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 2022, 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 2021 Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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 42 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 2021 Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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 7th largest bank mortgage originator in the nation and the 5th largest subservicer of mortgage loans nationwide. AtSeptember 30, 2022 , we had 4,911 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 financial solutions for our customers. AtSeptember 30, 2022 , we operated 158 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 81 retail locations in 26 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.
Strategic Merger with New York Community Bancorp, Inc.
OnApril 26, 2021 , it was announced that New York Community Bancorp, Inc. ("NYCB") and Flagstar had entered into a definitive merger agreement (the "Merger Agreement") under which the two companies will combine in an all stock merger. Under the terms of the Merger Agreement, Flagstar shareholders will receive 4.0151 shares of NYCB common stock for each Flagstar share they own. The combined company expects to have over$85 billion in assets and operate nearly 400 traditional branches in nine states and over 80 loan production offices across a 28 state footprint. OnAugust 4, 2021 , Flagstar's and NYCB's shareholders each voted in their respective special meetings of shareholders to approve the proposed business combination. The transaction is subject to customary closing conditions, including regulatory approvals. OnApril 26, 2022 , NYCB and Flagstar entered into Amendment No. 1 (the "Amendment") to the Merger Agreement. Under the Amendment, the parties have agreed to: extend the termination date of the Merger Agreement toOctober 31, 2022 ; change the structure of the merger of the subsidiary banks, so thatFlagstar Bank, FSB will initially convert to a national bank charter andNew York Community Bank will merge with and into the national bank, with the national bank as the surviving entity; and clarify that approvals of theFDIC and theNew York State Department of Financial Services are no longer required but that the approval of the OCC will be required. Other than as expressly modified by the Amendment, the Merger Agreement, remains in full force and effect. 4 -------------------------------------------------------------------------------- OnOctober 27, 2022 , Flagstar and NYCB received the requisite approval of theOffice of the Comptroller of the Currency (the "OCC") to convertFlagstar Bank, FSB to a national bank to be known asFlagstar Bank, N.A. , and to mergeNew York Community Bank intoFlagstar Bank, N.A. withFlagstar Bank, N.A. being the surviving entity (the "OCC Approval"). In addition to receiving the OCC Approval, onOctober 27, 2022 , NYCB and Flagstar entered into Amendment No. 2 (the "Second Amendment") to the Merger Agreement to extend the Termination Date toDecember 31, 2022 . Completion of the merger remains subject to approval from theBoard of Governors of theFederal Reserve System . OnOctober 27, 2022 , the Flagstar board of directors declared a special dividend of$2.50 per share on its common stock. The dividend will be paid onNovember 17, 2022 to shareholders of record at the close of business onNovember 7, 2022 . OnNovember 4, 2022 , Flagstar and NYCB, received regulatory approval from theBoard of Governors of theFederal Reserve System (the "Fed Approval") for the previously announced pending acquisition of Flagstar which is expected to occur onDecember 1, 2022 . 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. 5 --------------------------------------------------------------------------------
Results of Operations
The following table summarizes our results of operations for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, 2022 June 30, Change September 30, 2022 September 30, Change
2022 2021
(Dollars in millions, except share data)
Net interest income $ 219 $ 193 $ 26 $ 577 $ 566 $ 11
(Benefit) provision for credit 5 (9) 14 (8) (95) 87 losses Total noninterest income 114 131 (17) 405 842 (437) Total noninterest expense 236 256 (20) 753 922 (169) Provision for income taxes 19 17 2 51 133 (82) Net income $ 73 $ 60$ 13 $ 186$ 448 $ (262) Income per share Basic$ 1.36 $ 1.13 $ 0.23 $ 3.49 $ 8.48 $ (4.99) Diluted$ 1.35 $ 1.12 $ 0.23 $ 3.47 $ 8.37 $ (4.90) Weighted average shares outstanding: Basic 53,330,518 53,269,631 60,887 53,273,743 52,767,923 505,820 Diluted 53,610,266 53,535,448 74,818 53,574,690 53,499,289 75,401
The following table summarizes our adjusted results of operations(1):
Three Months Ended Nine Months Ended
September 30, 2022 June 30, Change September 30, 2022 September 30, Change
2022 2021
(Dollars in millions, except share data)
Net interest income $ 219 $ 193 $ 26 $ 577 $ 566 $ 11
(Benefit) provision for credit 5 (9) 14 (8) (95) 87 losses Total noninterest income 114 131 (17) 405 842 (437) Total noninterest expense 233 253 (20) 744 883 (139) Provision for income taxes 20 17 3 53 142 (89) Net income $ 75$ 63 $ 12 $ - $ 193$ 478 $ (285) Income per share Basic$ 1.42 $ 1.18 $ 0.24 $ 3.62 $ 9.04 $ (5.42) Diluted$ 1.41 $ 1.17 $ 0.24 $ 3.60 $ 8.92 $ (5.32)
(1)See Use of Non-GAAP Financial Measures for further information.
6
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The following table summarizes certain selected ratios and statistics for the
periods indicated:
Three Months Ended Nine Months Ended
September 30, 2022 June 30, September 30, 2022 September 30, 2021
2022
Selected Ratios:
Interest rate spread (1) 3.62 % 3.47 % 3.33 % 2.70 %
Net interest margin 3.98 % 3.69 % 3.60 % 2.90 %
Return on average assets 1.2 % 1.0 % 1.0 % 2.1 %
Adjusted return on average assets (2) 1.2 % 1.1 % 1.1 % 2.2 %
Return on average common equity 10.4 % 8.7 % 9.0 % 24.3 %
Return on average tangible common equity (2) 11.2 % 9.5 % 9.8 % 24.7 %
Adjusted return on average tangible common equity 11.9 % 10.1 % 10.4 % 27.2 %(2)
Common equity-to-assets ratio 10.3 % 10.8 % 10.3 % 9.8 % Common equity-to-assets ratio (average for the 11.1 % 11.5 % 11.2 % 8.6 %
period)
Efficiency ratio 70.9 % 79.1 % 76.7 % 65.5 % Adjusted efficiency ratio (2) 69.8 % 78.1 % 75.8 % 62.8 % Selected Statistics: Book value per common share $ 49.05$ 50.50 $ 49.05 $ 50.04 Tangible book value per share (2) $ 46.42$ 47.83 $ 46.42 $ 47.21 Number of common shares outstanding 53,330,827 53,329,993 53,330,827 52,862,383 (1)Interest rate spread is the difference between the yield earned on average interest-earning assets for the period and the rate of interest paid on average interest-bearing liabilities. (2) See Use of Non-GAAP Financial Measures for further information.
Overview
Net income for the quarter endedSeptember 30, 2022 was$73 million , or$1.35 per diluted share, compared to second quarter 2022 net income of$60 million , or$1.12 per diluted share. Third quarter 2022 adjusted net income was$75 million , or$1.41 per diluted share, as compared to$63 million , or$1.17 per diluted share, in the second quarter of 2022 when adjusting for the impact of merger related expenses. Net interest income increased$26 million , or 13 percent, as compared to the second quarter 2022, driven by a 29 basis point increase in net interest margin and a$0.9 billion , or 5 percent, net increase in average earning assets. The net interest margin expansion was largely attributable to our asset sensitivity and our management of funding costs. We grew our loans held for investment by$1.3 billion , led by our residential mortgage and commercial portfolios. This growth was partially offset by a$0.6 billion decrease in our mortgage loans held-for-sale as a result of lower mortgage volume. Net gain on loan sales increased$5 million , or 19 percent, compared to the prior quarter. Gain on sale margins increased 27 basis points to 66 basis points for the third quarter 2022, compared to 39 basis points for the second quarter 2022. The improved result was driven by improved secondary marketing performance which was partially offset by a 32 percent decline in fallout-adjusted locks. The net return on mortgage servicing rights decreased$4 million to$26 million for the third quarter 2022, compared to a$22 million return for the second quarter 2022. Our provision for credit losses for the quarter endedSeptember 30, 2022 was$5 million , compared to a benefit of$9 million in the second quarter 2022. The third quarter net provision was driven by an increase to the reserve due to HFI loan growth which was focused in well collateralized portfolios. The credit performance of our portfolio remained strong with a low number of consumer non-accrual loans and no commercial non-accrual loans atSeptember 30, 2022 .
