Jan 21, 2021
Operator
Good day, and welcome to the Flagstar Bank Fourth Quarter 2020 Earnings Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Mr. Ken Schellenberg.
Please go ahead, sir.
Ken Schellenberg
Thank you all and good morning. Welcome to the Flagstar fourth quarter 2020 earnings call.
Before we begin, I would like to mention that our fourth quarter earnings release and presentation are available on our website at flagstar.com. I would also like to remind you that any forward-looking statements made during today’s call are subject to risks and uncertainties.
Factors that could materially change our current forward-looking assumptions are described on Slide 2 of today’s presentation, in our press release and in our 2019 Form 10-K and subsequent reports on file with the SEC. We are also discussing GAAP and non-GAAP financial measures, which are described in our earnings release and in the presentation, we made available for this earnings call.
You should also refer to these documents as part of this call. With that, I’d like to now turn the call over to Sandro DiNello, our President and Chief Executive Officer.
Sandro DiNello
Thanks, Ken, and good morning to everyone listening in. I hope all of you and your loved ones have been able to stay safe and healthy through these most unusual times.
I’m joined this morning by Jim Ciroli, our Chief Financial Officer; Lee Smith, our President of Mortgage; and Reggie Davis, our President of Banking. I’m going to start by providing a high-level view of our performance for the quarter and the year, then I’ll turn the call over to Jim for details on our financial results.
Reggie will file with an update on the Community Bank; then Lee will handle the Mortgage segment, including Servicing, and then we’ll open up the line for questions. 2020 brought many challenges and few companies ended the year stronger when they started it.
But Flagstar, it’s the opposite. We kept getting better throughout the year as we adapted to a new normal and finished the year extremely strong.
This is a testament to how we built our business model, to have diverse revenue streams and a flexible balance sheet that provides us optionality and less volatile earnings during change in economic environments. You recall in 2018, the mortgage business was challenging, where we said, grew earnings as the rest of the company stepped up to contribute.
Then in 2019, declining interest rates put pressure on our spread income, but we were able to temper this by capitalizing unfavorable conditions in the mortgage market and was carried into 2020. Today we are looking at an exceptionally strong fourth quarter, shaping up where I consider to be the most successful year in our history.
As reported, we posted net income of $154 million or $2.83 per share, up a phenomenal 183% from the same quarter last year. For the fourth quarter, we achieved net income of $538 million, or $9.52 per diluted share, topping the result for the full year 2019 by 151%.
In fact, our earnings of this quarter alone are roughly three quarters of what we earned in all of 2019. Mortgage continue to lead the way in the fourth quarter, as it has for most of the year, but the contributions from our banking and servicing businesses should not be overlooked.
Make sure we believe the relationships with [indiscernible] strengthened through adversity. It’s going to be true in our banking business, if their team focused all year on supporting our borrowers and helping them navigate the challenging conditions brought on by the pandemic.
We want our borrowers to remember that we stood by them every step of the way. It’s times of adversity that built the kind of long-lasting relationships we want to be our hallmark.
At the same time, banking produced steady results, again led by the warehouse business, which is now the third largest in the nation. On to mortgage, what an incredible year.
The mortgage team delivered amazing results throughout the year, as they took advantage of an extraordinary mortgage market, while maintaining pricing and expense discipline. As always, we managed the volume to maintain industry-leading service levels, while producing margin and revenue, we haven’t seen in a very long time.
And as servicing business kept delivering consistent results, supporting our mortgage business, providing efficient funding, adding fee income and keeping the number of loan service or sub-service steady, even in the face of historically high payoffs related to the robust refinance market. We couldn’t be more pleased with how we ended the year in the many milestones we achieved as well as to which was the investment grade rating for Moody’s.
This further validates the strength of our balance sheet and the earnings power of the business model. It has been a long and winding road, but I believe we are a very special company with a very bright future.
We move into 2021 with a state of net interest margin, the power generates strong non-interest income and a fortress balance sheet. We are ready to take on, whatever 2021 throws our way.
With that, let me now turn it over to Jim.
Jim Ciroli
Thanks Sandro. Turning to Slide 6, net income this quarter was $154 million, $2.83 per share.
This compared to $222 million, $3.88 per share last quarter. the decrease on a linked quarter basis was largely due to the extraordinary levels of gain on sale revenue last quarter.
Increase in net increase income and a lower credit provision this quarter partially offset the lower mortgage revenue. For the year, we had net income of $538 million or $9.52 per share compared to $218 million or $3.80 per share that we earned in 2019.
Current year earnings represent 2% return on assets and a 28% return on equity. Diving deeper into this quarter’s performance our pre-tax, pre-provision earnings were $207 million compared to $327 million last quarter.
Net interest income increased $9 million or 5% as average earning assets grew $1.4 billion while the net interest margins flat at 2.78%. Excluding loans with government guarantees that have not been repurchased.
The net interest margin actually increased 4 basis points. This performance was primarily driven by the strength of our warehouse business that has rate floors in place to protect from margin compression and our core deposits which benefited from high custodial balances and also from maturity of higher cost CDs and the expiration promotional rates on savings accounts.
We will review these numbers in a couple of slides. Mortgage revenues were $232 million, a decrease of $126 million compared to the very strong number we reported last quarter.
During the quarter we saw gain on sales margins decreased from last quarter’s record levels. Asset quality remained strong.
Net charge offs were 4 basis points. Early-stage delinquencies were only 22 basis points of total loans.
Non-performing loans were $57 million up $12 million as a result of two commercial borrowers being put on non-accrual status during the quarter. Our allowances for credit losses remained flat to the prior quarter at $280 million and our coverage ratio excluding warehouse, increased to 3.2% from 3.1% at the end of the third quarter.
We’ll provide more details when we get to the asset quality slide and take a deeper dive into CECL. Capital also remained solid.
Total risk-based capital was 11.9% at December 31st. Our CET1 ratio was 9.1% and our Tier 1 leverage ratio was 7.7%.
We repurchased $115 million of stock which caused our capital ratios to decline. This was more than offset by our earnings and total assets grew $1.6 billion causing our CET1 and Tier 1 leverage ratios to decline slightly.
