FLAGSTAR BANCORP, INC. The following is Management's Discussion and Analysis of the financial condition and results of operations ofFlagstar Bancorp, Inc. for the third quarter of 2020, which should be read in conjunction with the financial statements and related notes set forth in Part I, Item 1 of this Form 10-Q and Part II, Item 8 ofFlagstar Bancorp, Inc.'s 2019 Annual Report on Form 10-K for the year endedDecember 31, 2019 . Certain statements in this Form 10-Q, including but not limited to statements included within Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements are based on the current beliefs and expectations of our management. Actual results may differ from those set forth in forward-looking statements. See Forward-Looking Statements on page 41 of this Form 10-Q, Part II, Item 1A, Risk Factors of this Form 10-Q and Part I, Item 1A, Risk Factors ofFlagstar Bancorp, Inc.'s 2019 Annual Report on Form 10-K for the year endedDecember 31, 2019 . Additional information about Flagstar can be found on our website at www.flagstar.com. Where we say "we," "us," "our," the "Company," "Bancorp" or "Flagstar," we usually meanFlagstar Bancorp, Inc. However, in some cases, a reference will include our wholly-owned subsidiaryFlagstar Bank, FSB (the "Bank"). See the Glossary of Abbreviations and Acronyms on page 3 for definitions used throughout this Form 10-Q. Introduction We are a savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. We provide commercial and consumer banking services, and we are the 6th largest bank mortgage originator in the nation and the 6th largest subservicer of mortgage loans nationwide. AtSeptember 30, 2020 , we had 4,871 full-time equivalent employees. Our common stock is listed on the NYSE under the symbol "FBC". Our relationship-based business model leverages our full-service bank's capabilities and our national mortgage platform to create and build financial solutions for our customers. AtSeptember 30, 2020 , we operated 160 full-service banking branches that offer a full set of banking products to consumer, commercial, and government customers. Our banking footprint spansMichigan ,Indiana ,California ,Wisconsin ,Ohio and contiguous states. We originate mortgages through a network of brokers and correspondents in all 50 states and our own loan officers, which includes our direct lending team, from 87 retail locations in 29 states and 3 call centers. We are also a leading national servicer of mortgage loans and provide complementary ancillary offerings including MSR lending, servicing advance lending and MSR recapture services. Operating Segments Our operations are conducted through our three operating segments: Community Banking, Mortgage Originations, and Mortgage Servicing. For further information, see MD&A - Operating Segments and Note 17 - Segment Information. 4 --------------------------------------------------------------------------------
Selected Financial Ratios
Three Months Ended, Nine Months Ended,
September 30, 2020 June 30, 2020 September 30, 2020 September 30, 2019
(In millions and percentages)
Selected Mortgage Statistics: (1)
Mortgage rate lock commitments (fallout-adjusted) $ 15,000 $ 13,800 $ 40,000 $ 24,100 (2) Mortgage loans originated
$ 14,400 $ 12,200 $ 35,200 $ 23,400 Mortgage loans sold and securitized
$ 14,500 $ 12,900 $ 34,900 $ 22,200
Selected Ratios:
Interest rate spread (3) 2.44 % 2.52 % 2.41 % 2.57 %
Net interest margin 2.78 % 2.86 % 2.81 % 3.07 %
Adjusted net interest margin (4) 2.94 % 2.88 % 2.88 % 3.07 %
Return on average assets 3.15 % 1.77 % 1.97 % 1.08 %
Return on average common equity 41.54 % 23.47 % 25.71 % 12.90 %
Return on average tangible common equity (4) 45.42 % 26.16 % 28.58 % 15.30 %
Efficiency ratio 48.3 % 54.3 % 56.4 % 75.0 %
Effective tax provision rate 24.7 % 21.5 % 23.0 % 18.6 %
Average Balances:
Average interest-earning assets $ 25,738 $ 23,692 $ 23,535 $ 17,693 Average interest-paying liabilities
$ 14,281 $ 15,119 $ 14,625 $ 12,767
Average stockholders' equity $ 2,141 $ 1,977 $ 1,991 $ 1,658
September 30, June 30, March 31, December 31, September 30,
2020 2020 2020 2019 2019
(In millions, except per share data and percentages)
Selected Statistics:
Book value per common share $ 38.41 $
34.62
56,943,979 56,729,789 56,631,236 56,510,341
Common equity-to-assets ratio 7.45 % 7.18 % 6.87 % 7.68 % 7.88 % Tangible common equity to assets ratio 6.90 % 6.58 % 6.25 % 6.95 % 7.08 %
(4)
Capitalized value of mortgage servicing 0.85 % 0.87 % 0.95 % 1.21 % 1.14 %
rights
Bancorp total capital (to adjusted risk 11.29 % 11.32 % 11.18 % 11.52 % 11.54 %
weighted assets)
Bank total capital (to adjusted risk 11.09 % 11.05 % 11.30 % 11.73 % 12.06 %
weighted assets)
Number of bank branches 160 160 160 160 160
Number of FTE employees 4,871 4,641 4,415 4,453 4,171
(1)Rounded to nearest hundred million.
(2)Fallout adjusted refers to mortgage rate lock commitments which are adjusted
by a percentage of mortgage loans in the pipeline that are not expected to close
based on previous historical experience and the impact of changes in interest
rates.
(3)Interest rate spread is the difference between the annualized yield earned on
average interest-earning assets for the period and the annualized rate of
interest paid on average interest-bearing liabilities for the period.
(4)See Non-GAAP reconciliation for further information.
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Results of Operations The following table summarizes our results of operations for the periods indicated:
Three Months Ended, Nine Months Ended,
September 30, June 30, September 30, 2020 September 30,
2020 2020 Change 2019 Change
(Dollars in millions, except per share data)
Net interest income $ 180 $ 168 $ 12 $ 496 $ 410 $ 86
Provision for credit losses 32 102 (70) 148 18 130
Total noninterest income 452 378 74 988 448 540
Total noninterest expense 305 296 9 837 643 194
Provision for income taxes 73 32 41 115 37 78
Net income $ 222 $ 116 $ 106 $ 384 $ 160 $ 224
Income per share
Basic $ 3.90 $ 2.04 $ 1.86 $ 6.76 $ 2.83 $ 3.93
Diluted $ 3.88 $ 2.03 $ 1.85 $ 6.71 $ 2.80 $ 3.91
Overview
Net income was $222 million , or $3.88 per diluted share for the quarter ended
September 30, 2020 compared
to second quarter 2020 net income of $116 million , or $2.03 per diluted share.
For the nine months ended September 30, 2020 , net income was $384 million , or
$6.71 per diluted share as compared to net income of $160 million , or $2.80 per
diluted share for same period a year ago.
Net interest income increased $12 million for the quarter ended September 30,
2020 as compared to the quarter ended June 30, 2020 , driven by a $2.0 billion
increase in average earning assets led by growth in our warehouse business. The
net interest margin in the third quarter 2020 was 2.78 percent, an 8 basis point
decrease from the prior quarter. This was driven by an increase in LGG loans in
forbearance which we have not repurchased and which do not accrue interest.
Excluding the impact from these loans, adjusted net interest margin expanded 6
basis points to 2.94 percent in the third quarter, compared to adjusted net
interest margin of 2.88 percent in the prior quarter. The increase in the
adjusted net interest margin was primarily driven by an increase in higher
spread warehouse loans and lower rates on deposit and borrowing costs.
Compared to the second quarter 2020, noninterest income increased $74 million
while noninterest expense only increased $9 million . The increase in noninterest
income was primarily due to higher net gain on loan sales and net return on
mortgage servicing rights. Gain on sale margin increased 12 basis points, to
2.31 percent as compared to 2.19 percent for the second quarter 2020. The
increase was primarily driven by improved execution in secondary marketing and
the gain associated with the RMBS transaction we executed during the quarter.
The increase in noninterest expense was primarily due to the capitalization of
direct origination costs in the second quarter for the PPP loans which did not
reoccur and the accelerated vesting of certain components of executive
compensation that resulted from the most recent secondary share offering.
Despite increased volume, mortgage expenses were flat quarter over quarter due
to certain expenses in the second quarter that did not reoccur this quarter and
are not expected to reoccur in the future, including certain performance-related
incentives related to our Opes Advisors division.
Our provision for credit losses for the quarter ended September 30, 2020 was $32
million , compared to $102 million for the second quarter 2020. We have continued
to add to our reserve balance as we believe the economic recovery will continue
to be challenged due to the COVID-19 pandemic for an extended period of time,
especially as it relates to consumer loans in forbearance and commercial real
estate loans.
6
--------------------------------------------------------------------------------Net Interest Income
The following tables present details on our net interest margin and net interest income on a consolidated basis:
Three Months Ended,
September 30, 2020 June 30, 2020
Average Annualized Average Annualized
Balance Interest Yield/ Balance Interest Yield/
Rate Rate
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ 5,602 $ 45 3.21 % $ 5,645 $ 48 3.42 %
Loans held-for-investment
Residential first mortgage 2,584 21 3.24 % 2,822 24 3.41 %
Home equity 951 9 3.77 % 1,001 9 3.78 %
Other 950 13 5.28 % 881 12 5.42 %
Total consumer loans 4,485 43 3.78 % 4,704 45 3.87 %
Commercial real estate 3,007 27 3.47 % 3,101 28 3.64 %
Commercial and industrial 1,650 14 3.25 % 2,006 17 3.34 %
Warehouse lending 5,697 56 3.92 % 3,785 38 3.88 %
Total commercial loans 10,354 97 3.68 % 8,892 83 3.67 %
Total loans held-for-investment (1) 14,839 140 3.71 % 13,596 128 3.74 %
Loans with government guarantees 2,122 5 0.89 % 858 4 1.97 %
Investment securities 2,807 16 2.29 % 3,417 21 2.42 %
Interest-earning deposits 368 - 0.11 % 176 - 0.11 %
Total interest-earning assets 25,738 206 3.16 % 23,692 201 3.38 %
Other assets 2,539 2,569
Total assets $ 28,277 $ 26,261
Interest-Bearing Liabilities
Retail deposits
Demand deposits $ 1,824 $ - 0.09 % $ 1,800 $ 1 0.22 %
Savings deposits 3,675 3 0.34 % 3,476 4 0.52 %
Money market deposits 733 - 0.09 % 716 - 0.12 %
Certificates of deposit 1,672 8 1.62 % 1,987 10 2.00 %
Total retail deposits 7,904 11 0.53 % 7,979 15 0.78 %
Government deposits 1,403 1 0.35 % 1,088 2 0.63 %
Wholesale deposits and other 953 4 1.77 % 738 4 2.07 %
Total interest-bearing deposits 10,260 16 0.62 % 9,805 21 0.86 %
Short-term FHLB advances and other 2,328 2 0.20 % 3,753 2 0.26 %
Long-term FHLB advances 1,200 3 1.03 % 1,068 3 1.13 %
Other long-term debt 493 5 4.52 % 493 7 4.99 %
Total interest-bearing liabilities 14,281 26 0.72 % 15,119 33 0.86 %
Noninterest-bearing deposits
Retail deposits and other 1,954 1,687
Custodial deposits (2) 7,347 6,223
Total non-interest bearing deposits 9,301 7,910
Other liabilities 2,554 1,255
Stockholders' equity 2,141 1,977
Total liabilities and stockholders' equity $ 28,277 $ 26,261
Net interest-earning assets 11,457 8,573
Net interest income $ 180 $ 168
Interest rate spread (3) 2.44 % 2.52 %
Net interest margin (4) 2.78 % 2.86 %
Ratio of average interest-earning assets to 180.2 % 156.7 %
interest-bearing liabilities
Total average deposits 19,561 17,715
(1)Includes nonaccrual loans. For further information on nonaccrual loans, see
Note 4 - Loans Held-for-Investment.
(2)Includes noninterest-bearing custodial deposits that arise due to the
servicing of loans for others.
(3)Interest rate spread is the difference between rates of interest earned on
interest-earning assets and rates of interest paid on interest-bearing
liabilities.
(4)Net interest margin is net interest income divided by average
interest-earning assets.
7
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Nine Months Ended,
September 30, 2020 September 30, 2019
Average Annualized Average Annualized
Balance Interest Yield/ Balance Interest Yield/
Rate Rate
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ 5,499 $ 142 3.44 % $ 3,532 $ 119 4.48 %
Loans held-for-investment
Residential first mortgage 2,822 72 3.40 % 3,158 85 3.61 %
Home equity 990 30 4.10 % 832 34 5.50 %
Other 882 36 5.47 % 512 25 6.51 %
Total consumer loans 4,694 138 3.94 % 4,502 144 4.29 %
Commercial real estate 3,019 90 3.90 % 2,414 102 5.56 %
Commercial and industrial 1,774 50 3.68 % 1,702 67 5.20 %
Warehouse lending 3,937 119 3.98 % 1,898 74 5.17 %
Total commercial loans 8,730 259 3.89 % 6,014 243 5.34 %
Total loans held-for-investment (1) 13,424 397 3.91 % 10,516 387 4.89 %
Loans with government guarantees 1,267 12 1.23 % 511 11 2.88 %
Investment securities 3,094 56 2.40 % 2,957 61 2.77 %
Interest-earning deposits 251 1 0.56 % 177 3 2.38 %
Total interest-earning assets 23,535 608 3.42 % 17,693 581 4.37 %
Other assets 2,457 2,184
Total assets $ 25,992 $ 19,877
Interest-Bearing Liabilities
Retail deposits
Demand deposits $ 1,737 $ 4 0.33 % $ 1,311 $ 8 0.80 %
Savings deposits 3,513 17 0.63 % 3,181 26 1.10 %
Money market deposits 712 1 0.17 % 748 2 0.31 %
Certificates of deposit 1,970 29 1.98 % 2,561 44 2.29 %
Total retail deposits 7,932 51 0.86 % 7,801 80 1.37 %
Government deposits 1,208 6 0.68 % 1,184 13 1.49 %
Wholesale deposits and other 758 12 2.03 % 518 9 2.35 %
Total interest-bearing deposits 9,898 69 0.93 % 9,503 102 1.44 %
Short-term FHLB advances and other 3,212 16 0.65 % 2,420 44 2.45 %
Long-term FHLB advances 1,021 9 1.13 % 349 4 1.71 %
Other long-term debt 494 18 4.94 % 495 21 5.84 %
Total interest-bearing liabilities 14,625 112 1.01 % 12,767 171 1.80 %
Noninterest-bearing deposits
Retail deposits and other 1,680 1,278
Custodial deposits (2) 6,120 3,524
Total non-interest bearing deposits 7,800 4,802
Other liabilities 1,576 650
Stockholders' equity 1,991 1,658
Total liabilities and stockholders' equity $ 25,992 $ 19,877
Net interest-earning assets 8,910 4,926
Net interest income $ 496 $ 410
Interest rate spread (3) 2.41 % 2.57 %
Net interest margin (4) 2.81 % 3.07 %
Ratio of average interest-earning assets to 160.9 % 138.6 %
interest-bearing liabilities
Total average deposits 17,698 14,305
(1)Includes nonaccrual loans. For further information on nonaccrual loans, see
Note 4 - Loans Held-for-Investment.
