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Flagstar Bancorp Inc (NYSE:FBC)
Q1 2020 Earnings Call
Apr 28, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Flagstar Bank First Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ken Schellenberg, VP, Investor Relations. Please go ahead, sir.

Kenneth Schellenberg -- Vice President, Investor Relations

Thank you, Rachelle, and good morning. Welcome to the Flagstar First Quarter 2020 Earnings Call. Before we begin, I'd like to mention that our first 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 number 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.

Alessandro P. DiNello -- President and Chief Executive Officer

Thank you, Ken. Good morning to everyone listening and my apologies for the delay in getting this going today. Unfortunately, our conference call company was having some difficulties and I don't think it has anything to do with all of us being remote. So hopefully the rest of this goes much smoother than it has thus far and I hope that all of you and your loved ones have been able to stay safe and healthy, and as I said, in the spirit of proper social distancing, I'm joined remotely this morning by Jim Ciroli, our Chief Financial Officer; Lee Smith, our Chief Operating Officer; Kristy Fercho, our President of Mortgage and Steve Figliuolo, our Chief Risk Officer.

I'm not going to spend much time today on our results except for some commentary on our provision [Phonetic]. I think it's more important to tell you how we've adjusted our operations in the face of COVID-19 and how I think we will operate going forward given the uncertainty of the length of this pandemic. With respect to our results, it was a strong quarter, with earnings of $0.80 per share, stronger still if you look at our pre-provision net revenue. Details will come from Jim and Lee in their remarks.

So let me start with some comments about our provision, which totaled $14 million for the quarter. Admittedly, the provision for the quarter was difficult to estimate. We had no option, but to use an immature model to estimate life of loan losses in perhaps the most uncertain economic time in our history, and when you add the unknown impact of government assistance programs to the mix was a daunting endeavor. Frankly, I don't think there is a model that exists that can accurately predict the life of loan loss at this stage of the game. That said, based on our current data, we're comfortable with our analysis, we have a strong commercial portfolio that at the end of the quarter had no nonperforming loans and thus far we've seen no weakness. As you know our portfolio is diversified with no outsized exposure to any geography or industry including little exposure to the auto industry. Our loan concentration policy is highly granular and conservatively structured, built to be resilient to a recession. Now we find ourselves in a recession, perhaps a deep one that may linger for the next 18 months. The hallmark of our lending philosophy has been to bank only proven operators and the 11th commandment that Flagstar is [Indecipherable] lend to anyone that has walked away from the bank obligation. These principles, coupled with the fact that virtually all our borrowers are recession hardened will help mitigate credit concerns going forward.

Finally, I'll remind you that while we're a $27 billion bank in terms of assets, our commercial credits, net of warehouse loans total less than $5 billion. Thus far, every borrower is working with us and today there are all positive about their ability to weather the storm and remain a growing concern. Thus far 252 commercial borrowers representing $548 million in unpaid balances, just 11% of our commercial book, have requested payment deferrals and all were in good standing prior to their request. Business banking requests account for $71 million with C&I and CRE representing $287 million and $190 million respectively. It's worth noting that we received no deferral requests from our homebuilder clients thus far.

We are on top of every one of our credits closely monitoring and actively managing for the slightest blip. We have assisted many of these customers with a PPP loan and we will be assisting even more through the needs through lending program. We're being careful in connection with new commercial loans across outside of our warehouse business and we are pulling back on commitments wherever it's prudent and the opportunity presents itself. Even inside warehouse lending we have taken a more conservative approach essentially accepting no jumbo or non-QM loans as collateral and requiring a tighter credit box for government loans and lower advance rates for loans that we believe are higher risk.

As to our consumer loan portfolio which consists largely of low LTV, high FICO mortgage loans and high FICO of HELOCs. Thus far we have seen no material weakness in those loans. I think it's a given that the economic forecast at June 30 will be weaker than those at March 31. So, I fully expect that our ECL model will suggest a significant allowance adjustment for Q2, but just how much is impossible to predict. My opinion is that GDP will contract perhaps as much as 10% in Q2, so as much as 40% on an annualized basis, followed by slow growth in the ensuing quarters. Unemployment might reach 20% in Q2, then gradually declining as GDP improves, so not quite what I would call it, the recovery, I realize this opinion is probably on a pessimistic side of the universal thinking, but my view is that it's most prudent to prepare for the worst and hope for the best and that's exactly what we're doing.

Next I'd like to speak to how our Company responded to the pandemic and I'll start by saying I could not be more proud of our team and how we've adjusted, could not have gotten much better. We prepared for a possible pandemic in our business continuity plan. As part of that plan three years ago, we moved the vast majority of our people to laptops. Additionally, we had secured enough VPN licenses and bandwidth to move quickly and so the transition went really well. Today, over 80% of our employees are working remotely and interestingly productivity has not dropped. In fact, in the last two weeks of the month, we processed over $2 billion of mortgage loans, increased warehouse balances by over $1.5 billion, worked [Phonetic] out arrangements with every commercial customers seeking a deferral, accepted thousands of requests for mortgage forbearance and built a new technology platform literally overnight to launch the paycheck protection program and got it up and running 36 hours after the guidelines were released. We took and processed over 3,000 applications for $400 million in loans. Remarkably, all these processes were performed and management remotely. Additionally, on March 16, we eliminated in branch service at select bank branches and then a few days later, moved to drive up service only with lobby access by appointment and not one customer complaint has reached my desk.

In fact, deposit growth has been encouraging. The reduced rates aggressively following each Fed move and still saw deposit balances increase about $900 million during the quarter, and we've seen a further increase in deposits in April of over $350 million from our banking customers. So, I don't know when normal will return or what it would look like, I can tell you we will be very conservative in moving people back to our facilities. That's the right thing for our team and given how smoothly we are operating, there is no need to get ahead of a clear flattening of the curve. As always, we've always been there for our communities. To date, we've contributed almost $600,000 in markets across the country to support the COVID-19 cause, including $300,000 to a cut-and-sew company that shifted to manufacturing masks that are being donated to hospitals, only 17 of our 4700 Flagstar employees and contractors have tested positive for COVID-19 and rest of all, we all have either recovered or appear to be on the road to recovery. We believe that's a large part because we started our social distancing early on March 13. Also very pleased to tell you that we surveyed our team and 98% felt that Flagstar responded effectively to both employee and customer needs and concerns.

As difficult as the last 6 weeks have been, I do think we have seen the resilience of our business model in action. Here's why. First, I think we can sustain net interest income on the back of our warehouse business, which currently has outstanding balances of approximately $3.8 billion with a month-to-date average balance of over $4 billion. Warehouse lines are now almost entirely secured by confirming agency and government products. The portfolio provides strong returns with virtually no credit risk, 91% of these loans have rate flows. Even without booking new commercial loans outside of the warehouse, we expect to grow net interest income. Second, the mortgage business continues to be strong. Our gain on sale month to date is over $90 million and shows no signs of weakening with over 95% of the locks representing conforming agency loans [Indecipherable] time and how long this performance will continue, I think it demonstrates the power of this business in the current environment.