We serviced or subserviced 1.4 million accounts as of
7
--------------------------------------------------------------------------------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, 2022 June 30, 2022
Average Annualized Average Annualized
Balance Interest Yield/ Balance Interest Yield/
Rate Rate
(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale $ 2,976 $ 34 4.58 % $ 3,571 $ 36 4.10 %
Loans held-for-investment
Residential first mortgage 2,633 26 3.97 % 1,789 16 3.68 %
Home equity 699 11 6.29 % 614 7 4.74 %
Other 1,381 17 4.99 % 1,302 16 4.80 %
Total consumer loans 4,713 54 4.61 % 3,705 39 4.25 %
Commercial real estate 3,542 49 5.40 % 3,366 41 4.78 %
Commercial and industrial 2,844 37 5.06 % 2,169 26 4.65 %
Warehouse lending 3,541 42 4.63 % 4,099 34 3.27 %
Total commercial loans 9,927 128 5.03 % 9,634 101 4.11 %
Total loans held-for-investment (1) 14,640 182 4.90 % 13,339 140 4.15 %
Loans with government guarantees 1,275 14 4.39 % 1,161 15 5.13 %
Investment securities 2,723 22 3.32 % 2,310 17 2.89 %
Interest-earning deposits 291 2 1.83 % 577 1 0.64 %
Total interest-earning assets $ 21,905 $ 254 4.59 % $ 20,958 $ 209 3.96 %
Other assets 3,243 2,909
Total assets $ 25,148 $ 23,867
Interest-Bearing Liabilities
Retail deposits
Demand deposits $ 1,640 $ 1 0.34 % $ 1,725 $ 1 0.10 %
Savings deposits 4,082 3 0.27 % 4,251 2 0.16 %
Money market deposits 854 1 0.28 % 926 - 0.16 %
Certificates of deposit 848 1 0.58 % 851 1 0.35 %
Total retail deposits 7,424 6 0.32 % 7,753 4 0.17 %
Government deposits 1,731 4 0.93 % 1,699 1 0.32 %
Wholesale deposits and other 830 1 0.73 % 935 2 0.98 %
Total interest-bearing deposits 9,985 11 0.46 % 10,387 7 0.26 %
Short-term FHLB advances and other 2,653 15 2.23 % 1,124 3 1.05 %
Long-term FHLB advances 1,041 4 1.35 % 982 3 1.15 %
Other long-term debt 396 5 4.40 % 396 3 3.07 %
Total interest-bearing liabilities
0.96 %$ 12,889 $ 16 0.48 % Noninterest-bearing deposits Retail deposits and other 2,550 2,460 Custodial deposits (2) 4,681 4,641 Total noninterest bearing deposits 7,231 7,101 Other liabilities 1,057 1,123 Stockholders' equity 2,785 2,754 Total liabilities and stockholders' equity$ 25,148 $ 23,867 Net interest-earning assets$ 7,830 $ 8,069 Net interest income$ 219 $ 193 Interest rate spread (3) 3.62 % 3.47 % Net interest margin (4) 3.98 % 3.69 % Ratio of average interest-earning assets to 155.6 % 162.6 % interest-bearing liabilities Total average deposits$ 17,216 $ 17,488 (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 -------------------------------------------------------------------------------- Nine Months Ended September 30, 2022 September 30, 2021 Average Annualized Average Annualized Balance Interest Yield/ Balance Interest Yield/ Rate Rate (Dollars in millions) Interest-Earning Assets Loans held-for-sale$ 3,787 $ 111 3.89 %$ 7,403 $ 169 3.04 % Loans held-for-investment Residential first mortgage 1,978 55 3.72 % 1,907 46 3.21 % Home equity 637 24 5.10 % 751 20 3.59 % Other 1,313 48 4.88 % 1,106 40 4.78 % Total consumer loans 3,928 127 4.33 % 3,764 106 3.75 % Commercial real estate 3,379 119 4.63 % 3,125 80 3.38 % Commercial and industrial 2,286 78 4.52 % 1,425 39 3.60 % Warehouse lending 3,869 108 3.68 % 5,729 170 3.91 % Total commercial loans 9,534 305 4.22 % 10,279 289 3.71 % Total loans held-for-investment (1) 13,462 432 4.25 % 14,043 395 3.72 % Loans with government guarantees 1,279 44 4.62 % 2,295 15 0.95 % Investment securities 2,354 50 2.85 % 2,130 35 2.19 % Interest-earning deposits 597 3 0.59 % 158 - 0.15 % Total interest-earning assets$ 21,479 $ 640 3.96 %$ 26,029 $ 614 3.13 % Other assets 2,918 2,672 Total assets$ 24,397 $ 28,701 Interest-Bearing Liabilities Retail deposits Demand deposits$ 1,664 $ 2 0.18 %$ 1,713 $ 1 0.06 % Savings deposits 4,195 6 0.19 % 4,058 4 0.14 % Money market deposits 889 1 0.18 % 763 - 0.07 % Certificates of deposit 876 3 0.43 % 1,152 6 0.71 % Total retail deposits 7,624 12 0.21 % 7,686 11 0.20 % Government deposits 1,769 6 0.47 % 1,907 3 0.19 % Wholesale deposits and other 944 6 0.87 % 1,182 11 1.27 % Total interest-bearing deposits 10,337 24 0.32 % 10,775 25 0.32 % Short-term FHLB advances and other 1,486 18 1.64 % 2,646 3 0.17 % Long-term FHLB advances 1,094 10 1.15 % 1,248 9 0.99 % Other long-term debt 396 11 3.54 % 414 11 3.50 %
Total interest-bearing liabilities
0.63 %$ 15,083 $ 48 0.43 % Noninterest-bearing deposits Retail deposits and other 2,495 2,307 Custodial deposits (2) 4,763 6,517 Total noninterest bearing deposits 7,258 8,824 Other liabilities 1,084 2,340 Stockholders' equity 2,742 2,454 Total liabilities and stockholders' equity$ 24,397 $ 28,701 Net interest-earning assets$ 8,166 $ 10,946 Net interest income$ 577 $ 566 Interest rate spread (3) 3.33 % 2.70 % Net interest margin (4) 3.60 % 2.90 % Ratio of average interest-earning assets to 161.3 % 172.6 % interest-bearing liabilities Total average deposits$ 17,595 $ 19,598 (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. 9 -------------------------------------------------------------------------------- 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 variances are allocated to rate. Rate and volume variances are calculated on each line separate as an indication of the magnitude. Line items may not aggregate to the totals due to mix changes. Three Months Ended Nine Months Ended September 30, 2022 versus June 30, 2022 September 30, 2022 versus September Increase (Decrease) Due to: 30, 2021 Increase (Decrease) Due to: Rate Volume Total Rate Volume Total (Dollars in millions) Interest-Earning Assets Loans held-for-sale$ 5 $ (7)
2 8 10 7 2 9
Home equity 3 1 4 7 (3) 4
Other - 1 1 1 7 8
Total consumer loans 3 12 15 16 5 21
Commercial real estate 6 2 8 33 6 39
Commercial and industrial 2 9 11 16 23 39
Warehouse lending 14 (6) 8 (7) (55) (62)
Total commercial loans 23 4 27 37 (21) 16
Total loans held-for-investment 26 16 42 53 (16) 37
Loans with government guarantees (2) 1 (1) 36 (7) 29
Investment securities 2 3 5 11 4 15
Interest-earning deposits and other 2 (1) 1 3 - 3
Total interest-earning assets $ 34 $ 11 $ 4 $ -
9 12 16 (1) 15
Long-term FHLB advances 1 - 1 2 (1) 1
Other long-term debt 2 - 2 - - -
Total interest-bearing liabilities 16 3 19 21 (6) 15
Change in net interest income $ 18 $ 8 $ 26 $ 112 $ (101) $ 11
Comparison to Prior Quarter
Net interest income for the three months ended
The net interest margin increased 29 basis points to 3.98 percent for the quarter endedSeptember 30, 2022 , as compared to 3.69 percent for the quarter endedJune 30, 2022 . The increase in net interest margin was largely attributable to our asset sensitivity, hedging strategies, higher rates on newly originated mortgages and a lag on deposit pricing increases.
Average total deposits were
10
--------------------------------------------------------------------------------Comparison to Prior Year to Date
Net interest income for the nine months ended
Net interest margin increased 70 basis points to 3.60 percent for the nine months endedSeptember 30, 2022 , as compared to 2.90 percent for the nine months endedSeptember 30, 2021 primarily due to our asset sensitivity in a rising interest rate environment. Additionally, in the first nine months of 2021, the majority of our$2.3 billion of LGG were not earning interest due to forbearance. Average interest-bearing liabilities decreased$1.8 billion , primarily driven by a decrease of$1.2 billion in short term FHLB borrowings due to a reduction in our overall asset base due to a smaller mortgage origination market. Additionally, government deposits were down$138 million and wholesale deposits were down$238 million . Noninterest Income The following tables provide information on our noninterest income and other mortgage metrics: Three Months Ended Nine Months Ended September 30, June 30, Change September 30, 2022 September 30, Change 2022 2022 2021 (Dollars in millions) Net gain on loan sales$ 32 $ 27 $ 5 $ 104 $ 564 $ (460) Loan fees and charges 20 29 (9) 76 112 (36) Net return (loss) on mortgage 26 22 4 77 4 73 servicing rights Loan administration income 18 33 (15) 84 85 (1) Deposit fees and charges 8 9 (1) 26 26 - Other noninterest income 10 11 (1) 38 51 (13) Total noninterest income$ 114 $ 131 $ (17) $ -$ 405 $ -$ 842 $ (437) Three Months Ended Nine Months Ended September 30, June 30, Change September 30, September 30, Change 2022 2022 2022 2021 (Dollars in millions) Mortgage rate lock commitments$ 4,800 $ 7,100 $ (2,300) $ 19,600 $ 36,000 $ (16,400) (fallout-adjusted) (1)(3) Mortgage loans closed (3)$ 6,900 $ 7,700 $ (800) $ 22,800 $ 39,100 $ (16,300)
Mortgage loans sold and securitized (3)
$ 300 $ 24,000 $ 40,100 $ (16,100) Net margin on mortgage rate lock 0.66 % 0.39 % 0.27 % 0.53 % 1.57 % (1.04) % commitments (fallout-adjusted) (1)(2) Net margin on loans sold and 0.44 % 0.39 % 0.05 % 0.43 % 1.41 % (0.98) %
securitized
(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 to fallout-adjusted mortgage rate lock commitments. (3)Rounded to nearest hundred million.
Comparison to Prior Quarter
Noninterest income decreased
•Net gain on loan sales increased$5 million as compared to the second quarter 2022. Gain on sale margins increased 28 basis points, to 66 basis points for the third quarter 2022, as compared to 39 basis points for the second quarter 2022. The improved result was driven by improved secondary marketing performance which was partially offset by a 32 percent decline in fallout-adjusted locks. 11 -------------------------------------------------------------------------------- •Net return on mortgage servicing rights was$26 million in the third quarter of 2022, an increase of$4 million compared to the second quarter of 2022. In the third quarter, we grew the MSR asset by$213 million and our return benefited from our partial hedge position, which we transitioned to a fully hedged position as rates rose during the quarter. •Loan administration income was$18 million for the third quarter 2022, a decline of$15 million compared to the second quarter 2022. The decline in income was driven primarily by higher LIBOR-based fee credits paid on custodial deposits that are subserviced. •Loan fees and charges were$20 million for the third quarter 2022, a decline of$9 million compared to the second quarter 2022 driven by lower originations and lower ancillary fee income due to lower loss mitigation fees associated with loans coming out of forbearance.
Comparison to Prior Year to Date
Noninterest income decreased
•Net gain on loan sales decreased$460 million , primarily due to$16.4 billion lower FOALs and a 104 basis points decrease in our gain on sale margin, driven by the reduction in the mortgage origination market due to higher mortgage rates. •Net return on mortgage servicing rights increased$73 million , primarily driven by the increase in interest rates. We have also grown the MSR asset by$634 million during the nine months endedSeptember 30, 2022 which has resulted in higher service fee income.