(2)Includes noninterest-bearing custodial deposits that arise due to the
servicing of loans for others.
(3)Interest rate spread is the difference between rates of interest earned on
interest-earning assets and rates of interest paid on interest-bearing
liabilities.
(4)Net interest margin is net interest income divided by average
interest-earning assets.
8
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The following table presents the dollar amount of changes in interest income and
interest expense for the components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between the changes
related to average outstanding balances (changes in volume while holding the
initial rate constant) and the changes related to average interest rates
(changes in average rates while holding the initial balance constant). The
rate/volume mix variances are allocated to rate.
Three Months Ended, Nine Months Ended,
September 30, 2020 versus June 30, 2020 September 30, 2020 versus
Increase (Decrease) Due to: September 30, 2019 Increase
(Decrease) Due to:
Rate Volume Total Rate Volume Total
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ (3) $ - $ (3) $ (43) $ 66 $ 23
Loans held-for-investment
Residential first mortgage (1) (2) (3) (4) (9) (13)
Home equity - - - (11) 7 (4)
Other - 1 1 (7) 18 11
Total consumer loans (1) (1) (2) (22) 16 (6)
Commercial real estate - (1) (1) (37) 25 (12)
Commercial and industrial - (3) (3) (20) 3 (17)
Warehouse lending (1) 19 18 (34) 79 45
Total commercial loans (1) 15 14 (91) 107 16
Total loans held-for-investment (2) 14 12 (113) 123 10
Loans with government guarantees (5) 6 1 (15) 16 1
Investment securities (1) (4) (5) (8) 3 (5)
Interest-earning deposits and other - - - (3) 1 (2)
Total interest-earning assets $ (11) $ 16 $ (6) $ 1
1 (1) - (43) 15 (28)
Long-term FHLB advances - - - (4) 9 5
Other long-term debt (2) - (2) (3) - (3)
Total interest-bearing liabilities (7) - (7) (87) 28 (59)
Change in net interest income $ (4) $ 16 $ 12 $ (95) $ 181 $ 86
Comparison to Prior Quarter
Net interest income increased $12 million , or 7 percent, to $180 million for
the third quarter 2020 as compared to the second quarter 2020. The increase was
primarily driven by warehouse loan growth partially offset by lower net interest
margin as the impact of lower interest rates on deposit and borrowing costs was
more than offset by lower yields on earning assets which included $1.3 million
higher LGG loans in forbearance that have not been repurchased and do not bear
interest. Average earnings assets increased $2.0 billion , reflecting increases
of $2.5 billion in average total loans, partially offset by a $0.6 billion
decrease in average investment securities.
The net interest margin in the third quarter of 2020 was 2.78 percent, an 8
basis point decrease from the prior quarter. Excluding the impact from the loans
with government guarantees discussed above, adjusted net interest margin
expanded 6 basis points to 2.94 percent in the third quarter, compared to
adjusted net interest margin of 2.88 percent in the prior quarter. The increase
in the adjusted net interest margin was primarily driven by $1.9 billion (51
percent) higher average warehouse loan balances as we grew our business and took
advantage of the strong mortgage market along with lower rates on retail banking
deposits and borrowing costs. Retail banking deposit rates decreased 22 basis
points driven by the expiration of promotional rates on some of our savings
deposits and the maturity of higher cost time deposits.
Loans held-for-investment averaged $14.8 billion for the third quarter of 2020,
increasing $1.2 billion (9 percent) from the prior quarter. The increase was
primarily driven by $1.9 billion (51 percent) higher average warehouse loan
balances as we grew our business and took advantage of the strong mortgage
market, partially offset by $0.5 billion (9 percent) lower average commercial
loans, excluding warehouse, primarily due to a decrease in our home builder
finance portfolio and the sale of the PPP loans during the third quarter.
Average total deposits were
9
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refinancings, average government deposits increased $0.3 billion (29 percent)
and retail deposits increased $0.2 billion (2 percent) primarily due to changes
in consumer behavior and spending patterns since the COVID-19 pandemic began and
higher cash balances being carried by commercial depositors.
Comparison to Prior Year to Date
Net interest income increased$86 million , for the nine months endedSeptember 30, 2020 , compared to the same period in 2019. The 21 percent increase was driven by growth in average interest-earning assets led by the warehouse and LHFS portfolios. Volume growth was partially offset by a 26 basis point decline in net interest margin to 2.81 percent for the nine months endedSeptember 30, 2020 , as compared to 3.07 percent for the nine months endedSeptember 30, 2019 primarily attributable to the interest rate cuts occurring in late 2019 and inMarch 2020 . Average interest-earnings assets increased$5.8 billion due primarily to growth in the warehouse portfolio, due to increased volume from the favorable mortgage environment and improvements in market share, and the LHFS portfolio which benefited from the favorable mortgage environment due to lower market rates. Average loans with government guarantees increased$0.8 billion due to a$0.5 billion increase in average GNMA loans in forbearance for the nine months endedSeptember 30, 2020 . Average non-warehouse commercial portfolios increased$677 million driven by broad-based growth across CRE and C&I throughout 2020. Average interest-bearing liabilities increased$1.9 billion , driven by increases of$672 million and$621 million in long-term and short-term FHLB borrowings, respectively, which were used to fund asset growth while taking advantage of the lower interest rate environment. Average total deposits increased$3.4 billion driven by higher custodial deposits which resulted from growth in subservicing and higher refinance activity, and growth in retail deposits as customer balances grew due to the impact of COVID-19 on customer behavior and spending patterns.
Provision for Credit Losses
The provision for credit losses was$32 million for the three months endedSeptember 30, 2020 , compared to$102 million for the three months endedJune 30, 2020 . The decrease in the provision is primarily driven by the significant provision taken in during the second quarter of 2020 due to our forecast of economic and credit conditions as impacted by COVID-19. The additional provision in the third quarter of 2020 reflects our belief that the economy will continue to be challenged by the response to the COVID-19 pandemic for an extended period of time, especially as it relates to consumer loans in forbearance and commercial real estate loans. The provision for credit losses and unfunded commitments was$148 million for the nine months endedSeptember 30, 2020 , compared to$18 million for the nine months endedSeptember 30, 2019 . The increase is reflective of the adoption of CECL in 2020 and an increase due to changes in the economic forecast used in the ACL models and judgment we applied related to those forecasts as a result of the ongoing COVID-19 pandemic.
For further information on the provision for credit losses see MD&A - Credit Quality.
10
--------------------------------------------------------------------------------Noninterest Income
The following tables provide information on our noninterest income and other mortgage metrics:
Three Months Ended, Nine Months Ended,
September 30, June 30, September 30, September 30,
2020 2020 Change 2020 2019 Change
(Dollars in millions)
Net gain on loan sales $ 346 $ 303 $ 43 $ 739 $ 234 $ 505
Loan fees and charges 45 41 4 112 70 42
Net return (loss) on mortgage servicing 12 (8) 20 10 9 1
rights
Loan administration income 26 21 5 59 22 37 Deposit fees and charges 8 7 1 24 28 (4) Other noninterest income 15 14 1 44 85 (41) Total noninterest income$ 452 $ 378 $ 74 $ 988 $ 448 $ 540 Three Months Ended, Nine Months Ended, September 30, June 30, September 30, September 30, 2020 2020 Change 2020 2019 Change (Dollars in millions) Mortgage rate lock commitments$ 15,000 $ 13,800 $
1,200
$ 14,400 $ 12,200 $
2,200
0.12 % 1.85 % 0.96 % 0.89 %
(fallout-adjusted) (1)(2)
Mortgage loans sold and securitized (3) $ 14,500 $ 12,900 $
1,600
(1)Fallout-adjusted refers to mortgage rate lock commitments which are adjusted by estimates of the percentage of mortgage loans in the pipeline that are not expected to close based on our historical experience and the impact of changes in interest rates. (2)Gain on sale margin is based on net gain on loan sales (excludes net gain on loan sales of$3 million and$2 million from loans transferred from LHFI during the nine months endedSeptember 30, 2020 andSeptember 30, 2019 , respectively) to fallout-adjusted mortgage rate lock commitments. (3)Rounded to nearest hundred million.
Comparison to Prior Quarter
Noninterest income increased
•Net gain on loan sales increased$43 million to$346 million , as compared to$303 million in the second quarter 2020. The net gain on loan sale margin increased 12 basis points, to 2.31 percent for the third quarter 2020, as compared to 2.19 percent for the second quarter 2020. The margin increase was primarily driven by improved execution in secondary marketing and the gain associated with the RMBS transaction during the quarter. Fallout-adjusted locks increased$1.2 billion , or 9 percent, to$15.0 billion , as historically low interest rates continued to support a strong refinance market. •Net return (loss) on mortgage servicing rights increased$20 million to a$12 million net return for the third quarter of 2020, compared to an$8 million net loss for the second quarter 2020. The third quarter 2020 MSR return normalized following the MSR valuation decrease caused by rising prepayment speeds during the second quarter of 2020 which did not reoccur. The UPB of loans serviced for others also increased 26 percent driving a$6 million increase in service fee income. •Loan administration income increased$5 million to$26 million for the third quarter of 2020, compared to$21 million for the second quarter 2020, largely driven by a decline in LIBOR-based fees paid to sub-servicing customers on custodial deposits and an increase in the average number of loans being subserviced and higher monthly services fees for loans in forbearance. •Loan fees and charges increased$4 million to$45 million for the third quarter of 2020, compared to$41 million for the second quarter 2020, resulting from a 19 percent increase in mortgage closings partially offset by lower ancillary fees on subserviced loans. 11 --------------------------------------------------------------------------------
Comparison to Prior Year to Date
Noninterest income increased
•Net gain on loan sales increased$505 million , primarily due to$15.9 billion higher fallout adjusted locks driven by the favorable mortgage environment supported by historically low interest rates. In addition, the 0.89 percent increase in gain on sale margin was driven by managing our volume level within our channels and products to fit our fulfillment capacity made possible by demand due to favorable market conditions which has led to higher closings in our retail channel, which supports a higher gain on sale. •Loan fees and charges increased$42 million primarily driven by an increase in retail closings along with$14 million higher subservicing ancillary fees driven by fees related to forbearance programs. •Loan administration income increased$37 million , driven about equally by a decline in LIBOR-based fees paid to sub-servicing customers on custodial deposits and higher subservice fee income due to an increase in the average number of loans being subserviced and an increase in the number of loans past due which are charged a higher servicing rate. •Other noninterest income declined$41 million primarily due to the$25 million DOJ Liability fair value adjustment in 2019 which did not reoccur (see Note 15 - Legal Proceedings, Contingencies and Commitments for additional information) and$7 million of AFS investment security gains recorded in 2019 that did not reoccur in 2020 along with lower returns on other investments due to lower interest rates. •Deposit fees and charges decreased$4 million , to$24 million for the nine months endedSeptember 30, 2020 , primarily driven by a decrease in non-sufficient funds fee income due to higher customer balances and fees we elected to waive to support our customers during the initial COVID-19 surge.
Noninterest Expense
The following table sets forth the components of our noninterest expense:
Three Months Ended, Nine Months Ended,
September 30, June 30, September 30, September 30,
2020 2020 Change 2020 2019 Change
(Dollars in millions)
Compensation and benefits $ 123 $ 116 $ 7 $ 341 $ 275 $ 66
Occupancy and equipment 47 44 3 132 118 14
Commissions 72 61 11 162 76 86
Loan processing expense 24 25 (1) 69 60 9
Legal and professional expense 9 5 4 20 18 2
Federal insurance premiums 6 7 (1) 19 14 5
Intangible asset amortization 3 4 (1) 10 11 (1)
Other noninterest expense 21 34 (13) 84 71 13
Total noninterest expense $ 305 $ 296 $ 9 $ 837 $ 643 $ 194
Efficiency ratio 48.3 % 54.3 % (6.0) % 56.4 % 75.0 % (18.6) %
Average number of FTE 4,789 4,451 338 4,589 4,071 518
Comparison to Prior Quarter
Noninterest expense increased
•Commissions increased$11 million due to$2.3 billion , or 19 percent, higher mortgage closings. •Compensation and benefits expense increased$7 million from the prior quarter. This was primarily due to a 5 percent increase in FTE, the capitalization of direct PPP loan origination costs in the second quarter which did not reoccur and the accelerated vesting of certain components of executive compensation that resulted from the most recent secondary share offering. This was partially offset by lower incentive compensation as the second quarter 2020 included a catch-up adjustment as a result of the strong financial performance. 12 -------------------------------------------------------------------------------- •Other noninterest expense decreased$13 million from the prior quarter due to certain expenses in the second quarter that did not reoccur this quarter and are not expected to reoccur in the future, including certain performance-related earn out adjustments related to ourOpes Advisors acquisition.
Comparison to Prior Year to Date
Noninterest expense increased
•Compensation and benefits increased$66 million , primarily due to a 13 percent increase in average FTE which was impacted by bringing default servicing in house and adding variable mortgage closing capacity in response to the robust mortgage performance along with an increase in incentive compensation attributed to stronger financial results. •Commissions and loan processing increased$86 million and$9 million , respectively, primarily driven by$11.8 billion higher mortgage closings along with a shift in channel mix from TPO to retail which supports a higher gain on sale but also has higher commission rates and costs. •Occupancy and equipment increased$14 million primarily due to increases in IT software expenses and depreciation expense which includes certain costs associated with taking our workforce remote during 2020 in response to the COVID-19 pandemic. •Other noninterest expense increased$13 million primarily driven by higher mortgage related expenses including certain performance-related earn out adjustments related to ourOpes Advisors acquisition.
Provision for Income Taxes
Our provision for income taxes for the three and nine months endedSeptember 30, 2020 , was$73 million and$115 million , respectively. Our effective tax rate was 24.7 percent for the three months endedSeptember 30, 2020 , compared to an effective tax rate of 21.5 percent for the three months endedJune 30, 2020 . The higher rate was the result of our higher level of income, which is taxed at higher marginal tax rates. Also contributing to the higher rate was the delay of certain tax planning strategies.