While we're not guiding our net interest income or locks for Q1, the Fannie Mae's most recent projection of a 10% increase in originations for 2020, that's compared to 2019 holds true, our warehouse and mortgage businesses will thrive and we will be in a position to build a credit war chest without the dipping into capital, should it be muted. To put it mildly, giving guidance right now is too much guesswork; however, I believe Flagstar is well positioned to weather the storm and come out stronger on the other side. Our profitability is strong, our capital is strong, our [Indecipherable] is strong, our liquidity is trying and our business model is working precisely as we designed it.

Finally, I'd like to make it clear that we don't expect to change our dividend posture in the near term and we're not contemplating stock buybacks at this time. I would say my comments today have been unlike anything before because we are in unprecedented times. My goal has been to give you my perspective on how I see Flagstar performing in the near future in the context of the SECs recent guidance and Safe Harbor protections. In doing so, I'm drawing on more than 40 years of experience of Flagstar and a deep understanding of the company and the quality and caliber of its employees. We are committed to doing the right thing for our employees, customers and our communities protecting their health will secure Flagstar's health. We will focus on the opportunities this environment gives us and though we will continue to manage the risks we face conservatively, we will not dwell on them. If we do that, I firmly believe we will produce the best possible results for our shareholders.

With that, I'll turn it over to Jim.

James K. Ciroli -- Executive Vice President and Chief Financial Officer

Thanks Sandro. Turning to Slide 7, our net income this quarter was $46 million or $0.80 per share. This performance compares to the $58 million or $1 per share last quarter. The decline on a linked quarter basis is largely due to the $14 million credit provision this quarter. We had adjusted net income of $37 million or $0.64 per share in the same quarter last year. Diving deeper into this quarter's performance, our pre-tax pre-provision earnings were $70 million this quarter compared to $69 million last quarter. Net interest income was down $4 million or 3% over the prior quarter. Average earning assets grew $442 million in line with our expectations. The net interest margin decreased by only 10 basis points despite 150 basis points of rate cuts in March that were unexpected. This performance was driven both by our strong core deposit franchise consisting of granular retail customers and by a well positioned well diversified loan portfolio that has a large composition of fixed rate assets and floors on many of the variable-rate loans. We will review these numbers further on the next slide.

Mortgage revenues were $96 million, a decrease of $2 million or 2% compared to the prior quarter. During the quarter, we saw gain on sale margins increase significantly as primary, secondary spreads widened to historic levels and lenders work to manage capacity. However, in the second half of March, extreme market dislocation and volatility occurred and we experienced $45 million of hedge losses, which I'll discuss further in a moment. Asset quality remained strong. Net charge-offs were 8 basis points and non-performing loans were relatively flat to year end. Our allowance for credit losses or ACL, which includes the reserve for unfunded loan commitments was $152 million at quarter end, up from $110 million at year-end. At this levels, our coverage of loans HFI is 1.5%. This was the result of our January 1 CECL adoption and the $14 million credit provision this quarter. We'll provide more details when we get to be asset quality slide and take a deeper dive into CECL. Capital also remains solid. Despite our balance sheet ending the quarter at $27 billion, up from $23 billion at year-end, all capital ratios remained above the stress buffers that we've established based on our [Indecipherable] models. Total risk-based capital was 11.2% at March 31. Our CET1 ratio was 9.2% and our Tier 1 leverage ratio was 8.1%. We'll go into more details on capital later. So, let's turn to Slide 8 and dive deeper into the income statement.

Net interest income decreased $4 million to $148 million this quarter, which was 3% lower than last quarter. Nearly half of this decline resulted from having one less day in the quarter. The results reflect a 2% increase in average earning assets led by investment securities, loans held for sale and commercial real estate loans. Deposit costs came down 9 basis points, while average deposit balances were relatively flat quarter-over-quarter excluding a decline in broker deposits.

As we dive deeper into net interest income and our interest rate risk position on the next slide, non-interest income decreased $5 million or 3% to $157 million due to lower mortgage revenues. Our gain on sale revenue was $90 million, represented a decrease of $11 million or 11% from the prior quarter. Fallout adjusted locks increased 36% to $11.2 billion and the gain on sale margin decreased 80 basis points. General [Phonetic] margins were strong, especially in our delegated [Indecipherable] channel. The Fed buying of mortgage-backed securities beginning on March 16 pushed prices on MBS much higher. This price change impacted the values of the TBA mortgage-backed securities that we fell short to hedge our pipeline closed loans held for sale. The pipeline in closed loans did not experience the same level of price appreciation before position declined in value more than the long position increased in value creating $45 million of hedge losses. See that in Slide 14 in the appendix to provide more details on what we and the industry experienced. We reacted quickly to this phenomenon, took actions to rebalance our hedge profile and made pricing changes, which improved our position by month end. In April, the Fed modified their purchases and our actions to cold which stabilized our gain on sale. Through last Friday, we recorded over $90 million of gain on sale revenue for April. While we won't forecast what the second quarter gain on sale revenue will be, this partial month result indicates that the hedging issues have not persisted. We also had a $9 million improvement in the MSR return, the result of hedging gains this quarter. Loan administration income improved $4 million due to higher average loan serviced and a decline in the LIBOR-based credit that we provide to our sub-servicing customers to the custodial deposits that they control.

Non-interest expenses $235 million down $10 million from the prior quarter. The decrease was primarily related to $5 million of balance sheet clean up in discretionary expenses that took place in the fourth quarter and did not recur. Expenses were also down as mortgage loan closings declined 8%. Overall mortgage expenses as a percentage of closings we're consistent with the prior two quarters. Lee will provide more color on expenses later.

See that [Phonetic] in Slide 9 to provide more details on our interest rate risk position at the end of the quarter. While we won't provide guidance on net interest income, we feel that we're in a good position. Looking at our commercial loan portfolio 95% of the loans are variable as we [Indecipherable] variable [Indecipherable] as Sandro mentioned over 90% of our warehouse loans have floors in them. We also have floors in many of our C&I and CRE loans, either floors that don't allow LIBOR to recalculate zero or floors with LIBOR at a higher level. Consequently, we don't see a lot of risk to spread compression coming from the asset side of the balance sheet.

Looking at deposits, we have moved pricing down in our portfolio in reaction to the aggressive actions taken by the Fed to drive short-term interest rates. At quarter end in the retail CD book, we had $1.8 billion of CDs that mature in the remaining nine months of this year and reset to lower rates. We also had $900 million of savings in money market accounts at quarter end. So, we're under some level of promotional rate, we will come off that promotional rate, which has an average cost of 1.9% and also reprice lower in the latter part of this year. Approximately 80% of our facility deposits are controlled by our sub-servicing clients and naturally price down as those rates are based on LIBOR.

In summary, we believe that the deposit rates could be a tailwind for the remainder of the year. Also on the liability side, we've executed interest rate swaps and entered into long-term FHLB advances to lock in lower rate funding lightering [Phonetic] those out between three and seven years. We've now executed $1.5 billion of this strategy, securing long-term funding at an average cost of 61 basis points well below our cost of funds in Q1. While it is difficult to predict where rates might be for the remainder of this year, we feel that our interest rate risk position is in a good place especially considering the liability sensitive nature of our mortgage business. We feel that we can protect our net interest income and net interest margin in this environment and believe that our net interest margin should be relatively flat to the first quarter. This perspective also contemplates the impact of the PPP loans that we have originated and the [Indecipherable] on those loans illustrate how it's positioned us. I would share that while the first quarter net interest margin was 2.81%, March's net interest margin was 2.84% jointly effectiveness of the actions we've taken to protect net interest income.

