans serviced or subsurface study, we didn't have a sense of historically high pay offs related to the robust refinance market.
I couldnt be more pleased with how we ended the year and the many milestones we achieved that's what we used to which was the investment grade rating from Moody's.
Further validates the strength of our balance sheet and the earnings power of the business model.
It has been on long and winding road, but I believe that's a very special company with a very bright future.
Through 2021 for the stable net interest margin.
To generate strong noninterest income on a purchase balance sheet, where it is.
To take on whatever 2021 throws our way.
With that let me now turn it over to Jim.
Thanks Andre.
Turning to slide six net income this quarter was 154 million $2 83 per share this compared to 222 million or $3 88 per share last quarter.
Decrease on a linked quarter basis was largely due to the extra ordinary levels of gain on sale revenue last quarter.
An increase in net interest income and a low credit provision this quarter, partially offset the lower mortgage revenue for.
For the year, we had net income of 538 billion or $9 52 per share compared to $218 million.
$3 80 per share year on year 2019.
Current year earnings represent 2% return on assets.
8% return on equity.
Diving deeper into this quarter's performance our pre tax pre provision earnings were $207 million compared to $327 million last quarter net.
Net interest income increased $9 million or 5% as average, earning assets grew $1 4 billion, while the net interest margin was flat at $2, 78%.
Excluding loans with government guarantees that have not been repurchased the net interest margin actually increased four basis points.
This performance was primarily driven by the strength of our warehouse business. It has rate floors in place to protect the margin compression.
Assets, which benefited from higher custodial balances, but also from the maturity of higher cost Cds and the exploration of promotional rates on savings accounts.
We will review these numbers in a couple of slides.
Mortgage revenues were $232 million, a decrease of $126 million compared to the very strong number we reported last quarter.
During the quarter, we saw gain on sale margins decreased from last quarter's record levels.
Asset quality remains strong net charge offs were four basis points early stage delinquencies were only 22 basis points of total loans non performing loans were $57 million up $12 million as a result of two commercial borrowers being put on non accrual status during the quarter are.
Our allowances for credit losses remained flat to the prior quarter at $280 million and our coverage ratio excluding warehouse increase.
Increased to three 2% from three 1% at the end of the third quarter.
We'll provide more details when we get to the asset quality slide and take a deeper dive on the seasonal.
Capital also remained solid silver risk based capital was 11, 9% at December 31.
Our CET one ratio was nine 1% tier one leverage ratio was seven 7%.
We repurchased $150 million of stock, which caused our capital ratio decline.
This was more than offset by earnings and total assets were $1 6 billion, causing our CET one tier one leverage ratios declined slightly.
Total risk based capital increased.
On the subordinated debt, we issued during the quarter to fund the stock buyback.
Finally, we continued to demonstrate significant capital generation with growth in our tangible book value per share to $38.80 at year end.
$3 20 from September 30th.
$10 23.
One year ago, 36% increase.
So, let's turn to slide seven and dive deeper into the income statement.
Net interest income increased $9 million to $189 million this quarter up 5% from last quarter.
Average, earning assets grew $1 4 billion led by warehouse lending.
<unk> costs came down 15 basis points on average retail banking, a customer deposit balances increased <unk> 3 billion and $1 2 billion respectively.
We'll dive deeper into net interest income and our interest rate position on the next slide.
Noninterest income decreased 115 million to $337 million due to lower mortgage revenues and noninterest expense was $319 million up $14 million in the prior quarter.
Our effective tax rate was 24, 8%. This quarter. This is the result of $2 million in additional state level taxes that resulted from mountain on Patterson's exit certain non deductible expenses, including FDIC insurance and incentive compensation.
We expect that the effective tax rate in 2021 will be approximately 23%.
Turning to slide eight average, earning assets increased $1 4 billion from last quarter.
This resulted from a $1 3 billion increase in warehouse loans and a <unk> 4 billion increase in the loans with government guarantees because theyre not been repurchase.
The increase in warehouse loans resulted from continued success in bringing on new customers.
Clients in Securities and mortgage loans held for investment were due to faster prepayments, partially offset the balance sheet growth.
C&I balances also declined by $200 million, primarily driven by the full quarter impact on the sale of the PPP loan portfolio in the third quarter.
On the balance of the loans with government guarantees peaked at the end of last quarter.
<unk> declined only slightly throughout the fourth quarter, resulting in the average balances increase.
We expect to see balances gradually declined throughout 2021 as we've stated previously we do not.
I believe there are significant downside to holding these loans either by buying them walk through this accounting gross up.
Where do repurchase these loans, we can pledge the loans to the <unk> and there are 20% risk weighted assets.
Either if we do repurchase the loans, we sell those at a later date, which is attractive for us.
It remained government guaranteed.
Average deposits increased $1 5 billion last quarter custodial deposits drove $1 $2 billion of this increase.
We also saw growth of $311 million, and DDA and savings account balances and a 5% increase from last quarter and a $188 million seasonal increase in government deposits.
Overall, we manage deposit costs lower by 15 basis points as deposits continued to reprice into new curve environment, providing support for our net interest margin expansion.
We continue to believe that our interest rate risk position is in a good place due to the actions we've taken in this lower interest rate environment. We feel that we can protect our net interest income and net interest margin and believe that our net interest margin should be relatively flat to where its been the past three quarters.
There are interest rate floors in place on a large portion of our commercial loan book and these for his help protect us against further margin compression.
The actions we took earlier this year to lock in $2 billion of lower rates funding remains in place.
While this has made us more asset sensitive in our structural balance sheet.
Our mortgage origination business is naturally liability sensitive. So we believe the combination positions us well for future success, regardless of where rates are.
We continue to have a strong liquidity position driven by the strength of our deposit base and access to multiple sources of liquidity both on balance sheet with a high quality securities portfolio and off balance sheet with our Undrawn <unk> facility.
