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Rating Action:

Moody's assigns first-time Baa3 long-term issuer rating to Flagstar Bancorp, Inc.; outlook stable

22 Oct 2020

New York, October 22, 2020 -- Moody's Investors Service, ("Moody's") has assigned first-time ratings to Flagstar Bancorp, Inc. and its bank subsidiary Flagstar Bank, FSB (together "Flagstar"). The bank was assigned a long-term issuer rating of Baa3 and long- and short-term deposit ratings of A3/Prime-2, together with a standalone Baseline Credit Assessment (BCA) of baa2. Moody's has assigned long- and short-term Counterparty Risk Assessments of Baa1(cr)/Prime-2(cr) and long- and short-term Counterparty Risk Ratings of Baa2/Prime-2 to the bank.

Moody's also assigned a long-term issuer rating of Baa3 to the holding company as well as assigned provisional ratings to Flagstar Bancorp, Inc.'s shelf registration. The shelf was rated (P)Baa3 for senior unsecured, (P)Baa3 for subordinate, (P)Ba1 for cumulative preferred stock and (P)Ba2 for non-cumulative preferred stock.

The ratings outlooks for the bank and holding company are stable.

Assignments:

.. Issuer: Flagstar Bank, FSB

.... Adjusted Baseline Credit Assessment, Assigned baa2

.... Baseline Credit Assessment, Assigned baa2

.... LT Counterparty Risk Assessment, Assigned Baa1(cr)

.... ST Counterparty Risk Assessment, Assigned P-2(cr)

.... LT Counterparty Risk Rating, Assigned Baa2

.... ST Counterparty Risk Rating, Assigned P-2

.... Issuer Rating, Assigned Baa3, Stable Outlook

.... ST Deposit Rating, Assigned P-2

....LT Deposit Rating, Assigned A3, Stable Outlook

.. Issuer: Flagstar Bancorp, Inc.

.... Issuer Rating, Assigned Baa3, Stable Outlook

. Senior Unsecured Shelf Rating, Assigned (P)Baa3

. Subordinate Shelf Rating, Assigned (P)Baa3

. Cumulative Preferred Stock Shelf Rating, Assigned (P)Ba1

. Noncumulative Preferred Stock Shelf Rating, Assigned (P)Ba2

Outlook Actions:

..Issuer: Flagstar Bank, FSB

....Outlook, Assigned Stable

..Issuer: Flagstar Bancorp, Inc.

....Outlook, Assigned Stable

RATINGS RATIONALE

Flagstar's baa2 BCA reflects the strength of the bank's mortgage origination and servicing businesses, which provide strong levels of fee income and mitigate profitability pressures in the current low interest rate environment, as well as the bank's somewhat weaker capitalization and funding profile relative to US regional bank peers. The BCA also takes into consideration the benefits to creditors from solid asset quality in its loan portfolio despite high levels of loan growth. Moody's assessment of Flagstar's credit fundamentals results in its bank-level BCA being positioned two notches below the median of Moody's rated US bank universe, which is currently a3.

Moody's assessment of Flagstar's asset risk recognizes the improved diversification in its loan portfolio, reducing its concentration in residential real estate from 71% of its gross loan portfolio at year-end 2015 to 50% at 30 September 2020. Flagstar's commercial and industrial (C&I) and commercial real estate (CRE) portfolios have grown significantly in recent years but represent a modest portion of its total loan portfolio at 8% and 12%, respectively, at 30 June 2020. Positively, the bank does not have a CRE concentration, with CRE accounting for 1.5 times its Moody's tangible common equity (TCE) as of 30 June 2020.

Moody's also incorporates in the BCA the operational and regulatory risks stemming from the size and scale of Flagstar's mortgage origination and servicing business, which is large relative to its balance sheet. Positively, Moody's views Flagstar's strengthened risk governance and infrastructure favorably and supportive of continued strong asset quality. Moody's believe Flagstar has an adequate operational risk infrastructure commensurate with its sizeable mortgage origination and servicing operations. Beyond its national mortgage operations, Moody's believes Flagstar has adequate credit underwriting and loan monitoring processes in its loans held for investment portfolio, including its sizeable mortgage warehouse portfolio. This portfolio has grown very rapidly in recent periods, nearly tripling in the first nine months of 2020. However, Moody's believes the likelihood for material credit losses is low given the strong underwriting structure.

Flagstar's capitalization, as measured by Moody's-calculated TCE to risk-weighted assets (Moody's TCE ratio), was 9.0% as of 30 June 2020, which in Moody's view is the weakest aspect of its financial profile. Even so, Moody's expects that over time Flagstar's capitalization will improve, as mortgage warehouse and residential mortgage loans held for sale volumes subside. In addition, Moody's believes management has flexibility to manage its regulatory capital position, if required, such as in a stress scenario.

Flagstar's profitability profile is supported by its business model, which drives sizeable fee income from residential mortgage banking. As such, its profitability has proven resilient in different interest rate environments. Currently, its solid residential mortgage franchise has boosted its profitability given strong demand due to the decline in interest rates, driving elevated residential mortgage origination, particularly refinancing mortgage volumes. This has offset the impact of lower interest rates squeezing profitability in its community banking segment and sizeable loan loss provisions owing to the expected higher credit costs from the economic slowdown due to the coronavirus pandemic.

Flagstar's liquidity and funding profile is not as robust as many US regional bank peers. While Flagstar has grown its core deposit base in recent years, it has not kept up with the pace of its loan growth and in recent periods has been driven by sizeable growth in custodial deposits. While custodial deposits are a source of inexpensive funding, they are also a source of deposit concentration at Flagstar. Regarding liquidity, Flagstar's securities portfolio is modest and has declined as a portion of its balance sheet as the bank has grown its loan portfolio.

The stable outlook for bank and holding company is a reflection of Moody's view that Flagstar's credit profile will remain stable over the next 12-18 months.

Flagstar's deposit and issuer ratings reflect Moody's application of its advanced Loss Given Failure (LGF) analysis. Moody's believes that Flagstar Bank's deposits are likely to face a very low loss given failure due to the loss absorption provided by the volume of deposits and by more junior obligations in the bank's liability structure; hence, long-term deposits are rated A3, two notches above the bank's baa2 BCA. On the other hand, because of the comparative thinness of its debt structure, Moody's assesses the possible loss severity in all of the other debt classes to be potentially high; hence, the holding company and bank issuer ratings are Baa3, one notch below the BCA.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A sustained improvement in Flagstar's capitalization or strengthened core deposit funding base could result in a higher BCA. In addition, credit quality outperformance and sustained robust profitability relative to similarly rated peers would add positive rating pressure. A higher BCA would likely lead to higher deposit and debt ratings.

A significant deterioration in Flagstar's funding profile, operational misstep in its mortgage business or a material, sustained reduction in Flagstar's capitalization could lead to a lower BCA, as could significantly weaker credit quality relative to peers. A lower BCA would likely lead to lower deposit and debt ratings.

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Megan Fox
Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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