Operating Segments
Our operations are conducted through three operating segments: Community Banking, Mortgage Originations, and Mortgage Servicing. The Other segment includes the remaining reported activities. The operating segments have been determined based on the products and services offered and reflect the manner in which financial information is currently evaluated by management. Each of the operating segments is complementary to each other and because of the interrelationships of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. As a result of management's evaluation of our segments, effectiveJanuary 1, 2020 , certain departments have been re-aligned between the Community Banking and Mortgage Originations segments. Specifically, a majority of the residential mortgage HFI portfolio is now part of the Mortgage Originations segment. The income and expenses relating to these changes are reflected in our financial statements and all prior period segment financial information has been recast to conform to the current presentation. Before the adoption of CECL onJanuary 1, 2020 , we charged the lines of business for the net charge-offs that occurred during the period. The difference between total net charge-offs and the consolidated provision for credit losses was assigned to the "Other" segment. This amount assigned to the "Other" segment was then allocated back to the lines of business through other noninterest expense. This year, with the adoption of CECL, we still charge the lines of business for the net charge-offs that occur. In addition to this amount, we charge them for the change in loan balances during the period, applied at the budgeted credit loss factor. The difference between the consolidated provision for credit losses and the sum of total net charge-offs and the change in loan balances is still assigned to the "Other" segment, although now that amount includes the changes related to the economic forecasts, model changes, qualitative adjustments and credit downgrades. As in the prior methodology, the amount assigned to the "Other" segment continues to be allocated back to the lines of business through other noninterest expense.
For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 17 - Segment Information.
13
--------------------------------------------------------------------------------Community Banking
Our Community Banking segment serves commercial, governmental and consumer customers in our banking footprint which spans throughoutMichigan ,Indiana ,California ,Wisconsin ,Ohio and contiguous states. We also serve home builders, correspondents, and commercial customers on a national basis. The Community Banking segment originates and purchases loans, while also providing deposit and fee based services to consumer, business, and mortgage lending customers. Our commercial customers operate in a diversified range of industries including financial, insurance, service, manufacturing, and distribution. We offer financial products to these customers for use in their normal business operations, as well as provide financing of working capital, capital investments, and equipment. Additionally, our commercial real estate business supports income producing real estate and home builders. The Community Banking segment also offers warehouse lines of credit to non-bank mortgage lenders. Our Community Banking segment has seen continued growth driven by our warehouse portfolio which has benefited from the robust mortgage market in the first nine months of 2020. Our relationship-based approach and speed of execution also enabled us to add new customers as well as increase lines for existing customers during the quarter. In addition, we continue to maintain our disciplined underwriting in this business. In the 12 months endedSeptember 30, 2020 , our commercial loan portfolio has grown 59 percent to$12.1 billion while our consumer loan portfolio has decreased 11 percent to$4.4 billion . Average deposits for the nine months endedSeptember 30, 2020 increased to$10.8 billion , compared to$10.2 billion for the same period in 2019 driven primarily by higher customer balances. Three Months Ended, Nine Months Ended, Community Banking September 30, June 30, September 30, September 30, 2020 2020 Change 2020 2019 Change (Dollars in millions) Summary of Operations Net interest income$ 158 $ 133 $
25
(2) (3) 1 3 17 (14)
Net interest income after provision for 160 136 24 392 279 113
credit losses
Net gain (loss) on loan sales 2 - 2 2 (10) 12
Loan fees and charges - - - 1 1 -
Loan administration expense (1) (1) - (2) (3) 1
Other noninterest income 15 12 3 43 46 (3)
Total noninterest income 16 11 5 44 34 10
Compensation and benefits 28 24 4 79 77 2
Commissions 1 - 1 2 1 1
Loan processing expense 1 1 - 4 5 (1)
Other noninterest expense 63 124 (61) 231 125 106
Total noninterest expense 93 149 (56) 316 208 108
Income before indirect overhead allocations 83 (2) 85 120 105 15
and income taxes
Indirect overhead allocation (11) (11) - (31) (30) (1)
Provision (benefit) for income taxes 15 (3) 18 19 16 3
Net income $ 57 $ (10) $ 67 $ 70 $ 59 $ 11
Key Metrics
Average number of FTE employees 1,253 1,266 (13) 1,282 1,316 (34)
14--------------------------------------------------------------------------------
Comparison to Prior Quarter
The Community Banking segment reported net income of$57 million for the three months endedSeptember 30, 2020 , compared to net loss of$10 million for the three months endedJune 30, 2020 . The$67 million increase was driven by the following: •Other noninterest expense decreased$61 million primarily driven by a decrease in the intersegment expense allocation from the impact of the degradation of economic forecasts and credit downgrades on the provision for credit losses. •Net interest income increased$25 million primarily driven by warehouse loan growth and the impact of lower interest rates on borrowing costs, especially core deposits due to the expiration of promotional rates on some of our savings deposits and the maturity of higher cost time deposits, partially offset by lower yields on earning assets. •Compensation and benefits expense increased$4 million primarily due to the capitalization of direct PPP loan origination costs in the second quarter which did not reoccur.
Comparison to Prior Year to Date
The Community Banking segment reported net income of$70 million for the nine months endedSeptember 30, 2020 , compared to$59 million for the nine months endedSeptember 30, 2019 . The increase was driven by the following: •Net interest income increased$99 million driven by higher average loan and deposit balances, led by our warehouse business partially offset by lower margins due to rate cuts that have occurred over the past year. •Provision (benefit) for credit losses was$14 million lower primarily due to lower net charge-offs as 2019 included the charge-off of the Live Well commercial loan. •Noninterest income increased$10 million as during 2020 the Community Banking segment has not repurchased any residential HELOC loans from the Mortgage Originations segment. In 2019, HELOC purchases from the Mortgage Originations segment resulted in upfront losses for the Community Banking segment. •Noninterest expense increased$108 million primarily driven by higher intersegment expense allocation from the impact of the degradation in the economic forecasts and credit downgrades on the provision for credit losses. 15 --------------------------------------------------------------------------------
Mortgage Originations
We are a leading national originator of residential first mortgages. Our
Mortgage Originations segment utilizes multiple distribution channels to
originate or acquire one-to-four family residential mortgage loans on a national
scale, primarily to sell. We originate and retain certain mortgage loans in our
LHFI portfolio which generate interest income in the Mortgage Originations
segment.
Three Months Ended, Nine Months Ended,
Mortgage Originations September 30, June 30, September 30, September 30,
2020 2020 Change 2020 2019 Change
(Dollars in millions)
Summary of Operations
Net interest income $ 49 $ 56
(3) (2) (1) (8) (3) (5)
Net interest income after provision for credit 52 58 (6) 155 106 49
losses
Net gain on loan sales 344 303 41 737 243 494
Loan fees and charges 29 22 7 68 47 21
Loan administration expense (10) (8) (2) (25) (16) (9)
Net return (loss) on mortgage servicing rights 12 (8) 20 10 9 1
Other noninterest income 3 1 2 5 9 (4)
Total noninterest income 378 310 68 795 292 503
Compensation and benefits 42 38 4 111 79 32
Commissions 71 61 10 160 75 85
Loan processing expense 15 14 1 39 23 16
Other noninterest expense 32 56 (24) 114 63 51
Total noninterest expense 160 169 (9) 424 240 184
Income before indirect overhead allocations and 270 199 71 526 158 368
income taxes
Indirect overhead allocation (18) (15) (3) (45) (30) (15)
Provision for income taxes 53 39 14 101 26 75
Net income $ 199 $ 145 $ 54 $ 380 $ 102 $ 278
Key Metrics
Mortgage rate lock commitments $ 15,000 $ 13,800
1,758 1,599 159 1,675 1,406 269
(1)Fallout adjusted refers to mortgage rate lock commitments which are adjusted
by a percentage of mortgage loans in the pipeline that are not expected to close
based on our historical experience and the impact of changes in interest rates.
(2)Rounded to nearest hundred million.
Comparison to Prior Quarter
The Mortgage Originations segment reported net income of$199 million for the three months endedSeptember 30, 2020 as compared to$145 million for the three months endedJune 30, 2020 . The increase was driven by the following: •Net gain on loan sales increased$41 million , to$344 million , as compared to$303 million in the second quarter 2020. The net gain on loan sale margin increased 12 basis points, to 2.31 percent for the third quarter 2020, as compared to 2.19 percent for the second quarter 2020. The increase was primarily driven by improved execution in secondary marketing and the gain associated with the RMBS transaction we executed during the quarter. Fallout-adjusted locks increased$1.2 billion , or 9 percent, to$15.0 billion , as historically low interest rates continued to support a strong refinance market. •Net return (loss) on mortgage servicing rights increased$20 million , to a$12 million net gain for the third quarter of 2020, compared to an$8 million net loss for the second quarter 2020. The third quarter 2020 MSR return normalized following the MSR valuation decrease caused by rising prepayment speeds in the second quarter of 2020. •Loan fees and charges, commissions and loan processing expense all increased due to$2.3 billion higher mortgage closings in the third quarter of 2020. 16 -------------------------------------------------------------------------------- •Other noninterest expense decreased$24 million primarily driven by certain performance-related earn out adjustments related to ourOpes Advisors acquisition in the second quarter of 2020 along with a decrease in the intersegment expense allocation of$8 million from the impact of the degradation of economic forecasts and credit downgrades on the provision for credit losses. •Net interest income declined$7 million driven about equally by lower average HFS and HFI mortgage balances as deliveries and payoffs outpaced new closings and yields continued to decline in line with market rates.
Comparison to Prior Year to Date
The Mortgage Originations segment reported net income of$380 million for the nine months endedSeptember 30, 2020 and$102 million for the nine months endedSeptember 30, 2019 . The increase was driven by the following: •Net gain on loan sales increased$494 million , to$737 million , as compared to$243 million in the first nine months of 2019. Fallout adjusted locks increased$15.9 billion , or 65 percent, to$40.0 billion , primarily driven by low interest rates that fueled a strong refinance market. The net gain on loan sale margin increased 89 basis points to 1.85 percent for the first nine months of 2020, as compared to 0.96 percent for the first nine months of 2019 reflecting our management of volume level to fit our fulfillment capacity driven by demand due to market conditions, in addition to a higher mix of retail closings (29 percent during the first nine months of 2020 compared to 20 percent for the first nine months of 2019). •Net interest income increased$44 million primarily due to$2.0 billion higher average LHFS balances resulting from increased mortgage production. •Loan fees and charges, commissions and loan processing expense all increased due to$11.8 billion higher closings and increased retail mix in the first half of 2020. •Other noninterest expense increased$51 million primarily driven by an increase in the intersegment expense allocation from the impact of the degradation of economic forecasts and credit downgrades on the provision for credit losses.
Mortgage Servicing
The Mortgage Servicing segment services loans when we hold the MSR asset, and
subservices mortgage loans for others through a scalable servicing platform on a
fee for service basis. We may also collect ancillary fees and earn income
through the use of noninterest bearing escrows. The loans we service generate
custodial deposits which provide a stable funding source which support
interest-earning asset generation in the Community Banking and Mortgage
Originations segments. Revenue for serviced and subserviced loans is earned on a
contractual fee basis, with the fees varying based on our responsibilities and
the delinquency status of the underlying loans. The Mortgage Servicing segment
also services residential mortgages for our LHFI portfolio in the Community
Banking segment and our own MSR portfolio in the Mortgage Originations segment
for which it earns intersegment revenue on a fee per loan basis.
17
--------------------------------------------------------------------------------
Three Months Ended, Nine Months Ended,
Mortgage Servicing September 30, June 30, September 30, September 30,
2020 2020 Change 2020 2019 Change
(Dollars in millions)
Summary of Operations
Net interest income $ 5 $ 4 $ 1 $ 14 $ 11 $ 3
Loan fees and charges $ 16 $ 19 $ (3) $ 43 $ 22 $ 21
Loan administration income 40 36 4 112 91 21
Total noninterest income 56 55 1 155 113 42
Compensation and benefits 12 11 1 33 19 14
Loan processing expense 8 9 (1) 24 30 (6)
Other noninterest expense 21 17 4 57 43 14
Total noninterest expense 41 37 4 114 92 22
Income before indirect overhead allocations 20 22 (2) 55 32 23
and income taxes
Indirect overhead allocation (4) (6) 2 (15) (13) (2)
Provision for income taxes 3 3 - 8 4 4
Net income $ 13 $ 13 $ - $ 32 $ 15 $ 17
Key Metrics
Average number of residential loans 1,073,000 1,062,000 11,000 1,098,000 979,000 119,000
serviced (1)
Average number of FTE employees 582 520 62 541 275 266
(1)Rounded to nearest thousand.
The following table presents loans serviced and the number of accounts associated with those loans:
September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 Unpaid Unpaid Unpaid Unpaid Unpaid Principal Number of accounts Principal Number of accounts Principal Number of accounts Principal Number of accounts Principal
Number of accounts
Balance (1) Balance (1) Balance (1) Balance (1) Balance (1)
(Dollars in millions)
Loan servicing
Subserviced for others (2) $ 180,981 893,559 $ 174,517 854,693 $ 193,037 916,989 $ 194,638 918,662 $ 171,145 826,472
Serviced for others (3) 37,908 148,868 29,846 122,779 23,439 102,338 24,003 105,469 25,039
106,992
Serviced for own loan portfolio 8,469 62,486 9,211 64,142 8,539 63,085 9,536 66,526 8,058
60,088
(4)
Total loans serviced$ 227,358 1,104,913$ 213,574 1,041,614$ 225,015 1,082,412$ 228,177 1,090,657$ 204,242 993,552 (1)UPB, net of write downs, does not include premiums or discounts. (2)Loans subserviced for a fee for non-Flagstar owned loans or MSRs. Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. (3)Loans for which Flagstar owns the MSR. (4)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage) and loans with government guarantees (residential first mortgage).
Comparison to Prior Quarter
The Mortgage Servicing segment reported net income of$13 million for the three months endedSeptember 30, 2020 , consistent with net income reported for the three months endedJune 30, 2020 . Loan administration income increased$4 million , driven by an increase in the average number of subserviced loans and higher monthly service fees for loans in forbearance. This was mostly offset by a$3 million decrease in loan fees and charges driven by lower ancillary fees. 18 --------------------------------------------------------------------------------
Comparison to Prior Year to Date
The Mortgage Servicing segment reported net income of$32 million for the nine months endedSeptember 30, 2020 , compared to net income of$15 million for the nine months endedSeptember 30, 2019 . The$17 million increase in net income was driven by a$42 million increase in noninterest income, a result of a decline in LIBOR-based fees paid to sub-servicing customers on custodial deposits, higher ancillary income driven by increases in forbearance and loss mitigation activities, and higher subservice fee income due to an increase in the average number of subserviced loans as well as an increase in the number of delinquent loans which carry a higher servicing charge. This was partially offset by a$14 million increase in compensation and benefits expense primarily due to business growth, including bringing default servicing in-house in late 2019. Other noninterest expense increased$14 million driven by an increase in loans serviced and other fees, including software costs and corporate allocations.