•Loan fees and charges decreased
Noninterest Expense
The following table sets forth the components of our noninterest expense:
Three Months Ended Nine Months Ended
September 30, 2022 June 30, Change September 30, 2022 September 30, 2021 Change
2022
(Dollars in millions)Compensation and benefits $ 113$ 122 $ (9) $ 362 $ 396$ (34) Occupancy and equipment 45 46 (1) 136 141 (5) Commissions 15 22 (7) 63 156 (93) Loan processing expense 21 23 (2) 65 65 - Legal and professional expense 11 10 1 32 32 - Federal insurance premiums 4 4 - 12 16 (4) Intangible asset amortization 2 3 (1) 7 8 (1) General, administrative and other 25 26 (1) 76 108 (32) Total noninterest expense $ 236$ 256 $ (20) $ 753 $ 922$ (169) Efficiency ratio 70.9 % 79.1 % (8.2) % 76.7 % 65.5 % 11.2 % Number of FTE employees 4,911 5,036 (125) 4,911 5,461 (550)
Comparison to Prior Quarter
Noninterest expense decreased$20 million , or 8 percent to$236 million for the quarter endedSeptember 30, 2022 , compared to$256 million for the quarter endedJune 30, 2022 . Both periods include$3 million of merger related costs. The decrease in noninterest expense is primarily due to the following:
•Compensation and benefits decreased
•Commissions decreased
12
--------------------------------------------------------------------------------Comparison to Prior Year to Date
Noninterest expense decreased
•Mortgage commissions decreased
•Compensation and benefits decreased
•General, administrative and other noninterest expense decreased$32 million , primarily driven by the$35 million DOJ final settlement expense recognized during the nine months endedSeptember 30, 2021 . The nine months endedSeptember 30, 2022 includes$9 million of merger expenses and the nine months endedSeptember 30, 2021 includes$14 million of merger expenses.
Provision for Credit Losses
Comparison to Prior Quarter
The provision for credit losses was$5 million for the three months endedSeptember 30, 2022 , as compared to a$9 million benefit for credit losses for the three months endedJune 30, 2022 . The third quarter net provision was driven by an increase to the reserve due to HFI loan growth which was focused in well collateralized portfolios. The strong performance of our portfolio continued with a low number of consumer non-accrual loans and no commercial non-accrual loans atSeptember 30, 2022
Comparison to Prior Year to Date
The benefit for credit losses was$8 million for the nine months endedSeptember 30, 2022 , as compared to a benefit for credit losses of$95 million for the nine months endedSeptember 30, 2021 . The decrease is reflective of significantly improved economic forecasts and credit conditions throughout 2021 as the nation recovered from the impacts of the pandemic.
For further information on the provision for credit losses, see MD&A - Credit Quality.
Provision for Income Taxes The third quarter provision for income taxes totaled$19 million , as compared to a provision for income taxes of$17 million for the second quarter 2022, with an effective tax rate of 21 percent, compared to an effective tax rate of 22 percent for the second quarter 2022.
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, 2022 , certain administrative departments have been realigned between the Community Banking and the Other 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. We 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 (benefit) for credit losses and the sum of total net charge-offs and the change in loan balances is assigned to the "Other" segment, which includes the changes related to the economic forecasts, model changes, qualitative adjustments and 13 --------------------------------------------------------------------------------
credit downgrades. The amount assigned to "Other" is allocated back to the lines of business through general, administrative and other noninterest expense.
For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Note 17 - Segment Information.
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 CRE business supports income producing real estate and home builders. The Community Banking segment also offers warehouse lines of credit to non-bank mortgage lenders.
Three Months Ended Nine Months Ended
Community Banking September 30, June 30, Change September 30, September 30, Change
2022 2022 2022 2021
(Dollars in millions)
Summary of Operations
Net interest income $ 140 $ 136
13 - 48 (5) 53
Net interest income after provision 127 123 4 350 459 (109)
(benefit) for credit losses
Loan fees and charges 1 - 1 1 1 -
Loan administration income (1) (1) - (2) (1) (1)
Other noninterest income 15 19 (4) 52 49 3
Total noninterest income 15 18 (3) 51 49 2
Compensation and benefits 27 28 (1) 83 75 8
Commissions 1 - 1 2 2 -
Loan processing expense 1 1 - 4 4 -
General, administrative and other 33 34 (1) 85 46 39
Total noninterest expense 62 63 (1) 174 127 47
Income before indirect overhead 80 78 2 227 381 (154)
allocations and income taxes
Indirect overhead allocation (10) (12) 2 (32) (26) (6)
Provision for income taxes 14 11 3 37 75 (38)
Net income $ 56 $ 55 $ 1 $ 158 $ 280 $ (122)
Key Metrics
Number of FTE employees 1,215 1,215 - 1,200 1,140 60
Number of bank branches 158 158 - 158 158 -
Comparison to Prior Quarter
The Community Banking segment reported net income of$56 million for the quarter endedSeptember 30, 2022 , compared to net income of$55 million for the quarter endedJune 30, 2022 . The$1 million increase was driven by$4 million higher net interest income primarily due to rising interest rates and the impact on our asset sensitive variable rate loan portfolio partially offset by lower other noninterest income. The provision for credit losses was$13 million in the second and third quarter 2022 driven by non-warehouse HFI loan growth. 14 --------------------------------------------------------------------------------
Comparison to Prior Year to Date
The Community Banking segment reported net income of$158 million for the nine months endedSeptember 30, 2022 , compared to$280 million for the nine months endedSeptember 30, 2021 . The decrease was driven by the following: •Net interest income decreased$56 million primarily due to a$1.9 billion decline in our warehouse portfolio as a result of the reduction in the mortgage origination market. •The provision for credit losses of$48 million for the nine months endedSeptember 30, 2022 was primarily driven by a charge-off relating to one commercial borrower and the impact of non-warehouse HFI loan growth. The$5 million benefit for credit losses for the nine months endedSeptember 30, 2021 was primarily due to a$16 million recovery on a previously charged-off loan partially offset by non-warehouse HFI loan growth. •General, administrative and other noninterest expense increased$39 million due to higher intersegment expense allocations from the Other segment. This is primarily due to the larger decrease in ACL during the first nine months of 2021 compared to 2022, resulting in a provision benefit, which caused a benefit to the Other segment. 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. Subsequent to sale, we retain certain mortgage
servicing rights which are reported at their fair value. The fair value includes
service fee revenues, a cost to service which is an intercompany allocation paid
to our servicing business, and other financial line impacts. 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,
Change
2022 2022 2022 2021
(Dollars in millions)
Summary of Operations
Net interest income $ 42 $ 46 $ (4) $ 144 $ 186 $ (42)
Provision (benefit) for credit losses 2 (6) 8 (1) (7) 6
Net interest income after provision 40 52 (12) 145 193 (48)
(benefit) for credit losses
Net gain on loan sales 32 27 5 104 564 (460)
Loan fees and charges 5 7 (2) 18 55 (37)
Loan administration expense (7) (7) - (21) (26) 5
Net return on mortgage servicing rights 26 22 4 77 4 73
Other noninterest income (3) (5) 2 (7) 8 (15)
Total noninterest income 53 44 9 171 605 (434)
Compensation and benefits 32 37 (5) 114 151 (37)
Commissions 14 22 (8) 61 155 (94)
Loan processing expense 9 9 - 27 34 (7)
General, administrative and other 16 4 12 31 65 (34)
Total noninterest expense 71 72 (1) 233 405 (172)
Income before indirect overhead 22 24 (2) 83 393 (310)
allocations and income taxes
Indirect overhead allocation (13) (16) 3 (44) (50) 6
Provision for income taxes 2 - 2 6 72 (66)
Net income $ 7 $ 8 $ (1) $ 33 $ 271 $ (238)
Key Metrics
Mortgage rate lock commitments $ 4,800 $ 7,100 $ (2,300) $ 19,600 $ 36,000 $ (16,400)
(fallout-adjusted) (1)(2)
Noninterest expense to closing volume 1.01 % 0.94 % 0.07 % 1.02 % 1.00 % 0.02 %
Number of FTE employees 1,573 1,697 (124) 1,573 2,132 (559)
(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
•Net gain on loan sales increased$5 million as compared to the second quarter 2022. Gain on sale margins increased by 28 basis points to 66 basis points for the third quarter 2022, as compared to 39 basis points for the second quarter 2022. The overall increase was primarily due to improved secondary marketing performance which was partially offset by a 32 percent decline in fallout-adjusted locks as a result of lower refinance volumes caused by the rising interest rate environment.
•Net interest income decreased
16
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•Our mortgage servicing rights portfolio yielded an annualized 12 percent return
for the quarter. Net return on mortgage servicing rights decreased $4 million ,
to $26 million for the third quarter 2022, compared to a $22 million net return
for the second quarter 2022.
•General, administrative and other noninterest expense decreased
•Compensation and benefits declined
Comparison to Prior Year to Date
The Mortgage Originations segment reported net income of$33 million for the nine months endedSeptember 30, 2022 and$271 million for the nine months endedSeptember 30, 2021 . The decrease was driven by the following: •Net gain on loan sales decreased$460 million primarily due to$16.4 billion lower FOALs and a 104 basis points decrease in our gain on sale margin driven by the challenging mortgage market, competitive factors relative to the prior year and a significant reduction in retail channel volumes. The decline in retail volumes also resulted in a$37 million decline in loan fees and charges. •The decline in FOAL and loan closings was partially offset by the associated decline in commissions of$94 million and a decline in compensation and benefits of$37 million . •Net return on mortgage servicing rights, including the impact of economic hedges, increased$73 million , primarily driven by the hedge strategies deployed and the increase in interest rates during 2022. •General, administrative and other noninterest expense decreased$34 million primarily due to lower intersegment expense allocations from the Other segment given the lower asset base and income of the business. Additionally, the allocated benefits from the ACL reductions were larger in 2021 as compared to 2022. Mortgage Servicing The Mortgage Servicing segment services loans when we hold the MSR asset, and subservices mortgage loans for others through a scalable servicing platform on a fee for service basis. The loans we service generate custodial deposits which provide a stable funding source supporting interest-earning asset generation in the Community Banking and Mortgage Originations segments. We earn income from other segments for the use of noninterest-bearing escrows. Revenue for serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the delinquency or payment status of the underlying loans. Along with these contractual fees, we may also collect ancillary fees related to these loans. The Mortgage Servicing segment also services residential mortgages for our LHFI portfolio in the Community Banking segment and our own MSR portfolio in the Mortgage Originations segment for which it earns intersegment revenue on a fee per loan basis. Our continued growth in our subservicing business and the strength of our platform has made us the 5th largest subservicer in the nation. 17 -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended Mortgage Servicing September 30, June 30, Change September 30, September 30, Change 2022 2022 2022 2021 (Dollars in millions) Summary of Operations Net interest income$ 6 $ 4$ 2 $ 13 $ 11$ 2 Loan fees and charges 14 22 (8) 57 57 - Loan administration income 43 44 (1) 130 120 10 Total noninterest income 57 66 (9) 187 177 10 Compensation and benefits 17 18 (1) 51 47 4 Loan processing expense 10 12 (2) 31 24 7 General, administrative and other 22 23 (1) 66 66 - Total noninterest expense 49 53 (4) 148 137 11 Income before indirect overhead 14 17 (3) 52 51 1 allocations and income taxes Indirect overhead allocation (7) (7) - (20) (14) (6) Provision for income taxes 2 2 - 7 8 (1) Net income$ 5 $ 8$ (3) $ 25 $ 29$ (4) Key Metrics Average number of residential loans 1,402,000 1,319,000 83,000 1,402,000 1,193,000 209,000
serviced (1) Number of FTE employees 708 748 (40) 708 727 (19)
(1)Rounded to nearest thousand.