Total risk-based capital increased due to the subordinated debt we issued during the quarter to fund the stock buyback. Finally, we continued to demonstrate significant capital generation with growth in our tangible book value per share of $38.80 at year end, up $3.20 from September 30 and $10.23 from one year ago, 36% increase.
So let’s turn to Slide 7 and dive deeper into the income statement. Net interest income increased $9 million to $189 million this quarter up 5% from last quarter.
Average earning asset grew $1.4 billion led by warehouse lending. Deposit costs came down 15 basis points on average retail banking and customer deposit balances increased $0.3 billion and $1.2 billion respectively.
We’ll dive deeper into net interest income and our interest rate position on the next slide. Non-interest income decreased to $115 million to $337 million due to lower mortgage revenues and non-interest expense was $319 million up $14 million from the prior quarter.
Finally, our effective tax rate was 24.8% this quarter. This is the result of $2 million an additional state level taxes that results from MatlinPatterson’s exit and certain non-deductible expenses including FDIC insurance and incentive compensation.
We expect that the effective tax rate in 2021 will be approximately 23%. Turning to Slide 8, average earning assets increased $1.4 billion from last quarter.
this resulted from a $1.3 billion increase in warehouse loans and a $0.4 billion increase in the loans with government guarantees that have not been repurchased. The increase in warehouse loans resulted from continued success in bringing on new customers.
Declines in securities and in mortgage loans held for investment were due to faster prepayments that partially offset the balance sheet growth. C&I balance has also declined by $200 million primarily driven by the full quarter impact, with the sale of PPP loan portfolio in the third quarter.
Balance of the loans with government guarantees peaked at the end of last quarter. the balance declined only slightly throughout the fourth quarter resulting in average balance increase.
We expect to see balances gradually decline through 2021. As we’ve stated previously, we do not believe there’ significant downside to holding these loans either by buying them or through this accounting close up.
If we were to repurchase these loans, we can pledge the loans for FHLB and they’re 20% risk weighted asset. Further, if we do repurchase the loans.
We could resell those at a later date, which is attractive for us and they remain government guarantee. Average deposits increased $1.5 billion from last quarter.
Custodial deposits drove $1.2 billion of this increase. We also saw growth of $311 million in DDA and savings accounts balances, 5% increase from last quarter and $188 million seasonal increase from government deposits.
Overall, we managed deposit costs lower by 15 basis points to deposits continued to reprice into new current environment providing support for our net interest margin expansion. We continue to believe that our interest rate risk position is in a good place due to the actions we’ve taken in this lower interest rate environment.
We feel that we can protect our net interest income and net interest margin and believe that our net interest margin should be relatively flat where it’s been in the past three quarters. There are interest rate floors in place on a large portion of our commercial loan book and these floors help protect us against further margin compression.
The actions we took earlier this year to lock $2 billion of lower rate funding remains in place. Well, this has made us more asset sensitive in our structural balance sheet.
Our mortgage origination business is naturally liability sensitive. So we believe the combination positions us well for future success regardless of where rates are.
We continue to have a strong liquidity position driven by the strength of our deposit base and access to multiple sources of liquidity built on balance sheet with our high-quality securities portfolio and our off-balance sheet with our undrawn FHLB facilities. At December 31, we had ready liquidity at $4.5 billion not including the ample access we have to borrow at this gap window.
Let’s now turn to Slide 9, which details our non-interest income and non-interest expenses. Non-interest income decreased $115 million due to the extraordinary levels of mortgage revenue in the prior quarter.
our gain on sale revenue of $232 million represented a decrease of $114 million fallout adjusted locks decreased 20% to $12.0 billion and the gain on sale margin was 193 basis points. Channel margins continue to come down gradually and Lee will provide more insight in the gain on sale revenues later.
The net return on mortgage servicing rights declined $12 million for the prior quarter. Prepayment continued to be elevated resulting in high one-off.
The capitalization of our MSRs remain relatively flat 86 basis points of UPB at the end of the quarter, up only 1 basis point from the prior quarter. We would observe that the MSR market continues to show signs of improvement, as shown with the bulk and flow sales that we executed during the quarter.
Non-interest expense increased to $319 million for the third quarter, compared to $305 million last quarter, primarily reflecting a $7 million loss recognized on the early extinguishment of our senior notes and $2 million of extra charitable contributions we made to Flagstar Foundation in support of its efforts to help those in greatest need in the communities we serve. Both of these items will not recur next quarter.
We saw $7 million increase in mortgage expenses which was driven by efforts to expand capacity along with the higher retail channel mix. Lee will provide more insight in the mortgage expenses later.
We expect non-interest expense of $295 million to $305 million and an efficiency ratio in the low 60s to the first quarter of 2021. So, let’s now turn to asset quality on Slide 10.
Credit quality and the loan portfolio remained strong. Early-stage delinquencies continued to be relatively low as early-stage consumer loan delinquencies as of December 31st were flat and early-stage commercial loan delinquencies increased driven by one commercial loan that is beyond it’s maturity date which we haven’t renewed yet.
But which remains current with respect to interest payments. Total early-stage delinquencies were $36 million at December 31st were only 22 basis points of total loans held for investment.
Commercial deferrals were only $22 million at December 31st. We continue to be pleased with how well the portfolio is holding up despite what the economy has done this past year.
Non-performing loans picked up slightly as we added two small commercial credits, the non-accrual status. Our allowances for credit losses of $280 million covered 1.7% of total HFI loans excluding warehouse loans from the denominator given their relatively clean credit loss history and considering that substantially all of these loans are collateralized with agency or government back loans.
Our coverage ratio stands among the best in the industry at 3.2%. On Slide 11, we can see that we ended the quarter with $280 million of allowances for credit losses consisting of $252 million of allowance for loan losses and $28 million in the reserve of unfunded loan commitments.
As we did last quarter, we used three different Moody’s forecast of the next two years to guide our allowance levels. A S1 growth forecast weighted at 30%, a baseline forecast weighted at 40%, and an S3 adverse forecast weighted at 30%.
All forecasts used December release. The resulting composite forecast for this quarter was slightly better than the composite forecast we used last quarter.
Unemployment increases only slightly in 2021 and begins recovering in 2022. GDP recovered slightly by the end of the year from current levels.
It does not return to near pre-COVID levels until 2024. HPI decreases 1% throughout 2021.