Let's turn to Slide 10, which highlights our average balance sheet this quarter. Average loans held for investment declined $0.3 billion, driven by a decrease in average warehouse loans and residential first mortgages. Most of the decline in warehouse was seasonal and the decrease in average residential mortgages was the result of loan prepayments. At quarter end, we saw higher level of warehouse loans and the loans held for sale. The higher levels of warehouse loans resulted from our actions to continue to support customers in the mortgage-finance business even as we took a more conservative approach with non-QM in jumbo loans and tightened the credit box on the government loans that we would support on our warehouse lines.

The loans held for sale, we saw elevated levels of newly created mortgage-backed securities. It could not be sold at reasonable prices due to supply and balances in the market. Ultimately we delivered deep bonds into our TBA in April. While this inflated [Phonetic] our balance sheet and compressed our spreads of debt, we were able to hold these assets without sacrificing execution. We expect that we will continue to have relatively higher balances in our warehouse and mortgage loans held for sale portfolios in the second quarter. Average deposits decreased $0.1 billion, driven by lower CD and wholesale deposit balances. Higher demand deposits partially offset this run off. We continue to have a strong liquidity position driven by the strength of our deposit base that access to multiple sources of liquidity both [Phonetic] on balance sheet with our high quality securities portfolio and off balance sheet with our undrawn FHLB facilities. We also plan to fund our PPP loans due to the Fed's PPP facility and have ample access to borrow at the discount window. Finally, we continue to demonstrate significant capital generation capabilities with growth in our tangible book value per share at $29.52 at quarter end, up $0.95 from year-end.

Let's turn to asset quality on Slide 11. Credit quality on the loan portfolio remains strong. Delinquencies continue to be relatively well. Only 40 basis points of total loans were over 30 days delinquent, up 7 basis points from year-end. Our allowance for credit losses covered 1.1% of total HFI loans. This coverage now includes our reserve for unfunded loan commitments, excluding warehouse loans for the denominator given their relatively clean credit loss history and considering that substantially all of these are collateralized as agency and government-backed loans, our coverage ratio would stand at 1.5% consistent with what we see other banks having under CECL. Considering the economic uncertainties related to COVID, we're monitoring our entire loan portfolio, doing additional analysis within certain sectors and relationships and staying in close communication with our significant borrowers.

On Slide 12 we wanted to share with you our exposure to those industries that we believe are more likely to be most impacted. In total we have just under $1 billion of outstanding loans in this category representing only 7% of our loan portfolio. In the commercial loan portfolio, these balances totaled $328 million. Within this group, we're focused on our exposures to automotive, hospitals, and leisure and entertainment businesses, which includes restaurants. You can see that the exposure here is relatively low. We have no oil and gas exposures. In our commercial real estate portfolio, we have $647 million outstanding in the areas most likely to be impacted by COVID including loan secured with hotels, retail properties and senior housing. With the loans in this category, our average LTV is 55% and our average debt service coverage is 1.6 times. We will be analyzing all of our broader relationships this quarter, but we know this will be a challenging time for many people. We believe that our low level of exposure to these industries is the result of our well diversified loan portfolio and the strong LTV and debt service coverage ratios, the result of our credit discipline.

So let's turn to Slide 13. We wanted to walk you through how we implemented CECL, how we got to the CECL balance at the end of the quarter and how we'll be thinking about CECL in light of the uncertain economic outlook that we have right now. Overall, we ended the quarter with $152 million allowance for credit losses, consisting of $132 million of allowance for loan losses and $20 million in the reserve for unfunded loan commitments. The reserve for unfunded loan commitments is included in other liabilities on our balance sheet. Both are available to cover credit losses in the loan portfolio. In total, our allowance for credit losses at quarter end represents 38% increase over what we reported at the end of 2019. In our adoption of CECL, we use three different forecasts of the next two years, which then reverting to a long-term average over a one-year period. These forecasts included an adverse projection that reflected severe economic distress. We weighted that model 30% at our day one adoption. For quarter end estimates, we elected to use the March 27 moving [Phonetic] baseline, which reflects the economic distress caused by COVID and also contemplates some impact of the government actions taken to mitigate the stress the forecast assumes that we are in a sudden sharp and severe recession, only partially recovering later in the year. In this scenario, GDP contracted 18% in Q2, HPI decreases 3% by the end of the year and unemployment spikes to 9% and moderates to 10% by the end of the year. We also judgmentally increased reserves in our CRE homebuilder and C&I portfolios to provide additional coverage for industries and customers that we thought could be more exposed to the stressful conditions in our forecast. We provided a portfolio by portfolio breakdown of the resulting APL [Phonetic] coverage ratios in our appendix. We also continue to maintain reserves for our loans with government guarantees and specifically measured loans we have announced are not impacted by the CECL methodology change. Finally, as you would expect, we have elected to defer the regulatory capital impact of adopting CECL until the end of 2021 after which will phase [Phonetic] in at 25% per year.

Turning to Slide 14, despite tremendous balance sheet growth, our capital ratios remain solid and nicely above our stress buffers. Total risk-based capital was 11.2% at March 31, down only 31 basis points while our CET1 ratio of 9% was relatively unchanged. Our Tier 1 leverage ratio of 8.1% actually increased 9 basis points at the same ratio pro forma with capital simplification as this ratio is based on average balances and the balance sheet growth in loans held for sale and warehouse loans happened toward the end of the quarter. I would expect our Tier 1 leverage ratio to be lower next quarter. Between loans held for sale and warehouse loan portfolio, we have approximately 540 [Phonetic] basis points of total risk-based capital and over 400 basis points Tier 1 leverage capital dedicated to these asset categories that have very little risk content. In warehouse lending, which has 100% risk weight, we've had under $5 million of losses cumulatively over the last 12 years and we took a more conservative approach during the quarter for certain product categories. I remind you that we also hold the collateral for those loans while they are on our lines and that collateral consisted almost entirely of agency and government-backed loans. Loans held for sale also have very little risk content and over $2 billion of these balances at quarter-end were Fannie, Freddie, or Ginnie Securities and were reflected in our trading portfolio.

In summary, we believe that we're operating strong at capital levels given our low risk balance sheet composition as more than half of our assets at quarter-end were in categories that have very low risk content, that is loans and trading securities held for sale, warehouse loans, investment securities, loans of government guarantees and cash.

I'll now turn to Lee for more insight in each of our businesses.

Lee Matthew Smith -- Executive Vice President and Chief Operating Officer

Thanks, Jim and good morning everyone. We're very pleased with our net income of $0.80 per diluted share for the first quarter, which increased tangible book value to $29.52. But more importantly, I couldn't be more proud of how we've responded as an organization to the COVID-19 pandemic. Nothing is more critical than the health and safety of the Flagstar family and we were able to pivot quickly and ensure the vast majority of our employees working from home by Monday March 16. This didn't just happen. We conducted a 2500-employee remote work test on Friday, March 13, and expanded our network capacity in the days leading up to stay at home orders being put in place, which increased our remote connection capacity by 10,000 users. So, those employees still needing to work from Flagstar facilities, we moved to implement distancing standards and enhanced cleaning regimen and provide necessary protective equipment to ensure they felt as safe as possible while on site. It's a testament to the morale and spirit of the Flagstar team that during this transition, we didn't miss a beat and continued to serve our customers and partners with the same exceptional standards they had come to expect from us.