The following table presents loans serviced and the number of accounts associated with those loans:
September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 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) $ 284,120 1,090,130 $ 293,808 1,160,087 $ 253,013 1,041,251 $ 246,858 1,032,923 $ 230,045 1,007,557
Serviced for others (3) 67,918 267,416 41,557 160,387 40,065 154,404 35,074 137,243 31,354
124,665
Serviced for own loan portfolio (4) 7,801 63,461 7,959 62,217 7,215 60,167 8,793 63,426 10,410
70,738
Total loans serviced$ 359,839 1,421,007$ 343,324 1,382,691$ 300,293 1,255,822$ 290,725 1,233,592$ 271,809 1,202,960 (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), LGG (residential first mortgage), and repossessed assets.
Comparison to Prior Quarter
The Mortgage Servicing segment reported net income of$5 million for the quarter endedSeptember 30, 2022 , compared to net income of$8 million for the quarter endedJune 30, 2022 .
Comparison to Prior Year to Date
The Mortgage Servicing segment reported net income of$25 million for the nine months endedSeptember 30, 2022 , compared to net income of$29 million for the nine months endedSeptember 30, 2021 . The$4 million decrease in net income was driven by higher intersegment expenses. 18 --------------------------------------------------------------------------------
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, Change September 30, 2022 September 30, Change
2022 2022 2021
(Dollars in millions)
Summary of Operations
Net interest income $ 31 $ 7 $ 24 $ 22 $ (85) $ 107
(Benefit) provision for credit losses (10) (16) 6 (55) (83) 28
Net interest income after (benefit) 41 23 18 77 (2) 79
provision for credit losses
Loan fees and charges - - - - (1) 1 Loan administration expense (17) (3) (14) (23) (8) (15) Other noninterest income 6 6 - 19 20 (1) Total noninterest income (11) 3 (14) (4) 11 (15) Compensation and benefits 37 39 (2) 114 123 (9) Commissions - - - - (1) 1 Loan processing expense 1 1 - 3 3 - General, administrative and other 16 28 (12) 81 128 (47) Total noninterest expense 54 68 (14) 198 253 (55) Income before indirect overhead (24) (42) 18 (125) (244) 119 allocations and income taxes Indirect overhead allocation 30 35 (5) 96 90 6 Provision for income taxes 1 4 (3) 1 (22) 23 Net gain (loss)$ 5 $ (11) $ 16 $ (30) $ (132) $ 102 Key Metrics Number of FTE employees 1,375 1,375
- 1,375 1,484 (109)
Comparison to Prior Quarter
The Other segment reported a net gain of $5 million for the quarter ended
September 30, 2022 , compared to a net loss of $11 million for the quarter ended
June 30, 2022 . The $16 million improvement was primarily driven by a $24 million
increase in net interest income.
Comparison to Prior Year to Date
The Other segment reported a net loss of$30 million for the nine months endedSeptember 30, 2022 , compared to a net loss of$132 million for the nine months endedSeptember 30, 2021 . The$102 million improvement was primarily driven by a$107 million increase in net interest income as a result of the net impact of rising rates on our overall net asset position and the hedging actions we took beginning in the first quarter of 2022. Additionally, in the first nine months of 2021, we recorded a$35 million final settlement expense for theDOJ Liability which did not reoccur.
Risk Management
Certain risks are inherent in our business and include, but are not limited to,
credit, market, liquidity, strategic, reputation, compliance, and operational
risks. 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.
19
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A comprehensive discussion of risks affecting us can be found in the Risk
Factors section included in Part I, Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2021 and in Part II, Item 1A of this Quarterly
Report on Form 10-Q. Some of the more significant processes used to manage and
control credit, market, liquidity and operational risks are described in the
following paragraphs.
Credit Risk
Credit risk is the risk of loss to us arising from an obligor's inability or
failure to meet contractual payment or performance terms. We provide loans,
extend credit, and enter into financial derivative contracts, all of which have
related credit risk. We manage credit risk using a thorough process designed to
ensure we make prudent and consistent credit decisions. The process was
developed with a focus on utilizing risk-based limits and credit concentrations
while emphasizing diversification on a geographic, industry and customer level.
The process utilizes documented underwriting guidelines, comprehensive
documentation standards, and ongoing portfolio monitoring including the timely
review and resolution of credits experiencing deterioration. These activities,
along with the management of credit policies and credit officers' delegated
authority, are centrally managed by our credit risk team.
We maintain credit limits in compliance with regulatory requirements. Under
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 ACL not included in Tier 2 capital. This limit was $452 million
as of September 30, 2022 . We maintain a more conservative maximum internal Bank
credit limit than required by HOLA, generally not exceeding $125 million to any
one borrower/obligor relationship, with the exception of warehouse
borrower/obligor relationships, which have a higher internal Bank limit of
$250 million . All warehouse advances are fully collateralized by residential
mortgage loans and this asset class has had very low levels of historical loss.
We have a tracking and reporting process to monitor lending concentration
levels, and all new commercial credit exposures to a single or related borrower
that exceed $50 million and all new warehouse credit exposures to a single or
related borrower that exceed $75 million must be approved by the Board of
Directors. Exceptions to these levels are made to strong borrowers on a case by
case basis, with the approval of 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 we will follow those established customer
relationships to meet their financing needs in areas outside of our footprint.
We have also formed relationship lending on a national scale through our home
builder finance and warehouse lending businesses. At September 30, 2022 , we
had $10.5 billion UPB in our commercial loan portfolio, including our warehouse
lending and home builder finance businesses, which accounted for 50 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.
20
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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 considered to be
SNCs. A SNC is defined as any loan or loan commitment totaling at least $100
million that is shared by three or more unaffiliated supervised 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 CRE 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 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. Our consumer loan portfolio includes high credit quality residential first and second lien mortgage loans, non-auto boat and recreational vehicle indirect lending loans and other unsecured consumer loans.
Loans Held-for-Investment
The following table summarizes the amortized cost of our LHFI by category:
September 30, December 31,
2022 % of Total 2021 % of Total Change
(Dollars in millions)Consumer loans Residential first mortgage$ 3,147 19.9 %$ 1,536 11.5 %$ 1,611 Home equity (1) 769 4.9 % 613 4.5 % 156 Other 1,411 8.9 % 1,236 9.2 % 175 Total consumer loans 5,327 33.7 % 3,385 25.2 % 1,942 Commercial loans Commercial real estate 3,721 23.6 % 3,223 24.0 % 498 Commercial and industrial 3,188 20.2 % 1,826 13.6 % 1,362 Warehouse lending 3,557 22.5 % 4,974 37.1 % (1,417) Total commercial loans 10,466 66.3 % 10,023 74.8 % 443 Total loans held-for-investment$ 15,793 100.0 %$ 13,408 100.0 %$ 2,385
(1)Includes second mortgages, HELOCs, and HELOANs.
Our commercial loan portfolio grew$443 million , or 4 percent, fromDecember 31, 2021 toSeptember 30, 2022 , as growth of$1.9 billion in our CRE and C&I portfolios was partially offset by lower warehouse lending as a result of the weaker 21 -------------------------------------------------------------------------------- mortgage origination market. Our commercial loan growth was led by MSR loans which are included in our C&I portfolio. We also grew our consumer portfolio$1.9 billion led by growth in strong credit quality residential first mortgages. 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. As ofSeptember 30, 2022 , loans in this portfolio had an average current FICO score of 738 and a weighted average current LTV of 54 percent. AtSeptember 30, 2022 , the residential first mortgage loan portfolio includes home equity loans in a first lien position totaling$95 million .
The following table presents amortized cost of our total residential first mortgage LHFI by major category:
September 30, 2022 December 31, 2021
(Dollars in millions)
Estimated LTVs (1)
Less than 80% and current FICO scores (2):
Equal to or greater than 660 $ 1,966 $ 988
Less than 660 32 50
80% and greater and current FICO scores (2):
Equal to or greater than 660 1,036 385
Less than 660 113 113
Total $ 3,147 $ 1,536
Geographic region
California $ 1,220 $ 441
Michigan 470 400
Texas 200 83
Washington 192 59
Florida 161 68
New York 99 38
Colorado 62 30
Indiana 51 34
Illinois 44 31
New Jersey 33 24
Other 615 328
Total $ 3,147 $ 1,536
(1)LTVs reflect loan balance at the date reported, as a percentage of appraised
property value at loan closing.
(2)FICO scores are updated at least on a quarterly basis or more frequently, if
available.
The following table presents the amortized cost of our total residential first
mortgage LHFI as of
2022 2021 2020 2019 2018 and Prior Total
(Dollars in millions)
Residential first mortgage loans $ 1,894 $ 322 $ 181 $ 216 $ 534 $ 3,147
Percent of total 60.2 % 10.2 % 5.8 % 6.8 % 17.0 % 100.0 %
Home equity. Our home equity portfolio includes second mortgage loans in the
form of HELOANs and HELOCs. These loans 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 700. HELOANs are fixed rate loans and are available with terms up to 20
years. HELOCs are variable-rate loans that contain a 10-year interest only draw
period followed by a 20-year amortizing period. As of September 30, 2022 , loans
in this portfolio had an average current FICO score of 752.
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.
22
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The following table presents amortized cost of our other consumer loan portfolio
by purchase type:
September 30, 2022 December 31, 2021
Balance % of Portfolio Balance % of Portfolio
(Dollars in millions)
Indirect lending $ 1,071 76 % $ 926 75 %
Point of sale 283 20 % 272 22 %
Other 57 4 % 38 3 %
Total other consumer loans $ 1,411 100 % $ 1,236 100 %
Other consumer loans increased $175 million to $1.4 billion as of September 30,
2022 , compared to $1.2 billion at December 31, 2021 , driven by growth in our
non-auto indirect lending and point of sale portfolios. Within the indirect
lending portfolio, 68 percent is secured by boats and 32 percent is secured by
recreational vehicles. As of September 30, 2022 , loans in our indirect portfolio
had an average current FICO score of 751. Point of sale loans consist of
unsecured consumer installment loans originated for home improvement purposes
through a third-party financial technology company who also provides us a level
of credit loss protection. We are not currently originating new point of sale
loans.