Other
The Other segment includes the treasury functions, which include the impact of
interest rate risk management, balance sheet funding activities and the
investment securities portfolios, as well as other expenses of a corporate
nature, including corporate staff, risk management, and legal expenses which are
charged to the line of business segments. The Other segment charges each
operating segment a daily funds transfer pricing rate on their average assets
which resets more rapidly than the underlying borrowing costs resulting in an
asset sensitive position. In addition, the Other segment includes revenue and
expenses not directly assigned or allocated to the Community Banking, Mortgage
Originations or Mortgage Servicing segments.
Three Months Ended, Nine Months Ended,
Other September 30, June 30, September 30, September 30,
2020 2020 Change 2020 2019 Change
(Dollars in millions)
Summary of Operations
Net interest income $ (32) $ (25) $ (7) $ (60) $ - $ (60)
Provision for credit losses 37 107 (70) 153 4 149
Net interest income after provision for (69) (132) 63 (213) (4) (209)
credit losses
Net gain on loan sales - - - - 1 (1)
Loan administration income (expense) (3) (6) 3 (26) (50) 24
Other noninterest income 5 8 (3) 20 58 (38)
Total noninterest income 2 2 - (6) 9 (15)
Compensation and benefits 41 43 (2) 118 100 18
Loan processing expense - 1 (1) 2 2 -
Other noninterest expense (30) (103) 73 (137) 1 (138)
Total noninterest expense 11 (59) 70 (17) 103 (120)Income before indirect overhead allocations (78) (71)
(7) (202) (98) (104) and income taxes Indirect overhead allocation 33 32 1 91 73 18 Provision for income taxes 2 (7) 9 (13) (9) (4) Net income (loss)$ (47) $ (32) $ (15) $ (98) $ (16) $ (82) Key Metrics Average number of FTE employees 1,163 1,142 21 1,163 1,056 107 19
--------------------------------------------------------------------------------
Comparison to Prior Quarter
The Other segment reported a net loss of$47 million , for the three months endedSeptember 30, 2020 , compared to a net loss of$32 million for the three months endedJune 30, 2020 . The$15 million higher loss was primarily driven by a decrease in net interest income as a result of the Bank's overall asset sensitive position and the lower average rates throughout the third quarter. The provision for credit losses decreased$70 million as a result of the significant provision taken in second quarter of 2020 due to our forecast of economic and credit conditions as impacted by COVID-19. The additional provision in the third quarter of 2020 reflects our belief that the economy will continue to be challenged by the response to the COVID-19 pandemic for an extended period of time, especially as it relates to consumer loan forbearance and the commercial real estate sector. The provision for credit losses is directly allocated to the other applicable segments through other noninterest expense. The majority of all other activity within the Other segment largely offsets and is allocated back to the operating segments, recorded as contra other noninterest expense.
Comparison to Prior Year to Date
The Other segment reported a net loss of$98 million , for the nine months endedSeptember 30, 2020 , compared to net loss of$16 million for the nine months endedSeptember 30, 2019 . The$82 million decrease was primarily due to a$60 million decrease in net interest income as a result of the Bank's overall asset sensitive position and the lower average rates during the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . The nine months endedSeptember 30, 2019 also includes a$25 million benefit from the DOJ Liability fair value adjustment. The provision for credit losses increased$149 million primarily due to changes in the forecasts of economic conditions and impacts of COVID-19. With the adoption of CECL onJanuary 1, 2020 , the difference between the consolidated provision for credit losses and the sum of total net charge-offs and the change in loan balances is still assigned to the Other segment. However, this amount now includes changes related to the economic forecasts, model changes, qualitative adjustments and credit downgrades. The provision for credit losses is then directly allocated to the other applicable segments through other noninterest expense. The majority of all other activity within the Other segment largely offsets and is allocated back to the operating segments, recorded as contra other noninterest expense.
Risk Management
Certain risks are inherent in our business and include, but are not limited to, operational, strategic, credit, regulatory compliance, legal, reputational, liquidity, market and cybersecurity. We continuously invest in our risk management activities which are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. We hold capital to protect us from unexpected loss arising from these risks. A comprehensive discussion of risks affecting us can be found in the Risk Factors section included in Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. Some of the more significant processes used to manage and control credit, market, liquidity and operational risks are described in the following paragraphs. Credit Risk Credit risk is the risk of loss to us arising from an obligor's inability or failure to meet contractual payment or performance terms. We provide loans, extend credit, and enter into financial derivative contracts, all of which have related credit risk. We manage credit risk using a thorough process designed to ensure we make prudent and consistent credit decisions. The process was developed with a focus on utilizing risk-based limits and credit concentrations while emphasizing diversification on a geographic, industry and customer level. The process utilizes documented underwriting guidelines, comprehensive documentation standards, and ongoing portfolio monitoring including the timely review and resolution of credits experiencing deterioration. These activities, along with the management of credit policies and credit officers' delegated authority, are centrally managed by our credit risk team. 20 -------------------------------------------------------------------------------- We maintain credit limits in compliance with regulatory requirements. Under HOLA, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 plus Tier 2 capital and any portion of the allowance for credit losses not included in the Tier 2 capital. This limit was$371 million as ofSeptember 30, 2020 . We maintain a more conservative maximum internal Bank credit limit than required by HOLA of$100 million to any one borrower/obligor relationship, with the exception of warehouse borrower/obligor relationships which have a higher internal Bank limit of$125 million . During 2020, the Board approved the extension of short-term "overlines" to certain warehouse borrowers as all advances are fully collateralized by residential mortgage loans and this asset class has had very low levels of historical loss, resulting in a temporary increase of the warehouse borrower limit to$175 million . We have a tracking and reporting process to monitor lending concentration levels, and all credit exposures to a single or related borrower that exceed$50 million must be approved by the Board of Directors. Our commercial loan portfolio has been built on our relationship-based lending strategy. We provide financing and banking products to our commercial customers in our core banking footprint and will follow those established customer relationships to meet their financing needs in areas outside of our footprint. We have also formed relationship lending on a national scale through our home builder finance and warehouse lending businesses. AtSeptember 30, 2020 , we had$12.1 billion in our commercial loan portfolio with our warehouse lending and home builder finance businesses accounting for 63 percent of the total. Of the remaining commercial loans in our portfolio, the majority of CRE and C&I loans were with customers who have established relationships within our core banking footprint. Credit risk within the commercial loan portfolio is managed using concentration limits based on line of business, industry, geography and product type. This is managed through the use of strict underwriting guidelines detailed in credit policies, ongoing loan level reviews, monitoring of the concentration limits and continuous portfolio risk management reporting. The commercial credit policy outlines the risks and underwriting requirements and provides a framework for all credit and lending activities. Our commercial loan credit policies consider maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pro-forma analysis requirements and thresholds for product specific advance rates. We typically originate loans on a recourse basis with full or partial guarantees. On a limited basis, we may approve loans without recourse if sufficient consideration is provided in the loan structure. Non-recourse loans primarily have low LTVs, strong cash flow coverage or other mitigating factors supporting the lack of a guaranty. These guidelines also require an appraisal of pledged collateral prior to closing and on an as-needed basis when market conditions justify. We contract with a variety of independent licensed professional firms to conduct appraisals that are in compliance with our internal commercial credit and appraisal policies and regulatory requirements. Our commercial loan portfolio includes leveraged lending. The Bank defines a transaction as leveraged when two or more of the following conditions exist: 1) proceeds from the loan are used for buyouts, acquisitions, recapitalization or capital distributions, 2) the borrower's total funded debt to EBITDA ratio is greater than four or Senior Funded Debt to EBITDA ratio is greater than three, 3) the borrower has a high debt to net worth ratio within its industry or sector as defined by internal limits, and 4) debt leverage significantly exceeds industry norms or historical levels for leverage as defined by internal limits. Leveraged lending transactions typically result in leverage ratios that are significantly above industry norms or historical levels. Our leveraged lending portfolio and other loan portfolios with above-average default probabilities tend to behave similarly during a downturn in the general economy or a downturn within a specific sector. Consequently, we take steps to avoid undue concentrations by setting limits consistent with our appetite for risk and our financial capacity. In addition, there are specific underwriting conditions set for our leveraged loan portfolio and there is additional emphasis on certain items beyond the standard underwriting process including synergies, collateral shortfall and projections. Our commercial loan portfolio also includes loans that are part of the SNC Program. A SNC is defined as any loan or loan commitment of at least$100 million that is shared by three or more federally regulated institutions. On an annual basis, a joint regulatory task force performs a risk assessment of all SNCs. When completed, these risk ratings are shared and our risk rating must be no better than the risk rating listed in the SNC assessment. Exposure and credit quality for SNCs are carefully monitored and reported internally. For our commercial real estate portfolio, including owner and nonowner-occupied properties and home builder finance lending, we obtain independent appraisals as part of our underwriting and monitoring process. These appraisals are reviewed by an internal appraisal group that is independent from our sales and credit teams. The home builder finance group is a national relationship-based lending platform that focuses on markets with strong housing fundamentals and higher population growth potential. The team primarily originates construction and development loans. We generally lend in metropolitan areas or counties where verifiable market statistics and data are readily available to 21 -------------------------------------------------------------------------------- support underwriting and ongoing monitoring. We also evaluate the jurisdictions and laws, demographic trends (age, population and income), housing characteristics and economic indicators (unemployment, economic growth, household income trends) for the geographies where our borrowers primarily operate. We engage independent licensed professionals to supply market studies and feasibility reports, environmental assessments and project site inspections to complement the procedures we perform internally. Further, we perform ongoing monitoring of the projects including periodic inspections of collateral and annual portfolio and individual credit reviews. The consumer loan portfolio has been built on strong underwriting criteria and within concentration limits intended to diversify our risk profile. We have built our consumer loan portfolio by adding high quality first mortgage loans to our balance sheet making up 57 percent of our total consumer loan portfolio atSeptember 30, 2020 . Loans held-for-investment The following table summarizes amortized cost of our loans held-for-investment by category: September 30, December 31, 2020 % of Total 2019 % of Total Change (Dollars in millions) Consumer loans Residential first mortgage$ 2,472 15.0 %$ 3,154 26.0 %$ (682) Home equity (1) 924 5.6 % 1,024 8.4 % (100) Other 973 5.9 % 729 6.0 % 244 Total consumer loans 4,369 26.5 % 4,907 40.5 % (538) Commercial loans Commercial real estate 2,996 18.2 % 2,828 23.3 % 168 Commercial and industrial 1,520 9.2 % 1,634 13.5 % (114) Warehouse lending 7,591 46.1 % 2,760 22.8 % 4,831 Total commercial loans 12,107 73.5 % 7,222 59.5 % 4,885 Total loans held-for-investment$ 16,476 100.0 %$ 12,129 100.0 %$ 4,347
(1)Includes second mortgages, HELOCs and HELOANs.
Prior toMarch 2020 we had continued to strengthen our Community Banking segment by growing our consumer and commercial real estate LHFI. Due to the COVID-19 pandemic, subsequent toMarch 2020 we have focused on managing credit in our CRE and C&I portfolios while growing our lower-risk, higher return warehouse lending portfolio. This drove growth in our commercial loan portfolio of$4.9 billion , or 68 percent, fromDecember 31, 2019 toSeptember 30, 2020 . Our consumer loan portfolio decreased$538 million , or 11 percent, fromDecember 31, 2019 toSeptember 30, 2020 as a$244 million increase in other consumer loans was more than offset by a$682 million decrease in residential first mortgage loans due to higher refinance activity and lower new closings to the HFI portfolio. Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. We typically hold certain mortgage loans in LHFI that do not qualify for sale to the Agencies and that have an acceptable yield and risk profile. The LTV requirements on our residential first mortgage loans vary depending on occupancy, property type, loan amount, and FICO scores. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. As ofSeptember 30, 2020 , loans in this portfolio had an average current FICO score of 738 and an average LTV of 52 percent. 22 --------------------------------------------------------------------------------
The following table presents amortized cost of our total residential first mortgage LHFI by major category:
September
30, 2020
(Dollars in millions)
Estimated LTVs (1)
Less than 80% and current FICO scores (2):
Equal to or greater than 660 $ 1,676 $ 2,263
Less than 660 92 93
80% and greater and current FICO scores (2):
Equal to or greater than 660 624 687
Less than 660 80 111
Total $ 2,472 $ 3,154
Geographic region
California $ 908 $ 1,205
Michigan 420 442
Texas 169 205
Washington 148 181
Florida 116 214
Colorado 69 68
Arizona 61 79
Illinois 59 95
New York 56 84
New Jersey 38 49
Other 428 532
Total $ 2,472 $ 3,154
(1)LTVs reflect loan balance at the date reported, as a percentage of property
values as appraised at loan closing.
(2)FICO scores are updated at least on a quarterly basis or more frequently, if
available.
The following table presents amortized cost of our total residential first
mortgage LHFI as of
2020 2019 2018 2017 2016 and Prior Total
(Dollars in millions)
Residential first mortgage loans
851 $ 2,472
Percent of total 11.1 % 27.3 % 12.3 % 14.8 % 34.5 % 100.0 %
Home equity. Our home equity portfolio includes HELOANs, second mortgage
loans, and HELOCs. These loans require full documentation and are underwritten
and priced in an effort to ensure credit quality and loan profitability. Our
debt-to-income ratio on HELOANs and HELOCs is capped at 43 percent and 45
percent, respectively. We currently limit the maximum CLTV to 89.99 percent and
FICO scores to a minimum of 660 for primary residences and 680 for second homes.
Second mortgage loans and HELOANs are fixed rate loans and are available with
terms up to 20 years. HELOC loans are variable-rate loans that contain a 10-year
interest only draw period followed by a 20-year amortizing period. At
September 30, 2020 , HELOCs and HELOANs in a first lien position totaled $189
million . As of September 30, 2020 , loans in this portfolio had an average
current FICO score of 746 and an average CLTV of 54 percent.
Other consumer loans. Our other consumer loan portfolio consists of secured and unsecured loans originated through our indirect lending business, third party closings and our Community Banking segment.