Number 31, we had ready liquidity of $4 5 billion not including the ample access we have to borrow with the fed discount window.
Let's now turn to slide nine which details our non interest income and noninterest expenses.
Noninterest income decreased $115 million.
Due to the extraordinary levels of mortgage revenue on the prior quarter on.
<unk> revenue of $232 million represented a decrease of $114 million fallout adjusted locks decreased 20% to $12 1 billion and the gain on sale margin was 193 basis points.
Channel margins continued to come down gradually and Lee will provide more insight into gain on sale revenues later.
The net return on mortgage servicing rights declined $12 million in the prior quarter prepayments continued to be elevated resulting in higher went off.
Capitalization of our MSR has remained relatively flat at 86 basis points, a new P. B at the end of the quarter up only one basis point from the prior quarter end.
We would observe that the MSR market continues to show signs of improvement as shown with a bulk and flow sales that we executed during the quarter.
Noninterest expense increased to $319 million for the third quarter compared to $305 million last quarter, primarily reflecting a $7 million loss recognized on the early extinguishment of our senior notes in $2 million of extra charitable contributions we made to Flagstar foundation in support of its efforts.
To help those in greatest need in the communities we serve.
Both of these items will not recur next quarter.
We saw a 7 million increase in mortgage expenses, which was driven by efforts to expand capacity along with the higher retail channel mix.
We will provide more insight into mortgage expenses later.
We expect noninterest expense of 295 million to $305 million and an efficiency ratio in the low <unk> for the first quarter of 2021, So let's now turn to asset quality on slide 10.
Credit quality in the loan portfolio remained strong early stage delinquencies continued to be relatively low as early stage consumer loan delinquencies as of December 31 were flat and early stage commercial loans delinquencies increase driven by one commercial loan that is beyond its maturity date.
We haven't renewed yet.
Which remains current with respect to interest payments.
Total early stage delinquencies were $36 million at December 31st or only 22 basis points of total loans held for investment.
Commercial deferrals, where only $22 million at December 31.
We continue to be pleased with how well the portfolio is holding up despite what the economy has gotten to this past year.
Non performing loans ticked up slightly as we added two small commercial credits.
Non accrual status.
Our allowance for credit losses of $280 million covered one 7% of total <unk> loans.
Excluding warehouse loans for the denominator given their relatively clean credit loss history, and considering that substantially all of these loans are collateralized with agency on government backed loans or coverage ratio stands among the best in the industry at three 2%.
On slide 11, we can see that we ended the quarter with $280 million of allowances for credit losses, consisting of $252 million of allowance for loan losses of $28 million in the reserve for unfunded loan commitments.
As we did last quarter, we used three different Moody's forecast on the next two years to get our allowance level.
<unk> growth forecast weighted at 30%, our baseline forecast weighted at 40% and an S. Three adverse forecast weighted at 30%.
All forecasts using the separate release.
The resulting composite forecast for this quarter was slightly better than the composite forecast, we used last quarter unemployment increases only slightly in 2021 and begin to recovering in 2022 GDP recover slightly by the end of the year from current levels.
And just not return to near pre Covid levels until 2024, H P. I decrease was 1% throughout 2021.
So there are positive economic signs, we continue to be cautious in our confidence about the recovery until we see more evidence that the recovery will sustain.
Accordingly, we have qualitative reserves of $77 million, primarily in our commercial real estate Inc.
C&I portfolios guided by the seasonal allowance model output using the Moody's adverse scenarios to provide coverage for industries and customers that we believe could be more exposed to the stressful conditions on our forecast.
We feel very comfortable about the strength of credits in the portfolio.
It would be difficult to provide future guidance.
We provided a portfolio by portfolio breakdown with a resulting ACL coverage ratios in our appendix.
On slide 12, we've updated our exposure to those industries that we believe are more likely to be most impacted in.
In total we have one 1 billion outstanding loans in this category, representing 6% of our total loan portfolio.
It's interesting to note we have almost no loans on deferral and these portfolios today.
In our commercial and industrial loan portfolio, the Covid impacted loans totaled <unk> 3 billion.
You can see that the exposure here is relatively low, especially if there are no deferrals and only 110 million alone classified as nonperforming.
We have no oil and gas exposure.
They are commercial and commercial real estate portfolio.
Net 0.7 billion outstanding in the areas most impacted by Covid, including commercial real estate loans secured with hotels retail properties and senior housing although loans.
And this category our average pre Covid LTV was 55% and our average debt service coverage was one six times.
I don't have any loans in these portfolios.
Luc will default.
Well, we believe that we will have losses, we continue to see strong borrower support across the portfolio. We feel good about our credit risk in this portfolio because we are starting from a position of strength from our carefulness about who we lend to to the disciplined underwriting of those credits in the pre Covid ltvs and debt service coverage ratios and the <unk>.
Our <unk> portfolio.
Turning to slide 13, our capital ratios remained solid and nicely above our stress buffers at December 31 on.
Total risk based capital was 11, 9%.
CET, one ratio was nine 1% and our tier one leverage ratio was seven 7%.
So as I mentioned before we repurchase $150 million of stock, which caused our capital ratio declined this was more than offset by our earnings.
Total assets grew $1 6 billion, causing our CET, one tier one leverage ratios to decline slightly.
The total risk based capital increased as a result of the subordinated debt we issued during the quarter to fund the stock buyback.
As we pointed out with our warehouse loan portfolio loans held for sale and loans with government guarantees net more than half of our balance sheet and over 100 basis points on <unk>.
Risk based capital dedicated to these three asset categories that have very little risk content.
Write offs loans are secured with recently originated first mortgage loans and turnover every 10 to 15 days loans held for sale turned over every one to two months in this portfolio was carried at fair value.
On your loans with government guaranteed has little downside.
Perhaps a modest upside.