As government relief programs have been rolled out, we've moved quickly and efficiently to ensure our customers can participate and benefit. We took over 3,000 applications for the paycheck protection program and have work with thousands of borrowers requesting forbearance relief on their mortgages. We've increased our call center capacity and have not seen material wait or hold times throughout this period. Furthermore, there have been no layoffs or furloughs with Flagstar. A lot has been thrown at us over the last seven weeks, but the team has stood tall and I believe the journey we've been on over the last few years, including the multiple acquisitions has helped prepare us for this moment. Now more than ever I believe our business model was showing, we previously talked about how our different business lines act as a natural hedge and in this low interest rate environment, mortgage originations because of increased refinance volume has performed exceptionally well, so has warehouse lending and these 2 businesses have been well supported by our sub-servicing operation, 52% of our revenues in the first quarter were from non-interest or fee income business and I believe this deliberate and well balanced mix will ensure continued strong performance as we move forward.

There were several other notable developments during the quarter, which included average interest earning assets increased $442 million or 2%, primarily a result of an increase in investment securities. While our net interest margin decreased 10 basis points to 2.81% as we effectively manage net interest margin compression through timely and thoughtful actions on the liability side of the balance sheet. We adopted CECL, increase in our credit reserves to $152 million at the end of the quarter, $18 million of which was the result of COVID-19 and its potential impact on our loan portfolio in the future. We maintain a diversified lending portfolio with quality credits, and no significant exposure in any one industry. Mortgage banking revenues decreased only $2 million or 2% to $96 million in the first quarter versus $98 million in the fourth quarter as we continue to take advantage of the strong refinance market.

Our sub-servicing business remained relatively flat in terms of loan serviced or sub-serviced and at the end of March, we were servicing or sub-servicing approximately 1.1 million loans, which generates consistent non-interest fee income for the bank. For the fifth consecutive year, we were awarded the Fannie Mae star performer award in general servicing which is testament to the exceptional work and commitment of our servicing call center and collections teams. Finally, our capital position remains solid and we maintain strong liquidity, particularly given our broad deposit base and our access to Federal Home Loan Bank funding, which means we're well positioned to not only weather this pandemic but also support our customers and business partners who are not so fortunate. It's undoubtedly been a trying time, but we've rallied exceptionally well as an organization, as a result of our fantastic employees, team-oriented approach and robust business model.

I will now outline some of the key operating metrics from each of our major business segments during the first quarter. Please turn to Slide 16. Quarterly operating highlights for the Community Banking segment include average commercial and industrial and commercial real estate loans increased $127 million or 3% with the growth being driven by the CRE lending group. We've been actively managing our commercial loan portfolio since the advent of COVID-19 and working closely with our customers given our relationship-based approach. Line of credit usage increase from 49% to 60% or $249 million between March 13 and April 17. We continue to be thoughtful in terms of new facilities and believe our strong credit policies and diversified portfolio will be of strength as the fallout from this pandemic becomes more apparent. Average consumer loans held for investment decreased $35 million or 1% as we ended the quarter with approximately $4.9 billion of consumer loans on our balance sheet with 82% being residential first lane [Phonetic] mortgages and HELOCs. Through April 24, we have received approximately 2000 requests for deferrals on our non-mortgage consumer loan portfolio, which amounts to $119 million or 5.8% of all outstanding balances. Utilization levels on HELOCs have remained fairly flat throughout the pandemic period. I will talk about forbearance activity on firstly in mortgages shortly.

Average warehouse lending loans decreased $437 million or 16% to $2.3 billion in the quarter due to fewer days online resulting from the seasonal slowdown in mortgage activity, particularly in January and February. However, we made changes to our warehouse credit box at the end of the quarter as a result of the volatility in the mortgage market. We honored all loans that were on the line at the time of announcing we were going to stop financing non-QM and jumbo loans. Furthermore we tightened our FICO limits around several other products in response to the market uncertainty and to protect our own position. I would add that during the month of April, we have been encouraged to see continued high outstanding average balances in warehouse lending and given its positive correlation to the mortgage business, it acts as a nice hedge in a low interest rate environment when refinance activity is thriving. Overall, this means average loans held for investment decreased $345 million, which drove the $4 million or 3% decrease in net interest income quarter-over-quarter.

In order to help our customers, we participated in administering the SBA's Paycheck Protection Program just after the quarter ended and received approximately 3,000 applications totaling approximately $400 million. This program was introduced very quickly and the Flagstar team did an outstanding job of standing this up and ensuring that customers were able to participate and benefit. 150 of our 160 bank branches remain open. The 10 that had closed do not have a driver and are located in close proximity to another branch. So, we chose to close them to further protect our employees. All of our ATMs remain operational. Average deposits, which include all interest bearing and non-interest bearing retail and custodial accounts decreased approximately $100 million, but we did reduce the cost of interest bearing deposits 13 basis points during the quarter as we moved quickly to compensate for the lower interest rate environment. We will continue to maintain our disciplines in relationship-based approach within the community bank. We feel we have a loan portfolio with strong credit quality and we'll continue to work closely with our customers throughout this pandemic.

Please turn to Slide 17. Quarterly operating highlights for the mortgage origination business include fallout adjusted lock volume increased 36% to $11.2 billion ouarter-over-quarter, while the net gain on loan sale margin decreased 43 basis points to 80 basis points. As a result, gain on sale decreased $11 million to $90 million in the quarter. The increase in fallout adjusted lock volume was driven by the robust refinance market due to low interest rates, particularly during the month of March. Refinance activity accounted for 64% of our lock volume during the quarter. Mortgage closings were $8.6 billion in the first quarter, an 8% decrease from the fourth quarter due to the anticipated seasonal slowdown in the purchase market. The big story happened toward the end of the quarter when we incurred a substantial loss on our pipeline hedge for the reasons Jim has previously described. This reduced our margin for the quarter materially, but it was a short-term phenomenon and the hedge volatility settled down right at the quarter end and has been stable during the month of April.

Similar to what we did on the warehouse side, right around quarter end we moved to stop originating higher risk products and tightened the credit box in certain areas to protect our position and minimize any future writedowns or losses. Despite moving to a work from home environment, our mortgage operations team continues to excel and keep up with the additional volume. We have not seen any degradation in productivity levels and I believe this is due in large part to our underwriting staff being 98% remote prior to COVID-19. This means the shift in working environment wasn't unfamiliar. Furthermore, we have not been affected by offshore shutdowns as almost all of our operations are here in the US. We continue to run a compliance and efficient operation of scale. We're pleased with how we reacted quickly at the end of the quarter to protect our mortgage earnings both now and in the future and are very encouraged by what we've seen during the month of April. We have already booked over $90 million of gain on sale revenue through April 23. Mortgage has always been a key component of our business model and strategy. It generates significant non-interest fee income for the bank and is a natural hedge for some of our other businesses in the declining interest rate environment.