The following table presents amortized cost of our other consumer loan portfolio
by purchase type:
September 30, 2020 December 31, 2019
Balance % of Portfolio Balance % of Portfolio
(Dollars in millions)
Indirect lending $ 710 73 % $ 577 79 %
Point of Sale 202 21 % 63 9 %
Other 61 6 % 89 12 %
Total other consumer loans $ 973 100 % $ 729 100 %
23-------------------------------------------------------------------------------- AtSeptember 30, 2020 , other consumer loans increased to$973 million compared to$729 million atDecember 31, 2019 . The increase is primarily due to growth in our high quality, dealer relationship based, non-auto indirect lending business of which 68 percent is secured by boats and 32 percent secured by recreational vehicles and our point of sale portfolio. As ofSeptember 30, 2020 , loans in our indirect portfolio had an average current FICO score of 749. Point of sale loans include loans originated in conjunction with certain third-party financial technology companies. Commercial real estate loans. The commercial real estate portfolio contains loans collateralized by diversified property types which are primarily income producing in the normal course of business. The majority of our retail exposure is to neighborhood centers and single tenant locations, which include pharmacies and hardware stores. Generally, the maximum LTV is 80 percent, or 90 percent for owner-occupied real estate, and the minimum debt service coverage is 1.20. AtSeptember 30, 2020 , our average LTV and average debt service coverage for our CRE portfolio, excluding owner-occupied real estate, was 53 percent and 2.35 times, respectively. Our CRE loans primarily earn interest at a variable rate. Our national home builder finance program within our commercial portfolio contained$2.0 billion in commitments with$849 million in outstanding loans as ofSeptember 30, 2020 . Certain of these loans are collateralized and included in our CRE portfolio while the remaining loans are unsecured and included in our C&I portfolio.
As of
The following table presents amortized cost of our total CRE LHFI by collateral location and collateral type:
% by collateral
MI TX CA CO FL Other Total type
(Dollars in millions)
September 30, 2020
Home builder $ 28 $ 171 $ 138 $ 142 $ 107 $ 181 $ 767 25.6 %
Owner occupied 305 4 27 - 1 50 387 12.9 %
Multi family 208 79 35 9 13 145 489 16.3 %
Retail (1) 163 - 6 4 - 111 284 9.5 %
Office 181 19 - - 2 55 257 8.6 %
Hotel 136 - 25 - - 94 255 8.5 %
Senior living facility 75 25 - - 4 61 165 5.5 %
Industrial 52 - 25 - 6 25 108 3.6 %
Parking garage/lot 48 9 1 - 1 33 92 3.1 %
Land-residential (2) 3 - 7 - 4 5 19 0.6 %
Shopping Mall 4 - 14 - - - 18 0.6 %
Single family residence (3) 1 - - - - 2 3 0.1 %
All other (4) 15 48 21 3 18 47 152 5.1 %
Total $ 1,219 $ 355 $ 299 $ 158 $ 156 $ 809 $ 2,996 100.0 %
Percent by state 40.7 % 11.8 % 10.0 % 5.3 % 5.2 % 27.0 % 100.0 %
(1)Includes multipurpose retail space, neighborhood centers, shopping centers
and single-use retail space.
(2)Loans secured by land. Land residential includes development and unimproved
vacant land.
(3)Loans secured by 1-4 single family residence properties.
(4)All other primarily includes: mini-storage facilities, data centers, movie
theaters, etc.
Commercial and industrial loans. Commercial and industrial LHFI facilities
typically include lines of credit and term loans and leases to businesses for
use in normal business operations to finance working capital, equipment and
capital purchases, acquisitions and expansion projects. We lend to customers
with a history of profitability and a long-term business model. Generally,
leverage conforms to industry standards and the minimum debt service coverage is
1.20 times. The majority of our C&I loans earn interest at a variable rate.
As of September 30, 2020 , our C&I portfolio included $645 million of SNCs. We
are the lead bank on 26 percent of the SNCs. The services sector and the
financial and insurance sector comprised the majority of the portfolio's NBV
with 28 and 39 percent of the balance, respectively. The SNC portfolio had
forty-nine borrowers with an average UPB of $13 million and an
24
--------------------------------------------------------------------------------
average commitment of
As ofSeptember 30, 2020 , our C&I portfolio included$327 million of leveraged lending, of which$212 million were SNCs. The manufacturing sector comprised 49 percent of the leveraged lending portfolio, and the financial and insurance sector comprised 25 percent. There were no nonperforming loans as ofSeptember 30, 2020 , and loans totaling$21 million and$25 million were rated as special mention and substandard, respectively. Included in Financial & Insurance within our C&I portfolio, are$151 million in loans outstanding to 4 borrowers that are collateralized by MSR assets. Our amounts outstanding to those borrowers range from$10 million to$60 million and the ratio of the loan outstanding to the fair market value of the collateral ranges from 21 percent to 48 percent.
The following table presents amortized cost of our total C&I LHFI by borrower's geographic location and industry type as defined by North American Industry Classification System (NAICS):
MI CA OH IN WI TX MN NY SC CT Other Total % by industry
(Dollars in millions)
September 30, 2020
Financial & Insurance $ 92 $ 19 $ 21 $ 13 $ - $ 31 $ 60 $ 67 $ 60 $ 5 $ 125 $ 493 32.4 %
Services 103 39 2 7 - 28 21 - - 42 88 330 21.7 %
Manufacturing 158 6 28 1 7 12 - - - - 52 264 17.4 %
Home Builder Finance - 12 - - - 58 - - - - 1 71 4.7 %
Rental & Leasing 80 - 13 - - - - - - - 30 123 8.1 %
Distribution 80 20 1 2 - - - - - - 14 117 7.7 %
Healthcare 2 14 1 - - 8 - - - - 13 38 2.5 %
Government & Education 28 6 - 20 - - - - - 13 - 67 4.4 %
Servicing Advances - - - - - - - - - - 10 10 0.7 %
Commodities 3 - - 1 - - - - - - 3 7 0.5 %
Total $ 546 $ 116 $ 66 $ 44 $ 7 $ 137 $ 81 $ 67 $ 60 $ 60 $ 336 $ 1,520 100.0 %
Percent by state 36.1 % 7.6 % 4.3 % 2.9 % 0.5 % 9.0 % 5.3 % 4.4 % 3.9 % 3.9 % 22.1 % 100.0 %
Warehouse lending. We have a national platform with relationship managers
across the country. We offer warehouse lines of credit to other mortgage lenders
which allow the lender to fund the closing of residential mortgage loans. Each
extension, advance, or draw-down on the line is fully collateralized by
residential mortgage loans and is paid off when the lender sells the loan to an
outside investor or, in some instances, to the Bank. In response to COVID-19, we
have increased credit requirements for government loans and lowered the advance
rate for loans that we believe have higher risk, as well as not accepting jumbo
or non-qualified mortgage loans as collateral.
Underlying mortgage loans are predominantly originated using the Agencies'
underwriting standards. The guideline for debt to tangible net worth is 15 to 1.
The aggregate committed amount of adjustable-rate warehouse lines of credit
granted to other mortgage lenders at September 30, 2020 was $10.0 billion , of
which $7.6 billion was outstanding, compared to $4.8 billion at September 30,
2019 , of which $3.2 billion was outstanding.
Credit Quality
Our focus on effectively managing credit risk through our careful underwriting
standards and processes has resulted in strong trends in certain credit quality
characteristics in our loan portfolios. The credit quality of our loan
portfolios is demonstrated by low delinquency levels, minimal charge-offs and
low levels of nonperforming loans.
For all loan categories within the consumer and commercial loan portfolio, loans
are placed on nonaccrual status when any portion of principal or interest is 90
days past due (or nonperforming), or earlier when we become aware of information
indicating that collection of principal and interest is in doubt. While it is
the goal of management to collect on loans, we attempt to work out a
satisfactory repayment schedule or modification with past due borrowers and will
undertake foreclosure proceedings if the delinquency is not satisfactorily
resolved. Our practices regarding past due loans are designed to both assist
borrowers in meeting their contractual obligations and minimize losses incurred
by the Bank. When a loan is placed on nonaccrual status, the accrued interest
income is reversed. Loans return to accrual status when principal and interest
become current and are anticipated to be fully collectible.
25
--------------------------------------------------------------------------------Nonperforming assets
The following table sets forth our nonperforming assets:
September
30, 2020
(Dollars in millions)
LHFI
Residential first mortgage $ 22 $ 13
Commercial and industrial 10 -
Home equity 2 2
Other consumer 2 1
Total nonperforming LHFI 36 16
TDRs
Residential first mortgage 7 8
Home equity 2 2
Total nonperforming TDRs 9 10
Total nonperforming LHFI and TDRs (1) 45 26
Real estate and other nonperforming assets, net 6 10
LHFS 6 5
Total nonperforming assets $ 57 $ 41
Nonperforming assets to total assets (2) 0.17 % 0.15 %
Nonperforming LHFI and TDRs to LHFI 0.28 % 0.21 %
Nonperforming assets to LHFI and repossessed assets (2) 0.31 % 0.30 %
(1)Includes less than 90 day past due performing loans placed on nonaccrual.
Interest is not being accrued on these loans.
(2)Ratio excludes LHFS, which are recorded at fair value.
The following table sets forth activity related to our total nonperforming
LHFI and TDRs:
Three Months Ended, Nine Months Ended,
September 30, June 30, September 30, September 30,
2020 2020 2020 2019
(Dollars in millions)
Beginning balance $ 33 $ 29 $ 26 $ 22
Additions 17 12 39 82
Reductions 1 - 1 -
Principal payments (3) (1) (11) (41)
Charge-offs (2) (1) (4) (34)
Return to Performing Status (1) (6) (6) (1)
Transfers to REO - - - (2)
Total nonperforming LHFI and TDRs (1) $ 45 $
33
(1)Includes less than 90 day past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.
26
--------------------------------------------------------------------------------Delinquencies
The following table sets forth loans 30-89 days past due in our LHFI
portfolio:
September 30, 2020 December 31, 2019
Amount % of LHFI Amount % of LHFI
(Dollars in millions)
Performing loans past due 30-89:
Consumer loans
Residential first mortgage $ 8 0.05 % $ 9 0.08 %
Home equity 1 0.01 % 1 0.01 %
Other consumer 4 0.02 % 4 0.03 %
Total consumer loans 13 0.08 % 14 0.12 %
Total performing loans past due 30-89 $ 13 0.08 % $ 14 0.12 %
days
For further information, see Note 4 - Loans Held-for-Investment.
Payment Deferrals
Beginning inMarch 2020 , as a response to COVID-19, we offered our consumer borrowers principal and interest payment deferrals, forbearance and/or extensions. Consumer borrowers were not required to provide proof of hardship to be granted forbearance or payment deferral. Typically payment history is the primary tool used to identify consumer borrowers who are experiencing financial difficulty. Forbearance or payment deferrals make this determination more challenging. In addition, consumer borrowers who have requested forbearance or payment deferrals are not being aged and remain in the aging category they were in prior to forbearance or payment deferral.
The table below summarizes borrowers in our consumer loan portfolios that are in forbearance or were granted a payment deferral:
As of September 30, 2020 As of June 30, 2020
Number of Borrowers UPB Percent of Number of UPB Percent of
Portfolio Borrowers Portfolio
(Dollars in millions)
Loans Held-For-Investment
Consumer loans
Residential first mortgage 819 $ 255 10.4 % 885 $ 292 10.8 %
Home equity 821 62 6.9 % 1,015 87 9.0 %
Other consumer 887 40 4.2 % 1,408 50 5.8 %
Total consumer loan deferrals/forbearance 2,527 $ 357 8.3 % 3,308 $ 429 9.5 %
Loans Held-For-Sale
Residential first mortgage 142 $ 71 1.6 % 302 $ 126 4.0 %
As of September 30, 2020 , commercial borrowers requested and were granted $47
million of payment deferrals, and, of that amount, $19 million are deferrals of
both principal and interest payments, $12 million are deferrals of principal
only, and $16 million are deferrals of interest only. Commercial borrowers who
have requested payment deferrals are not being aged and remain in the aging
category they were in prior to payment deferral.
27
--------------------------------------------------------------------------------The table below summarizes borrowers in our commercial loan portfolios that have requested and received payment deferral:
As of September 30, 2020 As of June 30, 2020
Number of Borrowers UPB Percent of Number of UPB Percent of
Portfolio Borrowers Portfolio
(Dollars in millions)
Loans Held-For-Investment
Automotive 1 $ 1 1.5 % 8 $ 44 28.4 %
Leisure & entertainment 2 - 0.1 % 13 15 12.1 %
Healthcare - - - % 14 4 9.0 %
Other 11 7 0.6 % 70 108 6.6 %
Total C&I deferrals 14 8 0.6 % 105 171 13.3 %
Hotel 3 28 10.8 % 12 132 56.3 %
Retail - - - % 24 91 29.1 %
Senior housing - - - % 1 7 5.0 %
Other 7 11 0.4 % 98 148 6.4 %
Total CRE deferrals 10 39 1.3 % 135 378 12.5 %
Warehouse deferrals - - - % - - - %
Total commercial loan deferrals (1) 24 $ 47 1.0 % 240 $ 549 11.0 %
(1)Percent shown excludes warehouse loans.
The table below summarizes the percent of our residential loan servicing
portfolio in forbearance as of
Loans in Forbearance
Borrowers making July, August and Remaining Borrowers
Total Population September Payments Total Loans in Forbearance
Unpaid Unpaid Principal Unpaid Percent of
Principal Number of accounts Balance (1) Number of accounts Principal Number of accounts Percent of UPB Accounts
Balance (1) Balance (1)
(Dollars in millions)Loan servicing Subserviced for others (2)$ 180,981 893,559 $ 5,654 26,529$ 15,103 67,192 11.5 % 10.5 % Serviced for others (3) (4) 37,908 148,868 950 3,908 3,081 12,217 10.6 % 10.8 % Serviced for own loan 8,469 62,486 196 1,792 468 1,886 7.8 % 5.9 % portfolio (5) Total loans serviced$ 227,358 1,104,913 $ 6,800 32,229$ 18,652 81,295 11.2 % 10.3 % (1)UPB, net of write downs, does not include premiums or discounts. (2)Loans subserviced for a fee for non-Flagstar owned loans or MSRs. Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. (3)Loans for which Flagstar owns the MSR. (4)Of the$1.8 million of GNMA repurchase options on the balance sheet as ofSeptember 30, 2020 ,$1.7 billion relates to loans in forbearance and are included in remaining borrowers. (5)Includes LHFI (residential first mortgage, home equity and other consumer), LHFS (residential first mortgage), and loans with government guarantees (residential first mortgage). 28 --------------------------------------------------------------------------------
The table below summarizes the percent of our residential loan servicing
portfolio in forbearance as of
Loans in Forbearance
Borrowers making April, May and June Remaining Borrowers
Total Population Payments Total Loans in Forbearance
Unpaid Unpaid Principal Unpaid Percent of
Principal Number of accounts Balance (1) Number of accounts Principal Number of accounts Percent of UPB Accounts
Balance (1) Balance (1)
(Dollars in millions)
Loan servicing
Subserviced for others (2) $ 174,384 854,216 $ 7,145 32,403 $ 13,808 59,692 12.0 % 10.8 %
Serviced for others (3) 29,979 123,256 1,261 5,058 3,018 11,661 14.3 % 13.6 %
Serviced for own loan 9,211 64,142 237 1,895 473 1,850 7.7 % 5.8 %
portfolio (4)
Total loans serviced $ 213,574 1,041,614 $ 8,643 39,356 $ 17,299 73,203 12.1 % 10.8 %
(1) UPB, net of write downs, does not include premiums or discounts.