When you take all of this into consideration we believe that we are operating at strong capital levels, given our low risk balance sheet composition.
If we just waited our warehouse loans at 50% the weighted at a high percentage of your current risk based capital rules you'd see that our capital ratios compare favorably to most other mid size banks. This makes us the loans are fully collateralized by 50% risk weighted assets.
Those assets remained under our custody while the loans are on airlines.
Further there is even an outstanding proposals on the mortgage bankers Association to make this distinction on the risk based capital rules.
Proposal equal hard on new support so adjusting the risk weighting on the warehouse loans, our total risk based capital would be 14.0% over 200 basis on tire, which would put that ratio above the average for all midsize banks.
Our CET one ratio would be 10, 7%.
So that provides the rationale behind our belief that we are solid.
A strong capital ratios.
I will now turn it over to Reggie kick up a community bank. Thank you Jim and good morning.
The last 12 months has been like nothing we've experienced before at the start of the year and in response to the COVID-19 pandemic defensive on president action by significantly cutting interest rates on putting immense pressure on our net interest margin firms. Many banks. Additionally in response to the uncertainty around the duration and impact on <unk>, we took a pause.
Service of approach in the bank by tightening the credit box and being thoughtful around new lending opportunities.
Served us well, so far and will be on approach into the foreseeable future will continue to lean into lower risk commercial lending opportunities and be diligent in adding new relationships as we continue to navigate these uncertain waters.
Please turn to slide 15.
On the operating highlights for the community banking segment include average warehouse lending balances increased $1 3 billion or 22% to $6 9 billion on the core that's a low interest rate environment has persisted driving strong mortgage refinance volume.
Our relationship based approach and speed of execution also enabled us to add new customers as well as increased lines to existing customers during the quarter.
We continue to maintain our disciplined underwriting in this business.
Average commercial and industrial and commercial real estate loans decreased to $146 million, partially impacted by the timing of the sale of the PPP loans in the third quarter as well as a thoughtful approach we continue to take share in terms of new facilities.
We believe our conservative credit policies and diversified portfolio will be a strength as we get more clarity around the fallout from this pandemic.
Average consumer loans held for investment decreased $241 million. A result of increased payoffs on our first lien mortgage portfolio, partially offset by growth in the other consumer loans, which is predominantly our indirect marine RV loan portfolio.
Is performing rather nicely in this environment.
I'm also proud of success at the retail team has achieved.
Average community banking deposits, which exclude custodial accounts and broker deposits increased $269 million or two 4% on the last quarter to $11 five day.
We continue to see solid growth in governmental deposits due to seasonal tax collections and higher noninterest bearing DDA and low cost savings accounts.
Also sobbing CD balances contract 257 million overall.
The overall cost of deposits declined by 16 basis points to 26 basis points on 42 basis points for last quarter.
Last week, the retail team did a great job retaining Cds that were maturing in redeploying these deposits and the DDA and savings accounts.
Turning to commercial lending on the next slide we continued advantage on a well diversified commercial loan book.
Warehouse lending book, we've been using our quarter end balance sheet to accommodate the needs of our customers. Despite this having a direct impact on a period end capital ratios.
Rental built in prior quarters carried over this quarter as warehouse loan balances remained elevated which is a testament to the strength of the relationships, we built with our warehouse customers.
And commercial real estate, we're in constant contact with our customer base.
<unk> growth continues to perform well the result of doing business with strong and experienced clients and a closer relationship with those clients have with our lenders here at flagstar.
The C&I growth remains well diversified and we're starting to see our customers get their business back on track.
We're taking steps now to build on our relationships in our markets. So that we can be on a position to fully serve these customers when the opportunity presents itself.
I'll now turn things over to return.
Thanks, Rajiv and good morning, everyone. We're thrilled with how our mortgage origination on mortgage servicing businesses are performing and what was an unprecedented year. Both business lines have demonstrated the resiliency and delivered important and significant non interest fee income for the bank in this low rate environment.
During the year, we generated an incredible $971 million of gain on sale revenues, including $232 million in the fourth quarter as we continued to leverage our diversified mortgage platform and the strong mortgage market.
We ended the year servicing or Subservicing, approximately one 1 million loans consistent with the end of the third quarter on where we ended 2019 net is noteworthy. However is we processed over 350000 pay offs during the year given the low interest rate environment.
Indeed over 290000 of non flagstar originated loans on a remarkable achievement in this highly volatile work from home environment.
The earnings generated from our mortgage origination and servicing businesses have contributed significantly to our overall earnings per share of $9 52 for the year on given mortgage another economic forecast for 2021, we believe the foundations are in place for us to.
<unk> to be successful and generate strong returns for our shareholders.
I will now outline additional key operating metrics from our mortgage and servicing segments during the fourth quarter on full year. Please.
Please turn to slide 19 quarterly and full year operating highlights for the mortgage origination business include we're very pleased with that gain on sale revenues of $232 million during the quarter, which held up remarkably well in a remarkable year for mortgage.
Volume and margins remained seasonally strong as we continued to see robust refinance and purchase activity in all channels.
One channel that did stand out was that consumer direct or direct lending business, where we saw a 20% increase in low volume on 'twenty, one basis point margin expansion quarter over quarter.
She said channel, we'd been actually be growing in 2020, and you'd also price a key role in our recapture capabilities. We expect to see continued growth in this channel throughout 2021.
Refinance activity accounted for 64% of our lock volume during the quarter on retail accounted for 36% of low volume.
On 33% in the third quarter.
Mortgage closings were $13 1 billion in the fourth quarter, a 9% decrease from the previous quarter, given the seasonal holiday values on employees using <unk> towards the end of the year.
Our mortgage operations team continues to operate effectively in this work from home and brought them on.
We've increased capacity, 47% in 2023 basis points you know on my team. We continued to hire on trying new fulfillment staff in the fourth quarter setting us up well for 2021, given the strong mortgage market outlook.