Commercial real estate loans. The CRE 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 underwritten LTV is 80 percent, or 90 percent for
owner-occupied real estate, and the minimum underwritten debt service coverage
is 1.20. Our CRE loans primarily earn interest at a variable rate.
Our national home builder finance program within our commercial portfolio
contained
As ofSeptember 30, 2022 , our CRE portfolio included$166 million of SNCs and no leveraged lending loans compared to$186 million of SNCs and no leveraged lending loans as ofDecember 31, 2021 . As ofSeptember 30, 2022 , the SNC portfolio had eight borrowers with an average amortized cost of$21 million and an average commitment of$25 million . There were no nonperforming SNCs or leveraged loans as ofSeptember 30, 2022 and there was no SNC loans that were rated as substandard. There was no special mention SNC loans outstanding as ofSeptember 30, 2022 . There were no leveraged loans outstanding that were rated as special mention or substandard as ofSeptember 30, 2022 .
The following table presents the 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, 2022
Home builder $ 35 $ 247 $ 166 $ 181 $ 155 $ 399 $ 1,183 31.8 %
Multi family 195 41 80 42 - 134 492 13.2 %
Owner occupied 285 3 19 - 2 65 374 10.1 %
Hotel 166 - 26 - 66 210 468 12.6 %
Retail (1) 215 - 2 4 1 60 282 7.6 %
Senior living facility 128 24 - - 17 119 288 7.7 %
Office 178 - 20 - 1 55 254 6.8 %
Industrial 66 - 12 - 19 14 111 3.0 %
Parking garage/lot 46 - - - - 21 67 1.8 %
Shopping Mall - - 16 - - - 16 0.4 %
All other (2) 28 48 7 - 23 80 186 5.0 %
Total $ 1,342 $ 363 $ 348 $ 227 $ 284 $ 1,157 $ 3,721 100.0 %
Percent by state 36.1 % 9.8 % 9.3 % 6.1 % 7.6 % 31.1 % 100.0 %
(1)Includes multipurpose retail space, neighborhood centers, shopping centers
and single-use retail space.
(2)All other primarily includes: mini-storage facilities, data centers, movie
theaters, etc.
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Commercial and industrial loans. C&I LHFI facilities typically include lines of
credit and term loans 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. Of our C&I loans, 96 percent
earn interest at a variable rate.
As of September 30, 2022 , our C&I portfolio included $1.6 billion of SNCs. The
finance and insurance sector and the services sector comprised the majority of
the portfolio's NBV with 48 and 25 percent of the balance, respectively. The SNC
portfolio had fifty-six borrowers with an average amortized net book value of
$29 million and an average commitment of $47 million . There were no NPLs, no
loans were rated as special mention, and loans totaling $20 million of amortized
cost were rated as substandard as of September 30, 2022 .
As of September 30, 2022 , our C&I portfolio included $454 million of leveraged
lending, of which $309 million were SNCs, which were also included in the SNC
portfolio discussed in the prior paragraph. The manufacturing sector comprised
38 percent of the leveraged lending portfolio, and the financial and insurance
sector comprised 16 percent. There were no NPLs as of September 30, 2022 , and
three borrowers with loans totaling $24 million were rated substandard and no
loans were rated as special mention.
Included in the financial and insurance sector within our C&I portfolio are
$1.0 billion in loans outstanding to 14 borrowers that are collateralized by MSR
assets with an average net book value of $73 million and an average commitment
of $98 million . The ratio of the loan outstanding to the fair market value of
the collateral ranges from 21 percent to 69 percent.
The following table presents the amortized cost of our total C&I LHFI by borrower's geographic location and industry type as defined by the North American Industry Classification System:
MI FL NY SC TX MN CA OH IN WI Other Total % by industry
(Dollars in millions)
September 30, 2022
Financial & Insurance $ 77 $ - $ 131 $ 199 $
19 $ -
18.7 % Mortgage Servicing Rights - 249 287 11
150 200 - 37 - - 93 1,027
32.2 %
Services 129 34 1 30 14 21 10 1 3 - 103 346
10.9 %
Manufacturing 261 - - - - - - - - 6 43 310
9.7 %
Home Builder Finance - 180 - 51 76 - 148 - - - 51 506
15.9 %
Rental & Leasing 131 34 29 - - - - - 8 - 49 251
7.9 %
Distribution 58 - - - - - 17 1 1 - 4 81
2.5 %
Healthcare 3 - - - - - 1 18 - - 10 32
1.0 %
Government & Education 2 - - - - - - - - - 12 14 0.4 %
Commodities - - - - - - 5 - 1 - 18 24 0.8 %
Total $ 661 $ 497 $ 448 $ 291 $ 259 $ 221 $ 201 $ 73 $ 34 $ 20 $ 483 $ 3,188 100.0 %
Percent by state 20.7 % 15.6 % 14.1 % 9.1 % 8.1 % 6.9 % 6.3 % 2.3 % 1.1 % 0.6 % 15.2 % 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. 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 warehouse lines of credit granted to other mortgage lenders atSeptember 30, 2022 was$11.6 billion , of which$3.6 billion was outstanding, compared to$12.0 billion atDecember 31, 2021 , of which$5.0 billion was outstanding. Of the total warehouse loans outstanding as ofSeptember 30, 2022 , 48 percent were collateralized by agency and conventional loans, 23 percent were collateralized by government loans, 24 percent were collateralized by non-qualified mortgage loans and 5 percent were collateralized by jumbo loans. 24 --------------------------------------------------------------------------------
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 NPLs. 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 under their original legal terms, 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.
Nonperforming assets
The following table sets forth our nonperforming assets:
September 30 ,
2022
(Dollars in millions)
LHFI
Residential first mortgage (1) $ 54 $ 38
Home equity 6 7
Other consumer 4 4
Commercial and industrial - 32
Total nonperforming LHFI 64 81
TDRs
Residential first mortgage 28 11 Home equity 2 2 Total nonperforming TDRs 30 13 Total nonperforming LHFI and TDRs 94 94 Real estate and other nonperforming assets, net 6 6 LHFS 17 17 Total nonperforming assets $ 117 $ 117 Nonperforming assets to total assets (2) 0.39 % 0.39 % Nonperforming LHFI and TDRs to LHFI 0.59 % 0.70 % Nonperforming assets to LHFI and repossessed assets (2) 0.63 % 0.74 % (1)Includes$44 million of first residential mortgage loans that are current in accordance with their forbearance exit plan and have not yet returned to accrual status as ofSeptember 30, 2022 . (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, 2022 September 30, September 30, 2021 2022 2022 (Dollars in millions) (Dollars in millions)
Beginning balance $ 99 $ 107 $ 93 $ 56 Additions 10 16 80 75 Principal payments (6) (8) (24) (25) Charge-offs (1) (1) (27) (8) Return to performing status (6) (15) (26) (2) Transfers to REO (2) - (2) (2) Total nonperforming LHFI and TDRs $ 94 $ 99 $ 94 $ 94
(1)
(1)Includes less than 90 days past due performing loans which are deemed nonaccrual. Interest is not being accrued on these loans.
25
--------------------------------------------------------------------------------Delinquencies
The following table sets forth loans 30-89 days past due in our LHFI portfolio:
September 30, 2022 December 31, 2021
Amount % of LHFI Amount % of LHFI
(Dollars in millions)
Performing loans past due 30-89:
Consumer loans
Residential first mortgage $ 13 0.08 % $ 48 0.36 %
Home equity 4 0.03 % 9 0.07 %
Other consumer 6 0.04 % 5 0.04 %
Total consumer loans 23 0.15 % 62 0.46 %
Commercial loans
C&I 5 0.03 % - - %
Warehouse Lending 6 0.04 % - - %
Total commercial loans 11 0.07 % - - %
Total performing loans past due 30-89 $ 34 0.22 % $ 62 0.46 %
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 up to a maximum period of 18 months. 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 while they remain in a forbearance or payment deferral status.
The table below summarizes borrowers in our consumer loan portfolios that are in active forbearance or were granted a payment deferral:
As of September 30, 2022 As of December 31, 2021
Number of Borrowers UPB Percent of Number of Borrowers UPB Percent of
Portfolio Portfolio
(Dollars in millions, actual number of borrowers)
Loans Held-For-Investment
Consumer loans
Residential first mortgage 142 $ 23 0.7 % 212 $ 35 2.3 %
Home equity 26 3 0.4 % 48 5 0.8 %
Other consumer 90 4 0.3 % 96 4 0.3 %
Total consumer loan deferrals/forbearance 258 $ 30 0.6 % 356 $ 44 1.3 %
Loans Held-For-Sale
Residential first mortgage 17 $ 7 0.4 % 47 $ 13 0.3 %
There were no performing commercial borrowers in payment deferral as of
26
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The table below summarizes the percent of our residential loan servicing
portfolio in forbearance as of
Total Population Loans in Forbearance
Unpaid Unpaid Percent of
Principal Number of accounts Principal Number of accounts Percent of UPB Accounts
Balance (1) Balance (1)
(Dollars in millions)
Loan servicing
Subserviced for others $ 284,120 1,090,130 $ 2,001 7,980 0.7 % 0.7 %
(2)
Serviced for others (3) 67,918 267,416 394 1,526 0.6 % 0.6 %
Serviced for own loan 7,801 63,461 78 465 1.0 % 0.7 %
portfolio (4)
Total loans serviced $ 359,839 1,421,007 $ 2,473 9,971 0.7 % 0.7 %
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Loans subserviced for non-Flagstar owned loans or MSRs, in each case
subserviced for a fee. 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 LGG (residential first mortgage).
The table below summarizes the percent of our residential loan servicing
portfolio in forbearance as of
Total Population Loans in Forbearance
Unpaid Unpaid Percent of
Principal Number of accounts Principal Number of accounts Percent of UPB Accounts
Balance (1) Balance (1)
(Dollars in millions)
Loan servicing
Subserviced for others $ 247,081 1,033,711 $ 3,946 18,313 1.6 % 1.8 %
(2)
Serviced for others (3) 35,097 137,315 514 2,158 1.5 % 1.6 %
Serviced for own loan 8,645 63,039 220 1,158 2.5 % 1.8 %
portfolio (4)
Total loans serviced $ 290,823 1,234,065 $ 4,680 21,629 1.6 % 1.8 %
(1)UPB, net of write downs, does not include premiums or discounts.