(2) Loans subserviced for a fee for non-Flagstar owned loans or MSRs. Includes
temporary short-term subservicing performed as a result of sales of
servicing-released MSRs.
(3) Loans for which Flagstar owns the MSR. Remaining borrowers includes
$1.1 billion of GNMA repurchase options related to loans in forbearance.
(4) Includes LHFI (residential first mortgage, home equity and other consumer),
LHFS (residential first mortgage), loans with government guarantees (residential
first mortgage), and repossessed assets.
As the MSR owner for loans serviced for others, the Agencies require us to advance payments on past due loans as follows:
Principal and Interest Taxes and Insurance
Fannie Mae and Freddie Mac 4 months No time limit
GNMA No time limit No time limit
We anticipate servicing advances for these loans in forbearance to increase
throughout the remainder of 2020. We believe that we have ample liquidity to
handle the increase in servicing advances. We initially provide advances on a
short-term basis for loans we subservice and are reimbursed by the MSR owner.
Our advance receivable for our subserviced loans is therefore insignificant.
Troubled debt restructurings (held-for-investment)
TDRs are modified loans in which a borrower demonstrates financial difficulties and for which a concession has been granted as a result. Nonperforming TDRs are included in nonaccrual loans. TDRs remain in nonperforming status until a borrower has made payments and is current for at least six consecutive months. Performing TDRs are not considered to be nonaccrual so long as we believe that all contractual principal and interest due under the restructured terms will be collected. Beginning inMarch 2020 , as a response to COVID-19, we offered our consumer and commercial customers principal and interest payment deferrals and extensions. We considered these programs in the context of whether or not the short-term modifications of these loans would constitute a TDR. We considered the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), interagency guidance and related guidance from the FASB, which provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not required to be accounted for as TDRs. As a result, we have determined that these loans are not TDRs. We believe our application of the referenced guidance and accounting for these programs is appropriate. 29 --------------------------------------------------------------------------------
The following table sets forth a summary of TDRs by performing status:
September
30, 2020
(Dollars in millions)
Performing TDRs
Consumer Loans
Residential first mortgage $ 20 $ 20
Home equity 14 18
Commercial Real Estate 5 -
Total performing TDRs 39 38
Nonperforming TDRs
Nonperforming TDRs 4 3
Nonperforming TDRs, performing for less than six months 5 7
Total nonperforming TDRs 9 10
Total TDRs $ 48 $ 48
At September 30, 2020 our total TDR loans were consistent with December 31,
2019 , primarily due to the addition of a commercial real estate loan offset by
principal payments and payoffs. Of our total TDR loans, 81 percent and 79
percent were in performing status at September 30, 2020 and December 31, 2019 ,
respectively. For further information, see Note 4 - Loans Held-for-Investment.
Allowance for Credit Losses
The following tables present the changes in the allowance for credit losses
balance for the three and nine months ended
Three Months Ended September 30, 2020
Residential First Home Equity Other Consumer Commercial Real Commercial and Warehouse Total LHFI Unfunded Total ACL
Mortgage Estate Industrial Lending Portfolio (1) Commitments
(Dollars in millions)
Beginning allowance balance $ 60 $ 28 $ 34 $ 83 $ 23 $ 1 $ 229 $ 21 $ 250
Provision (benefit) for credit
losses:
Loan volume (4) (1) 3 - (4) 1 (5) 4 (1)
Economic forecast (2) (3) (3) (1) - - - (7) - (7)
Credit (3) (7) 1 (4) 13 12 - 15 - 15
Qualitative factor adjustments 6 3 5 (7) 11 3 21 - 21
(4)
Charge-offs (2) (1) (1) - - - (4) - (4)
Provision for charge-offs 2 1 1 - - - 4 - 4
Recoveries - 1 1 - - - 2 - 2
Ending allowance balance $ 52 $ 29 $ 38 $ 89 $ 42 $ 5 $ 255 $ 25 $ 280
(1) Excludes loans carried under the fair value option.
(2) Includes changes in the lifetime loss rate based on current economic forecasts as compared to forecasts used in the prior quarter.
(3) Includes changes in the probability of default and severity of default based on current borrower and guarantor characteristics, as well as individually evaluated reserves.
(4) Includes
30
--------------------------------------------------------------------------------
Nine Months Ended September 30, 2020
Residential First Home Equity Other Consumer Commercial Real Commercial and Warehouse Lending Total LHFI Unfunded Total ACL
Mortgage Estate Industrial Portfolio (1) Commitments
(Dollars in millions)
Beginning balance ALLL $ 22 $ 14 $ 6 $ 38 $ 22 $ 5 $ 107 $ 3 $ 110
Impact of adopting ASC 326 25 12 10 (14) (6) (4) 23 7 30
Beginning allowance balance 47 26 16 24 16 1 130 10 140
Provision (benefit) for credit
losses:
Loan volume (8) (2) 8 2 (1) 1 - 4 4
Economic forecast (2) 11 - 5 15 (3) - 28 11 39
Credit (3) (4) (1) 2 23 12 - 32 - 32
Qualitative factor adjustments 6 3 5 25 18 3 60 - 60
(4)
Charge-offs (5) (3) (4) - - - (12) - (12)
Provision for charge-offs 5 3 4 - - - 12 - 12
Recoveries - 3 2 - - - 5 - 5
Ending allowance balance $ 52 $ 29 $ 38 $ 89 $ 42 $ 5 $ 255 $ 25 $ 280
(1) Excludes loans carried under the fair value option.
(2) Includes changes in the lifetime loss rate based on current economic
forecasts as compared to forecasts used in the prior quarter.
(3) Includes changes in the probability of default and severity of default based
on current borrower and guarantor characteristics, as well as individually
evaluated reserves.
(4) Includes $10 million of unallocated reserve attributed to various portfolios
for presentation purposes.
The allowance for credit losses was $280 million at September 30, 2020 , compared
to $250 million at June 30, 2020 . The increase in the allowance is primarily
reflective of changes in our economic forecast and judgment we applied related
to those forecasts and underlying borrower credit as a result of the ongoing
COVID-19 pandemic between June 30, 2020 and September 30, 2020 . We utilized the
Moody's September scenarios in our forecast: a growth forecast, weighted at 30
percent; a baseline forecast, weighted at 40 percent; and an adverse forecast,
weighted at 30 percent. The resulting composite forecast for the third quarter
2020 was roughly equivalent to the scenario used in the second quarter 2020.
Unemployment ends the year at 10 percent and recovers only slightly in 2021. GDP
recovers only slightly by the end of the year from current levels and does not
return to near pre-COVID level until 2024. HPI decreases 2 percent from mid-2020
through 2021. We judgmentally increased the qualitative reserves by $21 million ,
guided by the model output from Moody's adverse scenario, our judgment relating
to industries and borrowers we believe could be more exposed to the stressful
conditions in our forecast, uncertainty related to loans in forbearance and our
judgment regarding economic uncertainty including the impact from the upcoming
national election and additional government stimulus.
The allowance as a percentage of LHFI was 1.7 percent at September 30, 2020
compared to 0.9 percent at December 31, 2019 . Excluding warehouse, the allowance
as a percentage of LHFI was 3.1 percent at September 30, 2020 compared to 1.1
percent at December 31, 2019 . The increase in the allowance, as a percentage of
LHFI is reflective of the additional increases to the allowance to reflect the
change in economic and credit forecast used during that period. At September 30,
2020 , we had a 2.8 percent and 1.3 percent allowance coverage on our consumer
loan portfolio and our commercial loan portfolio, respectively.
31
--------------------------------------------------------------------------------The following tables set forth certain information regarding the allocation of our allowance to each loan category, including the allowance amount as a percentage of amortized cost and average loan life:
September 30, 2020
LHFI Portfolio Percent of Allowance Allowance as a Weighted Average
(1) Portfolio Amount (2) Percent of Loan Loan Life
PortfolioConsumer loans Residential first mortgage$ 2,459 14.9 % $ 52 2.1 % 4 Home equity 922 5.6 % 29 3.1 % 3 Other consumer 973 5.9 % 39 4.0 % 3 Total consumer loans 4,354 26.5 % 120 2.8 % Commercial loans Commercial real estate$ 2,996 18.2 %$ 106 3.5 % 2 Commercial and industrial 1,520 9.2 % 47 3.1 % 2 Warehouse lending 7,591 46.1 % 7 0.1 % - Total commercial loans 12,107 73.5 % 160 1.3 % Total consumer and commercial loans$ 16,461 100.0 %$ 280 1.7 % Total consumer and commercial loans excluding$ 8,870 53.9 %$ 273 3.1 %
warehouse
(1) Excludes loans carried under the fair value option (2) Includes allowance for loan losses and reserve for unfunded commitments
December 31, 2019
LHFI Portfolio Percent of Allowance Allowance as a Weighted Average
(1) Portfolio Amount (2) Percent of Loan Loan Life
PortfolioConsumer loans Residential first mortgage$ 3,145 26.0 % $ 22 0.7 % 5 Home equity 1,021 8.4 % 14 1.4 % 3 Other consumer 729 6.0 % 6 0.8 % 2 Total consumer loans 4,895 40.4 % 42 0.9 % Commercial loans Commercial real estate$ 2,828 23.3 % $ 40 1.4 % 2 Commercial and industrial 1,634 13.5 % 23 1.4 % 1 Warehouse lending 2,760 22.8 % 5 0.2 % - Total commercial loans 7,222 59.6 % 68 0.9 % Total consumer and commercial loans$ 12,117 100.0 %$ 110 0.9 % Total consumer and commercial loans excluding$ 9,357 77.2 %$ 105 1.1 %
warehouse
(1) Excludes loans carried under the fair value option (2) Includes allowance for loan losses and reserve for unfunded commitments
Market Risk
Market risk is the risk of reduced earnings and/or declines in the net market value of the balance sheet due to changes in market rates. Our primary market risk is interest rate risk which impacts our net interest income, fee income related to interest sensitive activities such as mortgage closing and servicing income, and loan and deposit demand.
We are subject to interest rate risk due to:
•The maturity or repricing of assets and liabilities at different times or for
different amounts
•Differences in short-term and long-term market interest rate changes
•The remaining maturity of various assets or liabilities may shorten or lengthen
as interest rates change
Our ALCO, which is composed of our executive officers and certain members of
other management, monitors interest rate risk on an ongoing basis in accordance
with policies approved by our board of directors. The ALCO reviews interest rate
positions and considers the impact projected interest rate scenarios have on
earnings, capital, liquidity, business strategies, and other factors. However,
management has the latitude to change interest rate positions within certain
limits if, in management's judgment, the change will enhance profitability or
minimize risk.
32
--------------------------------------------------------------------------------To assess and manage interest rate risk, sensitivity analysis is used to determine the impact on earnings and the net market value of the balance sheet across various interest rate scenarios, balance sheet trends, and strategies.
Net interest income sensitivity
Management uses a simulation model to analyze the sensitivity of net interest
income to changes in interest rates across various interest rate scenarios which
demonstrates the level of interest rate risk inherent in the existing balance
sheet. The analysis holds the current balance sheet values constant and does not
take into account management intervention. In addition, we assume certain
correlation rates, often referred to as a "deposit beta," for interest-bearing
deposits, wherein the rates paid to customers change relative to changes in
benchmark interest rates. The effect on net interest income over a 12-month time
horizon due to hypothetical changes in market interest rates is presented in the
table below. In this interest rate shock simulation, as of the periods
presented, interest rates have been adjusted by instantaneous parallel changes
rather than in a ramp simulation which applies interest rate changes over time.
All rates, short-term and long-term, are changed by the same amount (e.g. plus
or minus 100 basis points) resulting in the shape of the yield curve remaining
unchanged.
September 30, 2020
Scenario Net interest income $ Change % Change
(Dollars in millions)
100 $ 677 $ 80 13.5 %
Constant $ 596 $ - - %
(100) N/M N/M N/M
December 31, 2019
Scenario Net interest income $ Change % Change
(Dollars in millions)
100 $ 592 $ 34 6.0 %
Constant $ 559 $ - - %
(100) $ 520 $ (39) (6.9) %
In the net interest income simulations, our balance sheet exhibits asset
sensitivity. When interest rates rise our net interest income increases.
Conversely, when interest rates fall our net interest income decreases. At
The net interest income sensitivity analysis has certain limitations and makes various assumptions. Key elements of this interest rate risk exposure assessment include maintaining a static balance sheet and parallel rate shocks. Future interest rates not moving in a parallel manner across the yield curve, how the balance sheet will respond and shift based on a change in future interest rates and how the Company will respond are not included in this analysis and limit the predictive value of these scenarios.
Economic value of equity
Management also utilizes EVE, a point in time analysis of the economic value
of our current balance sheet position, which measures interest rate risk over a
longer term. The EVE calculation represents a hypothetical valuation of equity,
and is defined as the market value of assets, less the market value of
liabilities, adjusted for the market value of off-balance sheet instruments. The
assessment of both the short-term earnings (Net Interest Income Sensitivity) and
long-term valuation (EVE) approaches, rather than Net Interest Income
Sensitivity alone provides a more comprehensive analysis of interest rate risk
exposure.
There are assumptions and inherent limitations in any methodology used to
estimate the exposure to changes in market interest rates and as such,
sensitivity calculations used in this analysis are hypothetical and should not
be considered to be predictive of future results. This analysis evaluates risks
to the current balance sheet only and does not incorporate future growth
assumptions. Additionally, the analysis assumes interest rate changes are
instantaneous and the new rate environment is constant but does not include
actions management may undertake to manage risk in response to interest rate
changes. Each rate scenario reflects unique prepayment and repricing
assumptions. Management derives these assumptions by considering published
market prepayment expectations, repricing characteristics, our historical
experience, and our asset and liability management strategy. This analysis
assumes that changes in interest rates may not affect or could partially affect
certain instruments based on their characteristics.