The increasing capacity in the fourth quarter on both the sales and operations sorry to the business together with a higher percentage of retail business on lower closings given the holidays drove the increase in mortgage non interest expense the closings from 1.0% to 2% to $1, one 8% quarter over.
Quarter.
During the quarter, we started to roll back some of the overlay. Some protocols we put in place as a result of the pandemic as we became more confident around market liquidity and the economic outlook.
At <unk>, we have approximately $2 5 billion in Ginnie Mae early payouts on our balance sheet at least approximately $1 9 billion will it result of borrowers opting to forbearance as a result of the pandemic.
The accounting consequence of owning the MSR is to show the misery probably outs, whether you bought them I also one offs as.
As we've analyzed these loans in more detail, we believe $800 million will cure through the partial client process and our intention is to buy out these loans and re securitized loans the.
The gain on sale benefit from doing this is approximately 32 million <unk> 3 million of which will be realized in the second half of 2021 9 million in 2022.
We thank our friends at $250 million fuel through a modification and again, we will find these loans out on re securitize, realizing approximately $10 million of gain on sale revenue $7 million in 2021 3 million Inc. 2022.
If anything from the remaining population of about $150 million would secure through a partial claim on modification, we would pay them out re securitize unrealized gain on sale benefit.
Given the increasing home prices over the last few years on equity milestone is having their homes. We don't anticipate many pharma was going into foreclosure. Following the end of the forbearance period.
Accordingly, given the slightly smaller range some of the mortgage market in Q1 versus Q4 from the agencies and M. B and continued tightening of margins with full cash gain on sale revenues to be between 200 on $220 million in Q1.
We couldnt be more pleased with the performance of our mortgage business in the fourth quarter and during 2020. We believe we will continue to be a meaningful contributor to the bank's earnings in 2021 on beyond particularly given the low interest rate outlook.
Moving to servicing quarterly operating highlights for the mortgage servicing segment on slide 20 include we ended the quarter servicing or Subservicing, approximately one 1 million loans of which almost 870000 or 80% or sub service further MSR owners.
The number of loans serviced the subset, which stayed relatively flat quarter over quarter as we added in excess of 100000, non flagstar originated loans and despite the higher levels of refinance activity were able to replace runoff with new loans from our mortgage origination business. Another advantage of our business model.
Today, we have the capacity to service a sub serviced 2 million loans as well as provide ancillary offerings such as recapture services on financing solutions to MSR owners.
If you look at Slide 37, you will see that we are generating $4 7 million of operating profit before tax for every 100000 loans, we add to the platform as we continue to achieve economies of scale benefits in this business.
As it relates to forbearance through December 31st 83750, non borrowers representing 8% of the first lien mortgage portfolio that we certainly saw subset of this IP.
The forbearance relief because of COVID-19.
We've seen a significant decrease in new forbearance requests since the peak weeks at the outset of the Covid pandemic.
Of the 83700 <unk>.
ROE was in forbearance on E rate, 12% I'll come on so 7% of the loans, we service or sub service or actually using full parents.
The peak number of loans in forbearance was 129332 and as of December 31st that members of the calling on approximately 45000 or 35% as borrowers who had initially on TD or biopsy now tied up their loans reached out to say their hardship has been resolved.
And the loans Cowen or had their low moderate volume.
During the quarter, we sold $2 6 billion in bulk and $2 6 billion inflow for a total of $5 2 billion in MSR deals.
The market <unk>, you certainly bouncing back up redrawing, the outset of the pandemic on our.
Our MSR to CET one ratio is currently 16% significantly below the 25% threshold before it becomes capsule unity.
Finally, custodial deposits average $9 5 billion in the fourth quarter, a 16% increase compared to the profit quarter.
Our sub servicing business had another successful year.
On the volatility and uncertainty brought about because of COVID-19, it complements our mortgage origination capabilities and provide several on the benefits the flagstar, including low cost deposits to help on the balance sheet.
This concludes our prepared remarks, and we will now open the call to questions from Alex Smith.
Thank you.
Like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure. Your mute function is turned off July your signal to reach our equipment again that is star one to ask a question on.
First question comes from Bose, George with K B W.
Good morning barrels.
Hey, guys good morning, great quarter.
Wanted to ask first about the net interest margin guidance, you noted that it's going to be roughly.
Roughly flat for the next few quarters, just what are your thoughts in terms of expectations for the warehouse and so it's obviously been very supportive to the margin.
How does how do you think that plays into that guidance.
Yes, I think I can see expect to see more of the same.
The house.
When maximizing our balances there based on the capital of the company and we're going to continue to be.
With the plan around that.
Given the fact that the mortgage business appears to be still strong in the first quarter.
No I think I think it's a business that's going to continue to be very helpful.
Maintaining our margin on forward, what do you have anything you'd like to add on that.
I think that's right.
We're very selective with flowers.
And we do business with and new private build that business as a long term business and so it's less about price and more about our ability to fulfill on.
And we consistently air flow and so we feel really good about the dynamics of the portfolio. We built in that business, obviously still have a lot of that a lot of.
<unk> strength.
That's a good point ready the pipe Brian in terms of incoming new business is still strong.
As we gain more capacity just because of growth in capital and obviously, we're generating a lot of capital right now that will allow us to.
Moving to bring net new business.
On line and we're still investing in that business, where we're improving the technology platform.
Greater efficiency, there, so we really like that business.
Okay. Great. Thanks, that's helpful. And then actually I wanted to go back to new comments just on the pull back on.
Hey, what's happening on the GSE programming side can you remind us what the deadline for that is there a clear deadline for when debt and you guys still giving forbearance is there how does that sort of debt.
Program going to play out.
So if you remember post end of the cares Act.
We were a low too.
<unk>.