While there are positive economic signs. We continue to be cautious and are confident about the recovery until we see more evidence that the recovery will sustain.
Accordingly, we have qualitative reserves of $77 million primarily in our commercial real estate and C&I portfolios guided by the CECL allowance model output using the Moody’s adverse scenarios to provide coverage for industries and customers that we believe could be more exposed to the stressful conditions in our forecast. We feel very comfortable about the strength of credit and the portfolio.
We feel it’ll be difficult to provide future guidance. We’ve provided a portfolio-by-portfolio breakdown of the resulting ACL coverage ratios in our appendix.
On Slide 12, we’ve updated our exposure to those industries we believe are more likely to be most impacted. In total, we have $1.0 billion of outstanding loans in this category representing 6% of our total loan portfolio.
It’s interesting to note, we have almost no loans in deferral in these portfolios today. In our commercial and industrial loan portfolio, the COVID impacted loans totaled $0.3 billion.
You can see that the exposure here is relatively low, especially as there are no deferrals and only one $10 million cost side is non-performing. We have no oil and gas exposure.
In our commercial real estate portfolio, we have $0.7 billion outstanding in the areas most impacted by COVID, including commercial real estate loans secured with hotels, retail properties and senior housing. Of loans in this category, our average pre-COVID LTV was 55%, and our average pre-COVID debt service coverage ratio was 1.6 times.
We still don’t have any loans in these portfolios that we believe will default. While we believe that we will have losses, we continue to see strong borrower support across the portfolio.
We feel good about our credit risk in this portfolio, as we’re starting from a position of strength from our carefulness about who we lend to, to the disciplined underwriting of those credits, and the pre-COVID LTVs and debt service coverage ratios in the CRE portfolio. Turning to Slide 13, our capital ratios remain solid and nicely above our stress buffers.
At December 31st, our total risk-based capital was 11.9%. Our CET1 ratio was 9.1%, and our Tier 1 leverage ratio was 7.7%.
As I mentioned before, we repurchased $150 million of stock which caused our capital ratios to decline. This was more than offset by our earnings and total assets grew $1.6 billion causing our CET1 and Tier 1 leverage ratios to decline slightly.
The total risk-based capital increased as a result of the subordinated debt we issued during the quarter to fund the stock buyback. As we pointed out with our warehouse loan portfolio, loans held for sale and loans with government guarantees.
We have more than half of our balance sheet and over 1,100 basis points of risk-based capital dedicated to these three assets categories that has very little risk content. Warehouse loans are secured with recently originated first mortgage loans and turn over every 10 to 15 days.
Loans held for sale turn over every one to two month and this portfolio was carried at fair value. The portfolio of loans with government guarantees has no real downside, and perhaps a modest upside.
When you take all of this into consideration, we believe that we are operating at strong capital levels, given our low-risk balance sheet composition. If we just weighted our warehouse loans at 50% that weighted at 100% at a current risk based capital rules.
You’ll see that our capital ratios compare favorably to most other mid-sized banks. This makes sense, the loans are fully collateralized by 50% risk weighted assets and those assets remain under our custody while the loans are on our lines.
Further there is even an outstanding proposal from the mortgage bankers’ associations and makers distinction and risk-based capital rules. A proposal we wholeheartedly support.
So, adjusting the risk weighting on the warehouse loans. Our total risk-based capital will be 14.0% over 200 basis points higher which will put that ratio above the average for all mid-sized banks.
Our CET1 ratio will be 10.7%. so that provides the rationale behind our belief that we have solid I’d even say, strong capital ratio.
I’ll now turn it over to Reggie to cover Community Banking.
Reggie Davis
Thank you, Jim and good morning. The last 12 months have been like nothing we had experienced before.
At the start of the year and response to the COVID-19 pandemic the feds took unprecedent action by significantly cutting interest rates and putting immense pressure on the net interest margin for many banks. Additionally, in response to the uncertainly around the duration and the impact of the pandemic.
We took a conservative approach in the bank by tightening the credit box and being thoughtful around new lending opportunities. This has served us well so far and will be our approach into the foreseeable future.
We’ll continue to lean into lower risk commercial lending opportunities and be diligent in adding new relationships as we continue to navigate these uncertain waters. Please turn to Slide 15, quarterly operating highlights for the Community Banking segment include, average warehouse lending balances increased $1.3 billion or 22% to $6.9 billion in the quarter, as the low interest rate environment has persisted driving strong mortgage refinance volume.
Our relationship-based approach and speed of execution, also enabled us to add new customers, as well as increased lines for existing customers during the quarter. We continue to maintain our disciplined underwriting in this business.
Average commercial and industrial and commercial real estate loans, decreased $146 million partially impacted by the timing of the sale of PPP loans as well as a thoughtful approach we continue to take in terms of new facilities. We believe our conservative credit policies and diversified portfolio will be a strength as we get more clarity around the fallout from this pandemic.
Average consumer loans held for investment decreased $241 million, a result of increased payoffs in our first lien mortgage portfolio, partially offset by growth in other consumer loans, which is predominantly our indirect Marine RV loan portfolio, which has performed rather nicely in this environment. I’m also proud of the success that the retail team has achieved.
Average Community Banking deposits, which excludes custodial accounts and broker deposits, increased $269 million or 2.4% over the last quarter to $11.5 billion. We continue to see solid growth in governmental deposits due to seasonal tax collections and higher non-interest bearing DDAs and low-cost savings accounts.
We also saw CD balances contract $257 million. The overall cost of these deposits declined by 16 basis points to 26 basis points, from 42 basis points for last quarter.
The retail team did a great job retaining CDs that were maturing and redeploying these deposits into DDA and savings accounts. Turning to commercial lending on the next slide, we continue to manage our well diversified commercial loan book.
In the warehouse lending book, we’ve been using our quarter end balance sheet to accommodate the needs of our customers, despite this having a direct impact on our period end capital ratios. Momentum built in prior quarter carried over this quarter as warehouse loan balances remained elevated which is a testament to the strength of the relationships, we’ve built with our warehouse customers.
In commercial real estate, we’re in constant contact with our customer base. The home builder book continues to perform well.