33
--------------------------------------------------------------------------------
The following table is a summary of the changes in our EVE that are projected
to result from hypothetical changes in market interest rates as well as our
internal policy limits for changes in our EVE based on the different scenarios.
The interest rates, as of the dates presented, are adjusted by instantaneous
parallel rate increases and decreases as indicated in the scenarios shown in the
table below.
September 30, 2020 December 31, 2019
Scenario EVE EVE % $ Change % Change Scenario EVE EVE % $ Change % Change Policy Limits
(Dollars in millions)
300 $ 3,643 12.4 % $ 710 24.2 % 300 $ 3,147 13.6 % $ 150 5.0 % 22.5 %
200 $ 3,495 11.9 % $ 562 19.2 % 200 $ 3,152 13.7 % $ 155 5.2 % 15.0 %
100 $ 3,287 11.2 % $ 354 12.1 % 100 $ 3,103 13.5 % $ 106 3.5 % 7.5 %
Current $ 2,933 10.0 % $ - - % Current $ 2,997 13.0 % $ - - % - %
(100) N/M N/M N/M N/M (100) $ 2,832 12.3 % $ (165) (5.5) % 7.5 %
Our balance sheet exhibits asset sensitivity in various interest rate
scenarios. The increase in EVE as rates raise is the result of the amount of
assets that would be expected to reprice exceeding the amount of liabilities
repriced. This increased as of September 30, 2020 compared to December 31, 2019
due to the addition of pay fixed interest rate swaps. At September 30, 2020 and
December 31, 2019 , for each scenario shown, the percentage change in our EVE is
within our Board policy limits.
Derivative financial instruments
As a part of our risk management strategy, we use derivative financial instruments to minimize fluctuation in earnings caused by market risk. We use forward sales commitments to hedge our unclosed mortgage closing pipeline and funded mortgage LHFS. All of our derivatives and mortgage loan production originated for sale are accounted for at fair market value. Changes to our unclosed mortgage closing pipeline are based on changes in fair value of the underlying loan, which is impacted most significantly by changes in interest rates and changes in the probability that the loan will not fund within the terms of the commitment, referred to as a fallout factor or, inversely, a pull-through rate. Market risk on interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments. The adequacy of these hedging strategies, and the ability to fully or partially hedge market risk, rely on various assumptions or projections, including a fallout factor, which is based on a statistical analysis of our actual rate lock fallout history. For further information, see Note 8 - Derivative Financial Instruments and Note 16 - Fair Value Measurements.
Mortgage Servicing Rights (MSRs)
Our MSRs are sensitive to interest rate volatility and are highly susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve. We utilize derivatives, including interest rate swaps and swaptions, as part of our overall hedging strategy to manage the impact of changes in the fair value of the MSRs, however these risk management strategies do not completely eliminate repricing risk. Our hedging strategies rely on assumptions and projections regarding assets and general market factors, many of which are outside of our control. For further information, see Note 7 - Mortgage Servicing Rights, Note 8 - Derivative Financial Instruments and Note 16 - Fair Value Measurements. Liquidity Risk Liquidity risk is the risk that we will not have sufficient funds, at a reasonable cost, to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects the ability to, at a reasonable cost, meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate and market opportunities. The ability of a financial institution to meet current financial obligations is a function of the balance sheet structure, the ability to liquidate assets, and access to various sources of funds.
Parent Company Liquidity
The Company currently obtains its liquidity primarily from dividends from the Bank. The primary uses of the Company's liquidity are debt service, operating expenses and the payment of cash dividends which were increased to$0.05 per share in the first quarter 2020. The Company holds$246 million of senior notes which are scheduled to mature onJuly 15, 2021 . AtSeptember 30, 2020 , the Company held$305 million of cash on deposit at the Bank, for future cash outflows for an 34 --------------------------------------------------------------------------------
amount sufficient to service the senior notes, repay the senior notes at maturity, pay dividends and cover the operating expenses of the Company.
The OCC and the FRB regulate all capital distributions made by the Bank, directly or indirectly, to the holding company, including dividend payments. Whether an application or notice is required is based on a number of factors including whether the institution qualifies for expedited treatment under the OCC rules and regulations or if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years, or the Bank would not be at least adequately capitalized following the dividend. Additional restrictions on dividends apply if the Bank fails the QTL test. As ofSeptember 30, 2020 , the Bank is in compliance with the QTL test. AtSeptember 30, 2020 , the Bank is able to pay dividends to the holding company of approximately$249 million without submitting an application to the OCC and remain well capitalized.
Bank Liquidity
Our primary sources of funding are deposits from retail and government customers, custodial deposits related to loans we service and FHLB borrowings. We use the FHLB ofIndianapolis as a significant source for funding our residential mortgage origination business due to the flexibility in terms which allows us to borrow or repay borrowings as daily cash needs require. The amount we can borrow, or the value we receive for the assets pledged to our liquidity providers, varies based on the amount and type of pledged collateral, as well as the perceived market value of the assets and the "haircut" of the market value of the assets. That value is sensitive to the pricing and policies of our liquidity providers and can change with little or no notice. Further, other sources of liquidity include our LHFS portfolio and unencumbered investment securities. We primarily originate agency-eligible LHFS and therefore the majority of new residential first mortgage loan closings are readily convertible to cash, either by selling them as part of our monthly agency sales, RMBS, private party whole loan sales, or by pledging them to the FHLB and borrowing against them. In addition, we have the ability to sell unencumbered investment securities or use them as collateral. AtSeptember 30, 2020 , we had$2.5 billion available in unencumbered investment securities. Our primary measure of liquidity is a ratio of ready liquidity to volatile funding, the volatile funds coverage ratio ("VFCR"). The VFCR is a liquidity coverage ratio that is customized to our business and ensures we have adequate coverage to meet our liquidity needs during times of liquidity stress. Volatile funds are the portion of the Bank's funding identified as being at a higher risk of runoff in times of stress. Ready liquidity consists of cash on reserve at theFederal Reserve and unused borrowing capacity provided by the loan and investments portfolios. The VFCR is calculated, reported, and forecasted daily as part of our liquidity management framework and was 59 percent as ofSeptember 30, 2020 . Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. We balance the liquidity of our loan assets to our available funding sources. Our LHFI portfolio is funded with stable core deposits whereas our warehouse loans and LHFS may be funded with FHLB borrowings and custodial deposits. Warehouse loans are typically more liquid than other loan assets, as loans are paid within a short amount of time, when the lender sells the loan to an outside investor or, in some instances, to the Bank. As not all asset categories require the same level of liquidity, our loan-to-deposit ratio shows how we manage our liquidity position, how much liquidity we have and the agility of our balance sheet. The Company's average HFI loan-to-deposit ratio, was 75.9 percent for the three months endedSeptember 30, 2020 . Excluding warehouse loans, which have draws that typically pay off within a few weeks, and custodial deposits, which represent mortgage escrow accounts on deposit with the Bank, the average HFI loan-to-deposit ratio was 74.8 percent for the three months endedSeptember 30, 2020 . As governed and defined by our policy, we maintain adequate excess liquidity levels appropriate to cover unanticipated liquidity needs. In addition to this liquidity, we also maintain targeted minimum levels of unused borrowing capacity as another cushion against unexpected liquidity needs. Each business day, we forecast 90 days of daily cash needs. This allows us to determine our projected near term daily cash fluctuations and also to plan and adjust, if necessary, future activities. As a result, in an adverse environment, we believe we would be able to make adjustments to operations as required to meet the liquidity needs of our business, including adjusting deposit rates to increase deposits, planning for additional FHLB borrowings, accelerating sales of LHFS (agencies and/or private), selling LHFI or investment securities, borrowing through the use of repurchase agreements, reducing closings, making changes to warehouse funding facilities, or borrowing from the discount window.
Management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity.
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The following table presents primary sources of funding as of the dates
indicated:
September 30, 2020 December 31, 2019 Change
(Dollars in millions)
Retail deposits $ 9,747 $ 9,164 $ 583
Government deposits 1,748 1,213 535
Wholesale deposits 1,034 633 401
Custodial deposits 7,416 4,136 3,280
Total deposits 19,945 15,146 4,799
FHLB advances and other short-term 3,426 4,815 (1,389)
debt
Other long-term debt 493 496 (3)
Total borrowed funds 3,919 5,311 (1,392)
Total funding $ 23,864 $ 20,457 $ 3,407 The following table presents certain liquidity sources and borrowing capacity as of the dates indicated:
September 30 ,
2020
(Dollars in millions)
Federal Home Loan Bank advances
Outstanding advances $ 2,755 $ 4,345 $ (1,590)
Total used borrowing capacity $ 2,755 $ 4,345 $ (1,590)
Borrowing capacity:
Collateralized borrowing capacity $ 3,057 $ 2,345 $ 712
Line of credit 30 30 -
Total unused borrowing capacity $ 3,087 $
2,375
FRB discount window Collateralized borrowing capacity$ 1,745 $ 758$ 987 Unencumbered investment securities Agency - Commercial (1)$ 1,399 $ 1,257$ 142 Agency - Residential (1) 956 1,180 (224) Municipal obligations 25 26 (1) Corporate debt obligations 70 77 (7) Other 1 1 - Total unencumbered investment securities$ 2,451 $
2,541
(1) These are not currently pledged to the FHLB but are eligible to be pledged, at our discretion.
36
--------------------------------------------------------------------------------Deposits
The following table presents the composition of our deposits:
September 30, 2020 December 31, 2019
Balance % of Deposits Balance % of Deposits Change
(Dollars in millions)
Retail deposits
Branch retail deposits
Savings accounts $ 3,347 16.8 % $ 3,030 20.0 % $ 317
Certificates of deposit/CDARS (1) 1,525 7.6 % 2,353 15.5 % (828)
Demand deposit accounts 1,573 7.9 % 1,318 8.7 % 255
Money market demand accounts 487 2.4 % 495 3.3 % (8)
Total branch retail deposits 6,932 34.8 % 7,196 47.5 % (264)
Commercial deposits (2)
Demand deposit accounts 2,185 11.0 % 1,438 9.5 % 747
Savings accounts 432 2.2 % 342 2.3 % 90
Money market demand accounts 198 1.0 % 188 1.2 % 10
Total commercial retail deposits 2,815 14.1 % 1,968 13.0 % 847
Total retail deposits $ 9,747 48.9 % $ 9,164 60.5 % $ 583
Government deposits
Savings accounts $ 830 4.2 % $ 495 3.3 % $ 335
Demand deposit accounts 518 2.6 % 360 2.4 % 158
Certificates of deposit/CDARS (1) 400 2.0 % 358 2.4 % 42
Total government deposits 1,748 8.8 % 1,213 8.0 % 535
Custodial deposits (3) 7,416 37.2 % 4,136 27.3 % 3,280
Wholesale deposits 1,034 5.2 % 633 4.2 % 401
Total deposits (4) $ 19,945 100.0 % $ 15,146 100.0 % $ 4,799
(1)The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $1.2 billion and $1.7 billion at September 30,
2020 and December 31, 2019 , respectively.
(2)Contains deposits from commercial and business banking customers.
(3)Represents investor custodial accounts and escrows controlled by us in
connection with loans serviced or subserviced for others that have been placed
on deposit with the Bank.
(4)Total exposure related to uninsured deposits over $250,000 was approximately
$5.6 billion and $3.6 billion at September 30, 2020 and December 31, 2019 ,
respectively.
Total deposits increased
We utilize local governmental agencies and other public units as an additional source for deposit funding. We are not required to hold collateral against our government deposits fromMichigan government entities as they are covered by theMichigan Business and Growth Fund . AtSeptember 30, 2020 , we were required to hold collateral for our government deposits inCalifornia that were in excess of$250,000 . The total of collateral held forCalifornia atSeptember 30, 2020 was$100 million . InIndiana ,Wisconsin andOhio , we may be required to hold collateral against our government deposits based on a variety of factors including, but not limited to, the size of individual deposits and external bank ratings. AtSeptember 30, 2020 , collateral held on government deposits in these states was$10 million . AtSeptember 30, 2020 , government deposit accounts included$0.4 billion of certificates of deposit with maturities typically less than one year and$1.3 billion of checking and savings accounts. Custodial deposits arise due to our servicing or subservicing of loans for others and represent the portion of the investor custodial accounts on deposit with the Bank. For certain subservice agreements, these deposits require us to credit the MSR owner interest against subservicing income. This cost is a component of net loan administration income. We participate in the CDARS program, through which certain customer CDs are exchanged for CDs of similar amounts from other participating banks and customers may receiveFDIC insurance up to$50 million . This program helps the Bank secure larger deposits and attract and retain customers. AtSeptember 30, 2020 , we had$123 million of total CDs enrolled in the CDARS program, a decrease of$10 million fromDecember 31, 2019 . 37 --------------------------------------------------------------------------------
FHLB Advances
The FHLB provides loans, also referred to as advances, on a fully collateralized basis, to savings banks and other member financial institutions. We are required to maintain a minimum amount of qualifying collateral securing FHLB advances. In the event of default, the FHLB advance is similar to a secured borrowing, whereby the FHLB has the right to sell the pledged collateral to settle the fair value of the outstanding advances. We rely upon advances from the FHLB as a source of funding for the closing or purchase of loans for sale in the secondary market and for providing duration specific short-term and long-term financing. The outstanding balance of FHLB advances fluctuates from time to time depending on our current inventory of mortgage LHFS and the availability of lower cost funding sources. Our portfolio includes short-term fixed rate advances and long-term fixed rate advances. We are currently authorized through a resolution of our Board of Directors to apply for advances from the FHLB using approved loan types as collateral, which includes residential first mortgage loans, home equity lines of credit, and commercial real estate loans. As ofSeptember 30, 2020 , our Board of Directors authorized and approved a line of credit with the FHLB of up to$10 billion , which is further limited based on our total assets and qualified collateral, as determined by the FHLB. AtSeptember 30, 2020 , we had$2.8 billion of advances outstanding and an additional$3.1 billion of collateralized borrowing capacity available at the FHLB.