Six month forbearance theories on say, if you think that that came into play.
Around April when we look at when most of the loans are going to be and being the second six month forbearance period. It is April of this year. So unless there is a new announcement further extending back the way its currently constructed.
Most of our loans because most stopped TD when it was made available will be coming out around April time.
Okay, but are new.
New forbearance is being offered non smoking a borrower via a new program.
Correctly.
Yes, I could call for parents correct.
Okay perfect. Thank you.
Our next question.
Our next question comes from Scott <unk> with Piper Sandler.
Good morning, guys.
Another net quarter so congrats.
Just hoping I know you don't like to provide specific guidance, but I'm getting on sale margins, obviously, a huge topic just wondering even qualitatively I mean any thoughts you can give on.
Hi.
Ability to support because I guess as I look at things.
And.
And to just the normal market ebbs and flows what's a little more idiosyncratic to flagstar is just your kind of ability to create.
Have you been doing kind of richer origination.
Origination mix, which I would think would hold up your margins a little better than perhaps the industry at large so we'd be curious to hear.
Any thoughts on sort of where do you see things and how flagstar in particular supports.
Yeah, yes gradually.
So if you I mean look we rely on the primary secondary spreads and if you looked at the primary secondary spreads.
They were one second one in Q3 and in Q1.
On 159, so we did see a little bit of tightening in the fourth quarter, and we've seen a little bit of pointing Ian.
The first quarter or month to day in January the advantage that we have as you mentioned and we've spoken about is we have a diversified mortgage business somewhat on the bar that is when we're originating in all six channels, whether that's delegated.
Delegated correspondent non-GAAP correspondent rote discrete distributed recycle or direct lending on.
We were able to maximize earnings based on where we get the biggest advantage.
On borrowing capacity to the channel, where we think.
So it was just on so that's how we sort of take advantage of it but at the end of the day that primary secondary spreads on those was seen that sort of tell me that does affect sauces savory originator, yeah, and I would add Scott that we really do focus on net revenue targets and what the.
Best way to get there is and so you know the margins are obviously they are very very important the market will give you what the market will give you and then you got to figure out where you know where the best that's the opportunity there is to get to your revenue targets I think we've done that pretty well.
Leave speech he made reference to the fact that we're seeing great success in growing our direct to consumer business and obviously, that's a business with.
Pretty strong margin so.
We're very bullish on on the mortgage business on its strength going forward here. So welcome channel focus on on the revenue target.
You heard we say $200 million to $220 million. So when you when you think about debt against fourth quarter, given what the market thinks is going to happen in Q1.
It's a pretty good number if we get there.
Yeah.
That's perfect I appreciate those thoughts.
And then separately I guess this is more of an emerging issue, but so the GSE is now limiting the number of lenders that can access to the cash.
Cash flow just curious.
Although I know, it's sort of a newer issue to what degree if you guys thought about that and are there any opportunities.
That presents to you guys or how are you thinking about it on a top level.
Yes, so as you can imagine issue Scott so because it's the cash window it doesn't affect us we're obviously operating at <unk>.
Scale.
So I think that it's going to affect more the small originators its knockdown to affect as much or.
The bigger originators, who are operating at scale, while our cash sales and some of the as well.
Names in terms of opportunities on each.
So think about that more.
We expect that he is going to be on on the smaller originators as a set where it should be a positive for your business, particularly I would say our business with small correspondent channel as you know, we historically flagstar that was at the bread and butter work the small correspondent and frankly as many of you know we're able to get into the cash.
One day.
But the bulk space.
It had an impact on that so it remains to be seen where that curve, where it could be a benefit to those mortgage originators that have a strong third party business.
Yeah.
Okay perfect Alright, Thank you guys very much.
Thank you Scott.
Our next question comes from Daniel Tamayo with Raymond James.
Hi, Dan good morning.
Good morning, everybody.
M.
Nice quarter.
Just a question on on the expenses first price.
Lee.
Specifically on the on the mortgage side.
<unk> mentioned in the release and talked about it being driven by the efforts to expand capacity as well as the higher retail mix sounds like higher retail mix will continue to be.
Okay, so I'm expecting that debt.
You would say the mortgage expense ratio to closings would be a little bit higher than.
What you were thinking prior.
How are you thinking about that number.
Going forward.
Yes, I would actually say it slightly differently.
In the same ZIP code I think the retail mix will sort of be similar to what you've seen the last couple of quarters and I think that was one 8%.
The result of that.
That's all I would expect us to be in a similar Zip code.
Next quarter, so that's how we're thinking about it.
Hey, good back to my earlier comment about managing to the revenue, we really manage to net revenue when it's all said and done so if youre generating business from higher expense.
Category or delivery channel then you can have more revenue to support that and I think we've shown our ability to two.
Tie that revenue changes to the expense changes and that will continue to be the case.
So what I'm, saying is if I have a certain mix of retail went way up which cause our expenses to go way out on that.
Profit will remain if we're doing it right.
There are gradually guided two should be more than what we guided you to so why don't just to be real clear about this we're very careful in terms of how we're managing the net revenue on the business.
That's no that's great and you certainly have proven that.
And then I guess.
On the on the new non mortgage side, maybe for Roger here.
But.
How do you think about the expenses on that side of the businesses where it is.
Perhaps you know anticipating shifts on the balance sheet is there an efficiency systems your ratio or profitability target.
When you used to govern their own or is it just too tough to pin down given all the moving parts.
Yeah, I don't know about on overhead efficiency target.
We're trying to basically keep expenses flat.
We are looking for opportunities, where we think that the spend can be optimized in certain channels and businesses.
And we're also looking for opportunities to move Inc.
Expenses from non growth areas are where we think we have less growth things like technology and other things.
Currently driving overhead efficiency ratio.
It's kind of a low before.
Pick a number right now.
Yes, no I understand that.