The result of doing business with strong and experienced client and the close relationship that those clients have with our lenders here at Flagstar. The C&I book remains well diversified, and we’re starting to see our customers get their business back on track.
We’re taking steps now to build our relationships in our markets so that we can be in a position to fully serve these customers when the opportunities present itself. I’ll now turn things over to Lee.
Lee Smith
Thanks Reggie and good morning, everyone. We’re thrilled with how our mortgage origination; mortgage servicing businesses have performed in what was unprecedented year.
Both business lines have demonstrated their resiliency and delivered important and significant non-interest fee income for the bank in its low-rate environment. During the year, we generated an incredible $971 million of gain on sale revenues including $232 million in the fourth quarter as we continue to leverage our diversified mortgage platform in a strong mortgage market.
We ended the year servicing or sub-servicing approximately 1.1 million loans consistent with the end of the third quarter and where we ended 2019. What is noteworthy however, is we processed over 350,000 pay offs during the year given the low interest rate environment and boarded over 290,000 of non-Flagstar originated loans.
A remarkable achievement in this highly volatile work from home environment. The earnings generated from our mortgage origination and servicing business have contributed significantly to our overall earnings per share of $9.52 for the year and given mortgage another economic forecast for 2021.
We believe the foundations are in place for us to continue to be successful and generate strong returns for our shareholders. I will now outline additional key operating metrics from our mortgage and servicing segments during the fourth quarter and full year.
Please turn to Slide 19, quarterly and full year operating highlights for the mortgage origination business include. We’re very pleased with our gain on sale revenues at $232 million during the quarter which held up remarkably well in a remarkable year for mortgage.
Both volume and margins remain seasonally strong as we continue to see robust refinance and purchase activity in all channels. One channel that did standout was our consumer direct or direct lending business where we saw 20% increase in lot volume and 21 basis point margin expansion quarter-over-quarter.
this is a channel we’ve been actively growing in 2020 and it also plays a key role in our recapture capabilities. We expect to see continued growth in this channel throughout 2021.
Refinance activity accounted for 64% of our lot volume during the quarter and retail accounted for 36% of lot volume up from 33% in the third quarter. Mortgage closings were $13.1 billion in the fourth quarter, a 9% decrease from the previous quarter given the seasonal holidays and employees using PTO towards the end of the year and mortgage operations team continues to operate effectively in this work from home environment.
With increased capacity 47% in 2020 versus 2019 and we’ve continued to hire and train new fulfilment staff in the fourth quarter setting us up well for 2021 given the strong mortgage outlook. The increasing capacity in the fourth quarter on both for sales and operations side of the business together with higher percentage of retail business and lower closings even the holidays, drove the increase in mortgage non-interest expense to closings from 1.02% to 1.18% quarter-over-quarter.
During the quarter, we started to roll back some of the overlays and product holds we put in place as a result of the pandemic as we became more confident around market liquidity in the economic outlook. At period end, we have approximately $2.5 billion in Ginnie Mae early buyouts on our balance sheet.
Of this approximately $1.9 billion were result of borrowers obtaining to forbearance as a result of the pandemic. The accounting consequence of owning the MSR is to show them as early buy outs whether you buy them out or not.
As we’ve analyzed these loans in more detail, we believe $800 million will cure through the partial claim process and our intention is to buy out these loans and re-securitize them. The gain on sale benefit from doing this is approximately $32 million, $23 million of which will be realized in the second half of 2021, a $9 million in 2022.
We think a further $250 million will queue up through a modification, and again we will buy these loans out and re-securitize, realizing approximately $10 million of gain on sale revenue, $7 million in 2021, and $3 million in 2022. If anything from the remaining population of $850 million we’ll secure through a partial claim or modification, we would buy them out, resecuritize and realize the gain on sale benefit.
Given the increase in home prices over the last few years and equity most owners have in their homes, we don’t anticipate many borrowers going into foreclosure following the end of the forbearance period. Finally, given the slightly smaller [indiscernible] of the mortgage market in Q1 versus Q4, from the agencies and MBA and continued tightening of margins, we forecast gain on sale revenues to be between $200 million and $220 million in Q1.
We couldn’t be more pleased with the performance of our mortgage business in the fourth quarter and during 2020. We believe we will continue to be a meaningful contributor to the bank’s earnings in 2021 and beyond particularly given the low interest rate outlook.
Moving to servicing, quarterly operating highlights for the Mortgage Servicing segment on Slide 20, include, we ended the quarter servicing or sub-servicing approximately $1.1 million loans, of which almost $870,000, or 80% a sub-service further MSR owners. The number of loans serviced or sub-serviced stayed relatively flat quarter-over-quarter, as we have it in excess of 100,000 non-Flagstar originated loans.
And despite the high levels of refinance activity, we’re able to replace runoff with new loans from our mortgage origination business, another advantage of our business model. Today, we have the capacity to service, sub-service two million loans as well as provide ancillary offering such as recapture services and financing solutions to MSR owners.
If you look at Slide 37, you’ll see that we’re generating $5 million to $7 million of operating profit before tax for every 100,000 loans we add for the platform as we continue to achieve economies of scale benefits in this business. As it relates to forbearance through December 31, 83,759 borrowers represented 8% of the first lien mortgage portfolio that we either service or sub-service have requested forbearance relief because of COVID-19.
We’ve seen a significant decrease in new forbearance request since peak weeks at the outset of the COVID pandemic. Off the 83,759 borrowers in forbearance at year end 12% are current, so 7% of the loan but with service or sub-service are actually using forbearance.
The peak number of loans in forbearance was 129,332 and as of December 31 that number has declined by approximately 45,000 or 35% as borrowers who had initially opted in, have opted out, paid off their loan, reached out to say their hardship has been resolved and there is loan is current or had their loan modified. During the quarter, we sold $2.6 billion in Bulk and $2.6 billion in Flow for a total of $5.2 billion in MSR deals.
The market for MSRs is certainly bouncing back after it dried up at the outset of the pandemic and our MSR to CET1 ratio is currently 16% significantly below the 25% threshold before it becomes capital punitive. Finally, custodial deposits averaged $8.5 billion in the fourth quarter, a 16% increase compared to the prior quarter.
Our sub-servicing business has had another successful year despite the volatility and uncertainty brought about because of COVID-19. It complements our mortgage origination capabilities and provides several other benefits to Flagstar including low-cost deposits to help fund the balance sheet.