(2)Loans subserviced for non-Flagstar owned loans or MSRs, in each case
subserviced for a fee. 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 LGG (residential first mortgage).
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 believe that we have ample liquidity to handle servicing advances related to
these loans. 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. SinceMarch 2020 , as a response to COVID-19, we have offered our consumer and commercial customers principal and interest payment deferrals and extensions up to a maximum period of 18 months. We considered these programs in the context of whether or not the short-term modifications of these loans and the programs offered to return to paying status would constitute a TDR. We considered the CARES Act, interagency guidance and related guidance from the FASB, which provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any 27 --------------------------------------------------------------------------------
relief are not required to be accounted for as TDRs. As a result, we have determined that loans modified under these programs are not TDRs. We believe our application of the referenced guidance and accounting for these programs is appropriate.
The following table sets forth a summary of TDRs by performing status:
September 30, 2022 December 31, 2021
(Dollars in millions)
Performing TDRs
Consumer Loans
Residential first mortgage $ 19 $ 14
Home equity 6 8
Total consumer loans 25 22
Commercial Loans
Commercial and industrial - 2
Total commercial loans - 2
Total performing TDRs 25 24
Nonperforming TDRs
Nonperforming TDRs 6 8
Nonperforming TDRs, performing for less than six months 24 5
Total nonperforming TDRs 30 13
Total TDRs $ 55 $ 37
At September 30, 2022 our total TDR loans increased $18 million to $55 million
compared to $37 million at December 31, 2021 primarily driven by new additions
out-pacing principal payments and payoffs. Of our total TDR loans, 45 percent
and 65 percent were in performing status at September 30, 2022 and December 31,
2021 , respectively. For further information, see Note 4 - Loans
Held-for-Investment.
Allowance for Credit Losses
The ACL represents Management's estimate of lifetime losses in our LHFI portfolio which have not yet been realized. For further information see Note 1 - Basis of Presentation and Note 4 - Loans Held-for-Investment.
28
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The following tables present the changes in the ACL balance for the three and
nine months ended
Three Months Ended September 30, 2022
Residential First Home Equity Other Consumer Commercial Real Commercial and Warehouse Total LHFI Unfunded Total ACL
Mortgage (1) Estate Industrial Lending Portfolio (2) Commitments
(Dollars in millions)
Beginning allowance balance $ 33 $ 21 $ 31 $ 22 $ 11 $ 4 $ 122 $ 13 $ 135
Provision (benefit) for credit
losses:
Loan volume 10 2 2 2 4 - 20 1 21
Economic forecast (3) - - - 1 (1) - - - -
Credit (4) (11) - (3) 2 (1) - (13) - (13)
Qualitative factor adjustments - - - (1) 1 (3) (3) - (3)
Charge-offs (1) - (2) - - - (3) - (3)
Recoveries - - 1 - 2 - 3 - 3
Ending allowance balance $ 31 $ 23 $ 29 $ 26 $ 16 $ 1 $ 126 $ 14 $ 140
(1)Includes loans with government guarantees where insurance limits may result
in a loss in excess of all or part of the guarantee.
(2)Excludes loans carried under the fair value option.
(3)Includes changes in the lifetime loss rate based on current economic
forecasts as compared to forecasts used in the prior quarter.
(4)Includes changes in the probability of default and severity of default based
on current borrower and guarantor characteristics, changes in duration, as well
as individually evaluated reserves.
Nine Months Ended September 30, 2022
Residential First Home Equity Other Consumer Commercial Real Commercial and Warehouse Total LHFI Unfunded Total ACL
Mortgage (1) Estate Industrial Lending Portfolio (2) Commitments
(Dollars in millions)
Beginning allowance balance $ 40 $ 14 $ 36 $ 28 $ 32 $ 4 $ 154 $ 16 $ 170
Provision (benefit) for credit
losses:
Loan volume 14 3 5 3 11 - 36 (2) 34
Economic forecast (3) 3 3 (4) 2 (4) - - - -
Credit (4) (24) 2 (5) (5) (2) - (34) - (34)
Qualitative factor adjustments - - - (2) (3) (3) (8) - (8)
Charge-offs (2) - (7) - (20) - (29) - (29)
Recoveries - 1 4 - 2 - 7 - 7
Ending allowance balance $ 31 $ 23 $ 29 $ 26 $ 16 $ 1 $ 126 $ 14 $ 140
(1)Includes loans with government guarantees where insurance limits may result
in a loss in excess of all or part of the guarantee.
(2)Excludes loans carried under the fair value option.
(3)Includes changes in the lifetime loss rate based on current economic
forecasts as compared to forecasts used in the prior quarter.
(4)Includes changes in the probability of default and severity of default based
on current borrower and guarantor characteristics, changes in duration, as well
as individually evaluated reserves.
The ACL was $140 million at September 30, 2022 , compared to $135 million at June
30, 2022 . The increase in the allowance is primarily due to loan portfolio
growth during the quarter. We utilized the Moody's August 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. Within
our composite forecast, unemployment ends 2022 at 4 percent, increasing to just
under 5 percent in 2023, remains static through mid-2024, and ending the year at
slightly above 4 and a half percent. GDP continues to recover throughout 2022
and returns to pre-COVID levels in 2024. HPI decreases by 1 percent from the
third quarter of 2022 through the fourth quarter of 2022 before decreasing 1
percent by the fourth quarter of 2023.
The ACL as a percentage of LHFI was 0.9 percent as of September 30, 2022
compared to 1.3 percent as of December 31, 2021 . Excluding warehouse loans, the
allowance as a percentage of LHFI was 1.1 percent at September 30, 2022 compared
to 2.0 percent at December 31, 2021 . The decrease in the allowance as a
percentage of LHFI is reflective of the stable economic forecast used during the
period and loan growth being focused in well collateralized portfolios. At
September 30, 2022 , we had a 1.6 percent and 0.5 percent allowance coverage on
our consumer loan portfolio and our commercial loan portfolio, respectively.
29
--------------------------------------------------------------------------------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, 2022
LHFI Portfolio Percent of Allowance Allowance as a Weighted Average
(1) Portfolio Amount (2) Percent of Loan Loan Life
Portfolio (in years)
(Dollars in millions)
Consumer loans
Residential first mortgage $ 3,124 19.7 % $ 32 1.0 % 3
Home equity 768 4.9 % 24 3.1 % 3
Other consumer 1,412 9.0 % 30 2.1 % 3
Total consumer loans 5,304 33.6 % 86 1.6 %
Commercial loans
Commercial real estate $ 3,721 23.6 % $ 31 0.9 % 2
Commercial and industrial 3,188 20.2 % 22 0.7 % 2
Warehouse lending 3,557 22.6 % 1 - % -
Total commercial loans 10,466 66.4 % 54 0.5 %
Total consumer and commercial loans $ 15,770 100.0 % $ 140 0.9 %
Total consumer and commercial loans excluding $ 12,213 77.4 % $ 139 1.1 %
warehouse
(1) Excludes loans carried under the fair value option. (2) Includes ALLL and reserve for unfunded commitments.
December 31, 2021
LHFI Portfolio Percent of Allowance Allowance as a Weighted Average
(1) Portfolio Amount (2) Percent of Loan Loan Life
Portfolio (in years)
(Dollars in millions)
Consumer loans
Residential first mortgage $ 1,521 11.4 % $ 40 2.6 % 5
Home equity 611 4.6 % 14 2.3 % 3
Other consumer 1,236 9.2 % 37 3.0 % 3
Total consumer loans 3,368 25.2 % 91 2.7 %
Commercial loans
Commercial real estate $ 3,223 24.1 % $ 38 1.2 % 1
Commercial and industrial 1,826 13.6 % 36 2.0 % 2
Warehouse lending 4,974 37.1 % 5 0.1 % -
Total commercial loans 10,023 74.8 % 79 0.8 %
Total consumer and commercial loans $ 13,391 100.0 % $ 170 1.3 %
Total consumer and commercial loans excluding $ 8,417 62.9 % $ 165 2.0 %
warehouse
(1) Excludes loans carried under the fair value option. (2) Includes ALLL and reserve for unfunded commitments.
Loans with Government Guarantees
Substantially all our LGG 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 if the loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) and can recover losses through a claims process from the guarantor. 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 60 days delinquent until the loan is conveyed to HUD (if foreclosure timelines are met), which is not paid by the FHA until claimed. Additionally, if the Bank cures the loan, it can be resold to GNMA, usually at a gain. 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 indemnification obligations and insurance limits which expose us to limited credit risk. Additional expenses or charges may arise on LGG due to Veteran's Affairs loan insurance limits and FHA property foreclosure and preservation requirements that may result in a loss in excess of all, or part of, the guarantee. During the nine months endedSeptember 30, 2022 , we had$0.5 million in net charge-offs related to LGG and have reserved for the remaining risks within other assets and as a component of our ALLL on residential first mortgages. 30 -------------------------------------------------------------------------------- Our LGG portfolio totaled$1.4 billion atSeptember 30, 2022 , as compared to$1.7 billion atDecember 31, 2021 . 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 LGG, and a liability to repurchase the loans is recorded in other liabilities on the Consolidated Statements of Financial Condition.
For further information, see Note 5 - Loans with Government Guarantees and the Credit Risk - Payment Deferrals section of the MD&A.
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 other members of 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.
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 non-maturity
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 100 basis points) resulting in the shape of the yield curve remaining
unchanged.
September 30, 2022
Scenario Net interest income $ Change % Change
(Dollars in millions)
100 $770 $9 1.2%
Constant 761 - -%
(100) 751 (10) (1.3)%
December 31, 2021
Scenario Net interest income $ Change % Change
(Dollars in millions)
100 $882 $122 16.1%
Constant 760 - -%
(100) 695 (65) (8.5)%
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. The reduction in our interest
31
--------------------------------------------------------------------------------
income sensitivity as of June 30, 2022 compared to December 31, 2021 is
primarily driven by changes in our hedging activities as described in Note 8 -
Derivative Financial Instruments. The decline in the sensitivity of net interest
income to changes in rates since December 31, 2021 resulted from actions taken
late in the first quarter 2022 and early in the second quarter 2022 to both
terminate certain interest rate swaps under which we received a variable rate
and paid a fixed rate and to establish new hedging relationships through the use
of interest rate swaps under which we received a fixed rate and paid a variable
rate. The new hedger was largely designated as hedging our variable rate assets
in our CRE and C&I portfolios.