Moving to servicing, quarterly operating highlights for the Mortgage Servicing segment on Slide 18 include we ended the quarter servicing or subservicing approximately 1.1 million loans, of which over 917,000 or 85% or sub-service for other MSR owners. Of the 1.1 million loans we service or sub-service, 94% are backed by Fannie Mae, Freddie Mac or Ginnie Mae. The number of loan serviced or sub-serviced remained relatively flat in the quarter despite the high levels of refinance activity as we are able to replace run-off with new loans from our mortgage origination business. Today, we have the capacity to service or sub-service 2 million loans as well as provide ancillary offerings such as recapture services and financing solutions to MSR owners. Those offerings are proving to be very beneficial in this current environment. If you look at Slide 39, you will see that we are achieving $4 million to $6 million above operating profit before tax guidance for every 100,000 loans we add to the platform. The major issues for the servicing right now are forbearance activity and liquidity. Through Thursday, April 23, 110,325 borrowers representing 10.7% of the portfolio that we either service or sub-service have requested forbearance relief because of COVID-19. Interestingly, 50% or half of those borrowers have made their April payment and not taken advantage of the forbearance option. This effectively means that right now, 5.3% of the loan book we service or sub-service is actually in forbearance. As part of the forbearance period, we're also waiving certain fees and there will be no negative reporting to the credit bureaus. As you may recall, we acquired a default servicing operation in Jacksonville in September 2019 in order to leverage our industry leading oversight and monitoring and bring default servicing back in-house. Operationally, we couldn't have been better prepared to handle the spike in core volume because of this pandemic. We have been monitoring core wait times closely and have been quick to react to the spikes to ensure we operate within our one-minute average speed to answer service level requirements.

Furthermore, we've set up a hardship relief task force within our default servicing team to proactively reach out to borrowers in forbearance and work out an appropriate loss mitigation solution after they exit forbearance. This will streamline the operation and allow us to get ahead of things rather than just letting these loans run through the normal process. During the quarter we sold $6.6 billion of MSRs, $2.2 billion via bulk and $4.4 billion via flow sales and retained the subservicing on 85% of these sales. However, right now there is no market for MSRs given the recent market volatility and uncertainty surrounding liquidity on the advances. We do believe the market for MSRs will come back in the near future. But in the meantime, we're very comfortable retaining the MSRs we create through our origination business on our balance sheet. Our MSR to CET1 ratio is currently 13.6%. So we have plenty of room before we start to approach the 25% MSR to CET1 capital level and intend to use the runway we've created through the end of the year if necessary.

Of the 1.1 million loans we service or sub-service, only 9% our MSRs Flagstar owns. It's a small percentage and the liquidity need on the advances is immaterial given our overall strong liquidity position as a bank. Finally, custodial deposits averaged $4.8 billion in the first quarter, which was flat compared to prior quarter. Again, this is just one additional benefit we get from our sub-servicing business as it provides liquidity that helps fund our balance sheet. Now more than ever the strength of our sub-servicing business within a bank that is well capitalized and has plenty of liquidity stands alone in the industry and I expect you will continue to see thrive in the future.

Moving on to expenses on Slide 20, our total non-interest expenses decreased 4% or $10 million to $235 million quarter-over-quarter, and total revenues also decreased by $10 million to $305 million generating positive operating leverage of 1.4% in the quarter. The main driver of the decrease in expenses was lower mortgage closings.

If you look at Slide 21, our core non-mortgage non-interest expenses were $139 million in Q1. Within this amount is a one-time write-off of $2 million which relates to a 2013 legacy sale, meaning the run rate is $137 million, a slight increase of $1 million from last quarter. Expenses tied directly to the mortgage origination business were $96 million, a decrease of $8 million versus Q4 given mortgage closings, which drive mortgage expenses were down 8%, as a percentage of mortgage closings, mortgage expenses have been very consistent for the last three quarters as you can see on Slide 21. Our efficiency ratio was 77% for the first quarter, which was an improvement of 1% from the prior quarter for the reasons I just outlined. Given the uncertainty around the mortgage market and COVID-19 expenses, we will not be providing Q2 non-interest expense guidance at this time. It's an unprecedented time, the health and safety of the Flagstar family, our employees, customers, partners, communities and stakeholders is our number one priority. The way the team has adapted to the new environment without breaking stride has been exceptional. We will continue to relentlessly to help our customers through this difficult situation and we will come out the other side stronger for it. I believe the strength of our business model and logic of our business strategy will prevail in this uncertain environment. This concludes our prepared remarks and we will now open the call to questions from our listeners.

Questions and Answers:

Operator

Thank you. The question and answer session will be conducted electronically. [Operator Instructions] We'll first hear from Scott Siefers with Sandler O'Neill. Please go ahead.

Scott Siefers -- Sandler O'Neill -- Analyst

Good morning.

Alessandro P. DiNello -- President and Chief Executive Officer

Good morning, Scott.

Scott Siefers -- Sandler O'Neill -- Analyst

How are you? I appreciate you taking my question.

Alessandro P. DiNello -- President and Chief Executive Officer

I am good. Sure.

Scott Siefers -- Sandler O'Neill -- Analyst

I guess first question I wanted to ask is just on that increase in the trading securities of about $2.1 billion. And I guess the presumably related $2 billion increase short-term and long-term FHLB advances. Maybe a little more color on what the strategy is there and then as a follow-up between, there is the $2 billion in trading securities and then of course the $1 billion plus jump in the warehouse, they really kind of dink [Phonetic] the TCE ratio. So just curious what you're thinking is on the balance between strong regulatory ratios, but a comparatively thin TCE ratio?

Alessandro P. DiNello -- President and Chief Executive Officer

Let me address the $2 billion and the $1 billion, and I'll let Jim chime in on the capital piece of it. So, the $2 billion where securities that were kind of trapped in that period of time where there was the Fed action going on and we were unable to get them off the balance sheet at the end of the month. We did deliver them into the hedges in mid-April I think around April 13, 14, and 15. So they are off the balance sheet now. So that's what that was. And then the warehouse, we've just seen the ability to increase our warehouse commitments grow as other warehouse providers haven't been in a position to take on more and that's because we've kept a fairly low concentration limit on our warehouse business historically. And so, given the fact that the opportunity was there in the market and then we narrowed the collateral that we accepted on our warehouse lines and then even reduced the advance levels on certain collateral. So even though we're at a higher level in our warehouse balances, the risks associated with that we feel very, very comfortable with, in fact, if you look at that page in the slide that's on our warehouse business and I think it's on Page 34, you can see the losses to be there and it is virtually nothing. So even if you go back into the financial crisis, it was $1 million a year there for four years. So we're really comfortable taking the level of warehouse exposure up given the spreads in that business and the low credit risk. So, it does impact assets a little bit, but I think the trade-off is very, very helpful to us.

So, I'll let Jim then opine on the capital piece of that.