And then finally I guess given.
You know that the stronger our warehouse business and.
Taking share there and your ability to grow that business and the demand every day.
But you've mentioned.
How does the more traditional commercial lending sedans in the series on the C&I.
Especially with C&I has been.
Declining over the last year or so understandably, but.
How do you think about that.
The growth of that business given.
You know kind of what we've seen on what you're expecting in the warehouse business going forward.
Yeah, that's a great question, Josh and it's funny, you know not having benefited from having the warehouse business in past experiences.
It's a wonderful thing because what it whether that takes the pressure off of us on the commercial side and so we've been really selective about things that were looking at was there prior existing chronic neuroscience extremely well but were.
Looking at external opportunities, where we have very strong sponsorship or if it's a project growth strong project.
Were kind of cherry picking for lack of bank card and without feeling any undue pressure because of the benefit of the warehouse business to do anything other than that yeah.
I think this is a time, where you would need to be very patience with the commercial business, whether it's CRE or C&I. Let me try on here in a recession I think you gotta be you got to be really patient and particularly given this unique recession ever in now that you know more about health crisis than it is anything else and as Rajeev said it's.
It's a terrific advantage to be able to grow the warehouse business by billions of dollars without adding any risk to the balance sheet.
We're going to continue to operate this way and when the right opportunities present themselves, we'll jump on them and when the market gets a little more certain than what we have heard a bit more aggressive.
Alright, great. That's all I had early on.
Got it.
Okay.
Our next.
<unk> comes from Steve Moss of B Riley Riley Securities.
Hi, good morning, guys.
On the reserve ratio here, you know continue to maintain a very strong allowance just kind of curious what you want to see.
Reserve releases releases going forward here.
No I wouldn't I wouldn't project any reserve releases at this point I don't know how you could I don't.
We know how to project even at a reserve increase with reserve decreases and if you had a crystal ball Peter with value.
For a couple of Birdman extra spend ready to know what's going on here.
As a reference on.
The usual type of recession so.
I think for the foreseeable future, it's prudent for us to.
Stay right, where we're at until we have more information that would change your mind or where things you announced on its pretty specific about how we arrive at our ACL and you're not using Moody's and so on so forth.
Continuing with the final rules analytics.
And add qualitatively wherever we think it's appropriate so I've always said since I've been CEO here, we're going to moving to operate on the conservative side of our conservative range.
Range when it comes true.
Loss reserves on I don't this is not the time to change that kind of thinking.
Okay, That's fair and then on.
On capital here, obviously very strong and looking at another good quarter here, just kind of wondering what's the appetite for additional repurchases or acquisitions.
I'm, sorry would you repeat that.
Purchases.
Position, yes.
Alright.
It's certainly possible you know on.
We are open to both.
This combination of the business acquisition bolt ons, where it makes sense.
Uh huh.
We did use.
Our ability to repurchase shares in the last quarter. So that's certainly an option that we increase the dividend last night, we announced that so those are all our range to use capital and they're all on the table, but it's got to be the right situations, where a patient organization and wait for the right situation and if we don't find the right.
Situation in terms of.
Our business opportunity then we'll figure out another way too.
We want our shareholders they have been very patient with us on you know.
They're seeing the benefits of that now.
Okay. That's helpful. And then in terms of just the loans is here I know there is.
The elevated per our loss mitigation forbearance I, just kind of wondering how sustainable do you think about that is it more like as things come off in April perhaps that will pull back a bit.
Any color there would be helpful.
Yes.
There's a few things going on when you think.
You're right you've got some of the full bedroom and species.
Yes.
Why are you being light decent charge juice as a result of loans meaningful parents said when that burns when the forbearance period loans off that comes back on and then we.
B boarding loans as I mentioned on this boarding fees.
We included it in Nash So you know as.
As we continue to board loans.
We would expect to continue to generate those fees. So there's a lot going on that I think the yeah.
The $5 million to $7 million of operating profit for every hundred thousand loans, we add to the platform I am confident in that guidance, whether we are in the forbearance period or not.
Okay.
Thank you very much good quarter.
Okay.
Our next question comes from Giuliano Bologna with Compass point.
Congrats on a great quarter.
I guess could you kind of trying to turn it back to a topic. That's on a few times on the warehouse lines on.
So on an incredible job of growing that the warehouse line business and you kind of alluded to there's a lot of demand out there for for.
For other opportunities within that business.
I'm kind of curious what the pipeline looks like because you're obviously managing capital in there, which implies that there are other opportunities out there that you could take advantage of the capital wasn't the constraint here.
But what I'm trying to figure out is kind of like what the magnitude of the opportunity that you're potentially turning away it might be because that could be relevant when the mortgage cycled on school down eventually in terms of your ability to kind of take more share.
Going forwards.
Yeah.
Provided specific guidance on the pipeline and you know that's a difficult question to answer because you don't know how much business, you're your reps out in the field actually not encouraging because they know that we've got some limitations, but that's where I can tell you as we go into the commodity every week there are new.
With our new request every week that come into our committee and they're not smart requests in order to come to the committee meetings that I got to they've got to be pretty significant requests. So it's been that way all year.
2020, it's been that way so far in 2021.
So it's difficult for me, it's really how strong.
Along with that debt.
That will continue but I don't know how it could be much stronger right now Ritchie anything on add on that no I think that's right we don't.
It's impossible to forecast.
We thought we might see some degradation of decline towards the end of the year.
Quite honestly the business has continued to be really strong.
And so we're in a war for business.
That makes sense.
And then on the on the mortgage origination side, you've obviously done a lot on the channel mix side and.
In terms of shifting around channels and managing very effectively on on the net margin side I'd be curious when we think about you have the direct channel.
What kind of upside there is there kind of worked for and to an extent me on what kind of recapture rates, you're achieving or where that could go.
Thinking about the upside opportunity with.