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,
the impact of interest rate floors on certain of our commercial loans and how
the Company will respond are not included in this analysis and limit the
predictive value of these scenarios.
Economic value of equity
Management also utilizes EVE, a point in time analysis of the economic value of
our current balance sheet position, which measures interest rate risk over a
longer term. The EVE calculation represents a hypothetical valuation of equity,
and is defined as the market value of assets, less the market value of
liabilities, adjusted for the market value of off-balance sheet instruments. The
assessment of both the short-term earnings (Net Interest Income Sensitivity) and
long-term valuation (EVE) approaches, rather than Net Interest Income
Sensitivity alone provides a more comprehensive analysis of interest rate risk
exposure.
There are assumptions and inherent limitations in any methodology used to
estimate the exposure to changes in market interest rates and as such,
sensitivity calculations used in this analysis are hypothetical and should not
be considered to be predictive of future results. This analysis evaluates risks
to the current balance sheet only and does not incorporate future growth
assumptions. Additionally, the analysis assumes interest rate changes are
instantaneous and the new rate environment is constant but does not include
actions Management may undertake to manage risk in response to interest rate
changes. Each rate scenario reflects unique prepayment and repricing
assumptions. Management derives these assumptions by considering published
market prepayment expectations, repricing characteristics, our historical
experience, and our asset and liability management strategy. This analysis
assumes that changes in interest rates may not affect or could partially affect
certain instruments based on their characteristics.
The following table is a summary of the changes in our EVE that are projected to
result from hypothetical changes in market interest rates as well as our
internal policy limits for changes in our EVE based on the different scenarios.
The interest rates, as of the dates presented, are adjusted by instantaneous
parallel rate increases and decreases as indicated in the scenarios shown in the
table below.
September 30, 2022 December 31, 2021
Scenario EVE EVE % $ Change % Change Scenario EVE EVE % $ Change % Change Policy Limits
for % Change
(Dollars in millions)
300 $ 4,122 16.9 % $ 202 5.2 % 300 $ 4,579 18.2 % $ 1,042 29.5 % (22.5) %
200 4,082 16.7 % 162 4.1 % 200 4,232 16.8 % 695 19.6 % (15.0) %
100 4,026 16.5 % 106 2.7 % 100 3,939 15.6 % 402 11.4 % (7.5) %
Current 3,920 16.1 % - - % Current 3,537 14.0 % - - % - %
(100) $ 3,752 15.4 % (168) (4.3) % (100) N/M N/M N/M N/M 7.5 %
Our balance sheet exhibits asset sensitivity in various interest rate scenarios.
The increase in EVE as rates rise is the result of the amount of assets that
would be expected to reprice exceeding the amount of liabilities repriced. The
amount of the change in EVE decreased as of September 30, 2022 compared to
December 31, 2021 primarily driven by changes in our hedging activities as
described in Note 8 - Derivative Financial Instruments. For each scenario shown,
the percentage change in our EVE is within our Board policy limits.
32
--------------------------------------------------------------------------------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 and we do not apply hedge accounting related to the management of these risks. 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. We have designated certain interest rate swaps as fair value hedges of our subordinated debt. Additionally, we designated certain interest rate swaps as cash flow hedges on LIBOR-based variable interest payments on certain commercial loans. For further information, see Note 8 - Derivative Financial Instruments and Note 16 - Fair Value Measurements.
Mortgage Servicing Rights (MSRs)
Our MSRs are sensitive to changes in interest rates 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 all risk. Our hedging strategies rely on assumptions and projections regarding assets and general market factors, many of which are outside of our control. In certain interest rate environments, such as those environments that have existed throughout the first six months of 2022, we may also change our hedge ratio on this portfolio. The resulting hedge ratio is intended to help mitigate the impact of higher mortgage rates on our mortgage origination revenue. 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 paid by the Bank. The primary uses of the Company's liquidity are debt service, operating expenses and the payment of cash dividends to shareholders, which remained at$0.06 per share in the third quarter 2022. OnOctober 27, 2022 the Flagstar board of directors declared a special dividend of$2.50 per share on its common stock to be paid in the fourth quarter 2022. The Company holds$150 million of subordinated debt which is scheduled to mature onNovember 1, 2030 . The Bank did not pay any dividends to the Company in the third quarter of 2022 and atSeptember 30, 2022 , the Company held$180 million of cash on deposit at the Bank which is sufficient to cover the cash outflows needed to service the subordinated debt interest, pay dividends and cover the operating expenses of the Company in excess of 2 years, which is our policy requirement. 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 for more than three out of the prior twelve months. As ofSeptember 30, 2022 , the Bank is in compliance with the QTL test, having qualified assets above the 65 percent requirement for twelve consecutive months. AtSeptember 30, 2022 , our QTL ratio was 75 percent. AtSeptember 30, 2022 , the Bank is able to pay dividends to the holding company of approximately$1 billion without submitting an application to the OCC and remain well capitalized. 33 --------------------------------------------------------------------------------
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, 2022 , we had$2.0 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 as ofSeptember 30, 2022 was 96.8 percent and in compliance with our board policy limit of 90 percent. 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 85.0 percent for the three months endedSeptember 30, 2022 . 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 88.5 percent for the three months endedSeptember 30, 2022 . 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. 34 -------------------------------------------------------------------------------- The following table presents primary sources of funding as of the dates indicated: September 30, 2022 December 31, 2021 Change (Dollars in millions) Retail deposits $ 9,548 $ 10,264$ (716) Government deposits 1,851 2,000 (149) Wholesale deposits 836 1,141 (305) Custodial deposits 4,356 4,604 (248) Total deposits 16,591 18,009 (1,418) FHLB advances and other short-term 4,450 3,280 1,170 debt Other long-term debt 390 396 (6) Total borrowed funds 4,840 3,676 1,164 Total funding $ 21,431 $ 21,685$ (254) The following table presents our borrowing capacity as of the dates indicated: September 30, December 31, 2021 Change 2022 (Dollars in millions) FLHB Borrowing capacity Line of credit available $ 30 $ 30 $ - Collateralized borrowing capacity 11 3,792 (3,781) Total unused borrowing capacity $ 41 $ 3,822$ (3,781) FRB discount window Collateralized borrowing capacity$ 1,430 $ 1,666$ (236) Unencumbered investment securities Agency - Commercial (1)$ 1,558 $ 123$ 1,435 Agency - Residential (1) 440 55 385 Municipal obligations 12 18 (6) Corporate debt obligations 36 54 (18) Other 1 1 - Total unencumbered investment securities 2,047 251 1,796
Total liquidity sources and borrowing capacity
5,739 $ (2,221) (1) These securities are not currently pledged to the FHLB but are eligible to be pledged, at our discretion.
35
--------------------------------------------------------------------------------Deposits
The following table presents the composition of our deposits:
September 30, 2022 December 31, 2021
Balance % of Deposits Balance % of Deposits Change
(Dollars in millions)
Retail deposits
Branch retail deposits
Savings accounts $ 3,541 21.3 % $ 3,751 20.8 % $ (210)
Certificates of deposit/CDARS (1) 851 5.1 % 951 5.3 % (100)
Demand deposit accounts 1,932 11.6 % 1,946 10.8 % (14)
Money market demand accounts 461 2.8 % 494 2.7 % (33)
Total branch retail deposits 6,785 40.9 % 7,142 39.7 % (357)
Commercial deposits (2)
Demand deposit accounts 2,010 12.1 % 2,194 12.2 % (184)
Savings accounts 417 2.5 % 520 2.9 % (103)
Money market demand accounts 336 2.0 % 408 2.3 % (72)
Total commercial retail deposits 2,763 16.7 % 3,122 17.3 % (359)
Total retail deposits $ 9,548 57.5 % $ 10,264 57.0 % $ (716)
Government deposits
Savings accounts $ 624 3.8 % $ 721 4.0 % $ (97)
Demand deposit accounts 730 4.4 % 664 3.7 % 66
Certificates of deposit/CDARS (1) 491 3.0 % 609 3.4 % (118)
Money market demand accounts 6 - % 6 - % -
Total government deposits 1,851 11.2 % 2,000 11.1 % (149)
Custodial deposits (3) 4,356 26.3 % 4,604 25.6 % (248)
Wholesale deposits 836 5.0 % 1,141 6.3 % (305)
Total deposits (4) $ 16,591 100.0 % $ 18,009 100.0 % $ (1,418)
(1)The aggregate amount of CD with a minimum denomination of $100,000 was
approximately $1.0 billion and $1.2 billion at September 30, 2022 and
December 31, 2021 , 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
$4.3 billion and $6.0 billion at September 30, 2022 and December 31, 2021 ,
respectively.
We utilize local governmental agencies and other public units as an additional
source for deposit funding. At September 30, 2022 , we were required to hold
collateral for certain Michigan , California , Indiana , Wisconsin and Ohio
government deposits based on a variety of factors including, but not limited to,
the size of individual deposits, FDIC limits and external bank ratings. At
September 30, 2022 , collateral held on government deposits was $199 million . At
September 30, 2022 , government deposit accounts included $491 million of CDs
with maturities typically less than one year and $1.4 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, we give a LIBOR-based fee
credit that reduces subservicing income from the MSR owners who control the $3.3
billion custodial deposit against subservicing income.
We participate in the CDARS program, through which certain customer CDs are
exchanged for CDs of similar amounts from other participating banks and
customers may receive FDIC insurance up to $50 million . This program helps the
Bank secure larger deposits and attract and retain customers. At September 30,
2022 , we had $65 million of total CDs enrolled in the CDARS program, a decrease
of $29 million from December 31, 2021 .
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.
36
--------------------------------------------------------------------------------
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, HELOC, CRE loans and investment
securities. As of September 30, 2022 , our Board of Directors authorized and
approved a line of credit with the FHLB of up to $10 billion , which is further
limited based on our total assets and qualified collateral, as determined by the
FHLB. At September 30, 2022 , we had $4.5 billion of advances outstanding and an
additional $11 million of collateralized borrowing capacity available at the
FHLB. Additionally, we had $2.0 billion of unencumbered investment securities
that are eligible to be pledged to the FHLB at our discretion.