Federal Reserve Discount Window
We have arrangements with the FRB ofChicago to borrow from its discount window. The discount window is a borrowing facility that we may utilize for short-term liquidity needs arising from special or unusual circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we provide. To collateralize the line, we pledge investment securities and loans that are eligible based on FRB ofChicago guidelines. AtSeptember 30, 2020 , we pledged collateral, which included commercial loans, municipal bonds, and agency bonds, to the FRB ofChicago amounting to$2.6 billion with a lendable value of$1.7 billion . AtDecember 31, 2019 , we pledged collateral to the FRB ofChicago amounting to$788 million with a lendable value of$758 million . We do not typically utilize this available funding source, and atSeptember 30, 2020 andDecember 31, 2019 , we had no borrowings outstanding against this line of credit. Other Unsecured Borrowings We have access to overnight federal funds purchased lines with otherFederal Reserve member institutions. We utilize this source of funding for short-term liquidity needs, depending on the availability and cost of our other funding sources. AtSeptember 30, 2020 we had$671 million of borrowings outstanding under this source of funding. Additional borrowing capacity under this and other sources of funding can vary depending on market conditions.
Debt
As part of our overall capital strategy, we previously raised capital through
the issuance of junior subordinated notes to our special purpose trusts formed
for the offerings, which issued Tier 1 qualifying preferred stock ("trust
preferred securities"). The trust preferred securities are callable by us at any
time. Interest is payable on a quarterly basis; however, we may defer interest
payments for up to 20 quarters without default or penalty. At September 30,
2020 , we are current on all interest payments. Additionally, we have
$246 million of senior debt outstanding at September 30, 2020 ("Senior Notes")
which matures on July 15, 2021 . For further information, see Note 9 -
Borrowings.
Operational Risk
Operational risk is the risk to current or projected financial condition and
resilience arising from inadequate or failed internal processes or systems,
human errors or misconduct, or adverse external events which may include vendor
failures, fraudulent activities, disasters, and security risks. We continuously
strive to adapt our system of internal controls to ensure compliance with laws,
rules, and regulations, and to improve the oversight of our operational risk.
We evaluate internal systems, processes and controls to mitigate loss from
cyber-attacks and, to date, have not experienced any material losses. The goal
of this framework is to implement effective operational risk techniques and
strategies, minimize operational and fraud losses, and enhance our overall
performance.
38
--------------------------------------------------------------------------------Loans with government guarantees
Substantially all of our loans with government guarantees continue to be insured or guaranteed by the FHA or theU.S. Department of Veterans Affairs ("VA"). In the event of a government guaranteed loan borrower default, the Bank has a unilateral option to repurchase loans sold to GNMA that are 90 days past due and recover losses through a claims process from the insurer. Nonperforming repurchased loans in this portfolio earn interest at a rate based upon the 10-yearU.S. Treasury note rate from the time the underlying loan becomes delinquent, which is not paid by the FHA until claimed. Additionally, if the Bank cures the loan, it can be re-sold to GNMA. If not, the Bank can begin the process of collecting the government guarantee by filing a claim in accordance with established guidelines. Certain loans within our portfolio may be subject to indemnifications and insurance limits which expose us to limited credit risk. In the nine months endedSeptember 30, 2020 , we had less than$2.2 million in net charge-offs related to loans with government guarantees and have reserved for the remaining risks within other assets and as a component of our allowance for loan losses on residential first mortgages. These additional expenses or charges arise due to insurance limits onVA insured loans and FHA property foreclosure and preservation requirements that may result in a loss in excess of all, or part of, the guarantee. Our loans with government guarantees portfolio totaled$2.5 billion atSeptember 30, 2020 , as compared to$0.7 billion atDecember 31, 2019 . GNMA has granted borrowers with an option to seek forbearances on their mortgage repayments.$2.9 billion of GNMA loans are in forbearance as ofSeptember 30, 2020 . When a GNMA loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) the loan is required to be re-recognized on the balance sheet by the MSR owner. These loans are recorded in loans with government guarantees, and the liability to repurchase the loans is recorded in other liabilities on the consolidated statements of financial condition. This resulted in$1.8 billion of repurchase options as ofSeptember 30, 2020 , a$1.7 billion increase fromDecember 31, 2019 . We have elected not to exercise these repurchase options as ofSeptember 30, 2020 because loans are not able to be modified and re-sold during the forbearance period. Our right to repurchase these loans continues as long as they remain unpaid for three consecutive months. At the prudent time, we intend to repurchase the loans which we believe will be accretive to net income by modifying and re-selling the loans or utilizing the partial claims process.
For further information, see Note 5 - Loans with Government Guarantees and the Credit Risk - Payment Deferrals section of the MD&A.
Representation and warranty reserve
When we sell mortgage loans, we make customary representations and warranties to the purchasers, including sponsored securitization trusts and their insurers (primarily Fannie Mae and Freddie Mac). An estimate of the fair value of the guarantee associated with the mortgage loans is recorded in other liabilities in the Consolidated Statements of Financial Condition, which was$7 million and$5 million atSeptember 30, 2020 andDecember 31, 2019 , respectively.
Capital
Management actively reviews and manages our capital position and strategy. We conduct quarterly capital stress tests and capital adequacy assessments which utilize internally defined scenarios. These analyses are designed to help management and the Board better understand the integrated sensitivity of various risk exposures through quantifying the potential financial and capital impacts of hypothetical stressful events and scenarios. We make adjustments to our balance sheet composition taking into consideration potential business risks, regulatory requirements and the flexibility to support future growth. We prudently manage our capital position and work with our regulators to ensure that our capital levels are appropriate considering our risk profile. The capital standards we are subject to include requirements contemplated by the Dodd-Frank Act as well as guidelines reached by Basel III. These risk-based capital adequacy guidelines are intended to measure capital adequacy with regard to a banking organization's balance sheet, including off-balance sheet exposures such as unused portions of loan commitments, letters of credit, and recourse arrangements. Our capital ratios are maintained at levels in excess of those considered to be "well-capitalized" by regulators. Tier 1 leverage was 8.04 percent atSeptember 30, 2020 providing a 853 basis point stress buffer above the minimum level needed to be considered "well-capitalized." Additionally, total risk-based capital to RWA was 11.29 percent atSeptember 30, 2020 providing a 283 basis point buffer above the minimum level needed to be considered "well-capitalized".
Dodd-Frank Act Section 171, commonly known as the Collins Amendment, established minimum Tier 1 leverage and
39
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risk-based capital requirements for insured depository institutions, depository
institution holding companies, and non-bank financial companies that are
supervised under the Federal Reserve . Under the amendment, certain hybrid
securities, such as trust preferred securities, may be included in Tier 1
capital for bank holding companies that had total assets below $15 billion as of
December 31, 2009 . As we were below $15 billion in assets as of December 31,
2009 , the trust preferred securities classified as long term debt on our balance
sheet will be included as Tier 1 capital, unless we complete an acquisition of a
depository institution holding company or a depository institution and we report
total assets greater than $15 billion in the quarter in which the acquisition
occurs. Should that event occur, our trust preferred securities would be
included in Tier 2 capital.
The Bank and Flagstar have been subject to the capital requirements of the Basel III rules sinceJanuary 1, 2015 . OnJuly 9, 2019 , the Agencies issued the Final Capital Simplification Rule (the "New Rule") which simplifies certain requirements in the Agencies' current regulatory capital rules. We implemented capital simplification onJanuary 1, 2020 . The New Rule increased the individual limit on MSRs and temporary difference DTAs to 25 percent of CET1 and eliminated the aggregate 15 percent CET1 deduction threshold for MSRs and temporary difference DTAs. OnMarch 27, 2020 ,U.S. banking regulators issued an interim final rule to delay for two years the initial adoption impact of CECL on regulatory capital in response to COVID-19 followed by a three-year transition period. During the two-year delay we will add back to CET1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting onJanuary 1, 2022 , the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period.
For the period presented, the following table sets forth our capital ratios as well as our excess capital over well-capitalized minimums.
Excess Capital Over
Flagstar Bancorp Well-Capitalized Under Prompt Corrective Well-Capitalized
Actual Action Provisions Minimum (1)
Amount Ratio Amount Ratio Capital Simplification
(Dollars in millions)
September 30, 2020
Tier 1 leverage capital 2,256 8.04 % 1,403 5.0 % $ 853
(to adjusted avg. total assets)
Common equity Tier 1 capital 2,016 9.21 % 1,422 6.5 % 594
(to RWA)
Tier 1 capital (to RWA) 2,256 10.31 % 1,751 8.0 % 505
Total capital (to RWA) 2,471 11.29 % 2,188 10.0 % 283
(1)Excess capital is the difference between the actual capital ratios under current simplification rules and the well-capitalized minimum ratio, multiplied by the relevant asset base.
As presented in the table above, our constraining capital ratio is our total capital to risk weighted assets at 11.29 percent. It would take a$283 million after-tax loss, with the balance sheet remaining constant, for our total risk-based capital ratio to fall below the level considered to be "well-capitalized". As ofSeptember 30, 2020 , we had$323 million in MSRs,$89 million in DTAs arising from temporary differences and no material investments in unconsolidated financial institutions or minority interest which drive differences between our current capital ratios. For additional information on our capital requirements, see Note 14 - Regulatory Matters.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this report includes
certain non-GAAP financial measures. We believe these non-GAAP financial
measures provide additional information that is useful to investors in helping
to understand the underlying performance and trends of the Company.
Non-GAAP financial measures have inherent limitations, which are not required
to be uniformly applied and are not audited. Readers should be aware of these
limitations and should be cautious with respect to the use of such measures. To
mitigate these limitations, we have practices in place to ensure that these
measures are calculated using the appropriate GAAP or regulatory components in
their entirety and to ensure that our performance is properly reflected to
facilitate consistent period-to-period comparisons. Our method of calculating
these non-GAAP measures may differ from methods used by other
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companies. Although we believe the non-GAAP financial measures disclosed in this
report enhance investors' understanding of our business and performance, these
non-GAAP measures should not be considered in isolation, or as a substitute for
those financial measures prepared in accordance with GAAP. Where non-GAAP
financial measures are used, the most directly comparable GAAP or regulatory
financial measure, as well as the reconciliation to the most directly comparable
GAAP or regulatory financial measure, can be found in this report.
Tangible book value per share, tangible common equity to assets ratio, return
on average tangible common equity and adjusted net interest margin. The Company
believes that tangible book value per share, tangible common equity to assets
ratio, return on average tangible common equity and adjusted net interest margin
provide a meaningful representation of its operating performance on an ongoing
basis. Management uses these measures to assess performance of the Company
against its peers and evaluate overall performance. The Company believes these
non-GAAP financial measures provide useful information for investors, securities
analysts and others because they provide a tool to evaluate the Company's
performance on an ongoing basis and compared to its peers.
The following table provides a reconciliation of non-GAAP financial measures.
September 30, June 30, March 31, December 31, 2019 September 30,
2020 2020 2020 2019
(Dollars in millions)
Total stockholders' equity $ 2,195 $ 1,971
160 164 167 170 174
Tangible book value/Tangible common
Number of common shares outstanding 57,150,470 56,943,979 56,729,789 56,631,236 56,510,341
Tangible book value per share
Total assets$ 29,476 $ 27,468
6.90 % 6.58 % 6.25 % 6.95 % 7.08 %
ratio
Three Months Ended, Nine Months Ended,
September 30, June 30, September 30, September 30,
2020 2020 2020 2019
(Dollars in millions, except share data)
Net income $ 222 $ 116 $ 384 $ 160
Plus: Intangible asset amortization, net of tax 3 3 7 10
Tangible net income $ 225 $ 119 $ 391 $ 170
Total average equity $ 2,141 $ 1,977 $ 1,991 $ 1,658
Less: Average goodwill and intangible assets 162 165 165 184
Total average tangible equity $ 1,979 $
1,812
Return on average common equity 41.54 % 23.47 % 25.71 % 12.90 % Return on average tangible common equity 45.42 % 26.16 % 28.58 % 15.30 % Net interest margin 2.78 % 2.86 % 2.81 % 3.07 % Adjustment to LGG loans available for repurchase 0.16 % 0.02 % 0.07 % - % Adjusted net interest margin 2.94 % 2.88 % 2.88 % 3.07 %
Critical Accounting Estimates
Various elements of our accounting policies, by their nature, are subject to
estimation techniques, valuation assumptions and other subjective assessments.
Certain accounting policies that, due to the judgment, estimates and assumptions
are critical to an understanding of our Consolidated Financial Statements and
the Notes, are described in Item 1. These policies relate to: (a) the
determination of our ACL and (b) fair value measurements. We believe the
judgment, estimates and assumptions used in the preparation of our Consolidated
Financial Statements and the Notes are appropriate given the factual
circumstances at the time. However, given the sensitivity of our Consolidated
Financial Statements and the Notes to these critical accounting policies, the
use of other judgments, estimates and assumptions could result in material
differences in our results of operations and/or financial condition.
41
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For further information on our critical accounting policies, please refer to
our Form 10-K for the year ended December 31, 2019 and our Form 10-Q for the
quarter ended March 31, 2020 , which are available on our website, flagstar.com,
under the Investor Relations section, or on the website of the Securities and
Exchange Commission , at sec.gov.
Forward - Looking Statements
Certain statements in this Form 10-Q, including but not limited to statements
included within the Management's Discussion and Analysis of Financial Condition
and Results of Operations, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, as amended. In
addition, we may make forward-looking statements in our other documents filed
with or furnished to the Security and Exchange Commission , and our management
may make forward-looking statements orally to analysts, investors,
representatives of the media, and others.
Generally, forward-looking statements are not based on historical facts but
instead represent management's current beliefs and expectations regarding future
events and are subject to significant risks and uncertainties. The COVID-19
pandemic is adversely affecting us, our customers, counterparties, employees,
and third-party service providers, and the ultimate extent of the impacts on our
business, financial position, results of operations, liquidity, and prospects is
uncertain. Other than as required under United States securities laws, Flagstar
does not undertake to update the forward-looking statements to reflect the
impact of circumstances or events that may arise after the date of the
forward-looking statements. Such statements may be identified by words such as
believe, expect, anticipate, intend, plan, estimate, may increase, may
fluctuate, and similar expressions or future or conditional verbs such as will,
should, would, and could. Our actual results and capital and other financial
conditions may differ materially from those described in the forward-looking
statements depending upon a variety of factors, including without limitation the
precautionary statements included within each individual business' discussion
and analysis of our results of operations and the risk factors listed and
described in Item 1A to Part I, of our Annual Report on Form 10-K for the year
ended December 31, 2019 , which are incorporated by reference herein, and
Item 1A. to Part II, of this Quarterly Report on Form 10-Q for the quarter ended
September 30, 2020 .
Other than as required under United States securities laws, we do not undertake
to update the forward-looking statements to reflect the impact of circumstances
or events that may arise after the date of the forward-looking statements.
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