This concludes our prepared remarks and we will now open the call to questions from our listeners.
Operator
[Operator Instructions] our first question comes from Bose George with KBW.
Bose George
I wanted to ask first about the net interest margin guidance. You noted that it’s going to be roughly flat in the next few quarters.
Just what are your thoughts there in terms of expectation for the warehouse? So it’s obviously been very supportive to the margin, how do you think that sort of plays into that guidance.
Jim Ciroli
I think we can expect to see more of the same in warehouse. We’ve been maximizing our balances there based on the capital company.
We’re going to continue to be disciplined around that. But given the fact that the mortgage business appears to be so strong in the first quarter.
I think it’s a business that’s going to continue to be very helpful to us in maintaining our margin long forward. Reggie, anything you’d like to add on that?
Reggie Davis
No, I think that’s right. We’re very selective with the borrowers that we do business with and we’ve tried to build that business as a long-term business.
And so it’s less about price and more about our ability to fulfil and be consistently there for them. And so we feel really good about the dynamics of the portfolio we built and that business obviously still had a lot of strength.
Jim Ciroli
Yes, that’s good quite Reggie. The pipeline in terms of incoming new business is still strong and so as we gain more capacity just because of growth and capital and obviously we’re generating a lot of capital right now that will allow us to continue to bring that new business online.
Reggie Davis
And we’re still investing in that business and we’re improving the technology platform to drive greater efficiency there. So, we really like that business.
Bose George
Okay, great thanks, that’s helpful. And then actually I wanted to go back to Lee’s comments just on forbearance, on the GSC forbearance side.
Can you remind us what the deadline is for that? Is there a clear deadline for when that ends?
You guys still doing forbearances there, how does that sort of that program is going to play out?
Lee Smith
So, if you remember Bose, under the CARES Act, we were allowed to offer two six months forbearance periods and so if you think that came into play, sort of around April when we look at when most of the loans are going to be ending their second six-month forbearance period, it is April of this year. So, unless there is new announcement further extending that, the way it’s currently constructed most of the loans because most opted in when it was made available will be coming out around April time.
Bose George
Okay. But are new forbearances are being offered now, so can a borrower be a new forbearance currently?
Lee Smith
Yes, they could call and [indiscernible] forbearance, correct.
Bose George
Okay, perfect. Thank you.
Operator
Our next question comes from Scott Siefers with Piper Sandler.
Scott Siefers
I was just hoping and I know you don’t like to provide too specific guidance. But gain on sale margin obviously a huge topic.
Just wondering even qualitatively any thoughts you can give on sort of the ability to support because I guess as I look at things, in addition to just the normal market ebbs and flows. What’s a little more idiosyncratic to Flagstar is just your kind of ability to create as you’ve been doing richer origination mix which I would think would hold up your margins a little better than perhaps the industry at large.
So, would be curious to hear any thoughts on sort of where you see things and how Flagstar in particular supports.
Lee Smith
Yes, Scott. Its Lee.
Good morning. We rely on the primary, secondary spreads.
And if you look at the primary, secondary spreads, that was 1.71 in Q3, and in Q4, they were 1.59. So, we did see a little bit of tightening in the fourth quarter and we’ve seen a little bit of tightening in the first quarter or month-to-date January.
The advantage that we have as you mentioned and we’ve spoken about is, we have the diversified mortgage business and what I mean by that is, we’re originating in all six channels whether that’s bulk, delegate correspondent, non- correspondent, distributive retail or direct lending. And we’re able to maximize earnings based on where we get the biggest advantage and guide capacity to the channel where we think that serves us, that’s how we take advantage of it.
But at the end of the day that primary, secondary spread and as we’re seeing that come in, that does affect us as it effects every originator.
Jim Ciroli
Yes, and I would add, Scott. We really do focus on the revenue targets and what’s the best way to get there is and so, the margins - obviously they’re very, very important.
The market will give you, what the market will give you and then you got to figure out what are the best opportunity there is to get to your revenue target. I think we’ve done that pretty well in Lee’s speech he made reference to the fact that we’re seeing great success in grown our direct-to-consumer business and obviously that’s a business with a pretty strong margin.
So, we’re very bullish on the mortgage business and its strength going forward here. So we’ll continue to focus on the revenue target and you heard Lee say $200 million to $220 million.
So when you think about that against fourth quarter given what the market thinks is going to happen in Q1, that’s a pretty good number if we get there.
Scott Siefers
Yes, okay that’s perfect. I appreciate those thoughts and then separately I guess this is a more of an emerging issue.
But so the GSC’s are now limiting the number of lenders that can access the cash window. Just to be curious, although I know it’s sort of newer issue, to what degree have you guys thought about that.
Are there any opportunities that presents to you guys or how are you thinking about it, at a top level?
Lee Smith
Yes, it is an emerging issue Scott. Because it’s the cash window it doesn’t affect us.
We obviously operate in a scale and so I think that it’s going to affect the smaller originators. It’s not going to effect as much or at all the big originators who are operating at scale like ourselves and some of the other big names.
In terms of opportunities, I need to think about that more. But I think the effect is going to be on the smaller originator as a set.
Sandro DiNello
Which should be a positive for our TPO busines, so particularly I would say our business with small correspondent and as you know, we historically - Flagstar that was its bread and butter was the small correspondents and frankly as many [indiscernible] were able to get into the cash window - don’t even think it’s a book space that had an impact on us. So, it remains to be seen where that goes but it could be a benefit to those mortgage originators that have a strong third-party business.
Scott Siefers
Yes, okay. Perfect.
Thank you guys very much.
Operator
Our next question comes from Daniel Tamayo with Raymond James.
Daniel Tamayo
Just a question on the expenses first for Lee. Specifically, on the mortgage side, you mentioned in the release and talked about it being driven by the efforts to expand capacity as well as higher retail mix.
It sounds like that higher retail mix will continue to be the case. So, I’m expecting that you would say the mortgage expense ratio, the closing would be a little bit higher than what you were thinking prior - how are you thinking about that number going forward?