James K. Ciroli -- Executive Vice President and Chief Financial Officer

Yes, thanks Sandra. Just going back quickly, Scott, just to remind you at the end of the quarter, it was a lot of dumping of mortgage-backed securities going on especially like the [Indecipherable], because there were margin calls going on and those entities needed liquidity, that supply imbalance I think helped some of the dealers in that space get a lot more aggressive with their bids and when we found the bids for our Fannie, Freddie, and Ginnie securities and that's what comprises that trade securities line is newly created MBS that we weren't able to sell off our balance sheet at prices that we expected to get. We always had the option to deliver those securities into our TBAs and so rather than, look, we didn't have to sacrifice execution at quarter end just to get those off the balance sheet, we had, we let our capital levels go down a bit and in our balance sheet a little bit, we had the liquidity, we had the capital to be able to do that and deliver those into the TBAs mid month. So that is a big part of it. My remarks at the end, we continue to emphasize that when you look at Flagstar's balance sheet between the warehouse loans and Sandro elaborated on the credit loss content that we've seen historically there and I think we've strengthened it even more so this past quarter and loans held for sale. Between those 2 portfolios I think you've got some pretty strong categories, not to mention 97% of our securities portfolio are Ginnie Securities. So there is no credit risk implicitly in that portfolio and then just look at some of the other categories we have on our balance sheet. We have roughly half our balance sheet, more than half our balance sheet is in categories that really have either no or very, very little credit risk, credit loss content. So, [Indecipherable] in the quarter, TCE ratio at the end, I think, it got a little low. If you look at it on an average basis because as you're aware warehouse spikes at the end of the month, at the end of the quarter and also we had that end of the quarter back up on our trading securities. But as you're aware, yes, if you look at it was down to spike up at the end of the quarter. If you look at it on an average basis, the ratio is [Indecipherable] in the quarter. So, 100 basis points higher.

Scott Siefers -- Sandler O'Neill -- Analyst

Okay, perfect. That's good color. I think particularly on those $2 billion of Securities. I think I had estimated that was just the loan, 60 [Phonetic] basis points or so.

James K. Ciroli -- Executive Vice President and Chief Financial Officer

Yes, and just if I could, so all those things that you mentioned are kind of not related. So the ballooning of the balance sheet due to the backup of those trading securities in the balance sheet is different from what we're trying to do in terms of the long-term FHLB advances, which is we think that rates are just attractive at these low levels and given our reposition that I walked just through from a deposit and a loan perspective, we think it's the right thing to do now to lock in these low rates for that three or seven-year period of time.

Scott Siefers -- Sandler O'Neill -- Analyst

And then separately, was just hoping to ask on the gain on sale revenue. So, I appreciate the color on the $90 million so far and it certainly sounds like that transitory hedge stuff will not impact. So, I can back into what sort of a core gain on sale margin would be, but just given all the fluidity in the mortgage market right now. Maybe any sense for what sort of ongoing gain on sale margins might look like and the big factors impacting them in your minds?

Alessandro P. DiNello -- President and Chief Executive Officer

No, I'm not going there Scott. I don't have the crystal ball. I can't tell you what the margins are going to be going forward. But you know what I said in my prepared remarks, I'll just reiterate and emphasize. If what Fannie thinks is going to happen happens and by the way it's not much different than what the MBA or Freddie thinks, I just picked Fannie from my prepared comments. If we have that kind of strength in the mortgage market going forward this year, then the opportunity to have gain on sale maybe not at these levels, who knows, but they have continued to gain on sale strong, you had some numbers, I think is the likelihood of that is strong. And then similarly, that does great things for our warehouse business as well. And we did say it was over $90 million, it's actually now over $95 million, so this right now it looks very good. But we're just not going to speculate on where it might go. And honestly, your guess is as good as mine.

Scott Siefers -- Sandler O'Neill -- Analyst

Yeah, fair enough. So, good stuff. Thank you guys very much.

Alessandro P. DiNello -- President and Chief Executive Officer

You are welcome.

Operator

Thank you. The next one is from Bose George with KBW.

Alessandro P. DiNello -- President and Chief Executive Officer

Good morning.

Mitchell -- KBW -- Analyst

This is Mitchell [Phonetic] on for Bose. Yes, I'm going to ask about the large sub-servicing business and how they get impacted by the [Indecipherable]. How does the contract work in terms of what you guys are compensating for that?

Alessandro P. DiNello -- President and Chief Executive Officer

Yes, so Lee will obviously answer that one. That's the deal, but I'll just start by saying it's different when you are a sub-servicer versus a servicer and I know that Lee will highlight that difference for you. So, Lee, do you want to take this one?

Lee Matthew Smith -- Executive Vice President and Chief Operating Officer

Yes, let me just pick up on the last point you made and I made these in my prepared remarks. First of all, of all the loans we sub-service or service, only 9% are owned by Flagstar. So that's a very small percentage. And from a liquidity point of view, it's going to be immaterial just given our position as a bank and the available liquidity we have. In terms of our sub-servicing contract, so, there's a couple of things that are going on as loans become more delinquent then the fees that we get do increase but obviously given the higher request for forbearances and that activity, we've obviously had to increase capacity first of all on the collection side of the business and we are now and have been increasing capacity in terms of loss mitigation activity because we know that is coming further down the line. So, while there will be an increase in revenue the way the contracts are structured, there's also an increase in our cost base, just given the higher activity levels.

James K. Ciroli -- Executive Vice President and Chief Financial Officer

And Scott, I'm sorry, Mitchell, other thing I would add is, if you look at our servicing portfolio and we know that it is under 10% of the total loans and service. It's not much different than your typical bank. So when you look at our servicing, our own servicing, it is very comparable to what any bank would have. It's the sub-servicing that's the big number and as we've articulated that's very different dynamic.

Mitchell -- KBW -- Analyst

Thank you. In any case, also just give a little more detail on annual credit positioning within the CRE exposures, particularly the hotel, in retail and senior housing. Just sort of where you think those provisions [Indecipherable] scenario?

James K. Ciroli -- Executive Vice President and Chief Financial Officer

Yes, so, I can't, kind of like gain on sale, I can't tell you where the provision is going to go. I just know I just feel like I said in my comments that we're going to be looking at economics forecasted are much different and worse at June 30 compared to March 31, but if you look at our portfolios, so, go to Page 31 and you'd see the commercial lending and then 32 the detail on commercial real estate and 33 the detail on C&I. I mean especially look at 32 and 33 and look at each of those categories and we just don't see any big number in any one category, and that's what we talk about relative to the diversification as well as concentrations. The biggest number is in homebuilder at $900 million and we haven't had one deferral request from our homebuilder clients thus far. So when I look at this portfolio and again as I said in my comments, this is a $27 billion balance sheet that has less than $5 billion in commercial exposure. I don't think there's any other $27 billion bank in the country that can say that and that's pretty low. So, and then you look at the diversification that's here, and even in the syndicated portfolio, it's over 90 plus credits that number comes from. And so, the average balance on each is relatively manageable and when you look at the loan-to-value ratios in our pre-portfolio, they are low. So, if you really dig into the detail, we provided you a lot of detail on these pages, I think you'll see that the risk content is on the low end of the scale and we've always been very conservative when it comes to our allowance and we're not going to change posture today, we feel very good about it based on the economic scenarios at the end of March and we'll do the right thing by the allowance come the end of June. But I don't have a crystal ball man to tell you what I think the provision to be in Q2. I just don't know.

Mitchell -- KBW -- Analyst

Okay, I appreciate your comment. Thank you.

Alessandro P. DiNello -- President and Chief Executive Officer

You are welcome.

Operator

And next we'll move to Daniel Tamayo with Raymond James.

Alessandro P. DiNello -- President and Chief Executive Officer

Hi Daniel.

Daniel Tamayo -- Raymond James -- Analyst

Hi guys. How are you?

Alessandro P. DiNello -- President and Chief Executive Officer

Good.