On the direct channel.
Yes, I mean, we don't provide guidance or a recapture right, but as al mentioned, we on boarded 290000 of non flagstar originated loans in 2020 and so.
We're doing something wrong, because if we won we wouldn't be onboarding that many loans and so as it relates to recapture in terms of the consumer direct channel.
Yes, we have been growing that we bought in a significant number of allo strong gallows humor.
You were selling flagstar, not just selling right.
High quality at Lowe's, and I think the potential for.
Continued upsell.
So on English channel on the.
The other thing I think you know in this COVID-19 environment, where people are doing more things remotely.
I think that's another opportunity for direct lending to continue to grow up and people are more comfortable.
Things regionally or over the telephone calls you can put on so.
We feel very good about the potential for our direct lending channel.
Yes.
So I think that's absolutely right I think the opportunity and that channel is.
There is significant and I think we've got the right leadership, there and so I'm optimistic about our opportunities there.
So it makes a lot of times, the only thing that I'd be curious about.
Recover.
Good questions.
Obviously.
The implied outlook.
Our the outlook implies some pretty strong performance, which we'll obviously continue to capital.
I'm kind of curious.
What.
No.
What kind of asset growth potential there might be out there or how you think about.
The roll forward in terms of kind of assets versus capital in the next couple of quarters.
Obviously as well you might have some growth out of house and it's hard to tell outside of that.
Yes Julien.
New fire, you're going to fire on the company and our history is that where cash available and this capital.
Area, and so we're going to maximize the <unk>.
The investment of our capital to where we always have.
Uh huh.
We're going to find ways to run our balance sheet to match the growth in capital and if we can then too low.
The previous question, then we look for different ways to invest our capital. So it's hard to give you.
Since it gives you a target growth for the balance sheet.
We're going to grow it as much as we can while still maintaining proper capital levels.
That's great I really appreciate the time smell a jump back in the queue.
Okay Janine on them.
Yeah.
And our next question comes from Henry Coffey with Wedbush.
Yes, good morning, everyone and let me add my congratulations.
Fantastic quarter, and a great run on the stock.
Yeah.
Turning all the way back.
To the discussion about mortgage.
I think the comments on gain on sale margin were very helpful.
The overall tone of the market.
What are your thoughts in terms of where the various parties that create mortgage estimates are going to take their numbers.
And.
There is some real heating up going on without getting into all the details you've got.
You could call it four five.
Parties that are trying to expand their their muscle in the broker direct channel you've got.
I assume a fairly robust set of competition competitors already in correspondent.
What what are you what are your thoughts there on one of the things that the the broker direct party has talked about is channel conflict because of the new Battle Cry is you know don't give your loans to rocket Theyre just going to steal your customers I mean, we've heard this from people. So you know as you look at these different channel is you've got a lot of different places to deploy capital but.
Are there some channels that are just going to get too hot to handle.
Is the market.
Gonna come in bigger or smaller than you about three trillion dollar estimate that seems to be out there now I'm. Just wondering what are your thoughts about the overall tone of the market and where our competition goes by channel.
I'm going to let me answer.
Credit card or your question, but I do want to make one comment on relative to the.
Reference you made to rocket.
We're not going to go down there, okay, we're not going to worry about.
Others say about other companies, we never talk about other companies.
I don't buy the argument that there is channel conflict.
Operating in this organization across channels for decades with that.
On the console.
Provide great service to everybody and every channel and we will continue to do that.
So I don't I don't.
I, just don't think any of that makes sense.
So we're going to keep doing what we're doing and I don't think any customer of ours would ever tell you.
That's the way we handle their business.
It is in any way impacted by the fact that we operate in fixed income channel just jump on.
And with that I'll, let Lee answer that like I said this important part of the question.
Thanks Sandra.
Good morning, Henry Yes.
So let me let me talk about the market first few a questions.
Questions in your comments I mean look on very bullish on the mortgage market in 2021, if you look at the agencies an M B a.
Cash on the M. B, a FDIC debt yesterday. So this is off the press and you average them out we're looking at a three three trillion dollar market. That's the second biggest mortgage market in the years after 2020.
It's gonna be strong debt redeploy M approach.
On a reported solid just maybe a couple of studies in the last Ah <unk>.
Six weeks or so that have already data still 19 million group that was out there that could save 75, she's able to refinance at current rates. Good borrowers meeting minimum volume code 700, <unk> at least 20% equity in that.
In their homes.
One of the major investment banks over the holiday Chinese 80% of mortgage.
To the tune of 50 bps.
Stay with the refined current right. So I think the refi wave.
On his call.
Some room to run here, which I think is positive in terms of purchase mortgage is the low rates.
King hormone share much more affordable, particularly for first time homebuyers.
On the low rates are offsetting some of the home price increase you spoke with C.
Homebuilders assigned that starts home starts are going to be increased 16% year over year. So that's going to put inventory.
Each of the market and then I'll mentioned Covid a couple of moments ago people are much more flexible in their work life balance on so we're seeing them on a movement because of that.
And then the final thing upside on purchases.
The Nd item sales offset by expected to be the strongest coach market share.
Yes.
I feel very bullish on the mortgage market in <unk>.
In 2021.
The only thing upside based on what.
Sandra commented on these loans, we have proven our ability to optimize and maximize revenue. So we will look because we have the benefit of a diversified mortgage business, we will look to see where the opportunities are.
We will focus.
Resources, there and we've done that and you've seen us do that in our results and I would just emphasize we've never really to conflict no. We just havent range of conflict and if you think of Michigan, which is where we.
We have a lot of retail space makes T T O P snakes.
Not something.
We've had a problem with I think it is because we offer great service to all of our customers.
Great.
Yeah.
M behave as a rental rate to the party here relative to their projections for 'twenty one.