Lee Smith
Yes, I would actually say slightly - I think that it will be in the same zip code. I think the retail mix will sort of be similar to what you’ve seen in the last couple of quarters and I think that 1.18% result, that I would expect just to be in a similar zip code next quarter so that’s how I would think about it.
Jim Ciroli
Danny back to my earlier comment about managing to the revenue. We really managed net revenue when it’s all said and done.
So, if you’re generating business from higher expense category or delivery channel then you’re going to need more revenue to support that and I think we’ve shown our ability to tie the revenue changes to the expense changes and that will continue to be the case. So, what I’m saying is, if I was certain the mix of retail went way up which caused our expenses to go way up and that probably would mean, if we’re doing it right, the [indiscernible] guided should be more than what we guided you to.
So, I just want to be real clear about this we’re very careful in terms of how we’re managing net revenue in the business.
Daniel Tamayo
No, that’s great. And you certainly have proven that.
And then I guess on the non-mortgage side maybe for Reggie here. How do you think about the expenses and that side of the businesses were as were perhaps anticipating a shift on the balance sheet, is there any efficiency ratio or profitability target that you used to govern there or is it just too tough to pin down given all the moving parts?
Reggie Davis
Yes, I don’t know about overhead efficiency target. But we’re trying to basically keep expenses flat.
We are looking for opportunities where we think that the spend can be optimized in certain channels and businesses and we’re also looking for opportunities to move expenses from non-growth areas where we think we have less growth, things like technology and other things that ultimately drive the overhead efficiency ratio. So that’s kind of the mode that we’re in.
it’s hard to pick a number right now.
Daniel Tamayo
No, I understand that. And then finally I guess given the stronger warehouse business and really taking share there your ability to grow that business and the demand everything.
That you’ve mentioned, how does the more traditional, commercial lending fit in and CRE and the C&I especially the C&I has been kind of declining over the last year or so understandably. How do you think about - the growth of that business given the kind of what we’ve seen and what you’ve expecting in the warehouse business going forward?
Reggie Davis
That’s a great question. It’s funny not having benefitted from having the warehouse business in past experiences.
It’s a wonderful thing. Because what it does it takes the pressures off of us on the commercial side and so we’re being really selective about things that we’re looking at, with their prior existing clients and you know those clients extremely well.
But we’re looking at external opportunities where we have very strong sponsorship, very strong project and we’re kind of cherry picking for lack of better term and we’re not feeling any undue pressure because of the benefit of the warehouse business to do anything other than that.
Sandro DiNello
Yes, I think this is a time where you need to be very patient with the commercial business whether it’s CRE or C&I, anytime you’re in a recession. I think you got to be really patient and particularly given this unique recession that we’re in now that’s more about health crisis than it is anything else and as Reggie said it’s a terrific advantage to be able to grow the warehouse business by billion of dollars without adding any risk to the balance sheet.
So, we’re going to continue to operate this way and when the right opportunities present themselves. We’ll jump on them and when the market gets more certain than we’ll be more aggressive.
Daniel Tamayo
All right, great. That’s all I had.
Thanks for all the color.
Operator
Our next question comes from Steve Moss with B. Riley Securities.
Steve Moss
On the reserve ratio here - continue to maintain a very strong allowance just kind of curious what you want to see for reserve releases going forward here?
Sandro DiNello
Yes, I wouldn’t project any reserve releases at this point. I don’t know how you could.
I don’t know how to project either reserve increases or reserve decreases and if you got a crystal ball. I’ll be happy to borrow it for a couple of days.
There’s just no way to know what’s going on here, with our references unusual type of recession. So, I think for the foreseeable future it’s prudent for us to stay right where we’re at until we have more information that will change our mind.
As I think you know Jim’s [ph] pretty specific about how we arrive at our ACL using Moody’s and so on so forth. We’re going to continue to follow those analytics and add the qualitatively where we think it’s appropriate.
I’ve always said since I’ve been CEO here, we’re going to operate on the conservative side, conservative range when it comes to loss reserves and this is not the time to change that kind of thinking.
Steve Moss
Okay, that’s fair. On capital here obviously very strong and looking another good quarter here.
just kind of wondering when the appetite for additional repurchases for acquisitions?
Sandro DiNello
I’m sorry would you repeat that?
Reggie Davis
Stock purchases or acquisition?
Sandro DiNello
Any and all certainly possible. We are open to business combination, business acquisitions, bolt-ons, where it makes sense.
Where we did use our ability to repurchase shares in the last quarter so that’s certainly an option. We increased the dividend.
Last night we announced that. So those are always the used capital and they’re all on the table.
But it’s got to be the right situation. We’re patient organization and we’ll wait for the right situation and if we don’t find the right situation in terms of a business opportunity then we’ll figure out another way to reward our shareholders.
They’ve been very patient with us and they’re seeing the benefits of that now.
Steve Moss
Okay, that’s helpful. And then in terms of just the loan fees here.
I know there is elevated for a loss of mitigation forbearance just kind of wondering how sustainable when you think about that, is it more like things come of in April perhaps that will pull back a bit, any color there would be helpful?
Lee Smith
So, there’s few things going on - you’ve got some of the forbearance fees. But we’ve been waving late fees and charges as a result of loan being in forbearance.
So, when the forbearance period burns off that comes back. And then board loans as I mentioned and there’s boarding fees that are included in there.
So, as we continue to board loans. We would expect to continue to generate those fees.
So, there’s lot going on there. I think the $5 million to $7 million of operating profit for every 100,000 loans we add to the platform.
I’m confident in that guidance whether we’re in the forbearance period or not.
Steve Moss
Okay, thank you very much. Good quarter.
Operator
Our next question comes from Giuliano Bologna with Compass Point.
Giuliano Bologna
I guess turning back to topics kind of few times on the warehouse line side. You obviously done an incredible job growing the warehouse line business and as you’ve alluded to there’s a lot of demand out there.
For other opportunities within that business. I’m kind of curious what the pipeline looks like because you’re obviously managing at the capital and there which implies that there are other opportunities out there that you could take advantage of, if capital wasn’t the constraint here.
what I’m trying to figure out is kind of like what the magnitude of the opportunity that you’re potentially turning away might be because that could be relevant when the mortgage cycle does cool down eventually in terms of your ability to kind of take more share going forward.