Daniel Tamayo -- Raymond James -- Analyst

Just on the NIM and then how the PPP program impacts that. I think you mentioned that the NIM should be relatively flat in the second quarter, including the PPP benefit, how much benefit is assumed from PPP in that, if I heard that right in that flat NIM?

Alessandro P. DiNello -- President and Chief Executive Officer

Yes, I'll let Jim answer, but I don't think there is a little benefit from PPP to the NIM. Jim?

James K. Ciroli -- Executive Vice President and Chief Financial Officer

That's correct. No, it's diluted to the NIM that we would expect Danny.

Daniel Tamayo -- Raymond James -- Analyst

Okay.

James K. Ciroli -- Executive Vice President and Chief Financial Officer

But it's, I would also say, it's not going to be material.

Daniel Tamayo -- Raymond James -- Analyst

It is immaterial. Okay. I was assuming that there was some kind of recapture of fees in there, but if it's an immaterial number, then that's fine. All right. And then the floors in the warehouse business, did you benefit from those at all in the first quarter and then how much would you, how many or how much of a percentage, how much disclose [Phonetic] are in-the-money at this point?

Alessandro P. DiNello -- President and Chief Executive Officer

I don't know if I know the answer to how many are in the money per se, but we have bumped into a lot of the floors, it's not that I don't want to give you that information, I just don't know that I know it off the top of my head. Jim does, OK. Jim?

James K. Ciroli -- Executive Vice President and Chief Financial Officer

Again, if you look at Slide 9, roughly 1% of those warehouse loans have LIBOR floors that is something higher than 0. So, I think you can safely assume with LIBOR where it is today, and it just continues to come down to take the Fed [Phonetic] spread on the difference between where LIBOR is, one month LIBOR and Fed funds, so that comes down even more. If you look at that 71% of that portfolio have LIBOR something north of 0, a floor, a LIBOR floor north of 0.

Daniel Tamayo -- Raymond James -- Analyst

Okay, thank you. And then, sorry, go ahead.

James K. Ciroli -- Executive Vice President and Chief Financial Officer

No, please.

Daniel Tamayo -- Raymond James -- Analyst

And then just one last question on the CRE portfolio, can you disclose how much of that is construction?

Alessandro P. DiNello -- President and Chief Executive Officer

Did we disclose how much of that is construction? Well, if you go to Page 32 and Jim check me on this, but if you go to Page 32, you see that book value is $3.1 billion, commitment level is $4.8 billion. If you take the homebuilder piece out of it, the total commitment would be $3.9 billion, so it would be something less than $800 million. I don't know. Jim, if you know what that is?

James K. Ciroli -- Executive Vice President and Chief Financial Officer

I don't have those answers, specifically, Danny. But if you look at our December call reports and when you look at our soon to be filed March call reports, it will break out in the loan section RCC [Phonetic]. It will break those analysis out for you.

Daniel Tamayo -- Raymond James -- Analyst

All right. Perfect. Thanks for answering my questions guys.

Alessandro P. DiNello -- President and Chief Executive Officer

You are welcome.

Operator

And we will next move to Henry Coffey with Wedbush.

Henry Coffey -- Wedbush Securities -- Analyst

Yes.

Alessandro P. DiNello -- President and Chief Executive Officer

Hi Henry.

Henry Coffey -- Wedbush Securities -- Analyst

Hello, I was about to say good morning but its lunchtime. So, no, and thank you very much for taking my call. Three questions. Number one, it's probably an editorial as well as a question. Given the reliance everyone has particularly on Moody's COVID forecast for their leasehold adjustments, is there any risk that that becomes counter cyclical and starts affecting your lending decisions? Obviously your portfolio doesn't reflect the reserve add, it's all seasonal related, and so we know that the Moody's forecast is more negative in April, it probably gets worse in May and June, and does that, that could affect your reserving as you're stuck with the models, but does it affect your lending behavior?

Alessandro P. DiNello -- President and Chief Executive Officer

I don't think it directly affects our lending behavior. I mean indirectly if the economy is continuing to weaken then that has an impact on our decisions and the commercial areas you know whether it's business banking, C&I, or CRE. Right now, I don't remember the last time I looked at a commercial loan for approval and we've tightened our approval process down such that three of us, our Chief Commercial Officer, our Chief Credit Officer, and myself have to sign off on every new commercial loan right now and like I said, I can't remember the last one I signed off on. As time goes on and as things start to get better, we'll make decisions to make commercial loans where we feel like the business has revenue confidence that allows us to have underwriting confidence, that's the problem right now, it is just very difficult to have confidence in cash flows with most businesses and so therefore we've drawn back quite a bit. So, I think our lending activities would probably be ahead of the Moody's analytics in terms of when we start lending, when more opportunities come about that makes sense. But I don't think there is a direct correlation.

Henry Coffey -- Wedbush Securities -- Analyst

Thank you. And then two more questions. Obviously, a $90 million gain on sale revenue in one month is quite spectacular, do you have enough insight into the pipeline to get a feeling for how May and June play out? Can you, were there any, are there any sort of aberrant outcomes in April that really change that or are you just seeing a big flow of business and obviously a return on gain on sale margins to where you would expect, they would be, which is much higher?

Alessandro P. DiNello -- President and Chief Executive Officer

Kristy if I'm wrong on anything you correct me, but I don't think there's anything much different in April than March other than we didn't have the hedging challenges in April. The business continues to be very strong. The question Henry is can the margins continue at the levels they're at today, I think the volume for the next couple of months looks pretty good but whether the margins continue, I don't know. And that was the question that we're asked earlier that I punted on because I don't know, but I'll let Kristy add anything she'd like to that.

Kristy W. Fercho -- Executive Vice President and President of Mortgage

Yes, Henry, one thing I'll share is. You only have to look at the strategy that we have really deployed over the last year, which is really evaluating those opportunities where we could optimize our returns through product, through volume and through channel mix and then really just continue to focus on how do we bring value to our customers. And so we've continued that strategy in April as the market has really been dislocated over the last two months and really taking advantage of that to the $90 million plus benefit that we've seen. So there is no reason to expect that won't continue as we get into the future months and our strategy will continue to be the same optimizing that channel mix.

Henry Coffey -- Wedbush Securities -- Analyst

We can go back to looking at primary, secondary spreads is kind of the guide post as to what to expect and given the volatility seen in March that probably doesn't come up for a while. Is that a fair conclusion?

Kristy W. Fercho -- Executive Vice President and President of Mortgage

Yes. And it's a great point that you bring that up. Because actually if you look at primary, secondary spreads, there has been a historic high of 233 basis points at the end of March and over the last two weeks, we've actually seen that tighten about 60 basis points. So that's a good measure of obviously the competitive dynamic in the market as well as capacity and so you're absolutely right. I think that's a good thing to watch. We have certainly watched that and pay attention to what our pricing power is in the market every day.

Henry Coffey -- Wedbush Securities -- Analyst

Great, thank you. And then moving on, on the servicing side, for you it's not a question, you don't have to worry about servicer advances, you've got plenty of liquidity, and as you pointed out on the call, owned MSR is a very small part of your servicing book, but maybe you could give us some insight into what's going on with your sub-servicing clients, are they seeing in April rolling uptick in servicer advance requirements, are they, are you working with them on this to provide a liquidity line to help them with this given that the Fannie and Freddie are kind of sitting on their hands. I was wondering what your, how does that business look like from the perspective of your clients. And what are you doing to work with them?