We felt when Fannie Mae came out early with their increased projections that that was the right number. That's one of the reasons why you saw us continue to build our capacity and so we have some additional expenses. There in Q4 were prepared for this so we're ready for the market.
And I think if.
If the estimate for that there are wrong.
I think you'll probably agree with me that probably wrong on the low side.
No I, it's it's it's amazing I never seen anything like this in 34 years would be internet, so she'd be fun.
You do have a bank do you have a incredible bank.
And generally when we analyze it does a tad of assets sensitivity in there.
How do you think that plays out that.
Long term you know the 10 year is up over 100 basis points. So obviously it doesn't sound like it's going to slow down the mortgage market.
Is there room for margin expansion as the yield curve steepens, a little bit from all this or what should our thoughts be I know you've given guidance around the word stability, but there is some assets sensitivity in your equation and we're wondering how it plays out.
I think the primary let Jim talk free cash flow kind of in that brand.
Thanks.
Yeah.
And we just go back to my prepared comments.
What I am saying there is I think we're extremely asset sensitive.
We are as high as we've ever been as a company in terms of our asset sensitivity, but we took actions to lengthen our liability duration in this low interest rate environment.
So even if even if we had a steepening come along I really I think that's only going to accrue.
Accrue to our benefit.
Certainly if we see something move on the short end of the curve that will immediately accrued on our balance sheet, but even on the longer end, if we had a steepen or.
I think that there.
I think were rather a new on the liability side.
And there are things that we can take advantage of an environment that will help our net interest income the other thing I'll say is it.
To put this in my prepared remarks, but with the pay off the senior notes that we have keep in mind that those those notes cost offs over 6% and were going to effectively replace debt funding, that's something that's around or maybe a little bit less than 25 basis points does that alone in 2021, we will give.
Loss about three and a half.
Million of lower interest expense per quarter. If you look at Q4 as interest expense, that's about 15% of our interest our total interest expense.
And just that one moving so.
Again feel pretty confident about where net interest margin is and our ability to maintain that.
Okay.
Everybody in our company with the mortgage business makes all the sense in the world. So you know.
That's a strategic position that we've taken.
My last question.
Turing to Lee ultimately.
But you had a very successful branch based branch acquisition.
Would you be integrated done a great job with.
You've got the capital you've increased the dividend the stock is performing exceptionally well.
As you look longer term, particularly on the mortgage sector.
Would you do another acquisition there and if you would I would it be a branch based company DTC company would.
If you have thoughts in that direction, what are you thinking about.
I don't think debt that's perfect for us to go on in terms of Netflix.
Expansion.
I don't think on market, what would we would match and I think we are at a level and on mortgage with us in terms of scale and search that is very comfortable and I think what we do know the mortgage is simply to take advantage of the opportunities that the market is.
To look at that.
With future growth of the organization's revenue I think I think we looked at a banking value for that.
And we can share the unit servicing as a way to support the mortgage business is where the declared on funding.
Mortgage business generate a lot of catheter at time and enough capital other times and a new rep.
That's the revenue that.
Comes in from our banking business I think we've got a great platform to the growth from the banking card and graduate credit Division, that's going to take us and we expect a differentiated price that can provide some real opportunities on the <unk>.
Banking.
We're strong on our fair now in terms of the day.
We are comfortable that we have to use on potential bank acquisitions.
We're in a position because of how much capital will deliver that generate is within the next 12 to 24 months.
New opportunities too.
To expand our company into markets that we're not currently in and give us access to customers that we don't currently have access to is wherever the right way to look at growing the company.
Managers settling in right now you know on.
I think a lot of my.
Colleagues on the banking business, who are found on the mortgage business may wish they were in it today.
Im thankful that we are.
But it also sounds like long term in terms of creating shareholder value.
My place to.
So their chips.
Great. Thank you very much.
Okay.
And we have no further questions at this time I'd like to turn the conference back to Sandra day, Melo for any additional or closing remarks.
Thank you Brian.
Chocolate Swanning about financial success that was off the charts for the clever and the year and I'm incredibly proud of what we've achieved but I'm equally proud of the success of profit financial field.
That we've accomplished for on Prem.
And customers and our communities.
Sure.
Diversity equity and inclusion and without question Flagstar was all in the Carolina drove shred it became a catalyst for us to accelerate our diversity and inclusion journey and to make equity part of it.
We realized one of the library before that the faster on a work environment, where I'm clearly feel comfortable and do their best work, we have to acknowledge what was happening in the outside world.
On this emphasizes a dialogue with our employees that meaningfully strengthened our culture.
Our customers were on the spotlight in 2020, as we work to help them overcome the challenges brought on by the pandemic.
PPP loans to everyone, who apps, including many who are not on our customers at the time that we work closely with our commercial customers to help keep them a flow and with our consumer customers to have more than 100000 of bandwidth forbearance.
It's really sad that gave you net of grants whenever before net income minority owned small businesses as well as to nonprofits committed to helping those impacted by the pandemic.
We support our program for restaurants to provide meals to hospital workers.
Preferred bank referral nations with very high put small business converted from manufacturing surprise to careers to making personal protective equipment.
Retrofitted on apartments as non recurring from donations of masks on all of our communities benefited from an elevated level of giving and our focus on helping those hardest hit by the pandemic.
Just a few of the many actions on our company and our employees took on to give back to there was amazing.
And so on the creditor and year were successful across the board from the performance of our business lines to our progress on the Eni.
Outreach to our customers and sort of contribution to our communities.
This level of success and progress crude on Ted been accomplished without the tireless effort and sacrifice for part of our team members.
I know I've said, all the time, but I really mean it.
This year belongs to you.
Thanks to all for spending a few minutes with US. This morning, I refer to reported on Q1 in April.
And that does conclude today's conference. We thank you for your participation you may now disconnect.
Yeah.
Yeah.
Yes.
Yes.
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Sure.