Sandro DiNello
We have never provided specific guidance on the pipeline and it’s a difficult question to answer because you don’t know how much business your rep side in the field are actually not encouraging because they know that we’ve got some limitations. But that said, I can tell you as we go into committee every week.
There are new requests every week that come into our committee and they’re not small request. In order to come through the committees meetings that I go, go through it, have not been pretty significant request.
So it’s been that way all year, in 2020 it’s been that way so far in 2021. So it’s difficult for me to say how strong or how long that will continue.
But I don’t know how it could be much stronger right now. Reggie, anything you want to add on that?
Reggie Davis
No, I think that’s right. We don’t - it’s impossible to forecast.
We thought we might see some degradation of the client toward the end of the year. But honestly the business has continued to be really strong and so we’re - we’re open for business.
Giuliano Bologna
That makes sense. And then on the mortgage origination side, you obviously done a lot on the channel mix side in terms of shifting around channels and managing very effectively on the net margin side.
I’d be curious when we think about you have the direct channel. What kind of upside there is there or and to extend what kind of recap rates you’re achieving or where that could go just in terms of thinking about the upside opportunity on the direct channel side?
Jim Ciroli
We don’t provide guidance or our recapture rate. But as I mentioned we onboarded 290,000 of non-Flagstar originated loans in 2020 and so we’re doing something right because if we weren’t, we wouldn’t be onboarding that many loans and so we’re competitive as it relates to recapture.
In terms of the consumer direct channel, yes, we have been growing that. We board in a significant number of strong LO’s who are selling Flagstar not just selling rate.
These are high quality LO’s and I think these protentional for continued upside in this channel and the other thing, in this COVID environment where people are doing more things remotely. I think that’s another opportunity for direct lending to continue to grow.
I think people are more comfortable doing things digitally or over the telephone versus in person and so we feel very good about the potential for direct lending channel.
Reggie Davis
Yes, I think that’s absolutely right. I think the opportunity and that channel is significant and I think we’ve got the right leadership there and so I’m optimistic about our opportunities there.
Giuliano Bologna
Yes, makes a lot of sense. The only thing I’d be curious about kind of a quicker question.
Obviously, the implied outlook or the outlook implies some pretty strong performance which will obviously continue to add to capital. I’m perhaps curious what kind of asset growth potential there might be out there or how you think about the roll forward in terms of kind of assets versus capital in the next couple of quarters or obviously you might have some growth [indiscernible] it’s hard to tell outside of that?
Sandro DiNello
Giuliano, you’ve been following the company and our history is that, we’re comfortable in this capital area. And so we’re going to maximize the reinvestment of our capital the way we always have, so we’re going to find way to grow the balance sheet, to match the growth and capital and if we can’t than to go to previous question, then we look for different ways to invest our capital.
So it’s hard to give you, reluctant to give you a target growth for the balance sheet. But we’re going to grow as much as we can, while still maintain proper capital levels.
Giuliano Bologna
That’s good. I really appreciate the time and I’ll jump back in the queue.
Operator
And our next question comes from Henry Coffey with Wedbush.
Henry Coffey
Turning all the way back to the discussion about mortgage. I think the comments on gain on sale margin were very helpful.
The overall tone of the market. What are your thoughts in terms of where the various parties that create mortgage estimates are going to take their numbers?
And there is some real heating up going on without getting into all the details, you’ve - you could call it four or five parties that are trying to expand their muscle in the broker-direct channel. You’ve got I assume a fairly robust set of competitors already in correspondent.
What are your thoughts there? One of the things that the broker direct parties talk about is channel conflict.
The new battle cry is, don’t give your loans to Rocket, they’re just going to steal your customers. we’ve heard this from people.
So as you look at these different channels, you’ve got a lot of different places to deploy capital. Are there some channels that are just going to get too hot to handle, is the market going to come in bigger or smaller than be about $3 trillion estimate that seems to be out there now?
I’m just wondering what are your thoughts about the overall tone of the market and where competition goes by channel?
Sandro DiNello
I’m going to let Lee answer the important part of your question. But I do want to make one comment relative to the reference you made to Rocket.
We’re not going to go down there. We’re not going to worry about what others says about other companies.
We never talk about other companies and I don’t buy the argument that there is channel conflict. We have operated in this organization across channels for decades without any conflict.
We provide great service to everybody and every channel and we will continue to do that. So I just don’t think any of that makes any sense.
So, we’re going to keep doing what we’re doing and I don’t think any customer wise would ever tell you that the way we handle their business is anyway impacted by the fact that we operate in six different channels. I just won’t buy it and with that, I’ll let Lee answer like I said important part of the question.
Lee Smith
Thanks Sandro. Morning, Henry.
So, let me talk about the market first your few questions and your comments. I mean look I’m very bullish on the mortgage market in 2021.
If you look at the agencies and MBA forecaster and the MBA updated yesterday. So this is hot out of press and you average them out.
We’re looking at a $3.3 trillion market, that’s the second biggest mortgage market in put in year after 2020 and I think it’s going to be strong but the refi and the purchase side. On the refi side, there’s been a couple of studies in the last six weeks or so - there’s still 19 million good borrowers out there that could save 75 bps if they were to refinance at current rate.
good borrowers meaning minimum [indiscernible] code 720 at least 20% equity in their homes. And that was confirmed by one of the major investment banks over the holiday same as 80% mortgages are in the money for the tune of 50 bps.
If they were to refi current rate. So I think the refi way, has got some room to run here which I think is positive.
In terms of the purchase mortgages, the low rate are making homeownership much more affordable particularly for first time home buyers and the low rates are offsetting some of the home price increases that we’re seeing. Home builders are saying that home starts are going to increase 16% year-over-year so that’s going to put inventory into the market and then I mentioned COVID couple of moments ago.
People are much more flexible in their work-life balance and so we’re seeing a lot of movement because of that. And then the final thing I’ve said on purchases, the MBA themselves have said they expect this year to be the strongest purchase market ever.
And I feel very bullish on the mortgage market in 2021. The only thing I’d say based on what Sandro commented on is look we have proven our ability to optimize and maximize revenue.
So, we will look because we have the benefit of diversified mortgage business. We will look to see where the opportunities are and we will focus resources there and we’ve done that and you’ve seen us do that in our result and I would just emphasize, we’ve never really to conflict - we just haven’t running to conflict and if you think of Michigan, which is where we’re based.