Alessandro P. DiNello -- President and Chief Executive Officer

Yes, I'll let Lee give you the detail, but the only comment I'll make is obviously the four months maximum advance that the FHFA announced was I think a big relief to a lot of our partners, but yes we know we're going to work with them just like we're going to work with every commercial customer and Lee can give you some detail on that.

Lee Matthew Smith -- Executive Vice President and Chief Operating Officer

Yes, I think you've hit the nail on the head Sandro. The FHFA announcement last week, it gave sub-service or MSR owners who we sub-service for a lot of certainty, because it effectively capped the amount of time that they would have to make advances for and so I think that was very helpful for all of them in being able to from a liquidity need plug it into their models and understand what they would want or what they may need. And then on the G&A side, you've obviously got the PTAP program that Ginnie Mae has put in place. That's helpful. And of course we work with our partners where we can and we do have some financing lines that are out there and if we can be helpful in any way with our partners, we will do that. As I said, we're in a fortunate position that we're a bank well capitalized, we have a lot of liquidity, and if it makes sense to do so, and we can help our partners, we will look to do that but I think the uncertainty that was there around liquidity maybe three weeks ago, two weeks ago, it's eased given the certainty that people now have with the FHFA announcement.

Henry Coffey -- Wedbush Securities -- Analyst

Thank you. I think you're in a great position. We've heard at least from the press that there is one or two major correspondent lenders that may walk away from that business. Do you have the capacity from a technology and a people and a lending perspective to pick up even more market share if that's where we end up?

Lee Matthew Smith -- Executive Vice President and Chief Operating Officer

Yes, look, here's what I'd say. You never like to benefit from adversity or if others are struggling. I mentioned in my prepared remarks with servicing or subservicing a little over 1 million loans right now and we have the capacity to service or sub-service 2 million loans and look we will just continue to do what we've always done in terms of growing that portfolio and we've been very successful in doing that up to now. And so as opportunities arise, we will evaluate them and see if they make sense. I'm certainly not going to talk about benefiting from others sort of falling down at this moment.

Henry Coffey -- Wedbush Securities -- Analyst

Great, thank you very much. Thank you. Sandra, what did you want to say, I'm sorry, I cannot cut you off.

Alessandro P. DiNello -- President and Chief Executive Officer

I was just going to emphasize what Lee said. No, this is not the time to look at significant growth in our servicing business. I think we take it slow and easy and take advantage of the really strong opportunities that may present themselves. But the way we've been building this business overtime has worked really well, and we are just going to continue to follow that same very thoughtful path.

Henry Coffey -- Wedbush Securities -- Analyst

Thank you very much. This call was extremely helpful and the stock has responded well.

Alessandro P. DiNello -- President and Chief Executive Officer

Thanks, Henry.

Operator

Next we'll move to Steve Moss with B Riley.

Steve Moss -- B. Riley FBR -- Analyst

Hi, Sandro. Good morning. Two questions from me, got a quite a lot of detail here, but just one on the non-interest bearing deposit growth for the quarter. I apologize I missed it. I'm just wondering if you could give some color there?

Alessandro P. DiNello -- President and Chief Executive Officer

I'm sorry. You cut out on me. I couldn't hear your question. Help me again, please.

Steve Moss -- B. Riley FBR -- Analyst

Yes, sorry, on the non-interest bearing deposit growth for the quarter, just wondering what were the drivers there? Any color there would be helpful?

Alessandro P. DiNello -- President and Chief Executive Officer

Yes, I think it's primarily custodial deposits.

Steve Moss -- B. Riley FBR -- Analyst

Okay. And then in terms of the disclosures around the leverage lending and the shared national credit portfolios here, just wondering if you guys have any specific reserves for those portfolios. Any color there would be helpful?

Alessandro P. DiNello -- President and Chief Executive Officer

Well that's Page 37 will give you that breakdown and it is within the CECL model. Jim?

James K. Ciroli -- Executive Vice President and Chief Financial Officer

Yes, [Indecipherable] either of those portfolios.

Steve Moss -- B. Riley FBR -- Analyst

Okay.

James K. Ciroli -- Executive Vice President and Chief Financial Officer

I'm sorry.

Alessandro P. DiNello -- President and Chief Executive Officer

Okay. There are not specific reserves. But let me just clarify. Okay, there aren't specific reserves in the GAAP terminology. But when you look at the CECL model, each industry has reserves obviously, which would all be part of both the leverage and the synergy of the portfolio.

Steve Moss -- B. Riley FBR -- Analyst

Okay, that's helpful. And then in terms of, just wondering about the $35 million in loans that were special mention are substandard at quarter end, has that increased quarter-over-quarter or is that relatively, just any dynamics there?

Alessandro P. DiNello -- President and Chief Executive Officer

Yes. It's relatively flat.

Steve Moss -- B. Riley FBR -- Analyst

Okay. Thank you very much.

Alessandro P. DiNello -- President and Chief Executive Officer

Those had nothing to do with COVID.

Steve Moss -- B. Riley FBR -- Analyst

Okay, thank you very much, I appreciate that.

Alessandro P. DiNello -- President and Chief Executive Officer

You're welcome, Steve.

Operator

And that will conclude today's question and answer session. At this time, I would like to turn the call back over to Sandro DiNello for any additional or closing remarks.

Alessandro P. DiNello -- President and Chief Executive Officer

Yes, thank you Rachelle. I'd like to close by talking about the Flagstar spirit. This company has come together in a way that I'll never forget not just in the daunting deadlines we have met and the crushing workload we have shouldered, but in the way they have brought fun into the things like the Flagstar COVID Facebook group and the virtual happy hour and companywide photo contest showing their at home workstations and while we've moved over 4,000 people to work at home, some folks do have to support bank branches and some do have to be in an office building. And as you heard in Lee's comments, we are doing all that we can to put them in a safe environment and have rewarded them with over $1 million in bonuses plus though we changed the work week for our branch employees to four days, we are paying them for five and we continue to pay employees who are not working due to the virus. We also set up an employee assistance program through our foundation to help employees experiencing COVID-19 related financial hardships. And in addition to the community support I noted earlier, we also opened our paycheck protection program to non-profits that were not previous Flagstar customers. Additionally, we've set up a special small dollar loan program for people impacted by COVID-19 who live in [Indecipherable] communities. We know that we're in the fight of our lives and we've given expressions of that sentiment with the Flagstar versus COVID-19 T-shirts for every employee. We are tough and we will prevail. Finally, thank you to the entire Flagstar family and I appreciate all you do more than our words can express and all of the best everyone else listening. I urge you to stay home as much as you can and I pray that you stay safe and healthy.

Operator

[Operator Closing Remarks]

Duration: 78 minutes

Call participants:

Kenneth Schellenberg -- Vice President, Investor Relations

Alessandro P. DiNello -- President and Chief Executive Officer

James K. Ciroli -- Executive Vice President and Chief Financial Officer

Lee Matthew Smith -- Executive Vice President and Chief Operating Officer

Kristy W. Fercho -- Executive Vice President and President of Mortgage

Scott Siefers -- Sandler O'Neill -- Analyst

Mitchell -- KBW -- Analyst

Daniel Tamayo -- Raymond James -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

Steve Moss -- B. Riley FBR -- Analyst

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