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, 2022 , we pledged collateral, which included commercial loans, municipal bonds, and agency bonds, to the FRB ofChicago amounting to$1.7 billion with a lendable value of$1.4 billion . AtDecember 31, 2021 , we pledged collateral to the FRB ofChicago amounting to$2.3 billion with a lendable value of$1.7 billion . We do not typically utilize this available funding source, and atSeptember 30, 2022 andDecember 31, 2021 , 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, 2022 we had no 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,
2022 , we are current on all interest payments. Additionally, we have
$150 million of subordinated debt outstanding (the "Notes"), which mature on
November 1, 2030 . As of June 30, 2022 , both the bank and the holding company
have investment grade ratings of subordinated debt from Moody's and Kroll, of
Baa3 and BBB respectively. Accordingly, we believe that we could raise
additional funding in the credit markets, if such needs would exist in the
future.
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 continuously evaluate internal systems, processes and controls to identify potential vulnerabilities and mitigate potential loss from cyber-attacks. The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational and fraud losses, and enhance our overall performance.
We believe that the impacts of any previously experienced cyber incidents will not have a material financial impact and we have cyber insurance in place.
37
--------------------------------------------------------------------------------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 11.06 percent atSeptember 30, 2022 providing a 606 basis point stress buffer above the minimum level needed to be considered "well-capitalized." Additionally, total risk-based capital to RWA was 14.32 percent atSeptember 30, 2022 providing a 432 basis point buffer above the minimum level needed to be considered "well-capitalized". Dodd-Frank Act Section 171, commonly known as the Collins Amendment, established minimum Tier 1 leverage and risk-based capital requirements for insured depository institutions, depository institution holding companies, and non-bank financial companies that are supervised under theFederal 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 ofDecember 31, 2009 . As we were below$15 billion in assets as ofDecember 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 are subject to the Basel III-basedU.S. rules, including capital simplification. These standards limit the amount of net MSRs to 25 percent of CET1 and should the level of mortgage servicing rights exceed 25 percent of common equity Tier 1 capital, we are required to deduct the excess in determining our regulatory capital levels. In response to COVID-19 in 2020,U.S. banking regulators issued a final rule that allows banking organizations the option to delay the initial adoption impact of CECL on regulatory capital for two years followed by a three-year transition period. During the two-year delay we added back to CET1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the ACL (i.e., quarterly transitional amounts). Starting onJanuary 1, 2022 , the quarterly transitional amounts along with the initial adoption impact of CECL are phased out of CET1 capital over the three-year transition 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
Amount Ratio Amount Ratio Capital
Simplification
(Dollars in millions)
September 30, 2022
Tier 1 leverage capital
(to adjusted avg. total 2,759 11.06 % 1,247 5.0 % $ 1,512
assets)
Common equity Tier 1 capital 2,519 11.97 % 1,368 6.5 % 1,151
(to RWA)
Tier 1 capital (to RWA) 2,759 13.11 % 1,684 8.0 % 1,075
Total capital (to RWA) 3,015 14.32 % 2,105 10.0 % 910
As presented in the table above, our constraining capital ratio is our total
capital to risk weighted assets at 14.32 percent. It would take a $0.9 billion
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".
38
--------------------------------------------------------------------------------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 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, return on average tangible common equity, adjusted return on average tangible common equity, adjusted return on average assets, adjusted noninterest expense, adjusted provision for income taxes, adjusted net income, adjusted basic earnings per share, adjusted diluted earnings per share, adjusted net interest margin and adjusted efficiency ratio.
The Company believes that these non-GAAP financial measures provide a meaningful
representation of its operating performance on an ongoing basis for investors,
securities analysts, and others.
The following tables provide a reconciliation of non-GAAP financial measures.
September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021
(Dollars in millions)
Total stockholders' equity $ 2,616 $ 2,693 $ 2,733 $ 2,718 $ 2,645
Less: Goodwill and intangible assets 140 142 145 147 149 Tangible book value/Tangible common equity $ 2,476 $ 2,551 $ 2,588 $ 2,571 $
2,496
Number of common shares outstanding 53,330,827 53,329,993 53,236,067 53,197,650
52,862,383
Tangible book value per share $ 46.42 $ 47.83 $ 48.61 $ 48.33 $ 47.21 Total assets $ 25,443 $ 24,899$ 23,244 $ 25,483 $ 27,042 Tangible common equity to assets ratio 9.7 % 10.2 % 11.1 % 10.1 % 9.2 % 39
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021
(Dollars in millions, except share data)
Net income $ 73 $ 60 $ 186 $ 448
Plus: Intangible asset amortization, net 2 3 5 6
of tax
Tangible net income $ 75 $ 63 $ 191 $ 454
Total average equity $ 2,785 $ 2,754 $ 2,742 $ 2,454
Less: Average goodwill and intangible 141 144 144 -
assets
Total average tangible equity $ 2,644$ 2,610 $ 2,598 $ 2,454 Return on average tangible common equity 11.2 % 9.5 % 9.8 % 24.7 % Adjustment to remove DOJ settlement - % - % - % 2.3 %
expense
Adjustment for former CEO SERP agreement - % - % - % (0.7) % Adjustment for merger costs 0.7 % 0.6 % 0.6 % 0.9 % Adjusted return on average tangible common 11.9 % 10.1 % 10.4 % 27.2 %
equity
Return on average assets 1.2 % 1.0 % 1.0 % 2.1 % Adjustment to remove DOJ - % - % - % 0.1 % Adjustment for former CEO SERP agreement - % - % - % - % Adjustment for merger costs - % - % - % - % Adjusted return on average assets 1.2 % 1.0 % 1.0 % 2.2 %
Adjusted HFI loan-to-deposit ratio.
Three Months Ended
September 30, June 30, December 31, September 30,
2022 2022 March 31, 2022 2021 2021
(Dollars in millions)Average LHFI$ 14,640 $ 13,339 $ 12,384 $ 13,314 $ 13,540 Less: Average warehouse loans 3,541 4,099 3,973 5,148 5,392 Adjusted average LHFI$ 11,099 $ 9,240 $ 8,411 $ 8,166 $ 8,148 Average deposits$ 17,216 $
17,488
4,681 4,641 4,970 6,309 6,180
Adjusted average deposits $ 12,535 $
12,847
HFI loan-to-deposit ratio 85.0 % 76.3 % 68.5 % 67.2 % 68.8 %
Adjusted HFI loan-to-deposit ratio 88.5 % 71.9 % 64.1 % 60.5 % 60.3 %
40--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021
(Dollars in millions)
Noninterest expense $ 236 $ 256 $ 753 $ 922
Adjustment to remove DOJ settlement - - - 35
expense
Adjustment for former CEO SERP agreement - - - (10) Adjustment for merger costs 3 3 9 14 Adjusted noninterest expense $ 233 $ 253 $ 744 $ 883 Income before income taxes $ 92 $ 77 $ 237 $ 581 Adjustment to remove DOJ settlement - - - 35
expense
Adjustment for former CEO SERP agreement - - - (10) Adjustment for merger costs 3 3 9 14 Adjusted income before income taxes $ 95 $ 80 $ 246 $ 620 Provision for income taxes $ 19 $ 17 $ 51 $ 133 Adjustment to remove DOJ settlement - - - (8)
expense
Adjustment for former CEO SERP agreement - - - 2 Adjustment for merger costs (1) - (2) (3) Adjusted provision for income taxes $ 20 $ 17 $ 53 $ 142 Net income $ 73 $ 60 $ 186 $ 448 Adjusted net income $ 75 $ 63 $ 193 $ 478 Weighted average common shares 53,330,518 53,269,631 53,273,743 52,767,923
outstanding
Weighted average diluted common shares 53,610,266 53,535,448
53,574,690 53,499,289
Adjusted basic earnings per share $ 1.42 $ 1.18 $ 3.62 $ 9.04
Adjusted diluted earnings per share $ 1.41 $ 1.17 $ 3.60 $ 8.92
Average interest earning assets $ 21,905
$ 21,479 $ 26,029
Net interest margin 3.98 % 3.69 % 3.60 % 2.90 %
Adjustment for LGG loans available for 0.02 % 0.01 % 0.01 % 0.14 %
repurchase
Adjusted net interest margin 4.00 % 3.70 % 3.61 % 3.04 %
Efficiency Ratio 70.9 % 79.1 % 76.7 % 65.5 %
Adjustment to remove DOJ settlement - % - % - % (2.5) %
expense
Adjustment for former CEO SERP agreement - % - % - % 0.7 % Adjustment for merger costs (1.1) % (1.0) % (1.0) % (1.0) % Adjusted efficiency ratio 69.8 % 78.1 % 75.7 % 62.7 % Critical Accounting Estimates Various elements of our accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain accounting policies that, due to the judgment, estimates and assumptions are critical to an understanding of our Consolidated Financial Statements and the Notes, are described in Item 1. These policies relate to: (a) the determination of our ACL and (b) fair value measurements. We believe the judgment, estimates and assumptions used in the preparation of our Consolidated Financial Statements and the Notes are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements and the Notes to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations and/or financial condition. For further information on our critical accounting policies, please refer to our Form 10-K for the year endedDecember 31, 2021 , which is available on our website, flagstar.com, under the Investor Relations section, or on the website of theSecurities and Exchange Commission , at sec.gov. 41 -------------------------------------------------------------------------------- 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 theSEC , and 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. Such statements may be identified by words such as believe, expect, anticipate, intend, plan, estimate, 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 occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the definitive merger agreement among NYCB, 615 Corp. and Flagstar; the outcome of any legal proceedings that may be instituted against NYCB or Flagstar; the possibility that the proposed transaction will not close when expected or at all because required regulatory or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated; the ability of NYCB and Flagstar to meet expectations regarding the timing, completion and accounting and tax treatments of the proposed transaction; the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of the common stock of NYCB or Flagstar; the possibility that the anticipated benefits of the proposed transaction will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where NYCB and Flagstar do business; certain restrictions during the pendency of the proposed transaction that may impact the parties' ability to pursue certain business opportunities or strategic transactions; the possibility that the proposed transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management's attention from ongoing business operations and opportunities; the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the proposed transaction within the expected timeframes or at all and to successfully integrate Flagstar's operations and those of NYCB; such integration may be more difficult, time consuming or costly than expected; revenues following the proposed transaction may be lower than expected; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the proposed transaction; NYCB's and Flagstar's success in executing their respective business plans and strategies and managing the risks involved in the foregoing; and the precautionary statements included within the 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 endedDecember 31, 2021 , which are incorporated by reference herein. Other than as required underUnited 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. 42
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