We have a lot of retail business TPO business that’s not something we’ve had a problem with and I think it is because we offer great service to all of our customers.
Reggie Davis
The MBA was really late for the party relative to their projection for 2021. We felt when Fannie Mae came out early with their increased projections, that was the right number and that’s one of the reasons why you saw us continue to build out capacity and so we have some additional expenses there in Q4.
We’re prepared for this. So, we’re ready for the market and I think if the estimates that are out there are wrong.
I think you’ll probably agree with me. They’re probably wrong on the low side.
Henry Coffey
No, it’s amazing. I’ve never seen anything like this in 34 years of being an analyst.
So, should be fun. You do have a bank.
You have an incredible bank and generally when we analyze it, there’s a tad of asset sensitivity in there. How do you think that plays out now that long-term the 10-year is up over 100 basis points?
So obviously it doesn’t sound like it’s going to slow down, the mortgage market. Is there a room for margin expansion?
Is the yield curve steep is a little bit from all this? What should our thoughts be?
I know you’ve given guidance around the world stability but there is some asset sensitivity in your equation and we’re wondering how it plays out?
Reggie Davis
I think it’s time I let Jim talk. We can’t [indiscernible] without Jim saying [indiscernible].
Jim Ciroli
Henry just to back to my prepared comments. What I’m saying there is, I think we’re extremely asset sensitive.
We’re as high as we’ve ever been as a company in terms of our asset sensitivity. We took actions to lengthen liability duration in this low interest rate environment.
So even if we had a steep and are come along. I think that’s only going to accrue to our benefit.
Certainly, if we see something move on the short end of the curve that will immediately accrue to our benefits. But even on the longer end, if we had a steep and are - I think there are - I think we’re rather immune on the liability side and there are things that we can take advantage of that environment that will help our net interest income.
The other thing I’ll say and I did put this in my prepared remarks. But with the payoff of the senior notes that we have, keep in mind that those notes cost us over 6% and we’re going to effectively replace that funding at something that’s around or maybe a little bit less than 25 basis points for that alone in 2021 will give us about $3.5 million of lower interest expense per quarter and if you look at Q4’s interest expense that’s about 15% of our total interest expense in just that one move.
So again, I feel pretty confident about where net interest margin is and our ability to maintain that.
Sandro DiNello
[Indiscernible] and our company with the mortgage business makes all the sense in the world. So, we’re that’s the strategic position that we’ve taken.
Henry Coffey
My last question and probably directing this to Lee ultimately. But you had a very successful branch acquisition that which you’ve integrated, done a great job.
You’ve got the capital. You’ve increased the dividend.
The stock is performing exceptionally well. As you look longer term particularly in the mortgage sector would you do another acquisition there and if you would, would it be a branch-based company, a DTC company.
If you have thoughts in that direction, what are you thinking about?
Sandro DiNello
Yes, I don’t think that’s the best place for us to go in terms of a business expansion. I don’t think the market would reward that and I think we are at a level in our mortgage business in terms of scale and such that is very comfortable and I think what we do now with mortgage, it’s simply take advantage of the opportunities that the market gives us as oppose to look at the future growth of the organizations revenue.
I think we look to the banking side for that and we can certainly use servicing as a way to support the mortgage business as well as support our funding. Let the mortgage business generate a lot of capital at times and enough capital other times and use up to build up the revenue that comes in from our banking business.
I think we’ve got a great platform to grow from in the banking side. I think Reggie’s got a vision that’s going to take us in a - we expect that differentiated place that can provide some real opportunities on the banking side.
I think we’re strong enough right now in terms of the currency that we have to use in potential bank acquisitions. We’re in a position because of how much capital we delivered and generate as we go through the next 12 to 24 months that the opportunities to extend our company into markets that were not currently in and give us access to customers, we don’t really have access to is really the right way to look at growing the company.
And then mortgage is exciting and right now I think a lot of my colleagues in the banking business who I’ve found in the mortgage business may wish they were in it today and I’m thankful that we are. But [indiscernible] think that long-term in terms of creating shareholder value that’s smart place to lay our chips.
HenryCoffey
Great, thank you very much.
Operator
We have no further questions at this time. I’d like to turn the conference back to Sandro DiNello
Sandro DiNello
Thank you, Lauren. We’ve talked this morning about financial success that was off the charts for the quarter and the year and I’m incredibly proud of what we’ve achieved.
But I’m equally proud of the success off the financial field, of what we’ve accomplished for our employees and customers and our communities. Certainly, it was the year of diversity, equity and inclusion and without question Flagstar was all in.
The killing of George Floyd became a catalyst for us to accelerate our diversity and inclusion journey and to make equity part of it. We realized more than ever before that the foster work environment where employees feel comfortable and do their best to work.
We’re here to acknowledge what was happening in the outside world and this amplify the dialogue with our employees that meaningful strengthened our culture. Our customers were in spotlight in 2020 as we work to help them overcome the challenges brought on by the pandemic.
We made PPP loans to everyone who asked including many who were not our customers at the time and we work closely with our commercial customers to help keep them afloat and with our consumer customers more than 100,000 of them with forbearance. On the community side we gave more grants than ever before many to minority owned small businesses as well as to non-profit committed to helping those impacted by the pandemic.
We supported programs for restaurants to provide meals to hospital workers and support the local food bank with donations. With our help with small business converted from manufacturing, supplies to [indiscernible] to making personal protective equipment.
With the cellular apartments benefitted from donations of masks and all of our communities benefitted from our elevated level of giving and our focus on helping those hardest hit by the pandemic. These were just few of the many actions our company and our employees took on to give back to those in need.
In summary, the quarter and year were successful across the board from the performance all our business lines to our progress in the ENI to our outreach to our customers and to our contributions to our communities. This level of success and progress couldn’t have been accomplished without the tireless effort and sacrifice from all of our team members.
Thanks to all of you. I know I say it all the time.
But I really mean it. The success of this year belongs to you.
Thanks to all for spending a few minutes with us this morning. I look forward to reporting on Q1, in April.
Operator
And that does conclude today’s conference. We thank you for your participation.
You may now disconnect.